SEC Form 10-Q filed by Lipella Pharmaceuticals Inc.
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
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As of November 13, 2024, there were shares of common stock, par value $0.0001 per share (“Common Stock”), of the registrant outstanding.
Lipella Pharmaceuticals Inc.
Form 10-Q
September 30, 2024
Table of Contents
References in this Quarterly Report on Form 10-Q to the “Company,” “Lipella,” “we,” “us,” or “our” mean Lipella Pharmaceuticals Inc. unless otherwise expressly stated or the context indicates otherwise.
i
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements.
Lipella Pharmaceuticals Inc.
CONDENSED BALANCE SHEETS
September 30, 2024 (unaudited) |
December 31, 2023 |
|||||||
| Assets | ||||||||
| Current Assets | ||||||||
| Cash and cash equivalents | $ | $ | ||||||
| Grants receivable | ||||||||
| Prepaid expenses | ||||||||
| Total Current Assets | ||||||||
| Property and Equipment | ||||||||
| Furniture, fixtures and equipment | ||||||||
| Furniture, fixtures and equipment (accumulated depreciation) | ( |
) | ( |
) | ||||
| Furniture and fixtures, net | ||||||||
| Other Assets | ||||||||
| Operating lease right of use asset | ||||||||
| Total Assets | ||||||||
| Liabilities and Stockholders’ Equity | ||||||||
| Current liabilities | ||||||||
| Accounts payable | ||||||||
| Accrued expenses | ||||||||
| Operating lease liability | ||||||||
| Payroll liability | ||||||||
| Total Current Liabilities | ||||||||
| Operating lease liability, net of current portion | ||||||||
| Total Liabilities | ||||||||
| Stockholders’ equity: | ||||||||
| Preferred stock, $ par value; shares authorized; -- shares issued and outstanding at September 30, 2024 and December 31, 2023, respectively | $ | $ | ||||||
| Common stock, $ par value; shares authorized, shares issued and outstanding at September 30, 2024 and shares issued and outstanding at December 31, 2023 | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( |
) | ( |
) | ||||
| Total stockholders’ equity | ||||||||
| Total liabilities and stockholders’ equity | $ | $ | ||||||
The accompanying notes are an integral part of these condensed financial statements.
1
Lipella Pharmaceuticals Inc.
CONDENSED STATEMENTS OF OPERATIONS
(Unaudited)
| For the Three Months Ended | For the Nine Months Ended | |||||||||||||||
| September 30, 2024 | September 30, 2023 | September 30, 2024 | September 30, 2023 | |||||||||||||
| Grant revenues | $ | $ | $ | $ | ||||||||||||
| Total revenues | ||||||||||||||||
| Cost and expenses | ||||||||||||||||
| Research and development | ||||||||||||||||
| General and administrative | ||||||||||||||||
| Total costs and expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other income (expense) | ||||||||||||||||
| Interest income, net | ||||||||||||||||
| Interest expense related party | ( | ) | ||||||||||||||
| Total other income(expense) | ||||||||||||||||
| Loss before income taxes | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Provision for income taxes | ||||||||||||||||
| Net Loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Loss per share of Common Stock | ||||||||||||||||
| Basic | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Dilutive | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average of shares of Common Stock outstanding: | ||||||||||||||||
| Basic | ||||||||||||||||
| Dilutive | ||||||||||||||||
The accompanying notes are an integral part of these condensed financial statements.
2
Lipella Pharmaceuticals Inc.
CONDENSED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY
(Unaudited)
|
|
Common Stock |
Additional paid-in capital |
Accumulated Deficit |
Total | ||||||||||||||||
| Shares | Amount | |||||||||||||||||||
| Balances, December 31, 2022 | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Net loss | — | ( |
) | ( |
) | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Balances, March 31, 2023 | ( |
) | ||||||||||||||||||
| Net loss | — | ( |
) | ( |
) | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Balances, June 30, 2023 | ( |
) | ||||||||||||||||||
| Net loss | — | ( |
) | ( |
) | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Shares issued for services | ||||||||||||||||||||
| Balances, September 30, 2023 | ( |
) | ||||||||||||||||||
| Balances, December 31, 2023 | ( |
) | ||||||||||||||||||
| Net loss | — | ( |
) | ( |
) | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Pre-funded warrants exercised for shares of Common Stock | ( |
) | ||||||||||||||||||
| Issuance of Common Stock | ||||||||||||||||||||
| Shares issued for services | ||||||||||||||||||||
| Balances, March 31, 2024 | ( |
) | ||||||||||||||||||
| Net loss | — | ( |
) | ( |
) | |||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Pre-funded warrants exercised for shares of Common Stock | ( |
) | ||||||||||||||||||
| Balances, June 30, 2024 | $ | $ | $ | ( |
) | $ | ||||||||||||||
| Net loss | — | ( |
) | ( |
) | |||||||||||||||
| Issuance
of Common Stock and pre-funded warrants, net of issuance costs of $ |
||||||||||||||||||||
| Stock-based compensation | — | |||||||||||||||||||
| Pre-funded warrants exercised for shares of Common Stock | ( |
) | ||||||||||||||||||
| Balances, September 30, 2024 | $ | $ | $ | ( |
) | $ | ||||||||||||||
The accompanying notes are an integral part of these condensed financial statements.
3
Lipella Pharmaceuticals Inc.
CONDENSED STATEMENTS OF CASH FLOWS
(Unaudited)
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Cash flow from operating activities: | ||||||||
| Net loss | $ | ( |
) | $ | ( |
) | ||
| Adjustments to reconcile net loss to net cash provided by (used in) operating activities: | ||||||||
| Depreciation and amortization | ||||||||
| Shares issued for services | ||||||||
| Non-cash stock option expense | ||||||||
| Interest expense related party net (non-cash) | ||||||||
| Changes in operating assets and liabilities: | ||||||||
| Operating right of use asset | ( |
) | ( |
) | ||||
| Grants receivable | ||||||||
| Prepaid expense | ( |
) | ||||||
| Accounts payable | ( |
) | ||||||
| Accrued expenses | ( |
) | ||||||
| Payroll liability | ||||||||
| Net cash used in operating activities | ( |
) | ( |
) | ||||
| Cash flow from investing activities | ||||||||
| Purchase of Property, plant and equipment | ( |
) | ||||||
| Net cash used in investing activities | ( |
) | ||||||
| Cash flow from financing activities: | ||||||||
| Proceeds from issuance of Common Stock and pre-funded warrants, net of issuance costs | ||||||||
| Repayment of notes payable | ( |
) | ||||||
| Net cash provided by financing activities | ( |
) | ||||||
| Net decrease in cash, cash equivalents | ( |
) | ( |
) | ||||
| Cash, and cash equivalents at beginning of period | ||||||||
| Cash, and cash equivalents at end of period | $ | $ | ||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Interest paid | $ | ( |
) | $ | ( |
) | ||
| Income taxes paid | ||||||||
| Supplemental disclosure of cash flow information: | ||||||||
| Issuance of Common Stock for forgiveness of related party note | ||||||||
| Issuance of Common Stock options for consulting services | ||||||||
The accompanying notes are an integral part of these condensed financial statements.
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Lipella Pharmaceuticals Inc.
NOTES TO CONDENSED FINANCIAL STATEMENTS
(Unaudited)
Note 1. Description of Business and Basis of Presentation
Nature of Business
Lipella Pharmaceuticals Inc. (the “Company”, “we”, “us” or “our”) is a clinical-stage biotechnology company focused on developing new drugs by reformulating the active agents in existing generic drugs and optimizing these reformulations for new applications. Our operations consist of research, preclinical development and clinical development activities, and our most advanced program is in Phase 2 clinical development. Since our inception in 2005, we have historically financed our operations through a combination of federal grant revenue, licensing revenue, manufacturing revenue, as well as equity and debt financing.
Basis of Presentation
The Company’s unaudited condensed financial statements have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”). Any reference in these notes to applicable guidance is meant to refer to the authoritative GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).
In the opinion of management, the accompanying unaudited condensed financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly the Company’s financial position, results of operations, and cash flows. The interim results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosure normally included in the financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to instructions, rules, and regulations prescribed by the U.S. Securities and Exchange Commission (“SEC”). The unaudited condensed interim financial statements should be read in conjunction with the audited financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2023 that was filed with the U.S. Securities and Exchange Commission (the “SEC”) on February 27, 2024 (our “Annual Report”).
On November 7, 2024, we effected an 8-for-1 reverse stock split (the “Reverse Stock Split”) of all outstanding shares of our common stock, $ par value per share (“Common Stock”). Net loss per share and all share data for have been retroactively adjusted to reflect the Reverse Stock Split for all periods presented, in accordance with ASC 260-10-55-22, Restatement of EPS Data. See Note 15 for more information.
5
Note 2. Going Concern
The accompanying condensed financial statements have been prepared in conformity with GAAP, which contemplate continuation of the Company as a going concern. The Company has not established a source of revenues sufficient to cover its operating costs and will require significant additional capital to continue its research and development programs, including progressing clinical product candidates to commercialization and preparing for commercial-scale manufacturing and sales.
The
Company’s net loss for the nine months ended September 30, 2024 and fiscal year ended December 31, 2023 was $
If we are unable to obtain additional capital (which is not assured at this time), our long-term business plan may not be accomplished, and we may be forced to curtail or cease operations. These factors individually and collectively raise substantial doubt about our ability to continue as a going concern. The accompanying unaudited condensed financial statements do not include any adjustments that may result from this uncertainty.
Note 3. Summary of Significant Accounting Policies
The Company’s significant accounting policies are described in Note 3, “Accounting Policies,” in the Company’s Annual Report on Form 10-K filed with the SEC on February 27, 2024. There have been no material changes to the significant accounting policies during the three-month period ended September 30, 2024, except for items mentioned below.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of these financial statements. Actual results could differ from those estimates.
Adoption of New Accounting Pronouncements
During the three months ended September 30, 2024, no new accounting pronouncement was issued or became effective, that had or is expected to have, a material impact on our Financial Statements.
6
Concentration of Credit Risk
The
Company’s grant revenues and grant receivables are from the National Institute of Health (the “NIH”). The NIH
is an agency of the United States Department of Health & Human Services, and the Company believes amounts are fully collectible
from this agency. Contract revenues were $
Basic net loss per share of Common Stock is computed by dividing the net loss for the period by the weighted-average number of shares of Common Stock outstanding during the period. Diluted net loss per share of Common Stock is computed giving effect to all dilutive Common Stock equivalents, consisting of stock options and warrants. Diluted net loss per share of Common Stock for the nine months ended September 30, 2024 and 2023 is the same as basic net loss per share, as the Common Stock equivalents were anti-dilutive due to the net loss.
| September 30, | ||||||||
| 2024 | 2023 | |||||||
| Shares of Common Stock issuable under equity incentive plans outstanding | ||||||||
| Shares of Common Stock issuable upon exercise of warrants | ||||||||
| Shares of Common Stock issuable upon conversion of Series A Preferred Stock | ||||||||
| Common Stock equivalent shares excluded from diluted net loss per share | ||||||||
Note 4. Fair Value Measurements and Marketable Debt Securities
In accordance with ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), the Company measures its assets and liabilities at fair value. We apply the three-level valuation hierarchy as described in ASC 820, which is based upon the transparency of input as of the measurement date. The three levels of inputs as defined are:
Level 1 - Inputs to the valuation methodology are quoted prices (unadjusted) for identical assets or liabilities in active markets.
Level 2 - Inputs to the valuation methodology include quoted prices for similar assets and liabilities in active markets, and inputs that are observable for the asset or liability, either directly or indirectly, for substantially the full term of the financial instruments.
Level 3 - Inputs to the valuation methodology are unobservable and significant to the fair value measurement.
At September 30, 2024 and December 31, 2023, the Company’s financial instruments consist primarily of: cash and cash equivalents, accounts payable and accrued liabilities. For cash equivalents, accounts payable and accrued liabilities, the carrying amounts of these financial instruments as of September 30, 2024 and December 31, 2023 were considered representative of their fair values due to their short term to maturity.
7
The Company held no marketable securities at September 30, 2024 and December 31, 2023. For cash equivalents at September 30, 2024 and December 31, 2023, the fair value input levels are summarized below:
| September 30, 2024 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Cash Equivalents (maturity less than 90 days) | ||||||||||||||||
| Commercial Paper | $ | $ | $ | $ | ||||||||||||
| U.S. Government | ||||||||||||||||
| Money market funds | ||||||||||||||||
| Total Cash equivalents | ||||||||||||||||
| Marketable Securities | ||||||||||||||||
| Total Cash Equivalents and Marketable Securities | $ | $ | $ | $ | ||||||||||||
| December 31, 2023 | Level 1 | Level 2 | Level 3 | Total | ||||||||||||
| Cash Equivalents (maturity less than 90 days) | ||||||||||||||||
| Commercial Paper | $ | $ | $ | $ | ||||||||||||
| U.S. Government | ||||||||||||||||
| Money market funds | ||||||||||||||||
| Total Cash equivalents | ||||||||||||||||
| Marketable Securities | ||||||||||||||||
| Total Cash Equivalents and Marketable Securities | $ | $ | $ | $ | ||||||||||||
Note 5. Prepaid Expenses
At
September 30, 2024, prepaid expenses were $
Note 6. Accrued Expenses
At
September 30, 2024, accrued expenses were $
Note 7. Notes Payable – Related Party
There
were
8
Note 8. Letter of Credit
The
Company has a letter of credit with a bank for an aggregate available amount of $
The Company has two stock incentive plans (each, a “Stock Option Plan” and collectively, the “Stock Option Plans”), each of which provides for the grant of both incentive stock options and non-qualified stock options. Under the terms of the Stock Option Plans, the maximum number of shares of Common Stock for which incentive and/or non-qualified stock options may be issued is shares, after retroactively applying the effects of the Reverse Stock Split. This number comprises stock options already issued and outstanding (non-expired) from the 2008 stock option plan, and shares of Common Stock underlying option awards that may be issuable under the 2020 stock option plan. Incentive stock options are granted with an exercise price determined by the Company’s board of directors (the “Board”). The terms of the vesting of such options, including termination, are as set forth in the Stock Option Plans and their respective award agreements. Such stock options generally expire years from the date of the grant. Subject to certain exceptions for grants made to employees who are large stockholders, stock options granted under the Stock Option Plans have an exercise price not less than the fair market value of the underlying Common Stock on the date of such grant. If an employee leaves the Company prior to fully vesting their option awards and the remaining unvested portion is considered forfeited, the earlier recognition of the unvested shares is reversed during the period of forfeiture. As of September 30, 2024, there were $ in unrecognized compensation costs related to non-vested share-based compensation arrangements granted, to be recognized over the remaining vesting period of less than year.
The Company recognized $ and $ of compensation costs related to stock option vesting for the three months ended September 30, 2024 and 2023, respectively. The Company recognized $ of compensation costs for the nine months ended September 30, 2024, and $ of compensation costs for the nine months ended September 30, 2023.
| Shares | Weighted Average Exercise Price Per Share ($) |
Weighted Average Remaining Contractual Term (in Years) |
Aggregate intrinsic value ($) |
|||||||||||||
| Outstanding as of December 31, 2022 | $ | $ | ||||||||||||||
| Granted | $ | $ | — | |||||||||||||
| Expired | ||||||||||||||||
| Cancelled | ( |
) | $ | |||||||||||||
| Exercised | ||||||||||||||||
| Outstanding as of December 31, 2023 | $ | $ | ||||||||||||||
| Granted | $ | $ | — | |||||||||||||
| Expired | ||||||||||||||||
| Cancelled | ||||||||||||||||
| Exercised | ||||||||||||||||
| Outstanding as of March 31, 2024 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Expired | ||||||||||||||||
| Cancelled | ||||||||||||||||
| Exercised | ||||||||||||||||
| Outstanding as of June 30, 2024 | $ | $ | ||||||||||||||
| Granted | ||||||||||||||||
| Expired | ||||||||||||||||
| Cancelled | ||||||||||||||||
| Exercised | ||||||||||||||||
| Outstanding as of September 30, 2024 | $ | $ | ||||||||||||||
| Vested as of September 30, 2024 | ||||||||||||||||
| Exercisable as of September 30, 2024 | ||||||||||||||||
| Exercisable as of December 31, 2023 | ||||||||||||||||
9
| Number of Stock Options |
Weighted- Average Fair Value Grant Date |
|||||||
| Nonvested at December 31, 2022 | $ | |||||||
| Granted | ||||||||
| Vested | ( |
) | ||||||
| Expired | ||||||||
| Nonvested at September 30, 2023 | $ | |||||||
| Nonvested at December 31, 2023 | $ | |||||||
| Granted | ||||||||
| Vested | ( |
) | ||||||
| Expired | ||||||||
| Nonvested at September 30, 2024 | $ | |||||||
In the nine months ended September 30, 2024 and September 30, 2023, the Company granted options as described below.
Stock Option Grants - On March 15, 2024, the Company granted stock options at a $ strike price, vesting as follows: one third of such grant vests on April 1, 2024, one third of such grant vests on July 1, 2024, and one third of such grant vests on October 1, 2024.
On June 16, 2023, the Company issued stock options at a $ strike price, vesting immediately upon issuance.
| Nine months ended September 30, | 2024 | 2023 | ||||||
| Weighted-average fair value of options granted | $ | $ | ||||||
| Expected volatility | % | % | ||||||
| Expected life (in years) | ||||||||
| Risk-free interest rate (range) | % | % | ||||||
| Expected dividend yield | $ | $ | ||||||
Note 10. Preferred Stock
The Company’s Certificate of Incorporation authorizes as aggregate of shares of preferred stock, par value $ per share (the “Preferred Stock”), of the Company, issuable from time to time in one or more series. There was no Preferred Stock outstanding during the nine months ended September 30, 2024 or the year ended December 31, 2023.
10
In the year ended December 31, 2022, all outstanding shares of the Company’s Series A Convertible Preferred Stock, par value $ per share (the “Series A Preferred Stock”), were converted to Common Stock on a 1:1 basis. There were no shares of Series A Preferred Stock outstanding at December 31, 2023 or September 30, 2024. The Series A Preferred Stock was cancelled and eliminated by the Company on April 11, 2024.
The Company’s second amended and restated certificate of incorporation, as amended (the “Certificate of Incorporation”), authorizes the issuance of shares of Common Stock. After considering the effects of the Reverse Split, there were shares of Common Stock outstanding as of September 30, 2024 and shares outstanding as of December 31, 2023.
On August 1, 2024, we issued shares of our Common Stock to an institutional investor at an offering price of $ per share, along with 209,625 pre-funded warrants to purchase the same number of shares of Common Stock. See Note 12 for details of the pre-funded warrants.
On August 16, 2024, shares of Common Stock were issued for the exercise of the same number of pre-funded warrants. On September 17, 2024, shares of Common Stock were issued for the exercise of the same number of pre-funded warrants. On September 24, 2024, shares of Common Stock were issued for the exercise of the same number of pre-funded warrants. On September 26, 2024, an additional shares of Common Stock were issued for the exercise of the same number of pre-funded warrants.
Notice of Failure to Satisfy Nasdaq Minimum Bid Price Requirement
As disclosed in the Company’s Current Report on Form 8-K filed with the SEC on April 19, 2024, on April 17, 2024, the Company received a written notification (the “April Nasdaq Letter”) from the Nasdaq Listing Qualifications staff (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) notifying the Company that, based upon the closing bid price of the Common Stock for the last 30 consecutive business days, the Company was not in compliance with the requirement to maintain a minimum bid price of $1.00 per share of its Common Stock, as set forth in Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”). The April Nasdaq Letter had no immediate effect on the listing of the Common Stock, which continues to trade on the Nasdaq Capital Market.
Nasdaq provided the Company with 180 calendar days, or until October 14, 2024, to regain compliance with the Minimum Bid Price Requirement.
As disclosed in the Company’s Current Report on Form 8-K filed with the SEC on August 23, 2024, the Company received a letter from the Staff on August 21, 2024 stating that it was not in compliance with Nasdaq Listing Rule 5550(b)(1), which requires companies listed on the Nasdaq Capital Market to maintain a minimum of $2,500,000 in stockholders’ equity for continued listing (the “Stockholders’ Equity Requirement”). The Company reported stockholders’ equity of $1,703,798 in its Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, and, as a result, it was not in compliance with the Stockholders’ Equity Requirement.
As disclosed in our Current Report on Form 8-K filed with the SEC on October 18, 2024, the Staff notified the Company on October 16, 2024 that it would delist the Common Stock from the Nasdaq Capital Market, and in response, the Company timely requested an appeal of such notice to a Nasdaq hearing panel (the “Panel”). The Nasdaq hearing date has been set for December 12, 2024. While the appeal process is pending, the suspension of trading of the Common Stock on the Nasdaq Capital Market will continue to be stayed until the hearing process concludes and the Panel issues a decision. See also Note 15, Subsequent Events, for more information regarding the Reverse Stock Split.
Note 12. Warrants
On August 1, 2024, the Company conducted the August 2024 Offering. In connection therewith, the Company
issued pre-funded warrants to purchase up to shares of Common Stock at a price of $
11
Note 13. Commitment and Contingencies
Operating Leases
Operating leases are recorded as right of use (“ROU”) assets and lease liabilities on the balance sheet. ROU assets represent our right to use the leased assets for the lease term, and lease liabilities represent our obligation to make lease payments. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. As most of the Company’s leases do not provide an implicit rate, the Company uses its estimated incremental borrowing rate at the commencement date to determine the present value of lease payments. The operating lease ROU assets also include any lease payments made and exclude lease incentives.
The Company entered into a lease agreement beginning July 1, 2020, for the Company’s principal headquarters on the fifth floor of 7800 Susquehanna Street, Pittsburgh, Pennsylvania, which includes office space and sterile manufacturing operations (the “Lease”). The Lease has a five-year term and includes an option for renewal, which is not reasonably certain and is excluded from the right of use calculation. On July 26, 2023, the Company entered a second lease for additional space on the fourth floor of the same building (the “Fourth Floor Lease”), commencing August 1, 2023 and co-terminating with the existing Lease on September 30, 2025. Subsequently effective January 1, 2024, the Company terminated the Fourth Floor Lease early at no penalty upon mutual agreement with the landlord and replaced it with a lease of additional space that had become available immediately adjacent to our existing offices (the “Suite 504 Lease”, and together with the “Lease”, “the Leases”). The Suite 504 Lease term co-terminates with the Lease. Future minimum rent payments under the Leases as of September 30, 2024 are as follows:
| Year ending | ||||
| 2024 (three months remaining at September 30, 2024) | $ | |||
| 2025 | $ | |||
| Total minimum lease payments | $ | |||
| Less: amount representing interest | $ | ( |
) | |
| Present value of minimum lease payments | $ | |||
The
Leases are accounted for as a ROU asset and liability. As of September 30, 2024, the Company had $
The
lease expense for the three months ended September 30, 2024 and September 30, 2023 was $
Contract Commitments
The Company enters into contracts in the normal course of business with contract research organizations (“CROs”), contract manufacturing organizations, universities, and other third parties for preclinical research studies, clinical trials and testing and manufacturing services. These contracts generally do not contain minimum purchase commitments and are cancellable by us upon prior written notice although, purchase orders for clinical materials are generally non-cancellable. Payments due upon cancellation consist only of payments for services provided or expenses incurred, including non-cancellable obligations of our service providers, up to the date of cancellation or upon the completion of a manufacturing run.
12
Note 14. Income Taxes
The
provision for income taxes for the three and nine months ended September 30, 2024 and 2023 was $0, resulting in an effective income
tax rate of
The
Company regularly evaluates the realizability of its deferred tax assets and establishes a valuation allowance if it is more likely
than not that some or all of the deferred tax assets will not be utilized. Because of our cumulative losses, substantially all
of the deferred tax assets have been fully offset by a valuation allowance as of September 30, 2024 and December 31, 2023. We
have not paid income taxes for the year ended December 31, 2023. The income tax provision attributable to loss before income tax
benefit for the three and nine months ended September 30, 2024 differed from the amounts computed by applying the U.S. federal statutory
rate of
| Statutory federal income tax rate | % | |||
| State taxes, net of federal benefit | % | |||
| Change in valuation allowance | - |
% | ||
| Effective tax rate | % |
The Company’s 2019 through 2023 tax years remain subject to examination by the Internal Revenue Service for federal tax purposes and the Commonwealth of Pennsylvania for state tax purposes.
Note 15. Subsequent Events
Subsequent events have been evaluated through the date on which the unaudited condensed financial statements were issued, and no material events were identified, except as disclosed below.
On October 15, 2024, pre-funded warrants were exercised and exchanged for the same number of shares of Common Stock.
On November 7, 2024, the Company, acting pursuant to authority received at an annual meeting of its stockholders on September 10, 2024, filed with the Secretary of State of the State of Delaware a certificate of amendment (the “Charter Amendment”) to the Certificate of Incorporation to effect the Reverse Stock Split on November 7, 2024. As a result of the Reverse Stock Split, every eight (8) shares of Common Stock were exchanged for one (1) share of Common Stock. The Common Stock began trading on the Nasdaq Capital Market on a split-adjusted basis at the start of trading on November 8, 2024. The Reverse Stock Split did not affect the total number of shares of capital stock, including the Common Stock, that the Company is authorized to issue, which remain as set forth pursuant to the Certificate of Incorporation. The Reverse Stock Split also has a proportionate effect on all other options and warrants of the Company outstanding as of the effective date of the Reverse Stock Split.
Net loss per share and all share data as of and for the nine months ended September 30, 2024 and 2023 have been retroactively adjusted to reflect the Reverse Stock Split in accordance with ASC 260-10-55-12, Restatement of EPS Data.
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The following discussion and analysis of our financial condition and results of operations for the three and nine months ended September 30, 2024 should be read together with our unaudited condensed financial statements and related notes included in Item 1 of Part I of this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2024 (this “Form 10-Q”), as well as the audited financial statements, the related notes thereto and management’s discussion and analysis of financial condition and results of operations for the year ended December 31, 2023 contained in our Annual Report on Form 10-K for the year ended December 31, 2023, that was filed with the SEC on February 27, 2024 (our “Annual Report”), and all risk factors disclosed herein and therein. Such discussion contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), as well as information relating to our business that reflect our management’s current views, expectations and assumptions concerning our business, strategies, products, future results and events and financial performance, which are subject to risks and uncertainties that may cause our, or our industry’s, actual results, levels of activity, performance or achievements to be materially different from any future results, levels of activity, performance or achievements expressed or implied by such forward-looking statements. Such forward-looking statements speak only as of the date of this Form 10-Q. Although we believe that the expectations reflected in such forward-looking statements are reasonable, we cannot guarantee future results, levels of activity or achievements or that our underlying assumptions will prove to be correct. Except as required by applicable law, including the securities laws of the United States, we expressly disclaim any obligation or undertaking to disseminate any update or revisions to any such forward-looking statement to reflect any change in our expectations with regard thereto or to conform such forward-looking statements to actual results. Statements made in this Form 10-Q, other than statements of historical fact, addressing operating performance, events, or developments which our management expects or anticipates will or may occur in the future, and also statements related to expected or anticipated growth, revenues, profitability, new products, adequacy of funds from operations, statements expressing general optimism about future operating results, and other non-historical information, are forward-looking statements. In particular, the words “may,” “will,” “expects,” “anticipates,” “aims,” “potential,” “future,” “intends,” “plans,” believes,” “estimates,” “continue,” “likely to,” and variations of such words and similar expressions identify forward-looking statements, but such words are not the exclusive means of identifying such forward-looking statements, and their absence does not necessarily mean that such statement is not forward-looking.
Overview
We are a clinical-stage biotechnology company focused on developing new drugs by reformulating the active agents in existing generic drugs and optimizing these reformulations for new applications. We believe that this strategy combines many of the cost efficiencies and risk abatements derived from using existing generic drugs with potential patent protections for our proprietary formulations; this strategy allows us to expedite, protect, and monetize our product candidates. Additionally, we maintain a therapeutic focus on diseases with significant, unaddressed morbidity and mortality where no approved drug therapy currently exists. We believe that this focus can potentially help reduce the cost, time and risk associated with obtaining marketing approval.
LP-10 is the development name of our reformulation of tacrolimus (an approved generic active agent) specifically optimized for topical deposition to the internal surface of the urinary bladder lumen using a proprietary drug delivery platform that we have developed and that we refer to as our metastable liposome drug delivery platform (our “Platform”). We are developing LP-10 and our Platform to be, to our knowledge, the first drug candidate and drug delivery technology that could be successful in treating cancer survivors who acquire hemorrhagic cystitis. We have received U.S. Food and Drug Administration (“FDA”) “orphan drug” designation covering LP-10 and plan to apply for additional regulatory designations in the event we achieve qualifying results in clinical trials for LP-10. Market data exclusivity may be available in the U.S. and other jurisdictions in which regulatory approval is obtained for the Company’s product, regardless of patent status.
The safety and efficacy of LP-10 was evaluated in a 13-subject, open-label, multi-center, dose-escalation, phase 2a clinical trial in patients experiencing complications associated with a rare but highly morbid disease called “radiation-induced hemorrhagic cystitis” or “radiation cystitis.” This phase 2a clinical trial commenced on February 15, 2021, and we reported the trial’s summary results in the first quarter of 2023. We met with the FDA in the fourth quarter of 2023 regarding the LP-10 clinical trial results, and on April 3, 2024, the FDA granted a Type C meeting request to discuss our proposed Phase-2b clinical trial design for the evaluation of LP-10. We have submitted to the FDA a full Phase 2b multi-center prospective double-blind placebo controlled trial that is ready to initiate.
There is currently no FDA approved drug therapy available for radiation cystitis patients, who are all cancer survivors who received pelvic radiation therapy to treat solid pelvic tumors, including prostate and ovarian cancers, and who are now dealing with therapy-associated complications, including urinary bleeding (a radiation cystitis symptom). LP-10’s active ingredient, tacrolimus, which has a well-known pharmacology and toxicology, addresses a reduction (or cessation) of uncontrolled urinary bleeding.
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In the fourth quarter of 2023, we received IND approval from the FDA for LP-310, our product for the treatment of oral lichen planus (“OLP”). We have begun the clinical trial process for LP-310, and initiated the first clinical site in the second quarter of 2024. Three patients have completed the trial, and we expect topline results before the end of 2024. OLP is a chronic, T-cell-mediated, autoimmune oral mucosal disease, and LP-310 contains tacrolimus which inhibits T-lymphocyte activation. To date, upon review of relevant FDA public data resources on approved drugs and biologics, we are not aware of any other liposomal products developed to treat such disease.
In the first quarter of 2024, we received IND approval from the FDA for LP-410, our phase-1/2a product, for the treatment of oral graft-versus-host disease (“GVHD”). LP-410 is an oral rinse, similar to LP-310, but will have a different containment system. Hematopoietic cell transplantation (“HCT”) is used to treat a wide range of malignancies, hematologic and immune deficiency states, and autoimmune diseases. GVHD is a clinical syndrome where donor-derived immunocompetent T-cells react against patient tissues directly or through exaggerated inflammatory responses following HCT. Lipella has developed LP-410 for the topical delivery directly to the mouth surface. LP-410 targets the underlying mechanisms of oral GVHD, potentially providing a safe and effective treatment option for affected individuals. Lipella received “orphan drug” designation approval on November 11, 2023 for tacrolimus for the treatment of oral GVHD.
Since our inception in 2005, we have focused primarily on business planning and progressing our lead product candidates, including progressing LP-10 through clinical development, raising capital, organizing and staffing the Company. On December 22, 2022, we completed our initial public offering (the “IPO”) and issued an aggregate of 152,174 shares of Common Stock at a price of $46 per share, as retroactively adjusted to reflect the Reverse Split. The aggregate net proceeds from the IPO were approximately $5.0 million after deducting underwriting discounts and commissions of approximately $630,000 and offering expenses of approximately $1.16 million.
Recent Developments
Nasdaq Notifications
As previously disclosed, on April 17, 2024, and August 21, 2024, the Company received letters from the Nasdaq Listing Qualifications staff (the “Staff”) of The Nasdaq Stock Market LLC (“Nasdaq”) stating that it was not in compliance with Nasdaq Listing Rule 5550(a)(2) (the “Minimum Bid Price Requirement”) and Nasdaq Listing Rule 5550(b)(1) (the “Stockholders’ Equity Requirement”), respectively. On October 16, 2024, the Company received a letter (the “October Letter”) from the Staff stating that although the Company submitted a plan to regain compliance with the Stockholders’ Equity Requirement on October 4, 2024, the Common Stock would be delisted from the Nasdaq Capital Market unless such determination is appealed to a Nasdaq Hearings Panel (the “Panel”) by October 23, 2024. On October 17, 2024, the Company requested a hearing before the Panel to appeal such determination and the hearing has been set for December 12, 2024. While the appeal process is pending, the suspension of trading of the Common Stock on the Nasdaq Capital Market continues to be stayed until the hearing process concludes and the Panel issues a decision.
Reverse Stock Split
On November 7, 2024, the Company executed a 1-for-8 reverse stock-split of the Company’s outstanding shares of Common Stock (the “Reverse Stock Split”), whereby every 8 shares of Common Stock was consolidated into 1 share of Common Stock following the Reverse Stock Split. See “Note 15 – Subsequent Events” of the notes to the Company’s unaudited condensed financial statements in this Form 10-Q as well as the Current Report on Form 8-K filed by the Company with the SEC on November 7, 2024 for more information regarding the Reverse Stock Split.
Results of Operations
Comparison of the Three Months Ended September 30, 2024 and 2023
The following table summarizes our results of operations for the three months ended September 30, 2024 and 2023 (in thousands):
| For the Three Months Ended | ||||||||||||
| September 30, | Increase | |||||||||||
| 2024 | 2023 | (Decrease) | ||||||||||
| (in thousands) | ||||||||||||
| Revenue | $ | 80 | $ | 104 | $ | (24 | ) | |||||
| Operating expenses: | ||||||||||||
| Research and development (“R&D”) | 1,047 | 833 | 213 | |||||||||
| General and administrative | 493 | 628 | (135 | ) | ||||||||
| Total operating expenses | 1,540 | 1,461 | 79 | |||||||||
| Loss from operations | (1,460 | ) | (1,357 | ) | (103 | ) | ||||||
| Other income | 15 | 33 | (18 | ) | ||||||||
| Net loss | $ | (1,445 | ) | $ | (1,324 | ) | $ | (121 | ) | |||
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Grants and Other Revenue
We have not yet commercialized any products and we do not expect to generate revenue from sales of any product candidates for several years. For the three months ended September 30, 2024 and 2023, we recognized revenue from a grant awarded by the National Institutes of Health (“NIH”) in September of 2022 (the “2022 NIH Grant”), which was an award of an aggregate of $673,000. NIH approved an additional year of funding under the 2022 NIH Grant in June 2023, increasing the total funding provided under the 2022 NIH Grant to $1,353,000.
We recognize revenue from grants when the related costs are incurred and the right to payment is realized. For the three months ended September 30, 2024, we earned $80,000 in connection with the 2022 NIH Grant, recognized as revenue, compared with $104,000 of revenue in the three months ended September 30, 2023. The decrease in annual grant revenue of $24,000 was driven by lower subcontractor costs on the grant work.
Operating Expenses
Our operating expenses consist of (i) R&D expenses and (ii) general and administrative expenses.
Research and Development Expenses
R&D costs primarily consist of direct costs associated with consultants and materials, biologic storage, third party CRO costs and contract development and manufacturing expenses, salaries and other personnel-related expenses. R&D costs are expensed as incurred. More specifically, these costs include:
| ● | costs of funding research performed by third parties that conduct research and development and nonclinical and clinical activities on our behalf; |
| ● | costs of manufacturing drug supply and drug product; |
| ● | costs of conducting nonclinical studies and clinical trials of our product candidates; |
| ● | consulting and professional fees related to research and development activities, including equity-based compensation to non-employees; |
| ● | costs related to compliance with clinical regulatory requirements; and |
| ● | employee-related expenses, including salaries, benefits and stock-based compensation expense for our research and development personnel. |
Costs for certain activities are recognized based on an evaluation of the progress to completion of specific tasks using data, such as information provided to us by our vendors, and analyzing the progress of our nonclinical and clinical studies or other services performed. Significant judgment and estimates are made in determining the accrued expense balances at the end of any reporting period. Advance payments that we make for goods or services to be received in the future for use in R&D activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered or the services rendered.
We expect that our R&D expenses will increase substantially in connection with our clinical development activities for our LP-10 and LP-310 programs. At this time, we cannot accurately estimate or know the nature, timing and costs of the efforts that will be necessary to complete the clinical development of, or obtain regulatory approval for, any of our current or future product candidates. This is due to the numerous risks and uncertainties associated with product development and commercialization, including the specific factors set forth in the section of our Annual Report titled “Risk Factors.” If any events described in the applicable risk factors included in the section of our Annual Report titled “Risk Factors” occur, then the costs and timing associated with the development of any of our product candidates could significantly change. We may never succeed in obtaining regulatory approval for, of commercialization of, LP-10, LP-310, or any of our other product candidates.
R&D expenses increased by approximately $213,000, to $1,047,000, for the three months ended September 30, 2024, compared to $833,000 for the three months ended September 30, 2023. The increase in R&D expenses was attributable to an increase in stock option expense of $40,000, related to partial vesting of the March 2024 option grants, as well as an increase in outside services of $131,000 for clinical study trials. In the three months ended September 30, 2024, personnel costs increased by $16,000, and indirect costs related to operational overhead and employee benefits increased $12,000, and supplies for lab and clinical trial work increased by approximately $14,000, as compared to the three months ended September 30, 2023.
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General and Administrative Expenses
General and administrative expenses consist primarily of management and business consultants and other related costs, including stock-based compensation. General and administrative expenses also include board of directors’ expenses and professional fees for legal, patent, consulting, accounting, auditing, tax services and insurance costs.
There were $493,000 of general and administrative expenses for the three months ended September 30, 2024, compared to $628,000 for the three months ended September 30, 2023, a decrease of $135,000. Outside services, including legal and investor relations services, decreased by approximately $56,000, and Board compensation decreased by $125,000 as compared to the quarter ended September 30, 2023. This was offset by an increase in stock option expense of $41,000 compared to the three months ended September 30, 2023, related to the partial vesting of the March 2024 option grants.
Net Other Income (Expense)
Net other income for the three months ended September 30, 2024 was $15,000, as compared to $33,000 for the three months ended September 30, 2023. The change reflected an approximately $18,000 decrease in interest income on the Company’s short term investment portfolio, driven by lower investment balances.
Comparison of the Nine Months Ended September 30, 2024 and 2023
The following table summarizes our results of operations for the nine months ended September 30, 2024 and 2023 (in thousands):
| Nine Months Ended | ||||||||||||
| September 30, | Increase | |||||||||||
| 2024 | 2023 | (Decrease) | ||||||||||
| (in thousands) | ||||||||||||
| Revenue | $ | 363 | $ | 329 | $ | 34 | ||||||
| Operating expenses: | ||||||||||||
| R&D | 2,551 | 2,585 | (34 | ) | ||||||||
| General and administrative | 1,441 | 1,760 | (319 | ) | ||||||||
| Total operating expenses | 3,992 | 4,345 | (353 | ) | ||||||||
| Loss from operations | (3,629 | ) | (4,016 | ) | 387 | |||||||
| Other income (expense) | 55 | 86 | (31 | ) | ||||||||
| Net loss | $ | (3,574 | ) | $ | (3,930 | ) | $ | 356 | ||||
Grants and Other Revenue
For the nine months ended September 30, 2024, we earned $363,000 in connection with a grant from the NIH, recognized as revenue. We received $329,000 in revenue for the nine months ended September 30, 2023. The increase in annual grant revenue from 2023 to 2024 of $34,000 is related to both the amount of time spent on the grant project, as well as increased salaries and overhead costs associated.
Operating Expenses
Research and Development Expenses
The following table summarizes our R&D expenses for the nine months ended September 30, 2024 and 2023 (in thousands):
| Nine Months Ended | ||||||||||||
| September 30, | Increase | |||||||||||
| (in thousands) | 2024 | 2023 | (Decrease) | |||||||||
| Direct R&D expenses for the LP-10 product candidate program: | ||||||||||||
| Employee-related costs | $ | 60,000 | $ | 133,000 | $ | (73,000 | ) | |||||
| Employee stock option expense | 56,000 | 220,000 | (164,000 | ) | ||||||||
| Outsourced R&D | 95,000 | 140,000 | (45,000 | ) | ||||||||
| Facility-related costs | 37,000 | 67,000 | (30,000 | ) | ||||||||
| Platform development, early-stage research and unallocated expenses: | ||||||||||||
| Employee-related costs | 619,000 | 448,000 | 171,000 | |||||||||
| Employee stock option expense | 529,000 | 796,000 | (267,000 | ) | ||||||||
| Outsourced R&D | 802,000 | 534,000 | 268,000 | |||||||||
| Facility-related costs | 353,000 | 247,000 | 105,000 | |||||||||
| Total research and development expenses | $ | 2,551,000 | $ | 2,585,000 | $ | (34,000 | ) | |||||
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R&D expenses decreased by approximately $34,000, with expenses of $2,551,000 for the nine months ended September 30, 2024, versus $2,585,000 for the nine months ended September 30, 2023. The decrease in R&D expenses was primarily attributable to a decrease in stock option expense versus the prior year by $431,000. This was offset by increases in 2024 of indirect overhead costs of $144,000, including employee benefits, overhead and facility related costs, office and lab expenses and supplies. There was also an increase in outside services of $233,000 during the nine months ended September 30, 2024, compared to the nine months ended September 30, 2023, related to planning and launching our current clinical trial.
General and Administrative Expenses
General and administrative expenses were approximately $1,441,000 for the nine months ended September 30, 2024, compared to $1,760,000 for the nine months ended September 30, 2023. General and administrative expenses decreased by approximately $319,000, including a decrease in stock option expense of $256,000, with higher costs in the prior year related to our June 2023 option grants to employees and directors. Simultaneously, board compensation decreased by $125,000, and there was an increase in outside services of $270,000, which includes investor relations and other shareholder services, offset by a decrease in legal fees of $205,000.
Net Other Income (Expense)
Net other income for the nine months ended September 30, 2024 was approximately $55,000, as compared to $86,000 for the nine months ended September 30, 2023. This balance primarily included (i) cash interest income, (ii) unrealized loss on investments, and (iii) non-cash interest expense on related party notes in 2023. A higher cash investment balance in 2023 resulted in a decrease of $42,000 in interest on short term investments in the nine months ended September 30, 2024 compared to the nine months ended September 30, 2023. This was offset by a decrease in interest expense on related party notes of $11,000, due to a reduction in the balance of debt outstanding. See Note 7 of the notes to our unaudited condensed financial statements in this Form 10-Q as well as Note 7 of the notes to our financial statements in our Annual Report for details of such related party notes and accrued interest at the respective periods.
Liquidity and Capital Resources
Sources of Liquidity
We have not yet commercialized any products, and we do not expect to generate revenue from sales of any product candidates for several years, if at all. Cash and cash equivalents totaled $1,353,734 as of September 30, 2024. We consider all highly liquid investments that mature in 90 days or less when purchased to be cash equivalents.
We have incurred operating losses and experienced negative operating cash flows for the nine months ended September 30, 2024 and the year ended December 31, 2023, and we anticipate that we will continue to incur losses for the foreseeable future. Our net loss totaled $3,574,592 and $3,930,081 for the nine months ended September 30, 2024 and 2023 respectively, and $4,618,965 for the year ended December 31, 2023.
Historically, we have financed our operations through a combination of grant revenue and equity financing, however our goals for the foreseeable future will likely require significant equity financing. Our ability to achieve significant profitability depends on our ability to successfully complete the development of, and obtain the regulatory approvals necessary to commercialize, LP-10 and/or our other product candidates, which may not occur for several years, if ever. The net losses we incur may fluctuate significantly from quarter to quarter.
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Cash Flows
The following table provides information regarding our cash flows for each of the periods presented (in thousands):
| For the Nine Months Ended | ||||||||
| September 30, | ||||||||
| Dollars in thousands | 2024 | 2023 | ||||||
| Net cash (used) provided by operating activities | $ | (2,960 | ) | $ | (2,423 | ) | ||
| Net cash (used) provided by investing activities | -- | (14 | ) | |||||
| Net cash (used) provided by financing activities | 1,020 | (275 | ) | |||||
| Net increase (decrease) in cash and cash equivalents | $ | (1,940 | ) | $ | (2,712 | ) | ||
Net Cash (Used) Provided in Operating Activities
Net cash used in operating activities for the nine months ended September 30, 2024 was approximately $2,960,000. This comprised a net loss for the period of approximately $3,574,000, and increased prepaid expenses (primarily insurance policies, outside services, and clinical trial operations services) of $592,000, offset by increased operating liabilities of $333,000. There were also non-cash adjustments reducing the net loss by $669,000 in stock option expense and $200,000 in shares of Common Stock issued for services.
Net cash used in operating activities for the nine months ended September 30, 2023 was approximately $2,423,000. This comprised a net loss for the period of approximately $3,930,000, and decreased operating liabilities of $383,000, offset by decreases in the following assets: grants receivable of $60,000 and prepaid expenses (primarily insurance policies and consulting services) of $356,000. There were also and noncash adjustments to net loss of $1,355,000 in stock option expense.
Net Cash (Used) Provided by Investing Activities
There was no cash used in investing activities for the nine month period ended September 30, 2024. In the nine months ended September 30, 2023, cash of $14,000 was invested in the purchase of laboratory equipment.
Net Cash (Used) Provided by Financing Activities
Net cash provided by financing activities for the nine months ended September 30, 2024 was approximately $1,020,000, received for the issuance of Common Stock. Net cash used in financing activities for the nine months ended September 30, 2023 was $275,000 in cash, of which $25,000 was used to fully repay a line of credit and $250,000 was used to fully repay a related party note.
Funding Requirements
We expect our expenses to increase substantially in connection with our ongoing R&D activities, particularly as we continue R&D, advance clinical trials of LP-10 and advance the preclinical development of our other programs, including LP-310. In addition, we expect to incur additional costs associated with operating as a public company. As a result, we expect to incur substantial operating losses and negative operating cash flows for the foreseeable future.
Based on our current operating plan, we believe that our existing cash and cash equivalents will be sufficient to fund our operations and capital expenses into 2025. However, we have based this estimate on assumptions that may prove to be wrong, and we could exhaust our capital resources sooner than we expect.
Because of the numerous risks and uncertainties associated with research, development and commercialization of LP-10, LP-310 and our other and future product candidates, we are unable to estimate the exact amount of our working capital requirements. Our future funding requirements will depend on, and could increase significantly as a result of, many factors, including, but not limited to, those referenced above in “— Results of Operations — Operating Expenses — Research and Development Expenses”.
Going Concern
The unaudited condensed financial statements of the Company have been prepared on a going concern basis, which contemplates the realization of assets and the discharge of liabilities in the normal course of business. We have generated losses from operations since inception. The Company expects operating losses to continue in the foreseeable future because of additional costs and expenses related to research and development activities, plans to expand its product portfolio, and increasing its market share. The Company’s ability to transition attaining profitable operations is dependent upon achieving a level of revenues adequate to support its cost structure. The timing and amount of our actual expenditures will be based on many factors, including cash flows from operations and the anticipated growth of our business.
Management of the Company may raise additional funds through the issuance of equity securities or debt. There can be no assurance that such financing will be available at terms acceptable to the Company, if at all. Failure to generate sufficient cash flows from operations and raise additional capital could have a material adverse effect on the Company’s ability to achieve its intended business objectives. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The accompanying unaudited condensed financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
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Off-Balance Sheet Arrangements
We did not have during the nine months ended September 30, 2024, or the year ended December 31, 2023, and we do not currently have, any off-balance sheet arrangements, as defined under applicable SEC rules.
Contractual Obligations
We did not have during the nine months ended September 30, 2024 or the year ended December 31, 2023, and we do not currently have, any material contractual obligations, such as license agreements or similar arrangements, other than as described below and in the financial notes to our unaudited condensed financial statements included in this Form 10-Q and in our Annual Report.
Employment Agreements
We are party to employment agreements with each of Drs. Kaufman and Chancellor and Mr. Johnston, executive officers of the Company, the material terms of each of which are described in the section entitled “Executive Compensation – Executive Employment Agreements” of our Annual Report, which descriptions are supplemented by the disclosure of the August 2023 amendments to our agreements with Drs. Kaufman and Chancellor contained in our Current Report on Form 8-K filed with the SEC on August 8, 2023, and as described in our Annual Report.
Lease Agreement
We are party to a lease agreement, dated June 1, 2019, with Bridgeway Development Corporation (“Bridgeway”), as amended, for the lease of 2,690 square feet of office and lab and manufacturing space in Pittsburgh, Pennsylvania commencing on July 1, 2020 (the “Lease”). The Lease term expires on September 30, 2025 and we have the right to exercise a one-time option to extend the Lease term for an additional five-year term. The annual base rent under the Lease is approximately $66,000. On July 26, 2023, the Company entered into a second lease for additional space on the fourth floor of the same building (the “Fourth Floor Lease,” and together with the Lease, the “Leases”), commencing August 1, 2023 and co-terminating with the Lease on June 30, 2025. Annual rent under the Fourth Floor Lease was approximately $28,000. As space became available in the immediate proximity to our existing offices at the beginning of 2024, we terminated the Fourth Floor Lease upon mutual agreement with the landlord and replaced it with a lease for Suite 504 (“the Suite 504 Lease”). The Suite 504 Lease is effective January 1, 2024 and the term co-terminates with the Lease. The annual base rent for the current year for the Suite 504 Lease is approximately $29,000. See Note 13 of the notes to our unaudited condensed financial statements included in this Form 10-Q for more details.
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Service Agreements
We enter into service agreements in the normal course of business with CROs and for clinical trials, preclinical research studies and testing, manufacturing, and other services and products for operating purposes. These contracts do not contain any minimum purchase commitments. Certain agreements provide for termination rights subject to termination fees or wind down costs. Under such agreements, we are contractually obligated to make certain payments to vendors, mainly to reimburse them for their unrecoverable outlays incurred prior to cancellation. The exact amounts of such obligations are dependent on the timing of termination, and the exact terms of the relevant agreement and cannot be reasonably estimated. The expense we incurred pursuant to these agreements for the nine months ended September 30, 2024 was approximately $694,000, which was an increase of approximately $93,000 over the $601,000 expense incurred for the nine months ended September 30, 2023. The spending was primarily attributable to expenses relating to our ongoing research and development work, and costs related to our clinical trials for LP-310 in 2024. in During the nine months ended September 30, 2023, spending was primarily related to oral toxicology testing for LP-310, along with FDA and grant writing support expenses.
Critical Accounting Policies and Significant Judgments and Estimates
This management’s discussion and analysis is based on our unaudited condensed financial statements, which have been prepared in accordance with GAAP. The preparation of these financial statements requires us to make judgments and estimates that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the unaudited condensed financial statements and the reported amounts of expenses during the reported periods. We base our estimates on historical experience, known trends and events, and various other factors that we believe to be reasonable under the circumstances. Actual results may differ from these estimates under different assumptions or conditions. On an ongoing basis, we evaluate our judgments and estimates in light of changes in circumstances, facts and experience. The effects of material revisions in estimates, if any, will be reflected in the financial statements prospectively from the date of change in estimates.
While our accounting policies are described in more detail in the notes to our financial statements included in our Annual Report, we believe the following accounting policies used in the preparation of our financial statements require the most significant judgments and estimates. See Note 3 of the notes to our financial statements in our Annual Report for a description of our other significant accounting policies.
Accrued Expenses
As part of the process of preparing our financial statements, we are required to estimate our accrued third-party R&D expenses as of each balance sheet date. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf, and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. The majority of our service providers invoice us monthly in arrears for services performed or when contractual milestones are met. We make estimates of our accrued expenses as of each balance sheet date based on facts and circumstances known to us at that time. We periodically confirm the accuracy of our estimates with the service providers and make adjustments if necessary. The significant estimates in our accrued R&D expenses include the costs incurred for services performed by our vendors in connection with R&D activities for which we have not yet been invoiced.
We base our expenses related to R&D activities on our estimates of the services received and efforts expended pursuant to quotes and contracts with vendors that conduct R&D activities on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the R&D expense. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid balance accordingly. Non-refundable advance payments for goods and services that will be used in future R&D activities are expensed when the activity has been performed or when the goods have been received rather than when the payment is made.
Although we do not expect our estimates to be materially different from amounts incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed, it could result in us reporting amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates of such expenses and the amounts incurred.
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Stock-Based Compensation
We measure stock-based compensation based on the grant date fair value of the stock-based awards and recognize stock-based compensation expense on a straight-line basis over the requisite service period of the awards, which is generally the vesting period of the respective award. For non-employee awards, compensation expense is recognized as the services are provided, which is generally ratably over the vesting period. We account for forfeitures as they occur. On January 1, 2018, we adopted, using the modified retroactive approach, the guidance of Accounting Standard Update 2018-07, Compensation — Stock Compensation (Topic 718) — Improvements to Nonemployee Share-Based Payment Accounting (“ASU 2018-07”), and account for awards to non-employees using the grant date fair value without subsequent periodic remeasurement. The adoption of ASU 2018-07 did not have a material effect on our financial statements.
We classify stock-based compensation expense in our statements of operations in the same manner in which the award recipient’s salary and related costs are classified or in which the award recipient’s service payments are classified. In future periods, we expect stock-based compensation expense to increase, due in part to our existing unrecognized stock-based compensation expense and as we grant additional stock-based awards to continue to attract and retain our employees.
We determine the fair value of restricted Common Stock awards granted based on the fair value of our Common Stock. We have historically determined the fair value of the underlying Common Stock based on input from management and the board of directors and the Company’s enterprise value determined utilizing various methods, including the “back-solve” method. The total enterprise value, determined from the back-solve method, is historically then allocated to the various outstanding equity instruments, including the underlying Common Stock, utilizing the option pricing method (“OPM”) or a hybrid of the probability-weighted expected return method (“PWERM”) and the OPM.
The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model, which requires inputs based on certain subjective assumptions, including the expected stock price volatility, the expected term of the option, the risk-free interest rate for a period that approximates the expected term of the option, and our expected dividend yield. As the public market for our Common Stock has been limited and prior to the IPO there was no such public market, we have historically determined the volatility for awards granted based on an analysis of reported data for a group of guideline companies that issued options with substantially similar terms. The expected volatility has been determined using a weighted-average of the historical volatility measures of this group of guideline companies along with our own. We expect to continue estimating expected volatility based on the group of guideline companies until we have adequate historical data regarding the volatility of our own traded stock price. The expected term of our stock options granted to employees and non-employees has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. We have not paid, and do not anticipate paying, dividends on our Common Stock; therefore, the expected dividend yield is assumed to be zero.
As there was no public market for our Common Stock prior to the IPO, the estimated fair value of our Common Stock prior to our IPO had been approved by our board of directors, with input from management, as of the date of each award grant, considering our most recently available independent third-party valuations of our Common Stock and any additional objective and subjective factors that we believed were relevant and which may have changed from the date of the most recent valuation through the date of each award grant. We estimated the value of our equity using the market approach and a precedent transaction method which “back-solves” the equity value that yielded a specific value for our Series A Stock. We allocated the equity value to our Common Stock and shares of our Series A Stock using either an OPM or a hybrid method, which is a hybrid between the OPM and the PWERM. The hybrid method we utilized estimated the probability-weighted value across multiple scenarios but used the OPM to estimate the allocation of value within at least one of the scenarios. In addition to the OPM, the hybrid method considered the IPO scenario in which the shares of our Series A Preferred Stock converted to Common Stock. The future value of the Common Stock in the IPO scenario was discounted back to the valuation date at an appropriate risk adjusted discount rate. In the hybrid method, the present value indicated for each scenario was probability weighted to arrive at an indication of value for our Common Stock.
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In addition to considering the results of the valuations, management considered various objective and subjective factors to determine the fair value of our Common Stock as of each grant date, which may be a date later than the most recent third-party valuation date, including:
| ● | the prices of our Series A Preferred Stock sold to or exchanged between outside investors in arm’s length transactions, if any, and the rights, preferences and privileges of our Series A Preferred Stock as compared to those of our Common Stock, including the liquidation preferences of our Series A Preferred Stock; | |
| ● | the progress of our R&D efforts, including the status of preclinical studies; | |
| ● | the lack of liquidity of our equity as a private company; | |
| ● | our stage of development and business strategy and the material risks related to our business and industry; | |
| ● | the achievement of enterprise milestones; | |
| ● | the valuation of publicly traded companies in the life sciences and biotechnology sectors, as well as recently completed mergers and acquisitions of peer companies; | |
| ● | any external market conditions affecting the biotechnology industry, and trends within the biotechnology industry; | |
| ● | the likelihood of achieving a liquidity event for the holders of our Series A Preferred Stock and Common Stock, such as an IPO, or a sale of the Company, given prevailing market conditions; and | |
| ● | the analysis of IPOs and the market performance of similar companies in the biopharmaceutical industry. |
There are significant judgments and estimates inherent in these valuations. These judgments and estimates included assumptions regarding our future operating performance, the stage of development of our programs, the timing of a potential offering, or other liquidity event, and the determination of the appropriate valuation methodology at each valuation date. The assumptions underlying these valuations represented management’s best estimates, which involve inherent uncertainties and the application of management judgment. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our stock-based compensation expense could be materially different. Subsequent to the completion of the IPO, the fair value of our Common Stock has been determined based on the market price of our Common Stock on Nasdaq.
With respect to stock options granted during the nine months ended September 30, 2024 and 2023, the following table sets forth by grant date the (i) number of shares of our Common Stock issuable upon exercise of such stock options, (ii) per share exercise price of such options and (iii) estimated fair value per share of our Common Stock on each such date. We did not grant any shares of restricted Common Stock during this period.
| Grant date |
Number of shares
of Common Stock issuable upon exercise of stock options granted |
Exercise price
per share of Common Stock |
Estimated fair
value per share of Common Stock at grant date |
|||||||||
| 03/15/24 | 55,000 | $ | 6.16 | $ | 4.40 | |||||||
| 06/16/23 | 53,000 | $ | 17.52 | $ | 12.00 | |||||||
The per share values at each such grant date, which we applied to determine the per share estimated fair value of the respective awards for accounting purposes, were based upon the calculations described above used to determine the fair value of our Common Stock as of each grant date.
Emerging Growth Company Status
In April 2012, the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”) was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” may take advantage of the extended transition period provided in Section 7(a)(2)(B) of the Securities Act for complying with new or revised accounting standards. Therefore, an emerging growth company can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies. We have irrevocably elected to avail ourselves of this extended transition period and, as a result, we will not be required to adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required for other public companies.
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In addition, as an emerging growth company, we may take advantage of specified reduced disclosure and other requirements that are otherwise applicable generally to public companies. These provisions include, among other things:
| ● | reduced disclosure about the compensation paid to our executive officers; | |
| ● | not being required to submit to our stockholders’ advisory votes on executive compensation or golden parachute arrangements; | |
| ● | an exemption from the auditor attestation requirement in the pursuant to the Sarbanes-Oxley Act of 2002; and | |
| ● | an exemption from compliance with any new requirements adopted by the Public Company Accounting Oversight Board requiring mandatory audit firm rotation. |
We may take advantage of these exemptions until such time that we are no longer an emerging growth company. We would cease to be an emerging growth company upon the earliest of
| ● | the last day of the fiscal year on which we have $1.235 billion or more in annual revenue; | |
| ● | the date on which we become a “large accelerated filer” (i.e., as of our fiscal year end, the total market value of our common equity securities held by non-affiliates is $700 million or more as of September 30); | |
| ● | the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period; or | |
| ● | the last day of our fiscal year following the fifth anniversary of the date of the completion of the IPO. |
We may choose to take advantage of some but not all of these exemptions.
Recent Accounting Pronouncements
We have reviewed all recently issued accounting pronouncements and have determined that, other than as disclosed in Note 3 to our unaudited condensed financial statements included in this Report, such standards will not have a material impact on our financial statements or do not otherwise apply to our operations.
Item 3. Quantitative and Qualitative Disclosures about Market Risk.
As a smaller reporting company, as defined in Item 10(f)(1) of Regulation S-K, we are not required to provide the information required by this Item.
Item 4. Controls and Procedures.
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including the Chief Executive Officer and Chief Financial Officer, the Company conducted an evaluation of the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act as of the end of the period covered by this report. Disclosure controls and procedures are designed to ensure that information required to be disclosed in the reports the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that such information is accumulated and communicated to management, including the Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure. Based on this evaluation, the Company’s management, including the Chief Executive Officer and Chief Financial Officer, concluded that its disclosure controls and procedures were effective as of September 30, 2024.
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Changes in Internal Controls
There were no changes in the Company’s internal control over financial reporting that occurred during the three months ended September 30, 2024, that have materially affected or are reasonably likely to materially affect our internal control over financial reporting.
Limitations of the Effectiveness of Controls
Our management, including our Chief Executive Officer and Chief Financial Officer, does not expect that our disclosure controls and procedures will prevent all errors and all fraud. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected. These inherent limitations include, but are not limited to, the realities that judgments in decision making can be faulty and that breakdowns can occur because of simple errors. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the control. The design of any system of controls is also based in part upon certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions. Because of the inherent limitations in a cost-effective control system, misstatements due to error or fraud may occur and not be detected.
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PART II. OTHER INFORMATION
Item 1. Legal Proceedings.
From time to time, we may become subject to legal proceedings, claims or litigation arising in the ordinary course of business. We are not presently a party to any legal proceedings that in the opinion of our management, if determined adversely to us, would individually or taken together have a material adverse effect on our business, operating results, financial condition or cash flows.
Item 1A. Risk Factors.
Our business, financial condition and operating results are subject to a number of risk factors, both those that are known to us and identified below and others that may arise from time to time. These risks and uncertainties are not the only ones that we face and additional risks and uncertainties not presently known to us or that we currently consider immaterial may also impair our business operations. These risk factors could cause our actual results to differ materially from those suggested by forward-looking statements in this Quarterly Report on Form 10-Q for the quarterly period ended September 30, 2024 (this “Report”) and elsewhere, and may adversely affect our business, financial condition or operating results. If any of these risk factors should occur, moreover, the trading price of our Common Stock could decline, and investors in our Common Stock could lose all or part of their investment. These risk factors, along with other information contained in this Report, should be carefully considered in evaluating our prospects.
We have been notified by Nasdaq of our failure to comply with certain continued listing requirements and, if we are unable to regain compliance with all applicable continued listing requirements and standards of Nasdaq, our Common Stock could be delisted from Nasdaq.
Our Common Stock is currently listed on the Nasdaq Capital Market. In order to maintain that listing, we must satisfy minimum financial and other continued listing requirements and standards, including those regarding director independence and independent committee requirements, minimum stockholders’ equity, minimum share price, and certain corporate governance requirements.
As disclosed in our Current Report on Form 8-K filed with the U.S. Securities and Exchange Commission (the “SEC”) on April 19, 2024, on April 17, 2024, we received a written notification from the Staff notifying us that we were not in compliance with the Minimum Bid Price Requirement because the closing bid price of our Common Stock was below $1.00 per share for the previous thirty (30) consecutive business days.
As disclosed in our Current Report on Form 8-K filed with the SEC on August 23, 2024, we received a letter from the Staff on August 21, 2024 stating that we were not in compliance with the Stockholders’ Equity Requirement. We reported stockholders’ equity of $1,703,798 in our Quarterly Report on Form 10-Q for the quarter ended June 30, 2024, and, as a result, we were not in compliance with the Stockholders’ Equity Requirement.
As disclosed in our Current Report on Form 8-K filed with the SEC on October 18, 2024, the Staff notified us on October 16, 2024 that it would delist the Common Stock from the Nasdaq Capital Market, and in response, we timely requested an appeal of such notice to the Panel. The Nasdaq hearing date has been set for December 12, 2024. While the appeal process is pending, the suspension of trading of the Common Stock on the Nasdaq Capital Market will continue to be stayed until the hearing process concludes and the Panel issues a decision. The Company is diligently working to regain compliance with the Minimum Bid Price Requirement and the Stockholders’ Equity Requirement.
There can be no assurances that we will be able to regain compliance with the Minimum Bid Price Requirement or the Stockholders’ Equity Requirement or if we do later regain compliance with the Minimum Bid Price Requirement or the Stockholders’ Equity Requirement, that we will be able to continue to comply with all applicable Nasdaq listing requirements now or in the future. If we are unable to maintain compliance with these Nasdaq requirements, our Common Stock will be delisted from the Nasdaq Capital Market.
In the event that our Common Stock is delisted from the Nasdaq Capital Market, as a result of our failure to comply with the Minimum Bid Price Requirement or the Stockholders’ Equity Requirement, or due to our failure to continue to comply with any other requirement for continued listing on the Nasdaq Capital Market, and is not eligible for listing on another exchange, trading in the shares of our Common Stock could be conducted in the over-the-counter market or on an electronic bulletin board established for unlisted securities such as the Pink Market or another over-the-counter market operated by the OTC Markets Group Inc. In such event, it could become more difficult to dispose of, or obtain accurate price quotations for, our Common Stock, and it would likely be more difficult to obtain coverage by securities analysts and the news media, which could cause the price of our Common Stock to decline further. Also, it may be difficult for us to raise additional capital if we are not listed on a national exchange.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
None.
Item 3. Defaults Upon Senior Securities.
None.
Item 4. Mine Safety Disclosures.
Not applicable.
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Item 5. Other Information.
None.
Item 6. Exhibits.
In accordance with SEC Release 33-8238, Exhibits 32.1 and 32.2 are being furnished and not filed.
| * | Filed herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
| Lipella Pharmaceuticals Inc. | ||
| Date: November 14, 2024 | By: | /s/ Jonathan Kaufman |
| Jonathan Kaufman | ||
| President and Chief Executive Officer | ||
| (Duly Authorized Officer and Principal Executive Officer) | ||
| Date: November 14, 2024 | By: | /s/ Douglas Johnston |
| Douglas Johnston | ||
| Chief Financial Officer | ||
| (Duly Authorized Officer and Principal Financial and Accounting Officer) | ||
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