Acurx Pharmaceuticals(ACXP) - 2021 Q2 - Quarterly Report

FORM 10-Q / Company Information This section provides essential registration details for Acurx Pharmaceuticals, Inc., including its filing status and common stock outstanding Registrant Information Acurx Pharmaceuticals, Inc., a Delaware corporation, filed its 10-Q quarterly report for the period ended June 30, 2021, identifying as a non-accelerated filer, smaller reporting company, and emerging growth company, with 10,119,208 shares of common stock outstanding as of August 13, 2021 - The company filed its Form 10-Q quarterly report for the period ended June 30, 2021[2] - The company is identified as a non-accelerated filer, a smaller reporting company, and an emerging growth company[3] Common Stock Issuance | Indicator | Quantity | | :--- | :--- | | Common stock issued and outstanding as of August 13, 2021 | 10,119,208 shares | Table of Contents This section lists all chapters and sub-sections of the quarterly report, facilitating efficient navigation SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS This section disclaims forward-looking statements, noting inherent risks and uncertainties that may cause actual results to differ Forward-Looking Statements Disclaimer This quarterly report contains forward-looking statements based on current expectations and projections, subject to risks and uncertainties that may cause actual results to differ materially, with no obligation for the company to update them - This quarterly report contains forward-looking statements based on current expectations and projections, which are subject to risks, uncertainties, and assumptions that could cause actual results to differ materially from expectations[6][7] - The company cautions investors not to place undue reliance on these forward-looking statements and disclaims any obligation to update them after the report date[8] - Risk factors for forward-looking statements include macroeconomic and financial conditions, adverse effects of the COVID-19 pandemic, costs of being a public company, technological advancements, marketing activities, IT system disruptions or breaches, reliance on third parties, compliance with health and safety laws, intellectual property protection, litigation risks, product shortages, ability to attract key employees, and common stock price volatility[7] PART I - FINANCIAL INFORMATION This part presents the company's unaudited condensed interim financial statements and notes, detailing financial position, operations, equity, and cash flows ITEM 1. FINANCIAL STATEMENTS This section presents the company's unaudited condensed interim financial statements and explanatory notes, covering balance sheets, operations, equity, and cash flows Condensed Interim Balance Sheets As of June 30, 2021, the company's cash and total assets significantly increased from December 31, 2020, primarily due to its initial public offering, leading to a substantial rise in total shareholders' equity Key Data from Condensed Interim Balance Sheets | Indicator | June 30, 2021 (Unaudited) | December 31, 2020 | | :--- | :----------------------- | :--------------- | | Cash | $17,095,596 | $3,175,411 | | Prepaid expenses | $344,549 | $48,609 | | Total assets | $17,440,145 | $3,224,020 | | Accounts payable and accrued expenses | $1,918,639 | $455,931 | | Paycheck Protection Program loan | $0 | $66,503 | | Total liabilities | $1,918,639 | $522,434 | | Total shareholders' equity | $15,521,506 | $2,701,586 | Condensed Interim Statements of Operations For the three and six months ended June 30, 2021, the company's net loss significantly increased year-over-year, primarily driven by a substantial rise in selling, general, and administrative expenses, partially offset by reduced R&D expenses and PPP loan forgiveness income Condensed Interim Statements of Operations (Three Months) | Indicator | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Change (%) | | :--- | :--------------------- | :--------------------- | :----- | | Research and development expenses | $95,074 | $400,738 | -76% | | Selling, general and administrative expenses | $3,975,488 | $512,622 | 677% | | Total operating expenses | $4,070,562 | $913,360 | 346% | | Paycheck Protection Program loan forgiveness income | $66,503 | $0 | 100% | | Net loss | $(4,004,059) | $(913,360) | 339% | | Basic and diluted net loss per share | $(0.57) | $(0.15) | 280% | Condensed Interim Statements of Operations (Six Months) | Indicator | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | Change (%) | | :--- | :--------------------- | :--------------------- | :----- | | Research and development expenses | $186,981 | $1,085,469 | -83% | | Selling, general and administrative expenses | $5,357,911 | $1,106,992 | 384% | | Total operating expenses | $5,544,892 | $2,192,461 | 153% | | Paycheck Protection Program loan forgiveness income | $66,503 | $0 | 100% | | Net loss | $(5,478,389) | $(2,192,461) | 150% | | Basic and diluted net loss per share | $(0.79) | $(0.37) | 114% | Condensed Interim Statements of Changes in Members' and Shareholders' Equity This statement details equity changes, particularly the company's conversion from an LLC to a corporation in June 2021, involving the conversion of Class A and B member interests into common stock and the impact of the initial public offering - The company completed its corporate conversion on June 23, 2021, transitioning from a Delaware limited liability company to a Delaware corporation[60] - 14,082,318 Class A and Class B member interests were converted into 7,041,208 shares of common stock at a 1:2 ratio[61] - The initial public offering was completed on June 29, 2021, issuing 2,875,000 shares of common stock at $6.00 per share, generating net proceeds of approximately $14.8 million[61] Condensed Interim Statements of Cash Flows For the six months ended June 30, 2021, cash outflow from operating activities decreased, while cash inflow from financing activities significantly increased due to the initial public offering, leading to a substantial rise in the period-end cash balance Key Data from Condensed Interim Statements of Cash Flows | Indicator | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--------------------- | :--------------------- | | Net cash used in operating activities | $(876,947) | $(1,633,046) | | Net cash provided by financing activities | $14,797,132 | $1,124,163 | | Net increase (decrease) in cash | $13,920,185 | $(508,883) | | Cash at end of period | $17,095,596 | $1,974,439 | - Net cash provided by financing activities significantly increased in the first half of 2021, primarily attributable to the net proceeds from the company's initial public offering[113] Notes to the Condensed Interim Financial Statements This section provides detailed explanations of the company's financial statements, covering business nature, accounting policies, key accounts, equity, compensation, and other disclosures NOTE 1 – NATURE OF OPERATIONS Acurx Pharmaceuticals, Inc. is a clinical-stage biopharmaceutical company focused on developing novel antibiotics for Gram-positive bacterial infections by blocking the DNA polymerase IIIC (Pol IIIC) enzyme, has incurred losses since inception, and requires additional funding despite a recent IPO - Acurx Pharmaceuticals is a clinical-stage biopharmaceutical company focused on developing novel antibiotics for difficult-to-treat bacterial infections by developing antibiotic candidates that may block the DNA polymerase IIIC (Pol IIIC) enzyme[24][87] - The company's lead antibiotic candidate, ibezapolstat (formerly ACX-362E), is designed to treat Clostridioides difficile infection (CDI)[26] - The company has not generated any revenue since inception and has incurred recurring net losses and negative cash flows from operations, which are expected to continue for the foreseeable future[27][28] - The company completed its initial public offering on June 29, 2021, issuing 2,875,000 shares of common stock at $6.00 per share for gross proceeds of approximately $17.3 million, with a cash balance of approximately $17.1 million as of June 30, 2021[28] NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES This note outlines the company's significant accounting policies, including financial statement preparation under U.S. GAAP and SEC rules, use of accounting estimates, 0% effective federal income tax rate due to losses, concentration of credit risk, expensing of R&D costs, and share-based compensation recognition - Financial statements are prepared in accordance with U.S. Generally Accepted Accounting Principles (U.S. GAAP) and the rules and regulations of the U.S. Securities and Exchange Commission (SEC) for interim reporting[31] - The company estimates an annual effective tax rate of 0% due to incurring losses for the six months ended June 30, 2021, and expecting to continue to incur losses for the full year, resulting in an estimated net loss for both financial statement and tax purposes, thus no current federal or state income tax expense is recorded[33] - Research and development expenses are expensed as incurred[39] - The company accounts for the cost of services received from executives and directors in exchange for grants of company member interests, common stock, or stock options based on the fair value of the award at the grant date, recognizing compensation expense over the vesting period[40] - The company maintains its cash balances at one financial institution, holding $17.1 million in a U.S. bank account as of June 30, 2021, which is not fully insured by the FDIC[35] NOTE 3 - ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accrued professional fees significantly increased as of June 30, 2021, compared to December 31, 2020, primarily driving the overall growth in accounts payable and accrued expenses Accounts Payable and Accrued Expenses Details | Category | June 30, 2021 | December 31, 2020 | | :--- | :------------ | :--------------- | | Accrued compensation expense | $20,242 | $317,068 | | Accrued research and development expenses | $51,246 | $89,156 | | Accrued professional fees | $1,750,146 | $49,707 | | Other accounts payable and accrued expenses | $97,005 | $0 | | Total | $1,918,639 | $455,931 | NOTE 4 – PAYCHECK PROTECTION PROGRAM LOAN The company received a $66,503 Paycheck Protection Program (PPP) loan in May 2020, which was fully forgiven in May 2021, resulting in the recognition of debt forgiveness income in the statements of operations - The company received a $66,503 Paycheck Protection Program (PPP) loan in May 2020[48] - The PPP loan was fully forgiven in May 2021, leading the company to reduce the liability and record debt forgiveness income in the statements of operations[48] NOTE 5 – EXECUTIVE COMPENSATION Executive compensation involved Class A member interests and later stock options, with 770,000 common stock options granted to management in June 2021 replacing previously canceled Class B interests, and new executive employment agreements effective June 29, 2021 - In January 2021, the company issued 57,430 Class A member interests to two executives to settle unpaid year-end bonuses and deferred compensation[51] - In March 2021, the company and three executives and non-employee management team members voluntarily agreed to cancel previously approved Class B member interest grants[52] - In June 2021, the company granted 770,000 options to purchase common stock to three management team members in lieu of the previously canceled year-end grants[52] - The company is currently managed by three executives, with new employment agreements effective June 29, 2021[53] NOTE 6 – ISSUANCE OF EQUITY INTERESTS This note details multiple private equity issuances of Class A member interests and warrants from 2018 to 2020, the June 2021 corporate conversion of LLC interests into common stock, and the subsequent initial public offering - The company conducted multiple private equity issuances of Class A member interests and warrants between 2018 and 2020[54][56][57][58][59][60] - On June 23, 2021, Acurx Pharmaceuticals, LLC converted to Acurx Pharmaceuticals, Inc., authorizing 200 million shares of common stock, with 9,916,208 shares issued as of June 30, 2021[60] - On June 29, 2021, the company completed its initial public offering, issuing 2,875,000 shares of common stock at $6.00 per share, generating net proceeds of approximately $14.8 million[61] - Issued Class A and Class B member interests (totaling 14,082,318 units) were converted into 7,041,208 shares of common stock at a 1:2 ratio[61] NOTE 7 – SHARE-BASED COMPENSATION Share-based compensation expense significantly increased for the three and six months ended June 30, 2021, primarily due to accelerated vesting of member interests during the corporate conversion and new stock option grants under the 2021 Equity Incentive Plan Share-Based Compensation Expense | Indicator | Three Months Ended June 30, 2021 | Three Months Ended June 30, 2020 | Six Months Ended June 30, 2021 | Six Months Ended June 30, 2020 | | :--- | :--------------------- | :--------------------- | :--------------------- | :--------------------- | | Total share-based compensation expense | $563,889 | $166,666 | $755,556 | $333,333 | - All restricted Class A member interests fully vested upon corporate conversion, leading to the recognition of previously unrecognized compensation expense[64] - The 2021 Equity Incentive Plan was approved, reserving 2,000,000 shares of common stock[66] - In June 2021, the company granted 807,500 stock options in lieu of the Class B member interests canceled in March 2021, resulting in $1,655,885 of general and administrative expense recognized for the three and six months ended June 30, 2021[67] NOTE 8 – SHARE-BASED PAYMENTS TO VENDORS The company granted Class A member interests and warrants to vendors for consulting services, and in Q2 2021, entered new agreements to grant common stock and options, alongside cash payments, for future services - The company granted Class A member interests to vendors in exchange for consulting services, expensing them based on fair value[72] - In the second quarter of 2021, the company entered into several agreements with vendors to grant a total of 175,000 shares of common stock and 100,000 options, along with $343,500 in cash, for future services[75] NOTE 9 – NET LOSS PER SHARE Basic and diluted net loss per share for the three and six months ended June 30, 2021, is calculated by dividing net loss by the weighted-average common shares outstanding, with potentially dilutive shares excluded due to their anti-dilutive effect - The company's potentially dilutive shares (including 75,000 unvested common shares, 1,588,477 warrants, and 807,500 stock options) were excluded from the diluted net loss per share calculation because their effect would be anti-dilutive[78] - The impact of the corporate conversion on weighted-average common shares outstanding and net loss per share has been retroactively reflected for all periods presented[78] NOTE 10 – RELATED PARTY TRANSACTIONS In 2020, the company engaged a board member for 12 months of administrative services totaling $15,000, with $7,500 to be expensed in 2021 - In 2020, the company engaged a board member for 12 months of administrative services totaling $15,000; as of June 30, 2021, $0 has been paid and expensed, with the remaining $7,500 to be expensed in 2021 as services are provided per the agreement[79] NOTE 11 – RECENT ACCOUNTING PRONOUNCEMENTS The company assessed ASU No. 2016-02, "Leases (Topic 842)," effective after December 15, 2021, and determined it will not impact its financial statements as the company currently has no lease obligations - The company evaluated the adoption of ASU No. 2016-02, "Leases (Topic 842)," and determined it will not have an impact on its financial statements as the company currently has no lease obligations[81] NOTE 12 – COMMITMENTS AND CONTINGENCIES Upon acquiring ACX-362E assets, the company incurred $700,000 in milestone payment obligations (with $50,000 already paid) and a 4% royalty payment obligation on net sales of ACX-362E - Upon acquiring assets in February 2018, the company is obligated to pay a total of $700,000 in milestone payments (of which $50,000 has been paid) and a 4% royalty on net sales of ACX-362E[82] NOTE 13 – SUBSEQUENT EVENTS In July 2021, the company granted a total of 1,200,000 stock options to three executives and 50,000 stock options to each of five independent directors, all with a 36-month vesting period, under employment agreements - In July 2021, the company granted a total of 1,200,000 stock options to three executives and 50,000 stock options to each of five independent directors, all with a 36-month vesting period, under employment agreements[83] ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS This section discusses the company's financial condition and operating performance, covering business overview, recent developments, operational results, liquidity, and key accounting policies Overview Acurx Pharmaceuticals is a clinical-stage biopharmaceutical company developing novel antibiotics for Gram-positive bacterial infections, targeting WHO, CDC, and FDA priority pathogens by blocking the DNA polymerase IIIC (Pol IIIC) enzyme, with ibezapolstat as its lead candidate for CDI - Acurx Pharmaceuticals is a clinical-stage biopharmaceutical company dedicated to developing novel antibiotics for bacterial infections listed as priority pathogens by the World Health Organization (WHO), the U.S. Centers for Disease Control and Prevention (CDC), and the U.S. Food and Drug Administration (FDA)[86] - The company's approach involves developing antibiotic candidates that block DNA polymerase IIIC (Pol IIIC), believing it is developing the first Pol IIIC inhibitor to enter clinical trials[87][88] - The company's pipeline includes ibezapolstat, its lead antibiotic candidate for Clostridioides difficile (C. difficile) infection[87] Recent Developments This section outlines key recent developments, including the completion of the initial public offering and its intended use of proceeds, as well as the impact of the COVID-19 pandemic on clinical trial enrollment and the forgiveness of the PPP loan Initial Public Offering The company completed its initial public offering on June 29, 2021, issuing 2,875,000 common shares at $6.00 per share, generating $14.8 million in net proceeds, earmarked for ibezapolstat's Phase 2b clinical trial, ACX-375C preclinical development, and general corporate purposes - The company completed its initial public offering on June 29, 2021, issuing 2,875,000 shares of common stock at $6.00 per share, generating net proceeds of $14.8 million[90] - Proceeds from the IPO will be used to: (i) complete the Phase 2b clinical trial of ibezapolstat in CDI patients (approximately $4 million), (ii) complete preclinical development of ACX-375C, and (iii) for general corporate purposes[90] - Prior to the IPO, the company converted from a Delaware limited liability company to a Delaware corporation, converting 14,082,318 Class A and Class B member interests into 7,041,208 shares of common stock[90] Effects of Coronavirus (COVID-19) on Our Business The COVID-19 pandemic significantly reduced patient enrollment for ibezapolstat's Phase 2a clinical trial, though manufacturing and R&D with key suppliers remained unaffected, and the company's PPP loan was forgiven, with long-term impacts on operations and financial results remaining uncertain - The COVID-19 pandemic led to a significant decrease in patient enrollment rates for the company's Phase 2a clinical trial of ibezapolstat at certain clinical trial sites[92] - The company's manufacturing and research and development activities with key suppliers were not impacted by the COVID-19 pandemic[92] - The company received a $66,503 Paycheck Protection Program loan in May 2020, which was fully forgiven in April 2021[94] Results of Operations This section analyzes the company's operating results for the three and six months ended June 30, 2021, showing a significant increase in net loss compared to the prior year, primarily due to higher selling, general, and administrative expenses, partially offset by reduced R&D and PPP loan forgiveness Three Months Ended June 30, 2021 Compared to the Three Months Ended June 30, 2020 For the three months ended June 30, 2021, net loss increased to $4 million from $0.9 million in the prior year, mainly due to a 677% rise in selling, general, and administrative expenses, partially offset by a 76% decrease in R&D expenses and PPP loan forgiveness income Summary of Operating Results (Three Months) | Indicator | Three Months Ended June 30, 2021 (in thousands) | Three Months Ended June 30, 2020 (in thousands) | Change (%) | | :--- | :------------------------------- | :------------------------------- | :-------- | | Research and development expenses | 95 | 401 | (76)% | | Selling, general and administrative expenses | 3,976 | 512 | 677% | | Total operating expenses | 4,071 | 913 | 346% | | Paycheck Protection Program loan forgiveness income | 67 | — | 100% | | Net loss | 4,004 | 913 | 339% | - Selling, general, and administrative expenses increased by $3.4 million, primarily due to a $0.4 million increase in share-based director fees, a $1.7 million increase in share-based compensation expense, a $1.2 million increase in professional fees, and a $0.1 million increase in other employee-related expenses[99] - Research and development expenses decreased by $0.3 million, mainly due to a $0.2 million reduction in Phase 2a clinical trial-related costs (completed in 2020) and a $0.1 million decrease in consulting fees[98] Six Months Ended June 30, 2021 Compared to the Six Months Ended June 30, 2020 For the six months ended June 30, 2021, net loss increased to $5.5 million from $2.2 million in the prior year, primarily due to a 384% rise in selling, general, and administrative expenses, partially offset by an 83% decrease in R&D expenses and PPP loan forgiveness income Summary of Operating Results (Six Months) | Indicator | Six Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | Change (%) | | :--- | :------------------------------- | :------------------------------- | :-------- | | Research and development expenses | 187 | 1,085 | (83)% | | Selling, general and administrative expenses | 5,358 | 1,107 | 384% | | Total operating expenses | 5,545 | 2,192 | 153% | | Paycheck Protection Program loan forgiveness income | 67 | — | 100% | | Net loss | 5,478 | 2,192 | 150% | - Selling, general, and administrative expenses increased by $4.3 million, primarily attributable to a $2.4 million increase in share-based compensation expense, a $1.4 million increase in professional fees, and a $0.5 million increase in share-based director fees[104] - Research and development expenses decreased by $0.9 million, mainly due to a $0.3 million reduction in Phase 2a clinical trial-related costs (completed in 2020) and a $0.6 million decrease in consulting fees[104] Liquidity and Capital Resources This section discusses the company's liquidity and capital resources, noting no revenue generation since inception, accumulated losses of $19.3 million, and funding primarily through equity issuances, including $14.8 million net proceeds from its IPO, with management expressing substantial doubt about its ability to continue as a going concern without additional funding Overview_Liquidity The company has generated no operating revenue since inception, accumulating approximately $19.3 million in losses as of June 30, 2021, funding operations primarily through equity issuances, including $14.8 million net proceeds from its June 2021 IPO, leading management to express substantial doubt about its ability to continue as a going concern without additional funding - The company has not generated operating revenue since inception, incurring accumulated losses of approximately $19.3 million as of June 30, 2021[106] - The company completed its initial public offering on June 29, 2021, generating net proceeds of approximately $14.8 million[106] - Management believes there is substantial doubt about the company's ability to continue as a going concern for one year from the financial statement issuance date due to uncertainties regarding future financing[107] - As of June 30, 2021, the company had working capital of $15.5 million, primarily comprising $17.1 million in cash, offset by $1.9 million in accounts payable and accrued expenses[108] Net Cash Used in Operating Activities For the six months ended June 30, 2021, net cash used in operating activities decreased to $0.9 million from $1.6 million in the prior year, with 2021 outflows primarily influenced by increased share-based compensation and accounts payable, partially offset by higher prepaid expenses Net Cash Used in Operating Activities | Indicator | Six Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | | :--- | :------------------------------- | :------------------------------- | | Net cash used in operating activities | (877) | (1,633) | - In the first half of 2021, net cash used in operating activities was $0.9 million, with net loss exceeding cash used in operations by $4.6 million, primarily attributable to $3.4 million in share-based compensation and a $1.5 million increase in accounts payable, partially offset by a $0.3 million increase in prepaid expenses[112] Net Cash Used in Financing Activities For the six months ended June 30, 2021, net cash provided by financing activities significantly increased to $14.8 million, primarily driven by net proceeds from the initial public offering, compared to $1.1 million in the prior year from private placements Net Cash Provided by Financing Activities | Indicator | Six Months Ended June 30, 2021 (in thousands) | Six Months Ended June 30, 2020 (in thousands) | | :--- | :------------------------------- | :------------------------------- | | Net cash provided by financing activities | 14,797 | 1,124 | - The significant increase in net cash provided by financing activities in the first half of 2021 is primarily attributable to the net proceeds from the company's initial public offering[113] Critical Accounting Policies and Estimates This section reiterates the company's critical accounting policies and estimates, including a 0% effective federal income tax rate with a full valuation allowance, concentration of credit risk, expensing of R&D costs, share-based compensation, share-based payments to vendors, foreign currency transactions, and reliance on a major CRO supplier - The company estimates an annual effective tax rate of 0% and maintains a full valuation allowance against all deferred tax assets[116] - Research and development expenses are expensed as incurred[121] - Share-based compensation and share-based payments to vendors are accounted for based on the fair value at the grant date or the fair value of services received[122][123] - In 2020, one major vendor accounted for approximately 40% of R&D expenditures, and this vendor is expected to continue providing CRO services for the planned Phase 2b clinical trial[125] Other Company Information This section details the company's status as an "emerging growth company" and "smaller reporting company," allowing for simplified reporting requirements and extended accounting standard transition periods, and notes that recent accounting pronouncements are not expected to materially impact its financial statements Emerging Growth Company Status The company qualifies as an "emerging growth company" and "smaller reporting company" under the JOBS Act, enabling it to utilize simplified reporting requirements and an extended transition period for adopting new accounting standards - The company is an "emerging growth company" and a "smaller reporting company" as defined by the Jumpstart Our Business Startups Act (JOBS Act)[127][128][241][246] - The company can take advantage of simplified reporting requirements, including providing only two years of audited financial statements and delaying the adoption of new or revised accounting standards[128][241][245] Recent Accounting Pronouncements_Other The company does not believe that recently issued accounting pronouncements effective in subsequent periods will have a material impact on its financial accounting measurements or disclosures as of June 30, 2021 - The company does not believe that recently issued accounting pronouncements will have a material impact on its financial accounting measurements or disclosures for 2021, nor will they have a material impact upon adoption[129] ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, Acurx Pharmaceuticals is not required to provide quantitative and qualitative disclosures about market risk - As a smaller reporting company, the company is not required to provide quantitative and qualitative disclosures about market risk[131] ITEM 4. CONTROLS AND PROCEDURES This section discusses the company's assessment of disclosure controls and procedures, noting they were not at a reasonable assurance level as of June 30, 2021, due to insufficient segregation of duties, with plans to engage third-party experts for improvement, and confirming no significant changes in internal controls during the quarter Evaluation of Disclosure Controls and Procedures Management, including the CEO and CFO, assessed that the company's disclosure controls and procedures were not at a reasonable assurance level as of June 30, 2021, primarily due to insufficient segregation of duties within a limited management team, with plans to engage third-party experts for review and improvement - Management, including the Chief Executive Officer and Chief Financial Officer, assessed that the company's disclosure controls and procedures were not at a reasonable assurance level as of June 30, 2021[132] - The primary reason for ineffective disclosure controls and procedures is insufficient segregation of duties due to the limited three-person management team[133] - Management plans to engage third-party experts to review current internal controls and recommend design improvements to address segregation of duties issues[133] Changes in Internal Control over Financial Reporting Management's assessment found no changes in internal control over financial reporting that materially affected or are reasonably likely to materially affect internal control during the period covered by this quarterly report - Management's assessment found no changes in internal control over financial reporting that materially affected or are reasonably likely to materially affect internal control during the period covered by this quarterly report[135] Inherent Limitations over Internal Controls Management acknowledges that internal control systems can only provide reasonable, not absolute, assurance and cannot prevent or detect all errors and fraud due to inherent limitations and resource constraints - Management believes that disclosure controls and procedures and internal control over financial reporting are designed to provide reasonable assurance but cannot prevent or detect all errors and fraud[136] PART II - OTHER INFORMATION This part contains additional information not covered in the financial statements, including legal proceedings, risk factors, equity sales, and exhibits ITEM 1. LEGAL PROCEEDINGS The company is not currently involved in any legal proceedings that management believes would have a material adverse effect on its business, though litigation, regardless of outcome, could adversely impact the company due to defense costs, settlement expenses, and diversion of management resources - The company is not currently involved in any legal proceedings or legal actions that management believes would have a material adverse effect on its business[137] - Regardless of outcome, litigation could adversely affect the company due to defense and settlement costs, diversion of management resources, and other factors[137] ITEM 1A. RISK FACTORS This section details various risks, including business operations, regulatory approvals, third-party reliance, intellectual property, and common stock ownership, which could materially affect the company Risks Related to Our Business The company faces risks from its limited operating history, significant losses, auditor's going concern doubt, high dependence on ibezapolstat, development risks, competition, and COVID-19 impacts - The company has a very limited operating history (formed in July 2017, acquired rights to its lead product candidate in February 2018) and expects to incur significant operating losses in the early stages of its development[139][140] - The company's independent registered public accounting firm, in its report on the financial statements as of December 31, 2020, expressed substantial doubt about the company's ability to continue as a going concern, noting significant accumulated losses and negative cash flows from operations[141][142] - The company's ability to generate product revenue, which may take several years or never be achieved, is currently highly dependent on the successful development and commercialization of ibezapolstat[143] - The company's product candidates are in clinical development and carry a high risk of failure; if product candidates exhibit adverse side effects or unexpected characteristics, their development may need to be abandoned or limited[145][146] - The outbreak of coronavirus disease (COVID-19) could adversely affect the company's business, including preclinical studies and clinical trials, such as delays or difficulties in recruiting clinical trial participants[161][162][163] - The company will compete with larger, better-funded companies, and competitors in the drug development or pharmaceutical industry may develop competing products that are superior or completely replace the company's proposed products[158][159] Risks Related to Regulatory Approval Regulatory approval is costly, time-consuming, and uncertain, with clinical trials facing risks of failure, delays, or halts, while non-compliance and healthcare legislation may adversely affect the business - Clinical trials are expensive, difficult to design and implement, take many years to complete, and have uncertain outcomes, with potential for failure at any stage[181] - If the company is unable to enroll a sufficient number of eligible patients in its clinical trials, the clinical trials for ibezapolstat may be delayed or prevented, thereby delaying or preventing necessary marketing approvals[184][185][187] - Failure to obtain FDA or foreign regulatory approval, or failure to comply with ongoing government regulations, could delay or limit the introduction of the company's proposed products and formulations, and result in a failure to generate revenue or maintain ongoing operations[188][189][190] - Current and potential future healthcare legislation and regulatory actions, particularly those affecting government prescription drug purchasing and reimbursement programs, could adversely affect the company's business[191][192][194][195][196] Risks Related to Our Dependence on Third Parties The company's reliance on third parties for manufacturing, clinical trials, and sales/marketing, coupled with reimbursement challenges and healthcare fraud laws, poses significant risks - The company has no sales or marketing infrastructure and no experience selling or marketing pharmaceutical products; to achieve commercial success for any approved products, the company must establish a sales and marketing organization or outsource these functions to third parties[198][201] - The company contracts with third parties to manufacture its product candidates for preclinical studies and ongoing clinical trials and expects to continue doing so for additional clinical trials and eventual commercialization; this reliance on third parties increases the risk that the company will not have sufficient quantities or acceptable costs of product candidates, which could delay, prevent, or impair its development or commercialization efforts[202][203][204][207] - The company relies on third-party clinical investigators, contract research organizations (CROs), clinical data management organizations, and consultants to design, conduct, supervise, and monitor preclinical studies and clinical trials for its product candidates; due to its reliance on third parties and inability to independently conduct preclinical studies or clinical trials, the company has less control over the timing, quality, and other aspects of these studies and trials[208][209] - If end-users of product candidates are unable to obtain adequate reimbursement from third-party payors, or if new restrictive legislation is adopted, market acceptance of the company's proposed products may be limited, and the company may not be able to achieve significant revenue[210][212] - The company's relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse, and other healthcare laws and regulations, which could expose the company to criminal sanctions, civil penalties, contractual damages, reputational harm, and diminished profits and future earnings[213][214][215][216] Risks Related to Intellectual Property The company's intellectual property faces risks from infringement, patent validity challenges, licensing needs, costly litigation, and failure to protect trade secrets, all impacting its competitive position - Competitors may infringe the company's patents; to counter infringement or unauthorized use, the company or its collaborators may be required to file infringement claims, which can be expensive and time-consuming[217][220] - The patent position of biotechnology and pharmaceutical companies, including the company, is generally uncertain and involves complex legal and factual questions; the company's patents, patent applications, and other intellectual property may not provide protection against competing technologies or products, or may be held invalid or unenforceable if challenged[225] - Third parties may own intellectual property, including patent rights, that is important or necessary to the development or commercialization of the company's products; the company may need to use third-party patents or proprietary technology to commercialize its products, in which case it would be required to obtain licenses from these third parties on commercially reasonable terms, or its business could be harmed[222][223] - In addition to patenting certain technologies and products, the company will rely on trade secrets, including unpatented proprietary know-how, technical, and other proprietary and confidential information, to maintain its competitive position; if any of the company's trade secrets were lawfully obtained or independently developed by a competitor, its competitive position would be harmed[227][228] Risks Related to Ownership of Our Common Stock Risks to common stock ownership include the need for substantial additional funding, potential dilution from future financing, stock price volatility, major shareholder influence, anti-takeover provisions, and reduced investor appeal due to emerging growth company status - The company expects its expenses to increase with ongoing R&D activities and the initiation of additional product candidate clinical trials and seeking regulatory approvals; consequently, the company may need to obtain substantial additional funding to support ongoing operations, and if it cannot raise capital when needed or on attractive terms, it may be forced to delay, scale back, or cancel its R&D programs or future commercialization efforts[229][230][234] - If the company raises additional funds by issuing equity or convertible debt securities, existing shareholders' ownership interests may be substantially diluted, and the terms of such securities may include rights such as liquidation or other preferences or anti-dilution rights that could adversely affect shareholders' rights[235][236] - The price of the company's common stock may fluctuate, influenced by various factors including actual or anticipated results of clinical trials, regulatory feedback on clinical trial plans, new product introductions by competitors, macroeconomic and market conditions, and analysts' earnings expectations[247][248] - As of June 30, 2021, the company's executive officers, directors, and their affiliates collectively owned approximately 24% of the company's common stock, giving them significant influence over matters requiring shareholder approval, such as director elections and significant corporate transactions[250] - Provisions in the company's organizational documents and Delaware law may make it more difficult to acquire the company, even if doing so would be beneficial to shareholders, and may prevent attempts by shareholders to replace or remove current management[239][240][269] - The company is an "emerging growth company" and a "smaller reporting company," and it cannot be certain if the reduced reporting requirements applicable to emerging growth companies and smaller reporting companies will make its common stock less attractive to investors[241][243][246] General Risk Factors General risks include cyber incidents, employee misconduct, internal control limitations, inaccurate estimates, FCPA non-compliance, adverse litigation, and environmental/health/safety law non-compliance - Cyber incidents or attacks against the company could result in information theft, data corruption, operational disruption, and/or financial loss; as an early-stage company, insufficient investment in data security protection may not adequately protect against such events[255][256] - The company's employees, principal investigators, consultants, and business partners may engage in misconduct or other improper activities, including non-compliance with regulatory standards and requirements and insider trading, which could result in regulatory sanctions and severely harm the company's reputation[257][258] - The effectiveness of internal controls may have limitations, and control systems failing to prevent or detect errors or fraud could cause significant harm to the company[259][260] - If the company fails to comply with environmental, health, and safety laws and regulations, it could face fines or penalties or incur costs that could harm its business[264][265][266] - Management has broad discretion over the use of cash, cash equivalents, and marketable securities and may not effectively utilize these financial resources, which could affect the company's operating results and lead to a decline in its stock price[267] ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS This section discloses the use of proceeds from the company's initial public offering, allocated for ibezapolstat's Phase 2b clinical trial, ACX-375C's preclinical development, and general corporate purposes, confirming no material changes to the planned uses Use of Proceeds The company completed its initial public offering on June 29, 2021, receiving $14.8 million in net proceeds, which will be used to complete ibezapolstat's Phase 2b clinical trial (approximately $4 million), ACX-375C's preclinical development, and for general corporate purposes, with no material changes to the planned uses - The company completed its initial public offering on June 29, 2021, generating net proceeds of $14.8 million[272] - Proceeds will be used to: (i) complete the Phase 2b clinical trial of ibezapolstat in CDI patients (approximately $4 million), (ii) complete preclinical development of ACX-375C, and (iii) for general corporate purposes[272] - No material changes have occurred in the planned use of proceeds from the initial public offering[273] ITEM 3. DEFAULTS UPON SENIOR SECURITIES The company has no defaults upon senior securities to report - No defaults upon senior securities[273] ITEM 4. MINE SAFETY DISCLOSURE This item is not applicable to the company's operations - Not applicable[273] ITEM 5. OTHER INFORMATION No other information is required to be reported in this section - No other information[273] ITEM 6. EXHIBITS This section lists exhibits filed with or incorporated by reference into this quarterly report, including organizational documents, employment agreements, equity incentive plans, and various certification documents - Exhibits include the Certificate of Incorporation, Bylaws, Common Stock Certificate, Indemnification Agreements, Securities Purchase Agreements, Warrants, Investor Rights Agreement, Amended and Restated Employment Agreements, 2021 Equity Incentive Plan, Stock Option Agreements, Restricted Stock Agreements, Recapitalization Option Exchange Agreement, Master Clinical Services Agreement, Asset Purchase Agreement, and various certification documents[275][276] SIGNATURES This section contains the official signatures of the company's authorized officers, certifying the accuracy and completeness of the quarterly report Report Signatures This report was duly signed on August 13, 2021, by David P. Luci, President and Chief Executive Officer, and Robert G. Shawah, Chief Financial Officer - This report was signed on August 13, 2021, by David P. Luci, President and Chief Executive Officer, and Robert G. Shawah, Chief Financial Officer[279]