BullFrog AI Holdings, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION The following discussion and analysis of the results of operations and financial condition of Bullfrog AI Holdings, Inc. (“Bullfrog” or the “Company”) as of and for the years ended December 31, 2024 and 2023 should be read in conjunction with our consolidated financial statements and the notes to those consolidated financial statements that are included elsewhere in this Annual Report on Form 10-K. References in this Management’s Discussion and Analysis of Financial Condition and Results of Operations to “us”, “we”, “our” and similar terms refer to the Company. This Management’s Discussion and Analysis of Financial Condition and Results of Operations contains statements that are forward-looking. These statements are based on current expectations and assumptions that are subject to risk, uncertainties, and other factors. These statements are often identified by the use of words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,” “could,” “estimate,” or “continue,” and similar expressions or variations. Actual results could differ materially because of the factors discussed in “Risk Factors” elsewhere in this Annual Report on Form 10-K, and other factors that we may not know. 24 OVERVIEW Bullfrog AI Holdings, Inc. was incorporated in the State of Nevada on February 6, 2020. Bullfrog AI Holdings, Inc. is the parent company of Bullfrog AI, Inc. and Bullfrog AI Management, LLC, which were incorporated in Delaware and Maryland, in 2017 and 2021, respectively. Operations are currently conducted through Bullfrog AI Holdings, Inc., which began operations on February 6, 2020. We are a company focused specifically on advanced Artificial Intelligence / Machine Learning (“AI/ML”) analysis of complex data in the advancement of medicine. Our AI/ML platform (trade name: bfLEAP™) was created from technology originally developed at The Johns Hopkins University Applied Physics Laboratory (“JHU-APL”). Subsequently, we have developed new tools and capabilities composed of an ensemble of machine learning and artificial intelligence models. In February 2018, the Company secured an original exclusive, worldwide, royalty-bearing license from JHU-APL for the technology underlying our bfLEAP™ platform. The license covers three (3) issued patents, one (1) new provisional patent application, non-patent rights to proprietary libraries of algorithms and other trade secrets including modifications and improvements. We entered into a license agreement in July 2022 that provides the Company with new intellectual property and also encompasses most of the intellectual property from the February 2018 license. Our objective is to utilize bfLEAP™, our AI/ML platform, with a precision medicine approach toward drug development with biopharmaceutical collaborators, as well as our own internal clinical development programs. We believe the bfLEAP™ platform is ideally suited for evaluating pre-clinical and clinical trial data generated in translational research and clinical trial settings in order to lead to faster, less expensive drug approvals. Our aim is to improve the odds of success in each stage of developing medicine, ranging from early pre-clinical through late-stage clinical development. Our ultimate objective is to utilize bfLEAP™ to enable the success of ongoing third-party clinical trials or rescue late-stage failed drugs (i.e., Phase II or Phase III clinical trial failures) for in-house development and divestiture. We will also consider collaborations for earlier stage drugs. In July 2022, the Company entered into an exclusive, worldwide, royalty-bearing license from JHU-APL that provides additional intellectual property rights including patents, copyrights, and knowhow for the technology underlying the Company’s bfLEAP™ analytical AI/ML platform. In consideration for the new license entered into in July 2022 with JHU-APL, the Company issued to JHU-APL 39,879 shares of common stock. Under the terms of the new license agreement, JHU-APL will be entitled to eight (8%) percent of net sales for the services provided by the Company to other parties and three (3%) percent for internally developed drug projects in which the JHU-APL license was utilized. The new license also contains tiered sub licensing fees that start at fifty (50%) percent and reduce to twenty-five (25%) percent based on revenues. The Company and JHU-APL entered into Amendment Number 1 of the July 2022 license agreement pursuant to which the Company gained access to certain improvements including additional patents and knowhow in exchange for a series of payments totaling $275,000. The first of these payments of $75,000 was paid in July 2023 and the remaining payments of $75,000, $75,000 and $50,000 are due in years 2025, 2026 and 2027, respectively. The amendment also reduced the 2023 minimum annual royalty payment to $60,000. All other financial terms remain the same. As a result of this amendment, the minimum annual payments were $30,000 for 2022 and $60,000 for 2023, and the minimum annual payments will be $300,000 for 2024 and beyond, all of which are creditable against royalties paid by us. As of December 31, 2024, we have accrued $300,000 of the 2024 minimum annual royalty payments, and the entire accrued balance was paid in January 2025. We intend to continue to evolve and improve bfLEAP™, either in-house or with development partners like JHU-APL. We plan to leverage our proprietary AI/ML platform developed over several years at one of the top innovation institutions in the world, which has already been successfully applied in multiple sectors. We have staffed our business using funds from our initial public offering and subsequent financings and have entered into partnerships and relationships and recently completed our first commercial service contract with a leading rare disease non-profit organization for AI/ML analysis of late-stage clinical data. We have also acquired the rights to a series of preclinical and early clinical drug assets from universities, as well as a strategic collaboration with a world-renowned research institution to create a HSV1 viral therapeutic platform to engineer immunotherapies for a variety of diseases. We have signed exclusive worldwide License Agreements with JHU for a cancer drug that targets glioblastoma (brain cancer), pancreatic cancer, and others. We have also signed an exclusive worldwide license from George Washington University for another cancer drug that targets hepatocellular carcinoma (liver cancer) and other liver diseases. In addition, we have signed three-year strategic data and commercialization agreements with the Lieber Institute for Brain Development (“LIBD”) whom we believe has a repository of the largest collection of postmortem brains in the world, including molecular, clinical, and other data. The objective of this collaboration with LIBD is for the Company to analyze these rich data sets using its proprietary AI/ML tools and models and then go to market with the discoveries with the ultimate goal of securing revenue generating strategic partnership deals with biopharmaceutical companies. We intend to secure the rights to other proprietary data sets and repeat this strategy. Additionally, we intend to gain access to later-stage clinical assets through partnerships or the acquisition of rights to failed therapeutic candidates for drug rescue. In certain circumstances, we intend to conduct late-stage clinical trials in an effort to rescue therapeutic assets that previously failed. In these cases, there will be a requirement for drug supply and regulatory services to conduct clinical trials. The success of our clinical development programs will require finding partners to support the clinical development, adequate availability of raw materials and/or drug product for our R&D and clinical trials, and, in some cases, may also require establishment of third-party arrangements to obtain finished drug product that is manufactured appropriately under good manufacturing practices, and packaged for clinical use or sale. Since we are a company focused on using our AI/ML technology to advance medicines, any clinical development programs will also require, in all cases, partners and the establishment of third-party relationships for execution and completion of clinical trials. 25 Since completing our initial public offering in February 2023 (the “IPO”), aided by the receipt of the IPO proceeds in addition to the proceeds from our February 2024 and October 2024 offerings, we have implemented several initiatives: investor relations and marketing to promote and raise awareness of the Company in the financial and business sectors, research and development, collaboration with J Craig Venter Institute (“JCVI”) and initiated preclinical studies with our in-licensed drug programs. The Company is actively engaged in developing and pursuing new intellectual property as it strives to continuously evolve its AI/ML platform. Internally, the Company has added incremental staff to accelerate execution and the development of processes and custom scripts for use in performing new drug target discovery and analytical services for customers, while also launching initiatives targeting large public health data sources and seeking access to proprietary health data sources, such as our agreement with the LIBD. We also transitioned our accounting and financial reporting systems and processes to enhance our internal control environment as a public company. Capital from the IPO was also used to retire two notes that were sold to fund the Company through the IPO as well as other debts accrued over time to our staff, employees and consultants, and obligations related to the acquisition of our licensed drug programs. The Company has had negative cash flows from operations and operated at a net loss since inception. In the first quarter of 2023, we completed our IPO. In February 2024, we received net proceeds of approximately $5.7 million from an underwritten secondary public offering of common stock and warrants. Additionally, in October 2024, we received net proceeds of approximately $2.7 million from a registered direct offering of common stock and pre-funded warrants, and concurrent private placement of common stock warrants. As of December 31, 2024, the Company has a cash balance of approximately $5.4 million. As of December 31, 2024, the Company’s cash and cash equivalents position is not sufficient to fund the Company’s planned operations for at least a year beyond the filing date of the consolidated financial statements. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company obtaining the necessary financing and/or revenues to meet its obligations arising from normal business operations when they become due. Our Strategy The Company has a unique strategy designed to reduce risk and increase the frequency of cash flow. The first part of the strategy is to generate revenues through strategic relationships with biopharma companies. These relationships will be structured as a combination of fees and intellectual property based on the specific scope of the engagement. The objective of these engagements will be to uncover valuable insights to reduce the risk and increase the speed of the drug development process, which can be achieved through manual or automated integration into the client’s workflow or analysis of discrete data sets. In the future, the second part of our strategy involves acquiring the rights to drugs at various stages of development and using our proprietary AI/ML technology to advance the development of such drugs, with the objective of creating near term value and then exiting and monetizing as quickly as possible, preferably within approximately 30 months. 26 Results of Operations For the years ended December 31, 2024 and 2023 Revenue and Costs of Goods Sold We recognized $65,000 in revenue and $5,200 in costs of goods sold during the year ended December 31, 2023 related to a commercial service contract. We did not recognize any revenue in the year ended December 31, 2024. Operating Expenses Year ended December 31, Net Change 2024 2023 $ % Operating expenses: Research and development $ 2,223,265 $ 1,432,614 $ 790,651 55 % General and administrative 5,013,118 3,994,710 1,018,408 25 % Total operating expenses $ 7,236,383 $ 5,427,324 $ 1,809,059 33 % Research and Development Our research and development expenses for the year ended December 31, 2024 increased by approximately $791,000 or 55% compared the year ended December 31, 2023, primarily due to increased personnel costs related to the hiring of additional R&D staff members. In addition, in the first quarter of 2024, we engaged disease experts as area consultants, we expanded our target discovery efforts, and we also initiated a preclinical obesity study related to an siRNA program. Going forward, we expect our R&D expenses to increase as we begin the validation process on potential targets identified in our target discovery program. General and Administrative Our general and administrative expenses for the year ended December 31, 2024 increased by approximately $1,018,000 or 25% compared to the year ended December 31, 2023, primarily due to increased personnel costs related to the hiring of additional staff members, as well as associated increases in equity compensation costs and recruiting fees as we work to expand our headcount and capabilities. Other Income (Expense), Net Interest expense decreased by approximately $61,000 for the year ended December 31, 2024, compared to the same period ended December 31, 2023 due to our outstanding notes converting or being paid off in 2023. In 2023, we also recognized a loss on the conversion of notes of approximately $93,000 in the year ended December 31, 2023. Interest income increased by approximately $77,000 primarily due to an increase in our average cash balances. Liquidity and Capital Resources Through December 31, 2024, the Company has an accumulated deficit of approximately $16.8 million and has funded its operations through the sale of common stock, warrants and debt. We anticipate that our expenses will increase in the future to support our service offerings, clinical and pre-clinical research and development activities associated with strategic partnering and collaborations, as well as acquired product candidates. These increases could include increased costs related to the hiring of additional personnel and fees to outside consultants, lawyers, and accountants, among other expenses. In February 2023, the Company completed its IPO of 1,297,318 units at a price of $6.50 per unit for a total of approximately $8.4 million of gross proceeds. Each unit consists of one share of the Company’s common stock, one tradeable warrant to purchase one share of common stock at an exercise price of $7.80 per share, and one non-tradeable warrant to purchase one share of the Company’s common stock at an exercise price of $8.125. In connection with, and immediately prior to, the IPO, the Company also completed a 1-for-7 reverse stock split of our common stock. In connection with the IPO, a simple agreement for future equity (“SAFE”) and convertible loan agreement held by a related party converted into 55,787 shares of common stock. Additionally, all outstanding convertible bridge notes and accrued interest were converted into 276,289 shares of common stock and 276,289 warrants to purchase common stock and were issued to the holders of such notes at conversion. 27 In April 2023, the holders of outstanding warrants exercised 436,533 warrants for common stock at various exercise prices and the Company received net proceeds of approximately $1.5 million. In February 2024, we completed an underwritten offering of common stock and warrants generating approximately $5.7 million of net proceeds. In October 2024, we completed a registered direct offering of common stock and pre-funded warrants, and concurrent private placement of common stock warrants generating approximately $2.7 million of net proceeds. During 2024, we received approximately $0.1 million from the exercise of warrants. As of December 31, 2024, the Company’s cash and cash equivalents position is not sufficient to fund the Company’s planned operations for at least a year beyond the filing date of the consolidated financial statements. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The ability to continue as a going concern is dependent upon the Company obtaining the necessary financing and/or revenues to meet its obligations arising from normal business operations when they become due. Accordingly, we will seek additional capital to continue to execute our strategy as discussed above. Consolidated Cash Flow Data Year ended December 31, Net Change 2024 2023 Net cash (used in) provided by Operating activities $ (5,610,249 ) $ (6,001,299 ) $ 391,050 Investing activities - - - Financing activities 8,421,502 8,568,359 (146,857 ) Net increase in cash and cash equivalents $ 2,811,253 $ 2,567,060 $ 244,193 Cash Flows Used in Operating Activities Net cash used in operating activities for the year ended December 31, 2024 decreased by approximately $391,000 compared to the same period ended December 31, 2023 primarily due to paying down accrued expenses for technology access, consultants, and compensation in 2023, partially offset by increased operating costs in 2024 primarily relating to increased personnel costs. Cash Flows Used in Investing Activities There was no cash used in investing activities during any of the periods presented. Cash Flows Provided by Financing Activities Net cash provided by financing activities for the year ended December 31, 2024 decreased by approximately $147,000, compared to the same period ended December 31, 2023 primarily due to fewer proceeds from equity issuances in 2024 partially offset by payments of debt in 2023. Critical Accounting Policies In Note 2 of our Audited Financial Statements for the year ended December 31, 2024 found elsewhere in this Annual Report on Form 10-K, we included a discussion of the most critical accounting policies used in the preparation of our financial statements. There has been no material change in the policies and estimates used in the preparation of our financial statements since the completion of the 2024 audit. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements, as such term is defined in Item 303(a)(4) of Regulation S-K. 28 Financial Operations Overview Revenue We completed our first commercial service contract and recognized revenue in the amount of $65,000 in the third quarter of 2023. We did not recognize any revenue in 2024. In February 2025, we announced our entry into a collaboration agreement with Eleison Pharmaceuticals Inc. (“Eleison”), a Phase III oncology company focused on novel chemotherapeutic treatments for rare cancers. We are in discussions with other potential partners, although there can be no assurance of entering into other business relationships in 2025 or beyond. Operating Expenses We classify our operating expenses into two categories: research and development and general and administrative. Prior to 2023, most of our activities were related to: technology evaluation, acquisition and validation, capital acquisition and business development activities in general, which we believe have readied the Company for contract services while exploring strategic partnering and asset acquisition. These activities and related expenditures have been recorded and reported as general and administrative in our financial statements. In 2022, we licensed two drug development programs from universities and entered into a new license with JHU-APL for new intellectual property and other enhancements used with our bfLEAP™ platform. We incurred license and annual minimum royalty fees associated with these relationships in 2023 and 2024, and we expect our research and development expenses to increase in 2025 as we initiate activities directed towards the development of service offering products, collaborations and preclinical studies aimed at generating the data to enable the filing of an Investigational New Drug (IND) application. Research and Development Costs and Expenses Research and development costs and expenses in 2023 and 2024 include development activities on our licensed drug candidates and our discovery collaborations with JCVI. In addition to fees paid to external service providers, we are also allocating internal costs for personnel working on these efforts in addition to personnel costs related to our internal efforts to develop our product and service offerings using bfLEAP™. We anticipate our research and development costs could become significant as we execute on our business plan and begin conducting preclinical research and development activities directed at securing development partners and filing an IND for our licensed drug development programs described in this filing, as well as under strategic partnerships and for other drug development programs we may acquire. Research and development expenses are recorded in operating expenses in the period in which they are incurred. Estimates will be used in determining the expense liability of certain costs where services have been performed but not yet invoiced. We will monitor levels of performance under each significant contract for external services through communications with the service providers to reflect the actual amount expended. General and Administrative Expenses General and administrative costs and expenses in 2023 and 2024 include personnel costs and costs associated with being a public company such as D&O insurance, audit and tax provider fees, SEC legal counsel, and exchange listing costs. Additionally, our general and administrative costs include expenses for our business development, investor relations and marketing efforts. We anticipate our general and administrative expenses increasing in the future to support our service offerings and clinical and pre-clinical research and development activities associated with strategic partnering and collaborations. Emerging Growth Company and Smaller Reporting Company Status The Company is an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012 (“JOBS Act”) and may take advantage of reduced reporting requirements that are otherwise applicable to public companies. Section 107 of the JOBS Act exempts emerging growth companies from being required to comply with new or revised financial accounting standards until private companies are required to comply with those standards. We have elected to use the extended transition period to comply with new or revised accounting standards. This may make it difficult to compare our financial results with the financial results of another public company that is either not an emerging growth company or is an emerging growth company that has chosen not to take advantage of the extended transition period exemptions because of the potential differences in accounting standards used. 29 We are also considered a “smaller reporting company”, meaning that the market value of our stock held by non-affiliates plus the aggregate amount of gross proceeds to us as a result of the IPO is less than $700 million and our annual revenue was less than $100 million during the most recently completed fiscal year. We may continue to be a smaller reporting company if either (i) the market value of our stock held by non-affiliates is less than $250 million or (ii) our annual revenue was less than $100 million during the most recently completed fiscal year and the market value of our stock held by non-affiliates is less than $700 million. If we are a smaller reporting company at the time we cease to be an emerging growth company, we may continue to rely on exemptions from certain disclosure requirements that are available to smaller reporting companies. Specifically, as a smaller reporting company we may choose to present only the two most recent fiscal years of audited financial statements in our Annual Report on Form 10-K and, similar to emerging growth companies, smaller reporting companies have reduced disclosure obligations regarding executive compensation. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK As a smaller reporting company, the Company is not required to provide the information required by this Item.