Aditxt, Inc. - Quarter Report: 2021 September (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended September 30, 2021

or

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

For the transition period from ________________ to ________________

Commission File Number: 001-39336

Aditxt, Inc.

(Exact name of registrant as specified in its charter)

(650) 870-1200

(Registrant’s telephone number, including area code)

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

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

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒     No ☐

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or 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.

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

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

As of November 12, 2021, the registrant had 27,027,149 and 26,926,346 shares of common stock, $0.001 par value per share, issued and outstanding, respectively.

Table of Contents

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA

This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions 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”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:

All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition, and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes, or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.

This Quarterly Report on Form 10-Q may include market data and certain industry data and forecasts, which we may obtain from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications, articles, and surveys. Industry surveys, publications, consultant surveys, and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that such studies and publications are reliable, we have not independently verified market and industry data from third-party sources.

References to Aditxt, Inc.

Throughout this Quarterly Report on Form 10-Q, the “Company,” “Aditxt,” “we,” “us,” and “our” refers to Aditxt, Inc. and “our board of directors” refers to the board of directors of Aditxt, Inc.

PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

ADITXT, INC.

BALANCE SHEETS

(Unaudited)

See accompanying notes to the financial statements.

ADITXT, INC.

STATEMENTS OF OPERATIONS

(Unaudited)

See accompanying notes to the financial statements.

ADITXT, INC.

STATEMENTS OF STOCKHOLDERS’ EQUITY (DEFICIT)

THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2021 AND 2020

(Unaudited)

See accompanying notes to the financial statements.

ADITXT, INC.

STATEMENTS OF CASH FLOWS

(Unaudited)

See accompanying notes to the financial statements.

ADITXT, INC.

NOTES TO FINANCIAL STATEMENTS

(unaudited)

NOTE 1 – ORGANIZATION AND NATURE OF BUSINESS

Company Background

Overview

Aditxt, Inc. (“Aditxt” or the “Company”), formally known as Aditx Therapeutics, Inc., was incorporated in the State of Delaware on September 28, 2017 and the Company’s headquarters are located in Richmond, VA. The Company is a biotech innovation company with a mission of prolonging life and enhancing its quality by improving the health of the immune system.

The Company is developing biotechnologies specifically focused on improving the health of the immune system through immune reprogramming and monitoring. The Company’s immune reprogramming technologies are currently at the pre-clinical stage and are designed to retrain the immune system to induce tolerance with an objective of addressing rejection of transplanted organs, autoimmune diseases, and allergies. The Company’s immune monitoring technologies are designed to provide a personalized comprehensive profile of the immune system and the Company plans to utilize them in its upcoming reprogramming clinical trials to monitor subjects’ immune response before, during and after drug administration.

Offerings

On July 2, 2020, the Company completed its initial public offering (“IPO”). In connection therewith, the Company issued 1,226,668 Units (the “Units”), at an offering price of $9.00 per Unit, resulting in gross proceeds of approximately $11.0 million. The Units issued in the IPO consisted of one share of common stock, one Series A warrant, and one Series B warrant. The Series A warrants originally had an exercise price of $9.00 and a term of 5 years. In addition, the Company issued a Unit Purchase Option at an exercise price of $11.25 per unit to the underwriters to purchase up to 67,466 units, with each unit consisting of (i) one share of common stock and (ii) one Series A warrant. On August 19, 2020, the Company modified the exercise price of the Series A warrants from $9.00 per share to $4.50 per share. The term of the Series A warrants was not modified. The Series B warrants have an exercise price of $11.25 per share, a term of 5 years and contain a cashless exercise option upon certain criteria being met. As of September 30, 2021, substantially all of the Series B warrants issued in the IPO have been exercised pursuant to a cashless provision therein.

On September 10, 2020, the Company completed a follow-on public offering (“September 2020 Offering”). In connection therewith, the Company issued 2,400,000 Units (the “Follow-On Units”), at an offering price of $4.00 per Follow-On Unit, resulting in gross proceeds of approximately $9.6 million. The Follow-On Units issued in the September 2020 Offering consisted of one share of common stock (or Series A Preferred Stock for investors who would own more than 4.99% of the Company if they invested in common stock), one Series A-1 warrant, and one Series B-1 warrant. The Series A-1 warrants have an exercise price of $3.19 per share and a term of 5 years. The Series B-1 warrants have an exercise price of $5.00 per share, a term of 5 years and contain a cashless exercise option upon certain criteria being met. In addition, the Company issued a warrant to the underwriters to purchase up to 60,000 shares of common stock at an exercise price of $5.00 per share. Subsequent to quarter end, substantially all of the Series B-1 warrants issued in the September 2020 Offering have been exercised pursuant to a cashless provision therein.

On August 31, 2021, the Company completed a registered direct offering (“August 2021 Offering”). In connection therewith, the Company issued 4,583,334 shares of common stock, at a purchase price of $2.40 per share, resulting in gross proceeds of approximately $11.0 million. In a concurrent private placement, the Company issued warrants to purchase up to 4,583,334 shares. The warrants have an exercise price of $2.53 per share and are exercisable for a five-year period commencing six months from the date of issuance. In addition, the Company issued a warrant to the placement agent to purchase up to 229,166 shares of common stock at an exercise price of $3.00 per share.

Risks and Uncertainties

The Company has a limited operating history and has not generated revenue from intended operations. The Company’s business and operations are sensitive to general business and economic conditions in the U.S. and worldwide along with local, state, and federal governmental policy decisions. A host of factors beyond the Company’s control could cause fluctuations in these conditions. Adverse conditions may include: changes in the biotechnology regulatory environment, technological advances that render our technologies obsolete, availability of resources for clinical trials, acceptance of technologies into the medical community, and competition from larger, more well-funded companies. These adverse conditions could affect the Company’s financial condition and the results of its operations.

On January 30, 2020, the World Health Organization declared the COVID-19 novel coronavirus outbreak a “Public Health Emergency of International Concern” and on March 10, 2020, declared it to be a pandemic. Actions taken around the world to help mitigate the spread of the coronavirus include restrictions on travel, and quarantines in certain areas, and forced closures for certain types of public places and businesses. The COVID-19 coronavirus and actions taken to mitigate it have had and are expected to continue to have an adverse impact on the economies and financial markets of many countries, including the geographical area in which the Company operates. While it is unknown how long these conditions will last and what the financial impact will be to the Company, it is reasonably possible that future capital raising efforts and additional development of our technologies may be negatively affected.

NOTE 2 – GOING CONCERN ANALYSIS

Management Plans

The Company was incorporated on September 28, 2017 and has not generated revenues to date. During the nine months ended September 30, 2021, the Company had a net loss of $22,318,832 and cash of $5,469,435 at September 30, 2021. The Company will be conducting medical research and development, and the time at which the Company will begin generating revenue is unknown. These factors indicate substantial doubt about the Company’s ability to continue as a going concern. The Company believes, however, that the funds raised by August 2021 Offering as well as its remaining availability of approximately $89.0 million to raise future funds pursuant to an effective shelf registration statement filed with the SEC on Form S-3 declared effective on July 13, 2021 will be sufficient to fund the Company’s operations for at least the next 12 months. Because of these factors, the Company believes that this alleviates substantial doubt in connection with the Company’s ability to continue as a going concern. The accompanying financial statements have been prepared assuming that the Company will continue as a going concern.

The financial statements included in this report do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classification of liabilities that may result from the matters discussed herein. While we believe in the viability of our strategy to generate sufficient revenue, control costs, and raise additional funds, when necessary, there can be no assurances to that effect. The Company’s ability to continue as a going concern is dependent upon the ability to complete clinical studies and implement the business plan, generate sufficient revenues and to control operating expenses.

NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying unaudited financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the Securities and Exchange Commission (“SEC”). In the opinion of the Company’s management, the accompanying financial statements reflect all adjustments, consisting of normal, recurring adjustments, considered necessary for a fair presentation of the results for the interim periods ended September 30, 2021 and September 30, 2020. Although management believes that the disclosures in these unaudited financial statements are adequate to make the information presented not misleading, certain information and footnote disclosures normally included in financial statements that have been prepared in accordance U.S. GAAP have been omitted pursuant to the rules and regulations of the SEC.

The accompanying unaudited financial statements should be read in conjunction with the Company’s financial statements and notes related thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on March 25, 2021. The interim results for the nine months ended September 30, 2021 are not necessarily indicative of the results to be expected for the year ended December 31, 2021 or for any future interim periods.

Use of Estimates

The preparation of financial statements in conformity with U.S. 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 the financial statements and the reported amounts of revenue and expense during the reporting period. Actual results could differ from those estimates. Significant estimates underlying the financial statements include the fair value of stock options and warrants.

Fair Value Measurements and Fair Value of Financial Instruments

The Company adopted Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurements. ASC Topic 820 clarifies the definition of fair value, prescribes methods for measuring fair value, and establishes a fair value hierarchy to classify the inputs used in measuring fair value as follows:

The Company did not identify any assets or liabilities that are required to be presented on the balance sheets at fair value in accordance with ASC Topic 820.

Due to the short-term nature of all financial assets and liabilities, their carrying value approximates their fair value as of the balance sheet dates.

Concentrations of Credit Risk

The Company maintains its cash accounts at financial institutions which are insured by the Federal Deposit Insurance Corporation. At times, the Company may have deposits in excess of federally insured limits.

Cash and Cash Equivalents

Cash and cash equivalents include short-term, liquid investments.

Fixed Assets

Fixed assets are stated at cost less accumulated depreciation. Cost includes expenditures for furniture, office equipment, laboratory equipment, and other assets. Maintenance and repairs are charged to expense as incurred. When assets are sold, retired, or otherwise disposed of, the cost and accumulated depreciation are removed from the accounts and any resulting gain or loss is reflected in operations. The costs of fixed assets are depreciated using the straight-line method over the estimated useful lives or lease life of the related assets.

Intangible Assets

Intangible assets are stated at cost less accumulated amortization. For intangible assets that have finite lives, the assets are amortized using the straight-line method over the estimated useful lives of the related assets. For intangible assets with indefinite lives, the assets are tested periodically for impairment.

Offering Costs

The Company accounts for offering costs in accordance with ASC 340, Other Assets and Deferred Costs. Prior to the completion of an offering, offering costs were capitalized as deferred offering costs on the balance sheet. The deferred offering costs are netted against the proceeds of the offering in stockholders’ equity (deficit) or the related debt, as applicable. Costs related to unsuccessful offerings are expensed.

Leases

Under Topic 842, adopted in 2020 with no impact related to adoption, operating lease expense is generally recognized evenly over the term of the lease. The Company has operating leases consisting of office space, laboratory space, and lab equipment.

Leases with an initial term of twelve months or less are not recorded on the balance sheet. For lease agreements entered or reassessed after the adoption of Topic 842, we combine the lease and non-lease components in determining the lease liabilities and right of use (“ROU”) assets.

Stock-Based Compensation

The Company accounts for stock-based compensation costs under the provisions of ASC 718, Compensation—Stock Compensation, which requires the measurement and recognition of compensation expense related to the fair value of stock-based compensation awards that are ultimately expected to vest. Stock based compensation expense recognized includes the compensation cost for all stock-based payments granted to employees, officers, and directors based on the grant date fair value estimated in accordance with the provisions of ASC 718. ASC 718 is also applied to awards modified, repurchased, or cancelled during the periods reported. Stock-based compensation is recognized as expense over the employee’s requisite vesting period and over the nonemployee’s period of providing goods or services.

Patents

The Company incurs fees from patent licenses, which are expensed as incurred. During the nine months ended September 30, 2021 and September 30, 2020, the Company incurred patent licensing fees for the patents of $76,245 and $258,635, respectively.

Research and Development

We incur research and development costs during the process of researching and developing our technologies and future offerings. We expense these costs as incurred unless such costs qualify for capitalization under applicable guidance. During the nine months ended September 30, 2021 and September 30, 2020, the Company incurred research and development costs of $3,340,247 and $514,478, respectively.

Basic and Diluted Net Loss per Common Share

Basic loss per common share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding for each period. Diluted loss per share is computed by dividing the net loss by the weighted average number of shares of common stock outstanding plus the dilutive effect of shares issuable through the common stock equivalents. The weighted-average number of common shares outstanding excludes common stock equivalents because their inclusion would be anti-dilutive. As of September 30, 2021, 2,143,000 stock options, 1,428,800 restricted stock units, and 10,263,964 warrants were excluded from dilutive earnings per share as their effects were anti-dilutive. As of September 30, 2020, 1,110,000 stock options and 6,237,296 warrants were excluded from dilutive earnings per share as their effects were anti-dilutive.

Recent Accounting Pronouncements

In August 2020, the FASB issued ASU 2020-06, which simplifies the guidance on the issuer’s accounting for convertible debt instruments by removing the separation models for convertible debt with a cash conversion feature and convertible instruments with a beneficial conversion feature. As a result, entities will not separately present in equity an embedded conversion feature in such debt and will account for a convertible debt instrument wholly as debt, unless certain other conditions are met. The elimination of these models will reduce reported interest expense and increase reported net income for entities that have issued a convertible instrument that is within the scope of ASU 2020-06. ASU 2020-06 is applicable for fiscal years beginning after December 15, 2021, with early adoption permitted no earlier than fiscal years beginning after December 15, 2020. The Company has elected to early adopt this ASU and the adoption of this ASU did not have a material impact on the Company’s consolidated financial statements and related disclosures.

The FASB issues ASUs to amend the authoritative literature in ASC. There have been several ASUs to date, including those above, that amend the original text of ASC. Management believes that those issued to date either (i) provide supplemental guidance, (ii) are technical corrections, (iii) are not applicable to us or (iv) are not expected to have a significant impact on our financial statements.

NOTE 4 – NOTE RECEIVABLE

On August 25, 2021, the Company entered into a letter of intent ("the LOI") to acquire a biopharmaceutical company, the (“Target Company”), commercializing COVID-19 antiviral oral therapy. Key terms of the proposed transaction as stated in the Letter of Intent included: the completion of a proposed $6.5 million secured loan from the Company to the Target Company by August 31, 2021, as well as the issuance of such number of shares of the Company’s common stock that yields 50% of the number of the Company’s outstanding shares post-closing of the transaction. The acquisition is subject to the satisfaction of numerous conditions, including satisfactory due diligence, the negotiation and execution of definitive agreements and other closing conditions, including board and shareholder approval and approval by Nasdaq of the listing of shares proposed to be issued in the transaction. The Company and the Target Company have agreed to an exclusivity period until September 30, 2021 (the “Exclusivity Period”), with a view to settling the definitive agreement. On September 30, 2021, the parties entered into a letter agreement pursuant to which they agreed to extend the Exclusivity Period until October 4, 2021.

As contemplated by the Letter of Intent, on August 30, 2021, the Company entered into a secured credit agreement dated August 27, 2021 (the “Credit Agreement”) with the Target Company and certain affiliated entities, pursuant to which the Company made a secured loan to the Target Company in the principal amount of $6.5 million (the “Loan”). The Loan was funded on August 31, 2021, following the closing of the Company’s August 2021 Offering. The Loan bears interest at a rate of 8% per annum and matures on November 30, 2021 or upon such earlier date as the Letter of Intent or Exclusivity Period is terminated in accordance with the terms thereof. The Loan is secured by certain accounts receivable and other assets of the Target Company and certain of its affiliates. The Credit Agreement also contains certain covenants that prohibit the Target Company from incurring additional indebtedness, incurring liens or making any dispositions of its property.

NOTE 5 – FIXED ASSETS

The Company’s fixed assets include the following on September 30, 2021:

The Company’s fixed assets include the following on December 31, 2020:

Depreciation expense was $99,857 for the three months ended September 30, 2021 and $2,796 for the three months ended for September 30, 2020. Depreciation expense was $266,385 for the nine months ended September 30, 2021 and $2,796 for the nine months ended for September 30, 2020. None of the Company’s fixed assets serve as collateral against any loans as of September 30, 2021 and December 31, 2020, other than those subject to the financed asset liability.

NOTE 6 – INTANGIBLE ASSETS

The Company’s intangible assets include the following on September 30, 2021:

The Company’s intangible assets include the following on December 31, 2020:

Amortization expense was $26,970 for the three months ended September 30, 2021 and zero for the three months ended for September 30, 2020. Amortization expense was $80,030 for the nine months ended September 30, 2021 and zero for the nine months ended for September 30, 2020. None of the Company’s intangible assets serve as collateral against any loans as of September 30, 2021 and December 31, 2020.

NOTE 7 – RELATED PARTY TRANSACTIONS

On February 24, 2021, the Company granted 225,000 shares of restricted stock pursuant to the Company’s 2017 Equity Incentive Plan to the Company’s Chief Executive Officer. The Company recognized $747,000 in stock-based compensation for the issuance of these shares. The grant vests in equal annual installments over the course of (3) three years, beginning on March 31, 2021.

On February 24, 2021, the Company granted 110,000 shares of restricted stock pursuant to the Company’s 2017 Equity Incentive Plan to the Company’s current President and former Chief Financial Officer. The Company recognized $365,200 in stock-based compensation for the issuance of these shares. The grant vests in equal annual installments over the course of (3) three years, beginning on March 31, 2021.

On June 4, 2021, the Company granted 75,000 shares of restricted stock pursuant to the Company’s 2021 Equity Incentive Plan to the Company’s Chief Executive Officer. The Company recognized $191,250 in stock-based compensation for the issuance of these shares.

On June 4, 2021, the Company granted 55,000 shares of restricted stock pursuant to the Company’s 2021 Equity Incentive Plan to the Company’s current President and former Chief Financial Officer. The Company recognized $140,250 in stock-based compensation for the issuance of these shares.

On August 5, 2021, the Company granted 225,000 shares of Restricted Stock Units pursuant to the Company’s 2021 Equity Incentive Plan to officers and board members of the Company. 5,000 of these shares vested during the quarter, the remaining 220,000 shares are unvested as of September 30, 2021. The Company recognized $46,264 in stock-based compensation for the issuance of these vested and unvested shares during the three months ended September 30, 2021.

NOTE 8 – FINANCING AGREEMENT

In February 2021, the Company entered into an additional 24-month financing agreement for lab equipment. The aggregate cost of this financing agreement, net of a $200,000 down payment is $892,094, of which $821,861 represents principal and $70,233 represents interest. The financing agreement has an interest rate of 8% per year.

NOTE 9 – CONVERTIBLE NOTE PAYABLE

On January 25, 2021, the Company entered into a Securities Purchase Agreement with an institutional accredited investor (the “Investor”) for the offering, sale, and issuance of a $6,000,000 Senior Convertible Promissory Note (the “January 2021 Securities Purchase Agreement, or the Convertible Note”). The Convertible Note had a twenty-four-month term and was convertible at the option of the Investor at any time prior to maturity in shares of common stock at an initial conversion price of $4.00 per share. Pursuant to the January 2021 Securities Purchase Agreement, the Company also issued a warrant to the Investor to purchase up to 800,000 shares of the Company’s common stock. The warrant is immediately exercisable for a period of three (3) years at an exercise price of $4.00 per share, subject to adjustment. An additional 75,000 warrants to purchase shares of the Company’s common stock was also issued to the underwriters. These underwriter warrants are immediately exercisable for a period of five (5) years at an exercise price of $4.00 per share, subject to adjustment. The Convertible Note had an original issuance discount of $1,000,000. The Company also recognized an additional discount of $526,460 from the issuance costs of the debt, $1,322,840 from the relative fair value of the warrants issued to the Investor, and $231,316 from the fair value of warrants issued to the underwriters. The total debt discount from these items was $3,080,616 which would have been amortized over the life of the Convertible Note. Repayment of the Convertible Note’s principal amount would occur in nineteen monthly cash or common stock payments beginning in July 2021. The Convertible Note could have been prepaid by the Company at any time without penalty at 105% of the then outstanding principal amount due under the Convertible Note.

On August 25, 2021, commensurate with the offering of securities described in Note One, the exercise price of the warrants was reset based on the sale of securities at a lesser price than the original strike price of the warrants. The reset provision was partially waived at the time and formally waived based on the defeasance and waiver agreement on August 30, 2021, described below. The reset provision resulted in a warrant reset adjustment for $102,267 and recorded as an increase to accumulated deficit and an increase to additional paid-in-capital.

On August 30, 2021, the Company entered into a defeasance and waiver agreement with the holder (the “Noteholder”) of the Convertible Note pursuant to which the Noteholder has agreed in exchange for (a) a cash payment by the Company to the Convertible Noteholder of $1.2 million, (b) a waiver, in part, of the conversion price adjustment provision such that the January 2021 Note shall be convertible into 4,802,497 shares of common stock (without giving effect to the conversion notices received by the Company from the Noteholder prior to the date hereof totaling 1,005,748 shares) and (c) a voluntary and permanent reduction by the Company of the exercise price of the warrant to purchase 800,000 shares of common stock of the Company to $2.53 per share. As a result of the modification of the debt terms, the Company determined that an extinguishment of the debt occurred and recorded a loss on extinguishment of the debt in the amount of $2,500,970 for the three and nine months ended September 30, 2021.

NOTE 10 – LEASES

Our lease agreements generally do not provide an implicit borrowing rate; therefore, an internal incremental borrowing rate is determined based on information available at lease commencement date for purposes of determining the present value of lease payments. We used the incremental borrowing rate on September 30, 2021 and December 31, 2020 for all leases that commenced prior to that date. In determining this rate, which is used to determine the present value of future lease payments, we estimate the rate of interest we would pay on a collateralized basis, with similar payment terms as the lease and in a similar economic environment.

Lease Costs

Lease Positions as of September 30, 2021

ROU lease assets and lease liabilities for our operating leases are recorded on the balance sheet as follows:

Lease Terms and Discount Rate

On May 4, 2021, the Company entered a triple net lease (the “Richmond Lease”) for approximately 25,000 square feet of laboratory and office space in Richmond, Virginia. The Richmond Lease has a term of sixty-three months. The monthly base rent is approximately $53,000, plus applicable pro-rata common area charges, taxes, and maintenance. The Richmond Lease contains a base rent escalation clause of 3% per lease calendar year as well as a tenant improvement allowance of $375,000 in aggregate.

NOTE 11 – STOCKHOLDERS’ EQUITY

Common Stock

On May 24, 2021, the Company increased the number of authorized shares of the Company’s common stock, par value $0.001 per share, from 27,000,000 to 100,000,000 (the “Authorized Shares Increase”) by filing a Certificate of Amendment (the “Certificate of Amendment”) to its Amended and Restated Certificate of Incorporation with the Secretary of State of the State of Delaware. In accordance with the General Corporation Law of the State of Delaware, the Authorized Shares Increase and the Certificate of Amendment were approved by the stockholders of the Company at the Company’s Annual Meeting of Stockholders on May 19, 2021. 

During the nine months ended September 30, 2021, the Company issued 88,934 shares of common stock and recognized expense of $238,264 in stock-based compensation for consulting services. The Company also issued 1,163,556 shares of common stock upon the exercise of warrants and received $3,718,956 in cash proceeds. The Company granted 465,000 shares of restricted common stock for employee compensation and recognized expense of $1,443,700 in stock-based compensation. The Company also granted 1,445,400 Restricted Stock Units, of which 16,000 vested and resulted in the issuance of shares, as a result, the Company recognized expense of $674,265 in stock-based compensation (See Note 7) The Company issued 4,802,497 shares of common stock for the conversion of a convertible note. (See Note 9) The Company issued 4,583,334 shares of common stock as part of the August 2021 Offering. The stock-based compensation for shares issued or RSU’s granted during the period, were valued based on the fair market value on the date of grant. 

During the nine months ended September 30, 2020, the Company issued 330,916 shares of common stock and recognized expense of $1,312,930 in stock compensation for consulting services. The Company also issued 3,740,753 shares of commons stock for the exercise of warrants and received $210,546 for the exercise of the warrants. The Company issued 1,250,000 shares of common stock for the exercise of 1,250,000 shares of Series A Preferred Stock. The Company issued 146,818 shares of common stock for the settlement of accounts payable and issued 62,500 shares of common stock for the settlement of debt. The Company issued 1,226,668 shares of common stock related to the IPO and issued 1,150,000 shares of common stock related to the September 2020 Offering. The stock compensation for the period was valued based on prior private placements or based on management’s estimates of value immediately prior to the IPO and the value of the shares based on public information post IPO.  

Preferred Stock

The Company is authorized to issue 3,000,000 shares of preferred stock, par value $0.001 per share. There were no shares of preferred stock outstanding as of September 30, 2021 and December 31, 2020, respectively.

Stock-Based Compensation

In October 2017, our Board of Directors adopted the Aditx Therapeutics, Inc. 2017 Equity Incentive Plan (the “2017 Plan”). The 2017 Plan provides for the grant of equity awards to directors, employees, and consultants. The Company is authorized to issue up to 2,500,000 shares of our common stock pursuant to awards granted under the 2017 Plan. The 2017 Plan is administered by our Board of Directors, and expires ten years after adoption, unless terminated earlier by the Board of Directors. 

On February 24, 2021, our Board of Directors adopted the Aditx Therapeutics, Inc. 2021 Omnibus Equity Incentive Plan (the “2021 Plan”). The 2021 Plan provides for grants of nonqualified stock options, incentive stock options, stock appreciation rights, restricted stock and restricted stock units, and other stock-based awards (collectively, the “Awards”). Eligible recipients of Awards include employees, directors or independent contractors of the Company or any affiliate of the Company. The Compensation Committee of the Board of Directors (the “Committee”) will administer the 2021 Plan. A total of 3,000,000 shares of common stock, par value $0.001 per share, of the Company may be issued pursuant to Awards granted under the 2021 Plan. The exercise price per share for the shares to be issued pursuant to an exercise of a stock option will be no less than one hundred percent (100%) of the Fair Market Value (as defined in the 2021 Plan) of a share of Common Stock on the date of grant. The 2021 Plan was submitted and approved by the Company’s stockholders at the 2021 annual meeting of stockholders, held on May 19, 2021.

During the nine months ended September 30, 2021, the Company granted no new stock options.

During the nine months ended September 30, 2020, the Company granted 7,500 stock options with an exercise price of $11.00 per share vesting on issuance. The total grant date fair value was determined to be $27,799.

The following is an analysis of the stock option grant activity under the Plan:

The Company recognized stock-based compensation expense related to options issued and vesting of $616,781 during the nine months ended September 30, 2021, of which $556,817 is included in general and administrative expenses and $59,964 is included in research and development expenses in the accompanying statements of operations. The remaining value to be expensed is $1,164,704 with a weighted average vesting term of 1.12 years as of September 30, 2021. The Company recognized stock-based compensation expense related to options issued and vesting of $27,799 during the nine months ended September 30, 2020, which is included in general and administrative expenses in the accompanying statements of operations.

Warrants

For the nine months ended September 30, 2021, the fair value of each warrant granted was estimated using the assumption ranges and/or factors in the Black-Scholes Model as follows:

The risk-free interest rate assumption for warrants granted is based upon observed interest rates on the United States Government Bond Equivalent Yield appropriate for the expected term of warrants.

The Company determined the expected volatility assumption for warrants granted using the historical volatility of comparable public companies’ common stock. The Company will continue to monitor peer companies and other relevant factors used to measure expected volatility for future warrant grants, until such time that the Company’s common stock has enough market history to use historical volatility.

The dividend yield assumption for warrants granted is based on the Company’s history and expectation of dividend payouts. The Company has never declared nor paid any cash dividends on its common stock, and the Company does not anticipate paying any cash dividends in the foreseeable future.

The Company recognizes warrant forfeitures as they occur as there is insufficient historical data to accurately determine future forfeitures rates.

A summary of warrant issuances are as follows:

The Company recognized stock-based compensation expense related to warrants issued and vesting of $163,637 and $223,398 during the nine months ended September 30, 2021 and September 30, 2020, respectively, which is included in general and administrative in the accompanying Statements of Operations. The remaining value to be expensed is $131,311 with a weighted average vesting term of 1.25 years as of September 30, 2021.

During the nine months ended September 30, 2021, 1,163,556 warrants were exercised for 1,163,556 shares of common stock. The Company recognized proceeds of $3,718,956 related to the exercises.

On January 25, 2021, pursuant to the January 2021 Securities Purchase Agreement the Company issued the January 2021 Warrant to the Investor to purchase up to 800,000 shares of the Company’s common stock. The January 2021 Warrant is immediately exercisable for a period of three years at an exercise price of $4.00 per share. The warrant was subsequently adjusted to $2.53 as disclosed in Note 9. In addition, the Company issued 75,000 warrants to the placement agent related to the January 2021 Securities Purchase Agreement. These warrants have an exercise price of $4.00 and a term of five years. All the 75,000 warrants are exercisable on issuance. (See Note 8)

In connection with the August 2021 Offering, the Company issued warrants to purchase up to 4,583,334 shares. In addition, the Company issued a warrant to the placement agent to purchase up to 229,166 shares of common stock at an exercise price of $3.00 per share. (See Note 1)

Restricted Stock Units

A summary of Restricted Stock Units (“RSUs”) issuances are as follows:

The Company recognized stock-based compensation expense related to RSUs issued and straight-line vesting expense of $674,265 and zero during the nine months ended September 30, 2021 and September 30, 2020, respectively, of which, $485,240 is included in general and administrative and $189,025 is included in research and development in the accompanying Statements of Operations. The remaining value to be expensed is $2,367,211 as of September 30, 2021.

During the nine months ended September 30, 2021, the Company issued a total of 1,445,400 RSUs. As of September 30, 2021, 16,000 of these RSUs have vested and 600 were forfeited. The Company issued 16,000 shares of common stock for the 16,000 vested RSUs.

NOTE 12 – INCOME TAXES

The Company has incurred losses since inception. During the nine months ended September 30, 2021, the Company did not provide any provision for income taxes as the Company incurred losses during such period. The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, “Accounting for Income Taxes”. The asset and liability method provides that deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the financial reporting and tax bases of assets and liabilities and for operating loss and tax credit carry forwards. Deferred tax assets and liabilities are measured using the currently enacted tax rates and laws that will be in effect when the differences are expected to reverse. In assessing the need for a valuation allowance, the Company has considered both positive and negative evidence related to the likelihood of realization of deferred tax assets using a “more likely than not” standard. In making such assessment, more weight was given to evidence that could be objectively verified, including recent cumulative losses. Based on the Company’s review of this evidence, the Company has recorded a full valuation allowance for its net deferred tax assets as of September 30, 2021.

As of September 30, 2021, the Company did not have any amounts recorded pertaining to uncertain tax positions.

NOTE 13 – SUBSEQUENT EVENTS

Transaction agreement:

On October 4, 2021 the Company entered into a transaction agreement (the “Transaction Agreement”) with AiPharma Global Holdings LLC (“AiPharma Global”), pursuant to which the Company agreed to reach a definitive agreement (the “Definitive Agreement”) no later than November 30, 2021 to acquire a subsidiary (“AiPharma Subsidiary” or Holdco”) of AiPharma Global which is to own all of the assets of AiPharma Global, following a restructuring of AiPharma Global. AiPharma Global is a biopharmaceutical company focused on discovering, developing and commercializing antiviral therapies across a broad spectrum of infectious diseases.

Pursuant to the Transaction Agreement, the Company also agreed to permit AiPharma Global to borrow an additional principal amount of $8.5 million under the Credit Agreement resulting in total availability of $15 million, as well as the Company issuing such number of shares of common stock that yields 65% of the number of the Company’s outstanding shares as of September 30, 2021 upon satisfaction of all closing conditions at the closing of the transaction.

The Transaction Agreement contemplates two events. First, upon the execution of the Definitive Agreement (the “Initial Closing”), AiPharma Global would acquire 19.99% of the Company’s common stock as of September 30, 2021, subject to the filing of the Company’s Quarterly Report on Form 10-Q (the “Initial Shares”), in exchange for 10% of the issued and outstanding equity interests of AiPharma Subsidiary. In addition, the Company would forgive all amounts then outstanding under the Credit Agreement, as amended. Following the execution of the Definitive Agreement, the Company has also agreed to take all necessary actions to cause two individuals designated by AiPharma Global to be appointed to the board of directors of the Company.

The Transaction Agreement may be terminated: (i) by mutual agreement of the parties, (ii) by either party if the Definitive Agreement has not be executed by November 30, 2021, (iii) by either party if there has been material breach or any material failure to perform any covenant or agreement and such breach or failure has not been cured or is incapable of being cured, (iv) by the Company if the Company is not satisfied with the currant due diligence conditions, (v) by the board of directors of the Company if it received a proposal that it deems to be superior to the AiPharma Global proposal described in the Transaction Agreement, (vi) by AiPharma Global if the Company breaches certain convents under the Transaction Agreement restricting issuance of securities during the period from execution of the Transaction Agreement through the Initial Closing, or termination of the Transaction Agreement, or (vii) if at any time period to the Initial Closing or earlier termination of the Transaction Agreement, the Initial Shares and Secondary Shares (defined below) represent less than 50.1% of the issued and outstanding shares of the Company. In the event that the Transaction Agreement is terminated pursuant to (i) or (ii), AiPharma Global is required to pay the Termination Fee to the Company by November 30, 2021. The Credit Agreement provided for a termination fee of $4 million (the “Termination Fee”) in the event that the Definitive agreement is not entered into by November 30, 2021. In the event that the Transaction Agreement is terminated by the Company pursuant to (iii) or (iv), AiPharma Global is required to pay the Termination Fee to the Company of $4 million and AiPharma Global is not required to pay the Termination Fee. In the event that the Transaction Agreement is terminated by AiPharma Global pursuant to (vii) the Company is not required to pay a termination fee and AiPharma Global is not required to pay the Termination Fee.

The Secondary Closing (as defined below) is conditioned upon certain closing conditions, including but not limited to: (i) the approvals of the stockholders of the Company of all matters required for the Secondary Closing, and (ii) Nasdaq approval of the issuance of shares to AiPharma Global at the Secondary Closing and the continued listing of the Company’s common stock following the Secondary Closing (collectively, the Closing Conditions”).

The second event under the Transaction agreement occurs upon the satisfaction of all Closing Conditions (the “Secondary Closing”) the Company shall issue an additional number of shares of the Company’s common stock that yields 65.00% of the Company’s outstanding shares of common stock as of September 30, 2021 (the “Secondary Shares”) to AiPharma Global in exchange for all remaining equity interest of AiPharma Subsidiary.

Common stock offering:

On October 18, 2021, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Revere Securities LLC, relating to the public offering (the “October Offering”) of 2,833,333 shares of the Company’s common stock (the “Shares”) by the Company.

The Shares were offered, issued, and sold at a price to the public of $1.50 per share under a prospectus supplement and accompanying prospectus filed with the SEC pursuant to an effective shelf registration statement filed with the SEC on Form S-3 (File No. 333-257645), which was declared effective by the SEC on July 13, 2021.

The October Offering closed on October 20, 2021 for gross proceeds of $4.25 million. The Company utilized a portion of the proceeds, net of underwriting discounts of approximately $3.91 million from the October Offering to fund certain obligations under the Credit Agreement.

Amendment to Credit Agreement:

On October 18, 2021, the Company entered into the first amendment to the Credit Agreement with AiPharma Global and certain affiliated entities (the “Credit Agreement Amendment”), pursuant to which the Company agreed to increase the amount which AiPharma is permitted to borrow under the Credit Agreement by $8.5 million to an aggregate of $15.0 million, of which $6.5 million was outstanding prior to entering the Credit Agreement Amendment. The Company agreed to fund such additional borrowings, as requested by AiPharma, by advancing 70% of any amounts received by the Company from the exercise of existing warrants or any other capital raises, including the October Offering.

Lease:

On November 3, 2021, the Company entered a modified gross lease (the “Melville Lease”) for approximately 3,150 square feet of office space in Melville, New York. The Melville Lease has a term of thirty-six months. The monthly base rent is approximately $7,240, plus applicable pro-rata common area charges. The Melville Lease contains a base rent escalation clause of 3.00% per lease calendar year. The Company anticipates moving into the space before the end of 2021.

RSU grant:

On November 10, 2021, the Compensation Committee approved the grant of 335,400 RSUs to employees pursuant to the Company’s 2021 Equity Incentive Plan. Included in this grant were 195,000 RSUs granted to officers of the Company.

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 should be read together with the unaudited financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and the audited financial statements and related notes for the year ended December 31, 2020 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission, or SEC. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties, and assumptions. Our actual results may differ materially from those anticipated in these forward-looking statements as a result of certain factors. We discuss factors that we believe could cause or contribute to these differences below and elsewhere in this Quarterly Report on Form 10-Q, including those factors set forth in the section entitled “Cautionary Note Regarding Forward-Looking Statements and Industry Data” and in the section entitled “Risk Factors” in Part II, Item 1A.

Overview

We are a biotech innovation company with a mission of prolonging life and enhancing its quality by improving the health of the immune system. We are developing biotechnologies specifically focused on improving the health of the immune system through immune reprogramming and monitoring. Our immune reprogramming technologies are currently at the pre-clinical stage and are designed to retrain the immune system to induce tolerance with an objective of addressing rejection of transplanted organs, autoimmune diseases, and allergies. Our immune monitoring technologies are designed to provide a personalized comprehensive profile of the immune system and we plan to utilize them in our upcoming reprogramming clinical trials to monitor subjects’ immune response before, during and after drug administration.

Immune Reprogramming

The discovery of immunosuppressive (anti-rejection and monoclonal) drugs over 40 years ago has made possible life-saving organ transplantation procedures and blocking of unwanted immune responses in autoimmune diseases. However, immune suppression leads to significant undesirable side effects, such as increased susceptibility to life-threatening infections and cancers, because it indiscriminately and broadly suppresses immune function throughout the body. While the use of these drugs has been justifiable because they prevent or delay organ rejection, their use for treatment of autoimmune diseases and allergies may not be acceptable because of the aforementioned side effects. Furthermore, transplanted organs often ultimately fail despite the use of immune suppression, and about 40% of transplanted organs survive no more than 5 years.

New, focused therapeutic approaches are needed that modulate only the small portion of immune cells that are involved in rejection of the transplanted organ, as this approach can be safer for patients than indiscriminate immune suppression. Such approaches are referred to as immune tolerance, and when therapeutically induced, may be safer for patients and potentially allow long-term survival of transplanted tissues and organs.

In the late 1990s, academic research on these approaches was conducted at the Transplant Center in Loma Linda University (“LLU”) in connection with a project that secured initial grant funding from the U.S. Department of Defense. The focus of that project was for skin grafting for burn victims. Twenty years of research at LLU and an affiliated incubator led to a series of discoveries that have been translated into a large patent portfolio of therapeutic approaches that may be applied to the modulation of the immune system to induce tolerance to self and transplanted organs.

We have an exclusive worldwide license for commercializing this nucleic acid-based technology (which is currently at the pre-clinical stage), named Apoptotic DNA Immunotherapy™ (ADi™) from LLU, which utilizes a novel approach that mimics the way the body naturally induces tolerance to our own tissues (“therapeutically induced immune tolerance”). While immune suppression requires continuous administration to prevent rejection of a transplanted organ, induction of tolerance has the potential to retrain the immune system to accept the organ for longer periods of time. Thus, ADi™ may allow patients to live with transplanted organs with significantly reduced immune suppression. ADi™ is a technology platform which we believe can be engineered to address a wide variety of indications. 

We are developing ADi™ products for organ transplantation including skin grafting, autoimmune diseases, and allergies, with the initial focus on skin allografts and psoriasis, as we believe these indications will be most efficient in providing safety and efficacy data in clinical trials. To submit a Biologics License Application (“BLA”) for a biopharmaceutical product, clinical safety and efficacy must be demonstrated in a series of clinical studies conducted with human subjects. For products in our class of drugs, the first-in-human trials will be a combination of Phase I (safety/tolerability) and Phase II (efficacy) in affected subjects. To obtain approval to initiate the Phase I/IIa studies, an Investigational New Drug Application will be submitted to compile non-clinical efficacy data as well as manufacturing and pre-clinical safety/toxicology data. To date, we have conducted non-clinical studies in a stringent model of skin transplantation using genetically mismatched donor and recipient animals demonstrating a 3-fold increase in the survival of the skin graft in animals that were tolerized with ADi™ compared to animals that receive immune suppression alone. Prolongation of graft life was observed despite discontinuation of immune suppression after the first 5 weeks. Additionally, in an induced non-clinical model for psoriasis, ADi™ treatment resulted in a 69% reduction in skin thickness and a 38% decrease in skin flaking (two clinical parameters for assessment of psoriasis skin lesions). The Phase I/IIa studies in psoriasis will evaluate the safety/tolerability of ADi™ in patients diagnosed with psoriasis. Since the drug will be administered in subjects diagnosed with psoriasis, effectiveness of the drug to improve psoriatic lesions will also be evaluated. In another Phase I/IIa study, patients requiring skin allografts will receive weekly intra-dermal injections of ADi™ in combination with standard immune suppression to assess safety/tolerability and possibility of reducing levels of immunosuppressive drugs as well as prolongation of graft life. Later phase trials are planned after successful completion of these studies in preparation for submission for a BLA to regulatory agencies.

Immune Monitoring

We believe that understanding the status of an individual’s immune system is key to developing and administering immunotherapies such as ADi™. We have secured an exclusive worldwide license for commercializing a technology platform which provides a personalized comprehensive profile of the immune system. It is intended to be informative for individual immune responses to viruses, bacterial antigens, peptides, drugs, bone marrow and solid organ transplants, and cancer. It has broad applicability to many other agents of clinical interest impacting the immune system, including those not yet identified such as future infectious agents. We plan to brand this technology, and other future licensed and/or in-house developed monitoring technologies collectively as AditxtScore™.

AditxtScore™ is being designed to allow individuals to understand, manage and monitor their immune profiles in order to be informed about attacks on or by their immune system. We believe AditxtScore™ can also assist the medical community in anticipating possible immune responses and reactions to viruses, bacteria, allergens, and transplanted organs. It can be useful in anticipating attacks on the body by having the ability to determine its potential response and for developing a plan to deal with an undesirable reaction by the immune system. Its advantages include the ability to provide a simple, rapid, accurate, high throughput, single platform assay that can be multiplexed to determine the immune status with respect to several factors simultaneously, in 3-16 hours, as well as detect antigen and antibody in a single test (i.e., infectious, recovered, immune). In addition, it can determine and differentiate between various types of cellular and humoral immune responses (T and B cells). It also provides for simultaneous monitoring of cell activation and levels of cytokine release (i.e., cytokine storms).

We plan to utilize AditxtScore™ in our upcoming clinical trials to monitor subjects’ immune response before, during, and after ADi™ drug administration. We are working with regulatory consultants with the objective to obtain FDA approval for AditxtScore™ as a clinical assay. We are currently securing marketing and distribution partnerships for application of AditxtScore™ in the infectious diseases market. To obtain FDA approval to use AditxtScore™ as a clinical assay, we are performing validation studies to demonstrate AditxtScore™’s utility to evaluate various components of the immune system reproducibly. We believe that this data will show AditxtScore™’s ability to measure various components of the immune system (e.g., humoral and cell-mediated immune responses) to provide a broader view of the immune system and its status in health and disease. Our plan is to submit a 510(K) application to the FDA after compilation of these data. Beyond infectious diseases, we plan to develop AditxtScore™ for applications in additional markets such as organ rejection, allergies, drug/vaccine response, and disease susceptibility.

License Agreement with Loma Linda University

On March 8, 2018, we entered into an Assignment Agreement (the “Assignment Agreement”) with Sekris Biomedical, Inc. (“Sekris”). Sekris was a party to a license agreement with LLU, entered and made effective on May 25, 2011, and amended on June 24, 2011, July 16, 2012 and December 27, 2012 (the “Original Agreement,” and together with the Assignment Agreement, the “Sekris Agreements”). Pursuant to the Assignment Agreement, Sekris transferred and assigned all of its rights, obligations and liabilities under the Original Agreement, of whatever kind or nature, to us. In exchange, on March 8, 2018, we issued a warrant to Sekris to purchase up to 500,000 shares of our common stock (the “Sekris Warrant”). The warrant was immediately exercisable and has an exercise price of $4.00 per share. The expiration date of the warrant is March 8, 2023. On March 15, 2018, as amended on July 1, 2020, we entered into a LLU License Agreement directly with Loma Linda University, which amends and restates the Sekris Agreements.

Pursuant to the LLU License Agreement, we obtained the exclusive royalty-bearing worldwide license in and to all intellectual property, including patents, technical information, trade secrets, proprietary rights, technology, know-how, data, formulas, drawings, and specifications, owned or controlled by LLU and/or any of its affiliates (the “LLU Patent and Technology Rights”) and related to therapy for immune-mediated inflammatory diseases (the ADi™ technology). In consideration for the LLU License Agreement, we issued 25,000 shares of common stock to LLU.

Pursuant to the LLU License Agreement, we are required to pay an annual license fee to LLU. Also, we paid LLU $455,000 in July 2020 for outstanding milestone payments and license fees. We are also required to pay to LLU milestone payments in connection with certain development milestones. Specifically, we are required to make the following milestone payments to LLU: $175,000 on March 31, 2022; $100,000 on March 31, 2024; $500,000 on March 31, 2026; and $500,000 on March 31, 2027. Additionally, as consideration for prior expenses incurred by LLU to prosecute, maintain and defend the LLU Patent and Technology Rights, we made the following payments to LLU: $70,000 at the end of December 2018, and a final payment of $60,000 at the end of March 2019. We are required to defend the LLU Patent and Technology Rights during the term of the LLU License Agreement. Additionally, we will owe royalty payments of (i) 1.5% of Net Product Sales (as such terms are defined under the LLU License Agreement) and Net Service Sales on any Licensed Products (defined as any finished pharmaceutical products which utilizes the LLU Patent and Technology Rights in its development, manufacture or supply), and (ii) 0.75% of Net Product Sales and Net Service Sales for Licensed Products and Licensed Services (as such terms are defined under the LLU License Agreement) not covered by a valid patent claim for technology rights and know-how for a three (3) year period beyond the expiration of all valid patent claims. We also are required to produce a written progress report to LLU, discussing our development and commercialization efforts, within 45 days following the end of each year. All intellectual property rights in and to LLU Patent and Technology Rights shall remain with LLU (other than improvements developed by or on our behalf).

The LLU License Agreement shall terminate on the last day that a patent granted to us by LLU is valid and enforceable or the day that the last patent application licensed to us is abandoned. The LLU License Agreement may be terminated by mutual agreement or by us upon 90 days written notice to LLU. LLU may terminate the LLU License Agreement in the event of (i) non-payments or late payments of royalty, milestone and license maintenance fees not cured within 90 days after delivery of written notice by LLU, (ii) a breach of any non-payment provision (including the provision that requires us to meet certain deadlines for milestone events (each, a “Milestone Deadline”)) not cured within 90 days after delivery of written notice by LLU and (iii) LLU delivers notice to us of three or more actual breaches of the LLU License Agreement by us in any 12-month period. Additional Milestone Deadlines include: (i) the requirement to have regulatory approval of an IND application to initiate first-in-human clinical trials on or before March 31, 2022, (ii) the completion of first-in-human (phase I/II) clinical trials by March 31, 2024, (iii) the completion of Phase III clinical trials by March 31, 2026 and (iv) biologic licensing approval by the FDA by March 31, 2027.

License Agreement with Leland Stanford Junior University (“Stanford”)

On February 3, 2020, we entered into an exclusive license agreement (the “February 2020 License Agreement”) with Stanford regarding a patent concerning a method for detection and measurement of specific cellular responses. Pursuant to the February 2020 License Agreement, we received an exclusive worldwide license to Stanford’s patent regarding use, import, offer, and sale of Licensed Products (as defined in the agreement). The license to the patented technology is exclusive, including the right to sublicense, beginning on the effective date of the agreement, and ending when the patent expires. Under the exclusivity agreement, we acknowledged that Stanford had already granted a non-exclusive license in the Nonexclusive Field of Use, under the Licensed Patents in the Licensed Field of Use in the Licensed Territory (as those terms are defined in the February 2020 License Agreement”). However, Stanford agreed to not grant further licenses under the Licensed Patents in the Licensed Field of Use in the Licensed Territory.

We were obligated to pay and paid a fee of $25,000 to Stanford within 60 days of February 3, 2020. We also issued 18,750 shares of the Company’s common stock to Stanford. An annual licensing maintenance fee is payable by us on the first anniversary of the February 2020 License Agreement in the amount of $40,000 for 2021 through 2024 and $60,000 starting in 2025 until the license expires upon the expiration of the patent. The Company is required to pay and has paid $25,000 for the issuances of certain patents. The Company will pay milestone fees of $50,000 on the first commercial sales of a licensed product and $25,000 at the beginning of any clinical study for regulatory clearance of an in vitro diagnostic product developed and a potential licensed product. We are also required to: (i) provide a listing of the management team or a schedule for the recruitment of key management positions by March 31, 2020 (which has been completed), (ii) provide a business plan covering projected product development, markets and sales forecasts, manufacturing and operations, and financial forecasts until at least $10,000,000 in revenue by June 30, 2020 (which has been completed), conduct validation studies by September 30, 2020 (which has been completed), (iii) hold a pre-submission meeting with the FDA by September 30, 2020 (which has been completed), (iv) submit a 510(k) application to the FDA, Emergency Use Authorization (“EUA”), or a Laboratory Developed Test (“LDT”) by March 31, 2021 (LDT has been developed and being validated; also, working with a FDA consultant to submit an application for regulatory clearance), (v) obtain FDA approval by December 31, 2021, (vi) complete a prototype assay kit by December 31, 2021, and (vii) have a written agreement with Stanford on further development and commercialization milestones for specific fields of use by December 31, 2021.

In addition to the annual license maintenance fees outlined above, we will pay Stanford royalties on Net Sales (as such term is defined in the February 2020 License Agreement) during the of the term of the agreement as follows: 4% when Net Sales are below or equal to $5 million annually or 6% when Net Sales are above $5 million annually. The February 2020 License Agreement may be terminated upon our election on at least 30 days advance notice to Stanford, or by Stanford if we: (i) are delinquent on any report or payment; (ii) are not diligently developing and commercializing Licensed Product; (iii) miss certain performance milestones; (iv) are in breach of any provision of the February 2020 License Agreement; or (v) provide any false report to Stanford. Should any events in the preceding sentence occur, we have a thirty (30) day cure period to remedy such violation.

Our Team

We have assembled a team of experts from a variety of scientific fields and commercial backgrounds, with many years of collective experience that ranges from founding startup biotech companies, to developing and marketing biopharmaceutical products, to designing clinical trials, and to management of private and public companies.

Going Concern

We were incorporated on September 28, 2017 and have not generated revenues to date. During the nine months ended September 30, 2021 we had a net loss of $22,318,832 and cash of $5,469,435. The Company will require significant additional capital to operate in the normal course of business and fund clinical studies in the long-term. As a result of the September 2020 Offering, the January 2021 Securities Purchase Agreement, and the August 2021 Offering, we received net proceeds of approximately $23,000,000 during the last twelve months. We believe that the funds raised as well as the remaining availability of approximately $89.0 million to raise future funds pursuant to an effective shelf registration statement filed with the SEC on Form S-3 declared effective on July 13, 2021 will be sufficient to fund our operations for at least the next 12 months. As a result, these conditions have alleviated the doubt regarding our ability to continue as a going concern beyond one year.

Financial Results

We have a limited operating history. Therefore, there is limited historical financial information upon which to base an evaluation of our performance. Our prospects must be considered in light of the uncertainties, risks, expenses, and difficulties frequently encountered by companies in their early stages of operations. Our financial statements as of September 30, 2021, show a net loss of $22,318,832. We expect to incur additional net expenses over the next several years as we continue to maintain and expand our existing operations. The amount of future losses and when, if ever, we will achieve profitability are uncertain.

Results of Operations

Results of operations for the three months ended September 30, 2021 and 2020

During the three months ended September 30, 2021, we incurred a loss from operations of $6,073,145. This is due to general and administrative expenses of $4,451,545, which includes $650,325 in stock-based compensation, research and development of $1,471,544, which includes $248,989 in stock-based compensation, and sales and marketing expenses of $150,056. The $1,471,544 in research and development is comprised of $3,700 in licensing fees, $484,197 in product development, $736,997 in compensation, and $246,650 in other research and development expense.

During the three months ended September 30, 2020, we incurred a loss from operations of $2,744,538. This is due to general and administrative expenses of $2,453,725, which includes $874,363 in stock-based compensation, research and development of $285,813, and sales and marketing expenses of $5,000. The $285,813 in research and development is comprised of $131,965 in licensing fees, $126,987 in product development, and $26,861 in other research and development expense.  

The increase in expenses during the three months ended September 30, 2021 compared to the three months ended September 30, 2020 was due to the Company continuing to execute its business plan and incur costs of being a public company.

Results of operations for the nine months ended September 30, 2021 and 2020

During the nine months ended September 30, 2021, we incurred a loss from operations of $17,941,184. This is due to general and administrative expenses of $14,348,375, which includes $2,887,657 in stock-based compensation, research and development of $3,340,247, which includes $248,989 in stock-based compensation, and sales and marketing expenses of $252,562. The $3,340,247 in research and development is comprised of $76,245 in licensing fees, $1,460,086 in product development, $736,997 in compensation, and $1,066,919 in other research and development expense.

During the nine months ended September 30, 2020, we incurred a loss from operations of $4,199,816. This is due to general and administrative expenses of $3,677,490, which includes $1,564,129 in stock-based compensation, research and development of $514,478, and sales and marketing expenses of $7,848. The $514,478 in research and development is comprised of $258,635 in licensing fees, $57,000 in product development, and $198,843 in other research and development expense.  

The increase in expenses during the nine months ended September 30, 2021 compared to the nine months ended September 30, 2020 was due to the Company continuing to execute its business plan and incurring costs of being a public company.

Liquidity and Capital Resources

We have incurred substantial operating losses since inception and expect to continue to incur significant operating losses for the foreseeable future and may never become profitable. Although the Company has signed agreements with channel partners throughout the period, no receivables have been recorded as there has been no history of collectability. As of September 30, 2021, we had an accumulated deficit of $43,300,277. We had working capital of $8,784,679 as of September 30, 2021. During the nine months ended September 30, 2021, we purchased $1,722,555 in fixed assets, for which we made cash payments of $900,693 and financed $821,862. These fixed assets were purchased to continue the buildout of our operations. Approximately $1,384,000 of these purchased fixed assets were lab equipment, $258,000 was for computers, $73,000 was for office furniture, and $8,000 was for other fixed assets.

Our financial statements have been prepared assuming that we will continue as a going concern.

We have funded our operations from proceeds from the sale of equity and debt securities. On July 2, 2020, we completed our IPO and raised approximately $9.5 million in net proceeds. At the time of the IPO, we believed that these funds would be sufficient to fund our operations for the foreseeable future.

On September 10, 2020, we completed a follow-on public offering. In connection therewith, we issued 2,400,000 units, or Follow-On Units, excluding the underwriters’ option to cover overallotments, at an offering price of $4.00 per Follow-On Unit, resulting in gross proceeds of approximately $9.6 million.

On January 25, 2021, the Company entered into a securities purchase agreement with an institutional accredited investor (the “Investor”) for the sale of a $6,000,000 senior secured convertible note (the “Convertible Note”). The Convertible Note had a term of 24 months, was originally convertible at a price of $4.00 per share and was issued at an original issuance discount of $1,000,000. On August 30, 2021, the Company entered into a defeasance and waiver agreement with the Investor, pursuant to which the Noteholder has agreed in exchange for (a) a cash payment by the Company to the Investor of $1.2 million (the Cash Payment”), (b) a waiver, in part of the conversion price adjustment provision such that the January 2021 Note shall be convertible into 4,802,497 shares of common stock (without giving effect to the conversion notice received by the company form the Noteholder prior to the date hereof totaling (1,005,748 shares) (the “Shares”), and (c) a voluntary and permanent reduction by the Company of the exercise price of the warrant to purchase 800,000 shares of the common stock of the Company (the “January 2021 Warrant”) to $2.53 per share. As of September 30, 2021, the outstanding principle of the convertible note had been converted to 4,802,497 shares of common stock.

On August 30, 2021, we completed a registered direct; offering and raised approximately $10.1 million in net proceeds.

We may need to raise significant additional capital to continue to fund our operations and the clinical trials for our product candidates. We may seek to sell common stock, preferred stock or convertible debt securities, enter into a credit facility or another form of third-party funding or seek other debt financing. In addition, we may seek to raise cash through collaborative agreements or from government grants. The sale of equity and convertible debt securities may result in dilution to our stockholders and certain of those securities may have rights senior to those of our common shares. If we raise additional funds through the issuance of preferred stock, convertible debt securities, or other debt financing, these securities or other debt could contain covenants that would restrict our operations. Any other third-party funding arrangement could require us to relinquish valuable rights.

The source, timing, and availability of any future financing will depend principally upon market conditions, and, more specifically, on the progress of our clinical development program. Funding may not be available when needed, at all, or on terms acceptable to us. Lack of necessary funds may require us to, among other things, delay, scale back or eliminate expenses including some or all our planned development, including our clinical trials. While we may need to raise funds in the future, we believe the current cash reserves should be sufficient to fund our operation for the foreseeable future. Because of these factors, we believe that this alleviates the issues about our ability to continue as a going concern.

Contractual Obligations

The following table shows our contractual obligations as of September 30, 2021:

Critical Accounting Polices and Estimates

Our financial statements are prepared in accordance with generally accepted accounting principles in the United States. The preparation of our financial statements and related disclosures requires us to make estimates, assumptions and judgments that affect the reported amount of assets, liabilities, revenue, costs and expenses, and related disclosures. We believe that our critical accounting policies described under the heading “Management’s Discussion and Analysis of Financial Condition and Plan of Operations—Critical Accounting Policies” in our Prospectus, dated September 1, 2020, filed with the SEC pursuant to Rule 424(b), are critical to fully understanding and evaluating our financial condition and results of operations. The following involve the most judgment and complexity:

Accordingly, we believe the policies set forth above are critical to fully understanding and evaluating our financial condition and results of operations. If actual results or events differ materially from the estimates, judgments and assumptions used by us in applying these policies, our reported financial condition and results of operations could be materially affected.

Off-Balance Sheet Arrangements

We did not have during the periods presented, and we do not currently have, any off-balance sheet arrangements, as defined in the rules and regulations of the SEC. 

JOBS Act

On April 5, 2012, the JOBS Act was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” can 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. In other words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise apply to private companies.

When favorable, we have chosen to take advantage of the extended transition periods available to emerging growth companies under the JOBS Act for complying with new or revised accounting standards until those standards would otherwise apply to private companies provided under the JOBS Act. 

We are in the process of evaluating the benefits of relying on other exemptions and reduced reporting requirements provided by the JOBS Act. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including without limitation, (i) providing an auditor’s attestation report on our system of internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act and (ii) complying with any requirement that may be adopted by the Public Company Accounting Oversight Board (“PCAOB”) regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements, known as the auditor discussion and analysis. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.07 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of our IPO (December 31, 2025); (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC.

Recently Issued and Adopted Accounting Pronouncements

See Note 3 - Summary of Significant Accounting Policies to the accompanying financial statements for a description of other accounting policies and recently issued accounting pronouncements.

Recent Developments

See Note 12 – Subsequent Event to the accompanying financial statements for a description of material recent developments.

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

We are not required to provide the information required by this Item as we are a “smaller reporting company,” as defined in Rule 229.10(f)(1).