Notes
to Condensed Financial Statements
(Unaudited)
Note
1 — Organization and Basis of Presentation
Organization
and Nature of Operations
Blue
Water Vaccines Inc. (the “Company”) was formed on October 26, 2018, to focus on the research and development of transformational
vaccines to prevent infectious diseases worldwide. The Company’s lead vaccine candidates, BWV-101 and BWV-102, are being investigated
as a universal influenza vaccine with the potential to protect against all influenza strains and may provide a first-in-class long-term
global vaccine that protects millions. The Company’s proprietary, immunogenic, multi-purpose platform enables the Company to bioengineer
viral nanoparticles to deliver antigens, enhancing immunity, in an array of infectious disease agents, including influenza. All of the
Company’s vaccine candidates are in the pre-clinical developmental stage.
Initial
Public Offering
On
February 23, 2022, the Company completed its initial public offering (“IPO”) in which the Company issued and sold 2,222,222
shares of its common stock, at a price to the public of $9.00 per share. Proceeds from the IPO, net of underwriting discounts, commissions,
and offering costs of $2.9 million, were $17.1 million. In connection with the completion of the IPO, all outstanding shares of convertible
preferred stock were converted into 5,626,365 shares of common stock. See Note 6.
Stock
Split
On
November 24, 2021, the Company’s board of directors approved a 4-for-1 (4:1) stock split (the “Stock Split”) of the
Company’s common stock without any change to its par value, which became effective on November 24, 2021. All references to share
and per share amounts for all periods presented in these financial statements have been retrospectively restated to reflect the Stock
Split and proportional adjustment of the preferred stock conversion ratio. Par values were not adjusted.
Basis
of Presentation
The
Company’s unaudited condensed financial statements have been prepared in conformity with accounting principles generally accepted
in the United States of America (“U.S. GAAP”).
Note
2 — Liquidity and Financial Condition
The
Company has had limited operating activities to date, substantially all of which have been devoted to seeking licenses and engaging in
research and development activities. The Company’s product candidates currently under development will require significant additional
research and development efforts prior to commercialization. The Company has financed its operations since inception primarily using
proceeds received from seed investors, and proceeds received upon the completion of its IPO and private placements.
The
Company has incurred substantial operating losses since inception and expects to continue to incur significant operating losses for the
foreseeable future. As of September 30, 2022, the Company had cash of approximately $29.1 million, working capital of approximately $25.6
million and an accumulated deficit of approximately $16.2 million.
On
April 19, 2022, the Company completed a private placement in which it received approximately $6.9 million in net cash proceeds, after
deducting placement agent fees and other offering expenses, see Note 6. In addition, on August 11, 2022, the Company completed a private
placement in which it received approximately $8.7 million in net proceeds, after deducting placement agent fees and other offering expenses,
see Note 6. The Company believes the existing cash at September 30, 2022, will be sufficient to continue operations, satisfy its obligations
and fund the future expenditures that will be required to conduct the clinical and regulatory work to develop its product candidates
for at least one year after the date that these financial statements are available to be issued. As such, the Company determined that
it is not probable based on projected cash flows that substantial doubt about the Company’s ability to continue as a going concern
exists for the one-year period following the date that the financial statements for the three and nine months ended September 30, 2022
were available to be issued.
The
Company will require significant additional capital to make the investments it needs to execute its longer-term business plan. The Company
expects a significant increase in cash outflows as compared to its historical spend for its planned pre-clinical development and clinical
trial activities, and as such, it will need to raise additional capital to sustain operations and meet its long-term operating requirements
beyond the one year period following the issuance of these financial statements. The Company expects to seek additional funding through
additional debt or equity financings; however, there are currently no commitments in place for further financing nor is there any assurance
that such financing will be available to the Company on favorable terms, if at all. If the Company is unable to secure additional capital,
it may be required to curtail any clinical trials and development of products and take additional measures to reduce expenses in order
to conserve its cash in amounts sufficient to sustain operations and meet its obligations in the long-term.
BLUE
WATER VACCINES INC.
Notes
to Condensed Financial Statements
(Unaudited)
Note
3 — Summary of Significant Accounting Policies
Use
of Estimates
The
preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the
reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements
and the reported amounts of expenses during the reporting periods. The most significant estimates in the Company’s financial statements
relate to the valuation of common stock, stock-based compensation, valuation of the contingent warrant liability, judgments used in the
evaluation of potential loss contingencies, accrued research and development expenses and the valuation allowance of deferred tax assets
resulting from net operating losses. These estimates and assumptions are based on current facts, historical experience and various other
factors believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results may differ
materially and adversely from these estimates. To the extent there are material differences between the estimates and actual results,
the Company’s future results of operations will be affected.
Unaudited
Interim Financial Statements
The
accompanying condensed balance sheet as of September 30, 2022, the condensed statements of operations and the condensed statements of
changes in stockholders’ equity for the three and nine months ended September 30, 2022 and 2021, and the condensed statements of
cash flows for the nine months ended September 30, 2022 and 2021 are unaudited. These unaudited interim financial statements have been
prepared on the same basis as the audited financial statements, and in management’s opinion, include all adjustments, consisting
of only normal recurring adjustments, necessary for the fair statement of the Company’s financial position as of September 30,
2022, the results of its operations for the three and nine months ended September 30, 2022 and 2021, and its cash flows for the nine
months ended September 30, 2022 and 2021. The financial data and the other financial information disclosed in the notes to these condensed
financial statements related to the three and nine-month periods are also unaudited. Operating results for the three and nine months
ended September 30, 2022 are not necessarily indicative of the results that may be expected for the year ending December 31, 2022, any
other interim periods, or any future year or period. The unaudited condensed financial statements included in this Quarterly Report on
Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in the Company’s annual
report on Form 10-K for the year ended December 31, 2021, which includes a broader discussion of the Company’s business and the
risks inherent therein.
Concentration
of Credit Risk
Financial
instruments that potentially subject the Company to concentrations of credit risk consist of cash accounts in a financial institution,
which, at times, may exceed the Federal Depository Insurance Coverage limit of $250,000. As of September 30, 2022 and December 31, 2021,
the Company has not experienced losses on these accounts and management believes the Company is not exposed to significant risks on such
accounts.
Property
and Equipment
Property
and equipment consists of computers and office furniture and fixtures, all of which are recorded at cost. Depreciation is recorded using
the straight-line method over the respective useful lives of the assets ranging from three to seven years. Long-lived assets are reviewed
for impairment whenever events or circumstances indicate that the carrying amount of these assets may not be recoverable.
Fair
Value Measurements
Fair
value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction
between market participants at the measurement date. U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs
used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets
or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
| ● | Level
1, defined as observable inputs such as quoted prices (unadjusted) for identical instruments
in active markets; |
BLUE
WATER VACCINES INC.
Notes
to Financial Statements
Note
3 — Summary of Significant Accounting Policies (cont.)
| ● | Level
2, defined as inputs other than quoted prices in active markets that are either directly
or indirectly observable such as quoted prices for similar instruments in active markets
or quoted prices for identical or similar instruments in markets that are not active; and |
| ● | Level
3, defined as unobservable inputs in which little or no market data exists, therefore requiring
an entity to develop its own assumptions, such as valuations derived from valuation techniques
in which one or more significant inputs or significant value drivers are unobservable. |
In
some circumstances, the inputs used to measure fair value might be categorized within different levels of the fair value hierarchy. In
those instances, the fair value measurement is categorized in its entirety in the fair value hierarchy based on the lowest level input
that is significant to the fair value measurement. Financial instruments, including cash, prepaid expenses, deferred offering costs,
receivables from related party, accounts payable and accrued liabilities are carried at cost, which management believes approximates
fair value due to the short-term nature of these instruments. As of December 31, 2021, none of the Company’s non-financial assets
or liabilities were recorded at fair value on a non-recurring basis. No transfers between levels have occurred during the periods presented.
The contingent warrant liability that became issuable upon the closing of the private placements during the nine months ended September
30, 2022, are valued on a recurring basis utilizing a Monte Carlo simulation which includes Level 3 inputs. See Note 6. The following
assumptions were used for the valuation of the contingent warrant liability upon the various commitment dates:
| |
April
19, 2022 | | |
August
11,
2022 | |
Exercise price | |
$ | 8.46875 | | |
$ | 3.3938 | |
Term (years) | |
| 4.00 | | |
| 5.00 | |
Expected stock
price volatility | |
| 117.0 | % | |
| 127.82 | % |
Risk-free
rate of interest | |
| 2.86 | % | |
| 2.98 | % |
The
fair value of financial instruments measured on a recurring basis is as follows:
| |
As
of September 30, 2022 | |
Description | |
Total | | |
Level
1 | | |
Level
2 | | |
Level
3 | |
Liabilities: | |
| | |
| | |
| | |
| |
Contingent warrant
liability | |
$ | 42,056 | | |
| — | | |
| — | | |
$ | 42,056 | |
The
following table summarizes the change in fair value, as determined by Level 3 inputs, for the contingent warrant liability using unobservable
Level 3 inputs for the nine months ended September 30, 2022:
| |
Contingent
Warrant
Liability | |
Balance at December 31, 2021 | |
$ | — | |
Fair value at
issuance | |
| 75,431 | |
Change
in fair value | |
| (33,375 | ) |
Balance at September 30, 2022 | |
$ | 42,056 | |
Deferred
Offering Costs
The
Company capitalizes certain legal, professional accounting and other third-party fees that are directly associated with in-process equity
financings as deferred offering costs until such financings are consummated. After consummation of the equity financing, these costs
are recorded in stockholders’ equity as a reduction of proceeds generated as a result of the offering. Should the in-process equity
financing be abandoned, the deferred offering costs will be expensed immediately as a charge to operating expenses in the statements
of operations. As of September 30, 2022, all previously deferred offering costs related to the IPO, totaling approximately $0.8 million,
and of which $0.3 million were paid during 2021, were netted against the proceeds received upon the closing of the IPO, which occurred
on February 23, 2022.
Research
and Development
The
Company expenses the cost of research and development as incurred. Research and development expenses include costs incurred in funding
research and development activities, license fees, and other external costs. Advance payments for goods and services that will be used
in future research and development activities are expensed when the activity has been performed or when the goods have been received
rather than when the payment is made. Upfront and milestone payments due to third parties that perform research and development services
on the Company’s behalf will be expensed as services are rendered or when the milestone is achieved. When billing terms under research
and development contracts do not coincide with the timing of when the work is performed, the Company is required to make estimates of
outstanding obligations as of period end to those third parties. Accrual estimates are based on several factors, including the Company’s
knowledge of the progress towards completion of the research and development activities, invoicing to date under the contracts, communication
from the research institution or other companies of any actual costs incurred during the period that have not yet been invoiced, and
the costs included in the contracts. Significant judgments and estimates may be made in determining the accrued balances at the end of
any reporting period. Actual results could differ from the estimates made by the Company. The historical accrual estimates made by the
Company have not been materially different from the actual costs. See Notes 5 and 7.
BLUE
WATER VACCINES INC.
Notes
to Financial Statements
Note
3 — Summary of Significant Accounting Policies (cont.)
In
accordance with FASB ASC Topic 730-10-25-1, Research and Development, costs incurred in obtaining licenses and patent rights are
charged to research and development expense if the technology licensed has not reached commercial feasibility and has no alternative
future use. The licenses purchased by the Company (see Note 5) require substantial completion of research and development, regulatory
and marketing approval efforts to reach commercial feasibility and have no alternative future use. Accordingly, the total purchase price
for the licenses acquired is reflected as research and development on the Company’s statements of operations.
Contingencies
Accruals
are recorded for loss contingencies when it is probable that a liability has been incurred and the amount of the related loss can be
reasonably estimated. The Company evaluates, on a quarterly basis, developments in legal proceedings and other matters that could cause
an increase or decrease in the amount of the liability that has been accrued previously. Considering facts known at the time of the assessment,
the Company determines whether potential losses are considered reasonably possible or probable and whether they are estimable. Based
upon this assessment, the Company carries out an evaluation of disclosure requirements and considers possible accruals in the financial
statements.
Stock-Based
Compensation
The
Company expenses stock-based compensation to employees and non-employees over the requisite service period based on the estimated grant-date
fair value of the awards. Stock-based awards to employees with graded-vesting schedules are recognized using the accelerated attribution
method, on a straight-line basis over the requisite service period for each separately vesting portion of the award.
The
Company estimates the fair value of stock option grants using the Black-Scholes option pricing model and the assumptions used in calculating
the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties and the application
of management’s judgment.
Expected
Term — The expected term of options represents the period that the Company’s stock-based awards are expected to be outstanding
based on the simplified method, which is the half-life from vesting to the end of its contractual term.
Expected
Volatility —Volatility is a measure of the amount by which the Company’s share price has historically fluctuated or is
expected to fluctuate (i.e., expected volatility) during a period. Due to the lack of an adequate history of a public market for the
trading of the Company’s common stock and a lack of adequate company-specific historical and implied volatility data, the Company
computes stock price volatility over expected terms based on comparable companies’ historical common stock trading prices. For
these analyses, the Company has selected companies with comparable characteristics, including enterprise value, risk profiles, and position
within the industry.
Common
Stock Fair Value — Due to the absence of an active market for the Company’s common stock prior to the IPO, the fair value
of the common stock underlying the Company’s stock options granted prior to the IPO was estimated at each grant date and was determined
with the assistance of an independent third-party valuation expert. The assumptions underlying these valuations represented management’s
best estimates, which involved inherent uncertainties and the application of significant levels of management judgment. After the completion
of the IPO, the fair value of each share of common stock is based on the closing price of the Company’s common stock as reported
by the Nasdaq Capital Market.
Risk-Free
Interest Rate — The Company bases the risk-free interest rate on the implied yield available on U.S. Treasury securities with
a remaining term commensurate with the estimated expected term.
Expected
Dividend — The Company has never declared or paid any cash dividends on its shares of common stock and does not plan to pay
cash dividends in the foreseeable future, and, therefore, uses an expected dividend yield of zero in its valuation models.
The
Company recognizes forfeitures of equity awards as they occur.
Fair
Value of Common Stock
In
order to determine the fair value of shares of common stock of the Company when issuing stock options prior to the IPO, its board of
directors considered with input from third party valuations, among other things, contemporaneous valuations of the Company’s common
stock. Given the absence of a public trading market of the Company’s capital stock prior to its IPO, its board of directors has
exercised reasonable judgment and considered a number of objective and subjective factors to determine the best estimate of the fair
value of the Company common and preferred stock, including:
| ● | the
prices, rights, preferences and privileges of the Company’s preferred stock relative
to the Company’s common stock; |
| ● | the
Company’s business, financial condition and results of operations, including related
industry trends affecting the Company’s operations; |
BLUE
WATER VACCINES INC.
Notes
to Financial Statements
Note
3 — Summary of Significant Accounting Policies (cont.)
| ● | the
likelihood of achieving a liquidity event, such as an IPO, or sale of the Company, given
prevailing market conditions; |
| ● | the
lack of marketability of the Company’s common stock; |
| ● | the
market performance of comparable publicly traded companies; |
| ● | U.S.
and global economic and capital market conditions and outlook; and |
| ● | common
stock valuation methodology. |
In
estimating the fair market value of common stock of the Company, its board of directors first determined the equity value of its business
using accepted valuation methods.
The
Company engaged a third-party valuation specialist to conduct a valuation, which used its most recent preferred stock financing as a
starting point and determined the equity value of the Company based on the Backsolve method using an Option Pricing Method (OPM) to calculate
the implied value based on a market approach. The Company’s equity value was allocated using OPM to estimate the fair market value
of the Company’s classes of equity.
After
the completion of the IPO, the fair value of each share of common stock is based on the closing price of the Company’s common stock
as reported by the Nasdaq Capital Market.
Income
Taxes
Income
taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for future tax consequences
attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective
tax bases and operating loss and tax credit carryforwards.
Deferred
tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary
differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rate is recognized
in operations in the period that includes the enactment date. Deferred tax assets are reduced to estimated amounts expected to be realized
by the use of a valuation allowance.
Comprehensive
Income (Loss)
The
Company is required to report all components of comprehensive income (loss), including net income (loss), in the accompanying condensed
financial statements in the period in which they are recognized. Comprehensive income (loss) is defined as the change in equity during
a period from transactions and other events and circumstances from non-owner sources, including unrealized gains and losses on investments
and foreign currency translation adjustments. Net loss and comprehensive loss were the same for all periods presented.
Warrants
The
Company determines the accounting classification of warrants that are issued, as either liability or equity, by first assessing whether
the warrants meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics
of both Liabilities and Equity, (“ASC 480-10”), and then in accordance with ASC 815-40, Derivatives and Hedging -
Contracts in Entity’s Own Equity (“ASC 815-40”). Under ASC 480-10, warrants are considered liability-classified
if the warrants are mandatorily redeemable, obligate the issuer to settle the warrants or the underlying shares by paying cash or other
assets, or must or may require settlement by issuing variable number of shares.
If
the warrants do not meet liability classification under ASC 480-10, the Company assesses the requirements under ASC 815-40, which states
that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective
of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the warrants do not require liability
classification under ASC 815-40, in order to conclude equity classification, the Company assesses whether the warrants are indexed to
its common stock and whether the warrants are classified as equity under ASC 815-40 or other applicable GAAP. After all relevant assessments
are made, the Company concludes whether the warrants are classified as liability or equity. Liability-classified warrants are required
to be accounted for at fair value both on the date of issuance and on subsequent accounting period ending dates, with all changes in
fair value after the issuance date recorded as a component of other income (expense), net in the statements of operations. Equity-classified
warrants are accounted for at fair value on the issuance date with no changes in fair value recognized after the issuance date. As of
September 30, 2022, all of the Company’s outstanding warrants are equity-classified warrants, except for the contingent warrants
that became issuable upon the close of the April and August private placements. See Note 6.
BLUE
WATER VACCINES INC.
Notes
to Financial Statements
Note
3 — Summary of Significant Accounting Policies (cont.)
Net
Loss Per Share
Basic
loss per share is computed by dividing the net income or loss applicable to common shares by the weighted average number of common shares
outstanding during the period, including pre-funded warrants because their exercise requires only nominal consideration for the delivery
of shares. Diluted earnings per share is computed using the weighted average number of common shares and, if dilutive, potential common
shares outstanding during the period. Potential common shares consist of the Company’s preferred stock, warrants and options. Diluted
loss per share excludes the shares issuable upon the conversion of preferred stock, as well as common stock options and warrants, from
the calculation of net loss per share if their effect would be anti-dilutive.
The
two-class method is used to determine earnings per share based on participation rights of participating securities in any undistributed
earnings. Each preferred stock that includes rights to participate in distributed earnings is considered a participating security and
the Company uses the two-class method to calculate net income available to the Company’s common stockholders per common share —
basic and diluted.
The
following securities were excluded from the computation of diluted shares outstanding due to the losses incurred in the periods presented,
as they would have had an anti-dilutive impact on the Company’s net loss:
| |
Three
Months Ended | | |
Nine
Months Ended | |
| |
September
30, | | |
September
30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
Options to purchase
shares of common stock | |
| 1,383,801 | | |
| 780,640 | | |
| 1,383,801 | | |
| 780,640 | |
Series Seed Preferred Stock | |
| — | | |
| 4,584,552 | | |
| — | | |
| 4,584,552 | |
Warrants issued upon close
of IPO | |
| 111,111 | | |
| — | | |
| 111,111 | | |
| — | |
Private
Placement Warrants | |
| 5,264,274 | | |
| — | | |
| 5,264,274 | | |
| — | |
Total | |
| 6,759,186 | | |
| 5,365,192 | | |
| 6,759,186 | | |
| 5,365,192 | |
New
Accounting Pronouncements
In
April 2012, the Jump-Start Our Business Startups Act (the “JOBS Act”) was signed into law. The JOBS Act contains provisions
that, among other things, reduce certain reporting requirements for an emerging growth company. As an emerging growth company, the Company
may elect to adopt new or revised accounting standards when they become effective for non-public companies, which typically is later
than when public companies must adopt the standards. The Company has elected to take advantage of the extended transition period afforded
by the JOBS Act and, as a result, unless the Company elects early adoption of any standards, will adopt the new or revised accounting
standards on the relevant dates on which adoption of such standards is required for non-public companies.
In August 2020, the FASB issued Accounting
Standard Update (“ASU”) No. 2020-06, Debt — Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives
and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in
an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required
under current GAAP. The ASU also removes certain settlement conditions that are required for equity contracts to qualify for the derivative
scope exception and it also simplifies the diluted earnings per share calculation in certain areas. This guidance is effective for public
business entities except for smaller reporting companies for fiscal years, and interim periods within those fiscal years, beginning after
December 15, 2021. For all other entities, the standard will be effective for fiscal years beginning after December 15, 2023, including
interim periods within those fiscal years. Early adoption is permitted. The Company adopted ASU 2020-06 on January 1, 2022, using the
modified retrospective method, and the adoption of the ASU did not impact the Company’s financial position, results of operations,
cash flows or net loss per share.
BLUE
WATER VACCINES INC.
Notes
to Financial Statements
Note
3 — Summary of Significant Accounting Policies (cont.)
In October 2020, the FASB issued ASU 2020-10,
Codification Improvements, which updates various codification topics by clarifying or improving disclosure requirements to align
with the SEC’s regulations. The Company adopted ASU 2020-10 as of the reporting period beginning January 1, 2022. The adoption of
this update did not have a material effect on the Company’s financial statements.
In May 2021, the FASB issued ASU 2021-04,
Earnings Per Share (Topic 260), Debt — Modifications and Extinguishments (Subtopic 470-50), Compensation — Stock Compensation
(Topic 718), and Derivatives and Hedging — Contracts in Entity’s Own Equity (Subtopic 815-40): Issuer’s Accounting for
Certain Modifications or Exchanges of Freestanding Equity-Classified Written Call Options (a consensus of the FASB Emerging Issues Task
Force). The ASU clarifies and reduces diversity in an issuer’s accounting for modifications or exchanges of freestanding equity-classified
written call options (for example, warrants) that remain equity classified after modification or exchange. The ASU provides guidance that
will clarify whether an issuer should account for a modification or an exchange of a freestanding equity-classified written call option
that remains equity classified after modification or exchange as (1) an adjustment to equity and, if so, the related earnings per share
(EPS) effects, if any, or (2) an expense and, if so, the manner and pattern of recognition. The new guidance is effective for all entities
for annual and interim periods beginning after December 15, 2021, and early adoption is permitted, including adoption in an interim period.
The Company adopted ASU 2021-04 on January 1, 2022, and the adoption of the ASU did not impact the Company’s financial position,
results of operations, cash flows, or net loss per share.
In June 2022, the FASB issued ASU No.
2022-03, Fair Value Measurement (Topic 820): Fair Value Measurement of Equity Securities Subject to Contractual Sale Restrictions
(“ASU 2022-03”), which applies to all equity securities measured at fair value that are subject to contractual sale restrictions.
This change prohibits entities from taking into account contractual restrictions on the sale of equity securities when estimating fair
value and introduces required disclosures for such transactions. This guidance is effective for public business entities beginning after
December 15, 2023, including interim periods within those fiscal years. For all other entities, the standard will be effective for fiscal
years beginning after December 15, 2024, including interim periods within those fiscal years. Early adoption is permitted. The Company
adopted ASU 2022-03 effective July 1, 2022, and the adoption of the ASU did not impact the Company’s financial position, results
of operations, cash flows, or net loss per share.
The
Company’s management does not believe that any other recently issued, but not yet effective, accounting standards if currently
adopted would have a material effect on the accompanying condensed financial statements.
Note
4 — Balance Sheet Details
Prepaid
Expenses
Prepaid
expenses consisted of the following as of September 30, 2022 and December 31, 2021:
| |
As of | | |
As of | |
| |
September 30, | | |
December 31, | |
| |
2022 | | |
2021 | |
Prepaid research and development | |
$ | 125,281 | | |
$ | 203,910 | |
Prepaid insurance | |
| 434,762 | | |
| 4,842 | |
Prepaid other | |
| 143,786 | | |
| 25,799 | |
Total | |
$ | 703,829 | | |
$ | 234,551 | |
BLUE
WATER VACCINES INC.
Notes
to Financial Statements
Note
4 — Balance Sheet Details (cont.)
Accrued
Expenses
Accrued
expenses consisted of the following as of September 30, 2022 and December 31, 2021:
| |
As
of | | |
As
of | |
| |
September
30, | | |
December
31, | |
| |
2022 | | |
2021 | |
Accrued license
fees | |
$ | 12,500 | | |
$ | 225,000 | |
Accrued research and development | |
| 994,875 | | |
| 300,182 | |
Accrued deferred offering
costs | |
| 125,000 | | |
| 246,236 | |
Accrued compensation | |
| 815,902 | | |
| 234,265 | |
Accrued loss contingency | |
| 1,313,924 | | |
| — | |
Accrued director fees | |
| 86,875 | | |
| — | |
Accrued other | |
| 205,937 | | |
| 49,832 | |
Total | |
$ | 3,555,013 | | |
$ | 1,055,515 | |
Note
5 — Significant Agreements
Oxford
University Innovation Limited
In
December 2018, the Company entered into an option agreement with Oxford University Innovation (“OUI”), which was a precursor
to a license agreement (the “OUI Agreement”), dated July 16, 2019. Under the terms of the OUI Agreement, the Company holds
an exclusive, worldwide license to certain specified patent rights and biological materials relating to the use of epitopes of limited
variability and virus-like particle products and practice processes that are covered by the licensed patent rights and biological materials
for the purpose of developing and commercializing a vaccine product candidate for influenza. The Company is obligated to use its best
efforts to develop and market Licensed Products, as defined in the OUI Agreement, in accordance with its development plan, report to
OUI on progress, achieve the following milestones and must pay OUI nonrefundable milestone fees when it achieves them: initiation of
first Phase I study; initiation of first Phase II study; initiation of first Phase III/pivotal registration studies; first submission
of application for regulatory approval (BLA/NDA); marketing authorization in the United States; marketing authorization in any EU country;
marketing authorization in Japan; first marketing authorization in any other country; first commercial sale in Japan; first commercial
sale in any ROW country; first year that annual sales equal or exceed certain thresholds. See Note 7 for additional information on the
milestone payments as well as royalty obligations required under the OUI Agreement. The OUI Agreement will expire upon ten (10) years
from the expiration of the last patent contained in the licensed patent rights, unless terminated earlier. During the year ended December
31, 2021, the U.S. Patent related to immunogenic composition was issued to OUI. This patent expires in August 2037. No additional patents
have been issued during the three and nine months ended September 30, 2022. Either party may terminate the OUI Agreement for an uncured
material breach. The Company was able to terminate the OUI Agreement for any reason at any time upon six months’ written notice
until July 16, 2022, which was the third anniversary of the OUI Agreement. OUI may terminate immediately if the Company has a petition
presented for its winding-up or passes a resolution for winding up other than for a bona fide amalgamation or reconstruction or compounds
with its creditors or has a receiver or administrator appointed. OUI may also terminate if the Company opposes or challenges the validity
of any of the patents or applications in the Licensed Technology, as defined in the OUI Agreement; raises the claim that the know-how
of the Licensed Technology is not necessary to develop and market Licensed Products; or in OUI’s reasonable opinion, is taking
inadequate or insufficient steps to develop or market Licensed Products and does not take any further steps that OUI requests by written
notice within a reasonable time.
For
the three and nine months ended September 30, 2022 and 2021, the Company did not incur any licensing fee payments for intellectual property
licenses.
See
Note 7.
BLUE
WATER VACCINES INC.
Notes
to Financial Statements
Note
5 — Significant Agreements (cont.)
St.
Jude Children’s Hospital
The
Company entered into a license agreement (the “St. Jude Agreement”), dated January 27, 2020, with St. Jude
Children’s Research Hospital (“St. Jude”). Under the terms of the St. Jude Agreement, the Company holds an
exclusive, worldwide license to certain specified patent rights and biological materials relating to the use of live attenuated
streptococcus pneumoniae and practice processes that are covered by the licensed patent rights and biological materials for the
purpose of developing and commercializing a vaccine product candidate for streptococcus pneumoniae. The St. Jude Agreement will
expire upon the expiration of the last valid claim contained in the licensed patent rights, unless terminated earlier. The Company
is obligated to use commercially reasonable efforts to develop and commercialize the licensed product(s). The milestones include the
following events: (i) complete IND enabling study; (ii) initiate animal toxicology study; (iii) file IND; (iv) complete Phase I
Clinical Trial; (v) commence Phase II Clinical Trial; (vi) commence Phase III Clinical
Trial; and, (vii) regulatory approval, U.S. or foreign equivalent. If the Company fails to achieve the development milestones
contained in the St. Jude Agreement, and if the Company and St. Jude fail to agree upon a mutually satisfactory revised timeline,
St. Jude will have the right to terminate the St. Jude Agreement. Either party may terminate the St. Jude Agreement in the event the
other party (a) files or has filed against it a petition under the Bankruptcy Act (among other things) or (b) fails to perform or
otherwise breaches its obligations under the St. Jude Agreement, and has not cured such failure or breach within sixty (60) days.
The Company may terminate for any reason on thirty (30) days written notice. On May 11, 2022, the Company entered into an amendment
to the St. Jude Agreement, whereby the royalty terms, milestone payments and licensing fees were amended, and a revised development
milestone timeline was agreed to. See Note 7 for more information on this amendment.
For
the three and nine months ended September 30, 2022, the Company recognized approximately $3,000 and $13,000, respectively, for intellectual
property licenses, which is recorded as research and development expenses. For the three and nine months ended September 30, 2021, the
Company recognized $0 and $10,000 for intellectual property licenses, respectively, which is recorded as research and development expenses.
See Note 7 for additional information on the milestone payments as well as royalty obligations required under the St. Jude Agreement.
Cincinnati
Children’s Hospital Medical Center
The
Company entered into a license agreement (the “CHMC Agreement”), dated June 1, 2021, with Children’s Hospital
Medical Center, d/b/a Cincinnati Children’s Hospital Medical Center (“CHMC”). Under the terms of the CHMC
Agreement, the Company holds an exclusive, worldwide license (other than the excluded field of immunization against, and prevention,
control, or reduction in the severity of gastroenteritis caused by rotavirus and norovirus in China and Hong Kong) to certain
specified patent and biological materials relating to the use of norovirus nanoparticles and practice processes that are covered by
the licensed patent rights and biological materials for the purpose of developing and commercializing CHMC patents and related
technology directed to a virus-like particle vaccine platform that utilizes nanoparticle delivery technology that may have potential
broad application to develop vaccines for multiple infectious diseases. The term of the CHMC Agreement begins on the effective date
and extends on a jurisdiction by jurisdiction and product by product basis until the later of: (i) the last to expire licensed
patent; (ii) ten (10) years after the first commercial sale; or, (iii) entrance onto the
market of a biosimilar or interchangeable product. The Company is obligated to use commercially reasonable efforts to bring licensed
products to market through diligent research and development, testing, manufacturing and commercialization, to use best efforts to
make all necessary regulatory filings and obtain all necessary regulatory approvals, to achieve milestones relating to development
and sales, and report to CHMC on progress. The Company will also be obligated to pay the agreed upon development milestone payments
to CHMC, as well as royalty payments, see Note 7 for additional information. The Company may terminate the CHMC Agreement for
convenience, at any time prior to first commercial sale of a product or process by providing one hundred and eighty (180)
days’ written notice to CHMC. It may also terminate for a CHMC uncured material breach. CHMC may terminate the CHMC Agreement
for an uncured Company material breach or insolvency or bankruptcy. Pursuant to the terms of the CHMC Agreement, if the Company
fails to achieve the milestones, and cannot mutually agree with CHMC on an amendment to the milestones, then CHMC will have the
option of converting any and all of such exclusive licenses to nonexclusive licenses, to continue developing indications that have
already entered development at any stage or in which the Company has invested in developing. CHMC may also terminate the CHMC
Agreement to the fullest extent permitted by law in the countries of the worldwide territory, in the event the Company or its
affiliates challenge or induce others set up challenges to the validity or enforceability of any of the Licensed Patents, as defined
in the CHMC Agreement, and the Company will be obligated to reimburse CHMC for its costs, including reasonable attorneys’
fees.
BLUE
WATER VACCINES INC.
Notes
to Financial Statements
Note
5 — Significant Agreements (cont.)
For
the three and nine months ended September 30, 2022, the Company did not incur any licensing fee payments for intellectual property licenses.
For the three and nine months ended September 30, 2021, the Company accrued licensing fee payments for intellectual property licenses,
which is recorded as research and development expenses, in aggregate of approximately $25,000 and $402,000, respectively. See Note 7.
Ology
Bioservices, Inc. (which was later acquired by National Resilience, Inc.)
The
Company entered into a Master Services Agreement (“Ology MSA”), dated July 19, 2019, with Ology, Inc. (“Ology”)
to provide services from time to time, including but not limited to technology transfer, process development, analytical method optimization,
cGMP manufacture, regulatory affairs, and stability studies of biologic products. Pursuant to the Ology MSA, the Company and Ology shall
enter into a Project Addendum for each project to be governed by the terms and conditions of the Ology MSA.
The Company has entered into two Project
Addendums as of September 30, 2022 and December 31, 2021. The initial Project Addendum was executed on October 18, 2019 and the Company
was required to pay Ology an aggregate of approximately $4 million. Due to unforeseen delays associated with COVID-19, the Company and
Ology entered into a letter agreement dated January 9, 2020 to stop work on the project. The Company paid Ology $100,000 for services,
of which $48,600 remained as a prepaid expense as of December 31, 2020. The second Project Addendum was executed on May 21, 2021 and the
Company is obligated to pay Ology an aggregate amount of approximately $2.8 million, plus reimbursement for materials and outsourced testing,
which will be billed at cost plus 15%. This project began during 2021, and the Company recorded approximately $164,000 and $115,000 as
related accounts payable and accrued expenses, respectively, at December 31, 2021. On April 20, 2022, the Company entered into an amendment
to the Ology MSA, whereby the Company’s obligations increased by $300,000, specifically related to regulatory support on the project.
On August 30, 2022, the Company entered into another amendment to the Ology MSA which reduced the Company’s obligations by approximately
$379,000 as a result of changes in the scope of work related to certain tasks defined in the second Project Addendum. During the three
and nine months ended September 30, 2022, the Company incurred related research and development expenses of approximately $496,000 and
$988,000, respectively, and had approximately $53,000 and $851,000 recorded as related accounts payable and accrued expenses, respectively,
at September 30, 2022. There was approximately $71,000 of related expenses incurred during the three and nine months ended September 30,
2021.
Note
6 — Stockholders’ Equity
Authorized
Capital and Stock Split
On
February 23, 2022, the Company filed with the Secretary of State of the State of Delaware an amended and restated certificate of incorporation
(the “A&R COI”), which became effective immediately. The Company’s board of directors and stockholders approved
the A&R COI to be effective upon the closing of the IPO. There was no change to the Company’s authorized shares of common stock
and preferred stock of 250,000,000 shares and 10,000,000 shares, respectively, or the par value, which is $0.00001 for both common and
preferred stock. Prior to this amendment, the Company had designated 1,150,000 shares of preferred stock, with par value $0.00001 per
share. In addition, on February 23, 2022 and in connection with the closing of the IPO, the Company’s board of directors adopted
Amended and Restated Bylaws.
Common
Stock
As
of September 30, 2022 and December 31, 2021, there were 14,689,851 and 3,200,000 shares of common stock issued and outstanding, respectively.
Holders
of the Company’s common stock are entitled to one vote for each share held of record, and are entitled upon liquidation of the
Company to share ratably in the net assets of the Company available for distribution after payment of all obligations of the Company
and after provision has been made with respect to each class of stock, if any, having preference over the common stock, currently including
the Company’s preferred stock. The shares of common stock are not redeemable and have no preemptive or similar rights.
On
February 17, 2022, the Company entered into an underwriting agreement (the “Underwriting Agreement”) with Boustead Securities,
LLC, acting as representative of the underwriters (“Boustead”), in relation to the Company’s IPO, pursuant to which
the Company agreed to sell to the underwriters an aggregate of 2,222,222 shares of the Company’s common stock, at a price of $9.00
per share. The IPO closed on February 23, 2022, and resulted in net proceeds to the Company, after deducting the 8% underwriting discount,
and other offering costs, of approximately $17.1 million. Pursuant to the Underwriting Agreement, the Company issued to Boustead warrants
to purchase 111,111 shares of common stock. As of September 30, 2022, the warrants were exercisable, at the option of the holder, at
a per share exercise price equal to $10.35, and were exercisable at any time and from time to time, in whole or in part, starting on
February 23, 2022 and terminating on February 11, 2027. Subsequent to September 30, 2022, the warrants were exchanged for 93,466 shares
of restricted stock. See Notes 7 and 11.
The
Company evaluated the terms of the warrants issued at the close of the IPO and determined that they should be classified as equity instruments
based upon accounting guidance provided in ASC 480 and ASC 815-40. Since the Company determined that the warrants were equity-classified,
the Company recorded the proceeds from the IPO, net of issuance costs, within common stock at par value and the balance of the net proceeds
to additional paid in capital.
BLUE
WATER VACCINES INC.
Notes
to Financial Statements
Note
6 — Stockholders’ Equity (cont.)
Private
Investments in Public Equity
April
Private Placement
On
April 19, 2022, the Company consummated the closing of a private placement (the “April Private Placement”), pursuant to the
terms and conditions of a securities purchase agreement, dated as of April 13, 2022. At the closing of the April Private Placement, the
Company issued 590,406 shares of common stock, pre-funded warrants to purchase an aggregate of 590,406 shares of common stock and preferred
investment options to purchase up to an aggregate of 1,180,812 shares of common stock. The purchase price of each share of common stock
together with the associated preferred investment option was $6.775, and the purchase price of each pre-funded warrant together with
the associated preferred investment option was $6.774. The aggregate net cash proceeds to the Company from the April Private Placement
were approximately $6.9 million, after deducting placement agent fees and other offering expenses. The pre-funded warrants had an exercise
price of $0.001 per share, were exercisable on or after April 19, 2022, and were exercisable until the pre-funded warrants were exercised
in full. The pre-funded warrants were exercised in full on May 24, 2022, and as such the Company issued 590,406 shares of common stock
on that date. The preferred investment options were exercisable at any time on or after April 19, 2022 through April 20, 2026, at an
exercise price of $6.65 per share, subject to certain adjustments as defined in the agreement.
H.C.
Wainwright & Co., LLC (“Wainwright”) acted as the exclusive placement agent for the April Private Placement. The Company
agreed to pay Wainwright a placement agent fee and management fee equal to 7.5% and 1.0%, respectively, of the aggregate gross proceeds
from the April Private Placement and reimburse certain out-of-pocket expenses up to an aggregate of $85,000. In addition, the Company
issued warrants to Wainwright (the “April Wainwright Warrants”) to purchase up to 70,849 shares of common stock. The Wainwright
Warrants are in substantially the same form as the preferred investment options, except that the exercise price is $8.46875. The form
of the preferred investment options is a warrant, and as such the preferred investment options, the pre-funded warrants, and the Wainwright
Warrants are collectively referred to as the “April Private Placement Warrants”. Further, upon any exercise for cash of any
preferred investment options, the Company agreed to issue to Wainwright additional warrants to purchase the number of shares of common
stock equal to 6.0% of the aggregate number of shares of common stock underlying the preferred investment options that have been exercised,
also with an exercise price of $8.46875 (the “April Contingent Warrants”). The maximum number of April Contingent Warrants
issuable under this provision is 70,849.
In
connection with the April Private Placement, the Company entered into a Registration Rights Agreement with the purchasers, dated as of
April 13, 2022 (the “April Registration Rights Agreement”). The April Registration Rights Agreement provides that the Company
shall file a registration statement covering the resale of all of the registrable securities (as defined in the April Registration Rights
Agreement) with the Securities and Exchange Commission (the “SEC”) no later than the 20th calendar day following the date
of the April Registration Rights Agreement and have the registration statement declared effective by the SEC as promptly as possible
after the filing thereof, but in any event no later than the 45th calendar day following April 13, 2022 or, in the event of a full review
by the SEC, the 75th day following April 13, 2022. The registration statement on Form S-1 required under the Registration Rights Agreement
was filed with the SEC on May 3, 2022, and became effective on May 20, 2022.
Upon
the occurrence of any Event (as defined in the April Registration Rights Agreement), which, among others, prohibits the purchasers from
reselling the securities for more than ten consecutive calendar days or more than an aggregate of fifteen calendar days during any 12-month
period, and should the registration statement cease to remain continuously effective, the Company is obligated to pay to each purchaser,
on each monthly anniversary of each such Event, an amount in cash, as partial liquidated damages and not as a penalty, equal to the product
of 2.0% multiplied by the aggregate subscription amount paid by such purchaser in the April Private Placement. As of September 30, 2022,
the Company determined that the likelihood of the Company incurring liquidated damages pursuant to the April Registration Rights Agreement
is remote, and as such no accrual of these payments is required as of September 30, 2022.
The
Company evaluated the terms of the April Private Placement Warrants and determined that they should be classified as equity instruments
based upon accounting guidance provided in ASC 480 and ASC 815-40. Since the Company determined that the April Private Placement Warrants
were equity-classified, the Company recorded the proceeds from the April Private Placement, net of issuance costs, within common stock
at par value and the balance of the net proceeds to additional paid in capital.
The
Company evaluated the terms of the April Contingent Warrants and determined that they should be classified as a liability based upon
accounting guidance provided in ASC 815-40. Since the April Contingent Warrants are a form of compensation to the placement agent, the
Company recorded the value of the liability of approximately $36,000, as a reduction of additional paid in capital, with subsequent changes
in the value of the liability recorded in other income (expense) in the accompanying condensed statements of operations. The Company
measured the liability upon the close of the April Private Placement using a Monte Carlo simulation. See Note 3.
On
August 11, 2022, the investors in the April Private Placement agreed to cancel the aggregate of 1,180,812 preferred investment options
issued in the April Private Placement, as part of their participation in the August Private Placement. Concurrent with the cancellation
of the April preferred investment options, which was accounted for as an exchange of equity-linked financial instruments, the April Contingent
Warrants, which are issuable only upon exercise of the preferred investment options, were also modified. See ‘August Private Placement’
below for further detail.
BLUE
WATER VACCINES INC.
Notes
to Financial Statements
Note
6 — Stockholders’ Equity (cont.)
August
Private Placement
On August 11, 2022, the Company consummated the
closing of a private placement (the “August Private Placement”), pursuant to the terms and conditions of a securities purchase
agreement, dated as of August 9, 2022. At the closing of the August Private Placement, the Company issued 1,350,000 shares of common stock,
pre-funded warrants to purchase an aggregate of 2,333,280 shares of common stock and preferred investment options to purchase up to an
aggregate of 4,972,428 shares of common stock. The purchase price of each share of common stock together with the associated preferred
investment option was $2.715, and the purchase price of each pre-funded warrant together with the associated preferred investment option
was $2.714. The aggregate net cash proceeds to the Company from the August Private Placement were approximately $8.7 million, after deducting
placement agent fees and other offering expenses. In addition, the investors in the August Private Placement, who are the same investors
from the April Private Placement, agreed to cancel preferred investment options to purchase up to an aggregate of 1,180,812 shares of
the Company’s common stock issued in April 2022. The pre-funded warrants have an exercise price of $0.001 per share, are exercisable
on or after August 11, 2022, and are exercisable until the pre-funded warrants are exercised in full. On September 20, 2022, 945,000 of
the pre-funded warrants were exercised, and as such the Company issued 945,000 shares of common stock on that date. The preferred investment
options are exercisable at any time on or after August 11, 2022 through August 12, 2027, at an exercise price of $2.546 per share, subject
to certain adjustments as defined in the agreement.
Wainwright
acted as the exclusive placement agent for the August Private Placement. The Company agreed to pay Wainwright a placement agent fee and
management fee equal to 7.5% and 1.0%, respectively, of the aggregate gross proceeds from the August Private Placement and reimburse
certain out-of-pocket expenses up to an aggregate of $85,000. In addition, the Company issued warrants to Wainwright (the “August
Wainwright Warrants”) to purchase up to 220,997 shares of common stock. The August Wainwright Warrants are in substantially the
same form as the preferred investment options, except that the exercise price is $3.3938. The form of the preferred investment options
is a warrant, and as such the preferred investment options, the pre-funded warrants, and the August Wainwright Warrants are collectively
referred to as the “August Private Placement Warrants”. Further, upon any exercise for cash of any preferred investment options,
the Company agreed to issue to Wainwright additional warrants to purchase the number of shares of common stock equal to 6.0% of the aggregate
number of shares of common stock underlying the preferred investment options that have been exercised, also with an exercise price of
$3.3938 (the “August Contingent Warrants”). The maximum number of August Contingent Warrants issuable under this provision
is 298,346, which includes 70,849 of April Contingent Warrants that were modified in connection with the August Private Placement.
In
connection with the August Private Placement, the Company entered into a Registration Rights Agreement with the purchasers, dated as
of August 9, 2022 (the “August Registration Rights Agreement”). The August Registration Rights Agreement provides that the
Company shall file a registration statement covering the resale of all of the registrable securities (as defined in the August Registration
Rights Agreement) with the SEC no later than the 30th calendar day following the date of the August Registration Rights Agreement and
have the registration statement declared effective by the SEC as promptly as possible after the filing thereof, but in any event no later
than the 45th calendar day following August 9, 2022 or, in the event of a full review by the SEC, the 80th day following August 9, 2022.
The registration statement on Form S-1 required under the Registration Rights Agreement was filed with the SEC on August 29, 2022, and
became effective on September 19, 2022.
Upon
the occurrence of any Event (as defined in the August Registration Rights Agreement), which, among others, prohibits the purchasers from
reselling the securities for more than ten consecutive calendar days or more than an aggregate of fifteen calendar days during any 12-month
period, and should the registration statement cease to remain continuously effective, the Company is obligated to pay to each purchaser,
on each monthly anniversary of each such Event, an amount in cash, as partial liquidated damages and not as a penalty, equal to the product
of 2.0% multiplied by the aggregate subscription amount paid by such purchaser in the August Private Placement. As of September 30, 2022,
the Company determined that the likelihood of the Company incurring liquidated damages pursuant to the August Registration Rights Agreement
is remote, and as such no accrual of these payments is required as of September 30, 2022.
The
Company evaluated the terms of the August Private Placement Warrants and determined that they should be classified as equity instruments
based upon accounting guidance provided in ASC 480 and ASC 815-40. Since the Company determined that the August Private Placement Warrants
were equity-classified, the Company recorded the proceeds from the August Private Placement, net of issuance costs, within common stock
at par value and the balance of the net proceeds to additional paid in capital.
As discussed above, the investors in the private
placements agreed to cancel the aggregate of 1,180,812 preferred investment options issued in the April Private Placement, as part of
their participation in the August Private Placement. The preferred investment options that were cancelled were effectively exchanged for
1,289,148 new preferred investment options in the August Private Placement, and accordingly have been accounted for as a modification
or exchange of equity-linked instruments. In accordance with ASC 815-40, as the preferred investment options were classified as equity
instruments before and after the exchange, and as the exchange is directly attributable to an equity offering, the Company recognized
the effect of the exchange as an equity issuance cost. The increase in the fair value of the preferred investment options as a result
of the exchange was approximately $860,000, and was determined using the Black-Scholes option pricing model, with the following assumptions:
| |
Original | | |
Exchanged | |
Exercise price | |
$ | 6.65 | | |
$ | 2.546 | |
Term (years) | |
| 3.67 | | |
| 5.0 | |
Expected stock price volatility | |
| 116.2 | % | |
| 120.2 | % |
Risk-free rate of interest | |
| 3.16 | % | |
| 2.98 | % |
BLUE WATER VACCINES INC.
Notes to Financial Statements
Note 6 — Stockholders’ Equity (cont.)
The Company evaluated the terms of
the August Contingent Warrants and determined that they should be classified as a liability based upon accounting guidance provided
in ASC 815-40. As a result of the exchange of the preferred investment options issued in the April Private Placement, the underlying
equity-linked instruments that would trigger issuance of the April Contingent Warrants was replaced, and therefore the 70,849 of
April Contingent Warrants were exchanged for 70,849 of the August Contingent Warrants. The value of the April Contingent Warrant
liability was adjusted to fair value on the date of modification, using a Monte Carlo simulation, with the change in fair value of
approximately $8,000 recognized in the accompanying condensed statements of operations. The remaining 227,497 of August Contingent
Warrants were measured as a liability upon the close of the August Private Placement, and the entire 298,346 of August Contingent
Warrants were remeasured at September 30, 2022, using a Monte Carlo simulation. See Note 3. Since the Contingent Warrants are a form
of compensation to the placement agent, the Company recorded the value of the liability of approximately $39,000, as a reduction of
additional paid in capital, with subsequent changes in the value of the liability recorded in other income (expense) in the
accompanying condensed statements of operations.
Warrants
The following summarizes activity related to the Company’s outstanding
warrants as discussed above, excluding contingent warrants issuable upon exercise of the preferred investment options, for the nine months
ended September 30, 2022:
| |
| | |
| | |
Weighted | |
| |
| | |
| | |
Average | |
| |
| | |
Weighted | | |
Remaining | |
| |
| | |
Average | | |
Contractual | |
| |
Number of | | |
Exercise | | |
Life | |
| |
Shares | | |
Price | | |
(in years) | |
Outstanding as of December 31, 2021 | |
| — | | |
$ | — | | |
| — | |
Granted | |
| 9,479,883 | | |
| 2.43 | | |
| | |
Exercised | |
| (1,535,406 | ) | |
| 0.001 | | |
| | |
Cancelled | |
| (1,180,812 | ) | |
| 6.65 | | |
| | |
Outstanding as of September 30, 2022 | |
| 6,763,665 | | |
| 2.24 | | |
| 4.9 | |
Warrants vested and exercisable as of September 30, 2022 | |
| 6,763,665 | | |
$ | 2.24 | | |
| 4.9 | |
As of September 30, 2022, the outstanding warrants
include 70,849 April Private Placement Warrants, 6,581,705 August Private Placement Warrants, and 111,111 warrants issued in connection
with the IPO, which are exercisable into 6,763,665 shares of common stock which had a fair value of $1.71 per share, based on the closing
trading price on that day.
Additionally, as of September 30, 2022,
the value of the April Contingent Warrants and the August Contingent Warrants (collectively the “Contingent Warrants”) was
approximately $42,000, and none of the Contingent Warrants have been issued, as no preferred investment options have been exercised.
BLUE WATER VACCINES INC.
Notes to Financial Statements
Note 6 — Stockholders’ Equity (cont.)
Preferred Stock
Prior to the close
of the IPO, the Company had designated 1,150,000 shares of preferred stock as Series Seed Preferred Stock (“Series Seed”),
with an original issue price of $6.09 per share (the “Original Issue Price”). As of September 30, 2022 and December 31, 2021,
there were 0 and 1,146,138 shares issued and outstanding, respectively.
Conversion
Each share of the Series Seed was convertible,
at the option of the holder, at any time and from time to time, and without the payment of additional consideration by the holder, at
a conversion price of $1.52 per share, subject to certain adjustments for stock splits, stock dividends, recapitalizations, and similar
corporate transactions, into fully paid and non-assessable shares of the Company’s common stock. Each Series Seed share was automatically
convertible into common stock of the Company, at the then-effective conversion price, upon the closing of a firmly underwritten public
offering netting proceeds of at least $50 million with an offering price of at least three hundred percent (300%) of the Original Issue
Price of the Series Seed. On February 18, 2022, the majority of the holders of the Series Seed approved the automatic conversion of the
outstanding shares of the Series Seed and all related accrued and unpaid dividends, upon the close of the IPO. The number of conversion
shares to be issued upon the close of the IPO were to be calculated in accordance with the original conversion terms provided by the Company’s
Amended and Restated Certificate of Incorporation (“COI”) dated July 1, 2019. This conversion occurred on February 23, 2022,
upon the close of the Company’s IPO.
Dividends
Holders of the Series Seed were entitled
to receive cumulative dividends at a per share rate of 8% per annum, compounded annually, on the initial investment amount commencing
on the date of issue. Dividends were payable only when, as, and if declared by the Board of Directors or upon a Liquidation Event, as
described below. Dividends on Series Seed were in preference to any dividend on the Company’s common stock. Upon the close of the
IPO, aggregate cumulative dividends of $1,586,162 or $1.38 per Series Seed share were automatically converted into shares of common stock.
Liquidation Preference
In the event of certain voluntary or involuntary
acquisition or sale transactions or upon the liquidation, dissolution or winding up of the Company (each, a “Liquidation Event”),
the holders of Series Seed were entitled to receive out of the proceeds or assets of the Company legally available for distribution to
its stockholders (the “Proceeds”), prior and in preference to any distribution of the Proceeds of such Liquidation Event to
the holders of shares of common stock by reason of their ownership thereof, an amount (“the Liquidation Preference Amount”)
determined based on the provisions of the Company’s COI. The COI provided that the Liquidation Preference Amount be calculated upon
the occurrence of a Liquidation Event, based on the Company’s achievement of a Pre-Clinical Milestone and a Qualified Financing,
both as defined in the COI. Per the provisions of the COI, if a Liquidation Event occurred before a Pre-Clinical Milestone was achieved,
the Liquidation Preference Amount would be equal to two times the Series Seed Original Issue price per share, plus unpaid cumulative dividends.
If a Liquidation Event occurred after a Pre-Clinical Milestone was achieved, and after a Qualified Financing was completed, then the Liquidation
Preference Amount would be equal to one times the Series Seed Original Issue price, plus unpaid cumulative dividends. If a Liquidation
Event occurred after a Pre-Clinical Milestone was achieved and before a Qualified Financing was completed, the Liquidation Preference
Amount would be equal to the greater of (a) such amount per share as such holder would have been entitled to receive after a Qualified
Financing or (b) two times the Series Seed Original Issue price, plus unpaid cumulative dividends.
As of December 31, 2021, and all other prior historical
periods, the Liquidation Preference Amount was equal to two times the Series Seed Original Issue Price per share, plus unpaid cumulative
dividends. In the event that the Proceeds were insufficient to enable the distribution in full of the Liquidation Preference Amount to
the holders of the Series Seed for all of the preferred shares held by them, all of the Proceeds were to be distributed among the holders
of Series Seed on a pro rata basis. Upon completion of the distribution required to the holders of Series Seed, all of the remaining Proceeds
available for distribution to stockholders were to be distributed among the holders of common shares and preferred shares, on an as-converted
basis, pro rata based on the number of common shares held by each such holder. However, if upon the occurrence of a Liquidation Event,
the Liquidation Preference Amount the Series Seed stockholders were entitled to receive is two times the Original Issue Price per share,
plus unpaid cumulative dividends, after such distribution is made, then the remaining Proceeds available for distribution to stockholders
were to be distributed among the holders of common shares, pro rata based on the number of common shares held by each such holder.
Voting
On any matter presented to the stockholders
of the Company for their action or consideration at any meeting of stockholders of the Company (or by written consent of stockholders
in lieu of meeting), each holder of outstanding shares of Series Seed were entitled to cast the number of votes equal to the number of
whole shares of common stock into which the shares of Series Seed held by such holder were convertible as of the record date for determining
stockholders entitled to vote on such matter. Holders of Series Seed were entitled to vote together with the holder of common stock as
a single class. Holders of Series Seed were entitled to nominate two out of five of the Company’s directors.
BLUE WATER VACCINES INC.
Notes to Financial Statements
Note 6 — Stockholders’ Equity (cont.)
Equity Incentive Plans
The Company’s 2019 Equity Incentive
Plan (the “2019 Plan”) was adopted by its board of directors and by its stockholders on July 1, 2019. The Company has reserved
1,400,000 shares of common stock for issuance pursuant to the 2019 Plan. There were no share-based awards granted under the 2019 Plan
during the three and nine months ended September 30, 2022 and 2021.
In addition, on February 23, 2022 and
in connection with the closing of the IPO, the Company’s board of directors adopted the Company’s 2022 Equity Incentive Plan
(the “2022 Plan”), which is the successor and continuation of the Company’s 2019 Plan. Under the 2022 Plan, the Company
may grant stock options, restricted stock, restricted stock units, stock appreciation rights, and other forms of awards to employees,
directors and consultants of the Company. Upon its effectiveness, a total of 1,600,000 shares of common stock were reserved for issuance
under the 2022 Plan. In August 2022, the number of shares of common stock reserved for issuance under the 2022 Plan was increased to 2,600,000.
The stock options granted during the three and nine months ended September 30, 2022 were all granted under the 2022 Plan. As of September
30, 2022, there are 1,050,747 options available for issuance under the 2022 Plan.
Stock Options
The following summarizes activity related
to the Company’s stock options under the 2019 Plan and the 2022 Plan for the nine months ended September 30, 2022:
| |
| | |
| | |
| | |
Weighted | |
| |
| | |
| | |
| | |
Average | |
| |
| | |
Weighted | | |
| | |
Remaining | |
| |
| | |
Average | | |
Total | | |
Contractual | |
| |
Number of | | |
Exercise | | |
Intrinsic | | |
Life | |
| |
Shares | | |
Price | | |
Value | | |
(in years) | |
Outstanding as of December 31, 2021 | |
| 780,640 | | |
$ | 0.01 | | |
$ | 532,787 | | |
| 8.1 | |
Granted | |
| 768,613 | | |
| 6.10 | | |
| — | | |
| — | |
Forfeited / cancelled | |
| — | | |
| — | | |
| — | | |
| — | |
Exercised | |
| (165,452 | ) | |
| 0.01 | | |
| 573,465 | | |
| — | |
Outstanding as of September 30, 2022 | |
| 1,383,801 | | |
| 3.40 | | |
$ | 1,044,282 | | |
| 8.6 | |
Options vested and exercisable as of September 30, 2022 | |
| 847,081 | | |
$ | 3.13 | | |
$ | 735,622 | | |
| 8.4 | |
The fair value of options granted in 2022 was estimated using the following
assumptions:
| |
For the Three Months
Ended September 30, | | |
For the Nine Months
Ended September 30, | |
| |
2022 | | |
2022 | |
Exercise price | |
$ | 2.91 – 3.48 | | |
$ | 2.55 – 6.45 | |
Term (years) | |
| 5.04 – 7.00 | | |
| 5.00 – 10.00 | |
Expected stock price volatility | |
| 114.8% – 119.9 | % | |
| 114.5% – 121.2 | % |
Risk-free rate of interest | |
| 3.2% – 3.5 | % | |
| 2.9% – 3.5 | % |
The weighted average
grant date fair value of stock options granted during the three and nine months ended September 30, 2022 was $2.55 and $3.49, respectively.
The aggregate fair value of stock options that vested during the three and nine months ended September 30, 2022 was approximately $0.4
million and $1.9 million, respectively.
Of the total stock options granted during
the nine months ended September 30, 2022, 200,000 stock options were granted to the Company’s Chief Executive Officer (“CEO”),
Chairman, and significant stockholder, 200,000 stock options were granted to the Company’s Chief Business Officer (“CBO”),
and 100,000 stock options were granted to the Company’s Chief Financial Officer (“CFO”). The aggregate grant-date fair
value of the stock options granted to the CEO, CBO, and CFO during the nine months ended September 30, 2022 was approximately $1.8 million,
of which approximately $0.2 million and $1.4 million was recognized as stock-based compensation expense during the three and nine months
ended September 30, 2022, respectively. Additionally, during the three and nine months ended September 30, 2022, the Company granted an
aggregate of 4,073 and 68,613 stock options, respectively, to non-executive directors. The grant-date fair value of the stock options
granted to the non-executive directors was approximately $12,000 and $0.2 million for the three and nine months ended September 30, 2022,
respectively, of which approximately $46,000 and $0.1 million was recognized as stock-based compensation expense during the three and
nine months ended September 30, 2022, respectively.
During the three and nine months ended
September 30, 2022, the Company’s board of directors approved the accelerated vesting of an aggregate of 19,109 stock options to
a former director, in connection with the director’s separation from the Company. The Company recognized stock-based compensation
expense of approximately $48,000 related to this modification during the three and nine months ended September 30, 2022.
BLUE WATER VACCINES INC.
Notes to Financial Statements
Note 6 — Stockholders’ Equity (cont.)
Stock-Based Compensation
Stock-based compensation expense for the three and nine months
ended September 30, 2022 and 2021 was as follows:
| |
For the Three Months Ended | | |
For the Nine Months Ended | |
| |
September 30, | | |
September 30, | |
| |
2022 | | |
2021 | | |
2022 | | |
2021 | |
General and administrative | |
$ | 255,115 | | |
$ | 9,337 | | |
$ | 1,193,743 | | |
$ | 33,213 | |
Research and development | |
| 74,694 | | |
| 19,971 | | |
| 602,525 | | |
| 72,740 | |
Total | |
$ | 329,809 | | |
$ | 29,308 | | |
$ | 1,796,268 | | |
$ | 105,953 | |
As of September 30, 2022, unrecognized
stock-based compensation expense relating to outstanding stock options is approximately $1.0 million, which is expected to be recognized
over a weighted-average period of 2.02 years.
Note 7 — Commitments and Contingencies
Office Leases
Starting in 2018, the Company leased office space
for approximately $5,500 a month from a related party. The Company was required to pay a $15,000 rental deposit. Rent expense related
to this lease for the three and nine months ended September 30, 2022 was $0. Rent expense related to this lease for the three and nine
months ended September 30, 2021 was approximately $0 and $28,000, respectively. The Company terminated the related party lease in May
2021 and entered into a month-to-month lease in Cincinnati, Ohio, with an unrelated party in April 2021 with monthly payments of approximately
$500 per month.
The Company entered into a short-term
lease in Palm Beach, Florida with an unrelated party, with a commencement date of May 1, 2022, for approximately $14,000 per month. The
lease term ends on April 30, 2023 and is personally guaranteed by the Company’s CEO. The Company incurred rent expense for the three
and nine months ended September 30, 2022 of approximately $53,000 and $89,000, respectively.
Litigation
From time to time, the Company may be
subject to various legal proceedings and claims that arise in the ordinary course of its business activities. As of September 30, 2022,
the Company is not a party to any material legal proceedings and is not aware of any pending or threatened claims aside from the following.
On April 15, 2022, the Company received
a demand letter (the “Demand Letter”) from Boustead. The Demand Letter alleged that the Company breached the Underwriting
Agreement entered into between Boustead and the Company, dated February 17, 2022, in connection with the Company’s initial public
offering. The Demand Letter alleged that, by engaging Wainwright as placement agent in the April Private Placement, the Company breached
Boustead’s right of first refusal (“ROFR”) to act as placement agent granted to Boustead under the Underwriting Agreement
and, as a result of selling securities in the April Private Placement, breached the Company’s obligation under the Underwriting
Agreement not to offer, sell, issue, agree or contract to sell or issue or grant or modify the terms of any option for the sale of, any
securities prior to February 17, 2023 (the “Standstill”).
On October 9, 2022, the Company and Boustead entered
into a Settlement Agreement and Release (the “Settlement Agreement”), pursuant to which Boustead agreed to waive the ROFR
and the Standstill, and to release the Company from certain claims with respect to the April Private Placement, the August Private Placement,
and all future private, public equity or debt offerings of the Company. As consideration for such waiver and termination of the Underwriting
Agreement, the Company agreed to pay Boustead a cash fee of $1,000,000, $50,000 in legal expenses, and release Boustead from all claims,
subject to certain exceptions. In addition, the Company agreed to issue to Boustead 93,466 shares of restricted common stock in
exchange for the cancellation of 111,111 warrants issued to Boustead in connection with the IPO (see Note 6). Concurrent with the execution
of the Settlement Agreement, the Company and Boustead Capital Markets, LLP (“Boustead Capital”) entered into a three-month
Advisory Agreement (the “Advisory Agreement”) for which consideration equal to 200,000 shares of restricted common stock,
with no vesting provisions, was issuable to Boustead Capital upon execution of the Advisory Agreement.
The Company evaluated the related contingency
in accordance with authoritative guidance, and determined that all consideration due by the Company under the Settlement Agreement and
the Advisory Agreement relates to the settlement of a liability that was incurred as of September 30, 2022, and therefore the Company
recognized approximately $1.3 million as an accrued loss contingency in the accompanying condensed balance sheet as of September 30, 2022.
The restricted common stock exchanged for the cancellation of the warrants was accounted for as a modification of the warrant, with the
incremental fair value of approximately $10,000 recorded as part of the consideration. In addition, the total consideration includes approximately
$254,000 for the fair value of the 200,000 shares of restricted common stock that were issued upon execution of the Advisory Agreement.
The restricted common stock issuable under the Settlement Agreement and the Advisory Agreement was valued based on the closing trading
price on the date the agreements were executed, adjusted to reflect the effect of the restriction on the sale of the common stock. The
value of the restriction was measured using the Black-Scholes model to measure the discount for lack of marketability, using the following
assumptions: expected term of 0.5 years, expected volatility of 96.36%, risk-free interest rate of 4.09% and dividend yield of 0.0%.
The Company has recorded a related expense
of approximately $0.8 million and $1.3 million for the three and nine months ended September 30, 2022, respectively, which is included
in general and administrative expense in the accompanying condensed statements of operations.
BLUE WATER VACCINES INC.
Notes to Financial Statements
Note 7 — Commitments and Contingencies (cont.)
Registration Rights Agreement
See Note 6.
Significant Agreements
Oxford University Innovation Limited
Pursuant to the OUI Agreement, as disclosed
in Note 5, the Company is obligated to pay certain milestone and royalty payments in the future, as the related contingent events occur.
Specifically, the Company is obligated to pay a 6% royalty on all net sales of licensed products, as defined in the OUI Agreement, with
an annual minimum royalty payment of $250,000 starting post-product launch, until the expiration of the OUI Agreement or revocation of
the last valid claim covering a licensed product, at which point a royalty rate of 3% will apply. An annual maintenance fee of $10,000
and $20,000 is required in the pre-phase III year and Phase III year, respectively, and as defined in the OUI Agreement. The Company is
also obligated to pay a 25% royalty on any sums received by the Company from any sublicensee (including all up-front, milestone and other
one-off payments received by the Company from any sub-licenses or other contracts granted by the Company with respect to the licensed
technology). In addition, the Company is required to pay OUI milestone payments of up to an aggregate of $51.25 million; specifically,
upon the achievement of specified development milestones of approximately $2.25 million, regulatory milestones of approximately $9.5 million,
and commercial milestones of approximately $39.5 million. The annual maintenance fee and milestone fees are indexed to the RPI (Retail
Prices index for all items which is published in the United Kingdom by the Office for National Statistics, or any replacement of it) and
will be increased or decreased as appropriate as set forth in the OUI Agreement. As of September 30, 2022, the Company evaluated the likelihood
of the Company achieving the specified milestones and generating product sales, and determined the likelihood is not yet probable and
as such no accrual of these payments is required as of September 30, 2022.
Oxford University Research Agreement
Pursuant to the terms of the OUI Agreement,
as disclosed in Note 5, the Company entered into a sponsored research agreement dated December 18, 2019 with Oxford University for research
related to the OUI Agreement for a period of three years for a total of £420,000. The Company prepaid the full amount to Oxford
of $554,802 for the services in January 2020, of which approximately $0.2 million remains as a prepaid expense as of September 30, 2022
and December 31, 2021. On May 16, 2022, the Company entered into an amendment to the Oxford University Research Agreement, whereby the
Oxford University Research Agreement was extended until June 30, 2024, with an option to extend another 12 months, for a fee of £53,500
(or approximately $56,000).
St. Jude Children’s Hospital
Pursuant to the St. Jude Agreement, as
disclosed in Note 5, the Company is obligated to pay certain milestone and royalty payments in the future, as the related contingent events
occur. On May 11, 2022, the Company entered into an amendment to the St. Jude Agreement, whereby the royalty terms, milestones payments
and licensing fees were amended. Specifically, pursuant to the terms of the St. Jude Agreement, as amended, the Company is obligated to
make 5% royalty payments for each licensed product(s) sold by the Company or its affiliates, based on the net sales for the duration of
the St. Jude Agreement, and also pay 15% of consideration received for any sublicenses. The Company is also required to pay an additional
one-time $5,000 license fee, and an annual maintenance fee of $10,000 beginning on the first anniversary of the Effective Date (which
is waived if all of the developmental milestones scheduled for completion before such annual fee is due have been achieved). In addition,
the Company is required to pay St. Jude milestone payments of up to an aggregate of $1.9 million; specifically, upon the achievement of
specified development milestones of $0.3 million, regulatory milestones of $0.6 million, and commercial milestones of $1.0 million. As
of September 30, 2022, the Company evaluated the likelihood of the Company achieving the specified milestones and generating product sales,
and determined the likelihood is not yet probable and as such no accrual of these payments is required as of September 30, 2022.
St. Jude Children’s Sponsored Research Agreement
In addition to the St. Jude Agreement,
the Company also entered into a sponsored research agreement dated May 3, 2021 with St. Jude for research related to the St. Jude Agreement
(the “St. Jude SRA”). Pursuant to the St. Jude SRA, the Company is obligated to pay St. Jude an aggregate amount of $73,073
in two parts, Phase I for $57,624 and Phase II for $15,449. This sponsored research project began during 2021, and the Company recorded
approximately $8,000 in related accrued expenses at December 31, 2021.
The Company entered into a second sponsored
research agreement with St. Jude, dated August 29, 2022, pursuant to which the Company is obligated to pay St. Jude an amount of $75,603
which is due within 30 days of the effective date of the agreement.
During the three and nine months ended September
30, 2022, the Company incurred related research and development expenses related to the sponsored research agreements with St. Jude of
approximately $8,000 and $15,000, respectively, and had approximately $8,000 recorded in accrued expenses at September 30, 2022. During
the three and nine months ended September 30, 2021, the Company incurred related research and development expenses of approximately $0
and $58,000, respectively.
BLUE WATER VACCINES INC.
Notes to Financial Statements
Note 7 — Commitments and Contingencies (cont.)
Cincinnati Children’s Hospital Medical Center
Pursuant to the CHMC Agreement, as disclosed
in Note 5, the Company is obligated to pay certain milestone and royalty payments in the future, as the related contingent events
occur. Specifically, the Company is obligated to pay CHMC a single-digit royalty on net sales, being 5%, 4% or 2% depending on the
product, until the last valid claim covering a licensed product exists, at which point the royalty rates decrease by 50%. The
Company is also obligated to pay up to a 25% royalty on any non-royalty sublicense revenue paid to the Company by any sublicensee.
The CHMC Agreement also provides the Company with an option to license any CHMC or jointly patented modification, alteration or
improvement of any invention claimed in a Licensed Patent (“CHMC Improvement” and “Joint Improvement,
respectively”), with a $50,000 option fee for each Improvement that the Company elects to include in the license grant of the
CHMC Agreement. In addition, the Company is required to pay CHMC milestone payments of up to an aggregate of $59.75 million;
specifically, upon the achievement of specified development milestones of approximately $0.5 million, regulatory milestones of
approximately $1.25 million, and commercial milestones of approximately $58 million. As of September 30, 2022, the Company evaluated
the likelihood of the Company achieving the specified milestones and generating product sales, and determined the likelihood is not
yet probable and as such no accrual of these payments is required as of September 30, 2022.
CHMC Sponsored Research Agreement
In addition to the CHMC Agreement, the
Company also entered into a sponsored research agreement dated June 30, 2022 with CHMC for research related to the CHMC Agreement (the
“CHMC SRA”). Pursuant to this research agreement, the Company is obligated to pay CHMC an aggregate amount not-to-exceed $247,705.
The CHMC SRA has a term of one year, and is cancelable upon 60 days written notice by either party for convenience. In addition, either
party may terminate the CHMC SRA in the event the other party (a) files or has filed against it a petition under the Bankruptcy Act (among
other things) or (b) fails to perform or otherwise breaches its obligations under the agreement, and has not cured such failure or breach
within 30 days of notice of material breach. During the three and nine months ended September 30, 2022, the Company incurred related research
and development expenses of approximately $37,000, which was included in accrued expenses at September 30, 2022. There were no such expenses
incurred during the three and nine months ended September 30, 2021.
Ology Bioservices, Inc. (which was later acquired by National Resilience,
Inc.)
Pursuant to the Ology MSA
and the second Project Addendum, as disclosed in Note 5, the Company is obligated to pay Ology an aggregate amount of approximately $2.8
million, plus reimbursement for materials and outsourced testing which will be billed at cost plus 15%. This project began during 2021,
and the Company recorded approximately $164,000 and $115,000 as related accounts payable and accrued expenses, respectively, at December
31, 2021.
On April 20, 2022, the Company entered into an amendment to
the Ology MSA, whereby the Company’s obligations increased by $300,000, specifically related to regulatory support on the project.
During the three and nine months ended September 30, 2022, the Company incurred related research and development expenses of approximately
$496,000 and $988,000, respectively, and had approximately $53,000 and $851,000 recorded as related accounts payable and accrued expenses,
respectively, at September 30, 2022. There was approximately $71,000 of related expenses incurred during the three and nine months ended
September 30, 2021. This project is currently expected to be performed through the fourth quarter of 2023.
Underwriter Termination Agreement
On February 7, 2022, the Company and its
former underwriter, Maxim Group (“Maxim”), entered into a termination agreement, whereby the parties agreed to terminate their
engagement of Maxim as the Company’s lead managing underwriter and book runner in connection with the Company’s IPO. Per the
terms of the termination agreement, the Company agreed to pay Maxim a termination fee of $300,000, due upon the close of the Company’s
IPO. The termination fee was recorded as general and administrative expense, and paid, during the nine months ended September 30, 2022.
Indemnification
In the normal course of business, the
Company enters into contracts and agreements that contain a variety of representations and warranties and provide for general indemnifications.
The Company’s exposure under these agreements is unknown because it involves claims that may be made against the Company in the
future but have not yet been made. To date, the Company has not paid any claims or been required to defend any action related to its indemnification
obligations. However, the Company may incur charges in the future as a result of these indemnification obligations.
Risks and Uncertainties — COVID-19
Management continues to evaluate the impact
of the COVID-19 pandemic on the industry and has concluded that while it is reasonably possible that the virus could have a negative effect
on the Company’s financial position, results of its operations and/or search for drug candidates, the specific impact is not readily
determinable as of the date of these financial statements. The financial statements do not include any adjustments that might result from
the outcome of this uncertainty.
BLUE WATER VACCINES INC.
Notes to Financial Statements
Note 8 — Related Party Transactions
The Company originally engaged the CEO, who is
also the Board Chairman and prior to the close of the IPO, sole common stockholder of the Company, pursuant to a consulting agreement
commencing October 22, 2018, which called for the Company to pay for consulting services performed on a monthly basis. Upon the close
of the Company’s IPO, the consulting agreement was terminated and the CEO’s employment agreement became effective. During
the three and nine months ended September 30, 2022, the Company incurred approximately $0 and $63,000 in fees under the consulting agreement,
respectively, which are recognized in general and administrative expenses in the accompanying condensed statements of operations. During
the three and nine months ended September 30, 2021, the Company incurred approximately $105,000 and $315,000 in fees under the consulting
agreement, respectively, which are recognized in general and administrative expenses in the accompanying condensed statements of operations.
The Company also leased office space
from a related party, through common ownership. The lease is further described in Note 7 of these financial statements. The lease was
terminated in May 2021, and the related deposit was reclassified to the receivable from related party balance.
During the nine months ended September 30, 2022,
the Company’s compensation committee approved one-time bonus awards of $140,000 and $100,000 to the Company’s CEO and CBO,
respectively, in recognition of their efforts in connection with the Company’s IPO. These bonuses were recognized during the nine
months ended September 30, 2022 as general and administrative expenses in the accompanying condensed statements of operations. In addition,
during the three and nine months ended September 30, 2022, the Company’s compensation committee approved stock option grants under
the Company’s 2022 Equity Incentive Plan to certain of the Company’s executive officers. See Note 6.
As of September 30, 2022 and December 31, 2021,
the Company has a receivable from related party of approximately $35,000 and $153,000, respectively. The balance as of September 30, 2022
consists of miscellaneous payments made by the Company on the behalf of the Company’s CEO.
The CEO paid the Company approximately $14,000 of the receivable balance in October 2022. The balance as of December 31,
2021, consists primarily of consulting fee prepayments to the Company’s CEO, in the amount of $140,000. These consulting fee prepayments
were repaid to the Company in lieu of a bonus payout due to the CEO during May 2022. The remaining balance as of December 31, 2021 consists
of miscellaneous payments made by the Company on the behalf of the CEO.
One of the Company’s former directors
and current Scientific Advisory Board members serves on the Advisory Board for the Cincinnati Children’s Hospital Medical Center
Innovation Fund, which is affiliated with CHMC. The Company has an exclusive license agreement with CHMC as disclosed in Note 5. This
director resigned from the Company’s board upon the close of its IPO.
Note 9 — Income Taxes
No provision for federal, state or foreign
income taxes has been recorded for the three and nine months ended September 30, 2022 and 2021. The Company has incurred net operating
losses for all of the periods presented and has not reflected any benefit of such net operating loss carryforwards in the accompanying
condensed financial statements due to uncertainty around utilizing these tax attributes within their respective carryforward periods.
The Company has recorded a full valuation allowance against all of its deferred tax assets as it is not more likely than not that such
assets will be realized in the near future. The Company’s policy is to recognize interest expense and penalties related to income
tax matters as income tax expense. For the three and nine months ended September 30, 2022 and 2021, the Company has not recognized any
interest or penalties related to income taxes.
Note 10 — Retirement Plan
Effective January 1, 2022, the Company
adopted a defined contribution savings plan pursuant to Section 401(k) of the Internal Revenue Code (“the 401(k) Plan”). The
401(k) Plan is for the benefit of all qualifying employees and permits voluntary contributions by employees of up to 100% of eligible
compensation, subject to the maximum limits imposed by the Internal Revenue Service. The terms of the 401(k) Plan allow for discretionary
employer contributions. No expenses were incurred related to the 401(k) Plan during the three and nine months ended September 30, 2022,
and the 401(k) Plan lapsed during the nine months ended September 30, 2022 due to inactivity.
Note 11 — Subsequent Events
On October 9, 2022, the Company and Boustead entered
into a Settlement Agreement and Release (the “Settlement Agreement”) pursuant to which Boustead agreed to waive certain obligations
of the Company under the Underwriting Agreement that was entered into between the two parties in connection with the Company’s IPO
in February 2022. As consideration for such waiver and termination of the Underwriting Agreement, the Company agreed to pay Boustead a
cash fee of $1,000,000, $50,000 in legal expenses, and release Boustead from all claims, subject to certain exceptions. In addition,
the Company agreed to issue to Boustead 93,466 shares of restricted common stock in exchange for the cancellation of 111,111 warrants
issued to Boustead in connection with the IPO. Concurrent with the execution of the Settlement Agreement, the Company and Boustead entered
into a three-month Advisory Agreement for which consideration equal to 200,000 shares of restricted common stock, with no vesting provisions,
was issuable to Boustead Capital upon execution of the Advisory Agreement. See Note 7.
On October 4, 2022, 491,640 of the
Pre-Funded Warrants issued in connection with the August Private Placement were exercised, at an exercise price of $0.001 per share,
and as such the Company issued 491,640 shares of common stock on that date.
On November 4, 2022, the Company’s Board
of Directors (the “Board”) appointed a new Class I Director to replace a director who resigned from the Board on the same
day. The new Class I Director was also appointed to the Compensation Committee of the Board and the Nomination and Corporate Governance
Committee of the Board. On November 8, 2022, the Board granted 3,610 stock options to the new Class I Director, with an exercise price
of $1.06.
On November 10, 2022, the Board approved a share
repurchase program to allow for the Company to repurchase up to 5 million shares with a maximum price of $1.00 per share, with discretion
to management to make purchases subject to market conditions.