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Table of Contents

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 June 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: 001-39169

Kiromic BioPharma, Inc.

(Exact name of registrant as specified in its charter)

Delaware

    

46-4762913

(State or other jurisdiction of incorporation or organization)

(I.R.S. Employer Identification Number)

7707 Fannin Street, Suite 140, Houston, TX

    

77054

(Address of Principal Executive Offices)

Zip Code

(832) 968-4888

(Registrant’s telephone number)

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

Title of Each Class

    

Trading symbol

    

Name of Exchange on which registered

Common Shares, par value $0.001 per share

KRBP

The Nasdaq Stock Market

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

    Yes      No  

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

    Yes      No  

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

Large Accelerated Filer  

Accelerated Filer  

Non-accelerated Filer  

Smaller Reporting Company  

Emerging Growth Company  

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

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

As of August 13, 2021, there were 15,437,689 shares of the registrant’s common stock outstanding.

Table of Contents

Kiromic BioPharma, Inc.

Quarterly Report on Form 10-Q

Period Ended June 30, 2021

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

   

   

Item 1.

Financial Statements

4

Condensed Consolidated Balance Sheets as of June 30, 2021, and December 31, 2020 (Unaudited)

4

Condensed Consolidated Statements of Operations for the three months and six months ended June 30, 2021 and 2020 (Unaudited)

5

Condensed Consolidated Statements of Stockholders’ Equity for the three and six months ended June 30, 2021 and 2020 (Unaudited)

6

Condensed Consolidated Statements of Cash Flows for the six months ended June 30, 2021 and 2020 (Unaudited)

8

Notes to Condensed Consolidated Financial Statements (Unaudited)

9

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

28

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

42

Item 4.

Controls and Procedures

42

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

44

Item 6.

Exhibits

44

Signatures

46

2

Table of Contents

Kiromic Biopharma, Inc.

Quarterly Report on Form 10-Q

For the quarterly period ended June 30, 2021

Cautionary Note on Forward-Looking Statements

This report contains forward-looking statements that involve substantial risks and uncertainties. We make such forward-looking statements pursuant to the safe harbor provisions of the U.S. Private Securities Litigation Reform Act, Section 21E of the Securities Exchange Act of 1934, as amended, and other federal securities laws. All statements other than statements of historical facts are forward-looking statements. The forward-looking statements are contained principally in, but not limited to, the section entitled "Management's Discussion and Analysis of Financial Condition and Results of Operations." These statements relate to future events or to our future financial performance and involve known and unknown risks, uncertainties and other factors that may cause our 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 these forward-looking statements. Forward-looking statements include, but are not limited to, statements about:

our goals and strategies;
our future business development, financial condition and results of operations;
expected changes in our revenue, costs or expenditures;
growth of and competition trends in our industry;
our expectations regarding demand for, and market acceptance of, our products;
our expectations regarding our relationships with investors, institutional funding partners and other parties we collaborate with;
fluctuations in general economic and business conditions in the markets in which we operate; including those fluctuations caused by COVID-19; and
relevant government policies and regulations relating to our industry.

In some cases, you can identify forward-looking statements by terms such as “may,” “could,” “will,” “should,” “would,” “expect,” “plan,” “intend,” “anticipate,” “believe,” “estimate,” “predict,” “potential,” “project” or “continue” or the negative of these terms or other comparable terminology. These statements are only predictions. You should not place undue reliance on forward-looking statements because they involve known and unknown risks, uncertainties and other factors, which are, in some cases, beyond our control and which could materially affect results. Factors that may cause actual results to differ materially from current expectations include, among other things, those listed under the heading “Risk Factors” included in our Annual Report on Form 10-K (file no. 001-39169), filed with the Securities and Exchange Commission on March 31, 2021, and elsewhere in this report. If one or more of these risks or uncertainties occur, or if our underlying assumptions prove to be incorrect, actual events or results may vary significantly from those implied or projected by the forward-looking statements. No forward-looking statement is a guarantee of future performance.

The forward-looking statements made in this report relate only to events or information as of the date on which the statements are made in this report. Except as expressly required by the federal securities laws, there is no undertaking to publicly update or revise any forward-looking statements, whether as a result of new information, future events, changed circumstances or any other reason.

3

Table of Contents

PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

KIROMIC BIOPHARMA, INC.

Condensed Consolidated Balance Sheets

(Unaudited)

    

June 30,

    

December 31, 

2021

2020

Assets

 

  

 

  

Current Assets:

 

  

 

  

Cash and cash equivalents

$

3,070,400

$

10,150,500

Prepaid expenses and other current assets

 

875,600

 

588,800

Total current assets

 

3,946,000

 

10,739,300

Property and equipment, net

 

2,468,700

 

2,066,000

Other assets

 

24,400

 

24,400

Total Assets

$

6,439,100

$

12,829,700

Liabilities and Stockholders’ Equity:

 

  

 

  

Current Liabilities:

 

  

 

  

Accounts payable

$

1,124,100

$

665,200

Accrued expenses and other current liabilities

 

350,900

 

334,200

Interest payable

 

 

200

Loan payable

 

 

105,600

Note payable

 

91,600

 

362,400

Total current liabilities

 

1,566,600

 

1,467,600

Total Liabilities

 

1,566,600

 

1,467,600

Commitments and contingencies (Note 8)

 

  

 

  

Stockholders’ Equity:

 

  

 

  

Common stock, $0.001 par value: 300,000,000 shares authorized as of June 30, 2021 and December 31, 2020; 7,387,500 shares and 7,332,999 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively

 

1,300

 

1,200

Additional paid-in capital

 

55,327,800

 

52,988,700

Accumulated deficit

 

(50,456,600)

 

(41,627,800)

Total Stockholders’ Equity

 

4,872,500

 

11,362,100

Total Liabilities and Stockholders’ Equity

$

6,439,100

$

12,829,700

See accompanying notes to the condensed consolidated financial statements

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KIROMIC BIOPHARMA, INC.

Condensed Consolidated Statements of Operations

(Unaudited)

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2021

    

2020

    

2021

    

2020

Operating expenses:

 

  

 

  

 

  

 

  

Research and development

 

$

2,658,100

$

1,272,300

$

4,543,700

$

2,300,400

General and administrative

 

2,314,100

 

10,094,600

 

4,385,100

 

10,919,200

Total operating expenses

 

4,972,200

 

11,366,900

 

8,928,800

 

13,219,600

Loss from operations

 

(4,972,200)

 

(11,366,900)

 

(8,928,800)

 

(13,219,600)

Other income (expense)

 

  

 

  

 

  

 

  

Gain on loan extinguishment

105,800

Interest expense

 

(2,100)

 

 

(5,800)

 

Total other income (expense)

 

(2,100)

 

 

100,000

 

Net loss

 

$

(4,974,300)

$

(11,366,900)

$

(8,828,800)

$

(13,219,600)

Net loss per share, basic and diluted

 

$

(0.68)

$

(3.80)

$

(1.21)

$

(4.52)

Weighted average common shares outstanding, basic and diluted

 

7,345,147

 

3,077,085

 

7,345,147

 

3,077,085

See accompanying notes to the condensed consolidated financial statements

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KIROMIC BIOPHARMA, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

Three and Six Months Ended June 30, 2021

Common Stock

Additional Paid-

Number of

In

Accumulated

 

    

Shares

    

Amount

    

Capital

    

Deficit

Total

Balance at January 1, 2021

 

7,332,999

$

1,200

$

52,988,700

$

(41,627,800)

$

11,362,100

Common stock discount amortization

 

 

 

24,700

 

 

24,700

Warrants underlying common stock issuance

 

 

 

(24,700)

 

 

(24,700)

Stock compensation expense

 

 

 

945,200

 

 

945,200

Net loss

 

 

 

 

(3,854,500)

 

(3,854,500)

Balance at March 31, 2021

 

7,332,999

$

1,200

$

53,933,900

$

(45,482,300)

$

8,452,800

Common stock discount amortization

24,900

24,900

Warrants underlying common stock issuance

(24,900)

(24,900)

Exercised stock options

18,891

100

125,300

125,400

Released restricted stock units

35,610

Stock compensation expense

1,268,600

1,268,600

Net loss

(4,974,300)

(4,974,300)

Balance at June 30, 2021

7,387,500

$

1,300

$

55,327,800

$

(50,456,600)

$

4,872,500

See accompanying notes to the condensed consolidated financial statements

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KIROMIC BIOPHARMA, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

Three and Six Months Ended June 30, 2020

Series A1

Series B

 

Preferred Stock

Preferred Stock

Common Stock

 

Additional Paid-

Number of

Number of

Number of

In

Accumulated

 

    

Shares

    

Amount

    

Shares

    

Amount

    

Shares

    

Amount

    

Capital

    

Deficit

Total

Balance at January 1, 2020

 

21,822,301

$

9,134,700

 

9,869,659

$

1,306,900

 

2,863,812

$

$

13,965,000

$

(22,427,600)

$

1,979,000

Issuance of Series B Preferred Stock

 

 

 

6,521,738

 

331,700

 

 

 

 

 

331,700

Series B Preferred Stock discount amortization

 

 

 

 

368,400

 

 

 

(368,400)

 

 

Warrants underlying Series B Preferred Stock issuance

 

 

 

 

 

 

 

2,668,300

 

 

2,668,300

Stock compensation expense

 

 

 

 

 

 

 

456,000

 

 

456,000

Net loss

 

 

 

 

 

 

 

 

(1,852,700)

 

(1,852,700)

Balance at March 31, 2020

 

21,822,301

 

9,134,700

 

16,391,397

$

2,007,000

 

2,863,812

$

$

16,720,900

$

(24,280,300)

$

3,582,300

Series B Preferred Stock discount amortization

 

 

 

 

324,300

 

 

 

(324,300)

 

 

Exercise of warrants

 

 

 

 

 

1,399,921

 

 

4,900

 

 

4,900

Common stock issuance to employees and non-employees

 

 

 

 

 

725,536

 

 

9,432,000

 

 

9,432,000

Stock compensation expense

 

 

 

 

 

 

 

443,000

 

 

443,000

Net loss

 

 

 

 

 

 

 

 

(11,366,900)

 

(11,366,900)

Balance at June 30, 2020

 

21,822,301

$

9,134,700

 

16,391,397

$

2,331,300

 

4,989,269

$

$

26,276,500

$

(35,647,200)

$

2,095,300

See accompanying notes to the condensed consolidated financial statements

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KIROMIC BIOPHARMA, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Six Months Ended

June 30,

    

2021

    

2020

Cash flows from operating activities:

 

  

 

  

Net loss

$

(8,828,800)

$

(13,219,600)

Adjustments to reconcile net loss to net cash used for operating activities:

 

  

 

  

Depreciation

 

202,400

 

68,500

Stock compensation expense

 

2,213,800

 

10,331,000

Gain on loan extinguishment

(105,800)

Changes in operating assets and liabilities:

 

  

 

  

Prepaid expenses and other current assets

 

151,500

 

(141,500)

Accounts payable

 

41,800

 

291,000

Accrued expenses and other current liabilities

 

(19,000)

 

66,800

Net cash used for operating activities

 

(6,344,100)

 

(2,603,800)

Cash flows from investing activities:

 

  

 

  

Purchases of property and equipment

 

(590,600)

 

(762,300)

Net cash used for investing activities

 

(590,600)

 

(762,300)

Cash flows from financing activities:

 

  

 

  

Repayments of note payable

(270,800)

Exercise of stock options

125,400

Proceeds from warrant exercise

4,900

Proceeds from loan payable

115,600

Proceeds from Series B Preferred Stock issuance

 

 

3,000,000

Net cash (used for) provided by financing activities

 

(145,400)

 

3,120,500

Net change in cash and cash equivalents

 

(7,080,100)

 

(245,600)

Cash and cash equivalents:

 

 

  

Beginning of year

 

10,150,500

 

1,929,100

End of period

$

3,070,400

$

1,683,500

Supplemental disclosures of non-cash investing and financing activities:

 

  

 

  

Accruals for property and equipment

$

14,500

$

45,000

Cash paid for interest on note payable

$

5,800

$

Accruals for deferred public offering costs

$

438,300

$

594,200

Warrants underlying Series B Preferred Stock issuance

$

$

2,668,300

See accompanying notes to the condensed consolidated financial statements

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KIROMIC BIOPHARMA, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

1.ORGANIZATION

Nature of Business

Kiromic BioPharma, Inc. and subsidiary (the "Company") is a preclinical stage biopharmaceutical company formed under the Texas Business Organizations Code in December 2012. On May 27, 2016, the Company converted from a Texas limited liability company into a Delaware corporation and changed its name from Kiromic LLC to Kiromic Inc. On December 16, 2019, the Company amended and restated its certificate of incorporation charter to re-name the company, Kiromic BioPharma, Inc.

The Company is a target discovery and gene-editing company utilizing artificial intelligence and its proprietary neural network platform with a therapeutic focus on immuno-oncology. The Company maintains offices in Houston, Texas. The Company has not generated any revenues to date.

Going Concern—These condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has incurred significant losses and negative cash flows from operations since inception and expects to incur additional losses until such time that it can generate significant revenue from the commercialization of its product candidates. The Company had negative cash flow from operations of $6,344,100 for the six months ended June 30, 2021, and an accumulated deficit of $50,456,600 as of June 30, 2021. To date, the Company has relied on equity and debt financing to fund its operations. The Company’s product candidates are still in the early stages of development, and substantial additional financing will be needed by the Company to fund its operations and ongoing research and development efforts prior to the commercialization, if any, of its product candidates.

The Company has sufficient cash on hand and available liquidity to meet its obligations through the twelve months following the date the condensed consolidated financial statements are issued. After taking into account the Company’s cash flow projections, the Company does not believe it will have sufficient cash on hand or available liquidity to meet its obligations through the twelve months from the date of issuance of the condensed consolidated financial statements for the three months ending September 30, 2021. Therefore, this condition raises substantial doubt about the Company’s ability to continue as a going concern.

Given its projected operating requirements and its existing cash and cash equivalents, management is currently evaluating different strategies to obtain the required funding of future operations. These strategies may include, but are not limited to, additional funding from current or new investors. However, there can be no assurance that the Company will be able to secure such additional financing, or if available, that it will be sufficient to meet its needs or on favorable terms. Therefore, the plans cannot be deemed probable of being implemented. As a result, the Company has concluded that management’s plans do not alleviate substantial doubt about the Company’s ability to continue as a going concern.

The condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might result from the outcome of this uncertainty.

NIH Grant—In August 2018, the National Institute of Health ("the NIH"), the primary agency of the US government responsible for biomedical and public health research, awarded a Phase I/II grant to the Company in the amount of $2,235,000 for the development and non-clinical testing of a new anti-arteriosclerosis gene therapy delivered by engineered adeno-associated viral vectors. Phase I of the grant, approved amounts of $851,000 and covered the period September 2018 through August 2019, entitled the Company to reimbursement for certain salaries and wages, materials and supplies, facilities and administrative costs, and fixed fees. The Company did not complete Phase I by August 2019, but was granted an extension to complete Phase I by the NIH through August 2021. Starting after Phase 1 completion in 2021, Phase II of the grant covers reimbursements for certain salaries and wages, materials and supplies, facilities and administrative costs, and fixed fees of $1,384,000.

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2.SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Basis of Presentation

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") for interim financial information (Accounting Standards Codification ("ASC") 270, Interim Reporting) and with the instructions to Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all of the information necessary for a full presentation of financial position, results of operations, and cash flows in conformity GAAP. Operating results for interim periods are not necessarily indicative of results that may be expected for the fiscal year as a whole. In the opinion of management, the condensed consolidated financial statements reflect all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation of the results of the Company for the periods presented.

All intercompany balances were eliminated upon consolidation.

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 disclosures of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Significant estimates include determination of the fair value of common stock and related stock-based compensation, warrants to purchase common stock underlying shares of Series B Preferred Stock and Initial Public Offering (“IPO”) common stock, and estimating services incurred by third-party service providers used to recognize research and development expense.

Cash and Cash Equivalents—As of June 30, 2021 and December 31, 2020, cash and cash equivalents consisted entirely of cash on hand and bank deposits. The Company considers all highly liquid instruments with remaining maturities at purchase of 90 days or less to be cash equivalents.

Concentrations of Credit Risk and Other Uncertainties—Financial instruments that potentially subject the Company to concentration of credit risk consist of cash and cash equivalents. Substantially all of the Company’s cash and cash equivalents were deposited in accounts at a small number of national financial institutions. Account balances may at times exceed federally-insured limits. The Company has not incurred losses related to these cash and cash equivalents deposited at financial institutions and management believes that the Company is not exposed to significant credit risk due to the financial strength of the depository institutions in which the cash is held.

The Company is subject to certain risks and uncertainties from changes in any of the following areas that the Company believes could have a material adverse effect on future financial position or results of operations: the ability to obtain regulatory approval and market acceptance of, and reimbursement for, the Company’s product candidates; the performance of third-party clinical research organizations and manufacturers; protection of the intellectual property; litigation or claims against the Company based on intellectual property, patent, product, regulatory or other factors; the Company’s ability to attract and retain employees necessary to support commercial success; and changes in the industry or customer requirements including the emergence of competitive products with new capabilities.

Deposit—In connection with one of the Company’s facility leases, a deposit is held by the lessor per the terms of the noncancelable agreement. The deposit has been recorded as a long-term asset on the Company’s condensed consolidated balance sheets.

Deferred Public Offering Costs—In the six months ended June 30, 2021 and 2020, the Company began incurring costs in connection with the filing of a Registration Statements on Form S-1 and Form S-1/A for a public offering and an IPO, respectively, which are deferred in other current assets in accordance with ASC 505-10-25 in the condensed consolidated balance sheets. Public offering costs consist of legal, accounting, and other costs directly related to the Company's efforts to raise capital. As of June 30, 2021 and 2020, $478,900 and $696,700 of deferred costs related to the public offering and IPO were classified as other current assets on the condensed consolidated balance sheets.

Property and Equipment—Property and equipment are recorded at cost and depreciated using the straight-line method over the estimated useful lives of the assets ranging from 1 to 8 years. Major replacements and improvements are capitalized as leasehold improvements, while general repairs and maintenance are expensed as incurred. Estimated useful lives of leasehold improvements are the shorter of the remaining lease term or the estimated useful economic life of the specific asset.

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Estimated useful lives of property and equipment are as follows for the major classes of assets:

Asset Description

    

Estimated Lives

Laboratory Equipment

 

3 - 8

Leasehold Improvements

 

1 - 7

Office Furniture, Fixtures, and Equipment

 

5

Software

 

3 - 5

Internal Use Software Development Costs—The Company capitalizes certain costs incurred to develop internal use software. All costs incurred that relate to planning and post-implementation phases of development are expensed as incurred. Costs incurred in the development and implementation phases are capitalized and amortized over the estimated life of the software, generally five years. The Company did not capitalize any software development costs for the three and six months ended June 30, 2021 and 2020.

Impairment of Long-Lived Assets—The Company reviews its long-lived assets, including property and equipment, for impairment indicators. If indicators are noted, the Company compares the carrying amount of the asset to its estimated undiscounted cash flows. If the carrying amount exceeds its estimated undiscounted cash flows, an impairment loss is recognized to adjust the long-lived asset to fair value. There has been no impairment losses on the Company’s long-lived assets since inception.

Comprehensive Loss—Comprehensive loss includes net loss as well as other changes in stockholders’ equity that result from transactions and economic events other than those with stockholders. For all periods presented, there was no difference between net loss and comprehensive loss.

Income Taxes—The Company files federal and state income tax returns, utilizing the accrual basis of accounting. Income taxes are provided for the tax effects of transactions reported in the condensed consolidated financial statements and consist of taxes currently due and deferred taxes. Certain transactions of the Company may be subject to accounting methods for income tax purposes, which differ from the accounting methods used in preparing these condensed consolidated financial statements in accordance with GAAP. Accordingly, the net income or loss of the Company reported for income tax purposes may differ from the balances reported for those same items in the accompanying condensed consolidated financial statements.

Deferred tax assets and liabilities are recognized for the future tax consequences attributable between the financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which such temporary differences are expected to be recovered or settled. The Company records valuation allowances to reduce deferred income tax assets to the amount that is more likely than not to be realized.

The Company records uncertain tax positions in accordance with ASC 740, Income Taxes, on the basis of a two-step process in which (1) the Company determines whether it is more-likely-than-not that the tax positions will be sustained on the basis of the technical merits of the position and (2) for those tax positions that meet the more-likely-than-not recognition threshold, the Company recognizes the largest amount of tax benefit that is more than 50 percent likely to be realized upon ultimate settlement with the related tax authority. The Company recognizes interest and penalties related to unrecognized tax benefits on the income tax expense line in the accompanying condensed consolidated statements of operations. No such interest or penalties were recognized during the three months and six months ended June 30, 2021 and 2020.

Research and Development Expense—The Company expenses research and development costs as incurred. Research and development expenses include personnel and personnel-related costs, costs associated with the Company’s pre-clinical development activities including costs of outside consultants and contractors, the submission and maintenance of regulatory filings, equipment and supplies used in developing products prior to market approval and an allocation of certain overhead costs such as facility and related expenses.

The Company accrues and expenses costs of services provided by contract research organizations in connection with preclinical studies and contract manufacturing organizations engaged to manufacture clinical trial material, costs of licensing technology, and costs of services provided by research organizations and service providers. Upfront payments and milestone payments made for the licensing of technology are expensed as research and development in the period in which they are incurred if the technology is not expected to have any alternative future uses other than the specific research and development project for which it was intended. Nonrefundable advance payments for goods or services to

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be received in the future for use in research and development activities are recorded as prepaid expenses. The prepaid amounts are expensed as the related goods are delivered or the services are performed rather than when the payment is made.

Proceeds from Grants—During the three and six months ended June 30, 2021 and 2020, the Company did not recognize any reductions to research and development expense within the condensed consolidated statements of operations pursuant to its grant from the NIH.

Fair Value Measurements—The carrying value of the Company’s cash and cash equivalents, prepaid expenses and other assets, accounts payable, accrued expenses and other current liabilities approximate their fair value due to their short-term nature.

Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In estimating the fair value of an asset or a liability, the Company takes into account the characteristics of the asset or liability if market participants would take those characteristics into account when pricing the asset or liability at the measurement date.

The Company accounts for financial instruments in accordance with ASC 820, Fair Value Measurements and Disclosures. ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy under ASC 820 are described below:

Level 1—Unadjusted quoted prices in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities.

Level 2—Quoted prices in non-active markets or in active markets for similar assets or liabilities, observable inputs other than quoted prices, and inputs that are not directly observable but are corroborated by observable market data.

Level 3—Prices or valuations that require inputs that are both significant to the fair value measurement and unobservable.

There were no changes in the fair value hierarchy levels during the three and six months ended June 30, 2021 and 2020.

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Nonvested Stock Options and Restricted Stock Units—Pursuant to the Company’s 2017 Stock Incentive Plan (the “2017 Plan”) and the Omnibus 2021 Equity Incentive Plan (the “2021 Plan”), the Company has the ability to issue a variety of share-based payments and incentives to board members, employees, and non-employees through grants of nonvested stock options and restricted stock units.

The vesting conditions for stock options and restricted stock units include annual and monthly vesting. Annual vesting conditions are for four years. Monthly vesting conditions range from 10 to 48 months. When nonvested options are vested, they become exercisable over a 10-year period from grant date.

The vesting conditions for restricted stock units include cliff vesting conditions. Certain restricted stock units vest with a range of 6 to 12 months following the expiration of employee lock-up agreements. Certain restricted stock units vest based on the later of achievement of key milestones or the expiration of employee lock-up agreements. When nonvested restricted stock units are vested, they are released to the grantee within sixty days.

Stock-Based Compensation—The Company records stock compensation expense related to the 2017 Plan and the 2021 Plan in accordance with ASC 718, Compensation—Stock Compensation. The Company measures and recognizes stock compensation expense for all stock-based awards, including stock options, based on estimated fair values recognized using cliff vesting or the straight-line method over the requisite service period. The fair value of stock options is estimated on the grant date using the Black-Scholes option-valuation model (the “Black-Scholes model”). The calculation of stock-based compensation expense requires that the Company make assumptions and judgments about the variables used in the Black-Scholes model, including the fair value of the Company’s common stock, expected term, expected volatility of the underlying common stock, and risk-free interest rate. Forfeitures are accounted for when they occur.

Until the Company’s common stock became publicly traded, the board of directors’ approach to estimating the fair value of the Company’s common stock includes utilizing methods outlined in the American Institute of Certified Public Accountants’ Practice Aid, Valuation of Privately- Held Company Equity Securities Issued as Compensation.

The Company estimates the grant-date fair value of stock options using the Black-Scholes model and the assumptions used to value such stock options are determined as follows:

Expected Term. The expected term represents the period that the Company’s stock options are expected to be outstanding. Due to limitations on the sale or transfer of the Company’s common stock under the lock-up agreements and market standoff components of the stock option agreements, the Company does not believe its historical exercise pattern is indicative of the pattern it will experience after restricted periods expire. The Company has previously used the Staff Accounting Bulletin (“SAB”) No. 110, simplified method to calculate the expected term, which is the average of the contractual term and vesting period.

Risk-Free Interest Rate. The Company bases the risk-free interest rate used in the Black-Scholes model on the implied yield available on US Treasury zero-coupon issues with a term equivalent to that of the expected term of the stock options for each stock option group.

Volatility. The Company determines the price volatility based on the historical volatilities of industry peers as it has no trading history for its common stock price. The Company intends to continue to consistently apply this process using the same or a similar peer group of public companies, until a sufficient amount of historical information regarding the volatility of its own common stock price becomes available, or unless circumstances change such that the identified peer companies are no longer similar, in which case other suitable peer companies whose common stock prices are publicly available would be utilized in the calculation.

Dividend Yield. The expected dividend assumption is based on the Company’s current expectations about its anticipated dividend policy. To date, the Company has not declared any dividends and, therefore, the Company has used an expected dividend yield of zero.

Common Stock Valuations. During the three and six months ended June 30, 2021, the closing price listed on the Nasdaq Capital Market for the Company’s common stock on the date of the grant was used as the common stock valuation. During the three and six months ended June 30, 2020, the Company’s board of directors, with input from management and third-party valuations, determined the fair value of the common stock underlying all stock-based compensation grants. The Company believes that the board of directors had the relevant experience and expertise to determine the fair value of the Company’s common stock before the Company’s common stock became publicly traded. The board of

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directors exercised reasonable judgment and considered numerous objective and subjective factors to determine the best estimate of the fair value of the Company’s common stock at each grant date. These factors include:

valuations of the common stock performed by third-party specialists;
the prices, rights, preferences, and privileges of the Company’s Series A-1 Preferred Stock and Series B Preferred Stock relative to those of the Company’s common stock;
lack of marketability of the common stock;
current business conditions and projections;
hiring of key personnel and the experience of management;
the Company’s stage of development;
likelihood of achieving a liquidity event, such as an initial public offering, a merger or acquisition of the Company given prevailing market conditions, or other liquidation event;
the market performance of comparable publicly traded companies; and
the US and global capital market conditions.

In valuing the common stock, the board of directors determined the equity value of the Company’s business using various valuation methods including combinations of income and market approaches. The income approach estimates value based on the expectation of future cash flows that a company will generate. These future cash flows are discounted to their present values using a discount rate derived from an analysis of the cost of capital of comparable publicly traded companies in the Company’s industry or similar business operations as of each valuation date and is adjusted to reflect the risks inherent in the Company’s cash flows. The market approach references actual transactions involving (i) the subject being valued, or (ii) similar assets and/or enterprises.

For each valuation, the equity value determined by the income and market approaches was then allocated to the common stock using either the option pricing method (“OPM”) or probability—weighted expected return model (“PWERM”).

The option pricing method is based on the Black-Scholes option valuation model, which allows for the identification of a range of possible future outcomes, each with an associated probability. The OPM is appropriate to use when the range of possible future outcomes is difficult to predict and thus creates highly speculative forecasts. In general, while simple in its application, management did not use the OPM approach when considering allocation techniques for the valuation of equity interests in early stage, privately held life science companies. Management determined that applying the OPM would violate the major assumptions of the Black Scholes option valuation model approach. Additionally, the simulation approach can generally be reasonably approximated by a scenario-based approach like the PWERM as described below.

PWERM involves a forward-looking analysis of the possible future outcomes of the enterprise. This method is particularly useful when discrete future outcomes can be predicted at a relatively high confidence level with a probability distribution. Discrete future outcomes considered under the PWERM include an initial public offering, as well as non-initial public offering market-based outcomes. Determining the fair value of the enterprise using the PWERM requires the Company to develop assumptions and estimates for both the probability of an initial public offering liquidity event and stay private outcomes, as well as the values the Company expects those outcomes could yield. From February 2018 to October 2020, the Company has valued its common stock based on a PWERM.

Application of the Company’s approach involves the use of estimates, judgment, and assumptions that are highly complex and subjective, such as those regarding expected future revenue, expenses, and future cash flows, discount rates, market multiples, the selection of comparable companies, and the probability of possible future events. Changes in any or all of these estimates and assumptions or the relationships between those assumptions impact valuations as of each valuation date and may have a material impact on the valuation of the common stock.

For valuations after the completion of an initial public offering, the board of directors determines the fair value of each share of underlying common stock based on the closing price of the common stock as reported on the date of grant. Future expense amounts for any particular period could be affected by changes in assumptions or market conditions.

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Segment Data—The Company manages its operations as a single segment for the purposes of assessing performance and making operating decisions.

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

In February 2016, the FASB issued Accounting Standards Update (“ASU”) No. 2016-02, Leases (Topic 842), which requires lessees to recognize the following for all leases (with the exception of short-term leases) at the commencement date: a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis; and a right-of-use asset, which is an asset that represents the lessee’s right to use, or control the use of, a specified asset for the lease term. In July 2018, the FASB issued ASU 2018-11 to amend certain aspects of Topic 842. These amendments provide entities with an additional (and optional) transition method to adopt Topic 842. Under this transition method, an entity initially applies the transition requirements in Topic 842 at that Topic’s effective date with the effects of initially applying Topic 842 recognized as a cumulative effect adjustment to the opening balance of retained earnings (or other components of equity or net assets, as appropriate) in the period of adoption. On October 16, 2019, the FASB changed the effective date of this standard applicable to the Company as an emerging growth company to January 1, 2022. The Company is currently evaluating the potential impact of this standard on its financial position, results of operations, and cash flows.

In June 2016, FASB issued ASU 2016-13, Financial Instruments—Credit Losses (Topic 326). The amendments in ASU 2016-13 affect entities holding financial assets and net investment in leases that are not accounted for at fair value through net income. The amendments affect loans, debt securities, trade receivables, net investments in leases, off-balance-sheet credit exposures, reinsurance receivables, and any other financial assets not excluded from the scope that have the contractual right to receive cash. The amendments in ASU 2016-13 require a financial asset (or a group of financial assets) measured at amortized cost basis to be presented at the net amount expected to be collected. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset. On October 16, 2019, the FASB has changed the effective date of this standard applicable to the Company as an emerging growth company to January 1, 2023. The Company is currently evaluating the potential impact of this standard on its financial position, results of operations, and cash flows.

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3.NET LOSS PER COMMON SHARE

Basic and diluted net loss per common share is determined by dividing net loss less deemed dividends by the weighted-average common shares outstanding during the period. For all periods presented, the common shares underlying the stock options, restricted stock units, convertible Series A-1 Preferred Stock, and the convertible Series B Preferred Stock have been excluded from the calculation because their effect would be anti-dilutive. Therefore, the weighted-average common shares outstanding used to calculate both basic and diluted loss per common shares are the same. The following table illustrates the computation of basic and diluted earnings per share:

Three Months Ended

Six Months Ended

June 30,

June 30,

    

2021

    

2020

    

2021

    

2020

Net loss

$

(4,974,300)

$

(11,366,900)

$

(8,828,800)

$

(13,219,600)

Less: Series B Preferred Stock discount amortization

(324,300)

(692,700)

Less: IPO Common Stock discount amortization

 

(24,900)

 

 

(49,600)

 

Net loss attributable to common shareholders, basic and diluted

$

(4,999,200)

$

(11,691,200)

$

(8,878,400)

$

(13,912,300)

Weighted average common shares outstanding, basic and diluted

 

7,345,147

 

3,077,085

 

7,345,147

 

3,077,085

Net loss per common share, basic and diluted

$

(0.68)

$

(3.80)

$

(1.21)

$

(4.52)

For the six months ended June 30, 2021 and 2020, potentially dilutive securities excluded from the computations of diluted weighted-average common shares outstanding were:

    

June 30,

    

June 30,

2021

2020

Options to purchase

 

167

 

Restricted Stock Units

66,668

Series A‑1 Preferred Stock

 

 

624,594

Series B Preferred Stock

 

 

469,136

Total

 

66,835

 

1,093,730

4.PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of June 30, 2021 and December 31, 2020:

    

June 30,

    

December 31, 

2021

2020

Equipment

$

1,514,300

$

780,500

Leasehold improvements

 

1,284,600

 

1,229,700

Office furniture, fixtures, and equipment

 

16,600

 

16,600

Software

 

151,700

 

151,700

Construction in progress

 

265,600

 

449,200

 

3,232,800

 

2,627,700

Less: Accumulated depreciation

 

(764,100)

 

(561,700)

Total

$

2,468,700

$

2,066,000

Depreciation expense was $106,800 and $34,700 for the three months ended June 30, 2021 and 2020, respectively, and $202,400 and $68,500 for the six months ended June 30, 2021 and 2020, respectively. Depreciation expense is allocated between research and development and general and administrative operating expenses on the condensed consolidated statements of operations.

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5.ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following as of June 30, 2021 and December 31, 2020:

    

June 30,

    

December 31, 

2021

2020

Accrued consulting and outside services

$

294,500

$

143,200

Accrued compensation

 

56,400

 

191,000

Total

$

350,900

$

334,200

6.LOAN PAYABLE

On May 1, 2020, the Company received a loan in the principal amount of $115,600 (the “SBA Loan”) under the Paycheck Protection Program (“PPP”), which was established under the recently enacted Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) administered by the U.S. Small Business Administration (the “SBA”). The intent and purpose of the PPP is to support companies, during the COVID-19 pandemic, by providing funds for certain specified business expenses, with a focus on payroll. As a qualifying business as defined by the SBA, the Company is using the proceeds from this loan to primarily help maintain its payroll. The term of the SBA Loan promissory note (“the Note”) is two years, though it may be payable sooner in connection with an event of default under the Note. The SBA Loan carries a fixed interest rate of one percent per year, with the first payment due seven months from the date of initial cash receipt. Under the CARES Act and the PPP, certain amounts of loans made under the PPP may be forgiven if the recipients use the loan proceeds for eligible purposes, including payroll costs and certain rent or utility costs, and meet other requirements regarding, among other things, the maintenance of employment and compensation levels. The Company intends to use the SBA Loan for qualifying expenses and to apply for forgiveness of the SBA Loan in accordance with the terms of the CARES Act.

The Note provides for customary events of default, including, among others, those relating to failure to make payment, bankruptcy, materially false or misleading representations to the SBA, and adverse changes in the Company’s financial condition or business operations that may materially affect its ability to pay the SBA Loan.

As the legal form of the Note is a debt obligation, the Company accounts for it as debt under ASC 470, Debt, and recorded $105,600 as of December 31, 2020 in the condensed consolidated balance sheet. During the year ended December 31, 2020, the Company received initial proceeds of $115,600 and made a repayment of $10,000 on the SBA Loan, bringing the balance to $105,600 as of December 31, 2020. The Company accrued interest over the term of the loan and did not impute additional interest at a market rate because the guidance on imputing interest in ASC 835-30, Interest, excludes transactions where interest rates are prescribed by a government agency.

During the year ended December 31, 2020, the Company applied for forgiveness of the SBA Loan in accordance with the terms of the CARES Act. On February 16, 2021, the SBA granted forgiveness of the SBA Loan and all applicable interest. On the date of forgiveness, the principal and accrued interest totaled $105,800. The forgiveness was classified as a gain on loan extinguishment in the condensed consolidated statement of operations.

7.NOTE PAYABLE

In November 2020, the Company entered into a financing arrangement for its Director and Officer Insurance policy. The total amount financed was approximately $540,500 with an annual interest rate of 4.59%, to be paid over a period of nine months. As of June 30, 2021 and December 31, 2020, the remaining payable balance on the financed amount was $91,600 and $362,400, respectively.

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8.COMMITMENTS AND CONTINGENCIES

Facility Lease AgreementsThe Company leases its premises in Houston, Texas under an operating lease which was renewed on November 19, 2020. This renewed lease agreement will commence under an operating lease agreement that is noncancelable from commencement until May 1, 2024.

On March 22, 2021, the Company’s board of directors approved a lease expansion within its premises in Houston, Texas. The amended lease agreement commenced on August 1, 2021 under an operating lease agreement that is noncancelable from commencement until May 1, 2024. The amended lease agreement adds approximately 15,385 square feet. The Company has the option to cancel the lease thereafter until the agreement expires on May 1, 2026. The termination date is effective after a 90-day notice of cancellation.

If the Company exercises the cancellation option, the Company must also pay the lessor a termination payment equal to three months of base rent.

The total lease payments per month are $22,477, 45,554, and $46,116 beginning May 1, 2021, August 1, 2021, and May 1, 2023, respectively. The Company records rent expense as incurred over the term of the leases.

As of June 30, 2021, the future minimum commitments under the amended lease agreement will be as follows:

    

Amount

2021

$

250,200

2022

546,700

2023

551,100

2024

461,200

Total

$

1,809,200

Rent expense for the facility lease agreements was $74,900 and $67,100 during the three months ended June 30, 2021 and 2020, respectively, and $143,900 and $127,100 during the six months ended June 30, 2021 and 2020, respectively. Rent expense is included as an allocation between research and development and general and administrative expense in the condensed consolidated statements of operations.

License Agreements—The Company has entered into a number of licensing arrangements for various intellectual property and licensed patent rights for technologies being developed for commercial sale. As part of these arrangements, the Company is subject to contingent milestone payments in accordance with agreed-upon development objectives, as well as future royalty payments on product sales of the underlying assets. As of June 30, 2021 and December 31, 2020, the Company has not incurred any milestone or royalty liabilities related to these license agreements.

Strategic Alliance Agreement with Leon Office (H.K.)On January 28, 2021, the Company executed a strategic alliance agreement with Leon Office (H.K.) (“Leon”) a company established under existing laws of Hong Kong. It is intended that Leon acts as an independent business development advisor on behalf of the Company. Leon will seek to introduce organizations and individuals that will create business development opportunities for the Company, to expand the Company’s reach to international markets with a focus on certain Asian markets and to increase brand recognition and exposure through developing liaisons, collaborations, branches and subsidiaries. They will also use commercially reasonable efforts to research the Asian market, with a primary, but not exclusive, focus on determining the most suitable structures for the development of medical partnerships or joint ventures with scientific partners in the Asian market with a mission to test products to be created by the joint venture resulting from such partnership and to develop validation programs for any products produced by such joint venture, including programs for clinical trials and human testing and, ultimately, for product certification. The cost of the agreement is $360,000 annually, payable in four quarterly installments.

Membership Purchase Agreement with In Silico Solutions, LLCOn June 14, 2021, the Company entered into a Membership Interest Purchase Agreement (the “Purchase Agreement”) with In Silico Solutions, LLC (“In Silico”) and Michael Ryan (the “Seller”) pursuant to which the Company will acquire all of the outstanding membership interests of

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In Silico from the Seller for an aggregate purchase price of $540,000 (the “Purchase Price”).  The Purchase Price is payable in full through (i) the delivery to the Seller of a number of shares of the Company’s stock that is equal to $400,000 and (i) the delivery to the employees of In Silico of the Company’s restricted stock units under the Company’s 2021 Plan that is equal to $140,000.  

Pursuant to the Purchase Agreement, as soon as practicable following the closing, the Purchase Price shall be subject to a working capital adjustment.  In addition, the Purchase Agreement contains customary representations, warranties, covenants (including restrictive covenants), indemnification and other terms for transactions of this nature. The Purchase Agreement may be terminated by either the Company or the Seller if the closing does not occur on or before the 45th day following execution of the Purchase Agreement.

Legal Proceedings—In the normal course of business, the Company may have various claims in process and other contingencies. A complaint was filed on March 22, 2021 in the Court of Chancery of the State of Delaware against the Company by a former consultant and director.  The complaint alleges, among other things, that the plaintiff is entitled to additional stock options and he is seeking declaratory judgment and specific performance.  The Company believes that all of the claims in the complaint are without merit and the Company intends to defend vigorously against them.

The Company regularly assesses all contingencies and believes, based on information presently known, the Company is not involved in any matters that would have a material effect on the Company’s financial position, results of operations and cash flows.

9.STOCKHOLDERS’ EQUITY

On June 17, 2020, the Company filed an amendment to its amended and restated certificate of incorporation to complete a 1-for-3.494 reverse split of the Company’s outstanding shares common stock.

Accordingly, unless otherwise noted, all share and per share information has been restated to retroactively show the effect of this stock split.

As of June 30, 2021 and December 31, 2020, the Company was authorized to issue 300,000,000 shares of common stock and 60,000,000 shares of Preferred Stock, of which 24,000,000 shares were designated as Series A-1 Preferred Stock and 16,500,000 shares were designated as Series B Preferred Stock.

Common Stock—As of June 30, 2021 and December 31, 2020, the Company has a single class of common stock.

On October 15, 2020, the Company received net proceeds of $12,332,700 from its IPO, after deducting underwriting discounts and commissions of $1,275,000 and other offering expenses of $1,392,300 incurred. The Company issued and sold 1,250,000 shares of common stock in the IPO at a price of $12.00 per share.

In connection with the IPO, all shares of the Company’s Series A-1 Preferred Stock and Series B Preferred Stock were converted into 624,594 and 469,136 shares of common stock, respectively.

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Below is a table that outlines the initial value of issuances allocated to the IPO common stock, the IPO common stock discount amortized, and value of IPO common stock that was converted into additional-paid-in-capital during the three and six months ended June 30, 2021:

    

2021

Common Stock

 

  

Balance at January 1,

$

11,975,400

Common stock IPO discount amortization

 

24,700

Balance at March 31,

$

12,000,100

Common stock IPO discount amortization

24,900

Balance at June 30,

$

12,025,000

On June 8, 2020, the Company agreed to amend the warrant vesting schedule such that the warrants underlying shares of Series B Preferred Stock became immediately exercisable for each warrant holder. On June 8, 2020, warrant holders exercised their option to purchase 335,982 shares of common stock for proceeds of $1,200. Then, on June 10, 2020, warrant holders exercised their option to purchase an additional 1,063,939 shares of common stock for proceeds of $3,700.

On June 8, 2020, the Company issued 3,106 and 430 shares of common stock to the Company’s Chief Medical Officer and another employee, respectively. In addition, on June 19, 2020, the Company issued 402,000 and 320,000 shares of common stock to the Company’s Chief Financial Officer and Chief Operating Officer ("the CFO and COO") and Chief Strategy and Innovation Officer ("the CSO"), respectively. The shares were issued in exchange for services rendered and no cash considerations. These issuances resulted in $9,432,000 in stock compensation expenses.

Each holder of outstanding shares of common stock shall be entitled to one vote in respect of each share. The number of authorized shares of common stock may be increased or decreased by the affirmative vote of a majority of the outstanding shares of common stock and preferred stock voting together as a single class.

The Company has never paid dividends and has no plans to pay dividends on common stock. As of December 31, 2017, the Company adopted the 2017 Plan. On September 25, 2019, the board of directors approved an additional 10,000,000 shares to be reserved and authorized under the 2017 Plan. This approval increased the total number of authorized shares from 20,000,000 to 30,000,000. After the reverse stock splits, the total number of authorized shares was updated to 858,615. On June 19, 2020, the board of directors approved an additional 850,000 shares to be reserved and authorized under the 2017 Plan. This approval increased the total number of authorized shares from 858,615 to 1,708,615.

As of June 25, 2021, the Company adopted the 2021 Plan. Under the 2021 Plan, the board of directors approved an additional 200,000 shares to be reserved and authorized under the 2021 Plan plus any unallocated shares from the 2017 Plan.

There were 193,679 shares and 379,563 shares available for issuance as of June 30, 2021 and 2020, respectively.

Series B Preferred Stock—On January 24, 2020, the Company issued 4,782,608 shares of Series B Preferred Stock for $2,200,000. On January 29, 2020, the Company filed a certificate of correction to its amended and restated its certificate of incorporation to authorize the issuance of up to 16,500,000 shares of Series B Preferred Stock. On January 31, 2020, the Company issued an additional 1,739,130 shares of Series B Preferred Stock for $800,000.

On matters submitted to a vote of the stockholders of the Company, Series B Preferred Stock, Series A-1 Preferred Stock, and common stock vote together as one class, with the vote of the Series B Preferred Stock on an as-converted basis. Each holder of Series B Preferred Stock shall have a number of votes equal to the shares of common stock into which the shares of Series B Preferred Stock held by such holder are then convertible.

With respect rights on liquidation, winding up and dissolution, shares of Series B Preferred Stock rank senior to all shares of common stock, but not senior to Series A-1 Preferred Stock.

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Each share of Series B Preferred Stock is convertible at any time at the option of the holder at the then current conversion rate. In addition, upon the closing of the sale of shares of common stock to the public in an initial public offering pursuant to an effective registration statement under the Securities Act of 1933, as amended, all shares of preferred stock shall automatically be converted into shares of common stock at the then effective conversion rate.

Accordingly, in connection with the IPO, all shares of the Company’s Series B Preferred Stock were converted into 469,136 shares of common stock on October 15, 2020.

Below is a table that outlines the initial value of issuances allocated to Series B Preferred Stock and the Series B Preferred Stock discount amortized during the three and six months ended June 30:

    

2020

Series B Preferred Stock

 

  

Balance at January 1,

$

1,306,900

Series B Preferred Stock proceeds

 

3,000,000

Series B Preferred Stock discount

 

(2,668,300)

Series B Preferred Stock discount amortization

 

368,400

Balance at March 31,

$

2,007,000

Series B Preferred Stock discount amortization

324,300

Balance at June 30,

$

2,331,300

In the event of any voluntary or involuntary liquidation, dissolution or winding up of the Company or the occurrence of a liquidation, the holders of the shares of Series B Preferred Stock then outstanding shall be entitled to be paid out of the assets of the Company available for distribution to its stockholders, before any payment shall be made to the holders of common stock by reason of their ownership thereof, an amount per share equal to $0.46, the original issue price.

Warrants Underlying Series B Preferred Stock—In connection with the sale of the Series B Preferred Stock, each investor was issued warrants to purchase 0.0859 shares of common stock for each share of Series B Preferred Stock purchased at a price of $0.003494 per share of common stock. The warrants become exercisable in accordance with the schedule set forth below following completion by the Company of an initial public offering and thereafter may be exercised at any time prior to expiration ten years from the date of issuance.

30% of the warrants beginning six months after the date on which the securities of the Company are first listed on a United States national securities exchange (such date, the "Listing Date");
An additional 30% of the warrants beginning nine months after the Listing Date; and
The remainder of the warrants beginning twelve months after the Listing Date.

As of June 30, 2020, the Company sold 16,391,397 shares of Series B Preferred Stock, which contained 1,399,921 underlying warrants to purchase common stock based on the exercise price and vesting schedule outlined above. These warrants are equity classified and the fair value of $5,533,000 is reflected as additional paid-in capital.

On June 8, 2020, the Company agreed to amend the warrant vesting schedule such that the warrants became immediately exercisable for each warrant holder.

On June 8, 2020, warrant holders exercised their option to purchase 335,982 shares of common stock for proceeds of $1,200. Then, on June 10, 2020, warrant holders exercised their option to purchase an additional 1,063,939 shares of common stock for proceeds of $3,700. As of June 30, 2021, there were no warrants underlying Series B Preferred Stock.

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The Black-Scholes option-pricing model was used to estimate the fair value of the warrants with the following weighted-average assumptions for the six months ended June 30, 2020:

    

Risk-free interest rate

 

1.54% - 1.88

%

Expected volatility

 

71.95% - 72.71

%

Expected life (years)

 

10

Expected dividend yield

 

0

%

Representative's WarrantsIn connection with the IPO on October 15, 2020, the Company granted the underwriters warrants (the "Underwriters' Warrants") to purchase an aggregate of 62,500 shares of common stock at an exercise price of $15.00 per share, which is 125% of the initial public offering price. The Underwriters' Warrants have a five-year term and are not exercisable prior to April 13, 2021. All of the Underwriters' Warrants were outstanding at June 30, 2021.

These warrants were equity classified. As of June 30, 2021 and December 31, 2020, the warrant fair values of $307,700 and $357,300, respectively, is reflected as additional paid-in capital. On the issuance date, the Black-Scholes option-pricing model was used to estimate the fair value of the warrants with the following weighted-average assumptions on October 15, 2020:

Risk-free interest rate

 

0.18

%

Expected volatility

 

94.08

%

Expected life (years)

 

2.74

Expected dividend yield

 

0

%

10.STOCK-BASED COMPENSATION

2017 Stock Incentive Plan— Stock Options

The Black-Scholes option-pricing model was used to estimate the fair value of stock options with the following weighted-average assumptions for the six months ended June 30:

    

June 30,

    

June 30,

 

2021

2020

 

Risk-free interest rate

 

1.09

%  

0.23% - 2.92

%

Expected volatility

 

83.34

%  

72.29% - 82.15

%

Expected life (years)

 

6.22

 

4.93 - 6.07

Expected dividend yield

 

0

%  

0

%

In the six months ended June 30, 2021, the fair value of the common shares underlying the stock options was determined by the closing stock price listed on the Nasdaq Capital Market on the grant date.

Prior to the Company’s initial public offering, the fair value of the common shares underlying the stock options had historically been determined by the board of directors, with input from management. Because there was no public market for the Company’s common shares prior to October 15, 2020, the board of directors determined the fair value of the common shares at the time of grant of the stock option by considering a number of objective and subjective factors, including important developments in the Company’s operations, third-party valuations performed, sales of Series A-1 Preferred Stock, sales of Series B Preferred Stock, actual operating results and financial performance, the conditions in

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the biotechnology industry and the economy in general, the stock price performance and volatility of comparable public companies, and the lack of liquidity of the Company’s common shares, among other factors.

The following table summarizes the activity for all stock options outstanding at June 30 under the 2017 Plan:

2021

2020

    

    

Weighted

    

    

Weighted

Average

Average

Exercise

Exercise

Shares

Price

Shares

Price

Options outstanding at beginning of year

 

489,718

$

10.03

 

598,083