Virios Therapeutics(VIRI) - 2021 Q2 - Quarterly Report

PART I — FINANCIAL INFORMATION Item 1. Financial Statements Presents unaudited condensed financial statements for June 30, 2021, and December 31, 2020, covering balance sheets, operations, equity, cash flows, and detailed notes Condensed Balance Sheets Presents the company's financial position, detailing assets, liabilities, and stockholders' equity as of June 30, 2021, and December 31, 2020 | Metric | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :-------------- | :------------------ | | Cash | $21,835,092 | $29,795,366 | | Total current assets | $23,764,782 | $31,472,731 | | Total assets | $23,764,782 | $31,472,731 | | Total current liabilities | $906,257 | $1,531,842 | | Total liabilities | $906,257 | $1,531,842 | | Total stockholders' equity | $22,858,525 | $29,940,889 | | Accumulated deficit | $(35,304,100) | $(27,965,105) | Condensed Statements of Operations Details the company's revenues, expenses, and net loss for the three and six months ended June 30, 2021, and June 30, 2020 | Metric | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Revenue | $— | $— | $— | $— | | Research and development | $3,209,201 | $23,320 | $4,916,159 | $53,859 | | General and administrative expenses | $1,075,256 | $515,060 | $2,425,732 | $867,073 | | Total operating expenses | $4,284,457 | $538,380 | $7,341,891 | $920,932 | | Net loss | $(4,282,962) | $(654,585) | $(7,338,995) | $(1,121,138) | | Basic and diluted net loss per share | $(0.51) | $(0.14) | $(0.88) | $(0.23) | Condensed Statements of Changes in Members' Deficit/Stockholders' Equity Outlines changes in total stockholders' equity, including share-based compensation, warrant exercises, and net loss, for specified periods | Metric | December 31, 2020 | March 31, 2021 | June 30, 2021 | | :-------------------------- | :---------------- | :------------- | :------------ | | Total Stockholders' Equity | $29,940,889 | $27,107,243 | $22,858,525 | | Share-based compensation expense | — | $24,825 | $34,244 | | Exercise of warrants | — | $197,562 | — | | Net loss | — | $(3,056,033) | $(4,282,962) | Condensed Statements of Cash Flows Summarizes cash inflows and outflows from operating, investing, and financing activities for the six months ended June 30, 2021, and June 30, 2020 | Metric | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--------------------------------------- | :----------------------------- | :----------------------------- | | Net loss | $(7,338,995) | $(1,121,138) | | Net cash used in operating activities | $(7,862,670) | $(1,049,944) | | Net cash (used in) provided by financing activities | $(97,604) | $1,789,052 | | Net (decrease) increase in cash | $(7,960,274) | $739,108 | | Cash, end of period | $21,835,092 | $1,048,492 | Notes to Condensed Financial Statements Provides detailed explanations of the company's accounting policies, organization, and specific financial statement line items 1. Organization and Nature of Business Virios Therapeutics, Inc., incorporated in December 2020, is a pre-revenue, clinical-stage biotech company developing IMC-1 for fibromyalgia - Company incorporated as Virios Therapeutics, Inc. on December 16, 2020, via corporate conversion from Virios Therapeutics, LLC[21][23] - Operates as a pre-revenue, clinical-stage biotechnology company developing IMC-1 for fibromyalgia (FM)[22] - IMC-1 is a novel, proprietary, fixed dose combination of famciclovir and celecoxib, designed to inhibit HSV-1 activation and replication[22] 2. Summary of Significant Accounting Policies Unaudited interim financial statements are prepared per SEC rules, with the company electing extended transition for new accounting standards as an emerging growth company - Unaudited interim financial statements prepared per SEC rules, not full U.S. GAAP[28] - Company is an "emerging growth company" and uses the extended transition period for new accounting standards[34] - Management makes estimates and assumptions affecting reported amounts, including for contract manufacturers, equity valuation, and deferred taxes[29] 3. Prepaid Expenses and Other Current Assets Prepaid expenses and other current assets increased to $1.93 million at June 30, 2021, from $1.68 million at December 31, 2020, primarily due to a significant increase in prepaid clinical research costs | Item | June 30, 2021 | December 31, 2020 | | :------------------------------ | :-------------- | :------------------ | | Prepaid insurance | $807,133 | $1,586,042 | | Prepaid clinical research costs | $1,084,942 | $85,270 | | Prepaid services | $36,858 | $5,729 | | Other miscellaneous current assets | $757 | $324 | | Total | $1,929,690 | $1,677,365 | 4. License Agreement The company holds a Know-How License Agreement with the University of Alabama, effective for 25 years until June 1, 2037, in exchange for a 10% membership interest - License Agreement with the University of Alabama (UA) since 2012[39] - UA received a 10% non-voting membership interest, which converted to a voting interest in May 2020[39] - Agreement is in effect for 25 years, terminating on June 1, 2037[39] 5. Accrued Expenses Accrued expenses decreased to $643,667 at June 30, 2021, from $784,104 at December 31, 2020, mainly due to a reduction in accrued compensation, partially offset by increases in professional fees and director fees | Item | June 30, 2021 | December 31, 2020 | | :-------------------------------- | :-------------- | :------------------ | | Accrued compensation | $345,312 | $573,479 | | Accrued interest on preferred members' interests | $188,085 | $188,085 | | Accrued professional fees | $64,220 | $8,992 | | Accrued director fees | $31,000 | $— | | Other | $15,050 | $13,548 | | Total | $643,667 | $784,104 | 6. Convertible Promissory Notes, Net All $6.7 million convertible promissory notes outstanding as of June 30, 2020, converted to equity by December 2020, eliminating related debt - Convertible promissory notes totaling $6,706,633 were outstanding as of June 30, 2020[41] - All notes converted into membership interests prior to or during the Corporate Conversion[42] - No interest expense related to these notes was recognized for the three and six months ended June 30, 2021[43] 7. Members' Deficit The company's membership structure changed on May 1, 2020, consolidating to one class of voting membership interests, which subsequently converted into common stock during the Corporate Conversion - Second Amended and Restated Operating Agreement adopted May 1, 2020, changing membership to one class of voting interests[44] - All outstanding membership interests converted into shares of common stock during the Corporate Conversion[45] 8. Stockholders' Equity The company's certificate of incorporation, adopted December 16, 2020, authorizes 43 million shares of common stock and 2 million shares of preferred stock, each with a par value of $0.0001 - Authorized 43,000,000 shares of common stock and 2,000,000 shares of preferred stock[46] - Par value for both common and preferred stock is $0.0001 per share[46] 9. Related Parties The company contracts Gendreau Consulting, LLC for drug development, with its managing member becoming CMO in January 2021 - Contracts Gendreau Consulting, LLC for drug development and clinical trials[47] - Managing member of Gendreau Consulting became the company's Chief Medical Officer (CMO) on January 1, 2021[47] | Period | Payments to Gendreau Consulting, LLC | | :-------------------------------- | :----------------------------------- | | Three months ended June 30, 2021 | $77,816 | | Six months ended June 30, 2021 | $142,282 | 10. Commitments and Contingencies No material legal actions were pending as of June 30, 2021, though an employment agreement includes potential bonuses and change of control payments - No pending material legal actions as of June 30, 2021[48] - Employment agreement with Director of Clinical Operations includes potential cash bonus (target 20% of base salary) and change of control payment (50% of base salary + 50% of bonus)[49] 11. Share-based compensation The 2020 Equity Incentive Plan, effective at IPO, had 230,603 shares available for grants; share-based compensation expense was $59,069 for the six months ended June 30, 2021 - 2020 Equity Incentive Plan effective December 21, 2020 (IPO closing)[50] - 230,603 shares available for future grants as of June 30, 2021[50] | Metric | Six Months Ended June 30, 2021 | | :-------------------------------- | :----------------------------- | | Share-based compensation expense | $59,069 | | Unrecognized compensation expense | $1,091,215 | | Options granted | 299,984 | | Average exercise price of granted options | $6.85 | | Aggregate grant date fair value of options | $1,150,284 | 12. Income Taxes Subject to federal and state income taxes since December 2020, the company maintains a full valuation allowance on its net deferred tax asset due to cumulative losses - Subject to U.S. federal and state income taxes since Corporate Conversion in December 2020[55] - Maintains a full valuation allowance on its U.S. federal and state net deferred tax asset due to cumulative pre-tax losses and projected losses[56] - Had U.S. federal and state NOL carryforwards of approximately $2,316,000 as of December 31, 2020, with an indefinite carryforward[55] Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations Management discusses financial condition and results, noting increased operating expenses from R&D for IMC-1, liquidity, capital resources, and emerging growth company status Cautionary Note Regarding Forward-Looking Statements This section warns that the report contains forward-looking statements subject to risks and uncertainties, where actual results may differ materially - This report contains forward-looking statements subject to substantial risks and uncertainties, and actual results may differ materially[59] - Statements are based on a combination of facts and factors currently known and expectations of the future, about which the company cannot be certain[59] - Forward-looking statements include business strategies, regulatory approval, clinical trial timing/costs, reliance on third parties, competitive position, market assumptions, intellectual property, financial condition, liquidity, and financing plans[60] Overview Virios Therapeutics is a development-stage biotech company focused on advancing IMC-1, a novel antiviral therapy for fibromyalgia, currently in Phase 2b clinical trials - Virios Therapeutics is a development-stage biotechnology company focused on advancing novel antiviral therapies to treat diseases associated with a viral triggered abnormal immune response, such as fibromyalgia (FM)[62] - The lead product, IMC-1, is a novel, proprietary, fixed dose combination of famciclovir and celecoxib, designed to synergistically suppress HSV-1 activation and replication[62][63] - IMC-1 has been designated for fast-track review status by the FDA for FM and granted a synergy patent[63] - The company announced the dosing of its first patient in its Phase 2b clinical trial (FORTRESS study) in FM in June 2021, with top-line results projected for mid-2022[64] Results of Operations Operating expenses significantly increased for the three and six months ended June 30, 2021, driven by higher R&D costs for clinical trials and increased general and administrative expenses | Operating Expenses | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :------------------------------- | :------------------------------- | :----------------------------- | :----------------------------- | | Research and development | $3,209,201 | $23,320 | $4,916,159 | $53,859 | | General and administrative | $1,075,256 | $515,060 | $2,425,732 | $867,073 | | Total operating expenses | $4,284,457 | $538,380 | $7,341,891 | $920,932 | Research and Development Expenses Details the significant increase in R&D expenses for the three and six months ended June 30, 2021, primarily due to clinical trials and toxicology studies - Research and development expenses increased by $3.2 million for the three months ended June 30, 2021, and $4.9 million for the six months ended June 30, 2021, compared to prior year periods[67] - Increases were primarily due to expenses for clinical trials ($1.8M for 3 months, $2.6M for 6 months), toxicology studies ($0.8M for 3 months, $1.2M for 6 months), salaries and related costs, and drug development and manufacturing costs[67] General and Administrative Expenses Explains the increase in general and administrative expenses for the three and six months ended June 30, 2021, due to public company costs - General and administrative expenses increased by $0.6 million for the three months ended June 30, 2021, and $1.6 million for the six months ended June 30, 2021, compared to prior year periods[68] - The increase was due to costs associated with being a public company, including legal and accounting fees ($0.3M for 6 months) and salaries, benefits, and compensation costs ($0.1M for 6 months)[68] Liquidity and Capital Resources Operations are funded by equity and debt, with no product revenues; $21.8 million cash as of June 30, 2021, is expected to fund operations through 2022, but additional capital is needed - Since inception, operations have been financed through public offerings of common stock and private placements of membership interests and convertible promissory notes, with no revenues from product sales to date[69] - Principal source of liquidity as of June 30, 2021, was cash totaling $21.8 million[69] - Current cash is estimated to be sufficient to fund operations and capital requirements through the end of 2022, including the completion of the Phase 2b clinical trial for IMC-1 and planning for Phase 3[74] Equity Financings Details the company's Initial Public Offering (IPO) on December 21, 2020, which raised $34.5 million in gross proceeds - Closed Initial Public Offering (IPO) on December 21, 2020[71] - Raised gross proceeds of $34.5 million and net proceeds of approximately $31.1 million after deducting underwriting discounts, commissions, and offering expenses[71] Debt Financings Describes the $2.0 million convertible promissory notes issued in 2020, which converted to common interests, leaving no outstanding debt - Issued an aggregate of $2.0 million principal amount of convertible promissory notes in 2020[73] - These notes converted to common interests at the Corporate Conversion, resulting in no debt outstanding for the year ended December 31, 2020[73] Future Capital Requirements Outlines the need for additional capital beyond current cash to complete clinical development and commercialize product candidates, with no committed external funding - Current cash of $21.8 million at June 30, 2021, is estimated to fund operations and capital requirements through the end of 2022[74] - Additional capital will be needed to complete clinical development and commercially develop product candidates[75] - There are no committed external sources of funds, and additional financing may not be available on acceptable terms[75] Summary of Cash Flows Summarizes cash flow activities, noting a net decrease in cash for the six months ended June 30, 2021, primarily from operating activities | Cash Flow Activity | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :-------------------------------- | :----------------------------- | :----------------------------- | | Operating activities | $(7,862,670) | $(1,049,944) | | Financing activities | $(97,604) | $1,789,052 | | Net (decrease) increase in cash | $(7,960,274) | $739,108 | - Net cash used in operating activities for the six months ended June 30, 2021, was $7.9 million, primarily due to the net loss of $7.3 million and changes in operating assets and liabilities[77] - Net cash used by financing activities for the six months ended June 30, 2021, was $0.1 million, attributable to proceeds from warrant exercises ($0.2M) offset by IPO offering costs ($0.3M)[79] Off-Balance Sheet Arrangements Confirms the absence of any off-balance sheet arrangements or relationships with unconsolidated entities as of June 30, 2021 - As of June 30, 2021, the company did not have any off-balance sheet arrangements or relationships with unconsolidated entities or financial partnerships[81] JOBS Act The company, as an "emerging growth company," utilizes the extended transition period for new accounting standards and is exempt from certain reporting requirements - The company is an "emerging growth company" as defined in the Jumpstart Our Business Startups Act of 2012 (JOBS Act)[82] - The company has elected to use the extended transition period for complying with new or revised accounting standards[82] - As an emerging growth company, the company is exempt from certain reporting requirements, including providing an auditor's attestation report on internal controls over financial reporting (Section 404)[83] Item 3. Quantitative and Qualitative Disclosures about Market Risk This item is not required for smaller reporting companies, and therefore, no disclosures regarding quantitative and qualitative market risk are provided - This item is not required for smaller reporting companies[84] Item 4. Controls and Procedures Management concluded disclosure controls were ineffective as of June 30, 2021, due to a material weakness in internal control over financial reporting, with remediation efforts ongoing - Management concluded that disclosure controls and procedures were not effective at a reasonable assurance level as of June 30, 2021[87] - A material weakness in internal control over financial reporting exists due to ineffective segregation of duties, financial statement reporting, and general technology controls, primarily due to the size of the organization[88] - Remediation steps include contracting third-party controller assistance, adding mitigating controls for cash disbursements, and adopting a Delegation of Authority Policy to improve segregation of duties[89] PART II — OTHER INFORMATION Item 1. Legal Proceedings The company is not currently involved in any material pending litigation as of June 30, 2021, though it may face claims in the ordinary course of business - No material pending litigation to which the company is a party or its property is subject as of June 30, 2021[93] Item 1A. Risk Factors This item is not required for smaller reporting companies, and therefore, no specific risk factors are disclosed in this section - This item is not required for smaller reporting companies[94] Item 2. Unregistered Sales of Equity Securities and Use of Proceeds There were no unregistered sales of equity securities or use of proceeds to report for the period - None to report for unregistered sales of equity securities and use of proceeds[95] Item 3. Defaults Upon Senior Securities There were no defaults upon senior securities to report for the period - None to report for defaults upon senior securities[96] Item 4. Mine Safety Disclosures This item is not applicable to the company's operations - Not applicable to the company[97] Item 5. Other Information There is no other information to report for the period - None to report for other information[98] Item 6. Exhibits Lists exhibits filed with Form 10-Q, including corporate documents, certifications (302 and 906), and XBRL documents - Includes Certificate of Incorporation, Bylaws, and Specimen Certificate evidencing shares of common stock[102] - Includes Certification of Chief Executive Officer and Chief Financial Officer pursuant to Section 302 and Section 906 of the Sarbanes-Oxley Act of 2002[102] - Includes XBRL Instance Document, Taxonomy Extension Schema, Calculation Linkbase, Definition Linkbase, Label Linkbase, Presentation Linkbase Documents, and Cover Page Interactive Data File[102] Signatures The report is signed by Greg Duncan, Chairman and CEO, and Angela Walsh, SVP of Finance, on August 13, 2021 - Report signed by Greg Duncan (Chairman of the Board of Directors and Chief Executive Officer) and Angela Walsh (SVP of Finance, Corporate Secretary and Treasurer)[105] - Date of signature: August 13, 2021[105]