OTC: LIPO

LP-10 is the development name of our reformulation
of tacrolimus (an approved generic active agent) specifically optimized for topical deposition to the internal surface of the urinary
bladder lumen using a proprietary drug delivery platform that we have developed and that we refer to as our metastable liposome
drug delivery platform (our “Platform”). We are developing LP-10 and our Platform to be, to our knowledge, the first
drug candidate and drug delivery technology that could be successful in treating cancer survivors who acquire HC. Our first issued
U.S. patent covering LP-10 expires July 11, 2035, unless extended for regulatory delay (up to 14 years), our second issued U.S.
patent covering the method of making LP-10 expires November 9, 2034, unless extended for regulatory delay, and our third U.S. patent
covering particular LP-10 tacrolimus formulations expires November 9, 2034, unless extended for regulatory delay. Our issued Australian
patent covering LP-10 expires October 22, 2034. The Canadian patent, issued on August 23, 2022, expires October 22, 2034. The European
patent, issued on June 7, 2023, expires October 22, 2034. We also have a corresponding patent application pending in the U.S. (U.S.S.N.
18/924,830). We also have a pending U.S. patent application on an improvement to the technology. We have received FDA “orphan
drug” designation covering LP-10 and plan to apply for additional regulatory designations in the event we achieve qualifying
results in the current phase 2a clinical trial for LP-10. Market data exclusivity may be available in the US and other jurisdictions
in which regulatory approval is obtained for the Company’s product, regardless of patent status.

The safety and efficacy of LP-10
was evaluated in a 13-subject, open-label, multi-center, dose-escalation, phase 2a clinical trial in patients experiencing complications
associated with a rare but highly morbid disease called “radiation-induced hemorrhagic cystitis” or “radiation
cystitis.” This phase 2a clinical trial commenced on February 15, 2021, and we reported the trial’s summary results
in the first quarter of 2023. There is currently no FDA approved drug therapy available for radiation cystitis patients, who are
all cancer survivors who received pelvic radiation therapy to treat solid pelvic tumors, including prostate and ovarian cancers
and who are now dealing with therapy-associated complications, including urinary bleeding (a radiation cystitis symptom). LP-10’s
active ingredient, tacrolimus, which has a well-known pharmacology and toxicology, addresses a reduction (or cessation) of uncontrolled
urinary bleeding.

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LP-310 is the development name of our oral,
liposomal formulation of tacrolimus (the same approved generic active agent in LP-10) specifically optimized for local delivery
to oral mucosa. We believe that our approach of using metastable liposomal tacrolimus as a treatment for OLP is novel. To date,
upon review of relevant FDA public data resources on approved drugs and biologics, we are not aware of any other liposomal products
developed to treat such disease. We received investigational new drug (“IND”) approval from the FDA regarding LP-310
in the third quarter of 2023. We initiated a Phase 2a multicenter dose escalation of using LP-310 for the treatment of OLP in 2024.
In this first cohort, eight participants received a dose of 0.25 mg LP-310, with promising initial results. No product-related
serious adverse events were reported. Pharmacokinetic data demonstrated that whole blood tacrolimus levels in all patients were
either undetectable or minimal, highlighting LP-310’s potential to deliver localized therapeutic effects while minimizing
systemic exposure. Additionally, all patients tolerated LP-310 without significant adverse reactions. The trial is expected to
be completed in the second quarter of 2025. The top line data from the first two dose cohorts of this trial has been selected for
podium presentation at the 2025 American Association of Oral Medicine and European Association of Oral Medicine Joint Meeting that
will be held in Las Vegas, NV on May 15, 2025.

Our issued U.S. and Australian patents
covering LP-310 expire July 11, 2035, November 9, 2034 and October 22, 2034, respectively. The Canadian patent, issued on August
23, 2022, expires October 22, 2034. The European patent, issued on June 7, 2023, expires October 22, 2034. We also have a corresponding
patent application pending in the U.S. (U.S.S.N. 18/924,830). We also have a pending U.S. patent application on an improvement
to the technology. As noted above, patent term extensions may be available in Europe, Canada and the US for regulatory delay. Market
data exclusivity is also applicable in many jurisdictions, regardless of patent status. Approval of a 505(b)(1) or 505(b)(2) application
can result in five or three years of such exclusivity, respectively.

In a third program, Lipella is also developing
an oral, liposomal formulation of tacrolimus, LP-410, for the treatment of oral graft-versus-host disease (“GVHD”).
LP-410 is an oral rinse, similar to LP-310, but will have a different containment system. Hematopoietic cell transplantation (“HCT”)
is used to treat a wide range of malignancies, hematologic and immune deficiency states, and autoimmune diseases. GVHD is a clinical
syndrome where donor-derived immunocompetent T-cells react against patient tissues directly or through exaggerated inflammatory
responses following HCT. Oral GVHD is a rare and serious disease, with a prevalence of approximately 30,000 patients in the US
annually in 2023 (Bachier et al., 2019; Bachier et al., 2021, Orphanet 2023). GVHD remains a major cause of morbidity and mortality
with patients who undergo HCT treatment, with chronic GVHD being the leading cause of non-malignant fatality for such patients
who receive such HCT treatments.

Topical and local management of symptomatic
oral GVHD can reduce oral symptoms that can interfere with oral function and quality of life and can reduce the need for more intensive
immunosuppressive systemic therapies. However, there is currently no FDA approved local drug treatment of oral GVHD (Martini et
al., 2022).

Lipella has developed LP-410 for the topical
delivery directly to the mouth surface. LP-410 targets the underlying mechanisms of oral GVHD, potentially providing a safe and
effective treatment option for affected individuals. Lipella received orphan designation approval, on November 11, 2023, for tacrolimus
for the treatment of oral GVHD. We received IND approval from the FDA for LP-410’s treatment of oral GVHD on March 5, 2024.The
issued and pending patents regarding LP-310 are relevant to LP-410 as well. We plan to expand and specify patent coverage of LP-410
in the patent application currently pending in the U.S. (U.S.S.N. 18/924,830).

In a fourth program, Lipella is also developing
an intravesical formulation of immunoglobulins including checkpoint inhibitors, referred to as LP-50. LP-50 is an intravesical
formulation of immunoglobulins including local, intravesical PD-1 (i.e. checkpoint) inhibition, intended for the treatment of
non-muscle invasive bladder cancer (“NMIBC”), offering the potential for increasing efficacy while minimizing systemic toxicity.
Additional information regarding this preclinical program is included in the International Journal of Molecular Sciences 2024,
25(9), 4945, titled “Enhancing Therapeutic Efficacy and Safety of Immune Checkpoint Inhibition for Bladder Cancer: A Comparative
Analysis of Injectable vs. Intravesical Administration,” as well as in US patent publication number 2024/0115503 titled “Intravesical
Delivery of Hydrophilic Therapeutic Agents Using Liposomes.” We have a corresponding patent application pending in the U.S.
(U.S.S.N 18/011,635).

Our Metastable Liposome Drug Delivery
Platform

We have developed a proprietary technology,
referred to as our Platform, which is optimized for local hydrophobic drug delivery to body cavities having endothelial surfaces.
Our process employs liposomal technology protected by issued patents in the United States, Australia, and Canada. We also have
a corresponding patent application pending in the U.S. (U.S.S.N. 18/924,830) and a corresponding European Patent, issued on June
7, 2023. This technology involves direct drug delivery to the urinary bladder mucosa, and, we believe, has the potential to improve
efficacy (by increasing drug concentration at the site of injury) and to reduce the possibility of side effects (by reducing the
drug’s exposure to unrelated organs). The first body-cavity application for which we intend to utilize our Platform is the
urinary bladder, which has been designed to deliver LP-10. We are also developing an oral cavity product for the treatment of OLP
and oral GVHD using our Platform (liposomal-tacrolimus). We are continuing to research and develop products for additional body
cavities, including the anal-rectal cavity (radiation proctitis) and the esophagus (eosinophilic esophagitis). We have a pending
U.S. patent application on a new embodiment of this technology.

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We predict that our Platform will provide
a superior approach for treating inflammatory urinary bladder conditions compared to other delivery mechanisms and that certain
inherent features of the metastable liposomes, combined with our intravesical formulations, provides our Platform with several
advantages over existing bladder drug delivery methodologies in current clinical practice for inflammatory bladder applications.
These advantageous characteristics include the following:

● non-inflammatory (without the use of ethanol or other alcohols for solubility);

● large payload capacity of hydrophobic agents (10% by mass);

● urothelial affinity, which results in efficient drug transfer;

● low systemic distribution (large particle size);

● reproducible manufacturing and scalability; and

● prior clinical experience utilizing the liposomal delivery vehicle.

The following table summarizes
our therapeutic candidate pipeline and discovery research programs:

Figure 1

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Our Strengths

We believe we are uniquely positioned to
employ liposome technology in the development of intravesical treatments for urinary bladder and oral indications due, in part,
to our particular strengths, including:

● our proprietary Platform, which we believe will allow us to develop a pipeline of products to treat urinary bladder diseases
as well as diseases of other body cavities;

● our clinical development strategy intended to maximize efficiencies by repurposing existing therapeutics for new proprietary
indications and formulations;

● our clinical programs, which are designed to qualify, and take advantage of, accelerated regulatory approval pathways and designations
that provide marketing exclusivity;

● take
advantage of product exclusivity through patent protection of our novel formulations
and indications for use;

● our
product candidates, LP-10, LP-310, LP-410 and LP-50, which are being developed to address
HC, OLP, oral GVHD and NMIBC, in accordance
with our capital-efficient strategy via:

○ the
“505(b)(2) regulatory pathway” strategy, which refers to requests for marketing
approval from the FDA upon submission of an abbreviated new drug application (“aNDA”)
pursuant to Section 505 of the Federal Food, Drug, and Cosmetic Act, as amended (the
“FDCA”) and permits us to rely on existing data pertaining to the generic
active ingredient; we anticipate referencing relevant publicly available data, including
the publicly disclosed FDA drug approval package for tacrolimus in the preparation and
submission of our aNDA for LP-10 and LP-310;

○ a
known mechanism of action being combined with a new drug delivery method (our Platform)
and a new site of delivery; and

○ our
receipt of FDA “orphan drug” designations covering LP-10 and LP-410;

● our
in-house manufacturing pilot plant (our “Facility”), which positions us to
maximize scalability, quality and reliability, and permits us to better develop and maintain
our trade secrets;

● our
experienced scientific team, which has expertise in urology and liposomal drug development;
and

● our
management team, which has a track record in clinical development of local therapeutics
for urinary bladder indications.

Our Strategy

We are, to our
knowledge, currently developing the first drug candidate and proprietary drug delivery platform that could be successful in treating
cancer survivors who acquire HC and we intend to apply our proprietary drug delivery technology to the oral mucosa for the treatment
of OLP and oral GVHD. Our development programs are designed to address opportunities for capital efficient drug discovery and
development, especially research programs that reposition existing therapeutics for new indications that exploit new formulations.
The key elements of the strategy that we are employing to achieve our goals are:

● Advance the development of our lead product candidates, LP-10, to treat
HC patients, and LP-310, to treat OLP. We designed LP-10 as a differentiated therapy for the treatment of cancer survivors with
HC risks. We believe that LP-10 could be approved by the FDA as an effective therapy against HC due to its ability to exploit the
known irreversible local vasoconstriction of tacrolimus (the active ingredient of LP-10) and take advantage of tacrolimus’
well-known anti-inflammatory properties. Our Platform permits a relatively high local drug concentration while also avoiding potential
systemic toxicity. LP-10 has completed a phase 2a open-label, dose-escalation clinical trial for patients experiencing moderate
to severe HC. Based on these recent results and the preclinical profile, we believe LP-10 has the potential to deliver meaningful
clinical benefits over the currently available standard of care. A phase 2a multi-center dose-escalation study of LP-310 for the
treatment of OLP is expected to be completed in the second quarter of 2025 and the top line data from the first two dose cohorts of this trial
has been selected for podium presentation at the 2025 American Association of Oral Medicine and European Association of Oral Medicine
Joint Meeting that will be held in Las Vegas, NV on May 15, 2025.

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● Leverage our differentiated research and discovery approach to expand our product candidate pipeline.
We expect to maintain a pipeline of additional product candidates, including LP-410 and LP-50, consistent with our strategy of
developing proprietary 505(b)(2) regulatory pathway assets to address highly morbid indications where no adequate treatment(s)
exists. We believe that our drug design approach, which involves proprietary repositioning of existing therapeutics (i.e., development
of new applications using existing, approved active agents), integrated with our Platform, will allow us to efficiently design
and validate novel product candidates that target inflammatory conditions of mucosal membranes.

● Maximize the clinical impact and value of our pipeline by relying on the 505(b)(2) regulatory pathway
and, accordingly, deliver value to the stockholders. We believe the targeted nature of our research and discovery approach fosters
efficient and focused clinical development. We intend to continue to build a lean, experienced team to develop product candidates
in a capital-efficient manner. We intend to retain the commercialization rights to product candidates; however, we may opportunistically
enter into strategic collaborations in certain geographic or clinical settings to maximize the value of our product pipeline.

● Continue to seek new therapies for rare diseases that can be evaluated with relatively small clinical
trials, with an intent to minimize clinical development costs. Rare diseases that present severe morbidity and mortality are potentially
eligible for accelerated regulatory approval pathways, such as the FDA’s “orphan drug” designation and designations
under one or more of the FDA’s expedited development and review programs, which are associated with significantly lower development
costs to obtain marketing approval for promising drug candidates.

Our product development strategy involves
combining intellectual property protection for novel formulations and indications for approved active pharmaceutical ingredients
(“APIs”) with regulatory efficiencies provided by obtaining FDA designations that make our product candidates eligible
for certain incentives that expedite development and review. We believe that this product development strategy is more capital
efficient compared to traditional discovery of a new chemical entity because the safety and mechanisms of the approved APIs for
the novel formulations of our product candidates are better understood and established. In the United States, approval of API products
follows the “505(b)(2) regulatory pathway”; which permits us to rely on existing research and development (“R&D”)
data pertaining to the generic active ingredient. The 505(b)(2) regulatory pathway often provides an alternate path to FDA approval
for new or improved formulations or new uses of previously approved products. Using a 505(b)(2) new drug application (“NDA”),
we expect to reduce the cost, time and risk that would otherwise be associated with bringing these programs to market. See “Government
Regulation Applicable To Our Business – The 505(b)(2) NDA Regulatory Pathway” below for more information.

LP-10 and the Intended Treatment of HC

We completed our phase 2a clinical trial
of LP-10 and reported top-line results in January 2023. LP-10 relies on intravesical vasoconstrictive and anti-inflammatory drug
therapy for our intended treatment of HC, a rare and severe consequence of cancer therapy for which there is currently no approved
treatment. HC affects the bladder lining and is caused by the protein-cross-linking effects of chemotherapy as well as longer-term
effects from radiation-induced damage to urothelial tissue. In HC patients, the urothelial damage results in significant urinary
bleeding, inducing the need for blood transfusions. Those cancer patients who acquire HC suffer from pain and discomfort that accompanies
their bleeding. Based on information from the American Cancer Society as well as published reports on the incidence of HC resulting
from either chemo or radiation therapy, we believe there are approximately 60,000 patients annually in the United States who suffer
from a severe form of radiation-induced HC and an estimated 60,000 patients annually with systemic chemotherapy-induced HC. We
received “orphan drug” designation from the FDA for the use of tacrolimus (including LP-10) for the treatment of HC.

We believe that our approach of using metastable
liposomal tacrolimus as a treatment for HC, which has not yet been approved by the FDA, is novel. To date, we are not aware of
any other liposomal products developed for clinical urinary bladder instillation. The current standard of care for HC patients
is limited to measures such as irrigation and cauterization, which seek to reduce or halt the urinary bleeding of HC but often
do not work effectively. There is no approved treatment for HC, and there are currently no other drug treatments for HC in clinical
development of which we are aware. LP-10 is designed to be an acute treatment for HC to be administered via urinary catheter either
at a hospital or doctor’s office within 30 minutes, which would be repeated daily for a total of four instillations in the
same number of days. LP-10 seeks to treat HC via two mechanisms: high local vasoconstriction and longer-term anti-inflammation.

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On December 23, 2019, we received IND
approval from the FDA for LP-10, including approval for LP-10’s proposed clinical protocol, and central investigational
review board (“IRB”) approval of our IND-approved clinical protocol, as well as approval for the investigator’s
brochure and patient’s informed consent associated with LP-10. From 2020 to 2022, we signed clinical trial agreements in
connection with eight clinical sites to conduct the dose-escalation, phase 2a clinical trial of LP-10. We completed the phase
2a dose-escalation trial (reporting results in January 2023) and intend to apply for FDA accelerated approval pathways, and the
design of a pivotal phase 2b well-controlled clinical trial. If successful, a pivotal phase 3 trial can be requested, and we believe
the results of an LP-10 phase 3 trial could support the submission of an NDA for LP-10 to the FDA through the 505(b)(2) regulatory
pathway and a Marketing Authorization Application to the EMA in Europe. However, there can be no assurance that we will obtain
such designation from, or be permitted to use such pathway by, the FDA, who is ultimately responsible for making such determinations.

Background on HC

HC is characterized by the presence of
sustained hematuria and lower urinary tract symptoms in the absence of active tumor and other conditions or infections that cause
excessive bleeding, (Gorzynska et al. 2005). Urologic adverse events caused by HC include frequency, dysuria, urgency, nocturia,
suprapubic pain, bladder infection, fatigue and both microscopic and gross hematuria.

Bleeding from HC ranges from non-visible
(or microscopic) hematuria to gross (visible) hematuria with clots (Decker et al. 2009). Moderately severe cases of HC involve
massive bleeding and clot formation. Severe HC is a challenging condition to treat and may give rise to serious complications,
leading to prolonged hospitalization and/or mortality (Decker et al. 2009; Mukhtar and Woodhouse 2010) and HC cases resulting from
chemotherapy are reported to have a mortality rate approaching 4% (Rastinehad et al. 2007). Even mild cases of HC can cause disabling
symptoms (e.g., frequency, urgency and pelvic pain, often localized to the bladder or urethra) (Payne et al. 2013). A standardized
grading system (Droller et al. 1982) to classify the severity of HC has been proposed, which is shown in Figure 2 below:

Figure 2

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HC can be classified as early- or late-onset
(Zwaans et al. 2016). HC can also develop weeks to months after treatment in 20%–25% of patients who receive high doses of
cyclophosphamide. The effects of radiation-induced HC may be acute or delayed, occurring long after radiation treatment has ended,
from two months to 15 years later (Zwaans et al. 2018; Manikandan et al. 2010).

Prevalence

At the suggestion of the FDA’s Office
of Orphan Products Development, we have measured annual cyclophosphamide and ifosphamide use in a large commercial database for
private health plans between 2008 and 2010 and, based on guidance from the FDA, applied a 40% rate of HC in such patient database.
The information from the database, combined with the FDA’s recommended guidance, results in a prevalence of consequential
HC to potentially reach 60,000 new cases per year in the United States. This methodology implicitly assumes that the prevalence
of use observed in private health plans (including Medicare beneficiaries enrolled in private plans) is generalizable to the nation
as a whole, and such figure represents our conservative estimate of the number of new cases per year after applying the FDA’s
recommended 40% rate to the figures in such patient database. HC resulting from pelvic radiation therapy (occurring in the prostate,
rectum and uterine corpus) is less common than HC resulting from chemotherapy and is believed to be proportional to the incidence
of the “primary neoplasia” (the original malignancy). Such incidence of HC is based on a combined estimate of the incidence
of both chemotherapy-induced HC and radiation-induced HC from (i) peer-reviewed literature estimating the proportion of cyclophosphamide
and ifosphamide recipients that acquire chemotherapy-induced HC after undergoing chemotherapy, as applied to a national chemotherapy
incidence measurement study, and (ii) peer-reviewed literature containing estimates of the proportion of cancers treated with pelvic
radiation therapy and the number of years patients survive post-radiation therapy, in addition to pelvic cancer incidence estimates
publicly available from sources such as the American Cancer Society. According to the American Cancer Society publication Cancer
Facts & Figures 2023 (available at: https://www.cancer.org/content/dam/cancer-org/research/cancer-facts-and-statistics/annual-cancer-facts-and-figures/2023/2023-cancer-facts-and-figures.pdf),
there are an estimated 288,300 new cases of prostate cancer in the U.S. each year, 153,020 new cases of rectum and colon cancer
in the U.S. each year, and 66,200 cases new cases of uterine corpus cancer in the U.S. each year. Based, in part, on this data,
we estimate the U.S. incidence of HC to be in the range of approximately 100,000 to 200,000 cases per year.

Existing Treatment Options

There is currently no standard therapy
available for patients with HC, and there are no guidelines available on how HC should be optimally managed. Current HC treatments
are regarded as ineffective, risky, or both. Such treatments include general medical management (e.g., estrogens, pentosan-polysulfate,
and hyperbaric oxygen (“HBO”)), instillation therapy (e.g., aminocaproic-acid, alum, silver-nitrate, formalin, and
fibrin glue), embolization and surgery (e.g., coagulation and cystectomy). The moderately severe cases of HC involve massive bleeding
as well as clot formations that require evacuation. The most severe cases require surgical intervention (e.g., urinary diversion
or cystectomy) (Sant 2002; Perez-Brayfield and Kirsch 2009). In addition, we believe current treatments pose significant patient
risk: interventional fulguration of bleeding sites rarely works and exposes sick, frail patients to surgical risks; treatment with
aminocaprotic acid often leads to dangerous clots; treatment with silver nitrate can cause bladder perforation or kidney failure;
and treatment with formalin significantly reduces bladder functionality and causes excruciating pain (Vicente, Rios et al. 1990).

HBO treatments for HC may decrease and
prevent the risk of bleeding but cannot treat ongoing bleeding, in part because therapy takes up to 40 sessions over a period of
two to three months. Cystectomy causes significant morbidity and is generally an option of last resort; in some cases where cystectomy
is conducted, old and/or frail patients can bleed to death. There are no other products in development of which we are aware that
are indicated for the treatment of HC. Should LP-10 ultimately receive FDA market approval, we believe it will address this unmet
medical need and provide a benefit over existing products while fitting into the existing treatment algorithm as a treatment for
refractory HC.

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LP-10’s Mechanisms of Action – Tacrolimus

LP-10’s API tacrolimus has been approved
by the FDA for systemic use for inhibiting transplant rejection and as topical ointment for moderate to severe atopic dermatitis.
Tacrolimus acts by inhibition of IL-2-dependent T-cell activation and has a direct inhibitory effect on cell-mediated immunity
(Kino et al., 1987; Tamura et al., 2002). Tacrolimus prolongs the survival of the host and transplanted graft in animal transplant
models of liver, kidney, heart, bone marrow, small bowel and pancreas, lung and trachea, skin, cornea and limb. In animals, tacrolimus
has been demonstrated to suppress some humoral immunity and, to a greater extent, cell-mediated reactions such as allograft rejection,
delayed type hypersensitivity, collagen-induced arthritis, experimental allergic encephalomyelitis and graft versus host disease.
Tacrolimus inhibits T-lymphocyte activation, though the exact mechanism is not known. Experimental evidence suggests that tacrolimus
binds to an intracellular protein named FKBP-12. A complex molecule comprising tacrolimus-FKBP-12, calcium, calmodulin and calcineurin
is formed and the phosphatase activity of calcineurin is inhibited. This effect may prevent the dephosphorylation and translocation
of the nuclear factor of activated T-cells, a nuclear component thought to initiate gene transcription for the formation of lymphokines
(such as interleukin-2, gamma interferon). The net result is the inhibition of T-lymphocyte activation (i.e., immunosuppression).

The urothelium is the primary site of tissue
damage in the general pathophysiology of cystitis (Erdogan et al. 2002). Recent studies have highlighted the overexpression of
genes related to immune and inflammatory responses, including activation of CD4+ T-helper type-1-related chemokines in general
cystitis (Trompeter et al. 2002; Almawi and Melemedjian 2000). Expression of chemokines precedes infiltration of immune cells and
elevation of chemokines is an established signature of the inflammatory phenotype in bladder pain. Many of the symptoms of HC are
related to inflammation of urothelial tissues. We believe that our application of the liposomal tacrolimus could potentially have
a two-fold effect of (i) inhibiting calcineurin and the related response, and (ii) causing acute arteriole vasoconstriction to
suppress HC (see Figure 2 above). Calcineurin inhibition is the well-known tacrolimus intracellular signal transduction mechanism
that impairs the ability of certain immune cells to activate, and tacrolimus’ vasoconstrictive properties are referenced,
for example, in section “5.7 Nephrotoxicity” of the Label (prescribing information) associated with the “PROGRAF®
(tacrolimus) injection (for intravenous use) Initial U.S. Approval: 1994.”

Non-Clinical Study Results Involving Intravesical Tacrolimus

The following is a summary of non-clinical
studies conducted with rats and dogs that were sponsored by the Company or conducted in collaboration with Company scientists.
Results from animal studies are not always predictive of results of subsequent human clinical trials:

Effect of intravesical-tacrolimus on chemotherapy-induced
HC

In September 2010, the effect of intravesical-tacrolimus
was examined in a rat model for chemotherapy-induced, intraperitoneal injection of cyclophosphamide (200 mg/kg; i.p.) HC. This
study demonstrated that cyclophosphamide-induced hyperactivity (i.e., decrease in inter-contraction interval) was suppressed in
rats with intravesical LP-10 treatment but not in the rat groups left untreated (sham) or treated with empty liposomes (vehicle
control) (Chuang et al. 2010). This result indicates that liposomal tacrolimus may mitigate cyclophosphamide injury in an animal
model (Neurology and Urodynamics 30:421-427 (2011)).

Effect of intravesical-tacrolimus on radiation-induced HC

In October 2012, the efficacy of intravesical-tacrolimus
was also examined in a rat model for radiation-induced HC. A 40 Gy radiation dose induced statistically significant reductions
in the intermicturition interval recorded during metabolic urination patterns. Irradiated rats were randomly assigned to receive
a single instillation of saline or intravesical-tacrolimus. Intravesical-tacrolimus increased the post-irradiation intermicturition
intervals (p <0.001). Rat bladders that were harvested six weeks after the 40 Gy irradiation doses and two weeks after saline
instillation showed edematous changes accompanying infiltration of inflammatory cells and hyperplastic urothelial changes. In contrast,
bladder from group treated with intravesical-tacrolimus shows minimal edematous change, consistent with the hypothesis that the
intravesical-tacrolimus had an anti-inflammatory effect (J. of Urology 194, 578-584 (2015)).

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Pharmacokinetics of sphingomyelin formulated tacrolimus

A 2013 study examined levels of tacrolimus
in blood, urine and bladder tissue following a single dose of liposome formulated tacrolimus instilled in the bladder of rats under
anesthesia as compared to intravesical instillation of tacrolimus or intraperitoneal injection of tacrolimus in other rat groups.
The tacrolimus dose was constant in all formulations at 200g/ml. At different times, blood, urine and bladder samples were collected.
Tacrolimus levels in samples were analyzed using microparticle enzyme immunoassay. The area under curve (“AUC”) of
liposome tacrolimus in serum at 0 to 24 hours was significantly lower than that of tacrolimus instillation or injection. Non-compartmental
pharmacokinetic data analysis revealed maximum concentration of liposomal tacrolimus and tacrolimus in blood and urine at one and
at two hours, respectively. Urine AUC (0–24 hours) after intravesical administration was significantly higher than in the
intraperitoneal group (p < 0.05). Bladder tacrolimus AUC (0–24 hours) did not differ significantly between the groups.
Single dose pharmacokinetics revealed that bladder instillation of liposome tacrolimus significantly decreased systemic exposure
to instilled tacrolimus. This appears to indicate that a reduction in systemic exposure helps to limit the potential side effects
of the tacrolimus by concentrating the dose to only one organ (J. of Urology Vol. 189, 1553-1558 (2013)).

LP-10 Toxicology Studies

In 2018, we completed chronic toxicology
studies in rats and dogs, which were the two species of animals that we agreed to study in the course of our pre-IND communications
with the FDA. The completion of such studies is normally required prior to requesting IND approval. The in-life phase of the toxicology
rat study was performed between February and March 2018 and the in-life phase of the dog toxicology study was performed in March
2018. Such studies were company-sponsored and conducted by qualified vendors specializing in good laboratory practice in-vivo toxicology
studies. The animals in such 2018 studies were assessed for morbidity, mortality, clinical observations and weekly body weight.
Full sets of standard tissues, including urinary tract tissues, were collected and weighed and histopathology evaluations were
conducted from all such animals. The studies concluded that no significant local and systemic toxicity resulted from the administration
of LP-10 by intravesical instillation in either rats or dogs.

LP-10’s Addressable Market

LP-10 has been designed for the approximately
one million cancer survivors in the United States today who have had pelvic radiation therapy and are at risk for HC. Based on
the managed care database study that we sponsored in 2012 as part of our approved request for FDA “orphan drug” designation
of tacrolimus for HC, approximately 60,000 of these patients annually experience severe chronic bladder bleeding that is often
fatal. LP-10 has been developed to address this form of bleeding, as well as bladder bleeding associated with breast cancer patients
who are taking systemic cyclophosphamide or ifosfamide, leading to chemotherapy-related cystitis experienced by an estimated 60,000
patients annually in the United States, inferring an addressable market in excess of 120,000 patients annually.

Figure 3

(1) American Cancer Society Cancer Facts
and Figures 2023, (2) derived from a Company-sponsored study, (3) based on the Company’s 40% estimate, (4) American Cancer
Society Cancer Treatment and Survivorship Fact and Figures 2022-2024, (5) based on the Company’s 30% estimate (6) 8% estimate,
(7) based on the Company’s estimate, (8) $20,000 average revenue per each of an estimated 60,000 patients treated per year.

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Figure 3 above illustrates the potential
sources of revenue for LP-10. LP-10 is not currently approved for any indication; however, if clinical development is successful
and we receive marketing approval for LP-10, we estimate the average LP-10 price to exceed $20,000 per patient-year domestically.
This estimate is based on costs of HBO therapy, which is an option for patients with mild cases. HBO therapy can cost approximately
$15,000 for a course of 30 sessions. Our price estimate also includes the potential for associated reductions in direct medical
expenditures, especially for severe cases. We estimate the peak demand, at this price, to be, approximately 60,000 patients annually,
which represents an approximate 50% market penetration in the U.S. Based on such price and demand estimates, we believe there is
potential to receive up to $1.2 billion in annual gross revenue.

Our Lead Drug Candidates, LP-10, LP-310,
and Our Product Pipeline

Five fundamental aspects of our LP-10 drug
candidate make it an excellent fit for our strategy (see Figure 4 below). First, our API has a well-known mechanism of action.
Second, published non-clinical studies involving animals, which are described above, demonstrate the potential for significant
efficacy in our intended indication and route of administration. Third, we are fortunate to have had a successful human experience
with intravesical tacrolimus (Dave et. al. Int Urol Nephrol 2015). Fourth, we believe we can take advantage of accelerated regulatory
approval pathways for LP-10; we have already received “orphan drug” designation from the FDA that grants us product
exclusivity, and we plan to apply for designations under one or more of the FDA’s expedited development and review programs.
Fifth, we believe that the revenue potential for LP-10 could be significant. We believe our focus on capital-efficient drug development
provides us with additional opportunities as we evaluate potential drug candidates for other rare diseases, especially those associated
with locally delivering drugs to body cavities. When evaluating opportunities, we ensure that both the indication as well
as the regulatory pathway are conducive to capital-efficient drug development. Our product candidate pipeline includes product
candidates that could treat OLP (LP-310) and oral GVHD (LP-410). On November 10, 2023, we received the FDA’s IND approval
for a Phase 2a dose escalation clinical trial regarding LP-310, and we were granted “orphan drug” designation for LP-410
the treatment of oral GVHD in November 2023. We submitted a Phase 2a IND for LP-310 treatment of OLP in the first quarter of 2024
and proceeded into clinical trial that is expected to be completed in the second quarter of 2025. We believe that our current product
candidate pipeline could enable us to apply our drug delivery technology (our Platform) for multiple types of severe, rare diseases,
and in the future, could enable us to address additional broader indications associated with endothelial inflammation. Local delivery
often allows us to avert known risk factors by only locally applying the effective dose.

Figure 4

We are currently evaluating several potential
product candidates for additional indications (including radiation proctitis and eosinophilic esophagitis).

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LP-10’s Regulatory Status

In 2019, we completed the required manufacturing
and toxicology program to submit an IND request to the FDA to begin testing LP-10 in human subjects. We submitted the IND request
in September 2019 and received approval from the FDA within 30 days of submission to begin a clinical study involving LP-10. In
December 2019, we received an advice letter from the FDA recommending several modifications to our proposed clinical protocol for
LP-10, which we accommodated. We also submitted and received approval from the FDA for the trial’s associated investigator
brochure and the proposed documentation of patient consent. Both of these documents, in addition to the clinical protocol, were
submitted to Adverra, our central IRB, and we subsequently received IRB approval to conduct our clinical trial. In February 2020,
the first patient was dosed in LP-10’s FDA phase 2a open-label, dose-escalation clinical trial for patients experiencing
moderate to severe HC, which is intended to demonstrate proof-of-concept in humans. We reported summary results from LP-10’s
phase 2a clinical trial in January 2023. We had a type-C meeting with the FDA on November 7, 2023, during which we agreed on a
submission of a well-controlled phase 2b double-blind placebo-controlled trial with gross hematuria as assessed by patient report
outcome as primary endpoint. This submission has been completed, and we are proceeding toward the initiation of a Phase2b clinical
trial.

LP-10’s FDA “Orphan Drug” Designation Status

In 2010, we submitted a request to the
FDA for “orphan drug” designation covering LP-10 and subsequently received approval for such designation in July 2012.
This provides us with marketing exclusivity and permits us to benefit from shorter FDA review periods and reduced regulatory fees
for LP-10. We intend to apply for similar “orphan drug” designations in additional jurisdictions, including Europe
and Japan, as well as additional regulatory classifications, such as the FDA’s Breakthrough Therapy and Fast Track designations,
in the United States. We expect that any designations that we have received, or may in the future receive, will confer additional
advantages during LP-10’s development. However, there can be no assurance that we will obtain such designations from the
FDA, who is ultimately responsible for making such determinations.

LP-10’s Clinical Status

Our multi-center, open-label dose-escalation
phase 2a LP-10 clinical trial involved a total of thirteen subjects who received tacrolimus doses in one or two instillations of
2, 4 or 8mg via a pre-liposomal lyophilate reconstituted in 40 milliliters of sterile water. Subjects were cancer survivors with
a history of pelvic radiotherapy who developed moderate to severe HC refractory to conventional therapy. The study was IRB-approved
at nine clinical sites within the FDA’s jurisdiction.

Four subjects were enrolled in the 2mg
group, four subjects were enrolled in the 4mg group, and five subjects were enrolled in the 8mg group. All subjects were male,
with a median age of 67 years. Nine of the thirteen subjects had a history of prostate cancer and had been previously treated with
external beam radiation. Two of the thirteen subjects had a history of lymphoma previously treated with radiation, and two had
a history of bladder cancer previously treated with radiation.

The last subject of the LP-10 phase 2a
study completed the last visit in October 2022. We reported top-line data from this trial in January 2023. All twenty-three LP-10
instillations in the 2mg, 4 mg and 8mg groups were well-tolerated by all thirteen subjects without related adverse events or elevated
blood tacrolimus levels. For multiple subjects, hematuria and urinary symptoms improved, and cystoscopic bleeding and ulceration
sites decreased. There was a complete response in three of the subjects, a partial response in seven of the subjects and no response
in three of the subjects. We believe that such data and instillation safety findings indicate LP-10’s tolerability in HC
patients and evidence LP-10’s potential use for the treatment of HC.

The results of the LP-10 phase-2a clinical
trial have been published in the journal of International Urology and Nephrology, on September 19, 2023 (Hafron J. et al. Int.
Urol. Nephrol. September 2023, Springer).

LP-310 and the Intended Treatment of OLP

LP-310 is currently in clinical development.
LP-310 uses immunosuppressive and anti-inflammatory drug therapy to treat OLP, which is a chronic immune-mediated mucosal disease
characterized by ulcerative lesions in the oral cavity. To date, upon review of relevant FDA public data resources on approved
drugs and biologics, we are not aware of any other liposomal products developed to treat OLP. Patients are currently treated with
off-label steroids for managing painful, erosive or ulcerative lesions. Yet, there are virtually no steroids formulated for topical
drug delivery to lesions in the mouth. For severe and difficult-to-treat lesions, systemic steroids, and other immunosuppressive
agents (e.g., hydroxychloroquin) are often needed, even though OLP is localized. Creams, gels and ointments do not adhere to oral
mucosa and are easily swallowed, while mouthwashes and steroid inhalers have extremely short contact time with lesions. For severe
and difficult-to-treat lesions, systemic steroids are often needed, even though OLP is localized. As a result, we believe there
is great unmet medical need for this disease.

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We believe that our approach of using metastable
liposomal tacrolimus as a treatment for OLP, which has not yet been approved by the FDA, is novel. Tacrolimus has been used as
an off-label oral treatment of OLP, and it has been shown to be effective based on systematic review and meta-analysis (Sun et
al., 2019), which we believe is indicative of a rationale for using tacrolimus to treat OLP. Twenty-one trials involving 965 patients
were included in this meta-analysis that concluded, in part, that treatment with tacrolimus may be an alternative approach when
OLP does not respond to the standard protocols.

Background on OLP

OLP is a chronic T-cell-mediated mucosal
disease that affects more than 1% of the global population, or more than 6 million people in the U.S. and Europe, according to
González-Moles et. al., Oral Diseases 27(4):813-828 May 2021, “Worldwide prevalence of oral lichen planus:
A systematic review and meta-analysis.” OLP is generally divided into three clinical subtypes: reticular, atrophic or erythematous,
and erosive and/or ulcerative. Although lichen planus can be found on other areas of the body, such as with cutaneous lichen planus
(“LP”), OLP has a chronic course, with little chance for spontaneous resolution, and most therapies that are currently
available are palliative rather than curative. Based on peer-reviewed medical literature, OLP has a prevalence ranging from 1-2%,
and females twice as likely as men to have the disease. The age on onset is generally between 30-60 years. Although cutaneous LP
is associated with approximately 15% of OLP cases, OLP is associated with approximately 75% of patients with cutaneous LP.

Symptoms vary, but the disease is typically
characterized by white reticular changes, erythema and painful ulcerative lesions in the oral cavity, accompanied by inflammation
and severe pain. The precise cause is unknown, although an autoreactive immune process is suspected by most experts in the field.
OLP is most frequently located bilaterally on the buccal mucosa (the inside lining of the cheeks and floor of the mouth), but can
also appear on the tongue, palatal mucosa, gingiva and lips. Because of the long-lasting nature of the disease and painful symptoms,
which can be spontaneous or triggered by acidic, crunchy and spicy food, patients require ongoing care and monitoring. Patients
with OLP also have an approximately 1% likelihood of being diagnosed with oral cancer as a result of OLP (between 0.4% to 5% over
a 20-year period, with an annual rate between 0.2% to 0.5%), making early detection and treatment imperative.

Some cases of OLP are caused by a hypersensitivity
reaction to mercury and formaldehyde or medications such as ACE inhibitors, thiazide diuretics, beta blockers, gold salts, sulfasalazine,
sulfonylureas and penicillamine. The new biologic agents such as TNF alpha inhibitors may also cause lichen planus-like eruptions.
Patients with hypothyroidism, including Hashimoto thyroiditis, also develop OLP and it is unclear whether it is thyroid disease
that predisposes an individual to OLP, or whether the drugs used to treat such disease also cause OLP. Hepatitis C virus infection
has also been associated with the development of OLP in southern European countries. As mentioned above, we are not aware of any
approved treatments for OLP, and we do not believe that current treatments are sufficiently effective.

LP-310’s Mechanisms of Action

LP-310 contains the API tacrolimus, like
LP-10. Recent studies have highlighted that OLP pathophysiology is initiated by cellular-mediated immunity, most importantly, the
increased production of T-helper 1(Th1) cytokines (Chamani et al., 2015). The oral mucosa is the primary site of tissue damage
in the pathophysiology of OLP (Alrashdan et al., 2016). For a discussion of the tacrolimus API, on which LP-310 relies for its
delivery to the oral cavity, and the effect tacrolimus has on T-lymphocyte activation, see “– LP-10’s Mechanisms
of Action – Tacrolimus” above. We believe that our application of the liposomal tacrolimus to the oral cavity to
address OLP could exploit this mechanism with a high local and low systemic distribution.

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LP-310’s Addressable Market

LP-310 is not currently approved for any
indication; however, if clinical development is successful and we receive marketing approval for LP-310, based upon the economics
of existing oral cavity drug products, we project that the treatment of OLP will cost approximately $4,000 annually per patient.
Most OLP patients are treated by dentists, who are relatively accessible compared to other medical specialists (in the United States
there are approximately 200,000 dentists and ear, nose and throat physicians). Currently, dentists routinely recommend and prescribe
instill agents as oral rinses and the procedure is simple and easy to teach. Given the absence of FDA approved treatment of OLP,
we estimate revenue of approximately $4,000 per course of therapy, resulting in a total addressable market that exceeds $980 million.
These estimates are based on the prices of other brand intravesical products as well as our preliminary estimates of the potential
for reduction in medical expenditures associated with intractable cases.

LP-310’s Regulatory Status

On April 8, 2021, we successfully completed
a pre-IND meeting to confirm the specific IND manufacturing, analytical, toxicology requirements for LP-310 as an oral rinse for
the treatment of OLP. On October 17, 2023, the FDA approved an IND application for a multi-center, phase-2a, dose-escalation clinical
trial to assess the safety and efficacy of LP-310 in patients with symptomatic OLP.

We began the
clinical trial process for LP-310 and initiated the first clinical site in the second quarter of 2024. In the fourth quarter
of 2024, we announced the completion of dosing for the first cohort in its multi-center Phase 2a clinical trial of LP-310. In this
first cohort, eight participants received a dose of 0.25 mg LP-310, with promising initial results. No product-related serious
adverse events were reported. Pharmacokinetic data demonstrated that whole blood tacrolimus levels in all patients were either
undetectable or minimal, highlighting LP-310’s potential to deliver localized therapeutic effects while minimizing systemic
exposure. Additionally, all patients tolerated LP-310 without significant adverse reactions.

The trial is expected to be completed in the second
quarter of 2025. The top line data from the first two dose cohorts of this trial has been selected for podium presentation at the
2025 American Association of Oral Medicine and European Association of Oral Medicine Joint Meeting that will be held in Las Vegas,
NV on May 15, 2025. Lipella anticipates the submission to the FDA of a request for Breakthrough Designation for LP-310 in the second
half of 2025 and plans to commence a Phase 2b clinical trial for such product.

LP-410 and the Intended Treatment of oral GVHD

Lipella Pharmaceuticals Inc. is also developing
an oral, liposomal formulation of tacrolimus, LP-410, for the treatment of oral GVHD. LP-410 is an oral rinse, similar to LP-310,
but will have a different containment system. LP-410 targets the underlying mechanisms of oral GVHD, potentially providing a safe
and effective treatment option for affected individuals. Lipella received “orphan drug” designation approval, on November
11, 2023, for tacrolimus for the treatment of oral GVHD. On March 5, 2024, the FDA approved an IND application for LP-410’s
treatment of oral GVHD.

Background on oral GVHD

HCT is used to treat a wide range of malignancies,
hematologic and immune deficiency states, and autoimmune diseases. GVHD is a clinical syndrome where donor-derived immunocompetent
T cells react against patient tissues directly or through exaggerated inflammatory responses following HCT. Oral GVHD is a rare
and serious disease, with a prevalence of approximately 30,000 patients in the US annually (Bachier et al., 2019; Bachier et al.,
2021, Orphanet 2023). GVHD remains a major cause of morbidity and mortality with patients who undergo HCT treatment, with chronic
GVHD being the leading cause of non-malignant fatality for such patients who receive HCT treatment.

Topical and local management of symptomatic
oral GVHD can reduce oral symptoms that can interfere with oral function and quality of life and can reduce the need for more intensive
immunosuppressive systemic therapies. However, there is currently no FDA approved local drug treatment of oral GVHD.

LP-50 and the Intended Treatment of NMIBC

Lipella is also developing an intravesical formulation
of immunoglobulins including checkpoint inhibitors, LP-50, for the treatment of NMIBC. LP-50 offers the potential for increasing
efficacy while minimizing systemic toxicity. Additional information regarding this preclinical program is included in the International
Journal of Molecular Sciences 2024, 25(9), 4945, titled “Enhancing Therapeutic Efficacy and Safety of Immune Checkpoint
Inhibition for Bladder Cancer: A Comparative Analysis of Injectable vs. Intravesical Administration,” as well as in US patent
publication number 2024/0115503 titled “Intravesical Delivery of Hydrophilic Therapeutic Agents Using Liposomes.”

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Facility

We have approximately 2,000 square feet
of combined laboratory, office and warehouse space at our principal executive offices that we use in our research and development
efforts. The lease for our principal executive offices has a five-year term that ends on May 31, 2024, and the lease provides us
with an option to extend the term for an additional five years.

We believe our Facility contains all of
the various components necessary to support our research, and it includes a current good manufacturing practices (“cGMP”)-capable
manufacturing capability with a dedicated pilot-scale manufacturing. The space is divided into a production area and office space,
with the production area subdivided into a clean space (Class 10,000) and sterile space (Class 100 (ISO class 5) clean room). Our
Facility includes a pre-fabricated soft-wall, 6’x10’ class-100 clean room for aseptic formulation.

We maintain an internal LP-10 pilot manufacturing
facility. We plan to file for an NDA utilizing the 505(b)(2) regulatory pathway for LP-10, which, if approved, may rapidly increase
our manufacturing compliance needs. Even if we are able to pursue the 505(b)(2) regulatory pathway strategy, however, there is
no assurance that we will be successful developing and/or commercializing LP-10 in a rapid or accelerated manner.

We are in a continuous process of complying
with increasing regulatory requirements as the development of LP-10 and our other product candidates progresses. Currently, our
manufacturing process primarily involves facility-dependent sterility protocols surrounding a five-step batch process. The simplicity
of our process provides a strong incentive to continue investing internally in manufacturing compliance.

Compliance with stage-appropriate cGMPs
is a prerequisite for FDA approval of a drug product for use in a clinical trial. cGMP regulations increase as a product candidate
enters each subsequent clinical trial phase and as the scope of a proposed trial increases. Compliance with all cGMP regulations
is a requirement for NDA approval and commercialization of LP-10. We expect to increase the cGMP manufacturing capabilities at
our Facility to ensure full-scale compliant production of LP-10.

We believe that our manufacturing program
will be able to support any future clinical trials involving LP-10. We currently lease industrial space used for cGMP manufacturing
and analytical support. The space includes a non-porous epoxy floor, ideally suited for sterile environments, such as those used
in hospital surgical rooms and sterile processing facilities. We have completed initial characterization and quality control release
testing to confirm consistency of production of LP-10. Any applicable revised information and data will be provided to the FDA
as part of an amended Chemistry, Manufacturing and Controls (“CMC”) section of the IND application prior to and in
conjunction with use in any subsequent clinical trial.

Our Analytical Laboratory, Equipment & Supplies

Our current preparatory and biochemical/biophysical
analysis capabilities include: ultra-centrifugation, high performance liquid chromatography; differential scanning calorimetry;
gas chromatography; cross-polarization microscopy; fluorescent microscopy; near-infra-red imaging; and particle size analysis.
In addition to the analytical equipment and sterile cleanroom, our Facility it contains a laminar flow hood for sterile procedures
outside of the cleanroom, two Labconco lyophylizers (each with a 50-vile capacity), multiple incubators, a laboratory oven, an
autoclave, various mass balances, vortexes, a heat stage for our optical microscope, various freezers and refrigerators, chemical
and flammable storage cabinets, sterile disposables (including clothing, materials and vials), and raw materials, including APIs
and lipids.

Suppliers

We obtain our raw material supply of LP-10
from multiple vendors who have a drug master file with the FDA. It is supplied as a white, lyophilized powder (a pre-liposomal
lyophilate) formulated from sphingomyelin phospholipids, and tacrolimus. One vial of LP-10 drug product contains 80mg of tacrolimus
and sphingomyelin (10% tacrolimus by weight) and is supplied to a clinic as a powder to be reconstituted with sterile water for
injection prior to instillation. Quality control samples from each batch would be submitted for release testing according to established
product specifications for identity and purity, residual solvent quantification, sterility assurance, and bacterial endotoxins.

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Intellectual Property

Protection of our intellectual property
is an important part of our business. On May 5, 2020, we were issued U.S. patent number 10,639,278 (the “278 Patent”)
from the United States Patent and Trademark Office (“USPTO”), which does not expire until July 11, 2035. On June 14,
2022, we were issued U.S. patent number 11,357,725 (the “725 Patent”), which does not expire until November 9, 2034.
Further, on May 28, 2020, we were issued one patent in Australia (No. 2014340137) (the “Australia Patent”), which does
not expire until October 22, 2034. On August 23, 2022, we were issued a patent in Canada (No. 2,927,356) (the “Canadian Patent”),
which does not expire until October 22, 2034. On June 7, 2023, we were issued a European patent (No. 3060197) (the “European
Patent”), which does not expire until October 22, 2034. The European Patent was nationally validated in Switzerland, Spain,
and Great Britain and a request for unitary effect was granted covering Austria, Belgium, Bulgaria, Denmark, Estonia, Finland,
France, Germany, Italy, Latvia, Lithuania, Luxembourg, Malta, The Netherlands, Portugal, Slovenia, and Sweden. Each of the aforementioned
patents cover aspects of our Platform technology relating to uses for delivering hydrophobic therapeutic, prophylactic or diagnostic
agents to the body cavities, including LP-10 and LP-310, as well as methods of making formulations for delivering such hydrophobic
agents. We are also actively prosecuting corresponding utility patent applications in the U.S. We intend to seek additional patent
applications in the U.S. as well as in other jurisdictions, such as Europe, for our other proprietary technologies relating to
intravesical immunoglobulin delivery and any future discoveries that we deem appropriate to protect. A U.S. patent application
on the intravesical immunoglobulin delivery formulation is pending. Regulatory exclusivity should also be available in those countries
in which regulatory approval is required, including Europe, Canada and others.

In addition to patents, we rely on trade
secrets and know-how relating to our Platform technology and the product candidates we are developing using our Platform to develop
and maintain our competitive position. However, trade secrets can be difficult to protect. We intend to protect our proprietary
technology and processes, and maintain ownership of certain technologies, in part, through licenses as well as confidentiality
agreements and invention assignment agreements with our employees, consultants and commercial partners.

Government
Regulation Applicable to Our Business

In the United States, the FDA regulates
drug products, including liposomally delivered products, under the FDCA, the Public Health Service Act (the “PHSA”),
and regulations and guidance implementing these laws. The FDCA, PHSA and their corresponding regulations govern, among other things,
the testing, manufacturing, safety, efficacy, labeling, packaging, storage, record keeping, distribution, reporting, advertising
and other promotional practices involving drug products. Applications to the FDA are required before conducting human clinical
testing of drug products. FDA approval also must be obtained before marketing of drug products. The process of obtaining regulatory
approvals and the subsequent compliance with appropriate federal, state, local and foreign statutes and regulations require the
expenditure of substantial time and financial resources and we may not be able to obtain the required regulatory approvals to successfully
develop and commercialize our product candidates, including LP-10, LP-310, LP-410 and LP-50.

U.S. Drug Development Process

The FDA must approve a product candidate
before it may be legally marketed in the United States. The process required by the FDA before a drug product candidate may be
marketed in the United States generally involves the following:

● completion of preclinical laboratory tests and in vivo studies in accordance with the FDA’s
current good laboratory practice (“GLP”) regulations and applicable requirements for the humane use of laboratory animals
or other applicable regulations;

● submission to the FDA of an application for an IND exemption, which allows human clinical trials
to begin unless FDA objects within 30 days;

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● approval by an independent IRB reviewing each clinical site before each clinical trial may be initiated;

● performance of adequate and well-controlled human clinical trials according to the FDA’s
current GCP regulations, and any additional requirements for the protection of human research subjects and their health information,
to establish the safety and efficacy of the proposed drug product candidate for its intended use;

● preparation and submission to the FDA of an NDA for marketing approval that includes substantial
evidence of safety, purity and potency from results of nonclinical testing and clinical trials;

● review of the product by an FDA advisory committee, if applicable;

● satisfactory completion of an FDA inspection of the manufacturing facility or facilities where
the drug product candidate is produced to assess compliance with cGMP requirements and to assure that the facilities, methods and
controls are adequate to preserve the drug product candidate’s identity, safety, strength, quality, potency and purity;

● potential FDA audit of the nonclinical and clinical trial sites that generated the data in support
of the NDA; and

● payment of user fees and FDA review and approval, or licensure, of the NDA.

Before testing any drug product candidate
in humans, including a liposomal intravesical product candidate, the product candidate must undergo preclinical testing. Preclinical
tests, also referred to as nonclinical studies, include laboratory evaluations of product chemistry, toxicity and formulation,
as well as in vivo studies to assess the potential safety and activity of the product candidate and to establish a rationale for
therapeutic use. The conduct of the preclinical tests must comply with federal regulations and requirements including GLPs.

Concurrent with clinical trials, companies
usually must complete some long-term preclinical testing, such as animal studies of reproductive adverse events and carcinogenicity,
and must also develop additional information about the chemistry and physical characteristics of the drug and finalize a process
for manufacturing the drug in commercial quantities in accordance with cGMP requirements. The manufacturing process must be capable
of consistently producing quality batches of the drug candidate and, among other things, the manufacturer must develop methods
for testing the identity, strength, quality and purity of the final drug product. Additionally, appropriate packaging must be selected
and tested and stability studies must be conducted to demonstrate that the drug candidate does not undergo unacceptable deterioration
over its shelf life.

The clinical trial sponsor must submit
the results of the preclinical tests, together with manufacturing information, analytical data, any available clinical data or
literature and a proposed clinical protocol, to the FDA as part of an IND. Some preclinical testing may continue even after the
IND is submitted. The IND automatically becomes effective 30 days after receipt by the FDA, unless the FDA places the clinical
trial on a clinical hold. In such a case, the IND sponsor and the FDA must resolve any outstanding concerns before the clinical
trial can begin. The FDA also may impose clinical holds on a drug product candidate at any time before or during clinical trials
due to safety concerns or non-compliance. If the FDA imposes a clinical hold, trials may not recommence without FDA authorization
and then only under terms authorized by the FDA.

Human Clinical Trials Under an IND

Clinical trials involve the administration
of the drug product candidate to healthy volunteers or patients under the supervision of qualified investigators which generally
are physicians not employed by, or under, the control of the trial sponsor. Clinical trials are conducted under written study protocols
detailing, among other things, the objectives of the clinical trial, dosing procedures, subject selection and exclusion criteria
and the parameters to be used to monitor subject safety, including stopping rules that assure a clinical trial will be stopped
if certain adverse events should occur. Each protocol and any amendments to the protocol must be submitted to the FDA as part of
the IND. An IND automatically becomes effective 30 days after receipt by the FDA, unless before that time the FDA raises concerns
or questions related to a proposed clinical trial and places the trial on clinical hold, including concerns that human research
subjects will be exposed to unreasonable health risks. In such a case, the IND sponsor and the FDA must resolve any outstanding
concerns before the clinical trial can begin. Accordingly, submission of an IND may or may not result in the FDA allowing clinical
trials to commence. Clinical trials must be conducted and monitored in accordance with the FDA’s regulations comprising the
current GCP requirements, including the requirement that all research subjects provide informed consent. Further, each clinical
trial must be reviewed and approved by an IRB at or servicing each institution at which the clinical trial will be conducted. An
IRB is charged with protecting the welfare and rights of trial participants and considers items such as whether the risks to individuals
participating in the clinical trials are minimized and are reasonable in relation to anticipated benefits. The IRB also approves
the form and content of the informed consent that must be signed by each clinical trial subject, or their legal representative,
reviews and approves the study protocol, and must monitor the clinical trial until completed.

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U.S. Review and Approval Processes

The results of the preclinical tests and
clinical trials, together with detailed information relating to the product’s CMC and proposed labeling, among other things,
are submitted to the FDA as part of an NDA requesting approval to market the product for one or more indications. Under the Prescription
Drug User Fee Act, as amended (“PDUFA”), each NDA must be accompanied by a significant user fee. The FDA adjusts the
PDUFA user fees on an annual basis. Fee waivers or reductions are available in certain circumstances, including a waiver of the
application fee for the first application filed by a small business. Additionally, no user fees are assessed on NDAs for product
candidates designated as orphan drugs unless the product candidate also includes a non-orphan indication.

“Orphan Drug” Designation

Under the Orphan Drug Act of 1983, the
FDA may designate a drug product as an “orphan drug” if it is intended to treat a rare disease or condition (generally
meaning that it affects fewer than 200,000 individuals in the United States, or more than 200,000 individuals in the United States
in cases in which there is no reasonable expectation that the cost of developing and making a drug product available in the United
States for treatment of the disease or condition will be recovered from sales of the product). “Orphan drug” designation
must be requested before submitting an NDA. After the FDA grants “orphan drug” designation, the identity of the therapeutic
agent and its potential orphan use are disclosed publicly by the FDA. “Orphan drug” designation does not convey any
advantage in the regulatory review and approval process, nor does it shorten the duration of such process.

If a product with “orphan drug”
status receives FDA approval for the disease or condition for which it has such designation, the product is entitled to “orphan
drug” exclusivity, meaning that the FDA may not approve any other applications to market the same drug product for the same
indication for seven years, except in limited circumstances, such as a showing of clinical superiority to the product with “orphan
drug” exclusivity or if the party holding the exclusivity fails to assure the availability of sufficient quantities of the
drug to meet the needs of patients with the disease or condition for which the drug was designated. Competitors, however, may receive
approval of different drug products for the same indication for which the orphan drug has exclusivity or obtain approval for the
same drug product but for a different indication for which the orphan drug has exclusivity. Orphan medicinal product status in
the European Union has similar, but not identical, benefits.

The 505(b)(2) NDA Regulatory Pathway

Most drug products obtain FDA marketing
approval pursuant to a full Section 505(b)(1) NDA or an aNDA. A third alternative is a Section 505(b)(2) NDA, which enables the
applicant to rely, in part, on studies not conducted by, or for, the applicant and for which the applicant has not obtained a right
of reference or use, such as the FDA’s findings of safety and/or effectiveness for a similar previously approved product,
or published literature, in support of its application. For example, we anticipate referencing relevant publicly available data,
including the publicly disclosed FDA drug approval package for tacrolimus, in the preparation and submission of our aNDA for LP-10
and LP-310. However, the FDA is responsible for ultimately determining if the Company may utilize this pathway for LP-10, LP-310,
or any of our other product candidates and has presently not provided the Company with any indication that it may use such pathway.
There is no guarantee that the FDA will make such a determination with respect to LP-10 or any of our other product candidates.

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505(b)(2) NDAs often provide a path to
FDA approval for new or improved formulations or new uses of previously approved products. Section 505(b)(2) permits the filing
of an NDA where at least some of the information required for approval comes from studies not conducted by, or for, the applicant
and for which the applicant has not obtained a right of reference. If the 505(b)(2) applicant can establish that reliance on the
FDA’s previous approval is scientifically appropriate, it may eliminate the need to conduct certain preclinical or clinical
studies of the new product. The FDA may also require companies to perform additional studies or measurements to support the change
from the approved product. The FDA may then approve the new product candidate for all, or some, of the label indications for which
the referenced product has been approved, as well as for any new indication sought by the Section 505(b)(2) applicant.

The FDCA also provides three years of marketing
exclusivity for an NDA, 505(b)(2) NDA or supplement to an existing NDA if new clinical investigations, other than bioavailability
studies, that were conducted or sponsored by the applicant are deemed by the FDA to be essential to the approval of the application,
for example, new indications, dosages or strengths of an existing drug. This three-year exclusivity covers only the conditions
of use associated with the new clinical investigations and does not prohibit the FDA from approving aNDAs for drugs containing
the original active agent. Five-year and three-year exclusivity will not delay the submission or approval of a full NDA. However,
an applicant submitting a full NDA would be required to conduct or obtain a right of reference to all of the preclinical studies
and adequate and well-controlled clinical trials necessary to demonstrate safety and effectiveness.

To the extent that the Section 505(b)(2)
applicant is relying on studies conducted for an already approved product, the applicant is required to certify to the FDA concerning
any patents listed for the approved product in the Orange Book to the same extent that an aNDA applicant would. Thus approval of
a 505(b)(2) NDA can be stalled until all the listed patents claiming the referenced product have expired, until any non-patent
exclusivity, such as exclusivity for obtaining approval of a new chemical entity, listed in the Orange Book for the referenced
product has expired, and, in the case of a Paragraph IV certification and subsequent patent infringement suit, until the earlier
of 30 months, settlement of the lawsuit or a decision in the infringement case that is favorable to the Section 505(b)(2) applicant.

Expedited Development and Review Programs

In addition, the FDA is authorized to expedite
the review of NDAs in several ways, including:

● Fast Track Designation

To obtain Fast Track designation
for a drug product candidate, the sponsor of such drug may request the FDA to designate such drug for a specific indication concurrent
with or after the filing of the related IND. Drug products are eligible for Fast Track designation if they are intended to treat
a serious or life-threatening condition and demonstrate the potential to address unmet medical needs for the condition. We believe
that LP-10, and the specific indication for which it is being studied, meets the qualifications for Fast Track designation; however,
the FDA is responsible for ultimately determining if LP-10 meets such qualifications, and there is no guarantee that the FDA will
make such a determination with respect to LP-10. In addition to other benefits, such as the ability to have greater interactions
with the FDA, the FDA may initiate review of certain sections of a Fast Track NDA before the application is complete, a process
known as a “rolling review.” Any drug product candidate submitted to the FDA for marketing, including for Fast Track
designation, may be eligible for other types of FDA designations intended to expedite drug development and review, such as Breakthrough
Therapy designation, priority review and accelerated approval. Our initial request to obtain Fast Track designation covering LP-10
in July 2021 was denied by the FDA in September 2021. Lipella anticipates repeating its submission for Fast Track designation at
the conclusion of the Phase 2b study for LP-10.

● Breakthrough Therapy Designation

To qualify for the FDA’s
Breakthrough Therapy designation, product candidates must be intended to treat a serious or life-threatening disease or condition
and preliminary clinical evidence must indicate that such product candidates may demonstrate substantial improvement on one or
more clinically significant endpoints compared to existing therapies.

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The FDA will seek to ensure that
the sponsor of a breakthrough therapy product candidate receives intensive guidance on an efficient drug development program, intensive
involvement of senior managers and experienced staff on a proactive, collaborative and cross-disciplinary review, and rolling review.
We believe that LP-10, and the specific indication for which it is being studied, meets the qualifications for Breakthrough Therapy
designation, and we intend to apply for such status. Our initial Breakthrough Therapy designation was denied by the FDA on November
16, 2023. The FDA determined that refractory HC meets the criteria for a serious or life-threatening disease or condition, however,
the clinical evidence does not yet demonstrate substantial improvement and the designation as a Breakthrough Therapy cannot be
granted at this time. Lipella anticipates repeating its submission for Breakthrough Therapy Designation at the conclusion of the
Phase 2b study for LP-10. In addition, Lipella anticipates the submission for Breakthrough Therapy Designation for LP-310 treatment
of OLP in the second half of 2025, after the conclusion of the Phase2a clinical trial.

● Accelerated Approval

Drug or drug products studied
for their safety and effectiveness in treating serious or life-threatening illnesses and that provide meaningful therapeutic benefits
over existing treatments may receive accelerated approval from the FDA. Accelerated approval means that a product candidate may
be approved on the basis of adequate and well-controlled clinical trials establishing that the product candidate has an effect
on a surrogate endpoint that is reasonably likely to predict a clinical benefit, or on the basis of an effect on a clinical endpoint
other than survival or irreversible morbidity or mortality or other clinical benefit, taking into account the severity, rarity
and prevalence of the condition and the availability or lack of alternative treatments. As a condition of receipt of accelerated
approval, the FDA may require that a sponsor of a drug product candidate requesting such approval perform adequate and well-controlled
post-marketing clinical trials. In addition, the FDA currently requires, as a condition for accelerated approval, pre-approval
of promotional materials relating to such drug candidate. Given the availability of direct efficacy measures in the case of LP-10
for HC, it is unlikely that a surrogate measurement would accelerate approval of LP-10. However, we remain open to the possibility
of discovering relevant surrogate measurements during the clinical development of LP-10 that would accelerate the approval process. Lipella
is also exploring inflammatory saliva cytokines measurement as a potential surrogate measure to accelerate approval of LP-310 treatment
of OLP.

Fast Track designation, Breakthrough Therapy
designation and accelerated approval do not change the standards for approval but may expedite the development or approval process.

Post-Approval Requirements

Rigorous and extensive FDA regulation of
drug products continues after approval, particularly with respect to cGMP requirements. Manufacturers are required to comply with
applicable requirements in the cGMP regulations, including quality control, quality assurance and maintenance of records and documentation.
Other post-approval requirements applicable to drug products include reporting of cGMP deviations that may affect the identity,
potency, purity and overall safety of a distributed product; recordkeeping requirements; reporting of adverse effects; reporting
updated safety and efficacy information; and complying with electronic record and signature requirements. After an NDA is approved,
the product also may be subject to official lot release, which is a potential marketing requirement related to manufacturing quality.
If the product is subject to official release by the FDA, the manufacturer submits samples of each lot of product to the FDA, together
with a release protocol, showing a summary of the manufacturing history of the lot and the results of all tests performed on the
lot. The FDA also may perform certain confirmatory tests on lots of some products before releasing the lots for distribution. In
addition, the FDA conducts laboratory research related to the regulatory standards on the safety, purity, potency and effectiveness
of drug products. A sponsor also must comply with the FDA’s advertising and promotion requirements, such as the prohibition
on promoting products for uses or in patient populations that are not described in the product’s approved labeling (known
as “off-label use”).

Discovery of previously unknown problems
or the failure to comply with the applicable regulatory requirements may result in restrictions on the marketing of a product or
withdrawal of the product from the market, as well as possible civil or criminal sanctions. In addition, changes to the manufacturing
process or facility generally require prior FDA approval before being implemented and other types of changes to the approved product,
such as adding new indications and additional labeling claims, are also subject to further FDA review and approval.

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Although our primary market is in the United
States, we plan to commercialize LP-10 and our other product candidates in additional jurisdictions, including Europe, Canada,
Mexico and Australia. Each of these jurisdictions may currently have, and may in the future adopt, laws, directives and regulations,
that could affect our plan to test, obtain approval of and commercialize LP-10 and such other product candidates. We plan to develop
an international regulatory strategy regarding such additional jurisdictions in the United States.

Our Team and History

Dr. Jonathan Kaufman, our Chief
Executive Officer, and Dr. Michael Chancellor, our Chief Medical Officer, co-founded the Company in 2005. Prior to founding the
Company, Dr. Kaufman was employed in the manufacturing division of Merck & Co. Inc (NYSE: MRK), and, subsequently, helped co-found
Knopp Biosciences LLC, a privately held drug discovery and development company, and served as chief financial officer of Semprus
Biosciences Corp. (a biomedical company acquired by Teleflex Incorporated (NYSE: TFX)). Dr. Chancellor has conducted more than
75 clinical trials and has consulted with numerous biotech companies developing urology products. We believe that Drs. Kaufman
and Chancellor have a complimentary skillset combining basic and clinical research experience with entrepreneurial finance experience
in the biotech sector.

Our Competition

The biotechnology and pharmaceutical industries
are highly competitive. We are not aware of other existing clinical programs addressing new products for HC or OLP or GVHD. However,
there are several pharmaceutical companies that are developing intravesical technologies for other indications, including transitional
cell carcinoma (which is a superficial, non-muscle invasive form of bladder cancer). These companies and/or new entrants may potentially
compete with LP-10, LP-310 and any other products that we develop in the future that use novel delivery technologies. We intend
to rely on the market data exclusivity associated with obtaining FDA “orphan drug” designation covering LP-10, as
well as our issued U.S. patents, the 278 Patent and the 725 Patent, our issued Australian Patent, our issued Canadian Patent,
our issued European Patent, which may be extended for regulatory delay, and pending and future patent applications in order to
maintain our competitive advantages in this space.

Employees and Human Capital Resources

As of March 26, 2025, we had five full-time
employees and two part-time employees. None of our employees is subject to a collective bargaining agreement or represented by
a trade or labor union. We consider our relationship with our employees to be good.

Our human capital resources objectives
include, as applicable, identifying, recruiting, retaining, incentivizing and integrating our existing and additional employees.
The principal purposes of our equity incentive plans are to attract, retain and motivate selected employees, advisors, consultants
and directors through stock-based compensation awards. Also, we rely on cash-based performance bonus awards to incentivize such
individuals.

Corporate Information

Our principal executive offices are located at 7800 Susquehanna
Street, Suite 505, Pittsburgh, PA 15208 and include our Facility. Our telephone number is (412) 894-1853. We maintain an Internet
website at www.lipella.com. The information contained on our website is not incorporated by reference into this Report.

We make available free of charge under
the “Investors” section of our website all of our filings with the Securities and Exchange Commission (the “SEC”),
including our annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, proxy statements and amendments
to such documents, each of which is provided on our website as soon as reasonably practicable after we electronically file or furnish,
as applicable, the information with the SEC.

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Implications of Being an Emerging Growth
and Smaller Reporting Company

We qualify as an “emerging
growth company” as defined in the Jumpstart Our Business Startups Act of 2012 (the “JOBS Act”). An emerging growth
company may take advantage of relief from certain reporting requirements and other burdens that are otherwise applicable generally
to public companies. These provisions include:

● reduced obligations with respect to financial data;

● an exception from compliance with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act of 2002
(the “Sarbanes-Oxley Act”);

● reduced disclosure about our executive compensation arrangements in our periodic reports, proxy statements and registration
statements; and

● exemptions from the requirements of holding non-binding advisory votes on executive compensation or golden parachute arrangements.

We may take advantage of these
provisions for up to five years or such earlier time that we no longer qualify as an emerging growth company. We would cease to
be an emerging growth company upon the earliest of:

● the last day of the fiscal year on which we have $1.235 billion or more in annual revenue,

● the date on which we become a “large accelerated filer” (i.e., as of our fiscal year end, the total market value
of our common equity securities held by non-affiliates is $700 million or more as of June 30),

● the date on which we issue more than $1.0 billion of non-convertible debt over a three-year period, or

● the last day of our fiscal year following the fifth anniversary of the date of the completion of our initial public offering
(“IPO”).

We may choose to take advantage
of some but not all of these reduced reporting burdens.

In addition, under the JOBS Act,
emerging growth companies can take advantage of an extended transition period and delay adopting new or revised accounting standards
until such time as those standards apply to private companies. We have elected to use this extended transition period and, as a
result, we will adopt new or revised accounting standards on the relevant dates on which adoption of such standards is required
for private companies. If we were to subsequently elect instead to comply with public company effective dates, such election would
be irrevocable pursuant to the JOBS Act.

Also, we are a “smaller reporting
company” ​(and may continue to qualify as such even after we no longer qualify as an emerging growth company). For
as long as we qualify as a “smaller reporting company,” we may provide reduced disclosure in the public filings that
we make with the SEC than larger public companies, such as the inclusion of only two years of audited financial statements and
only two years of management’s discussion and analysis of financial condition and results of operations disclosure.

As a result of qualifying as an
emerging growth company and a smaller reporting company, to the extent we take advantage of the allowable reduced reporting burdens,
the information that we provide to our stockholders may be different than what you might receive from other public reporting companies
in which you hold equity interests.

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