PaxMedica, Inc. [PXMD] Filings

10-Q 1 pxmd-20230930x10q.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended September 30, 2023


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

For the transition period from to

PAXMEDICA, INC.

(Exact name of registrant as specified in its charter)


Delaware	001-41475	85-0870387
(State or other jurisdiction of incorporation or organization)	(Commission File Number)	(IRS Employer Identification No.)


303 South Broadway, Suite 125 Tarrytown, NY		10591
(Address Of Principal Executive Offices)		(Zip Code)

(914) 987-2876

Registrant’s telephone number, including area code

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

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


Title of each class	Trading Symbol(s)	Name of each exchange on which registered
Common stock, par value $0.0001 per share	PXMD	Nasdaq Capital Market

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

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

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


Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☒

Emerging growth company	☒

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

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

As of November 15, 2023, the Registrant had 2,292,715 shares of common stock, par value $0.0001 per share, issued and outstanding.

Table of Contents

PAXMEDICA, INC.

Form 10-Q

For the Quarter Ended September 30, 2023

Table of Contents


		Page
PART I. FINANCIAL INFORMATION
Item 1.	Financial Statements	1
	Condensed Balance Sheets as of September 30, 2023 (Unaudited) and December 31, 2022	1
	Unaudited Condensed Statements of Operations for the three and nine months ended September 30, 2023 and 2022	2
	Unaudited Condensed Statements of Changes in Stockholders’ Equity (Deficit) for the three and nine months ended September 30, 2023 and 2022	3
	Unaudited Condensed Statements of Cash Flows for the nine months ended September 30, 2023 and 2022	5
	Notes to Unaudited Condensed Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	19
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	30
Item 4.	Controls and Procedures	30
PART II. OTHER INFORMATION
Item 1.	Legal Proceedings	31
Item 1A.	Risk Factors	31
Item 2.	Unregistered Sales of Equity Securities, Use of Proceeds, and Issuer Purchases of Equity Securities	34
Item 3.	Defaults Upon Senior Securities	34
Item 4.	Mine Safety Disclosures	34
Item 5.	Other Information	34
Item 6.	Exhibits	36

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PART I. FINANCIAL INFORMATION

Item 1.Financial Statements

PAXMEDICA, INC.

CONDENSED BALANCE SHEETS


	September 30,		December 31,
	2023		2022
ASSETS		(Unaudited)
Current assets
Cash	$	1,152,961	$	1,901,887
Accounts receivable		500,000		—
Prepaid and other current assets		1,580,616		302,431
Total current assets		3,233,577		2,204,318
Total assets	$	3,233,577	$	2,204,318

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
Current liabilities
Accounts payable	$	1,644,996	$	721,955
Accounts payable - related party		—		20,000
Accrued expenses		44,232		1,019,071
Note payable - fair value, current portion		1,581,268		173,543
Shares settled liability		—		160,949
Total current liabilities		3,270,496		2,095,518
Deferred revenue		500,000		—
Total liabilities		3,770,496		2,095,518

Commitments and contingencies (Note 9)

Stockholders’ Equity (Deficit)
Preferred stock, par value $0.0001, 10,000,000 shares authorized:
Series X preferred shares, 500,000 shares authorized as of September 30, 2023 and December 31, 2022; 45,567 shares issued and outstanding at September 30, 2023 and December 31, 2022		5		5
Common stock, par value $0.0001; 200,000,000 shares authorized as of September 30, 2023 and December 31, 2022; 1,073,815 and 707,976 shares issued and outstanding at September 30, 2023 and December 31, 2022, respectively		107		71
Additional paid-in capital		45,572,237		33,848,740
Accumulated deficit		(46,109,268)		(33,740,016)
Total stockholders’ equity (deficit)		(536,919)		108,800
Total liabilities, and stockholders’ equity (deficit)	$	3,233,577	$	2,204,318

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

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PAXMEDICA, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Operating expenses
General and administrative	$	2,425,849	$	2,367,711	$	9,008,943	$	4,077,491
Research and development		1,938,672		327,268		2,750,192		1,549,397
Total operating expenses		4,364,521		2,694,979		11,759,135		5,626,888

Loss from operations		(4,364,521)		(2,694,979)		(11,759,135)		(5,626,888)

Other income (expense):
Interest expense		(1,309)		(1,309)		(9,165)		(1,309)
Loss on conversion of SAFE		—		(5,338,808)		—		(5,338,808)
Loss on issuance of debt		—		(88,234)		—		(391,246)
Loss on extinguishment of debt		(357,407)		(3,940)		(394,257)		(3,940)
Change in fair value of notes		(325,981)		(151,195)		(114,704)		(255,145)
Change in fair value of SAFE		—		(2,827,737)		—		163,025
Change in fair value warrant liability		—		(357,411)		—		1,873,192
Other expense		—		—		(91,991)		—
Total other expense		(684,697)		(8,768,634)		(610,117)		(3,954,231)

Net loss	$	(5,049,218)	$	(11,463,613)	$	(12,369,252)	$	(9,581,119)

Basic weighted average number of shares outstanding		971,738		539,864		859,439		451,560
Diluted weighted average number of shares outstanding		971,738		539,864		859,439		451,560

Basic net loss per share	$	(5.20)	$	(21.23)	$	(14.39)	$	(21.22)
Diluted net loss per share	$	(5.20)	$	(21.23)	$	(14.39)	$	(21.22)

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

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PAXMEDICA, INC.

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

For The Three Months Ended September 30, 2023


							Additional				Total
	Series X Preferred Stock			Common Stock			Paid-in		Accumulated		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Deficit		Equity (Deficit)
Balance at July 1, 2023	45,567	$	5	904,087	$	90	$	43,325,314	$	(41,060,050)	$	2,265,359
Issuance of common stock in connection with convertible note	—		—	96,122		10		445,157		—		445,167
Issuance of common stock in connection with equity purchase agreement	—		—	57,353		6		795,295		—		795,301
Delivery of common stock underlying restricted stock units, net of tax withholding	—		—	16,253		1		(58,435)		—		(58,434)
Stock-based compensation	—		—	—		—		1,064,906		—		1,064,906
Net loss	—		—	—		—		—		(5,049,218)		(5,049,218)
Balance at September 30, 2023	45,567	$	5	1,073,815	$	107	$	45,572,237	$	(46,109,268)	$	(536,919)

For The Three Months Ended September 30, 2022


										Additional				Total
	Series Seed Preferred Stock			Series X Preferred Stock			Common Stock			Paid-in		Accumulated		Stockholders’
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Deficit		Equity (Deficit)
Balance at July 1, 2022	2,696,439	$	270	—	$	—	406,676	$	41	$	9,159,087	$	(17,055,755)	$	(7,896,357)
Issuance of Series X preferred stock	—		—	3,200		1	—		—		299,999		—		300,000
Conversion of SAFE liability to Series X preferred stock	—		—	100,000		20	—		—		9,999,980		—		10,000,000
Issuance of common stock and warrants	—		—	—		—	90,909		9		6,023,004		—		6,023,013
Issuance of common stock in connection with conversion of notes payables	—		—	—		—	14,006		1		1,159,499		—		1,159,500
Issuance of Series X preferred stock in connection with conversion of notes payable	—		—	2,555		—	—		—		296,819		—		296,819
Conversion of Series Seed preferred stock to common stock	(2,696,439)		(270)	—		—	91,614		9		261		—		—
Conversion of Series X preferred stock to common stock	—		—	(61,689)		(6)	69,117		7		(1)		—		—
Warrants exchanged for shares of common stock and Series X preferred stock	—		—	1,250		—	20,588		2		2,009,205		—		2,009,207
Reclassification of warrants to equity	—		—	—		—	—		—		912,580		—		912,580
Stock-based compensation	—		—	—		—	—		—		1,047,153		—		1,047,153
Net loss	—		—	—		—	—		—		—		(11,463,613)		(11,463,613)
Balance at September 30, 2022	—	$	—	45,316	$	15	692,910	$	69	$	30,907,586	$	(28,519,368)	$	2,388,302

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

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PAXMEDICA, INC.

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

For The Nine Months Ended September 30, 2023


							Additional				Total
	Series X Preferred Stock			Common Stock			Paid-in		Accumulated		Stockholders’
	Shares	Amount		Shares	Amount		Capital		Deficit		Equity (Deficit)
Balance at January 1, 2023	45,567	$	5	707,976	$	71	$	33,848,740	$	(33,740,016)	$	108,800
Reclassification of shares settled liability to equity	—		—	1,824		—		160,949		—		160,949
Issuance of common stock in connection with convertible note	—		—	96,122		10		445,157		—		445,167
Issuance of common stock in connection with equity purchase agreement	—		—	209,118		21		5,565,895		—		5,565,916
Issuance of common stock warrants in connection with notes payable, net of fees	—		—	—		—		1,155,642		—		1,155,642
Delivery of common stock underlying restricted stock units, net of tax withholding	—		—	16,272		1		(104,320)		—		(104,319)
Stock-based compensation	—		—	42,503		4		4,500,174		—		4,500,178
Net loss	—		—	—		—		—		(12,369,252)		(12,369,252)
Balance at September 30, 2023	45,567	$	5	1,073,815	$	107	$	45,572,237	$	(46,109,268)	$	(536,919)

For The Nine Months Ended September 30, 2022


										Additional				Total
	Series Seed Preferred Stock			Series X Preferred Stock			Common Stock			Paid-in		Accumulated		Stockholders’
	Shares	Amount		Shares	Amount		Shares	Amount		Capital		Deficit		Equity (Deficit)
Balance at January 1, 2022	2,696,439	$	270	—	$	—	406,676	$	41	$	8,829,075	$	(18,938,249)	$	(10,108,863)
Issuance of Series X preferred stock	—		—	3,200		1	—		—		299,999		—		300,000
Conversion of SAFE liability to Series X preferred stock	—		—	100,000		20	—		—		9,999,980		—		10,000,000
Issuance of Common stock and warrants	—		—	—		—	90,909		9		6,023,004		—		6,023,013
Issuance of common stock in connection with conversion of notes payables	—		—	—		—	14,006		1		1,159,499		—		1,159,500
Issuance of Series X preferred stock in connection with conversion of notes payable	—		—	2,555		—	—		—		296,819		—		296,819
Conversion of Series Seed preferred stock to common stock	(2,696,439)		(270)	—		—	91,614		9		261		—		—
Conversion of Series X preferred stock to common stock	—		—	(61,689)		(6)	69,117		7		(1)		—		—
Warrants exchanged for shares of common stock and Series X preferred stock	—		—	1,250		—	20,588		2		2,009,205		—		2,009,207
Reclassification of warrants to equity	—		—	—		—	—		—		912,580		—		912,580
Stock-based compensation	—		—	—		—	—		—		1,377,165		—		1,377,165
Net loss	—		—	—		—	—		—		—		(9,581,119)		(9,581,119)
Balance at September 30, 2022	—	$	—	45,316	$	15	692,910	$	69	$	30,907,586	$	(28,519,368)	$	2,388,302

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

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PAXMEDICA, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)


	Nine Months Ended September 30,
	2023		2022
Cash flows from operating activities
Net loss	$	(12,369,252)	$	(9,581,119)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation		4,500,178		1,377,165
Change in fair value of notes		114,704		255,145
Change in fair value of SAFE		—		(163,025)
Loss on conversion of SAFE		—		5,338,808
Loss on extinguishment of debt		394,257		3,940
Loss on issuance of debt		—		391,246
Change in fair value warrant liability		—		(1,873,192)
Other expense		91,991		—
Deferred revenue		500,000		—
Changes in assets and liabilities:
Prepaid and other current assets		(1,278,185)		(211,660)
Accounts receivable		(500,000)		—
Accounts payable		1,289,488		(65,578)
Accounts payable - related party		(20,000)		131,250
Accrued expenses		(874,411)		1,392,845
Net cash used in operating activities		(8,151,230)		(3,004,175)

Cash flows from financing activities
Proceeds from issuance of convertible promissory notes and warrants		3,200,000		1,240,970
Payment of costs in connection with convertible promissory notes and warrants		(503,696)		—
Proceeds from the issuance of common stock in connection with equity purchase agreement		5,565,916		—
Proceeds from issuance of common stock and warrants		—		6,582,450
Proceeds from issuance of Series X preferred stock		—		300,000
Payment of costs in connection with equity purchase agreement		(195,997)		—
Repayment of convertible promissory notes		(559,600)		—
Settlement of shares withheld for payment of employee taxes		(104,319)		—
Net cash provided by financing activities		7,402,304		8,123,420

Net increase (decrease) in cash		(748,926)		5,119,245
Cash, beginning of period		1,901,887		444,087
Cash, end of period	$	1,152,961	$	5,563,332

Non-cash financing activities:
Series X preferred stock issued in connection with conversion of notes payable	$	—	$	296,819
Common stock issued in connection with conversion of notes payable	$	445,167	$	1,159,500
Conversion of SAFE liability to Series X preferred stock	$	—	$	10,000,000
Warrants exchanged for Shares of common stock and Series X preferred stock	$	—	$	2,009,207
Reclassification of warrants to equity	$	—	$	912,580
Reclassification of shares settled liability	$	160,949	$	—
Unpaid deferred offering costs and financing fees	$	20,393	$	559,437

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

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PAXMEDICA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 1. Organization and description of business operations

PaxMedica, Inc. (the “Company”) is a clinical stage biopharmaceutical company organized as a Delaware limited liability company on April 5, 2018 (“Inception”) to focus on the development of drug candidates for the treatment of autism spectrum disorder (ASD), Fragile X syndrome tremor-ataxia (FXTAS) and Human African Trypanosomiasis (HAT).

Initial Public Offering

On August 9, 2022, the Company entered into an underwriting agreement relating to the public offering of its common stock, par value $0.0001 per share. The Company agreed to sell 90,909 shares of its common stock to the underwriters, at a purchase price per share of $82.11 (the offering price to the public of $89.25 per share minus the underwriters’ discount), pursuant to the Company’s registration statement on Form S-1 (File No. 333-239676), as amended, under the Securities Act of 1933, that was filed by the Company under Rule 462(b) under the Securities Act. The Company also granted the underwriters a 45-day option to purchase up to 13,637 additional shares of common stock to cover over-allotments. On August 30, 2022, the Company received net proceeds from its public offering of approximately $6.0 million, net of underwriter fees and commissions of approximately $0.8 million, and offering costs of approximately $1.4 million. In connection with its public offering the Company issued warrants to purchase 6,364 shares of the Company’s common stock with an exercise price of $111.56 per share.

Going concern, liquidity and capital resources

The Company has no product revenues, incurred operating losses since inception, and expects to continue to incur significant operating losses for the foreseeable future and may never become profitable. The Company had an accumulated deficit of approximately $46.1 million at September 30, 2023, a net loss of approximately $12.4 million, and approximately $8.2 million of net cash used in operating activities for the nine months ended September 30, 2023.

Equity Purchase Agreement with Lincoln Park Capital

During the nine months ended September 30, 2023, in connection with its equity purchase agreement with Lincoln Park Capital Fund, LLC (LPC), the Company received net proceeds of approximately $5.4 million from the issuance of 0.2 million shares of the Company’s common stock (See Note 8).

2023 Note

During the nine months ended September 30, 2023, the Company issued a convertible promissory note (the “2023 Note”) with a principal balance of $3.7 million. The Company received proceeds of approximately $2.5 million, net of expenses and other costs. The 2023 Note bears no interest and matures 18 months from the issuance date. In connection with the 2023 Note, the Company issued a common stock warrant to purchase 47,059 shares of the Company’s common stock (See Note 6).

Vox Nova Exclusive Pharmacy Distribution Agreement

On June 30, 2023, the Company entered into an exclusive specialty benefit manager agreement with Vox Nova, LLC (“Vox Nova”) pursuant to which Vox Nova will act as the exclusive United States distributor for the Company’s lead pipeline asset, PAX-101 intravenous suramin. Vox Nova will provide certain distribution management, pharmacy benefit management, sales and supply monitoring services to the Company with respect to PAX-101, in the event PAX-101 receives FDA approval. The distribution agreement also provides for an exclusivity fee payable to the Company of up to $2.0 million, payable in installments based on various time and regulatory approval parameters. Vox Nova will pay $0.5 million of the exclusivity fee upfront in connection with the signing of the distribution agreement when the distribution right was transferred to Vox Nova. The remaining $1.5 million is due in four equal installments over a one-year period after PAX-101 is approved by the FDA and made available for distribution. The Company recognized the $0.5 million upfront fee in deferred revenue in June 30, 2023.

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PAXMEDICA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Reverse Stock Split

On October 30, 2023, we filed a Certificate of Amendment to our Certificate of Incorporation (the “Reverse Split Amendment”) with the Secretary of State of the State of Delaware to effect a 1-for-17 reverse stock split of our outstanding common stock (the “Reverse Stock Split”). The Amendment became effective October 30, 2023 (the “Reverse Split Effective Time”). The Reverse Split Amendment was authorized by our stockholders at our special meeting of stockholders on September 26, 2023.

The Reverse Split Amendment provides that, at the Reverse Split Effective Time, every 17 shares of our issued and outstanding common stock were automatically combined into one issued and outstanding share of common stock, without any change in par value per share. The Reverse Stock Split affected all or our shares of common stock outstanding immediately prior to the Reverse Split Effective Time. As a result of the Reserve Stock Split, proportionate adjustments have been made to the per share exercise price and/or the number of shares issuable upon the exercise or vesting of all stock options and warrants issued and outstanding immediately prior to the Reverse Split Effective Time, which resulted in a proportionate decrease in the number of shares of our common stock reserved for issuance upon exercise or vesting of such stock options and warrants, and, in the case of stock options and warrants, a proportionate increase in the exercise price of all such stock options and warrants. In addition, the number of shares reserved for issuance under our 2020 Plan (as defined below) immediately prior to the Reverse Split Effective Time has been reduced proportionately.

No fractional shares were issued as a result of the Reverse Stock Split. Stockholders of record who would otherwise have been entitled to receive a fractional share received a number of shares rounded up to the next whole share in lieu thereof. The Reverse Stock Split affected all stockholders proportionately and did not affect any stockholder’s percentage ownership of our common stock (other than the nominal effect of the treatment of fractional shares).

Our common stock began trading on The Nasdaq Capital Market on a split-adjusted basis when the market opened on October 31, 2023.

All share and per share information referenced throughout this Form 10-Q has been retroactively adjusted to reflect the Reverse Stock Split. Any fractional shares resulting from the Reverse Stock Split have been rounded up to the nearest whole share.

Going Concern

The accompanying condensed financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and settlement of liabilities in the normal course of business, and do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications of liabilities that may result from uncertainty related to its ability to continue as a going concern.

The Company’s future liquidity and capital funding requirements will depend on numerous factors, including:

●

its ability to raise additional funds to finance its operations;

●

the outcome, costs and timing of clinical trial results for the Company’s current or future product candidates;

●

the emergence and effect of competing or complementary products;

●

its ability to maintain, expand and defend the scope of its intellectual property portfolio, including the amount and timing of any payments the Company may be required to make, or that it may receive, in connection with the licensing, filing, prosecution, defense and enforcement of any patents or other intellectual property rights;

●

its ability to retain its current employees and the need and ability to hire additional management and scientific and medical personnel; and

●

the terms and timing of any collaborative, licensing or other arrangements that it has or may establish.

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PAXMEDICA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

The Company will likely need to raise substantial additional funds through one or more of the following: issuance of additional debt or equity, or the completion of a licensing transaction for one or more of the Company’s pipeline assets. If the Company is unable to maintain sufficient financial resources, its business, financial condition and results of operations will be materially and adversely affected. This could affect future development and business activities and potential future clinical studies and/or other future ventures. Failure to obtain additional equity or debt financing will have a material, adverse impact on the Company’s business operations. There can be no assurance that the Company will be able to obtain the needed financing on acceptable terms or at all. Additionally, equity or convertible debt financings will likely have a dilutive effect on the holdings of the Company’s existing stockholders. Accordingly, there are material risks and uncertainties that raise substantial doubt about the Company’s ability to continue as a going concern for the next twelve months from the issuance of these condensed financial statements. The accompanying condensed financial statements do not include any adjustments that result from the outcome of these uncertainties.

Note 2. Basis of Presentation, Summary of Significant Accounting Policies and Recent Accounting Pronouncements

Basis of presentation

The accompanying unaudited condensed financial statements are presented in U.S. dollars and in conformity with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Accordingly, they do not include all of the information and footnotes required by GAAP. In the opinion of management, the unaudited condensed financial statements reflect all adjustments, which include only normal recurring adjustments necessary for the fair statement of the balances and results for the periods presented. Operating results for the three and nine months ended September 30, 2023 are not necessarily indicative of the results that may be expected through December 31, 2023.

The accompanying unaudited condensed financial statements should be read in conjunction with the financial statements for the year ended December 31, 2022 and notes thereto included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2023 (the “2022 Annual Report”).

Use of estimates

The preparation of financial statements in conformity with 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 period. The most significant estimates in the Company’s condensed financial statements relate to the valuation of convertible notes, valuation of warrants, and valuation of equity-based awards. 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.

Significant Accounting Policies:

For a detailed discussion about the Company’s significant accounting policies, see the Company’s December 31, 2022 financial statements included in its 2022 Annual Report.

Concentrations of cash, cash equivalents and short-term investments

The Company considers all highly liquid investments with an original maturity of three months or less at the date of acquisition to be cash equivalents. As of September 30, 2023 and December 31, 2022, the Company had no cash equivalents or short-term investments.

Financial instruments that potentially subject the Company to the concentration of credit risk consist primarily of cash. The Company maintains its cash at high credit quality financial institutions, which may at times, be in excess of federal insured limits. The Company believes it is not exposed to any significant losses due to credit risk on cash.

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PAXMEDICA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Accounts Receivable and Allowances for Doubtful Accounts

The Company records a provision for doubtful accounts, when appropriate, based on historical experience and a detailed assessment of the collectability of its accounts receivable. In estimating the allowance for doubtful accounts, the Company considers, among other factors, the aging of the accounts receivable, its historical write-offs, the credit worthiness of each customer, and economic conditions that could affect the collectability of the balances in the future. Account balances are charged off against the allowance when the Company believes that it is probable that the receivable will not be recovered. Actual write-offs may be in excess of the Company’s estimated allowance. The Company has not incurred any bad debt expense to date and no allowance for doubtful accounts has been recorded during the periods presented.

Fair value of financial instruments

The Company accounts for financial instruments under Financial Accounting Standards Board (“FASB”) Accounting Standards Codification 820 (“ASC 820”), Fair Value Measurements. This statement defines fair value, establishes a framework for measuring fair value in generally accepted accounting principles, and expands disclosures about fair value measurements. To increase consistency and comparability in fair value measurements, ASC 820 establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value into three levels as follows:

Level 1 - quoted prices (unadjusted) in active markets for identical assets or liabilities;

Level 2 - observable inputs other than Level 1, quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets and liabilities in markets that are not active, and model-derived prices whose inputs are observable or whose significant value drivers are observable; and

Level 3 - assets and liabilities whose significant value drivers are unobservable.

Observable inputs are based on market data obtained from independent sources, while unobservable inputs are based on the Company’s market assumptions. Unobservable inputs require significant management judgment or estimation. In some cases, the inputs used to measure an asset or liability may fall into different levels of the fair value hierarchy. In those instances, the fair value measurement is required to be classified using the lowest level of input that is significant to the fair value measurement. Such determination requires significant management judgment. During the nine months ended September 30, 2023, the Company issued the 2023 Notes and warrants in connection with the 2023 Notes. The 2023 Notes were classified as liabilities and measured at fair value on the issuance date, with changes in fair value recognized as other expense on the statements of operations and disclosed in the condensed financial statements. The carrying amounts of the Company’s financial assets and liabilities, such as accounts payable, approximate fair value due to the short-term nature of these instruments.

Convertible Note

In accordance with Accounting Standards Codification 825, Financial Instruments (“ASC 825”), the Company has elected the fair value option for recognition of its 2023 Note (See Note 3). In accordance with ASC 825, the Company recognizes the 2023 Note at fair value with changes in fair value recognized in the condensed statements of operations. The fair value option may be applied instrument by instrument, but it is irrevocable. As a result of applying the fair value option, direct costs and fees related to the convertible note were recognized in general and administrative expense. The 2023 Note does not accrue interest.

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PAXMEDICA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Revenue Recognition

The Company follows the provisions of Accounting Standards Codification (“ASC”) 606, Revenue from Contracts with Customers. The guidance provides a five-step model to determine how revenue is recognized. In determining the appropriate amount of revenue to be recognized, the Company performs the following steps: (i) identification of the contracts with a customer; (ii) determination of the performance obligations in the contract; (iii) measurement of the transaction price, including potential constraints on variable consideration; (iv) allocation of the transaction price to the performance obligations based on estimated stand-alone selling prices; and (v) recognition of revenue when (or as) the Company satisfies a performance obligation. A performance obligation is a promise in a contract to transfer a distinct good or service to the customer and is the unit of account in ASC 606. Significant management judgment is required to determine the level of effort required under an arrangement and the period over which the Company expects to complete its performance obligations under the arrangement. If the Company cannot reasonably estimate when its performance obligations are either completed or become inconsequential, then revenue recognition is deferred until the Company can reasonably make such estimates. Revenue is then recognized over the remaining estimated period of performance or contract-term using the cumulative catch-up method. The Company allocates the total transaction price to each performance obligation based on the relative standalone selling prices of the promised goods or service underlying each performance obligation.

Research and Development

Research and development costs are expensed as incurred. 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.

Accrued Outsourcing Costs

Substantial portions of the Company’s preclinical studies and clinical trials are performed by third-party laboratories, medical centers, contract research organizations and other vendors (collectively “CROs”). These CROs generally bill monthly or quarterly for services performed, or bill based upon milestone achievement. For preclinical studies, the Company accrues expenses based upon estimated percentage of work completed and the contract milestones remaining. Clinical trial costs are a significant component of research and development expenses and include costs associated with third-party contractors. The Company outsources a substantial portion of its clinical trial activities, utilizing external entities such as CROs, independent clinical investigators, and other third-party service providers to assist the Company with the execution of its clinical studies. For each clinical trial that the Company conducts, certain clinical trial costs are expensed immediately, while others are expensed over time based on the number of patients in the trial, the attrition rate at which patients leave the trial, and/or the period over which clinical investigators or CROs are expected to provide services. The Company’s estimates depend on the timeliness and accuracy of the data provided by the CROs regarding the status of each program and total program spending. The Company periodically evaluates the estimates to determine if adjustments are necessary or appropriate based on information it receives.

Stock-Based Compensation

The Company expenses stock-based compensation to employees, non-employees and board members over the requisite service period based on the estimated grant-date fair value of the awards and actual forfeitures. The Company accounts for forfeitures as they occur. Stock-based awards with graded vesting schedules are recognized 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. All stock-based compensation costs are recorded in general and administrative costs in the statements of operations.

Income (Loss) Per Share

Basic net income (loss) per share (“EPS”) of common stock is computed by dividing net income (loss) allocated to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS reflects the potential dilution that could occur if securities or other contracts to issue common stock were exercised or converted into common stock or resulted in the issuance of common stock that then shared in the earnings of the entity.

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PAXMEDICA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Preferred Stock, unvested restricted stock units and the SAFE investment are participating securities as they participate in undistributed earnings on an as-if converted basis. The Company computes income (loss) per share of common stock using the two-class method required for participating securities.

Basic income per share includes an allocation of undistributed income to the Company’s participating securities. Diluted income (loss) per share is calculated using the more dilutive approach of (i) applying the treasury stock method, the if-converted method, or contingently issuable method and (ii) adding back the undistributed income allocated to participating securities in arriving at basic income per share, assuming that all other dilutive potential common shares have been exercised and then next reallocating the undistributed income.

For warrants that are liability-classified, during periods when the impact is dilutive, the Company assumes share settlement of the instruments as of the beginning of the reporting period and adjusts the numerator to remove the change in fair value of the warrant liability and adjusts the denominator to include the dilutive shares calculated using the treasury stock method.

Participating securities do not share in the losses of the Company, therefore, during periods of net loss, no effect is given to the Preferred Stock, unvested restricted stock units and the SAFE investment.

The net effect of common stock equivalents is based on the incremental common stock that would be issued upon the assumed conversion of convertible preferred stock, exercise of common stock warrants, the SAFE investment and the vesting of RSUs using the treasury stock method.

The Company’s common stock equivalents have been excluded from the computation of diluted loss per share for the three and nine months ended September 30, 2023, as the effect would be to reduce the loss per share. Therefore, the weighted average common stock outstanding used to calculate both basic and diluted loss per share is the same for the three and nine months ended September 30, 2023. The following is a reconciliation of the numerator and denominator of the diluted net income (loss) per share computations for the three and nine months ended September 30, 2023 and 2022:


	Three Months Ended September 30,				Nine Months Ended September 30,
	2023		2022		2023		2022
Numerator:
Net loss	$	(5,049,218)	$	(11,463,613)	$	(12,369,252)	$	(9,581,119)
Amount allocated to participating common shareholders		—		—		—		—
Net loss allocated to common shareholders- Basic	$	(5,049,218)	$	(11,463,613)	$	(12,369,252)	$	(9,581,119)

Net loss		(5,049,218)		(11,463,613)		(12,369,252)		(9,581,119)
Less: Change in fair value of warrant liabilities		—		—		—		—
Net loss allocated to common shareholders- Diluted	$	(5,049,218)	$	(11,463,613)	$	(12,369,252)	$	(9,581,119)

Denominator:
Basic weighted average number of shares outstanding		971,738		539,864		859,439		451,560

Diluted weighted average number of shares outstanding		971,738		539,864		859,439		451,560

Basic net loss per share	$	(5.20)	$	(21.23)	$	(14.39)	$	(21.22)

Diluted net loss per share	$	(5.20)	$	(21.23)	$	(14.39)	$	(21.22)

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PAXMEDICA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

The following securities were excluded from the computation of diluted net loss per share attributable to common shareholders for the nine months ended September 30, 2023 and 2022, because including them would have been anti-dilutive:


	September 30,
	2023	2022
Preferred stock	—	—
Series X preferred stock	51,056	50,775
Unvested restricted stock units	95,504	93,072
Common stock warrants	81,623	34,559
Convertible notes	669,173	2,192
Total	897,356	180,598

Income taxes

ASC 740 also provides guidance on derecognition, classification, interest and penalties, accounting in interim period, disclosure and transition. Based on the Company’s evaluation, it has been concluded that there are no significant uncertain tax positions requiring recognition in the Company’s condensed financial statements. The Company believes that its income tax positions and deductions would be sustained on audit and does not anticipate any adjustments that would result in material changes to its financial position.

Recent accounting pronouncements

In June 2016, the FASB issued ASU No. 2016-13, Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Statements, or ASU 2016-13. ASU 2016-13 significantly changes the impairment model for most financial assets and certain other instruments. The new standard requires that expected credit losses relating to financial assets measured on an amortized cost basis and available-for-sale debt securities be recorded through an allowance for credit losses. It also limits the amount of credit losses to be recognized for available-for-sale debt securities to the amount by which carrying value exceeds fair value, and requires the reversal of previously recognized credit losses if fair value increases. The allowance for credit losses is a valuation account that is deducted from the amortized cost basis of the financial asset(s) to present the net carrying value at the amount expected to be collected on the financial asset.

In November 2018, the FASB issued ASU No. 2018-19, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which clarifies codification and corrects unintended application of the guidance. In November 2019, the FASB issued ASU No. 2019-11, Codification Improvements to Topic 326, Financial Instruments-Credit Losses, which clarifies or addresses specific issues about certain aspects of ASU 2016-13. In November 2019 the FASB also issued ASU No. 2019-10, Financial Instruments-Credit Losses (Topic 326), Derivatives and Hedging (Topic 815), and Leases (Topic 842): Effective Dates, which delays the effective date of ASU 2016-13 by three years for certain smaller reporting companies such as the Company. The guidance in ASU 2016-13 is effective for the Company for financial statements issued for fiscal years beginning after December 15, 2022 and interim periods within those fiscal years, with early adoption permitted. The Company adopted the standard on January 1, 2023, and the adoption did not have a material impact on the unaudited condensed financial statements.

Note 3. Fair Value Measurements

Convertible Notes

During the nine months ended September 30, 2023, the Company issued the 2023 Note. The fair value of the 2023 Note on the issuance date and as of September 30, 2023 were estimated using a Monte Carlo simulation to capture the path dependencies intrinsic to their terms. The significant unobservable inputs used in the fair value measurement of the Company’s convertible notes are the common stock price, volatility, and risk-free interest rates. Significant changes in these inputs may result in significantly lower or higher fair value measurement. The Company elected the fair value option when recording its 2023 Note (See Note 2) and its convertible notes issued in 2022 (the “2022 Notes”). The notes were classified as liabilities and measured at fair value on the issuance date, with changes in fair value recognized as other income (expense) on the statements of operations and disclosed in the condensed financial statements. During the nine months ended September 30, 2023, the Company paid off the remaining balance of its 2022 Notes (approximately $0.2 million) with a portion of the proceeds received from the 2023 Note.

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PAXMEDICA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

A summary of significant unobservable inputs (Level 3 inputs) used in measuring the 2022 Notes as of the payoff date of February 6, 2023, and the 2023 Note upon the issuance date, and as of September 30, 2023 is as follows:



	February 6, 2023		September 30, 2023
Dividend yield	—	%	—	%
Expected price volatility	30.0 - 53.7	%	30	%
Risk free interest rate	4.65 - 4.89	%	5.35	%
Expected term (in years)	0.5 - 1.4		0.1 - 1.0

The following tables classify the Company’s liabilities measured at fair value on a recurring basis into the fair value hierarchy as of September 30, 2023 and December 31, 2022:

Fair value measured at September 30, 2023

Quoted prices in active

Significant other

Significant

Total carrying value at

markets

observable inputs