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.
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Overview
Hillstream
BioPharma is a pre-clinical biotechnology company developing novel therapeutic candidates targeting ferroptosis, an emerging new anti-cancer
mechanism resulting in IMCD, and targeted IO novel biologics, for the treatment drug resistant cancers. Our most advanced product candidate,
HSB-1216, is an IMCD inducer, targeting a variety of solid tumors. In a clinical pilot study conducted at the University of Heidelberg,
Germany, the active drug in HSB-1216 was found to reduce tumor burden in treatment resistant cancers, including TNBC and epithelial carcinomas.
We utilize 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. Our goal is to submit an IND to the FDA and initiate a clinical study with HSB-1216
in the second half of 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 studies will focus on expanding upon the clinical pilot study conducted in Germany.
If we are able to initiate our clinical study with HSB-1216 in the second half of 2023, we anticipate that clinical data from such trial
will be released either late 2024 or early 2025.
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, a known factor
required for cell growth. Cancer cells promote increase in 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, which lead to regulated cell death.
HSB-1216 sequesters iron in the cytoplasm of cancer cells and decreases the LIP, thereby inducing ferroptosis/IMCD, leading to regulated
cell death. Areas of interest for the development of HSB-1216 are as a treatment of solid tumors, including SCLC, TNBC, uveal melanoma,
glioblastoma multiforme, head and neck squamous cell carcinoma and other drug resistant cancers with high unmet need.
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 preferentially traps drugs in the TME. This emerging orthogonal anti-cancer approach
leverages 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 our Quatramer platform.
The
Quatrabody™ provides an entry into development of next generation IO biologics including, bispecific and trispecific antibodies,
ADCs, CAR-T, CAR-NKs among others. Quatrabodies capitalize on the long half-life of tumor targeting Quatramers combined with Picobodies™,
bovine-derived antibody “knob” domains which have potential to access and bind more tightly to “undruggable”
epitopes better than full sized antibodies. HSB-1940 is a combination of PD-1 targeting Picobodies bound to the surface of Quatramers.
Quatrabodies have the potential for delivering an increased drug payload to the tumor with a longer half-life while targeting novel “undruggable”
epitopes of well-established and validated IO targets such as PD-1.
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The
critical components of our business strategy to achieve our goals include:
●
Developing
drug candidate, HSB-1216, in solid tumors.
Data
from a clinical pilot study conducted at the University of Heidelberg, Germany, led us to progress HSB-1216 into IND-enabling studies
with the goal of submitting an IND to the FDA in 2023.
●
Developing
drug candidate, HSB-3215
The
ErbB family of cell surface proteins are some of the most well-known and validated oncology drug targets including ErbB2 or HER2 (human
epidermal growth factor receptor) and Erb3 or HER3.
●
Developing
drug candidate, HSB-1940
The
Quatrabody™ provides an entry into next generation of IO biologics including, bispecific and trispecific antibodies, ADCs, CAR-T,
CAR-NKs and others. Quatrabodies capitalize on the long half-life of tumor targeting Quatramers, combined with Picobodies™, bovine-derived
antibody “knob” domains which have potential to access and bind more tightly to “undruggable” epitopes better
than full sized antibodies.
●
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 IO whereby we could potentially increase the effectiveness of ICIs.
●
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. We intend to establish collaborations
with industry leaders and strategic pharmaceutical organizations.
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●
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. Following FDA approval in the United States, we may partner with a larger biopharmaceutical company as well as potentially build
a focused oncology sales organization to market Quatramer-based therapeutics. Outside of the United States, we intend to rely on collaborators
to commercialize proprietary approved Quatramer.
●
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. We expect to continue to file patent applications as we apply our technology to new targets and
therapeutic payloads. In addition, we believe the heightened regulatory requirements for generics of this technology may strengthen the
protection afforded by our intellectual property portfolio.
Minotaur Research and Collaboration Agreement and
Taurus License Agreement
Hillstream has entered into a research collaboration and product license
agreement with Minotaur and a commercial license agreement with Taurus for use of certain technology, including OmniAb antibodies, to
advance Picobodies against novel, unreachable and undruggable epitopes in high-value validated targets starting with PD-1. The research
and collaboration agreement and product license agreement is for the development of proprietary targeted biologics, Knob Quatrabodies™
(HSB-1940), against PD-1.
The
technologies of Hillstream and Minotaur will be combined under the license
from Taurus to discover, develop and advance biotherapeutics against high-value validated IO targets. Picobodies are bovine-derived antibody
“knob” domains comprised of cysteine-rich ultralong CDR H3 sequences of 30-40 amino acids weighing ~3-4KDa, which have the
potential to access challenging epitopes better than full size antibodies can.
By
combining Quatramers with their long half-life coated with a PD-1 Picobody ™
to create HSB-1940, Hillstream believes it could more efficiently target novel epitopes with greater binding affinity than approved anti-PD-1
antibodies. We further believe that the development of HSB-1940 is a step toward enabling us to enter the rapidly growing IO market with
additional targets thereafter.
Applied
Biomedical Research Institute Option Agreement
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ABSI has developed technology to target unique functional epitopes of the
cancer targets HER2 and HER3. Monoclonal antibodies being developed at ABSI are unique from the currently approved anti-HER2 antibodies.
ABSI has granted us an exclusive option to license technology to develop HER2 and HER3 antibodies, including multi-specific and Quatramer-based
therapeutics incorporating portions of the antibodies. These antibodies could be incorporated into proprietary multi-format biologics
(bi- and tri-specific antibodies, ADCs (antibody drug conjugates), CAR-T and CAR-NKs, in Quatramers and Quatrabodies) against drug resistant
cancers including HER2-positive metastatic breast cancer, gastric cancer, lung cancer and ovarian cancer. The ABSI option terminates on March 24, 2023, unless extended by the parties.
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.
Components
of Results of Operations
Revenue
We
did not recognize revenues for years ended December 31, 2022 and 2021.
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.
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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, HSB-3215 and HSB-1940.
We
cannot determine with certainty the duration and costs of future clinical trials of our product candidates, HSB-1216, HSB-3215 and HSB-1940,
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.
Change
in Redemption Value
We
account for derivative instruments in accordance with Accounting Standards Codification (“ASC”) 815, Derivatives 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. Amortization of debt discount
is recorded as a component of interest expense. If a loan is paid in full, any unamortized debt discounts will be removed from the related
accounts and charged to operations. As the convertible debt was converted into common stock at the date of our initial public offering
(“IPO”), the unamortized debt discount was charged to interest expense. In accordance with Accounting Standards Update (“ASU”)
2015-03, Interest — Imputation of Interest , the unamortized debt discount is presented in the accompanying consolidated
balance sheets 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 did not enter
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 (as defined herein) in the event of a Next Equity Financing
(as defined herein), 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. 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.
109
Deferred
Offering Costs
Deferred
offering costs consisted of legal, accounting, printing, and filing fees that the Company capitalized which were offset against the proceeds
from its initial public offering.
Results
of Operations
Comparison
of the Years Ended December 31, 2022 and 2021
The
following table sets forth key components of our results of operations for the years ended December 31, 2022 and 2021.
Year
Ended
December
31,
2022
2021
Change
Consolidated
Statements of Operations Data:
Operating
expenses:
Research
and development
$ 2,278,424
$ 1,842,803
$ 435,621
General
and administrative
4,603,514
1,365,214
3,238,300
Total
operating expenses
6,881,938
3,208,017
3,673,921
Other
income (expense)
Interest
expense
(1,591,244 )
(831,277 )
(759,967 )
Change
in redemption value
-
1,832,651
(1,832,651 )
Total
other income (expense), net
(1,591,244 )
1,001,374
(2,592,618 )
Net
loss
$ (8,473,182 )
$ (2,206,643 )
$ (6,266,539 )
Research
and Development Expenses
Research
and development expenses increased by $435,621, or 23.6%, to $2,278,424 for the year ended December 31, 2022 from $1,842,803 for the
year ended December 31, 2021. The increase was primarily the result of an increase in expenses for pre-clinical activities of $494,017
and consulting expenses of $130,771. These increases were offset by decreases of $189,167 in stock based compensation expense related
to research and development team members because of the limited number of stock options issued during the year.
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General
and Administrative Expenses
General
and administrative expenses increased by $3,238,300 or 237.2%, to $4,603,514 for the year ended December 31, 2022 from $1,365,214 for
the year ended December 31, 2021. The increase in general and administrative expenses was primarily due to an increase of $1,219,401
in insurance expenses, $693,632 in consulting expenses, $499,951 in payroll expenses, $236,265 in accounting expenses; $224,864 in legal
expenses; $220,380 in remuneration paid to our directors; $205,743 in investor relations expenses; $67,578 in filing fees, and $119,892
in various other expenses. The increases were offset by a decrease of $249,406 in stock-based compensation expense.
Interest
Expense
Interest
expense increased by $759,967, or 91.4%, to $1,591,244 for the year ended December 31, 2022 from $831,277 for the year ended December
31, 2021. The increase in interest expense was primarily related to the unamortized debt discount charged to interest expense on the
date of our IPO. See Note 3 of our consolidated financial statements.
Change
in Redemption Value
The
change in redemption value decreased by $1,832,651, or 100.0%, to $0 for the year ended December 31, 2022 from $1,832,651 for the year
ended December 31, 2021 as the redemption liability was re-evaluated in light of the actual fair value increment provided to the debt
holders upon completion of our IPO 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, 2022, we incurred operating losses in the amount of approximately $6.9 million, expended approximately $6.6 million in cash used
in operating activities, and had an accumulated deficit of approximately $15.4 million as of December 31, 2022. We financed our working
capital requirements through December 31, 2022 primarily through the issuance of common stock through our IPO. Net proceeds to us from
the IPO were approximately $13.0 million. See Note 5 to the consolidated financial statements for details regarding the IPO. Our common
stock began trading on The Nasdaq Capital Market on January 12, 2022 under the ticker symbol “HILS.”
Based
on our limited operating history, recurring negative cash flows from operations, current plans and available resources, we will need
substantial additional funding to support future operating activities. We have concluded that the prevailing conditions and ongoing liquidity
risks faced by us raise substantial doubt about our ability to continue as a going concern for at least one year following the date
these financial statements are issued. The accompanying consolidated financial statements do not include any adjustments that might be
necessary should we be unable to continue as a going concern.
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We
may seek to raise additional funding through the sale of additional equity or debt securities, enter into strategic partnerships, grants
or other arrangements or a combination of the foregoing to support its future operations. There can be no assurance that we will be able
to obtain additional capital on terms acceptable to us, on a timely basis or at all. The failure to obtain sufficient additional funding
could adversely affect our ability to achieve its business objectives and product development timelines and could have a material adverse
effect on our results of operations.
Cash
Flow Activities for the Years Ended December 31, 2022 and 2021
The
following table sets forth a summary of our cash flows for the periods presented.
Years
Ended December 31,
2022
2021
Net
cash used in operating activities
$ (6,557,950 )
$ (1,086,244 )
Net
cash provided by financing activities
13,064,128
898,748
Net
increase (decrease) in cash
$ 6,506,178
$ (187,496 )
Cash
Flows from Operating Activities
Cash used in operating activities for the year ended December 31, 2022
was $6,557,950 which consisted of net loss of $8,473,182, partially offset by $2,484,344 in non-cash charges and other adjustments to
reconcile net loss to net cash used in operating activities and $569,112 in net decrease in operating accounts. The non-cash charges consist
of amortization of debt discount of $1,569,003, stock compensation expenses of $800,696, stock issuance pursuant to service agreement
of $100,000 and interest and original issuance discount on promissory notes of $14,645. The net decrease in operating activities was primarily
due to a decrease of $200,000 due to founder, a decrease in accounts payable of $141,170, a decrease in accrued expenses of $127,755,
a decrease of $107,424 in prepaid expenses and other current assets offset by an increase of $7,237 in accrued interest.
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, 2022 was $13,064,128. The net increase in financing activities was from
net cash proceeds of $13,645,643 from the issuance of our common stock in connection with our IPO, $125,000 from the issuance of promissory notes and $24,389 from exercise of stock
options offset by deferred offering costs of $521,294, repayment of promissory notes of $139,645 and purchase of treasury stock, at cost of $69,965.
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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.
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 (collectively, the “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 stated 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 $2.1 million) which had a stated maturity date of three years. For Notes issued in
2017 and through September 2018, the default interest rate of 20% was added to the Notes for the period after the stated maturity date.
The
Notes were to automatically convert into the type of Equity Securities issued in the Next Equity Financing upon closing. 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 Equity Security by the investors in
the Next Equity Financing, or (ii) an equity valuation of $25 million ($50 million for Notes issued after December 2020). On January
14, 2022, all outstanding Notes and accrued interest were converted into an aggregate of 1,225,384 shares of the Company’s common
stock as the Company’s initial public offering qualified as a Next Equity Financing.
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: valuation of common shares
and stock options prior to the IPO, allowances of deferred tax assets, valuation of debt related instruments, and cash flow assumptions
regarding going concern considerations.
Concentration
of Credit Risk
We
maintain cash balances with various financial institutions. Account balances at these institutions are insured by the Federal Deposit
Insurance Corporation up to $250,000 per depositor. At various times during the year, bank account balances may have been in excess of
federally insured limits. We have not experienced losses in such accounts. We believe that we are not subject to unusual credit risk
beyond the normal credit risk associated with commercial banking relationships.
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.
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 the 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 to employees, non-employees and directors is estimated as of the date of grant using the Black-Scholes
option-pricing model, net of actual forfeitures. 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.
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The
fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. Prior to January
12, 2022, we were a private company and our common stock has only been publicly traded since that date. As a result, we lacked company-specific
historical and implied volatility information. Therefore, we have 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 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.
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 consolidated balance sheet as a direct deduction from the carrying amount of the related debt.
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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 3 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 $1.235 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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