Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion together with our financial statements and the related notes included elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements that are based on our current expectations, estimates and projections about our business and operations. Our actual results may differ materially from those currently anticipated and expressed in such forward-looking statements as a result of a number of factors, including those which we discuss under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.
Overview
We are a clinical stage biotechnology company engaged in the discovery, development and commercialization of therapies targeting cancer. Our initial disease target is lung cancer, a serious medical condition with an incidence of over 235,000 new cases in the US in 2021, representing 12.4% of all cancers, and over 131,000 deaths, or 21.7% of all cancers. Worldwide, lung cancer incidence is over 2,200,000 per year (ranking second only after breast cancer), and mortality over 1,800,000 (ranking first). Specifically, we are targeting Non-Small Cell Lung Cancer (NSCLC), which represents 85% of all lung cancers.
We accomplished the following key milestones:
•In November 2018, we in-licensed THIO from University of Texas Southwestern, in Dallas. The patent license is global and exclusive for the duration of the patients’ lives.
•In 2019, we completed a common stock seed round in the amount of $2 million.
•In 2019, we generated the first data for THIO demonstrating complete regression with no recurrence when administered in advance of atezolizumab (TecentriQ®; Genentech), in colorectal and lung cancer preclinical models.
•In the First Quarter 2020, we filed a provisional patent application for THIO in sequential combination with checkpoint inhibitors, covering all tumor types. The patent was allowed in the US in the First Quarter 2021 and expires in 2041.
•In the First Quarter 2021, we entered into a Drug Supply Agreement with Regeneron Pharmaceuticals, Inc. Under this agreement, Regeneron will provide cemiplimab (LIBTAYO; anti-PD-1 checkpoint inhibitor) at no charge for the THIO-101 trials, testing THIO administration for immune activation followed by cemiplimab in NSCLC. This drug supply agreement replaces direct drug purchase expense that we would be otherwise required to incur. In exchange, Regeneron received development exclusivity in NSCLC for the duration of the trial which is expected to be two years, meaning we cannot conduct trials in NSCLC with another checkpoint inhibitor during the time of the trial. All other areas of study and development in any other tumor types remain open.
•In the First Quarter 2021, we initiated our clinical supply manufacturing (CMC) under Good Manufacturing Practices (GMP) conditions to provide clinical supply for THIO-101 and other development needs.
•In the Second Quarter 2021, we completed a convertible note funding round in the amount of approximately $8 million.
•In the Third Quarter 2021 and Fourth Quarter 2021, we sold common shares of MAIA for total proceeds of approximately $6.2 million.
•In the First Quarter 2022, we completed the Crossover Round for total proceeds of approximately $2.4 million.
•In the First Quarter 2022, THIO received approval by the Bellberry Human Research Ethics Committee (HREC) in Australia to initiate the THIO-101 Phase 2 clinical study.
•In March 2022, the U.S. Food and Drug Administration (FDA) granted Orphan Drug Designation (ODD) to THIO for the treatment of hepatocellular carcinoma, and in May 2022, the FDA granted ODD to THIO
20
for the treatment of small-cell lung cancer. The FDA’s Office of Orphan Products Development may grant orphan designation status to drugs and biologics that are intended for the treatment, diagnosis or prevention of rare diseases, or conditions that affect fewer than 200,000 people in the U.S. Orphan Drug Designation provides certain benefits, including financial incentives, to support clinical development and the potential for up to seven years of market exclusivity for the drug for the designated orphan indication in the U.S. if the drug is ultimately approved for its designated indication.
•In May 2022, we completed the Additional Round for total proceeds of approximately $99,999.
•In May 2022, we entered into a research and collaboration agreement with the Nationwide Children’s Hospital to evaluate the potential of THIO in combination with current standard-of-care therapies for brain cancer. The organizations will conduct preclinical studies to assess the efficacy and safety of THIO in combination with radiotherapy and immune checkpoint inhibitors in vitro and in vivo models.
•In July 2022, we completed our selection process for the clinical sites for our Phase 2 study in Australia and Europe and our application to start the Phase 2 study in Australia has been approved. In July 2022, the first patient was administered with THIO in our Phase 2 human trial (THIO-101) in Australia. We have also submitted a similar application to conduct the same Phase 2 study in Europe.
•On July 28, 2022, the Company’s shares of common stock began trading on the NYSE American under the symbol MAIA. On August 1, 2022, the Company sold 2,000,000 shares of common stock at $5.00 per share for net proceeds of $10,000,000 in an initial public offering prior to deducting underwriting discounts, commissions, and other offering expenses. On August 3, 2022, the Company sold an additional 300,000 shares of common stock at $5.00 per share when the underwriter exercised the overallotment for net proceeds of $1,500,000 prior to deducting underwriting discounts, commissions, and other offering expenses. We believe we have raised sufficient capital to fund the THIO-101 lead-in and preliminary efficacy of the phase 2 THIO-101 trial.
Impact of the COVID-19 Pandemic on Our Operations
On January 30, 2020, the World Health Organization (“WHO”) announced a global health emergency because of a new strain of coronavirus originating in Wuhan, China (the “COVID-19 Outbreak”) and the risks to the international community as the virus spreads globally beyond its point of origin. In March 2020, the WHO classified the COVID-19 Outbreak as a pandemic, based on the rapid increase in exposure globally.
The full impact of the COVID-19 Outbreak continues to evolve as of the date of this report. As a result, we cannot estimate the full magnitude that the pandemic will have on our business. If the COVID-19 Outbreak continues, it may have a material adverse effect on our financial condition, liquidity, and future results of operations for the future. We are actively monitoring the impact of the global pandemic on our financial condition, liquidity, operations, industry, and workforce. Given the daily evolution of the COVID-19 Outbreak and the global responses to curb its spread, we are not able to estimate the effects of the COVID-19 Outbreak on our results of operations, financial condition, or liquidity for the future. One of our initial clinical studies is taking place in Australia, which initially imposed one of the strictest COVID-19-related measures, including lock-downs. While are not currently experiencing any delays or increased costs as a result of these measures, we may do so in the future.
Impact of the War in Ukraine on Our Operations
The short and long-term implications of Russia’s invasion of Ukraine are difficult to predict at this time. The imposition of sanctions and counter sanctions may have an adverse effect on the economic markets generally and could impact our business, financial condition, and results of operations. Because of the highly uncertain and dynamic nature of these events, the Company terminated any planned research activities in Russia.
21
Financial Operations Overview and Analysis for the Three Months Ended September 30, 2022 and 2021
Comparison of the three months ended September 30, 2022 and 2021
|
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|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Three Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
2022 |
|
|
2021 |
|
|
Dollars |
|
|
Percentage |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
$ |
2,343,154 |
|
|
$ |
1,081,705 |
|
|
$ |
1,261,449 |
|
|
117% |
General and administrative expenses |
|
|
1,653,072 |
|
|
|
1,151,542 |
|
|
|
501,530 |
|
|
44% |
Total operating costs and expenses |
|
|
3,996,226 |
|
|
|
2,233,247 |
|
|
|
1,762,979 |
|
|
79% |
Loss from operations |
|
|
(3,996,226 |
) |
|
|
(2,233,247 |
) |
|
|
(1,762,979 |
) |
|
79% |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(1,716 |
) |
|
|
(451,306 |
) |
|
|
449,590 |
|
|
(100)% |
Interest income |
|
|
348 |
|
|
708 |
|
|
|
(360 |
) |
|
(51)% |
Australian research and development incentives |
|
|
65,111 |
|
|
|
— |
|
|
|
65,111 |
|
|
100% |
Change in fair value of embedded features |
|
|
— |
|
|
|
(96,000 |
) |
|
|
96,000 |
|
|
(100)% |
Change in fair value of warrant liability |
|
|
— |
|
|
|
(100,780 |
) |
|
|
100,780 |
|
|
(100)% |
Loss on extinguishment of convertible notes and convertible notes, related parties |
|
|
— |
|
|
|
(2,322,943 |
) |
|
|
2,322,943 |
|
|
(100)% |
Other income (expense), net |
|
|
63,743 |
|
|
|
(2,970,321 |
) |
|
|
3,034,064 |
|
|
(102)% |
Net loss |
|
|
(3,932,483 |
) |
|
|
(5,203,568 |
) |
|
|
1,271,085 |
|
|
(24)% |
Net loss attributable to noncontrolling interests |
|
|
— |
|
|
|
(7,130 |
) |
|
|
7,130 |
|
|
(100)% |
Deemed dividend for ratchet shares issued at IPO |
|
|
(1,099,360 |
) |
|
|
— |
|
|
|
(1,099,360 |
) |
|
100% |
Net loss attributable to MAIA Biotechnology, Inc. shareholders |
|
$ |
(5,031,843 |
) |
|
$ |
(5,196,438 |
) |
|
$ |
164,595 |
|
|
(3)% |
Operating Expenses
Research and development expenses
Research and development expenses increased by approximately $1,261,000 or 117%, from approximately $1,082,000 for the three months ended September 30, 2021 to approximately $2,343,000 for the three months ended September 30, 2022. The increase was primarily related to the increase in clinical expenses related to the clinical preparation and startup of THIO 101 trial of approximately $667,000, an increase in payroll and bonus expenses of approximately $610,000 related to increased headcount of additional research and development employees, an increase of approximately $111,000 in professional fees and other expenses, offset by a decrease in stock-based compensation costs of approximately $127,000.
General and administrative expenses
General and administrative expenses increased by approximately $502,000 or 44% from approximately $1,152,000 for the three months ended September 30, 2021 to approximately $1,653,000 for the three months ended September 30, 2022. The increase was primarily related to an increase in payroll expense of approximately $228,000, an increase in other expenses of approximately $472,000 related to the costs of operating as a public
22
company, offset by a decrease in stock-based compensation of approximately $119,000 and professional fees of approximately $79,000.
Other income (expense), net
Other income (expense), net changed by approximately $3,034,000 or 102% from other expense of approximately $2,970,000 for the three months ended September 30, 2021 to other income of approximately $64,000 for the three months ended September 30, 2022. The change in other income (expense), net was primarily the result of the following expenses in the three months ended September 30, 2021: approximately $2,323,000 expense related to the loss on extinguishment of convertible notes, approximately $451,000 expense related to the interest for convertible notes, the change in the fair value of warrant liability expense of approximately $101,000 related to interest for convertible notes, approximately $96,000 of expense for the change in fair value of the bifurcated embedded feature, and by the increase of approximately $65,000 of income related to the Australian research and development incentives for the three months ended September 30, 2022. This was offset by approximately $2,000 of interest for the three months ended September 30, 2022.
Comparison of nine months ended September 30, 2022 and 2021
|
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|
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|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
|
|
|
|
Change |
|
|
2022 |
|
|
2021 |
|
|
Dollars |
|
|
Percentage |
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
Research and development expenses |
|
$ |
6,539,948 |
|
|
$ |
1,988,450 |
|
|
$ |
4,551,498 |
|
|
229% |
General and administrative expenses |
|
|
4,341,880 |
|
|
|
2,798,766 |
|
|
|
1,543,114 |
|
|
55% |
Total operating costs and expenses |
|
|
10,881,828 |
|
|
|
4,787,216 |
|
|
|
6,094,612 |
|
|
127% |
Loss from operations |
|
|
(10,881,828 |
) |
|
|
(4,787,216 |
) |
|
|
(6,094,612 |
) |
|
127% |
Other income (expense): |
|
|
|
|
|
|
|
|
|
|
|
Interest expense |
|
|
(1,820 |
) |
|
|
(827,539 |
) |
|
|
825,719 |
|
|
(100)% |
Interest income |
|
|
1,249 |
|
|
|
1,501 |
|
|
|
(252 |
) |
|
(17)% |
Australian research and development incentives |
|
|
230,188 |
|
|
|
— |
|
|
|
230,188 |
|
|
100% |
Change in fair value of embedded features |
|
|
— |
|
|
|
(203,000 |
) |
|
|
203,000 |
|
|
(100)% |
Change in fair value of warrant liability |
|
|
— |
|
|
|
(1,546,280 |
) |
|
|
1,546,280 |
|
|
(100)% |
Loss on extinguishment of convertible notes and convertible notes, related parties |
|
|
— |
|
|
|
(2,322,943 |
) |
|
|
2,322,943 |
|
|
(100)% |
Other income (expense), net |
|
|
229,617 |
|
|
|
(4,898,261 |
) |
|
|
5,127,878 |
|
|
(105)% |
Net loss |
|
|
(10,652,211 |
) |
|
|
(9,685,477 |
) |
|
|
(966,734 |
) |
|
10% |
Net loss attributable to noncontrolling interests |
|
|
— |
|
|
|
(74,331 |
) |
|
|
74,331 |
|
|
(100)% |
Deemed dividend on warrant modifications |
|
|
(450,578 |
) |
|
|
— |
|
|
|
(450,578 |
) |
|
100% |
Deemed dividend for ratchet shares issued at IPO |
|
|
(1,099,360 |
) |
|
|
— |
|
|
|
(1,099,360 |
) |
|
100% |
Net loss attributable to MAIA Biotechnology, Inc. shareholders |
|
$ |
(12,202,149 |
) |
|
$ |
(9,611,146 |
) |
|
$ |
(2,591,003 |
) |
|
27% |
|
|
|
|
|
|
|
|
|
- |
|
|
|
23
Operating Expenses
Research and development expenses
Research and development expenses increased by approximately $4,551,000 or 229%, from approximately $1,988,000 for the nine months ended September 30, 2021 to approximately $6,540,000 for the nine months ended September 30, 2022. The increase was primarily related to an increase in clinical expenses of approximately $2,721,000 due to an increase in payments to clinical research organizations and payments to consultants primarily related to the THIO 101 trial start-up and pre-clinical activities, an increase in payroll related expenses and bonus expense of approximately $1,470,000 related to increased headcount of eight research and development employees during the nine months ended September 30, 2022, an increase of approximately $190,000 in professional fees, and an increase in other expenses of approximately $193,000, offset by a decrease in stock-based compensation of approximately $23,000.
General and administrative expenses
General and administrative expenses increased by approximately $1,543,000 or 55% from approximately $2,799,000 for the nine months ended September 30, 2021 to approximately $4,342,000 for the nine months ended September 30, 2022. The increase was primarily attributable to the increased costs to create additional infrastructure to support our operations as a public company. Increases included an increase in payroll, bonus expenses and benefits of approximately $583,000 related to an increase in headcount over the same period last year, an increase in professional fees for approximately $623,000, and an increase in other expenses of approximately $592,000, offset by a decrease in stock-based compensation expense of approximately $255,000 primarily due to the 2021 expense related to founders' stock-based compensation expense.
Other income (expense), net
Other income (expense), net changed by approximately $5,128,000 or 105% from approximately $4,898,000 of other expenses for the nine months ended September 30, 2021 to approximately $230,000 of other income for the nine months ended September 30, 2022. The change in other income (expense), net was primarily the result of approximately $2,323,000 expense related to loss of extinguishment of convertible notes, the approximately $1,546,000 of expense for the change in fair value of the warrant liability, the change in the fair value of bifurcated embedded feature of $203,000, and expense related to approximately $828,000 related to interest for convertible notes for the nine months ended September 30, 2021 . Other income increased by approximately $230,000 of income related to the Australian research and development incentives and offset by approximately $2,000 of interest expense for nine months ended September 30, 2022 .
Liquidity and Capital Resources
As of September 30, 2022, our cash totaled approximately $14,064,000 which represented an increase of approximately $3,489,000 compared to December 31, 2021. As of September 30, 2022, we had working capital of approximately $12,324,000 which represents an increase of approximately $3,797,000 compared to December 31, 2021. We have generated no revenues and we expect to continue to incur operating losses for the foreseeable future and may never become profitable. We are dependent on our ability to continue to raise equity and/or debt financing to continue operations, until the attainment of profitable operations.
Between April 22, 2022 and May 3, 2022, warrant holders exercised warrants, resulting in the issuance of 153,000 shares of common stock for proceeds of approximately $275,400.
On May 19, 2022, the Company sold 11,111 shares of common stock at $9.00 per share for gross proceeds of $99,999 with no transaction costs. On August 1, 2022, the Company sold 2,000,000 shares of common stock at $5 per share for gross proceeds of $10,000,000 in an initial public offering. On August 3, 2022, the Company sold an additional 300,000 shares of common stock at $5 per share for gross proceeds of $1,500,000 per the overallotment option for the underwriter.
We will need to raise additional capital to fund our operations, to develop and commercialize THIO, and to develop, acquire or in-license other products. We may seek to fund our operations through additional public equity, or debt
24
financings, as well as other sources. We cannot make any assurances that additional financings will be available to us and, if available, on acceptable terms or at all. We believe that we currently have sufficient funds to support funding of the THIO-101 lead-in and preliminary efficacy of the phase 2 THIO-101 through the next 12 months from the date of this filing. If the Company is unable to raise the necessary funding, management will undertake cost cutting measures to reduce compensation and reduce the scope of or delay its clinical programs. This could negatively impact the Company’s business and could also lead to the reduction of the Company’s operations.
Cash Flows
Cash Flows nine months ended September 30, 2022 and 2021
|
|
|
|
|
|
|
|
|
|
|
Nine Months Ended September 30, |
|
|
|
|
|
|
|
2022 |
|
|
2021 |
|
Net cash flows used in operating activities |
|
$ |
(9,146,390 |
) |
|
$ |
(2,515,658 |
) |
Net cash flows provided by financing activities |
|
|
12,670,074 |
|
|
|
12,804,705 |
|
Effect of foreign currency exchange rate changes on cash |
|
|
(34,334 |
) |
|
|
— |
|
Net increase in cash and cash equivalents |
|
$ |
3,489,350 |
|
|
$ |
10,289,047 |
|
Operating Activities
For the nine months ended September 30, 2022, net cash used in operating activities was approximately $9,146,000, which consisted of a consolidated net loss of approximately $10,652,000 offset by non-cash charges of approximately $1,831,000 in stock-based compensation. Total changes in operating assets and liabilities of approximately $325,000 were driven by an approximate $412,000 increase in prepaid expense and other assets, and an approximate $230,000 increase in the Australia research and development incentives receivable offset by an increase of approximately $317,000 in other accounts payable and accrued expenses.
For the nine months ended September 30, 2021, net cash used in operating activities was approximately $2,516,000, which consisted of a net loss of approximately $9,685,000 offset by non-cash charges of approximately $6,785,000 which primarily includes approximately $2,109,000 in stock-based compensation, $2,323,000 loss on extinguishment of convertible notes, $203,000 related to the change in fair value of embedded features, $597,000 amortization of debt discount on convertible notes, a changes in the fair value of the warrant liability of approximately $1,546,000, and approximately $7,000 loss on settlement of bonus.. Total changes in operating assets and liabilities of approximately $385,000 were primarily driven by an approximate $345,000 increase in accrued expenses, an approximate increase of $342,000 in accounts payable and an approximate increase in accrued interest of $227,000 offset by and an approximate increase in prepaid expenses and other assets of $522,000 and an approximate decrease in amounts due to related parties of $7,000.
For the nine months ended September 30, 2022 the effect of foreign currency exchange rate changes on cash decreased the cash balance as of September 30, 2022 by approximately $34,000.
Financing Activities
Net cash provided by financing activities was approximately $12,670,000 and $12,805,000 for the nine months ended September 30, 2022 and 2021, respectively. Net cash provided by financing activities for the nine months ended September 30, 2022 consisted primarily of gross proceeds from the sale of common stock in the initial public offering of approximately $11,500,000, net proceeds from issuance of common stock of approximately of $2,474,000 in a crossover round, and proceeds from issuance of common stock upon exercise of warrants of approximately $385,000 and stock options of approximately $66,000 offset by approximately $1,755,000 of the offering costs paid in the nine months ended September 30, 2022. Total Net cash provided by financing activities for nine months ended September 30, 2021 consisted of proceeds from issuance of convertible notes totaling approximately $7,369,000, proceeds for issuance of common stock net of transactions costs totaling approximately $5,366,000, collections of subscriptions receivable of approximately $2,000, proceeds from the paycheck protection program loan totaling approximately $63,000, and proceeds from exercise of stock options of approximately $5,000.
25
Critical Accounting Policies and Significant Judgments and Estimates
Management’s discussion and analysis of our financial condition and results of our operations is based on our consolidated financial statements, which have been prepared in accordance with U.S. GAAP. The preparation of these financial statements requires us to make estimates and assumptions that affect the amounts reported in the financial statements and accompanying notes. The most significant estimates in the Company’s financial statements relate to the valuation of common stock, stock options and warrants, the embedded features in convertible notes, accruals for outsourced research and development activities, and the valuation allowance of deferred tax assets. These estimates and assumptions are based on current facts, historical experience and various other factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results, the Company’s future results of operations will be affected.
We define our critical accounting policies as those accounting principles that require it to make subjective estimates and judgments about matters that are uncertain and are likely to have a material impact on our financial condition and results of operations, as well as the specific manner in which we apply those principles. While our significant accounting policies are more fully described in Note 1 to our financial statements, we believe the following are the critical accounting policies used in the preparation of its financial statements that require significant estimates and judgments.
Fair value of common stock
For all periods prior to the initial public offering, there was no public market for our common stock. The Company sold shares of its common stock to third parties beginning in September 2018 through June 2019 at $1.80 per share. Subsequent to July 2019 the fair value of the shares of common stock underlying our stock-based awards was estimated by our board of directors based in part on valuations until we began selling shares of our common stock to third parties beginning on July 15, 2021 through October 15, 2021 at $8.00 per share and beginning on January 27, 2022 through February 27, 2022 at $9.00 per share. To determine the fair value of our common stock underlying annual option grants to officers and directors, our board of directors considered, among other things, input from management, valuations of our common stock valuation firms in accordance with the guidance provided by the American Institute of Certified Public Accountants 2013 Practice Aid, Valuation of Privately-Held-Company Equity Securities Issued as Compensation, and our board of directors’ assessment of additional objective and subjective factors that it believed were relevant, and factors that may have changed from the date of the most recent valuation through the date of the grant.
These factors included, but were not limited to:
•our results of operations and financial position, including our levels of available capital resources;
•our stage of development and material risks related to our business;
•our business conditions and projections;
•the valuation of publicly traded companies in the life sciences industry sectors, as well as recently completed mergers and acquisitions of peer companies;
•the lack of marketability of our common stock as a private company;
•the likelihood of achieving a liquidity event for our security holders, such as an initial public offering or a sale of our company, given prevailing market conditions;
•the hiring of key personnel and the experience and expertise of management;
•trends and developments in our industry; and
•external market conditions affecting the life sciences industry sectors.
Our valuation as of February 28, 2021 indicated a fair value of our common stock of $1.83 per share. For grants of stock awards and stock option awards during the period February 28, 2021 through July 12, 2021, management set the exercise prices for those awards based on the February 28, 2021 valuation until the Company initiated the sale of common stock at $8.00 per share which was first competed on July 18, 2021 and followed by additional sales through September 26, 2021. The Company set the exercise price of awards granted from July 18, 2021 through October 30, 2021 at $8.00 per share.
In evaluating the fair value of our common stock during the period March 2021 through May 2021, management evaluated events and their potential impact on the estimated fair value per share of the common stock. We
26
considered events during this period which would have an effect on the fair value of our common stock such as milestones related to the clinical development and operations of our drug substances and advances in the production of drug substances and our drug product, however, there were no specific events that would indicate a definitive change in the value of the Company.
Given that there were no specific events that caused the change in fair value of our common stock from the indicated value of $1.83 as of February 28, 2021 to the $8.00 per share realized from the sale of common stock initiated in mid July, we performed a retrospective valuation of our common stock as of April 30, 2021. The retrospective valuation as of April 30, 2021 also indicated a fair value of our common stock of $1.83. In estimating the fair value of stock and stock option awards, we used an estimated fair value of $1.83 for awards granted from February 28, 2021 through May 31, 2021, based on the February 28, 2021 and April 30, 2021 valuations. From June 1, 2021 through October 30, 2021, we used an estimated of fair value of our common stock of $8.00 in valuing our stock and stock option awards. We believe the fair values based on the valuations materially represents the fair value of our common stock during the period February 28, 2021 through May 31, 2021 since no single intervening specific event indicated a definitive change in the value of the Company.
The February 28, 2021 and the April 30, 2021 valuations used the income approach and the market approach in estimating the fair value of our common stock. The market approach utilized guideline public companies in estimating fair value of our stock. The income approach estimates enterprise value based on the estimated present value of future cash flows the business is expected to generate over its remaining life. The estimated present value is calculated using a discount rate reflective of the risks associated with an investment in a similar company in a similar industry or having a similar history of revenue growth. The market approach measures the value of a business through an analysis of recent sales or offerings of comparable investments or assets, and in our case, focused on comparing us to a group of our peer companies. In applying this method, valuation multiples are derived from historical and projected operating data of the peer company group. We then apply the selected multiples to our operating data to arrive at a range of indicated enterprise values of the Company. We then subtracted the net debt to determine equity value.
During November 2021 and December 2021, the fair value of the Company’s common stock was determined to be $8.69 and $8.87, respectively. For our valuations of common stock performed November 2021 and December 2021, we used a hybrid method of the Option Pricing Method ("OPM”) and the Probability-Weighted Expected Return Method ("PWERM”). PWERM considers various potential liquidity outcomes. Our approach included the use of an initial public offering scenario, a scenario assuming continued operation as a private entity, and a dissolution scenario. Under the hybrid OPM and PWERM, the per share value calculated under the OPM and PWERM are weighted based on expected exit outcomes and the quality of the information specific to each allocation methodology to arrive at a final estimated fair value per share of the common stock before a discount for lack of marketability is applied.
In the First Quarter of 2022, the Company made further progress in its clinical programs, which included the approval of THIO by the Bellberry Human Research Ethics Committee (HREC) in Australia to initiate the THIO-101 Phase 2 clinical study. Additionally, the Company completed its selection process for the clinical sites for its Phase 2 study in Australia and Europe and its application to start the Phase 2 study in Australia was approved. The Company also submitted a similar application in the second quarter of 2022, to conduct the same Phase 2 study in Europe.
The events above resulted in the Company being able to complete sales of its common stock to unrelated third-party investors beginning in January 27, 2022, through February 28, 2022, of 263,729 shares of common stock at a price of $9.00 per share resulting in aggregate proceeds of approximately $2.4 million. In May 2022, the Company completed additional sales of its common stock at a price of $9.00 per share resulting in aggregate proceeds of approximately $0.1 million. Due to the lack of any single specific event that would have indicated a definitive change in the value of the Company, the fair value of the Company’s common stock from January 27, 2022 through May 31, 2022, was determined based on sales of the Company’s shares at arm’s length to unrelated third parties at $9.00 per share. The fair value for common stock for June 2022 was determined based on the $5.00 per share for common stock initial public offering price.
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Following the initial public offering, the fair value of our common stock, is based on the closing price of the common stock in the public market.
Stock-based compensation
Our stock-based awards are classified as equity (restricted stock awards, stock options, and warrants). We recognize related stock-based compensation expense based on the grant date fair value of the awards. The fair value of restricted stock awards is based on our common stock price. We estimate the fair value of stock options and warrants using the Black-Scholes-Merton valuation model which requires the use of subjective assumptions that could materially impact the estimation of fair value and related compensation expense to be recognized. One of these assumptions include the expected volatility of our stock price. Developing this assumption requires the use of judgment. The Company lacks company-specific historical and implied volatility information. Therefore, we estimate our expected stock volatility based on the historical volatility of a publicly traded set of peer companies. These estimates are highly subjective and now that the initial public offering is completed these estimates will no longer be necessary since the fair value will be based on the trading value of the Company’s common stock.
Two of the assumptions used in the Black-Scholes-Merton valuation model are historical volatility and fair value of common stock, both of which are subject to uncertainty. Historical volatility is subject to uncertainty due to changes in the market over time. The fair value of our common stock is subject to uncertainty due to the possibility of changes in the results of our clinical trials, which could impact the fair value of our common stock. The total expense related to stock options is material to our financial statements on an annual basis, and significant fluctuations in the volatility assumption or the fair value of our common stock could result in material changes in related compensation expense to be recognized.
Prepaid and Accrued Research and Development Expenses
As part of the process of preparing our consolidated financial statements, we are required to estimate our prepaid and accrued research and development expenses. This process involves reviewing open contracts and purchase orders, communicating with our personnel to identify services that have been performed on our behalf and estimating the level of service performed and the associated cost incurred for the service when we have not yet been invoiced or otherwise notified of the actual cost. We make estimates of our prepaid and accrued research and development expenses as of each balance sheet date in our financial statements based on facts and circumstances known to us at the time. We confirm the accuracy of estimates with the service providers and make adjustments if necessary. Examples of estimated prepaid and accrued research and development expenses include expenses for:
• Clinical Research Organizations (CROs) in connection with clinical studies;
•Investigative sites in connection with clinical studies;
•Vendors in connection with preclinical development activities; and
• Vendors related to product manufacturing, development and distribution of clinical materials.
We base our expenses related to clinical studies on our estimates of the services received and efforts expended pursuant to contracts with multiple CROs that conduct and manage clinical studies on our behalf. The financial terms of these agreements are subject to negotiation, vary from contract to contract and may result in uneven payment flows. The scope of services under these contracts can be modified and some of the agreements may be cancelled by either party upon written notice. There may be instances in which payments made to our vendors will exceed the level of services provided and result in a prepayment of the clinical expense. Payments under some of these contracts depend on factors such as the successful enrollment of subjects and the completion of clinical study milestones. In accruing service fees, we estimate the time period over which services will be performed and the level of effort to be expended in each period. If the actual timing of the performance of services or the level of effort varies from our estimate, we adjust the accrual or prepaid accordingly. Although we do not expect our estimates to be materially different from amounts actually incurred, if our estimates of the status and timing of services performed differ from the actual status and timing of services performed we may report amounts that are too high or too low in any particular period. To date, there have been no material differences between our estimates and the amount actually incurred.
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