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Item 2. Management’s Discussion and Analysis

2023-05-04 compared with 2022-11-14 · 89 added, 183 removed, 134 unchanged (67% 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 consolidated financial statements and related notes appearing elsewhere in this 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 filed with the Securities and Exchange Commission, or SEC, on March 30, 2022.

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 and our audited financial statements and notes thereto as of and for the years ended December 31, 2022 and 2021 and the related Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in our Annual Report filed with the Securities and Exchange Commission, or SEC, on March 23, 2023.

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.

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Currently available therapies for these diseases are limited, with many diseases having no approved therapies or treatments.

Our goal is to develop disease modifying treatments for patients with these degenerative disorders by initially leveraging our expertise in the σ-2 (sigma-2) receptorc, or S2R, which is expressed by multiple cell types, including neuronal synapses, and acts as a key regulator of cellular damage commonly associated with certain age-related degenerative diseases of the CNS and retina.

Our goal is to develop disease modifying treatments for patients with these degenerative disorders by initially leveraging our expertise in the σ-2 (sigma-2) receptor, or S2R, which is expressed by multiple cell types, including neuronal synapses, and acts as a key regulator of cellular damage commonly associated with certain age-related degenerative diseases of the CNS and retina.

We believe that targeting the S2R complex represents a mechanism that is functionally distinct from other current approaches in clinical development for the treatment of degenerative diseases.

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, 2022, we had an accumulated deficit of $110.2 million.

We incurred a net loss of $6.6 million and $16.2 million for the three and nine months ended September 30, 2022, respectively, and net loss of $3.1 million and $4.4 million for the three and nine months ended September 30, 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 initial public offering, or IPO, completed in October 2021, 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 $171.0 million in cumulative grant awards to fund our clinical trials, primarily from the NIA, and we have raised approximately $103.6 million in net proceeds from sales of our equity securities, convertible notes, SAFEs, stock option exercises, and our IPO.

As of September 30, 2022, we had cash and cash equivalents of $46.6 million.

On November 10, 2022, we entered into an underwriting agreement with respect to a follow-on public offering, pursunt to which we agreed to issue and sell 5,000,000 shares of our common stock at a public offering price of $1.20 per share.

In connection with the follow-on public offering, we are expected to receive net proceeds of approximately $5.4 million, after deducting underwriting discounts and commissions and other offering related expenses.

The follow-on public offering is expected to close on November 15, 2022, subject to customary closing conditions.

Additionally, we granted the underwriters in the follow-on public offering an option to purchase up to 750,000 additional shares of our common stock at the public offering price, less underwriting discounts and commissions.

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.

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 exercise of the over-allotment option.

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.

As of March 31, 2023, we had an accumulated deficit of $121.6 million.

We incurred a net loss of $6.2 million and $3.8 million for the three months ended March 31, 2023 and 2022, 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 initial public offering, or IPO, completed in October 2021, proceeds from our follow-on public offering in November 2022, sales of our common stock through our ATM (as defined below), sales of our convertible promissory notes, convertible preferred stock, simple agreements for future equity, or SAFE, and stock option exercises.

Since our inception, we have received approximately $171.0 million in cumulative grant awards to fund our clinical trials, primarily from the NIA, and we have raised approximately $109.0 million in net proceeds from sales of our equity securities, convertible notes, SAFE, stock option exercises, IPO and follow-on public offering, and ATM.

As of March 31, 2023, we had cash and cash equivalents of $38.8 million.

On November 15, 2022, we completed our follow-on public offering, pursuant to which we issued and sold 5,000,000 shares of our common stock at a public offering price of $1.20 per share.

In connection with the follow-on public offering, we received net proceeds of approximately $5.2 million, after deducting underwriting discounts and commissions and other offering related expenses.

On December 23, 2022, we entered into a sales agreement with Cantor Fitzgerald & Co.

Riley Securities, Inc., or the Sales Agents, providing for the offering, issuance and sale by us of up to $40.0 million of our common stock from time to time in “at-the-market” offerings (the “ATM”).

We sold 95,823 shares of common stock under the Sales Agreement during the three months ended March 31, 2023 for gross proceeds of approximately $0.2 million.

As of March 31, 2023, there was $39.8 million of common stock remaining available for sale under the ATM, subject to the limitations of General Instruction I.B.6 of Form S-3.

On March 10, 2023, we entered into a purchase agreement with Lincoln Park Capital Fund, LLC (“Lincoln Park”) for an equity line financing (the “Lincoln Park Purchase Agreement”).

The Lincoln Park Purchase Agreement provides that, subject to the terms and conditions set forth therein, we have the right, but not the obligation, to direct Lincoln Park to purchase up to $35 million of shares of common stock at our sole discretion, over a 36-month period commencing on March 10, 2023.

We filed a prospectus supplement to our registration statement on Form S-3 (File No.

333-268992) covering the resale of shares of common stock that are issued under the Lincoln Park Purchase Agreement.

As of March 31, 2023, we had not sold any shares of our common stock to Lincoln Park.

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.

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We expense general and administrative costs as incurred.

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 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.

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

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, 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.

As of September 30, 2022, we have been awarded grants with project periods that extend through May 31, 2025, subject to extension.

As of March 31, 2023, the Company has been awarded grants with project periods that extend through May 31, 2026, subject to extension.

Our clinical trials have been funded by approximately $171.0 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, an approximately $30.5 million grant from the NIA to fund our Phase 2 (COG0201) study of CT1812 in patients with mild to moderate AD, and an approximately $29.5 million grant from the NIA to fund our Phase 2 (COG1201) study of CT1812 in patients with dementia with Lewy bodies.

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 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 (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.

Interest Expense

Interest expense for the three months ended March 31, 2023 and 2022 consisted of interest expense related to the insurance premium financing arrangement with a lender.

Other Expense, Net

Other expense, net consists primarily of other fees such as offering costs incurred to establish our equity line financing, as well as foreign currency transaction gains or losses.

Results of Operations

Comparison of the Three Months Ended September 30, 2022 and 2021

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

Three Months Ended September 30,

Operating Expenses:

Research and development

General and administrative

Total operating expenses

Loss from operations

Other income (expense):

Change in the fair value of SAFEs

Other (expense) income, net

Interest expense, net

Total other income, net

Research and Development Expenses

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

Three Months Ended September 30,

Clinical programs

Manufacturing

Preclinical programs

Facilities and other costs

Research and development expenses were $8.3 million for the three months ended September 30, 2022, compared to $3.7 million for the three months ended September 30, 2021.

The increase of $4.6 million was primarily due to the following:

● an increase of $3.0 million in clinical programs related to increased phase II trial activity primarily due to increased contract research organization spend;

● an increase of $1.1 million in personnel costs associated with expanded research and development activities, and equity-based compensation expense;

● an increase of $0.4 million in manufacturing and preclinical program 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.

General and Administrative Expenses

General and administrative expenses were $4.4 million for the three months ended September 30, 2022, compared to $1.6 million for the three months ended September 30, 2021.

The increase of $2.8 million was primarily due to:

● an increase of $0.4 million in Director & Officer liability insurance and other expenses;

● an increase of $0.5 million in compensation and benefits expense driven by increased headcount;

● an increase of $1.3 million in professional fees and other costs driven by increased audit, tax, and legal expenses;

● an increase of $0.6 million in equity-based compensation from stock option grants.

Other Income (Expense)

Grant income was $5.9 million for the three months ended September 30, 2022, compared to $3.0 million for the three months ended September 30, 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 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 the fair value for the three months ended September 30, 2022 as the derecognition of the SAFE liability occurred when the SAFEs converted into shares of our common stock upon the closing of our IPO.

Other Income, Net

Other income, net was less than $0.1 million for the three months ended September 30, 2022, compared to other income, net of less than $0.1 million for the three months ended September 30, 2021.

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

Interest Expense, Net

Interest expense, net was less than $0.1 million for the three months ended September 30, 2022, compared to no interest expense, net for the three months ended September 30, 2021.

Interest expense, net was not significant in either period.

Comparison of the Nine Months Ended September 30, 2022 and 2021

Comparison of the Three Months Ended March 31, 2023 and 2022

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

Nine Months Ended September 30,

(in thousands)

Consolidated Statements of Operations Data:

Three Months Ended March 31,

Operating Expenses:

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Other income (expense):

Change in the fair value of the derivative liability

Change in the fair value of SAFEs

Other (expense) income, net

Gain on debt extinguishment

Interest expense, net

Other expense, net

Interest expense

Total other income, net

Loss before income tax

Income tax expense

Research and Development Expenses

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

Nine Months Ended September 30,

Three Months Ended March 31,

Clinical programs

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Facilities and other costs

Research and development expenses were $23.9 million for the nine months ended September 30, 2022, compared to $13.0 million for the nine months ended September 30, 2021.

The increase of $10.9 million was primarily due to the following:

● an increase of $10.4 million in clinical programs related to increased phase II trial activity primarily due to increased contract research organization spend;

Research and development expenses were $5.4 million for the three months ended March 31, 2023, compared to $6.5 million for the three months ended March 31, 2022.

The decrease of $1.1 million was primarily due to the following:

● A decrease of $1.6 million in clinical programs related to decreased phase II trial activity primarily due to decreased contract research organization spend;

● an increase of $1.0 million in personnel costs associated with expanded research and development activities, and equity-based compensation expense;

● a decrease of $2.5 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 due to the timing of the manufacturing of the pre-clinical and clinical trial materials;

● an increase of $0.4 million in preclinical programs due to increased sponsored research spend under grants.

● a decrease of $0.8 million in manufacturing and preclinical program 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 $0.3 million in preclinical programs, facilities and other costs primarily due to increased sponsored research spend under grants.

General and Administrative Expenses

General and administrative expenses were $10.4 million for the nine months ended September 30, 2022, compared to $3.8 million for the nine months ended September 30, 2021.

General and administrative expenses were $3.5 million for the three months ended March 31, 2023, compared to $2.9 million for the three months ended March 31, 2022.

The increase of $0.6 million was primarily due to:

● an increase of $1.6 million in Director & Officer liability insurance and other expenses;

● an increase of $0.9 million in compensation and employee benefits driven by increased headcount;

● an increase of $2.1 million in professional fees and other costs driven by increased audit, tax, and legal expenses;

● a decrease of $0.2 million in Director & Officer liability insurance and other expenses;

● an increase of $0.6 million in professional fees and other costs primarily driven by increased audit, tax, and legal expenses;

● an increase of $0.3 million in equity-based compensation from stock option grants.

Other Income (Expense)

Grant income was $18.2 million for the nine months ended September 30, 2022, compared to $12.4 million for the nine months ended September 30, 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 a gain of $2.2 million for the nine months ended September 30, 2021.

There was no gain or loss for the nine months ended September 30, 2022 as the derecognition of the derivative liability occurred in May 2021 upon the conversion of convertible notes into shares of Series B-1 convertible preferred stock.

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 the fair value for the nine months ended September 30, 2022 as the derecognition of the SAFE liability occurred when the SAFEs converted into shares of our common stock upon the closing of our IPO.

Other Income (Expense), Net

Other expense, net was $0.2 million for the nine months ended September 30, 2022, compared to other income, net of $0.3 million for the nine months ended September 30, 2021.

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

Gain on Debt Extinguishment

There was no gain or loss on debt extinguishment for the nine months ended September 30, 2022.

Gain on debt extinguishment was $0.4 million for the nine months ended September 30, 2021 as a result of the forgiveness of the Paycheck Protection Program loan on January 21, 2021.

Interest Expense, Net

Interest expense, net was less than $0.1 million for the nine months ended September 30, 2022, compared to interest expense, net of $0.9 million for the nine months ended September 30, 2021.

The change of $0.9 million in interest expense, net was the result of the convertible notes outstanding balance during the nine months ended September 30, 2021, which were subsequently converted into shares of our Series B-1 convertible preferred stock in May 2021.

Grant income was $3.4 million for the three months ended March 31, 2023, compared to $5.9 million for the three months ended March 31, 2022.

The change in grant income is correlated with the decrease in eligible reimbursable costs incurred during 2023 as compared to 2022.

Other Expense, Net

Other expense, net was $0.6 million for the three months ended March 31, 2023, compared to other expense, net of $0.2 million for the three months ended March 31, 2022.

The change in other expense, net was driven primarily by expenses related to the Lincoln Park Purchase Agreement.

Interest Expense

Interest expense was less than $0.1 million for the three months ended March 31, 2023, compared to interest expense of less than $0.1 million for the three months ended March 31, 2022.

Interest expense was not significant in either period.

Liquidity and Capital Resources

Sources of Liquidity

To date, we have funded our operations primarily with proceeds from grants awarded by the NIA, and proceeds from the sales of our convertible promissory notes, convertible preferred stock, SAFEs, stock option exercises, and our IPO.

Since our inception, we have received grant awards primarily from the NIA in the aggregate amount of approximately $171.0 million and have raised approximately $103.6 million in net proceeds from sales of our equity securities, convertible notes and SAFEs, stock option exercises, and our IPO.

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.

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.

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 us, which includes net proceeds of approximately $6.3 million from the exercise of the over-allotment option.

As of September 30, 2022, we had $46.6 million in cash and cash equivalents and have not generated positive cash flows from operations.

On November 10, 2022, we entered into an underwriting agreement with respect to a follow-on public offering, pursuant to an effective registration statement on Form S-1 (File No.

333-268228), selling 5,000,000 shares of our common stock at a public offering price of $1.20 per share.

The net proceeds are expected to be approximately $5.4 million, after deducting underwriting discounts and commissions and other offering-related expenses payable by us.

The follow-on public offering is expected to close on November 15, 2022.

Based on our current business plans, we believe that the net proceeds from the IPO and follow-on public offering, 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 into the first half of 2024.

Since our inception, we have received grant awards primarily from the NIA in the aggregate amount of approximately $171.0 million and have raised approximately $109.0 million in net proceeds from sales of our equity securities, convertible notes and SAFE, stock option exercises, our ATM, our IPO and our follow-on public offering.

The net proceeds from our IPO, which closed on October 13, 2021, were approximately $44.2 million, after deducting underwriting discounts and commissions and other offering related expenses payable by us.

On November 15, 2022, we closed our follow-on public offering, selling 5,000,000 shares of our common stock at a public offering price of $1.20 per share.

The net proceeds were approximately $5.2 million, after deducting underwriting discounts and commissions and other offering related expenses payable by us.

On December 23, 2022, we entered into a sales agreement with the Sales Agents, providing for the offering, issuance and sale by us of up to $40.0 million of our common stock from time to time in ATM offerings, subject to the limitations of General Instruction I.B.6 of Form S-3.

As of March 31, 2023, we sold 95,823 shares of common stock under the Sales Agreement during the three months ended March 31, 2023 for gross proceeds of approximately $0.2 million.

As of March 31, 2023, there was $39.8 million of common stock remaining available for sale under the ATM.

In addition, in March 2023, we entered into the Lincoln Park Purchase Agreement with Lincoln Park Capital Fund, LLC , or Lincoln Park, giving the Company the right, but not the obligation to sell to Lincoln Park up to $35.0 million worth of shares of our common stock .

As of March 31, 2023, there had been no shares sold to date under this agreement.

As of March 31, 2023, we had $38.8 million in cash and cash equivalents and have not generated positive cash flows from operations.

Based on our current business plans, we believe that 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 into the second half of 2024, which assumes no usage from the remaining ATM nor the Lincoln Park Purchase Agreement.

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 diseases, global or political instability, such as the ongoing conflict between Ukraine and Russia, inflation, or other delays;

● 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 diseases, macroeconomic conditions, global or political instability, such as the ongoing conflict between Ukraine and Russia, inflation, 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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Debt financing and preferred equity financing, if available, may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends.

If we raise funds through collaborations, licenses and other similar arrangements with third parties, we may have to relinquish valuable rights to our technologies, future revenue streams, research programs or product candidates or grant licenses on terms that may not be favorable to us and/or may reduce the value of our common stock.

not be favorable to us and/or may reduce the value of our common stock.

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 or other diseases, the ongoing conflict between Ukraine and Russia, inflation, and otherwise.

and international financial banking systems, 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 financing activities

Effect of exchange rate changes on cash and cash equivalents

Net (decrease) increase in cash and cash equivalents

Net decrease in cash and cash equivalents

Operating Activities

Net cash used in operating activities for the nine months ended September 30, 2022 was $8.4 million, which consisted primarily of our net loss of $16.2 million, offset by the impact of equity-based compensation of $2.7 million and a net change of $5.0 million in our operating assets and liabilities.

The net change in our operating assets and liabilities was primarily due to a decrease in grant receivables of $0.7 million, an increase in prepaids and other assets of $1.5 million, offset by an increase in accounts payable of $3.9 million, and an increase in deferred grant income, current and other liabilities of $2.4 million.

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 three months ended March 31, 2023 was $2.7 million, which consisted primarily of our net loss of $6.2 million, offset primarily by the impact of equity-based compensation of $1.2 million and a net change of $1.9 million in our operating assets and liabilities.

The net change in our operating assets and liabilities was primarily due to a decrease in grant receivables of $2.1 million, an increase in prepaid expenses and other assets of $0.1 million, and a decrease in accounts payable and accrued expenses of less than $0.1 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.

Investing Activities

Net cash used in investing activities for the nine months ended September 30, 2022 was $0.2 million related to purchases of fixed assets.

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

Net cash used in investing activities for the three months ended March 31, 2023 and 2022 was less than $0.1 million and $0.1 million, respectively, related to a decreased purchase of fixed assets.

Overall, the change in net cash used in investing activities was insignificant.

Financing Activities

Net cash provided by financing activities was $0.4 million for the nine months ended September 30, 2022, and net cash provided by financing activities was $6.8 million for the nine months ended September 30, 2021.

The decrease in cash relates primarily to the $8.9 million of SAFEs issued during the nine months ended September 30, 2021.

Net cash used in financing activities was less than $0.1 million for the three months ended March 31, 2023, and net cash provided by financing activities was $0.1 million for the three months ended March 31, 2022.

Contractual Obligations

The following table summarizes our contractual obligations as of September 30, 2022 (in thousands):

The following table summarizes our contractual obligations as of March 31, 2023 (in thousands):

Operating lease obligations:

In October 2022, we entered into an insurance premium financing arrangement with a lender.

Under the agreement, we financed $0.8 million of certain premiums at a 6.85% annual interest rate.

Payments of less than $0.1 million are due monthly from November 2022 through December 2023.

As of March 31, 2023, the outstanding principal of the loan was $0.4 million.

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

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The annual base rent under the lease is less than $0.1 million throughout the term of the lease.

The impact of the new agreement is not reflected in the table above as the commencement date was October 1, 2022.

Total payments due over the term of the lease are $0.2 million.

Additionally, on August 31, 2022, we modified one of our existing lease agreements with the landlord for approximately 3,706 square feet of lab space at the same location to extend the lease term termination date from June 30, 2023 until June 30, 2026.

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 September 30, 2022, there was no remaining outstanding principal on the loan.

In October 2022, we entered into an insurance premium financing arrangement with the same lender whereby we financed $0.8 million of certain premiums at a 6.85% annual interest rate.

Payments of less than $0.1 million are due monthly from October 2022 through September 2023.

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 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.

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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Critical Accounting Policies and Use of Estimates

We believe that the accounting policies discussed below are critical to understanding our historical and future performance, as these policies relate to the more significant areas involving management’s judgments and estimates.

Research and Development Costs, Accrued Research and Development Costs and Related Prepaid Expenses

Research and development costs are expensed as incurred.

Research and development expenses consist principally of personnel costs, including salaries, stock-based compensation, and benefits for employees, third-party license fees and other operational costs related to our research and development activities, including allocated facility-related expenses and external costs of outside vendors, and other direct and indirect costs.

Non-refundable advance payments for research and development costs are deferred and expensed as the related goods are delivered or services are performed.

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.

Equity-Based Compensation

We maintain an equity-based compensation plan as a long-term incentive for employees, non-employee directors and consultants.

The plan allows for the issuance of incentive stock options, non-qualified stock options, restricted stock units, and other forms of equity awards.

We recognize equity-based compensation expense for stock options subject to time-based vesting on a straight-line basis over the requisite service period and account for forfeitures as they occur.

To the extent any stock option grants are made subject to the achievement of a performance condition, management evaluates when the achievement of any such performance-based milestone is probable based on the relative satisfaction of the performance conditions as of the reporting date.

Our stock-based compensation costs are based upon the grant date fair value of options estimated using the Black-Scholes option pricing model.

The Black-Scholes option pricing model utilizes inputs which are highly subjective assumptions and generally require significant judgment.

These assumptions include:

● Expected Term.

The expected term represents the period that the stock-based awards are expected to be outstanding.

As we do not have sufficient historical experience for determining the expected term of the stock option awards granted, expected term has been calculated using the simplified method.

● Risk-Free Interest Rate.

The risk-free interest rate is based on the U.S.

Treasury yield curve in effect at the date of grant for zero-coupon U.S.

Treasury constant maturity notes with terms approximately equal to the stock-based awards’ expected term.

● Expected Volatility.

Up until October 13, 2021, we were privately held and did not have a trading history of our 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 we consider to be comparable to our business over a period equivalent to the expected term of the stock-based awards.

We will continue to derive expected volatility from average historical stock volatilities of industry peers until we have compiled a trading history of its own for a sufficient period of time.

● Expected Dividend Yield.

The expected dividend yield is zero as we have not paid and do not anticipate paying any dividends in the foreseeable future.

● Fair Value of Common Stock.

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 consolidated financial statements for the three and nine months ended September 30, 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, 2022, the total unrecognized compensation expense related to unvested time-based vesting awards was $7.3 million, which is expected to be recognized over weighted-average remaining vesting period of approximately 2.2 years.

The Critical Accounting Policies and Significant Judgements and Estimates included in our Annual Report on Form 10-K have not materially changed.

See “Critical Accounting Policies and Use of Estimates” included in Part II, Item 7 of our Annaul Report on Form 10-K filed with the SEC on March 23, 2023.

Recent Accounting Pronouncements

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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.

We elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that we (1) are no longer an emerging growth company or (2) affirmatively and irrevocably opt out of the extended transition period provided in the JOBS Act.

As a result, our financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

We will remain an emerging growth company until the earliest to occur of:

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What changed 10-Q

Item 2. Management’s Discussion and Analysis