Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties, including those set forth under “Cautionary Statement About Forward-Looking Statements.” Actual results and experience could differ materially from the anticipated results and other expectations expressed in our forward-looking statements as a result of a number of factors, including but not limited to those discussed in this Item and in Item 1A - “Risk Factors.” Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report on Form 10-K.

Overview

We are a development-stage biotechnology company focused on advancing novel antiviral therapies to treat diseases associated with a viral triggered abnormal immune response such as FM. Overactive immune response related to activation of tissue resident herpes virus has been postulated to be a potential root cause of chronic illnesses such as FM, IBS, chronic fatigue syndrome and functional somatic syndrome, all of which are characterized by a waxing and waning manifestation of disease. While not completely understood, there is general agreement in the medical community that activation of the herpes virus is triggered by some form of environmental and/or health stressor. Our lead product, IMC-1, is a novel, proprietary, fixed dose combination of famciclovir and celecoxib. IMC-1 represents a novel combination, dual mechanism, antiviral therapy designed to synergistically suppress herpes virus activation and replication, with the end goal of reducing viral mediated disease burden.

IMC-1 combines two specific mechanisms of action purposely designed to inhibit herpes virus activation and replication, thereby keeping the herpes virus in a latent (dormant) state or “down-regulating” the virus

from a lytic (active) state back to latency. The famciclovir component of IMC-1 inhibits viral DNA replication. The celecoxib component of IMC-1 inhibits cyclooxegenase-2 (“COX-2”) and to a lesser degree cyclooxegenase-1 (“COX-1”), enzymes used by the herpes virus to amplify or accelerate its own replication. We are unaware of any other antivirals in development for the treatment of FM specifically used to inhibit both herpes virus activation and subsequent replication, with the goal of keeping tissue resident herpes virus tissue in a latent state. We believe this novel approach was a germane consideration in U.S. Food and Drug Administration (“FDA”) designating IMC-1 for fast-track review status for the treatment of FM. IMC-1 has also been granted a synergy patent based on the fact that neither of the individual components has proven effective in the management of FM, yet the combination therapy generated a result that is greater than the sum of its parts.

In June 2021, we announced the dosing of our first patient in our Phase 2b study in FM, known as the FORTRESS study (an abbreviation of and stands for Fibromyalgia Outcome Research Trial Evaluating Synergistic Suppression of Herpes Virus). We are presently enrolling over 400 female patients aged 18 to 65, who have been diagnosed with FM using the 2016 American College of Rheumatology diagnostic criteria for FM. The study participants are being randomized to receive either IMC-1 or placebo in a 1:1 ratio. The primary endpoint of our FORTRESS study focuses on reduction in pain over time. Pain reduction is being measured daily by the numeric rating scale (“NRS”) 24-hour recall scale via an electronic diary that the patient uses at home. In addition to assessing the FM patients pain reduction, we are assessing IMC-1’s ability to improve symptoms of fatigue, sleep disturbance, improvements in overall global health status and improved patient function. We have enrolled over 50% of patients in the trial and project top line results from the FORTRESS study in the third quarter of 2022. In parallel to the FORTRESS study, our chronic toxicology studies in two species are progressing as planned. These studies are required by regulatory authorities to support chronic administration of IMC-1 in forward clinical development. The results of our chronic toxicology program are timed to complete in the third quarter of 2022 as well.

We have never been profitable and have incurred losses since inception. Our net losses were $15,960,268 and $10,346,395 for the years ended December 31, 2021 and 2020, respectively, and our accumulated deficit at December 31, 2021 was $43,925,373. We expect to incur losses for the foreseeable future, and we expect these losses to increase as we continue to develop and seek regulatory approvals for our product candidates. Because of the numerous risks and uncertainties associated with product development, we are unable to predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability.

We recognize the emergence of widespread health emergencies or pandemics, such as the COVID-19 pandemic, could have a significant impact on our business or delay the enrollment or completion of our proposed clinical trials, including the FORTRESS study. Future emergence of widespread health emergencies or pandemics could lead to new quarantines, business shutdowns, disruptions to the healthcare system and overall economic instability. If suppliers, clinical research organizations, clinical trial sites, regulators, consultants and other third parties with whom we conduct business were to experience shutdowns or other business disruptions, our ability to enroll patients and conduct our clinical trial in the manner and on the timelines presently planned could be materially and negatively impacted. Although we currently believe our FORTRESS study will be completed on time, we cannot guarantee that the COVID-19 pandemic or any other widespread health emergencies will not have a material impact on our business or the timely completion of our clinical trials.

Financial Operations Overview

The following discussion sets forth certain components of our statements of operations as well as factors that impact those items.

Research and Development Expenses

Our research and development expenses consist of expenses incurred in development and clinical studies relating to our product candidates, including:

● payments to third-party contract research organizations, or CROs;

● personnel-related expenses, such as salaries and benefits; and

● payments to contract laboratories and independent consultants.

We expense all research and development costs as incurred. Clinical development expenses for our product candidates are a significant component of our current research and development expenses. Products in later stage clinical development generally have higher research and development expenses than those in earlier stages of development, primarily due to increased size and duration of the clinical trials. We track and record information regarding research and development expenses for each study or trial we conduct. We use third-party CROs, CMOs, contractor laboratories and independent contractors. All research and development costs incurred to date have been for our lead product candidate, IMC-1. We recognize the expenses associated with third parties performing services for us in our clinical studies based on the percentage of each study completed at the end of each reporting period.

Our research and development expenses in 2021 primarily related to our FORTRESS study which began screening patients in May 2021 and two long-term animal toxicology studies - a 26-week study in rats, which began in May 2021 and a 39-week study in dogs, which began in June 2021. We expect our research and development expenses to increase over the next several years as a result of the continuation of the FORTRESS study, related toxicology studies, and the initiation of a Phase 3 program in FM. These expenditures are subject to numerous uncertainties regarding timing and cost to completion. Completion of our clinical development and clinical trials may take several years or more. Because of the numerous risks and uncertainties associated with product development, we cannot determine with certainty the duration and completion costs of the current or future studies and clinical trials or if, when, or to what extent we will generate revenues from the commercialization and sale of our product candidates. We may never succeed in achieving regulatory approval for our product candidates. The duration, costs and timing of clinical trials and development of our product candidates will depend on a variety of factors, including:

● successful enrollment in, and completion of, clinical trials;

● receipt of marketing approvals from applicable regulatory authorities;

● effectively competing with other therapies and treatment options;

● a continued acceptable safety profile following approval;

● achieving desirable medicinal properties for the intended indications.

A change in the outcome of any of these factors could mean a significant change in the costs and timing associated with the development of our current and future product candidates. For example, if the FDA, or another regulatory authority were to require us to conduct clinical trials beyond those that we currently anticipate will be required for the completion of clinical development, or if we experience significant delays in execution of or enrollment in any of our clinical trials, we could be required to expend significant additional financial resources and time on the completion of clinical development. We expect our research and development expenses to increase for the foreseeable future as we continue the development of IMC-1 and other potential product candidates.

General and Administrative Expenses

General and administrative expenses consist primarily of salaries, benefits and other related personnel costs, including equity and stock-based compensation, for personnel serving in our executive, finance and administrative functions. General and administrative expenses also include public company costs, directors and officers’ insurance, professional fees for legal, including patent related expenses, consulting, auditing and tax services.

We anticipate that our general and administrative expenses will increase in the future to support continued research and development activities and potential commercialization of our product candidates and increased costs of operating as a public company. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers and accountants, among other expenses.

Other (Expense) Income, Net

Other (expense) income, net, in 2020, primarily consists of interest expense on the convertible promissory notes and amortization of related debt issuance costs that converted into membership interests in connection with our conversion into a Delaware corporation on December 16, 2020. Other (expense) income, net, in 2021, primarily consists of the cost associated with the Release and Settlement Agreement with Torreya. See Item 3. Legal Proceedings and Note 10 to the Financial Statements included in the Annual Report on Form 10-K.

Related Parties

The Company uses Gendreau Consulting, LLC, a consulting firm (“Gendreau”), for drug development, clinical trial design, and planning, implementation and execution of contracted activities with CROs. Gendreau’s managing member became the Company’s Chief Medical Officer (“CMO”) effective January 1, 2021. The Company has and will continue to contract the services of the CMO’s spouse through the firm to perform certain activities in connection with the Company’s ongoing clinical trial in FM.

For a full discussion of related party transactions see Note 9 to the Financial Statements included in this Annual Report on Form 10-K.

Income Taxes

As of December 31, 2021, the Company has U.S. federal and state net operating loss carryforwards of approximately $17,956,000. These net operating losses can be carried forward and applied against future taxable income, if any. These losses currently have no expiration date and may be carried forward

indefinitely. As the Company was incorporated in December 2020, all tax years of the Company remain open to examination by tax authorities.

The Company has recorded a full valuation allowance against its net deferred tax assets as of December 31, 2021 and 2020 because the Company has determined that it is more likely than not that these assets will not be fully realized due to historic net operating losses incurred. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods in which these temporary differences become deductible.

Critical Accounting Policies and Use of Estimates

Our management’s discussion and analysis of our financial condition and results of operations is based on our financial statements, which we have prepared in accordance with U.S. generally accepted accounting principles. We believe that several accounting policies are important to understanding our historical and future performance. We refer to these policies as critical because these specific areas generally require us to make judgments and estimates about matters that are uncertain at the time we make the estimate, and different estimates — which also would have been reasonable — could have been used. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and other market-specific or other relevant assumptions that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are described in more detail in the notes to our financial statements appearing elsewhere in this Annual Report on Form 10-K, we believe the following accounting policies to be most critical to the judgments and estimates used in the preparation of our financial statements.

Research and Development

Research and development costs are expensed as incurred. The Company arranges and contracts with third-party contract research organizations (“CROs”), contract development and manufacturing organizations (“CMOs”), contractor laboratories and independent consultants. As part of the process of preparing its financial statements, the Company may be required to estimate some of its expenses resulting from its obligations under these arrangements and contracts. The financial terms of these contracts are subject to negotiations which vary from contract to contract and may result in payment flows that do not match the periods over which materials or services are provided. The Company’s objective is to reflect the appropriate expenses in its financial statements by matching those expenses with the period in which services are rendered. The Company determines any accrual estimates based on account discussions with applicable personnel and outside service providers as to the progress or state of completion. The Company makes estimates of its accrued expenses as of each balance sheet date based on the facts and circumstances known at that time. The Company’s estimates are dependent upon the timely and accurate reporting of CROs, CMOs and other third-party vendors. At the end of each reporting period, the Company compares the payments made to each service provider to the estimated progress towards completion of the related project. Factors that the Company considers in preparing these estimates include the number of patients enrolled in studies, milestones achieved, and other criteria related to the efforts of its vendors. These estimates will be subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, the Company will record prepaid or accrued expenses related to these costs.

Equity and Share-Based Compensation

compensation expense is recognized over the requisite service period if it is probable that the performance condition will be satisfied. For awards to non-employees, the Company recognizes compensation expense in the same manner as if the Company had paid cash for the goods or services. The Company estimates the fair value of options and warrants granted using an options pricing model. Expense is recognized within general and administrative expenses and forfeitures are recognized as they are incurred.

Results of Operations

Operating expenses and other (expense) income were comprised of the following:

Year Ended

December 31,

Operating expenses:

Other (expense) income:

Years Ended December 31, 2021 and 2020

Research and Development Expenses

Research and development expenses increased by $10.6 million to $10.8 million for the year ended December 31, 2021 from $0.2 million for the year ended December 31, 2020. The increase was due to increases in expenses for our FORTRESS study of $7.1 million, toxicology studies of $1.8 million, salaries and related personnel costs of $1.0 million and drug development and manufacturing costs of $0.7 million.

General and Administrative Expenses

General and administrative expenses decreased by $5.0 million to $4.8 million for the year ended December 31, 2021 from $9.8 million for the year ended December 31, 2020. The decrease was due to a decrease of $7.6 million in salaries, benefits and equity and share-based compensation costs offset by an increase of $2.2 million in costs associated with being a public company and an increase of $0.4 million in accounting and legal fees. The significant year over year decrease in compensation expense was attributable to the recognition in 2020 $2.0 million in equity-based compensation for the issuances of membership interests to the Company’s founder and the recognition of $5.4 million in share-based compensation for the issuance of stock options pursuant to executive employment agreements upon our IPO.

Other (Expense) Income

Other expenses decreased by $0.02 million to $0.32 million for the year ended December 31, 2021 from $0.34 million for the year ended December 31, 2020. The decrease was mainly due to a net decrease in interest expense of $0.39 million, which was the result of the conversion of debt upon our Corporate Conversion and IPO in December 2020 offset by a net increase in other expense in 2021 of $0.37 million primarily related to the Release and Settlement Agreement with Torreya.

Liquidity and Capital Resources

Since our inception, we have financed our operations through a public offering of common stock and proceeds from private placements of membership interests and convertible promissory notes. To date, we have not generated any revenue from the sale of products and we do not anticipate generating any revenue from the sales of products for the foreseeable future. We have incurred losses and generated negative cash flows from operations since inception. As of December 31, 2021, our principal source of liquidity was our cash, which totaled $14.0 million.

The COVID-19 global pandemic has resulted in travel restrictions and temporary shutdowns of both essential and non-essential businesses in the United States and abroad. To date, the pandemic has not had a material impact on our operations as our employees are effectively working from home. FM research and development activities have largely progressed as planned during the pandemic. However, due to many uncertainties, we are unable to estimate the effect of the COVID-19 pandemic on our business, if any, in the future.

Equity Financings

We closed our IPO on December 21, 2020, raising gross proceeds of $34.5 million and net proceeds of approximately $31.1 million, after deducting underwriting discounts, commissions and offering expenses.

Debt Financings

In 2020, we issued an aggregate of $2.0 million principal amount of convertible promissory notes. At the Corporate Conversion, these notes converted to common interests at the price of $400,000 per 1% of common interests. There was no debt outstanding at December 31, 2021 and 2020.

Future Capital Requirements

We estimate our current cash of $14.0 million at December 31, 2021 is sufficient to fund our operations and capital requirements through the end of the first quarter of 2023. We believe that these available funds will be sufficient to complete our FORTRESS study for IMC-1 and commence the planning of our Phase 3 study in FM for this product candidate. However, it is difficult to predict our spending for our product candidates prior to obtaining FDA approval. Moreover, an adverse change in circumstances could cause us to expend cash faster than we currently anticipate because of any such circumstances beyond our control.

We will need to raise additional capital before we exhaust our current cash in order to continue to fund our research and development, including our plans for Phase 3 and any new product development, as well as to fund operations generally. As and if necessary, we will seek to raise additional funds through various potential sources, such as equity and debt financings or through corporate collaboration and license agreements, and we may file one or more registration statements with the SEC in connection with such financings. To the extent that we raise additional funds by issuing equity securities, our shareholders will experience dilution. We can give no assurances that we will be able to secure such additional sources of funds to support our operations, or, if such funds are available to us, that such additional financing will be sufficient to meet our needs.

Cash Flows

The following table summarizes our cash flows from operating, investing and financing activities.

Years Ended

December 31,

Statement of Cash Flows Data:

Total net cash (used in) provided by:

Years ended December 31, 2021 and 2020

Operating Activities

For the year ended December 31, 2021, net cash used in operations was $15.7 million and consisted of a net loss of $15.9 million and a net change in operating assets and liabilities of $0.1 million attributable to an increase in prepaid expenses offset by non-cash items of $0.3 million attributable to share-based compensation.

For the year ended December 31, 2020 net cash used in operations was $3.9 million and consisted of a net loss of $10.3 million and a net change in operating assets and liabilities of $1.0 million offset by non-cash items of $7.4 million attributable to equity and share-based compensation. The net change in operating assets and liabilities included an increase in prepaid expenses of $1.7 million offset by a net increase in operating liabilities of $0.7 million.

Financing Activities

Net cash used by financing activities for the year ended December 31, 2021 was $0.1 million and was attributable to $0.2 million in proceeds received from the exercise of warrants offset by payment of IPO offering costs of $0.3 million.

Net cash provided by financing activities during the year ended December 31, 2020 was $33.4 million and was attributable to cash proceeds from our IPO of $31.3 million, net of deal costs and other expenses, $1.9 million net proceeds from the issuance of convertible promissory notes and $0.2 million proceeds from the exercise of warrants to purchase our common stock.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities.

Recent Accounting Pronouncements

See Note 2 – Summary of Significant Accounting Policies in the accompanying notes to the financial statements elsewhere in this report for details of recently issued accounting pronouncements and their expected impact on our financial statements.

JOBS Act

On April 5, 2012, the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”), was signed into law. The JOBS Act contains provisions that, among other things, reduce certain reporting requirements for an “emerging growth company.” As an “emerging growth company,” we are electing to take advantage of the extended transition period afforded by the JOBS Act for the implementation of new or revised accounting standards.

Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we are not required to, among other things, (i) provide an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404, (ii) provide all of the compensation disclosure that may be required of non-emerging growth public companies under the Dodd-Frank Wall Street Reform and Consumer Protection Act, (iii) comply with any requirement that may be adopted by the Public Company Accounting Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis), and (iv) disclose certain executive compensation-related items such as the correlation between executive compensation and performance and comparisons of the chief executive officer’s compensation to median employee compensation. These exemptions will apply until the fifth anniversary of the completion of our initial public offering or until we no longer meet the requirements for being an “emerging growth company,” whichever occurs first.

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

This item is not required.

Item 8. Financial Statements and Supplementary Data

Index to Financial Statements

Report of Independent Registered Public Accounting Firm 88

Statements of Operations for the years ended December 31, 2021 and 2020 90

Statements of Cash Flows for the years ended December 31, 2021 and 2020 92

Notes to Financial Statements 93

Report of Independent Registered Public Accounting Firm

Shareholders and the Board of Directors

Virios Therapeutics, Inc.

Opinion on the Financial Statements

We have audited the accompanying balance sheets of Virios Therapeutics, Inc. (the "Company") as of December 31, 2021 and 2020, the related statements of operations, members’/stockholders’ equity, and cash flows, for each of the two years in the period ended December 31, 2021, and the related notes (collectively referred to as the "financial statements"). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2021 and 2020, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2021, in conformity with U.S. generally accepted accounting principles.

Basis for Opinion

These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on the Company's financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) ("PCAOB") and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.

We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company's internal control over financial reporting. Accordingly, we express no such opinion.

Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion.

/s/ Dixon Hughes Goodman LLP

We have served as the Company's auditor since 2020.

Atlanta, Georgia

March 18, 2022

VIRIOS THERAPEUTICS, INC.

BALANCE SHEETS

December 31, December 31,

Assets

Current assets:

Liabilities and stockholders' equity

Current liabilities:

Commitments and contingencies (Note 10)

Stockholders' equity:

See accompanying notes to the financial statements.

VIRIOS THERAPEUTICS, INC.

STATEMENTS OF OPERATIONS

Year Ended

December 31, December 31,

Revenue $ — $ —

Operating expenses:

Other (expense) income:

Interest income (expense), net 5,672 (384,222)

Income tax provision (benefit) — —

Basic and diluted net loss per share $ (1.92) $ (2.10)

See accompanying notes to the financial statements.

VIRIOS THERAPEUTICS, INC.

STATEMENTS OF MEMBERS’/STOCKHOLDERS’ EQUITY

Voting Non-voting Total Members'/

Members' Members' Common Stock Additional Accumulated Stockholders'

Interests Interests Shares Par Paid-In Capital Deficit Equity

(1) These transactions occurred prior to the corporate conversion.

See accompanying notes to the financial statements.

VIRIOS THERAPEUTICS, INC.

STATEMENTS OF CASH FLOWS

Year Ended

December 31, December 31,

Cash flows from operating activities

Adjustments to reconcile net loss to net cash used in operating activities:

Amortization of issuance costs — 53,983

Recovery of uncollectable receivables — (15,020)

Gain on vendor concession — (43,221)

Share-based and equity compensation expense 322,881 7,429,518

Changes in operating assets and liabilities:

Increase in prepaid expenses and other current assets (91,138) (1,655,829)

Cash flows from financing activities

Proceeds from initial public offering, net of costs (295,166) 31,349,055

Proceeds from issuance of convertible promissory notes — 1,994,133

Proceeds from the exercise of warrants 197,562 176,250

Payment of issuance costs for promissory notes — (63,261)

Payment of preferred members' interest — (75,000)

Net cash (used in) provided by financing activities (97,604) 33,381,177

Supplemental disclosure of non-cash financing transactions:

Cash paid for interest $ — $ 12,551

Non-cash financing transactions:

See accompanying notes to the financial statements.

VIRIOS THERAPEUTICS, INC.

NOTES TO FINANCIAL STATEMENTS

1. Background and Organization

Virios Therapeutics, Inc. (the “Company”) was incorporated under the laws of the State of Delaware on December 16, 2020 through a corporate conversion (the “Corporate Conversion”) just prior to the Company’s initial public offering (“IPO”). The Company was originally formed on February 28, 2012 as a limited liability company (“LLC”) under the laws of the State of Alabama as Innovative Med Concepts, LLC. On July 23, 2020, the Company changed its name from Innovative Med Concepts, LLC to Virios Therapeutics, LLC.

The Company is a pre-revenue, development-stage biotechnology company focused on advancing novel antiviral therapies to treat diseases associated with a viral triggered abnormal immune response. The Company is developing its initial product, IMC-1, for people who are suffering from fibromyalgia (“FM”). Research has shown that the herpes virus could be a root cause of FM. IMC-1 is a novel, proprietary, fixed dose combination of famciclovir and celecoxib, both of which are drugs approved by the U.S. Food and Drug Administration (“FDA”) for other indications. IMC-1 combines these two specific mechanisms of action purposely designed to inhibit herpes virus activation and replication, thereby keeping the herpes virus in a latent or dormant state. The famciclovir component of IMC-1 inhibits viral DNA replication, thus inhibiting upregulation of the herpes virus. The celecoxib component of IMC-1 inhibits cyclooxegenase-2 (“COX-2”) enzymes used by the herpes virus to amplify or accelerate its own replication. IMC-1’s synergistic antiviral mechanism represents a first-in-class medicine designed specifically to inhibit both herpes virus activation and subsequent replication, with the goal of keeping tissue resident herpes virus in a latent state.

Corporate Conversion

On December 16, 2020, immediately prior to the effectiveness of the Company’s registration statement on Form S-1, the Company converted into a Delaware corporation pursuant to a statutory conversion, and changed its name from Virios Therapeutics, LLC to Virios Therapeutics, Inc. As a result of the Corporate Conversion, all of the membership interests held by the existing members of Virios Therapeutics, LLC converted into shares of common stock of Virios Therapeutics, Inc. The purpose of the Corporate Conversion was to reorganize the corporate structure so that the entity offering common stock to the public was a corporation rather than a limited liability company.

Initial Public Offering

On December 16, 2020, the Company announced the pricing of its IPO of 3,000,000 shares of its common stock at an initial offering price of $10.00 per share. In addition, the Company granted the underwriters a 45-day option to purchase up to an additional 450,000 shares of common stock at the public offering price. The Company’s common stock commenced trading on The Nasdaq Capital Market on December 17, 2020 under the ticker symbol “VIRI”. The IPO closed on December 21, 2020 at which time the underwriters exercised their option to purchase 450,000 additional shares of the Company’s common stock bringing the total number of shares of common stock sold by the Company to 3,450,000 shares. The gross proceeds from the IPO, including proceeds from the exercise of the underwriters’ option to purchase additional shares, were $34.5 million. The net proceeds of the IPO were approximately $31.1 million after deducting underwriting discounts, commissions and offering expenses payable by the Company, including offering costs accrued and unpaid as of December 31, 2020. In conjunction with the IPO, the Company granted the underwriters 172,500 warrants to purchase shares of the Company’s common stock at an exercise price of $12.50 per share, which is 125% of the initial public offering price.

Material Uncertainty

Since its founding, the Company has been engaged in organizational activities, including raising capital, and research and development activities. The Company has not generated any revenues to date. As such,

the Company is subject to all of the risks associated with any development-stage biotechnology company that has substantial expenditures for research and development. Since inception, the Company has incurred losses and negative cash flows from operating activities. The Company does not expect to generate positive cash flows from operating activities in the near future.

For the years ended December 31, 2021 and 2020, the Company incurred net losses of $15,960,268 and $10,346,395, respectively, and had net cash flows used in operating activities of $15,689,578 and $3,895,195, respectively. As of December 31, 2021, the Company had an accumulated deficit of approximately $43.9 million and is expected to incur losses in the future as it continues its development activities. Since its inception, the Company has funded its losses primarily through issuance of members’ interests, convertible debt instruments and issuance of equity securities.

As of the date these financial statements are issued, based on reasonable estimates, current cash is sufficient to fund foreseeable operating expenses and obligations for at least 12 months. The Company will need to raise additional capital within the next 13 to 18 months to complete clinical development of and to commercially develop its product candidates. There is no assurance that such financing will be available when needed or on acceptable terms. The financial statements do not include any adjustments to reflect this uncertainty.

2. Summary of Significant Accounting Policies

Basis of Presentation

The accompanying financial statements have been prepared in conformity with U.S. generally accepted accounting principles (“U.S. GAAP”). Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”).

Use of Estimates

The preparation of these financial statements and accompanying notes in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. The Company's significant estimates and assumptions include estimated work performed but not yet billed by contract manufacturers, engineers and research organizations, the valuation of equity and stock-based related instruments, and the valuation allowance related to deferred taxes. Some of these judgments can be subjective and complex, and, consequently, actual results could differ from those estimates. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Actual results could differ from those estimates.

Segment Information

The Company operates in one reportable segment based on management’s view of its business for purposes of evaluating performance and making operating decisions.

Concentrations of Credit Risk

Cash is potentially subject to concentrations of credit risk. The Company believes it is not exposed to significant credit risk due to the financial strength of the depository institutions in which the cash is held.

Fair Value Measurements

ASC Topic 820, Fair Value Measurement, provides guidance on the development and disclosure of fair value measurements. Under this accounting guidance, fair value is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. As such, fair value is a market-based measurement that should be determined based on assumptions that market participants would use in pricing an asset or a liability.

The accounting guidance classifies fair value measurements in one of the following three categories for disclosure purposes:

● Level 1 — Quoted prices in active markets for identical assets or liabilities.

The carrying amount of the Company’s financial instruments, including cash, accounts payable and accrued expenses approximate their fair values.

Cash

Cash is maintained in bank deposit accounts, which exceed the federally insured limits of $250,000. The Company does not have any cash equivalents.

Variable Interest Entities

When determining whether a legal entity should be consolidated, the Company first determines whether it has a variable interest in the legal entity. If a variable interest exists, the Company determines whether the legal entity is a variable interest entity (“VIE”) due to either: 1) a lack of sufficient equity to finance its activities, 2) its equity holders lacking the characteristics of a controlling financial interest, or 3) the legal entity being structured with non-substantive voting rights. If the Company concludes that the legal entity is a VIE, the Company next determines whether it is the primary beneficiary due to it possessing both: 1) the power to direct the activities of a VIE that most significantly impact the VIE’s economic performance, and 2) the obligation to absorb losses of the VIE that potentially could be significant to the VIE or the right to receive benefits from the VIE which could be significant to the VIE. If the Company concludes that it is the primary beneficiary, it consolidates the entity.

Equity Method Investment

In 2017, the Company purchased a 25% ownership in Northriver Pharm, LLC (“NRP”) in the amount of $125,000 from existing investors of NRP. NRP is an entity with common ownership with the Company’s former Chief Executive Officer and Founder, who is also the Founder and sole voting member of NRP. The Company evaluated the ownership under VIE guidance and has determined that they do not have the power and economics to control the entity and are not the entity most closely associated with NRP.

The Company previously accounted for the investment under the equity method of accounting. However, consistent with equity method accounting guidance, the Company has now discontinued applying the equity method accounting as the investment has been reduced to zero and the Company has not committed to provide further financial support and there is no expected return to profitable operations by NRP.

Deferred Issuance Costs

Deferred issuance costs are netted against amounts outstanding for the convertible promissory notes when the offering is completed. Expenditures incurred prior to the closing are capitalized as deferred issuance costs in non-current assets. There were no amounts capitalized prior to an offering as of December 31, 2021 and 2020.

Upon closing, capitalized costs relating to debt offerings are recognized into interest expense over the terms of the instruments using the effective interest method. The Company recognized interest expense related to the amortization of issuance costs for the convertible promissory notes of $53,983 for the year ended December 31, 2020. The Company did not recognize any interest expense related to the amortization of issuance costs in 2021.

Accrued Salaries

Accrued salaries represented outstanding guaranteed payments to the Company’s former President and former Chief Executive Officer and Founder and were recognized when incurred and considered payable. These amounts were paid in 2021 and no amounts remained outstanding at December 31, 2021.

Income Taxes

The Company provides for income taxes using the asset and liability approach. Deferred tax assets and liabilities are recorded based on the differences between the financial statement and tax bases of assets and liabilities and the tax rates in effect when these differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if, based on the weight of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The Company operated as an Alabama limited liability company until its Corporate Conversion. Therefore, the Company passed through all income and losses to its members until this point. As of December 31, 2021 and 2020, the Company had a full valuation allowance against deferred tax assets.

The Company is subject to the provisions of ASC 740, Income Taxes. Under ASC 740, consideration is given to the recognition and measurement of tax positions that meet a “more-likely-than-not” threshold. A tax position is a position taken in a previously filed tax return or a position expected to be taken in a future that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions include the Company’s status as a pass-through entity until December 16, 2020 and as a corporation thereafter. The recognition and measurement of tax positions taken for various jurisdictions consider the amounts and probabilities of outcomes that could be realized upon settlement using the facts, circumstances, and information available at the reporting date. The Company has determined that it does not have any material unrecognized tax benefits or obligations as of December 31, 2021 and 2020. The Company recognizes interest and penalties related to uncertain tax positions, if any, in income tax expense. The Company is not currently under examination by the Internal Revenue Service or by state tax authorities and the Company’s tax year remains subject to examination by the tax authorities.

Basic and Diluted Net Income (Loss) per Share

Basic net loss per common share (“EPS”) is computed in accordance with U.S. GAAP. Basic EPS is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted EPS reflects potential dilution and is computed by dividing net loss by the weighted average number of common shares outstanding during the period increased by the number of additional common shares that would have been outstanding if all potential common shares had been issued and were dilutive. However, potentially dilutive securities are excluded from the computation of diluted EPS to the extent that their effect is anti-dilutive. For the years ended December 31, 2021 and 2020, the Company had 1,041,647 and 811,663 options, respectively, and 172,500 and 276,583 warrants, respectively, to purchase common shares outstanding that were anti-dilutive.

EPS and weighted-average shares outstanding for the year ended December 31, 2020, have been computed to give effect to the Corporate Conversion that occurred December 16, 2020 prior to the Company’s initial public offering. In conjunction with the Corporate Conversion, all of the Company’s outstanding members’ equity automatically converted into shares of common stock, based on the relative rights of the Company's pre-IPO equity holders.

Research and Development

Equity and Share-Based Compensation

The Company recognizes compensation expense relating to equity-based payments based on the fair value of the equity or liability instrument issued. For equity-based instruments, the expense is based upon the grant date fair value and recognized over the service period. For awards with a performance condition, compensation expense is recognized over the requisite service period if it is probable that the performance condition will be satisfied. For awards to non-employees, the Company recognizes compensation expense in the same manner as if the Company had paid cash for the goods or services. The Company estimates the fair value of options and warrants granted using an options pricing model, see Note 11. Expense is recognized within general and administrative expenses and forfeitures are recognized as they are incurred.

Emerging Growth Company Status

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that is (i) no longer an emerging growth company or (ii) affirmatively and irrevocably opt out of the extended transition period provided by the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (ASC 740): Simplifying the Accounting for Income Taxes. The standard eliminates the need for an organization to analyze whether the following apply in a given period: (1) the exception to the incremental approach for intraperiod tax allocation; (2) the exceptions to accounting for basis differences when there are ownership changes in foreign investments; and (3) the exception in interim periods income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also is designed to improve financial statement preparers’ application of income tax-related guidance and simplify GAAP for (1) franchise taxes that are partially based on income, (2) transactions with a government that result in a step-up in the tax basis of goodwill, (3) separate financial statements of legal entities that are not subject to tax, (4) enacted changes in tax laws in interim periods and (5) certain income tax accounting for employee stock ownership plans and affordable housing projects. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. The Company is continuing to evaluate the impacts that ASU 2019-12 will have on its financial statements.

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40). ASU 2020-06 eliminates the beneficial conversion and cash conversion accounting models for convertible instruments. It also amends the accounting for certain contracts in an entity’s own equity that are currently accounted for as derivatives because of specific settlement provisions. The new guidance also modifies how particular convertible instruments and certain contracts that may be settled in cash or shares impact the diluted EPS computation. ASU 2020-06 is effective for fiscal years beginning after December 15, 2023, including interim periods within those annual periods. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020, including interim periods within those annual periods. ASU 2020-06 allows companies to adopt the guidance through either a modified retrospective method of transition or a fully retrospective method of transition. The Company is continuing to evaluate the impacts that ASU 2020-06 will have on its financial statements.

3. Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:

December 31, December 31,

Other miscellaneous current assets 863 324

4. License Agreement

The Company entered into a Know-How License Agreement (the “Agreement”) with the University of Alabama (“UA”) in 2012. In consideration for the Agreement, UA received a 10% non-voting membership interest in the Company. Upon the adoption of the May 1, 2020 Second Amended and Restated Operating Agreement, the non-voting membership interest converted to a voting membership interest as discussed in Note 7 below. Upon the Corporate Conversion, voting membership interest was converted into shares of common stock. The Agreement is in effect for 25 years and will terminate on June 1, 2037.

5. Accrued Expenses

Accrued expenses consist of the following:

December 31, December 31,

Accrued interest on preferred members’ interests 188,085 188,085

Accrued clinical research costs 138,522 —

Accrued director fees 31,000 —

Accrued professional fees 24,100 8,992

6. Convertible Promissory Notes, Net

On March 31, 2020, June 10, 2020, and August 21, 2020, the Company completed and closed its first, second, and third round, respectively, of its fifth offering subscription (the “Fifth Offering”) for the issuance of convertible promissory notes (collectively with the promissory notes of the Fourth Offering, the “Notes”) for convertible preferred membership interests and received $1,162,500, $706,633, and $125,000, respectively. The terms of both the First Round and Second Round were substantially identical to those of the Third Round, except that the Third Round allowed the investors to convert the cash interest component into additional equity.

There were no Notes outstanding as of December 31, 2020, after giving effect to the July 2020 and November 2020 maturity of Notes sold in the first and second rounds of its fourth offering subscription (the “Fourth Offering”) and the conversion of the remaining notes into membership interests prior to and in conjunction with the Corporate Conversion, at which time all of the Company’s outstanding membership interest converted into shares of common stock.

The Notes bore interest at 8% per annum, with a maximum term of 18 months. The Notes were unsecured obligations and did not contain any financial covenants or restrictions on the payments to members, in incurrence of indebtedness, or the issuance or repurchase of securities by the Company.

The Company recognized interest expense related to the Notes as follows:

December 31, December 31,

Fourth Offering $ — $ 231,364

Fifth Offering — 98,634

In addition, each Note included warrant coverage of 25% of the principal value of the Note, which provided an option to purchase additional membership interests in cash at the same price as the conversion of the Note. The warrant coverage was exercisable on the conversion date, or within 30 days post conversion. If not exercised within this 30-day period, the warrant coverage was forfeited.

The warrant coverage was evaluated to determine whether the arrangements were embedded or free-standing (i.e., to determine whether they needed to be bifurcated and accounted for as a separate financial instrument). However, since the warrants were only exercisable at the time of conversion or within 30 days post conversion, and there were restrictions on transfer, they were considered to be non-detachable and did not require to be accounted for separately from the hybrid instrument.

None of the outstanding warrants of $366,250 were exercised within the 30-day exercise period post maturity of the July 20, 2020 Notes, and thus were forfeited. At the Corporate Conversion outstanding warrants of $231,250, relating to the maturity of the November 2020 Notes, were converted into 29,629 exercisable warrants of the Company’s common stock, of which 21,620 warrants were exercised within the 30-day exercise period post maturity and the remaining 8,009 were forfeited.

At the Corporate Conversion, the remaining Notes matured. As a result, the aggregate outstanding principal amount of $3,279,133 plus accrued interest through the conversion date of December 16, 2020 of $196,769 converted into memberships interests based on the carrying value of the convertible debt, net of unamortized deferred offering costs of $41,445 with no gain or loss recognized. Accrued interest of $9,551 was paid in cash. Warrants totaling $820,033 were converted into 105,044 exercisable warrants of the Company’s common stock, of which 961 warrants were exercised and 104,083 were outstanding as of December 31, 2020. In January 2021, 25,315 of these warrants were exercised for $197,562. The remaining unexercised warrants of 78,768 expired on January 20, 2021.

7. Members’ Equity

On May 1, 2020, the Company adopted its Second Amended and Restated Operating Agreement (the “Amended Operating Agreement”). The Amended Operating Agreement changed the Company’s classes of membership from two classes (voting and non-voting) to one class of membership and gave the Company’s board of directors (the “Board”) the right to make all decisions concerning the business, affairs and properties of the Company. Under the Amended Operating Agreement, the members had the right to vote on the dissolution and termination of the Company, the removal of existing directors, the appointment of new directors, and any plan of conversion or merger.

In July 2020, the Board approved two issuances of membership interests equal to an aggregate of 5.0% of the Company’s total membership interests to the Company’s founder. These issuances were considered equity-based compensation award grants that do not have any future service conditions. As a result, all compensation expense associated with such issuances were recognized upon issuance. In order to determine the amount of compensation associated with such issuances, the Company utilized recent observable prices under the terms of its Fifth Offering. For the year ended December 31, 2020, the Company recognized $2,000,000 of compensation expense for these issuances.

In July 2020, the Notes issued in the first round of the Fourth Offering matured. As a result, the outstanding principal amount of $1,465,000 plus accrued interest of $172,800 converted into membership interest based on the carrying value of the convertible debt with no gain or loss recognized. Accrued interest of $3,000 was paid in cash.

In November 2020, the Notes issued in the second round of the Fourth Offering matured. As a result, the outstanding principal amount of $925,000 plus accrued interest of $111,000 converted into membership interest based on the carrying value of the convertible debt with no gain or loss recognized. No accrued interest was paid in cash.

In conjunction with the Corporate Conversion, all of the Company’s outstanding membership interests converted into shares of common stock.

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8.Stockholders’ Equity

The Company’s certificate of incorporation adopted on December 16, 2020, authorizes the issuance of two classes of stock to be designated, respectively, “Common Stock” and “Preferred Stock”. The total number of shares which the Company is authorized to issue is 45,000,000, each with a par value of $0.0001 per share. Of these shares, 43,000,000 shall be Common Stock and 2,000,000 shall be Preferred Stock.

Common Stock

Dividends

Subject to the rights of holders of all classes of Company stock outstanding having rights that are senior to or equivalent to holders of the Common Stock are entitled to receive dividends when and as declared by the Board.

Liquidation

Subject to the rights of holders of all classes of stock outstanding having rights that are senior to or equivalent to the holders of Common Stock as to liquidation, upon liquidation, dissolution or winding up of the Company, the assets of the Company will be distributed to the holders of the Common Stock.

Voting

The holders of the Common Stock are entitled to one vote for each share of Common Stock held. There is no cumulative voting.

Preferred Stock

Preferred Stock may be issued from time to time by the Board in one or more series.

9. Related Parties

The Company uses Gendreau Consulting, LLC, a consulting firm (“Gendreau”), for drug development, clinical trial design, and planning, implementation and execution of contracted activities with CROs. Gendreau’s managing member became the Company’s Chief Medical Officer (“CMO”) effective January 1, 2021. The Company has and will continue to contract the services of the CMO’s spouse through the firm to perform certain activities in connect with the Company’s ongoing clinical trial in FM. During the years ended December 31, 2021 and 2020, the Company paid Gendreau $326,416 and $450, respectively, and had accounts payable of $24,840 and $7,916 to Gendreau as of December 31, 2021 and 2020, respectively.

10. Commitments and Contingencies

Litigation

The Company is subject, from time to time, to claims by third parties under various legal disputes. The defense of such claims, or any adverse outcome relating to any such claims, could have a material adverse effect on the Company’s liquidity, financial condition and cash flows.

On August 26, 2021, Torreya Capital LLC (“Torreya”) filed a demand for arbitration with the American Arbitration Association in New York, New York in connection with a claim by Torreya that it is entitled to a transaction fee of $1,035,000 in connection with the Company’s IPO, plus the costs of arbitration, based on services Torreya alleges it provided for the Company as a financial advisor to the Company prior to the IPO. On December 20, 2021, in order to avoid the risk, inconvenience and expense of a continued dispute, the Company entered into a release and settlement agreement with Torreya, whereby the Company agreed

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to pay Torreya $325,000 for the release and discharge of any and all claims, liabilities and costs related to the arbitration. The Company paid the obligation prior to December 31, 2021, the cost of which is included in other expense in the accompanying statements of operations.

Employment Agreement and Deferred Compensation Plan

The Company has employment agreements with its CEO, SVP of Operations, and SVP of Finance (the “Executives”), as well as its CMO and Director of Clinical Operations (the “Director”). Per the terms of the agreements, each Executive, the CMO and the Director are entitled to receive a cash bonus with a target amount of no less than 50% for the CEO, 35% for the CMO and 20% for the SVP of Operations, the SVP of Finance, and the Director, of the then-current base salary. The bonuses are subject to achievement of annual bonus metrics set by the Board. The employment agreements will continue in effect until terminated by either party pursuant to its terms. Upon termination of the agreement by the Company for any reason other than for cause, death or disability or by one of the Executives, CMO or Director for good reason, the Company shall pay to an Executive a “Severance Payment” equal to the aggregate of the Executive’s then-current annual base salary plus an amount equal to a prorated portion of the Executive’s cash bonus for the year in which the termination occurs. The Severance Payment to an Executive is payable in cash over a period of one year. The Company shall pay to the CMO a Severance Payment equal to 25% of the then-current annual base salary plus a prorated portion of the CMO’s cash bonus for the year in which the termination occurs over a period of three months and health benefits for a period of 12 months unless the CMO becomes eligible for health benefits under another employer. If the termination of the agreement is related to a change of control, the Company shall pay to the Executives and the CMO a “Change of Control Termination Payment” equal to the aggregate of 1.0 times the then-current annual base salary plus an amount equal to 1.0 times the Executives’ and CMO’s cash bonus for year in which the termination occurs. The Change of Control Termination Payment for the Director is equal to the aggregate of 0.5 times the then-current annual base salary plus and amount equal to 0.5 times the Director’s cash bonus for the year in which the termination occurs. The Change of Control Termination Payments are payable in a single cash lump sum no later than 45 days after the triggering event.

In July 2020, the Company entered into an agreement with Dr. William L. Pridgen, former Chief Executive Officer of the Company, for the payment and satisfaction of salary accrued and owed to Dr. Pridgen in the amount of $549,046 in a combination of equity and cash. Prior to the pricing of the Company’s IPO, the split between the equity portion and the cash portion was determined and the Company issued members interest for repayment of $336,880 of accrued salary. The remaining balance to be paid in cash of $212,166, less a salary advance of $100,000 previously paid to Dr. Pridgen, outstanding at December 31, 2020 was paid in January 2021. There were no amounts outstanding as of December 31, 2021.

In August 2020, the Company amended the President’s executive employment agreement to provide for an equity bonus in the form of non-qualified stock options upon the completion of an IPO, in lieu of cash and in-kind bonuses that were provided for in the original agreement. In addition to the equity bonus, the President was to participate in the Company’s executive bonus program alongside and to the same extent the other executives were awarded and paid such bonuses at a target rate of 50% of his base salary. A previously paid bonus advance of $150,000 offset the equity bonus options granted. The Company also owed the President accrued salary in the amount of $466,667. The President was issued members interest for repayment of $200,000 of accrued salary just prior to the pricing of the IPO on December 16, 2020. The remaining balance of $266,667 to be paid in cash outstanding at December 31, 2020 was paid in January 2021. There were no amounts outstanding as of December 31, 2021. Upon the pricing of the Company’s IPO, the President resigned and was appointed to the Company’s Board.

11. Share-Based Compensation

Equity Incentive Plan

The Company’s 2020 Equity Incentive Plan (the “Plan”) became effective on December 21, 2020. Under the Plan, 812,500 shares are authorized to be issued. As of December 31, 2021 and 2020, 63,353 and 293,337 shares, respectively, were available for future grants.

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The Plan provides for grants to employees, members of the Board, consultants and advisors to the Company, in the form of stock awards, options, and other equity-based awards. The amount and terms of grants are determined by the Board. Stock options have a maximum term of 10 years after date of grant and are exercisable in cash or as otherwise determined by the Board. The maximum aggregate number of shares of shares during any calendar year for an individual is limited to 500,000.

The table below sets forth the outstanding options to purchase common shares under the Plan:

Weighted

Average

Weighted Remaining

Average Contractual

Number of Exercise Term

Shares Price (Years)

Outstanding at December 31, 2019 — $ — —

As of December 31, 2021 and 2020, the aggregate intrinsic value of options outstanding and exercisable was $0.

During the year ended December 31, 2021, the Company granted certain individuals options to purchase 229,984 shares of the Company’s common stock with an average exercise price of $6.85 per share, contractual terms of 10 years and vesting periods ranging from 8.33% monthly over one year to 33.333% vesting after one year with the remaining 66.667% vesting in 24 monthly installments, thereafter. The options had an aggregate grant date fair value of $1,150,284 as calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option pricing model include: (1) discount rates ranging from 0.505% to 1.075% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected lives ranging from 5.27 years to 6.0 years based on the simplified method (vesting plus contractual term divided by two), (3) expected volatility ranging from 89.04% to 90.16% based on the average historical volatility of comparable companies' stock, (4) no expected dividends and (5) fair market value of the Company's stock ranging from $6.50 to $7.51 per share.

Upon the closing of the Company’s IPO, the Company granted options to employees, pursuant to their individual employment agreements, to purchase 519,163 shares of the Company’s common stock with an exercise price of $10.00 per share and a contractual term of 10 years. The options were 100% vested at the grant date. The options had an aggregate grant date fair value of $3,441,687 as calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option pricing model include: (1) discount rate of 0.39% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected life of 5.0 years based on the simplified method (vesting plus contractual term divided by two), (3) expected volatility of 88.3% based on the average historical volatility of comparable companies' stock, (4) no expected dividends and (5) fair market value of the Company's stock of $9.80 per share.

For the years ended December 31, 2021 and 2020, the Company recognized share-based compensation expense related to stock options of $322,881 and $3,441,687, respectively. The unrecognized compensation expense for stock options at December 31, 2021 was $827,402 and there was no unrecognized

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compensation expense related to stock options at December 31, 2020 as the granted options were 100% vested upon issuance.

Stock Options for Unregistered Securities

In addition to the stock options issued under the Plan, and in conjunction with the IPO, the Company granted non-qualified stock options to purchase 292,500 shares of common stock as provided for in the President’s employment agreement (the “President Options”). The President Options are exercisable within 10 years of the date of grant at $10.00 per share, were 100% vested at the grant date and have a remaining contractual term of 8.96 years.

The options had an aggregate grant date fair value of $1,987,831 that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option pricing model include: (1) discount rate of 0.37% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected life of 5.0 years based on the simplified method (vesting plus contractual term divided by two), (3) expected volatility of 88.3% based on the average historical volatility of comparable companies' stock, (4) no expected dividends and (5) fair market value of the Company's stock of $10.00 per share. The Company recognized share-based compensation expense of $1,987,831 during 2020 related to the stock options. As of December 31, 2021 and 2020, there was no unrecognized compensation expense related to these options as they were 100% vested upon issuance.

The shares of common stock issuable upon exercise of the President Options will be unregistered, and the option agreement does not include any obligation on the part of the Company to register such shares of common stock. Consequently, the Company has not recognized a contingent liability associated with registering the securities for the arrangement. As of December 31, 2021, the aggregate intrinsic value of the President Options was $0.

Underwriters Warrants

In conjunction with the IPO, the Company granted the underwriters warrants to purchase 172,500 shares of common stock at an exercise price of $12.50 per share. The warrants have a five-year contractual term and were not exercisable prior to December 21, 2021.

The Company has accounted for the warrants as equity-based awards issued to a non-employee. The warrants had an aggregate grant date fair value of $1,108,785 that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option pricing model include: (1) discount rate of 0.37% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected life of 5.0 years, (3) expected volatility of 88.3% based on the average historical volatility of comparable companies' stock, (4) no expected dividends and (5) fair market value of the Company's stock of $10.00 per share.

There was no net impact recognized by the Company in the accompanying financial statements as the warrants were equity-based awards issued for services rendered by the underwriter for the IPO that was offset by the Company recognizing the fair value of the warrants as a direct and incremental costs associated with the IPO by reducing paid-in capital for the same amount. There is no unrecognized compensation expense for these awards as of December 31, 2020.

As of December 31, 2021, the warrants have a remaining contractual term of 3.96 years and are 100% exercisable. The aggregate intrinsic value of the warrants outstanding was $0.

12. Income Taxes

Prior to the Company’s Corporate Conversion, the Company operated as an Alabama limited liability company that passed through income and losses to its members. As a result, the Company was not subject to any U.S. federal or U.S. state income taxes as the related tax consequences are reported by the individual

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members. Upon the Corporate Conversion, the Company converted to a Delaware corporation and is now subject to filing U.S. federal and various U.S. state income tax returns. The Company elected to adopt the accrual method of accounting for tax reporting purposes in its initial corporate returns for the period ended December 31, 2020. As the Company was incorporated in December 2020, all tax years of the Company remain open to examination by tax authorities. As of December 31, 2021, the Company has U.S. federal and state net operating loss carryforwards of approximately $17,956,000, which have an indefinite carryforward.

A reconciliation of the U.S. federal income tax rate to the Company’s effective tax rate is as follows:

Year Ended

December 31,

U.S. federal statutory income tax rate 21.00 % 21.00 %

Permanent differences (0.33) % (1.56) %

State taxes, net of federal benefit 4.47 % 4.20 %

Deferred tax true-ups (1.82) % — %

Other adjustments 0.15 % 0.27 %

Change in valuation allowance (23.47) % (23.91) %

Effective Income Tax rate — % — %

Deferred taxes are recognized for temporary differences between the basis of assets and liabilities for financial statement and income tax purposes. The significant components of the Company’s deferred tax assets are comprised of the following:

As of December 31,

Deferred tax assets:

Accrual to cash adjustments — 314,492

Deferred tax liabilities:

Net deferred taxes $ — $ —

As of December 31, 2021, the Company has not generated sufficient positive evidence for future earnings to support a position that it will be able to realize its net deferred tax asset. The Company has significant negative evidence to overcome in the form of cumulative pre-tax losses from continuing operations since its formation, as well as projected losses for the current year. Therefore, it will continue to maintain a full valuation allowance on its U.S. federal and state net deferred tax asset. The change in the valuation allowance offset the income tax benefit related to the pre-tax loss for the year ended December 31, 2021. The Company does not have any material unrecognized tax benefits as of December 31, 2021.

The Company experienced a net change in valuation allowance of $3,745,299 and $1,387,078 for the years ended December 31, 2021 and 2020, respectively.

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On March 27, 2020, the Coronavirus Aid, Relief and Economic Security (“CARES Act”) Act was enacted and signed into law. The CARES Act included a number of income tax law changes, including modifications to the interest limitation under IRC §163(j) and reinstatement of the ability to carry back net operating losses. The income tax items in the CARES Act do not have an impact on the Company’s 2021 or 2020 income tax provision.

13. Subsequent Events

In February 2022, the Company entered into an Unrestricted Grant Research Agreement with the Bateman Horne Center of Excellence, Inc., to sponsor an open-label, pilot study for the treatment of Post-Acute Sequelae of SARS-CoV-2 (“PASC”) with a combination therapy of valacyclovir and celecoxib (“IMC-2”). The Company has agreed to provide a one-time grant in the amount of $180,000 to fund the research study.

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Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and Procedures.

Our management, with the participation of our Chief Executive Officer and SVP of Finance, has evaluated the effectiveness of our disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this Annual Report on Form 10-K. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost benefit relationship of possible controls and procedures.

Based on such evaluation, our Chief Executive Officer and SVP of Finance have concluded that, as of the end of the period covered by this Annual Report on Form 10-K, our disclosure controls and procedures were effective to ensure that the information required to be disclosed by us in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in rules, regulations and forms of the SEC, including ensuring that such material information is accumulated by and communicated to our management, including our Chief Executive Officer and SVP of Finance, as appropriate to allow timely decisions regarding required disclosure.

Management’s Report on Internal Control Over Financial Reporting

Management is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act. Our internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

Management utilized the criteria established in the Internal Control – Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO) to conduct an assessment of the effectiveness of our internal control over financial reporting as of December 31, 2021. Based on the assessment, management has concluded that, as of December 31, 2021, our internal control over financial reporting was effective.

As an emerging growth company, management’s assessment of internal control over financial reporting was not subject to attestation by our independent registered public accounting firm.

Changes in Internal Control Over Financial Reporting

In March 2021, the Board approved, and the Company adopted, a Delegation of Authority Policy to improve segregation of duties in our authorization processes. In April 2021, we contracted with a third party to provide experienced controller assistance for post-closing procedures as well as providing segregation of duties for initiating and approving wire transactions and other payments. In addition, management added additional mitigating controls with regards to cash disbursements. In June 2021, we contracted with a third-party accounting firm to provide outsourced internal audit services (the “IA Firm”). The IA Firm assisted us in designing an internal control framework around key processes and controls. We have identified the gaps in our internal control processes and have put in place mitigating controls to address these gaps. In October 2021 and February 2022, the IA Firm completed its testing of our controls. Based on their report, we have

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determined that our internal controls over financial reporting were effective as of December 31, 2021. However, we cannot assure that the steps and measures we have implemented to remediate our material weakness will be sufficient to prevent future material weaknesses or significant deficiencies in our internal control over financial reporting from occurring.

Other than as described above, there has been no change in our internal control over financial reporting identified in connection with the evaluation required by Rule 13a-15(d) and 15d-15(f) of the Exchange Act that occurred during the quarter ended December 31, 2021 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

Item 9B. Other Information

None.

PART III

Item 10. Directors, Executive Officers, and Corporate Governance

We incorporate the information required by this Item 10 by reference to the definitive proxy statement for our 2022 annual meeting of shareholders, to be filed with the SEC.

The following is a list of our executive officers as of the date of this Annual Report.

Name Position

Greg Duncan Chairman and Chief Executive Officer

R. Michael Gendreau, M.D., Ph.D. Chief Medical Officer

Ralph Grosswald Vice President of Operations

Angela Walsh Senior Vice President of Finance

Item 11. Executive Compensation

We incorporate the information required by this Item 11 by reference to the definitive proxy statement for our 2022 annual meeting of shareholders, to be filed with the SEC.

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

We incorporate the information required by this Item 12 by reference to the definitive proxy statement for our 2022 annual meeting of shareholders, to be filed with the SEC.

Item 13. Certain Relationships and Related Transactions, and Director Independence

We incorporate the information required by this Item 13 by reference to the definitive proxy statement for our 2022 annual meeting of shareholders, to be filed with the SEC.

Item 14. Principal Accountant’s Fees and Services

The Independent Registered Public Accounting Firm is Dixon Hughes Goodman LLP (PCAOB Firm ID No. 57) located in Atlanta, Georgia. We incorporate the remaining information required by this Item 14 by reference to the definitive proxy statement for our 2022 annual meeting of shareholders, to be filed with the SEC.

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Part IV

Item 15. Exhibits and Financial Statement Schedules

1. Financial Statements

Reference is made to the Index to Financial Statements under Item 8, Part II hereof.

2. Financial Statement Schedules

The Financial Statement Schedules have been omitted because they are not applicable, not required, or the information is shown in the financial statements or related notes.

3. Exhibits

EXHIBIT INDEX

ExhibitNumber Description

109

23.1* Consent of Dixon Hughes Goodman LLP

101.SCH* XBRL Schema Document.

101.CAL* XBRL Calculation Linkbase Document.

101.DEF* XBRL Definition Linkbase Document.

101.LAB* XBRL Label Linkbase Document.

101.PRE* XBRL Presentation Linkbase Document.

* Filed with this Annual Report on Form 10-K.

+ Indicates management contract or compensatory plan.

Item 16. Form 10-K Summary

None.

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SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 18, 2022.

VIRIOS THERAPEUTICS, INC.

By: /s/ Greg Duncan

Greg Duncan

Chairman of the Board of Directors, and

Chief Executive Officer

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on March 18, 2022 by the following persons on behalf of the registrant and in the capacities indicated:

Signature Title

/s/ Greg Duncan Chairman of the Board of Directors, and

Greg Duncan Chief Executive Officer

(Principal Executive Officer)

Angela Walsh (Principal Financial and Accounting Officer)

/s/ Richard Burch Director

Richard Burch

/s/ Abel De La Rosa Director

Abel De La Rosa

/s/ David Keefer Director

David Keefer

/s/ William L. Pridgen, MD Director

William L. Pridgen, M.D.

/s/ John C. Thomas, Jr. Director

John C. Thomas, Jr.

/s/ Richard J. Whitley, MD Director

Richard J. Whitley, M.D.

DWTX US Equity

DWTX · 10-K · period ended 2021-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers, and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant’s Fees and Services

Item 15. Exhibits and Financial Statement Schedules

Item 16. Form 10-K Summary

DWTX US Equity☆

DWTX · 10-K · period ended 2021-12-31

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

Item 7A. Quantitative and Qualitative Disclosures About Market Risk

Item 8. Financial Statements and Supplementary Data

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

Item 9A. Controls and Procedures

Item 9B. Other Information

Item 10. Directors, Executive Officers, and Corporate Governance

Item 11. Executive Compensation

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Item 13. Certain Relationships and Related Transactions, and Director Independence

Item 14. Principal Accountant’s Fees and Services

Item 15. Exhibits and Financial Statement Schedules

Item 16. Form 10-K Summary

DWTX US Equity