ONCOSEC MEDICAL INCORPORATED Unless the context indicates otherwise, all references to "OncoSec," "the Company," "we," "us" and "our" in this report refer toOncoSec Medical Incorporated and its consolidated subsidiary. The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our condensed consolidated financial statements and the related notes included in this report. This discussion and analysis of our financial condition and results of operations is not a complete description of our business or the risks associated with an investment in our common stock. As a result, this discussion and analysis should be read together with our condensed consolidated financial statements and related notes included in this report, as well as the other disclosures in this report and in the other documents we file from time to time with theSecurities and Exchange Commission , orSEC , including our Annual Report on Form 10-K for our fiscal year endedJuly 31, 2022 filed with theSEC onOctober 31, 2022 (the "Annual Report"). Pursuant to Instruction 2 to paragraph (b) of Item 303 of Regulation S-K promulgated by theSEC , in preparing this discussion and analysis, we have presumed that readers have access to and have read the discussion and analysis of our financial condition and results of operations included in the Annual Report. This discussion and analysis and the other disclosures in this report contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, or Securities Act, and Section 21E of the Securities Exchange Act of 1934, as amended, or Exchange Act. Forward-looking statements relate to future events or circumstances or our future performance and are based on our current assumptions, expectations and beliefs about future developments and their potential effect on our business. All statements in this report that are not statements of historical fact could be forward-looking statements. The forward-looking statements in this discussion and analysis and elsewhere in this report include statements about, among other things, the status, progress and results of our clinical programs and our expectations regarding our liquidity and performance, including our expense levels, and the potential impact of the COVID-19 pandemic. Forward-looking statements are only predictions and are not guarantees of future performance, and they are subject to known and unknown risks, uncertainties and other factors, including the risks described under the heading "Risk Factors" herein and in Part I, Item IA of the Company's most recent Annual Report on Form 10-K and similar discussions contained in the other documents we file from time to time with theSEC . In light of these risks, uncertainties and other factors, the forward-looking events and circumstances described in this report may not occur and our results, levels of activity, performance or achievements could differ materially from those expressed in or implied by any forward-looking statements we make. As a result, you should not place undue reliance on any of our forward-looking statements. Forward-looking statements speak only as of the date they are made, and unless required to by law, we undertake no obligation to update or revise any forward-looking statement for any reason, including to reflect new information, future developments, actual results or changes in our expectations. Unless otherwise stated herein, all share and per share numbers relating to the Company's common stock prior to the effectiveness of the Reverse Stock Split have been adjusted to give effect to the Reverse Stock Split. Overview We are a late-stage immuno-oncology company focused on designing, developing and commercializing innovative, proprietary, intra-tumoral DNA-based therapeutics to stimulate and to augment anti-tumor immune responses for the treatment of cancers. Our core technology platform ImmunoPulse® is a drug-device therapeutic modality platform comprised of proprietary intratumoral electroporation ("EP") delivery devices (the "OMS EP Device") and a proprietary DNA plasmid delivery and application method that triggers transient expression of target protein in cells. The OMS EP Device is designed to promote cellular uptake of plasmid DNA-encoded drugs directly into a solid tumor and promote an immunological response against the cancer. The OMS EP Device can be adapted to treat different tumor types, and consists of an electrical pulse generator paired with disposable applicators. Our lead product candidate is a DNA-encoded interleukin-12 ("IL-12") called tavokinogene telseplasmid ("TAVO™"). The OMS EP Device is used to deliver TAVO™ intratumorally, with the aim of reversing the immunosuppressive microenvironment in the treated tumor. The activation of the appropriate inflammatory response can drive a systemic anti-tumor response against untreated tumors in other parts of the body. In 2017, we received Fast Track Designation and Orphan Drug Designation from theU.S. Food and Drug Administration ("FDA") for TAVO™ in metastatic melanoma, which could qualify TAVO™ for expedited FDA review, a rolling Biologics License Application review and certain other benefits.
Our current focus is to pursue TAVO™-EP in combination with KEYTRUDA® (pembrolizumab) in melanoma.
30 Performance Outlook As a result of recent cash runway and working capital limitations, we expect to use our available working capital in the near term primarily for the advancement of our existing and planned clinical melanoma programs, including delivery of the KEYNOTE-695 trial results. In order to preserve our existing working capital, we have decreased clinical work on our other clinical trials and studies, including those involving triple negative breast cancer. We anticipate our spending on clinical programs and the development of our next-generation OMS EP Device will continue throughout our current fiscal year. Our spending on research and development programs will be prioritized to support development of TAVO™-EP in melanoma. Due to ongoing restructuring efforts, we expect our cash-based general and administrative expenses to remain relatively flat in the near term, as we seek to continue to leverage internal resources and automate processes to decrease our outside services expenses. See "Results of Operations" below for more information. Restructuring Plan
OnOctober 2, 2022 , our Board of Directors authorized a restructuring plan (the "Restructuring Plan") that is designed to prioritize clinical activities in melanoma to reduce operating expenses while advancing our lead product candidate, TAVO™ EP, toward near-term data milestones in connection with the KEYNOTE-695 clinical trial. As part of the Restructuring Plan, we restructured our internal operations and reduced our workforce by approximately 45%, or
17 employees.
The Company incurred charges of approximately$650,000 throughJanuary 31, 2023 , in connection with the Restructuring Plan, consisting primarily of expenditures for employee transition, notice period and severance payments, retention bonus payments, and related costs. The Company currently estimates that it will incur additional charges of approximately$200,000 during the remainder of the first calendar quarter of 2023 in connection with the Restructuring Plan, consisting primarily of cash expenditures for retention bonus payments and related costs. The charges that we expect to incur in connection with the Restructuring Plan are estimates and subject to a number of assumptions, and actual results may differ materially. We expect to operationalize additional cost reduction actions that will include other incremental cost reduction actions unrelated to workforce reductions. Additionally, in connection with the Restructuring Plan, onDecember 26, 2022 , our Board of Directors approved cash bonus retention awards for certain members of our leadership team, pursuant to which we will provide a cash incentive designed to retain such employees (the "Retention Bonuses"). Pursuant to the terms of the Retention Bonuses, eligible employees will each receive a cash bonus award of$50,000 (not to exceed$300,000 in the aggregate for all recipients of the Retention Bonuses), to be paid on or aboutAugust 4, 2023 , for services rendered to us during the period beginning onOctober 7, 2022 and ending onJuly 31, 2023 , subject to each eligible employee's continued employment and good standing with us onJuly 31, 2023 . Our President and Chief Executive Officer and our Chief Financial Officer will not receive Retention Bonuses. Nasdaq Deficiency Notice OnDecember 27, 2022 , we received a notice from theNasdaq Stock Market, LLC ("Nasdaq") indicating that we were not in compliance with Nasdaq Listing Rule 5550(b)(1), which requires companies listed on Nasdaq to maintain a minimum of$2.5 million in stockholders' equity for continued listing. We have reported a stockholders' deficit of approximately$5.5 million in this quarterly report on Form 10-Q for the period endedJanuary 31, 2023 , and, as a result, do not currently satisfy Listing Rule 5550(b)(1). The notice has no immediate impact on the listing of our common stock, which will continue to be listed and traded on Nasdaq, subject to our compliance with the other continued listing requirements. The notice provided us with 45 calendar days, or untilFebruary 10, 2023 , to submit a plan to regain compliance. We submitted such a plan to Nasdaq onFebruary 10, 2023 , and onFebruary 21, 2023 , we received a notice from Nasdaq that we had been granted 180 calendar days fromDecember 27, 2022 , or untilJune 26, 2023 , to regain compliance. There can be no assurance that we will be able to regain compliance with all applicable continued listing requirements. In the event we fail to regain compliance within the compliance period, we have the right to a hearing before an independent panel. The hearing request would halt any suspension or delisting action pending the conclusion of the hearing process and the expiration of any additional extension period granted by the panel
following the hearing. 31 We intend to take all reasonable measures available to regain compliance under the Nasdaq Listing Rules and remain listed on Nasdaq. If trading in our common stock is suspended on Nasdaq or our common stock is delisted by Nasdaq for any reason, it could negatively impact us as it would likely reduce the liquidity and market price of our common stock; reduce the number of investors willing to hold or acquire our common stock; negatively impact our ability to access equity markets and obtain financing; and impair our ability to provide equity incentives.
Results of Operations for the Three Months Ended
The unaudited financial data for the three months endedJanuary 31, 2023 and 2022 is presented in the following table and the results of these two periods are included in the discussion thereafter. Three Months Three Months Ended Ended January 31, January 31, $ % 2023 2022 Change Change Revenue $ - $ - $ - - Expenses Research and development 4,653,595 6,825,540 (2,171,945 ) (32 ) General and administrative 3,009,912 2,590,893 419,019 16 Loss from operations (7,663,507 ) (9,416,433 ) 1,752,926 (19 ) Other expense, net (14,636 ) (2,583 ) (12,053 ) 467 Interest expense (33,551 ) (5,382 ) (28,169 ) 523 Foreign currency exchange gain (loss), net 853,764 (480,072 ) 1,333,836 (278 ) Loss before income taxes (6,857,930 ) (9,904,470 ) 3,046,540 (31 ) Income tax expense 2,950 2,950 - 0 Net loss$ (6,860,880 ) $ (9,907,420 ) $ 3,046,540 (31 ) Revenue
We have not generated any revenue since our inception, and we do not anticipate generating revenue in the near term.
Research and Development Expenses
Our research and development expenses decreased by approximately$2.1 million , from$6.8 million during the three months endedJanuary 31, 2022 , to$4.7 million during the three months endedJanuary 31, 2023 . This decrease was primarily due to: (i) a$2.0 million decrease in clinical trial related costs to support our various clinical trials and costs for discovery research and product development (See "Performance Outlook" above), (ii) a$0.1 million decrease in payroll and related benefit expenses as follows:$0.7 million decrease in salaries and related benefit expenses due to decreased headcount offset by severance costs of$0.1 million , retention bonuses of$0.2 million and annual bonuses of$0.3 million and (iii) a$0.1 million decrease in stock-based compensation to employees and consultants. 32 General and Administrative Our general and administrative expenses increased by$0.4 million , from$2.6 million during the three months endedJanuary 31, 2022 , to$3.0 million during the three months endedJanuary 31, 2023 . This increase was largely due to the following: (i) a$0.5 million increase in payroll and related benefit expenses as follows:$0.2 million increase in salaries and related benefit expenses as executive positions were filled during the second half of fiscal year 2022, retention bonuses of$0.1 million and annual bonuses of$0.2 million and (ii) a$0.3 million increase in legal fees due to intellectual property and general corporate counseling and expenses related to a special shareholder meeting held inDecember 2022 . These increases were partially offset by (i) a$0.3 million decrease in director fees paid to members of former Leadership Committee of our Board of Directors due to it dissolved inMay 2022 , (ii) a$0.1 million decrease partially related to recruiting expenses, and (iii) a$0.1 million decrease in insurance costs related to decreased D&O insurance premiums.
Foreign Currency Exchange Gain (Loss), Net
Foreign currency exchange gain (loss), net, increased by approximately
Results of Operations for the Six Months Ended
The unaudited financial data for the six months ended
Six Months Ended Six Months Ended
January 31, January 31, $ %
2023 2022 Change Change
Revenue $ - $ - $ - -
Expenses
Research and development 9,421,968 13,471,311 (4,049,343 ) (30 )
General and administrative 5,548,409 5,860,616 (312,207 ) (5 )
Loss from operations (14,970,377 ) (19,331,927 ) 4,361,550 (23 )
Other income (expense), net 23,463 (4,594 ) 28,057 (611 )
Interest expense (44,632 ) (13,427 ) (31,205 ) 232
Foreign currency exchange gain
(loss), net 72,218 (363,147 ) 435,365 (120 )
Loss before income taxes (14,919,328 ) (19,713,095 ) 4,793,767 (24 )
Income tax expense 2,950 2,950 - 0
Net loss $ (14,922,278 ) $ (19,716,045 ) $ 4,793,767 (24 )
Revenue
We have not generated any revenue since our inception, and we do not anticipate generating revenue in the near term.
Research and Development Expenses
Our research and development expenses decreased by approximately$4.1 million , from$13.5 million during the six months endedJanuary 31, 2022 , to$9.4 million during the six months endedJanuary 31, 2023 . This decrease was primarily due to the following: (i) a$3.3 million decrease in clinical trial-related costs to support our various clinical trials and costs for discovery research and product development (See "Performance Outlook" above), (ii) a$0.4 million decrease in payroll and related benefit expenses as follows:$1.3 million decrease in salaries and related benefit expenses due to decreased headcount offset by severance costs of$0.3 million , retention bonuses of$0.3 million and annual bonuses of$0.3 million and (iii) a$0.3 million decrease in stock-based compensation expense to employees and consultants. 33 General and Administrative Our general and administrative expenses decreased by approximately$0.4 million , from$5.9 million during the six months endedJanuary 31, 2022 , to$5.5 million during the six months endedJanuary 31, 2023 . This decrease was largely due to the following: (i) a$0.4 million decrease related to recruiting expenses, (ii) a$0.3 million decrease in director fees paid to members of our former Leadership Committee of our Board of Directors due to it dissolving inMay 2022 and (iii) a$0.2 million decrease in insurance costs related to decreased D&O insurance premiums. These decreases were partially offset by (i) a$0.3 million increase in payroll and related benefit expenses as follows:$0.4 million increase in salaries and related benefit expenses as executive positions were filled during the second half of fiscal year 2022,$0.2 million in retention bonuses,$0.2 million in annual bonuses and a decrease of$0.4 million in severance expense and (ii) a$0.2 million increase million increase in legal fees due to intellectual property counseling.
Foreign Currency Exchange Gain (Loss), Net
Foreign currency exchange gain (loss), net, increased by approximately$0.4 million from a$0.3 million loss during the six months endedJanuary 31, 2022 to a$0.1 million gain for the six months endedJanuary 31, 2023 . This increase was primarily due to unrealized foreign currency transaction gain recognized in connection with the Australian subsidiary's intercompany loan.
Liquidity and Capital Resources
Working Capital
The following table and subsequent discussion summarize our working capital as of each of the periods presented:
At At
January 31, 2023 July 31, 2022 Current assets$ 6,441,575 $ 15,232,471 Current liabilities 7,231,043 6,633,328 Working capital $ (789,468 )$ 8,599,143 Current Assets Current assets as ofJanuary 31, 2023 decreased by$8.8 million to$6.4 million , from$15.2 million as ofJuly 31, 2022 . This decrease was primarily related to a decrease in cash of$8.6 million and a decrease in prepaid expenses and other current assets of$0.2 million . The decrease in cash was due to cash used to support our operations during the six months endedJanuary 31, 2023 . The decrease in prepaid expenses and other current assets was due to amortization of prepaid insurance, partially offset by an increase in our research and development tax credit receivable. Current Liabilities Current liabilities as ofJanuary 31, 2023 increased by$0.6 million to$7.2 million , from$6.6 million as ofJuly 31, 2022 . This increase was primarily due to (i) an increase in accounts payable and accrued expenses due to slow payments and (ii) an increase in accrued compensation and related payroll liabilities due to accruals for retention bonuses and annual bonuses. 34 Cash Flow
Cash Used in Operating Activities
Net cash used in operating activities for the six months endedJanuary 31, 2023 was$12.7 million , as compared to$19.9 million for the six months endedJanuary 31, 2022 . The$7.1 million decrease in cash used in operating activities was primarily attributable to a decrease in cash used to support our operating activities, including but not limited to, our clinical trials, research and development activities and general working capital requirements.
Cash Used in Investing Activities
Net cash used in investing activities for the six months endedJanuary 31, 2023 was$0.01 million , as compared to$0.2 million for the six months endedJanuary 31, 2022 . During the six months endedJanuary 31, 2023 , the Company purchased fixed assets for use in its office and sold a piece of lab equipment. During the six months endedJanuary 31, 2022 , the Company purchased fixed assets for use in its clinical trials.
Cash Provided by (Used in) Financing Activities
Net cash provided by financing activities was$4.2 million for the six months endedJanuary 31, 2023 , as compared to$0.5 million cash used in financing activities for the six months endedJanuary 31, 2022 . Net cash provided by financing activities during the six months endedJanuary 31, 2023 was primarily attributable to the$1.9 million net proceeds received from issuance of a convertible note to a related party and$2.8 million net proceeds received from theDecember 2022 offering. Net cash used in financing activities during the six months endedJanuary 31, 2022 was primarily attributable to payments on a note payable.
Uses of Cash and Cash Requirements
Our primary uses of cash have been to finance clinical and research and development activities focused on the identification and discovery of new potential product candidates, the development of innovative and proprietary medical approaches for the treatment of cancer, and the design and advancement of pre-clinical and clinical trials and studies related to our pipeline of product candidates. We also use our capital resources on general and administrative activities and building and strengthening our corporate infrastructure, programs and procedures to enable compliance with applicable federal, state and local laws and regulations. Our primary objectives for the next 12 months are to continue the advancement of TAVO™-EP in combination with KEYTRUDA® (pembrolizumab) in melanoma and to continue our research and development activities for our next-generation OMS EP device. In addition, we expect to pursue capital-raising transactions, which could include equity or debt financings, in the near term to fund our existing and planned operations and acquire and develop additional assets and technology consistent with our business objectives as opportunities arise. Operating lease obligations We enter into various leases as a lessee for office buildings. As ofJanuary 31, 2023 , operating lease obligations totaled$1.2 million , of which$1.0 million is due within one year. These amounts did not reflect imputed interest adjustments. For more information on our leases, see Note 9, "Leases", to the Condensed Consolidated Financial Statements in Item I of Part I.
Debt
As ofJanuary 31, 2023 , future principal payment obligations on our debt totaled$2.4 million , of which$0.4 million is due within one year. For more information on our debt, see Note 5, "Note Payable" and Note 11, "Related Party Transactions", to the Condensed Consolidated Financial Statements in Item I
of Part I.
Going Concern and Management's Plans
We have sustained losses in all reporting periods since inception, with an accumulated deficit of approximately$301 million as ofJanuary 31, 2023 . These losses are expected to continue for an extended period of time. Further, we have never generated any cash from our operations and do not expect to generate such cash in the near term. The aforementioned factors raise substantial doubt about our ability to continue as a going concern within one year from the issuance date of the condensed consolidated financial statements. The accompanying condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of asset amounts or the classification of liabilities that might be necessary should we be unable to continue as a going concern within one year after the date the condensed consolidated financial
statements are issued. 35 As ofMarch 6, 2023 , we had cash and cash equivalents of$2.0 million . Since inception, cash flows from financing activities have been the primary source of our liquidity. Based on our current cash levels, we believe our cash resources are insufficient to meet our anticipated needs for the 12 months following the date the condensed consolidated financial statements are issued. We will need to raise additional capital to regain compliance with Nasdaq continued listing standards, continue operating our business and fund our planned operations, including research and development, clinical trials and, if regulatory approval is obtained, commercialization of its product candidates. In addition, we will require additional financing if we desire to in-license or acquire new assets, research and develop new compounds or new technologies and pursue related patent protection, or obtain any other intellectual property rights or other assets. There is no assurance that additional financing will be available to us when needed, that Management will be able to obtain financing on terms acceptable to us, or whether we will become profitable and generate positive operating cash flow. The source, timing and availability of any future financing will depend principally upon market conditions, and, more specifically, on the progress of our clinical development programs. Similarly, if our common stock is delisted from Nasdaq, it may limit our ability to raise additional funds. See "Nasdaq Deficiency Notice" above. Recent events, such as the ongoing COVID-19 pandemic, the outbreak of war in easternEurope , and the persistent inflationary environment have also caused volatility in the global financial markets and threatened a slowdown in the global economy, which may negatively affect our ability to raise additional capital on attractive terms or at all. If we are unable to raise sufficient additional funds when needed, on favorable terms or at all, we will not be able to continue the development of our product candidates as currently planned or at all, will need to reevaluate our planned operations and may need to delay, scale back or eliminate some or all of our development programs, reduce expenses or cease operations, any of which would have a significant negative impact on our prospects and financial condition. Sources of Capital We have not generated any revenue since our inception, and we do not anticipate generating revenue in the near term. Historically, we have raised the majority of the funding for our business through offerings of our common stock and warrants to purchase our common stock. If we issue equity or convertible debt securities to raise additional funds, our existing stockholders would experience further dilution, and the new equity or debt securities may have rights, preferences and privileges senior to those of our existing stockholders. If we incur debt, our fixed payment obligations, liabilities and leverage relative to our equity capitalization would increase, which could increase the cost of future capital. Further, the terms of any debt securities we issue or borrowings we incur, if available, could impose significant restrictions on our operations, such as limitations on our ability to incur additional debt or issue additional equity or other operating restrictions that could adversely affect our ability to conduct our business, and any such debt could be secured by any or all of our assets pledged as collateral. Additionally, we may incur substantial costs in pursuing future capital, including investment banking, legal and accounting fees, printing and distribution expenses and other costs. Reverse Stock Split Our Board of Directors approved a reverse stock split of the Company's authorized, issued and outstanding shares of common stock at a ratio of 1-for-22 (the "Reverse Stock Split"). The Reverse Stock Split became effective onNovember 9, 2022 (the "Effective Date"). All share and per share amounts for all periods presented in the accompanying consolidated financial statements and notes thereto have been adjusted, on a retrospective basis, to reflect the Reverse Stock Split, unless otherwise stated. The number of authorized shares were also proportionately adjusted and the par value remained unaffected. We issued one whole share of the post-Reverse Stock Split Common Stock to any stockholder who otherwise would have received a fractional share as a result of the Reverse Stock Split. As a result, no fractional shares were issued in connection with the Reverse Stock Split and no cash or other consideration was paid in connection with any fractional shares that would otherwise have resulted from the Reverse Stock Split. 36
Convertible Note -
OnNovember 25, 2022 (the "Funding Date"), we entered into a Convertible Note and Security agreement with GDDL pursuant to which the Company issued a Secured Convertible Note (the "Note") to GDDL. The Note has a principal amount of$2,000,000 , bears interest at a rate of 5% per annum untilNovember 25, 2023 and 10% per annum thereafter (the "Interest Rate") and matures onNovember 25, 2024 (the "Maturity Date"), on which date the principal balance and all accrued interest under the Note shall be due and payable. The Interest Rate will be 10% per annum upon occurrence of an event of default, including, but not limited to, the failure by us to make payment of principal or interest due under the Note on the Maturity Date, and any commencement by the Company of a case under any applicable bankruptcy or insolvency laws. The principal and interest accrued on the Note may be prepaid without any further agreement of the parties to the Note, or converted (as described below) upon the agreement of the parties to the Note, at any time without penalty to the Company. Subject to the consent of GDDL, the Note is convertible into such number of fully paid and non-assessable shares of the our common stock, par value$0.0001 per share as determined by dividing (i) any portion of the unpaid principal and accrued interest of the Note then outstanding by (ii) the greater of (a) the last closing bid price of a share of our common stock as reported on the Nasdaq Capital Market ("Nasdaq") on the date the Company and GDDL agree to such conversion and (b) the average closing bid price of a share of our common stock as reported on Nasdaq for the thirty trading days immediately preceding such date, subject to a share cap of 360,589 shares of our common stock (the "Share Cap"), representing 19.99% of the total issued and outstanding shares of our common stock as ofNovember 25, 2022 . Additionally, if at any time after the Funding Date the last closing bid price of a share of our common stock as reported on the Nasdaq for ten consecutive trading days or the average closing bid price of a share of our common stock as reported on Nasdaq for the thirty trading days immediately preceding such date is equal to or exceeds$44.00 (subject to any reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split or other substantially similar transaction), GDDL may require that we prepay the Note through conversion of the then outstanding principal and/or any accrued interest thereon into shares of our common stock, in whole or in part. The unpaid principal of and any accrued interest on the Note constitute unsubordinated obligations of the Company and are senior and preferred in right of payment to all equity securities of the Company outstanding as of the Funding Date, which are secured by all of the Company's right, title and interest, in and to certain of the Company's intellectual property rights inHong Kong ,Taiwan ,China andSouth Korea , as specified in the Note; provided, however, that the Company may incur or guarantee additional indebtedness after the Funding Date, whether such indebtedness are senior, pari passu or junior to the obligations under the Note.December 2022 Offering
OnNovember 30, 2022 , we entered into a Securities Purchase Agreement (the "Purchase Agreement") with certain investors (the "Investors"), pursuant to which we agreed to sell, issue, and deliver, in a registered public offering (the "Offering") (i) 1,166,667 shares of our common stock, par value$0.0001 per share (each a "Share" and collectively the "Shares"); (ii) Pre-Funded Warrants in lieu of shares of common stock (the "Pre-Funded Warrants") to purchase shares of common stock and (iii) 1,166,667 Common Warrants (the "Common Warrants" and collectively with the Pre-Funded Warrants, the "Warrants") to purchase shares of common stock, to the Investors. Under the terms of the Purchase Agreement, we agreed to sell one Share or a Pre-Funded Warrant and one Common Warrant for each Share or Pre-Funded Warrant sold at a price of$3.00 . For each Pre-Funded Warrant sold in the Offering, the number of Shares offered was decreased on
a one-for-one basis. The Common Warrants are exercisable immediately upon the date of issuance and have an exercise price of$3.00 per share, subject to adjustment. The Common Warrants will expire five (5) years from the date of issuance. The Pre-Funded Warrants are also exercisable immediately upon the date of issuance. The aggregate exercise price of the Pre-Funded Warrants, except for a nominal exercise price of$0.0001 per share of common stock, was pre-funded to us and, consequently, no additional consideration (other than the nominal exercise price of$0.0001 per share of common stock) is required for the exercise of the Pre-Funded Warrant. 37
The Offering closed onDecember 1, 2022 , and we received gross proceeds of$3,500,001 . As of the close of the Offering, we issued 250,000 Shares and Common Warrants to purchase 250,000 shares of common stock for a total consideration of$750,000 and 916,667 Pre-Funded Warrants to purchase 916,667 shares of common stock and 916,667 Common Warrants for a total consideration of$2,749,909 . Further, all of 916,667 Pre-Funded Warrants were exercised onDecember 1, 2022 . The terms and conditions of the Warrants are as noted and governed by the agreements entered into with the holders onDecember 1, 2022 . Placement agent fees and other offering expenses of approximately$0.7 million incurred directly related to the offering were reflected as a reduction in additional paid in capital. Total proceeds were allocated between the Shares and Warrants on a relative fair value basis given both securities are equity classified. The fair value of the Common Warrants issued to the Investors in the offering was approximately$1.5 million (based on a Monte Carlo simulation assuming no dividend yield, a 5.0 year life, a risk-free interest rate of 3.61% and volatilities of 92.3% or 100% varying based on the trigger of a fundamental transaction.)
Critical Accounting Policies
Use of Estimates The accompanying consolidated financial statements have been prepared in conformity withU.S. GAAP, which requires Management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Significant accounting estimates related to our ability to continue as a going concern and certain calculations related to that determination. We base our estimates on historical experience and on various other assumptions that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. On an ongoing basis, we review our estimates to ensure that they appropriately reflect changes in the business or as new information becomes available. Actual results may differ from these estimates.
Research and Development Expenses
Research and development expenses consist of costs incurred for internal
projects, as well as partner-funded collaborative research and development
activities. These costs include direct and research-related overhead expenses,
which include salaries, stock-based compensation and other personnel-related
expenses, facility costs, supplies, depreciation of facilities and laboratory
equipment, as well as research consultants and the cost of funding research at
universities and other research institutions, and are expensed as incurred.
Costs to acquire technologies that are utilized in research and development that
have no alternative future use, are expensed when incurred. In accordance with
Accounting Standards Codification ("ASC") 730-20, we account for upfront,
non-refundable research and development payments received from a related party
as a long-term liability as there has not been a substantive and genuine
transfer of risk and there is a presumption that we are obligated to repay
the
related party.
Equity-Based Awards
We grant equity-based awards (typically stock options or restricted stock units)
under our stock-based compensation plan and occasionally outside of our
stock-based compensation plan, with terms generally similar to the terms under
our stock-based compensation plan. We estimate the fair value of stock option
awards using the Black-Scholes option valuation model. For employees, directors
and consultants, the fair value of the award is measured on the grant date. The
fair value amount is then recognized over the period during which services are
required to be provided in exchange for the award, usually the vesting period.
The Black-Scholes option valuation model requires the input of subjective
assumptions, including price volatility of the underlying stock, risk-free
interest rate, dividend yield, and expected life of the option. We estimate the
fair value of restricted stock unit awards based on the closing price of the
Company's common stock on the date of grant.
38
Leases
We determine if an arrangement is a lease at inception. Operating lease right of
use ("ROU") assets represent our right to use an underlying asset during the
lease term, and operating lease liabilities represent our obligation to make
lease payments arising from the lease. Operating leases are included in ROU
assets, current operating lease liabilities, and long-term operating lease
liabilities on our consolidated balance sheets.
Lease ROU assets and lease liabilities are initially recognized based on the
present value of the future minimum lease payments over the lease term at
commencement date calculated using our incremental borrowing rate applicable to
the lease asset, unless the implicit rate is readily determinable. ROU assets
also include any lease payments made at or before lease commencement and exclude
any lease incentives received. Our lease terms may include options to extend or
terminate the lease when it is reasonably certain that we will exercise that
option. Leases with a term of 12 months or less are not recognized on the
consolidated balance sheets. Our leases do not contain any residual value
guarantees. Lease expense for minimum lease payments is recognized on a
straight-line basis over the lease term. We account for lease and non-lease
components as a single lease component for all its leases.
Recent Accounting Pronouncements
Information regarding recent accounting pronouncements is contained in Note 2 to our condensed consolidated financial statements included in this report.
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