1. Nature of business and history

Genenta Science S.p.A. (the “Company” or “Genenta”) – formerly Genenta Science S.r.l., a “società a responsabilità limitata” (“S.r.l.”), which is similar to a limited liability company in the United States (“U.S.”) converted to a “società per azioni” (“S.p.A.”), an Italian corporation in June 2021, which is similar to a C corporation in the U.S. The Company was founded in Milan, Italy by San Raffaele Hospital (“OSR”), Pierluigi Paracchi, Luigi Naldini and Bernhard Gentner, and was incorporated in July 2014. On May 20, 2021, the quotaholders (owners of the Company) resolved that the Company convert from an S.r.l. to an S.p.A. and determined that the outstanding quota be converted to 15 million ordinary shares at no par value. (See Note 10. Shareholders’ equity.) The registered office (or headquarters) is located in Milan, Italy. The Company’s reporting currency is Euros (“EUR” or “€”). In May 2021, the Company formed a wholly owned, Delaware incorporated subsidiary, Genenta Science, Inc. (“U.S. Subsidiary”), intended to support U.S. employees and future operations in the U.S.. The U.S. Subsidiary operates in U.S. Dollars (“USD” or “$”).

On December 17, 2021, the Company completed an initial public offering (“IPO”) of its shares. The shares began trading on the Nasdaq Stock Capital Market (“Nasdaq”) on December 15, 2021. Through the IPO, 3,120,114 new ordinary shares with no par value were issued. 720,114 ordinary shares were subscribed by the Company’s existing shareholders through a reserved offering, while 2,400,000 American Depository Shares (“ADSs”), each representing one of the Company’s ordinary shares, were offered to the public and listed on Nasdaq. Subsequently, on December 27, 2021, the Company’s underwriter exercised a portion of its “green shoe” allotment for an additional 96,744 ADSs. The total number of shares outstanding resulting at December 31, 2021 was 18,216,858. Through the IPO, approximately €29 million was raised, net of listing costs (approximately €3.9 million).

On May 12, 2023, the Company filed with the Securities and Exchange Commission (the “SEC”) a shelf registration statement that was subsequently declared effective on May 24, 2023. It permits the Company to sell from time-to-time ordinary shares, including ordinary shares represented by ADSs, or rights to subscribe for ordinary shares or ordinary shares represented by ADSs in one or more offerings in amounts, at prices, and on the terms that the Company will determine at the time of offering for aggregate gross sale proceeds of up to $100 million, subject currently to the limits set forth in Instruction I.B.6(a) of Form S-3 (referred to as “baby shelf” rules).

In June 2023, the Company’s shareholders reduced the number of directors from seven (7) to five (5).

In July 2023, the Company issued 100 ADSs for net proceeds of approximately €531 (or $582), increasing the total number of shares outstanding to 18,216,958, pursuant to a Controlled Equity Offering^SM Sales Agreement, dated May 12, 2023 (the “Prior Sales Agreement”), between the Company and Cantor Fitzgerald & Co. (“Cantor”), as agent, subject to the terms and conditions described in the Prior Sales Agreement and SEC rules and regulations (the “Prior ATM Offering”).

In March 2024, the Company issued 72,908 ADSs for net proceeds of approximately €270,885 (or $293,328), bringing the total number of ordinary shares outstanding to 18,289,866, pursuant to the Prior Sales Agreement. On March 28, 2024, the Company and Cantor mutually agreed to terminate the Prior Sales Agreement.

On April 26, 2024, the Company entered into an ATM Sales Agreement (the “Current Sales Agreement”) with Capital One Securities, Inc. and Virtu Americas LLC (the “Sales Agents”), pursuant to which the Company may offer and sell ADSs, for an aggregate offering price of up to $16,362,816 from time to time through or to the Sales Agents, acting as sales agents or principals, subject to the terms and conditions described in the Current Sales Agreement and SEC rules and regulations (the “Current ATM Offering”).

In May 2024, the Company’s shareholders approved an amendment of article 9 of the Company’s Bylaws, introducing increased voting rights by introducing a mechanism whereby each ordinary share owned by the same subject (either an entity or an individual) for a continuous period of not less than twenty-four months entitles the holder to a double vote and therefore to an increase from one to two votes per share. In addition, a further vote is attributed at the end of each twelve-month period, following the first vesting period of twenty-four months, in which the ordinary share has belonged to the same entity or individual, up to a total maximum of 10 votes per ordinary share. The amendment applies to only ordinary shares, not ADSs.

Genenta is an early-stage company developing first-in-class cell and gene therapies to address unmet medical needs in cancerous solid tumors. The Company is initially developing its clinical leading product, Temferon™, to treat glioblastoma multiforme (“GBM”), a solid tumor affecting the brain. The Company intends to continue its clinical trials in Italy, and eventually start a clinical trial in Europe and the U.S. to study Temferon™ in other cancers. In June 2023, the Company’s Board of Directors (the “Board”) selected Renal Cell Cancer (“RCC”) as the second solid tumor indication for Temferon. The Company is currently finalizing a clinical plan for RCC.

The Company is subject to risks and uncertainties common to early-stage clinical companies in the life-science and biotechnology industries, including but not limited to, risks associated with completing preclinical studies and clinical trials, receiving regulatory approvals for product candidates, development by competitors of new competing products, dependence on key personnel, protection of proprietary technology, compliance with government regulations and the ability to secure additional capital to fund operations. The clinical product candidates currently under development will require significant additional research and development efforts, including regulatory approval and clinical testing prior to commercialization. These efforts require significant amounts of additional capital, adequate personnel and infrastructure, and extensive compliance-reporting capabilities. Even if the Company’s product development efforts are successful, it is uncertain when, if ever, the Company will realize revenue from product sales and profit from operations.

Liquidity and risks

The Company has incurred losses since its inception, including a net loss of €4.0 million and €6.8 million for the six months ended June 30, 2024, and June 30, 2023, respectively. In addition, at June 30, 2024, the Company had an accumulated deficit of €51.2 million. The Company has primarily funded these losses through the proceeds from sales of convertible debt and equity quotas, before the Company’s conversion into an S.p.A., and then through the proceeds from its IPO. The Company has incurred recurring losses and expects to continue to incur losses for the foreseeable future. In addition, the Company expects that its existing cash and cash equivalents on hand of €6.2 million, together with the other short-term marketable securities of €10.7 million as of June 30, 2024 will be sufficient to fund current planned operations and capital expenditure requirements for at least the next twelve months. However, the future viability of the Company is dependent on its ability to raise additional capital to finance its operations. The Company’s inability to raise capital as and when needed could have a negative impact on its financial condition and ability to continue as a going concern, as well the ability to pursue its business strategies. There can be no assurance that the current operating plan will be achieved or that additional funding will be available on terms acceptable to the Company, or at all.

The Company’s business model, typical of biotechnology companies developing new therapeutic products that have not reached a balanced income and financial position, features negative cash flows. This is because, at this stage, costs must be borne in relation to services and personnel, directly connected to research and development activities, and return for these activities is not certain and, in any case, it is expected in future years. Based on the accounting policies adopted, requiring full recognition of research and development costs in the statement of operations and comprehensive loss in the year they are incurred, the Company has reported a loss since its inception and expects to continue to incur significant costs for research and development in the foreseeable future. There is no certainty that the Company will become profitable in the future.

The Company will require additional capital to meet its long-term operating requirements. It expects to raise additional capital through, among other things, the sale of equity, debt or convertible securities through public offerings or private placements, including sales of ADSs pursuant to the Current ATM Offering. If adequate funds are not available in the future, the Company may be forced to delay, reorganize, or cancel research and development programs, or to enter into financing, licensing or collaboration agreements with unfavorable conditions or waive rights to certain products which otherwise it would not have waived, resulting in negative effects on the activity and on the economic and /or financial situation of the Company.

The Company’s ability to raise additional capital may be adversely impacted by the potential worsening of global economic and political conditions and volatility in the credit and financial markets in the U.S. and worldwide. This could be exacerbated by, among other factors, the war between Russia and Ukraine, the ongoing conflict in the Middle East or other macroeconomic conditions. The Company’s failure to raise capital as and when needed, or on acceptable terms could have a negative impact on the Company’s financial condition, its ability to continue as a going concern, and its ability to pursue its business strategy, and the Company may have to delay, reduce the scope of, suspend or eliminate one or more of its research-stage programs, clinical trials, or future commercialization efforts.

Quantitative and qualitative disclosure about market risk

The Company is exposed to market risks in the ordinary course of its business. Market risk represents the risk of loss that may impact the Company’s financial position due to adverse changes in financial market prices and rates. The Company’s current investment policy is conservative due to the need to support operations. The Company invests available cash in Italian and U.S. government treasury bills and notes with short-term maturities. A minority of the Company’s cash and cash equivalents and marketable securities are held in deposits that bear a small amount of interest. The Company’s market risk exposure is primarily a result of foreign currency exchange rates, which is discussed in detail in the following section.

The Company is an early-stage cell and gene therapy company commercializing technology licensed from OSR. The Company intends to continue to conduct its operations so that neither it nor its subsidiary is required to register as an investment company under the Investment Company Act of 1940, as amended, and the rules and regulations promulgated thereunder (the “‘40 Act”). To ensure that the Company does not become subject to regulation under the ‘40 Act, the Company may be limited in the type of assets that it may own or acquire. If the Company were to become inadvertently subject to the ‘40 Act, any violation of the ‘40 Act could subject the Company to material adverse consequences.

Foreign currency exchange risk

The Company’s results of operations and cash flow may be subject to fluctuations due to changes in foreign currency exchange rates. The Company’s liquid assets and expenses are denominated in EUR and USD. At June 30, 2024, the Company maintained €6.2 million in cash and cash equivalents and €10.7 million in marketable securities. Changes in the USD/EUR exchange rate could increase/decrease the Company’s operating expenses, especially as more costs are incurred in the U.S. or, as USD are exchanged for EUR to cover European operating costs. As the Company continues to grow its business, the Company’s results of operations and cash flows might be subject to significant fluctuations due to changes in foreign currency exchange rates, which could adversely impact the Company’s results of operations.

Currently, the Company has recorded an unrealized net gain from exchange rate of approximately €0.2 million. The Company does not currently hedge its foreign currency exchange risk. In the future, the Company may enter into formal currency hedging transactions to decrease the risk of financial exposure from fluctuations in the exchange rates of its principal operating currencies. These measures, however, may not adequately protect the Company from the material adverse effects of such fluctuations.

2. Summary of significant accounting policies

3. Research and development

Research and development costs are expensed as incurred. Research and development expenses consist of costs incurred in performing research and development activities, including salaries, share-based compensation and benefits, facilities costs, third-party license fees, and external costs of outside vendors and consultants engaged to conduct clinical development activities and clinical trials, (e.g., contract research organizations or “CROs”), as well as costs to develop manufacturing processes, perform analytical testing and manufacture clinical trial materials, (e.g., contract manufacturing organizations or “CMOs”). Non-refundable prepayments for goods or services that will be used or rendered for future research and development activities are recorded as prepaid expenses. Such amounts are recognized as an expense as the goods are delivered or the related services are performed, or until it is no longer expected that the goods will be delivered, or the services rendered. In addition, funding from research grants, if any, is recognized as an offset to research and development expense based on costs incurred on the research program.

The Company annually sustains a significant amount of research costs to meet its business objectives. The Company has various research and development contracts, and the related costs are recorded as research and development expenses as incurred. When billing terms under these contracts do not coincide with the timing of when the work is performed, the Company is required to make estimates of outstanding obligations at period end to those third parties. Any accrual estimates are based on several factors, including the Company’s knowledge of the progress towards completion of the research and development activities, invoicing to date under the contracts, communication from the research institution or other companies of any actual costs incurred during the period that have not yet been invoiced, and the costs included in the contracts. Significant judgments and estimates may be made in determining the accrued balances at the end of any reporting period. Actual results could differ from the estimates made by the Company. The historical accrual estimates made by the Company have not been materially different from the actual costs. For further details, please refer to the Related Parties disclosures in Note 12. Accumulated Other Comprehensive Income below.

4. General and administrative

General and administrative costs consist primarily of salaries, share-based compensation, benefits, and other related costs for personnel and consultants in the Company’s executive and finance functions, professional fees for legal, finance, accounting, auditing, tax and consulting services, travel expenses and facility-related expenses, which include rent and maintenance of facilities and other operating costs not otherwise included in research and development expense.

5. Income taxes

The Company is subject to taxation in Italy, and the U.S., through the U.S. Subsidiary. Taxation in Italy includes the standard corporate income tax (“IRES”) and a regional business tax (“IRAP”). Taxation in the U.S. includes federal corporate income tax (“IRS”), as well as state and local taxes. Taxes are recorded on an accrual basis. They therefore represent the allowances for taxes paid or to be paid for the year, calculated according to the current enacted rates and applicable laws. In the future, the Company may be taxed in various other countries where it may have permanent establishments, as applicable. Due to the tax loss position reported, no income taxes were accrued for the six months ending June 30, 2024, and June 30, 2023, in Italy or the U.S. At June 30, 2024, the U.S, subsidiary had an immaterial amount of other state taxes.

The Company uses the asset and liability method of accounting for deferred income taxes. Under this method, deferred tax assets and liabilities are recognized for the expected future tax consequences of temporary differences between the carrying amounts and the tax basis of assets and liabilities, measured at tax rates expected to be enacted at the time of their reversals. These temporary differences primarily relate to net operating losses carried forward available to offset future taxable income.

At each reporting date, the Company considers existing evidence, both positive and negative, that could impact its view with regard to future realization of deferred tax assets. In consideration of the start-up status of the Company, a valuation allowance has been established to offset the deferred tax assets, as the related realization is currently uncertain. In the future, should the Company conclude that it is more likely than not that the deferred tax assets are partially or fully realizable, the valuation allowance will be reduced to the extent of such expected realization, and the corresponding amount will be recognized as income tax benefit in the Company’s Consolidated Statements of Operations and Comprehensive Loss.

The Company recognizes tax liabilities from an uncertain tax position if it is more likely than not that the tax position will not be sustained upon examination by the taxing authorities, based on the technical merits of the tax position. There are no uncertain tax positions that have been recognized in the accompanying consolidated financial statements. For the Company, the prior five years of tax returns (2019-2023) are potentially subject to audit. For the U.S. Subsidiary, the open years for tax examination are 2021, 2022, and 2023.

At June 30, 2024, and June 30, 2023, the Company believes there were no significant differences with regard to its deferred tax assets and its relevant components, compared to the computations of the preceding periods.

In 2011, the Italian tax authorities issued a set of rules that modified the previous treatment of tax loss carryforwards. According to DL 98/2011, at the end of 2011, all existing tax loss carryforwards will never expire but they can offset only 80% of the taxable income of the year.

The Company has analyzed its tax position by determining the amount of tax losses that can be carried forward indefinitely and has decided to accrue an allowance for related deferred tax assets as the Company is in a situation of pre-revenues that is destined to remain in the long run and there is no certainty of the future recoverability of such tax losses through tax relevant incomes. Future taxable profits for the Company depend on the manufacture of marketable drugs following the successful completion of the applicable clinical trial. Since the GBM clinical trial is still in Phase 1/2a status, the time frame and uncertainties regarding the outcome of the completion justify the full allowance of deferred tax assets.

6. Prepaid expenses and other current assets

Value added tax (“VAT”) receivables are linked to purchases. Italian VAT (Imposta sul Valore Aggiunto) applies to the supply of goods and services carried out in Italy by entrepreneurs, professionals, or artists and on imports carried out by anyone. Intra-Community acquisitions are also subject to VAT under certain situations. The Italian standard VAT rate for 2024 and 2023 is 22%. Reduced rates are provided for specifically listed supplies of goods and services. It is carried forward indefinitely and does not expire. The Company reclassified to other non-current assets a portion of the receivable which is expected to be realized beyond 12 months. During the six months ended June 30, 2024, the Company received a VAT refund of approximately €1.7 million, of which approximately €1.3 million related to short-term VAT and approximately €0.4 million related to VAT that was classified as long-term at December 31, 2023. The amount of VAT as of June 30, 2024 is related to the VAT accrued in the same period.

Tax credits on research and development represent a special tax relief offered to Italian companies operating in the research and development sector and can be used to offset most taxes payable. The Company has a total research and development tax credit available to be used of approximately €4.0 million at June 30, 2024, which can be carried forward indefinitely and does not expire. However, given the start-up status of the Company, and the fact that it will not be profitable in the foreseeable future (which limits the utilization of the credit), the Company recognized a receivable balance that represents the Company’s best estimate of the amount of tax credit that can be used in offsetting taxes payable by the fourth quarter of 2025. This estimate is consistent with the Company’s most updated cash budget utilization projections approved by the Board in March 2024 and the revised cash forecast as of October 2024. According to the revised cash forecast dated October 2024, the Company’s available cash as of June 30, 2024, together with our investment in short-term marketable securities, is deemed more than sufficient to cover the operating activities through at least November 2025, without additional financing or other management plans.

During the six months ended June 30, 2024 and 2023, the Company utilized approximately €0.4 million to offset certain social contributions and taxes payable. In addition, the recorded benefit for the six months ended June 30, 2024, and June 30, 2023, was approximately €0.4 million, respectively, to offset research and development expenses.

The advance payments to suppliers mainly refer to an advance payment to a supplier whose activities are still ongoing based on a service agreement that provides for a discount on this advance payment on the last invoice that will be issued at the end of the works.

As of June 30, 2024, other current assets were primarily composed of tax credits amounting to approximately €0.2 million and financial claims for accrued interest on ongoing investments, amounting to approximately €53,000. The change compared to the previous period balance was due to the reclassification from long-term to short-term of a €180,000 of tax credit related to Italian Additional Corporate Tax (the “ACE tax”) which, based on the latest updates received from the Italian Revenue Agency, will be recovered in the short term.

The prepaids refer to accrual adjustments for services that have already been fully invoiced and paid, but whose economic usefulness is distributed over multiple periods beyond the current closing period. These costs mainly concern IT services, licenses, insurance, and manufacturing activities. The change in the prepaid balance is primarily influenced by the trend in manufacturing activities performed by the Company’s manufacturing vendor, AGC Biologics, and the amount of the premium for the directors’ and officers’ insurance policy. The most recent renewal of this policy specifically resulted in a significant cost saving, which consequently led to a reduction in the balance of the related prepaid from approximately €0.2 million at June 30, 2023 to approximately €0.1 million at June 30, 2024.

7. Fixed assets, net

For the period ended June 30, 2024 and June 30, 2023, software was €87,800 and includes software customization and development costs related to information technology security infrastructure and the new ERP system.

Equipment consists of computers, and furniture and fixtures of our office space in Milan, Italy. There were no significant purchases, disposals or impairments during the periods. Depreciation has been calculated by taking into consideration the use, purpose, and financial-technical duration of the assets, based on their estimated economic lives. No significant purchases occurred during the six months ended June 30, 2024.

8. Other non-current assets

The balance of long-term VAT credit is what remains outstanding after the refund of €0.4 million already received during the six months ended June 30, 2024.

The R&D tax credit long-term portion at June 30, 2024 was approximately €250,000 as compared to €167,000 at December 31, 2023 due to the expected utilization period for the R&D tax credit being adjusted to a timeframe ending November 30, 2025 as per the contingent financial cash projections.

Other non-current assets include the ROU asset for the car lease in the amount of €21,004. The main change in the Other non-current assets balance, compared to the previous period, was due to the reclassification of the €180,000 of ACE tax credit from long-term to short-term following a recent update from the Italian Revenue Agency regarding the expected timing of the related refund.

9. Retirement benefit obligation

Employees in Italy are entitled to Trattamento di Fine Rapporto (“TFR”), commonly referred to as an employee leaving indemnity, which represents deferred compensation for employees in the private sector. Under Italian law, an entity is obligated to accrue for TFR on an individual employee basis payable to each individual upon termination of employment (including both voluntary and involuntary dismissal). The annual accrual is approximately 7% of total pay, with no ceiling, and is revalued each year by applying a pre-established rate of return of 1.50%, plus 75% of the Consumer Price Index, and is recorded by a book reserve. TFR is an unfunded plan. The costs of the retirement benefit obligation are accounted for under the provisions of ASC 715, Compensation – Retirement Benefits.

The amount of the obligation at June 30, 2024 and December 31, 2023 was €196,368 and €164,655, respectively. The increase was due to the increase in personnel costs and as a result of new hires.

10. Shareholders’ equity

The number of the Company’s outstanding ordinary shares at December 31, 2022, was 18,216,858, no par value. All ordinary shares outstanding are held in ledger form with some of the ordinary shares represented by ADSs.

For the six-month period ended June 30, 2023, the Company accrued €415,433 as the fair value of stock options granted as per the Plan. (See Note 11. Share-based compensation for more details.)

In July 2023, 100 new ADSs were issued in the Prior ATM Offering, and the Company recorded an increase in the ordinary shares, no par value of €531.

For the six-month period from July 1, 2023 to December 31, 2023, the Company accrued €324,451 to update the fair value of the granted stock options.

At December 31, 2023, the Company had 18,216,958 ordinary shares issued and outstanding with approximately 1.8 million ordinary shares reserved for the Plan.

In March 2024, 72,908 new ADSs were issued in the Prior ATM Offering and the Company recorded an increase in the ordinary shares, no par value of €270,885.

For the six-months ended June 30, 2024, the Company accrued €232,768 as the fair value of stock options granted as per the Plan. (See Note 11. Share-based compensation for more details)

At June 30, 2024, the Company had 18,289,866 ordinary shares issued and outstanding with approximately 1.8 million ordinary shares reserved for the Plan.

11. Share-based compensation

As mentioned in Note 2. Summary of significant accounting policies, to reward the efforts of employees, officers, directors, and certain consultants, and to promote the Company’s growth and development, the Board may approve, upon occasion, various share-based awards.

The Plan was originally approved on May 20, 2021 and was subsequently modified, in June 2023, to extend the final deadline for the issuance of the ordinary shares until December 31, 2035, to allow that all stock options granted during the term of the Plan could provide for an exercise period of 10 years starting from the date of grant.

At January 1, 2023, there were 540,523 granted stock options and 1,281,162 stock options remaining available for grant.

In March 2023, the Board, as administrator of the Plan, awarded non-qualified stock options (“NSOs”) on 46,400 shares to the Company’s directors. The NSOs vested monthly over a one (1) year period with a 10-year term. All NSOs were priced based on a 30-day volume weighted average formula, adjusted with the Black-Scholes method, which was determined to be $5.62 per share.

At December 31, 2023, there were 586,923 granted stock options and 1,234,772 stock options remaining available for grant.

In April 2024, NSOs on 147,783 shares expired. These options had a two (2) year term and were awarded to the Company’s former Chairman in April 2022, according to the terms of a sub-plan called the “2021-2025 Chairman Sub-Plan” (or the “Sub-Plan”) attached to the original Equity Incentive Plan 2021–2025.

At June 30, 2024, there were 439,140 stock options granted and 1,389,846 options available for grant.

The Company calculates the fair value of stock option awards granted to employees and non-employees using the Black-Scholes option-pricing method. If the Company determines that other methods are more reasonable, or other methods for calculating these assumptions are prescribed by regulators, the fair value calculated for the Company’s stock options could change significantly. Higher volatility and longer expected lives would result in an increase to share-based compensation expense to non-employees determined at the date of grant. Share-based compensation expense to non-employees affects the Company’s general and administrative expenses and research and development expenses.

The Company calculated the share compensation expense for the options granted by utilizing the Black-Scholes method with the following inputs for each of the stock grants:

For the six months ended June 30, 2024, and June 30, 2023, the Company recorded €232,768 and €415,433, respectively, as the fair value of the stock options granted. The amount of unrecognized expense at June 30, 2024 and June 30, 2023 was €747,043 and €1,471,743, respectively.

There were no options granted during the six months ended June 30, 2024. The weighted average grant date fair value of the options granted during the six months ended June 30, 2023 was €5.30 per share.

Weighted average shares

The calculation was performed by taking the number of shares outstanding during a given period and weighting them for the number of days that number of shares were outstanding. For the six months ended June 30, 2024, and June 30, 2023, there was a weighted average of 18,256,622 and 18,216,858 shares, respectively, of the Company’s ordinary shares, no par value.

12. Accumulated Other Comprehensive Income