Canton Strategic Holdings, Inc. 10-K

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA HILLSTREAM BIOPHARMA, INC. INDEX TO FINANCIAL STATEMENTS Page AUDITED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm (PCAOB ID: 199 ) F-2 Consolidated Balance Sheets as of December 31, 2022 and 2021 F-3 Consolidated Statements of Operations for the Years Ended December 31, 2022 and 2021 F-4 Consolidated Statements of Changes in Stockholders’ Equity (Deficit) for the Years Ended December 31, 2022 and 2021 F-5 Consolidated Statements of Cash Flows for the Years Ended December 31, 2022 and 2021 F-6 Notes to Consolidated Financial Statements F-7 F- 1 Report of Independent Registered Public Accounting Firm To the Board of Directors and Stockholders of Hillstream BioPharma, Inc.: Opinion on the Financial Statements We have audited the accompanying consolidated balance sheets of Hillstream BioPharma, Inc. (“Company”) as of December 31, 2022 and 2021, and the related consolidated statements of operations, changes in stockholders’ equity (deficit), and cash flows for each of the two years in the period ended December 31, 2022, and the related notes (collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects, the financial position of the Company as of December 31, 2022 and 2021, and the results of its operations and its cash flows for each of the two years in the period ended December 31, 2022, in conformity with accounting principles generally accepted in the United States of America. Going Concern Uncertainty The accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 1 to the financial statements, the Company has incurred recurring losses and negative cash flows from operations and is dependent on additional financing to fund operations. These conditions raise substantial doubt about its ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 1. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. Basis for Opinion These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB. We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis, evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable basis for our opinion. We have served as the Company’s auditor since 2020. /s/ Mayer Hoffman McCann P.C. Los Angeles, California March 16, 2023 F- 2 HILLSTREAM BIOPHARMA, INC. CONSOLIDATED BALANCE SHEETS December 31, 2022 December 31, 2021 ASSETS Current assets Cash $ 6,510,534 $ 4,356 Prepaid expenses and other current assets 178,094 70,670 Deferred offering costs - 546,651 Total current assets 6,688,628 621,677 Total assets $ 6,688,628 $ 621,677 LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) Current liabilities Accounts payable $ 954,505 $ 1,463,059 Accrued interest - 179,621 Due to founder - 200,000 Accrued expenses 190,468 318,223 Redemption liability - 980,233 Short-term portion of related-party convertible notes, net - 1,392,544 Total current liabilities 1,144,973 4,533,680 Related-party convertible notes, net of short-term portion - 772,899 Total liabilities 1,144,973 5,306,579 Commitments and contingencies (see Note 9) - - Stockholders’ equity (deficit) Preferred stock, $ 0.0001 par value, 10,000,000 shares authorized, no shares issued and outstanding as of December 31, 2022 and 2021 - - Common stock, $ 0.0001 par value, 250,000,000 shares authorized, 11,604,970 and 6,357,314 shares issued and 11,514,144 and 6,357,314 shares outstanding as of December 31, 2022 and 2021, respectively 1,160 636 Additional paid-in capital 20,996,892 2,225,712 Accumulated deficit ( 15,384,432 ) ( 6,911,250 ) Treasury stock, at cost, 90,826 and 0 shares held in treasury as of December 31, 2022 and 2021, respectively ( 69,965 ) - Total stockholders’ equity (deficit) 5,543,655 ( 4,684,902 ) Total liabilities and stockholders’ equity (deficit) $ 6,688,628 $ 621,677 The accompanying notes are an integral part of these consolidated financial statements. F- 3 HILLSTREAM BIOPHARMA, INC. CONSOLIDATED STATEMENTS OF OPERATIONS For the Years Ended December 31, 2022 2021 Operating expenses Research and development $ 2,278,424 $ 1,842,803 General and administrative 4,603,514 1,365,214 Total operating expenses 6,881,938 3,208,017 Loss from operations ( 6,881,938 ) ( 3,208,017 ) Other income (expenses) Interest expense ( 1,591,244 ) ( 831,277 ) Change in redemption value - 1,832,651 Total other income (expenses), net ( 1,591,244 ) 1,001,374 Net loss $ ( 8,473,182 ) $ ( 2,206,643 ) Net loss per share Basic and diluted $ ( 0.75 ) $ ( 0.35 ) Weighted average number of common shares outstanding: Basic and diluted 11,316,804 6,357,314 The accompanying notes are an integral part of these consolidated financial statements. F- 4 HILLSTREAM BIOPHARMA, INC. CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT) FOR THE YEARS ENDED DECEMBER 31, 2022 AND 2021 Common Stock Additional Paid-in Accumulated Treasury Stock Shares Amount Capital Deficit Shares Amount Total Balance, December 31, 2020 6,357,314 $ 636 $ 986,443 $ ( 4,704,607 ) - $ - $ ( 3,717,528 ) Net loss - - - ( 2,206,643 ) - - ( 2,206,643 ) Stock based compensation - - 1,239,269 - - - 1,239,269 Balance, December 31, 2021 6,357,314 636 2,225,712 ( 6,911,250 ) - - ( 4,684,902 ) Net loss - - - ( 8,473,182 ) - - ( 8,473,182 ) Exercise of stock options 240,526 24 24,365 - - - 24,389 Stock based compensation - - 800,696 - - - 800,696 Stock issuance pursuant to services agreement 31,746 3 99,997 - - - 100,000 Initial public offering, net of issuance costs of $ 2,054,918 3,750,000 375 12,944,707 - - - 12,945,082 Initial public offering, net of issuance costs 3,750,000 375 12,944,707 - - - 12,945,082 Conversion of related-party convertible notes 1,225,384 122 4,901,415 - - - 4,901,537 Purchase of treasury stock, at cost - - - - 90,826 ( 69,965 ) ( 69,965 ) Balance, December 31, 2022 11,604,970 $ 1,160 $ 20,996,892 $ ( 15,384,432 ) 90,826 $ ( 69,965 ) $ 5,543,655 The accompanying notes are an integral part of these consolidated financial statements. F- 5 HILLSTREAM BIOPHARMA, INC. CONSOLIDATED STATEMENTS OF CASH FLOWS For the Years Ended December 31, 2022 2021 Cash flows from operating activities: Net loss $ ( 8,473,182 ) $ ( 2,206,643 ) Adjustments to reconcile net loss to net cash used in operating activities: Amortization of debt discount 1,569,003 666,566 Stock based compensation 800,696 1,239,269 Stock issuance pursuant to services agreement 100,000 - Interest and original issuance discount on promissory notes 14,645 - Change in fair value of redemption liability - ( 1,832,651 ) (Increase) decrease in: Prepaid expenses and other current assets ( 107,424 ) 32,276 Increase (decrease) in: Accounts payable ( 141,170 ) 580,847 Accrued interest 7,237 164,646 Due to founder ( 200,000 ) - Accrued expenses ( 127,755 ) 269,446 Net cash used in operating activities ( 6,557,950 ) ( 1,086,244 ) Cash flows from financing activities: Exercise of stock options 24,389 - Purchase of treasury stock at cost ( 69,965 ) - Proceeds from issuance of common stock upon initial public offering, net of underwriting discounts and issuance costs 13,645,643 - Payment of deferred offering costs ( 521,294 ) ( 179,267 ) Proceeds from promissory notes 125,000 - Repayments on promissory notes ( 139,645 ) - Proceeds from related party convertible notes - 1,078,015 Net cash provided by financing activities 13,064,128 898,748 Net increase (decrease) in cash 6,506,178 ( 187,496 ) Cash, beginning of period 4,356 191,852 Cash, end of period $ 6,510,534 $ 4,356 Supplemental disclosure of non-cash financing activities: Conversion of related party convertible notes: Related party convertible note principal converted to common stock upon initial public offering $ 3,734,446 - Related party convertible note accrued interest converted to common stock upon initial public offering $ 186,858 - Redemption liability converted to common stock upon initial public offering $ 980,233 - Unpaid deferred offering costs - $ 367,384 Accrued interest rollover to new notes payable - $ 58,091 The accompanying notes are an integral part of these consolidated financial statements. F- 6 HILLSTREAM BIOPHARMA, INC. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS Note 1 – Description of Business and Liquidity Nature of Operations Hillstream BioPharma, Inc. (“HBI”) was incorporated on March 28, 2017, as a Delaware C-corporation. At December 31, 2022, Hillstream BioPharma, Inc. had two wholly-owned subsidiaries: HB Pharma Corp. (“HB”) and Farrington Therapeutics LLC (“Farrington” and together with HBI and HB, the “Company”). HBI is a pre-clinical biotechnology company developing novel therapeutic candidates targeting ferroptosis, an emerging new anti-cancer mechanism resulting in iron mediated cell death (“IMCD”), and targeted immuno-oncology novel biologics, for the treatment drug resistant cancers. The Company’s 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 triple negative breast cancer and epithelial carcinomas. The Company utilizes Quatramer™, its proprietary tumor targeting platform, to enhance the uptake of HSB-1216 in the tumor microenvironment with an extended duration of action and minimal off-target toxicity. The Company’s goal is to submit an investigational new drug application (“IND”) to the U.S. Food and Drug Administration (“FDA”) and initiate a clinical study with HSB-1216 in the second half of 2023; however, no assurance can be provided that the Company’s IND will be accepted by the FDA in 2023, if at all. If the Company’s IND is accepted by the FDA, the Company’s HSB-1216 clinical studies will focus on expanding upon the clinical pilot study conducted in Germany. If the Company able to initiate its clinical study with HSB-1216 in the second half of 2023, it anticipates that clinical data from such trial will be released either late 2024 or early 2025. F- 7 Liquidity and Going Concern The accompanying consolidated financial statements have been prepared on the basis that the Company is 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, the Company 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. The Company financed its working capital requirements through December 31, 2022 primarily through the issuance of common stock in its initial public offering (“IPO”). Net proceeds to the Company from the IPO were approximately $ 13.0 million. See Note 5 to the consolidated financial statements for details regarding the IPO. The shares of the Company’s common stock began trading on The Nasdaq Capital Market on January 12, 2022 under the ticker symbol “HILS.” Based on the Company’s limited operating history, recurring negative cash flows from operations, current plans and available resources, the Company will need substantial additional funding to support future operating activities. The Company has concluded that the prevailing conditions and ongoing liquidity risks faced by the Company raise substantial doubt about the Company’s 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 the Company be unable to continue as a going concern. The Company 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 the Company will be able to obtain additional capital on terms acceptable to the Company, on a timely basis or at all. The failure to obtain sufficient additional funding could adversely affect the Company’s ability to achieve its business objectives and product development timelines and may result in the Company delaying or terminating clinical trial activities which could have a material adverse effect on the Company’s results of operations. Other Risks and Uncertainties There can be no assurance that the Company’s products, if approved, will be accepted in the marketplace, nor can there be any assurance that any future products can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or that such products will be successfully marketed, if at all. The Company is subject to risks common to biopharmaceutical companies including, but not limited to, the development of new technological innovations, dependence on key personnel, protection of proprietary technology, compliance with government regulations, product liability, uncertainty of market acceptance of products and the need to obtain additional financing. The Company is dependent on third party suppliers. The Company’s products require approval or clearance from the FDA prior to commencing commercial sales in the United States. Approvals or clearances are also required in foreign jurisdictions in which the Company may license or sell its products. There can be no assurance that the Company’s products will receive all of the required approvals or clearances. COVID-19 Considerations On March 11, 2020, the World Health Organization characterized the outbreak of a novel strain of coronavirus (“COVID-19”) as a pandemic, prompting many national, regional, and local governments to implement preventative or protective measures, such as travel and business restrictions, temporary store closures and capacity limitations, and wide-sweeping quarantines and stay-at-home orders. As a result, COVID-19 and the related restrictive measures have had a significant adverse impact upon many sectors of the economy. As a result of the COVID-19 pandemic, the Company had to delay the start of its IND enabling studies for over a year. As the COVID-19 situation continues to evolve, the Company intends to closely monitor the impact of the COVID-19 pandemic on all aspects of its business, including, but not limited to, impacts on third-party contractors, suppliers, vendors and employees. The Company believes that the ultimate impact of the COVID-19 pandemic on operating results, cash flows, and financial condition is likely to be determined by factors which are uncertain, unpredictable, and outside of the Company’s control. The situation surrounding COVID-19 remains fluid, and if disruptions arise, they could have a material adverse impact on the Company’s business. F- 8 Note 2 – Summary of Significant Accounting Policies Basis of Presentation These accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). The Company operates in one segment. Reverse Stock Split On September 16, 2021, the Company effectuated a reverse split of shares of its common stock at a ratio of 1-for-26.4 pursuant to an amendment to the Company’s Certificate of Incorporation, as amended, filed with the Delaware Secretary of State and approved by the Company’s board of directors and stockholders. The par value of the Company’s common stock was not adjusted as a result of the reverse split. All issued and outstanding common stock share and per share amounts contained in the consolidated financial statements have been retroactively adjusted to reflect this reverse split for all periods presented. Principles of Consolidation The consolidated financial statements include the accounts of HBI and its wholly-owned subsidiaries, HB and Farrington. All significant intercompany balances and transactions have been eliminated in consolidation. Use of Estimates The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. 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. Although management believes the estimates that have been used are reasonable, actual results could vary from the estimates that were used. Concentration of Credit Risk The Company maintains 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. The Company has not experienced losses in such accounts. The Company believes that it is not subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships. F- 9 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. The Company accrues for costs incurred by external service providers, including contract research organizations and clinical investigators, based on its 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. Approximately $ 61,000 of prepaid expenses at December 31, 2022 and 2021 relate to a manufacturing services agreement. Stock Based Compensation The Company recognizes 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. 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, the Company was a private company and the Company’s common stock has been publicly traded since that date. As a result, the Company has lacked company-specific historical and implied volatility information. Therefore, it has estimated its 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. Common Stock Valuations Prior to the IPO, the Company was required to periodically estimate the fair value of common stock 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, the Company considered, among other things, contemporaneous valuations of the Company’s common stock; the Company’s business, financial condition and results of operations, including related industry trends affecting its operations; the likelihood of achieving various liquidity events; the lack of marketability of the Company’s common stock; the market performance of comparable publicly traded companies; and U.S. and global economic and capital market conditions. After the closing of the Company’s IPO on January 14, 2022, the fair value of common stock is determined by using the closing price of the Company’s common stock on The Nasdaq Capital Market. Treasury Stock The Company’s board of directors has authorized the repurchase of up to $ 1 million of shares of the Company’s common stock, from time to time, ending December 31, 2022, in the open market or through privately-negotiated transactions, at such times and at such prices as the Company’s management may decide. Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired common stock is recorded as treasury stock. F- 10 Debt Discount and Derivative Instruments The initial fair value of the redemption feature relating to the convertible debt instruments was treated as a debt discount and was 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 the IPO, the unamortized debt discount was charged to interest expense. In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) 2015-03, Interest - Imputation of Interest , the unamortized debt discount at December 31, 2021 was presented in the accompanying consolidated balance sheet as a direct deduction from the carrying amount of the related debt. The Company accounts for derivative instruments in accordance with FASB 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. The Company’s derivative financial instrument consisted of an embedded feature contained in the Company’s convertible debt that was bifurcated and accounted for separately. See Note 3 to the consolidated financial statements for further details. Fair Value Measurements The Company applies FASB 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 the Company’s 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. Observable inputs reflect the assumptions that market participants would use in pricing the asset or liability and are developed based on market data obtained from sources independent of the reporting entity. Unobservable inputs reflect the entity’s own assumptions based on market data and the entity’s judgments about the assumptions that market participants would use in pricing the asset or liability and are to be developed based on the best information available in the circumstances. The carrying value of the Company’s prepaid expenses, accounts payable, and accrued expenses approximate fair value because of the short-term maturity of these financial instruments. The redemption feature of the debt instruments is recorded at fair value. See Note 4 to the consolidated financial statements for further details. The valuation hierarchy is composed of three levels. The classification within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. The levels within the valuation hierarchy are described below: Level 1 Inputs: Observable inputs such as quoted prices (unadjusted) in active markets that are accessible at the measurement date for identical, unrestricted assets or liabilities. Level 2 Inputs: Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for assets or liabilities recently traded in active markets, with similar underlying terms, as well as direct or indirect observable inputs, such as interest rates and yield curves that are observable at commonly quoted intervals, as well as quoted prices for identical or similar assets or liabilities in markets that are not active. Level 3 Inputs: Unobservable inputs, such as estimates, assumptions, and valuation techniques when little or no market data exists for the assets or liabilities, that reflect the reporting entity’s own assumptions. 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 the IPO. F- 11 Income Taxes The Company accounts for income taxes using the asset-and-liability method in accordance with FASB ASC 740, Income Taxes (“ASC 740”). Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred income taxes are recognized for the tax effect of temporary differences between the financial statement carrying amount of assets and liabilities and the amounts used for income tax purposes and for certain changes in valuation allowances. Valuation allowances are recorded to reduce certain deferred tax assets when, in management’s estimation, it is more-likely-than-not that a tax benefit will not be realized. A valuation allowance has been recognized for all periods since it is more-likely-than-not that some portion or all of the deferred tax assets will not be realized in future periods. The Company follows the guidance in FASB ASC Topic 740-10 in assessing uncertain tax positions. The standard applies to all tax positions and clarifies the recognition of tax benefits in the financial statements by providing for a two-step approach of recognition and measurement. The first step involves assessing whether the tax position is more-likely-than-not to be sustained upon examination based upon its technical merits. The second step involves measurement of the amount to be recognized. Tax positions that meet the more-likely-than-not threshold are measured at the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate finalization with the taxing authority. The Company recognizes the impact of an uncertain income tax position in the financial statements if it believes that the position is more likely than not to be sustained by the relevant taxing authority. The Company will recognize interest and penalties related to tax positions in income tax expense . At December 31, 2022 and 2021, the Company had no unrecognized uncertain income tax positions, and therefore no amounts have been recognized in the consolidated financial statements. Net Loss per Share The Company reports loss per share in accordance with FASB ASC 260-10, Earnings Per Share , which provides for calculation of basic and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss available to common stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential dilution of securities that could share in the earnings of an entity. The calculation of diluted net earnings (loss) per share gives effect to common stock equivalents; however, potential common shares are excluded if their effect is anti-dilutive. Potentially dilutive securities not included in the computation of loss per share for the years ended December 31, 2022 and 2021 included options to purchase 1,628,813 and 903,468 shares of common stock, respectively. All common share amounts as of December 31, 2022 and 2021 and per share amounts for the years ended December 31, 2022 and 2021 have been adjusted to reflect a 1-for-26.4 reverse stock split of the Company’s common stock effectuated on September 16, 2021. Other potentially dilutive securities also not included in the computation of loss per share for the year ended December 31, 2022 included warrants to purchase 187,500 shares of the Company’s common stock. Recently Adopted Accounting Pronouncements The Company has evaluated all recent accounting pronouncements and believes that none of them will have a material effect on the Company’s financial position, results of operations, or cash flows, including as described below. Earnings per Share In May 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt-Modifications and Extinguishments (Subtopic 470-50), Compensation-Stock Compensation (Topic 718), and Derivatives and Hedging-Contracts in Entity’s Own Equity (Subtopic 815-40). This ASU addresses an issuer’s accounting for certain modifications or exchanges of freestanding equity-classified written call options. This amendment is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, and was effective for the Company beginning January 1, 2022. This ASU did not have a material impact on the Company’s consolidated financial statement presentation. F- 12 Codification Improvements In October 2020, the FASB issued ASU 2020-10, Codification Improvements . The guidance contains improvements to the Codification by ensuring that all guidance that requires or provides an option for an entity to provide information in the notes to financial statements is codified in the Disclosure Section of the Codification. The guidance also contains Codifications that are varied in nature and may affect the application of the guidance in cases in which the original guidance may have been unclear. This amendment is effective for fiscal years beginning after December 15, 2021, including interim periods within those fiscal years, and was effective for the Company beginning January 1, 2022. This ASU did not have a material impact on the Company’s consolidated financial statement presentation. Recent Accounting Pronouncements Not Yet Adopted Debt with Conversion and Other Options and Derivatives and Hedging The FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options (Subtopic 470- 20) and Derivatives and Hedging - Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity (“ASU 2020-06”), to reduce complexity in applying US GAAP to certain financial instruments with characteristics of liabilities and equity. The guidance in ASU 2020-06 simplifies the accounting for convertible debt instruments and convertible preferred stock by removing the existing guidance that requires entities to account for beneficial conversion features and cash conversion features in equity, separately from the host convertible debt or preferred stock. The guidance in FASB ASC Subtopic 470-20 applies to convertible instruments for which the embedded conversion features are not required to be bifurcated from the host contract and accounted for as derivatives. In addition, the amendments revise the scope exception from derivative accounting in FASB ASC Subtopic 815-40 for freestanding financial instruments and embedded features that are both indexed to the issuer’s own stock and classified in stockholders’ equity, by removing certain criteria required for equity classification. These amendments are expected to result in more freestanding financial instruments qualifying for equity classification (and, therefore, not accounted for as derivatives), as well as fewer embedded features requiring separate accounting from the host contract. The amendments in ASU 2020-06 further revise the guidance in FASB ASC 260, Earnings Per Share , to require entities to calculate diluted earnings per share (“EPS”) for convertible instruments by using the if-converted method. In addition, entities must presume share settlement for purposes of calculating diluted EPS when an instrument may be settled in cash or shares. The amendments in ASU 2020-06 are effective for public entities that meet the definition of an SEC filer, excluding smaller reporting companies as defined by the SEC for fiscal years beginning after December 15, 2021. For all other entities, including the Company, the amendments are effective for fiscal years beginning after December 15, 2023. Early adoption is permitted. The Company is currently evaluating the impact this standard will have on its consolidated financial statements. Note 3 – Convertible Notes - Related Parties Commencing in May 2017, the Company entered into Subordinated Convertible Promissory Note Agreements (the “Agreements”) with certain lenders (together, the “Holders” or individually, the “Holder”), pursuant to which the Company issued Subordinated Convertible Promissory Notes (individually the “Note” or together, the “Notes”) to the Holders, principally all to the Chief Executive Officer (“CEO”) and founder of the Company, a member of the Company’s board of directors and third parties that are family members of the founder and CEO. 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 the Company’s common stock or preferred stock (collectively, the “Equity Securities”), the principal and accrued interest was to be due and payable by the Company on demand by the Holders at any time after the earlier of (i) the Maturity Date (as defined in each Agreement) and (ii) the closing of the Next Equity Financing. “Next Equity Financing” means the next sale, or series of related sales, by the Company of its Equity Securities pursuant to which the Company received gross proceeds of not less than $ 5.0 million for Notes issued in 2017 and through November 2020 and $ 7.5 million for Notes issued after November 2020 (including the aggregate amount of debt securities converted into Equity Securities upon conversion or cancellation of the Notes). The Company’s IPO qualified as a Next Equity Financing. F- 13 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 share for 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). 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 IPO qualified as a Next Equity Financing. Certain embedded features contained in the Notes in the aggregate were embedded derivative instruments, which were recorded as a debt discount and derivative liability at the issuance date at their estimated fair value for all Notes of approximately $ 2.4 million. Amortization of debt discount for the Notes recorded as interest expense was approximately $ 1.6 million and $ 667,000 for the years ended December 31, 2022 and 2021, respectively. The amount for the year ended December 31, 2022 contains amortization charged to interest expense of approximately $ 34,000 up to the date of the IPO and the full amount of the unamortized debt discount of approximately $ 1.5 million charged to interest expense on the date of the IPO. Accrued interest expense associated with the Notes at December 31, 2021 was approximately $ 180,000 . Accrued interest at the date of the IPO was approximately $ 187,000 and was converted into common stock as the IPO qualified as a Next Equity Financing. Total interest expense, including accrued interest and amortization of the debt discount, amounted to approximately $ 1.6 million and $ 831,000 for the years ended December 31, 2022 and 2021, respectively. The carrying value of the outstanding related-party convertible notes at December 31, 2021 was as follows: Schedule of Convertible Debt Principal amount outstanding $ 3,734,446 Less: debt discount, net of accumulated amortization ( 1,569,003 ) Carrying value $ 2,165,443 Current portion $ 1,392,544 Long-term portion 772,899 Total carrying value $ 2,165,443 Roll-over Notes Effective October 1, 2020, all Notes which matured, and were not repaid or converted, were rolled over, including the default interest rate of 20 % as disclosed above. Approximately $ 805,000 of such Notes were rolled over through December 31, 2021, of which approximately $ 166,000 occurred prior to December 31, 2020 and approximately $ 639,000 occurred between January 1, 2021 and December 31, 2021. Since the terms of the new notes were not substantially different from the Notes, this was not accounted for as a debt modification or debt extinguishment. F- 14 Note 4 – Redemption Liability 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 the Company had 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 (see Note 3 to the consolidated financial statements), 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 the Company’s common stock, the probabilities of such exit events occurring, and discounts/premiums available to the Holders at such measurement dates. The calculation of the redemption liability at December 31, 2021 was based upon the actual incremental value derived by the Holders at the IPO date. The fair value of the redemption liability is re-measured at each period and is summarized as of December 31, 2021 as follows: Schedule of Fair Value of Redemption Liability December 31, 2020 $ 1,325,288 Beginning balance as of December 31, 2020 $ 1,325,288 Initial embedded redemption value 1,487,596 Change in fair value ( 1,832,651 ) December 31, 2021 $ 980,233 Ending balance as of December 31, 2021 $ 980,233 The change in fair value of a gain of approximately $ 1.8 million as of December 31, 2021, was recorded as a component of other income (expenses) in the accompanying consolidated statements of operations. The balance of approximately $ 980,000 as of December 31, 2021 and as of the date of the IPO was converted into common stock in connection with the related-party convertible debt to which it related. Note 5 – Common Stock Pursuant to an amendment to the Company’s Certificate of Incorporation filed in April 2019, the Company increased the number of authorized shares of common stock to 250,000,000 shares. See the Net Loss Per Share section of Note 2 to the consolidated financial statements for a discussion of the reverse stock split effectuated on September 16, 2021. On January 14, 2022, the Company closed the IPO pursuant to which it issued 3,750,000 shares of its common stock at a public offering price of $ 4.00 per share. The gross proceeds to the Company from the IPO were $ 15.0 million, prior to deducting underwriting discounts of approximately $ 1.1 million and commissions and other offering expenses of approximately $ 1.0 million. Other offering expenses include deferred offering costs of approximately $ 547,000 that were capitalized prior to December 31, 2021 and additional costs incurred prior to the date of the IPO. The net proceeds to the Company from the IPO were approximately $ 13.0 million. The Company 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 the Company’s convertible debt and accrued interest was converted into an aggregate of 1,225,384 shares of the Company’s common stock pursuant to the terms of the Notes. Outstanding principal of approximately $ 3.7 million, accrued interest of approximately $ 187,000 , and a redemption liability of approximately $ 980,000 were converted to common stock as the IPO qualified as a Next Equity Financing. In addition, the Company issued warrants in connection with the IPO. See Note 6 to the consolidated financial statements for a discussion of the warrants issued. On February 16, 2022, the Company entered into an agreement for marketing and investor related consulting services. Pursuant to the agreement, compensation includes a monthly fee and an upfront issuance of shares of the Company’s common stock. On the effective date of February 16, 2022, the Company issued 31,746 shares of common stock with a per share value of $ 3.15 and a total value of $ 100,000 as compensation expense. F- 15 On June 9, 2022, the Company’s Board of Directors authorized the repurchase of up to $ 1.0 million of shares of the Company’s common stock until December 31, 2022. On June 10, 2022, the Company entered into a Repurchase Agreement (the “Repurchase Agreement”) with a financial institution pursuant to which such financial institution may purchase shares of the Company’s common stock upon the terms and conditions set forth in such agreement, including in accordance with the guidelines specified in Rules 10b5-1 and 10b-8 under the Securities Exchange Act of 1934, as amended . Shares of the Company’s common stock were able to be repurchased in open market or through privately-negotiated transactions. Pursuant to the Repurchase Agreement, the financial institution ceased purchasing shares of the Company’s common stock at the earlier of (i) the close of trading on December 31, 2022, (ii) the completion of repurchases up to the approved amount and (iii) the date upon which the Company gives notice of termination of the Repurchase Agreement to the financial institution. The Company determined the timing and amount of any repurchases based upon its evaluation of market conditions, applicable SEC guidelines and regulations, and other factors. During the year ended December 31, 2022, the Company purchased 90,826 shares of its common stock for a total purchase cost of approximately $ 70,000 . Note 6 – Stock Based Compensation Incentive Plans and Options Under the Company’s 2017 Stock Incentive Plan (the “2017 Stock Incentive Plan”) the Company may grant incentive stock options, non-statutory stock options, rights to purchase common stock, stock appreciation rights, restricted stock, performance shares, and performance units to employees, directors, and consultants of the Company and its affiliates. Up to 94,696 shares of the Company’s common stock may be issued pursuant to the 2017 Stock Incentive Plan. The Company has granted options to acquire 92,801 shares of common stock at $ 13.20 per share under the 2017 Stock Incentive Plan, and 1,895 shares remain available for issuance. At both December 31, 2022 and 2021, there were options outstanding to acquire 92,801 shares of common stock. As of both December 31, 2022 and 2021, all such options were fully vested, and the weighted average remaining contractual life for such options was approximately 5.2 and 6.2 years, respectively. In July 2019, the Company authorized a new plan (the “2019 Stock Incentive Plan”). The Company initially reserved 284,090 shares of its common stock for issuance pursuant to the 2019 Stock Incentive Plan in the form of incentive stock options, non-statutory stock options, rights to purchase common stock, stock appreciation rights, restricted stock, performance shares, and performance units to employees, directors, and consultants of the Company and its affiliates. On August 30, 2019, the Company approved an increase in the number of shares authorized for issuance under the 2019 Stock Incentive Plan by 2,575,757 shares. In January 2021, the Company approved an increase in the number of shares reserved for issuance under the 2019 Stock Incentive Plan by 574,494 shares. On May 31, 2021, the Company approved an increase in the number of shares reserved for issuance under the 2019 Stock Incentive Plan by 467,171 shares. At both December 31, 2022 and 2021, a total of 3,901,512 shares were authorized for issuance under the 2019 Stock Incentive Plan. The Company has granted options to acquire 3,386,385 and 2,420,514 shares of common stock under the 2019 Stock Incentive Plan, and 515,127 and 1,480,998 shares of common stock remain available for issuance under the 2019 Stock Incentive Plan at December 31, 2022 and 2021, respectively. There are stock options outstanding to acquire 1,536,012 and 810,667 shares of common stock with weighted average exercise prices of $ 3.80 and $ 3.25 and weighted average contractual terms of 8.4 years and 8.0 years at December 31, 2022 and 2021, respectively. F- 16 The following table summarizes stock-based activities under the 2017 Stock Incentive Plan and 2019 Stock Incentive Plans: Schedule of Stock Option Activity Weighted Weighted Shares Average Average Underlying Exercise Contractual Options Price Terms Outstanding at December 31, 2020 675,731 $ 3.09 8.8 years Granted 227,737 $ 7.76 Outstanding at December 31, 2021 903,468 $ 4.27 7.9 years Granted 980,075 $ 3.38 Exercised ( 240,526 ) $ 0.10 Forfeited /cancelled ( 14,204 ) $ 5.28 Outstanding at December 31, 2022 1,628,813 $ 4.34 8.2 years Exercisable options at December 31, 2022 981,908 $ 4.69 7.8 years Vested and expected to vest at December 31, 2022 1,628,813 $ 4.34 8.2 years The following table summarizes the exercise price range as of December 31, 2022 and 2021: Schedule of Exercise Price Range December 31, 2022 Exercise Price Outstanding Options Exercisable Options $ 0.08 57,763 53,621 $ 0.31 55,487 55,487 $ 1.00 50,000 50,000 $ 1.33 172,500 134,523 $ 2.64 107,004 86,825 $ 3.82 73,857 73,857 $ 4.00 757,575 183,002 $ 5.28 34,090 27,252 $ 7.03 18,940 18,940 $ 7.82 208,797 205,601 $ 13.20 92,800 92,800 1,628,813 981,908 December 31, 2021 Exercise Price Outstanding Options Exercisable Options $ 0.08 275,564 33,261 $ 0.31 78,212 78,133 $ 2.64 107,004 65,564 $ 3.82 73,857 73,857 $ 5.28 48,294 19,044 $ 7.03 18,940 18,940 $ 7.82 208,797 204,180 $ 13.20 92,800 87,663 903,468 580,642 The fair value of stock option awards is estimated at the date of grant using the Black-Scholes option-pricing model. The estimated fair value of each stock option is then expensed over the requisite service period, which is generally the vesting period (ranging between immediate vesting and four years). The determination of fair value using the Black-Scholes model is affected by the Company’s share price as well as assumptions regarding a number of complex and subjective variables, including expected price volatility, expected life, risk-free interest rate and forfeitures. F- 17 Stock options granted during the years ended December 31, 2022 and 2021 were valued using the Black-Scholes option-pricing model with the following weighted average assumptions: Schedule of Options Weighted Average Assumptions For the years ended December 31, 2022 2021 Expected volatility 94.5 % - 104.0 % 111.3 % Risk-free interest rate 1.69 % - 3.39 % 0.60 % Expected dividend yield 0 % 0 % Expected life of options in years 5.0 – 7.0 5.0 Estimated fair value of options granted $ 0.78 - $ 3.20 $ 7.03 Included in the above table are stock options granted in 2019 to purchase 231,058 shares of the Company’s common stock at an exercise price of $ 0.08 per share, which vest upon a specified performance condition. These stock options vested at the date of the Company’s IPO, which was the specified performance condition. The weighted average grant date fair value of stock options granted during the years ended December 31, 2022 and 2021 was approximately $ 2.70 and $ 5.48 , respectively. The weighted average fair value of stock options vested during the years ended December 31, 2022 and 2021 was approximately $ 1.25 and $ 5.47 , respectively. Total stock based compensation expense included in the accompanying consolidated statements of operations was as follows: Schedule of Stock Based Compensation Expense 2022 2021 For the years ended December 31, 2022 2021 Research and development $ 341,389 $ 530,556 General and administrative 459,307 708,713 Total stock based compensation $ 800,696 $ 1,239,269 At December 31, 2022, the total unrecognized compensation expense related to non-vested options was approximately $ 1.9 million and is expected to be recognized over the remaining weighted average service period of approximately 2.8 years. In March 2021, the Company modified the stock option exercise price for stock options granted during 2020, increasing the exercise price of such stock options (after adjusting for the 1-for-26.4 reverse stock split) from $0.18 or $2.60 to $0.31 or $3.82 per share, respectively . The increase in the stock option exercise price was accounted for as a modification of the stock grant in 2021; however, the impact on the Company’s consolidated statements of operations was immaterial. Warrants In connection with the IPO, the Company issued warrants to purchase such number of shares of the Company’s common stock equal to 5% of the total shares of common stock issued in the IPO. The warrants are exercisable at $ 5.00 per share, were not exercisable within the first six months after issuance, and may, under certain circumstances, be exercised on a cashless basis. The exercise price of the warrants is subject to standard antidilutive provision adjustments for stock splits, stock combinations, or similar events affecting the Company’s common stock. The Company has determined that these warrants should be classified as equity instruments since they do not require the Company to repurchase the underlying common stock and do not require the Company to issue a variable amount of common stock. In addition, these warrants are indexed to the Company’s common stock and do not have any unusual antidilution rights. Terms of the warrants outstanding at December 31, 2022 are as follows: Schedule of Warrants Initial Exercise Warrants Warrants Warrants Issuance Date Exercise Date Expiration Date Price Issued Exercised Outstanding January 14, 2022 July 10, 2022 January 11, 2027 $ 5.00 187,500 - 187,500 F- 18 Note 7 – Income Taxes The Company does not have any significant current income taxes due because of the losses generated in each year. Deferred income taxes represent the net tax effects of temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and income tax purposes. The Company’s deferred tax assets relate primarily to its net operating loss carryforwards and other balance sheet basis differences. In accordance with FASB ASC 740, the Company recorded a valuation allowance to fully offset the gross deferred tax asset because it is not more likely than not that the Company will realize future benefits associated with these deferred tax assets at December 31, 2022 and 2021. The valuation allowance increased by approximately $ 2.3 million and $ 652,000 for the years ended December 31, 2022 and 2021, respectively. The significant components of the Company’s deferred tax assets and liabilities as of December 31, 2022 and 2021 were as follows: Schedule of Significant Components of Company’s Deferred Tax Assets 2022 2021 December 31, 2022 2021 Deferred tax asset (liabilities) related to: Federal net operating loss carryforward $ 1,951,000 $ 702,000 State net operating loss carryforward 660,000 238,000 Capitalized costs 512,000 394,000 Acquired in-process research and development 163,000 178,000 Research and development credit 81,000 45,000 Stock compensation 534,000 336,000 Accrued expenses and other - ( 66,000 ) Total deferred tax assets 3,901,000 1,827,000 Valuation allowance ( 3,901,000 ) ( 1,827,000 ) Deferred tax asset, net of valuation allowance $ - $ - The income tax benefit for the years ended December 31, 2022 and 2021 differ from the amounts computed by applying the U.S. federal income tax rate of 21 % to loss before income tax benefit as a result of non-deductible expenses, tax credits generated, and increases in the Company’s valuation allowance. Schedule of Effective Income Tax Expense 2022 2021 For the years ended December 31, 2022 2021 Income tax benefit at the federal statutory rate $ ( 1,779,000 ) $ ( 463,000 ) Permanent differences and other 257,000 ( 61,000 ) State income taxes ( 515,000 ) ( 118,000 ) Research and development credit ( 76,000 ) ( 40,000 ) Other 40,000 30,000 Change in valuation allowance 2,073,000 652,000 Effective income tax expense $ - $ - A valuation allowance is required to reduce the deferred tax assets reported if, based on the weight of the evidence, it is more likely than not that some portion or all of the deferred tax assets will not be realized. After consideration of the available evidence, both positive and negative, the Company determined that valuation allowances of approximately $ 3.9 million and $ 1.8 million at December 31, 2022 and 2021, respectively, were necessary to reduce the deferred tax assets to the amount that will more likely than not be realized. At both December 31, 2022 and 2021, the Company had available net operating loss carryforwards of approximately $ 9.3 million and $ 3.3 million, respectively, for federal income tax purposes, all of which was generated after 2017 and can be carried forward indefinitely under the Tax Cuts and Jobs Act. At both December 31, 2022 and 2021, the Company had approximately $ 81,000 of federal research and development (“R&D”) tax credit carryforwards. If not utilized, the federal R&D credits will begin to expire in 2038. The Company also had $ 10.3 million of state net operating losses that will begin to expire in 2037. F- 19 Sections 382 and 383 of the Internal Revenue Code, and similar state regulations, contain provisions that may limit the NOL carryforwards available to be used to offset income in any given year upon the occurrence of certain events, including changes in the ownership interests of significant stockholders. In the event of a cumulative change in ownership in excess of 50% over a three-year period, the amount of the NOL carryforwards that the Company may utilize in any one year may be limited. Although the Company has not undertaken a formal analysis, it is likely that such an ownership change occurred during 2021. On March 27, 2020, the United States Department of the Treasury enacted the Coronavirus Aid, Relief, and Economic Security Act (“CARES Act”). The CARES Act is an emergency economic stimulus package that includes spending and tax breaks to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. While the CARES Act provides sweeping tax changes in response to the COVID-19 pandemic, some of the more significant provisions which are expected to impact the Company’s financial statements include removal of certain limitations on utilization of NOLs, increasing the loss carryback period for certain losses to five years, and increasing the ability to deduct interest expense, as well as amending certain provisions of the previously enacted Tax Cuts and Jobs Act. The Company has concluded that the CARES Act did not have a material impact on its financial position, results of operations, or cash flows. On December 27, 2020, the United States enacted the Consolidated Appropriations Act which extended many of the benefits of the CARES Act that were scheduled to expire. The Company evaluated the impact of the Consolidated Appropriations Act on its consolidated financial statements and related disclosures and concluded that the impact is immaterial. Note 8 – Related-party Transactions As described in Note 3 to the consolidated financial statements, the Company entered into the Notes with the Holders commencing in May 2017. The Holders of substantially all of the Notes were the Company’s founder and CEO, a member of the Company’s board of directors, and third parties that are family members of the founder and CEO. The Notes were converted into shares of the Company’s common stock on January 14, 2022 in connection with the closing of the IPO. In addition to the above Notes, the Company had amounts due to the founder and CEO that totaled $ 200,000 at December 31, 2021 for accrued compensation. See Note 9 to the consolidated financial statements. On April 1, 2022, the founder and CEO received the full amount of $ 200,000 . On January 4, 2022 and January 6, 2022, the Company issued unsecured promissory notes in the aggregate principal amount of approximately $ 139,000 (including an original issuance discount of an aggregate of approximately $ 14,000 ) to three related-party investors. The notes were to accrue interest at a rate of 12 % per annum and mature upon the earlier of (i) June 30, 2022, and (ii) the closing of a subsequent equity financing. “Subsequent equity financing” means the next sale (or series of related sales) by the Company of its equity securities following the date of the notes pursuant to which the Company receives gross proceeds of not less than $ 5.0 million. The notes were repaid in full on January 21, 2022 following the Company’s IPO on January 14, 2022 as the IPO was considered a subsequent Equity Financing. Additionally, on April 18, 2022, the founder and CEO exercised options to purchase up to 240,526 shares of the Company’s common stock at a weighted average exercise price of $ 0.10 per share for a total of approximately $ 24,000 . F- 20 Note 9 – Commitments and Contingencies Small Molecule Analogues On December 30, 2019, the Company acquired a series of small molecule analogues pursuant to an Asset Purchase Agreement (“APA”). Pursuant to the APA, the Company is required to make a payment of $50,000 upon raising of at least $2.0 million in funding, and up to approximately $1.75 million based upon successfully meeting clinical and sales milestones. As of December 31, 2022 and 2021, such fund-raising requirement was not met and no payments were made pursuant to the APA. The Company included, in accounts payable at both December 31, 2022 and 2021, the $ 50,000 required initial payment. Milestone based payments, if any, will be expensed as incurred. Research Collaboration and Product License Agreement with Minotaur Therapeutics, Inc. (“Minotaur”) and Commercial License Agreement with Taurus Biosciences, LLC (“Taurus”) Hillstream has entered into a research collaboration and product license agreement with Minotaur and a commercial license agreement with Taurus 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 complementary determining region 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. Hillstream believes that targeting PD-1 is a step toward enabling Hillstream to enter the rapidly growing IO therapeutics market with additional targets thereafter. The research collaboration with Minotaur includes an up-front payment of $ 150,000 . Hillstream shall fund the discovery and characterization study performed by Minotaur as set forth in a statement of work and budget. For example, the statement of work includes protein target expression and purification, cow immunization, phage display and hit identification and knob expression. Each target is estimated to be completed in 32 weeks. There are development and regulatory milestones on a target by target basis. There will be a milestone payment of $ 1,000,000 for each first product directed against a target and first regulatory approval in the U.S. In addition, there will be single digit royalties on net sales for up to ten years. The Taurus agreement contains single digit royalties on net product sales and development milestone payments tied to advancement through clinical trials and final regulatory approval. Employment Agreement In January 2019, the Company entered into a three-year employment agreement with its CEO which provides a specified base salary and bonus. The employment agreement also provides the CEO with certain benefits while employed and if employment ceases. The Company accrued $ 200,000 in 2019 related to the CEO’s base salary as per the employment agreement, which was included in due to founder as of December 31, 2021, which was paid in full on April 1, 2022. No bonus was approved by the board of directors of the Company for any period through December 31, 2022. In January 2020, the Company amended the employment agreement pursuant to which, in lieu of a cash base salary, the CEO was to be compensated with stock options to purchase 7,575 shares of the Company’s common stock per month (at an exercise price based upon the Company’s most recent 409A valuation at the date of the grant) effective January 1, 2020 until the Company received a minimum of $ 3.0 million of gross proceeds from the sale of its securities, after which time, cash compensation, pursuant to the employment agreement, would be paid. Effective January 1, 2021, the Company amended the employment agreement with its CEO to provide a revised base salary pre-funding (as defined in the employment agreement). In lieu of cash base salary, the CEO was to be compensated with stock options to purchase 18,939 shares of the Company’s common stock per month at an exercise price of $ 7.82 per share effective January 1, 2021 until funding meets or exceeds $ 5.0 million, after which time, cash compensation, pursuant to his employment agreement, would be paid. The amended employment agreement also provides for a future base salary for the CEO after the Company receives funding greater than $ 5.0 million or completes an initial public offering or similar transaction as set forth in the employment agreement. In addition, if the CEO acts as the “finder” of an investor who purchases more than $ 5.0 million of the Company’s equity, he will receive a grant of stock options to acquire 757,575 shares of common stock of the Company at an exercise price equal to the most recent fair value of the Company’s common stock at the time of grant. On June 1, 2021, the Company entered into an Amended and Restated Employment Agreement, as amended on September 24, 2021 (the “Amended and Restated Employment Agreement”) with the Company’s CEO. The term of the Amended and Restated Employment Agreement commenced upon the closing of the Company’s IPO and continues for a period of five years and automatically renews for successive one-year periods at the end of each term unless either party provides written notice of their intent not to renew at least 60 days prior to the expiration of the then effective term. Pursuant to the Amended and Restated Employment Agreement, the CEO will receive an annual base salary of $ 485,000 , which may be increased from time to time, and shall be eligible to receive an annual cash bonus equal to 55 % of his then base salary based upon the achievement of Company and individual performance targets established by the Company’s board of directors. In addition, in the first year in which the Company’s market capitalization (as defined in the Amended and Restated Employment Agreement) equals or exceeds (i) $250 million , the CEO shall receive a cash payment of $150,000; (ii) $500 million, the CEO shall receive a cash payment of $350,000; and (iii) $1.0 billion , the CEO shall receive a cash payment of $750,000 . Furthermore, following the date of the Company’s IPO, the CEO was issued an option to purchase 757,575 shares of the Company’s common stock at an exercise price of $ 4.00 per share, which options shall vest over a 48-month period commencing 12 months after the date of grant. This shall be in addition to any additional equity-based compensation awards the Company may grant the CEO from time to time. Note 10 – Subsequent Events On January 1, 2023, the Company granted its Chief Executive Officer stock options to purchase up to 515,127 shares of common stock of the Company at an exercise price of $ 0.39 per share in lieu of half of his salary for 2023. On February 27, 2023, the Company filed a Certificate of Cancellation with the Delaware Secretary of State with respect to Farrington Therapeutics LLC. Except as noted above, there were no material subsequent events that required recognition or additional disclosure in these consolidated financial statements. F- 21 ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None.