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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, 2022

OR

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 or former address, 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, 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 14, 2022, the Registrant had 11,779,475 shares of common stock, par value $0.0001 per share, issued and outstanding.

PAXMEDICA, INC.

Form 10-Q

For the Quarter Ended September 30, 2022

Table of Contents

Page

PART I. FINANCIAL INFORMATION

Item 1.

Condensed Financial Statements

1

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

1

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

2

Unaudited Condensed Statements of Changes in Stockholders’ Deficit for the three and nine months ended September 30, 2022 and 2021

3

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

5

Notes to Unaudited Condensed Financial Statements

6

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

18

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

30

Item 4.

Controls and Procedures

30

PART II. OTHER INFORMATION

Item 1.

Legal Proceedings

32

Item 1A.

Risk Factors

32

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds from Registered Securities

32

Item 3.

Defaults Upon Senior Securities

33

Item 4.

Mine Safety Disclosures

33

Item 5.

Other Information

33

Item 6.

Exhibits

34

PART I. FINANCIAL INFORMATION

Item 1.Condensed Financial Statements

PAXMEDICA, INC.

CONDENSED BALANCE SHEETS

    

September 30, 

    

December 31, 

2022

2021

(Unaudited)

ASSETS

Current assets

Cash

$

5,563,332

$

444,087

Prepaid and other current assets

416,439

Total current assets

 

5,979,771

 

444,087

Deferred offering costs

 

 

204,779

Total assets

$

5,979,771

$

648,866

LIABILITIES, AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

  

 

  

Current liabilities

 

  

 

  

Accounts payable

$

2,688,533

$

736,251

Accounts payable - related party

 

132,000

 

750

Accrued expenses

 

614,450

 

680,026

Notes payable - fair value

 

156,486

 

SAFE liability

 

 

4,824,217

Warrant liability

 

 

4,516,485

Total current liabilities

 

3,591,469

 

10,757,729

Total liabilities

 

3,591,469

 

10,757,729

Commitments and contingencies (Note 9)

 

  

 

  

Stockholders’ Equity (Deficit)

 

  

 

  

Preferred stock, par value $0.0001, 10,000,000 shares authorized:

 

 

Series Seed preferred shares, 2,696,439 shares authorized; no shares issued and outstanding at September 30, 2022 and 2,696,439 shares issued and outstanding at December 31, 2021; aggregate liquidation preference of $2,808,148 at December 31, 2021

270

Series X preferred shares, 500,000 shares authorized at September 30, 2022; 45,316 shares issued and outstanding at September 30, 2022 and no shares issued and outstanding at December 31, 2021

15

Common stock, par value $0.0001; 200,000,000 shares authorized at September 30, 2022 and 20,000,000 shares authorized at December 31, 2021; 11,779,475 and 6,913,492 shares issued and outstanding at September 30, 2022 and December 31, 2021, respectively

 

1,178

 

691

Additional paid-in capital

 

30,906,477

 

8,828,425

Accumulated deficit

 

(28,519,368)

 

(18,938,249)

Total stockholders’ equity (deficit)

 

2,388,302

 

(10,108,863)

Total liabilities, and stockholders’ equity (deficit)

$

5,979,771

$

648,866

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

1

PAXMEDICA, INC.

CONDENSED STATEMENTS OF OPERATIONS

(Unaudited)

    

Three Months Ended September 30, 

    

Nine Months Ended September 30, 

2022

    

2021

2022

    

2021

Operating expenses

 

  

 

  

 

  

 

  

General and administrative

$

2,367,711

$

1,277,287

$

4,077,491

$

3,651,218

Research and development

 

327,268

 

437,559

 

1,549,397

 

1,755,428

Total operating expenses

 

2,694,979

 

1,714,846

 

5,626,888

 

5,406,646

Loss from operations

 

(2,694,979)

 

(1,714,846)

 

(5,626,888)

 

(5,406,646)

Other income (expense):

 

 

 

 

Interest expense

 

(1,309)

 

 

(1,309)

 

(2,805,856)

Gain on conversion of notes

 

 

 

 

59,890

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

(3,940)

(3,940)

Change in fair value of notes

 

(151,195)

 

 

(255,145)

 

Change in fair value of SAFE

 

(2,827,737)

 

(622,212)

 

163,025

(3,806,374)

Change in fair value warrant liability

 

(357,411)

 

(789,419)

 

1,873,192

 

(4,498,146)

Other income (expense)

 

 

15,835

 

 

(5,095)

Total other expense

 

(8,768,634)

 

(1,395,796)

 

(3,954,231)

 

(11,055,581)

Net loss

$

(11,463,613)

$

(3,110,642)

$

(9,581,119)

$

(16,462,227)

Basic and diluted weighted average number of shares outstanding

 

9,177,683

 

6,913,492

 

7,676,516

 

6,582,602

Basic and diluted net loss per share

$

(0.87)

$

(0.45)

$

(1.10)

$

(2.50)

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

2

PAXMEDICA, INC.

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

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

$

 

6,913,492

$

691

$

9,158,437

$

(17,055,755)

$

(7,896,357)

Issuance of Series X preferred stock, net of fees

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, net of fees

1,545,454

154

6,022,859

6,023,013

Issuance of common stock in connection with conversion of notes payable

238,094

24

1,159,476

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)

1,557,435

156

114

Conversion of Series X preferred stock to common stock

(61,689)

(6)

1,175,000

118

(112)

Warrants exchanged for shares of common stock and Series X preferred stock

1,250

350,000

35

2,009,172

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

 

11,779,475

$

1,178

$

30,906,477

$

(28,519,368)

$

2,388,302

For The Three Months Ended September 30, 2021

    

    

    

    

    

Additional

    

    

Total

Series Seed Preferred Stock

Common Stock

Paid-in

Accumulated

Stockholders’

Shares

Amount

Shares

Amount

Capital

Deficit

Deficit

Balance at July 1, 2021

2,696,439

$

270

 

6,913,492

$

691

$

8,331,310

$

(22,060,863)

$

(13,728,592)

Stock-based compensation

 

 

 

 

272,124

 

 

272,124

Net loss

 

 

 

 

 

(3,110,642)

 

(3,110,642)

Balance at September 30, 2021

2,696,439

$

270

 

6,913,492

$

691

$

8,603,434

$

(25,171,505)

$

(16,567,110)

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

3

PAXMEDICA, INC.

CONDENSED STATEMENTS OF CHANGES IN SHAREHOLDERS’ EQUITY (DEFICIT)

(Unaudited)

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

$

 

6,913,492

$

691

$

8,828,425

$

(18,938,249)

$

(10,108,863)

Issuance of Series X preferred stock, net of fees

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, net of fees

1,545,454

154

6,022,859

6,023,013

Issuance of common stock in connection with conversion of notes payable

238,094

24

1,159,476

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)

1,557,435

156

114

Conversion of Series X preferred stock to common stock

(61,689)

(6)

1,175,000

118

(112)

Warrants exchanged for shares of common stock and Series X preferred stock

1,250

350,000

35

2,009,172

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

 

11,779,475

$

1,178

$

30,906,477

$

(28,519,368)

$

2,388,302

For The Nine Months Ended September 30, 2021

    

    

    

    

    

    

    

    

    

Additional

    

    

    

Total

Series Seed Preferred Stock

Common Stock

Paid-in

Accumulated

Stockholders’

Shares

Amount

Shares

Amount

Capital

Deficit

Deficit

Balance at January 1, 2021

 

2,696,439

$

270

 

5,775,898

$

578

$

4,079,891

$

(8,709,278)

$

(4,628,539)

Common stock issued in connection with conversion of notes payable

 

 

 

1,137,594

 

113

 

3,412,669

 

 

3,412,782

Stock-based compensation

 

 

 

 

 

1,110,874

 

 

1,110,874

Net loss

 

 

 

 

 

 

(16,462,227)

 

(16,462,227)

Balance at September 30, 2021

 

2,696,439

$

270

 

6,913,492

$

691

$

8,603,434

$

(25,171,505)

$

(16,567,110)

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

4

PAXMEDICA, INC.

CONDENSED STATEMENTS OF CASH FLOWS

(Unaudited)

    

Nine Months Ended September 30, 

2022

    

2021

Cash flows from operating activities

Net loss

$

(9,581,119)

$

(16,462,227)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

Stock-based compensation

 

1,377,165

 

1,110,874

Amortization of debt discount

 

 

2,550,780

Change in fair value of notes

 

255,145

 

Change in fair value of SAFE

 

(163,025)

 

3,806,374

Loss on conversion of SAFE

5,338,808

Loss on issuance of debt

 

391,246

 

Loss on extinguishment of debt

3,940

Gain on conversion of notes

 

 

(59,890)

Change in fair value warrant liability

 

(1,873,192)

 

4,498,145

Non-cash interest expense

 

 

255,076

Changes in assets and liabilities:

 

 

Other current assets

(416,439)

Deferred offering costs

 

204,779

 

Accounts payable

 

(65,578)

 

140,935

Accounts payable - related party

 

131,250

 

(100,138)

Accrued expenses

 

1,392,845

 

(4,179)

Net cash used in operating activities

 

(3,004,175)

 

(4,264,250)

Cash flows from financing activities

 

 

Proceeds from issuance of common stock and warrants, net of fees

6,582,450

Proceeds from issuance of convertible promissory notes, net of fees

 

1,240,970

 

Proceeds from issuance of Series X preferred stock, net of fees

300,000

Proceeds from SAFE investment

 

 

5,000,000

Payment of deferred offering costs

(60,779)

Net cash provided by financing activities

 

8,123,420

 

4,939,221

Net increase in cash

 

5,119,245

 

674,971

Cash, beginning of period

 

444,087

 

1,123,625

Cash, end of period

$

5,563,332

$

1,798,596

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

$

1,159,500

$

3,412,782

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

$

Unpaid offering costs

$

559,437

$

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

5

Table of Contents

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 1,545,454 shares of its common stock to the underwriters, at a purchase price per share of $4.83 (the offering price to the public of $5.25 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 231,818 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 108,181 warrants to purchase shares of the Company’s common stock with an exercise price of $6.5625 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 $28.5 million at September 30, 2022, a net loss of approximately $9.6 million, and approximately $3.0 million of net cash used in operating activities for the nine months ended September 30, 2022.

2022 Notes

During the second and third quarters of 2022, the Company entered into senior secured convertible promissory notes (the “2022 Notes”) with a principal balance totaling approximately $1.5 million. The 2022 Notes contain an original issue discount totaling $0.3 million and the Company received net proceeds of approximately $1.2 million (See Note 6).

Series X Preferred Stock

On August 2, 2022, the Company issued 3,200 shares of Series X preferred stock, par value $0.0001 per share at a purchase price of $100 per share. The Company received net proceeds of approximately $0.3 million, net of fees. (See Note 8).

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;

6

Table of Contents

PAXMEDICA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

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.

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 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.

The COVID-19 global pandemic has been unprecedented and unpredictable, is likely to continue to result in significant national and global economic disruption, which may adversely affect our business. Based on the Company’s current assessment, the Company does not expect any material impact on its long-term development timeline and its liquidity due to the worldwide spread of the COVID-19 virus. However, the Company is continuing to assess the effect on its operations by monitoring the spread of COVID-19 and the resulting global pandemic and the actions implemented to combat the virus throughout the world.

Note 2. Significant accounting policies

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, 2022 are not necessarily indicative of the results that may be expected through December 31, 2022.

The accompanying unaudited condensed financial statements should be read in conjunction with the audited financial statements and notes thereto included in the registration statement on Form S-1/A filed by the Company with the SEC on August 8, 2022.

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, valuation of the Simple Agreement For Equity (“SAFE”)  liability 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.

7

Table of Contents

PAXMEDICA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

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, 2022 and December 31, 2021, the Company had no cash equivalents or short-term investments.

Concentrations of Credit Risk

Financial instruments that potentially subject the Company to concentration of credit risk consist primarily of cash. The Company maintains its cash 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.

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, 2022, the Company issued certain of the 2022 Notes and warrants in connection with the 2022 Notes. The 2022 Notes and warrants 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 During the year ended December 31, 2021, the Company entered into its SAFE agreement and classified the SAFE as a liability measured at cost on the issuance date, with changes in fair value recognized as other income on the statement of operations. 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 Notes

In accordance with Accounting Standards Codification 825, Financial Instruments (“ASC 825”), the Company has elected the fair value option for recognition of its 2022 Notes. In accordance with ASC 825, the Company recognizes these 2022 Notes 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 notes were recognized in general and administrative expense. Accrued interest for the 2022 Notes has been included in the change in fair value of convertible notes in the condensed statements of operations.

8

Table of Contents

PAXMEDICA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Warrant Liability

The Company accounts for certain common stock warrants outstanding as a liability at fair value and adjusts the instruments to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until exercised, and any change in fair value is recognized in the Company’s statements of operations. The fair value of the warrants issued by the Company have been estimated using the Monte Carlo simulation. As of September 30, 2022, there are no warrant liabilities (See Note 3).

Simple Agreement for Future Equity

The Company accounts for a SAFE as a liability at fair value and adjusts the instrument to fair value at each reporting period. This liability is subject to re-measurement at each balance sheet date until a triggering event, equity financing or a liquidity/dissolution occurs, and any change in fair value is recognized in the Company’s statements of operations. The fair value of the SAFE has been estimated using the Backsolve method which utilizes the Option Pricing Method. As of September 30, 2022, the SAFE liability has been converted to 100,000 shares of Series X preferred stock (See Note 8).

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 rather than when the payment is made.

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.

Loss Per Share

Basic net loss per share (“EPS”) of common stock is computed by dividing net 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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Table of Contents

PAXMEDICA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

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, 2022 and 2021, 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, 2022 and 2021.

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, 2022 and 2021, because including them would have been anti-dilutive:

    

September 30, 

2022

    

2021

Preferred stock

 

 

1,557,435

Series X preferred stock

863,162

Unvested restricted stock units

 

1,582,220

 

1,377,999

Common stock warrants

 

587,497

 

1,034,176

SAFE investment

 

 

414,808

Convertible notes

 

37,259

 

Total

 

3,070,138

 

4,384,418

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 August 2020, the FASB issued 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 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 ASU is effective for annual reporting periods beginning after December 15, 2021, including interim periods within those fiscal years. Early adoption is permitted, but no earlier than fiscal years beginning after December 15, 2020. This update permits the use of either the modified retrospective or fully retrospective method of transition. The Company adopted this standard on January 1, 2022, and the adoption did not have a material impact on the Company’s condensed financial statements or disclosures.

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). This ASU 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. This ASU provides guidance for a modification or an exchange of a freestanding equity-classified written call option that is not within the scope of another Topic. It specifically addresses: (1) how an entity should treat a modification of the terms or conditions or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; (2) how an entity should measure the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange; and (3) how an entity should recognize the effect of a modification or an exchange of a freestanding equity-classified written call option that remains equity classified after modification or exchange. This ASU will be effective for all entities for fiscal years beginning after December 15, 2021. An entity should apply the amendments prospectively to modifications or exchanges occurring on or after the effective date of the amendments. Early adoption is permitted, including adoption in an interim period. The Company adopted this standard on January 1, 2022, and the adoption did not have a material impact on the Company’s condensed financial statements or disclosures.

10

Table of Contents

PAXMEDICA, INC.

NOTES TO CONDENSED FINANCIAL STATEMENTS

Note 3. Fair Value Measurements

Convertible Notes

During the second and third quarters of 2022, the Company issued the 2022 Notes. The fair value of the 2022 Notes on the issuance dates and as of September 30, 2022 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 2022 Notes (See Note 2) and 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. On August 26, 2022, two holders of the 2022 Notes converted their notes to 238,094 shares of the Company’s common stock and one holder of the 2022 Notes converted its note to 2,555 shares of Series X preferred stock.

A summary of significant unobservable inputs (Level 3 inputs) used in measuring the 2022 Notes upon the issuance dates, conversion dates and during three and nine months ended September 30, 2022 is as follows:

Three months

 

August 3, 2022 -

ended September

Nine months ended

    

July 8, 2022

    

August 5, 2022

    

30, 2022

    

September 30, 2022

 

Dividend yield

 

0

%  

0

%  

0

%  

0

%

Expected price volatility

 

57.0

%  

57.0

%  

57.0

%  

57.0%-57.2

%

Risk free interest rate

 

2.96

%  

3.14%-3.29

%  

2.8%-4.05

%  

2.8%-4.05

%

Expected term (in years)

 

1.0

 

1.0

 

0.7-0.9

0.7-0.9

Simple Agreement for Future Equity

On March 19, 2021, the Company entered into a SAFE agreement with an investor. At issuance date, the Company classified the cash received of $5.0 million as a liability, with changes in fair value recognized as other income (expense) on the statements of operations and disclosed in the condensed financial statements (See Note 5). On August 2, 2022 the SAFE was converted to 100,000 shares of Series X preferred stock (See Note 8).

A summary of significant unobservable inputs (Level 3 inputs) used in measuring the SAFE on the conversion date of August 2, 2022, and the period January 1, 2022 through August 2, 2022 is as follows:

January 1,

 

August 2,

2022-August

    

2022

    

2, 2022

 

Dividend yield

 

0

%  

0

%

Expected price volatility

 

50.0

%  

50.0

%

Risk free interest rate

 

3.08

%