VRPX Virpax Pharmaceuticals Inc

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2023

OR

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

From the transition period from_____ to______

Commission File Number: 001-40064

VIRPAX PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

1055 Westlakes Drive, Suite 300

Berwyn, PA 19312

(Address of principal executive offices) (Zip Code)

(610) 727-4597 

(Registrant’s telephone number, including area code)

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

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.

If an emerging growth company, indicate by check mark if registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards 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.

There were 11,714,284 shares of common stock, par value $0.00001 of Virpax Pharmaceuticals, Inc. issued and outstanding as of December 5, 2023.

VIRPAX PHARMACEUTICALS, INC.

QUARTERLY REPORT ON FORM 10-Q

FOR THE FISCAL PERIOD ENDED SEPTEMBER 30, 2023

INDEX 

PART I

ITEM 1: FINANCIAL STATEMENTS

VIRPAX PHARMACEUTICALS, INC.

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

The Board of Directors and Stockholders of

Virpax Pharmaceuticals, Inc.

Results of Review of Interim Financial Information

We have reviewed the condensed consolidated balance sheet of Virpax Pharmaceuticals, Inc. and Subsidiary (the “Company”) as of September 30, 2023, and the related condensed consolidated statements of operations and changes in stockholders’ equity for the three- and nine-month periods ended September 30, 2023 and 2022, statements of cash flows for the nine months ended September 30, 2023 and 2022, and the related notes (collectively referred to as the “interim financial information”). Based on our reviews, we are not aware of any material modifications that should be made to the accompanying interim financial information for it to be in conformity with accounting principles generally accepted in the United States of America.

We have previously audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States) ("PCAOB"), the balance sheet of the Company as of December 31, 2022, and the related statements of operations, changes in stockholders’ equity, and cash flows for the year then ended (not presented herein); and in our report dated March 22, 2023, we expressed an unqualified opinion on those financial statements. In our opinion, the information set forth in the accompanying condensed consolidated balance sheet as of December 31, 2022, is fairly stated, in all material respects, in relation to the balance sheet from which it has been derived.

Going Concern

Note 1 of the Company's audited consolidated financial statements as of December 31, 2022, and for the year then ended, discloses that the Company incurred continuing losses and had litigation that may require cash payments in the next year. Our auditor's report on those financial statements includes an explanatory paragraph referring to the matters in Note 1 of those consolidated financial statements and indicates that these matters raised substantial doubt about the Company's ability to continue as a going concern. As indicated in Note 1 of the Company's unaudited interim financial information as of September 30, 2023, and for the three- and nine-months then ended, the Company was still incurring continuing losses and continues to be party to litigation that may require cash payments in the next year. The accompanying interim financial information does not include any adjustments that might result from the outcome of this uncertainty.

Basis for Review Results

This financial information is the responsibility of the Company's management. We conducted our review in accordance with the standards of the PCAOB. A review of interim financial information consists principally of applying analytical procedures and making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with the standards of the PCAOB, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

/s/ EisnerAmper LLP

EISNERAMPER LLP

Philadelphia, Pennsylvania

December 7, 2023

VIRPAX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

(UNAUDITED)

See Notes to Condensed Consolidated Financial Statements

VIRPAX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(UNAUDITED)

See Notes to Condensed Consolidated Financial Statements

VIRPAX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(UNAUDITED)

See Notes to Condensed Consolidated Financial Statements

VIRPAX PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

See Notes to Condensed Consolidated Financial Statements

VIRPAX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

VIRPAX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

VIRPAX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

VIRPAX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

VIRPAX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

VIRPAX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

VIRPAX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

VIRPAX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

VIRPAX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

VIRPAX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

VIRPAX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

VIRPAX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

VIRPAX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

VIRPAX PHARMACEUTICALS, INC.

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

(UNAUDITED)

ITEM 2: MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following discussion and analysis of our financial condition and results of operations should be read together with our financial statements and the related notes and the other financial information included elsewhere in this Quarterly Report on Form 10-Q (the “Quarterly Report”). This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in these forward-looking statements as a result of various factors, including those discussed below and elsewhere in this Quarterly Report, particularly those under “Risk Factors” and those identified under Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2022.

CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS

This report on Form 10-Q contains forward-looking statements made pursuant to the safe harbor provisions of the Private Securities Litigation Reform Act of 1995 under Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended. Forward-looking statements include statements with respect to our beliefs, plans, objectives, goals, expectations, anticipations, assumptions, estimates, intentions and future performance, and involve known and unknown risks, uncertainties and other factors, which may be beyond our control, and which may cause our actual results, performance or achievements to be materially different from future results, performance or achievements expressed or implied by such forward-looking statements. All statements other than statements of historical fact are statements that could be forward-looking statements. You can identify these forward-looking statements through our use of words such as “may,” “can,” “anticipate,” “assume,” “should,” “indicate,” “would,” “believe,” “contemplate,” “expect,” “seek,” “estimate,” “continue,” “plan,” “point to,” “project,” “predict,” “could,” “intend,” “target,” “potential” and other similar words and expressions of the future.

There are a number of important factors that could cause the actual results to differ materially from those expressed in any forward-looking statement made by us. These factors include, but are not limited to:

The foregoing does not represent an exhaustive list of matters that may be covered by the forward-looking statements contained herein or risk factors that we are faced with that may cause our actual results to differ from those anticipated in our forward-looking statements. Please see “Risk Factors” for additional risks which could adversely impact our business and financial performance.

All forward-looking statements are expressly qualified in their entirety by this cautionary notice. You are cautioned not to place undue reliance on any forward-looking statements, which speak only as of the date of this report, or the date of the document incorporated by reference into this report. We have no obligation, and expressly disclaim any obligation, to update, revise or correct any of the forward-looking statements, whether as a result of new information, future events or otherwise. We have expressed our expectations, beliefs and projections in good faith and we believe they have a reasonable basis. However, we cannot assure you that our expectations, beliefs or projections will result or be achieved or accomplished.

Overview

Company Overview

We are a preclinical-stage pharmaceutical company focused on developing novel and proprietary drug delivery systems across various pain indications in order to enhance compliance and optimize each product candidate in our pipeline. Our drug-delivery systems and drug-releasing technologies being developed are focused on advancing non-opioid and non-addictive pain management treatments and treatments for central nervous system (“CNS”) disorders to enhance patients’ quality of life.

We have exclusive global rights to the following proprietary patented technologies: (i) Molecular Envelope Technology (“MET”) that uses an intranasal device to deliver enkephalin for the management of acute and chronic pain, including pain associated with cancer (Envelta™) and PTSD (PES200), (ii) Injectable “local anesthetic” Liposomal Technology for postoperative pain management (Probudur™), and (iii) Investigational formulation delivered via the nasal route to enhance pharmaceutical-grade cannabidiol (“CBD”) transport to the brain (“NobrXiol^TM”, formerly VRP324) to potentially treat seizures associated with Lennox-Gastaut syndrome and Dravet syndrome in patients two years of age and older. We are also exploring value creative opportunities for our two nonprescription product candidates including seeking regulatory approval for commercialization of such products: AnQlar, which is being developed as a 24 hour prophylactic viral barrier to inhibit viral infection by influenza or SARS-CoV-2, and Epoladerm™, which is a topical diclofenac epolamine metered dosed spray film formulation being developed to manage pain associated with osteoarthritis.

Probudur

Probudur, our lead product candidate, uses a unique liposomal delivery platform that incorporates large multi-lamellar vesicles (“LMLVs”) to encapsulate high doses of bupivacaine. Early preclinical animal studies produced data that demonstrated that Probudur provided significantly improved onset and duration of analgesic effect as compared to a similar product on the market. The animal studies were conducted by infiltrating the surgical/wound site with Probudur. Probudur’s prolonged effectiveness is due to the formulation’s ability to keep the local anesthetic at the surgical/wound site for an extended period of time (at least 96 hours). Four nonclinical trials were conducted using three animal models.

We plan to market Probudur to general surgeons, anesthesiologists, and orthopedic surgeons within the $35 billion post operative pain management market. Based on head-to-head preclinical studies compared to an approved liposomal bupivacaine formulation, if used appropriately, we believe Probudur has the potential to eliminate or significantly reduce the need to prescribe opioids for post-operative pain relief. As a result of our pre-investigational new drug (“pre-IND”) review, the FDA has indicated that it is reasonable for us to pursue a 505(b)(2) new drug application (“NDA”) for Probudur. There can be no assurance that we will be successful in securing regulatory approval under the 505(b)(2) pathway or that we will be successful in mitigating risks associated with the clinical development of this product candidate. Charles River Laboratories was engaged to perform preclinical animal studies during the second half of 2021, including method, dosage, and toxicity as part of the required FDA enabling trials for an IND filing for Probudur. However, we elected to strategically delay these trials in order to enhance the formulation of Probudur to increase stability with the possibility to extend the lifetime of a relevant patent. The development of the formulation was successfully completed in the third quarter of 2023. We anticipate this relevant provisional patent will be filed at some point between the fourth quarter of 2023 and the first quarter of 2024. Lipocure RX, Ltd. (“Lipocure”) is currently in the process of working through the scale up of Probudur to a larger batch size. IND enabling studies have started. The FDA minutes indicated that we are to initiate our clinical studies in targeted patient populations following the completion of our nonclinical toxicity studies. We anticipate starting Phase 2 clinical trial in 2024; however, we may need to adjust this timeline if Lipocure becomes unable to continue development work due to the war in the Middle East.

Yissum Research Agreements

On June 30, 2021, we entered into an Agreement for Rendering of Research Services with Yissum (the “June 2021 Yissum Research Agreement”). Under the June 2021 Yissum Research Agreement, we provided funding for research and development studies performed by researchers at Hebrew University related to the optimization of the Liposomal Bupivacaine formulation of Probudur and to increase stability for manufacturing purposes. In consideration for the research services, we paid research service fees of $337,500 in six equal quarterly installments. All services provided under the June 2021 Yissum Research Agreement initiated on July 1, 2021, and were completed in early January 2023.

On January 31, 2023, we entered into an Agreement for Rendering of Research Services with Yissum (the “January 2023 Yissum Research Agreement”) on substantially similar terms and conditions as detailed above under the June 2021 Yissum Research Agreement. Under the January 2023 Yissum Research Agreement, we will provide funding for research and development studies to be performed by researchers at Hebrew University related to the optimization of the Liposomal Bupivacaine formulation and to increase stability for manufacturing purposes. We may terminate the agreement at any time and will only be responsible to pay Yissum for work performed through the date of termination. In consideration for the research services, we agreed to pay aggregate research service fees of $326,000 in four equal quarterly installments ($81,500 per calendar quarter). All services to be provided under the January 2023 Yissum Research Agreement initiated on January 1, 2023, and are anticipated to be completed by the end of 2023.

We incurred $81,500 and $56,250 in research and development expenses respectively for the three months ended September 30, 2023 and 2022 associated with these Yissum agreements. We incurred $244,500 and $187,500 in research and development expenses respectively for the nine months ended September 30, 2023 and 2022 associated with these Yissum agreements.

Lipocure Research Agreements

On June 29, 2021, we entered into an Agreement for Rendering of Research Services with Lipocure RX, Ltd. (the “June 2021 Lipocure Research Agreement”). Under the June 2021 Lipocure Research Agreement, we shall provide funding for research and development related to the optimization of the Liposomal Bupivacaine formulation of Probudur and eventual manufacturing of preclinical batches including for stability testing, and pre-clinical toxicology work. This will also include work associated with the potential filing of additional provisional patent applications. We may terminate the agreement at any time upon 30 days’ written notice and shall be only responsible to pay Lipocure for work performed through the date of such notice. In consideration for the research services, we agreed to pay research service fees of $200,000 upon execution, as well as $400,000 in July 2021, $270,000 in both September 2021 and January 2022, and three additional payments of $270,000 during 2022. We also agreed to pay $250,000 to Lipocure upon successful completion of Chemistry, Manufacturing and Controls (“CMC”) filing with the FDA. All services to be provided under the June 2021 Lipocure Research Agreement initiated on July 1, 2021 and were substantially complete by the end of 2022.

On February 1, 2023, we entered into an Agreement for Rendering of Research Services (the “January 2023 Lipocure Research Agreement”) with Lipocure. Under the January 2023 Lipocure Research Agreement, we shall provide funding for research and development related to the optimization of the Liposomal Bupivacaine formulation and eventual manufacture of pre-clinical batches including batches for stability testing, animal studies and toxicology work. This will also include work associated with the potential filing of additional provisional patent applications. We may terminate the agreement at any time upon 30 days written notice and shall be only responsible to pay Lipocure for work performed through the date of such notice. In consideration for the research services, we agreed to pay research service fees of $1,286,000 in four equal quarterly installments ($321,500 per calendar quarter). All services to be provided under the January 2023 Lipocure Research Agreement initiated on January 1, 2023, and are anticipated to be completed towards the end 2023.

We incurred $321,500 and $270,000 in research and development expenses associated with these agreements for the three months ended September 30, 2023 and 2022, respectively. We incurred $964,500 and $900,000 in research and development expenses associated with these agreements for the nine months ended September 30, 2023 and 2022, respectively.

Envelta

We believe Envelta and PES200 may provide prescribers, regulators, and patients alternative non-addictive treatment options to control severe pain and manage symptoms related to PTSD. We plan to utilize our proprietary drug delivery technologies to selectively develop a portfolio of patented new chemical entity (“NCE”) candidates for commercialization. The IND enabling studies for Envelta are being performed under a Cooperative Research and Development Agreement (“CRADA”) entered into with the National Center for Advancing Translational Sciences (“NIH/NCATS”). We intend to use the NIH/NCATS studies as a source for INDs for two additional potential indications, cancer pain and PTSD. To date, all four planned initial in vitro studies have been successfully completed. These preclinical studies under the CRADA are expected to continue over the next nine months. We anticipate starting the healthy volunteer studies in 2024.

In February 2022, we completed a 14-day intranasal dose range finding toxicity study of Envelta in rats with a 14-day recovery period which showed no adverse related findings in hematology, coagulation, and serum chemistry data, with no treatment related toxicology findings or mortality noted. A 14-day intranasal dose range finding toxicity study of Envelta in dogs with a 14-day recovery period was also conducted and showed no adverse toxicologic findings.

NobrXiol

NobrXiol is being developed by Nanomerics Ltd., a company organized and existing under the laws of the United Kingdom (“Nanomerics”) as an investigational formulation delivered via the nasal route to enhance CBD transport to the brain. NobrXiol uses a preassembled device and cartridge system to propel the CBD powder formulation into the nose and to the brain via the olfactory nerve/bulb. This product candidate will be formulated to potentially treat seizures associated with Lennox-Gastaut and Dravet syndromes in patients two years of age and older. Lennox-Gastaut syndrome and Dravet syndrome are rare central nervous system diseases considered serious epileptic encephalopathies that cause different types of epileptic seizures as well as cognitive and behavioral changes and are generally resistant to treatment. On September 17, 2021, we entered into a collaboration and license agreement with Nanomerics (the “Nanomerics License Agreement - NobrXiol”) for the exclusive worldwide license to develop and commercialize the product candidate. We plan to target our marketing and selling efforts to healthcare practitioners specializing in epilepsy within the $16.5 billion market for managing epilepsy in pediatrics and adults.

On April 21, 2022, we notified Nanomerics that the study aim of demonstrating the ability of Nanomerics platform technology delivering CBD to the brain via nasal administration in an animal model was met. Pursuant to the Nanomerics License Agreement - NobrXiol, we paid a milestone payment of $500,000 upon meeting this study aim in April 2022. We submitted the pre-IND Briefing Book with the FDA in October 2022 and received comments back from the FDA in December 2022. Upon our review of the FDA minutes, we now believe we have the appropriate guidance from the FDA to move forward with our overall development plan for this new product candidate and the ability to identify any need for further data prior to submitting the IND. Our current plan is to utilize potential grant awards to fund the development of NobrXiol through to an IND filing while we focus our cash resources on more immediate needs with regard to our lead product candidates. In April, 2023, we entered into a participant agreement with the National Institute of Neurological Disorders and Stroke (“NINDS”), a part of NIH, to supply our product candidate compounds to the NINDS’s Epilepsy Therapy Screening Program (“ETSP”). NINDS ETSP will test our compounds in epilepsy animal models to determine whether our compounds have activity against resistant epilepsy and related disorders.

Epoladerm

We believe the Topical Spray Film Delivery Technology, which we refer to as Epoladerm, could provide a pathway for additional proprietary spray formulations with strong adhesion and accessibility properties upon application, especially around active joints and contoured body surfaces to manage pain associated with osteoarthritis. Osteoarthritis, which we believe to be a significant global market opportunity for us, is a painful condition that results in reduced physical function and quality of life and increased risk of all-cause mortality. A recent large meta-analysis on pharmacologic treatments for knee and hip osteoarthritis indicated that topical diclofenac had the largest effect on pain and physical function with a better safety profile than oral diclofenac. Based on this meta-analysis it was recommended that topical diclofenac should be considered as a first-line pharmacological treatment for knee osteoarthritis. Pursuant to a Research and Option Agreement with MedPharm Limited (the “MedPharm Research and Option Agreement”), MedPharm will conduct certain research and development activities of proprietary formulations incorporating certain MedPharm technologies and certain of our proprietary molecules. Under the agreement, we were granted an option to obtain an exclusive, world-wide, sub-licensable, royalty bearing, irrevocable license to research, develop, market, use, commercialize, and sell any product utilizing MedPharm’s spray formulation technology.

As a result of pre-IND meeting, we believe it is reasonable for us to pursue a 505(b)(2) NDA for Epoladerm. There can be no assurance that we will be successful in securing regulatory approval under the 505(b)(2) pathway or that we will be successful in mitigating risks associated with the clinical development of this product candidate.

We made the determination to delay our First-in-Human study investigating Epoladerm for pain associated with chronic osteoarthritis due to: (i) a delay in procuring the active pharmaceutical ingredient necessary for the drug product candidate, (ii) delays related to supply chain disruptions, and (iii) an extensive review of the formulation and potential degradants resulting in MedPharm exploring alternatives to mitigate the formation of the potential degradant. This additional formulation work and permeation testing may enable the patent coverage of this asset to be extended until at least 2042. MedPharm is anticipated to complete the formulation work and permeation testing at the end of the fourth quarter 2023.

We are seeking to license out or partner this asset as we continue to focus our efforts on our prescription drug pipeline.

AnQlar

AnQlar is a high-density molecular masking spray we plan to develop as a viral barrier to potentially reduce the risk or the intensity of respiratory viral infections in humans. We intend for this formulation to be delivered using a metered dose nasal spray to propel the high-density molecular formulation into the nose.

We submitted and received a written pre-IND meeting response from the FDA for AnQlar. In its pre-IND response, the FDA provided guidance on our pathway to pursue prophylactic treatment against SARS-CoV-2 and influenza for daily use as an Over the Counter (“OTC”) product. We believe the results of the pre-IND response support further research on AnQlar as a once daily intranasal prophylactic treatment of viral infections. The FDA has indicated that, upon successful completion of all necessary preclinical and clinical trials, we may pursue an NDA drug approval with the Office of Non-Prescription Drugs.

We have engaged a previous Deputy Director of the Division of Antivirals (DAV), Center for Drug Evaluation and Research (CDER), Food and Drug Administration (FDA) to assist with the design of the optimal clinical trial to facilitate an efficient regulatory and development timeline for AnQlar. We have also entered into a commercial manufacturing and supply agreement with Seqens, an integrated global leader in pharmaceutical solutions with 24 manufacturing sites worldwide and seven research and development facilities throughout the U.S. and Europe. The agreement with Seqens provides for both the supply material for our clinical studies as well as the long-term commercial supply of AnQlar. In addition, we engaged a research and development firm to conduct a series of IND enabling toxicity studies for AnQlar which are expected to be completed by the first quarter of 2024. This was slightly delayed due to certain issues with finalizing the bioanalytical method development of the product candidate.

We recently conducted an initial review of the results from a preclinical virology study conducted by one of our CROs where we were evaluating the viral barrier properties of AnQlar™ versus two variants of the SARS CoV-2 virus. This review conducted by our external consultants indicates that the test article (AnQlar) supports the proposed mechanism of action for a prophylactic viral barrier product candidate, which was the outcome we were expecting.

We are seeking to license out or partner this asset as we continue to focus our efforts on our prescription drug pipeline.

We continue to seek opportunities to exploit our product portfolio through licensing and other strategic transactions to further develop our drug product candidates. This includes seeking potential partners in further developing our drug product candidates and responding to inquiries of interest we have received concerning our product portfolio.

Critical Accounting Estimates

We have based our management’s discussion and analysis of financial condition and results of operations on our financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires us to make estimates that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to clinical development expenses and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

While our significant accounting policies are more fully discussed in Note 2 to our audited financial statements contained within our Annual Report on Form 10-K for the year ended December 31, 2022, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements.

Research and Development (“R&D”) Expenses

We rely on third parties to conduct our preclinical studies and to provide services, including data management, statistical analysis and electronic compilation. Once our clinical trials begin, at the end of each reporting period, we will compare the payments made to each service provider to the estimated progress towards completion of the related project. Factors that we will consider in preparing these estimates include the number of patients enrolled in studies, milestones achieved, and other criteria related to the efforts of our vendors. These estimates will be subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, we will record net prepaid or accrued expenses related to these costs. 

Stock-Based Compensation

Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the requisite service period, which is generally the vesting period. Our policy permits the valuation of stock-based awards granted to non-employees to be measured at fair value at the grant date rather than on an accelerated attribution basis over the vesting period.

Determining the appropriate fair value of share-based awards requires the use of subjective assumptions, including the excepted life of the option and expected share price volatility. We use the Black-Scholes option pricing model to value its option awards. The assumptions used in calculating the fair value of share-based awards represent management’s best estimates and involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and management uses different assumptions, share-based compensation expense could be materially different for future awards. See Note 7 to notes to condensed consolidated financial statements.

Legal and Other Contingencies

The outcomes of legal proceedings and claims brought against us and other loss contingencies are subject to significant uncertainty. We accrue a charge against income when our management determines that it is probable that an asset has been impaired, or a liability has been incurred and the amount of loss can be reasonably estimated. In determining the appropriate accounting for loss contingencies, we consider the likelihood of loss or impairment of an asset or the incurrence of a liability, as well as our ability to reasonably estimate the amount of loss. We regularly evaluate current information available to us to determine whether an accrual should be established or adjusted. Estimating the probability that a loss will occur and estimating the amount of a loss, or a range of loss involves significant judgment.

As noted in Note 5. Commitments and Contingencies, the Company is currently involved in defending litigation. On September 1, 2023, the Chancery Court issued a memorandum opinion addressing liability in the action filed by the Plaintiffs against the Defendants and found in favor of the Plaintiffs on all but three counts which were deemed to have been waived. The Court, however, stated that the question of an appropriate remedy must await further proceedings. See further discussion in Note 5. Based on the facts of the litigation, including September 1, 2023 memorandum opinion issued by the Chancery Court, as well as the supplemental briefs filed by the Plaintiffs and the Defendants, the Company has recognized a total accrual of $5.0 million with respect to the litigation. While the Company believes it has issues to be raised on appeal, the ultimate resolution of the action could result in a material loss to the Company, and depending on the magnitude of the award granted by the Chancery Court, the Company may be forced to cease developing certain product candidates or all our product candidates, liquidate assets or initiate bankruptcy proceedings, unless we are able to raise additional capital, of which there can be no certainty. In addition, the Company’s ability to achieve profitability will be impacted by any royalties it is required to pay to the Plaintiffs in its litigation. The payment of these royalties, if awarded to Plaintiffs, will significantly impact our future revenue and may make it more difficult to engage in collaborations, licenses or the acquisition of such products by a large pharmaceutical company. If the Plaintiffs are awarded a royalty percent that we deem will make the further development of any of Epoladerm, Probudur and Envelta no longer economical, we may choose not to continue development of such product.

Results of Operations

Three Months Ended September 30, 2023 and 2022

Operating expenses:

General and administrative expenses decreased by $290,520, or 6%, to $4,619,519 for the three months ended September 30, 2023, from $4,910,039 for the three months ended September 30, 2022. The primary reason for the decrease in general and administrative costs was the result of a decrease in legal costs of $607,513 mainly due to a decrease in legal defense costs with regard to litigation (net of increase in litigation accrual of $2,000,000 in 2022 and $3,000,000 in 2023). This was offset by increases in salaries and wages, board of directors’ fees, travel and entertainment expenses, stock based compensation expenses, and professional fees.

Research and development expenses decreased by $1,309,484, or 47%, to $1,495,619 for the three months ended September 30, 2023, from $2,805,103 for the three months ended September 30, 2022. The decrease was primarily attributable to (i) a decrease in AnQlar preclinical activities of $1,475,933, (ii) a decrease in preclinical activity related to NobrXiol of $115,141, and (iii) a decrease in preclinical activity related to Epoladerm of $525,327. This was offset by an increase of $823,105 related to Probudur preclinical activities.

The following table presents R&D expenses tracked on a program-by-program basis for the three months ended September 30, 2023 and 2022:

Other income:

Other income increased by $47,388 primarily due to interest income.

Nine Months Ended September 30, 2023 and 2022

Operating expenses:

General and administrative expenses decreased by $2,354,400, or 25%, to $6,983,670 for the nine months ended September 30, 2023, from $9,338,070 for the nine months ended September 30, 2022. The primary reason for the decrease in general and administrative costs was the result of a decrease in legal costs of $3,383,040. This decrease was a result of a reimbursement of legal defense costs of $1,250,000 pursuant to our directors’ and officers’ insurance policy and a decrease of legal defense costs with regard to litigation (net of increase in litigation accrual of $2,000,000 in 2022 and $3,000,000 in 2023). This was offset by an increase in salaries and wages of $246,578, severance expense of $234,000, and an increase in fees related to market assessment and sub-licensing efforts of $485,277.

Research and development expenses decreased by $5,382,960, or 57%, to $4,022,020 for the nine months ended September 30, 2023, from $9,404,980 for the -nine months ended September 30, 2022. The decrease was primarily attributable (i) a one-time milestone payment of $1,500,000 made to Nanomerics in 2022 related to expanding AnQlar’s territory to global rights and a decrease in AnQlar preclinical activities of $3,537,737, (ii) a decrease in preclinical activity related to Epoladerm of $988,286, and (iii) a decrease of $458,126 in preclinical activity related to NobrXiol. This was offset by an increase of $1,077,138 related to Probudur preclinical activities.

The following table presents R&D expenses tracked on a program-by-program basis for the nine months ended September 30, 2023 and 2022:

Other income:

Other income increased by $298,448 primarily due to interest income.

Liquidity and Capital Resources

As of September 30, 2023 and December 31, 2022

Capital Resources

As of September 30, 2023, our principal source of liquidity was our cash, which totaled approximately $12.2 million. To continue to grow our business over the longer term, we plan to commit substantial resources to research and development, pre-clinical and clinical trials of our product candidates, other operations and potential product acquisitions and in-licensing. We have evaluated and expect to continue to evaluate a wide array of strategic transactions as part of our plan to acquire or in-license and develop additional products and product candidates to augment our internal development pipeline. Strategic transaction opportunities that we may pursue could materially affect our liquidity and capital resources and may require us to incur additional indebtedness, seek equity capital or both. In addition, we may pursue development, acquisition or in-licensing of approved or development products in new or existing therapeutic areas or continue the expansion of our existing operations. Accordingly, we expect to continue to opportunistically seek access to additional capital to license or acquire additional products, product candidates or companies to expand our operations, or for general corporate purposes. Strategic transactions may require us to raise additional capital through one or more public or private debt or equity financings or could be structured as a collaboration or partnering arrangement. Any equity financing would be dilutive to our stockholders. We have no arrangements, agreements, or understandings in place at the present time to enter into any acquisition, in-licensing or similar strategic business transaction. Our capital needs and our ability to continue our operations and development activities will also depend upon the damages that are awarded in our existing litigation (see “Part I – Financial Information”, “Item 1 - Notes to Condensed Consolidated Financial Statements (Unaudited)” and “Part II – Other Information, Item 1 —Legal Proceedings and Item 1A – Risk Factors”). Our ability to raise capital is likely to be adversely impacted if we are required to pay significant damages. Depending on the magnitude of the award granted by the Chancery Court, we may be forced to cease developing certain product candidates or all of our product candidates, liquidate assets or initiate bankruptcy proceedings, unless we are able to raise additional capital, of which there can be no certainty.

Cash Flows

Nine Months Ended September 30, 2023 and 2022

The following table summarizes our cash flows from operating activities:

Operating Activities

For the nine months ended September 30, 2023, cash used in operations was $6,842,291 compared to $16,279,381 for the nine months ended September 30, 2022. The decrease in cash used in operations was primarily the result of the decrease in net loss and an increase in prepaid insurance and prepaid research and development costs, partially offset by an increase in accounts payable and accrued expenses. In addition, in March 2023, we collected $1,250,000 in reimbursement of legal costs pursuant to our directors’ and officers’ insurance policy, which decreased our net loss during the period. No further reimbursements are permitted from the insurance policy with respect to the litigation.

Future Capital Requirements

It is difficult to predict our spending for our product candidates prior to obtaining FDA approval. Moreover, changing circumstances may cause us to expend cash significantly faster than we currently anticipate, and we may need to spend more cash than currently expected because of circumstances beyond our control.

Our expectations regarding future cash requirements do not reflect the potential impact of our existing litigation (see “Part I – Financial Information”, “Item 1 - Notes to Condensed Consolidated Financial Statements (Unaudited)” and “Part II – Other Information, Item 1 – Legal Proceedings and Item 1A – Risk Factors”), any future acquisitions, mergers, dispositions, joint ventures or investments that we make in the future. Depending on the magnitude of the award granted by the Chancery Court, we may be forced to cease developing certain product candidates or all of our product candidates, liquidate assets or initiate bankruptcy proceedings, unless we are able to raise additional capital, of which there can be no certainty. If the Chancery Court were to order us to pay significant damages, our ability to raise capital will likely be adversely impacted. In addition, our ability to achieve profitability will be impacted by any royalties we are required to pay to the Plaintiffs in our litigation. The payment of these royalties, if awarded to Plaintiffs, will significantly impact our future revenue and may make it more difficult to engage in collaborations, licenses or the acquisition of such products by a large pharmaceutical company. If the Plaintiffs are awarded a royalty percent that we deem will make the further development of any of Epoladerm, Probudur and Envelta no longer economical, we may choose not to continue development of such product. We have no current understandings, agreements or commitments for any material acquisitions or licenses of any products, businesses or technologies. We may need to raise substantial additional capital in order to engage in any of these types of transactions.

We expect to continue to incur substantial additional operating losses for at least the next several years as we continue to develop our product candidates and seek marketing approval and, subject to obtaining such approval, the eventual commercialization of our product candidates. If we obtain marketing approval for our product candidates, we will incur significant sales, marketing and outsourced manufacturing expenses. In addition, we expect to incur additional expenses to add operational, financial and information systems and personnel, including personnel to support our planned product commercialization efforts. We also expect to continue to incur significant costs to comply with corporate governance, internal controls and similar requirements applicable to us as a public company as well as commitments including severance payments.

Our future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:

To the extent that our capital resources are insufficient to meet our future operating and capital requirements, we must finance our cash needs through public or private equity offerings, including equity offerings for our subsidiaries, debt financings, collaboration and licensing arrangements or other financing alternatives. We have no committed external sources of funds. Additional equity or debt financing or collaboration and licensing arrangements may not be available on acceptable terms, if at all.

If we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional equity that we raise may contain terms, such as liquidation and other preferences that are not favorable to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us.

Liquidity

Since inception, we have been engaged in organizational activities, including raising capital and research and development activities. We have not generated revenues and have not yet achieved profitable operations, nor have we ever generated positive cash flow from operations. There is no assurance that profitable operations, if achieved, could be sustained on a continuing basis. We are subject to those risks associated with any preclinical stage pharmaceutical company that has substantial expenditures for research and development. There can be no assurance that our research and development projects will be successful, that products developed will obtain necessary regulatory approval, or that any approved product will be commercially viable. In addition, we operate in an environment of rapid technological change and is largely dependent on the services of its employees and consultants. Further, our future operations are dependent on the success of our efforts to raise additional capital.

We incurred a net loss of $10,627,799 and $18,663,607 for the nine months ended September 30, 2023 and 2022, respectively, and had an accumulated deficit of $54,982,426 as of September 30, 2023. We anticipate incurring additional losses until such time, if ever, that we can generate significant revenue from our product candidates currently in development. Our primary source of capital has been the issuance of debt and equity securities.

At September 30, 2023, we had cash of approximately $12.2 million. As noted in Note 5. Commitments and Contingencies, the Company is currently involved in defending litigation. On September 1, 2023, the Chancery Court issued a memorandum opinion addressing liability in the action filed by the Plaintiffs against the Defendants and found in favor of the Plaintiffs on all but three counts which were deemed to have been waived. The Court, however, stated that the question of an appropriate remedy must await further proceedings. See further discussion in Note 5. Based on the facts of the litigation, including the September 1, 2023 memorandum opinion issued by the Chancery Court, as well as the supplemental briefs filed by the Plaintiffs and the Defendants, the Company has recognized a total accrual of $5.0 million with respect to the litigation. While the Company believes that it has issues to be raised on appeal, the ultimate resolution of the action could result in a material loss to the Company. Due to the Company’s continuing losses, and the uncertainty regarding the outcome of this ongoing litigation and any potential claims, there exists substantial doubt about our ability to continue as a going concern. Our auditors report within our Annual Report on Form 10-K for the year ended December 31, 2022, filed on March 22, 2023, and the report herein for the nine month period ended September 30, 2023, contain a paragraph regarding our substantial doubt of continuing as a going concern. The accompanying financial statements do not include any adjustments to the carrying amounts and classification of assets, liabilities, and reported expenses that may be necessary if we were unable to continue as a going concern. Depending on the magnitude of the award granted by the Chancery Court, we may be forced to cease developing certain product candidates or all of our product candidates, liquidate assets or initiate bankruptcy proceedings.

We currently do not have sufficient capital to fund the commercialization of any or our product candidates. Additional financings will be needed by us to fund our operations, including potential litigation costs, and to complete clinical development of and to commercially develop our product candidates. There is no assurance that such financing will be available when needed or on acceptable terms. Our ability to raise additional capital may be adversely impacted by potential worsening of global economic conditions, potential future global pandemics or health crises, and the recent disruptions to, and volatility in, the credit, banking, and financial markets in the United States. In addition, our ability to raise additional capital will likely be adversely impacted if the Chancery Court were to order us to pay significant damages. We also may be forced to curtail spending in research and development activities in order to conserve cash.

Global Macroeconomic Environment

The global macroeconomic environment could be negatively affected by, among other things, COVID-19 or other pandemics or epidemics, instability in global economic markets, increased U.S. trade tariffs and trade disputes with other countries, instability in the global credit and banking markets, supply chain weaknesses, instability in the geopolitical environment as a result of the withdrawal of the United Kingdom from the European Union, the ongoing conflict between Russia and Ukraine, the war in the Middle East, other political tensions, and foreign governmental debt concerns. Such challenges have caused, and may continue to cause, uncertainty and instability in local economies and in global financial markets.

While expected to be temporary, these disruptions may negatively impact our results of operations, financial condition, and liquidity in 2023 and potentially beyond.

Factors that May Affect Future Results

You should refer to Part I, Item 1A “Risk Factors” of our Annual Report on Form 10-K for the year ended December 31, 2022, for a discussion of important factors that may affect our future results.

Critical Accounting Estimates

The preparation of financial statements in conformity with GAAP requires us to use judgment in making certain estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities and the reported amounts of revenues and expenses in our financial statements and accompanying notes. Critical accounting policies are those that are most important to the portrayal of our financial condition and results of operations and require difficult, subjective and complex judgments by management in order to make estimates about the effect of matters that are inherently uncertain. During the nine months ended September 30, 2023, there were no significant changes to our critical accounting policies from those described in our annual financial statements for the year ended December 31, 2022, which we included in our Annual Report on Form 10-K for the year ended December 31, 2022.

ITEM 3: QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Not applicable.

ITEM 4: CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Our management, with the participation of our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of our disclosure controls and procedures as of September 30, 2023. The term “disclosure controls and procedures,” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the company’s management, including its principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. Management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving their objectives and management necessarily applies its judgment in evaluating the cost-benefit relationship of possible controls and procedures. Based on the evaluation of our disclosure controls and procedures as of September 30, 2023, our Chief Executive Officer and Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were effective at the reasonable assurance level.

Evaluation of Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting (as defined in Rule 13a-15(f) of the Exchange Act) that occurred during the quarter ended September 30, 2023 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risks that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. From time to time, we make changes to our internal control over financial reporting that are intended to enhance its effectiveness, and which do not have a material effect on our overall internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1: LEGAL PROCEEDINGS

On March 12, 2021, the Company and the Company’s then Chief Executive Officer, Anthony P. Mack (the “Defendants”), were named as defendants in a complaint (the “Complaint”) filed by Sorrento Therapeutics, Inc. (“Sorrento”), and Scilex Pharmaceuticals Inc. (“Scilex” and together with Sorrento, the “Plaintiffs”) in the Chancery Court. In the Complaint, Plaintiffs alleged (i) Mr. Mack breached a Restrictive Covenants Agreement, dated as of November 8, 2016, between himself and Sorrento (the “Restrictive Covenants Agreement”), (ii) the Company tortiously interfered with the Restrictive Covenants Agreement, and (iii) the Company tortiously interfered with Scilex’s relationship with Mr. Mack. On May 7, 2021, Plaintiffs filed an Amended Complaint asserting the same three causes of action. On September 28, 2021, Plaintiffs filed a Second Amended Complaint asserting the same three causes of action as the prior complaints, as well as claims in which Plaintiffs alleged (i) Mr. Mack breached an Employment, Proprietary Information and Inventions Agreement, dated as of October 25, 2016, between himself and Sorrento (the “Employment Agreement”), (ii) the Company tortiously interfered with the Employment Agreement, (iii) Mr. Mack breached his fiduciary duties to Scilex, and (iv) the Company aided and abetted Mr. Mack’s alleged breach of fiduciary duties to Scilex. On April 1, 2022, Plaintiffs filed a Third Amended Complaint. The Third Amended Complaint asserts the same causes of action as the Second Amended Complaint, as well as claims for (i) misappropriation of trade secrets by Defendants under Delaware law, and (ii) misappropriation of trade secrets by Defendants under California law. On April 18, 2022, Defendants filed answers to the Third Amended Complaint. Trial was held before Vice Chancellor Paul Fioravanti from September 12 through September 14, 2022. Post-trial briefing was completed by December 12, 2022, and post-trial argument was held on January 20, 2023. Plaintiffs asserted alternative damages theories that would imply potential damages up to approximately $35.0 million. The Company countered that actual damages, even if Plaintiffs establish liability, could be zero because, among other things, Plaintiffs’ calculations use various unsupported assumptions, any alleged damages are speculative in nature, and there is a possibility the Company’s product candidates never reach market.

In March 2023, the Company collected $1,250,000 in reimbursement of legal costs pursuant to the Company’s directors’ and officers’ insurance policy, and recorded it as a reduction of general and administrative expense on the condensed consolidated statements of operations. No further reimbursements are permitted from the insurance policy with respect to the litigation.

On September 1, 2023, the Chancery Court issued a memorandum opinion addressing liability in the action filed by the Plaintiffs against the Defendants and found in favor of the Plaintiffs on all but three counts which were deemed to have been waived. The Chancery Court found it proper to attribute Mr. Mack’s knowledge and actions to the Company, which Mr. Mack used to effectuate the tortious interference and breach of fiduciary duty. The Chancery Court found that Mr. Mack breached the restrictive covenants agreement he entered into with Sorrento by developing Epoladerm; the Company is liable for tortious interference with contract; Plaintiffs were deemed to have waived their claims for breach of Mr. Mack’s employment contract and for tortious interference with prospective economic advantage; Mr. Mack breached his fiduciary duty of loyalty to Scilex; the Company aided and abetted Mr. Mack’s breach of fiduciary duty; and Mr. Mack misappropriated certain Scilex trade secrets. The Court, however, stated that the question of an appropriate remedy must await further proceedings.

On October 4, 2023, the Chancery Court issued a supplemental briefing schedule. Plaintiffs shall file their supplemental opening brief by October 18, 2023; Defendants shall file their supplemental answering brief by November 29, 2023; and Plaintiffs shall file their supplemental reply brief by December 20, 2023.

On October 18, 2023, the Plaintiffs filed their supplemental brief requesting the following relief: An injunction, in the first instance, enjoining Mr. Mack from having any relationship with Virpax for a period of 18 months and 27 days; enjoining Virpax from further developing or marketing Epoladerm for a period of 18 months and 27 days; alternatively, if these two injunction requests are not granted, the Plaintiffs request a judgement of joint and several liability against Mr. Mack and Virpax of $14,684,833. In addition to these requests for injunctive relief (or the alternative damages) Plaintiffs seek a constructive trust over the revenues of Epoladerm, Probudur and Envelta, or, in the alternative to a constructive trust, a royalty of 5 per cent of net sales of Epoladerm, 8-11 percent of net sales of Probudur and 7.5 percent of net sales of Envelta. Plaintiffs also seek, in addition to the requests for injunctive relief, constructive trust and/or royalties, further damages jointly and severally against Mr. Mack and Virpax as follows: $1.3 million for misuse of Scilex resources, $6.7 million for misappropriation of trade secrets, $13.4 million for exemplary damage (trade secrets damage x2) and attorney’s fees in an unspecified amount. Finally, Plaintiffs seek injunctive relief, enjoining Mr. Mack and Virpax from further access to Scilex’s trade secrets; requiring Mr. Mack and Virpax to return Scilex’s trade secrets to Plaintiffs; and enjoining Mr. Mack and Virpax from marketing or selling any products derived from or incorporating Scilex’s trade secrets.

On November 29, 2023, the Defendants filed their supplement brief on damages rebutting Plaintiffs’ damages analysis. Throughout the brief, Defendants argued Plaintiffs failed to meet their burden to prove damages, and as such, should be precluded from any damages award. However, given the Court’s instruction, Defendants proffered a reasonable damages analysis as follows: As for the injunctive relief requested against Mr. Mack, the Company took no position, as the request was directed to Mr. Mack personally. Concerning Plaintiffs’ request for an injunction against further development of Epoladerm for a period of 18 months and 27 days, Defendants opposed this request, arguing lack of irreparable harm, given Plaintiffs’ request for money damages. Defendants also argued a constructive trust is inappropriate, given Plaintiffs failed to articulate the parameters of such relief and, additionally, the lack of sales for the drug candidates preclude such relief. In terms of the money damages related to the three drug candidates, Defendants proffered a reasonable royalty rate of 1-3% of the net profits of the drug candidates, as opposed to lump sum damages, as such rate would alleviate the speculative nature of the damages requested by Plaintiffs. As for the misappropriation of trade secrets request of $6.7 million, given the Court found only 5 of the proffered 1,182 documents were trade secrets, Defendants contend Plaintiffs either should receive no monetary damages (given the reasonable royalty would encompass use of these documents and, alternatively, Defendants would return such documents). However, if the Court were to award damages, such damages should be pro rata for the documents, or roughly $28,382. And, finally, Defendants opposed the request for attorneys’ fees and exemplary damages.

The parties to date have not had successful settlement negotiations. As of December 31, 2022, the Company accrued $2.0 million with respect to the litigation. Based on the facts of the litigation, including the September 1, 2023 memorandum opinion issued by the Chancery Court, as well as the supplemental briefs filed by the Plaintiffs and the Defendants, the Company has recognized an accrual totaling $5.0 million with respect to the litigation as of September 30, 2023. The $5.0 million accrual is recorded as “Estimated litigation liability” on the condensed consolidated balance sheets as of September 30, 2023. While the Company believes that it has issues to be raised on appeal, the ultimate resolution of the action could result in a material loss to the Company, and depending on the magnitude of the award granted by the Chancery Court, we may be forced to cease developing certain product candidates or all of our product candidates, liquidate assets or initiate bankruptcy proceedings, unless the Company is able to raise additional capital, of which there can be no certainty. In addition, our ability to achieve profitability will be impacted by any royalties we are required to pay to the Plaintiffs in our litigation. The payment of these royalties, if awarded to Plaintiffs, will significantly impact our future revenue and may make it more difficult to engage in collaborations, licenses or the acquisition of such products by large pharmaceutical company. If the Plaintiffs are awarded a royalty percent that we deem will make the further development of any of Epoladerm, Probudur and Envelta no longer economical, we may choose not to continue development of such product.

From time to time, we are subject 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 our liquidity, financial condition, and cash flows.

ITEM 1A: RISK FACTORS

Our operations and financial results are subject to various risks and uncertainties, including those described in Part I, Item 1A, “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2022 filed with the Securities and Exchange Commission on March 22, 2023. Except as set forth below, there have been no other material changes to our risk factors since our Annual Report on Form 10-K for the year ended December 31, 2022.

We have incurred losses since inception and anticipate that we will continue to incur losses for the foreseeable future. We are not currently profitable, and we may never achieve or sustain profitability.

We are a preclinical stage biopharmaceutical company with a limited operating history and have incurred losses since our formation. We incurred net losses of approximately $10.6 million and $18.7 million for the nine months ended September 30, 2023 and 2022, respectively. As of September 30, 2023, we had an accumulated deficit of approximately $55.0 million. We have not commercialized any product candidates and have never generated revenue from the commercialization of any product. To date, we have devoted most of our financial resources to research and development, including our preclinical work, general and administrative expenses, including, but not limited to, legal defense costs and general corporate purposes, as well as to intellectual property.

We expect to incur significant additional operating losses for the next several years, at least, as we advance Epoladerm, Probudur, and Envelta through preclinical development, complete clinical trials, seek regulatory approval and commercialize Epoladerm, Probudur, Envelta, AnQlar and NobrXiol (collectively, “Product Candidates”), if approved. The costs of advancing product candidates into each clinical phase tend to increase substantially over the duration of the clinical development process. Therefore, the total costs to advance any of our product candidates to marketing approval in even a single jurisdiction will be substantial. Because of the numerous risks and uncertainties associated with pharmaceutical product development, we are unable to accurately predict the timing or amount of increased expenses or when, or if, we will be able to begin generating revenue from the commercialization of any products or achieve or maintain profitability. Our expenses will also increase substantially if and as we:

Furthermore, our ability to successfully develop, commercialize and license any product candidates and generate product revenue is subject to substantial additional risks and uncertainties, as described under “Risks Related to Development, Clinical Testing, Manufacturing and Regulatory Approval” and “Risks Related to Commercialization.” As a result, we expect to continue to incur net losses and negative cash flows for the foreseeable future. These net losses and negative cash flows have had, and will continue to have, an adverse effect on our stockholders’ equity and working capital. The amount of our future net losses will depend, in part, on the rate of future growth of our expenses and our ability to generate revenues. If we are unable to develop and commercialize one or more product candidates, either alone or through collaborations, or if revenues from any product that receives marketing approval are insufficient, we will not achieve profitability. In addition, our ability to achieve profitability will be impacted by any royalties we are required to pay to the Plaintiffs in our litigation. The payment of these royalties, if awarded to Plaintiffs, will significantly impact our future revenue and may make it more difficult to engage in collaborations, licenses or the acquisition of such products by large pharmaceutical company. If the Plaintiffs are awarded a royalty percent that we deem will make the further development of any of Epoladerm, Probudur and Envelta no longer economical, we may choose not to continue development of such product. Even if we do achieve profitability, we may not be able to sustain profitability or meet outside expectations for our profitability. If we are unable to achieve or sustain profitability or to meet outside expectations for our profitability, the value of our common stock will be materially and adversely affected.

We will require additional capital to fund our operations, and if we fail to obtain necessary financing, we may not be able to complete the development and commercialization of our drugs.

Our operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial amounts to advance the clinical development and launch and commercialize our product candidates if we receive regulatory approval. We will require additional capital for the further development and potential commercialization of our product candidates and may also need to raise additional funds sooner to pursue a more accelerated development of our product candidates. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate our research and development programs or any future commercialization efforts.

At September 30, 2023, we had cash of approximately $12.2 million. We have incurred continuing losses including a loss of $10.6 million for the nine months ended September 30, 2023, and are currently involved in litigation and while we believe we have issues to be raised on appeal, the ultimate resolution of the action could result in a material loss. Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to the:

If the Chancery Court were to order us to pay significant damages, our ability to raise capital will likely be adversely impacted. If we are unable to expand our operations or otherwise capitalize on our business opportunities due to a lack of capital, our ability to become profitable will be compromised.

Our business, financial condition and results of operations may be adversely affected by the damages awarded in our current litigation with Sorrento Therapeutics, Inc. and Scilex Pharmaceuticals, Inc.

On March 12, 2021, the Company and its then Chief Executive Officer, Anthony P. Mack (the “Defendants”), were named as defendants in a complaint (the “Complaint”) filed by Sorrento Therapeutics, Inc. (“Sorrento”), and Scilex Pharmaceuticals Inc. (“Scilex” and together with Sorrento, the “Plaintiffs”) in the Court of Chancery of the State of Delaware. In the Complaint, Plaintiffs alleged (i) Mr. Mack breached a Restrictive Covenants Agreement, dated as of November 8, 2016, between himself and Sorrento (the “Restrictive Covenants Agreement”), (ii) the Company tortiously interfered with the Restrictive Covenants Agreement, and (iii) the Company tortiously interfered with Scilex’s relationship with Mr. Mack. On May 7, 2021 Plaintiffs filed an Amended Complaint asserting the same three causes of action. On September 28, 2021, Plaintiffs filed a Second Amended Complaint asserting the same three causes of action as the prior complaints, as well as claims in which Plaintiffs alleged (i) Mr. Mack breached an Employment, Proprietary Information and Inventions Agreement, dated as of October 25, 2016, between himself and Sorrento (the “Employment Agreement”), (ii) the Company tortiously interfered with the Employment Agreement, (iii) Mr. Mack breached his fiduciary duties to Scilex, and (iv) the Company aided and abetted Mr. Mack’s alleged breach of fiduciary duties to Scilex. On April 1, 2022, Plaintiffs filed a Third Amended Complaint. The Third Amended Complaint asserts the same causes of action as the Second Amended Complaint, as well as claims for (i) misappropriation of trade secrets by Defendants under Delaware law, and (ii) misappropriation of trade secrets by Defendants under California law. On April 18, 2022, Defendants filed answers to the Third Amended Complaint. Trial was held before Vice Chancellor Paul Fioravanti from September 12 through September 14, 2022. Post-trial briefing was completed by December 12, 2022, and post-trial argument was held on January 20, 2023. Plaintiffs asserted alternative damages theories that would imply potential damages up to approximately $35.0 million. The Company countered that actual damages, even if Plaintiffs establish liability, could be zero because, among other things, Plaintiffs’ calculations use various unsupported assumptions, any alleged damages are speculative in nature, and there is a possibility the Company’s product candidates never reach market.

On September 1, 2023, the Chancery Court issued a memorandum opinion addressing liability in the action filed by the Plaintiffs against the Defendants and found in favor of the Plaintiffs on all but three counts which were deemed to have been waived. The Chancery Court found it proper to attribute Mr. Mack’s knowledge and actions to the Company, which Mr. Mack used to effectuate the tortious interference and breach of fiduciary duty. The Chancery Court found that Mr. Mack breached the restrictive covenants agreement he entered into with Sorrento by developing Epoladerm; the Company is liable for tortious interference with contract; Plaintiffs were deemed to have waived their claims for breach of Mr. Mack’s employment contract and for tortious interference with prospective economic advantage; Mr. Mack breached his fiduciary duty of loyalty to Scilex; the Company aided and abetted Mr. Mack’s breach of fiduciary duty; and Mr. Mack misappropriated certain Scilex trade secrets. The Court, however, stated that the question of an appropriate remedy must await further proceedings.

On October 4, 2023, the Chancery Court issued a supplemental briefing schedule: Plaintiffs shall file their supplemental opening brief by October 18, 2023; Defendants shall file their supplemental answering brief by November 29, 2023; and Plaintiffs shall file their supplemental reply brief by December 20, 2023.

On October 18, 2023, the Plaintiffs filed their supplemental brief requesting the following relief: An injunction, in the first instance, enjoining Mr. Mack from having any relationship with Virpax for a period of 18 months and 27 days; enjoining Virpax from further developing or marketing Epoladerm for a period of 18 months and 27 days; alternatively, if these two injunction requests are not granted, the Plaintiffs request a judgement of joint and several liability against Mr. Mack and Virpax of $14,684,833. In addition to these requests for injunctive relief (or the alternative damages) Plaintiffs seek a constructive trust over the revenues of Epoladerm, Probudur and Envelta, or, in the alternative to a constructive trust, a royalty of 5 per cent of net sales of Epoladerm, 8-11 percent of net sales of Probudur and 7.5 percent of net sales of Envelta. Plaintiffs also seek, in addition to the requests for injunctive relief, constructive trust and/or royalties, further damages jointly and severally against Mr. Mack and Virpax as follows: $1.3 million for misuse of Scilex resources, $6.7 million for misappropriation of trade secrets, $13.4 million for exemplary damage (trade secrets damage x2) and attorney’s fees in an unspecified amount. Finally, plaintiffs seek injunctive relief, enjoining Mr. Mack and Virpax from further access to Scilex’s trade secrets; requiring Mr. Mack and Virpax to return Scilex’s trade secrets to Plaintiffs; and enjoining Mr. Mack and Virpax from marketing or selling any products derived from or incorporating Scilex’s trade secrets.

On November 29, 2023, the Defendants filed their supplement brief on damages rebutting Plaintiffs’ damages analysis. Throughout the brief, Defendants argued Plaintiffs failed to meet their burden to prove damages, and as such, should be precluded from any damages award. However, given the Court’s instruction, Defendants proffered a reasonable damages analysis as follows: As for the injunctive relief requested against Mr. Mack, the Company took no position, as the request was directed to Mr. Mack personally. Concerning Plaintiffs’ request for an injunction against further development of Epoladerm for a period of 18 months and 27 days, Defendants opposed this request, arguing lack of irreparable harm, given Plaintiffs’ request for money damages. Defendants also argued a constructive trust is inappropriate, given Plaintiffs failed to articulate the parameters of such relief and, additionally, the lack of sales for the drug candidates preclude such relief. In terms of the money damages related to the three drug candidates, Defendants proffered a reasonable royalty rate of 1-3% of the net profits of the drug candidates, as opposed to lump sum damages, as such rate would alleviate the speculative nature of the damages requested by Plaintiffs. As for the misappropriation of trade secrets request of $6.7 million, given the Court found only 5 of the proffered 1,182 documents were trade secrets, Defendants contend Plaintiffs either should receive no monetary damages (given the reasonable royalty would encompass use of these documents and, alternatively, Defendants would return such documents). However, if the Court were to award damages, such damages should be pro rata for the documents, or roughly $28,382. And, finally, Defendants opposed the request for attorneys’ fees and exemplary damages.

The parties to date have not had successful settlement negotiations. As of December 31, 2022, the Company accrued $2.0 million with respect to the litigation. Based on the facts of the litigation, including the September 1, 2023 memorandum opinion issued by the Chancery Court and the supplemental briefs filed by the Plaintiffs and the Defendants, the Company has recognized an accrual totaling $5.0 million with respect to the litigation as of September 30, 2023, which may not be sufficient. There can be no assurance that Plaintiffs’ requested injunctive relief, royalties and/or damages award will not be granted by the Court in whole or in part. Depending on the magnitude of the award granted by the Chancery Court, we may be forced to cease developing certain product candidates or all of our product candidates, liquidate assets or initiate bankruptcy proceedings.

In addition, Plaintiffs are seeking royalty payments or a constructive trust over revenues of Epoladerm, Probudur and Envelta. Our ability to achieve profitability will be impacted by any royalties we are required to pay to the Plaintiffs in our litigation. The payment of these royalties, if awarded to Plaintiffs, will significantly impact our future revenue and may make it more difficult to engage in collaborations, licenses or the acquisition of such products by large pharmaceutical companies. If the Plaintiffs are awarded a royalty percent that we deem will make the further development of any of Epoladerm, Probudur and Envelta no longer economical, we may choose not to continue development of such product.

Adverse global conditions, including economic uncertainty, may negatively impact our financial results.

Global conditions, dislocations in the financial markets, any negative financial impacts affecting United States as a result of tax reform or changes to existing trade agreements or tax conventions, may adversely impact our business.

In addition, the global macroeconomic environment could be negatively affected by, among other things, COVID-19 or other pandemics or epidemics, instability in global economic markets, increased U.S. trade tariffs and trade disputes with other countries, instability in the global credit markets, supply chain weaknesses, instability in the geopolitical environment as a result of the withdrawal of the United Kingdom from the European Union, the Russian invasion of Ukraine, the war in the Middle East and other political tensions, and foreign governmental debt concerns. Such challenges have caused, and may continue to cause, uncertainty and instability in local economies and in global financial markets.

Our development activities for Probudur are conducted in Israel. The war in the Middle East, may affect our operations.

Lipocure, the company performing all of the development work for Probudur, is located in Israel. If Lipocure were to be unable to continue to perform development work for us or were to be delayed in its performance of development work due to the war in the Middle East, our development timelines will be adversely impacted and we may not be able to develop Probudur within the timeline anticipated, if at all. There can be no assurance that we will be able to find alternative developers at favorable prices.

Our failure to meet the continued listing requirements of The Nasdaq Capital Market could result in a de-listing of our common stock.

Our shares of common stock are listed for trading on The Nasdaq Capital Market under the symbol “VRPX.” If we fail to satisfy the continued listing requirements of The Nasdaq Capital Market such as the corporate governance requirements, the stockholder’s equity requirement or the minimum closing bid price requirement, The Nasdaq Capital Market may take steps to de-list our common stock or warrants.

On April 10, 2023, we received a written notice (the “Notice”) from the Listing Qualifications Department of The Nasdaq Stock Market (“Nasdaq”) indicating that we are not in compliance with the $1.00 Minimum Bid Price requirement set forth in Nasdaq Listing Rule 5550(a)(2) for continued listing on The Nasdaq Capital Market (the “Bid Price Requirement”). The Notice does not result in the immediate delisting of our common stock from The Nasdaq Capital Market.

The Nasdaq Listing Rules require listed securities to maintain a minimum bid price of $1.00 per share and, based upon the closing bid price of our common stock for the last 30 consecutive business days, we no longer meet this requirement. The Notice indicated that the Company will be provided 180 calendar days in which to regain compliance, or until October 9, 2023. On October 10, 2023 the Company received a written notice from Nasdaq that we were granted an additional 180 calendar day compliance period, granting the Company, a 180-day extension to regain compliance with the Nasdaq listing rule.

In the event we do not regain compliance with Rule 5550(a)(2) prior to April 8, 2024, the Staff will provide us with written notification that its securities are subject to delisting from The Nasdaq Capital Market. At that time, we may appeal the delisting determination to a hearings panel.

On November 16, 2023, we received a notice from Nasdaq notifying the Company that we were not in compliance with the continued listing requirements of Nasdaq Listing Rule 5250(c)(1) because our Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 had not yet been filed with the Securities and Exchange Commission (“SEC”). Nasdaq Listing Rule 5250(c)(1) requires us to timely file all required periodic financial reports with the SEC. Under the Nasdaq rules, we now have 60 calendar days (until January 16, 2024) to submit a plan to regain compliance. If Nasdaq accepts our plan, Nasdaq can grant an exception of up to 180 calendar days from the Quarterly Report’s original due date, which 180-day period would end on May 13, 2024, to regain compliance. We believe that the filing of this Quarterly Report resolves the matter with respect to the late filing of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 and the filing of a plan with respect to the late filing of our Quarterly Report on Form 10-Q for the quarter ended September 30, 2023 will not be required.

We intend to attempt to take actions to restore our compliance with Nasdaq’s listing requirements and if needed intend to seek shareholder approval of a reverse stock split, but we can provide no assurance that our shareholders will approve such a reverse stock split or that any action taken by us would result in our common stock meeting the Nasdaq listing requirements, or that any such action would stabilize the market price or improve the liquidity of our common stock. Any perception that we may not regain compliance or a delisting of our common stock by Nasdaq could adversely affect our ability to attract new investors, decrease the liquidity of the outstanding shares of our common stock, reduce the price at which such shares trade and increase the transaction costs inherent in trading such shares with overall negative effects for our stockholder. In addition, delisting of our common stock from Nasdaq could deter broker-dealers from making a market in or otherwise seeking or generating interest in our common stock and might deter certain institutions and persons from investing in our common stock.

In the event of a de-listing, we would take actions to restore our compliance with The Nasdaq Capital Market’s listing requirements, but we can provide no assurance that any such action taken by us would allow our common stock become listed again, stabilize the market price or improve the liquidity of our common stock, prevent our common stock from dropping below The Nasdaq Capital Market, minimum bid price requirement or prevent future non-compliance with The Nasdaq Capital Market’s listing requirements.

The National Securities Markets Improvement Act of 1996, which is a federal statute, prevents or preempts the states from regulating the sale of certain securities, which are referred to as “covered securities.” Because our common stock is listed on The Nasdaq Capital Market, our common stock is covered securities. Although the states are preempted from regulating the sale of covered securities, the federal statute does allow the states to investigate companies if there is a suspicion of fraud, and, if there is a finding of fraudulent activity, then the states can regulate or bar the sale of covered securities in a particular case. Further, if we were to be delisted from The Nasdaq Capital Market, our common stock would cease to be recognized as covered securities and we would be subject to regulation in each state in which we offer our securities.

We have experienced turnover in our senior management team, and the loss of one or more of our executive officers or key employees or an inability to attract and retain highly skilled employees could adversely affect our business.

Our success depends largely upon the continued services of our key executive officers. We have in the past and may in the future experience changes in our executive management team resulting from the departure of executives, which may be disruptive to our business. To continue to develop our pipeline and execute our strategy, we also must attract and retain highly skilled personnel in our industry.

ITEM 2: UNREGISTERED SALES OF EQUITY SECURITIES, USE OF PROCEEDS, AND ISSUER PURCHASES OF EQUITY SECURITIES

None.

ITEM 3: DEFAULTS UPON SENIOR SECURITIES

None.

ITEM 4: MINE SAFETY DISCLOSURES

Not applicable.

ITEM 5: OTHER INFORMATION

None.

ITEM 6: EXHIBITS

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized on December 7, 2023.