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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

 

FORM 10-Q

 

 

 

(Mark One)

 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended September 30, 2021

 

OR

 

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from to

Commission File Number: 001-40708

 

 

 

RENOVORX, INC.

(Exact Name of Registrant as Specified in its Charter)

 

 

 

Delaware   27-1448452

(State or other jurisdiction of

incorporation or organization)

  (I.R.S. Employer
Identification No.)
     

4546 El Camino Real, Suite B1

Los Altos, California

  94022
(Address of principal executive offices)   (Zip Code)

 

Registrant’s telephone number, including area code: (650) 284-4433

 

 

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class   Trading Symbol(s)   Name of each exchange on which registered
Common Stock, par value $0.0001 per share   RNXT   Nasdaq Capital Market

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer   Accelerated filer
         
Non-accelerated filer   Smaller reporting company
         
Emerging growth company      

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No

 

As of November 1, 2021, the registrant had 8,908,150 shares of common stock, $0.0001 par value per share, outstanding.

 

 

 

 
 

 

Table of Contents

 

    Page
PART I. FINANCIAL INFORMATION 2
Item 1. Condensed Interim Financial Statements (Unaudited) 2
  Condensed Balance Sheets as of September 30, 2021 and December 31, 2020 (Audited) 2
  Condensed Statements of Operations for the three and nine months ended September 30, 2021 and 2020 3
  Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2021 and 2020 4
  Condensed Statements of Cash Flows for the nine months ended September 30, 2021 and 2020 6
  Notes to the Unaudited Condensed Interim Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 20
Item 3. Quantitative and Qualitative Disclosures About Market Risk 30
Item 4. Controls and Procedures 31
     
PART II. OTHER INFORMATION 32
Item 1. Legal Proceedings 32
Item 1A. Risk Factors 32
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 59
Item 3. Defaults Upon Senior Securities 59
Item 4. Mine Safety Disclosures 59
Item 5. Other Information 59
Item 6. Exhibits 62
Signatures 63

 

i
 

 

Forward-Looking Statements

 

This Quarterly Report on Form 10-Q, or Quarterly Report, contains forward-looking statements that are based on our beliefs and assumptions and on information currently available to us. All statements other than statements of historical facts contained in this Quarterly Report are forward-looking statements. These forward-looking statements include, but are not limited to, information regarding our expectations on the timing of clinical study initiation and results and the timing and success of future development of our products; our possible or assumed future results of operations and expenses, including research and development expenses; business strategies and plans; trends; market sizing; competitive position; industry environment; potential growth opportunities; reliance on third parties, including third-party manufacturers; the timing of product revenues, if any; financing needs; liquidity, cash flows and operating losses; the effects of the COVID-19 pandemic, including on our preclinical and clinical studies; and impact of the Affordable Care Act and other legislation, among other things. In some cases, investors can identify forward-looking statements by terms such as “anticipates,” “believes,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “seeks,” “should,” “will,” “would” or similar expressions and the negatives of those terms.

 

We have based these forward-looking statements largely on our current expectations and projections about our business, the industry in which we operate and financial trends that we believe may affect our business, financial condition, results of operations and prospects, and these forward-looking statements are not guarantees of future performance or development. These forward-looking statements speak only as of the date of this Quarterly Report and are subject to a number of risks, uncertainties and assumptions described in the section titled “Risk Factors” and elsewhere in this Quarterly Report. Because forward-looking statements are inherently subject to risks and uncertainties, some of which cannot be predicted or quantified, investors should not rely on these forward-looking statements as predictions of future events. The events and circumstances reflected in our forward-looking statements may not be achieved or occur and actual results could differ materially from those projected in the forward-looking statements. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events or otherwise.

 

In addition, statements that “we believe” and similar statements reflect our beliefs and opinions on the relevant subject. These statements are based upon information available to us as of the date of this Quarterly Report, and while we believe such information forms a reasonable basis for such statements, such information may be limited or incomplete, and our statements should not be read to indicate that we have conducted an exhaustive inquiry into, or review of, all potentially available relevant information. These statements are inherently uncertain and investors are cautioned not to unduly rely upon these statements.

 

ii
 

 

PART I—FINANCIAL INFORMATION

 

Item 1. Condensed Interim Financial Statements (Unaudited)

 

RenovoRx, Inc.

Condensed Balance Sheets

(Unaudited)

(in thousands, except share and per share amounts)

 

   September 30,   December 31, 
   2021   2020 
       (audited) 
Assets          
Current assets:          
Cash and cash equivalents  $17,725   $1,795 
Prepaid expenses and other current assets   439    115 
Total current assets   18,164    1,910 
Leasehold improvements, net   10    - 
Other assets   4    4 
Total assets  $18,178   $1,914 
Liabilities, convertible preferred stock and stockholders’ equity (deficit)          
Current liabilities:          
Accounts payable  $133   $162 
Accrued expenses   492    311 
Promissory note, current   -    117 
Convertible note   -    2,650 
Derivative liability   -    856 
Total current liabilities   625    4,096 
Promissory note, net of current portion   -    23 
Total liabilities  $625    4,119 
Commitments and contingencies (Note 8)   -      
Convertible preferred stock, $0.0001 par value; 15,000,000 and 22,360,455 shares authorized; 0 and 3,535,469 shares issued and outstanding at September 30, 2021 and December 31, 2020, respectively (aggregate liquidation preference of $0 at September 30, 2021 and $12,782 as of December 31, 2020)   -    12,451 
Stockholders’ equity (deficit):          
Common stock, $0.0001 par value, 250,000,000 and 42,000,000 shares authorized; 8,908,150 and 2,291,497 shares issued and outstanding as of September 30, 2021 and December 31, 2020, respectively   1    1 
Additional paid-in capital   36,481    303 
Accumulated deficit   (18,929)   (14,960)
Total stockholders’ equity (deficit)   17,553    (14,656)
Total liabilities, convertible preferred stock and stockholders’ equity (deficit)  $18,178   $1,914 

 

The accompanying notes are an integral part of these condensed interim financial statements.

 

2
 

 

RenovoRx, Inc.

Condensed Statements of Operations

(Unaudited)

(in thousands, except share and per share amounts)

 

                 
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2021   2020   2021   2020 
Operating expenses:                    
Research and development  $767   $727   $1,938   $1,934 
General and administrative   628    183    1,377    631 
Total operating expenses   1,395    910    3,315    2,565 
Loss from operations   (1,395)   (910)   (3,315)   (2,565)
Interest expense, net   (208)   (186)   (835)   (355)
Other income, net   170    -    119    - 
Loss (gain) on loan extinguishment   (78)   -    62    - 
Total other expenses, net   (116)   (186)   (654)   (355)
Net loss  $(1,511)  $(1,096)  $(3,969)  $(2,920)
Net loss per share, basic and diluted  $(0.27)  $(0.48)  $(1.09)  $(1.31)
Weighted-average shares of common stock outstanding, basic and diluted   5,620,135    2,263,589    3,640,988    2,233,645 

 

The accompanying notes are an integral part of these condensed interim financial statements.

 

3
 

 

RenovoRx, Inc.

Condensed Statements of Convertible Preferred Stock and Stockholders’ Equity (Deficit)

(Unaudited)

(in thousands, except share amounts)

 

    Shares     Amount       Shares     Amount     Capital     Deficit     Equity (Deficit)  
                                       
                              Additional           Total   
    Convertible Preferred Stock       Common Stock     Paid-In     Accumulated     Stockholders’  
    Shares     Amount       Shares     Amount     Capital     Deficit     Equity (Deficit)  

Balance—December 31,

2020 (audited)

    3,535,469     $ 12,451         2,233,139     $ 1     $         303     $ (14,960 )   $               (14,656 )
Issuance of common stock
upon exercise of stock
options
    -       -         50,058       -       34       -       34  
Stock-based compensation
expense
    -       -         -       -       8       -       8  
Net loss                                               (1,148 )     (1,148 )

Balance—March 31,

2021

    3,535,469     $ 12,451         2,283,197       1     $ 345     $ (16,108 )   $ (15,762 )
Issuance of common stock
upon exercise of stock
options
    -       -         8,300       -       5       -       5  
Stock-based compensation
expense
    -       -         -       -       7       -       7  
Net loss     -       -         -                  -       -       (1,310 )     (1,310 )
                                                           
Balance—June 30, 2021     3,535,469     $ 12,451         2,291,497       1     $ 357     $ (17,418 )   $ (17,060 )
Conversion of convertible
preferred stock to
common stock upon
initial public offering
    (3,535,469 )     (12,451   )     3,535,469       -       12,451       -       12,451  
Conversion of convertible
notes and accrued interest
to units upon
initial public offering
    -       -         708,820       -       5,279       -       5,279  
Reclassification of
derivative liability upon
conversion of convertible
notes
    -       -         -       -       1,101       -       1,101  
Proceeds from initial public
offering, net of
underwriters’ commissions,
discounts and issuance
costs of $2,090
    -       -         1,850,000       -       14,561       -       14,561  
Issuance of common stock
upon exercise of warrants
issued upon initial public
offering
    -       -         247,700       -       2,675       -       2,675  
Issuance of common stock
upon exercise of stock
options
                      274,574               51       -       51  
Reverse stock split
adjustment
    -       -         90       -       -       -       -  
Stock-based compensation
expense
    -       -         -       -       6       -       6  
Net loss     -       -         -       -       -       (1,511 )     (1,511 )
Balance—September 30, 2021     -     $ -         8,908,150     $ 1     $ 36,481     $ (18,929 )   $ 17,553  

 

The accompanying notes are an integral part of these condensed interim financial statements.

 

4
 

 

RenovoRx, Inc.

Condensed Statements of Convertible Preferred Stock and Stockholders’ Deficit 

(Unaudited)

(in thousands, except share amounts)

 

                                
                     Additional        Total  
   Convertible Preferred Stock     Common Stock   Paid-In    Accumulated   Stockholders’ 
   Shares   Amount     Shares   Amount   Capital    Deficit   Deficit 
Balance—December 31, 2019   3,508,631   $12,391      2,177,187   $-   $       235    $(11,162)  $        (10,926)
Issuance of restricted stock award to Nonemployee for
service
   -    -      24,478    -    17     -    17 
Issuance of common stock
upon exercise of stock options
   -    -      16,666    -    11     -    11 
Issuance of Series A-1
convertible preferred stock
upon exercise of warrant
   26,838    25      -    -    -     -    - 
Warrant liability transferred to
mezzanine equity
upon exercise of warrant
   -    35      -    -    -     -    - 
Stock-based compensation
expense
   -    -      -    -    10     -    10 
Net loss                               (1,051)   (1,051)
Balance—March 31, 2020   3,535,469    12,451      2,218,331              1    273     (12,213)   (11,939)
Stock-based compensation expense   -    -      -    -    8     -    8 
Net loss   -    -      -    -    -     (773)   (773)
Balance—June 30, 2020   3,535,469    12,451      2,218,331    1    281     (12,986)   (12,704)
Stock-based compensation expense   -    -      -    -    7     -    7 
Net loss   -    -      -    -    -     (1,096)   (1,096)
Balance—September 30, 2020   3,535,469    12,451      2,218,331    1    288     (14,082)   (13,793)

 

The accompanying notes are an integral part of these condensed interim financial statements.

 

5
 

 

RenovoRx, Inc.

Condensed Statements of Cash Flows

(Unaudited)

(in thousands)

 

   2021   2020 
  

Nine Months Ended

September 30,

 
   2021   2020 
Operating activities          
Net loss  $(3,969)  $(2,920)
Adjustments to reconcile net loss to net cash used in operating activities:          
Stock-based compensation expense   21    25 
Amortization on leasehold improvement   5    - 
Loss on change in fair value of derivative liability   (118)   - 
Gain on loan extinguishment from PPP loan   (140)   - 
Loss on loan extinguishment from convertible notes   78    - 
Amortization of debt discount   697    341 
Changes in operating assets and liabilities:          
Prepaid expenses and other current assets   (324)   26 
Accounts payable   (29)   (287)
Accrued expenses   421    257 
Net cash used in operating activities   (3,358)   (2,558)
Investing activities          
Expenditures for leasehold improvements   (15)   - 
Net cash used in investing activities   (15)   - 
Financing activities          
Net proceeds from issuance of common stock upon initial public offering   14,561    - 
Proceeds from exercise of warrants   2,675    - 
Proceeds from convertible notes   1,977    2,570 
Proceeds from promissory note   -    140 
Proceeds from exercise of Series A-1 warrant   -    25 
Proceeds from exercise of common stock options   90    11 
Net cash provided by financing activities   19,303    2,746 
Increase in cash and cash equivalents   15,930    188 
Cash, cash equivalents, beginning of period   1,795    2,124 
Cash, cash equivalents, end of period  $17,725   $2,312 
Supplemental disclosure of non-cash investing and financing activities:          
Derivative liability  $738   $743 
Conversion of convertible preferred stock upon initial public offering  $12,451   $- 
Conversion of convertible notes upon initial public offering  $5,279   $- 

 

The accompanying notes are an integral part of these condensed interim financial statements.

 

6
 

 

RenovoRx, Inc.

Notes to the Unaudited Condensed Interim Financial Statements

 

1. Business and Principal Activities

 

Description of Business

 

RenovoRx, Inc. (the “Company”) was incorporated in the state of Delaware in December 2012 and operates from its headquarters in Los Altos, California. The Company is a clinical-stage biopharmaceutical company focused on developing therapies for the local treatment of solid tumors and conducting a phase 3 pancreatic cancer clinical trial for its lead product candidate RenovoGem™. The Company’s therapy platform, RenovoRx Trans-Arterial Micro-Perfusion, or RenovoTAMP™ utilizes approved chemotherapeutics with validated mechanisms of action and well-established safety and side effect profiles, with the goal of increasing their efficacy, improving their safety, and widening their therapeutic window.

 

Initial Public Offering

 

On August 25, 2021, the Company’s Registration Statement on Form S-1 (File No. 333-258071) relating to its initial public offering (“IPO”) of units of securities, or units, was declared effective by the U.S. Securities and Exchange Commission, (or “SEC”), and its shares of common stock began trading on the Nasdaq Capital Market on August 26, 2021. The transaction formally closed on August 30, 2021. In connection with the IPO, the Company issued and sold an aggregate of 1,850,000 units at a price of $9.00 per unit. Each unit consisted of (a) one share of common stock and (b) one warrant to purchase one share of common stock at an exercise price equal to $10.80 per share, which is exercisable for a period of five years after the issuance date. The Company also granted the underwriters an over-allotment option, exercisable for 45 days after August 25, 2021, to purchase any combination of up to 277,500 shares of its common stock and/or common stock warrants to purchase 277,500 shares of common stock with an exercise price of $10.80 per share. The underwriters exercised their over-allotment option to purchase 277,500 common stock warrants on August 30, 2021. In connection with the IPO, the underwriters were issued a five-year warrant, exercisable on or after February 25, 2022, to purchase up to 198,875 shares of the Company’s common stock at an exercise price of $10.80.

 

The Company received aggregate gross proceeds of $16.7 million from the IPO, paid underwriting discounts and commissions of $1.3 million and incurred other expenses of $0.8 million. As a result, the net offering proceeds to the Company, after deducting underwriting discounts and commissions and other offering expenses, were $14.6 million. Immediately prior to the closing of the IPO, all shares of convertible preferred stock then outstanding were converted into 3,535,469 shares of common stock after giving effect to the reverse stock split. In addition, all of the outstanding Convertible Notes, representing principal and accrued but unpaid interest of $5.3 million, converted into an aggregate of 708,820 units. Each unit consisted of (a) one share of common stock and (b) one warrant to purchase one share of common stock at an exercise price equal to $10.80 per share, which is exercisable for a period of five years after the issuance date. The 2020 Convertible Notes converted at a 20% discount to the IPO price and the 2021 Convertible Notes converted at a 12.5% discount to the IPO price, see Note 5, Convertible Notes.

 

Reverse Stock Split

 

The Company filed a certificate of amendment to its Fifth Amended and Restated Certificate of Incorporation to effect a 1-for-5 reverse stock split of its issued and outstanding preferred stock and common stock, which became effective on August 5, 2021. The number of authorized shares and the par values of the common stock and convertible preferred stock were not adjusted as a result of the reverse stock split. Adjustments corresponding to the reverse stock split were made to the ratio at which the Company’s convertible preferred stock converted into the Company’s common stock. Accordingly, all share and per share amounts related to the common stock, stock options, warrants and restricted stock awards for all periods presented in the accompanying financial statements and notes thereto have been retroactively adjusted, where applicable, to reflect the effect of the reverse stock split.

 

Liquidity and Capital Resources

 

The Company raised $14.6 million in net proceeds from its IPO in August 2021 and from the Company’s inception through September 30, 2021, it raised an aggregate of $35.0 million in net cash proceeds from the sale and issuance of convertible preferred stock, convertible notes, issuance of common stock in connection with its IPO and the exercise of warrants. The Company had cash and cash equivalents of $17.7 million as of September 30, 2021.

 

The Company has incurred significant losses and negative cash flows from operations since its inception. For the nine months ending September 30, 2021, the Company reported a net loss of $4.0 million and an accumulated deficit of $18.9 million and does not expect to generate positive cash flows from operations in the foreseeable future. The Company expects to incur significant and increasing losses until regulatory approval is granted for its first product candidate, RenovoGem™. Regulatory approval is not guaranteed and may never be obtained. The Company may seek to raise additional capital through debt financings, private or public equity financings, license agreements, collaborative agreements or other arrangements with other companies, or other sources of financing. There can be no assurance that such financing will be available or will be at terms acceptable to the Company. The inability to raise capital as and when needed would have a negative impact on the Company’s financial condition and its ability to pursue its business strategy. The Company will need to generate significant revenue to achieve profitability, and it may never do so.

 

7
 

 

The Company has reviewed the relevant conditions and events surrounding its ability to continue as a going concern including among others: historical losses, projected future results, including the effects of the novel coronavirus (“COVID-19”) pandemic, cash requirements for the upcoming year, funding capacity, net working capital, total stockholders’ deficit and future access to capital. Based upon the Company’s current operating plan, management believes that its existing cash and cash equivalents as of September 30, 2021 will be sufficient to allow the Company to fund operating, investing and financing cash flow needs for at least twelve months from the date of issuance of these interim condensed financial statements. The accompanying condensed interim financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates the realization of assets and the settlement of liabilities and commitments in the normal course of business. The accompanying condensed interim financial statements do not reflect any adjustments relating to the recoverability and reclassifications of assets and liabilities that might be necessary if the Company is unable to continue as a going concern.

 

2. Summary of Significant Accounting Policies

 

Basis of Presentation and Unaudited Condensed Interim Financial Information

 

The accompanying unaudited interim financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”) and applicable rules and regulations of the SEC for interim reporting. As permitted under those rules and regulations, certain footnotes or other financial information normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. The condensed interim financial statements have been prepared on the same basis as the annual financial statements and, in the opinion of management, reflect all adjustments, which include only normal, recurring adjustments that are necessary to present fairly the Company’s results for the interim periods presented. The condensed balance sheet as of December 31, 2020, is derived from the Company’s audited financial statements. The results of operations for the three and nine months ended September 30, 2021, are not necessarily indicative of the results to be expected for the year ending December 31, 2021, or for any other future annual or interim period.

 

The accompanying unaudited condensed interim financial statements should be read in conjunction with the audited financial statements and the related notes thereto for the year ended December 31, 2020, which are included in the Company’s prospectus related to the Company’s IPO, filed with the SEC on August 25, 2021, pursuant to Rule 424(b) under the Securities Act of 1933.

 

Use of Estimates

 

The preparation of unaudited condensed interim financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the unaudited condensed interim financial statements and accompanying notes. The Company bases its estimates on historical experience and market-specific or other relevant assumptions that it believes are reasonable under the circumstances. Assets and liabilities reported in the Company’s condensed balance sheets and expenses and income reported are affected by estimates and assumptions, which are used for, but are not limited to, determining the fair value of assets and liabilities, including the accrual of certain liabilities, the valuation of financial instruments, the fair value of the Company’s common stock, income tax uncertainties, and measurement of stock-based compensation expense. Actual results could differ from such estimates or assumptions.

 

Concentration of Credit Risk and Other Risks and Uncertainties

 

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains bank deposits in federally insured financial institutions and these deposits may exceed federally insured limits. The Company is exposed to credit risk in the event of default by the financial institutions holding its cash and cash equivalents to the extent recorded in the condensed balance sheets. The Company has not experienced any losses on its deposits of cash and cash equivalents. The Company is subject to a number of risks similar to other early-stage biopharmaceutical companies, including, but not limited to, the need to obtain adequate additional funding, possible failure of current or future preclinical studies or clinical trials, its reliance on third parties to conduct its clinical trials, the need to obtain regulatory and marketing approvals for its product candidates, competitors developing new technological innovations, the need to successfully commercialize and gain market acceptance of the Company’s product candidates, protection of its proprietary technology, and the need to secure and maintain adequate manufacturing arrangements with third parties.

 

The Company relied, and expects to rely, on a small number of third-party manufacturers to manufacture and supply its RenovoCath devices and its product candidates for clinical trials. These activities could be adversely affected by a significant interruption in supply of these items. If the Company does not successfully commercialize or partner any of its product candidates, it will be unable to generate product revenue or achieve profitability.

 

8
 

 

Deferred Offering Costs

 

The Company incurred offering costs consisting of legal, accounting and other fees and costs directly attributable to the Company’s IPO. For the three and nine months ended September 30, 2021, the Company charged $774,000 of deferred offering costs to additional paid-in capital upon completion of the IPO in August 2021. There were no deferred offering costs at September 30, 2021 and December 31, 2020.

 

Operating Segment

 

The Company operates and manages its business as one reportable and operating segment, which is the development of a platform technology to deliver de-risked small molecules for localized treatment of solid cancer tumors. The Company’s chief executive officer, who is the chief operating decision maker, reviews financial information on an aggregate basis for allocating resources and evaluating financial performance.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments purchased with original maturities of 90 days or less from the purchase date to be cash equivalents. Cash and cash equivalents are held in accounts at financial institutions. Cash equivalents consist of amounts held in a money market account. Such deposits have and will continue to exceed federally insured limits in the foreseeable future.

 

Leasehold Improvements, Net

 

Leasehold improvements are presented at cost, net of accumulated amortization. Amortization expense is recorded using the straight-line method over the shorter of the remaining lease term or the estimated useful life.

 

Convertible Instruments and Embedded Derivatives

 

The Company accounts for certain redemption features that are associated with convertible notes as liabilities at fair value and adjusts the instruments to their fair value at the end of each reporting period. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in other income (expense), net in the condensed statements of operations. Derivative instrument liabilities are classified in the condensed balance sheets as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. As of December 31, 2020, the Company’s only derivative financial instrument was related to the 2020 Convertible Notes, which contained certain redemptive features. The Company completed its IPO on August 30, 2021, which triggered the automatic conversion of all outstanding Convertible Notes, plus accrued interest, into units, consisting of (a) one share of common stock and (b) one five-year warrant to purchase one share of common stock at an exercise price equal to $10.80 per share. Upon the conversion of the Convertible Notes, the outstanding Convertible Notes, plus accrued interest thereon totaling $5.3 million, net of unamortized debt discounts, were derecognized into stockholders’ equity (Note 5).

 

Clinical Trial Expenses

 

The Company makes payments in connection with its ongoing Phase 3 clinical trial under contracts with clinical trial sites and contract research organizations that support conducting and managing clinical trials. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed fee, unit price or on a time and materials basis. A portion of the obligation to make payments under these contracts depends on factors such as the successful enrollment or treatment of patients or the completion of other clinical trial milestones.

 

Expenses related to clinical trials are accrued based on estimates and/or representations from service providers regarding work performed, including actual level of patient enrollment, completion of patient studies and progress of the clinical trials. Other incidental costs related to patient enrollment or treatment are accrued when reasonably certain. If amounts and obligations to pay under clinical trial agreements are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), the accruals are adjusted accordingly. Revisions to contractual payment obligations are charged to expense in the period in which the facts that give rise to the revision become reasonably certain. In addition, the clinical trial sites involved in our Phase 3 clinical trial of RenovoGem are charged for the RenovoCath delivery devices used in the trial. The payments received from the clinical trial sites for the devices are adequate to cover the direct costs of manufacturing and offset research and development expenses.

 

9
 

 

Research and Development Expenses

 

Research and development expenses are charged to expense as incurred. Research and development expenses includes personnel costs including salaries, benefits and stock-based compensation for employees related to research and development activities. In addition, expenses for consultants that support clinical trial studies, materials costs, external clinical drug product manufacturing costs, outside services costs, regulatory activities including filing fees, fees for maintaining licenses and other amounts due to third-party agreements, laboratory materials, clinical trial, as noted above, and supplies to support our research activities, as well as allocated facility related costs.

 

Fair Value Measurement

 

Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability, or an exit price, in the principal or most advantageous market for that asset or liability in an orderly transaction between market participants on the measurement date. Fair value measurement establishes a fair value hierarchy that requires an entity to maximize the use of observable inputs, where available, and minimize the use of unobservable inputs when measuring fair value.

 

The Company determined the fair value of financial assets and liabilities using the fair value hierarchy that describes three levels of inputs that may be used to measure fair value, as follows:

 

Level 1—Quoted prices in active markets for identical assets and liabilities;
   
Level 2—Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted prices for similar assets or liabilities, quoted prices in markets that are not active, or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities; and
   
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities.

 

As of September 30, 2021, fair value measurements consisted solely of cash equivalents which comprise money market securities. The carrying amounts of these instruments approximate their fair value. The carrying value of all remaining current assets and current liabilities approximate their fair value.

 

Stock-Based Compensation Expense

 

The Company maintains an equity incentive plan as a long-term incentive for selected employees, consultants, and directors. The plan allows for the issuance of incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock grants, and restricted stock units.

 

The Company accounts for stock-based compensation expense by measuring and recognizing compensation expense for all share-based payments made to employees and non-employees based on estimated grant-date fair values. The Company uses the straight-line method to allocate compensation cost to reporting periods over each recipient’s requisite service period, which is generally the vesting period over four years. The Company estimates the fair value of stock options granted to employees and non-employees using the Black-Scholes option pricing model. The Black-Scholes option pricing model requires the input of subjective assumptions, including expected volatility, expected dividend yield, expected term and the risk-free rate of return.

 

Prior to the Company’s IPO, given the absence of a public trading market, the Company’s Board of Directors considered numerous objective and subjective factors to determine the fair value of the common stock at each grant date. These factors included, but were not limited to: (i) contemporaneous third-party valuations of common stock; (ii) the prices for preferred stock sold to outside investors; (iii) the rights and preferences of preferred stock relative to common stock; (iv) the lack of marketability of the Company’s common stock; (v) developments in the business; and (vi) the likelihood of achieving a liquidity event, such as an IPO or sale of the business, given prevailing market conditions. The methodology to determine the fair value of our common stock included estimating the fair value of the enterprise using the “backsolve” method, which is a market approach that assigns an implied enterprise value by accounting for all share class rights and preferences based on the latest round of financing. The total equity value implied was then applied in the context of an option pricing model to determine the value of each class of our shares.

 

Future awards will be based on the closing price of the Company’s common stock as reported on the date of grant to determine the fair value of the award.

 

10
 

 

Emerging Growth Company and Smaller Reporting Company Status

 

The Company is an emerging growth company (“EGC”) as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) and may take advantage of reduced reporting requirements that are otherwise applicable to public companies. Section 107 of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with those standards. The Company has elected to use the extended transition period for complying with new or revised accounting standards.

 

From time to time, new accounting pronouncements are issued by the Financial Accounting Standards Board (“FASB”) or other standard setting bodies and adopted by the Company as of the specified effective date. Unless otherwise discussed, the impact of recently issued standards that are not yet effective will not have a material impact on the Company’s financial position or results of operations upon adoption.

 

Recent Accounting Pronouncements

 

Recently Adopted Accounting Pronouncements

 

In June 2018, the FASB issued Accounting Standards Updates (“ASU”) No. 2018-07, Improvements to Nonemployee Share-Based Payment Accounting (ASU 2018-07). The standard simplifies the accounting for share-based payments granted to nonemployees for goods and services and aligns most of the guidance on such payments to the nonemployees with the requirements for share-based payments granted to employees. ASU 2018-07 is effective for the Company for annual reporting periods beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020, with early adoption permitted. The guidance should be applied to new awards granted after the date of adoption. The Company adopted this new standard on January 1, 2020 and the adoption of this standard did not have an impact on its condensed interim financial statements.

 

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820), Disclosure Framework — Changes to the Disclosure Requirements for Fair Value Measurement (ASU 2018-13). The standard eliminates, adds and modifies certain disclosure requirements for fair value measurements. Entities will no longer be required to disclose the amount of and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, but public companies will be required to disclose the range and weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The standard is effective for annual reporting periods beginning after December 15, 2019, and for interim periods within those periods. The Company adopted this new standard on January 1, 2020, with no material impact on its condensed interim financial statements.

 

-In November 2016, the FASB ASU 2016-18, Statement of Cash Flows (Topic 230): Restricted Cash (ASU 2016-18), which requires that a statement of cash flows explain the change during the period in the total of cash, cash equivalents and restricted cash. Therefore, amounts described as restricted cash should be included with cash and cash equivalents when reconciling the beginning of period and end of period amounts shown on the statement of cash flows. The Company adopted this guidance on January 1, 2019, and it did not have an impact on its financial results, but it did result in a change in the presentation of restricted cash and cash equivalents within the statements of cash flows.

 

Recent Accounting Pronouncements Not Yet Adopted

 

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). The guidance requires lessees to recognize assets and liabilities related to long-term leases on the balance sheet and expands disclosure requirements regarding leasing arrangements. In July 2018, the FASB issued additional guidance, which offers a transition option to entities adopting the new lease standards, and a package of practical expedients an entity can elect to utilize to reduce the level of effort required for adoption. Under the transition option, entities can elect to apply the new guidance using a modified retrospective approach at the beginning of the year in which the new lease standard is adopted, rather than to the earliest comparative period presented in their financial statements. In November 2019, the FASB issued ASU 2019-10, Leases (Topic 842) (ASU 2019-10), deferring the effective date for the Company for fiscal years beginning after December 15, 2020 and interim periods within fiscal years beginning after December 15, 2021. In June 2020, the FASB issued ASU 2020-05, Leases (Topic 842) (ASU 2020-05), which further defers the effective date for the Company for fiscal years beginning after December 15, 2021 and interim periods within fiscal years beginning after December 15, 2021. Early adoption is permitted. The Company plans to adopt this new standard effective January 1, 2022. The Company is currently evaluating its contracts to determine whether there will be a significant impact from the adoption of this guidance on its condensed interim financial statements.

 

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments – Credit Losses (ASU 2016-13), which requires the measurement of expected credit losses for financial instruments carried at amortized cost, such as accounts receivable, held at the reporting date based on historical experience, current conditions and reasonable forecasts. The main objective of this standard is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financing Instruments – Credit Losses (ASU 2018-19), which included an amendment of the effective date. The standard is effective for the Company for annual reporting periods beginning after December 15, 2021, and for interim periods within those periods. Early adoption is permitted. The Company plans to adopt this new standard on January 1, 2022 and does not believe that adoption will have a significant impact on its condensed interim financial statements.

 

11
 

 

In December 2019, the FASB issued ASU No. 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (ASU 2019-12), which simplifies the accounting for income taxes, and is effective on a prospective basis for annual reporting periods beginning after December 15, 2021 and for interim periods within fiscal years beginning after December 15, 2022, with early adoption permitted. The Company plans to adopt this new standard on January 1, 2022 and does not believe that adoption will have a significant impact on its condensed interim financial statements.

 

In August 2020, the FASB issued ASU No. 2020-06, Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (Subtopic 815-40) (ASU 2020-06): Accounting for Convertible Instruments and Contracts in an Entity, which simplifies the accounting for certain financial instruments with characteristics of liabilities and equity, including convertible instruments and contracts on an entity’s own equity. The updated guidance is effective on a prospective basis for annual reporting periods beginning after December 15, 2023 and for interim periods within those periods. Early adoption is permitted. The Company has not yet determined the impact that this new standard will have on its financial position and results of operations.

 

3. Fair Value Measurements

 

As of September 30, 2021 and December 31, 2020, the Company held $16.1 million and $1.7 million, respectively, in a money market account.

 

The following tables summarize the Company’s financial assets and liabilities measured at fair value on a recurring basis by level within the fair value hierarchy as of September 30, 2021 and December 31, 2020 (in thousands):

 

   Fair Value Measurements at September 30, 2021 using: 
Assets:  Level 1   Level 2   Level 3   Total 
Money market account  $16,141   $-   $-   $16,141 
   $16,141   $-   $-   $16,141 

 

   Fair Value Measurements at December 31, 2020 (audited) using: 
Assets:  Level 1   Level 2   Level 3   Total 
Money market account  $1,703   $-   $-   $1,703 
   $1,703   $-   $-   $1,703 

 

Liabilities:                
Derivative liability – 2020
Convertible Notes
  $-   $-   $856   $856 
   $-   $-   $856   $856 

 

12
 

 

The change in the fair value of the derivative liability is summarized below (in thousands):

 

    2021   2020 
    Derivative Liability at
   

September 30,

2021

  

December 31,

2020

(audited)

 
          
Fair value at beginning of the period   $856   $- 
Initial fair value of instruments issued    363    856 
Change in fair value of instruments    (118)   - 
Conversion upon IPO    (1,101)   - 
Fair value at end of the period   $-   $856 
            

 

The derivative liability in the table above relates to the 2020 and 2021 Convertible Notes and represents the fair value of the redemption-like contingent conversion feature. The Company calculated the fair value of the derivative liability using a probability weighted discounted cash flow analysis. The inputs used to determine the estimated fair value of the derivative were based primarily on the probability of an underlying event occurring that would trigger the embedded derivative and the timing of such event. The Company’s derivative liability was measured at fair value on a recurring basis and was classified as a Level 3 liability. The Company recorded subsequent adjustments to reflect the increase or decrease in estimated fair value at each reporting date in other income (expense), net in the condensed statements of operations (see Note 5, Convertible Notes).

 

There were no transfers among Level 1, Level 2 or Level 3 categories during any of the periods presented. The Company had no other financial assets or liabilities that were required to be measured at fair value on a recurring basis.

 

4. Accrued Expenses

 

Accrued expenses consisted of the following (in thousands):

 

   September 30,   December 31, 
   2021  

2020

(audited)

 
Clinical trials  $377   $171 
Research and development   14     
Professional services   80     
Interest       101 
Personnel   13    39 
Other   8     
Total accrued expenses  $492   $311 

 

Accrued research and development expenses were primarily related to clinical trials and materials.

 

5. Convertible Notes

 

In March 2020, the Company entered into a note purchase agreement for the issuance of up to $4.0 million of convertible promissory notes, which, if not converted, had an initial maturity date of March 31, 2021. The Company entered into a series of convertible note payable agreements (the “2020 Convertible Notes”) for aggregate borrowings of $3.0 million. The 2020 Notes bore interest at the rate of 5% per annum and could not be prepaid prior to the maturity date unless approved in writing by the Company and requisite holders.

 

The terms of the 2020 Convertible Notes provided for automatic conversion into equity shares in the next equity financing round with total proceeds of not less than $10.0 million (a “Qualified Financing’), at a conversion price per share equal to 80% of the price per share paid by investors purchasing such equity securities in a Qualified Financing. For purposes of the 2020 Convertible Notes, equity securities meant the Company’s common stock, preferred stock or any securities providing for rights to purchase the Company’s common stock, preferred stock or securities convertible into or exchangeable for the Company’s common stock or preferred stock issued in the Qualified Financing. If the Company consummated a Change of Control prior to a Qualified Financing, the Company would repay each holder in cash an amount equal to the greater of (a) two times (2x) the entire outstanding principal balance of the 2020 Convertible Notes or (b) the amount the holder would receive if the 2020 Convertible Notes had been converted into shares of the Company’s Series B convertible preferred stock immediately prior to the consummation of the Change in Control, at a conversion price equal to the Series B convertible preferred stock Original Issue Price.

 

13
 

 

On March 1, 2021, the Company entered into an amendment to the 2020 Convertible Notes which extended the maturity date of the 2020 Convertible Notes from March 31, 2021 to October 30, 2021 and provided for the conversion of the 2020 Convertible Notes into shares of the Company’s common stock upon a Qualified Financing that is an IPO. No other terms of the 2020 Convertible Notes were amended. This amendment was accounted for as a troubled debt restructuring pursuant to FASB ASC Topic 470-60, “Troubled Debt Restructurings by Debtors.” As the future undiscounted cash flows of the 2020 Convertible Notes were greater than their carrying amount, the carrying amount was not adjusted and no gain was recognized as a result of the modification of terms.

 

The Company determined that the redemption features contained rights and obligations for conversion were contingent upon a potential future financing event or a change in control. Thus, the embedded redemption features were bifurcated from the face value of the notes and accounted for as a derivative liability to be remeasured at the end of each reporting period. The fair value of the derivative liability at September 30, 2021 and December 31, 2020 was $0 and $856,000, respectively. Debt issuance costs were $22,000 at December 31, 2020. There were no debt issuance costs as of September 30, 2021. The derivative liability was subject to fair value remeasurement at the end of each reporting period. The debt discount and debt issuance costs were being amortized to interest expense using the effective interest method over the expected term of the 2020 Convertible Notes. For the three and nine months ended September 30, 2021, the Company recognized $18,000 and $379,000 for amortization of the debt discount and debt issuance costs, respectively. For the three and nine months ended September 30, 2020, the Company recognized $153,000 and $294,000 for the amortization of the debt discount and debt issuance costs, respectively. This amortization expense is recognized as interest expense in the condensed statements of operations. The effective interest rate of the 2020 Convertible Notes was 0% at September 30, 2021 and 30.8% at December 31, 2020, compared to the stated rate of 5% per annum. The effective interest rate immediately prior to the conversion of the Convertible Notes resulting from the Company’s IPO was 8.6% per annum. As a result, the Company’s reported interest expense was significantly higher than the contractual cash interest payments. During the three and nine months ended September 30, 2021, the Company recognized interest expense in the condensed statements of operations of $25,000 and $101,000, respectively, related to the 2020 Convertible Notes. During the three and nine months ended September 30, 2020, the Company recognized interest expense in the condensed statements of operations of $33,000 and $63,000, respectively, related to the 2020 Convertible Notes.

 

In April 2021, the Company entered into a note purchase agreement and a series of convertible note payable agreements (the “2021 Convertible Notes,” together with the 2020 Convertible Notes, the “2020 and 2021 Convertible Notes”) for aggregate borrowings of $2.0 million. Outstanding borrowings under the 2021 Convertible Notes and accrued interest were due in April 2022, if not previously converted. The 2021 Notes bore interest at the rate of 5% per annum. Pursuant to the 2021 Convertible Notes, the outstanding principal and accrued interest are automatically convertible into equity shares in a Qualified Financing at a conversion price per share equal to 87.5% of the price per share paid by investors purchasing such equity securities in a Qualified Financing.

 

The Company determined that these redemption features in the 2021 Convertible Notes contained rights and obligations for conversion that were contingent upon a potential future financing event or a change in control. Thus, the embedded redemption features were bifurcated from the face value of the note and accounted for as a derivative liability to be remeasured at the end of each reporting period. Upon issuance of the notes, the Company recorded the fair value of the derivative liability of $363,000 and debt issuance costs of $23,000, with the offsetting amount being recorded as a debt discount. The discount and debt issuance costs were amortized to interest expense using the effective interest method over the expected term of the 2021 Convertible Notes. For the three and nine months ended September 30, 2021, the Company recognized $141,000 and $318,000, respectively, for the amortization of the debt discount and debt issuance costs as interest expense in the condensed statements of operations. The effective interest rate immediately prior to the conversion of the 2021 Convertible Notes resulting from the Company’s IPO was 46.5% per annum compared to the stated rate of 5% per annum. During the three and nine months ended September 30, 2021, the Company recognized interest expense in the condensed statements of operations of $17,000 and $38,000, respectively, relating to the 2021 Convertible Notes.

 

The Company completed an IPO on August 30, 2021, which triggered the automatic conversion of the outstanding Convertible Notes plus accrued interest into an aggregate of 708,820 units. Each unit consisted of (a) one share of common stock and (b) one five-year warrant to purchase one share of common stock at an exercise price equal to $10.80 per share (Note 7). Upon conversion of the 2020 and 2021 Convertible Notes, the outstanding principal, including debt discount and debt issuance costs for those Convertible Notes of $5.3 million, was derecognized into stockholders’ equity. The unamortized debt discount totaling $78,000 was recognized as a loss on extinguishment of debt and is included in loss (gain) on loan extinguishment in the Company’s condensed statements of operations.

 

6. Promissory Note

 

On April 22, 2020, the Company entered into a promissory note with Silicon Valley Bank that provided for the receipt by the Company of loan proceeds of $140,000 (the “PPP Loan”), with an interest rate of 1.0% per annum, pursuant to the Paycheck Protection Program under the Coronavirus Aid, Relief and Economic Security Act (the “CARES Act”). Under certain conditions, the loan and accrued interest were forgivable, including if the loan proceeds were used for eligible purposes, including payroll, benefits, rent and utilities, and maintaining payroll levels. In October 2020, the Paycheck Protection Program Flexibility Act of 2020 extended the deferral period for borrower payments of principal, interest, and fees on all PPP loans from 6 months to 10 months. As of December 31, 2020, payments were deferred for 10 months. If not forgiven earlier, the PPP Loan was to mature on April 22, 2022. The PPP Loan contains events of default and other provisions customary for a loan of this type. The Company recorded the PPP Loan as a promissory note in the December 31, 2020 balance sheet as both a current and non-current liability.

 

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On February 6, 2021, the Company received notification and confirmation from Silicon Valley Bank that its PPP loan and related accrued interest were forgiven in their entirety by the U.S. Small Business Administration and automatically cancelled. During the nine-months ended September 30, 2021, the $140,000 was recorded to loss (gain) on loan extinguishment in the condensed statements of operations.

 

7. Capital Stock

 

Common Stock

 

On August 25, 2021, the Company’s Registration Statement on Amendment No. 4 to the Form S-1 relating to its IPO was declared effective by the SEC. In connection with the IPO, the Company issued and sold an aggregate of 1,850,000 units at a price of $9.00 per unit. Each unit consisted of (a) one share of common stock and (b) one warrant to purchase one share of common stock at an exercise price equal to $10.80 per share, which is exercisable for a period of five years after the issuance date. The Company received net proceeds of $14.6 million from the IPO, after deducting underwriting discounts and commissions of $1.3 million and other costs incurred with the offering of $0.8 million. Upon the closing of the IPO, all of the 3,535,469 outstanding shares of the Company’s convertible preferred stock automatically converted into 3,535,469 shares of common stock and the outstanding 2020 and 2021 Convertible Notes, including accrued but unpaid interest, representing $5.3 million, converted to 708,820 units, which consisted of (a) one share of common stock and (b) one five-year warrant to purchase one share of common stock at an exercise price equal to $10.80 per share. Upon completion of the offering on August 30, 2021, the Company was authorized to issue 250,000,000 shares of common stock, par value of $0.0001 per share and 15,000,000 shares of preferred stock, par value of $0.0001 per share.

 

Convertible Preferred Stock

 

Issued and outstanding convertible preferred stock and its principal terms as of December 31, 2020 (audited) were as follows (in thousands, except share and per share amounts):

 

Preferred Series  Shares Authorized   Shares
Issued and Outstanding
   Aggregate Liquidation Value   Net
Carrying
Value
 
Series A-1   3,542,669    708,533   $660   $639 
Series A-2   3,546,095    709,219    1,150    1,099 
Series A-3   2,660,230    532,046    2,227    2,166 
Series B   12,611,461    1,585,671    8,745    8,547 
Total   22,360,455    3,535,469   $12,782   $12,451 

 

The Company classified its convertible preferred stock as mezzanine equity on the condensed balance sheets as the shares were contingently redeemable upon deemed liquidation events, such as a change of control.

 

In August 2021, immediately prior to the completion of the IPO and after giving effect to the 1-5 reverse stock split, all outstanding shares of the Company’s convertible preferred stock were automatically converted into 3,535,469 shares of common stock. In August 2021, the Company filed its Sixth Amended and Restated Articles of Incorporation with the Secretary of State of the State of Delaware, authorizing the issuance of 15,000,000 shares of preferred stock. There were no shares of preferred stock outstanding as of September 30, 2021.

 

15
 

 

8. Commitments and Contingencies

 

Contingencies

 

From time to time, the Company may become involved in legal proceedings arising in the ordinary course of business. The Company was not subject to any material legal proceedings during the nine months ended September 30, 2021 and no material legal proceedings are currently pending or threatened.

 

Indemnification

 

In the ordinary course of business, the Company enters into agreements that may include indemnification provisions. As permitted under Delaware law and in accordance with its bylaws, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving in such capacity. The Company is also party to indemnification agreements with its officers and directors. In some cases, the indemnification will continue after the termination of the agreement. The maximum potential amount of future payments that the Company could be required to make under these provisions is not determinable. The Company has never incurred material costs to defend lawsuits or settle claims related to these indemnification provisions. The Company is not currently aware of any indemnification claims. Accordingly, the Company has not recorded any liabilities for these indemnification rights and agreements as of September 30, 2021 and December 31, 2020.

 

Operating Leases

 

The Company leases its headquarters in Los Altos, California under a one-year operating lease agreement which expires on May 31, 2022. Rent expense was $18,000 and $11,000 for the three months ended September 30, 2021 and 2020, respectively. Rent expense was $42,000 and $33,000 for the nine months ended September 30, 2021 and 2020, respectively.

 

Coronavirus Pandemic

 

In December 2019, a novel strain of coronavirus, which causes the disease known as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread globally. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The ongoing COVID-19 global and national health emergency has caused significant disruption in the international and U.S. economies and financial markets. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability.

 

In response to public health directives and orders and to help minimize the risk of the virus to employees, the Company has taken precautionary measures, including implementing work-from home and/or hybrid work policies for employees. The COVID-19 global pandemic has also negatively affected, and the Company expects it will continue to negatively affect, our clinical studies. For example, we have faced challenges in conducting our Phase 3 clinical trial, including recruiting subjects and accommodating patient visits. Additionally, the Company’s service providers and their operations may be disrupted, temporarily closed or experience worker or supply shortages, which could result in additional disruptions or delays in shipments of purchased materials or the continued development of our product candidates. To date, the Company has not suffered material supply chain disruptions.

 

The Company is not able to estimate the duration of the pandemic and the potential impact on its business. As the global pandemic of COVID-19 continues to evolve, it could result in significant long-term disruption of global financial markets, reducing the Company’s ability to raise additional capital when needed and on acceptable terms, if at all, which could negatively affect liquidity. The extent to which the COVID-19 pandemic impacts the Company’s clinical development and regulatory efforts will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the ultimate geographic spread of the disease, the duration of the outbreak, travel restrictions, quarantines and social distancing requirements in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the virus. The Company continues to monitor the COVID-19 situation closely.

 

9. Equity Incentive Plan-Stock-Based Compensation Expense and Common Stock Warrants

 

2021 Omnibus Equity Incentive Plan

 

On July 19, 2021, the Company’s Board of Directors adopted the RenovoRx, Inc. 2021 Omnibus Equity Incentive Plan (the “2021 Plan”). The 2021 Plan, which became effective immediately prior to the closing of the IPO, provides for the grant of incentive stock options (“ISO”), non-statutory stock options (“NSO”), restricted stock, restricted stock units, stock appreciation rights, and other stock-based awards to selected employees, directors, and consultants. The Company initially reserved 2,175,000 shares of common stock, including the addition of 20,401 common shares available pursuant to the Amended and Restated 2013 Equity Incentive Plan (the “2013 Plan”). The Company’s 2013 Plan was terminated immediately prior to the closing of the IPO; however, shares subject to awards granted under the 2013 Plan will continue to be governed by the 2013 Plan. Shares subject to awards granted under the 2013 Plan that are repurchased by, or forfeited to, the Company will also be reserved for issuance under the 2021 Plan. The 2021 Plan provides an annual increase on January 1, beginning on January 1, 2022, during the initial ten-year term of the 2021 Plan, equal to the lesser of (A) three percent (3%) of the shares outstanding (on an as-converted basis) on the final day of the immediately preceding calendar year and (B) such lesser number of shares as determined by the Board; provided that shares of common stock issued under the 2021 Plan with respect to an Exempt Award will not count against the share limit. The term “Exempt Award” means (i) an award granted in assumption of, or in substitution for, outstanding awards previously granted by another business entity acquired by the Company or any of its subsidiaries or with which the Company or any of its subsidiaries merge, or (ii) an award that a participant purchases at fair value. Since the date of adoption of the 2013 and 2021 Plans and through September 30, 2021, the Company has issued stock-based awards to its employees, directors, and consultants. In most instances, the options vest over a four-year period, subject to continuing service.

 

16
 

 

Options under the 2021 Plan may be granted for periods of up to 10 years and at exercise prices no less than 100% of the estimated fair value of the underlying shares of common stock on the date of grant as determined by the Board of Directors provided that the exercise price of an ISO and NSO granted to a 10% stockholder shall not be less than 110% of the estimated fair value of the shares on the date of grant. The 2021 Plan requires that options be exercised no later than 10 years after the grant. Options granted to employees generally vest ratably on a monthly basis over four years, subject to cliff vesting restrictions.

 

The following is a summary of the stock option award activity during the nine months ended September 30, 2021:

 

   Number of Stock Options   Weighted- Average Exercise Price   Weighted- Average Remaining Contractual Life   Aggregate Intrinsic Value 
           (in years)   (in thousands) 
Outstanding as of December 31, 2020   997,266   $0.42    5.84   $276 
Granted   238,269   $4.94    -    - 
Exercised   (332,932)  $0.27    -    - 
Forfeited   (23,625)  $0.67    -    - 
Expired   (83)  $0.70    -    - 
Outstanding as of September 30, 2021   878,895   $0.48    6.58   $3,817 
Exercisable as of September 30, 2021   603,086   $0.53    5.28   $3,323 
Vested and expected to vest as of September 30, 2021   878,895   $1.70    6.58   $3,817 

 

As of September 30, 2021, there was $364,000 of unrecognized stock-based compensation expense related to options granted but not yet amortized, which will be recognized over a weighted-average period of 2.36 years.

 

For the nine months ended September 30, 2021, the Company utilized the Black-Scholes option-pricing model for estimating the fair value of the stock option granted. The following table presents the assumptions and the Company’s methodology for developing each of the assumptions used:

 

    Nine Months Ended 
    September 30, 2021 
Volatility   41.66% – 42.13%
Expected life (years)   5.0010.0 
Risk-free interest rate   0.62% – 1.00%
Dividend rate   %

 

  Volatility—The Company estimates the expected volatility of its common stock at the date of grant based on the historical volatility of comparable public companies over the expected term.
     
  Expected life—The expected life is estimated as the contractual term.
     
  Risk-free interest rate—The risk-free rate for periods within the estimated life of the stock award is based on the U.S. Treasury yield curve in effect at the time of grant.
     
  Dividend rate—The assumed dividend yield is based upon the Company’s expectation of not paying dividends in the foreseeable future.

 

17
 

 

The following table summarizes the components of stock-based compensation expense recognized in the Company’s condensed statements of operations during the three and nine months ended September 30, 2021 and 2020 (in thousands):

 

                     
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2021   2020   2021   2020 
Research and development  $2   $5   $5   $19 
General and administrative   4    2    16    6 
Total stock-based compensation expense  $6   $7   $21   $25 

 

Common Stock Warrants

 

In connection with the IPO, the Company issued warrants to purchase 3,035,195 shares of the Company’s common stock, of which, warrants to purchase 198,875 shares of the Company’s common stock expire on August 25, 2026 and warrants to purchase 2,836,320 shares of the Company’s common stock expire on August 31, 2026. See Note 1, Initial Public Offering.

 

The following is a summary of the common stock warrant activity during the nine months ended September 30, 2021:

 

   Shares Issuable Upon Exercise of Outstanding Warrants  

Weighted-

Average

Exercise

Price

  

Weighted-

Average

Remaining

Contractual

Life

  

Aggregate

Intrinsic

Value

 
           (in years)   (in thousands) 
Outstanding as of December 31, 2020   -   $-    -   $- 
Issued   3,035,195   $9.81    -    - 
Exercised   (525,200)  $5.10    -    - 
Expired   -   $-    -    - 
Outstanding as of September 30, 2021   2,509,995   $10.80    4.92   $27,108 

 

10. Income Taxes

 

The Company had no income tax expense for the three and nine months ended September 30, 2021 and 2020. During the nine months ended September 30, 2021 and 2020, the Company had a net operating loss (“NOL”) for each period that generated deferred tax assets for NOL carryforwards. Deferred income tax assets and liabilities are recognized for temporary differences between the financial statements and income tax carrying values using tax rates in effect for the years such differences are expected to reverse. Due to uncertainties surrounding our ability to generate future taxable income and consequently realize such deferred income tax assets, the Company has determined that it is more-likely-than-not that these deferred tax assets will not be realized. Accordingly, the Company has established a full valuation allowance against its deferred tax assets as of September 30, 2021.

 

The Company’s policy is to recognize any interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of September 30, 2021 and December 31, 2020, the Company had no accrued interest or penalties related to uncertain tax positions.

 

11. Net Loss Per Share

 

The following table sets forth the computation of the basic and diluted net loss per share (in thousands, except share and per share data):

 

   2021   2020   2021   2020 
   Three Months Ended   Nine Months Ended 
   September 30,   September 30, 
   2021   2020   2021   2020 
Numerator:                    
Net loss  $(1,511)  $(1,096)  $(3,969)  $(2,920)
Denominator:                    
Weighted-average shares of common stock outstanding used in the calculation of basic and diluted net loss per share   5,620,135    2,263,589    3,640,988    2,233,645 
Net loss per share, basic and diluted  $(0.27)  $(0.48)  $(1.09)  $(1.31)

 

Since the Company had a net loss for all periods presented, basic net loss per share is the same as diluted net loss per share for all periods as the inclusion of all common stock equivalents outstanding would have been anti-dilutive. Potentially dilutive securities that were not included in the diluted per share calculations because they would be anti-dilutive were as follows:

 

   As of September 30, 
   2021   2020 
Options to purchase common stock   878,895    1,012,075 
Convertible preferred stock       3,535,469 
Total   878,895    4,547,544 

 

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12. Related Party Transactions

 

In January 2018, the Company entered into a consulting agreement with one of the Company’s co-founders, Dr. Ramtin Agah, pursuant to which Dr. Agah provides consulting services as the Company’s Chief Medical Officer by overseeing Company-sponsored clinical trials. The Agreement, which was amended on September 1, 2019, and November 11, 2021, continues in force for as long as Dr. Agah is providing consulting services and may be terminated by either party on thirty (30) days’ notice. Dr. Agah was awarded (i) options to purchase 60,000 shares of the Company’s common stock in May 2017, which have vested, (ii) options to purchase 40,000 shares of the Company’s common stock in July 2018, of which 25% vested after one year and the remainder vests ratably over the 36 month period ending July 2022, (iii) options to purchase 20,000 shares of the Company’s common stock in June 2021, which vest ratably over 24 months from the vesting commencement date of May 14, 2023, and (iv) options to purchase of 52,203 shares of the Company’s common stock in September 2021, which vest ratably over 48 months from the vesting commencement date of August 26, 2021. In December 2018, Dr. Agah’s agreement was amended to provide that he would receive cash compensation of $4,000 per month for certain proctoring services, and in September 2019, his compensation was increased to $10,000 per month to compensate for additional services he was providing. Effective upon the completion of the IPO, Dr. Agah’s compensation was increased to $260,000 annually, based on Dr. Agah spending no less than 24 hours per week on Company matters. Consulting fees paid to Dr. Agah for the three months ending September 30, 2021 and 2020, were $42,000 and $30,000, respectively. Consulting fees paid to Dr. Agah for the nine months ending September 30, 2021 and 2020, were $102,000 and $90,000, respectively.

 

In July 2019, the Company entered into a consulting agreement with the Company’s then Chief Financial Officer , Paul Manners. In February 2020, the Company granted Mr. Manners an option to purchase 28,000 shares of the Company’s common stock, of which 25% were vested at the grant date and the remainder vested ratably over the following 18 months. The CFO Agreement was amended in December 2020 to increase Mr. Manners hourly rate to $150. Consulting fees paid to Mr. Manners for the three months ending September 30, 2021 and 2020, were $56,000 and $12,000, respectively. Consulting fees paid to Mr. Manners for the nine months ending September 30, 2021 and 2020, were $155,000 and $32,000, respectively. In August 2021, upon completion of the IPO, Mr. Manners stepped from his role and Christopher J. Lehman, was appointed Chief Financial Officer.

 

Kamran Najmabadi, another co-founder of the Company, has served as our consulting technical engineering advisor on manufacturing and intellectual property matters since January 2020. Mr. Najmabadi served as the Company’s Chief Executive Officer from its inception in December 2009 until January 2013; Chief Technical and Operations Officer from January 2013 until January 2019; and Chief Technology Officer from January 2019 to January 2020. He currently receives cash compensation of $3,000 per quarter.

 

13. Subsequent Events

 

The Company has evaluated all events occurring through November 15, 2021, the date on which the unaudited condensed interim financial statements were issued. Since September 30, 2021, the following material subsequent events occurred:

 

In October 2021, 66,923 non-qualified stock options were granted to members of the Board of Directors.

 

In October 2021, the Company filed its Form S-8, Registration Statement Under the Securities Act of 1933 with the SEC.

 

In November 2021, the Company’s Board of Directors approved, and we entered into the following agreements: (i) a Confirmatory Employment Letter with Shaun R. Bagai, our Chief Executive Officer, (ii) an Amendment to our Consulting Agreement with Dr. Ramtin Agah, our Chief Medical Officer, (iii) Change in Control and Severance Agreements with Mr. Bagai and Dr. Agah. The Board of Directors also adopted a Key Service Provider Incentive Compensation Plan, which allows our Compensation Committee to determine which employees or service providers may receive awards under the plan, establish target awards and performance goals for those individuals, and determine the appropriate incentive awards to be granted. See Item 5. Other Information.

 

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Item 2: Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Unless the context otherwise requires, all references in this section to the “Company,” “we,” “us,” or “our” refer to the business of RenovoRx, Inc. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with our unaudited interim condensed financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q and our final prospectus, dated August 25, 2021, filed with the SEC pursuant to Rule 424(b)(4) under the Securities Act of 1933, as amended (the “Securities Act”).

 

This discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended, that reflect our plans, estimates, and beliefs that involve risks and uncertainties, including those described in the section titled “Special Note Regarding Forward Looking Statements.” Our actual results and the timing of selected events could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below and those set forth under the section titled “Risk Factors” included elsewhere in this report.

 

Overview

 

We are a late-stage clinical biopharmaceutical company focused on developing therapies for the local treatment of solid tumors. Our therapy platform, RenovoRx Trans-Arterial Micro-Perfusion, or RenovoTAMP™ utilizes approved chemotherapeutics with validated mechanisms of action and well-established safety and side effect profiles with the goal of increasing their efficacy, improving their safety, and widening their therapeutic window. RenovoTAMP combines our patented FDA cleared delivery system, RenovoCath®, with small molecule chemotherapeutic agents that can be forced across the vessel wall using pressure, targeting these anti-cancer drugs locally to the solid tumors. Our first product candidate, RenovoGemTM, is a drug and device combination consisting of intra-arterial gemcitabine and RenovoCath. FDA has determined that RenovoGem will be regulated as, and if approved we expect will be reimbursed as, a new oncology drug product. We have secured FDA Orphan Drug Designation for RenovoGem in our first two indications: pancreatic cancer and cholangiocarcinoma, or CCA. We have completed Phase 1/2 and observational registry studies in locally advanced pancreatic cancer, or LAPC, demonstrating safety and a median overall survival rate of 27.9 months in patients treated with RenovoGem and radiation versus expected survival rate (historical control) of 12-15 months in patients only receiving intravenous (IV) systemic chemotherapy dosed at 1,000mg/m2. RenovoGem is currently being evaluated in a Phase 3 registration Investigational New Drug, or IND, clinical trial and we expect to report data from a planned interim data readout in the second half of 2022. As we prepared the FDA Pre-Investigational New Drug, or Pre-IND, application for our second indication, hilar cholangiocarcinoma (cancer that occurs in the bile ducts that lead out of the liver and join with the gallbladder, also called hilar cholangiocarcinoma, or HCCA), we discovered an alternative approach to treat this patient population with our therapy platform that we believe may be more efficient. We have launched animal studies to explore this alternative approach and will file the Pre-IND application for our second indication once we have validated the preferable approach for our therapy for HCCA patients. We anticipate completing these preclinical studies for the alternative treatment pathway for HCCA during the first half of 2022 and launching the appropriate study in 2023. In addition, we may evaluate RenovoGem in other indications, potentially including locally advanced lung cancer, locally advanced uterine tumors, and glioblastoma, and develop other chemotherapeutic agents for intra-arterial delivery via RenovoCath.

 

Since our inception, we have devoted substantially all of our efforts to developing our cancer therapy platform and product candidates, raising capital and organizing and staffing our company. To date, we have financed our operations with proceeds from the issuance of convertible preferred stock and convertible notes. Through July 31, 2021, we have financed our operations primarily through issuance of convertible preferred stock with net proceeds of $11.8 million, including $5.0 million through the issuance of convertible notes and a loan of $140,000 pursuant to the Paycheck Protection Program under the CARES Act, which was forgiven in February 2021. In August 2021, we completed our IPO with aggregate gross proceeds of $16.7 million. We paid underwriting discounts and commissions of $1.3 million, and we also incurred expenses of $0.8 million in connection with the offering. As a result, the net offering proceeds to us, after deducting underwriting discounts and commissions and offering expenses, were $14.6 million.

 

We have incurred significant operating losses and generated negative cash flows from operations since our inception. As of September 30, 2021, we had cash and cash equivalents of $17.7 million. We also had net losses of $1.5 million and $4.0 million for the three and nine months ended September 30, 2021, respectively and $1.1 million and $2.9 million for the three and nine months ended September 30, 2020, respectively. As of September 30, 2021, we had an accumulated deficit of $18.9 million. We expect to continue to incur significant expenses, increasing operating losses and negative cash flows from operations in 2021 and for the foreseeable future. We do not expect to generate revenues from product sales unless and until we successfully complete development and obtain regulatory approval for one or more product candidates. We expect that our expenses will increase substantially in connection with our ongoing research and development activities, particularly as we:

 

  Advance clinical development of RenovoGem and our platform technology by continuing to enroll patients in our ongoing TIGeR-PaC Phase 3 clinical trial, expanding the number of clinical trials including our planned clinical trial in HCCA, and advancing RenovoGem through preclinical and clinical development in additional indications;
     
  Hire additional research, development, engineering, and general and administrative personnel;
     
  Maintain, expand, enforce, defend, and protect our intellectual property portfolio; and
     
  Expand our operational, financial and management systems and increase personnel, including personnel to support our clinical development, manufacturing and commercialization efforts and our operations as a public company.

 

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In addition to the variables described above, if and when any of our product candidates successfully complete development, we will incur substantial additional costs associated with establishing a sales, marketing, medical affairs and distribution infrastructure to commercialize products for which we may obtain marketing approval, regulatory filings, marketing approval, and post-marketing requirements, in addition to other commercial costs. We cannot reasonably estimate these costs at this time.

 

As a result, we will need significant additional funding to support our continuing operations. Until such time, if ever, as we can generate substantial product revenue, we expect to finance our cash needs through equity issuances, debt financings and collaborations, licenses or other similar arrangements. We currently have no credit facility or committed sources of capital. To the extent that we raise additional capital through the future sale of equity or debt, the ownership interests of our stockholders will be diluted and the terms of these securities may include liquidation or other preferences that adversely affect the rights of our existing common stockholders. If we raise additional funds through the issuance of debt securities, these securities could contain covenants that would restrict our operations. We may require additional capital beyond our currently anticipated amounts and additional capital may not be available on reasonable terms, or at all. If we raise additional funds through collaboration arrangements or other strategic transactions in the future, we may have to relinquish valuable rights to our technologies or future revenue streams or grant licenses on terms that may not be favorable to us. If we are unable to raise additional funds through equity or debt financings when needed, we may be required to delay, limit, reduce or terminate development or future commercialization efforts.

 

Impact of COVID-19

 

In December 2019, a novel strain of coronavirus, which causes the disease known as COVID-19, was reported to have surfaced in Wuhan, China. Since then, COVID-19 has spread globally. In March 2020, the World Health Organization declared the COVID-19 outbreak a pandemic. The ongoing COVID-19 pandemic has caused significant disruption in the international and U.S. economies and financial markets. The spread of COVID-19 has caused illness, quarantines, cancellation of events and travel, business and school shutdowns, reduction in business activity and financial transactions, labor shortages, supply chain interruptions and overall economic and financial market instability.

 

In response to public health directives and orders and to help minimize the risk of the virus to employees, we have taken precautionary measures, including implementing work-from home and/or hybrid work policies for our employees. The COVID-19 pandemic also has negatively affected, and we expect will continue to negatively affect, our clinical studies. For example, we have faced challenges in conducting our Phase 3 clinical trial, including recruiting subjects and accommodating patient visits. Additionally, our service providers and their operations may be disrupted, temporarily closed or experience worker or supply shortages, which could result in additional disruptions or delays in shipments of purchased materials or the continued development of our product candidates. To date, we have not suffered material supply chain disruptions.

 

We are not able to estimate the duration of the pandemic and the potential impact on our business. As the global pandemic of COVID-19 continues to evolve, it could continue to result in significant long-term disruption of global financial markets, reducing our ability to raise additional capital when needed and on acceptable terms, if at all, which could negatively affect our liquidity. The extent to which the COVID-19 pandemic impacts our clinical development and regulatory efforts will depend on future developments that are highly uncertain and cannot be predicted with confidence, such as the duration of the outbreak, vaccine and infection rates, new travel restrictions, quarantines and social distancing requirements in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the virus. We will continue to monitor the COVID-19 situation closely.

 


Components of Our Results of Operations

 

Revenue

 

We have not generated any revenue from product sales and do not expect to generate any revenue from the sale of products for several years, if at all. If our development efforts for our current or future product candidates are successful and result in marketing approval or collaboration or license agreements with third parties, we may generate revenue in the future from a combination of product sales or payments from collaboration or license agreements.

 

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Operating Expenses

 

Research and Development

 

Research and development expenses consist of costs related to the research and development of our platform technology. Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. We outsource a substantial portion of our clinical trial activities, utilizing the service of third-party clinical trial sites and contract research organizations to assist us with the execution of our clinical trials. In addition, we have FDA 510(k) clearance for the RenovoCath delivery device, which comprises part of the RenovoGem product. Accordingly, we are able to charge our clinical trial sites for the RenovoCath delivery device. To date, payments from clinical trial sites in consideration for RenovoCath delivery devices have been adequate to cover our direct manufacturing costs. Any payments we receive from clinical trial sites as consideration for use of RenovoCath delivery devices offset our research and development expenses. We expect our research and development expenses to increase for the foreseeable future as we continue the development of our product candidates and enroll subjects in our ongoing clinical Phase 3 trial, initiate future clinical trials and pursue regulatory approval of our product candidates. It is difficult to predict with any certainty the duration and costs of completing our current or future clinical trials of our product candidates or if, when or to what extent we will achieve regulatory approval and generate revenue from the commercialization and sale of our product candidates. The duration, costs and timing of clinical trials and other development of our product candidates will depend on a variety of factors, including uncertainties in clinical trial enrollment, timing and extent of future clinical trials, development of new product candidates and significant and changing government regulation. We may never succeed in achieving regulatory approval for any of our product candidates.

 

Our research and development expenses include:

 

  expenses incurred under agreements with clinical trial sites, contract research organizations, and consultants that conduct our clinical trials,
     
  costs of acquiring and developing clinical trial materials,
     
  personnel costs, including salaries, benefits, bonuses, and stock-based compensation for employees engaged in preclinical and clinical research and development,
     
  costs related to compliance with regulatory requirements,
     
  travel expenses, and
     
  facilities, insurance, and other allocated expenses which include direct and allocated expenses for rent, insurance and other general overhead costs.

 

Research and development costs are expensed as incurred. Costs for certain development activities, such as clinical trials and preclinical studies, are recognized based on evaluation of progress to completion of specific tasks using data such as subject enrollment, clinical site activations or information provided to us by third party vendors.

 

Due to the impact of the COVID-19 pandemic and work-from-home policies and other operational limitations mandated by federal, state, and local governments as a result of the pandemic, certain of our research and development activities have been delayed and may be further delayed until such operational limitations are lifted.

 

General and Administrative

 

General and administrative expenses consist of salaries, benefits, and stock-based compensation for personnel in executive, finance and administrative functions, professional services and associated costs related to accounting, tax, audit, legal, intellectual property and other matters, consulting costs, conferences, travel and allocated expenses for rent, insurance and other general overhead costs. Following the listing of our common stock on Nasdaq, we expect to continue to incur additional expenses as a result of operating as a public company, including costs to comply with the rules and regulations of the SEC and Nasdaq listing standards and increased expenses in the areas of insurance, professional services and investor relations. As a result, we expect our general and administrative expenses to increase for the foreseeable future. General and administrative expenses are expensed as incurred.

 

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Other Income (Expenses), Net

 

Interest Income (Expense) Net

 

Interest expense consists of charges relating to the amortization of the debt discount and debt issuance costs as well as interest on amounts outstanding on our convertible notes. In March 2020, we completed the offering of $3.0 million of convertible notes, the 2020 Convertible Notes, that provided for the automatic conversion into shares of our common stock and warrants at the closing of our IPO at a 20% discount to the public offering price of the units. In April 2021, we completed the offering of $2.0 million of convertible notes, the 2021 Convertible Notes, that provided for the automatic conversion into shares of our common stock and warrants at the closing of our IPO at a 12.5% discount to the public offering price of the units.

 

Interest income is earned from cash deposited in our money market account.

 

Other Income, Net

 

Other income, net primarily represents the mark-to-market adjustment on the derivative liability resulting from the 2020 and 2021 Convertible Notes. Upon the completion of our IPO in August 2021, the 2020 and 2021 Convertible Notes were converted into units consisting of (a) one share of common stock and (b) one five-year warrant to purchase one share of common stock at an exercise price equal to $10.80 per share.

 

Gain (Loss) on Loan Extinguishment

 

The gain (loss) on loan extinguishment represents the loss from the conversion and settlement of our 2020 and 2021 Convertible Notes as well as the gain on loan extinguishment from the forgiveness and cancellation of our PPP loan.

 

Income Tax Expense

 

We account for income taxes using the asset and liability method. Under this method, deferred income tax assets and liabilities are recorded based on the estimated future tax effects of differences between the financial statement and income tax basis of existing assets and liabilities. Deferred income tax assets and liabilities are recorded net and classified as noncurrent on the balance sheets. A valuation allowance is provided against our deferred income tax assets when their realization is not reasonably assured.

 

We are subject to income taxes in the federal and state jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In accordance with the authoritative guidance on accounting for uncertainty in income taxes, we recognize tax liabilities for uncertain tax positions when it is more likely than not that a tax position will not be sustained upon examination and settlement with various taxing authorities. Liabilities for uncertain tax positions are measured based upon the largest amount of benefit that is more-likely-than-not (greater than 50%) of being realized upon settlement. Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense.

 

On March 27, 2020, the CARES Act was enacted. The CARES Act includes several significant provisions for corporations, including the usage of net operating losses, interest deductions and payroll benefits. Corporate taxpayers may carryback net operating losses, or NOLs, originating during 2018 through 2020 for up to five years.

 

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Results of Operations

 

The following table summarizes the significant components of our results of operations for the periods presented (in thousands):

 

   Three Months Ended
September 30,
   Nine Months Ended
September 30,
 
   2021   2020   2021    2020 
Statements of Operations Data:                
Operating expenses:                    
Research and development  $767   $727   $1,938   $1,934 
General and administrative   628    183    1,377    631 
Total operating expenses   1,395    910    3,315    2,565 
Loss from operations   (1,395)   (910)   (3,315)   (2,565)
Other income (expense), net                    
Interest expense, net   (208)   (186)   (835)   (355)
Other income, net   170    -    119    - 
Gain (loss) on loan extinguishment   (78)   -    62    - 
Total other expense, net   (116)   (186)   (654)   (355)
Net loss  $(1,511)  $(1,096)  $(3,969)  $(2,920)

 

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

 

The following table summarizes our results of operations for the three months ended September 30, 2021 and 2020 (in thousands, except percentages):

 

   Three Months Ended
September 30,
   Change 
   2021    2020   $   % 
   (unaudited)         
Operating expenses:                    
Research and development  $767   $727   $40    6%
General and administrative   628    183    445    243%
Total operating expenses   1,395    910    485    53%
Loss from operations   (1,395)   (910)   (485)   53%
Other income (expense), net                    
Interest expense, net   (208)   (186)   (22)   12%
Other income, net   170    -    170    100%
Loss on loan extinguishment   (78)   -    (78)   100%
Total other expense, net   (116)   (186)   70    (38)%
Net loss  $(1,511)  $(1,096)  $(415)   38%

 

Research and Development

 

Research and development expenses were $0.8 million for the three months ended September 30, 2021, an increase of 6%, compared to $0.7 million for the prior year quarter. This increase was due to an increase in clinical development personnel costs, including an allocation of executive-level clinical support from general and administrative of $0.1 million. The increase was partially offset by reduced spending in leased software costs.

 

General and Administrative Expenses

 

General and administrative expenses were $0.6 million for the three months ended September 30, 2021, an increase of 243%, or $0.4 million, compared to $0.2 million for the prior year quarter. This increase was primarily due to higher professional and consulting costs related to preparing for our IPO in August 2021 of $0.2 million, including salaries and related benefits of $0.1 million, and insurance costs primarily related to the purchase of Directors and Officers Liability Insurance of $0.1 million.

 

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Interest Expense, Net

 

Interest expense, net for the three months ended September 30, 2021, includes both the amortization of the discount and debt issuance costs, including the interest associated with the 2020 and 2021 Convertible Notes of $0.2 million. Interest expense, net for the three months ended September 30, 2020, includes both the amortization of the discount and debt issuance costs, including the interest associated with the 2020 Convertible Notes of $0.2 million.

 

Other Income, Net

 

Other income, net for the three months ended September 30, 2021 was $0.2 million and primarily includes the mark-to-market adjustment on the derivative liability resulting from the 2020 and 2021 Convertible Notes. There was no other income or expense, net for the three months ended September 30, 2020.

 

Loss on Loan Extinguishment

 

The loss on loan extinguishment, representing the unamortized debt discount on our 2020 and 2021 Convertible Notes, of $0.1 million during the three months ended September 30, 2021 resulted from the conversion of the 2020 and 2021 Convertible Notes into units (consisting of (a) one share of common stock and (b) one five-year warrant to purchase one share of common stock) upon the completion of our IPO in August 2021.

 

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

 

The following table summarizes our results of operations for the nine months ended September 30, 2021 and 2020 (in thousands, except percentages):

 

   Nine Months Ended
September 30,
   Change 
   2021   2020   $   % 
   (unaudited)         
Operating expenses:                    
Research and development  $1,938   $1,934   $4     -%
General and administrative   1,377    631    746    118%
Total operating expenses   3,315    2,565    750    29%
Loss from operations   (3,315)   (2,565)   (750)   29%
Other income (expense), net                    
Interest expense, net   (835)   (355)   (480)   135%
Other income, net   119    -    119    100%
Gain on loan extinguishment   62    -    62    100%
Total other expense, net   (654)   (355)   (299)   84%
Net loss  $(3,969)  $(2,920)  $(1,049)   36%

 

Research and Development

 

Research and development expenses were $1.9 million for the nine months ended September 30, 2021 and 2020. Increases in research and development expenses consisted of clinical development personnel costs and related benefits, as well as the allocation of executive-level clinical support from general and administrative of $0.1 million. These increases were offset by lower leased software costs and payments received from clinical sites for the use of RenovoCath delivery devices in our Phase 3 clinical trial of $0.1 million.

 

General and Administrative Expenses

 

General and administrative expenses were $1.4 million for the nine months ended September 30, 2021, an increase of 118%, or $0.7 million, compared to $0.6 million for the prior year period. This increase was due to higher professional and consulting services costs of $0.6 million related to preparing for our IPO in August 2021, including an increase in spending in personnel costs of $0.2 million and insurance costs of $0.1 million related to the purchase of Directors and Officers Liability Insurance. These increases were partially offset by a $0.1 million decrease in expense as a result of allocating executive-level clinical support costs to research and development expense.

 

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Interest Expense, Net

 

Interest expense, net for the nine months ended September 30, 2021 includes both the stated interest on the 2020 and 2021 Convertible Notes of 5% per annum, or $0.1 million, as well as the amortization of the discount and debt issuance costs associated with the 2020 and 2021 Convertible Notes of $0.7 million. Interest expense for the nine months ended September 30, 2020 includes both the stated interest on the 2020 Convertible Notes of 5% per annum, or $0.1 million, as well as the amortization of the debt discount and debt issuance costs of $0.3 million.

 

Other Income, Net

 

Other income, net for the nine months ended September 30, 2021 was $0.1 million and represents the mark-to-market adjustment on the derivative liabilities resulting from the 2020 and 2021 Convertible Notes. There was no other income, net for the nine months ended September 30, 2020.

 

On March 1, 2021, the Company entered into an amendment to the 2020 Convertible Notes which extended the maturity date of the 2020 Convertible Notes from March 31, 2021 to October 30, 2021 and provided for the conversion of the 2020 Convertible Notes into shares of the Company’s common stock upon a Qualified Financing that is an IPO. No other terms to the 2020 Convertible Notes were amended. This amendment was accounted for as a troubled debt restructuring pursuant to FASB ASC Topic 470-60, “Troubled Debt Restructurings by Debtors.” As the future undiscounted cash flows of the 2020 Convertible Notes were greater than their carrying amount, the carrying amount was not adjusted and no gain was recognized as a result of the modification of terms.

 

Gain on Loan Extinguishment

 

The gain on loan extinguishment of $0.1 million during the nine months ended September 30, 2021 represents a loss of $0.1 million on the automatic conversion of the 2020 and 2021 Convertible Notes upon completion of our IPO offset by the forgiveness and cancellation of our PPP loan of $0.1 million.

 

Liquidity and Capital Resources

 

For the three and nine months ended September 30, 2021 we incurred net losses of $1.5 million and $4.0 million, respectively. As of September 30, 2021, we had an accumulated deficit of $18.9 million. We expect to incur additional losses and increased operating expenses in future periods. Since our inception, our primary sources of liquidity have been the sale and issuance of convertible preferred stock, convertible notes and common stock, including in our IPO, and from the exercise of warrants.

 

As of September 30, 2021 and December 31, 2020, we had $17.7 million and $1.8 million in cash and cash equivalents, respectively. During the nine months ended September 30, 2021, we used $3.4 million of cash in operations. Our primary requirements for liquidity have been to fund our clinical trial activity and general corporate and working capital needs. In August 2021, we completed our IPO for aggregate gross proceeds of $16.7 million. We paid underwriting discounts and commissions of $1.3 million, and we also incurred expenses of $0.8 million in connection with the offering. As a result, the net offering proceeds to us, after deducting underwriting discounts and commissions and offering expenses, were $14.6 million. In February 2021, we received notification and confirmation from Silicon Valley Bank that our PPP loan of $0.1 million, has been forgiven in its entirety and automatically cancelled by the U.S. Small Business Administration.

 

Based on our current operating plan, we expect that our current cash and cash equivalents as of September 30, 2021 will be sufficient to fund our operating, investing and financing cash flow needs for at least 12 months from the issuance date of these interim financial statements. We intend to raise additional capital through equity offerings and/or debt financings. If we are unable to raise capital when needed or on attractive terms, we would be forced to delay, reduce or eliminate our clinical trials or other operations. If any of these events occur, our ability to achieve our operational goals would be adversely affected. Our future capital requirements and the adequacy of available funds will depend on many factors, including those described in “Risk Factors.” Depending on the severity and direct impact of these factors on us, we may be unable to secure additional financing to meet our operating requirements on terms favorable to us, or at all.

 

Sources of Liquidity

 

Since our inception, we have not generated any revenue from product sales and we have incurred significant operating losses and negative cash flows from our operations. We do not have any products that have achieved regulatory marketing approval and we do not expect to generate revenue from sales of any product candidates for several years, if ever.

 

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We have financed our operations primarily through the issuance and sale of convertible preferred stock and convertible debt. Through the date of this report, we have raised an aggregate of $17.0 million of gross proceeds from private placements of our equity and convertible debt securities, net proceeds of $14.6 million from our IPO in August 2021 and $2.7 million in proceeds from the exercise of warrants and of the underwriter’s exercise of its over-allotment option to purchase common stock warrants. We also received $0.1 million from a loan under the PPP which was forgiven in February 2021. As of September 30, 2021, we had cash and cash equivalents of $17.7 million and an accumulated deficit of $18.9 million.

 

Cash Flows

 

Our primary uses of cash are to fund our operations including research and development and general and administrative expenses. We will continue to incur operating losses in the future and expect that our research and development and general and administrative expenses will continue to increase as we continue our research and development efforts with respect to clinical development of our product candidates and further develop our platform. We expect that we will use a substantial portion of the net proceeds of this offering, in combination with our existing cash and cash equivalents, for these purposes and for the increased expenses associated with being a public company. Cash used to fund operating expenses is impacted by the timing of when we pay expenses, as reflected in the change in our outstanding accounts payable and accrued expenses.

 

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

 

   Nine Months Ended
September 30,
 
   2021   2020 
   (unaudited) 
Net cash provided by (used in):          
Operating activities  $(3,358)  $(2,558)
Investing activities   (15)   - 
Financing activities   19,303    2,746 
Increase in cash and cash equivalents  $15,930   $188 

 

Net Cash Used in Operating Activities

 

Cash used in operating activities for the nine months ended September 30, 2021 reflected a net loss of $4.0 million and a net change in our operating assets and liabilities of $0.1 million, offset by non-cash charges of $0.5 million consisting primarily of amortization of a debt discount and gain/loss on loan/convertible debt extinguishments. Net cash used in operating activities for the nine months ended September 30, 2020 reflected a net loss of $2.9 million and non-cash charges of $0.4 million representing amortization of debt discount and stock-based compensation expense.

 

Net Cash Used in Investing Activities

 

Net cash used in investing activities for the nine months ended September 30, 2021 consisted of capital expenditures made for leasehold improvements to our new office space. There were no investment activities in the comparable nine months ended September 30, 2020.

 

Cash Provided by Financing Activities

 

Net cash provided by financing in the nine months ended September 30, 2021 was $19.3 million, consisting of net proceeds of $14.6 million from the issuance of common stock in our IPO, $2.0 million from the issuance of convertible notes and $2.8 million from exercise of warrants and stock options. Net cash provided by financing activities in the nine months ended September 30, 2020 was $2.7 million, consisting of $2.6 million in proceeds from the issuance of convertible notes and $0.2 million in proceeds from the PPP loan and the exercise of the Series A-1 warrants and stock options.

 

Contractual Obligations and Other Commitments

 

As of the date of this report, we have no contractual obligations or other commitments. In August 2021, the 2020 and 2021 Convertible Notes, including accrued interest, of $5.3 million were converted to common shares upon the completion of our IPO. In February 2021, the Company received notification and confirmation from Silicon Valley Bank that its PPP loan of $0.1 million, had been forgiven in its entirety and automatically cancelled by the U.S. Small Business Administration. There have been no other significant changes in our contractual obligations or other commitments as of September 30, 2021.

 

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Critical Accounting Policies and Significant Judgments and Estimates

 

The accompanying management’s discussion and analysis of our financial condition and results of operations are based upon our unaudited condensed interim financial statements and the related disclosures, which have been prepared in accordance with accounting principles generally accepted in the United States or GAAP. The preparation of these unaudited condensed interim financial statements requires us to make estimates, assumptions and judgments that affect the reported amounts in our unaudited condensed interim financial statements and accompanying notes. We base our estimates on historical experience and on various other assumptions that we believe to be 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. Actual results may differ from these estimates under different assumptions or conditions. To the extent that there are material differences between these estimates and actual results, our future financial statement presentation, financial condition, results of operations and cash flows will be affected. While our significant accounting policies are described in the notes to our financial statements included elsewhere in this report, we believe that the following critical accounting policies are most important to understanding and evaluating our reported financial results because they require us to make estimates, assumptions and judgments about matters that are inherently uncertain.

 

A critical accounting policy is defined as one that is both material to the presentation of our financial statements and requires management to make difficult, subjective, or complex judgments that could have a material effect on our financial condition and results of operations. Specifically, critical accounting estimates have the following attributes: (i) we are required to make assumptions about matters that are highly uncertain at the time of the estimate; and (ii) different estimates we could reasonably have used, or changes in the estimate that are reasonably likely to occur, would have a material effect on our financial condition or results of operations.

 

Clinical Trial Expenses

 

We make payments in connection with our Phase 3 clinical trial under contracts with clinical trial sites and contract research organizations that support conducting and managing clinical trials. The financial terms of these agreements are subject to negotiation and vary from contract to contract and may result in uneven payment flows. Generally, these agreements set forth the scope of work to be performed at a fixed fee, unit price or on a time and materials basis. A portion of the obligation to make payments under these contracts depends on factors such as the successful enrollment or treatment of patients or the completion of other clinical trial milestones.

 

Expenses related to clinical trials are accrued based on estimates and/or representations from service providers regarding work performed, including actual level of patient enrollment, completion of patient studies and progress of the clinical trials. Other incidental costs related to patient enrollment or treatment are accrued when reasonably certain. If the amounts we are obligated to pay under clinical trial agreements are modified (for instance, as a result of changes in the clinical trial protocol or scope of work to be performed), the accruals are adjusted accordingly. Revisions to contractual payment obligations are charged to expense in the period in which the facts that give rise to the revision become reasonably certain.

 

Stock-Based Compensation

 

We calculate the fair value of stock options using the Black-Scholes option pricing model, which incorporates various assumptions including the fair value of our common stock, volatility, expected life, and risk-free interest rate. Compensation related to service-based awards is recognized starting on the grant date on a straight-line basis over the vesting period, which is generally four years.

 

Determining the grant date fair value of options using the Black-Scholes option pricing model requires management to make assumptions and judgments. If any of the assumptions used in the Black-Scholes model change significantly, stock-based compensation for future awards may differ materially compared with the awards granted previously. The assumptions and estimates are as follows:

 

Fair Value of Common Stock—Given the absence of a public trading market prior to the Company’s IPO, our Board of Directors considered numerous objective and subjective factors to determine the fair value of our common stock at each grant date. These factors included but were not limited to: (i) contemporaneous third-party valuations of common stock; (ii) the prices for preferred stock sold to outside investors; (iii) the rights and preferences of preferred stock relative to common stock; (iv) the lack of marketability of our common stock; (v) developments in the business; and (vi) the likelihood of achieving a liquidity event, such as an IPO or sale of the business, given prevailing market conditions. The methodology to determine the fair value of our common stock included estimating the fair value of the enterprise using the “backsolve” method, which is a market approach that assigns an implied enterprise value by accounting for all share class rights and preferences based on the latest round of financing. The total equity value implied was then applied in the context of an option pricing model to determine the value of each class of our shares.

 

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Expected Term—The expected term represents the period that the stock-based awards are expected to be outstanding. We determine the expected term using the simplified method. The simplified method deems the term to be the average of the time-to-vesting and the contractual life of the options. For stock options granted to non-employees, the expected term equals the remaining contractual term of the option from the vesting date.

 

Expected Volatility—Given the absence of a public trading market, the expected volatility was estimated by taking the average historic price volatility for industry peers, consisting of several public companies in our industry that are either similar in size, stage, or financial leverage, over a period equivalent to the expected term of the awards.

 

Risk-Free Interest Rate—The risk-free interest rate is calculated using the average of the published interest rates of U.S. Treasury zero-coupon issues with maturities that are commensurate with the expected term.

 

Dividend Rate—The dividend yield assumption is zero as we have no plans to make dividend payments.

 

The determination of the fair value of our common stock after our IPO on August 30, 2021 is determined by the closing price of our common stock on the date of grant.

 

Convertible Instruments and Embedded Derivatives

 

We evaluate all our agreements to determine whether such instruments have derivatives or contain features that qualify as embedded derivatives. We account for certain redemption features that are associated with the terms of convertible notes as liabilities at fair value and adjust the instruments to their fair value at the end of each reporting period. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in other income (expense), net in the statements of operations. Derivative instrument liabilities are classified in the balance sheets as current or non-current based on whether net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date. As of December 31, 2020, our derivative financial instruments were related to the 2020 and 2021 Convertible Notes, which contained certain redemptive features. On August 30, 2021, we completed our IPO which triggered the automatic conversion of all outstanding Convertible Notes and accrued interest into shares of common stock.

 

Emerging Growth Company and Smaller Reporting Company Status

 

We are an “emerging growth company” as defined in the JOBS Act. Under the JOBS Act, companies have extended transition periods available for complying with new or revised accounting standards. We have elected this exemption to delay adopting new or revised accounting standards. We will remain an emerging growth company until the earlier of (1) December 31, 2026, (2) the last day of the fiscal year in which we have total annual gross revenues of at least $1.07 billion, (3) the date on which we are deemed to be a “large accelerated filer” as defined in Rule 12b-2 under the Exchange Act, or (4) the date on which we have issued more than $1.0 billion in non-convertible debt securities during the prior three-year period. An emerging growth company may take advantage of specified reduced reporting requirements and is relieved of certain other significant requirements that are otherwise generally applicable to public companies. As an emerging growth company,

 

  we may present only two years of audited financial statements, plus unaudited interim condensed financial statements for any interim period, and related Management’s Discussion and Analysis of Financial Condition and Results of Operations;
     
  we may avail ourselves of the exemption from the requirement to obtain an attestation and report from our auditors on the assessment of our internal control over financial reporting pursuant to the Sarbanes-Oxley Act;
     
  we may provide reduced disclosure about our executive compensation arrangements; and
     
  we do not require stockholder non-binding advisory votes on executive compensation or golden parachute arrangements.

 

We have elected to take advantage of certain reduced disclosure obligations in this Quarterly Report on Form 10-Q and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our stockholders may be different than you might receive from other public reporting companies in which you hold equity interests.

 

We are also a “smaller reporting company,” meaning that the market value of our stock held by non-affiliates plus the proposed aggregate amount of gross proceeds to us as a result of this offering is less than $700.0 million and our annual revenue is less than $100.0 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (1) the market value of our stock held by nonaffiliates is less than $250.0 million or (2) our annual revenue is less than $100.0 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700.0 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, like emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation

 

Recently Issued and Adopted Accounting Pronouncements

 

A description of recently issued and adopted accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2, Summary of Significant Accounting Policies to our interim financial statements included elsewhere in this report.

 

Off-Balance Sheet Arrangements

 

During the periods presented, we did not have, nor do we currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC.

 

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Item 3: Quantitative and Qualitative Disclosures about Market Risk

 

We are exposed to market risks in the ordinary course of our business. These risks primarily include interest rate risks, foreign currency exchange, risks and inflation risks. Periodically, we maintain deposits in accredited financial institutions in excess of federally insured limits. We deposit our cash in financial institutions that we believe have high credit quality and have not experienced any losses on such accounts and do not believe we are exposed to any unusual credit risk beyond the normal credit risk associated with commercial banking relationships.

 

Interest Rate Risk

 

Our cash and cash equivalents consisted primarily of cash on hand and marketable securities at September 30, 2021 and December 31, 2020. The fair value of our cash and cash equivalents would not be significantly affected by either an increase or decrease in interest rates.

 

Our exposure to risks related to interest rates is minimal. The interest rates for our 2020 and 2021 Convertible Notes were fixed rates.

 

Foreign Currency Exchange Risk

 

We are not currently exposed to significant market risk related to changes in foreign currency exchange rates. However, we have contracted with and may continue to contract with vendors such as contract research organizations and clinical trial sites that are in Europe. We may be subject to fluctuations in foreign currency rates in connection with certain of these agreements. Transactions denominated in currencies other than the U.S. dollar are recorded based on exchange rates at the time such transactions arise. While we have not engaged in hedging our foreign currency transactions to date, we may evaluate the costs and benefits of initiating such a program and may in the future, hedge selected significant transactions denominated in currencies other than the U.S. dollar as we expand our clinical trial sites globally.

 

Inflation Risk

 

Inflation generally affects us by increasing our labor and clinical trial costs. We do not believe that inflation had a material effect on our business, financial condition or results of operations during the nine months ended September 30, 2021 and the year ended December 31, 2020.

 

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Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial and Accounting Officer, we conducted an evaluation of the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the fiscal quarter ended September 30, 2021. Based on this evaluation, our Chief Executive Officer and Chief Financial and Accounting Officer have concluded that, during the period covered by this Quarterly Report, our disclosure controls and procedures were not effective due to our previously identified material weakness in internal control over financial reporting. Notwithstanding the identified material weaknesses, management, including our Chief Executive Officer and Chief Financial and Accounting Officer, believes the financial statements included in this Quarterly Report on Form 10-Q are fairly presented, in all material respects, in accordance with U.S. GAAP.

 

Disclosure controls and procedures are designed to ensure that information required to be disclosed by us in our Exchange Act reports is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive officer and principal financial and accounting officer or persons performing similar functions, as appropriate, to allow timely decisions.

 

Previously Identified Material Weakness and Plans to Remediate

 

In preparation for our IPO, we identified a material weakness in our internal control over financial reporting related to our control environment. Specifically, we have determined that we have not maintained adequate formal accounting policies, processes and controls related to complex transactions as a result of a lack of finance and accounting staff with the appropriate GAAP technical expertise needed to identify, evaluate and account for complex and non-routine transactions. We also determined that we have not maintained sufficient staffing or written policies and procedures for accounting and financial reporting, which contributed to the lack of a formalized process or controls for management’s timely review and approval of financial information. More specifically, we have determined that our financial statement close process includes significant control gaps mainly driven by the small size of our accounting and finance staff and, as a result, a significant lack of appropriate segregation of duties. A material weakness is a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of our annual or interim financial statements will not be prevented or detected and corrected on a timely basis.

 

We are in the process of implementing a number of measures to address the material weakness that has been identified including: (i) engaging additional accounting and financial reporting personnel with US GAAP, and SEC reporting experience, (ii) developing, communicating and implementing an accounting policy manual for our accounting and financial reporting personnel for recurring transactions and period-end closing processes, and (iii) establishing effective monitoring and oversight controls for non-recurring and complex transactions to ensure the accuracy and completeness of our consolidated financial statements and related disclosures.

 

These additional resources and procedures are designed to enable us to broaden the scope and quality of our internal review of underlying information related to financial reporting and to formalize and enhance our internal control procedures. With the oversight of senior management and our audit committee, we have begun taking steps and plan to take additional measures to remediate the underlying causes of the material weaknesses.

 

We intend to complete the implementation of our remediation plan during 2022. Although we believe that our remediation plan will improve our internal control over financial reporting, additional time may be required to fully implement it and to make conclusions regarding the effectiveness of our internal control over financial reporting. Our management will closely monitor and modify, as appropriate, the remediation plan to eliminate the identified material weakness.

 

Changes in Internal Control over Financial Reporting

 

There were no changes in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) during the quarter ended September 30, 2021 that materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Limitations on the Effectiveness of Controls

 

In designing and evaluating our disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints, and that management is required to apply judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

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PART II—OTHER INFORMATION

 

Item 1. Legal Proceedings

 

From time to time, we may become involved in legal proceedings arising in the ordinary course of our business. We are not currently a party to any material legal proceedings. Regardless of outcome, litigation can have an adverse impact on us due to defense and settlement costs, diversion of management resources, negative publicity, reputational harm and other factors.

 

Item 1A. Risk Factors

 

An investment in our securities involve a high degree of risk. You should carefully consider the risks described below, as well as the other information in this Quarterly Report on Form 10-Q, including our unaudited interim condensed financial statements and the related notes and the section titled “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” and in our other public filings in evaluating our business. The occurrence of any of the events or developments described below could harm our business, financial condition, results of operations, growth prospects or stock price. In such an event, the market price of our common stock could decline, and you may lose all or part of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations and the market price of our common stock.

 

Risk Factors Summary

 

Investing in shares of our common stock involves a high degree of risk because our business is subject to numerous risks and uncertainties, including those outside of our control, that could cause our actual results to be harmed. The principal factors and uncertainties that make investing in shares of our common stock risky and impact our ability to execute on our business strategy include risks regarding the following, among others:

 

  We are a clinical stage biopharmaceutical company, have a limited operating history and have no products approved for commercial sale, which makes it difficult to evaluate our current business and predict our future success and viability.
     
  We have incurred significant net losses in each period since inception, and we expect to continue to incur net losses for the foreseeable future.
     
  We will need to raise substantial additional capital to develop and commercialize RenovoGem, and our failure to obtain funding when needed may force us to delay, reduce or eliminate our product development programs or collaboration efforts.
     
  Our product candidates’ commercial viability remains subject to current and future preclinical studies, clinical trials, regulatory approvals, and the risks generally inherent in the development of a pharmaceutical product candidate. If we are unable to successfully advance or develop our product candidates, our business will be materially harmed
     
  If we do not achieve our projected development goals in the timeframes we announce and expect, our stock price may decline.
     
  Our product candidates may exhibit undesirable side effects when used alone or in combination with other approved pharmaceutical products or investigational new drugs, which may delay or preclude further development or regulatory approval or limit their use if approved.
     
  If the results of preclinical studies or clinical trials for our product candidates are negative, we could be delayed or precluded from the further development or commercialization of our product candidates, which could materially harm our business.
     
  If we are unable to satisfy regulatory requirements, we may not be able to commercialize our product candidates.
     
  If our product candidates are unable to compete effectively with marketed drugs targeting similar indications as our product candidates, our commercial opportunity will be reduced or eliminated.