Moleculin Biotech Inc

Notes to the Condensed Consolidated Financial Statements

1. Nature of Business

The terms “MBI” or “the Company”, “we”, “our” and “us” are used herein to refer to Moleculin Biotech, Inc. MBI is a clinical-stage pharmaceutical company, organized as a Delaware corporation in* July 2015,with clinical programs for hard-to-treat cancers and viruses. The Company hasthree core technologies, each of which have hadone* or more drugs successfully complete a Phase1 clinical trial, based substantially on discoveries made at and licensed from MD Anderson Cancer Center (MD Anderson) in Houston, Texas. In* July 2024the Company’s lead program Annamycin completed a Phase2* trial and has held it End-of-Phase1/2 meeting with the Food and Drug Administration in the US and in* August 2024announced the preparations for a Phase3* trial. The Company hastwo wholly owned subsidiaries, Moleculin Australia Pty. Ltd., which was set up to perform certain preclinical development and Moleculin Amsterdam B.V., which acts as its legal representative for clinical trials in Europe. The Company utilizes its own internal resources and funds to conduct some of these trials and also has trials being conducted via physician-sponsored trials. The physician-sponsored trials utilize primarily external funds, such as grant funds, which arenot presented in these financial statements. The Company doesnot have manufacturing facilities, and all manufacturing activities are contracted out tothird parties. Additionally, the Company doesnot have a sales organization. The Company’s overall strategy is to seek potential outlicensing or outsourcing opportunities with development/commercialization strategic partners who are better suited for the marketing, sales and distribution of its drugs, if approved.

In2019, the Company sublicensed its technologies to Animal Life Sciences, Inc. (ALI), to enable research and commercialization for non-human use and share development data. As part of this agreement, ALI issued to the Company a 10% equity interest in ALI.

On* May 5, 2023,the Company received a letter from the Nasdaq Capital Market (Nasdaq) notifying the Company that for the prior30* consecutive business days the bid price for the Company's common stock had closed below the minimum $1.00 per share requirement for continued inclusion on Nasdaq pursuant to Nasdaq Listing Rule5550(a)(2) (Bid Price Rule). The deficiency letter didnot result in the immediate delisting of the Company's common stock from the Nasdaq. In accordance with Nasdaq Listing Rule5810(c)(3)(A), the Company was provided an initial period of180 calendar days, until* November 1, 2023,to regain compliance with the Bid Price Rule. On November 2,2023, the Company received a 180-calendar day extension, until April 29, 2024,from the Nasdaq to regain compliance with Bid Price Rule. On March 5, 2024,the Board of Directors approved a reverse1*-for-15 reverse stock split effective11:59 P.M. (Eastern time) on* March 21, 2024,with trading to commence on a split-adjusted basis on March 22, 2024.On April 8, 2024,the Company received a letter from Nasdaq notifying the Company that it had regained compliance with Bid Price Rule5550*(a)(2) as a result of the closing bid price of the Company's common stock being at $1.00 per share or greater for the10 consecutive business days from* March 22, 2024through April 5, 2024.*Accordingly, the Company is in compliance with the Bid Price Rule and Nasdaq considers the matter closed.

2. Basis of presentation, principles of consolidation, and significant accounting policies and liquidity

Reverse Stock Split - On* March 22, 2024,the Company completed a reverse stock split of all the issued and outstanding shares of the Company's common stock at a ratio of1* to 15. The accompanying consolidated financial statements and notes to the consolidated financial statements gives retroactive effect to the reverse stock split for all periods presented. Certain amounts previously reported include rounding up of fractional shares as a result of the reverse stock split.

Basis of Presentation – Condensed Consolidated Financial Information - The accompanying condensed consolidated financial statements and related notes have been prepared in accordance with accounting principles generally accepted in the U.S. (U.S. GAAP) for financial information, and in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (SEC) with respect to Form10-Q and Article8 of Regulation S-X. Accordingly, they donot include all of the information and footnotes required by U.S. GAAP for complete financial statements. The condensed consolidated financial statements furnished reflect all normal adjustments, which are, in the opinion of management, necessary for a fair statement of results for the interim periods presented. Interim results arenot necessarily indicative of the results for the full year. These condensed consolidated financial statements should be read in conjunction with the audited financial statements of the Company as of* December 31, 2023* and for the year then ended, including the notes thereto contained in the Form10-K filed with the SEC on* March 22, 2024.*

Principles of Consolidation - The accompanying condensed consolidated financial statements include the accounts of the Company and its wholly owned subsidiaries. All intercompany balances and transactions have been eliminated in consolidation. Any reference in these notes to applicable guidance is meant to refer to U.S. GAAP. The Company views its operations and manages its business inone operating segment. All material long-lived assets of the Company reside in the U.S.

Significant Accounting Policies- The Company's significant accounting policies are described in Note2, Basis of Presentation, principles of consolidation and significant accounting policies, to the consolidated financial statements included in the Company's Annual Report on Form10-K for the year ended* December 31, 2023*. There have beenno material changes to the significant accounting policies during thenine months ended* September 30, 2024*.

Use of Estimates - The preparation of these condensed consolidated financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results could differ from those estimates. Management considers many factors in selecting appropriate financial accounting policies and controls, and in developing the estimates and assumptions that are used in the preparation of these financial statements. Management must apply significant judgment in this process. In addition, other factors* mayaffect estimates, including expected business and operational changes, sensitivity and volatility associated with the assumptions used in developing estimates, and whether historical trends are expected to be representative of future trends. The estimation process often mayyield a range of potentially reasonable estimates of the ultimate future outcomes and management must select an amount that falls within that range of reasonable estimates. This process may*result in actual results differing materially from those estimated amounts used in the preparation of financial statements. Estimates are used in the following areas, among others: fair value estimates on intangible assets, warrants, and stock-based compensation expense, as well as accrued expenses and taxes.

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Intangible Assets – Intangible assets with finite lives are amortized using the straight-line method over their estimated period of benefit. Acquired intangible assets identified as in-process research and development (IPR&D) assets, are considered indefinite lived until the completion or abandonment of the associated research and development efforts. If the associated research and development effort is abandoned, the related IPR&D assets will be written-off and the Company will record a noncash impairment loss on its statements of operations. For those compounds that reach commercialization, the IPR&D assets will be amortized over their estimated useful lives. Intangible assets are tested for impairment on an annual basis, which was completed as of* September 30, 2024,*and between annual tests if indicators of potential impairment exist, using a fair-value-based approach. The Company evaluates the recoverability of intangible assets periodically and take into account events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists.No impairments of intangible assets have been identified during any of the periods presented.

Going Concern and Liquidity - These condensed consolidated financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The continuation of the Company as a going concern is dependent upon the ability of the Company to obtain necessary equity financing to continue operations and the attainment of profitable operations. As of * September 30, 2024*, the Company had an accumulated deficit of$151.5 million since inception and hadnot yet generated any revenues from operations. Additionally, management anticipates that its cash on hand of$9.4 million as of* September 30, 2024* isnot sufficient to fund its planned operations for a period of at leastone year from when these consolidated financial statements are issued. These factors raise substantial doubt regarding the Company's ability to continue as a going concern. These unaudited condensed consolidated financial statements donot include any adjustments to the recoverability and classification of recorded asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern. The Company intends to seek additional funding throughone or more of the following: a combination of equity offerings, debt financings, government or otherthird-party funding, commercialization, marketing and distribution arrangements, other collaborations, strategic alliances and licensing arrangements and delay planned cash outlays or a combination thereof. There can beno assurance that such events or a combination thereof can be achieved.

In* March 2022,the Company received a subpoena from the SEC requesting information and documents, including materials related to certain individuals (none of which are the Company's officers or directors) and entities, and materials related to the development of and statements regarding the Company's drug candidate for the treatment of COVID-19. The Company has received, and expects to continue to receive, periodic further requests from the SEC staff with respect to this matter. The Company isnot* aware of the specific nature of the underlying investigation by the SEC, and to the extent that this investigation relates to prior public disclosures that it has made, the Company believes in the accuracy and adequacy of such prior disclosures. The correspondence from the SEC transmitting the subpoena to the Company states that the SEC is trying to determine whether there have been any violations of federal securities laws, but that its investigation doesnot mean that the SEC has concluded that anyone has violated the law or that the SEC has a negative opinion of any person, entity, or security. The Company cannot predict when this matter will be resolved or what, if any, action the SEC* maytake following the conclusion of the investigation. The company expensed approximately $0.1 million and $0.4 million in related general and administrative fees and expenses for thethree* months ended* September 30, 2024and2023*, respectively, and $0.2 million and $1.4 million for thenine months ended* September 30, 2024and2023*, respectively. The Company is in the process of filing a claim with its insurance carriers related to this loss which* maycover a portion of the related expenses butnot* all. The claim is currently under review by the insurance company. The claim hasnot yet been approved nor has a reimbursement amount been determined which, if any, would be limited by the applicable retention as defined under the policy. Accordingly, the Company hasnot recorded any provision for insurance reimbursement. The Company expects to record the insurance reimbursement at the time that the amount to be reimbursed is determined and approved by the insurance carrier. Any insurance reimbursement receivable will be recorded at an amountnot to exceed the recorded loss and only if the terms of the legally enforceable insurance contracts support that the insurance recovery willnot be disputed and is deemed collectible, or if recovery of the loss is probable.

Cash and Cash Equivalents - Financial instruments that potentially subject the Company to a concentration of credit risk consist of cash and cash equivalents. The Company maintains cash accounts principally atone financial institution in the U.S., which at times,* mayexceed the Federal Deposit Insurance Corporation’s limit. The Company hasnot* experienced any losses from cash balances in excess of the insurance limit. The Company’s management doesnot believe the Company is exposed to significant credit risk at this time due to the financial condition of the financial institution where its cash is held.

**Fair Value of Financial Instruments -**The Company's financial instruments consist primarily of non-trade receivables, accounts payable, accrued expenses and its warrant liability. The carrying amount of non-trade receivables, accounts payable, and accrued expenses approximates their fair value because of the short-term maturity of such.

The Company has categorized its assets and liabilities that are valued at fair value on a recurring basis into athree-level fair value hierarchy in accordance with U.S. GAAP. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. The fair value hierarchy gives the highest priority to quoted prices in active markets for identical assets and liabilities (Level1) and lowest priority to unobservable inputs (Level3).

Assets and liabilities recorded in the condensed consolidated balance sheets at fair value are categorized based on a hierarchy of inputs as follows:

Level1 – Unadjusted quoted prices in active markets of identical assets or liabilities.

Level2 – Quoted prices for similar assets or liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument.

Level3 – Unobservable inputs for the asset or liability.

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The Company’s financial assets and liabilities recorded at fair value on a recurring basis include the fair value of warrant liability discussed in Note4.

The following table provides the financial liabilities reported at fair value and measured on a recurring basis at* September 30, 2024* and* December 31, 2023* (table in thousands):

The table below of Level3 liabilities (table in thousands) begins with the valuation as of the beginning of thethird quarter and then is adjusted for changes in fair value that occurred during thethird quarter. The ending balance of the Level3 financial instrument presented above represents the Company's best estimates and* may**not* be substantiated by comparison to independent markets and, in many cases, couldnot be realized in immediate settlement of the instruments.* *

The table below of Level3 liabilities (table in thousands) begins with the valuation as of* December 31, 2023and then is adjusted for changes in fair value that occurred during thenine* months ended* September 30, 2024*. The ending balance of the Level3 financial instrument presented above represents the Company's best estimates and* may**not* be substantiated by comparison to independent markets and, in many cases, couldnot be realized in immediate settlement of the instruments.* *

Loss Per Common Share - Basic net loss per common share is computed by dividing net loss available to common shareholders by the weighted-average number of common shares outstanding during the period. For purposes of this calculation, options to purchase common stock, restricted stock units subject to vesting and warrants to purchase common stock are considered to be common stock equivalents. Diluted net loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. For thethree months ended* September 30, 2024and2023*, approximately 4.8 million and 0.6 million, respectively, of potentially dilutive shares were excluded from the computation of diluted earnings per share due to their anti-dilutive effect. For thenine months ended* September 30, 2024and2023*, approximately 2.7 million and 0.5 million, respectively, of potentially dilutive shares were excluded from the computation of diluted earnings per share due to their anti-dilutive effect.

Subsequent Events - The Company’s management reviewed all material events through the date of these unaudited condensed consolidated financial statements.

Recent Accounting Pronouncements - In* November 2024,FASB issued ASU* 2024-03, Income Statement - Reporting Comprehensive Income - Expense Disaggregation Disclosures (Subtopic220-40): Disaggregation of Income Statement Expenses, which requires disclosure in the notes to the financial statements of specified information about certain costs and expenses. The amendments are effective for fiscal years beginning after* December 15, 2026,and for interim periods within fiscal years beginning after December 15, 2027.Early adoption is permitted. The amendments should be applied either prospectively to financial statements issued for reporting periods after the effective date of this ASU or retrospectively to any or all prior periods presented in the financial statements. The Company is currently evaluating the new guidance to determine the impact it mayhave on its consolidated financial statements and related disclosures, but expects additional disclosures upon adoption. There areno* other recently issued accounting standards updates that are currently expected to have a material impact on the Company.

3. Accrued expenses and other current liabilities

Accrued expenses and other current liabilities consist of the following components (in thousands):

Additionally, accounts payable includes $20,000 and$67,000 as of* September 30, 2024* and* December 31, 2023*, respectively, for related party payables.

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4. Warrants and Equity

2024 Warrant and Stock Issuances

In* August 2024,the Company entered into a securities purchase agreement with an institutional investor for the sale by the Company of 283,000 shares of common stock, and 2,183,368 pre-funded warrants to purchase shares of common stock, series A warrants to purchase up to 2,466,368 shares of common stock, series B warrants to purchase up to 2,466,368 shares of common stock, and placement agent warrants. The combined purchase price for the securities was $2.23 per share of common stock (or pre-funded warrant in lieu thereof). Each pre-funded warrant is exercisable forone* share of common stock at an exercise price of $0.001 per share. The pre-funded warrants are exercisable immediately and* maybe exercised at any time until all of the pre-funded warrants are exercised in full, subject to the beneficial ownership limitation. Each common warrant has an exercise price of $2.23 per share and will be exercisable beginning on the effective date of shareholder approval. The series A warrants expire on the earlier of (i)two years from the initial exercise date, or (ii)60 days from the Company's public announcement that it has achieved the series A milestone event. The series B warrants expire on the earlier of (i)five years from the initial exercise date, or (ii)six months from the Company's public announcement that it has achieved the series B milestone event. The series A milestone event means the Company releases interim data for thefirst* subject group from the MIRACLE trial whereby the complete remission rate for either dose of the Company's study drug is greater than placebo; and series B milestone event means the Company releases final topline data from the MIRACLE trial and documented a statistically significant improvement in the primary efficacy endpoint. In addition, in* August 2024,the Company entered into a warrant amendment agreement, pursuant to which the Company agreed that effective upon closing of the offering, and subject to shareholder approval, to amend 895,834 existing warrants originally issued on December 26, 2023at an exercise price of $9.60 per share and a termination date of February 14, 2029,so that the amended warrants would have a reduced exercise price of $2.23 per share and would expire five years from the date of shareholder approval. The Company calculated the valuation of the warrant amendment immediately prior to the offering, as well as the valuation of the warrant amendment with the repriced terms, and a50%* probability of obtaining shareholder approval. The loss on modification of the warrants of*$0.4* million was recorded as a loss on issuance of warrant liabilities in thethree andnine months ended* September 30, 2024.The Company also considered a50%* probability of obtaining shareholder approval in the valuation for the* August 2024warrants in thethree* andnine months ended* September 30, 2024.In October 2024,the Company’s shareholders approved the issuance of both the August 2024*warrants, as well as the warrant amendment.

The Company received gross proceeds of $5.5 million, before deducting the placement agent's fees and other offering expenses payable by the Company. Proceeds of offerings are allocated between common shares and warrantsfirst by allocating to the warrants classified as a liability based on their fair value and then allocating the residual to the equity instruments, which would include pre-funded warrants. As the fair value of the liability classified warrants in the* August 2024offering exceeded the total proceeds,no consideration was allocated to the Common Shares or Pre-Funded Warrants. The full proceeds of the August 2024offering were recorded to warrant liabilities, with an initial liability of $6.1 million, and a loss on initial recognition of $0.8 million. Transaction costs related to the offering were correspondingly fully allocated to warrant liabilities, and $1.0 million in related transaction costs were expensed during thethree* andnine months ended* September 30, 2024*.

Lincoln Park Equity Line

The Company didnot utilize the2021 Lincoln Park purchase agreement during thenine months ended* September 30, 2024*. The2021 Lincoln Park Agreement terminated in* June 2024.*

Other Components of Equity

In* March 2024,the Company issued 6,834 shares of common stock to consultants in exchange for services to be provided. In addition, during thenine* months ended* September 30, 2024*, the Company issued 20,485 shares of common stock related to the vesting of restricted stock units.

Liability Classified Warrants

The Company uses the Black-Scholes option pricing model (BSM) to determine the fair value of its warrants at the date of issue and outstanding at each reporting date. The risk-free interest rate assumption is based upon observed interest rates onzero coupon U.S. Treasury bonds linearly interpolated to obtain a maturity period commensurate with the term of the warrants. Estimated volatility is a measure of the amount by which the Company's stock price is expected to fluctuate each year during the expected life of the warrants. Only the volatility of the Company's own stock is used in the Black-Scholes option pricing model. Certain assumptions, including the expected term, are subjective and require judgment to develop. As a result, if factors or expected outcomes change and we use significantly different assumptions or estimates, our warrant liability could be materially different.

The assumptions used in determining the fair value of the Company's outstanding liability classified warrants are as follows:

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A summary of the Company's liability classified warrant activity during thenine months ended* September 30, 2024* and related information follows:

For a summary of the changes in fair value associated with the Company's warrant liability for thenine months ended* September 30, 2024*, see Note2 - Basis of presentation, principles of consolidation and significant accounting policies - Fair Value of Financial Instruments.

Equity Classified Warrants

In* March 2024,*the Company granted equity-classified warrants to purchase up to 3,334 shares of Company common stock with aten-year term and an exercise price of $9.15. The warrants vest annually over four years while services are being performed.

At* September 30, 2024*, the Company had 2,089,105 equity classified warrants outstanding (including the remaining* August 2024pre-funded warrants) and 2,066,894 warrants were exercisable. At December 31, 2023*, the Company had 289,276 equity classified warrants outstanding and 266,350 warrants were exercisable.

5. Stock Based Compensation

The2015 Stock Plan provides for the grant of stock options, stock awards, stock unit awards, and stock appreciation rights to employees, non-employee directors and consultants. In* May 2023and2022,* the2015 Stock Plan (the Plan) was amended to authorize an additional 116,667 shares and 133,334 shares, respectively, such that 366,667 total shares* maybe issued under the Plan. As of September 30, 2024*, there were 2,853 shares remaining to be issued under the2015 Stock Plan. In* October 2024,the Company's shareholders approved the2024* Stock Plan, which authorizes a total of 1,000,000 shares of common stock, which will replace the2015 Stock Plan.

Stock-based compensation expense for thethree andnine months ended* September 30, 2024and2023*, respectively, is as follows (table in thousands):

The Company recorded stock compensation expense for the equity classified warrants relating to non-employee consulting agreements of $26,000 and $50,000 for thethree months ended* September 30, 2024and2023*, respectively, and $94,000 and $142,000 for thenine months ended* September 30, 2024and2023* , respectively, which are included in the table above. At* September 30, 2024*, there was $283,000 of unrecognized stock compensation expense related to the Company's equity classified warrants.

In* Octoberand November 2024,*the Company granted 545,000 stock options,267,500 shares of restricted stock units,73,334 shares of performance based restricted stock units, and 36,000 in warrants to employees and contractors. These stock options have an exercise price ranging from $2.45 to $2.54 and vest over aone-to-four year period from the grant date on a straight-line basis over the requisite service period. The restricted stock units vest annually infour equal installments.

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6. Income Taxes

Deferred income tax assets and liabilities are determined based upon differences between the financial reporting and tax basis of assets and liabilities and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse.

The Company doesnot expect to pay any significant federal, state, or foreign income taxes in2024 as a result of the losses recorded during thethree andnine months ended* September 30, 2024* and the additional losses expected for the remainder of2024 and cumulative net operating loss carryforwards. Accounting standards require the consideration of a valuation allowance for deferred tax assets if it is “more likely thannot” that some component or all of the benefits of deferred tax assets willnot be realized. As a result, as of* September 30, 2024* and* December 31, 2023* the Company maintained a full valuation allowance for all deferred tax assets.

The Company recordedno income tax provision for thethree andnine months ended* September 30, 2024and2023*, respectively. The effective tax rate for thenine months ended* September 30, 2024and2023* isnil. The income tax rates vary from the federal and state statutory rates primarily due to the change in fair value of the stock warrants, Internal Revenue Code Section162(m) limitations and ISO activity, as well as the valuation allowances on the Company’s deferred tax assets. The Company estimates its annual effective tax rate at the end of each quarterly period. Jurisdictions with a projected loss for the year whereno tax benefit can be recognized due to the valuation allowance could result in a higher or lower effective tax rate during a particular quarter depending on the mix and timing of actual earnings versus annual projections.

7. Commitments and Contingencies

In addition to the commitments and contingencies described elsewhere in these notes, see below for a discussion of the Company's commitments and contingencies as of* September 30, 2024*.

Lease Obligations Payable

The following summarizes quantitative information about the Company's operating leases for thethree andnine months ended* September 30, 2024and2023*, respectively (table in thousands):

In* September 2023,the Company executed an amendment to extend the corporate office lease until August 31, 2029,*with an option to renew. The Company is required to remit base monthly rent of approximately $4,700 which will increase at an average approximate rate of 2%each year. The Company is also required to pay additional rent in the form of its pro-rata share of certain specified operating expenses of the building.

In* June 2022,the Company extended the lab lease until September 30, 2027,withno* further right or option to renew. The Company recorded approximately $12,000 in sublease income from a related party for thethree months ended* September 30, 2024and2023*, and $37,000 for thenine months ended* September 30, 2024and2023*. Sublease income is recorded as other income, net on the Company's condensed consolidated statement of operations and comprehensive loss. Operating cash flows from operating leases was $39,000 and $34,000 for thethree months ended* September 30, 2024and2023*, respectively, and$107,000 and $109,000 for thenine months ended* September 30, 2024and2023*, respectively.

Licenses

MD Anderson -Total expenses related to the Company's license agreements with MD Anderson were $63,000 and $64,000 for thethree months ended September 30, 2024and2023, respectively, and$180,000 and $193,000 for thenine months ended* September 30, 2024and2023*, respectively.

HPI -The Company hastwo agreements with a related party, Houston Pharmaceuticals, Inc. (HPI) with total expenses of$59,000 for each of thethree months ended September 30, 2024and2023, respectively, and $176,000 for thenine months ended* September 30, 2024and2023*, respectively.

Sponsored Research Agreements - The expenses recognized under the agreements were$767,000 and $221,000 for thethree months ended* September 30, 2024and2023*, respectively, and$1,300,000 and $552,000 for thenine months ended* September 30, 2024and2023*, respectively.

8. Subsequent Events

In addition to the subsequent events discussed elsewhere in these notes,no other subsequent events were noted as occurring after* September 30, 2024*.

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