MIRA PHARMACEUTICALS INC

NOTES TO THE FINANCIAL STATEMENTS

Note 1. Description of business and summary of significant accounting policies:

Overview

MIRA Pharmaceuticals, Inc. (“MIRA” or the “Company” and formerly known as MIRA1a Therapeutics, Inc.) is a pre-clinical-stage pharmaceutical development company with two neuroscience programs targeting a broad range of neurologic and neuropsychiatric disorders. The Company has an exclusive licensing agreement for Ketamir-2, a unique, patent pending novel oral ketamine analog under investigation to potentially deliver ultra-rapid antidepressant effects, providing hope for individuals battling treatment-resistant depression (TRD) and major depressive disorder with suicidal ideation (MDSI). The Company’s novel oral pharmaceutical marijuana, MIRA-55, is currently under investigation for treating adult patients suffering from anxiety and cognitive decline, often associated with early-stage dementia. MIRA-55, if approved by the FDA, could mark a significant advancement in addressing various neuropsychiatric, inflammatory, and neurologic diseases and disorders.

The U.S. Drug Enforcement Administration (DEA)’s scientific review of Ketamir-2 concluded that it would not be considered a controlled substance or listed chemical under the Controlled Substances Act (CSA) and its governing regulations. Additionally, we have submitted the required paperwork for MIRA-55 to be evaluated by the DEA.

The Company was organized as a Florida corporation in September 2020 and commenced substantive operations in late 2020, at which time the Company commenced its pharmaceutical development program.

The accounting and reporting policies of the Company conform to accounting principles generally accepted in the United States of America (“GAAP”).

As used herein, the Company’s Common Stock, par value $0.0001 per share, is referred to as the “Common Stock” and the Company’s preferred stock, par value $0.0001 per share, is referred to as the “Preferred Stock”.

Operating updates

In early February 2024, we made a significant discovery during the manufacturing and scale-up process of our patented molecule known as “MIRA1a,” which we had been utilizing with a contract manufacturer. Through this process, we identified a novel and improved version of the molecule, MIRA-55. MIRA-55 exhibits enhanced potency and holds promise for improved efficacy compared to MIRA1a.

As part of our due diligence and subsequent testing, we discovered that the pre-clinical studies we conducted, previously attributed to MIRA1a, were in fact performed on MIRA-55. Following this revelation, we promptly filed a provisional patent for MIRA-55, which encompasses all pre-clinical studies disclosed in our two registration statements on Form S-1, declared effective on August 2, 2023 and December 27, 2023 (File Nos. 333-273024 and 333-276118, respectively).

Moreover, based on our pre-clinical analyses to date, we believe that MIRA-55 is an improvement over MIRA1a in that it displays enhanced potency and potential for efficacy. In early March 2024, we filed a provisional patent application for MIRA-55, aiming for global patent protection. If such patent is issued, we would own the patent rights to both MIRA1a and MIRA-55.

Additional testing is required to confirm our preliminary beliefs. However, based on our discoveries to date, the Company has decided to advance MIRA-55 as our lead compound for our oral pharmaceutical marijuana drug candidate while still retaining our rights to MIRA1a. As such, we do not intend to move MIRA1a forward as of the date of this Report.

Initial public offering

On August 7, 2023, the Company closed its initial public offering consisting of 1,275,000 shares at a price of $7.00 per share for approximately $8.9 million in gross proceeds. After deducting the underwriting commission and other deferred offering expenses totaling $1.2 million, the net proceeds to the Company were $7.7 million (the “IPO”).

The shares were offered and sold pursuant to the Company’s Registration Statement on Form S-1, as amended (File No. 333-273024), originally filed with the Securities and Exchange Commission (the “SEC”) on June 29, 2023 (the “Registration Statement”) and the final quarterly report filed with the Commission pursuant to Rule 424(b)(4) of the Securities Act of 1933, as amended. The Registration Statement was declared effective by the Commission on August 2, 2023. The common stock began trading on The Nasdaq Capital Market on August 3, 2023 under the symbol “MIRA”. The closing of the IPO occurred on August 7, 2023.

As of the completion of the IPO, among other things, certain of the Company’s then-outstanding convertible debt was converted into shares of common stock. See Note 5 for more information.

Revenue recognition

The Company currently has no source of revenue. Miscellaneous income, including interest, is recognized when earned by the Company.

Income taxes

The Company is taxed as a C corporation. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amount of existing assets and liabilities and their respective tax bases. Deferred tax assets are recognized for temporary differences that will result in deductible amounts in future years and for loss carryovers. A valuation allowance is recognized regarding deferred tax assets, if any, if it is more likely than not that some portion of the deferred tax asset will not be realized.

Research and development expenses

Research and development costs are expensed in the period in which they are incurred and include the expenses paid to third parties, such as contract research organizations and consultants, who conduct research and development activities on behalf of the Company. Patent-related costs, including registration costs, documentation costs and other legal fees associated with the application, are expensed in the period in which they are incurred.

General and administrative expense

General and administrative expenses are primarily comprised of personnel costs, marketing expenses, amortization, insurance expenses, professional services fees, travel and office expenses, and stock-based compensation.

Advertising expenses

The Company expenses advertising costs when incurred. Advertising expense for the years ended December 31, 2023 and 2022 is as follows:

Leases

The Company accounts for leases under the provisions of FASB ASC Topic 842, “Leases”, which requires the Company to recognize right-to-use (ROU) assets and lease liabilities for operating leases on the balance sheet.

Use of estimates

The preparation of financial statements in accordance with generally accepted accounting principles in the United States of America requires the Company’s management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. Actual results may differ from such estimates and such differences could be material.

Cash

The Company maintains cash balances with financial institutions that management believes are of high credit quality. The Company’s cash account at times may exceed federally insured limits. The Company has not experienced any losses in such accounts. The Company believes it is not exposed to any significant credit risk from its cash account.

The Company accounts for stock-based compensation under the provisions of FASB ASC 718, “Compensation - Stock Compensation”, which requires the measurement and recognition of compensation expense for all stock-based awards made to employees, directors and consultants based on estimated fair values on the grant date. The Company estimates the fair value of stock-based awards on the date of grant using the Black-Scholes model. The value of the portion of the award that is ultimately expected to vest is recognized as expense over the requisite service periods using the straight-line method. The Company has elected to account for forfeiture of stock-based awards as they occur.

Segment information

ASC Topic 280, “Disclosures about Segments of an Enterprise and Related Information,” established standards for the way that public business enterprises report information about operating segments in annual financial statements and requires those enterprises to report selected information about operating segments in interim financial reports issued to stockholders. Management has determined that the Company operates in one business segment, which is the research and development of neuroscience drug candidates.

Recent accounting pronouncements not yet adopted

In December 2023, the FASB issued Accounting Standards Update No. 2023-09,“Income Taxes (Topic 740): Improvements to Income Tax Disclosures” (“ASU 2023-09”), which modifies the rules on income tax disclosures to require entities to disclose (1) specific categories in the rate reconciliation, (2) the income or loss from continuing operations before income tax expense or benefit (separated between domestic and foreign) and (3) income tax expense or benefit from continuing operations (separated by federal, state and foreign). ASU 2023-09 also requires entities to disclose their income tax payments to international, federal, state and local jurisdictions, among other changes. The guidance is effective for annual periods beginning after December 15, 2024. Early adoption is permitted for annual financial statements that have not yet been issued or made available for issuance. ASU 2023-09 should be applied on a prospective basis, but retrospective application is permitted. The Company is currently evaluating the potential impact of adopting this new guidance on its financial statements and related disclosures.

Management has considered all other recent accounting pronouncements that are issued, but not effective, and it does not believe that they will have a significant impact on the Company’s results of operations or financial position.

Change in accounting principle

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842), which supersedes existing guidance for accounting for leases under Topic 840, Leases. The FASB also subsequently issued additional ASUs which amend and clarify Topic 842. The most significant change in the new leasing guidance is the requirement to recognize right-to-use (ROU) assets and lease liabilities for operating leases on the balance sheet.

The Company adopted these ASUs effective January 1, 2022 using the modified retrospective approach. As a result of adopting these ASUs, the Company recorded ROU assets and lease liabilities of approximately $0.2 million and $0.2 million, respectively. Adoption of the new standard did not materially impact the Company’s net income and had no impact on cash flows.

Fair value of financial instruments

The Company measures the fair value of financial instruments in accordance with GAAP which defines fair value, establishes a framework for measuring fair value, and expands disclosures about fair value measurements.

GAAP defines fair value 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. GAAP also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. The Company considers the carrying amount of deferred offering costs to approximate fair value due to short-term nature of this instrument. GAAP describes three levels of inputs that may be used to measure fair value:

Level 1 – quoted prices in active markets for identical assets or liabilities.

Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable.

Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions).

Contingencies

In the normal course of business, the Company may be subject to loss contingencies, such as legal proceedings, amounts arising from contractual arrangements and claims arising out of the Company’s business that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, and tax matters. In accordance with ASC Topic 450,Accounting for Contingencies, (ASC 450), the Company records accruals for such loss contingencies when it is probable that a liability will be incurred, and the amount of loss can be reasonably estimated. The Company, in accordance with this guidance, does not recognize gain contingencies until realized or realizable.

Note 2. Liquidity and capital resources:

In accordance withAccounting Standards Codification 205-40, Going Concern, the Company has evaluated whether there are conditions and events, considered in the aggregate, that raise substantial doubt about the Company’s ability to continue as a going concern within one year after the date the financial statements are issued. As of December 31, 2023, the Company had cash of approximately $4.6 million. The Company used approximately $4.5 million of cash in operations during the year ended December 31, 2023 and had stockholders’ equity of approximately $4.4 million, versus stockholders’ deficit of approximately $0.6 million at December 31, 2022

Historically, the Company has been primarily engaged in developing MIRA-55. During these activities, the Company sustained substantial losses. The Company’s ability to fund ongoing operations and future clinical trials required for FDA approval is dependent on the Company’s ability to obtain significant additional external funding in the near term. Since inception, the Company financed its operations through the sale of Common Stock, the IPO and related party financings. Additional sources of financing may be sought by the Company. The Company expects to be able to fund operations through the fourth quarter of 2024, with available borrowings on the loan agreement (Note 4). Additional financing will be needed by the Company to fund its operations after such date to complete clinical developments and to commercially develop its product candidate. However, there can be no assurance that any fundraising will be achieved on commercially reasonable terms, if at all.

The Company expects to continue to generate losses in the foreseeable future. The Company’s liquidity needs will be determined largely by the budgeted operational expenditures incurred in regard to the progression of its product candidates. Management believes that the Company has sufficient resources available to support its development activities and business operations and timely satisfy its obligations as they become due into the fourth quarter of 2024. The Company does not have sufficient cash and cash equivalents as of the date of filing this Annual Report on Form 10-K to support its operations for at least the 12 months following the date the financial statements are issued. These conditions raise substantial doubt about the Company’s ability to continue as a going concern through 12 months after the date the financial statements are issued.

To alleviate the conditions that raise substantial doubt about the Company’s ability to continue as a going concern, the Company plans to secure additional capital, potentially through a combination of public or private equity offerings and strategic transactions, including potential alliances and drug product collaborations; however, none of these alternatives are committed at this time. There can be no assurance that the Company will be successful in obtaining sufficient funding on terms acceptable to it to fund continuing operations, if at all, identify and enter into any strategic transactions that will provide the capital that it will require or achieve the other strategies to alleviate the conditions that raise substantial doubt about the Company’s ability to continue as a going concern. If none of these alternatives are available, or if available, are not available on satisfactory terms, the Company will not have sufficient cash resources and liquidity to fund its business operations for at least the 12 months following the date the financial statements are issued. The failure to obtain sufficient capital on acceptable terms when needed may require the Company to delay, limit, or eliminate the development of business opportunities and its ability to achieve its business objectives and its competitiveness, and its business, financial condition, and results of operations will be materially adversely affected. In addition, the perception that the Company may not be able to continue as a going concern may cause others to choose not to deal with it due to concerns about its ability to meet its contractual obligations.

The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and satisfaction of liabilities in the normal course of business, and do not include any adjustments relating to recoverability and classification of recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.

Note 3 Accounts payable and accrued liabilities:

The following table represents the components of accounts payable and accrued liabilities as of:

Note 4. License agreement, related party:

MIRALOGX

On November 15, 2023, the Company and MIRALOGX, LLC, a Florida limited liability company (“MIRALOGX”), entered into an exclusive license agreement (the “License Agreement”) to develop and commercialize a drug product containing 2-(2- chlorophenyl)-2-(methylamino) cyclopentan-1-one (sometimes referred to by the Parties as “M209” or “KETAMIR-2”) (“the Product”) as an active agent in North America. (the “Territory”). The exclusive license in the License Agreement includes the right of the Company to sublicense the licensed intellectual property.

Pursuant to the terms of the License Agreement, and subject to the conditions set forth therein, the Company paid MIRALOGX a one-time, nonrefundable payment of $0.1 million upon the signing of the Agreement and will be obligated to pay quarterly royalty payments on sales of the Product in the Territory of 8% of net sales and 8% of other revenue (such as milestone or sublicense payments) from licensed products.

Also, in consideration of License Agreement, the Company issued to MIRALOGX a Common Stock Purchase Warrant to purchase up to 700,000 shares of the Company’s common stock (the “MIRALOGX Warrants”). The MIRALOGX Warrants are exercisable, in whole or in part, any time prior to November 15, 2028 at a cash exercise price of $2.00 per share.

The Company and MIRALOGX have made customary representations and warranties in the License Agreement and have agreed to certain other customary covenants, including confidentiality, cooperation, and indemnity provisions. Either party may terminate the License Agreement for cause if the other party materially breaches or defaults in the performance of its obligations, and, if curable, such material breach remains uncured for 120 days. Unless earlier terminated, the License Agreement will continue in effect until the last to expire of the Patent Rights (the “Term”), unless earlier terminated.

The Company and MIRALOGX have the same founder.

Note 5. Debt, related party:

MIRALOGX

On November 15, 2023, the Company entered into a Promissory Note and Loan Agreement (the “Loan Agreement”) with MIRALOGX.

Pursuant to the Loan Agreement, the Company may borrow up to $3.0 million from MIRALOGX to fund the development of licensed products under the License Agreement (the “Loan”).

Together with any Advance Request, the Company shall deliver to the Lender a budget for the requested Advance (the “Budget”). The Budget may only include costs directly associated with preparing an Investigational New Drug (“IND”) application for KETAMIR-2, exclusive of personnel costs. Any Advances made by the Lender to the Company pursuant to this Note may be repaid by the Company (together with any and all interest accrued thereon) at any time without penalty or premium in accordance with the terms hereof. Amounts repaid hereunder may not be reborrowed.

The Loan Agreement has a one-year term, and all outstanding principal and accrued but unpaid interest must be repaid in full on November 15, 2024. Interest on the amounts borrowed under the Loan Agreement accrues at an annual fixed rate of 8%. The Company may prepay all or a portion of the outstanding principal and accrued unpaid interest under the Loan Agreement at any time without a prepayment fee. The Company did not borrow any funds from the MIRALOGX loan as of December 31, 2023.

Bay Shore Trust

In May 2021, the Company entered into a revolving credit facility which allowed for borrowings of up to $5 million from Starwood Trust, a shareholder of the Company. The facility had an initial term of 24 months (extended to 36 months in March 2023), with a new maturity date of May 10, 2024, at which time all outstanding borrowings and accrued interest, if any, were due in full. Borrowings accrued interest at a rate of 5% per annum.

In April 2023, the Company entered into a Promissory Note and Loan Agreement with the Bay Shore Trust, a trust established by a shareholder of the Company. Under this Promissory Note and Loan Agreement (the “Bay Shore Note”), the Company has the right to borrow up to an aggregate of $5 million from the Bay Shore Trust at any time up to the second anniversary of the issuance of the Bay Shore Note or, if earlier, upon the completion of the Company’s IPO. The Company’s right to borrow funds under the Bay Shore Note is subject to the absence of a material adverse change in the Company’s assets, operations, or prospects. The Bay Share Note, together with accrued interest, will become due and payable on the second anniversary of the issuance of the note, provided that it may be prepaid at any time without penalty. The Bay Shore Note will accrue interest at a rate equal 7% per annum, simple interest, during the first year that the note is outstanding and 10% per annum, simple interest, thereafter. The Bay Shore Note is unsecured.

The Bay Shore Note replaced the revolving credit facility that the Company entered into with Starwood Trust, a separate trust established by a shareholder of the Company, in May 2021 and pursuant to which the Company had an outstanding principal balance of $0.2 million as of the date of the Bay Shore Note (which outstanding balance was retired with an advance under the Bay Shore Note).

In consideration of the loan facility provided by the Bay Shore Trust, in April 2023, the Company issued to the Bay Shore Trust a common stock purchase warrant giving the Bay Shore Trust the right to purchase up to 1,000,000 shares of common stock at an exercise price of $5.00 per share, which warrant will expire five years after the date of grant. Pursuant to a registration rights agreement, the Company has granted to Bay Shore Trust the right to require the Company, at any time after one year following the Company’s IPO, to register for resale the shares issuable upon the exercise of the warrant, with such registration rights being in the form of demand and “piggyback” registration rights that are subject to customary limitations and restrictions. See Note 8 for additional details related to these warrants.

On July 20, 2023, the Company entered into a conversion agreement with the Bay Shore Trust under which the Bay Shore Trust had agreed to convert, upon the completion of the IPO, $1.1 million of the outstanding principal balance of the Bay Shore Note into shares of the Company’s common stock at a conversion price equal to the Company’s IPO price, which resulted in the issuance of 157,170 shares to the Bay Shore Trust. On August 14, 2023, the Company paid $1.0 million in full to Bay Shore Trust, which was the amount due. The company also paid accrued interest of $0.03 million. Both amounts are recorded in the accompanying statement of operations for the year ended December 31, 2023 as interest expense. There is a remaining amount of $0.01 in accrued interest due to Bay Shore Trust as of December 31, 2023.

Note 6. Related party transactions:

Due from Related Party – As of the year ended December 31, 2023, the Company paid $0.07 million in accounts payable on behalf of a related party. There was no such amount during the corresponding period in 2022.

Due to Related Party – Amounts due to related parties as of December 31, 2023 and December 31, 2022, are recorded as related party accounts payable, in the accompanying balance sheets. As of December 31, 2022, amounts due to related parties totaled $0.1 million. The balance was paid in 2023 which resulted in a $0.0 balance as of December 31, 2023.

Travel expenses – In April 2021, the Company entered into an airplane lease with an entity under common control that the Company incurs approximately $0.05 million of lease charges per month. The lease was renewable, at the Company’s discretion, for an additional one to three years, however, the Company terminated the lease at March 31, 2023, without any penalties. The Company may continue to incur related party travel-related expenses as they occur, which will be recorded in Related Party Travel Costs, in the condensed statement of operations. During the year ended December 31, 2023, the Company incurred $0.5 million, for travel-related expenses to the related party for monthly rental charges and airplane-related expenses. There was $1.7 million of related party travel expenses during the year ended December 31, 2022.

License agreement - See Note 4.

Line of credit - See Note 5.

Note 7. Leases:

The Company’s corporate headquarters was in Baltimore, Maryland, which includes a lease for office space. This lease began in November 2021 and was amended in April 2023. This space is approximately 550 square feet and has a remaining base rent of $0.01 million payable through April 2024. Rent is payable in monthly installments and is subject to yearly price increases.

The Company had leased an office in Tampa, Florida, for its finance and general operations, which began in March 2022 for 37 months. On December 1, 2023, the Company formally terminated the lease with the landlord. There is a remaining deposit due from the landlord to the Company of $0.005 million, which is recorded in accounts receivable in the accompanying balance sheet as of December 31, 2023.

The Company also leased a jet (Note 5) from a related party, which terminated on March 31 2023.

Variable lease costs

Variable lease costs primarily include utilities, property taxes, and other operating costs that are passed on from the lessor. Variable lease costs related to the aircraft include usage expenses, which includes pilot expenses, jet fuel and general flight expenses.

The components of lease expense were as follows:

Supplemental cash flow information related to leases were as follows:

Maturity of Lease Liabilities

Future minimum lease payments under non-cancellable leases as of December 31, 2023 were as follows:

Maturity of Lease Liabilities

On April 1, 2023 the Company entered into an Agreement For Shared Lease Costs with MIRALOGX, LLC, (the “Shared Agreement”) who is a related party for the jet usage. Under the Shared Agreement, the Company agrees to make monthly contributions or payments in accordance with its monthly use of shared aircraft toward rent payments. However, the Company has not used the aircraft after the termination of the lease and there are no minimum payments due without usage.

Note 8. Income taxes:

The significant components of the Company’s net deferred tax assets are as follows as of December 31:

Beginning in 2022, in accordance with Internal Revenue Code Section 174, Qualified Research Expenditures are capitalized for tax purposes and amortized over a period of five years. Accordingly, for income tax purposes, the Company has recorded a deferred tax asset totaling approximately $0.5 million related to the timing difference between GAAP and Tax recognition of these expenditures.

The components of the provision for income taxes consist of the following:

ASC Topic 740 requires that a deferred tax amount be reduced by a valuation allowance if, based on the weight of available evidence it is more likely than not (a likelihood of more than 50%) that some portion or all of the deferred tax assets will not be realized. The valuation allowance should be sufficient to reduce the deferred tax asset to the amount that is more likely than not to be realized. The Company has recorded a full valuation allowance against its deferred tax assets generated by net operating loss carryforwards as it has determined that such amounts may not be recognizable, given the historical losses of the Company to date. As of December 31, 2023, the Company has a cumulative federal net operating loss carryforward of approximately $9.5 million. The net operating loss carryforwards have no expiration date.

Note 9. Stockholders’ equity:

Capital stock

The Company has the authority to issue 110,000,000 shares of capital stock, consisting of 100,000,000 shares of Common Stock and 10,000,000 shares of undesignated preferred stock (as amended and restated on June 28, 2023), whose rights and privileges will be defined by the Board of Directors when a series of preferred stock is designated.

Reverse stock-split

Effective June 28, 2023, the Company completed a 1-for-5 reverse stock split of its outstanding common stock upon the filing of the Company’s Third Amended and Restated Articles of Incorporation with the Florida Secretary of State. No fractional shares were issued in connection with the reverse stock split, and all such fractional shares resulting from the reverse stock split were rounded up to the nearest whole number. The shares issuable upon the exercise of our outstanding options and warrants, and the exercise prices of such options and warrants, have been adjusted to reflect the reverse stock split.

Stock issuances

At IPO in August 2023,1,275,000 shares of the Company’s common stock were issued at a price of $7.00 per share which resulted in gross proceeds of $8.9 million and net proceeds of $7.7 million to the Company after the underwriter discount but before other IPO related expenses.

Additionally, the Company issued its investor relations firm $0.25 million worth of restricted common stock upon closing of the IPO, which resulted in issuance of 35,715 shares of stock.

During the year ended December 31, 2022, the Company sold 3.2 million shares of Common Stock at $1.00 per share, net of offering costs of $0.3 million, resulting in net proceeds of $2.9 million.

2022 Omnibus Incentive Plan

In June 2022, the Company’s Board of Directors adopted, and its stockholders approved, the Company’s 2022 Omnibus Incentive Plan, as amended and restated in August 2023, (“2022 Omnibus Plan”). The 2022 Omnibus Plan authorizes the grant of incentive stock options, within the meaning of Section 422 of the Internal Revenue Code, to the Company’s employees and any of its parent and subsidiary corporations’ employees, and for the grant of nonstatutory stock options, restricted stock, restricted stock units, stock appreciation rights, performance units and performance shares to the Company’s employees, directors, and consultants and any of its future subsidiary corporations’ employees and consultants.

The 2022 Omnibus Plan provides that 2,000,000 shares of the Company’s Common Stock are reserved for issuance under the 2022 Omnibus Plan, all of which may be issued pursuant to the exercise of incentive stock options.

The fair value of each option award is estimated on the grant date using the Black-Scholes valuation model that uses assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate. Expected price volatility is based on the historical volatilities of a peer group as the Company does not have a trading history for its shares prior to its IPO. Industry peers consist of several public companies in the biotech industry similar to the Company in size, stage of life cycle and product indications. The Company intends to continue to consistently apply this process using the same or similar public companies until a sufficient amount of historical information regarding the volatility of the Company’s own stock price becomes available, or unless circumstances change such that the identified companies are no longer similar to the Company, in which case, more suitable companies whose share prices are publicly available would be utilized in the calculation.

Expected term of options granted is derived using the “simplified method” which computes expected term as the average of the sum of the vesting term plus contract term. The risk-free rate is based on the 5-year U.S. Treasury yield curve in effect at the time of grant. The Company recognizes forfeitures as they occur.

During the year ended December 31, 2023, a total of 635,001 options to purchase Common Stock, with an aggregate fair market value of approximately $2.75 million were granted to the Company’s executive officers and management, and consultants of the Company. Options have a term of 10 years from the grant date. These option vest as follows: (i) executive officer options vested 100% on date of grant and (ii) employee and consultant options vest 33.33% at 6 month anniversary of date of grant,33.33% at 1 year anniversary at date of grant and the remaining vest attwo-year anniversary of date of grant.

As of December 31, 2023, there was approximately $1.3 million of unrecognized compensation cost related to unvested share-based compensation awards granted. These costs will be expensed over the next two years.

The following is option activity during the year ended December 31, 2023:

Key assumptions used to value stock options during the year ended December 31, 2023 are as follows:

On March 25, 2024, a total of 100,000 options to purchase Common Stock, with an aggregate fair market value of approximately $0.1 million were granted to the Company’s Independent Board of Directors. These option vest as follows: (i) 50% on date of grant and (ii) 50% at 1 year anniversary at date of grant.

On March 26, 2024, a total of 450,000 options to purchase Common Stock were granted to the Company’s executive officers. These option vest as follows: (i) 50% six months from the date of grant and (ii) 50% at 1 year anniversary at date of grant.

Both aforementioned option grants have a term of 10 years from the grant date.

Warrants

MIRALOGX warrants

The Company issued to MIRALOGX a common stock purchase warrant on November 15, 2023 giving MIRALOGX the right to purchase up to 700,000 shares of common stock at an exercise price of $2.00 per share. This warrant will expire five years after the date of grant.

The fair value of the warrants were estimated on the grant date using the Black-Scholes valuation model and level 3 inputs based on assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate, which resulted in $1.8 million of warrant expense. This cost was recorded as interest expense in General and Administrative expenses on the accompanying statement of operations and additional paid in capital on the accompanying balance sheet.

Bay Shore Trust warrants

In consideration of the line of credit provided by the Bay Shore Trust, the Company issued to the Bay Shore Trust a common stock purchase warrant on April 28, 2023 giving the Bay Shore Trust the right to purchase up to 1,000,000 shares of common stock at an exercise price of $5.00 per share. This warrant will expire five years after the date of grant. There are 1,000,000 warrants outstanding at December 31, 2023.

The fair value of the warrants were estimated on the grant date using the Black-Scholes valuation model and level 3 inputs based on assumptions for expected volatility, expected dividends, expected term, and the risk-free interest rate, which resulted in $3.5 million of deferred financing costs. This cost was recorded as deferred financing costs and additional paid in capital on the accompanying balance sheet and is amortized straight-line over the term of the line of credit (which is 24 months). Associated amortization of deferred finance costs is recorded to interest expense on the condensed income statement of operations.

Subsequent to the IPO, the Bay Shore Trust line of credit was paid in full early, of $2.8 million. These costs were recorded as interest expense on the accompanying statement of operations with the offsetting entry clearing the balance of amortization in deferred finance costs.

Underwriter warrants

In connection with the IPO, the Company issued 63,750 warrants to purchase common stock to the IPO underwriter (or its designees) at an exercise price of $7.00 which will expire in the four-and-a-half-year period commencing six months after the commencement of sales in the IPO. The warrants will be exercisable at any time and from time to time, in whole or in part, during the four-and-a-half-year period commencing six months after the commencement of sales in the IPO. The warrants provide for registration rights (including a one-time demand registration right and piggyback registration rights that expire 5 years from the commencement of sales of the offering) and customary anti-dilution provisions as permitted under FINRA Rule 5110(g)(8).

Key assumptions used to value underwriter warrants in August 2023 are as follows:

Earnings Per Share

During the year ended December 31, 2023 and 2022, outstanding stock options and warrants of 2,915,001 and 750,000, respectively, were not included in the computation of diluted earnings per share, because to do so would have had an antidilutive effect.

Note 10. Employment Agreements:

Erez Aminov

On April 28, 2023, the Company entered into an employment agreement with Mr. Erez Aminov pursuant to which Mr. Aminov serves as the Company’s Chief Executive Officer on a full-time basis. Mr. Aminov’s employment agreement provides that his employment will be on an at-will basis and can be terminated by either Mr. Aminov or the Company at any time and for any reason. Under the agreement, Mr. Aminov will receive an initial base salary of $0.11 million per year. In the event that Mr. Aminov’s employment is terminated by the company without “Cause” or is terminated by Mr. Aminov for “Good Reason”, Mr. Aminov will be entitled to severance compensation in the form of salary continuation for a period of three months (subject to Mr. Aminov executing and delivering a customary general release in favor of the company).

On August 17, 2023, Mr. Aminov received a $0.12 million cash bonus net of federal, state, local and income taxes related to the successful completion of the IPO.

On August 28, 2023, the Company amended Mr. Aminov’s employment agreement to increase his yearly compensation from its current amount of $0.11 million to $0.2 million per year, effective August 1, 2023. In March 2024, Mr. Aminov assumed the role of Chairman and on March 25, 2024, the Compensation Committee of the Board of Directors approved increasing Mr. Aminov’s annual base salary to $0.28 million.

Michelle Yanez

On April 28, 2023, the Company entered into an employment agreement with Ms. Michelle Yanez pursuant to which Ms. Yanez serves as the Company’s Chief Financial Officer on a full-time basis. Ms. Yanez’s employment agreement provides that her employment will be on an at-will basis and can be terminated by either Ms. Yanez or the company at any time and for any reason. Under the agreement, Ms. Yanez will receive an initial base salary of $0.17 million per year. In the event that her employment is terminated by the company without “Cause” or is terminated by Ms. Yanez for “Good Reason”, Ms. Yanez will be entitled to severance compensation in the form of salary continuation for a period of three months (subject to Ms. Yanez executing and delivering a customary general release in favor of the company).

On August 17, 2023, Ms. Yanez received a $0.05 million cash bonus net of federal, state, local and income taxes related to the successful completion of the IPO. On March 25, 2024, the Compensation Committee of the Board of Directors approved increasing Ms. Yanez’ annual base salary to $0.23 million.

Chris Chapman

On April 28, 2023, the Company entered into an employment agreement with Dr. Chris Chapman pursuant to which Dr. Chapman served as the Company’s Executive Chairman. Dr. Chapman’s employment agreement provided that his employment will be on a part-time basis whereby Dr. Chapman would devote 50% of his full business time and effort to the business and affairs of the company, and it further provided that such employment would be on an at-will basis and could be terminated by either Dr. Chapman or the company at any time and for any reason. Under the agreement, Dr. Chapman would receive an initial base salary of $0.15 million per year. In the event that Dr. Chapman’s employment is terminated by the company without “Cause” or is terminated by Dr. Chapman for “Good Reason”, Dr. Chapman would be entitled to severance compensation in the form of salary continuation for a period of three months (subject to Dr. Chapman executing and delivering a customary general release in favor of the company).

On August 17, 2023, Dr. Chapman received a $0.05 million cash bonus net of federal, state, local and income taxes related to the successful completion of the IPO.

On August 28, 2023, the Company amended Dr. Chapman’s employment agreement to indicate that he works part-time on an as needed basis for the Corporation, rather than fifty percent (50%) of the time, effective August 1st, 2023.

On October 13, 2023, the Company amended Dr. Chapman’s employment agreement to reflect a temporary reduction in his compensation from $0.15 million per year to $0.05 million per year, to extend for a period of 90 days. After the 90-day period, Dr. Chapman’s compensation shall be reinstated to the amount in his employment agreement of $0.15 million per year. On March 13, 2024, Dr. Chapman resigned as both an employee and as the Chairman of the Board of Directors.

Christos Nicholoudis

On April 28, 2023, the Company entered into an employment agreement with Christos Nicholoudis pursuant to which Mr. Nicholoudis served as the Company’s General Counsel. Under the agreement, Mr. Nicholoudis receive an initial base salary of $0.075 million per year.

On August 17, 2023, Mr. Nicholoudis received a $0.025 million cash bonus net of federal, state, local and income taxes related to the successful completion of the IPO. Mr. Nicholoudis resigned on January 15, 2024, and there are no further payments due to him.

Note 11. Subsequent Events**:**

Section 16(b) disgorgement

In January 2024, the Company recorded a related party receivable of $148,703 related to the recovery of short-swing profits due from The Bay Shore Trust, under Section 16(b) of the Securities Exchange Act of 1934, as amended. Once the receivable is paid in full, the Company will recognize these proceeds as a capital contribution from a stockholder with an increase to additional paid-in-capital in its balance sheet and as cash provided by financing activities in its statement of cash flows.

Restructuring of the Board of Directors

On March 9, 2024, after a series of discussions between our board of directors (the “Board”) and senior management regarding the need to have additional scientific expertise among the members of the Board, Ms. Talhia Tuck, Mr. Brad Kroenig and Mr. Hugh McColl, each voluntarily resigned from the Board, effective immediately. This action allowed the remaining members of the Board to appoint new members of the Board, as discussed below. The resignations of Ms. Tuck, Mr. Kroenig, and Mr. McColl were not the result of any disagreement with our company on any matter relating to its operations, policies or practices.

Also on March 9, 2024, Dr. Chris Chapman notified the Board and senior company management of his resignation both as Executive Chairman and as an employee of our company, effective immediately, citing his desire to focus his time on his role as Chairman and Chief Executive Officer of Telomir Pharmaceuticals, Inc., given the recent initial public offering of that company. Dr. Chapman’s resignation was not the result of any disagreement with our company on any matter relating to its operations, policies or practices.

On March 13, 2024, the remaining members of the Board (Erez Aminov and Michael Jerman)unanimously approved the appointment of (i) Mr. Aminov, our Chief Executive Officer, as Chairman of the Board and (ii) Dr. Matthew P. Del Giudice, Dr. Denil N. Shekhat and Mr. Edward MacPherson as members of the Board, to fill the vacancies on the Board occasioned by the resignations from the Board described above, for a term expiring at our 2024 annual meeting of shareholders.

Resignation of Chief Science Officer

We are focused on strengthening our clinical and regulatory development expertise with a view towards a future IND for one of our product candidates. As part of this development, on March 7, 2024, following discussions with our management, Adam Kaplin, M.D., Ph.D. resigned from his position as President and Chief Scientific Officer of the company to pursue other business endeavors, effective immediately. As described under “Key Consultants” below, in light of Mr. Kaplin’s resignation, we expanded the role of an existing consultant to assist in clinical and regulatory affairs.