Item 7. Management’s Discussion and Analysis
ITEM
7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITIONS AND RESULTS OF OPERATIONS
You
should read the following discussion and analysis of our financial condition and plan of operations together with and our accompanying
consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical
information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our
actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include,
but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere
in this Annual Report on Form 10-K. All amounts in this report are in U.S. dollars, unless otherwise noted.
Overview
We
are a pre-clinical biotechnology company developing novel therapeutic candidates targeting ferroptosis, an emerging new anti-cancer mechanism
resulting in IMCD for treatment resistant cancers. Our most advanced product candidate is HSB-1216, an IMCD modulator, targeting a variety
of solid tumors. In a clinical pilot study conducted in Germany by the University of Heidelberg, the active drug in HSB-1216 was found
to reduce tumor burden in treatment resistant cancers, including TNBC and epithelial carcinomas. Our goal is to submit an IND to the
FDA in 2023 and start a clinical study with HSB-1216 in 2023; however, no assurance can be provided that our IND will be accepted by
the FDA in 2023, if at all. If our IND is accepted by the FDA, our HSB-1216 clinical study will focus on expanding upon the clinical
pilot study conducted in Germany. If we are able to start our clinical study with HSB-1216 in 2023, we anticipate that initial clinical
data from such trial will be released either the end of 2023 or early 2024. We use Quatramer™, our proprietary tumor targeting
platform, to enhance the uptake of HSB-1216 in the TME with an extended duration of action and minimal off-target toxicity. In addition,
TridentAI, our artificial intelligence precision medicine platform, is used to identify biomarkers in our clinical programs to target
specific patient segments.
The
discovery of regulated cell death processes, such as apoptosis and autophagy, has enabled novel target discovery for drug development.
Ferroptosis, a form of IMCD, is an emerging regulated cell death process which decreases intracellular iron or the LIP. Cancer cells
increase the LIP leading to unregulated cell growth and metabolism. Decreasing the LIP induces iron-led ROS production and lipid peroxidation,
two key hallmarks of ferroptosis/IMCD. HSB-1216 binds iron in the cytoplasm of cancer cells and decreases the LIP, thereby inducing ferroptosis/IMCD,
leading to regulated cell death.
Quatramer
is a tumor targeting platform which allows us to leverage and exploit key tumor targets and novel emerging pathways such as IMCD to facilitate
the delivery of potent drugs directly to the TME, while sparing healthy tissue. By efficiently extending the circulation half-life, as
well as targeting delivery to the tumor site, Quatramer traps drugs into the TME. This emerging orthogonal anti-cancer approach utilizes
a fundamental recognized mechanism of iron mediated tumor growth and metabolism. We are building a portfolio of long-acting, potent anti-cancer
drug candidates using the Quatramer platform.
TridentAI
uses an artificial intelligence precision medicine platform to identify novel biomarkers. TridentAI integrates diverse public datasets,
including TCGA to identify novel gene signatures to stratify patients prospectively in clinical trials. Quatramer tumor targeting also
allows us to segment patients by exploiting TridentAI’s findings by (i) synthetic lethal sensitivities with novel combinations,
(ii) pursue undruggable targets such as c-myc and (iii) target tumors with a high degree of cell plasticity indicative of recurrent/drug
resistant phenotype.
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The
critical components of our business strategy to achieve our goals include:
●
Developing
our drug candidate, HSB-1216, in solid tumors.
Data
from a clinical pilot use study in Germany led us to progress HSB-1216 into IND-enabling studies with the ultimate goal of submitting
an IND to the FDA in 2023.
●
Developing
our combination drug candidate, HSB-888, for pediatric sarcomas.
HSB-888
is in IND-enabling trials with the ultimate goal of submitting an IND to the FDA in 2024.
●
Leveraging
our Trident Artificial Intelligence Platform.
TAI
is a computational intelligence platform that identifies synthetic lethal sensitivities associated with degree of cell plasticity.
●
Developing
and commercializing Quatramer in collaboration with leading pharmaceutical companies.
In
addition to our internal development programs, we actively seek opportunities to collaborate with recognized biopharmaceutical companies
to develop Quatramer incorporating therapeutic payloads from their proprietary product portfolios.
●
Leveraging
our novel platform to develop a pipeline of high value Quatramer leads.
The
tunability of our technology allows us to efficiently expand our pipeline of Quatramer, both on our own and in collaboration with others,
through various combinations of targeted DNA encoded for anti-tumor cytokines and therapeutic payloads, which enables us to move into
other areas of oncology, including immuno-oncology whereby we could increase the effectiveness of ICIs.
●
Commercializing
proprietary Quatramer based products, including HSB-1216, directly in the United States and with collaborators outside the United
States.
We
own HSB-1216 and our other proprietary pipeline and expect to maintain similar rights with respect to other proprietary Quatramer we
develop.
●
Continuing
to extend and protect our product technology and Quatramer through our intellectual property portfolio.
We
seek to protect our novel platform through U.S. and international patents as well as know-how and trade secrets relating to the design
and manufacturing of our technology.
Recent
Developments
On
January 14, 2022, we closed the initial public offering of our common stock pursuant to which we issued and sold an aggregate of 3,750,000
shares of our common stock for a purchase price of $4.00 per share. We received net proceeds of approximately $13.0 million, after deducting
underwriting discounts and commissions and offering expenses borne by us.
Trends
and Uncertainties—COVID-19
The
global COVID-19 pandemic continues to evolve. The extent of the impact of the COVID-19 on our business, operations, pre-clinical and
clinical development timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread
of the outbreak, COVID-19 variants, and the future impact of COVID-19 on our clinical trial enrollment, clinical trial sites, CROs, third-party
manufacturers, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific
and management personnel. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to
change. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and
with many of our employees and consultants working remotely. We will continue to actively monitor the evolving situation related to COVID-19
and may take further actions that alter our operations, including those that may be required by federal, state or local authorities,
or that we determine are in the best interests of our employees and other third parties with whom we do business. At this point, the
extent to which the COVID-19 pandemic may affect our business, operations and clinical development timelines and plans, including the
resulting impact on our expenditures and capital needs, remains uncertain.
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Components
of Results of Operations
Revenue
We
did not recognize revenues for years ended December 31, 2021 and 2020.
Research
and Development Expenses
Research
and development expenses include personnel costs associated with research and development activities, including third-party contractors
to perform research, conduct clinical trials, stock based compensation and manufacture drug supplies and materials. Research and development
expenses are charged to operations as incurred.
We
accrue costs incurred by external service providers, including contract research organizations and clinical investigators, based on estimates
of service performed and costs incurred. These estimates include the level of services performed by third parties, patient enrollment
in clinical trials, administrative costs incurred by third parties, and other indicators of the services completed. Based on the timing
of amounts invoiced by service providers, we may also record payments made to those providers as prepaid expenses that will be recognized
as expense in future periods as the related services are rendered.
We
have incurred research and development expenses related to the development of HSB-1216. We expect that our research and development expenses
will increase as we plan for and commence our clinical trials of HSB-1216 and HSB-888.
We
cannot determine with certainty the duration and costs of future clinical trials of our product candidates, HSB-1216 and HSB-888, or
any other product candidates we may develop or if, when or to what extent we will generate revenue from the commercialization and sale
of any of our product candidates for which we obtain marketing approval. We may never succeed in obtaining marketing approval for any
of our product candidates. The duration, costs and timing of clinical trials and development of our current and future product candidates
will depend on a variety of factors, including:
●
the
scope, rate of progress, expense and results of clinical trials of our current product candidates, as well as of any future clinical
trials of our future product candidates and other research and development activities that we may conduct;
●
uncertainties
in clinical trial design and patient enrollment rates;
●
the
actual probability of success for our product candidates, including their safety and efficacy, early clinical data, competition,
manufacturing capability and commercial viability;
●
significant
and changing government regulations and regulatory guidance; and
●
the
timing and receipt of any marketing approvals.
A
change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change
in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority
were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development
of a product candidate, or if we experience significant delays in our clinical trials due to slower than expected patient enrollment
or other reasons, we would be required to expend significant additional financial resources and time on the completion of clinical development.
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General
and Administrative Expenses
General
and administrative expenses consist primarily of compensation and consulting related expenses, including
stock based compensation . General and administrative expenses also include professional fees and other corporate expenses, including
legal fees relating to corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel
expenses and other operating costs that are not specifically attributable to research activities.
We
expect that our general and administrative expenses will increase in the future as we increase our personnel headcount to support our
continued research activities and development of our product candidates. We also incur expenses associated with being a public company,
including expenses related to compliance with the rules and regulations of the SEC and Nasdaq, director and officer insurance expenses,
corporate governance expenses, investor relations activities and other administrative and professional services.
Acquired
In-process Research and Development Expense
Research
and development costs incurred in obtaining technology licenses and asset purchases are charged to research and development expense if
the technology licensed has not reached technological feasibility which includes manufacturing, clinical, intellectual property and/or
regulatory success which has no alternative future use. The licenses purchased by
us require substantial completion of research and development and regulatory and marketing approval efforts in order to reach technological
feasibility. As such, for the years ended December 31, 2021 and 2020, the purchase price of licenses and assets acquired was classified
as acquired in-process research and development expenses in the consolidated statements of operations.
Change
in Redemption Value
We
account for derivative instruments in accordance with Accounting Standards Codification (“ASC”) 815, Derivative and Hedging,
which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded
in other financial instruments or contracts, and requires recognition of all derivatives on the balance sheet at fair value. Our derivative
financial instrument consists of an embedded feature contained in our convertible debt that we call the “redemption liability.”
The
initial fair value of the redemption feature relating to the convertible debt instruments is treated as a debt discount and amortized
over the term of the related debt using the straight-line method, which approximates the interest method. If a loan is paid in full,
any unamortized financing costs will be removed from the related accounts and charged to operations. Amortization of debt discount is
recorded as a component of interest expense. In accordance with Accounting Standards Update (“ASU”) 2015-03, Interest
— Imputation of Interest , the unamortized debt discount is presented in the accompanying balance sheet as a direct deduction
from the carrying amount of the related debt.
The
redemption liability includes a provision that provides the noteholder with certain conversion and put rights at various conversion or
redemption values as well as certain call options for us. The fair value of the redemption liability is calculated under Level 3 of the
fair value hierarchy, determined based upon a Probability-Weighted Expected Returns Method (“PWERM”). This PWERM was determined
to be the most appropriate method of estimating the value of possible redemption or conversion outcomes over time, since we have not
entered into a priced equity round through December 31, 2021. The significant assumptions utilized in these calculations are the possible
exit scenarios (either a conversion of the principal and accrued interest of the Notes in the event of a Next Equity Financing, a repayment
of the Notes and accrued interest in the event of a Corporate Transaction (as defined in the Notes) or a repayment of the Notes and accrued
interest at maturity), the pre-money valuation of our common stock, the probabilities of such exit events occurring and discounts/premiums
available to the noteholders at such measurement dates. At December 31, 2020, we assumed a 40% probability of a Next Equity
Financing event occurring at IPO pricing and a 5% probability of a Corporate Transaction. The calculation of the redemption
liability at December 31, 2021 is based upon the actual incremental value derived by the noteholders at the IPO date.
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Deferred
Offering Costs
Deferred
offering consisted of legal, accounting, printing, and filing fees that the Company capitalized which will be offset against the proceeds
from the our initial public offering.
Results
of Operations
Comparison
of the Years Ended December 31, 2021 and 2020
The
following table sets forth key components of our results of operations for the years ended December 31, 2021 and 2020.
Year
Ended December 31,
2021
2020
Change
Consolidated
Statements of Operations Data:
Operating
expenses:
Research
and development
$ 1,842,803
$ 847,272
$ 995,531
Acquired
in-process research and development
-
289,200
(289,200 )
General
and administrative
1,365,214
671,879
693,335
Total
operating expenses
3,208,017
1,808,351
1,399,666
Other
(expenses) income:
Interest
expense
(831,277 )
(246,534 )
(584,743 )
Change
in redemption value
1,832,651
(362,486 )
2,195,137
Total
other (expenses) income, net
1,001,374
(609,020 )
1,610,394
Net
(loss) income
$ (2,206,643 )
$ (2,417,371 )
$ 210,728
Research
and Development Expenses
Research
and development expenses increased by $995,531, or 117.5%, to $1,842,803 for the year ended December 31, 2021 from $847,272 for the year
ended December 31, 2020. The increase was primarily the result of an increase in expenses for pre-clinical activities of $512,279; stock
based compensation expense of $406,024 related to research and development team members; and consulting expenses of $78,357. These
increases were offset by decreases of $1,129 in various other expenses.
Acquired
In-Process Research and Development Expenses
Acquired
in-process research and development expense was $0 for the year ended December 31, 2021 and $289,200 for the year ended December 31,
2020, a decrease of $289,200. The in-process research and development expenses represent expenses incurred with the acquisition
of Farrington that closed during the year ended December 31, 2020.
General
and Administrative Expenses
General
and administrative expenses increased by $693,335, or 103.2%, to $1,365,214 for the year ended December 31, 2021 from $671,879
for the year ended December 31, 2020. The increase in general and administrative expenses was primarily due to an increase of $598,665
in stock based compensation expense; $164,862 in accounting expenses; $8,665 in insurance expenses; and $3,080 in legal
expenses. These increases were offset by a decreases of $34,786 in consulting expenses and $47,151 in various other expenses.
Interest
Expense
Interest
expense increased by $584,743, or 237.2%, to $831,277 for the year ended December 31, 2021 from $246,534 for the year ended December
31, 2020. The increase in interest expense was primarily related to the issuance of convertible promissory notes. See Note 4 of
our consolidated financial statements.
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Change
in Redemption Value
The
change in redemption value decreased by $2,195,137, or 605.6%, to $1,832,651 for the year ended December 31, 2021 from $362,486 for the
year ended December 31, 2020 as the redemption liability was re-evaluated in light of the actual fair value increment provided to the
debt holders upon completion of our initial public offering in January 2022.
Liquidity
and Capital Resources
The
accompanying consolidated financial statements have been prepared on the basis that we are a going concern, which contemplates, among
other things, the realization of assets and satisfaction of liabilities in the normal course of business. For the year ended December
31, 2021, we incurred operating losses in the amount of approximately $3.2 million and have an accumulated deficit of approximately
$6.9 million at December 31, 2021. We have financed our working capital requirements through December 31, 2021 primarily through
the issuance of convertible promissory notes payable issued to related parties.
On
January 14, 2022, we closed our initial public offering (“IPO”) of 3,750,000 shares of our common stock at a public
offering price of $4.00 per share. The gross proceeds from the IPO were $15.0 million, prior to deducting underwriting discounts, commissions,
and other offering expenses. The net proceeds from the IPO were approximately $13.0 million. We granted the underwriters a 45-day
option to purchase up to an additional 562,500 shares of common stock at the public offering price less discounts and commissions, to
cover over-allotments; however, this option expired unexercised. Additionally, and as a result of the completion of the IPO, all
of our related party convertible debt and accrued interest was converted into an aggregate of 1,225,384 shares of our
common stock pursuant to the terms of the convertible note.
We
believe our cash on hand after the IPO is sufficient to meet our operating obligations and capital requirements for at least twelve
months from the issuance of the financial statements included in this Annual Report on Form 10-K. Thereafter, we may need
to raise further capital through the sale of additional equity or debt securities or other debt instruments to support our future
operations.
Cash
Flow Activities for the Years Ended December 31, 2021and 2020
The
following table sets forth a summary of our cash flows for the periods presented.
Years
Ended December 31,
2021
2020
Net
cash used in operating activities
$ (1,086,244 )
$ (1,078,432 )
Net
cash provided by financing activities
898,748
1,232,003
Net
(decrease) increase in cash
$ (187,496 )
$ 153,571
Cash
Flows from Operating Activities
Cash
used in operating activities for the year ended December 31, 2021 was $1,086,244 which consisted of net loss of $2,206,643, partially
offset by $73,184 in non-cash charges and other adjustments to reconcile net loss to net cash used in operating activities and $1,047,215
in net increase in operating accounts. The non-cash charges consist of stock compensation expenses of $1,239,269, amortization of debt
discount of $666,566 offset by decrease in fair value of redemption liability of $1,832,651. The net increase in operating activities
was primarily due to an increase of $850,293 in accounts payable and accrued expenses, an increase in accrued interest of $164,646 and
a decrease of $32,276 in prepaid expenses and other current assets.
Cash
Flows from Financing Activities
Cash
provided by financing activities for the year ended December 31, 2021 was $898,748. The net increase in financing activities was from
net cash proceeds of $1,078,015 from the issuance of convertible promissory notes offset by deferred offering costs of $179,267.
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Convertible
Promissory Notes
Commencing
in May 2017, we issued convertible promissory notes (the “Notes”) to certain investors to help finance our operations. The
principal amount of such notes ranged from $1,000 to $300,000. Interest on the unpaid principal balance accrued at a rate
of 5% per annum, computed on the basis of the actual number of days elapsed and a year of 365 days. Unless earlier converted into shares
of our common stock or preferred stock (“Equity Securities”), the principal and accrued interest was due and payable
by us on demand by the holders at any time after the earlier of (i) the maturity date of each Note and (ii) the closing of the Next Equity
Financing. “Next Equity Financing” means the next sale or series of related sales of our Equity Securities pursuant to which
we receive gross proceeds of not less than $5,000,000 for Notes issued in 2017 and through November 2020 and $7,500,000 for Notes issued
after November 2020 (including the aggregate amount of debt securities converted into Equity Securities upon conversion or cancellation
of Notes).
In
general, the maturity date was two years from the date of issuance, except for the Notes issued in December 2020 and thereafter, in the
aggregate principal amount of approximately $2,135,000, which had a maturity date of three years from the date of issuance. For
Notes issued in 2017 through September 2018, the default interest rate of 20% was added to the Notes for the period after the
maturity date (“default period”).
As
discussed below, the Notes automatically converted
into the type of Equity Securities issued in the Next Equity Financing upon closing of the IPO. The number of shares of such
Equity Securities to be issued was equal to the quotient obtained by dividing the outstanding principal and unpaid accrued interest
due on the Note on the date of conversion by the lesser of (i) 80% of the price paid per share of Equity Securities by the investors
in the Next Equity Financing, or (ii) an equity valuation of $25 million ($50 million for notes issued after December 2020). In connection
with the closing of our IPO, in January 2022, notes in the aggregate amount of approximately $3,920,640, including interest
accrued thereon, were converted into an aggregate of 1,225,384 shares of our common stock.
On
September 27, 2020, we issued a related party note holder notes (“Exchange Notes”) in exchange for seven Notes which were
in default (“Original Notes”) at such time by more than 90 days. The Original Notes had a principal of approximately $265,000
and accrued interest of $37,000 at December 31, 2019. As of September 27, 2020, the aggregate outstanding principal of the Original Notes
was approximately $265,000 and accrued interest (which included the default interest rate of 20% as described above) was approximately
$71,000. The Exchange Notes took the then principal and accrued interest of the Original Notes and added an original issue discount of
37.5% to determine the new principal, which amounted to an aggregate of $537,968. The Company accounted for this transaction as a debt
extinguishment, and the incremental amount of the principal of the notes payable of $201,737 was recorded to accumulated deficit (analogous
to a “deemed dividend”), since the notes were with related parties, and included in the calculation of loss per share.
On
September 27, 2020, we issued certain related party note holders Exchange Notes in exchange for five Notes payable which were in default.
As of such date, the aggregate outstanding principal and interest was approximately $26,000, which included the 20% default interest
rate. The new Exchange Notes in the aggregate principal amount of approximately $26,000 had substantially the same terms as the
original Notes. There were no accounting entries required upon the re-issuance of such Exchange Notes.
Effective
October 1, 2020, all Notes which matured, and were not repaid or converted, were rolled over on substantially the same terms as the Original
Notes (“Rolled Over”). Approximately $805,000 of such Original Notes were Rolled Over through December 31, 2021, of which
approximately $166,000 occurred prior to December 31, 2020 and $639,000 occurred between January 1, 2021 and December 31, 2021. Since
the terms of the new notes are not substantially different from the Original Notes, this was not accounted for as a debt modification
or debt extinguishment.
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Critical
Accounting Policies and Use of Estimates
Use
of Estimates
The
preparation of financial statements in conformity with generally accepted accounting principles in the United States of America (“U.S.
GAAP”) requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and
related disclosures in the financial statements and accompanying notes. Management bases its estimates on historical experience and on
assumptions believed to be reasonable under the circumstances. The estimation process often may yield a range of potentially reasonable
estimates of the ultimate future outcomes, and management must select an amount that falls within that range of reasonable estimates.
Estimates are used in the following areas, among others: research and development expense recognition, valuation of common shares and
stock options, allowances of deferred tax assets, valuation of debt related instruments, accrued expenses and liabilities, and cash flow
assumptions regarding going concern considerations.
Critical
Accounting Policies
Research
and development
Research
and development costs are expensed as incurred. Research and development expenses include personnel costs associated with research and
development activities, including third party contractors to perform research, conduct clinical trials and manufacture drug supplies
and materials. We accrue for costs incurred by external service providers, including contract research organizations and clinical investigators,
based on our estimates of service performed and costs incurred. These estimates include the level of services performed by third
parties, patient enrollment in clinical trials, administrative costs incurred by third parties, and other indicators of the services
completed.
Acquired
in-process research and development
We
have acquired, and may in the future acquire, rights to develop and commercialize new product candidates and/or other in-process research
and development assets. In accordance with Financial Accounting Standards Board’s ASC 730-10-25-1, Research and Development, the
up-front acquisition or licensing payments are expensed as acquired in-process research and development provided that the drug has not
achieved regulatory approval for marketing, and, absent obtaining such approval, have no alternative future use.
Stock
based compensation
Stock
based compensation represents the cost related to stock based awards granted to our employees, directors and consultants and our
affiliates. We measure stock based compensation costs at the grant date, based on the estimated fair value of the award and recognize
the cost over the requisite service period.
We
recognize compensation costs resulting from the issuance of stock based awards to employees, non-employees and directors as an expense
in our consolidated statements of operations over the requisite service period based on a measurement of fair value for each stock
based award. The fair value of each option grant is estimated as of the date of grant using the Black-Scholes option-pricing model. The
fair value is amortized as compensation cost on a straight-line basis over the requisite service period of the awards, which is generally
the vesting period.
The
fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. As of December
31, 2021, we were a private company and lacked company-specific historical and implied volatility information. Therefore,
we estimated our expected stock volatility based on the historical data regarding the volatility of a publicly traded set of peer
companies. The expected term of stock options granted to non-employees was between five and seven years. The risk-free interest
rate was determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods
approximately equal to the expected term of the award. The fair value of common stock was determined with the assistance of an
independent third-party valuation expert when issuing stock options and computing its estimated stock based compensation expense and
value of shares issued in acquiring product candidates. The assumptions underlying these valuations represented management’s best
estimates, which involved inherent uncertainties and the application of significant levels of management judgment. In order to determine
the fair value, we considered, among other things, contemporaneous valuations of our common stock, our business, financial condition
and results of operations, including related industry trends affecting our operations; the likelihood of achieving various liquidity
events; the lack of marketability of our common stock; the market performance of comparable publicly traded companies; and U.S. and global
economic and capital market conditions.
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Fair
value measurements
We
apply ASC 820, Fair Value Measurement (“ASC 820”), which establishes a framework for measuring fair value and clarifies the
definition of fair value within that framework. ASC 820 defines fair value as an exit price, which is the price that would be received
for an asset or paid to transfer a liability in our principal or most advantageous market in an orderly transaction between market participants
on the measurement date. The fair value hierarchy established in ASC 820 generally requires an entity to maximize the use of observable
inputs and minimize the use of unobservable inputs when measuring fair value. The calculation of the redemption liability at
December 31, 2021 is based upon the actual incremental value derived by the noteholders at the IPO date.
Debt
discount and derivative instruments
The
initial fair value of the redemption value relating to the convertible debt instruments is treated as a debt discount and amortized over
the term of the related debt using the straight-line method, which approximates the interest method. If a loan is paid in full, any unamortized
financing costs will be removed from the related accounts and charged to operations. Amortization of debt discount is recorded as a component
of interest expense. In accordance with ASU 2015-03, Interest — Imputation of Interest , the unamortized debt discount is
presented in the accompanying balance sheet as a direct deduction from the carrying amount of the related debt.
We
account for derivative instruments in accordance with ASC 815, Derivative and Hedging, which establishes accounting and reporting standards
for derivative instruments, including certain derivative instruments embedded in other financial instruments or contracts and requires
recognition of all derivatives on the balance sheet at fair value. Our derivative financial instrument consists of an embedded feature
contained in our convertible debt that is bifurcated and accounted for separately. See Note 4 of our audited consolidated financial statements.
Recently
Issued and Adopted Accounting Standards
See
Note 2 to our audited consolidated financial statements included elsewhere in this Annual Report on Form 10-K.
JOBS
Act
We
are an “emerging growth company,” as defined in the JOBS Act. Emerging growth companies can take advantage of the extended
transition period provided in Section 7(a)(2)(B) of the Securities Act, for complying with new or revised accounting standards. In other
words, an “emerging growth company” can delay the adoption of certain accounting standards until those standards would otherwise
apply to private companies. We have chosen to take advantage of the extended transition periods available to emerging growth companies
under the JOBS Act for complying with new or revised accounting standards until those standards would otherwise apply to private companies
provided under the JOBS Act. As a result, our consolidated financial statements may not be comparable to those of companies that comply
with public company effective dates for complying with new or revised accounting standards. For as long as we continue to be an emerging
growth company, we also intend to take advantage of certain other exemptions from various reporting requirements that are applicable
to other public companies including, but not limited to, reduced disclosure obligations regarding executive compensation in our periodic
reports and proxy statements, exemptions from the requirements of holding a nonbinding advisory stockholder vote on executive compensation
and any golden parachute payments not previously approved, exemption from the requirement of auditor attestation in the assessment of
our internal control over financial reporting and exemption from any requirement that may be adopted by the Public Company Accounting
Oversight Board regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information
about the audit and the financial statements (auditor discussion and analysis). We will remain an emerging growth company until the earliest
of (i) the date on which we are deemed to be a large accelerated filer under the rules of the SEC, (ii) the end of the fiscal year in
which we have total annual gross revenues of $1.07 billion or more during such fiscal year, (iii) the date on which we issue more than
$1 billion in non-convertible debt in a three-year period or (iv) the end of the fiscal year following the fifth anniversary of the date
of the completion of our IPO.
ITEM
7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
As
a smaller reporting company, we are not required to provide the information required by this item.
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