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Item 2. Management’s Discussion and Analysis

2022-05-11 compared with 2021-11-17 · 92 added, 156 removed, 177 unchanged (58% of the section changed)

Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis of our financial conditions and results of operations should be read together with our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and our final prospectus, or the Prospectus, for our initial public offering, or IPO, dated October 7, 2021 and filed with the United States Securities and Exchange Commission, or SEC, pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended, or the Securities Act.

Some of the information with respect to our plans and strategy for our business, including forward-looking statements that involve risks and uncertainties.

As a result of many factors, including those set forth in the section entitled “Risk Factors in Part II, Item 1A of this Quarterly Report, our actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis.

You should carefully read the section entitled “Risk Factors” in Part II, Item 1A of this Quarterly Report to gain an understanding of the important factors that could cause actual results to differ materially from our forward-looking statements.

The following discussion and analysis of our financial conditions and results of operations should be read together with our consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q, or Quarterly Report, and our audited financial statements and notes thereto as of and for the years ended December 31, 2021 and 2020 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, including Contractual Obligations, included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, or the 2021 Annual Report, filed with the United States Securities and Exchange Commission, or SEC, on March 30, 2022.

In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions and other factors that could cause actual results to differ materially from those made, projected or implied in the forward-looking statements.

Our actual results may differ materially from those discussed below.

Please see “Special Note Regarding Forward-Looking Statements” and “Risk Factors” included in Part I, Item 1A of our 2021 Annual Report for factors that could cause or contribute to such differences.

We are a clinical-stage biopharmaceutical company engaged in the discovery and development of innovative, small molecule therapeutics targeting age-related degenerative diseases and disorders of the central nervous system, or CNS, and retina.

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Since our inception in 2007, we have incurred significant operating losses and devoted substantially all of our time and resources to developing our lead product candidate, CT1812, building our intellectual property portfolio, raising capital and recruiting management and technical staff to support these operations.

As of September 30, 2021 and December 31, 2020, we had an accumulated deficit of $86.7 and $68.2 million, respectively.

We incurred net losses of $3.1 million and $4.4 million for the three and nine months ended September 30, 2021, respectively, and $1.8 million and $6.0 million for the three and nine months ended September 30, 2020, respectively.

To date, we have funded our operations primarily with proceeds from grants awarded by the National Institute of Aging, or NIA, a division of the National Institutes of Health, or NIH, and proceeds from the sales of our convertible promissory notes, convertible preferred stock, Simple Agreements for Future Equity, or SAFEs, and stock option exercises.

As of March 31, 2022, we had an accumulated deficit of $97.8 million.

We incurred a net loss of $3.8 million and net income of $0.2 million for the three months ended March 31, 2022 and 2021, respectively.

To date, we have funded our operations primarily with proceeds from grants awarded by the National Institute of Aging, or NIA, a division of the National Institutes of Health, or NIH, and proceeds from our IPO, the sales of our convertible promissory notes, convertible preferred stock, simple Agreements for future equity, or SAFEs, and stock option exercises.

Since our inception, we have received approximately $168.9 million in cumulative grant awards to fund our clinical trials, primarily from the NIA, and we have raised approximately $102.0 million in net proceeds from sales of our equity securities, convertible notes, SAFEs, stock option exercises, and our IPO.

On March 25, 2021, we entered into SAFEs, with various investors, pursuant to which we received gross proceeds in an aggregate amount equal to $8.9 million.

As of September 30, 2021, we had cash and cash equivalents of $8.3 million.

As of March 31, 2022, we had cash and cash equivalents of $51.5 million.

On October 13, 2021, we completed our IPO, pursuant to which we issued and sold 3,768,116 shares of our common stock at a public offering price of $12.00 per share.

We received net proceeds of approximately $38.1 million, after deducting underwriting discounts and commissions and other offering related expenses payable by us.

On November 12, 2021, the underwriters exercise of their over-allotment option in full to purchase 565,217 shares of our common stock closed.

We received net proceeds of approximately $6.3 million, after deducting underwriting discounts and commissions and other offering related expenses payable by us.

Additionally, on November 12, 2021, the underwriters exercise of their over-allotment option in full to purchase 565,217 shares of our common stock closed.

In connection with the IPO, we received net proceeds of approximately $44.2 million, after deducting underwriting discounts and commissions and other offering related expenses payable by us, which includes net proceeds of approximately $6.3 million from the over-allotment exercise.

We expect to continue to incur significant and increasing expenses and net 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.

We will not generate revenue from 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.

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.

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Impact of COVID-19 on Our Business

Our business has been and could continue to be adversely affected by the effects of the recent and evolving COVID-19 pandemic, which was declared by the World Health Organization as a global pandemic.

Our clinical trials have been, and may in the future be, affected by the COVID-19 pandemic.

Our business has been and could continue to be adversely affected by the effects of the COVID-19 pandemic, including, but not limited to, our clinical trials.

For example, the COVID-19 pandemic may impact patient enrollment in our ongoing and future clinical trials of CT1812.

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The spread of COVID 19, including the spread of new strains and variants of COVID-19, and actions taken to reduce such spread may also materially affect us economically.

While the potential economic impact brought by, and the duration of, the COVID-19 pandemic may be difficult to assess or predict, there could be a significant disruption of

global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity and financial position.

While the potential economic impact brought by, and the duration of, the COVID 19 pandemic may be difficult to assess or predict, there could be a significant disruption of global financial markets, reducing our ability to access capital, which could in the future negatively affect our liquidity and financial position.

In addition, the trading prices for other pharmaceutical companies have been highly volatile as a result of the COVID 19 pandemic.

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We expect that our general and administrative expenses will increase substantially for the foreseeable future as we increase our headcount to support our continued research activities and development of our programs.

Following the completion of our IPO on October 13, 2021, we expect that we will incur substantially increased expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, and those of any national securities exchange on which our securities are traded, legal, auditing, additional insurance expenses, investor relations activities, and other administrative and professional services.

Following the completion of our IPO on October 13, 2021, we have incurred, and will continue to incur, substantially increased expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC, and those of any national securities exchange on which our securities are traded, legal, auditing, additional insurance expenses, investor relations activities, and other administrative and professional services.

Other Income (Expense)

Grant income relates to the grants awarded from governmental bodies that are conditional cost reimbursement grants and are recognized as grant income as allowable costs are incurred and the right to payment is realized.

The grants awarded relate to agreed upon direct and indirect costs for specific studies or clinical trials, which may include personnel and consulting costs, costs paid to contract research organizations, or CROs, research institutions and /or consortiums involved in the grant , as well as facilities and administrative costs.

The grants awarded relate to agreed upon direct and indirect costs for specific studies or clinical trials, which may include personnel

and consulting costs, costs paid to contract research organizations, research institutions and /or consortiums involved in the grant, as well as facilities and administrative costs.

These grants are cost plus fixed fee arrangements in which we are reimbursed for eligible direct and indirect costs over time, up to the maximum amount of each specific grant award.

Only costs that are allowable under the grant award, certain government regulations and the NIH’s supplemental policy and procedure manual may be claimed for reimbursement, and the reimbursements are subject to routine audits from governmental agencies from time to time.

Our clinical trials have been funded by approximately $168.4 million in cumulative grants awarded primarily by the NIA, which includes an approximately $81.0 million grant from the NIA to fund our upcoming Phase 2 (COG0203) study of CT1812 in patients with early-stage AD.

As of March 31, 2022, the Company has been awarded grants with project periods that extend through May 31, 2025, subject to extension.

Our clinical trials have been funded by approximately $168.9 million in cumulative grants awarded primarily by the NIA, which includes an approximately $81.0 million grant from the NIA to fund our Phase 2 (COG0203) study of CT1812 in patients with early-stage AD.

Change in fair value of derivative liability

Change in fair value of our derivative liability consists of changes in the fair value of certain conversion and redemption features associated with our convertible notes that are required to be bifurcated and accounted for as free-standing derivative financial instruments.

The derivative liability expired unexercised upon the conversion of the convertible notes into Series B-1 convertible preferred stock in May of 2021.

Change in fair value of warrant liability

Change in fair value of our warrant liability consists primarily of the change in fair value of our unexercised Series A-1 convertible preferred stock warrants during the applicable periods.

These warrants expired unexercised in October 2020 and were derecognized at that time.

The derivative liability expired unexercised upon the conversion of the convertible notes into Series B-1 convertible preferred stock in May 2021.

Change in fair value of SAFEs

Change in fair value of our SAFEs consist of fair value adjustments to these instruments based primarily on the changes in the probability of occurrence and estimated timing of future event inputs in the valuation model.

Upon the occurrence of our IPO on October 7, 2021, the SAFEs were converted into 931,485 shares of our common stock.

Interest expense, net

Interest expense, net primarily consists of interest expense from our convertible notes, partially offset by interest income from interest-bearing cash equivalents.

Other income, net

Other income, net consists primarily of research and development tax credits earned in the applicable period, as well as foreign currency transaction gains or losses.

Other (expense) income, net

Other (expense) income, net consists primarily of research and development tax credits earned in the applicable period, as well as foreign currency transaction gains or losses.

Income Tax Expense

The Company’s effective tax rate for the three months ended March 31, 2022 was (3.4%), compared to the effective tax rate for the three months ended March 31, 2021 of 0.0%.

The March 31, 2022 income tax expense relates primarily to state income taxes related to an individual state.

Results of Operations

Comparison of the Three Months Ended September 30, 2021 and 2020

Comparison of the Three Months Ended March 31, 2022 and 2021

The following table summarizes our results of operations (in thousands):

Three Months Ended September 30,

Three Months Ended March 31,

Operating Expenses:

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Change in the fair value of the derivative liability

Change in the fair value of the warrant liability

Change in the fair value of the Simple Agreements for Future Equity

Other income, net

Gain on debt extinguishment

Interest expense, net

Total other income, net

Loss before income taxes

Income tax expense

Research and Development Expenses

The following table summarizes our research and development expenses (in thousands):

Three Months Ended September 30,

Three Months Ended March 31,

Clinical programs

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Facilities and other costs

Research and development expenses were $3.7 million for the three months ended September 30, 2021, compared to $3.4 million for the three months ended September 30, 2020.

Research and development expenses were $6.5 million for the three months ended March 31, 2022, compared to $4.4 million for the three months ended March 31, 2021.

The increase of $2.1 million was primarily due to the following:

● a decrease of $0.7 million in clinical programs related to delays due to COVID 19, resulting in timing and scope changes to clinical studies;

● an increase of $1.2 million in manufacturing expense related to costs incurred with contract manufacturing organizations for production of pre-clinical and future clinical trial materials associated with our most advanced product candidates.

● an increase of $2.6 million in clinical programs related to increased phase II trial activity;

● an increase of $0.6 million in personnel costs associated with expanded research and development activities, and equity-based compensation expense;

● a decrease of $1.4 million in manufacturing expense related to costs incurred with contract manufacturing organizations for production of pre-clinical and future clinical trial materials associated with our most advanced product candidates;

● an increase of $0.2 million in preclinical programs due to increased sponsored research spend under grants.

General and Administrative Expenses

General and administrative expenses were $1.6 million for the three months ended September 30, 2021, compared to $1.1 million for the three months ended September 30, 2020.

General and administrative expenses were $2.9 million for the three months ended March 31, 2022, compared to $1.2 million for the three months ended March 31, 2021.

The increase of $1.7 million was primarily due to:

● an increase of $0.5 million in professional fees and consulting services and stock compensation.

● an increase of $0.6 million in Director & Officer liability insurance and other expenses;

● an increase of $0.3 million in professional fees driven by increased audit, tax, and legal services;

● an increase of $0.8 million in equity-based compensation from stock option grants.

Other Income (Expense)

Grant income was $3.0 million for the three months ended September 30, 2021, compared to $3.2 million for the three months ended September 30, 2020.

Overall, the change in grant income was not significant in either period.

Grant income was $5.9 million for the three months ended March 31, 2022, compared to $4.7 million for the three months ended March 31, 2021.

The change in grant income is correlated with the increase in eligible reimbursable costs incurred during 2022 as compared to 2021.

Change in Fair Value of the Derivative Liability

Changes in the fair value derivative liability resulted in no gain or loss for the three months ended September 30, 2021, compared to a loss of $0.1 million for the three months ended September 30, 2020.

There was no gain or loss for the three months ended September 30, 2021 as the derecognition of the derivative liability occurred May of 2021 upon the conversion of the convertible notes into Series B-1 Convertible Preferred Stock at that time.

Change in Fair Value of the Warrant Liability

Changes in the fair value of warrant liabilities resulted in no gain or loss for the three months ended September 30, 2021, and a gain of less than $0.1 million for the three months ended September 30, 2020.

There was no gain or loss for the three months ended September 30, 2021 as the warrants to purchase Series A-1 preferred stock expired in October 2020.

Change in Fair Value of the SAFEs

Changes in the fair value of the SAFEs resulted in a loss of $1.0 million for the three months ended September 30, 2021.

There was no change in fair value for the three months ended September 30, 2020 as the SAFEs were entered into in March 2021.

The change was primarily driven by the change in the probability of occurrence of future event inputs in the valuation model during the period.

Changes in the fair value derivative liability resulted in a gain of $1.1 million for the three months ended March 31, 2021.

There was no gain or loss for the three months ended March 31, 2022 as the derecognition of the derivative liability occurred May, 2021 upon the conversion of convertible notes into Series B-1 Convertible Preferred Stock at that time.

Other Income (Expense), Net

Other income, net was less than $0.1 million for the three months ended September 30, 2021, and less than $0.1 million for the three months ended September 30, 2020.

Other expense, net was $0.2 million for the three months ended March 31, 2022, compared to other income, net of $0.1 million for the three months ended March 31, 2021.

Overall, the change in other expense was not significant in either period.

Interest Expense, Net

There was no interest expense, net for the three months ended September 30, 2021, compared to Interest expense, net of $0.5 million for the three months ended September 30, 2020.

The change of $0.5 million in interest expense, net was the result of the conversion of the convertible notes into Series B-1 convertible preferred stock in May 2021.

Comparison of the Nine Months Ended September 30, 2021 and 2020

The following table summarizes our results of operations (in thousands):

Nine Months Ended September 30,

(in thousands)

Consolidated Statements of Operations Data:

Operating Expenses:

Research and development

General and administrative

Total operating expenses

Loss from operations

Other income (expense):

Change in the fair value of the derivative liability

Change in the fair value of the warrant liability

Change in the fair value of the Simple Agreements for Future Equity

Other income, net

(Gain) loss on debt extinguishment

Interest expense, net

Total other income, net

Research and Development Expenses

The following table summarizes our research and development expenses (in thousands):

Nine Months Ended September 30,

Clinical programs

Manufacturing

Preclinical programs

Facilities and other costs

Research and development expenses were $13.0 million for the nine months ended September 30, 2021, compared to $9.6 million for the nine months ended September 30, 2020.

The increase of $3.4 million was primarily due to the following:

● an increase of $5.7 million in manufacturing expense related to costs incurred with contract manufacturing organizations for production of pre-clinical and future clinical trial materials associated with our most advanced product candidates;

● a decrease of $2.0 million in spending on clinical programs related to delays due to COVID 19, resulting in timing and scope changes to clinical studies.

General and Administrative Expenses

General and administrative expenses were $3.8 million for the nine months ended September 30, 2021, compared to $3.7 million for the nine months ended September 30, 2020.

The decrease of $0.1 million was primarily due to the following:

● a decrease of $0.6 million in compensation expenses;

● an increase of $0.5 million in professional fees and consulting services.

Other Income (Expense)

Grant income was $12.4 million for the nine months ended September 30, 2021, compared to $8.1 million for the nine months ended September 30, 2020.

The change in grant income is correlated with the increase in eligible reimbursable costs incurred during the nine months ended September 30, 2021 as compared to the nine months ended September 30, 2020.

Change in Fair Value of the Derivative Liability

Changes in the fair value derivative liability resulted in a gain of $2.2 million for the nine months ended September 30, 2021, compared to a gain of $0.1 million for the nine months ended September 30, 2020.

The increase in the gain recorded in the nine months ended September 30, 2021 relates to the derecognition of the derivative liability in May of 2021 upon the conversion of the convertible notes into Series B-1 convertible preferred stock at that time.

Change in Fair Value of the Warrant Liability

Changes in the fair value of warrant liabilities resulted in no gain or loss for the nine months ended September 30, 2021, compared to a gain of less than $0.1 million for the nine months ended September 30, 2020.

There was no gain or loss for the nine months ended September 30, 2021 as the warrants to purchase Series A-1 convertible preferred stock expired in October 2020.

Change in Fair Value of the SAFEs

Changes in the fair value of the SAFEs resulted in a loss of $2.0 million for the nine months ended September 30, 2021.

There was no change in fair value for the nine months ended September 30, 2020 as the SAFEs were entered into in March 2021.

The change was primarily driven by the change in the probability of occurrence of future event inputs in the valuation model during the period.

Other Income (Expense), Net

Other income, net was $0.3 million for the nine months ended September 30, 2021, and income of $0.4 million for the nine months ended September 30, 2020.

Overall, the change in other income was not significant in either period.

(Loss) gain on Debt Extinguishment

Gain on debt extinguishment was $0.4 million for the nine months ended September 30, 2021.

Loss on debt extinguishment was $0.1 million for the nine months ended September 30, 2020.

The loss was the result of the execution of the second amendment to the convertible notes on February 27, 2020, which resulted in an extinguishment of the existing notes for accounting purposes.

The gain was the result of the forgiveness of the Paycheck Protection Program loan on January 21, 2021.

Gain on Debt Extinguishment

There was no gain or loss on debt extinguishment for the three months ended March 31, 2022.

Gain on debt extinguishment was $0.4 million for the three months ended March 31, 2021 as a result of the forgiveness of the Paycheck Protection Program loan on January 21, 2021.

Interest Expense, Net

Interest expense, net was $0.9 million for the nine months ended September 30, 2021 compared to interest expense, net of $1.2 million for the nine months ended September 30, 2020.

The change of $0.3 million in interest expense, net was the result of the conversion of the convertible notes into Series B-1 convertible preferred stock in May of 2021.

Interest expense, net was less than $0.1 million for the three months ended March 31, 2022, compared to Interest expense, net of $0.5 million for the three months ended March 31, 2021.

The change of $0.4 million in interest expense, net was the result of the convertible notes outstanding balance during the three months ended March 31, 2021, which were subsequently converted into Series B-1 Preferred Stock in May of 2021.

Income Tax Expense

Income tax expense for the three months ended March 31, 2022 was approximately $0.1 million related to state income tax for a particular state.

Liquidity and Capital Resources

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On March 25, 2021, we completed a SAFE offering with various investors, pursuant to which we received gross proceeds in an aggregate amount equal to $8.9 million.

As of September 30, 2021, we had $8.3 million in cash and cash equivalents and have not generated positive cash flows from operations.

On October 13, 2021, we closed our IPO, selling 3,768,116 shares of our common stock at a public offering price of $12.00 per share.

The gross proceeds from the IPO, including the exercise of the over-allotment, were $45.2 million and the net proceeds were approximately $38.1 million, after deducting underwriting discounts and commissions and other offering related expenses payable by the Company.

On November 12, 2021, the underwriters exercise of their over-allotment option to purchase 565,217 shares of our common stock closed.

The gross proceeds from the exercise of the over-allotment were $6.8 million and the net proceeds were approximately $6.3 million, after deducting underwriting discounts and commissions and other offering related expenses payable by the Company.

Based on our current business plans, we believe that the net proceeds from the IPO, together with our existing cash and cash equivalents and income from non-dilutive grants, will be sufficient for us to fund our operating expenses and capital expenditures requirements through at least the next 24 months.

Additionally, on November 12, 2021, the underwriters exercise of their over-allotment option to purchase 565,217 shares of our common stock closed.

The net proceeds were approximately $44.2 million, after deducting underwriting discounts and commissions and other offering related expenses payable by the Company, which includes net proceeds of approximately $6.3 million from the over-allotment exercise.

As of March 31, 2022, we had $51.5 million in cash and cash equivalents and have not generated positive cash flows from operations.

We have based these estimates on assumptions that may prove to be incorrect or require adjustment as a result of business decisions, and we could utilize our available capital resources sooner than we currently expect.

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Our future funding requirements will depend on many factors, including, but not limited to:

● the scope, progress, costs and results of our ongoing and planned clinical trials of CT1812, as well as the associated costs, including any unforeseen costs we may incur as a result of preclinical study or clinical trial delays due to the COVID-19 pandemic or other delays;

● the scope, progress, costs and results of preclinical development, laboratory testing and clinical trials for any future product candidates we may decide to pursue;

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Adequate funding may not be available when needed or on terms acceptable to us, or at all.

Our ability to raise additional funds may be adversely impacted by potential worsening global economic conditions and the recent disruptions to, and volatility in, the credit and financial markets in the United States and worldwide resulting from the ongoing COVID-19 pandemic and otherwise.

If we fail to obtain necessary capital when needed on acceptable terms, or at all, it could force us to delay, limit, reduce or terminate our product development programs, commercialization efforts or other operations.

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The following table summarizes our cash flows for the periods indicated (in thousands):

Nine Months Ended September 30,

Three Months Ended March 31,

Cash flows used in operating activities

Cash flows used in investing activities

Cash flows provided by financing activities

Cash flows (used in) provided by financing activities

Effect of exchange rate changes on cash and cash equivalents

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Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2021 was $3.7 million, which consisted primarily of our net loss of $4.4 million as well as net non-cash gains of less than $0.1 million and a net change of $0.6 million in our operating assets and liabilities.

The net non-cash gains primarily consisted of amortization of debt discounts of $0.4 million, change in derivative liabilities of $2.2 million, change in fair value of the Simple Agreements for Future Equity of $2.0 million, a gain on debt extinguishment of $0.4 million, and equity-based compensation of $0.3 million.

The net change in our operating assets and liabilities was primarily due to an increase in grant receivables of $0.3 million, an increase in prepaid expenses and other current assets of less than $0.1 million, a decrease in other receivables of $0.3 million, a decrease in accounts payable of $0.3 million, an increase in accrued expenses of $0.3 million, and an increase in other current liabilities of $0.7 million.

Net cash used in operating activities for the nine months ended September 30, 2020 was $3.0 million, which consisted primarily of our net loss of $6.0 million partially offset by net non-cash charges of $1.0 million and a net change of $2.1 million in our operating assets and liabilities.

The non-cash charges primarily consisted of amortization of debt discounts of $0.5 million, change in derivative liabilities of $0.1 million, loss on debt extinguishment of $0.1 million, and equity-based compensation of $0.3 million.

The net change in our operating assets and liabilities was primarily due to a decrease in grant receivables of less than $0.1 million, net decrease in other receivables of $1.0 million, an increase in accounts payable of $0.3 million, an increase in accrued expenses of $0.3 million, and an increase in other current liabilities of $0.8 million.

Net cash used in operating activities for the three months ended March 31, 2022 was $3.0 million, which consisted primarily of our net loss of $3.8 million, offset by the impact of equity-based compensation of $1.0 million and a net change of $0.2 million in our operating assets and liabilities.

The net change in our operating assets and liabilities was primarily due to an increase in grant receivables of $1.0 million, an increase in other assets of $1.4 million, and an increase in other noncurrent liabilities of $1.9 million.

Net cash used in operating activities for the three months ended March 31, 2021 was $0.8 million, which consisted primarily of our net income of $0.2 million partially offset by the net non-cash gains of $1.1 million and a net change of $0.1 million in our operating assets and liabilities.

The non-cash gains primarily consisted of the change in derivative liabilities of $1.1 million and a gain on debt extinguishment of $0.4 million.

The net change in our operating assets and liabilities was primarily due to an increase in grant receivables of $1.1 million, and an increase in accounts payable of $1.0 million.

Investing Activities

We did not use any cash for investing activities for the nine months ended September 30, 2021.

During the nine months ended September 30, 2020 we used less than $0.1 million of cash for investing activities related to purchases of property and equipment.

Net cash used in investing activities for the three months ended March 31, 2022 was $0.1 million related to purchases of fixed assets.

We did not use any cash for investing activities for the three months ended March 31, 2021.

Financing Activities

Net cash provided by financing activities was $6.8 million and $5.3 million for the nine months ended September 30, 2021 and 2020, respectively.

The increase in cash provided by financing activities in 2021 relates primarily to the $8.9 million of SAFEs issued during the nine months ended September 30, 2021 partially offset by $2.2 million in deferred offering costs, as compared to $5.2 million of convertible notes issued in the nine months ended September 30, 2020.

Off-Balance Sheet Arrangements

We have not entered into any off-balance sheet arrangements as defined under the rules and regulations of the SEC.

Net cash used in financing activities was $0.1 million for the three months ended March 31, 2022, and net cash provided by financing activities was $9.0 million for the three months ended March 31, 2021.

The decrease in cash relates primarily to the $8.9 million of SAFEs issued during the three months ended March 31, 2021.

Contractual Obligations

The following table summarizes our contractual obligations as of September 30, 2021 (in thousands):

The following table summarizes our contractual obligations as of March 31, 2022 (in thousands):

Operating lease obligations:

We have entered into an operating lease for office and laboratory facilities under agreements that run through February 28, 2029.

We have entered into an operating leases for office and laboratory facilities under agreements that run through May 31, 2029.

The amounts reflected in the table above consist of the future minimum lease payments under the non-cancelable lease arrangements.

In March 2021, we entered into SAFEs with various investors, pursuant to which we received gross proceeds in an aggregate amount equal to $8.9 million.

In October 2021, the amount invested by the investors in the SAFEs automatically converted into 931,485 shares of our common stock upon the closing of our IPO at a conversion price equal to 80.0% of the IPO per share price of our common stock.

The amounts reflected in the table above do not include cash payments that would be payable by us to the holders of the SAFEs if, prior to the closing of the IPO:

(i) we underwent a change of control, (ii) we voluntarily terminated our operations, (iii) there was a general assignment for the benefit of our creditors or (iv) we effected any other liquidation, dissolution or winding up of our company, whether voluntary or involuntary.

From March 2018 to July 2020, we issued convertible promissory notes in the aggregate principal amount of $13.0 million with an interest rate of 8.0% per annum, pursuant to note purchase agreements entered into with certain holders of our capital stock.

On May 1, 2021, the holders of all of our outstanding convertible promissory notes agreed to an acceleration of the date of the automatic conversion from June 30, 2021 to May 1, 2021 for all convertible promissory notes.

Accordingly, on May 1, 2021, all of our outstanding convertible promissory notes were converted into 10,926,089 shares of our Series B-1 convertible preferred stock at a conversion price equal to $1.385 per share.

On July 1, 2021, we entered into an agreement to lease 2,864 square feet of office space in Purchase, New York.

The lease has a term of 89 months and is expected to commence on October 1, 2021.

The annual base rent under the lease is $0.07 million for the first lease year and is subject to annual increases of between 1.82% and 2.04%.

We provided a security deposit in the form of a Letter of Credit in the amount of $0.04 million pursuant to the terms of the lease.

The lease has a term of 89 months and commenced on December 9, 2021.

The annual base rent under the lease is less

than $0.1 million for the first lease year and is subject to annual increases of between 1.82% and 2.04%.

We provided a security deposit in the form of a Letter of Credit in the amount of less than $0.1 million pursuant to the terms of the lease.

In addition, in October 2021, we entered into an insurance premium financing arrangement with a lender.

Under the agreement, we financed $1.5 million of certain premiums at a 3.25% annual interest rate.

Payments of $0.1 million are due monthly from October 2021 through September 2022.

As of March 31, 2022, the outstanding principal of the loan was $0.8 million.

We enter into contracts in the normal course of business with contract research organizations and other vendors to assist in the performance of our research and development and other services and products for operating purposes.

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Costs for external development activities are recognized based on an evaluation of the progress to completion of specific tasks.

Costs for certain research and development activities are recognized based on the pattern of performance of the

individual arrangements, which may differ from the pattern of billings incurred, and are reflected in the consolidated financial statements as prepaid expenses or as accrued research and development expenses.

Costs for certain research and development activities are recognized based on the pattern of performance of the individual arrangements, which may differ from the pattern of billings incurred, and are reflected in the consolidated financial statements as prepaid expenses or as accrued research and development expenses.

Equity-Based Compensation

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● Expected Volatility.

Because we have been privately held and do not have a trading history of common stock, the expected volatility was derived from the average historical stock volatilities of the common stock of several public companies within the industry that we consider to be comparable to our business over a period equivalent to the expected term of the stock-based awards.

Up until October 13, 2021, the Company was privately held and did not have a trading history of common stock.

As such, the expected volatility was derived from the average historical stock volatilities of the common stock of several public companies within the industry that the Company considers to be comparable to our business over a period equivalent to the expected term of the stock-based awards.

The Company will continue to derive expected volatility from average historical stock volatilities of industry peers until the Company has compiled a trading history of its own for a sufficient period of time.

● Expected Dividend Yield.

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● Fair Value of Common Stock.

— The fair value of the shares of common stock underlying the stock-based awards has historically been determined by the board of directors with input from management.

Because there has been no public market for the common stock, the board of directors has determined the fair value of the common stock at the time of grant of the stock-based award by considering a number of objective and subjective factors, including having contemporaneous valuations of the common stock performed by a third-party valuation specialist.

See Note 13 to our audited financial statements for the fiscal year ended December 31, 2020 included in our Prospectus for more information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options.

— Prior to the IPO, the fair value of the shares of common stock underlying the stock-based awards had historically been determined by the board of directors with input from management.

Because there was no public market for the common stock, the board of directors has determined the fair value of the common stock at the time of grant of the stock-based award by considering a number of objective and subjective factors, including having contemporaneous valuations of the common stock performed by a third-party valuation specialist.

Subsequent to the IPO, the board of directors will determine the fair value of the shares of common stock underlying the stock-based awards based off of the closing price as reported on the Nasdaq Stock Market LLC on the grant date.

See Note 7 to our financial statements for the three months ended March 31, 2022 for more information concerning certain of the specific assumptions we used in applying the Black-Scholes option pricing model to determine the estimated fair value of our stock options.

Certain of such assumptions involve inherent uncertainties and the application of significant judgment.

As of September 30, 2021, the total unrecognized compensation expense related to unvested time-based vesting awards was $0.9 million, which is expected to be recognized over weighted-average remaining vesting period of approximately 2.6 years.

As of September 30, 2021, total unrecognized compensation expense related to un-vested performance-based awards was $0.3 million, which would be recognized commencing with the period in which the performance condition is deemed probable of achievement.

Convertible Instruments

We account for hybrid contracts with embedded conversion features in accordance with GAAP.

ASC 815 — Derivatives and Hedging Activities, requires companies to bifurcate certain conversion options and redemption features from their host instruments and account for them as free-standing derivative financial instruments should certain criteria be met.

The features requiring bifurcation were initially recorded at fair value, with gains and losses arising from changes in fair value recognized as a component of other income (expense) in the consolidated statement of operations and comprehensive loss.

As of March 31, 2022, the total unrecognized compensation expense related to unvested time-based vesting awards was $9.6 million, which is expected to be recognized over weighted-average remaining vesting period of approximately 3.1 years.

Recent Accounting Pronouncements

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Emerging Growth Company Status

We are an emerging growth company, as defined in the JOBS Act.

We are an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.

Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies.

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(1) the last day of the fiscal year in which we have at least $1.07 billion in annual revenue;

(2) the last day of the fiscal year in which we are deemed to be a “large accelerated filer,” as defined in Rule 12b 2 under the Securities Exchange Act of 1934, as amended, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year;

(2) the last day of the fiscal year in which we are deemed to be a “large accelerated filer,” as defined in Rule 12b-2 under the Exchange Act, which would occur if the market value of our common stock held by non-affiliates exceeded $700.0 million as of the last business day of the second fiscal quarter of such year;

(3) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period;

and (4) the last day of the fiscal year ending after the fifth anniversary of our IPO.

Quantitative and Qualitative Disclosures about Market Risk

As a “smaller reporting company,” as that term is defined in Rule 229.10(f)(1), we are not required to provide the information required by this Item.

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What changed 10-Q

Item 2. Management’s Discussion and Analysis