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 During the year ended December 31, 2025, we began a strategic shift in our business to prioritize digital asset treasury management and investment in the digital asset ecosystem, specifically the Canton Network. As described in Item 1, from 2022 through late 2025, we primarily operated as a biotechnology company developing therapeutic candidates in inflammatory and immunologic conditions. In November 2025, we undertook a strategic shift to prioritize a disciplined digital asset treasury strategy. In connection with this shift, in November 2025 we completed a private placement offering, strengthening our liquidity and supporting our digital asset treasury strategy. Concurrently, we entered into an at-the-market equity program and established a shelf registration statement. In January 2026, we completed a registered direct offering of common stock and pre-funded warrants, further strengthening our capital position. Our digital asset treasury strategy is centered on acquiring, holding and deploying Canton Coin (“CC”) and supporting the Canton Network through validator operations, application support and ecosystem participation. Our results of operations for the year ended December 31, 2025 reflect our two reportable segments: legacy biotechnology operations, and our digital asset treasury strategy initiated in November 2025. See Note 10 to our consolidated financial statements included elsewhere in this Annual Report on Form 10-K for additional segment financial performance information. 47 Components of Results of Operations Revenue We have not recognized revenue since inception or for the years ended December 31, 2025 and 2024. 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 HS3215 and HS1940. We cannot determine with certainty the duration and costs of future clinical trials of our product candidates, HS3215 and HS1940, 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; 48 ● 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. General and administrative expenses also include expenses related to our canton-centric digital asset treasury strategy. We expect that our general and administrative expenses will increase in the future as we increase our personnel headcount to support our digital asset treasury strategy and 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. Unrealized Loss from Digital Asset Holdings The unrealized gain (loss) from digital assets holdings represents the change in fair value of our digital assets. We use a USD/CC reference price from a crypto market data provider for purposes of periodic fair value remeasurement. Results of Operations Comparison of the Years Ended December 31, 2025 and 2024 The following table sets forth key components of our results of operations for the years ended December 31, 2025 and 2024. Year Ended December 31, 2025 2024 Change Consolidated Statements of Operations Data: Operating expenses: Research and development $ 3,073,964 $ 6,392,097 $ (3,318,133 ) General and administrative 17,032,102 6,041,695 10,990,407 Total operating expenses 20,106,066 12,433,792 7,672,274 Other income (expense): Interest expense (28,345 ) (13,684 ) (14,661 ) Interest income 41,410 249,908 (208,498 ) Unrealized loss from digital assets holdings (22,010,362 ) -0- (22,010,362 ) Total other income (expense) (21,997,297 ) 236,224 (22,233,521 ) Total loss before income taxes $ (42,103,363 ) $ (12,197,568 ) $ (29,905,795 ) 49 Research and Development Expenses The table below summarizes by program our research and development expenses for the periods presented: Year Ended December 31, 2025 2024 Change HS1940 $ 293,791 $ 431,362 $ (137,571 ) HS3215 182,649 445,183 (262,534 ) GV023 632,557 600,000 32,557 GV104 941,678 2,829,454 (1,887,776 ) Other research and development 1,023,289 2,086,098 (1,062,809 ) Total research and development expenses $ 3,073,964 $ 6,392,097 $ (3,318,133 ) Research and development expenses decreased by $3.3 million, or 52%, to $3.1 million for the year ended December 31, 2025 from $6.4 million for year ended December 31, 2024. The decrease was primarily the result of decreases in (i) clinical trial expenses of approximately $1.6 million due to completion of our Phase 1 clinical trial and offset by start-up costs related to our Phase 2 clinical trial in GV104, (ii) license fees of $1.5 million, (iii) pre-clinical expenses of $0.9 million. These decreases were offset by an increase of $0.3 million in CMC expenses and an increase of $0.1 million in stock-based compensation expense and $0.2 million in wages related to our research and development personnel. General and Administrative Expenses General and administrative expenses increased by $11.0 million, or 182%, to $17.0 million for the year ended December 31, 2025 from $6.0 million for the year ended December 31, 2024. The change in general and administrative expenses was primarily due to increases of (i) $7.3 million in general and administrative personnel expenses including bonuses, (ii) $1.5 million in investor relations, (iii) $2.0 million in stock-based compensation expense related to our general and administrative personnel (iv) $0.2 million in public company expenses, and (v) $0.1 million in other general corporate. These increases were offset by a decrease in professional fees of $0.2 million. Interest Expense Interest expense increased by $14,661, or 107%, to $28,345 for the year ended December 31, 2025 from $13,684 for the year ended December 31, 2024. The increase in interest expense was primarily related to the director and officer insurance premium financing liability as well as a note payable which was fully paid as of December 31, 2025. 50 Interest Income Interest income decreased by approximately $0.2 million, or 83%, to less than $0.1 million for the year ended December 31, 2025 from $0.3 million for year ended December 31, 2024. The decrease in interest income was primarily due to the decrease in cash during 2025 and a decrease in interest rates. Unrealized Loss from Digital Assets Holdings Unrealized loss from digital assets holdings increased to $22.0 million for the year ended December 31, 2025 from $0 for year ended December 31, 2024. This was the result of the contribution of digital assets from the Cryptocurrency Offering in November 2025 and subsequent digital asset purchases, where the reference price of CC as of December 31, 2025 was less than the weighted average cost of our CC holdings. Liquidity and Capital Resources The accompanying consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. During the year ended December 31, 2025, we incurred operating losses in the amount of approximately $20.0 million, expended approximately $16.0 million in net cash used in operating activities, and had an accumulated deficit of approximately $72.8 million as of December 31, 2025. Through December 31, 2025, we have primarily financed operations through public and private offerings of equity securities. During the year ended December 31, 2024, we sold 203,359 shares of our common stock pursuant to the 2024 ATM Agreement for net proceeds of approximately $0.3 million, after deducting commissions of $15,506 and other offering fees of $41,952. During the year ended December 31, 2025, we sold 1,657,799 shares of our common stock pursuant to the 2025 ATM Agreement for net proceeds of approximately $5.1 million, after deducting commissions of approximately $0.1 million. Further, on June 17, 2024, December 9, 2024, June 13, 2025, and July 25, 2025, we closed private placement offerings (the “June 2024 PIPE Offering,” “December 2024 PIPE Offering,” “June 2025 PIPE Offering,” and the “July 2025 PIPE Offering,” respectively) with certain accredited investors, consisting of shares of our common stock and/or pre-funded warrants to acquire shares of our common stock and common warrants to acquire shares of our common stock. The combined net proceeds received from these offerings was approximately $7.0 million. In addition, on July 23, 2025 and August 26, 2025, we closed registered direct public offerings (the “July 2025 Direct Offering” and the “August 2025 Direct Offering”) with certain investors, consisting of shares of our common stock and/or pre-funded warrants to acquire shares of our common stock and common warrants to acquire shares of our common stock, with combined net proceeds of approximately $6.3 million. In November 2025, we closed the Cash Offering for net proceeds of approximately $90.9 million in cash and the Cryptocurrency Offering for net proceeds of approximately $446.2 million in cryptocurrency. In the prior reporting period, we identified certain conditions that raised substantial doubt about our ability to continue as a going concern. These conditions included our limited operating history, recurring operating losses, and recurring negative cash flows from operations as described above. However, on November 3, 2025, we raised net proceeds of over $537 million through a private placement offering. As a result, we believe we now have sufficient liquidity to fund anticipated cash requirements for operations and working capital purposes through at least March 2027. As a result, the previously disclosed going concern uncertainty language has been removed as substantial doubt no longer exists regarding our ability to continue as a going concern. 51 Cash Flow Activities for the Years Ended December 31, 2025 and 2024 The following table sets forth a summary of our cash flows for the periods presented. Year Ended December 31, 2025 2024 Net cash used in operating activities $ (16,128,316 ) $ (10,901,991 ) Net cash used in investing activities (77,572,567 ) -0- Net cash provided by financing activities 107,174,270 3,526,000 Net increase (decrease) in cash $ 13,473,387 $ (7,375,991 ) Cash Flows from Operating Activities Cash used in operating activities for the year ended December 31, 2025 was $16.0 million which consisted of net loss of $42.1 million, partially offset by non-cash stock-based compensation of approximately $2.9 million, unrealized loss from digital asset holdings of approximately $22.0 million, write-off of deferred offering costs of $0.1 million, and net changes in operating assets and liabilities of approximately $1.1 million. Cash used in operating activities for the year ended December 31, 2024 was $10.9 million which consisted of net loss of $12.2 million, partially offset by non-cash stock-based compensation of approximately $0.7 million, non-cash stock issuance pursuant to a services agreement of less than $0.1 million, and net changes in operating assets and liabilities of approximately $0.6 million. Cash Flows from Investing Activities Cash used in investing activities for the year ended December 31, 2025 was $77.6 million, representing the purchase of digital assets. There were no cash flows from investing activities during the year ended December 31, 2024. Cash Flows from Financing Activities Cash provided by financing activities for the year ended December 31, 2025 was $107.2 million. The net increase in financing activities was due to proceeds from the Cash Offering of $99.4 million, proceeds from the PIPE offerings of $3.7 million, proceeds from the registered direct public offerings of $7.1 million, proceeds from the ATM offerings of $5.5 million, proceeds from the exercise of warrants of $1.5 million and proceeds from option exercises of $0.2 million. These increases were offset by payments of deferred offering and other issuance costs of $10.0 million and repayment of note payable of $0.2 million. Cash provided by financing activities for the year ended December 31, 2024 was $3.5 million. The net increase in financing activities was due to proceeds from the PIPE Offerings of $4.1 million, proceeds from the ATM Sale of $0.1 million and insurance premium financing liability of $0.4 million, offset by payments of deferred offering costs of $0.7 million and repayments of insurance premium financing liability of $0.4 million. Reverse Stock Split On May 24, 2024, the Company effectuated an additional reverse split of shares of its common stock at a ratio of 1-for-15 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 accompanying consolidated financial statements have been retroactively adjusted to reflect the reverse split for all periods presented. 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. We consider the following areas to be our critical accounting estimate: fair value of digital assets, research and development expense recognition, stock-based compensation, allowances of deferred tax assets, 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. 52 Critical Accounting Policies Digital Assets We account for digital assets, which are comprised of CC, as indefinite-lived intangible assets in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 350-60, Intangibles—Goodwill and Other-Crypto Assets . Our digital assets are initially recorded at cost. Subsequently, they are measured at fair value with the gain or loss associated with remeasurement of the digital assets recognized in net income (loss) during each reporting period. Upon disposal of a digital asset (e.g., by sale, exchange or transfer), we derecognize the asset and recognize a realized gain or loss in net income, calculated as the difference between the sale proceeds and the asset’s carrying amount. The fair value of the digital assets is determined based on the quoted price in its principal market at the time of measurement. We determine its principal market as the market that it has access to and has the greatest volume and level or orderly transactions in accordance with FASB ASC 820, Fair Value Measurement . We track the cost of its digital assets using the first-in-first-out (FIFO) method. 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. 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 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. 53