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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 September 30, 2023

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: 001-39619

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 200, 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 Stock, par value $0.001 per share

KRBP

The OTC Pink 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 November 9, 2023, there were 1,258,460 shares of the registrant’s common stock outstanding.

Table of Contents

TABLE OF CONTENTS

PART I

FINANCIAL INFORMATION

   

   

Item 1.

Financial Statements

5

Condensed Consolidated Balance Sheets as of September 30, 2023 (Unaudited) and December 31, 2022

5

Condensed Consolidated Statements of Operations for the Three and Nine months ended September 30, 2023 and 2022 (Unaudited)

6

Condensed Consolidated Statements of Stockholders’ Equity (Deficit) for the Three and Nine months ended September 30, 2023 and 2022 (Unaudited)

7

Condensed Consolidated Statements of Cash Flows for the Nine months ended September 30, 2023 and 2022 (Unaudited)

9

Notes to Condensed Consolidated Financial Statements

10

Item 2.

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

27

Item 3.

Quantitative and Qualitative Disclosures about Market Risk

41

Item 4.

Controls and Procedures

41

PART II

OTHER INFORMATION

Item 1.

Legal Proceedings

43

Item 1A.

Risk Factors

44

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

45

Item 6.

Exhibits

45

Signatures

45

2

Table of Contents

Note Regarding Forward-Looking Statements

Various statements made in this Quarterly Report on Form 10-Q are forward-looking and involve risks and uncertainties. All statements that address activities, events or developments that we intend, expect or believe may occur in the future are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Such statements give our current expectations or forecasts of future events and are not statements of historical or current facts. These statements include, among others, statements about:

our goals and strategies;
our future business development, financial condition and results of operations;
our expected timing of human clinical trials and other related milestones;
expected changes in our revenue, costs or expenditures;
our ability to obtain financing in amounts sufficient to fund our operations and continue as a going concern and avoid seeking protection under Chapters 7 or 11 of the United States Bankruptcy Code;
difficulties or delays in the product development process, including the results of preclinical studies or clinical trials;
difficulties or delays in the regulatory approval process;
manufacturing, sales, marketing and distribution of any of our products that may be successfully developed and approved for commercialization;
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;
our ability to raise capital when needed;
relevant government policies and regulations relating to our industry; and
the outcome of any pending or threatened litigation.

Forward-looking statements also include statements other than statements of current or historical fact, including, without limitation, all statements  related to any expectations of revenues, expenses, cash flows, earnings or losses from operations, cash required to maintain current and planned operations, capital or other financial items; any statements of the plans, strategies and objectives of management for future operations; any plans or expectations with respect to product research, development and commercialization, including regulatory approvals; any other statements of expectations, plans, intentions or beliefs; and any statements of assumptions underlying any of the foregoing. We often, although not always, identify forward-looking statements by using words or phrases such as “may," "could," "will," "should," "would," "expect," "plan," "intend," "anticipate," "believe," "estimate," "predict," "potential," "project" or "continue".

3

Table of Contents

The following are some of the factors that could cause actual results to differ materially from the anticipated results or other expectations expressed, anticipated or implied in our forward-looking statements:

the effectiveness and timeliness of our preclinical studies and clinical trials, and the usefulness of the data;
our expectations regarding the timing and clinical development of our product candidates;
our ability to achieve profitable operations and access to needed capital;
fluctuations in our operating results;
the success of current and future license and collaboration agreements
our dependence on contract research organizations, vendors and investigators;
effects of competition and other developments affecting development of products;
market acceptance of our products;
protection of intellectual property and avoiding intellectual property infringement;
product liability; and
other factors described in our filings with the SEC.

We cannot guarantee that the results and other expectations expressed, anticipated or implied in any forward-looking statement will be realized. The risks set forth under Item 1A and our Annual Report on Form 10-K for the fiscal year ended December 31, 2022, and subsequent quarterly reports on Form 10-Q describe major risks to our business, and you should read and interpret any forward-looking statements together with these risks. A variety of factors, including these risks, could cause our actual results and other expectations to differ materially from the anticipated results or other expectations expressed, anticipated or implied in our forward-looking statements. Should known or unknown risks materialize, or should underlying assumptions prove inaccurate, actual results could differ materially from past results and those anticipated, estimated or projected in the forward-looking statements. You should bear this in mind as you consider any forward-looking statements.

Our forward-looking statements speak only as of the dates on which they are made. We do not undertake any obligation to publicly update or revise our forward-looking statements even if experience or future changes makes it clear that any projected results expressed or implied in such statements will not be realized, except as may be required by law.

4

Table of Contents

PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

KIROMIC BIOPHARMA, INC.

Condensed Consolidated Balance Sheets

    

September 30, 

    

December 31, 

2023

2022

 

Unaudited

 

Assets:

Current Assets:

 

  

 

  

Cash and cash equivalents

$

4,379,500

$

645,200

Prepaid expenses and other current assets

 

1,558,200

 

1,043,700

Total current assets

 

5,937,700

 

1,688,900

Property and equipment, net

 

6,581,600

 

8,136,900

Operating lease right-of-use asset, net

1,692,800

2,117,300

Other assets

 

21,400

 

24,400

Total Assets

$

14,233,500

$

11,967,500

Liabilities and Stockholders’ Deficit:

 

  

 

  

Current Liabilities:

 

  

 

  

Senior secured convertible promissory note, net

$

9,600,000

$

3,809,900

Accounts payable

4,247,100

7,308,100

Accrued expenses and other current liabilities

 

1,800,700

 

881,600

Interest payable

 

1,322,800

 

142,100

Note payable

 

57,500

 

557,200

Operating lease liability - short term

619,800

584,400

Total current liabilities

 

17,647,900

 

13,283,300

Subordinated convertible promissory note

2,914,000

Operating lease liability - long term

1,073,000

1,544,900

Total Liabilities

 

18,720,900

 

17,742,200

Commitments and contingencies (Note 7)

 

  

 

  

Stockholders’ Deficit:

 

  

 

  

Preferred Stock, $0.0001 par value: 60,000,000 shares authorized, 14,000 and 0 issued and outstanding, with a liquidation preference of $15,323,300 and $0, as of September 30, 2023 and December 31, 2022, respectively

 

2

 

Common stock, $0.001 par value: 300,000,000 shares authorized as of September 30, 2023 and December 31, 2022; 1,176,260 and 648,384 shares issued and outstanding as of September 30, 2023 and December 31, 2022, respectively

 

1,176

 

648

Additional paid-in capital

 

113,717,122

 

96,172,152

Accumulated deficit

 

(118,205,700)

 

(101,947,500)

Total Stockholders’ Deficit

 

(4,487,400)

 

(5,774,700)

Total Liabilities and Stockholders’ Deficit

$

14,233,500

$

11,967,500

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

Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

2023

    

2022

Operating expenses:

 

  

 

  

  

 

  

Research and development

 

$

2,677,200

$

3,784,200

$

6,718,800

$

10,590,700

General and administrative

 

 

2,874,500

4,611,700

 

7,902,800

 

13,602,600

Total operating expenses

 

 

5,551,700

8,395,900

 

14,621,600

 

24,193,300

Loss from operations

 

 

(5,551,700)

(8,395,900)

 

(14,621,600)

 

(24,193,300)

Other expense:

 

 

  

  

 

  

 

  

Interest expense

(433,800)

(1,400)

(1,219,300)

(6,900)

Litigation settlement

(3,463,000)

(1,730,000)

(3,463,000)

Other income

1,792,000

1,312,700

Total other expense

 

 

1,358,200

(3,464,400)

 

(1,636,600)

 

(3,469,900)

Net loss

$

(4,193,500)

$

(11,860,300)

$

(16,258,200)

$

(27,663,200)

Net loss per preferred share, basic and diluted

 

$

(254.26)

$

$

(1,294.31)

$

Net loss per common share, basic and diluted

 

$

(1.52)

$

(22.63)

$

(8.43)

$

(53.33)

Weighted average preferred shares outstanding, basic and diluted

 

 

12,891

 

 

7,011

 

Weighted average common shares outstanding, basic and diluted

 

 

1,189,989

 

528,015

 

1,040,190

 

523,536

See accompanying notes to the condensed consolidated financial statements

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KIROMIC BIOPHARMA, INC.

Condensed Consolidated Statements of Stockholders’ Deficit

(Unaudited)

 

Preferred Stock

Common Stock

Number of

Number of

Additional

Accumulated

 

Shares

    

Amount

Shares

    

Amount

    

Paid-In Capital

    

Deficit

Total

Balance at December 31, 2022

$

648,384

$

648

$

96,172,152

$

(101,947,500)

$

(5,774,700)

Common stock discount amortization

 

 

 

85,000

 

 

85,000

Warrants underlying common stock issuance

 

 

 

(85,000)

 

 

(85,000)

Released restricted stock units

 

1,773

 

2

 

(2)

 

 

Conversion of subordinated convertible notes into shares of common stock

 

329,086

 

329

 

2,913,671

 

 

2,914,000

Stock compensation expense

 

 

 

20,700

 

 

20,700

Net loss

 

 

 

 

(5,300,300)

 

(5,300,300)

Balance at March 31, 2023

$

979,243

$

979

$

99,106,521

$

(107,247,800)

$

(8,140,300)

Common stock discount amortization

 

 

 

85,900

 

 

85,900

Warrants underlying common stock issuance

 

 

 

(85,900)

 

 

(85,900)

Issuance of preferred stock

8,000

1

7,999,999

8,000,000

Commitments shares issuance from standby equity purchase agreement

197,017

197

658,903

659,100

Stock issuance costs

(84,600)

(84,600)

Stock compensation expense

 

 

35,400

 

 

35,400

Net loss

 

 

 

(6,764,400)

 

(6,764,400)

Balance at June 30, 2023

8,000

$

1

1,176,260

$

1,176

$

107,716,223

$

(114,012,200)

$

(6,294,800)

Common stock discount amortization

86,900

86,900

Warrants underlying common stock issuance

(86,900)

(86,900)

Issuance of preferred stock

6,000

1

5,999,999

6,000,000

Stock issuance costs

(25,500)

(25,500)

Stock compensation expense

26,400

26,400

Net loss

(4,193,500)

(4,193,500)

Balance at September 30, 2023

14,000

$

2

1,176,260

$

1,176

$

113,717,122

$

(118,205,700)

$

(4,487,400)

See accompanying notes to the condensed consolidated financial statements

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KIROMIC BIOPHARMA, INC.

Condensed Consolidated Statements of Stockholders’ Equity

(Unaudited)

 

Common Stock

Additional

Accumulated

 

    

Shares

    

Amount

    

Paid-In Capital

    

Deficit

    

Total

Balance at December 31, 2021

516,284

$

516

$

94,535,784

$

(67,216,500)

$

27,319,800

Common stock discount amortization

 

 

 

85,100

 

 

85,100

Warrants underlying common stock issuance

 

 

 

(85,100)

 

 

(85,100)

Released restricted stock units

 

3,236

4

(4)

Stock compensation expense

 

 

 

80,100

 

 

80,100

Net loss

 

 

 

 

(7,367,800)

 

(7,367,800)

Balance at March 31, 2022

 

519,520

$

520

$

94,615,880

$

(74,584,300)

$

20,032,100

Common stock discount amortization

 

 

 

85,900

 

 

85,900

Warrants underlying common stock issuance

 

 

 

(85,900)

 

 

(85,900)

Released restricted stock units

 

8,451

8

(8)

Stock compensation expense

 

 

 

184,200

 

 

184,200

Net loss

 

 

 

 

(8,435,100)

 

(8,435,100)

Balance at June 30, 2022

 

527,971

$

528

$

94,800,072

$

(83,019,400)

$

11,781,200

Common stock discount amortization

 

 

 

86,900

 

 

86,900

Warrants underlying common stock issuance

 

 

 

(86,900)

 

 

(86,900)

Released restricted stock units

 

136

Stock compensation expense

 

 

 

363,200

 

 

363,200

Net loss

 

 

 

 

(11,860,300)

 

(11,860,300)

Balance at September 30, 2022

 

528,107

$

528

$

95,163,272

$

(94,879,700)

$

284,100

See accompanying notes to the condensed consolidated financial statements

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KIROMIC BIOPHARMA, INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

Nine Months Ended

September 30, 

    

2023

    

2022

Cash flows from operating activities:

 

  

 

  

Net loss

$

(16,258,200)

$

(27,663,200)

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

 

  

 

  

Depreciation

 

1,665,500

 

1,118,500

Operating lease non-cash expense

424,500

273,000

Stock compensation expense

 

82,500

 

627,500

Changes in operating assets and liabilities:

 

  

 

  

Accounts receivable

 

 

16,200

Prepaid expenses and other current assets

 

(511,500)

 

(6,100)

Accounts payable

 

(2,884,200)

 

2,928,100

Interest payable

1,180,700

Accrued litigation liability

1,087,500

3,463,000

Accrued expenses and other current liabilities

 

(168,300)

 

(137,000)

Operating lease liability

 

(436,500)

 

(263,400)

Net cash used for operating activities

 

(15,818,000)

 

(19,643,400)

Cash flows from investing activities:

 

  

 

  

Capital expenditures

 

(97,500)

 

(4,823,300)

Net cash used for investing activities

 

(97,500)

 

(4,823,300)

Cash flows from financing activities:

 

  

 

  

Proceeds from senior secured convertible note payable

 

19,600,000

 

Proceeds from issuance of common stock

659,100

Stock issuance costs

(109,600)

Repayments of note payable

 

(499,700)

 

(454,500)

Net cash provided by (used for) financing activities

 

19,649,800

 

(454,500)

Net change in cash and cash equivalents

 

3,734,300

 

(24,921,200)

Cash and cash equivalents:

 

 

  

Beginning of year

 

645,200

 

25,353,900

End of period

$

4,379,500

$

432,700

Supplemental disclosures of cash flow information:

 

  

 

  

Cash paid for interest on note payable

$

38,600

$

6,900

Non-cash investing and financing activities:

Right-of-use asset/liability recognized from ASC 842 implementation

$

$

2,232,700

Exchange of 25% senior convertible promissory notes into preferred stock

$

14,000,000

$

Conversion of subordinated convertible promissory notes into common stock

$

2,914,000

$

Property and equipment in accounts payable

$

12,800

$

1,351,700

Stock issuance costs in accounts payable

$

500

$

Right-of-use asset/liability acquired through lease liability

$

$

204,800

Deferred financing costs waived

$

364,700

$

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 subsidiaries (the "Company") is a clinical stage fully integrated biotherapeutics company formed under the Texas Business Organizations Code in December 2012. The Company maintains offices in Houston, Texas. The Company has not generated any revenues to date.

The Company is an Artificial Intelligence (“AI”) driven, end-to-end allogeneic cell therapy company, currently developing multi-indication allogeneic T cell therapies that exploit the natural potency of Gamma Delta T cells (“GDTs”) to target solid tumors. Our end-to-end approach consists of target discovery and validation, product development, and on-site current good manufacturing practices (“cGMP”), which we believe will allow us to leverage a new framework for the next generation of cell therapies. We also have new technologies in development to support our end-to-end approach.

From a development standpoint, we utilize innovative non-engineered and engineered GDT technologies and are developing proprietary, virus-free cell engineering tools to develop novel therapies for solid tumors that we believe will be effective and cost-efficient. DeltacelÔ (Deltacel) is our first allogeneic off-the-shelf GDT cell-based product in Phase 1 clinical stage. Our ProcelÔ (“Procel”) and IsocelÔ (“Isocel”) product candidates consist of allogeneic, engineered, off-the-shelf GDT cells and they are currently in the preclinical development stage. Our Deltacel product candidate consists of non-engineered GDTs which we expand, enrich, and activate ex-vivo through our proprietary process, and it is intended to treat solid tumors regardless of the specific tumor antigen expression. Procel consists of engineered GDTs targeting PD-L1 positive tumors, while Isocel consists of engineered GDTs targeting solid tumors expressing the Isoform 2 of Mesothelin (“Iso-Meso”).

We currently have three product candidates: 1) DeltacelÔ non-engineered GDTs, expanded and activated with proprietary technology; 2) ProcelÔ GDTs engineered with a PD-1 switch receptor; and 3) IsocelÔ GDTs engineered with an anti-Mesothelin isoform 2 Chimeric Antigen Receptor.

We have a total of five clinical programs to study our key product candidates:

1)Deltacel-01: This phase 1 clinical trial will evaluate Deltacel in combination with low-dose radiation for patients with non-small cell lung cancer (NSCLC)
2)Procel combination: This phase 1 clinical trial is expected to evaluate Procel in combination with low-dose radiation for patients with PD-L1 positive solid malignancies.
3)Alexis-PRO-1: This phase 1 clinical trial is expected to evaluate Procel in patients with PD-L1 positive solid malignancies.
4)Isocel combination: This phase 1 clinical trial is expected to evaluate Isocel in combination with low-dose radiation for patients with Mesothelin Isoform 2 positive solid malignancies.
5)Alexis-ISO-1: This phase 1 clinical trial is expected to evaluate Isocel in patients with Mesothelin Isoform 2 positive solid malignancies.

The Company is developing a novel and virus-independent engineering method, which will result in the submission of new IND applications (clinical programs 2, 3, 4 and 5). These applications are expected to be ready for submission to the FDA in the first half of 2025, subject to sufficient financing to support the progression of the developments of those additional clinical trial candidates.

IND #1 (number 1 above) will evaluate DeltacelÔ GDTs in combination with low-dose radiation. We submitted the IND for the Deltacel-01 trial on March 31, 2023. On April 28, 2023, the FDA authorized us to proceed with the first-in-human clinical trial of Deltacel (IND #1). We began the clinical trial activation process during the second quarter of 2023.

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Reverse Stock Split — On March 10, 2023, the Company’s Board of Directors approved a one-for-thirty reverse split of the Company’s issued and outstanding shares of common stock (“the Reverse Stock Split”). In addition, a proportionate adjustment was made to the per share exercise price and the number of shares issuable upon the exercise of all outstanding stock options, restricted stock units and warrants to purchase shares of common stock and the number of shares reserved for issuance pursuant to the Company’s equity incentive compensation plans. Any fraction of a share of common stock that would be created as a result of the Reverse Stock Split was rounded up to the next whole share. Unless noted otherwise, all common shares and per share amounts contained in the consolidated financial statements have been retroactively adjusted for the Reverse Stock Split.

Credit Memo – In September 2023, the Company entered into an engagement letter with a vendor whereby we renegotiated the terms of services to be received and the amounts to be paid for such services. As part of this negotiation, the Company obtained a credit memo (the “Credit Memo”) of $1.10 million against the amounts outstanding as of June 30, 2023. This credit memo has been recognized as follows:

Reduction to accounts payable of $1.10 million
Reduction of deferred financing costs of $0.36 million
Increase to other income of $0.74 million

Notice of Delisting – On September 12, 2023, Kiromic Biopharma, Inc. (the “Company”) received written notice (the “Notice”) from the Nasdaq Stock Market, LLC (“Nasdaq”) that it would delist the Company’s shares of common stock from the Nasdaq Capital Market upon the opening of trading on September 14, 2023 (the “Delisting Date”). On the Delisting Date, the Company’s common stock began trading on the OTC Pink Sheets and the Company began pursuing an uplisting to the OTCQB exchange and seeking to establish relationships with market makers in the OTC markets to provide additional trading opportunities in the Company’s stock. However, there can be no assurance that a market for the Company’s shares will develop. The Company does not expect the Staff’s determination to have any impact on its day-to-day operations.

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 $15,818,000 for the nine months ended September 30, 2023, and an accumulated deficit of $118,205,700 as of September 30, 2023. 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 does not have sufficient cash on hand or available liquidity to meet its obligations through the twelve months following the date the condensed consolidated financial statements are issued. 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’s plans include evaluating different strategies to obtain the required funding of future operations. These plans may include, but are not limited to, obtaining funding from current or new investors, including through private placements or public offering. However, there can be no assurance that the Company will be able to secure 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. In the event the Company is unable to secure sufficient financing to allow it to meet its obligations as they become due, the Company may need to file a voluntary petition for relief under the United States Bankruptcy Code in order to implement a restructuring plan or liquidation.

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.

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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 generally accepted accounting principles 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 with 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.

Certain information and footnote disclosures normally included in financial statements prepared in accordance with GAAP have been condensed or omitted. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto included in our Form 10-K for the year ended December 31, 2022. The results of operations for the period ended September 30, 2023 are not necessarily indicative of the operating results that may be expected for a full year. The condensed consolidated balance sheet as of December 31, 2022 contains financial information taken from the audited Company consolidated financial statements as of that date.

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 public offering common stock, and estimating services incurred by third-party service providers used to recognize research and development expense.

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.

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.

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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 and nine months ended September 30, 2023 or 2022.

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 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 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.

Net Loss per Share Attributable to Common Stockholders—The Company follows the two-class method when computing net loss per share as the Company has issued shares that meet the definition of participating securities. The two-class method determines net loss per share for each class of common and participating securities according to dividends declared or accumulated and participation rights in undistributed earnings. The two-class method requires income available to common stockholders for the period to be allocated between common and participating securities based upon their respective rights to receive dividends as if all income for the period had been distributed.

Basic net loss per share attributable to common stockholders is computed by dividing the net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period. Diluted net loss attributable to common stockholders is computed by adjusting net loss attributable to common stockholders to reallocate undistributed earnings based on the potential impact of dilutive securities.

Diluted net loss per share attributable to common stockholders is computed by dividing the diluted net loss attributable to common stockholders by the weighted average number of common shares outstanding for the period, including potential dilutive common shares. For purpose of this calculation, outstanding stock options, convertible preferred stock and warrants to purchase shares of convertible preferred stock are considered potential dilutive common shares.

Stock-Based Compensation—The Company records stock compensation expense related to the 2017 Equity Incentive Plan (the “2017 Plan”) and the 2021 Omnibus Equity Incentive Plan (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.

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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 uses 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 limited 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. We use our listed public market closing price on the grant date to determine common stock valuation.

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 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 has evaluated the impact of this standard on its financial position, results of operations, and cash flows, and determined that it is immaterial to the financial statements as of September 30, 2023.

Reclassifications— Certain prior year amounts have been reclassified to conform to the current year presentation. These reclassifications had no effect on previously reported results of operations.

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3.NET LOSS PER SHARE OF COMMON STOCK

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, RSUs and warrants 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 loss per share:

Three Months Ended

Nine Months Ended

September 30, 

September 30, 

    

2023

    

2022

    

2023

    

2022

Net loss

$

(4,193,500)

$

(11,860,300)

$

(16,258,200)

$

(27,663,200)

Less: Initial Public Offering Common Stock discount amortization

(25,200)

(25,200)

(74,700)

(74,800)

Less: Public Offering Common Stock discount amortization

(61,700)

(61,700)

(183,100)

(183,100)

Less: Undeclared dividends attributable to preferred stock

(808,200)

(1,323,300)

Net loss attributable to common shareholders

$

(5,088,600)

$

(11,947,200)

$

(17,839,300)

$

(27,921,100)

Three Months Ended

Three Months Ended

    

September 30, 2023

September 30, 2022

Common Stock

    

Preferred Stock

    

Common Stock

    

Preferred Stock

Net loss per share, basic and diluted

Allocation of undistributed net loss

$

(1,810,900)

$

(3,277,700)

$

(11,947,200)

$

Weighted average shares outstanding, basic and diluted

1,189,989

12,891

528,015

Basic and diluted net loss per share

$

(1.52)

$

(254.26)

$

(22.63)

$

Nine Months Ended

Nine Months Ended

September 30, 2023

September 30, 2022

    

Common Stock

    

Preferred Stock

    

Common Stock

    

Preferred Stock

Net loss per share, basic and diluted

Allocation of undistributed net loss

$

(8,764,900)

$

(9,074,400)

$

(27,921,100)

$

Weighted average shares outstanding, basic and diluted

1,040,190

7,011

523,536

Basic and diluted net loss per share

$

(8.43)

$

(1,294.31)

$

(53.33)

$

For the three months ended September 30, 2023, there were 37,782 restricted stock units and 15,416 warrants, that were potentially dilutive securities excluded from the computations of diluted weighted-average shares of common stock.

During the nine months ended September 30, 2023, the Company entered into an Exchange Agreement whereby outstanding promissory notes totaling $14,000,000 were exchanged for 14,000 shares of Series C Convertible Voting Preferred Stock (the “Series C Stock”). See Note 9 for details about conversion price. The Series C Stock accrues an annual 25% dividend, whether or not declared, which if unpaid is added to the aggregate liquidation preference. During the three and nine months ended September 30, 2023, the preferred shareholders earned $808,200 and $1,323,300, respectively, of preferred dividends. The dividends were not accrued on the condensed consolidated balance sheet as of September 30, 2023, as these dividends were not declared and do not represent a corporate liability to the Company.

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4.

PROPERTY AND EQUIPMENT

Property and equipment consisted of the following as of September 30, 2023 and December 31, 2022:

September 30, 2023

    

December 31, 2022

Equipment

$

3,057,000

$

3,041,900

Leasehold improvements

 

7,350,500

 

7,298,500

Office furniture, fixtures, and equipment

 

137,300

 

137,300

Software

 

359,500

 

359,500

Construction in progress

 

43,100

 

 

10,947,400

 

10,837,200

Less: Accumulated depreciation

 

(4,365,800)

 

(2,700,300)

Total

$

6,581,600

$

8,136,900

Depreciation expense was $560,100 and $536,600 for the three months ended September 30, 2023 and 2022, respectively, and $1,665,500 and $1,118,500 for the nine months ended September 30, 2023 and 2022, respectively. Depreciation expense is allocated between research and development and general and administrative operating expenses on the condensed consolidated statements of operations.

5.ACCRUED EXPENSES AND OTHER CURRENT LIABILITIES

Accrued expenses and other current liabilities consisted of the following as of September 30, 2023 and December 31, 2022.

    

September 30, 2023

    

December 31, 2022

Accrued litigation

$

1,087,500

$

Accrued compensation

606,600

 

668,700

Accrued consulting and outside services

 

106,600

 

212,900

Total

$

1,800,700

$

881,600

6.NOTE PAYABLE

In November 2022, the Company entered into a financing arrangement for its Director and Officer Insurance policy. The total amount financed was approximately $610,700 with an annual interest rate of 8.49%, to be paid over a period of eleven months. As of September 30, 2023 and December 31, 2022, the remaining payable balance on the financed amount was $57,500 and $557,200, respectively.

7.COMMITMENTS AND CONTINGENCIES

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 September 30, 2023 and December 31, 2022, the Company has not incurred any milestone or royalty liabilities related to these license agreements.

Legal Proceedings— On March 22, 2021, Jason Terrell (“Terrell”), a former consultant and former director of the Company, commenced an action against us in the Court of Chancery of the State of Delaware, C.A. No. 2021-0248-MTZ (the “Action”). In the Action, Terrell seeks a declaratory judgment that the Company is obligated to issue him (i) options to purchase 16,667 shares of common stock at a price of $15.00 per share pursuant to an alleged 2014 consulting agreement, and (ii) options to purchase an additional 16,667 shares of common stock at a price of $5.10 per share pursuant to an alleged January 2017 non-employee director options agreement. In his complaint, Terrell also claimed that, pursuant to the operative certificate of incorporation, he is entitled to indemnification from us for attorneys’ fees and costs he incurs in connection with the Action because the Action arises in connection with his position as a former director.

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The Company disputes Terrell’s claims and allegations in the Action and intends to vigorously defend against them. On May 21, 2021, the Company filed a motion to dismiss Terrell’s claims in the actions with prejudice, arguing that (i) Terrell’s options-related claims fail because his 2014 and January 2017 agreements were explicitly superseded by a later options agreement, under which Terrell relinquished his prior options; and (ii) Terrell is not entitled to indemnification because the Action relates to contracts between the Company and Terrell in his personal capacity, and not in connection with any activities or duties of Terrell in his official capacity as former director. In response to the motion, filed on June 21, 2021, Terrell withdrew his claim for indemnification, but opposed the portion seeking dismissal of his declaratory judgment claim. The motion was fully briefed with the filing of the Company’s reply brief on July 7, 2021.

Oral argument was held before the Vice Chancellor on October 20, 2021. During oral argument, the Vice Chancellor invited the parties to submit supplemental letter briefs on the question of whether the Court of Chancery even had the authority to adjudicate the Action in light of the delegation of authority in Terrell’s most recent stock option agreement with the Company (the “SOA”) to the Company’s Compensation Committee to resolve all disputes regarding the interpretation of the SOA. The parties submitted simultaneous supplemental letters briefs on this issue on November 15, 2021. On January 20, 2022, the Vice Chancellor issued her decision on our motion to dismiss, ruling that the Action is stayed until the Compensation Committee itself resolves whether it has sole authority to resolve the parties’ contract interpretation dispute.

Subsequently, the parties agreed upon a process for coordinating submissions and/or presentations to the Compensation Committee. The parties made their respective written submissions to the Compensation Committee on March 31, 2022,  and on July 21, 2022, the Compensation Committee determined that (i) the Compensation Committee has sole authority under the SOA to resolve the parties’ contract interpretation dispute, and (ii) Terrell’s most recent options agreement superseded and nullified any option rights Terrell may have had under his prior agreements. On August 2, 2022, the Vice Chancellor issued an order dismissing the Action for lack of subject matter jurisdiction.

On August 23, 2022, Terrell filed a notice of appeal of the Vice Chancellor’s order of dismissal to the Delaware Supreme Court.

Oral argument on Terrell’s appeal was held before the Delaware Supreme Court on February 8, 2023. On May 4, 2023, the Delaware Supreme Court issued a written opinion (the “Opinion”) reversing the Vice Chancellor’s order of dismissal and remanding to Chancery Court for further proceedings consistent with the Opinion.  In its Opinion, the Delaware Supreme Court affirmed several of the Chancery Court’s legal determinations on the motion to dismiss, but concluded that Chancery Court itself should independently review the Compensation Committee’s determinations under Delaware law.

Pursuant to a stipulated scheduling order, the parties submitted supplemental letter briefs to the Chancery Court in mid-August 2023, addressing the impact of the Opinion on Kiromic’s motion to dismiss. Thereafter, the Chancery Court notified the parties that it had received the supplemental letter briefs and would take the matter under advisement without holding oral argument. The parties are awaiting the Chancery Court’s decision on the motion to dismiss.

In a separate matter, on or about August 17 and 23, 2021, Tony Tontat, who at the time was the Chief Financial Officer and a member of the Board, submitted substantially identical reports (the “Complaints”) through the Company’s complaint hotline. These Complaints, alleged, among other topics, risks associated with the Company’s public disclosures in securities filings and in statements made to the public, investors, and potential investors regarding (i) the anticipated timing of the FDA authorization of the IND applications and (ii) the anticipated timing of human clinical trials. These Complaints were subsequently submitted to the Audit Committee of the Board.

After receiving the Complaints, the Audit Committee recommended that the Board form, and the Board did in turn form, a Special Committee comprised of three independent directors (the “Special Committee”) to review the Complaints and other related issues (the “Internal Review”). The Special Committee retained an independent counsel to assist it in conducting the Internal Review.

On February 2, 2022, following the conclusion of the Internal Review, the Company’s Special Committee reported the results of its Internal Review to the Board. The Board approved certain actions to address the fact that the Company had received communications from the FDA on June 16 and June 17, 2021 that the FDA was placing the IND applications that

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the Company submitted to the FDA on May 14 and May 17, 2021 for the ALEXIS-PRO-1 and ALEXIS-ISO-1 product candidates, respectively, on clinical hold (the “June 16 and 17 FDA Communications”). The Company did not disclose the June 16 and 17, 2021 FDA Communications in the Registration Statement on Form S-1 (Registration No. 333-257427) that was filed on June 25, 2021 and declared effective on June 29, 2021, nor the final prospectus contained therein dated June 29, 2021 (collectively, the “Registration Statement”). The Company then consummated a public offering of $40 million of its common stock pursuant to the Registration Statement on July 2, 2021. On July 13, 2021, the Company received the FDA’s formal clinical hold letters, which asked the Company to address key components regarding the chemical, manufacturing, and control components of the IND applications. On July 16, 2021, the Company issued a press release disclosing that it had received comments from the FDA on the two INDs, but did not use the term “clinical hold.” The Company did not disclose the clinical hold in its Form 10-Q for the fiscal quarter ended September 30, 2021 that was filed with the Securities and Exchange Commission on August 13, 2021. On August 13, 2021, the Company issued a press release announcing that these INDs were placed on clinical hold.

Upon completion of the Internal Review, the Company voluntarily contacted the SEC to report certain information about the Internal Review. Since that time, the Company has been voluntarily cooperating with requests for information from the SEC and intends to fully cooperate with any further requests from the SEC.

In November 2022, we received a Grand Jury Subpoena (the “Subpoena”) from the U.S. Department of Justice requesting certain information from the company in connection with an ongoing investigation being conducted by the Federal Grand Jury in the Southern District of Texas. The Company is not a target of this investigation at this time.

As a result of the disclosure omission of the June 16 and 17 FDA Communications, on March 7, 2022, entities related to Sabby Management LLC (the “Sabby Entities”) and Empery Asset Management, LP (the “Empery Entities”) filed a complaint in the United States District Court for the Southern District of New York asserting claims against the Company and certain current and former officers and directors of the Company for alleged violations of Sections 11, 12, and 15 of the Securities Act of 1933 in connection with the purchase of common stock through the Company’s public offering that closed on July 2, 2021. On July 1, 2022, the defendants filed motions to dismiss the complaint.  In response, on July 22, 2022, the plaintiffs amended their complaint to, among other things, include the Company’s underwriters on the July 2, 2021 public offering, ThinkEquity LLC, as a defendant. The plaintiffs seek unspecified damages; rescission to the extent they still hold the Company’s securities, or if sold, rescissory damages; reasonable costs and expenses, including attorneys’ and experts’ fees; and other unspecified equitable and injunctive relief. The two parties reached a settlement agreement in principle on September 26, 2022, which the Company’s board of directors approved on September 27, 2022. The settlement contained a cash component of $75,000 payable to Sabby Entities and $75,000 to Empery Entities.

As part of the settlement, the Company also agreed to issue convertible notes (the “Settlement Notes”) in the aggregate principal amount of $1,656,720 to each of the Empery Entities and the Sabby Entities. The Settlement Notes are convertible into shares (the “Conversion Shares”) of the Company’s common stock at an initial conversion price per share of $9.20 and can be convertible into a maximum of 180,000 shares of the Company’s common stock to each of the Empery Entities and Sabby Entities, subject to the adjustment of the conversion price and a beneficial ownership limitation equivalent to 9.99%. The United States District Court for the Southern District of New York granted a motion jointly filed by the plaintiffs and defendants, pursuant to which the Settlement Notes will be unrestricted and exempt from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), and the Conversion Shares, when issued upon conversion of the Settlement Notes in accordance with the terms set forth therein, will also be unrestricted and exempt from the registration requirements of the Securities Act.

There was also a related subordinated convertible promissory note totaling $2,914,000 on the balance sheet at December 31, 2022, which Empery held $1,502,700 and Sabby held $1,411,300. During the three months ended March 31, 2023, Empery and Sabby converted the totality of their notes into shares of common stock of 163,268 and 153,333, respectively, at a share price of $9.20.

On August 5, 2022, Ronald H. Karp filed a class action complaint in the United States District Court for the Southern District of New York (the “Karp Class Action”) covering the same subject matter as the Sabby Entities’ and Empery Entities’ claim discussed above asserting claims against the Company and certain current and former officers and directors for alleged violations of Sections 11, 12, and 15 of the Securities Act of 1933 in connection with the purchase of common

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stock through the Company’s public offering that closed on July 2, 2021 and Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated thereunder in connection with the certain statements and acts made by the defendants between June 25, 2021 and August 13, 2021.

On October 3, 2022, Joseph Podmore filed a class action complaint in the United States District Court for the Southern District of New York (the “Podmore Class Action”) covering the same subject matter as the Sabby Entities’ and Empery Entities’ claim discussed above asserting claims against the Company and certain current and former officers and directors for alleged violations of Sections 11, 12, and 15 of the Securities Act of 1933 in connection with the purchase of common stock through the Company’s public offering that closed on July 2, 2021 and Section 10(b) of the Exchange Act of 1934 and Rule 10b-5 promulgated thereunder in connection with the certain statements and acts made by the defendants between June 25, 2021 and August 13, 2021.

The Karp Class Action and the Podmore Class Action are collectively referred to as the “Class Action.” On August 7, 2023, we entered into a term sheet with the plaintiffs in the Class Action, to settle in principle (and globally resolve) the Class Actions.  In the Class Action, the plaintiffs have made allegations and asserted claims against the Company and certain current and former directors and officers, as well as the Company’s former underwriter, including for alleged violations of Sections 11, 12(a)(2), and 15 of the Securities Act of 1933 as well as Section 10(b) (and Rule 10b-5 promulgated thereunder) and Section 20(a) of the Securities Exchange Act of 1934 in connection with a public offering by the Company that closed on or about July 2, 2021. We subsequently reached agreement with the plaintiffs in the Class Action on all settlement materials and terms including with respect to payment of up to $2,300,000 and, on September 29, 2023, counsel for plaintiffs submitted the proposed settlement materials to the Court for approval. Of this amount, insurance will cover $570,000, resulting in a net settlement of $1,730,000 owed by the Company.

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

8.LEASES

The Company adopted FASB ASU No. 2016-02, Leases (Topic 842) on January 1, 2022, using the modified retrospective method, in which it did not restate prior periods. Upon adoption, the Company elected the package of practical expedients permitted under the transition guidance within Topic 842 which, among other things, allowed the Company to carry forward the historical lease classification.

In our implementation of ASU No. 2016-02 the Company elected to discount lease obligations using our incremental borrowing rate, which is derived from information available at the lease commencement date, in determining the present value of lease payments. The Company’s incremental borrowing rate represents the rate of interest that it would have to pay to borrow over a similar term an amount equal to the lease payments in a similar economic environment. The Company considers publicly available data for instruments with similar terms and characteristics when determining its incremental borrowing rates.  In addition, we elected the practical expedient to account for the lease and non-lease components on a combined basis. The Company intends to use the full lease term under the existing lease agreement as the lease term, which is currently set to expire on April 30, 2026.  As of September 30, 2023, the Company is not able to determine if any renewal options will be exercised.

The 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.

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Two further amendments were executed in 2021. The agreements commenced on November 1, 2021, and December 1, 2021 under an operating lease agreement that is noncancelable from commencement until May 1, 2024. The amended lease agreement adds approximately 3,684 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.

An amendment to the lease agreement was executed in January 2022 and commenced May 1, 2022. The amendment added approximately 9,352 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. In year one and two monthly rent is $4,800 per month, in year three and four monthly rent is $4,896 per month, and in year five monthly rent is $5,000 per month.

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 Company entered into a sublease of three suites for the use of certain fixture, fixtures and equipment on June 2, 2023. The lease commenced on June 5, 2023 under an operating lease agreement that is noncancelable until April 29, 2026. The monthly rent is $6,444 and remains flat during the period of the lease. The rent income received for this sublease is recorded in other income.

The following table indicates the balance sheet line items that include the right-of-use assets and lease liabilities for our operating lease:

    

September 30, 2023

December 31, 2022

Operating lease

Operating lease

Right-of-Use Asset

Operating lease

$

1,692,800

$

2,117,300

Total right-of use asset

$

1,692,800

$

2,117,300

Lease Liabilities