UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
(Mark One)
For the quarterly period ended
OR
For the transition period from _____ to _____
Commission file number:
(Exact Name of Registrant as Specified in Its Charter)
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(State or Other Jurisdiction of |
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Incorporation or Organization) |
Identification No.) |
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(Registrant’s Telephone Number, Including Area Code)
Not applicable
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Securities registered pursuant to Section 12(b) of the Act:
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Title of each class |
Trading Symbol(s) |
Name of each exchange on which registered |
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The 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. ☒
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). ☒
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a 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.
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Large accelerated filer |
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Accelerated filer |
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Smaller reporting company |
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Emerging growth company |
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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).
There were
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Part I |
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Item 1: |
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Condensed Consolidated Balance Sheets as of September 30, 2023 (unaudited) and December 31, 2022 |
4 | |
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Notes to Unaudited Condensed Consolidated Interim Financial Statements |
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Item 2: |
Management’s Discussion and Analysis of Financial Condition and Results of Operations |
24 |
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Item 3: |
35 | |
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Item 4: |
35 | |
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Part II |
36 | |
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Item 1: |
36 | |
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Item 1A: |
37 | |
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Item 2: |
Unregistered Sales of Equity Securities, Use of Proceeds and Issuer Purchases of Equity Securities | 69 |
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Item 3: |
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Item 4: |
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Item 5: |
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Item 6: |
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Explanatory Note Regarding Company References and Other Defined Terms
As previously disclosed in our Current Report on Form 8-K filed on August 17, 2023 with the SEC, on August 16, 2023, the Delaware corporation formerly known as “Diffusion Pharmaceuticals Inc.” completed the previously announced merger transaction in accordance with the terms and conditions of the Agreement and Plan of Merger, dated March 30, 2023 (the “Merger Agreement”) by and among Diffusion Pharmacueticals Inc. (“Diffusion”), Dawn Merger Inc., a wholly-owned subsidiary of Diffusion (“Merger Sub”) and EIP Pharmaceuticals, Inc. (“EIP “), pursuant to which Merger Sub merged with and into EIP, with EIP surviving the Merger a wholly-owned subsidiary of Diffusion (the “Merger”). Additionally, on August 16, 2023, Diffusion changed its name from “Diffusion Pharmaceuticals Inc.” to “CervoMed Inc.”
Prior to the effective time of the Merger, on August 16, 2023, in connection with the transactions contemplated by the Merger Agreement, Diffusion effected a reverse stock split of the Company’s common stock, par value $0.001 per share (“common stock”), at a ratio of 1-for-1.5 (the “Reverse Stock Split”). At the effective time of the Merger, each outstanding share of EIP capital stock was converted into the right to receive 0.1151 shares of Company common stock.
For accounting purposes, the Merger is treated as a reverse recapitalization under US GAAP and EIP Pharma, Inc. is considered the accounting acquirer. Accordingly, EIP’s historical results of operations are deemed the Company’s historical results of operations for all periods prior to the Merger and, for all periods following the Merger, the results of operations of the combined company will be included in the Company’s financial statements. Following the completion of the Merger, the business conducted by the Company became primarily the business conducted by EIP.
Accordingly, unless the context otherwise requires, all references in this Quarterly Report to (i) “CervoMed,” the “Company,” “we,” “our,” or “us,” refer to the business of EIP for all dates and periods prior to August 16, 2023 and to the business of CervoMed for all dates and periods subsequent to (and including) August 16, 2023 and (ii) “common stock” refer to the common stock, par value $0.001 per share, of the Company, after giving effect to the Reverse Stock Split. Historical share and per share figures of EIP have been retroactively restated based upon the exchange ratio of 0.1151.
We have also used several other defined terms in this Quarterly Report, many of which are explained or defined below:
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Term |
Definition |
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2015 Equity Plan |
CervoMed Inc. 2015 Equity Incentive Plan, as amended |
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2018 Plan |
CervoMed Inc. 2018 Employee, Director and Consultant Equity Incentive Plan, as amended |
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2020 Notes |
the previously outstanding convertible promissory notes of EIP, dated as of December 4, 2020, as amended |
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2021 Notes |
the previously outstanding convertible promissory notes of EIP, dated as of December 10, 2021, as amended |
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2023 Notes Amendment |
the amendments to the 2020 Notes and 2021 Notes entered into in June 2023 |
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401(k) Plan |
CervoMed Inc. 401(k) Defined Contribution Plan |
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AD |
Alzheimer’s Disease |
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Annual Report |
our Annual Report on Form 10-K for the year ended December 31, 2022, filed with the SEC on March 24, 2023 |
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ACA |
Affordable Care Act and the Healthcare and Education Reconciliation Act |
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AIA |
America Invents Act |
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AMP |
average manufacturer price |
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API |
active pharmaceutical ingredient |
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ASC |
Accounting Standard Codification of the FASB |
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ASU |
Accounting Standards Update |
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Bayh-Doyle Act |
Bayh-Dole Act of 1980 |
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BFC |
basal forebrain cholinergic |
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CARES Act |
Coronavirus Aid, Relief, and Economic Security Act |
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CDR-SB |
Clinical Dementia Rating Sum of Boxes test |
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cGMP |
current good manufacturing practices |
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CMO |
contract manufacturing organization |
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CMS |
the U.S. Centers for Medicine & Medicaid Services |
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Convertible Notes |
collectively, the 2020 Notes and the 2021 Notes |
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CNS |
central nervous system |
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Code |
the U.S. Internal Revenue Code of 1986, as amended |
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CRO |
contract research organization |
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DLB |
Dementia with Lewy Bodies |
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DNP |
the FDA’s Division of Neurology Products |
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Effective Time |
the effective time of the Merger on August 16, 2023 |
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EIP Common Stock |
the common stock, par value $0.001, of EIP issued and outstanding prior to the Merger |
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EMA |
European Medicines Agency |
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EOAD |
Early Onset Alzheimer’s Disease |
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Exchange Act |
Securities Exchange Act of 1934, as amended |
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FASB |
Financial Accounting Standards Board |
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FCPA |
the Foreign Corrupt Practices Act |
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FDA |
U.S. Food and Drug Administration |
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FDIC |
Federal Deposit Insurance Corporation |
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G&A |
general and administrative |
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GDPR |
EU General Data Protection Regulation |
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HIPAA |
the Health Insurance Portability and Accountability of Act of 1996 |
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IND |
investigational new drug application |
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IRA |
Inflation Reduction Act of 2022 |
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License Agreement |
the Option and License Agreement, dated as of August 27, 2012, by and between EIP Pharma LLC and Vertex, as amended |
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NASDAQ |
Nasdaq Stock Market, LLC |
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NDA |
new drug application |
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NIA |
the National Institute on Aging of the National Institutes of Health |
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NOL |
net operating loss |
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p38α |
p38 mitogen-activated protein kinase alpha |
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PBM |
pharmacy benefit mangers |
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POC |
proof-of-concept |
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Quarterly Report |
this Quarterly Report on Form 10-Q |
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R&D |
research and development |
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Regulation S-K |
Regulation S-K promulgated under the Securities Act of 1933, as amended |
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REMS |
Risk Evaluation and Mitigation Strategy |
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Reverse recapitalization |
Accounting treatment of the Merger |
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ROU |
right-of-use |
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SAE |
serious adverse events |
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SEC |
U.S. Securities and Exchange Commission |
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Section 382 |
Section 382 of the Code |
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TCJA |
Tax Cuts and Jobs Act of 2017 |
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TID |
three times daily |
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TSC |
trans sodium crocetinate |
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TUG |
Timed Up and Go test |
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U.S. |
United States |
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US GAAP |
U.S. generally accepted accounting principles |
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USPTO |
U.S. Patent and Trademark Office |
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Vertex |
Vertex Pharmaceuticals Incorporated |
Note Regarding Forward-Looking Statements
This Quarterly Report (including, for purposes of this Note Regarding Forward-Looking Statements, any information or documents incorporated herein by reference) includes express and implied forward-looking statements. By their nature, forward-looking statements involve risks and uncertainties because they relate to events, competitive dynamics and industry change, and depend on the economic circumstances that may or may not occur in the future or may occur on longer or shorter timelines than anticipated. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report, we caution you that forward-looking statements are not guarantees of future performance and that our actual results of operations, financial condition, liquidity, and prospects may differ materially from the forward-looking statements contained in this Quarterly Report. In addition, even if our results of operations, financial condition, liquidity, and prospects are consistent with the forward-looking statements contained in this Quarterly Report, they may not be predictive of actual results or reflect unanticipated developments in future periods.
Forward-looking statements appear in a number of places throughout this Quarterly Report. We may, in some cases, use terms such as “believes,” “estimates,” “anticipates,” “expects,” “plans,” “intends,” “may,” “could,” “might,” “will,” “should,” “approximately,” or other words that convey uncertainty of future events or outcomes to identify these forward-looking statements. Forward-looking statements also include statements regarding our intentions, beliefs, projections, outlook, analyses or expectations concerning, among other things:
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our cash balances and our ability to obtain additional financing in the future and continue as a going concern; |
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the success and timing of our ongoing Phase 2b clinical trial in patients with DLB and our other clinical and preclinical studies, including our ability to enroll subjects in our studies at anticipated rates and our ability to manufacture an adequate amount of drug supply for our studies; |
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obtaining and maintaining intellectual property protection for our current or future product candidates and our proprietary technology; |
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the performance of third parties, including contract research organizations, manufacturers, suppliers, and outside consultants, to whom we outsource certain operational, staff and other functions; |
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our ability to obtain and maintain regulatory approval of our current or future product candidates and, if approved, our products, including the labeling under any approval we may obtain; |
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our plans and ability to develop and commercialize our current or future product candidates and the outcomes of our research and development activities; |
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our estimates regarding expenses, future revenues, capital requirements, and needs for additional financing; |
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our future obligations under our License Agreement with Vertex; |
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our failure to recruit or retain key scientific or management personnel or to retain our executive officers; |
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the accuracy of our estimates of the size and characteristics of the potential markets for our current or future product candidates, the rate and degree of market acceptance of any of our current or future product candidates that may be approved in the future, and our ability to serve those markets; |
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the success of products that are or may become available which also target the potential markets for our current or future product candidates; |
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our ability to operate our business without infringing the intellectual property rights of others and the potential for others to infringe upon our intellectual property rights; |
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any significant breakdown, infiltration, or interruption of our information technology systems and infrastructure; |
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our ability to remediate our previously disclosed material weaknesses in our internal controls over financial reporting in a timely manner; |
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our ability to successfully integrate the historical businesses of EIP and Diffusion and realize the anticipated benefits of the Merger; |
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recently enacted and future legislation related to the healthcare system; |
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other regulatory developments in the U.S., European Union, and other foreign jurisdictions; |
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our ability to satisfy the continued listing requirements of the NASDAQ Capital Market or any other exchange on which our securities may trade in the future; |
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uncertainties related to general economic, political, business, industry, and market conditions, including the continued availability of funding for the NIA to support disbursements under our previously received grant and |
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other risks and uncertainties, including those discussed under the heading "Risk Factors" herein and in our other public filings. |
As a result of these and other factors, known and unknown, actual results could differ materially from our intentions, beliefs, projections, outlook, analyses, or expectations expressed in any forward-looking statements in this Quarterly Report. Accordingly, we cannot assure you that the forward-looking statements contained in this Quarterly Report will prove to be accurate or that any such inaccuracy will not be material. You should also understand that it is not possible to predict or identify all such factors, and you should not consider any such list to be a complete set of all potential risks or uncertainties. In light of the foregoing and the significant uncertainties in these forward-looking statements, you should not regard these statements as a representation or warranty by us or any other person that we will achieve our objectives and plans in any specified time frame, or at all. For all forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Any forward-looking statements that we make in this Quarterly Report speak only as of the date of such statement, and, except as required by applicable law or by the rules and regulations of the SEC, we undertake no obligation to update such statements to reflect events or circumstances after the date of this Quarterly Report or to reflect the occurrence of unanticipated events. Comparisons of current and any prior period results are not intended to express any ongoing or future trends or indications of future performance, unless explicitly expressed as such, and should only be viewed as historical data.
Note Regarding Trademarks, Trade Names and Service Marks
This Quarterly Report includes trademarks, trade names, and service marks owned by us or other companies. All trademarks, service marks and trade names included in this Quarterly Report are the property of their respective owners. To the extent any such terms appear without the trade name, trademark, or service mark notice, such presentation is for convenience only and should not be construed as being used in a descriptive or generic sense.
PART I – FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
Condensed Consolidated Balance Sheets
(unaudited)
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September 30, |
December 31, |
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2023 |
2022 |
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| Assets | ||||||||
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Current assets: |
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Cash and cash equivalents |
$ | $ | ||||||
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Prepaid expenses and other current assets |
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Total current assets |
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| Other assets | ||||||||
| Total assets | $ | $ | ||||||
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Liabilities, Convertible Preferred Stock and Stockholders’ Equity (Deficit) |
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Current liabilities: |
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Accounts payable |
$ | $ | ||||||
| Deferred grant revenue | ||||||||
| Accrued expenses and other current liabilities | ||||||||
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Convertible Notes |
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Total liabilities |
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Commitments and contingencies (Note 10) |
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Convertible preferred stock: |
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| Series preferred stock $ |
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Series A-1 preferred stock $ |
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Series A-2 preferred stock, $ |
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Series B preferred stock, $ |
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Total convertible preferred stock |
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Stockholders’ equity (deficit): |
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Common stock, $ |
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Additional paid-in capital |
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Accumulated deficit |
( |
) | ( |
) | ||||
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Total stockholders’ equity (deficit) |
$ | ( |
) | |||||
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Total liabilities, convertible preferred stock and stockholders’ equity (deficit) |
$ | $ | ||||||
See accompanying notes to unaudited condensed consolidated interim financial statements
Condensed Consolidated Statements of Operations
(unaudited)
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Three Months Ended September 30 |
Nine Months Ended September 30, |
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2023 |
2022 |
2023 |
2022 |
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Grant revenue |
$ | $ | $ | $ | ||||||||||||
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Operating expenses: |
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Research and development |
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General and administrative |
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Total operating expenses |
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Loss from operations |
( |
) | ( |
) | ( |
) | ( |
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Other income (expense): |
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Other income (expense) |
( |
) | ( |
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Interest income |
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Total other income (expense) |
( |
) | ||||||||||||||
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Net income (loss) |
$ | $ | ( |
) | $ | $ | ( |
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Per share information: |
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Net income (loss) per share of common stock - basic |
$ | $ | ( |
) | $ | $ | ( |
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Weighted average shares outstanding - basic |
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Net income (loss) per share of common stock - diluted |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
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Weighted average shares outstanding - diluted |
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See accompanying notes to unaudited condensed consolidated interim financial statements
Condensed Consolidated Statements of Changes in Convertible Preferred Stock and Stockholders’ Deficit
(unaudited)
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Three Month Period Ended September 30, 2023 |
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| Series A-1 Preferred Stock | Series A-2 Preferred Stock | Series B Preferred Stock |
Common Stock |
Additional Paid in |
Accumulated |
Total Stockholders’ Equity |
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Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Capital |
Deficit |
(Deficit) | ||||||||||||||||||||||||||||||||||
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Balance at June 30, 2023 |
$ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||||||||
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Conversion of preferred stock to common stock |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||
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Issuance of common stock upon settlement of convertible notes |
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Issuance of common stock to Diffusion stockholders in reverse recapitalization, net of issuance costs |
- | - | - | |||||||||||||||||||||||||||||||||||||||||
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Sale of common stock |
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Stock-based compensation expense, including vesting of RSUs |
- | - | - | |||||||||||||||||||||||||||||||||||||||||
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Net income |
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Balance at September 30, 2023 |
$ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||||||||||||
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Nine Month Period Ended September 30, 2023 |
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Series A-1 Preferred Stock |
Series A-2 Preferred Stock |
Series B Preferred Stock |
Common Stock |
Additional
Paid in |
Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||
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Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Capital |
Deficit |
Equity (Deficit) | ||||||||||||||||||||||||||||||||||
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Balance at January 1, 2023 |
$ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||||||||
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Conversion of convertible preferred stock to common stock |
( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||
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Issuance of common stock upon settlement of convertible notes |
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Issuance of common stock to Diffusion stockholders in reverse recapitalization, net of issuance costs |
- | - | ||||||||||||||||||||||||||||||||||||||||||
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Sale of common stock |
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Stock-based compensation expense, including vesting of RSUs |
- | - | - | |||||||||||||||||||||||||||||||||||||||||
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Net income |
- | |||||||||||||||||||||||||||||||||||||||||||
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Balance at September 30, 2023 |
$ | $ | $ | $ | $ | $ | ( |
) | $ | |||||||||||||||||||||||||||||||||||
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Three Month Period Ended September 30, 2022 |
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| Series A-1 Preferred Stock | Series A-2 Preferred Stock | Series B Preferred Stock |
Common Stock |
Additional
Paid in |
Accumulated | Total Stockholders’ | ||||||||||||||||||||||||||||||||||||||
|
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Capital |
Deficit |
Deficit | ||||||||||||||||||||||||||||||||||
|
Balance at June 30, 2022 |
$ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||||||||
|
Stock-based compensation expense |
- | - | - | - | ||||||||||||||||||||||||||||||||||||||||
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Net loss |
- | - | - | - | ( |
) | ( |
) | ||||||||||||||||||||||||||||||||||||
|
Balance at September 30, 2022 |
$ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||||||||
|
Nine Month Period Ended September 30, 2022 |
||||||||||||||||||||||||||||||||||||||||||||
| Series A-1 Preferred Stock | Series A-2 Preferred Stock | Series B Preferred Stock |
Common Stock |
Additional
Paid in |
Accumulated | Total
Stockholders’ |
||||||||||||||||||||||||||||||||||||||
|
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Shares |
Amount |
Capital |
Deficit |
Deficit | ||||||||||||||||||||||||||||||||||
|
Balance at January 1, 2022 |
$ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||||||||
|
Stock-based compensation expense |
- | - | - | - | - | - | - | |||||||||||||||||||||||||||||||||||||
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Contributed capital in lieu of executive compensation |
- | - | - | - | ||||||||||||||||||||||||||||||||||||||||
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Net loss |
- | - | - | (4,275,647 | ) | (4,275,647 | ) | |||||||||||||||||||||||||||||||||||||
|
Balance at September 30, 2022 |
$ | $ | $ | $ | $ | $ | ( |
) | $ | ( |
) | |||||||||||||||||||||||||||||||||
See accompanying notes to unaudited condensed consolidated interim financial statements
Condensed Consolidated Statements of Cash Flows
(unaudited)
|
Nine Months Ended September 30, |
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2023 |
2022 |
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Cash flows from operating activities: |
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Net income (loss) |
$ | $ | ( |
) | ||||
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Adjustments to reconcile net loss to net cash used in operating activities: |
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Stock-based compensation expense |
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Capital in lieu of executive compensation |
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Change in fair value of convertible debt |
( |
) | ||||||
|
Changes in operating assets and liabilities: |
||||||||
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Prepaid expenses, deposits and other assets |
( |
) | ||||||
|
Accounts payable |
||||||||
| Accrued expenses and other liabilities | 699,008 | 77,212 | ||||||
|
Deferred grant revenue |
||||||||
|
Net cash used in operating activities |
( |
) | ( |
) | ||||
| Net assets assumed in connection with reverse recapitalization | ||||||||
|
Proceeds from sale of common stock |
||||||||
| Payment of reverse recapitalization costs | ( |
) | ||||||
|
Net cash provided by financing activities |
||||||||
| Net increase (decrease) in cash and cash equivalents | ( |
) | ||||||
|
Cash and cash equivalents at beginning of period |
||||||||
| Cash and cash equivalents at end of period | $ | $ | ||||||
|
Supplemental disclosure of non-cash financing activities: |
||||||||
|
Conversion of convertible notes |
$ | $ | ||||||
|
Conversion of convertible preferred stock |
$ | $ | - | |||||
| Merger costs in accounts payable and accrued expenses | $ | $ | - | |||||
See accompanying notes to unaudited condensed consolidated interim financial statements
1. The Company and Description of Business
The Company, a corporation organized under the laws of the state of Delaware and headquartered in Boston, Massachusetts, is a clinical-stage biotechnology company developing treatments for degenerative diseases of the brain. The Company is currently developing its product candidate neflamapimod, an investigational orally administered small molecule brain penetrant that inhibits p38α. Neflamapimod has the potential to treat synaptic dysfunction, the reversible aspect of the underlying neurodegenerative processes that cause disease in DLB and certain other major neurological disorders, and is currently being evaluated in a Phase 2b study in patients with DLB.
On March 30, 2023, the Company, Merger Sub, and EIP entered into the Merger Agreement (Note 4), pursuant to which, at the Effective Time, Merger Sub merged with and into EIP, with EIP surviving the Merger as a wholly-owned subsidiary of the Company. In connection with the Merger, on August 16, 2023, the Company changed its corporate name from “Diffusion Pharmaceuticals Inc.” to “CervoMed Inc.”
On August 16, 2023, Diffusion approved a one-for-
All shares of EIP common stock outstanding immediately prior to the Effective Time, after giving effect to the conversion of EIP preferred stock and the Convertible Notes (and excluding shares held as treasury stock by EIP, shares held or owned by the Company and any dissenting shares), converted into the right to receive, in the aggregate,
2. Liquidity and Capital Resources
The Company has generated negative cash flows from operations and, as of September 30, 2023, had an accumulated deficit of approximately $
Based on our current operating plan, we believe that the Company’s existing cash and cash equivalents on hand as of September 30, 2023, along with the remaining funds to be received from the NIA grant, will enable us to fund our operating expenses and capital expenditure requirements for at least twelve months from the issuance of these unaudited condensed consolidated interim financial statements. We have based this estimate on assumptions that may prove to be wrong, and we could utilize our available capital resources sooner than we currently expect. We will continue to require additional financing to advance our current product candidates through clinical development, to develop, acquire or in-license other potential product candidates and to fund operations for the foreseeable future. We will continue to seek funds through equity offerings, debt financings or other capital sources, including potential collaborations, licenses and other similar arrangements. However, we may be unable to raise additional funds or enter into such other arrangements when needed on favorable terms or at all. If we do raise additional capital through public or private equity offerings, the ownership interest of our existing stockholders will be diluted, and the terms of these securities may include liquidation or other preferences that adversely affect our stockholders’ rights. If we raise additional capital through a debt financing, we may be subject to covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any failure to raise capital as and when needed could have a negative impact on our financial condition and on our ability to pursue our business plans and strategies. If we are unable to raise capital, we will need to delay, reduce or terminate planned activities to reduce costs, including our development or commercialization activities for neflamapimod. We might also be required to seek funds through arrangements with third parties that require us to relinquish certain of our rights to neflamapimod or otherwise agree to terms unfavorable to us.
Operations of the Company are subject to certain additional risks and uncertainties as well, and any one or more of these factors could materially affect the Company’s financial condition, future operations and liquidity needs. Many of these risks and uncertainties are outside of the Company’s control, including internal and external factors that may affect the success or failure of the Company’s research and development efforts, the length of time and cost of developing and commercializing the Company’s current or future product candidates, whether and when any such product candidates become approved drugs, and how significant a drug’s market share will be, if approved, among others.
The Company expects that its existing cash and cash equivalents as of September 30, 2023 will enable it to fund its operating expenses and capital expenditure requirements, including expected costs related to the ongoing Phase 2b trial for at least twelve months following the issuance of these condensed consolidated interim financial statements.
3. Summary of Significant Accounting Policies
Basis of presentation
The unaudited condensed consolidated interim financial statements have been prepared in conformity with US GAAP as defined by the FASB.
Unaudited condensed consolidated interim financial statements
The accompanying unaudited condensed consolidated interim financial statements have been prepared by the Company in accordance with US GAAP for interim information and pursuant to the rules and regulations of the SEC. Accordingly, certain information and footnote disclosures normally included in unaudited condensed consolidated interim financial statements prepared in accordance with US GAAP have been condensed or omitted pursuant to such rules and regulations. These unaudited condensed consolidated interim financial statements should be read in conjunction with the audited financial statements and related notes for the year ended December 31, 2022, which begin on page F-30 of the Difffusions Amended Registration Statement on Form S-4 as filed with the SEC on July 11, 2023.
The unaudited condensed consolidated interim financial statements have been prepared on the same basis as the audited financial statements, and in management’s opinion, include all adjustments, consisting of only normal recurring adjustments, necessary for the fair presentation of the financial information for the interim periods. The results of operations for any interim period are not necessarily indicative of the results to be expected for the full fiscal year.
Consolidation
The unaudited condensed consolidated interim financial statements include the accounts of the Company and its wholly-owned subsidiaries. All intercompany accounts and transactions have been eliminated in consolidation.
Use of estimates
The preparation of unaudited condensed consolidated interim financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets, liabilities, grant revenue, expenses, and related disclosures. On an ongoing basis, the Company’s management evaluates its estimates, including estimates related to money market accounts, clinical trial accruals, stock-based compensation expense, grant revenue, Convertible Notes, and expenses during the reported period. The Company bases its estimates on historical experience and other market-specific or relevant assumptions that it believes to be reasonable under the circumstances. Actual results may differ significantly from those estimates or assumptions.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to concentrations of credit risk are primarily cash and cash equivalents. The Company maintains its cash and cash equivalent balances with financial institutions that management believes are creditworthy. The Company has no financial instruments with off-balance-sheet risk of loss. The Company has not experienced any losses in such accounts.
Cash and Cash Equivalents
The Company considers all highly liquid investments with original maturities of 90 days or less at the date of purchase to be cash and cash equivalents. Cash equivalents, which consist of amounts invested in money market funds, are stated at fair value. There are no unrealized gains or losses on the money market funds for the period ended September 30, 2023.
Fair Value of Financial Instruments
The Company’s financial instruments consist primarily of cash, accounts payable, previously outstanding convertible notes and accrued liabilities. The Company’s cash, accounts payable and accrued liabilities approximate fair value due to their relatively short maturities. The Company determined the fair value of the convertible notes as described in Note 8. In connection with the consummation of the Merger (Note 4) on August 16, 2023, the convertible notes were converted into EIP common stock which was subsequently converted into the right to exchange such shares of EIP common stock for shares of the Company’s common stock.
The Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. The Company determines the fair value of its financial instruments based on assumptions that market participants would use in pricing an asset or liability in the principal or most advantageous market. When considering market participant assumptions in fair value measurements, the following fair value hierarchy distinguishes between observable and unobservable inputs, which are categorized in one of the following levels:
Level 1 – Inputs are unadjusted, quoted prices in active markets for identical assets or liabilities at the measurement date;
Level 2 – Inputs are observable, unadjusted quoted prices in active markets for similar assets or liabilities, unadjusted quoted prices for identical or similar assets or liabilities 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 related assets or liabilities; and
Level 3 – Unobservable inputs that are significant to the measurement of the fair value of the assets or liabilities that are supported by little or no market data.
The following table presents the Company’s assets that are measured at fair value on a recurring basis:
| September 30, 2023 | ||||||||||||
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(Level 1) |
(Level 2) |
(Level 3) |
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Assets |
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|
Cash equivalents (money market accounts) |
$ | $ | $ | |||||||||
|
Total assets measured at fair value |
$ | $ | $ | - | ||||||||
| December 31, 2022 | ||||||||||||
|
(Level 1) |
(Level 2) |
(Level 3) |
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|
Assets |
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|
Cash equivalents (money market accounts) |
$ | $ | $ | |||||||||
|
Total assets measured at fair value |
$ | $ | $ | |||||||||
|
Liabilities |
||||||||||||
|
Convertible Notes |
$ | $ | $ | |||||||||
|
Total liabilities measured at fair value |
$ | $ | $ | |||||||||
The following table presents a roll-forward of the fair value of the Convertible Notes (Note 9) for which fair value is determined by Level 3 inputs:
|
Nine Months Ended |
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|
September 30, 2023 |
September 30, 2022 |
|||||||
|
Beginning balance |
$ | $ | ||||||
|
Fair value adjustment |
( |
) | ||||||
|
Reclassification to additional paid in capital upon conversion |
( |
) | ||||||
|
Ending balance |
$ | $ | ||||||
|
Three Months Ended |
||||||||
|
September 30, 2023 |
September 30, 2022 |
|||||||
|
Beginning balance |
$ | $ | ||||||
|
Fair value adjustment |
( |
) | ||||||
|
Reclassification to additional paid in capital upon conversion |
( |
) | ||||||
|
Ending balance |
$ | $ | ||||||
Valuation techniques used to measure fair value maximize the use of relevant observable inputs and minimize the use of unobservable inputs (Note 9). The Company’s convertible notes are classified within Level 3 of the fair value hierarchy because the fair value measurement is based, in part, on significant inputs not observed in the market.
There were no transfers among Level 1, Level 2 or Level 3 categories in the nine months ended September 30, 2023 or in the year ended December 31, 2022.
The fair value of the 2020 Notes and the 2021 Notes, and collectively the Convertible Notes (Note 9) as of December 31, 2022 were estimated as the combination of a zero-coupon bond and a call option. The combined values for each of the 2020 Notes and the 2021 Notes as of December 31, 2022 were then weighted by the probability of completing a financing or reverse merger. This approach resulted in the classification of the 2020 Notes and the 2021 Notes as of December 31, 2022 as Level 3 of the fair value hierarchy. The assumptions utilized to value the 2020 Notes and the 2021 Notes as of December 31, 2022 were an estimated term of
Leases
In February 2016, the FASB issued ASU No. 2016-02, “Leases”, which establishes a ROU model. That requires a lessee to recognize an ROU asset and corresponding lease liability on the balance sheet for all leases with a term longer than 12 months. Leases will be classified as finance or operating, with classification affecting the pattern and classification of expense recognition in the Statement of Operations as well as the reduction of the ROU asset. The new standard provides a number of optional practical expedients in transition. The Company has elected to apply (i) the practical expedient, which allows us to not separate lease and non-lease components, for new leases and (ii) the short-term lease exemption for all leases with an original term of less than 12 months, for purposes of applying the recognition and measurements requirements in the new standard.
At the inception of an arrangement, the Company determines whether the arrangement is or contains a lease based on specific facts and circumstances, the existence of an identified asset(s), if any, and the Company’s control over the use of the identified asset(s), if applicable. Operating lease liabilities and their corresponding ROU assets are recorded based on the present value of future lease payments over the expected lease term. The interest rate implicit in lease contracts is typically not readily determinable. As such, the Company will utilize the incremental borrowing rate, which is the rate incurred to borrow on a collateralized basis over a similar term an amount equal to the lease payments in a similar economic environment.
The Company has elected to combine lease and non-lease components as a single component. Operating leases will be recognized on the unaudited interim condensed consolidated balance sheet as ROU assets, lease liabilities current and lease liabilities non-current. Fixed rent payments are included in the calculation of the lease balances, while variable costs paid for certain operating and pass-through costs are excluded. Lease expense is recognized over the expected term on a straight-line basis.
Research and Development
Research and development costs are expensed as incurred and consist primarily of new product development. Research and development costs include salaries and benefits, consultants’ fees, process development costs and stock-based compensation, as well as fees paid to third parties that conduct certain research and development activities on the Company’s behalf.
A substantial portion of the Company’s ongoing research and development activities are conducted by third-party service providers. The Company records accrued expenses for estimated preclinical study and clinical trial expenses. Estimates are based on the services performed pursuant to contracts with research institutions, contract research organizations in connection with clinical studies, investigative sites in connection with clinical studies, vendors in connection with preclinical development activities, and contract manufacturing organizations in connection with the production of materials for clinical trials. Further, the Company accrues expenses related to clinical trials based on the level of subject enrollment and activity according to the related agreement. The Company monitors subject enrollment levels and related activity to the extent reasonably possible and makes judgments and estimates in determining the accrued balance in each reporting period. Payments for these activities are based on the terms of the individual arrangements, which may differ from the pattern of costs incurred, and are reflected in the financial statements as prepaid or accrued research and development.
If the Company underestimates or overestimates the level of services performed or the costs of these services, actual expenses could differ from estimates. To date, the Company has not experienced significant changes in its estimates of preclinical studies and clinical trial accruals.
Patent Costs
All patent-related costs incurred in connection with filing and prosecuting patent applications are expensed as incurred due to the uncertainty about the recovery of the expenditure. Amounts incurred are classified as general and administrative expenses in the unaudited interim condensed consolidated statement of operations.
Stock-based Compensation
Stock-based compensation for employee and non-employee awards is measured on the grant date based on the fair value of the award and recognized on a straight-line basis over the requisite service period. The fair value of stock options to purchase common stock are measured using the Black-Scholes option pricing model. The Company accounts for forfeitures as they occur.
The fair value of stock options is determined by the Company using the methods and assumptions discussed below. Each of these inputs is subjective and generally requires significant judgment and estimation by management.
Expected Term—The expected term represents the period that stock-based awards are expected to be outstanding. The Company uses the “simplified method” to estimate the expected term of stock option grants. Under this approach, the weighted-average expected life is presumed to be the average of the contractual term of ten years and the weighted-average vesting term of the Company stock options, taking into consideration multiple vesting tranches. The Company utilizes this method due to lack of historical data and the plain-vanilla nature of the Company’s stock-based awards.
Expected Volatility—The Company has limited information on the volatility of its common stock as the shares were not actively traded on any public markets until recently. The expected volatility was derived from the historical stock volatilities of comparable peer public companies within its industry. These companies are considered to be comparable to the Company’s business over a period equivalent to the expected term of the stock-based awards.
Risk-Free Interest Rate—The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the date of grant for zero-coupon U.S. Treasury notes with maturities approximately equal to the and stock options expected term.
Expected Dividend Rate—The expected dividend is
Revenue Recognition
The Company generates revenue from government contracts that reimburse the Company for certain allowable costs for funded projects.
The Company recognizes funding received as grant revenue for the Company’s grant from the NIA, rather than as a reduction of research and development expenses, because the Company is the principal in conducting the research and development activities and these contracts are central to its ongoing operations. Revenue is recognized as the qualifying expenses related to the contracts are incurred. Revenue recognized upon incurring qualifying expenses in advance of receipt of funding is recorded in the Company’s unaudited interim condensed consolidated balance sheet as accounts receivable. Amounts received in advance of services rendered are recorded as deferred grant revenue. The related costs incurred by the Company are included in research and development expense in the Company’s unaudited interim condensed consolidated statements of operations.
Income Taxes
The Company accounts for income taxes under the asset and liability method, which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the unaudited condensed consolidated interim financial statements. Under this method, deferred tax assets and liabilities are determined on the basis of the differences between the financial statement and tax basis of assets and liabilities by using enacted tax rates in effect for the year in which the differences are expected to recover or settle. The effect of a change in tax rates on deferred tax assets and liabilities is recognized in income for the period that includes the enactment date.
The deferred tax assets are recognized to the extent the Company believes that these assets are more likely than not to be realized. A valuation allowance is provided when it is more likely than not that some portion or all of a deferred tax asset will not be realized. Due to the Company’s historical operating performance and the recorded cumulative net losses in prior fiscal periods, the net deferred tax assets have been fully offset by a valuation allowance.
The Company records uncertain tax positions using a two-step process. First, the Company determines whether it is more likely than not that the tax positions will be sustained on the basis of the technical merits of the position. Second, for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50% likely to be realized upon ultimate settlement with the related tax authority.
The Company recognizes interest and penalties, if any, related to unrecognized tax benefits on the interest expense line and other expense line, respectively, in the accompanying statements of operations. Accrued interest and penalties are included on the related liability lines in the unaudited interim condensed consolidated balance sheet.
Net Income (loss) per share
Basic net income (loss) per share of common stock is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding during each period. Diluted net income (loss) per share of common stock includes the effect, if any, from the potential exercise or conversion of securities, such as convertible preferred stock, Convertible Notes (inclusive of change in fair value of Convertible Notes), stock options, and warrants, which would result in the issuance of incremental shares of common stock. For diluted net loss per share in periods where the Company has a net loss, the weighted-average number of shares of common stock is the same for basic net loss per share due to the fact that when a net loss exists, dilutive securities are not included in the calculation. For the three and nine months ended September 30, 2023, the Company was in a net income position and calculated the diluted net income per share by dividing the Company’s net income by the dilutive weighted average number of share outstanding during the periods, determined using the treasury stock method and the average stock price during the period. The pre-funded warrants to purchase common stock issued in connection with the Merger are included in the calculation of basic and diluted net loss per share as the exercise price of $
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
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|
2023 |
2022 |
2023 |
2022 |
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|
Numerator: |
||||||||||||||||
|
Net income (loss) |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
| Change in fair value of convertible notes | ( |
) | ( |
) | ||||||||||||
| Adjusted net income (loss) | $ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
|
Denominator |
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Weighted average shares outstanding, basic |
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|
Weighted average convertible notes before conversion |
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|
Weighted average shares outstanding, diluted |
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|
Net income (loss), basic |
$ | $ | ( |
) | $ | $ | ( |
) | ||||||||
|
Net income (loss), dilutive |
$ | ( |
) | $ | ( |
) | $ | ( |
) | $ | ( |
) | ||||
The following potentially dilutive securities outstanding have been excluded from the computation of diluted weighted average shares outstanding, as they would be anti-dilutive:
|
Three and Nine Months Ended September 30, |
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|
2023 |
2022 |
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Preferred Series A-1 |
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Preferred Series A-2 |
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Preferred Series B |
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Warrants |
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Stock options |
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Total |
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Segments
The Company has one operating segment. The Company’s chief operating decision maker, its Chief Executive Officer, manages the Company’s operations on a condensed consolidated basis for purposes of allocating resources.
Recently Issued But Not Yet Adopted Accounting Pronouncements
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”). ASU 2020-06 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 ASU is part of the FASB’s simplification initiative, which aims to reduce unnecessary complexity in US GAAP. The ASU’s amendments are effective for fiscal years beginning after December 15, 2023, and interim periods within those fiscal years. The Company elected to early adopt ASU 2020-06 during the year ended December 31, 2022 using the modified retrospective method, which did not have a material impact on the financial statements.
In June 2016, the FASB issued ASU No. 2016-13, “Measurement of Credit Losses on Financial Instruments” (“ASU 2016-13”), together with a series of subsequently issued related ASUs, has been codified in Topic 326. Topic 326 establishes new requirements for companies to estimate expected credit losses when measuring certain financial assets, including accounts receivables. The new guidance is effective for fiscal years beginning after December 15, 2022. The Company adopted ASU No. 2016-13 on January 1, 2023 which did not have a material impact on the financial statements.
In January 2021, the FASB issued ASU No. 2021-01 “Reference Rate Reform (Topic 848): Scope” (“ASU 2021-01”), which was effective immediately and permits entities to elect certain optional expedients and exceptions when accounting for derivatives and certain hedging relationships affected by changes in interest rates and the transition. Additionally, ASU 2022-06 “Reference Rate Reform (Topic 848): Deferral of the Sunset Date of Topic 848” defers the sunset date of ASC 848 from December 31, 2022 to December 31, 2024. The new guidance is effective for fiscal years beginning after December 31, 2024. The Company does not currently believe that this transition from LIBOR will have a material impact on its financial statements.
4. Merger
On August 16, 2023, the Company completed the Merger of EIP and Merger Sub as discussed in Note 1. For financial reporting purposes, EIP was determined to be the accounting acquirer based upon the terms of the Merger and other factors, including: (i) EIP securityholders immediately prior to the Merger owning approximately
The following table shows the net assets acquired in the Merger:
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August 16, |
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2023 |
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Cash and cash equivalents |
$ | |||
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Prepaid and other assets |
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Accounts payable and accrued expenses |
( |
) | ||
|
Total net assets assumed |
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Minus: Transaction costs |
( |
) | ||
|
Total net assets assumed minus transaction costs |
$ | |||
5. Significant Agreements and Contracts
Vertex Option and License Agreement
In August 2012, the Company entered the License Agreement, as amended, to acquire an exclusive license to develop and commercialize a drug candidate “VX-745” from Vertex. In August 2014, the Company exercised its option to acquire the license and paid an option fee of $
The License Agreement granted the Company the exclusive worldwide use of VX-745 in the field of diagnosis, treatment and prevention of Alzheimer’s disease and related central nervous system disorders in humans.
As part of the License Agreement, the Company is obligated to make certain payments totaling up to approximately $
National Institute of Aging Grant
In January 2023, the Company was awarded a $
The total revenue recognized from the NIA grant was $
6. Prepaid Expenses and Other Current Assets
Prepaid expenses and other current assets consisted of the following:
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September 30, |
December 31, |
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2023 |
2022 |
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Prepaid clinical expenses |
$ | $ | ||||||
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Insurance |
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Rent |
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Other |
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Total |
$ | $ | ||||||
7. Accrued Expenses and Other Current Liabilities
Accrued expenses and other current liabilities consisted of the following:
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September 30, |
December 31, |
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2023 |
2022 |
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| Professional fees | $ | $ | ||||||
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Employee compensation costs |
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Clinical development costs |
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Other |
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Total |
$ | $ | ||||||
8. Line of Credit
The Company established a line of credit with a lender during the year ended December 31, 2020 in the amount of $
drawdowns were made, and costs incurred related to the line of credit during the nine months ended September 30, 2023 nor the year ended December 31, 2022.
9. Convertible Notes
In December 2020, EIP issued the 2020 Notes to predominantly related party investors for proceeds of $
In June 2023, EIP entered into the 2023 Notes Amendment which amended the conversion price of the Convertible Notes to $
The 2023 Notes Amendment qualified as a modification in accordance with FASB ASC 470 Debt, since there were no concessions granted and no substantive change to the fair value of the conversion option before and after the 2023 Amendment. There was no financial statement impact as a result of the 2023 Amendment other than the change in fair value of the Convertible Notes during the nine months ended September 30, 2023 and debt issuance costs of approximately $
As a result of the Merger (Note 4), pursuant to the terms thereof, the Convertible Notes converted into shares of EIP Common Stock which were subsequently converted into the right to exchange such shares for
10. Commitments and Contingencies
Operating Leases
The Company has a short-term agreement to utilize membership-based co-working space in Charlottesville, Virginia and a short-term lease for office space in Boston, Massachusetts. Rent expense related to the Company’s short-term agreements was approximately $
Research and Development Arrangements
In the course of normal business operations, the Company would enter into agreements with universities and CROs to assist in the performance of research and development activities and contract manufacturers to assist with chemistry, manufacturing, and controls related expenses. Expenditures to CROs represented a significant cost in clinical development for the Company. The Company could also enter into additional collaborative research, contract research, manufacturing, and supplier agreements in the future, which may require upfront payments and long-term commitments of cash.
Defined Contribution Retirement Plan
The Company has established its 401(k) Plan, which covers all employees who qualify under the terms of the plan. Eligible employees may elect to contribute to the 401(k) Plan up to
Legal Proceedings
On August 7, 2014, a complaint was filed in the Superior Court of Los Angeles County, California by Paul Feller, the former Chief Executive Officer of the Company’s legal predecessor under the caption Paul Feller v. RestorGenex Corporation, Pro Sports & Entertainment, Inc., ProElite, Inc. and Stratus Media Group, GmbH (Case No. BC553996). The complaint asserts various causes of action, including, among other things, promissory fraud, negligent misrepresentation, breach of contract, breach of employment agreement, breach of the covenant of good faith and fair dealing, violations of the California Labor Code and common counts. The plaintiff is seeking, among other things, compensatory damages in an undetermined amount, punitive damages, accrued interest and an award of attorneys’ fees and costs. On December 30, 2014, the Company filed a petition to compel arbitration and a motion to stay the action. On April 1, 2015, the plaintiff filed a petition in opposition to the Company’s petition to compel arbitration and a motion to stay the action. After a related hearing on April 14, 2015, the court granted the Company’s petition to compel arbitration and a motion to stay the action. On January 8, 2016, the plaintiff filed an arbitration demand with the American Arbitration Association. On November 19, 2018 at an Order to Show Cause Re Dismissal Hearing, the court found sufficient grounds not to dismiss the case and an arbitration hearing was scheduled, originally for November 2020 but later postponed due to the COVID-19 pandemic and related restrictions on gatherings in the State of California. In addition, following the November 2018 hearing, an automatic stay was placed on the arbitration in connection with the plaintiff filing for personal bankruptcy protection. On October 22, 2021, following a determination by the bankruptcy trustee not to pursue the claims and release them back to the plaintiff, the parties entered into a stipulation to abandon arbitration and return the matter to state court. A case management conference was held on February 23, 2022 at which an initial trial date of May 24, 2023 was set, and the parties have agreed to stipulate to mediation in advance of the trial. On October 20, 2022, the parties filed a joint stipulation to continue the trial and certain deadlines related to the mediation in order to allow plaintiff’s counsel to continue to seek treatment for an ongoing medical issue. On November 1, 2022, based on the parties joint stipulation, the court entered an order continuing the trial date to October 25, 2023 and, on October 6, 2023, the court entered an order further continuing the trial date to April 24, 2024.
The Company believes that is has meritorious defenses to the claims alleged in this matter and is defending itself vigorously. However, at this stage, the Company is unable to predict the outcome and possible loss or range of loss, if any, associated with its resolution or any potential effect the matter may have on the Company’s financial position. Depending on the outcome or resolution of this matter, it could have a material effect on the Company’s financial position, results of operations and cash flows.
11. Stockholders’ Equity (Deficit) and Common Stock Warrants
On August 16, 2023 in connection with the closing of the Merger, the following is reflected on the condensed consolidated interim financial statements of convertible preferred stock and stockholders’ equity (deficit) for the three and nine months ended September 30, 2023: (i) the issuance of
In July 2023, EIP sold
Warrants
As of September 30, 2023, the Company had the following warrants outstanding to acquire shares of its common stock:
|
Warrants |
Exercise |
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|
Outstanding |
Price |
Expiration Date |
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|
Historical Diffusion common stock warrants |
$ |
May 2024 through February 2026 |
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|
Historical EIP common stock warrants |
$ |
April 2028 |
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|
Pre-funded warrants issued related to closing of reverse recapitalization |
$ |
None |
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Upon completion of the Merger, the Convertible Notes and outstanding shares of EIP preferred stock converted into shares of EIP Common Stock which were subsequently converted into the right to exchange such shares for shares of the Company’s common stock or, in certain cases, pre-funded warrants to purchase the Company’s common stock.
12. Stock-Based Compensation
2015 Equity Plan
The 2015 Equity Plan provides for increases to the number of shares reserved for issuance thereunder each January 1 equal to
2018 Employee, Director and Consultant Equity Incentive Plan
On March 28, 2018, EIP adopted the 2018 Plan, which was assumed by the Company pursuant to and in accordance with the terms of the Merger Agreement. Under the 2018 Plan, the Company may issue incentive stock options, non-qualified stock options, stock grants, and other stock-based awards to employees, directors, and consultants, as specified in the 2018 Plan and subject to applicable SEC and Nasdaq rules and regulations. The Board of Directors has the authority to determine to whom options or stock will be granted, the number of shares, the term, and the exercise price. Options granted under the 2018 Plan have a term of up to years and generally vest over a period with
The Company recorded stock-based compensation expense in the following expense categories of its unaudited interim condensed consolidated statements of operations for the periods indicated:
|
Three Months Ended September 30, |
Nine Months Ended September 30, |
|||||||||||||||
|
2023 |
2022 |
2023 |
2022 |
|||||||||||||
|
Research and development |
$ | $ | $ | $ | ||||||||||||
|
General and administrative |
||||||||||||||||
|
Total stock-based compensation expense |
$ | $ | $ | $ | ||||||||||||
The following table summarizes the activity related to all stock option grants for the nine months ended September 30, 2023:
|
Number of Options |
Weighted average exercise price per share |
|||||||
|
Balance at January 1, 2023 |
$ | |||||||
|
Options assumed in the Merger |
$ | |||||||
|
Granted |
$ | |||||||
|
Outstanding at September 30, 2023 |
$ | |||||||
| Exercisable at September 30, 2023 | $ | |||||||
The Black-Scholes option-pricing model was used to estimate the grant date fair value of each stock option grant at the time of grant using the following weighted-average assumptions:
|
September 30, |
||||||||
|
2023 |
2022 |
|||||||
|
Expected term (in years) |
||||||||
|
Risk-free interest rate |
||||||||
|
Expected volatility |
||||||||
|
Dividend yield |
||||||||
options were exercised during the three or nine months ended September 30, 2023 and 2022. At September 30, 2023, there was $
13. Restatement of Previously Issued (Unaudited) Interim Financial Statements
While undergoing a review of its unaudited condensed consolidated interim financial statements as of September 30, 2023, the Company determined it had incorrectly expensed costs directly associated with the Merger during various periods in 2023. Fees such as accounting and legal related to the Merger should have been capitalized and net against proceeds of the Merger. This impacted previously reported amounts for deferred offering costs and general and administrative expense, among other line items in the unaudited condensed consolidated interim financial statements as of and for the three months ended March 31, 2023 and as of and for the six months ended June 30, 2023.
The following tables set forth the effects of the error corrections on affected items within the Company’s previously reported unaudited interim condensed consolidated balance sheet as of the periods indicated had the adjustments been made in the corresponding quarter:
|
June 30, 2023 |
||||||||||||
|
As reported |
Adjusted |
As restated |
||||||||||
|
Deferred offering costs |
$ | $ | $ | |||||||||
|
Accumulated deficit |
$ | ( |
) |
$ | $ | ( |
) |
|||||
|
Total assets |
$ | $ | $ | |||||||||
|
Total liabilities, convertible preferred stock and stockholder’s deficit |
$ | $ | $ | |||||||||
|
Total stockholders’ deficit |
$ | ( |
) |
$ | $ | ( |
) |
|||||
|
March 31, 2023 |
||||||||||||
|
As reported |
Adjusted |
As restated |
||||||||||
|
Deferred offering costs |
$ | $ | $ | |||||||||
|
Accumulated deficit |
$ | ( |
) |
$ | $ | ( |
) |
|||||
|
Total assets |
$ | $ | $ | |||||||||
|
Total liabilities, convertible preferred stock and stockholder’s deficit |
$ | $ | $ | |||||||||
|
Total stockholders’ deficit |
$ | ( |
) |
$ | $ | ( |
) |
|||||
The following tables set forth the effects of the error corrections on affected items within the Company’s previously reported unaudited interim condensed statements of operations for the periods indicated had the adjustments been made in the corresponding quarters:
|
Six Months Ended June 30, 2023 |
||||||||||||
|
As reported |
Adjusted |
As restated | ||||||||||
|
General and administrative expense |
$ | $ | ( |
) | $ | |||||||
|
Total operating expenses |
$ | $ | ( |
) |
$ | |||||||
|
Loss from operations |
$ | ( |
) |
$ | $ | ( |
) |
|||||
|
Net loss |
$ | ( |
) | $ | $ | ( |
) | |||||
|
Net loss per share of common stock, basic and diluted |
$ | ( |
) | $ | $ | ( |
) | |||||
|
Three Months Ended March 31, 2023 |
||||||||||||
|
As reported |
Adjusted | As restated | ||||||||||
|
General and administrative expense |
$ | $ | ( |
) | $ | |||||||
|
Total operating expenses |
$ | $ | ( |
) |
$ | |||||||
|
Loss from operations |
$ | ( |
) |
$ | $ | ( |
) |
|||||
|
Net loss |
$ | ( |
) | $ | $ | ( |
) | |||||
|
Net loss per share of common stock, basic and diluted |
$ | ( |
) | $ | $ | ( |
) | |||||
14. Subsequent Events
The Company has evaluated subsequent events through the filing of this Quarterly Report and determined that there have been no events that have occurred that would require adjustments to our disclosures in the condensed consolidated interim financial statements.
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
You should read the following discussion of our financial condition and results of operations together with the unaudited condensed consolidated interim financial statements and the notes thereto included elsewhere in this Quarterly Report and the other financial information included herein. The following discussion may contain predictions, estimates and other forward-looking statements that involve a number of risks and uncertainties, including those discussed under the heading “Note Regarding Forward-Looking Statements” included elsewhere in this Quarterly Report, under the heading “Part I — Item 1A. Risk Factors” in our Annual Report, under the heading "Risk Factors" in Exhibit 99.2 to our amended Current Report on Form 8-K filed with the SEC on September 29, 2023, and in our other public filings. These risks could cause our actual results to differ materially from any future performance suggested below.
Overview
We are a clinical-stage biotechnology company advancing CNS-focused therapeutics to benefit patients with a range of degenerative diseases of the brain. We are currently developing neflamapimod, an investigational orally administered small molecule brain penetrant that inhibits p38α. Neflamapimod has the potential to treat synaptic dysfunction, the reversible aspect of the underlying neurodegenerative processes that cause disease in DLB and certain other major neurological disorders. Neflamapimod is currently being evaluated in a Phase 2b study in patients with DLB.
There are currently no approved therapies in DLB and no disease-modifying drugs in Phase 3 clinical trials. We believe that we are a leader in the industry, as we are the only company of which we are aware with an asset that, in DLB, has shown statistically significant positive effects compared to placebo in a Phase 2a clinical trial and has initiated a Phase 2b clinical evaluation. Our novel approach focuses on reducing the impact of inflammation in the brain, or neuroinflammation, which we believe is a key factor in the manifestation of neurodegenerative disease, including DLB. Chronic activation of the enzyme p38α in the neurons (nerve cells) within the brains of people with neurodegenerative diseases is believed to impair how neurons communicate through synapses (the connections between neurons). This impairment, termed synaptic dysfunction, leads to deterioration of cognitive and motor abilities. Left untreated, synaptic dysfunction can result in neuronal loss that leads to devastating disabilities, institutionalization and, ultimately, death. We believe that inhibiting p38α activity in the brain, by interfering with key pathogenic drivers of disease, has the potential to improve cognitive and motor function observed in early-stage neurodegenerative diseases. We also believe it is possible to modify the course of these diseases by delaying permanent synaptic dysfunction and neuron death.
Our lead drug candidate, neflamapimod, is an oral therapy that penetrates the blood-brain barrier and inhibits activity of p38α in the neuron. Based on preclinical and clinical work to date, we believe if neflamapimod is given in the early stages of neurodegenerative diseases, it may reverse synaptic dysfunction and improve neuron health. In preclinical studies, neflamapimod has been shown to reverse the neurodegenerative process in the” BFC system, the specific region of the brain that is the site of the major pathology in DLB. We have obtained positive Phase 2a clinical data in DLB, specifically, statistically significant improvement compared to placebo on measures of dementia severity and functional mobility (walking ability). In addition, we previously obtained Phase 2 clinical data in AD that provides support by demonstrating blood-brain-barrier penetration, target (p38α) engagement, and identification of dose-response.
There are an estimated 700,000 individuals with DLB in each of the U.S. and the European Union. The disease in afflicted persons progresses and severely impacts not only their daily lives but that of their caregivers. To date, the management of DLB, involves treating certain cognitive and motor symptoms, with modest albeit transient improvement. No approaches have been shown to clinically slow neuronal loss or prevent cognitive decline, and there are no approved therapies for treating the underlying disease’s process. Our approach is based on understanding the mechanism by which neuroinflammation leads to the initiation of the neurodegenerative process through synaptic dysfunction. In major neurodegenerative diseases, the end result of the process is neuronal loss. Before neuronal loss commences, disease progression in major neurodegenerative disorders, including DLB, initially involves a protracted period of functional loss, particularly with respect to the synapses. We seek to target the molecular mechanisms within neurons that lead to synaptic dysfunction. We believe that successful treatment of synaptic dysfunction will provide patients with an improvement in cognition and motor function in the first few weeks or months after treatment initiation, followed by a slowing of neuronal loss and associated disease progression (i.e., further cognitive and motor function decline). Importantly, the clinical symptoms in DLB are most directly linked to synaptic dysfunction in cholinergic neurons (neurons producing the neurotransmitter acetylcholine) in a part of the brain named the basal forebrain, while scientific and preclinical data with neflamapimod support the notion that neflamapimod treats the molecular mechanisms underlying dysfunction and degeneration of such basal forebrain cholinergic neurons.
Neflamapimod has been evaluated in more than 300 healthy volunteers and patients, including in 149 subjects in Phase 2 clinical trials in either DLB or AD. We have obtained positive Phase 2a clinical data in DLB. Specifically, in a 91-subject, 16-week placebo-controlled Phase 2a clinical trial in DLB, in the all-subject analysis neflamapimod demonstrated improvement vs. placebo in dementia severity (evaluated by the CDR-SB test, p=0.023 vs. placebo) and motor function (evaluated by the TUG test, TUG p=0.044 vs. placebo). In secondary analysis, at highest dose (40mg TID), significant improvement vs. placebo was also seen on a cognitive test battery. The Phase 2 clinical data in AD provides support through demonstrating blood-brain-barrier penetration, target engagement in the brain, and understanding of dose-response.
The primary analysis of the Phase 2a DLB trial was published in Nature Communications and showed neflamapimod significantly improved dementia severity and motor function. A recent publication in the major clinical neurology journal, Neurology, extends the observations of the initial publication, describing the consistency and greater magnitude of clinical effect in observed patients without AD co-pathology, which we believe further strengthens the conclusions regarding the clinical effect in DLB demonstrated in Phase 2a. A subsequent publication in Molecular Neurodegeneration provides a combined evaluation of the findings in the Neurology and Nature Communications articles that makes the case for advancing neflamapimod as a treatment for DLB
Our next step in the clinical development of neflamapimod is the execution of our ongoing Phase 2b placebo-controlled clinical trial, named RewinD-LB, which is a double-blind, 16-week study in 160 patients with early stage DLB randomized 1:1 to 40mg neflamapimod or placebo TID. Patients in both the neflamapimod and placebo groups who complete the main, randomized, double-blinded, 16-week phase of the study will receive neflamapimod on an open label basis for an additional 32 weeks. Clinical sites are located in the US, the UK, and the Netherlands. Patients with Alzheimer’s disease-related co-pathology, assessed by a blood biomarker (plasma ptau181), will be excluded.
The RewinD-LB trial is intended to confirm, and the design of the trial is based upon, learnings from the Phase 2a DLB trial. Key distinctions in the design of the RewinD-LB trial from the Phase 2a study include, (1) the use of one dosing regimen of neflamapimod (40mg capsules three-times-a-day, TID), based on the dose-response analysis of the study, and on observations in AD studies; (2) the choice of CDR-SB as the primary endpoint; and (3) the exclusion of patients with Alzheimer’s related co-pathology, as evaluated by plasma levels of tau phosphorylated at position 181 (ptau181; to enrich for such patients, the global CDR score at entry will be limited to 0.5 or 1.0). With these modifications to the design from Phase 2a, sample size calculations (see below) indicate that the RewinD-LB Phase 2b study has greater than 95% statistical power (approaching 100%) to meet its primary objective of demonstrating improvement relative to placebo on change in CDR-SB over the course of the study.
We expect to complete enrollment in RewinD-LB during the first half of 2024 and then report initial results from the placebo-controlled portion of the study during the second half of 2024. The RewinD-LB study is funded by a $21 million grant from the NIA, which will be disbursed over the course of the study as costs are incurred. The results of these studies are intended to provide the data necessary to finalize design of a Phase 3 clinical trial, the general framework of which has been agreed upon with the FDA.
In addition to its potential to treat DLB, we believe the benefit of targeting neuroinflammation-induced synaptic dysfunction in the basal forebrain cholinergic system can be applied to other neurologic indications including as treatment promoting recovery in the three months after ischemic stroke and as a disease-modifying treatment for EOAD. The scientific rationale for evaluating neflamapimod to promote recovery after stroke is predicated on the BFC system playing a critical role in recovery, particularly motor function, after ischemic stroke. Impaired activity of that system by residual inflammation limits the extent of recovery that otherwise occurs in the weeks and months after an acute stroke event. Through the same mechanisms as in DLB, neflamapimod would be predicted to reverse suppression of basal forebrain cholinergic function, leading to improved recovery of motor activities. As there are overlapping disease mechanisms, the scientific rationale for EOAD is the same as that for DLB.
In 2012, we entered into the License Agreement with Vertex and subsequently acquired an exclusive license from Vertex in 2014 to develop and commercialize neflamapimod for the treatment of AD and other neurodegenerative diseases. We have made a number of discoveries related to our lead product candidate, neflamapimod, which have enabled us to build a wholly-owned intellectual property portfolio, which provides protection to 2032 (methods of treating patients suffering from AD) and 2035 (uses of neflamapimod for improving cognition). In addition, we have a patent on the formulation of neflamapimod that is protected through 2039.
Financial Summary
As of September 30, 2023, we had cash and cash equivalents of approximately $10.4 million. To date, we have not had any products approved for sale and have not generated any revenue from product sales. We do not expect to generate revenue from product sales until such time, if ever, that we are able to successfully complete the development and obtain marketing approval for one of our product candidates. We have never been profitable, and we will continue to require additional capital to develop neflamapimod and fund operations for the foreseeable future. We have historically incurred net losses in each year ended since inception, though not in the current three and nine months ended September 30, 2023. Our ability to generate product revenue will depend on the successful development and eventual commercialization of neflamapimod. Our net income was $2.2 million and $0.2 million for the three months and nine months ended September 30, 2023, respectively. As of September 30, 2023, we had an accumulated deficit of $52.1 million. We expect our expenses will increase in connection with our ongoing activities, as we:
|
● |
advance neflamapimod through clinical trials, including our ongoing Phase 2b trial for DLB, through to initiation of a Phase 3 trial in DLB; |
|
● |
hire additional personnel; |
|
● |
continue to operate as a public company; |
|
● |
require the manufacture of supplies for our nonclinical studies and clinical trials; and |
|
● |
obtain, maintain, expand, and protect our intellectual property portfolio. |
Based on our current operating plan, we believe that our existing cash and cash equivalents on hand as of September 30, 2023, along with the remaining funds to be received from the NIA grant, will enable us to fund our operating expenses and capital expenditure requirements through at least twelve months through the issuance of these interim financial statements. However, we expect to incur substantial expenditures in the foreseeable future for the development of neflamapimod and will require additional financing to continue this development.
Financial Operations Overview
Revenue
We have not generated any revenue from product sales and we do not expect to do so in the near future. As of September 30, 2023, total cash funding of $5.2 million was received by us from the NIA grant. The total revenue recognized from the NIA grant was $1.6 million and $4.7 million for the three and nine months ended September 30, 2023, respectively. The funding that has not been recognized as revenue, $0.5 million as of September 30, 2023, has been recorded as deferred revenue.
Research and Development Expenses
Research and development expenses account for a significant portion of our operating expenses. We recognize research and development expenses as incurred. Research and development expenses consist primarily of costs incurred for the discovery and development of our product candidates, which include:
|
● |
expenses incurred under agreements with third-party contract organizations, preclinical testing organizations, and consultants; |
|
● |
costs related to production of clinical materials, including fees paid to contract manufacturers; |
|
● |
vendor expenses related to the execution of preclinical studies and clinical trials; |
|
● |
personnel-related expenses, including salaries, benefits, and stock-based compensation for personnel engaged in research and development functions; |
|
● |
costs related to the preparation of regulatory submissions; |
|
● |
third-party license fees; and |
|
● |
expenses for rent and other supplies. |
Costs for certain development activities are recognized based on an evaluation of the progress to completion of specific tasks using information and data provided to us by our vendors, collaborators, and third-party service providers. Non-refundable advance payments made by us for future research and development activities are capitalized and expensed as the related goods are delivered and as services are performed.
Specific program expenses include expenses associated with the development of our lead product candidate, neflamapimod, which recently initiated a Phase 2b clinical trial for treatment of subjects with DLB. Personnel or other operating expenses incurred for our research and development programs primarily relate to salaries and benefits, stock-based compensation, and facility expenses.
At this time, we cannot reasonably estimate or know the nature, timing, and estimated costs of the efforts that will be necessary to complete the development of, and obtain regulatory approval for, neflamapimod, or for any other product candidates that we may develop or acquire. We expect our research and development expenses to increase substantially for the foreseeable future as we continue to invest in research and development (“R&D”) activities related to developing neflamapimod such as conducting larger clinical trials, seeking regulatory approval and incurring expenses associated with hiring personnel to support other R&D efforts. The process of conducting the necessary clinical research to obtain regulatory approval is costly and time-consuming, and the successful development of product candidates, including neflamapimod, is highly uncertain.
General and Administrative Expenses
General and administrative expenses consist primarily of personnel-related costs, including stock-based compensation for our personnel in executive, finance and accounting, and other administrative functions. General and administrative expenses also include legal fees relating to intellectual property and corporate matters, professional fees paid for accounting, auditing, consulting, and tax services, insurance costs, and facility costs.
We anticipate that our general and administrative expenses will increase in the future as we increase our headcount to support our continued research and development activities and as we begin development activities pursuant to the NIA grant. We also anticipate that we will incur increased expenses as a result of operating as a public company, including expenses related to compliance with the rules and regulations of the SEC and those of any national securities exchange on which our securities are traded, legal, auditing, additional insurance expenses, investor relations activities, and other administrative and professional services.
Other Income (Expense)
Other income (expense) consists of interest earned on our cash and cash equivalents and the change in fair value of the previously outstanding EIP Convertible Notes.
Results of Operations
Comparison of the Three Months Ended September 30, 2023 and 2022
The following table summarizes our results of operations for the three months ended September 30, 2023 and 2022:
| Three Months Ended September 30 | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
|
Grant revenue |
$ | 1,526,482 | $ | - | $ | 1,526,482 | 100 |
% |
||||||||
|
Operating expenses: |
||||||||||||||||
|
Research and development |
1,791,487 | 330,543 | 1,460,944 | 442 |
% |
|||||||||||
|
General and administrative |
2,410,124 | 573,511 | 1,836,613 | 320 |
% |
|||||||||||
|
Loss from operations |
(2,675,129 |
) |
(904,054 |
) |
(1,771,075 |
) |
196 |
% |
||||||||
|
Other income (expense): |
||||||||||||||||
|
Other income (expense) |
4,777,824 | (88 |
) |
4,777,912 | (a | ) | ||||||||||
|
Interest income |
47,667 | 21,519 | 26,148 | 122 |
% |
|||||||||||
|
Total other income (expense) |
4,825,491 | 21,431 | 4,804,060 | (a |
) |
|||||||||||
|
Net income (loss) |
$ | 2,150,362 | $ | (882,623 |
) |
$ | 3,032,985 | -344 |
% |
|||||||
(a) Percentage not meaningful
Grant Revenue
Grant revenue was $1.5 million for the three months ended September 30, 2023 which was a result of services performed during the three months ended September 30, 2023 related to the $21.0 million grant awarded to us by the NIA in January 2023 to support a Phase 2b study of neflamapimod in DLB. As the NIA grant was initially awarded in January 2023, there was no grant revenue in the corresponding three-month period in the prior year.
Research and Development Expenses
Research and development expenses were $1.8 million for the three months ended September 30, 2023, compared to $0.3 million for the three months ended September 30, 2022. The increase of $1.5 million was primarily due to our DLB Phase 2b trial beginning in the first quarter of 2023.
General and Administrative Expenses
General and administrative expenses were $2.4 million for the three months ended September 30, 2023, compared to $0.6 million for the three months ended September 30, 2022. The increase of $1.8 million was primarily due to higher professional fees related to public company costs, as well as increased headcount as a result of the Merger.
Other Income (Expense)
Other income (expense) was $4.8 million for the three months ended September 30, 2023, compared to $(88) for the three months ended September 30, 2022. The amount for the three months ended September 30, 2022 was driven by an increase in the estimated fair value of the Convertible Notes while the increase in the three months ended September 30, 2023 was driven by the stock price on the date of conversion as a result of the Merger.
Interest income
Interest income was $48 thousand for the three months ended September 30, 2023, compared to $22 thousand for the three months ended September 30, 2022. The increase of $26 thousand was primarily due to higher interest earned on cash equivalents.
Comparison of the Nine Months Ended September 30, 2023 and 2022
The following table summarizes our results of operations for the nine months ended September 30, 2023 and 2022:
| Nine Months Ended September 30 | ||||||||||||||||
| 2023 | 2022 | $ Change | % Change | |||||||||||||
|
Grant revenue |
$ | 4,654,294 | $ | - | $ | 4,654,294 | 100 |
% |
||||||||
|
Operating expenses: |
||||||||||||||||
|
Research and development |
5,583,149 | 955,784 | 4,627,365 | 484 |
% |
|||||||||||
|
General and administrative |
4,403,590 | 1,580,927 | 2,822,663 | 179 |
% |
|||||||||||
|
Loss from operations |
(5,332,445 |
) |
(2,536,711 |
) |
(2,795,734 |
) |
110 |
% |
||||||||
|
Other income (expense): |
||||||||||||||||
|
Other income (expense) |
5,422,192 | (1,769,093 |
) |
7,191,285 | -406 |
% |
||||||||||
|
Interest income |
100,778 | 30,157 | 70,621 | 234 |
% |
|||||||||||
|
Total other income (expense) |
5,522,970 | (1,738,936 |
) |
7,261,906 | -418 |
% |
||||||||||
|
Net income (loss) |
$ | 190,525 | $ | (4,275,647 |
) |
$ | 4,466,172 | -104 |
% |
|||||||
Grant Revenue
Grant revenue was $4.7 million for the nine months ended September 30, 2023 services performed during the nine months ended September 30, 2023 related to the as a result of a $21.0 million grant awarded to us by the NIA in January 2023 to support a Phase 2b study of neflamapimod in DLB. As the NIA grant was initially awarded in January 2023, there was no grant revenue in the corresponding nine-month period in the prior year.