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 candidate, which we have named IMC-1, is a novel, proprietary, fixed dose combination of famciclovir and celecoxib. IMC-1 represents a novel combination 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 herpes 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. We believe this novel approach was a germane consideration in the 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. IMC-1 was the focus of our Phase 2b FORTRESS study.
In September 2022, we announced the top line results from our FORTRESS study in FM. Overall, the FORTRESS study did not achieve statistical significance on the prespecified primary efficacy endpoint of change from baseline to Week 14 in the weekly average of daily self-reported average pain severity scores comparing IMC-1 to placebo (p=0.302). However, based on the analysis of the FORTRESS data, community based patients who have not participated in prior FM clinical trials demonstrated statistically significant improvement on the primary endpoint of reduction in FM related pain versus placebo, irrespective of when they enrolled in the study. We believe focusing the forward development of IMC-1 on these “new” patients represents a viable and manageable path forward. The Company is scheduled to meet with the FDA in March 2023 to discuss the most appropriate next steps in advancing IMC-1 development as a treatment for FM and hopefully agree on a Phase 3 program. If alignment can be reached, management will consider raising additional capital to fund future research and/or seek a partner to develop or co-develop IMC-1 as a treatment for FM.
For the Phase 3 program, we intend to run two qualifying pivotal trials demonstrating the safety and efficacy of IMC-1 treating patients with FM. The first Phase 3 study is planned to be a four-arm, multifactorial design to demonstrate the relative safety and efficacy of IMC-1 as compared to celecoxib alone, famciclovir alone and placebo. The second Phase 3 study is planned to be a two-arm study comparing IMC-1 to placebo.
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All patients from the Phase 3 program will be offered the opportunity to enroll into an open label safety follow-on extension study with all on IMC-1, which is the third key component of the Phase 3 program proposal.
We have not generated revenues and have incurred losses since inception. Our net losses were $12,247,834 and $15,960,268 for the years ended December 31, 2022 and 2021, respectively, and our accumulated deficit at December 31, 2022 was $56,173,207. 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.
The global economy, including credit and financial markets, has experienced extreme volatility and disruptions including severely diminished liquidity and credit availability, declines in consumer confidence, declines in economic growth, increases in unemployment rates, increases in inflation rates and uncertainty about economic stability. For example, the current conflict between Ukraine and Russia has created extreme volatility in the global capital markets and is expected to have further global economic consequences, including disruptions of the global supply chain and energy markets. Any such volatility and disruptions may have adverse consequences on us or the third parties on whom we rely. If the equity and credit markets deteriorate, including as a result of political unrest or war, it may make any necessary debt or equity financing more difficult to obtain in a timely manner or on favorable terms, if at all.
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;
● 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. 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 2022 primarily related to our FORTRESS study which completed in August 2022 and two long-term animal toxicology studies, a 26-week study in rats, which completed in the first quarter of 2022 and a 39-week study in dogs, which completed in the second quarter of 2022. Once we initiate our Phase 3 program in FM, we expect our research and development expenses to increase. 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
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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.
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Other Income (Expense), Net
In 2022, other income (expense), net consists of interest income earned on cash in a money market account. In 2021, other income (expense), net primarily consists of the cost associated with the Release and Settlement Agreement with Torreya Capital LLC. See Note 8 to the Financial Statements included in this Annual Report on Form 10-K.
Related Parties
The Company uses Gendreau Consulting, LLC (“Gendreau”), a consulting firm, 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 Gendreau to perform certain activities in connection with the Company’s clinical programs.
For a full discussion of related party transactions see Note 7 to the Financial Statements included in this Annual Report on Form 10-K.
Income Taxes
As of December 31, 2022, the Company has U.S. federal and state net operating loss carryforwards of approximately $22,168,000. 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, 2022 and 2021 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
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(“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
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. 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 income (expense):
Other expense — (325,000)
Years Ended December 31, 2022 and 2021
Research and Development Expenses
Research and development expenses decreased by $2.7 million to $8.1 million for the year ended December 31, 2022 from $10.8 million for the year ended December 31, 2021. The decrease was primarily due to decreases in expenses for clinical trials of $1.5 million, toxicology studies of $1.1 million and drug
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development and manufacturing costs of $0.4 million partially offset by increases in salaries and related personnel costs of $0.2 million and amortization of research grant of $0.1 million.
General and Administrative Expenses
General and administrative expenses decreased by $0.6 million to $4.2 million for the year ended December 31, 2022 from $4.8 million for the year ended December 31, 2021. This decrease was primarily due to decreases in expenses for salaries and related costs of $0.2 million, costs associated with being a public company of $0.2 million and accounting and legal fees of $0.2 million.
Other Income (Expense)
Other income (expense) increased by $0.4 million to $0.1 million in income for the year ended December 31, 2022 from an expense of $0.3 million for the year ended December 31, 2021. The increase in other income was mainly due to an increase in interest income of $0.1 million from 2021 to 2022 and a decrease in expense of $0.3 million related to the Release and Settlement Agreement with Torreya Capital LLC in 2021.
Liquidity and Capital Resources
Since our inception, we have financed our operations through public offerings 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, 2022, our principal source of liquidity was our cash, which totaled $7.0 million.
Equity Financings
On September 22, 2022, we closed an underwritten public offering raising gross proceeds of $5.0 million and net proceeds of approximately $4.5 million, after deducting underwriting discounts, commissions and offering expenses. There were no equity financings during the year ended December 31, 2021.
Debt Financings
There were no debt financings during the years ended December 31, 2022 and 2021. There was no debt outstanding at December 31, 2022 and 2021.
Future Capital Requirements
We estimate our current cash of $7.0 million at December 31, 2022 is sufficient to fund operations and capital requirements for at least the next 12 months subsequent to the filing date of the Company’s Annual Report on Form 10-K. Currently, there are no planned research and development activities for 2023 other than minimal carryover costs associated with completing the final reports the FORTRESS study and the chronic toxicology program, regulatory consulting to prepare for the FDA meeting, the on-going grant to BHC for the fully funded investigator-sponsored study in Long-COVID and purchase of API to support the start of a potential Phase 3 study for IMC-1. Additional capital will need to be raised before initiating additional research and development activities. We completed our FORTRESS study in August 2022 and are scheduled to meet with the FDA in March 2023 to discuss the most appropriate next steps in advancing IMC-1 development as a treatment for FM. If alignment on a Phase 3 program can be reached, management will consider raising additional capital to fund future research and/or seek a partner to develop or co-develop IMC-1 as a treatment for FM.
We will need to raise additional capital before we exhaust our current cash in order to continue to fund our research and development, including, subject to consultation with the FDA, any plans for a Phase 3 trial
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and any new product development, as well as to fund operations generally. We will need to finance our cash needs through public or private equity offerings, debt financings, collaboration and licensing arrangements or other financing alternatives. To the extent that we raise additional funds by issuing equity or equity-linked 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. Failure to secure the necessary financing in a timely manner and on favorable terms could have a material adverse effect on the Company’s strategy and value and could require the delay of product development and clinical trial plans.
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, 2022 and 2021
Operating Activities
For the year ended December 31, 2022, net cash used in operations was $11.5 million and consisted of a net loss of $12.3 million offset by a net change in operating assets and liabilities of $0.2 million attributable to a decrease in prepaid expenses of $0.4 million and an increase in accounts payable of $0.2 million offset by a decrease in accrued expenses of $0.4 million and non-cash items of $0.6 million attributable to share-based compensation.
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.
Financing Activities
Net cash provided by financing activities during the year ended December 31, 2022 was $4.5 million and was attributable to cash proceeds from our public offering in September 2022, net of costs.
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 the payment of $0.3 million in carryover offering costs from the Company’s IPO in December 2020.
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.
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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.
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Item 8. Financial Statements and Supplementary Data
Index to Financial Statements
Report of Independent Registered Public Accounting Firm 91
Statements of Operations for the years ended December 31, 2022 and 2021 93
Statements of Cash Flows for the years ended December 31, 2022 and 2021 95
Notes to Financial Statements 96
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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, 2022 and 2021, the related statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2022, 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, 2022 and 2021, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America.
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/ FORVIS, LLP (Formerly, Dixon Hughes Goodman LLP)
We have served as the Company's auditor since 2020.
Atlanta, Georgia
March 14, 2023
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VIRIOS THERAPEUTICS, INC.
BALANCE SHEETS
December 31, December 31,
Assets
Current assets:
Liabilities and stockholders' equity
Current liabilities:
Commitments and contingencies (Note 8)
Stockholders' equity:
See accompanying notes to the financial statements.
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VIRIOS THERAPEUTICS, INC.
STATEMENTS OF OPERATIONS
Year Ended
December 31, December 31,
Revenue $ — $ —
Operating expenses:
Other income (expense):
Income tax provision (benefit) — —
Basic and diluted net loss per share $ (1.11) $ (1.92)
See accompanying notes to the financial statements.
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VIRIOS THERAPEUTICS, INC.
STATEMENTS OF STOCKHOLDERS’ EQUITY
Total
Common Stock Additional Accumulated Stockholders'
Shares Par Paid-In Capital Deficit Equity
Share-based compensation expense — — 322,881 — 322,881
Share-based compensation expense — — 582,659 — 582,659
See accompanying notes to the financial statements.
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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:
Share-based and equity compensation expense 582,659 322,881
Changes in operating assets and liabilities:
(Decrease) increase in accrued expenses (451,662) 147,773
Decrease in accrued salaries — (378,833)
Cash flows from financing activities
Proceeds from initial public offering, net of costs 4,490,605 (295,166)
Proceeds from the exercise of warrants — 197,562
Net cash provided by (used in) financing activities 4,490,605 (97,604)
See accompanying notes to the financial statements.
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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 operates in one segment as a pre-revenue, development-stage biotechnology company focused on advancing novel combination antiviral therapies to treat diseases associated with a viral triggered abnormal immune response. The Company is developing its initial product candidate, IMC-1, for people who are suffering from fibromyalgia (“FM”). Research has shown that the herpes virus could be a potential 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 converting activated herpes virus back to dormancy and/or by 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.
Public Offering
On September 19, 2022, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with ThinkEquity LLC (the “Underwriter”) in connection with the issuance and sale by the Company in a public offering of 10,000,000 shares of its common stock at a public offering price of $0.50 per share (the “Offering”), pursuant to an effective shelf registration statement on Form S-3 (File No. 333-263700). The Offering closed on September 22, 2022 and the gross proceeds from the Offering were $5,000,000. The net proceeds of the Offering were approximately $4,490,605 after deducting underwriting discounts, commissions and offering expenses payable by the Company. In conjunction with the Offering, the Company granted to the Underwriter 500,000 warrants to purchase shares of the Company’s common stock at an exercise price of $0.625 per share, which was 125% of the Offering price.
Material Uncertainty
Since its founding, the Company has been engaged in research and development activities as well as organizational activities, including raising capital. 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 has funded its losses primarily through issuance of members’ interests, convertible debt instruments and issuance of equity securities. For the years ended December 31, 2022 and 2021, the Company incurred net losses of $12,247,834 and $15,960,268, respectively, and had net cash flows used in operating activities of $11,467,797 and $15,689,578, respectively. As of December 31, 2022, the Company had an accumulated deficit of $56,173,207.
As of the date these financial statements are issued, based on reasonable estimates, current cash is sufficient to fund operating expenses and obligations for at least 12 months. Currently, there are no planned research and development activities for 2023 other than minimal carryover costs associated with completing the final reports for the Company’s FORTRESS, (Fibromyalgia Outcome Research Trial Evaluating
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Synergistic Suppression of HSV-1), study for the treatment of FM and the chronic toxicology program, regulatory consulting to prepare for the meeting with the FDA, the on-going grant to the Bateman Horne Center for the fully funded investigator-sponsored study in Long-COVID and the purchase of active pharmaceutical ingredients to support the start of a potential Phase 3 program for IMC-1.
Our research and development expenses in 2022 primarily related to our FORTRESS study for IMC-1, the Company’s lead candidate, which was completed in August 2022 and two long-term animal toxicology studies; a 26-week study in rats, which was completed in the first quarter of 2022 and a 39-week study in dogs, which was completed in the second quarter of 2022. Overall, the study for IMC-1, did not achieve statistical significance on the prespecified primary efficacy endpoint of change from baseline to Week 14 in the weekly average of daily self-reported average pain severity scores comparing IMC-1 to placebo (p=0.302). However, management observed a differential response based on the timing of patient enrollment and believe it is highly unlikely due to chance or a random occurrence, thus further analysis of the data was warranted, particularly in the context of the previous IMC-1 Phase 2a study success. Based on the analysis of the data, management believes focusing the forward development of IMC-1 on new fibromyalgia patients remains a viable and manageable path forward.
The Company is scheduled to meet with the FDA in March 2023 to discuss the most appropriate next steps in advancing IMC-1 development as a treatment for FM and hopefully agree on a Phase 3 program. If alignment can be reached, management will consider raising additional capital to fund future research and/or seek a partner to develop or co-develop IMC-1 as a treatment for FM.
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.
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.
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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 the Company does 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.
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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, 2022 and 2021, 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, 2022 and 2021. 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, 2022 and 2021, the Company had 1,924,397 and 1,041,647 options, respectively, and 672,500 and 172,500 warrants, respectively, to purchase common shares outstanding that were anti-dilutive.
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
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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.
Share-Based Compensation
The Company recognizes compensation expense relating to share-based awards to employees and directors with a performance condition 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 9. Expense is recognized within both research and development and 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 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 U.S. 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 adoption of this standard did not have a material impact on the Company’s 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. 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.
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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 7,291 863
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. 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
Other miscellaneous accrued expenses 1,360 7,375
6.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.
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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.
7. 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 development of product candidates. During the years ended December 31, 2022 and 2021, the Company paid Gendreau $356,088 and $326,416, respectively, and had accounts payable of $21,000 and $24,840 to Gendreau as of December 31, 2022 and 2021, respectively.
8. 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 alleged 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 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.
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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. Per the terms of the agreements, each Executive and the CMO 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 and the SVP of Finance, 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 or CMO 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 Payments are payable in a single cash lump sum no later than 45 days after the triggering event.
9. Share-Based Compensation
Equity Incentive Plan
On June 16, 2022, the stockholders of the Company approved the Amended and Restated 2020 Equity Incentive Plan (the “Plan”) to increase the total number of shares of common stock reserved for issuance under the Plan by 1,250,000 shares to 2,062,500 total shares issuable under the Plan. As of December 31, 2022 and 2021, 430,603 and 63,353 shares, respectively, were available for future grants.
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 subject to grant under the Plan to any individual, with the exception of any non-employee director, during any calendar year is limited to 500,000 shares. With respect to any non-employee director, the maximum aggregate number of shares subject to grant under the Plan to any individual during any calendar year is limited to 200,000 shares.
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)
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As of December 31, 2022 and 2021, the aggregate intrinsic value of options outstanding and exercisable was $0.
During the year ended December 31, 2022, the Company granted certain individuals options to purchase 912,500 shares of the Company’s common stock with an average exercise price of $1.42 per share, contractual terms of 10 years and vesting periods ranging from 100% vesting after 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 $980,075 as calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option pricing model include: (1) discount rates ranging from 3.145% to 3.765% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected lives ranging from 5.5 years to 6.0 years based on the simplified method (vesting plus contractual term divided by two), (3) expected volatility ranging from 90.62% to 93.66% 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 $0.2789 to $4.23 per share.
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.
For the years ended December 31, 2022 and 2021, the Company recognized share-based compensation expense related to stock options of $582,659 and $322,881, respectively. The unrecognized compensation expense for stock options at December 31, 2022 and 2021 was $1,114,073 and $827,402, respectively.
Stock Options for Unregistered Securities
In addition to the stock options issued under the Plan, on December 16, 2020, the Company granted non-qualified stock options to purchase 292,500 shares of common stock as provided for in the employment agreement of the Company’s President at the time of and in conjunction with the Company’s IPO (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 7.96 years. As of December 31, 2022, 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, 2022, 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.
In conjunction with the Offering in September 2022, the Company granted the Underwriter warrants to purchase 500,000 shares of common stock at an exercise price of $0.625 per share. The warrants have a
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five-year contractual term and are not exercisable prior to March 18, 2023. 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 $178,462 that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option pricing model include: (1) discount rate of 3.69% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected life of 5.0 years, (3) expected volatility of 96.46% based on the average historical volatility of comparable companies' stock, (4) no expected dividends and (5) fair market value (Offering price) of the Company's stock of $0.50 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 Offering that was offset by the Company recognizing the fair value of the warrants as a direct and incremental costs associated with the Offering by reducing paid-in capital for the same amount. There is no unrecognized compensation expense for these awards as of December 31, 2022. The table below sets forth the outstanding warrants to purchase common shares:
Weighted
Average
Weighted Remaining
Average Contractual
Number of Exercise Term
Shares Price (Years)
Granted — — —
As of December 31, 2022, the aggregate intrinsic value of the warrants outstanding was $0.
10. Income Taxes
As of December 31, 2022, the Company has U.S. federal and state net operating loss carryforwards of approximately $22,168,000, 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 (0.57) % (0.33) %
State taxes, net of federal benefit 4.83 % 4.47 %
Deferred tax true-ups — % (1.82) %
Other adjustments 0.06 % 0.15 %
Change in valuation allowance (25.32) % (23.47) %
Effective Income Tax rate — % — %
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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:
Capitalized research and development expenditures 1,873,211 —
Deferred tax liabilities:
Net deferred taxes $ — $ —
For tax years beginning on or after January 1, 2022, the 2017 Tax Cuts and Jobs Act amended Section 174 of the code to eliminate current-year deductibility of research and development expenses and requires taxpayers to capitalize and amortize them over five years for research activities performed in the United States and fifteen years for research activities performed outside of the United States. For the 2022 tax year, the Company has capitalized $8,099,702 of research and development expenses. This has resulted in an increase in the deferred tax asset associated with capitalized research and development by $1,873,211.
As of December 31, 2022, 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, 2022. The Company does not have any material unrecognized tax benefits as of December 31, 2022.
The Company experienced a net change in valuation allowance of $3,100,898 and $3,745,299 for the years ended December 31, 2022 and 2021, respectively.
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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, 2022. Based on the assessment, management has concluded that, as of December 31, 2022, 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
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, 2022 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information
None.
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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 2023 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 Senior 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 2023 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 2023 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 2023 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 FORVIS, LLP (PCAOB Firm ID No. 686) located in Atlanta, Georgia. We incorporate the remaining information required by this Item 14 by reference to the definitive proxy statement for our 2023 annual meeting of shareholders, to be filed with the SEC.
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
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EXHIBIT INDEX
ExhibitNumber Description
10.6+* Form of Stock Option Award Agreement*
23.1* Consent of FORVIS, LLP
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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 14, 2023.
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 14, 2023 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.
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