Item 9A. Controls and Procedures
Item 9A. Controls and Procedures.
Disclosure Controls and Procedures
We maintain “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act, that are designed to ensure that information required to be disclosed in the reports that we file or submit 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 information required to be disclosed in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive and principal financial officers, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure. Our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and our management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures.
As required by Rules 13a-15(e) and 15d-15(e) of the Exchange Act, our management, including our principal executive officer and our principal financial officer, conducted an evaluation as of the end of the period covered by this Form 10-K of the effectiveness of the design and operation of our disclosure controls and procedures. In designing and evaluating our disclosure controls and procedures, our management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. Based on that evaluation, our principal executive officer and principal financial officer concluded that our disclosure controls and procedures were effective at the reasonable assurance level as of the end of the period covered by this Form 10-K.
Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure.
We can give no assurance that material weaknesses in our internal control over financial reporting will not be identified in the future. Our failure to implement and maintain effective internal control over financial reporting could result in errors in our financial statements that could result in a restatement of our financial statements and cause us to fail to meet our reporting obligations.
Management’s Annual Report on Internal Control over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over our financial reporting, as such term is defined in Rule 13a-15(f) and 15d-15(f) under the Exchange Act.
Our management conducted an assessment of the evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2022 based on the criteria set forth in “Internal Control – Integrated Framework (2013)” issued by the Committee of Sponsoring Organizations of the Treadway Commission.
Based on this assessment, our management concluded that our internal control over financial reporting was effective as of December 31, 2022.
Attestation Report of the Registered Public Accounting Firm
This Annual Report on Form 10-K does not include an attestation report of our registered public accounting firm due to an exemption established by the JOBS Act for “emerging growth companies”. Additionally, our independent
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registered public accounting firm will not be required to opine on our internal control over financial reporting until we are no longer an emerging growth company.
Changes in Internal Control Over Financial Reporting
As previously reported, management recognized that the Company had material weaknesses in its internal control over financial reporting as of December 31, 2021. We identified a material weakness as it relates to a lack of adequate segregation of accounting functions.
To remediate the inadequate segregation of duties, our management (i) engaged a third-party specialist to review our current internal controls and to recommend design improvements given the limited number of employees, (ii) hired a controller to remediate the segregation of duties issue, who commenced employment in April 2022 and (iii) implemented a quarterly financial statement close process that includes formal reviews of financial statement account balances and journal entries. Accordingly, management believes it has remediated the material weakness related to inadequate segregation of duties.
Except as noted above, there were no additional changes in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) identified in connection with the evaluation of such internal control that occurred during the fourth quarter of our last fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
Item 9B. Other Information.
None.
Item 9C. Disclosure Regarding Foreign Jurisdictions that Prevent Inspections.
Not applicable.
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PART III
Item 10. Directors, Executive Officers and Corporate Governance.
Set forth below are the names of our directors and officers and each of their principal occupations and employers, as applicable. Additional information required by this Item will be included in the 2023 Proxy Statement and is incorporated herein by reference.
David P. Luci — President and Chief Executive Officer, Director
Mr. Luci is our co-founder, President and Chief Executive officer and has served as Director since February 2018. Mr. Luci previously served as our Managing Director from February 2018 until June 2021. Previously, Mr. Luci was the President and Chief Executive Officer of Dipexium Pharmaceuticals (Nasdaq: DPRX), a pharmaceutical company focused on antibiotic drug development, from February 2010 until its sale to PLx Pharma Inc. (Nasdaq: PLXP) in a merger valued at $69.0 million in April 2017. From February 2009 to January 2010, Mr. Luci served as a member of the board of directors of Access, where he also served as Chairman of the Audit Committee and Chairman of the Compensation Committee as well as serving in a consulting capacity following the acquisition of MacroChem. From December 2007 through February 2009, Mr. Luci served as a member of the board of directors and President of MacroChem. Prior to that, Mr. Luci served as Executive Vice President, Chief Financial Officer, General Counsel and Corporate Secretary of Bioenvision, Inc. (or Bioenvision), an international biopharmaceutical company focused upon the development, marketing and commercialization of oncology products and product candidates. Mr. Luci began his career with Ernst & Whinney LLP (now Ernst &Young LLP) in New York as a certified public accountant working in the Healthcare Practice Group. He later practiced corporate law at Paul Hastings LLP in New York, where his practice encompassed all aspects of public and private mergers and acquisitions, corporate finance, restructurings and private equity transactions, with a core focus in the healthcare industry. Mr. Luci graduated from Bucknell University with a degree as a Bachelor of Science in Business Administration with a concentration in Accounting and graduated from Albany Law School of Union University where he served as Managing Editor of the Journal of Science & Technology. Mr. Luci became a certified public accountant in the State of Pennsylvania in 1990 (inactive) and is a member of the New York State Bar Association. Mr. Luci was selected to serve on our board of directors because of his extensive experience in the pharmaceutical industry.
Robert J. DeLuccia — Executive Chairman
Mr. DeLuccia is our co-founder and Executive Chairman and has served as Director since February 2018. Mr. DeLuccia previously served as our Managing Partner from February 2018 until June 2021. February 2018. Previously, Mr. DeLuccia was the Executive Chairman of Dipexium Pharmaceuticals (Nasdaq: DPRX), a pharmaceutical company focused on antibiotic drug development, from February 2010 until its sale to PLx Pharma Inc. (Nasdaq: PLXP) in a merger valued at $69 million in April 2017. Previously, from 2004 to 2009, Mr. DeLuccia served in several capacities at MacroChem, a development-stage, publicly traded pharmaceutical company using topical drug delivery technology for products in dermatology, podiatry, urology and cancer, including as Chairman of the board of directors, President and Chief Executive Officer. Prior to joining MacroChem, Mr. DeLuccia served as President and Chief Executive Officer of Immunomedics, Inc., a publicly-traded biopharmaceutical company focused on antibody-based therapeutic products and diagnostic imaging for cancer and infectious diseases. Mr. DeLuccia also served as President of Sterling Winthrop, Inc. (or Sterling Winthrop) (as an independent corporation and then as subsidiary of Eastman Kodak), and subsequently, upon acquisition, the U.S. subsidiary of Sanofi-Aventis (or Sanofi) and currently serves as a member of the board of directors of IBEX Technologies Inc., which manufactures and markets proprietary enzymes (heparinases and chondroitinases) for use in pharmaceutical research and Heparinase I, used in many leading hemostasis monitoring devices. Mr. DeLuccia began his career as a pharmaceutical sales representative for Pfizer, Inc. (or Pfizer) and progressed to Director of Marketing, Pfizer Laboratories Division, and to Vice President Marketing and Sales Operations for Pfizer’s Roerig Division. Mr. DeLuccia received a Bachelor of Business Administration with a concentration in Marketing and a Master’s Degree in Business Administration from Iona College. Mr. DeLuccia was selected to serve as Chairman of our board of directors because of his extensive executive leadership and experience in the pharmaceutical industry.
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Carl V. Sailer — Director
Mr. Sailer has served as our director since October 2018. Since May 2019, Mr. Sailer has served as VP, Global Account Lead for Syneos Health (Nasdaq: SYNH). Previously, Mr. Sailer served as VP, Sales and Marketing for Emisphere Technologies from October 2012 until March 2019, Vice President of Commercial Operations at New American Therapeutics from August 2010 to September 2012, and VP, Commercial Operations Akrimax Pharmaceuticals from May 2008 to July 2010. Mr. Sailer started his career in various sales, marketing and sales management roles in the pharmaceutical and consumer products divisions of Bristol-Myers Squibb and Bayer Healthcare. Mr. Sailer has over 25 years of experience as a commercial leader in the biopharmaceutical industry. Mr. Sailer earned a Master of Business Administration from Hofstra University and a Bachelor of Science in Marketing from Seton Hall University, where he currently serves on the Advisory Board of the Market Research Center at the Stillman School of Business. Mr. Sailer was selected to serve on our board of directors because of his extensive experience in the pharmaceutical and consumer goods industries.
Thomas Harrison — Director
Mr. Harrison has served as our director since July 2021. Since June 2016, Mr. Harrison has served as Chairman Emeritus of the Diversified Agency Services (“DAS”) division of Omnicom Group Inc. (NYSE: OMC), the world’s largest group of marketing services companies, having previously served as its President, then Chairman and CEO. DAS provides an unparalleled range of marketing communications services including public relations, crisis management, branding, sales promotion, customer relationship management and specialty communications including health care advertising. With over 5000 worldwide clients, the DAS division under Mr. Harrison had annual revenues of over $6.0 billion and became the largest business unit within Omnicom Group. Under Mr. Harrison’s leadership, the DAS division grew from Omnicom’s smallest to its largest division and accounted for over 50% of Omnicom’s total revenues. He acquired and led a group of companies which became the most influential in their respective disciplines and built the largest, most innovative, diverse and relevant group of specialized agencies.
Mr. Harrison’s multi-faceted career brought him to Omnicom in 1992 when Omnicom acquired the firm he co-founded, Harrison & Star Business Group, which was the most successful and rapidly growing agency group in the healthcare industry. Mr. Harrison served as Chairman of the Harrison & Star Group and Chairman of Diversified Healthcare Communications, a group of eight healthcare agencies within Omnicom, until his appointment as President of DAS in 1997. He was named Chairman and Chief Executive of DAS in 1998 and remained in this role until being named Chairman Emeritus in 2013.
With an advanced degree in cell biology and physiology, Mr. Harrison began his business career at Pfizer Laboratories as a pharmaceutical sales representative His agency, Harrison & Star, was an entrepreneurial agency that fused high science with high creativity. The agency became uniquely positioned in the market due to its understanding of the clinical and scientific underpinnings of prescription product promotion and its ability to communicate with practicing physicians using the language of science not sales.
Mr. Harrison brought his scientific acumen and career experience in healthcare, wellness, branding and communication to the evolving cannabis marketplace in 2015 when he joined the Board of Directors of Zynerba Pharmaceuticals, a leader in pharmaceutically produced transdermal cannabinoid therapies for rare and near-rare psychiatric disorders. Mr. Harrison joined Merida Capital Partners in 2019 as Senior Operating Partner. At Merida, he serves as a strategic and operational advisor across the firm’s portfolio companies. Mr. Harrison is focused on contributing his expertise to this dynamic industry as it continues to unfold.
Mr. Harrison is a member of the Executive Committee of the Montefiore Health System and currently sits on the board of Fifth Street Asset Management (2014 – Present) where he serves as Lead Independent Director and Chairman of the Audit Committee. He also serves on the board of Madison Logic, a digital business to business agency (2017 – Present). Most recently, Mr. Harrison was appointed to the board of MainStem, a cannabis-related supply company and also ACTV8me, a digital advertising attribution company.
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Mr. Harrison is a past board member at ePocrates, a publicly traded healthcare information company, where he served from 2006 until its acquisition in 2013 and he has also served as a board member for The Morgans Hotel Group (2006 – 2013). Mr. Harrison joined the board of Dipexium Pharmaceuticals in 2011 and served until its acquisition in 2017. He was a board member of rVue, a digital out-of-home media company from 2013 until 2016 and sat on the board of Social Growth Technologies from 2014 until its acquisition in 2016. Mr. Harrison was appointed to the board of directors of Zynerba Pharmaceuticals in 2015 serving as Chair of the Nominations and Corporate Governance Committee and as a member of the Compensation Committee until 2019 when he joined Merida Capital Partners.
Mr. Harrison earned an LH.D and Masters of Science in cell biology from West Virginia University, and a Bachelor of Science in cell biology and physiology from Shepherdstown University. Mr. Harrison was selected to serve on our board of directors because of his extensive public company experience and his knowledge of the pharmaceutical industry.
Joseph C. Scodari — Director
Mr. Scodari has served as our director since July 2021. Since October 2017, Mr. Scodari has served as Chairman of the Board of Directors of Optinose (Nasdaq: OPTN), a specialty pharmaceutical company focused on serving the needs of patients cared for by ear, nose and throat (“ENT”) and allergy specialists. Mr. Scodari was previously Worldwide Chairman, Pharmaceuticals Group, of Johnson & Johnson, and a member of Johnson & Johnson’s Executive Committee from March 2005 until his retirement in March 2008. From 2003 to March 2005, Mr. Scodari was Company Group Chairman of Johnson & Johnson’s Biopharmaceutical Business. Mr. Scodari joined Centocor in 1996 as President, Pharmaceutical Division and was named President and COO in 1998, a position that he served in until Conocor Inc.’s acquisition by Johnson & Johnson in 1999. Mr. Scodari began his career in 1974 in sales for Winthrop Laboratories, Division of Sterling Drug. He progressed through various management positions, eventually leading the Diagnostic Imaging Division for Winthrop and later Strategic Marketing at the corporate level for the Imaging business. Mr. Scodari joined Rorer Pharmaceuticals (shortly thereafter, Rhône-Poulenc Rorer) in 1989 as Vice President of Marketing and Business Development. He later served as Vice President and General Manager for the United States, and subsequently, North America, and finally as Senior Vice President and General Manager for the Americas. Mr. Scodari previously served as a director of Actelion Pharmaceuticals, Ltd., Endo Health Solutions, Inc. and Covance, Inc. Mr. Scodari has served on various non-profit boards, including the University of the Health Sciences in Philadelphia, the Board of Overseers for the Robert Wood Johnson School of Medicine, and on the Board of Trustees for Gwynedd Mercy College. He has also served on various industry association boards, including the NWDA Associate Member Board, the National Pharmaceutical Council, as Vice Chairman of the Biotechnology Industry Organization (“BIO”), and Chairman of PA BIO. Mr. Scodari received a B.A. from Youngstown State University. Mr. Scodari was selected to serve on our board of directors because of his extensive experience in the pharmaceutical industry.
Jack H. Dean, Ph.D., Sc.D. (Hon.), DABT, Fellow ATS — Director
Dr. Dean has served as our director since July 2021. He previously served as a director of our predecessor, Dipexium Pharmaceuticals (Nasdaq: DPRX), a pharmaceutical company focused on antibiotic drug development from October 2010 until its sale to PLx Pharma Inc. (Nasdaq: PLXP) in a merger valued at $69.0 million in April 2017. Since 2006, Dr. Dean has served as an advisor to the Executive Vice President of Drug Development for Sanofi, consulting on drug development strategy, drug safety issues and immunotoxicology through his company Drug Development Advisors, LLC where he serves as President. Dr. Dean is also a research professor in the departments of Medical Pharmacology and Pharmacology/ Toxicology, Colleges of Medicine and Pharmacy, at University of Arizona in Tucson. Prior to January 2006, Dr. Dean served as the President, U.S. Science and Medical Affairs (R&D), Sanofi in Malvern, Pennsylvania and the Global Director of Preclinical Development for Sanofi. Dr. Dean joined Sterling Winthrop in 1988, as Director of the Department of Toxicology and was appointed Vice President, Drug Safety worldwide in 1989. In addition, Dr. Dean served as Director of the Sterling Winthrop Research Center in Alnwick, England from 1990 to 1992. Dr. Dean was appointed Executive Vice President, Drug Development, in 1992 where he managed Non-Clinical and Clinical Development, and Regulatory Affairs. Before joining Sterling Winthrop, Dr. Dean headed the Department of Cellular and Molecular Toxicology, Chemical Industry Institute of Toxicology, Research Triangle Park, NC from 1982 to 1988. Prior to 1982, he headed the Immunotoxicology Section, National Institute of Environmental Health Services and National Toxicology Program, NIH in Research Triangle Park. From 1972 to 1979, Dr. Dean was in the Department
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of Immunology at Litton Bionetics (Department Director from 1975 to 1979) conducting research in tumor immunology. Dr. Dean holds a Bachelor of Science in microbiology and a Master of Science in medical microbiology from California State University at Long Beach. He earned a Ph.D. in molecular biology and minor in biochemistry in 1972 from the College of Medicine, University of Arizona. Dr. Dean held adjunct professorships at the University of North Carolina, Chapel Hill and Duke University from 1981 to 1988. Dr. Dean was selected to serve on our board of directors because of his extensive experience in the pharmaceutical industry.
James Donohue — Director
Mr. Donohue has served as our director since July 2021. Mr. Donohue has been a Vice President with Charles River Associates (Nasdaq: CRAI), a leading global consulting firm specializing in economic, financial, and management consulting services, since April 2004. Mr. Donohue has nearly 30 years of experience in valuation, damages, and forensic accounting. Mr. Donohue is a Certified Public Accountant (CPA) in Maryland and has a Bachelor of Science degree in Accountancy from Villanova University. He is also a Certified Valuation Analyst (CVA) and is Accredited in Business Valuation (ABV). Mr. Donohue was selected to serve on our board of directors because of his expertise in financial accounting.
Robert Shawah — Chief Financial Officer
Mr. Shawah has served as our Chief Financial Officer since June 2021. Mr. Shawah previously served as our Chief Accounting Officer and Vice President of Finance from February 2018 to June 2021. Previously, Mr. Shawah served as Chief Accounting Officer of Dipexium Pharmaceuticals, Inc. (Nasdaq: DPRX) from 2014 until when Dipexium Pharmaceuticals was sold to PLX Pharma (Nasdaq: PLXP) in a merger valued at $69.0 million in April 2017. Further, Mr. Shawah has served as Vice President of Baldwin Pearson & Co, Inc., a commercial real estate firm. From August 2018 to December 2018, Mr. Shawah served as a director for Ameri100, a software integration company. Mr. Shawah graduated from Bucknell University with a degree as a Bachelor of Science in Business Administration with a concentration in Accounting.
Item 11. Executive Compensation.
The information required by this Item will be included in the 2023 Proxy Statement and is incorporated herein by reference.
Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters.
The information required by this Item will be included in the 2023 Proxy Statement and is incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence.
The information required by this Item will be included in the 2023 Proxy Statement and is incorporated herein by reference.
Item 14. Principal Accounting Fees and Services.
The information required by this Item will be included in the 2023 Proxy Statement and is incorporated herein by reference.
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PART IV
Item 15. Exhibits, Financial Statement Schedules.
(a) The financial statements filed as part of this Form 10-K are listed in the Index to Financial Statements. Certain schedules are omitted because they are not applicable, or not required, or because the required information is included in the financial statements or notes thereto. The Exhibits are listed in Item 15(b) below.
(b) Exhibit Index.
Exhibit
Number
Exhibit Description
Filed
Herewith
Incorporated
by
Reference
herein
from Form
or
Schedule
Filing
Date
SEC File/
Registration
Number
3.1
Certificate of Incorporation of Acurx Pharmaceuticals, Inc.
S-1
05/27/21
333-256516
3.2
Bylaws of Acurx Pharmaceuticals, Inc.
S-1
05/27/21
333-256516
4.1
Form of Common Stock Certificate.
S-1
05/27/21
333-256516
4.2
Form of Series A Warrant
8-K
07/25/22
001-40536
4.3
Form of Series B Warrant
8-K
07/25/22
001-40536
4.4
Form of Pre-Funded Warrant.
8-K
07/25/22
001-40536
4.5
Form of Placement Agent Warrant.
8-K
07/25/22
001-40536
4.6
Description of Securities.
X
10.1
Form of Indemnification Agreement.
S-1
05/27/21
333-256516
10.2
Form of Warrant.
S-1
05/27/21
333-256516
10.3
Form of Common Stock Purchase Warrant.
S-1
05/27/21
333-256516
10.4
Form of Securities Purchase Agreement.
8-K
07/25/22
001-40536
10.5
Form of Investor Rights Agreement, by and between the Registrant and certain purchasers.
S-1
05/27/21
333-256516
10.5.1+
Acurx Pharmaceuticals, Inc. 2021 Equity Incentive Plan
S-1
05/27/21
333-256516
10.5.2+
Form of Stock Option Agreement under the 2021 Equity Incentive Plan.
S-8
07/19/21
333-258026
10.5.3+
Form of Restricted Stock Agreement under the 2021 Equity Incentive Plan.
S-8
07/19/21
333-258026
10.5.4+
Form of Recapitalization Exchange Option Agreement.
S-8
07/19/21
333-258026
10.6+
Amended and Restated Employment Agreement, by and between Acurx Pharmaceuticals, Inc. and Robert J. DeLuccia, dated May 25, 2021.
S-1
05/27/21
333-256516
10.7+
Amended and Restated Employment Agreement, by and between Acurx Pharmaceuticals, Inc. and David P. Luci, dated May 25, 2021.
S-1
05/27/21
333-256516
10.8+
Amended and Restated Employment Agreement, by and between Acurx
S-1
05/27/21
333-256516
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Exhibit
Number
Exhibit Description
Filed
Herewith
Incorporated
by
Reference
herein
from Form
or
Schedule
Filing
Date
SEC File/
Registration
Number
Pharmaceuticals, Inc. and Robert Shawah, dated May 25, 2021.
10.9
Master Clinical Services Agreement, dated October 11, 2019, by and between Acurx Pharmaceuticals, Inc. and Syneos Health, LLC.
S-1
05/27/21
333-256516
10.10#
Asset Purchase Agreement, dated February 5, 2018, by and between Acurx Pharmaceuticals, Inc. and GLSynthesis Inc.
S-1
05/27/21
333-256516
21.1
Subsidiaries
X
23.1
Consent of CohnReznick LLP.
X
31.1
Certification of the Principal Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
31.2
Certification of the Principal Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.
X
32.1
Certification of Principal Executive Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
32.2
Certification of Principal Financial Officer Pursuant to 18 U.S.C. Section 1350, as Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002.
X
101.INS
Inline XBRL Instance Document - the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document
X
101.SCH
Inline XBRL Taxonomy Extension Schema Document
X
101.CAL
Inline XBRL Taxonomy Extension Calculation Linkbase Document
X
101.DEF
Inline XBRL Taxonomy Extension Definition Linkbase Document
X
101.LAB
Inline XBRL Taxonomy Extension Labels Linkbase Document
X
101.PRE
Inline XBRL Taxonomy Extension Presentation Linkbase Document
X
104
Cover Page Interactive Data File (Embedded within the Inline XBRL document and included in Exhibit)
X
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#
Certain confidential portions of this Exhibit were omitted by means of marking such portions with brackets (“[***]”) because the identified confidential portions (i) are not material and (ii) would be competitively harmful if publicly disclosed.
+
Denotes management compensation plan or contract.
Item 16. Form 10-K Summary.
Not applicable.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized .
ACURX PHARMACEUTICALS, INC.
Date: March 15, 2023
By:
/s/ David P. Luci
David P. Luci
President and Chief Executive Officer
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/ David P. Luci
President, Chief Executive Officer and Director
March 15, 2023
David P. Luci
(Principal Executive Officer)
/s/ Robert G. Shawah
Chief Financial Officer
March 15, 2023
Robert G. Shawah
( Principal Accounting Officer and Principal Financial Officer )
/s/ Robert J. DeLuccia
Executive Chairman
March 15, 2023
Robert J. DeLuccia
/s/ Carl V. Sailer
Director
March 15, 2023
Carl V. Sailer
/s/ Joseph C. Scodari
Director
March 15, 2023
Joseph C. Scodari
/s/ Thomas Harrison
Director
March 15, 2023
Thomas Harrison
/s/ Jack H. Dean
Director
March 15, 2023
Jack H. Dean
/s/ James Donohue
Director
March 15, 2023
James Donohue
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INDEX TO FINANCIAL STATEMENTS
Years Ended December 31, 2022 and 2021
Page
Report of Independent Registered Public Accounting Firm (PCAOB ID: 596)
F-2
Balance Sheets
F-3
Statements of Operations
F-4
Statements of Changes in Members’ and Shareholders’ Equity
F-5
Statements of Cash Flows
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 Stockholders
Acurx Pharmaceuticals, Inc.
Opinion on the Financial Statements
We have audited the accompanying balance sheets of Acurx Pharmaceuticals, Inc. (the “Company”) as of December 31, 2022 and 2021, and the related statements of operations, changes in members’ and shareholders’ equity 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.
The Company's Ability to Continue as a Going Concern
The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring losses from operations since inception and has stated that substantial doubt exists about the Company's ability to continue as a going concern. Management's evaluation of the events and conditions and management's plans regarding these matters are also described in Note 1. The 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 these 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 from 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.
We have served as the Company’s auditor since 2018.
/s/ CohnReznick LLP
Parsippany, New Jersey
March 15, 2023
F-2
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ACURX PHARMACEUTICALS, INC.
BALANCE SHEETS
AS OF DECEMBER 31, 2022 and 2021
December 31,
December 31,
2022
2021
ASSETS
CURRENT ASSETS
Cash
$
9,111,751
$
12,958,846
Prepaid Expenses
264,955
295,304
TOTAL ASSETS
$
9,376,706
$
13,254,150
LIABILITIES AND MEMBERS' AND SHAREHOLDERS’ EQUITY
CURRENT LIABILITIES
Accounts Payable and Accrued Expenses
$
2,061,685
$
843,909
TOTAL CURRENT LIABILITIES
2,061,685
843,909
TOTAL LIABILITIES
2,061,685
843,909
COMMITMENTS AND CONTINGENCIES
MEMBERS' AND SHAREHOLDERS' EQUITY
Members’ Equity, Class A
—
—
Members’ Equity, Class B
—
—
Common Stock; $ .001 par value, 200,000,000 shares authorized, 11,627,609 and 10,215,792 shares issued and outstanding at December 31, 2022 and 2021, respectively
11,628
10,216
Additional Paid-In Capital
45,944,478
38,948,334
Accumulated Deficit
( 38,641,085 )
( 26,548,309 )
TOTAL MEMBERS' AND SHAREHOLDERS’ EQUITY
7,315,021
12,410,241
TOTAL LIABILITIES AND MEMBERS' AND SHAREHOLDERS’ EQUITY
$
9,376,706
$
13,254,150
See accompanying notes to the financial statements.
F-3
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ACURX PHARMACEUTICALS, INC.
STATEMENTS OF OPERATIONS
YEARS ENDED DECEMBER 31, 2022 AND 2021
2022
2021
OPERATING EXPENSES
Research and Development
$
4,754,271
$
2,030,177
General and Administrative
7,338,505
10,784,023
TOTAL OPERATING EXPENSES
12,092,776
12,814,200
Gain on Forgiveness of Paycheck Protection Program Loan
—
66,503
NET LOSS
$
( 12,092,776 )
$
( 12,747,697 )
LOSS PER SHARE
Basic and diluted net loss per common share
$
( 1.12 )
$
( 1.49 )
Weighted average common shares outstanding basic and diluted
10,816,412
8,535,873
See accompanying notes to the financial statements.
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ACURX PHARMACEUTICALS, INC.
STATEMENTS OF CHANGES IN MEMBERS’ AND SHAREHOLDERS’ EQUITY
YEARS ENDED DECEMBER 31, 2022 AND 20201
Class A Membership
Class B Membership
Interests
Interests
Common Stock
Total
Additional
Members’
Number of
Number
Paid-In
Accumulated
and Shareholders’
Units
Amount
of Units
Amount
Shares
Amount
Capital
Deficit
Equity
Balance at January 1, 2021
13,493,807
$
16,402,198
100,000
$
100,000
—
$
—
$
—
$
( 13,800,612 )
$
2,701,586
Executive Compensation Settled with Membership Interests
57,430
186,650
471,042
730,115
—
—
—
—
916,765
Cancellation of Class B Issuance
—
—
( 471,042 )
—
—
—
—
—
—
Share-Based Compensation
400,936
755,556
—
—
—
—
4,399,158
—
5,154,714
Share-Based Payments to Vendors
30,145
172,971
—
—
299,584
300
1,414,470
—
1,587,741
Corporate Conversion
( 13,982,318 )
( 17,517,375 )
( 100,000 )
( 830,115 )
7,041,208
7,041
18,340,449
—
—
Initial Public Offering and underwriter warrants, net of $ 2,452,868 cash issuance costs
—
—
—
—
2,875,000
2,875
14,794,257
—
14,797,132
Net Loss
—
—
—
—
—
—
—
( 12,747,697 )
( 12,747,697 )
Balance at December 31, 2021
—
—
—
—
10,215,792
10,216
38,948,334
( 26,548,309 )
12,410,241
Share-Based Compensation
—
—
—
—
—
—
2,871,681
—
2,871,681
Share-Based Payments to Vendors
—
—
—
—
114,889
115
430,565
—
430,680
Issuance of shares of common stock and pre-funded warrants in registered direct offering, net of $ 529,805 cash issuance costs
—
—
—
—
1,159,211
1,159
3,694,023
—
3,695,182
Cashless Warrant Exercise
—
—
—
—
6,948
7
( 7 )
—
-
Pre-funded Warrant Exercise
—
—
—
—
130,769
131
( 118 )
—
13
Net Loss
—
—
—
—
—
—
-
( 12,092,776 )
( 12,092,776 )
Balance at December 31, 2022
—
$
—
—
$
—
11,627,609
$
11,628
$
45,944,478
$
( 38,641,085 )
$
7,315,021
See accompanying notes to the financial statements.
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ACURX PHARMACEUTICALS, INC.
STATEMENTS OF CASH FLOWS
YEARS ENDED DECEMBER 31, 2022 AND 2021
Years Ended
December 31,
2022
2021
Cash Flow from Operating Activities:
Net Loss
$
( 12,092,776 )
$
( 12,747,697 )
Adjustments to Reconcile Net Loss to Net Cash Used in Operating Activities:
Share-Based Compensation
2,871,681
5,154,714
Share-Based Payments to Vendors
430,680
1,587,741
Executive Compensation Settled with Membership Interests
—
916,765
Gain on Forgiveness of Paycheck Protection Program Loan
—
( 66,503 )
(Increase) / Decrease in:
Prepaid Expenses
30,349
( 246,695 )
Accounts Payable and Accrued Expenses
1,217,776
387,978
Net Cash Used in Operating Activities
( 7,542,290 )
( 5,013,697 )
Cash Flow from Financing Activities:
Proceeds from Initial Public Offering, net of issuance costs
—
14,797,132
Proceeds from Registered Direct Offering, net of issuance costs
3,695,182
—
Pre-funded Warrant Exercise
13
—
Net Cash Provided by Financing Activities
3,695,195
14,797,132
Net (Decrease) Increase in Cash
( 3,847,095 )
9,783,435
Cash at Beginning of Year
12,958,846
3,175,411
Cash at End of Year
$
9,111,751
$
12,958,846
SUPPLEMENTAL DISCLOSURE OF NON-CASH FINANCING ACTIVITIES
Warrants issued in connection with offerings
$
171,409
$
618,000
See accompanying notes to the financial statements.
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ACURX PHARMACEUTICALS, INC.
NOTES TO THE FINANCIAL STATEMENTS
NOTE 1 – NATURE OF OPERATIONS
Business:
Acurx Pharmaceuticals, Inc., a Delaware corporation, formerly Acurx Pharmaceuticals, LLC (the “Company”) is a clinical stage biopharmaceutical company formed in July 2017, with operations commencing in February 2018. The Company is focused on developing a novel class of antibiotics that address serious or life threatening bacterial infections.
In March 2020, the World Health Organization declared the outbreak of COVID-19, a novel strain of coronavirus, a global pandemic. This outbreak caused major disruptions to businesses and markets worldwide as the virus continued to spread. The COVID-19 pandemic has disrupted, and the Company expects it will continue to disrupt, its operations. The extent of the effect on the Company’s operational and financial performance will depend on future developments, including the duration, spread and intensity of the pandemic, and governmental, regulatory and private sector responses, direct and indirect economic effects as a result of inflation, supply chain disruptions and labor shortages all of which are uncertain and difficult to predict. Although the Company is unable to estimate the financial effect of the pandemic, at this time, if the pandemic continues over a long period of time, it could have a material adverse effect on the Company’s business, results of operations, financial condition, and cash flows. The financial statements do not reflect any adjustments as a result of the pandemic.
In February 2018, the Company purchased the active pharmaceutical ingredient, the intellectual property and other rights to an antibiotic product candidate known as GLS362E (renamed ACX-362E and now approved for non-proprietary name, ibezapolstat) (the “Asset”) from GLSynthesis, Inc. The Company paid $ 110,174 in cash, along with granting 100,000 Class B Membership Interests, profits interests as defined in the operating agreement, with an exercise price of $ 0.10 per share. The Company was also required to make certain milestone payments totaling $ 700,000 in aggregate if certain milestones are achieved, $ 50,000 of which has already been paid by the Company and royalty payments equal to 4 % of net sales for a period of time equal to the last to expire of any applicable patents, as defined in the asset purchase agreement. The purchase of the Asset has resulted in our lead antibiotic product candidate, ibezapolstat, which targets the treatment of C. difficile infections (“CDI”).
The Company’s primary activities since inception aside from organizational activities have included performing research and development activities relating to the development of its two antibiotic candidates and raising funds through equity offerings including its initial public offering (“IPO”) consummated in June 2021. The Company has not generated any revenues since inception.
The Company has experienced net losses and negative cash flows from operations since inception and expects these conditions to continue for the foreseeable future. The Company has needed to raise capital from sales of its securities to sustain operations. On June 29, 2021, the Company completed the IPO, issuing 2,875,000 shares of common stock at a price of $ 6.00 per share, with gross proceeds of approximately $ 17.3 million. On July 27, 2022, the Company completed a registered direct offering and a concurrent private placement, issuing 1,159,211 shares of common stock and 130,769 pre-funded warrants and series A warrants to purchase 1,289,980 shares of common stock and series B warrants to purchase 1,289,980 shares of common stock for gross proceeds of approximately $ 4.2 million. As of December 31, 2022, the Company had a cash balance of approximately $ 9.1 million, which based on current estimates will not be sufficient to meet our anticipated cash requirements for at least 12 months from the issuance of the financial statements for the year ended December 31, 2022. Management believes that the Company will continue to incur losses for the foreseeable future and will need additional resources to sustain its operations until it can achieve profitability and positive cash flows, if ever. Management plans to seek additional equity financing and grant funding, but cannot assure that such financing and funding will be available at acceptable terms, or at all. These matters raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty. There can be no assurance that the Company’s research and development will be successfully completed or that any Company product candidate will be approved by
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the Food and Drug Administration (“FDA”) or any other worldwide regulatory authority or become commercially viable. The Company is subject to risks common to companies in the biopharmaceutical industry including, but not limited to, dependence on collaborative arrangements, development by the Company or its competitors of new technological innovations, dependence on key personnel, protection of proprietary technology, and compliance with FDA and other governmental regulations and approval requirements .
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates.
Income Taxes
The Company estimates an annual effective tax rate of 0 % as the Company incurred net losses for the year ended December 31, 2022 resulting in an estimated net loss for both financial statement and tax purposes. Therefore, no current federal or state income tax expense has been recorded in the financial statements.
Based on the Company’s history of generating operating losses and its anticipation of operating losses for the foreseeable future, the Company has determined that it is more likely than not that the tax benefits from those net operating losses would not be realized and a full valuation allowance against all deferred tax assets has been recorded. Should the Company’s assessment change, tax benefits associated with the historic net operating loss carryforwards could be limited due to future ownership changes.
Prior to the Company’s corporate conversion in June 2021, the Company was organized as a limited liability company. As such, the Company was not a tax paying entity for federal income tax purposes and, therefore, no income tax expense has been recorded in the financial statements. Income or losses of the Company was passed through to the members for inclusion in their respective income tax returns.
Concentration of Credit Risk
The Company maintains its cash balance in one financial institution. The balance is insured up to the maximum allowable by the Federal Deposit Insurance Corporation (“FDIC”). The Company has not experienced any losses in such accounts and does not believe it is exposed to any significant risk of loss on cash. At times, the cash balance may exceed the maximum insured limit of the FDIC. As of December 31, 2022, the Company had cash of approximately $ 9.1 million in U.S. bank accounts which was not fully insured by the FDIC.
Guaranteed Payments to Members
Prior to the corporate conversion, guaranteed payments to members of the Company that were designated to represent reasonable compensation for services rendered were accounted for as Company expenses rather than an allocation of the Company’s net income.
Research and Development
The Company expenses research and development costs when incurred. At times, the Company may make cash advances for future research and development services. These amounts are deferred and expensed in the period the service is provided. The Company incurred research and development expenses in the amount of $ 4,754,271 and $ 2,030,177 for the years ended December 31, 2022 and 2021, respectively.
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Costs for certain research and development activities, such as the provision of services for clinical trial activity, are estimated based on an evaluation of the progress to completion of specific tasks which may use data such as subject enrollment, clinical site activations or information provided to the Company by its vendors with respect to their actual costs incurred. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the financial statements as prepaid or accrued research and development expense, as the case may be. The estimates are adjusted to reflect the best information available at the time of the financial statement issuance. Although the Company does not expect its estimates to be materially different from amounts actually incurred, the Company's estimate of the status and timing of services performed relative to the actual status and timing of services performed may vary.
Share-Based Compensation
The Company accounts for the cost of services performed by officers and directors received in exchange for an award of Company membership interests, common stock or stock options, based on the grant-date fair value of the award. The Company recognizes compensation expense based on the requisite service period.
Compensation expense associated with stock option awards is recognized over the requisite service period based on the fair value of the option at the grant date determined based on the Black-Scholes option pricing model. Option valuation models require the input of highly subjective assumptions including the expected price volatility. The Company’s employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value computation using the Black-Scholes option pricing model. Because there is no public market for the Company’s stock options and very little historical experience with the Company’s stock, similar public companies were used for the comparison of volatility and the dividend yield. The risk-free rate of return was derived from U.S. Treasury notes with comparable maturities.
Share-Based Payments to Vendors
The Company accounts for the cost of services performed by vendors in exchange for an award of Company membership interests, common stock, or stock options, based on the grant-date fair value of the award or the fair value of the services rendered; whichever is more readily determinable. The Company recognizes the expense in the same period and in the same manner as if the Company had paid cash for the services.
Major Vendor
The Company had a major vendor that accounted for approximately 55 % and 42 % of the research and development expenditures for the years ended December 31, 2022 and 2021, respectively. The same vendor also accounted for approximately 56 % and 5 % of the total accounts payable and accrued expenses as of December 31, 2022 and 2021, respectively. The Company continues to maintain this vendor relationship and anticipates incurring significant expenses with this vendor over the next 12 months.
The Company had an additional major vendor that accounted for approximately 4 % and 15 % of the research and development expenditures for the years ended December 31, 2022 and 2021. The same vendor did not account for any material portion of the total accounts payable and accrued expenses. The Company will continue to maintain this vendor relationship over the next 12 months.
NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts payable and accrued expenses as of December 31, 2022 and 2021 were as follows:
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December 31, 2022
December 31, 2021
Accrued compensation expenses
$
542,895
$
508,343
Accrued research and development
1,405,536
229,090
Accrued professional fees
83,715
43,102
Other accounts payable and accrued expenses
29,539
63,374
Total
$
2,061,685
$
843,909
NOTE 4 – PAYCHECK PROTECTION PROGRAM LOAN
In May 2020, the Company received a Paycheck Protection Program loan (“PPP Loan”) under the CARES Act, as administered by the U.S. Small Business Administration (”SBA”) in the amount of $ 66,503 . The Company did not provide any collateral or guarantees in connection with the PPP loan, nor did the Company pay any facility charge to obtain the PPP Loan. The note and agreement provided for customary events of default, including those relating to failure to make payment, bankruptcy, breaches of representations and material adverse effects. The Company was permitted to prepay the principal of the PPP Loan at any time without incurring any prepayment charges. The PPP Loan carried an annual interest rate of 0.98 % and a maturity date two (2) years from issuance. The Company was not obligated to make any payments of principal or interest before the date on which the SBA remits the loan forgiveness amount to the lender or notifies the lender that no loan forgiveness is allowed. On April 13, 2021, the SBA authorized the full forgiveness of the PPP Loan. Accordingly, the Company reduced the full amount of the liability and recorded a gain in the amount of $ 66,503 on the forgiveness of the PPP loan in the statements of operations for the year ended December 31, 2021.
NOTE 5 – EXECUTIVE COMPENSATION
In January 2021, the Company issued 57,430 Class A Membership Interests at $ 3.25 per unit, equal to the value of the most recent private placement, to two of its executives to settle unpaid year-end bonus award and deferred compensation, which was approved by the board of directors. The year-end bonus component was equal to 38,353 Class A Membership Interests, which was included as accrued compensation. In January 2021, the Company also amended the employment agreements for the three executives.
The board of directors also approved certain grants to members of management as a component of their 2020 year-end compensation, authorizing the issuance of 1,540,000 Class B Membership Interests to its three executives, as well as 75,000 Class B Membership Interests which were granted to non-employee management team members. The Class B Membership Interests are profits interests with a defined exercise price of $ 3.25 per interest, the Company’s most recent financing offering price. In March 2021, the Company along with its three executives and non-employee management team agreed voluntarily to cancel the aforementioned equity grants. The Company granted options to purchase 770,000 shares of the Company’s common stock in June 2021 to the three-member management team in replacement of the cancelled year-end grants described above.
The Company is currently managed by three executives, in each case pursuant to new employment agreements effective June 29, 2021 and a controller hired in April 2022.
NOTE 6 – ISSUANCE OF EQUITY INTERESTS
On June 23, 2021, Acurx Pharmaceuticals, LLC was converted into a corporation and renamed Acurx Pharmaceuticals, Inc. The Company’s certificate of incorporation authorizes 200,000,000 shares of common stock of which 11,627,609 were outstanding as of December 31, 2022.
On June 29, 2021, the Company completed an IPO issuing 2,875,000 shares of common stock at a price of $ 6.00 per share, resulting in net cash proceeds of approximately $ 14.8 million, with cash issuance costs of approximately $ 2.4 million. The outstanding Class A and Class B Membership Interests were converted to shares of common stock pursuant to a conversion ratio of one-for-two of the Membership Interests outstanding, resulting in the conversion of 14,082,318 Class A and Class B Membership Interests into 7,041,208 shares of common stock. Warrants to purchase Class A
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Membership Interests were converted to warrants to purchase common stock at the same one-for two conversion ratio, resulting in 1,437,577 warrants to purchase common stock with a weighted average exercise price of $ 2.88 .
In connection with the IPO, the Company issued 150,000 warrants to the underwriter. Each warrant is exercisable for 4.5 years from December 21, 2021 at an exercise price of $ 7.50 per share. The Company used the Black-Scholes model to calculate the value of the warrants with an estimated fair value of $ 618,000 . The inputs utilized in the calculation were as follows: four and a half-year term, 0.79 % risk-free rate, stock price at grant date of $ 6.26 , and a 94 % volatility utilizing comparable companies. This amount was recorded as both an increase to additional paid-in capital and as a non-cash issuance cost of the offering.
On July 25, 2022, the Company entered into securities purchase agreements (the “Purchase Agreements”) with two of the Company’s executives and a member of the Company’s board of directors (collectively, the “Affiliate Investors”), and a single U.S. institutional investor (the “Investor”) pursuant to which the Company issued and sold in a registered direct offering an aggregate of 1,159,211 shares of common stock, par value $ 0.001 per share and pre-funded warrants to purchase an aggregate of 130,769 shares of common stock. The Affiliate Investors purchased an aggregate of 59,211 shares of common stock at a purchase price of $ 3.80 per share. The Investor purchased an aggregate of 1,100,000 shares of common stock at a purchase price of $ 3.25 per share and an aggregate of 130,769 pre-funded warrants at a purchase price of $ 3.2499 per pre-funded warrant. The pre-funded warrants sold to the Investor have an exercise price of $ 0.0001 , were immediately exercisable. As of December 31, 2022, all of the pre-funded warrants were exercised. The Company also issued to the Affiliate Investors and the Investor, series A warrants to purchase 1,289,980 shares of common stock and series B warrants to purchase 1,289,980 shares of common stock, all of which are deemed equity classified. These warrants included 59,211 series A warrants and an aggregate of 59,211 series B warrants to the Affiliate Investors with an exercise price per share of $ 3.55 and an aggregate of 1,230,769 series A warrants and an aggregate of 1,230,769 series B warrants to the Investor with an exercise price per share of $ 3.25 . The series A warrants will be exercisable commencing on January 27, 2023 and will expire on January 27, 2028. The series B warrants will be exercisable commencing on January 27, 2023 and will expire on January 27, 2024. The registered direct offering closed on July 27, 2022.
The gross proceeds to the Company from the registered direct offering were $ 4.2 million and net proceeds after deducting the placement agents’ fees and other offering expenses payable by the Company were approximately $ 3.7 million.
On July 25, 2022, the Company entered into a co-placement agent agreement (the “Placement Agent Agreement”), with two placement agents in connection with the registered direct offering pursuant to which the Company paid the Placement Agents a cash fee of $ 287,874 and issued to the Placement Agents an aggregate of 63,018 warrants to purchase shares of common stock. The warrants have an exercise price of $ 3.60 per share (representing 110 % of the weighted average public offering price of the aggregate number of shares of common stock sold in the registered direct offering to the Investor and Affiliate Investors) and expire on July 27, 2027. The Company used the Black-Scholes model to calculate the value of the warrants with an estimated fair value of $ 171,409 . The inputs utilized in the calculation were as follows: five year term, 2.82 % risk free rate, stock price at grant date of $ 3.70 and a 95 % volatility utilizing comparable companies. This amount was recorded as both an increase to additional paid-in capital and as a non-cash issuance cost of the offering.
The following table summarizes information with respect to outstanding warrants to purchase common stock of the Company at December 31, 2022:
Weighted Average
Number of Warrants
Exercise Price
Balance, December 31, 2021
1,588,477
$
3.32
Issued
2,776,476
3.12
Exercised
( 147,144 )
0.27
Balance, December 31, 2022
4,217,809
$
3.29
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NOTE 7 – SHARE-BASED COMPENSATION
While the Company was a limited liability company in its pre-IPO phase of corporate development, the Company granted performance-based awards of restricted Class A Membership Interests to board members and corporate advisory council members in exchange for services. All of these awards of membership interests became fully vested upon consummation of the Company’s corporate conversion from Delaware limited liability company to a Delaware corporation immediately prior to the Company’s IPO, with the Company recognizing all previously unrecognized compensation expense. The fair value of the membership interests granted during 2020 and 2019 was equal to the per-membership interest value of the most recent private placement with a weighted average of $ 2.14 per membership interest.
Total share-based compensation associated with these awards has been recorded as general and administrative expenses in the amount of $ 0 and $ 755,556 for the years ended December 31, 2022 and 2021, respectively.
The following table summarizes the unvested Class A Membership Interests converted to common stock pursuant to a conversion ratio of one-for-two, and associated activity for the 12 months ended December 31, 2021:
Class A
Membership Interests
Converted to common stock at one-for-two ratio
Unvested at December 31, 2020
200,463
Vested
( 200,463 )
Unvested at December 31, 2021
—
In April 2021, the board of directors approved the creation of the 2021 Equity Incentive Plan (the “Plan”). The Plan became effective as of the completion of the corporate conversion. The Plan originally reserved an aggregate of 2,000,000 shares of common stock, subject to annual adjustments as provided in the Plan, which was 408,632 shares for 2022, of which 537,937 shares are currently still available for issuance as of December 31, 2022. The purpose of the Plan is to attract, retain and incentivize directors, officers, employees, and consultants.
In June 2021, the Company granted stock options to purchase a total of 807,500 shares of common stock to its three executives and three non-employee management team members to replace the Class B Membership Interests that were cancelled in March 2021. The options were issued at an exercise price of $ 6.26 , with the employee options vesting 40 % upon issuance and the balance over 36 months , and the non-employee options vesting at grant date. The Company recorded general and administrative expense of $ 726,880 and $ 2,019,325 for the years ended December 31, 2022 and 2021, respectively, related to compensation expense for these options.
In July 2021, the Company granted stock options to purchase a total of 1,550,000 shares of common stock to its three executives pursuant to their respective employment agreements, the independent directors, and one consultant, pursuant to the Plan. The options were issued at an exercise price of $ 6.18 , the grant date fair value, with one -quarter of the executive’s options vesting upon issuance and the balance over 36 months , and the options granted to the directors and consultants vesting over 36 months . The Company recorded general and administrative expenses of $ 1,963,667 and $ 2,379,833 for the years ended December 31, 2022 and 2021, respectively, related to compensation expense for these options.
In January 2022, the Company granted stock options to purchase a total of 80,000 shares of common stock to seven consultants pursuant to the Plan. The options were issued at an exercise price of $ 4.44 , the grant date fair value, with one -quarter of the options vesting upon issuance and the balance over 36 months . The Company recorded general and administrative expenses of $ 145,283 for the year ended December 31, 2022 related to compensation expense for these options.
In April 2022, the Company granted stock options to purchase a total of 30,000 shares of common stock to a new employee pursuant to the Plan. The options were issued at an exercise price of $ 3.79 , the grant date fair value, with one -
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quarter of the options vesting upon issuance and the balance over 36 months . The Company recorded general and administrative expenses of $ 35,850 for the year ended December 31, 2022 related to compensation expense for these options.
Compensation expense associated with these awards is recognized over the vesting period based on the fair value of the option at the grant date determined based on the Black-Scholes option pricing model. Option valuation models require the input of highly subjective assumptions including the expected price volatility. The Company’s employee stock options have characteristics significantly different from those of traded options, and changes in the subjective input assumptions can materially affect the fair value computation using the Black-Scholes option pricing model. Because there is no public market for the Company’s stock options and very little historical experience with the Company’s stock, similar public companies were used for the comparison of volatility and the dividend yield. The risk-free rate of return was derived from U.S. Treasury notes with comparable maturities.
The Company determined the fair value of the option awards using the Black-Scholes option pricing model using the following weighted average assumptions:
Year Ended
December 31, 2022
Expected term
9
years
Volatility
90
%
Dividend yield
—
%
Risk-free interest rate
2.01
%
Weighted average grant date fair value
$
3.54
A summary of the Company’s stock option activity is as follows:
Year Ended
Weighted Average
December 31, 2022
Exercise Price
Outstanding at the beginning of the period
2,357,500
$
6.21
Granted
110,000
$
4.26
Exercised
—
—
Forfeited
—
—
Outstanding at the end of the period
2,467,500
$
6.12
Exercisable
1,552,333
$
6.15
The total compensation expense not yet recognized as of December 31, 2022 was $ 4,243,927 . The weighted average vesting period for the unvested options is 1.54 years. The intrinsic value of the stock options as of December 31, 2022 was $ 5,700 , with a remaining weighted average contractual life of 8.53 years. The weighted average grant date fair value of all options granted is $ 4.67 as of December 31, 2022. The Company records the impact of any forfeitures of options as they occur.
NOTE 8 – SHARE-BASED PAYMENTS TO VENDORS
While the Company was a limited liability company in its pre-IPO phase of corporate development, the Company granted Class A Membership Interests to certain vendors in the ordinary course of business in exchange for consulting services relating to research and development activities and investor relations. The Company granted 30,145 Class A Membership Interests for the year ended December 31, 2021. The fair value of the Class A Membership Interests granted was equal to the value of the most recent private placement. The Company recognized the expense in the same period and in the same manner as if the Company had paid cash for the services. The Company recorded general and administrative expenses and research and development expenses for vendor equity grants in the amounts of $ 0 for the year ended December 31, 2022 and $ 201,375 and $ 21,596 for the year ended December 31, 2021, respectively.
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In October 2019, the Company granted a total of 150,000 restricted Class A Membership Interests to three consultants for investor relations consulting services performed in 2019 through October 2021. These Class A Membership Interests vested on the second anniversary of the grant date, and were subject to accelerated vesting provisions upon a change of control of the Company. The fair value of the Class A Membership Interests granted was equal to the value of the most recent private placement, $ 2.00 per Class A Membership Interest. The Company recognized the expense on a straight-line basis over the vesting period. The Company recorded general and administrative expenses of $ 0 and $ 125,000 for the years ended December 31, 2022 and 2021, respectively. The conversion adjusted shares of common stock were issued in October 2021.
In the second quarter of 2021, the Company entered into a number of agreements with vendors pursuant to which the Company made grants of a total of 175,000 shares of common stock with a grant date fair value of $ 6.26 , cash payments in the amount of $ 343,500 , and 100,000 options which were included as a part of the July 2021 grant. These contracts have terms which range from six months to three years . The common stock was valued based on the grant date fair value and the options valued utilizing Black-Scholes option pricing model. The cash payments were expensed over the service period and the equity component expensed consistent with the contractual vesting. These shares and options were granted in the third quarter of 2021 pursuant to the Plan.
In the third quarter of 2021, the Company granted vendors a total of 35,695 shares of common stock, which fully vested in 2021, pursuant to the Plan. The Company recorded general and administrative expense of $ 208,270 , based on the respective grant date fair values, for the year ended December 31, 2021.
In October 2021, the Company entered into an agreement with a consultant to provide financial advisory services for a six-month term. Pursuant to the agreement, the Company granted $ 150,000 of common stock over the term of service. The Company granted total of 27,778 shares of common stock at grant date fair value and recorded general and administrative expenses of $ 75,000 for each of the years ended December 31, 2022, and 2021, respectively.
In March 2022, the Company entered into an agreement with a consultant to provide investor relation services for a six-month term. Pursuant to the agreement, the Company granted 30,000 shares of common stock with a grant date fair value of $ 3.77 and paid $ 25,000 of cash compensation The cash component was expensed over the service period and the equity component was expensed consistent with the contractual vesting. The Company recorded general and administrative expenses of $ 113,100 for the year ended December 31, 2022.
In September 2022, the Company entered into an agreement with a company to provide consulting services for a six-month term. Pursuant to the agreement, the Company granted 36,000 shares of common stock with a grant date fair value of $ 3.53 , which was expensed consistent with the contractual vesting. The Company recorded general and administrative expenses of $ 127,080 for the year ended December 31, 2022.
In the fourth quarter of 2022, the Company entered into a number of agreements with vendors pursuant to which the Company will make grants of a total of 43,186 share of common stock with a grant date fair values ranging from $ 3.30 to $ 3.67 , up to 10,096 of warrants, and cash payments. These contracts have six-months terms with various contractual vesting periods. The cash payments will be expensed over the service period and the equity component will be expensed consistent with the various contractual vesting periods. The Company recorded general and administrative expenses of $ 115,500 for the year ended December 31, 2022.
NOTE 9 – INCOME TAXES
The Company has $ 10.7 million of net operating loss carryforwards and $ 0.1 million of research tax credit carryforwards as of December 31, 2022. The net operating loss carryforwards are indefinite lived and research tax credit carryforwards will expire in 2042. Net operating loss and tax credit carryforwards may become subject to annual limitations in the event of certain cumulative changes in the ownership interest of significant stockholders over a three-year period in excess of 50%, as defined by Sections 382 and 383 of the Internal Revenue Code as well as similar state provisions. This could limit the amount of tax attributes that can be utilized annually to offset future taxable income or tax liabilities.
The components of the net deferred income tax asset at December 31, 2022 and 2021 are as follows:
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December 31, 2022
December 31, 2021
Deferred tax assets
Net operating loss carry forwards
$
3,359,183
$
1,594,650
Share-based compensation
2,262,381
1,149,720
Research and development credit carryforwards
141,671
105,881
Capitalized research and development
1,347,028
—
Gross deferred tax assets
7,110,263
2,850,251
Less valuation allowance
( 7,110,263 )
( 2,850,251 )
Net deferred tax asset
$
—
$
—
The Tax Cuts and Jobs Act of 2017 (TCJA) amended IRC Section 174 to require capitalization of all research and developmental (R&D) costs incurred in tax years beginning after December 31, 2021. These costs are required to be amortized over five years if the R&D activities are performed in the U.S., or over 15 years if the activities were performed outside the U.S. The Company capitalized approximately $ 4.3 million of R&D expenses incurred as of December 31, 2022.
In assessing the realizability of deferred tax assets, the Company considers whether it is more-likely-than-not that some portion or all the deferred tax assets will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which the temporary differences representing net future deductible amounts become deductible. After consideration of all the evidence, both positive and negative, the Company has recorded a full valuation allowance against their net deferred tax assets at December 31, 2022 because the Company has concluded that it is more-likely-than-not that these assets will not be realized.
A reconciliation of income tax expense (benefit) at the statutory Federal income tax rate and income taxes as reflected in the financial statements for both years ended December 31, 2022 and 2021 is as follows:
December 31, 2022
December 31, 2021
Federal income tax expense at statutory rate
21.0
%
21.0
%
State income tax, net of federal benefit
14.4
5.1
Permanent differences
( 0.5 )
—
Research and development tax credit
0.3
1.0
Change in valuation allowance
( 35.2 )
( 27.1 )
Effective income tax rate
—
%
—
%
The Company files income tax returns in the U.S. and the State of New York. The tax years 2022 and 2021 are open and potentially subject to examination by the federal and state taxing authorities. The Company is currently not under examination by the Internal Revenue Service (“IRS”) or any other jurisdictions for any tax years and has no knowledge of any pending examinations by the IRS or any other jurisdictions. To the extent the Company utilizes any tax attributes from a tax period that may otherwise be closed due to statute expiration, the IRS, state tax authorities, or other governing parties may still adjust the tax attributes upon their examination of the future period in which the attribute was utilized. There are no uncertain tax positions recorded for any federal or state positions. The Company’s policy is to record interest and penalties related to tax matters in income tax expense.
NOTE 10 – NET LOSS PER SHARE
On June 23, 2021, the Company completed a corporate conversion from a limited liability company to a corporation. Accordingly, the outstanding Class A and Class B Membership Interests were converted to shares of common stock using a conversion ratio of one-half of one share of common stock for each Class A membership interest or Class B membership interest, resulting in the conversion of 14,082,318 Class A and Class B Membership Interests into 7,041,208 shares of common stock.
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Basic and diluted net loss per share of common stock for the year ended December 31, 2022 was determined by dividing net loss by the weighted average shares of common stock outstanding during the period. The Company’s potentially dilutive shares, consisting of 4,217,809 warrants, and 2,467,500 stock options, have not been included in the computation of diluted net loss per share for all periods as the result would be antidilutive. The effects of the corporate conversion on the Company’s weighted average shares of common stock outstanding and net loss per share have been reflected for all periods presented retroactively.
NOTE 11 – COMMITMENTS AND CONTINGENCIES
In conjunction with the Asset purchase in February 2018, the Company is required to make certain milestone payments related to the ongoing development of ACX-362E totaling $ 700,000 in the aggregate if certain milestones are achieved (which includes $ 50,000 already paid after the acquisition in February 2018). There were no milestones reached during 2022 and 2021. The Company is also obligated to make royalty payments equal to 4 % of net sales of ACX-362E for a period of time equal to the last to expire of any applicable patents, as defined in the purchase agreement.
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Text extracted from the filing as submitted to EDGAR. Formatting, tables and exhibits are simplified for reading; the original document is authoritative for anything you rely on.