Canton Strategic Holdings, Inc. 10-K

ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. You should read the following discussion and analysis of our financial condition and plan of operations together with and our accompanying consolidated financial statements and the related notes appearing elsewhere in this Annual Report on Form 10-K. In addition to historical information, this discussion and analysis contains forward-looking statements that involve risks, uncertainties and assumptions. Our actual results may differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” included elsewhere in this Annual Report on Form 10-K. All amounts in this report are in U.S. dollars, unless otherwise noted. Overview Tharimmune is a clinical-stage biotechnology company developing therapeutic candidates in rare, inflammatory and oncologic conditions with high unmet need. On November 3, 2023, we entered into a patent license agreement (the “Avior License Agreement”) with Avior Inc. d/b/a Avior Bio, LLC (“Avior”) pursuant to which we received an exclusive sublicensable right and license to Licensed Patent Rights and Licensed Technology to, among other things, Develop, have Developed, make, have made, use, sell, import, export and commercialize TH104 and TH103 and to practice the Licensed Technology in connection with the foregoing, throughout the world, each as defined in the Avior License Agreement. See “Recent Developments” below for additional information. In February 2023, the U.S. Food and Drug Administration (“FDA”) approved an investigational new drug (“IND”) application for TH104. TH104 has a dual mechanism of action by affecting multiple receptors, known to suppress chronic, debilitating pruritis or “uncontrollable itching.” With respect to TH104, we intend to first seek approval for the treatment of moderate to severe chronic pruritis in patients with primary biliary cholangitis (“PBC”), an orphan rare form of liver disease with no known cure in which more than 70% of patients suffer from debilitating chronic pruritis, and with respect to TH103, we intend to develop the product candidate and potentially file an IND. 68 We are also developing an early-stage pipeline of novel therapeutic candidates targeting validated high value immuno-oncology (“IO”) targets including human epidermal growth factor (“EGF”) receptor 2 (“HER2”), human EGF receptor 3 (“ HER3”) and programmed cell death protein 1 (“PD-1”). We are developing antibodies including bispecific antibodies, antibody drug conjugates (“ADCs”) and small molecular weight bovine-derived Picobodies™ or antibody “knob” domains which have the potential to target and bind more tightly to “undruggable” epitopes better than full sized antibodies. We are advancing TH3215, a bispecific against both HER2 and HER3 antibody which targets a novel “bridging epitope” encompassing multiple domains of the HER2 extracellular domain (“ECD”) as well as ligand-dependent and independent blocking of the ECD of HER3 into IND-enabling studies in 2024. In addition, we anticipate that TH0059, a HER2/HER3 bispecific ADC (“bsADC”), and TH1940, a PD-1 Picobody, will progress to enter IND-enabling studies in 2024. We have deprioritized our previous preclinical candidate, HSB-1216, due to a strategic reprioritization of our vision to focus on therapeutics in high unmet need cancers focused on novel epitopes of certain antitumor drug targets. The critical components of our business strategy include: ● Develop TH14 as a transmucosal buccal film product for the treatment of chronic pruritis in PBC and other inflammatory diseases; ● Continue to advance TH3215 as an anti-HER2/HER3 BspAb for multiple tumor types including high unmet need cancers; ● Effectively create a strategy to develop TH0059 as a bispecific monoclonal ADC specifically targeted to both HER2 and HER3 receptors in high unmet need standard-of-care resistant tumors with a high capacity to metastasize; ● Create a preclinical and clinical path forward for our third product candidate, TH1940, a unique PD-1 Picobody with unique binding differentiation compared to full length antibodies for IO vulernable tumors; ● Hasten the discovery of next generation multi-specific (bi- and tri) antibodies with binding capabilities to novel epitopes of combinations of HER2, HER3, PD-1, PD-L1, TROP2 and other validated targets with and without toxin delivery capacity to multiple high unmet need rare cancers; ● Pursue strategic collaboration opportunities to maximize the value of our pipeline to bring novel therapies to patients suffering from high unmet need conditions. Applied Biomedical Research Institute Research and Development Collaboration and License Agreement On July 5, 2023 (the “ABSI Effective Date”), we entered into a Research and Development Collaboration and License Agreement (the “ABSI Agreement”) with Applied Biomedical Science Institute (“ABSI”) pursuant to which ABSI granted us an exclusive royalty-bearing, sublicensable license to the ABSI Patents and a non-exclusive, royalty-bearing, sublicensable license to the ABSI Know-How to Exploit the ABSI Products for the treatment, diagnosis, prediction, detection or prevention of disease in humans and animals worldwide (the “Territory”). Pursuant to the ABSI Agreement, the parties shall form a committee to manage the preclinical, IND- enabling studies and such other activities as shall lead to the initiation of a Phase 1 clinical trial of the ABSI Product. The parties will collaborate on a Target-by-Target basis to identify and evaluate ABSI Products directed against such Target with a view to identifying or generating suitable Products for our Company to Exploit. “Target” means ErB2 (Her2) and ErbB3. Upon completion of the Discovery Timeline for a Target, subject to the terms and conditions of ABSI Agreement, we shall exclusively own any ABSI Products against such Target. In the event the committee determines that the discovery activities are unsuccessful with respect to a Target, we may propose an additional target, which, upon approval by ABSI, shall replace a failed Target, each capitalized term as defined in the ABSI Agreement. As part of the ABSI Agreement, on July 26, 2023, we issued 25,107 shares of our common stock with a per share value of $9.95, representing total compensation expense of $250,000. 69 Recent Developments On November 3, 2023 (the “Avior Effective Date”), we entered into the Avior Patent License Agreement with Avior pursuant to which we received an exclusive sublicensable right and license to Licensed Patent Rights and Licensed Technology to, among other things, Develop, have Developed, make, have made, use, sell, import, export and commercialize TH104 and TH103 and to practice the Licensed Technology in connection with the foregoing, throughout the world. Pursuant to the Avior Patent License Agreement, we paid Avior a mid-six digit up front license fee within ten days of the Avior Effective Date and an additional mid-six digit license fee which shall be paid in four equal installments within ten days of the end of each fiscal quarter following the Avior Effective Date. In addition, we shall pay Avior a high single digit percentage of any upfront payments received by us as a result of the grant of any sublicenses with respect to TH104. We shall also pay Avior milestone payments in the aggregate amount of $24.25 million upon the occurrence of various development milestones (the “Development Milestone Payments”). Furthermore, we shall pay Avior certain fees based upon sales milestones. The payments for such sales milestones range from the low seven digits to the low eight digits with higher sales being subject to higher fees. Finally, we shall pay Avior royalties based on net sales. Such royalties range from low single digit percentages to mid-single digit percentages with higher sales being subject to lower percentages. The Avior Patent License Agreement shall expire upon the expiration of the final payment obligation due to Avior as set forth in such agreement. Upon the expiration of the Avior Patent License Agreement, we shall have a fully paid-up, irrevocable, freely transferable and sublicensable worldwide license to the Licensed Patent Rights and Licensed Technology to Develop, have Developed, make, have made, use, have used sell, offer for sale, have sold, import, have imported, export, have exported, commercialize or have commercialized any and all Licensed Products and to practice the Licensed Technology worldwide. Pursuant to the Avior Patent License Agreement, we may terminate the agreement at any time without cause, upon 30 days’ prior written notice to Avior along with payment of the next unpaid Development Milestone Payment, if any. Furthermore, either we or Avior may terminate the Avior Patent License Agreement (i) on written notice to the other party if the other party materially breaches any provision of the Avior Patent License Agreement and fails to cure such breach within 30 days after the breaching party receives written notice thereof or (ii) on written notice in the event that either party (A) becomes insolvent or admits its inability to pay its debts generally as they become due; (B) becomes subject, voluntarily or involuntarily, to any proceeding under any domestic or foreign bankruptcy or insolvency law, which is not fully dismissed or vacated within 60 days; (C) is dissolved or liquidated or takes any corporate action for such purpose; (D) makes a general assignment for the benefit of creditors; or (E) has a receiver, trustee, custodian or similar agent appointed by order of any court of competent jurisdiction to take charge of or sell any material portion of its property or business. Upon termination of the Avior Patent License Agreement, the license granted pursuant to such agreement shall terminate and all rights in the Licensed Patent Rights and Licensed Products shall revert back to Avior. Components of Results of Operations Revenue We did not recognize any revenue for the years ended December 31, 2023 and 2022. 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, and manufacture drug supplies and materials as well as stock-based compensation for our research and development personnel. Research and development expenses are charged to operations as incurred. We accrue costs incurred by external service providers, including contract research organizations and clinical investigators, based on estimates of service performed and costs incurred. These estimates include the level of services performed by third parties, patient enrollment in clinical trials, administrative costs incurred by third parties, and other indicators of the services completed. Based on the timing of amounts invoiced by service providers, we may also record payments made to those providers as prepaid expenses that will be recognized as expense in future periods as the related services are rendered. We have incurred research and development expenses related to the development of HSB-1216, which has been deprioritized. We expect that our research and development expenses will increase as we plan for and commence our clinical trials of TH3215 and TH1940. 70 We cannot determine with certainty the duration and costs of future clinical trials of our product candidates, TH3215 and TH1940, 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. General and Administrative Expenses General and administrative expenses consist primarily of compensation and consulting related expenses, including stock-based compensation for our general and administrative personnel. 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, directors and officers insurance expenses, corporate governance expenses, investor relations activities and other administrative and professional services. Interest Income Interest income consists of interest income from funds held in our cash accounts. Deferred Offering Costs Deferred offering costs consisted of legal, accounting, printing, and filing fees that were capitalized and offset against the proceeds from our common stock offerings during the year. Results of Operations Comparison of the Years Ended December 31, 2023 and 2022 The following table sets forth key components of our results of operations for the years ended December 31, 2023 and 2022. Year Ended December 31, 2023 2022 Change Consolidated Statements of Operations Data: Operating expenses: Research and development $ 3,559,635 $ 2,278,424 $ 1,281,211 General and administrative 5,895,585 4,603,514 1,292,071 Total operating expenses 9,455,220 6,881,938 2,573,282 Other expense: Interest expense (16,505 ) (1,591,244 ) 1,574,739 Interest income 152,631 - 152,631 Total other income (expense) 136,126 (1,591,244 ) 1,727,370 Net loss $ (9,319,094 ) $ (8,473,182 ) $ (845,912 ) 71 Research and Development Expenses Research and development expenses increased by $1.3 million, or 56.2%, to $3.6 million for the year ended December 31, 2023 from $2.3 million for the year ended December 31, 2022. The increase was the result of an increase in expenses for pre-clinical activities of approximately $0.3 million, an increase in licensing fees of approximately $1.0 million, an increase of approximately $0.1 million in stock-based compensation expense related to research and development team members because of an increased number of stock options vested during the year. These increases were offset by a decrease in research and development consulting expenses of approximately $0.1 million. The increase for the year ended December 31, 2023 was primarily the result of increased focus on newer product candidates as we placed our now deprioritized product candidate, HSB-1216, on hold during the 3 rd quarter. General and Administrative Expenses General and administrative expenses increased by approximately $1.3 million, or 28.1%, to $5.9 million for the year ended December 31, 2023 from $4.6 million for the year ended December 31, 2022. The change in general and administrative expenses was primarily due to an increase of approximately $0.9 million in investor relations expenses, approximately $0.6 million in general and administrative personnel expenses, $0.2 million in legal expenses, and other general corporate increases of approximately $0.1 million. These increases were offset by a decrease of $0.3 million in financial consulting expenses and a decrease in insurance expense of approximately $0.2 million. Interest Expense Interest expense decreased by $1.6 million, or 99%, to $16,505 for the year ended December 31, 2023 from $1.6 million for the year ended December 31, 2022. The decrease in interest expense was primarily related to the unamortized debt discount charged to interest expense on the date of our IPO during 2022 further described in Note 3 of the accompanying consolidated financial statements. Interest Income Interest income increased by $0.2 million, or 100.0%, to $0.2 million for the year ended December 31, 2023 from $0 for the year ended December 31, 2022. The increase in interest income was primarily from the funds held in our cash accounts. Net Loss Net loss increased by $0.8 million, or 10.0%, to $9.3 million for the year ended December 31, 2023 from $8.5 million for the year ended December 31, 2022. The change in net loss was primarily related to the increase in research and development and general and administrative expenses described above offset by the decrease in interest expense. 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, 2023, we incurred operating losses of approximately $9.5 million, expended approximately $7.3 million in cash in operating activities, and had an accumulated deficit of approximately $24.7 million as of December 31, 2023. We financed our working capital requirements through December 31, 2023 primarily through the issuance of common stock in various offerings. We received gross proceeds of approximately $13.6 million through public offerings of our common stock on May 2, 2023 and November 30, 2023 which generated net proceeds to us of approximately $2.1 million and $9.7 million, respectively. 72 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 consolidated financial statements included elsewhere in this Annual Report on Form 10-K 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. 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 our future operations; however, 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 our business objectives and product development timelines and may result in delaying or terminating clinical trial activities which could have a material adverse effect on our results of operations. Cash Flow Activities for the Year Ended December 31, 2023 and 2022 The following table sets forth a summary of our cash flows for the periods presented. Year Ended December 31, 2023 2022 Net cash used in operating activities $ (7,300,106 ) $ (6,557,950 ) Net cash provided by financing activities 11,724,924 13,064,128 Net increase in cash $ 4,424,818 $ 6,506,178 Cash Flows from Operating Activities Cash used in operating activities for the year ended December 31, 2023 was $7.3 million which consisted of net loss of $9.3 million, partially offset by non-cash stock-based compensation of approximately $0.8 million, non-cash stock issuance pursuant to a services agreement of approximately $0.4 million, and net changes in operating assets and liabilities of approximately $0.8 million. Cash used in operating activities for the year ended December 31, 2022 was $6.6 million which consisted of net loss of $8.5 million and net decrease in operating assets and liabilities of $0.6 million, partially offset by $2.5 million in non-cash charges and other adjustments to reconcile net loss to net cash used in operating activities. The non-cash charges consist of amortization of debt discount of $1.6 million, stock compensation expenses of $0.8 million, stock issuance pursuant to service agreement of $0.1 million, and interest expense and original issuance discount on promissory notes of $14,645. The net decrease in operating activities was primarily due to a decrease of $0.2 million due to founder, a decrease in accounts payable of $0.1 million, a decrease in accrued expenses of $0.1 million, and a decrease of $0.1 million in prepaid expenses and other current assets. Cash Flows from Financing Activities Cash provided by financing activities for the year ended December 31, 2023 was $11.7 million. The net increase in financing activities was from net cash proceeds of $12.2 million from the issuance of our common stock in connection with public offerings and $0.7 million in proceeds received from insurance premium financing liability offset by deferred offering costs of $0.5 million and $0.7 million in repayments of insurance premium financing liability. Cash provided by financing activities for the year ended December 31, 2022 was $13.1 million. The net increase in financing activities was from net cash proceeds of $13.6 million from the issuance of our common stock in connection with our IPO, $0.9 million from insurance premium financing liability, $0.1 million from the issuance of promissory notes, offset by repayment of insurance premium financing liability of $0.9 million, payment of deferred offering costs of $0.5 million, repayment of promissory notes of $0.1 million, and purchase of treasury stock at cost of $0.1 million. See Note 2 of our consolidated financial statements. 73 Critical Accounting Policies and Use of Estimates Use of Estimates The preparation of financial statements in conformity with accounting principles generally accepted 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 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: research and development expense recognition, valuation of common shares and stock options, 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 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, consultants, and 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. 74 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 lack company-specific historical and implied volatility information. Therefore, we have estimated our expected stock price 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. Recently Issued and Adopted Accounting Standards See Note 2 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K. JOBS Act On April 5, 2012, the Jumpstart Our Business Startups Act (the “JOBS Act”) was enacted. Section 107 of the JOBS Act provides that an “emerging growth company” 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 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. Subject to certain conditions set forth in the JOBS Act, as an “emerging growth company,” we intend to rely on certain of these exemptions, including, without limitation, (i) providing an auditor’s attestation report on our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, as amended, and (ii) complying with the requirement adopted by the Public Company Accounting Oversight Board regarding the communication of critical audit matters in the auditor’s report on financial statements. We will remain an “emerging growth company” until the earliest of (i) the last day of the fiscal year in which we have total annual gross revenues of $1.235 billion or more; (ii) the last day of our fiscal year following the fifth anniversary of the date of the completion of our IPO; (iii) the date on which we have issued more than $1 billion in nonconvertible debt during the previous three years; or (iv) the date on which we are deemed to be a large accelerated filer under the rules of the SEC. ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. The Company is not required to provide the information required by this Item as it is a “smaller reporting company,” as defined in Rule 12b-2 of the Exchange Act. 75