Item 7. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
The following discussion and analysis should be read in conjunction with “Selected
Financial Data” and our financial statements and related notes included elsewhere in this Annual Report. This discussion and analysis and other parts of this Annual Report contain forward-looking statements based upon current beliefs that
involve risks, uncertainties and assumptions, such as statements regarding our plans, objectives, expectations and intentions. Our actual results and the timing of selected events could differ materially from those described in or implied by these
forward-looking statements as a result of several factors, including those set forth under “Risk Factors” and elsewhere in this Annual Report. You should carefully read the “Risk Factors” section of this Annual Report to gain an
understanding of the important factors that could cause actual results to differ materially from our forward-looking statements. Please also see the section entitled “Special Note Regarding Forward- Looking Statements.”
Overview
Genelux is a late
clinical-stage biopharmaceutical company focused on developing a pipeline of next-generation oncolytic viral immunotherapies for patients suffering from aggressive and/or difficult-to-treat solid tumor types. Our most advanced product candidate,
Olvi-Vec, is a proprietary, modified strain of the VACV, a stable DNA virus with a large engineering capacity. We have met the preestablished endpoint for our Phase clinical 2 trial of Olvi-Vec in PRROC. Employing our CHOICE platform, we have
developed an extensive library of isolated and engineered oncolytic vaccinia virus immunotherapeutic product candidates. These provide potential utility in multiple tumor types in both the monotherapy and combination therapy settings, via physician-
preferred administration techniques, including regional (e.g., intraperitoneal), local and systemic (e.g., intravenous) delivery routes. Informed by our CHOICE platform and supported by extensive clinical and pre-clinical data, we believe we have
the capacity to develop a pipeline of treatment options to address high unmet medical needs for those patients with insignificant or unsatisfactory responses to standard-of-care therapies, including chemotherapies. From this library, we selected
Olvi-Vec, which we believe has the potential to exhibit anti-tumor properties, including potent oncolytic properties (tumor cell lysis) and to activate both the innate and adaptive arms of the immune system, to produce favorable changes within the
tumor microenvironment. The personalized and multi-modal immune activation generated by Olvi-Vec is designed with the goal to yield clinically- meaningful anti-tumor responses to virus treatment alone and in combination with other existing treatment
modalities. We believe Olvi-Vec currently represents the most advanced clinical development program throughout the oncolytic treatment landscape involving the non-local administration (e.g., non-intratumorally) of viral immunotherapies.
Since inception, our operations have focused on organizing and staffing our company, business planning, raising capital, acquiring and
developing our technology, establishing our intellectual property portfolio, identifying potential product candidates and undertaking preclinical and clinical studies and manufacturing. We do not have any products approved for sale and have not
generated any revenue from product sales.
Since inception, we have incurred significant operating losses. Our net losses were $5.2
million and $16.4 million for the years ended December 31, 2022 and 2021, respectively. As of December 31, 2022, we had an accumulated deficit of $189.8 million. We expect to continue to incur significant and increasing expenses and
operating losses for the foreseeable future, as we advance our current and future product candidates through preclinical and clinical development, manufacture drug product and drug supply, seek regulatory approval for our current and future product
candidates, maintain and expand our intellectual property portfolio, hire additional research and development and business personnel and operate as a public company.
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In March 2020, the World Health Organization declared COVID-19 a global pandemic and the
United States declared a national emergency with respect to COVID-19. In response to the COVID-19 pandemic, a number of governmental orders and other public health guidance measures have been implemented across much of the United States, including
in the locations of our office, clinical trial sites and third parties on whom we rely. As the COVID-19 pandemic started to spread in the first half of 2020, our clinical trial sites reported it had the most impact on patient care as facilities were
generally ill prepared to conduct business as usual; adequate clinical evaluations, physical exams and tests were either absent or drastically reduced. Our clinical trial sites further reported that their institutions better adjusted to pandemic
conditions beginning in the second half of 2020. Further, we have implemented a work-from-home policy allowing employees who can work from home to do so, while those needing to work in manufacturing facilities work in shifts to reduce the number of
people gathered together at one time. Business travel has been suspended, and online and teleconference technology is used to meet virtually rather than in person. We have taken measures to secure our research and development project activities,
while work in laboratories has been organized to reduce risk of COVID-19 transmission. Our increased reliance on personnel working from home may negatively impact productivity, or disrupt, delay or otherwise adversely impact our business.
We will not generate revenue from commercially approved product sales unless and until we successfully complete clinical development and
obtain regulatory approval for our product candidates. In addition, if we obtain regulatory approval for our product candidates and do not enter into a third-party commercialization partnership, we expect to incur significant expenses related to
developing our commercialization capability to support product sales, marketing, manufacturing, and distribution activities.
As a result,
we will need substantial additional funding to support our continuing operations and pursue our growth strategy. Until we can generate significant revenue from product sales, if ever, we expect to finance our operations through a combination of
public or private equity offerings and debt financings or other sources, such as potential collaboration agreements, strategic alliances and licensing arrangements. We may be unable to raise additional funds or enter into such other agreements or
arrangements when needed on acceptable terms, or at all. Our failure to raise capital or enter into such agreements as, and when needed, could have a material adverse effect on our business, results of operations and financial condition.
The report of our independent registered public accounting firm on our financial statements as of and for the years ended December 31,
2022 and 2021 included an explanatory paragraph indicating that there was substantial doubt about our ability to continue as a going concern. See Note 1 to our annual financial statements for additional information on our assessment.
As of December 31, 2022, we had a cash balance of $0.4 million. Subsequent to December 31, 2022, we closed our IPO of our common
stock and received net proceeds of approximately $12.4 million. We expect the proceeds from the IPO, plus our cash on hand, will last for at least 12 months from the closing of our IPO.
Joint Venture with TVAX Biomedical, Inc.
In January 2019, we formed V2ACT as a joint venture with TVAX for the purpose of developing and testing V2ACT Immunotherapy. The joint venture
is governed by an Amended and Restated Limited Liability Company Agreement entered into in June 2021, which provides each of us and TVAX with 50% ownership interests, identical voting and management rights and responsibilities, equal representation
on the governing four-member management committee, and equal sharing of profits and losses of V2ACT. To date, V2ACT’s expenses have been de minimis and have been funded through equal capital contributions made to V2ACT by us and TVAX, and we
expect this to continue for the foreseeable future.
Through December 31, 2022, there had been virtually no operating activities at
V2ACT and de minimis financial activities, all of which our joint venture partner had day-to-day control over. For accounting purposes, we treated the joint venture as a non-consolidated subsidiary and all expenses, totaling less than $0.1 million
during the years ended December 31, 2022 and 2021, have been expensed as incurred. Through the date of this filing, the joint venture has also not entered into any material third party commitments.
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Components of Results of Operations
Net Sales
There
was no revenue recorded from any sources during the year ended December 31, 2021. During the years ended December 31, 2022 and 2021, we received a combined $9.9 million of upfront and milestone payments under our license agreements with
Newsoara and ELIAS (this amount was net of a 10% foreign income tax on the Newsoara payments). As of December 31, 2021, we determined that since we did not complete certain obligations under those agreements as of that date, that revenue
recognition would be recognized at such time as we met those performance obligations. As such, as of December 31, 2021, we delayed recognition of any revenue under these contracts and the cash received of $4.5 million had been recorded as
deferred revenue. During the year ended December 31, 2022, under our Newsoara agreement, we completed the transfer of our manufacturing technology, at which point we completed our performance obligation and thus recognized the related revenue
of $11.0 million, with the 10% foreign income tax of $1.1 million being recorded as a provision for foreign income taxes. Under no circumstances would we be required to repay the $9.9 million received under the license agreement. During the year
ended December 31, 2022, under our ELIAS agreement, we completed the transfer of our manufacturing technology, at which point we completed our performance obligation and thus recognized the related revenue of $0.06 million.
Operating Expenses
Our operating
expenses consist of (i) research and development expenses and (ii) general and administrative expenses.
Research and Development Expenses
Research and development expenses consist primarily of costs incurred for our research and development activities, including our
product candidate discovery efforts and preclinical and clinical studies under our research programs, which include:
• costs related to compliance with clinical regulatory requirements; and
Research and development costs are expensed as incurred. Costs for certain
activities are recognized based on an evaluation of the progress to completion of specific tasks using data such as information provided to us by our vendors and analyzing the progress of our preclinical and clinical studies or other services
performed. Significant judgment and estimates are made in determining the accrued expense balances at the end of any reporting period.
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The successful development of our product candidates is highly uncertain. We cannot
reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete development of our current or future product candidates. We are also unable to predict when, if ever, material net cash inflows
will commence from the sale of our product candidates, if they are approved. This is due to the numerous risks and uncertainties associated with developing product candidates, including the uncertainty of:
• establishing an appropriate safety profile;
• successful enrollment in and completion of clinical trials;
• receipt of marketing approvals from applicable regulatory authorities;
A change in the outcome of any of these variables with respect to the development of our current and future product candidates would
significantly change the costs and timing associated with the development of those product candidates.
Research and development activities
are central to our business model. Product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of
later-stage clinical trials. We expect research and development costs to increase significantly for the foreseeable future as we commence clinical trials and continue the development of our current and future product candidates. However, we do not
believe that it is possible at this time to accurately project expenses through commercialization. There are numerous factors associated with the successful commercialization of any of our product candidates, including future trial design and
various regulatory requirements, many of which cannot be determined with accuracy at this time based on our stage of development. Additionally, future commercial and regulatory factors beyond our control will impact our clinical development programs
and plans.
General and Administrative Expenses
General and administrative expenses include salaries and other compensation-related costs, including stock-based compensation, for personnel in
executive, finance and accounting, business development, operations and administrative roles. Other significant costs include professional service and consulting fees, including legal fees relating to intellectual property and corporate matters,
accounting fees, recruiting costs and costs for consultants who we utilize to supplement our personnel, insurance costs, travel costs, facility and office-related costs not included in research and development expenses.
We anticipate that our general and administrative expenses will increase in the future as our business expands to support expected growth in
research and development activities, including our future clinical programs. These increases will likely include increased costs related to the hiring of additional personnel and fees to outside service providers, among other expenses. We also
anticipate increased expenses associated with being a public company, including costs for audit, legal, regulatory and tax-related services related to compliance with the rules and regulations of the SEC, and listing standards applicable to
companies listed on a national securities exchange, director and officer insurance premiums, and investor relations costs. In addition, if we obtain regulatory approval for any of our product candidates and do not enter into a third-party
commercialization collaboration, we expect to incur significant expenses related to building a sales and marketing team to support product sales, marketing and distribution activities.
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Results of Operations
Comparison of the Years Ended December 31, 2022 and 2021
The following table summarizes our results of operations for the years ended December 31, 2022 and 2021 (in thousands):
Operating Expenses:
Debt discount amortization (258 ) (196 )
Financing costs — (398 )
Gain on forgiveness of PPP loan payable 314 —
Gain on settlement of convertible notes payable — 50
Loss before provision for foreign income taxes (4,107 ) (16,378 )
Provision for foreign income taxes (1,100 ) —
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Research and Development Expenses
The table below summarizes our research and development expenses for the years ended December 31, 2022 and 2021 (in thousands):
Research and Development Expenses: December 31,2022 December 31,2021
Employee compensation and related expenses $ 1,531 $ 1,414
Manufacturing and laboratory materials and other expenses 937 810
Outsourced manufacturing services 908 770
Clinical and regulatory expenses 3,252 400
Facility-related expenses, including depreciation 1,278 1,137
Total research and development expenses $ 9,078 $ 6,319
Research and development expenses were $9.1 million and $6.3 million for the years ended December 31,
2022 and 2021, respectively, an increase of $2.8 million, or 44%. Significant variations between periods are as follows:
General and Administrative Expenses
The table below summarizes our general and administrative expenses for the years ended December 31, 2022 and 2021 (in thousands):
General and Administrative Expenses: December 31,2022 December 31,2021
Employee compensation and related expenses $ 1,520 $ 1,225
Stock compensation, including the cost of stock option modifications 2,047 3,314
Facility-related expenses 319 293
Consulting and contract labor expenses 305 1,082
Total general and administrative expenses $ 5,003 $ 8,294
General and administrative expenses were $5.0 million and $8.3 million for the years ended December 31,
2022 and 2021, respectively, a decrease of $3.3 million, or 40%. Significant variations between periods are as follows:
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Other Income (Expenses)
Other income (expenses) was a net $(1.1) million and $(1.8) million for the years ended December 31, 2022 and 2021, respectively. During
the year ended December 31, 2022, other expenses consisted of interest expense of $1.2 million and debt discount amortization of $0.3 million, while during the same period in 2021, other expenses consisted of interest expense of $1.2 million,
debt discount amortization of $0.2 million and financing costs of $0.4 million. During the year ended December 31, 2022, other income consisted of a gain on the forgiveness of a Paycheck Protection Program (PPP) loan payable of $0.3 million,
while during the same period in 2021, other income consisted of a gain on the settlement of a convertible note payable of $0.05 million.
Liquidity and
Capital Resources
Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the
settlement of liabilities and commitments in the normal course of business. During the year ended December 31, 2022, we incurred a net loss of $5.2 million and used cash in operations of $3.6 million and had a shareholders’ deficit of
$35.8 million as of December 31, 2022. These factors raise substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to raise additional funds and implement our
strategies, such as executing additional licensing contracts. The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
As of December 31, 2022, we had cash on hand in the amount of $0.4 million. The ability to continue as a going concern is dependent on us
raising additional capital and attaining and maintaining profitable operations in the future to meet our obligations and repay our liabilities arising from normal business operations when they come due. Since inception, we have funded our operations
primarily through equity and debt financings and licensing income and we expect to continue to rely on these sources of capital in the future. Subsequent to December 31, 2022, we closed our initial public offering of our common stock (IPO) and
received net proceeds of approximately $12.4 million. We expect the proceeds from the IPO, plus our cash on hand, will last for at least 12 months from the closing of the IPO.
No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us.
Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing, or grant unfavorable terms
in licensing agreements.
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Cash Flows
The table below summarizes our cash flow activities for the years ended December 31, 2022 and 2021 (in thousands):
Net cash provided by (used in): December 31,2022 December 31,2021
Operating activities $ (3,571 ) $ (6,585 )
Investing activities (49 ) —
Financing activities (478 ) (270 )
Net decrease in cash $ (4,098 ) $ (6,855 )
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Operating Activities
During the year ended December 31, 2022, we used cash from operating activities of $3.6 million, compared to $6.6 million used during the
year ended December 31, 2021. During the year ended December 31, 2022, we incurred a net loss of $5.2 million and had non-cash expenses of $3.3 million, compared to a net loss of $16.4 million and non-cash expenses of $5.7 million during
the year ended December 31, 2021. The primary non-cash expense during both years was stock compensation, totaling $2.4 million and $1.7 million during the years ended December 31, 2022 and 2021, respectively. The net change in assets and
liabilities during the year ended December 31, 2022 used cash of $1.7 million compared to $4.1 million provided during the year ended December 31, 2021. The primary use of cash during the year ended December 31, 2022 was the decrease
in deferred revenue of $4.3 million, while the primary source was the increase in accounts payable and accrued expenses of $2.3 million. The primary use of cash during the year ended December 31, 2021 was the increase in prepaid expenses of
$1.2 million, while the primary sources were the increase in accounts payable and accrued expenses, accrued compensation and accrued interest payable totaling $1.1 million, and the increase in deferred revenue of $4.5 million.
Investing Activities
Net cash
used in investing activities for the year ended December 31, 2022 was $0.05 million, consisting of the purchase of property and equipment. There was no cash used in investing activities for the year ended December 31, 2021.
Financing Activities
Net cash
used in financing activities for the years ended December 31, 2022 and 2021 was $0.5 million and $0.3 million, respectively. For the year ended December 31, 2022, cash provided by financing activities consisted of proceeds from the
issuance of notes payable-shareholders totaling $1.1 million and proceeds from the exercise of common stock warrants totaling $0.1 million. Cash used in financing activities during the year ended December 31, 2022 related to the repayment of
convertible notes payable-shareholders of $0.1 million and the payment of deferred offering costs of $1.6 million. For the year ended December 31, 2021, cash provided by financing activities consisted of proceeds from the issuance of various
debt offerings totaling $0.9 million and proceeds from the sale of common stock and warrants and the exercise of stock options and warrants totaling $0.3 million. Cash used in financing activities during the year ended December 31, 2021 related
to the repayment of various notes payable totaling $1.5 million.
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Funding Requirements
We expect our expenses to increase in connection with our ongoing activities, particularly as we continue our research and development,
initiate and conduct preclinical studies and clinical trials, and seek marketing approval for our current and any of our future product candidates. In addition, if we obtain marketing approval for any of our current or our future product candidates,
we expect to incur significant commercialization expenses related to product sales, marketing, manufacturing and distribution, which costs we may seek to offset through entry into collaboration agreements with third parties. Furthermore, we expect
to incur additional costs associated with operating as a public company. Accordingly, we will need to obtain substantial additional funding in connection with our continuing operations. If we are unable to raise capital when needed or on acceptable
terms, we would be forced to delay, reduce or eliminate our research and development programs or future commercialization efforts.
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We believe that our existing cash, together with the net proceeds from our IPO, will enable
us to fund our operating expenses and capital expenditure requirements until at least 12 months from the closing of our IPO. We have based this estimate on assumptions that may prove to be wrong, and we may use our available capital resources sooner
than we currently expect. Our future capital requirements will depend on a number of factors, including:
• the costs of conducting preclinical studies and clinical trials;
• the costs of manufacturing;
• the costs, timing, and outcome of regulatory review of our product candidates;
• the costs of operating as a public company.
The net proceeds of our IPO, together with our existing cash, will be sufficient to progress our Phase 3 registration trial of development of
Olvi-Vec in PRROC, but will not be sufficient to progress registration trials in other indications or the development of any other product candidate. Accordingly, we will be required to obtain further funding to achieve our business objectives.
Until such time, if ever, as we can generate substantial product revenues, we expect to finance our cash needs through public or private
equity offerings and debt financings or other sources, such as potential collaboration agreements, strategic alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible debt
securities, your ownership interests may be diluted, and the terms of these securities may include liquidation or other preferences that could adversely affect your rights as a common stockholder. Additional debt financing, if available, may involve
agreements that include restrictive covenants that limit our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends, that could adversely impact our ability to conduct our business.
If we raise funds through potential collaborations, strategic alliances or licensing arrangements with third parties, we may have to
relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates, or to grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds when needed, we may be
required to delay, limit, reduce or terminate our product development or future commercialization efforts or grant rights to develop and market product candidates that we would otherwise prefer to develop and market ourselves.
Critical Accounting Policies and Significant Judgments and Estimates
This Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on our financial statements, which
have been prepared in accordance with accounting principles generally accepted in the United States (GAAP). The preparation of these financial statements requires us to make estimates, judgments and
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assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities as of the date of the balance sheets and the reported amounts of expenses
during the reporting periods. In accordance with GAAP, we base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances at the time such estimates are made. Actual results may
differ materially from our estimates and judgments under different assumptions or conditions. We periodically review our estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates are
reflected in our financial statements prospectively from the date of the change in estimate.
We define our critical accounting policies
as those accounting principles that require us to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner
in which we apply those principles. While our significant accounting policies are more fully described in Note 2 to our audited financial statements appearing elsewhere in this Annual Report, we believe the following are the critical accounting
policies used in the preparation of our financial statements that require significant estimates and judgments.
Prepaid Research and Development
Expenses
As part of the process of preparing our financial statements, we are required to estimate our accrued expenses as of each
balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated
cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make
estimates of our research and development expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if
necessary.
The significant estimates in our prepaid research and development expenses include the costs incurred for services performed
by our vendors in connection with research and development activities for which we have not yet been invoiced. We base our expenses related to research and development activities on our estimates of the services received and efforts expended
pursuant to quotes and contracts with vendors that conduct research and development on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may
be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the research and development expense.
In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each
period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid balance accordingly. Non-refundable advance payments for goods and services that will be used in future
research and development activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.
Although we do not expect our estimates to be materially different from amounts incurred, if our estimates of the status and timing of
services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period.
Stock-Based Compensation
We
measure stock options and other stock-based awards granted to employees and directors based on the fair value of the award on the date of the grant and recognize compensation expense for those awards over the requisite service period, which is
generally the vesting period of the respective award. We recognize forfeitures as they occur. The reversal of compensation cost previously recognized for an award that is forfeited because of a failure to satisfy a service or performance condition
is recognized in the period of the forfeiture. Generally, we issue stock options with only service-based vesting conditions and record the expense for these awards using the straight-line method over the requisite service period.
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We classify equity-based compensation expense in our statements of operations in the same
manner in which the award recipient’s salary and related costs are classified or in which the award recipient’s service payments are classified. In future periods, we expect equity-based compensation expense to increase, due in part to our
existing unrecognized stock-based compensation expense and as we grant additional stock-based awards to continue to attract and retain employees.
Determination of the Fair Value of Equity-Based Awards
We estimate the fair value of stock option awards granted using the Black-Scholes option-pricing model, which uses as inputs the fair value of
our common stock and subjective assumptions we make, including expected stock price volatility, the expected term of the award, the risk-free interest rate, and expected dividends. Due to the lack of a public market for the trading of our common
stock and a lack of company-specific historical and implied volatility data, we base the estimate of expected stock price volatility on the historical volatility of a representative group of publicly traded companies for which historical information
is available. The historical volatility is generally calculated based on a period of time commensurate with the expected term assumption. We use the simplified method to calculate the expected term for options granted to employees and directors. We
utilize this method as we do not have sufficient historical exercise data to provide a reasonable basis upon which to estimate the expected term. For options granted to non-employees, we utilize the contractual term. The risk- free interest rate is
based on a U.S. treasury instrument whose term is consistent with the expected term of the stock options. The expected dividend yield is assumed to be zero, as we have never paid dividends and do not have current plans to pay any dividends on our
common stock. We determine the fair value of restricted common stock awards based on the fair value of our common stock on the date of grant.
As there has been no public market for our common stock, prior to our IPO, the estimated fair value of our common stock had been approved by
our board of directors, with input from management, as of the date of each award grant, considering our most recently available sale of our common stock to independent investors and our board of directors’ assessment of additional objective and
subjective factors deemed relevant that may have changed from the date of the most recent determination through the date of the grant.
The additional objective and subjective factors considered by our board of directors in determining the fair value of our common stock
included the following:
• the lack of liquidity of our equity as a private company;
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The assumptions underlying our board of directors’ valuation determinations represented
our board’s best estimates, which involved inherent uncertainties and the application of our board’s judgment. As a result, if factors or expected outcomes had changed or our board of directors had used significantly different assumptions
or estimates, our equity-based compensation expense could have been materially different. Following the completion of this offering, our board of directors will determine the fair value of our common stock based on the quoted market prices of our
common stock.
Commitments and Contingencies
From time to time, we may have certain contingent liabilities that arise in the ordinary course of business. We evaluate the likelihood of an
unfavorable outcome in legal or regulatory proceedings to which we are a party and record a loss contingency on an undiscounted basis when it is probable that a liability has been incurred and the amount of the loss can be reasonably estimated.
These judgments are subjective and based on the status of such legal proceedings, the merits of our defenses, and consultation with legal counsel. Actual outcomes of these legal proceedings may differ materially from our estimates. We estimate
accruals for legal expenses when incurred as of each balance sheet date based on the facts and circumstances known to us at that time.
Off-Balance
Sheet Arrangements
During the years ended December 31, 2022 and 2021, we did not have, and we do not currently have, any
off-balance sheet arrangements (as defined under SEC rules).
Quantitative and Qualitative Disclosures about Market Risk
We are not currently exposed to significant market risk related to changes in foreign currency exchange rates. However, we have contracted with
and may continue to contract with foreign vendors that are located in Europe. Our operations may be subject to fluctuations in foreign currency exchange rates in the future.
Inflation generally affects us by increasing our cost of labor. We do not believe that inflation had a material effect on our business,
financial condition or results of operations during the years ended December 31, 2022 or 2021.
Recent Accounting Pronouncements
For a description of recently issued accounting standards that may have a material impact on our financial statements or will otherwise apply
to our operations, please see Note 2 to our audited financial statements appearing elsewhere in this Annual Report.
Emerging Growth Company Status
As an “emerging growth company,” the Jumpstart Our Business Startups Act of 2012 permits us to take advantage of an extended
transition period to comply with new or revised accounting standards applicable to public companies until those standards would otherwise apply to private companies. We have irrevocably elected to “opt out” of this provision and, as a
result, we will comply with new or revised accounting standards when they are required to be adopted by public companies that are not emerging growth companies.
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Item 7A. Quantitative and Qualitative Disclosures about Market Risks
We are not currently exposed to significant market risk related to changes in foreign currency exchange rates. However, we have contracted with
and may continue to contract with foreign vendors that are located in Europe. Our operations may be subject to fluctuations in foreign currency exchange rates in the future.
Inflation generally affects us by increasing our cost of labor. We do not believe that inflation had a material effect on our business,
financial condition or results of operations during the years ended December 31, 2022 and 2021.
Item 8. Financial Statements and Supplementary Data
See the financial statements filed as part of this Annual Report on Form 10-K as listed under Item 15 below.
None.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, refers to controls
and procedures that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in
the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that such information is accumulated and communicated to a company’s management, including its principal
executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial
Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures as of December 31, 2022. Based on this evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls
and procedures were effective at a reasonable assurance level as of December 31, 2022.
In designing and evaluating our disclosure
controls and procedures, management recognizes that disclosure controls and procedures, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the disclosure controls and procedures are
met. Additionally, in designing disclosure controls and procedures, our management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible disclosure controls and procedures. The design of any system of
controls also is based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions; over time, controls may
become inadequate because of changes in conditions, or the degree of compliance with policies or procedures may deteriorate. Because of the inherent limitations in a control system, misstatements due to error or fraud may occur and not be detected.
Management’s Report on Internal Control Over Financial Reporting
This Annual Report does not include a report of management’s assessment regarding internal control over financial reporting or an
attestation report of our independent registered public accounting firm due to a transition period established by rules of the SEC for newly public companies.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15d-15(f) of the Exchange Act)
that occurred during the fourth quarter of 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
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Item 9B. Other Information
None.
Item 9C. Disclosure
Regarding Jurisdictions That Prevent Inspections
Not Applicable.
PART III
We will file a definitive Proxy Statement for our 2023 Annual Meeting of Stockholders (the 2023 Proxy Statement) with the SEC, pursuant to
Regulation 14A, not later than 120 days after the end of our fiscal year. Accordingly, certain information required by Part III has been omitted under General Instruction G(3) to Form 10-K. Only those sections of the 2023 Proxy Statement that
specifically address the items set forth herein are incorporated by reference.
Item 10. Directors, Executive Officers
and Corporate Governance.
The text of our Code of Conduct, which applies to our directors and employees (including our principal
executive officer, principal financial officer, and principal accounting officer or controller, and persons performing similar functions), is posted in the “Corporate Governance” section of our website, www.genelux.com. A copy of the Code
of Conduct, can be obtained free of charge on our website. We intend to disclose on our website any amendments to, or waivers from, our Code of Conduct, that are required to be disclosed pursuant to the rules of the SEC and Nasdaq. The information
contained on our website is not considered part of, or incorporated by reference into, this Annual Report on Form 10-K or any other filing that we make with the SEC.
The remaining information required under this item is set forth in our 2023 Proxy Statement, which 2023 Proxy Statement will be filed with the
SEC not later than 120 days after the close of our fiscal year ended December 31, 2022, under the sections headed “Proposal 1: Election of Directors,” “Information Regarding Director Nominees and Current Directors,”
“Information Regarding the Board of Directors and Corporate Governance” and “Executive Officers” and all of which is incorporated herein by reference.
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Item 11. Executive Compensation.
The information required under this item is set forth in our 2023 Proxy Statement, which 2023 Proxy Statement will be filed with the SEC not
later than 120 days after the close of our fiscal year ended December 31, 2022, under the section headed “Executive Compensation” and all of which is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by Item 12 is set forth in our 2023 Proxy Statement under the captions “Security Ownership of Certain
Beneficial Owners and Management” and “Securities Authorized for Issuance under Equity Compensation Plans,” which 2023 Proxy Statement will be filed with the SEC not later than 120 days after the close of our fiscal year ended
December 31, 2022, and all of which is incorporated herein by reference.
Item 13. Certain Relationships and
Related Transactions, and Director Independence.
The information required by Item 13 is set forth in our 2023 Proxy Statement
under the captions “Transactions with Related Persons” and “Independence of the Board of Directors,” which 2023 Proxy Statement will be filed with the SEC not later than 120 days after the close of our fiscal year ended
December 31, 2022, and all of which is incorporated herein by reference.
Item 14. Principal Accountant Fees and
Services.
Our independent public accounting firm is Weinberg & Company, P.A., Los Angeles, California (PCAOB Auditor ID:
572). The information required by Item 14 is set forth in our 2023 Proxy Statement under the caption “Ratification of Selection of Independent Registered Public Accounting Firm,” which 2023 Proxy Statement will be filed with the SEC
not later than 120 days after the close of our fiscal year ended December 31, 2022, under the section headed “Proposal 2: Ratification of Selection of Independent Registered Public Accounting Firm,” and all of which is
incorporated herein by reference.
PART IV
Item 15. Exhibits and Financial Statement Schedules
(a)(1) Financial Statements.
For a
list of the financial statements included herein, see Index on page F-1 of this report.
(a)(2) Financial Statement Schedules.
All required information is included in the financial statements or notes thereto.
(a)(3) List of Exhibits.
Item 16. Exhibits and Financial Statement Schedules.
(a) Exhibits.
ExhibitNumber Description
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24.1* Power of Attorney (included on the signature page hereto).
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* Filed with this Annual Report on Form 10-K.
+ Indicates management contract or compensatory plan.
Item 16. Form 10-K Summary
None.
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.
Date: March 29, 2023
GENELUX CORPORATION
By: /s/ Thomas Zindrick
Name: Thomas Zindrick, J.D.
Title: President and Chief Executive Officer
KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature appears below constitutes and appoints Thomas
Zindrick, J.D. and Doug Samuelson, and each of them, as his or her true and lawful attorneys-in-fact and agents, each with the full power of substitution, for him or her and in his or her name, place or stead, in any and all capacities, to sign any
and all amendments to this Annual Report on Form 10-K, and to file the same, with all exhibits thereto and other documents in connection therewith, with the Securities and Exchange Commission, granting unto said attorneys-in-fact and agents, and
each of them full power and authority to do and perform each and every act and thing requisite and necessary to be done in and about the premises, as fully to all intents and purposes as he or she might or could do in person, hereby ratifying and
confirming all that said attorneys-in-fact and agents, or their or his substitute or substitutes, may lawfully do or cause to be done by virtue hereof.
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Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this report has been signed
below by the following persons on behalf of the Registrant in the capacities and on the dates indicated.
Signature Title Date
/s/ Mary Mirabelli Mary Mirabelli Director March 29, 2023
/s/ James L. Tyree James L. Tyree Director March 29, 2023
/s/ John Thomas John Thomas, Ph.D. Director March 29, 2023
/s/ Gabe Woodward Gabe Woodward Director March 29, 2023
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Genelux Corporation
Index to the Financial Statements
For the Years Ended December 31, 2022 and 2021
Report of Independent Registered Public Accounting Firm (PCAOB ID 572) F-2
Statements of Operations for the Years Ended December 31, 2022 and 2021 F-4
Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 F-6
Notes to the Financial Statements F-7
F-1
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REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Shareholders
Genelux Corporation
Westlake Village, California
Opinion on the Financial
Statements
We have audited the accompanying balance sheets of Genelux Corporation (the “Company”) as of December 31, 2022 and 2021, the
related statements of operations, shareholders’ deficit, and cash flows for the years then ended 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 the years then ended in conformity with accounting principles generally accepted in the
United States of America.
Going Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1, the Company incurred a net loss and used cash in operations during the year ended December 31, 2022, and
the Company had a shareholders’ deficit at December 31, 2022. These matters raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans in regard to these matters are also described in
Note 1 to the financial statements. These financial statements do not include any adjustments that might result from the outcome of this uncertainty.
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 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 audits 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 audit 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, 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.
We have served as the Company’s auditor since 2021.
/s/
Weinberg & Company, P.A.
Los Angeles, California
March 29, 2023
F-2
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Genelux Corporation
Balance Sheets
(In thousands, except for share amounts and par value data)
December 31,
ASSETS
Current Assets
Prepaid expenses and other current assets 1,495 1,327
Property and equipment, net 644 1,148
Deferred offering costs 1,568 —
LIABILITIES AND SHAREHOLDERS’ DEFICIT
Current Liabilities
Accounts payable and accrued expenses $ 6,775 $ 4,462
Accrued interest payable—director and shareholders 3,817 3,475
Warrant liabilities 169 —
Lease liability, current portion 266 402
Notes payable—shareholders, net of debt discount of $108 in 2022 992 —
Long-term Liabilities
Lease liability, long-term portion 1,164 731
U.S. Small Business Administration PPP loan payable — 314
Convertible notes payable—shareholders, long-term portion — 9,382
Shareholders’ Deficit
Accumulated other comprehensive income 2 2
TOTAL LIABILITIES AND SHAREHOLDERS’ DEFICIT $ 5,531 $ 8,126
The accompanying notes are an integral part of these financial statements.
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Genelux Corporation
Statements of Operations
(in thousands, except for share amounts and per share data)
Years EndedDecember 31,
Operating expenses:
Other income (expenses):
Debt discount amortization (258 ) (196 )
Financing costs — (398 )
Gain on forgiveness of PPP loan payable 314 —
Gain on settlement of convertible notes payable — 50
Total other expenses, net (1,094 ) (1,765 )
Loss before provision for foreign income taxes (4,107 ) (16,378 )
Provision for foreign income taxes (1,100 ) —
BASIC AND DILUTED LOSS PER COMMON SHARE $ (0.57 ) $ (1.81 )
The accompanying notes are an integral part of these financial statements.
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Genelux Corporation
Statements of Shareholders’ Deficit
(in thousands, except share amounts)
Shares Amount Shares Amount Shares Amount
Common shares issued for cash, net — — 13,571 — 143 — — 143
Stock compensation — — — — — — 1,663 — — 1,663
Cost of stock option modifications — — — — — — 2,608 — — 2,608
Exercise of stock option — — 116 — — — 1 1
Stock compensation — — — — — — 2,415 — — 2,415
Shares issued upon exercises of stock warrants — — 16,666 — — — 120 — — 120
Net loss for the year ended December 31, 2022 — — — — — — — — (5,207 ) (5,207 )
The accompanying notes are an integral part of these financial statements.
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Genelux Corporation
Statements of Cash Flows
(In thousands)
Years EndedDecember 31,
Cash Flows from Operating Activities
Adjustments to reconcile net loss to net cash used in operating activities:
Amortization of debt discount 258 196
Gain on settlement of convertible note payable — (50 )
Cost of stock option modifications — 2,608
Gain on forgiveness of PPP loan payable (314 ) —
Changes in Assets and Liabilities
(Increase) Decrease in:
Prepaid expenses and other assets (168 ) (1,212 )
(Decrease) Increase in:
Accounts payable and accrued expenses 2,313 754
Accrued compensation (3 ) 15
Accrued interest payable 886 310
Net cash used in operating activities (3,571 ) (6,585 )
Cash Flows from Investing Activities
Purchases of property and equipment (49 ) —
Net cash used in investing activities (49 ) —
Cash Flows from Financing Activities
Proceeds from convertible notes payable - shareholders — 18
Repayment of convertible notes payable - shareholders (130 ) (1,445 )
Proceeds from convertible notes payable — 919
Repayment of convertible note payable — (50 )
Proceeds from notes payable - shareholders 1,100 —
Payment of deferred offering costs (1,568 ) —
Proceeds from the exercises of stock warrants 120 144
Proceeds from the exercise of stock option — 1
Proceeds from common stock and warrants issued for cash — 143
Net cash used in financing activities (478 ) (270 )
Supplemental cash flows disclosures:
Taxes paid $ — $ —
Supplemental non-cash financing disclosures:
The accompanying notes are an integral part of these financial statements.
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GENELUX CORPORATION
NOTES TO FINANCIAL STATEMENTS
FOR THE YEARS ENDED DECEMBER 31, 2022 and 2021
(In thousands, except for share amounts and per share data)
NOTE 1 – BASIS OF PRESENTATION
Organization and
Operations
Genelux Corporation (“Genelux” or the “Company”), a Delaware Corporation, incorporated on September 4, 2001, is a
biomedical company located in Westlake Village, California. The Company is engaged in the research and development of diagnostic and therapeutic solutions for cancer for which there is no effective treatment today. The Company is focused on the
development of therapeutic approaches for cancer that are designed to generate a personalized multi-prong attack to overwhelm a tumor’s sophisticated defense mechanisms.
COVID-19 Considerations
During the year ended December 31, 2022, the COVID-19 pandemic did not have a material net impact on our
operating results, but did have an impact on our supply chain. In response to the COVID-19 pandemic, a number of governmental orders and other public health guidance measures have been implemented
across much of the United States, including in the locations of our office, clinical trial sites and third parties on whom we rely.
Our ability to
operate without significant negative operational impact from the COVID-19 pandemic will in part depend on our ability to protect our employees and our supply chain. The Company has endeavored to
follow the recommended actions of government and health authorities to protect our employees. Since the onset of the COVID-19 pandemic, we maintained the consistency of our operations. However, the
uncertainty resulting from the pandemic could result in an unforeseen disruption to our workforce and supply chain (for example, an inability of a key supplier or transportation supplier to source and transport materials) that could negatively
impact our operations. We anticipate that our clinical development timelines could be negatively affected by COVID-19, which could materially and adversely affect our business, financial condition
and results of operations.
Through December 31, 2022, the COVID-19 pandemic has not negatively
impacted the Company’s liquidity position as of such date. During the year ended December 31, 2022, the Company generated cash flows through its licensing agreements to meet its short-term liquidity needs, but it expects to maintain access
to the shareholder loans and equity financings, if needed, and potentially future payments under existing and new licensing agreements. The Company has not observed any material impairments of its assets or a significant change in the fair value of
its assets due to the COVID-19 pandemic.
Going Concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the settlement of
liabilities and commitments in the normal course of business. As reflected in the accompanying financial statements, the Company incurred a net loss of $5,207 and used cash in operations of $3,571 during the year ended December 31, 2022, and
had a shareholders’ deficit of $35,783 as of December 31, 2022. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability of the Company to continue as a going concern is dependent
upon the Company’s ability to raise additional funds and implement its strategies. The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
At December 31, 2022, the Company had cash on hand in the amount of $397. The ability to continue as a going concern is dependent on the Company
attaining and maintaining profitable operations in the future and raising additional capital to meet its obligations and repay its liabilities arising from normal business operations when they come due. Since inception, the Company has funded its
operations primarily through equity and debt financings, and licensing income, and it expects to continue to rely on these sources of capital in the future. Subsequent to December 31, 2022, the Company closed its initial public offering (IPO)
of its common stock and received net proceeds of approximately $12,400. The Company expects the proceeds from the IPO, plus its cash on hand, will last until at least 12 months from the closing of the IPO.
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No assurance can be given that any future financing will be available or, if available, that it will be on
terms that are satisfactory to the Company. Even if the Company is able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in case
of equity financing, or grant unfavorable terms in licensing future licensing agreements.
Reverse Stock Split
In August 2022, the Company effected a 1-for-3 reverse stock split of its
common stock. The par value and the authorized shares of the common stock were not adjusted as a result of the reverse stock split. The reverse stock split resulted in an adjustment to the conversion prices of the convertible preferred stock to
reflect a proportional decrease in the number of shares of common stock to be issued upon conversion. The accompanying financial statements and notes to the financial statements give retroactive effect to the reverse stock split for all periods
presented.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of the financial
statements in conformity with accounting principles generally accepted in the U.S. requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at
the financial statement date, and reported amounts of revenue and expenses during the reporting period. Significant estimates are used in the valuation of accruals for potential liabilities, valuations of stock-based compensation, and realization of
deferred tax assets, among others. Actual results could differ from these estimates.
Income (Loss) Per Share
Basic loss per share is computed by dividing net loss applicable to common stockholders by the weighted average number of outstanding common shares during the
period. Diluted loss per share is computed by dividing the net loss applicable to common stockholders by the weighted average number of common shares outstanding plus the number of additional common shares that would have been outstanding if all
dilutive potential common shares had been issued.
For the years ended December 31, 2022 and 2021, the basic and diluted shares outstanding were
the same, as potentially dilutive shares were considered anti-dilutive. The potentially dilutive securities consisted of the following:
Stock warrants, issuable upon conversion of notes payable 183,852 183,852
Revenue Recognition
The
Company records revenue under the guidance of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers (Topic 606) which requires a company to recognize revenue to depict the transfer of
goods or services to a customer at an amount that reflects the consideration it expects to receive in exchange for those goods or services.