UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


(Mark One)
☒	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2022


☐	TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from to

Commission File Number: 001-39811

Virios Therapeutics, Inc.

(Exact name of registrant as specified in its charter)

Delaware

85-4314201

(State or other jurisdiction of

incorporation or organization)

(I.R.S. Employer

Identification Number)

44 Milton Avenue

Alpharetta, GA 30009

(Address of Principal Executive Offices)

(866) 620-8655

(Registrant’s telephone number)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ⌧ No ◻

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ⌧ No ◻

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


Large accelerated filer	◻	Accelerated filer	◻
Non-accelerated filer	☒	Smaller reporting company	☒	Emerging growth company	☒

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

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

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

Title of Each Class	Trading symbol	Name of Exchange on which registered
Common Stock, par value $0.0001 per share	VIRI	Nasdaq Capital Market

As of November 11, 2022, there were 18,330,390 shares of the registrant’s common stock outstanding.

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TABLE OF CONTENTS

		Page

Part I	Financial Information

Item 1.	Financial Statements	3

	Condensed Balance Sheets as of September 30, 2022 (Unaudited) and December 31, 2021	3

	Condensed Statements of Operations for the three and nine months ended September 30, 2022 and 2021 (Unaudited)	4

	Condensed Statements of Stockholders’ Equity for the three and nine months ended September 30, 2022 and 2021 (Unaudited)	5

	Condensed Statements of Cash Flows for the nine months ended September 30, 2022 and 2021 (Unaudited)	6

	Notes to Condensed Financial Statements (Unaudited)	7

Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	14

Item 3.	Quantitative and Qualitative Disclosures about Market Risk	20

Item 4.	Controls and Procedures	20

Part II	Other Information

Item 1.	Legal Proceedings	20

Item 1A.	Risk Factors	20

Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	20

Item 3.	Defaults Upon Senior Securities	21

Item 4.	Mine Safety Disclosures	21

Item 5.	Other Information	21

Item 6.	Exhibits	21

Exhibit Index

Signatures

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PART I —FINANCIAL INFORMATION

Item 1. Financial Statements

VIRIOS THERAPEUTICS, INC.

Condensed Balance Sheets

(Unaudited)


	September 30,		December 31,
	2022		2021
		(Unaudited)
Assets
Current assets:
Cash	$	9,788,397	$	14,008,184
Prepaid expenses and other current assets		1,069,580		1,768,503
Total current assets		10,857,977		15,776,687
Total assets	$	10,857,977	$	15,776,687
Liabilities and stockholders' equity
Current liabilities:
Accounts payable	$	679,416	$	353,863
Accrued expenses		953,726		921,760
Total current liabilities		1,633,142		1,275,623
Total liabilities		1,633,142		1,275,623
Commitments and contingencies (Note 8)
Stockholders' equity:
Common stock, $0.0001 par value; 43,000,000 shares authorized, 18,330,390 shares issued and outstanding at September 30, 2022 and 8,330,390 shares issued and outstanding at December 31, 2021		1,833		833
Preferred stock, $0.0001 par value; 2,000,000 shares authorized, no shares issued and outstanding at September 30, 2022 and December 31, 2021		—		—
Additional paid-in capital		63,351,653		58,425,604
Accumulated deficit		(54,128,651)		(43,925,373)
Total stockholders' equity		9,224,835		14,501,064
Total liabilities and stockholders' equity	$	10,857,977	$	15,776,687

The accompanying notes are an integral part of these condensed financial statements.

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VIRIOS THERAPEUTICS, INC.

Condensed Statements of Operations

(Unaudited)


	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2022		2021		2022		2021
Revenue	$	—	$	—	$	—	$	—

Operating expenses:
Research and development		1,622,374		2,961,122		6,797,914		7,877,281
General and administrative expenses		969,946		1,150,369		3,427,679		3,576,101
Total operating expenses		2,592,320		4,111,491		10,225,593		11,453,382

Loss from operations		(2,592,320)		(4,111,491)		(10,225,593)		(11,453,382)

Other income:
Interest income		16,605		1,509		22,315		4,405
Total other income		16,605		1,509		22,315		4,405

Loss before income taxes		(2,575,715)		(4,109,982)		(10,203,278)		(11,448,977)
Income tax provision		—		—		—		—

Net loss	$	(2,575,715)	$	(4,109,982)	$	(10,203,278)	$	(11,448,977)
Basic and diluted net loss per share	$	(0.28)	$	(0.49)	$	(1.18)	$	(1.37)
Weighted average number of shares outstanding – basic and diluted		9,199,955		8,330,390		8,623,430		8,328,946

The accompanying notes are an integral part of these condensed financial statements.

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VIRIOS THERAPEUTICS, INC.

Condensed Statements of Changes of Shareholders’ Equity

(Unaudited)


								Total
	Common Stock			Additional		Accumulated		Stockholders’
	Shares	Par		Paid-In Capital		Deficit		Equity
Balance, December 31, 2021	8,330,390	$	833	$	58,425,604	$	(43,925,373)	$	14,501,064
Share-based compensation expense	—		—		131,906		—		131,906
Net loss	—		—		—		(3,960,308)		(3,960,308)
Balance, March 31, 2022	8,330,390	$	833	$	58,557,510	$	(47,885,681)	$	10,672,662
Share-based compensation expense	—		—		136,957		—		136,957
Net loss	—		—		—		(3,667,255)		(3,667,255)
Balance, June 30, 2022	8,330,390	$	833	$	58,694,467	$	(51,552,936)	$	7,142,364
Proceeds from public offering of common stock, net of offering costs	10,000,000		1,000		4,492,920		—		4,493,920
Share-based compensation expense	—		—		164,266		—		164,266
Net loss	—		—		—		(2,575,715)		(2,575,715)
Balance, September 30, 2022	18,330,390	$	1,833	$	63,351,653	$	(54,128,651)	$	9,224,835


								Total
	Common Stock			Additional		Accumulated		Stockholders’
	Shares	Par		Paid-In Capital		Deficit		Equity
Balance, December 31, 2020	8,305,075	$	830	$	57,905,164	$	(27,965,105)	$	29,940,889
Share-based compensation expense	—		—		24,825		—		24,825
Exercise of warrants	25,315		3		197,559		—		197,562
Net loss	—		—		—		(3,056,033)		(3,056,033)
Balance, March 31, 2021	8,330,390	$	833	$	58,127,548	$	(31,021,138)	$	27,107,243
Share-based compensation expense	—		—		34,244		—		34,244
Net loss	—		—		—		(4,282,962)		(4,282,962)
Balance, June 30, 2021	8,330,390	$	833	$	58,161,792	$	(35,304,100)	$	22,858,525
Share-based compensation expense	—		—		131,906		—		131,906
Net loss	—		—		—		(4,109,982)		(4,109,982)
Balance, September 30, 2021	8,330,390	$	833	$	58,293,698	$	(39,414,082)	$	18,880,449

The accompanying notes are an integral part of these condensed financial statements.

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VIRIOS THERAPEUTICS, INC.

Condensed Statements of Cash Flows

(Unaudited)


	Nine Months Ended
	September 30,
	2022		2021
Cash flows from operating activities
Net loss	$	(10,203,278)	$	(11,448,977)
Adjustments to reconcile net loss to net cash used in operating activities:
Share-based compensation expense		433,129		190,975
Changes in operating assets and liabilities:
Decrease in prepaid expenses and other current assets		698,923		756,453
Increase in accounts payable		291,873		399,640
Decrease in accrued expenses		(17,034)		(30,696)
Decrease in accrued salaries		—		(378,833)
Net cash used in operating activities		(8,796,387)		(10,511,438)
Cash flows from financing activities
Proceeds from the exercise of warrants		—		197,562
Payment of offering costs for initial public offering		—		(295,166)
Proceeds from public offering of common stock, net of offering costs		4,576,600		—
Net cash provided by (used in) financing activities		4,576,600		(97,604)
Net decrease in cash		(4,219,787)		(10,609,042)
Cash, beginning of period		14,008,184		29,795,366
Cash, end of period	$	9,788,397	$	19,186,324

Supplemental disclosure of non-cash financing transactions:
Public offering costs included in accounts payable and accrued expenses	$	82,680	$	—

The accompanying notes are an integral part of these condensed financial statements.

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VIRIOS THERAPEUTICS, INC.

Notes to Condensed Financial Statements

(Unaudited)

1Organization and Nature of Business

Virios Therapeutics, Inc. (the “Company”) was incorporated under the laws of the State of Delaware on December 16, 2020 through a corporate conversion (the “Corporate Conversion”) just prior to the Company’s initial public offering (“IPO”). The Company was originally formed on February 28, 2012 as a limited liability company (“LLC”) under the laws of the State of Alabama as Innovative Med Concepts, LLC. On July 23, 2020, the Company changed its name from Innovative Med Concepts, LLC to Virios Therapeutics, LLC.

The Company operates in one segment as a pre-revenue, development-stage biotechnology company focused on advancing novel combination antiviral therapies to treat diseases associated with a viral triggered abnormal immune response. The Company is developing its initial product candidate, IMC-1, for people who are suffering from fibromyalgia (“FM”). Research has shown that the herpes virus could be a potential root cause of FM. IMC-1 is a novel, proprietary, fixed dose combination of famciclovir and celecoxib, both of which are drugs approved by the U.S. Food and Drug Administration (“FDA”) for other indications. IMC-1 combines these two specific mechanisms of action purposely designed to inhibit herpes virus activation and replication, thereby converting activated herpes virus back to dormancy and/or by keeping the herpes virus in a latent or dormant state. The famciclovir component of IMC-1 inhibits viral DNA replication, thus inhibiting upregulation of the herpes virus. The celecoxib component of IMC-1 inhibits cyclooxegenase-2 (“COX-2”) enzymes used by the herpes virus to amplify or accelerate its own replication. IMC-1’s synergistic antiviral mechanism represents a first-in-class medicine designed specifically to inhibit both herpes virus activation and subsequent replication, with the goal of keeping tissue resident herpes virus in a latent state.

Public Offering

On September 19, 2022, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with ThinkEquity LLC (the “Underwriter”) in connection with the issuance and sale by the Company in a public offering of 10,000,000 shares of its common stock (the “Firm Shares”) at a public offering price of $0.50 per share (the “Offering”), pursuant to an effective shelf registration statement on Form S-3 (File No. 333-263700). Pursuant to the Underwriting Agreement, the Company also granted to the Underwriter (1) a 45-day overallotment option to purchase up to 1,500,000 shares (the “Option Shares”) at the public offer price and (2) warrants to purchase up to 5% of the Firm Shares and Option Shares purchased in the Offering at an exercise price of $0.625 per share, which is 125% of the public offering price. The public offering closed on September 22, 2022 and the gross proceeds from the public offering were $5.0 million. The net proceeds of the public offering were approximately $4.5 million after deducting underwriting discounts, commissions and offering expenses payable by the Company, including offering costs of $82,680 accrued and unpaid as of September 30, 2022. As of September 30, 2022, the Underwriter had not exercised the overallotment option. The overallotment option expired unexercised on November 3, 2022.

Material Uncertainty

Since its founding, the Company has been engaged in organizational activities, including raising capital, and research and development activities. The Company has not generated any revenues to date. As such, the Company is subject to all of the risks associated with any clinical-stage biotechnology company that has substantial expenditures for research and development. Since inception, the Company has incurred losses and negative cash flows from operating activities. The Company does not expect to generate positive cash flows from operating activities in the near future.

For the three and nine months ended September 30, 2022 and 2021, the Company incurred net losses of $2,575,715 and $10,203,278, respectively, and $4,109,982 and $11,448,977, respectively, and had net cash

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outflows used in operating activities for the nine months ended September 30, 2022 and 2021 of $8,796,387 and $10,511,438, respectively. As of September 30, 2022, the Company had an accumulated deficit of $54,128,651 and is expected to incur losses in the future as it continues its development activities. Since its inception, the Company has funded its losses primarily through issuance of members’ interests, convertible debt instruments and issuance of equity securities.

The Company intends on financing its future development activities and its working capital needs largely on the issuance and sale of equity securities. As of the date these financial statements are issued, based on reasonable estimates, current cash is sufficient to fund foreseeable operating expenses and obligations for at least 12 months. The Company will need to raise additional capital within the next 13 to 15 months to further advance clinical development and to commercially develop its product candidates. There is no assurance that such financing will be available when needed or on acceptable terms. The financial statements do not include any adjustments to reflect this uncertainty.

2Summary of Significant Accounting Policies

Basis of Presentation

The accompanying condensed interim financial statements are unaudited. These unaudited financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all the information and notes required by accounting principles generally accepted in the United States of America (“U.S. GAAP”) for complete financial statements. These unaudited condensed interim financial statements should be read in conjunction with the audited financial statements and accompanying notes as found in the Company’s Annual Report on Form 10-K for the year ended December 31, 2021 filed with the SEC. In the opinion of management, the unaudited condensed interim financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position, results of operations and cash flows for the interim periods presented. The interim results of operations are not necessarily indicative of the results that may occur for the full fiscal year. The December 31, 2021 balance sheet included herein was derived from the audited financial statements, but does not include all disclosures, including notes, required by U.S. GAAP for complete financial statements. Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Updates (“ASU”) of the Financial Accounting Standards Board (“FASB”).

Use of Estimates

The preparation of these financial statements and accompanying notes in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. The Company's significant estimates and assumptions include estimated work performed but not yet billed by contract manufacturers, engineers and research organizations, the valuation of equity and stock-based related instruments, and the valuation allowance related to deferred taxes. Some of these judgments can be subjective and complex, and, consequently, actual results could differ from those estimates. Although the Company believes that its estimates and assumptions are reasonable, they are based upon information available at the time the estimates and assumptions were made. Actual results could differ from those estimates.

Basic and Diluted Net Loss per Share

Basic net loss per common share (“EPS”) is computed by dividing net loss by the weighted average number of common shares outstanding during the period. Diluted EPS reflects potential dilution and is computed by dividing net loss by the weighted average number of common shares outstanding during the period increased by the number of additional common shares that would have been outstanding if all potential common shares had been issued and were dilutive. However, potentially dilutive securities are excluded from

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the computation of diluted EPS to the extent that their effect is anti-dilutive. For the three and nine months ended September 30, 2022 and 2021, the Company had options to purchase 1,304,147 and 1,041,647 shares of common stock, respectively and warrants to purchase 672,500 and 172,500 shares of common stock, respectively, outstanding that were anti-dilutive. In addition, for the three and nine months ended September 30, 2022, the Company’s Underwriter held an overallotment option to purchase up to 1,500,000 shares of common stock outstanding that was anti-dilutive. The overallotment option expired unexercised on November 3, 2022.

Emerging Growth Company Status

The Company is an emerging growth company, as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act. Under the JOBS Act, emerging growth companies can delay adopting new or revised accounting standards issued subsequent to the enactment of the JOBS Act until such time as those standards apply to private companies. The Company has elected to use this extended transition period for complying with new or revised accounting standards that have different effective dates for public and private companies until the earlier of the date that it is (i) no longer an emerging growth company or (ii) affirmatively and irrevocably opts out of the extended transition period provided by the JOBS Act. As a result, these financial statements may not be comparable to companies that comply with the new or revised accounting pronouncements as of public company effective dates.

Subsequent Event

On November 1, 2022, the Company received a letter from the Listing Qualifications Department of The Nasdaq Stock Market, LLC (“Nasdaq”) notifying the Company that, for the previous 30 consecutive business days, the bid price for the Company’s common stock had closed below the minimum $1.00 per share requirement for continued listing on the Nasdaq.

In accordance with Nasdaq Rules, the Company has until May 1, 2023 to regain compliance such that the closing bid price for the Company’s common stock is at least $1.00 for a minimum of 10 consecutive business days. The Company may be eligible for an additional 180 calendar day compliance period. At that time, the Company may appeal the Staff’s delisting determination to a Nasdaq Hearings Panel. The Company intends to monitor the closing bid price of its common stock and may, if appropriate, consider available options to regain compliance.

Recent Accounting Pronouncements

In December 2019, the FASB issued ASU 2019-12, Income Taxes (ASC 740): Simplifying the Accounting for Income Taxes. The standard eliminates the need for an organization to analyze whether the following apply in a given period: (1) the exception to the incremental approach for intraperiod tax allocation; (2) the exceptions to accounting for basis differences when there are ownership changes in foreign investments; and (3) the exception in interim periods income tax accounting for year-to-date losses that exceed anticipated losses. The ASU also is designed to improve financial statement preparers’ application of income tax-related guidance and simplify U.S. GAAP for (1) franchise taxes that are partially based on income, (2) transactions with a government that result in a step-up in the tax basis of goodwill, (3) separate financial statements of legal entities that are not subject to tax, (4) enacted changes in tax laws in interim periods and (5) certain income tax accounting for employee stock ownership plans and affordable housing projects. The amendments in this update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2021. The adoption of this standard did not have a material impact on the Company’s financial statements.

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3	Prepaid Expenses and Other Current Assets

Prepaid expenses and other current assets consist of the following:


	September 30,		December 31,
	2022		2021
Prepaid insurance	$	318,901	$	1,329,385
Prepaid clinical research costs		717,482		422,591
Prepaid services		19,520		15,664
Other miscellaneous current assets		13,677		863
	$	1,069,580	$	1,768,503

4License Agreement

The Company entered into a Know-How License Agreement (the “Agreement”) with the University of Alabama (“UA”) in 2012. In consideration for the Agreement, UA received a 10% non-voting membership interest in the Company. Upon the adoption of the Second Amended and Restated Operating Agreement the “Amended Operating Agreement”) on May 1, 2020, the non-voting membership interest converted to a voting membership interest. In conjunction with the Corporate Conversion, all of the Company’s outstanding membership interest converted into shares of common stock. The Agreement is in effect for 25 years and will terminate on June 1, 2037.

5Accrued Expenses

Accrued expenses consist of the following:


	September 30,		December 31,
	2022		2021
Accrued compensation	$	261,347	$	532,678
Accrued interest on preferred members’ interests		188,085		188,085
Accrued clinical research costs		379,721		138,522
Accrued director fees		15,500		31,000
Accrued professional fees		103,575		24,100
Other miscellaneous accrued expenses		5,498		7,375
	$	953,726	$	921,760

6Stockholders’ Equity

The Company’s certificate of incorporation, adopted on December 16, 2020, authorizes the issuance of two classes of stock: 43,000,000 shares of common stock and 2,000,000 shares of preferred stock, each with a par value of $0.0001 per share.

Overallotment Option

Pursuant to the Underwriting Agreement and in connection with the Offering, the Company granted the Underwriter a 45-day overallotment option to purchase up to 1,500,000 shares at the public offer price. As of September 30, 2022, the overallotment option (the “Underwriters Option”) had not been exercised by the Underwriter. The Underwriters Option is not compensation, but a financial instrument paid for in the transaction, therefore, the Underwriters Option was evaluated to determine if it should be treated as an embedded or a separate free-standing financial instrument (i.e., to determine whether it needed to be bifurcated and accounted for as a separate financial instrument). As the rights and obligations related to the Option Shares are separate from the rights and obligations related to the Firm Shares and the exercise or termination of the Underwriters Option does not impact the Firm Shares under the Underwriting Agreement, the Company determined that the Underwriters Option is considered a free-standing financial instrument. The

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Company then considered the classification of the Underwriters Option as a liability or equity under ASC 480, Distinguishing Liability from Equity, and it was determined that the Underwriters Option did not meet the criteria for liability classification as the underlying instrument is not mandatorily redeemable, it does not require the Company to buy back its shares, it is fixed in nature and its value is tied to the Company’s common stock share price. As an equity-linked contract, the Company then considered applicability of ASC 815-40, Derivatives and Hedging, and determined that the Underwriters Option is a derivative that meets all the criteria and qualifies for equity classification without recurring remeasurement to fair value.

The Underwriters Option had an aggregate grant date fair value of $93,827 that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option pricing model include: (1) discount rate of 2.82% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected life of 45 days, (3) expected volatility of 88.6% based on the average historical volatility of comparable companies' stock, (4) no expected dividends and (5) fair market value (Offering price) of the Company's stock of $0.50 per share.

The Underwriters Option expired unexercised on November 3, 2022.

7Related Parties

The Company uses Gendreau Consulting, LLC, a consulting firm (“Gendreau”), for drug development, clinical trial design, implementation and execution of contracted activities with the clinical research organization. Gendreau’s managing member became the Company’s Chief Medical Officer (“CMO”) effective January 1, 2021. The Company has and will continue to contract the services of the CMO’s spouse through the firm to perform certain activities in connection with the Company’s ongoing clinical trial in FM. During the three and nine months ended September 30, 2022 and 2021, the Company paid Gendreau $94,907 and $283,844, respectively, and $91,335 and $233,616, respectively, and had accounts payable of $27,052 and $24,840 to Gendreau as of September 30, 2022 and December 31, 2021, respectively.

8Commitments and Contingencies

Litigation and Other

The Company is subject, from time to time, to claims by third parties under various legal disputes. The defense of such claims, or any adverse outcome relating to any such claims, could have a material adverse effect on the Company’s liquidity, financial condition and cash flows.

9Share-based compensation

Equity Incentive Plan

On June 16, 2022, the stockholders of the Company approved the Amended and Restated 2020 Equity Incentive Plan (the “Plan”) to increase the total number of shares of common stock reserved for issuance under the Plan by 1,250,000 shares to 2,062,500 total shares issuable under the Plan. As of September 30, 2022, 1,050,853 shares of common stock were available for future grants under the Plan. The table below sets forth the outstanding options to purchase common shares under the Plan:


				Weighted
				Average
		Weighted		Remaining
		Average		Contractual
	Number of	Exercise		Term
	Shares	Price		(Years)
Outstanding at December 31, 2021	749,147	$	9.03	9.09
Granted	262,500		4.23	—
Outstanding at September 30, 2022	1,011,647	$	7.79	8.71
Exercisable at September 30, 2022	650,681	$	9.35	8.31

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During the nine months ended September 30, 2022, the Company granted certain individuals options to purchase 262,500 shares of the Company’s common stock with an average exercise price of $4.23 per share, contractual terms of 10 years and vesting periods ranging from 100% after one year to 33.333% after one year and 66.667% in 24 monthly installments, thereafter. The options had an aggregate grant date fair value of $839,350 that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option-pricing model included: (1) discount rates ranging from 3.145% to 3.15% based on the daily par yield curve rates for U.S. Treasury obligations, (2) expected lives ranging from 5.5 years to 6.0 years based on the simplified method (vesting plus contractual term divided by two), (3) expected volatility ranging from 90.62% to 91.86% based on the average historical volatility of comparable companies’ stock, (4) no expected dividends and (5) fair market value of the Company’s stock of $4.23 per share.

As of September 30, 2022 the aggregate intrinsic value of options outstanding was $0.

The Company recognized share-based compensation expense related to stock options during the three and nine months ended September 30, 2022 and 2021, of $164,266 and $433,129, respectively, and $131,906 and $190,975, respectively. The unrecognized compensation expense for stock options at September 30, 2022 was $1,233,623.

Stock Options for Unregistered Securities

In addition to the stock options issued under the Plan, and in conjunction with the IPO, the Company granted non-qualified stock options to purchase 292,500 shares of common stock as provided for in the President’s employment agreement (the “President Options”). The President Options are exercisable within 10 years of the date of grant at $10.00 per share, were 100% vested at the grant date and have a remaining contractual term of 8.22 years. As of September 30, 2022, there was no unrecognized compensation expense related to these options as they were 100% vested upon issuance. The shares of common stock issuable upon exercise of the President Options will be unregistered, and the option agreement does not include any obligation on the part of the Company to register such shares of common stock. Consequently, the Company has not recognized a contingent liability associated with registering the securities for the arrangement. As of September 30, 2022, the aggregate intrinsic value of the President Options was $0.

Underwriters Warrants

In conjunction with the IPO, the Company granted the underwriters warrants to purchase 172,500 shares of common stock at an exercise price of $12.50 per share. The warrants became 100% exercisable on December 21, 2021.

In conjunction with the Offering in September 2022, the Company granted the Underwriter warrants to purchase 500,000 shares of common stock at an exercise price of $0.625 per share. The warrants have a five-year contractual term and are not exercisable prior to March 18, 2023. The Company has accounted for the warrants as equity-based awards issued to a non-employee. The warrants had an aggregate grant date fair value of $178,462 that was calculated using the Black-Scholes option-pricing model. Variables used in the Black-Scholes option pricing model include: (1) discount rate of 3.69% based on the daily yield curve rates for U.S. Treasury obligations, (2) expected life of 5.0 years, (3) expected volatility of 96.46% based on the average historical volatility of comparable companies' stock, (4) no expected dividends and (5) fair market value (Offering price) of the Company's stock of $0.50 per share.

There was no net impact recognized by the Company in the accompanying financial statements as the warrants were equity-based awards issued for services rendered by the Underwriter for the Offering that was offset by the Company recognizing the fair value of the warrants as a direct and incremental costs associated with the Offering by reducing paid-in capital for the same amount. There is no unrecognized compensation

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expense for these awards as of September 30, 2022. The table below sets forth the outstanding warrants to purchase common shares:


				Weighted
				Average
		Weighted		Remaining
		Average		Contractual
	Number of	Exercise		Term
	Shares	Price		(Years)
Outstanding at December 31, 2021	172,500	$	12.50	3.96
Granted	500,000		0.63	—
Outstanding at September 30, 2022	672,500	$	3.67	4.52
Exercisable at September 30, 2022	172,500	$	12.50	3.21

As of September 30, 2022, the aggregate intrinsic value of the warrants outstanding was $0.

10Income Taxes

As the Company was incorporated in December 2020, all tax years of the Company remain open to examination by tax authorities. As of December 31, 2021, the Company had U.S. federal and state net operating loss carryforwards of approximately $18,266,000, which have an indefinite carryforward.

As of September 30, 2022, the Company has not generated sufficient positive evidence for future earnings to support a position that it will be able to realize its net deferred tax asset. The Company has significant negative evidence to overcome in the form of cumulative pre-tax losses from continuing operations since its formation, as well as projected losses for the current year. Therefore, it will continue to maintain a full valuation allowance on its U.S. federal and state net deferred tax asset. The change in the valuation allowance offset the income tax benefit related to the net operating loss for the three and nine months ended September 30, 2022 and 2021. The Company does not have any material unrecognized tax benefits as of September 30, 2022.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See our Annual Report on Form 10-K for the year ended December 31, 2021 filed with the Security and Exchange Commission (“SEC”) on March 18, 2022 (the “2021 Annual Report on Form 10-K”), under “Risk Factors”, available on the SEC EDGAR website at www.sec.gov, for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this Quarterly Report on Form 10-Q.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This Quarterly Report on Form 10-Q contains “forward-looking statements”, within the meaning of the U.S. Private Securities Litigation Reform Act of 1995, that involve substantial risks and uncertainties. In some cases, you can identify forward-looking statements by the words “anticipate,” “believe,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “might,” “objective,” “ongoing,” “plan,” “predict,” “project,” “potential,” “should,” “will,” or “would,” and or the negative of these terms, or other comparable terminology intended to identify statements about the future. These statements involve known and unknown risks, uncertainties and other factors that may cause our actual results, levels of activity, performance or achievements to be materially different from the information expressed or implied by these forward-looking statements, including the risks set forth in our Annual Report on Form 10-K filed with the SEC on March 18, 2022. Although we believe that we have a reasonable basis for each forward-looking statement contained in this Quarterly Report on Form 10-Q, we caution you that these statements are based on a combination of facts and factors currently known by us and our expectations of the future, about which we cannot be certain.

The forward-looking statements contained in this Quarterly Report on Form 10-Q include, among other things, statements about:

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our business strategies;

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our

SEC Form 10-Q filed by Virios Therapeutics Inc.