UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
FORM
(Mark One)
| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For
the quarterly period ended
OR
| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _________to ___________
Commission
File Number:
(Exact Name of Registrant as Specified in its Charter)
(State or other jurisdiction of incorporation or organization) |
(I.R.S. Employer Identification No.) | |
| (Address of principal executive offices) | (Zip Code) | |
(Registrant’s telephone number, including area code)
Not applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered | ||
Indicate
by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Indicate
by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule
405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant
was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large accelerated filer | ☐ | Accelerated filer | ☐ | |
| ☒ | Smaller reporting company | |||
| Emerging growth company |
If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying
with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate
by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐
Number of common shares outstanding as of August 10, 2022 was .
| 2 |
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS AND INDUSTRY DATA
This Quarterly Report on Form 10-Q contains forward-looking statements which are made pursuant to the safe harbor provisions of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements may be identified by such forward-looking terminology as “may,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” “potential,” “continue” or the negative of these terms or other comparable terminology. Our forward-looking statements are based on a series of expectations, assumptions, estimates and projections about our company, are not guarantees of future results or performance and involve substantial risks and uncertainty. We may not actually achieve the plans, intentions or expectations disclosed in these forward-looking statements. Actual results or events could differ materially from the plans, intentions and expectations disclosed in these forward-looking statements. Our business and our forward-looking statements involve substantial known and unknown risks and uncertainties, including the risks and uncertainties inherent in our statements regarding:
| ● | our projected financial position and estimated cash burn rate; | |
| ● | our estimates regarding expenses, future revenues and capital requirements; | |
| ● | our ability to continue as a going concern; | |
| ● | our need to raise substantial additional capital to fund our operation; | |
| ● | the success, cost and timing of our clinical trials; | |
| ● | our dependence on third parties in the conduct of our clinical trials; | |
| ● | our ability to obtain the necessary regulatory approvals to market and commercialize our product candidates; | |
| ● | the ultimate impact of the ongoing COVID-19 pandemic, or any other health epidemic, on our business, our clinical trials, our research programs, healthcare systems or the global economy as a whole; | |
| ● | the potential that results of pre-clinical and clinical trials indicate our current product candidates or any future product candidates we may seek to develop are unsafe or ineffective; | |
| ● | the results of market research conducted by us or others; | |
| ● | our ability to obtain and maintain intellectual property protection for our current and future product candidates; | |
| ● | our ability to protect our intellectual property rights and the potential for us to incur substantial costs from lawsuits to enforce or protect our intellectual property rights; | |
| ● | the possibility that a third party may claim we or our third-party licensors have infringed, misappropriated or otherwise violated their intellectual property rights and that we may incur substantial costs and be required to devote substantial time defending against claims against us; | |
| ● | our reliance on third-party suppliers and manufacturers; | |
| ● | the success of competing therapies and products that are or become available; | |
| ● | our ability to expand our organization to accommodate potential growth and our ability to retain and attract key personnel; | |
| ● | the potential for us to incur substantial costs resulting from product liability lawsuits against us and the potential for these product liability lawsuits to cause us to limit our commercialization of our product candidates; | |
| ● | market acceptance of our product candidates, the size and growth of the potential markets for our current product candidates and any future product candidates we may seek to develop, and our ability to serve those markets; and | |
| ● | the successful development of our commercialization capabilities, including sales and marketing capabilities. |
All of our forward-looking statements are as of the date of this Quarterly Report on Form 10-Q only. In each case, actual results may differ materially from such forward-looking information. We can give no assurance that such expectations or forward-looking statements will prove to be correct. An occurrence of, or any material adverse change in, one or more of the risk factors or risks and uncertainties referred to in this Quarterly Report on Form 10-Q or included in our other public disclosures or our other periodic reports or other documents or filings filed with or furnished to the U.S. Securities and Exchange Commission (the “SEC”) could materially and adversely affect our business, prospects, financial condition and results of operations. Except as required by law, we do not undertake or plan to update or revise any such forward-looking statements to reflect actual results, changes in plans, assumptions, estimates or projections or other circumstances affecting such forward-looking statements occurring after the date of this Quarterly Report on Form 10-Q, even if such results, changes or circumstances make it clear that any forward-looking information will not be realized. Any public statements or disclosures by us following this Quarterly Report on Form 10-Q that modify or impact any of the forward-looking statements contained in this Quarterly Report on Form 10-Q will be deemed to modify or supersede such statements in this Quarterly Report on Form 10-Q.
This Quarterly Report on Form 10-Q may include market data and certain industry data and forecasts, which we may obtain from internal company surveys, market research, consultant surveys, publicly available information, reports of governmental agencies and industry publications, articles and surveys. Industry surveys, publications, consultant surveys and forecasts generally state that the information contained therein has been obtained from sources believed to be reliable, but the accuracy and completeness of such information is not guaranteed. While we believe that such studies and publications are reliable, we have not independently verified market and industry data from third-party sources.
| 3 |
ITEM 1. FINANCIAL STATEMENTS
HILLSTREAM BIOPHARMA, INC.
CONDENSED CONSOLIDATED BALANCE SHEETS
| June 30, 2022 | December 31, | |||||||
| (Unaudited) | 2021 | |||||||
| ASSETS | ||||||||
| Current assets | ||||||||
| Cash | $ | $ | ||||||
| Prepaid expenses and other current assets | ||||||||
| Deferred offering costs | ||||||||
| Total current assets | ||||||||
| Total assets | $ | $ | ||||||
| LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT) | ||||||||
| Current liabilities | ||||||||
| Accounts payable | $ | $ | ||||||
| Accrued interest | ||||||||
| Due to founder | ||||||||
| Accrued expenses | ||||||||
| Redemption liability | ||||||||
| Short-term portion of related party convertible notes, net | ||||||||
| Total current liabilities | ||||||||
| Related party convertible notes, net of short-term portion | ||||||||
| Total liabilities | ||||||||
| Commitments and contingencies (see Note 8) | ||||||||
| Stockholders’ equity (deficit) | ||||||||
| Preferred stock, $ par value, shares authorized, shares issued and outstanding as of June 30, 2022 and December 31, 2021 | ||||||||
| Common stock, $ par value, shares authorized, and shares issued and and shares outstanding as of June 30, 2022 and December 31, 2021, respectively | ||||||||
| Additional paid-in capital | ||||||||
| Accumulated deficit | ( | ) | ( | ) | ||||
Treasury stock, at cost, and shares held in treasury as of June 30, 2022 and December 31, 2021, respectively | ( | ) | ||||||
| Total stockholders’ equity (deficit) | ( | ) | ||||||
| Total liabilities and stockholders’ equity (deficit) | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-1 |
HILLSTREAM BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(UNAUDITED)
| For the Three Months Ended June 30, | For the Six Months Ended June 30, | |||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Operating expenses | ||||||||||||||||
| Research and development | $ | $ | $ | $ | ||||||||||||
| General and administrative | ||||||||||||||||
| Total operating expenses | ||||||||||||||||
| Loss from operations | ( | ) | ( | ) | ( | ) | ( | ) | ||||||||
| Other expense | ||||||||||||||||
| Interest expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Change in redemption value | ( | ) | ( | ) | ||||||||||||
| Total other expense | ( | ) | ( | ) | ( | ) | ||||||||||
| Net loss | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Net loss per share: | ||||||||||||||||
| Basic and diluted | $ | ( | ) | $ | ( | ) | $ | ( | ) | $ | ( | ) | ||||
| Weighted average number of common shares outstanding: | ||||||||||||||||
| Basic and diluted | ||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-2 |
HILLSTREAM BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)
FOR THE THREE AND SIX MONTHS ENDED JUNE 30, 2022 AND 2021
(UNAUDITED)
| Common Stock | Additional Paid-in | Accumulated | Treasury Stock | |||||||||||||||||||||||||
| Shares | Amount | Capital | Deficit | Shares | Amount | Total | ||||||||||||||||||||||
| For the three months ended June 30, 2021: | ||||||||||||||||||||||||||||
| Balance, March 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||
| For the six months ended June 30, 2021: | ||||||||||||||||||||||||||||
| Balance, December 31, 2020 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||
| Balance, June 30, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||
| For the three months ended June 30, 2022: | ||||||||||||||||||||||||||||
| Balance, March 31, 2022 | $ | $ | $ | ( | ) | $ | $ | |||||||||||||||||||||
| Net loss | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Exercise of stock options | - | |||||||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||
| Purchase of treasury stock at cost | 30,000 |
( | ) | ( | ) | |||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||
| For the six months ended June 30, 2022: | ||||||||||||||||||||||||||||
| Balance, December 31, 2021 | $ | $ | $ | ( | ) | $ | $ | ( | ) | |||||||||||||||||||
| Net loss | - | ( | ) | - | ( | ) | ||||||||||||||||||||||
| Exercise of stock options | - | |||||||||||||||||||||||||||
| Stock based compensation | - | - | ||||||||||||||||||||||||||
| Stock issuance pursuant to services agreement | - | |||||||||||||||||||||||||||
| Initial public offering, net of issuance costs of $ | - | |||||||||||||||||||||||||||
| Conversion of related-party convertible notes | - | |||||||||||||||||||||||||||
| Purchase of treasury stock at cost | 30,000 |
( | ) | ( | ) | |||||||||||||||||||||||
| Balance, June 30, 2022 | $ | $ | $ | ( | ) | $ | ( | ) | $ | |||||||||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-3 |
HILLSTREAM BIOPHARMA, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(UNAUDITED)
| For the Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | ( | ) | $ | ( | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Amortization of debt discount | ||||||||
| Stock based compensation | ||||||||
| Stock issuance pursuant to services agreement | ||||||||
| Change in fair value of redemption liability | ||||||||
| (Increase) decrease in: | ||||||||
| Prepaid expenses and other current assets | ( | ) | ||||||
| Increase (decrease) in: | ||||||||
| Accounts payable | ( | ) | ||||||
| Accrued interest | ||||||||
| Due to founder | ( | ) | ||||||
| Accrued expenses | ( | ) | ||||||
| Net cash used in operating activities | ( | ) | ( | ) | ||||
| Net cash provided by (used in) investing activities | ||||||||
| Cash flows from financing activities: | ||||||||
| Exercise of stock options | ||||||||
| Proceeds from issuance of common stock upon initial public offering, net of underwriting discounts and issuance costs | ||||||||
| Payment of deferred offering costs | ( | ) | ( | ) | ||||
| Proceeds from related party convertible notes | ||||||||
| Net cash provided by financing activities | ||||||||
| Net increase (decrease) in cash | ( | ) | ||||||
| Cash, beginning of period | ||||||||
| Cash, end of period | $ | $ | ||||||
| Supplemental disclosure of non-cash financing activities: | ||||||||
| Conversion of related party convertible notes: | ||||||||
| Related party convertible notes principal converted to common stock upon initial public offering | $ | $ | ||||||
| Related party convertible notes accrued interest converted to common stock upon initial public offering | $ | $ | ||||||
| Redemption liability converted to common stock upon initial public offering | $ | $ | ||||||
| Purchase of treasury stock at cost | $ | $ | ||||||
| Unpaid deferred offering costs | $ | $ | ||||||
| Accrued interest rollover to new notes payable | $ | $ | ||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| F-4 |
HILLSTREAM BIOPHARMA, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
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 June 30, 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”).
The Company 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”) for treatment resistant cancers. The Company’s most advanced product candidate is HSB-1216, an IMCD modulator, targeting a variety of solid tumors. The active drug in HSB-1216 was found to reduce tumor burden in a clinical pilot study in Germany in treatment resistant cancers, including triple negative breast cancer and epithelial carcinomas. The Company’s goal is to file an investigational new drug application (“IND”) with the U.S. Food and Drug Administration (“FDA”) in 2023 and start a clinical study with HSB-1216 in 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 IND is accepted by the FDA, the HSB-1216 clinical study will focus on expanding upon the clinical pilot study conducted in Germany. If the Company is able to start the clinical study with HSB-1216 in 2023, the Company anticipates that initial data from such trial will be released either at the end of 2023 or early 2024. The Company uses Quatramer™, the 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. In addition, Trident Artificial Intelligence, the Company’s artificial intelligence precision medicine platform, is used to identify biomarkers in its clinical programs to target specific patient segments. The discovery of regulated cell death processes, such as apoptosis and autophagy, has enabled novel target discovery for drug development. Ferroptosis, a form of IMCD, is an emerging regulated cell death process which decreases intracellular iron or the Labile Iron Pool (“LIP”). Cancer cells increase the LIP leading to unregulated cell growth and metabolism. Decreasing the LIP, induces iron-led reactive oxygen species production and lipid peroxidation, two key hallmarks of ferroptosis/IMCD. HSB-1216 binds iron in the cytoplasm of cancer cells and decreases the LIP, thereby inducing ferroptosis/IMCD, leading to regulated cell death. Areas of interest for the development of HSB-1216 are as a treatment of solid tumors, including small cell lung cancer, metastatic castration resistant prostate cancer, triple negative breast cancer, uveal melanoma, glioblastoma multiforme, head and neck squamous cell carcinoma, and other treatment resistant cancers with high unmet need.
Liquidity
The
accompanying condensed 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 six months ended
June 30, 2022, the Company incurred operating losses in the amount of approximately $
The Company believes its cash on hand as of June 30, 2022 is sufficient to meet its operating obligations and capital requirements for at least 12 months from the filing date of this Quarterly Report on Form 10-Q. Thereafter, the Company may need to raise further capital through the sale of additional equity or debt securities or other debt instruments, strategic relationships or grants or other arrangements to support its future operations. If such funding is not available, or not available on terms acceptable to the Company, the Company’s current development plan may be curtailed.
| F-5 |
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 ongoing 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.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The accompanying unaudited condensed consolidated interim financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) for interim financial reporting. These financial statements are unaudited and, in the opinion of management, include all adjustments (consisting of normal recurring adjustments and accruals) necessary for a fair statement of the balance sheet, operating results, and cash flows for the periods presented in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”). Operating results for the three and six months ended June 30, 2022 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2022 or any other future period. Certain information and footnote disclosure normally included in the annual financial statements prepared in accordance with U.S. GAAP have been omitted in accordance with the SEC’s rules and regulations for interim reporting. The Company’s financial position, results of operations, and cash flows are presented in U.S. Dollars. These financial statements and related notes should be read in conjunction with the audited financial statements and related notes thereto for the year ended December 31, 2021 included in the Company’s Annual Report on Form 10-K filed with the SEC on April 1, 2022. The Company operates in one segment.
| F-6 |
Principles of Consolidation
The condensed 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: research and development expense recognition, valuation of common shares and stock options, allowances of deferred tax assets, valuation of debt related instruments, accrued expenses and liabilities, and cash flow assumptions regarding going concern considerations. Given the situation surrounding the COVID-19 pandemic, many estimates and assumptions have required increased judgment and are subject to a higher degree of variability and volatility. Although management believes the estimates that have been used are reasonable, as events continue to evolve and additional information becomes available, 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 $
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 $
The Company recognizes compensation costs resulting from the issuance of stock based awards to employees, non-employees and directors as an expense in the condensed 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.
| F-7 |
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 $ million of shares of the Company’s common stock, from time to time, 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.
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 condensed 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 condensed 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 condensed consolidated financial statements for further details.
| F-8 |
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.
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 June 30, 2022 and December 31, 2021, the Company had no unrecognized uncertain income tax positions, and therefore no amounts have been recognized in the condensed consolidated financial statements.
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.
| F-9 |
Potentially
dilutive securities not included in the computation of loss per share for the three and six months ended June 30, 2022 and 2021 included
options to purchase and shares of common stock, respectively. All common share amounts as of
June 30, 2022 and December 31, 2021 and per share amounts for the three and six months ended June 30, 2022 and 2021 have been adjusted
to reflect a
Recently Adopted Accounting Pronouncements
The Company has evaluated all recent accounting pronouncements and believed that none of them will have a material effect on the Company’s financial position, results of operations, or cash flows, except 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.
Recent Accounting Pronouncements Not Yet Adopted
Debt with Conversion and Other Options and Derivatives and Hedging
The FASB recently 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 U.S. 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.
| F-10 |
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 ASU is effective for fiscal years beginning after December 15, 2021, and interim periods within annual periods beginning after December 15, 2022. The Company does not expect the adoption of ASU 2020-10 to have a material impact on its condensed 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
In
general, the stated maturity date was
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
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 $
Accrued
interest expense associated with the Notes at December 31, 2021 was approximately $
| F-11 |
The carrying value of the outstanding related-party convertible notes at December 31, 2021 was as follows:
| Principal amount outstanding | $ | |||
| Less: debt discount, net of amortization | ( | ) | ||
| Carrying value | $ | |||
| Current portion | $ | |||
| Long-term portion | ||||
| Total carrying value | $ |
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
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 condensed 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:
| December 31, 2020 | $ | |||
| Initial embedded redemption value | ||||
| Change in fair value | ( | ) | ||
| December 31, 2021 | $ |
The
change in fair value of a loss of $
| F-12 |
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 million shares. See the Net Loss Per Share section of Note 2 to the condensed 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
shares of its common stock at a public offering price of $
per share. The gross proceeds to the Company from the IPO were $
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 shares of common stock with a per share value of $
and a total value of $
On June 9, 2022, the Company’s Board of Directors authorized the repurchase of up to $ 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 may be repurchased in open market or through privately-negotiated transactions. Pursuant to the Repurchase Agreement, the financial institution shall cease purchasing shares of the Company’s common stock upon 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 will determine the timing and amount of any repurchases based upon its evaluation of market conditions, applicable SEC guidelines and regulations, and other factors.
During
the three and six months ended June 30, 2022, the Company purchased
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 shares of the Company’s common stock may be issued pursuant to the 2017 Stock Incentive Plan.
The Company has granted options to acquire shares of common stock at $ per share under the 2017 Stock Incentive Plan, and shares remain available for issuance. At both June 30, 2022 and December 31, 2021, there were options outstanding to acquire shares of common stock. As of both June 30, 2022 and December 31, 2021, all such options were fully vested, and the weighted average remaining contractual life for such options was approximately and years, respectively.
In July 2019, the Company authorized a new plan (the “2019 Stock Incentive Plan”). The Company initially reserved shares of its common stock for issuance pursuant to the 2019 Stock Incentive Plan in the form of, among other awards, incentive stock options, non-statutory stock options, stock appreciation rights, restricted stock and restricted stock 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 shares. In January 2021, the Company approved an increase in the number of shares reserved for issuance under the 2019 Stock Incentive Plan by 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 shares. At both June 30, 2022 and December 31, 2021, a total of shares were authorized for issuance under the 2019 Stock Incentive Plan.
| F-13 |
The Company has granted options to acquire and shares of common stock under the 2019 Stock Incentive Plan, and and shares of common stock remain available for issuance under the 2019 Stock Incentive Plan at June 30, 2022 and December 31, 2021, respectively. There are stock options outstanding to acquire and shares of common stock with weighted average exercise prices of $ and $ and weighted average contractual terms of years and years at June 30, 2022 and December 31, 2021, respectively.
| Weighted | Weighted | |||||||||
| Shares | Average | Average | ||||||||
| Underlying | Exercise | Contractual | ||||||||
| Options | Price | Terms | ||||||||
| Outstanding at December 31, 2021 | $ | years | ||||||||
| Granted | ||||||||||
| Exercised | ( | ) | ||||||||
| Forfeited /cancelled | ( | ) | ||||||||
| Outstanding at June 30, 2022 | $ | years | ||||||||
| Exercisable options at June 30, 2022 | $ | years | ||||||||
| Vested and expected to vest at June 30, 2022 | $ | years | ||||||||
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.
For the three months ended |
For the six months ended | |||||||||||||||
| June 30, | June 30, | June 30, | June 30, | |||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||
| Expected volatility | N/A |
% | % - | % | % | |||||||||||
| Risk-free interest rate | N/A | % - | % | % - | % | – | % | |||||||||
| Expected dividend yield | N/A | % | % | % | ||||||||||||
| Expected life of options in years | N/A | - | ||||||||||||||
| Estimated fair value of options granted | N/A | $ - $ | $ - $ | $ - $ | ||||||||||||
stock options were granted during the three months ended June 30, 2022.
The weighted average grant date fair value of stock options granted during the six months ended June 30, 2022 was approximately $and was approximately $and $, respectively. The weighted average fair value of stock options vested during the three and six months ended June 30, 2022 was approximately $ and $, respectively, and during the three and six months ended June 30, 2021 was approximately $and $, respectively.
| F-14 |
Included in the above table are stock options granted in 2019 to purchase shares of the Company’s common stock at an exercise price of $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.
Total stock based compensation expense included in the accompanying condensed consolidated statements of operations was as follows:
| For the three months ended | For the six months ended | |||||||||||||||
| June 30, 2022 | June 30, 2021 | June 30, 2022 | June 30, 2021 | |||||||||||||
| Research and development | $ | $ | $ | $ | ||||||||||||
| General and administrative | ||||||||||||||||
| Total stock based compensation | $ | $ | $ | $ | ||||||||||||
At June 30, 2022, the total unrecognized compensation expense related to non-vested options was approximately $ million and is expected to be recognized over the remaining weighted average service period of approximately years.
In March 2021, . 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 condensed 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 $
| Initial | Expiration | Exercise | Warrants | Warrants | Warrants | |||||||||||||||
| Issuance Date | Exercise Date | Date | Price | Issued | Exercised | Outstanding | ||||||||||||||
| $ | ||||||||||||||||||||
Note 7 – Related-party Transactions
As described in Note 3 to the condensed 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 $
On
January 4, 2022 and January 6, 2022, the Company issued unsecured promissory notes in the aggregate principal amount of $
| F-15 |
Additionally,
on April 18, 2022, the founder and CEO exercised options to purchase up to shares of the Company’s common stock at a weighted
average exercise price of $ per share for a total of $
Note 8 – Commitments and Contingencies
Small Molecule Analogues
On
December 30, 2019,
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 $
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
shares of the Company’s common stock per month (at an exercise price based upon the Company’s most recent 409A valuation
at the time of the grant) effective January 1, 2020 until the Company received a minimum of $
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 shares of
the Company’s common stock per month at an exercise price of $ per share effective January 1, 2021 until funding meets or exceeds
$
| F-16 |
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 $
Note 9 – Subsequent Events
There were no material subsequent events that required recognition or additional disclosure in these condensed consolidated financial statements.
| F-17 |
ITEM 2. 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 results of operations together with our unaudited interim condensed consolidated financial statements and the related notes appearing elsewhere in this Quarterly Report on Form 10-Q. 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 in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as may be amended, supplemented or superseded from time to time by other reports we file with the SEC. All amounts in this report are in U.S. dollars, unless otherwise noted.
Throughout this Quarterly Report on Form 10-Q, references to “we,” “our,” “us,” the “Company,” “Hillstream,” or “Hillstream BioPharma” refer to Hillstream BioPharma, Inc., individually, or as the context requires, collectively with its subsidiaries.
Overview
We are a pre-clinical biotechnology company developing novel therapeutic candidates targeting ferroptosis, an emerging new anti-cancer mechanism resulting in iron mediated cell death (“IMCD”) for treatment resistant cancers. Our most advanced product candidate is HSB-1216, an IMCD modulator targeting a variety of solid tumors. In a clinical pilot study conducted in Germany by the University of Heidelberg, the active drug in HSB-1216 was found to reduce tumor burden in treatment resistant cancers, including triple negative breast cancer and epithelial carcinomas. Our goal is to submit an investigational new drug application (“IND”) to the U.S. Food and Drug Administration (“FDA”) in 2023 and start a clinical study with HSB-1216 in 2023; however, no assurance can be provided that our IND will be accepted by the FDA in 2023, if at all. If our IND is accepted by the FDA, our HSB-1216 clinical study will focus on expanding upon the clinical pilot study conducted in Germany. If we are able to start our clinical study with HSB-1216 in 2023, we anticipate that initial clinical data from such trial will be released either the end of 2023 or early 2024. We use Quatramer™, our proprietary tumor targeting platform, to enhance the uptake of HSB-1216 in the tumor microenvironment (“TME”) with an extended duration of action and minimal off-target toxicity. In addition, Trident Artificial Intelligence (“TridentAI”), our artificial intelligence precision medicine platform, is used to identify biomarkers in our clinical programs to target specific patient segments.
The discovery of regulated cell death processes, such as apoptosis and autophagy, has enabled novel target discovery for drug development. Ferroptosis, a form of IMCD, is an emerging regulated cell death process which decreases intracellular iron or the Labile Iron Pool (“LIP”). Cancer cells increase the LIP leading to unregulated cell growth and metabolism. Decreasing the LIP induces iron-led reactive oxygen species production and lipid peroxidation, two key hallmarks of ferroptosis/IMCD. HSB-1216 binds iron in the cytoplasm of cancer cells and decreases the LIP, thereby inducing ferroptosis/IMCD, leading to regulated cell death.
Quatramer is a tumor targeting platform which allows us to leverage and exploit key tumor targets and novel emerging pathways such as IMCD to facilitate the delivery of potent drugs directly to the TME, while sparing healthy tissue. By efficiently extending the circulation half-life, as well as targeting delivery to the tumor site, Quatramer traps drugs into the TME. This emerging orthogonal anti-cancer approach utilizes a fundamental recognized mechanism of iron mediated tumor growth and metabolism. We are building a portfolio of long-acting, potent anti-cancer drug candidates using the Quatramer platform.
TridentAI uses an artificial intelligence precision medicine platform to identify novel biomarkers. TridentAI integrates diverse public datasets, including The Cancer Genome Atlas to identify novel gene signatures to stratify patients prospectively in clinical trials. Quatramer tumor targeting also allows us to segment patients by exploiting TridentAI’s findings by (i) synthetic lethal sensitivities with novel combinations, (ii) pursue undruggable targets such as c-myc and (iii) target tumors with a high degree of cell plasticity indicative of recurrent/drug resistant phenotype.
The critical components of our business strategy to achieve our goals include:
| ● | Developing our drug candidate, HSB-1216, in solid tumors. |
Data from a clinical pilot use study in Germany led us to progress HSB-1216 into IND-enabling studies with the ultimate goal of submitting an IND to the FDA in 2023.
| ● | Developing our combination drug candidate, HSB-888, for pediatric sarcomas. |
HSB-888 is in IND-enabling trials with the ultimate goal of submitting an IND to the FDA in 2024.
| ● | Leveraging our Trident Artificial Intelligence Platform. |
Our Trident Artificial Intelligence platform is a computational intelligence platform that identifies synthetic lethal sensitivities associated with degree of cell plasticity.
| 4 |
| ● | Developing and commercializing Quatramer in collaboration with leading pharmaceutical companies. |
In addition to our internal development programs, we actively seek opportunities to collaborate with recognized biopharmaceutical companies to develop Quatramer incorporating therapeutic payloads from their proprietary product portfolios.
| ● | Leveraging our novel platform to develop a pipeline of high value Quatramer leads. |
The tunability of our technology allows us to efficiently expand our pipeline of Quatramer, both on our own and in collaboration with others, through various combinations of targeted DNA encoded for anti-tumor cytokines and therapeutic payloads, which enables us to move into other areas of oncology, including immuno-oncology whereby we could increase the effectiveness of immune checkpoint inhibitors.
| ● | Commercializing proprietary Quatramer based products, including HSB-1216, directly in the United States and with collaborators outside the United States. |
We own HSB-1216 and our other proprietary pipeline and expect to maintain similar rights with respect to other proprietary Quatramer we develop.
| ● | Continuing to extend and protect our product technology and Quatramer through our intellectual property portfolio. |
We seek to protect our novel platform through U.S. and international patents as well as know-how and trade secrets relating to the design and manufacturing of our technology.
Trends and Uncertainties—COVID-19
The global COVID-19 pandemic continues to evolve. As a result of the ongoing COVID-19 pandemic, we had to the delay of the start of our IND enabling studies for HSB-1216. The extent of the impact of the COVID-19 on our business, operations, pre-clinical and clinical development timelines and plans remains uncertain, and will depend on certain developments, including the duration and spread of the outbreak, COVID-19 variants, and the future impact of COVID-19 on our clinical trial enrollment, clinical trial sites, contract research organizations, third-party manufacturers, and other third parties with whom we do business, as well as its impact on regulatory authorities and our key scientific and management personnel. The ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. To the extent possible, we are conducting business as usual, with necessary or advisable modifications to employee travel and with many of our employees and consultants working remotely. We continue to actively monitor the evolving situation related to COVID-19 and may take further actions that alter our operations, including those that may be required by federal, state or local authorities, or that we determine are in the best interests of our employees and other third parties with whom we do business. At this point, the extent to which the COVID-19 pandemic may affect our business, operations and clinical development timelines and plans, including the resulting impact on our expenditures and capital needs, remains uncertain.
Components of Results of Operations
Revenue
We did not recognize revenues for the three and six months ended June 30, 2022 and 2021.
Research and Development Expenses
Research and development expenses include personnel costs associated with research and development activities, including third-party contractors to perform research, conduct clinical trials, stock based compensation and manufacture drug supplies and materials. Research and development expenses are charged to operations as incurred.
We accrue costs incurred by external service providers, including contract research organizations and clinical investigators, based on estimates of service performed and costs incurred. These estimates include the level of services performed by third parties, patient enrollment in clinical trials, administrative costs incurred by third parties, and other indicators of the services completed. Based on the timing of amounts invoiced by service providers, we may also record payments made to those providers as prepaid expenses that will be recognized as expense in future periods as the related services are rendered.
We have incurred research and development expenses related to the development of HSB-1216. We expect that our research and development expenses will increase as we plan for and commence our clinical trials of HSB-1216 and HSB-888.
| 5 |
We cannot determine with certainty the duration and costs of future clinical trials of our product candidates, HSB-1216 and HSB-888, or any other product candidates we may develop or if, when or to what extent we will generate revenue from the commercialization and sale of any of our product candidates for which we obtain marketing approval. We may never succeed in obtaining marketing approval for any of our product candidates. The duration, costs and timing of clinical trials and development of our current and future product candidates will depend on a variety of factors, including:
| ● | the scope, rate of progress, expense and results of clinical trials of our current product candidates, as well as of any future clinical trials of our future product candidates and other research and development activities that we may conduct; | |
| ● | uncertainties in clinical trial design and patient enrollment rates; | |
| ● | the actual probability of success for our product candidates, including their safety and efficacy, early clinical data, competition, manufacturing capability and commercial viability; | |
| ● | significant and changing government regulations and regulatory guidance; and | |
| ● | the timing and receipt of any marketing approvals. |
A change in the outcome of any of these variables with respect to the development of a product candidate could mean a significant change in the costs and timing associated with the development of that product candidate. For example, if the FDA or another regulatory authority were to require us to conduct clinical trials beyond those that we anticipate will be required for the completion of clinical development of a product candidate, or if we experience significant delays in our clinical trials due to slower than expected patient enrollment or other reasons, we would be required to expend significant additional financial resources and time on the completion of clinical development.
General and Administrative Expenses
General and administrative expenses consist primarily of compensation and consulting related expenses, including stock based compensation. General and administrative expenses also include professional fees and other corporate expenses, including legal fees relating to corporate matters; professional fees for accounting, auditing, tax and consulting services; insurance costs; travel expenses; and other operating costs that are not specifically attributable to research activities.
We expect that our general and administrative expenses will increase in the future as we increase our personnel headcount to support our continued research activities and development of our product candidates. We also incur expenses associated with being a public company, including expenses related to compliance with the rules and regulations of the SEC and Nasdaq, director and officer insurance expenses, corporate governance expenses, investor relations activities and other administrative and professional services.
Change in Redemption Value
We account for derivative instruments in accordance with Accounting Standards Codification (“ASC”) 815, Derivative and Hedging, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other financial instruments or contracts, and requires recognition of all derivatives on the balance sheet at fair value. Our derivative financial instrument consists of an embedded feature contained in our convertible debt that we call the “redemption liability.”
The initial fair value of the redemption feature relating to the convertible debt instruments is treated as a debt discount and amortized over the term of the related debt using the straight-line method, which approximates the interest method. Amortization of debt discount is recorded as a component of interest expense. If a loan is paid in full, any unamortized debt discounts will be removed from the related accounts and charged to operations. As the convertible debt was converted into common stock at the date of our initial public offering (“IPO”), the unamortized debt discount was charged to interest expense. In accordance with Accounting Standards Update (“ASU”) 2015-03, Interest — Imputation of Interest, the unamortized debt discount is presented in the accompanying balance sheets as a direct deduction from the carrying amount of the related debt.
The redemption liability includes a provision that provides the noteholder with certain conversion and put rights at various conversion or redemption values as well as certain call options for us. The fair value of the redemption liability is calculated under Level 3 of the fair value hierarchy, determined based upon a Probability-Weighted Expected Returns Method (“PWERM”). This PWERM was determined to be the most appropriate method of estimating the value of possible redemption or conversion outcomes over time, since we did not enter into a priced equity round through December 31, 2021. The significant assumptions utilized in these calculations are the possible exit scenarios (either a conversion of the principal and accrued interest of the Notes (as defined herein) in the event of a Next Equity Financing (as defined herein), a repayment of the Notes and accrued interest in the event of a Corporate Transaction (as defined in the Notes) or a repayment of the Notes and accrued interest at maturity), the pre-money valuation of our common stock, the probabilities of such exit events occurring and discounts/premiums available to the noteholders at such measurement dates. The calculation of the redemption liability at December 31, 2021 is based upon the actual incremental value derived by the noteholders at the IPO date.
| 6 |
Deferred Offering Costs
Deferred offering costs consisted of legal, accounting, printing, and filing fees that we capitalized which were offset against the proceeds from the IPO.
Results of Operations
Three Months Ended June 30, 2022 Compared to the Three Months Ended June 30, 2021
Three Months Ended June 30, | ||||||||||||
| 2022 | 2021 | Change | ||||||||||
| Consolidated Statements of Operations Data: | ||||||||||||
| Operating expenses: | ||||||||||||
| Research and development | $ | 455,546 | $ | 674,765 | $ | (219,219 | ) | |||||
| General and administrative | 1,181,308 | 422,953 | 758,355 | |||||||||
| Total operating expenses | 1,636,854 | 1,097,718 | 539,136 | |||||||||
| Other expense: | ||||||||||||
| Interest expense | - | (188,900 | ) | 188,900 | ||||||||
| Change in redemption value | - | (269,471 | ) | 269,471 | ||||||||
| Total other expense, net | - | (458,371 | ) | 458,371 | ||||||||
| Net loss | $ | (1,636,854 | ) | $ | (1,556,089 | ) | $ | (80,765 | ) | |||
Research and Development Expenses
Research and development expenses decreased by $219,219, or 32.5%, to $455,546 for the three months ended June 30, 2022 from $674,765 for the three months ended June 30, 2021. The decrease was primarily the result of a decrease in expenses for pre-clinical activities of $138,612 and stock based compensation expense of $82,791 related to research and development team members offset by an increase in consulting expenses of $2,184.
General and Administrative Expenses
General and administrative expenses increased by $758,355, or 179.3%, to $1,181,308 for the three months ended June 30, 2022 from $422,953 for the three months ended June 30, 2021. The increase in general and administrative expenses was primarily due to an increase of $301,485 in insurance expenses; $131,539 in payroll expenses; $110,188 in remuneration paid to the Company’s board of directors (“Board of Directors”); $101,903 in accounting expenses; $96,977 in legal expenses; $56,063 in consulting expenses; $47,916 in investor relations expenses; and $44,957 in various other expenses. These increases were offset by a decrease of $132,673 in stock based compensation expense.
Interest Expense
Interest expense decreased by $188,900, or 100.0%, to $0 for the three months ended June 30, 2022 from $188,900 for the three months ended June 30, 2021. The decrease in interest expense was primarily related to conversion of debt into common stock upon the closing of our IPO. See Note 3 of our condensed consolidated financial statements.
Change in Redemption Value
The change in redemption value increased by $269,471, or 100.0%, to $0 for the three months ended June 30, 2022 from $269,471 for the three months ended June 30, 2021 as the redemption liability was re-evaluated in light of the actual fair value increment provided to the debt holders upon completion of our IPO in January 2022.
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Six Months Ended June 30, 2022 Compared to the Six Months Ended June 30, 2021
Six Months Ended June 30, |
||||||||||||
| 2022 | 2021 | Change | ||||||||||
| Consolidated Statements of Operations Data: | ||||||||||||
| Operating expenses: | ||||||||||||
| Research and development | $ | 763,375 | $ | 1,570,675 | $ | (807,300 | ) | |||||
| General and administrative | 2,224,639 | 994,636 | 1,230,003 | |||||||||
| Total operating expenses | 2,988,014 | 2,565,311 | 422,703 | |||||||||
| Other expense: | ||||||||||||
| Interest expense | (1,591,244 | ) | (337,090 | ) | (1,254,154 | ) | ||||||
| Change in redemption value | - | (903,744 | ) | 903,744 | ||||||||
| Total other expense, net | (1,591,244 | ) | (1,240,834 | ) | (350,410 | ) | ||||||
| Net loss | $ | (4,579,258 | ) | $ | (3,806,145 | ) | $ | (773,113 | ) | |||
Research and Development Expenses
Research and development expenses decreased by $807,300, or 51.4%, to $763,375 for the six months ended June 30, 2022 from $1,570,675 for the six months ended June 30, 2021. The decrease was primarily the result of a decrease in expenses for pre-clinical activities of $408,704; stock based compensation expense of $350,529 related to research and development team members; and consulting expenses of $48,067.
General and Administrative Expenses
General and administrative expenses increased by $1,230,003, or 123.7%, to $2,224,639 for the six months ended June 30, 2022 from $994,636 for the six months ended June 30, 2021. The increase in general and administrative expenses was primarily due to an increase of $614,933 in insurance expenses; $249,107 in payroll expenses; $223,941 in legal expenses; $214,738 in consulting expenses; $149,760 in accounting expenses; $110,188 in remuneration paid to the Board of Directors; $63,132 in investor relations expenses; and $123,834 in various other expenses. These increases were offset by a decrease of $519,630 in stock based compensation expense.
Interest Expense
Interest expense increased by $1,254,154, or 372.1%, to $1,591,244 for the six months ended June 30, 2022 from $337,090 for the six months ended June 30, 2021. The increase in interest expense was primarily related to the unamortized debt discount charged to interest expense on the date of our IPO. See Note 3 of our condensed consolidated financial statements.
Change in Redemption Value
The change in redemption value decreased by $903,744, or 100.0%, to $0 for the six months ended June 30, 2022 from $903,744 for the six months ended June 30, 2021 as the redemption liability was re-evaluated in light of the actual fair value increment provided to the debt holders upon completion of our IPO in January 2022.
Liquidity and Capital Resources
To date we have funded our operations primarily through the sale of equity and debt securities. As of June 30, 2022, we had approximately $9.5 million in cash, working capital of approximately $9.0 million and an accumulated deficit of approximately $11.5 million. Net cash used in operating activities was $3.7 million and $0.8 million for the six months ended June 30, 2022 and 2021, respectively. We incurred losses of approximately $4.6 million and $3.8 million for the six months ended June 30, 2022 and 2021, respectively. We have incurred substantial operating losses since inception and expect to continue to incur significant operating losses for the foreseeable future as we continue our pre-clinical and clinical development of our product candidates. We have not yet commercialized any products and have never generated any revenue from product sales. We believe that our existing cash and cash equivalents as of June 30, 2022 will enable us to fund our operating expenses and capital expenditure requirements for at least 12 months from the date of this Quarterly Report on Form 10-Q. The accompanying condensed consolidated financial statements have been prepared on the basis that our Company is a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business.
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Additional funding will be necessary to fund our future clinical and pre-clinical activities. We may obtain additional financing through sales of our equity and debt securities or entering into strategic partnership arrangements, or a combination of the foregoing. There are no assurances that we will be successful in obtaining an adequate level of financing as and when needed to finance our operations on terms acceptable to us or at all, particularly in light of the economic downturn and ongoing uncertainty related to the COVID-19 pandemic. If we are unable to secure adequate additional funding as and when needed, we may have to significantly delay, scale back or discontinue the development and commercialization of one or more of our product candidates. In addition, the magnitude and duration of the COVID-19 pandemic and its impact on our liquidity and future funding requirements is uncertain as of the filing date of this Quarterly Report on Form 10-Q, as the COVID-19 pandemic continues to evolve globally.
Cash Flow Activities for the Six Months Ended June 30, 2022 and 2021
The following table sets forth a summary of our cash flows for the periods presented.
| Six Months Ended June 30, | ||||||||
| 2022 | 2021 | |||||||
| Net cash used in operating activities | $ | (3,668,910 | ) | $ | (761,793 | ) | ||
| Net cash provided by financing activities | 13,148,738 | 599,212 | ||||||
| Net increase (decrease) in cash | $ | 9,479,828 | $ | (162,581 | ) | |||
Cash Flows from Operating Activities
Cash used in operating activities for the six months ended June 30, 2022 was $3,668,910 which consisted of net loss of $4,579,258, partially offset by $2,026,935 in non-cash charges and other adjustments to reconcile net loss to net cash used in operating activities and $1,116,587 in net decrease in operating accounts. The non-cash charges consist of amortization of debt discount of $1,569,003, stock issuance pursuant to services agreement of $100,000 and stock based compensation of $357,932. The net decrease in operating activities was primarily due to a decrease of $536,146 in accounts payable, a decrease in due to founder of $200,000, a decrease in accrued expenses of $132,279, an increase of $255,399 in prepaid expenses and other current assets offset by an increase of $7,237 in accrued interest.
Cash used in operating activities for the six months ended June 30, 2021 was $761,793 which consisted of net loss of $3,806,145, partially offset by $2,395,799 in non-cash charges and other adjustments to reconcile net loss to net cash used in operating activities and $648,553 in net increase in operating accounts. The non-cash charges consist of stock compensation expenses of $1,228,092, change in fair value of redemption liability of $903,744 and amortization of debt discount of $263,963. The net increase in operating activities was primarily due to an increase of $477,596 in accounts payable and accrued expenses, a decrease of $97,893 in prepaid expenses and other current assets and an increase in accrued interest of $73,064.
Cash Flows from Financing Activities
Cash provided by financing activities for the six months ended June 30, 2022 was $13,148,738. The net increase in financing activities was from net cash proceeds of $13,645,643 from the issuance of our common stock in connection with our IPO and $24,389 from exercise of stock options offset by deferred offering costs of $521,294.
Cash provided by financing activities for the six months ended June 30, 2021 was from net cash proceeds of $703,014 from the issuance of convertible promissory notes offset by deferred offering costs of $103,802.
Convertible Promissory Notes
Commencing in May 2017, we issued convertible promissory notes (the “Notes”) to certain investors to help finance our operations. The principal amount of such Notes ranged from $1,000 to $300,000. Interest on the unpaid principal balance accrued at a rate of 5% per annum, computed on the basis of the actual number of days elapsed and a year of 365 days. Unless earlier converted into shares of our common stock or preferred stock (“Equity Securities”), the principal and accrued interest was due and payable by us on demand by the holders at any time after the earlier of (i) the maturity date of each Note and (ii) the closing of the Next Equity Financing. “Next Equity Financing” means the next sale or series of related sales of our Equity Securities pursuant to which we receive gross proceeds of not less than $5,000,000 for Notes issued in 2017 and through November 2020 and $7,500,000 for Notes issued after November 2020 (including the aggregate amount of debt securities converted into Equity Securities upon conversion or cancellation of Notes).
In general, the maturity date was two years from the date of issuance, except for the Notes issued in December 2020 and thereafter, in the aggregate principal amount of approximately $2,135,000, which had a maturity date of three years from the date of issuance. For Notes issued in 2017 through September 2018, the default interest rate of 20% was added to the Notes for the period after the maturity date (“default period”).
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As discussed below, the Notes automatically converted into the type of Equity Securities issued in our IPO which was deemed to be a Next Equity Financing. The number of shares of Equity Securities to be issued was equal to the quotient obtained by dividing the outstanding principal and unpaid accrued interest due on the Notes on the date of conversion by 80% of the price paid per share of Equity Securities by the investors in the Next Equity Financing. In connection with the closing of our IPO, in January 2022, Notes in the aggregate principal amount of approximately $3,920,640, including interest accrued thereon, were converted into an aggregate of 1,225,384 shares of our common stock.
On September 27, 2020, we issued a related party note holder notes (“Exchange Notes”) in exchange for seven Notes which were in default (“Original Notes”) at such time by more than 90 days. The Original Notes had a principal amount of approximately $265,000 and accrued interest of approximately $37,000 at December 31, 2019. As of September 27, 2020, the aggregate outstanding principal of the Original Notes was approximately $265,000 and accrued interest (which included the default interest rate of 20% as described above) was approximately $71,000. The Exchange Notes took the then principal and accrued interest of the Original Notes and added an original issue discount of 37.5% to determine the new principal amount, which amounted to an aggregate of $537,968. We accounted for this transaction as a debt extinguishment, and the incremental amount of the principal of the notes payable of $201,737 was recorded to accumulated deficit (analogous to a “deemed dividend”), since the notes were with related parties, and included in the calculation of loss per share.
On September 27, 2020, we issued certain related party note holders Exchange Notes in exchange for five Notes payable which were in default. As of such date, the aggregate outstanding principal and interest was approximately $26,000, which included the 20% default interest rate. The new Exchange Notes in the aggregate principal amount of approximately $26,000 had substantially the same terms as the original Notes. There were no accounting entries required upon the re-issuance of such Exchange Notes.
Effective October 1, 2020, all Notes which matured, and were not repaid or converted, were rolled over on substantially the same terms as the Original Notes (“Rolled Over”). Approximately $805,000 of such Original Notes were Rolled Over through December 31, 2021, of which approximately $166,000 occurred prior to December 31, 2020 and $639,000 occurred between January 1, 2021 and December 31, 2021. Since the terms of the new notes are not substantially different from the Original Notes, this was not accounted for as a debt modification or debt extinguishment.
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 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, accrued expenses and liabilities, and cash flow assumptions regarding going concern considerations. Given the situation surrounding the COVID-19 pandemic, many estimates and assumptions have required increased judgment and are subject to a higher degree of variability and volatility. Although management believes the estimates that have been used are reasonable, as events continue to evolve and additional information becomes available, 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.
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Stock based compensation
Stock based compensation represents the cost related to stock based awards granted to our employees, directors and consultants and our affiliates. We measure stock based compensation costs at the grant date, based on the estimated fair value of the award and recognize the cost over the requisite service period.
We recognize compensation costs resulting from the issuance of stock-based awards to employees, non-employees and directors as an expense in the condensed 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 lacked company-specific historical and implied volatility information. Therefore, we have estimated our expected stock volatility based on the historical data regarding the volatility of a publicly traded set of peer companies. The expected term of stock options granted was between five and seven years. The risk-free interest rate was determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award.
Treasury Stock
Our Board of Directors has authorized the repurchase of up to $1 million of shares of our common stock, from time to time, in the open market or through privately-negotiated transactions, at such times and at such prices as our management may determine. See Part II, Item 2, Unregistered Sales of Equity Securities and Use of Proceeds for additional information. Treasury stock purchases are accounted for under the cost method whereby the entire cost of the acquired common stock is recorded as treasury stock.
Fair Value Measurements
We apply ASC 820, Fair Value Measurement (“ASC 820”), which establishes a framework for measuring fair value and clarifies the definition of fair value within that framework. ASC 820 defines fair value as an exit price, which is the price that would be received for an asset or paid to transfer a liability in our principal or most advantageous market in an orderly transaction between market participants on the measurement date. The fair value hierarchy established in ASC 820 generally requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.
Deferred Offering Costs
Deferred offering costs consisted of legal, accounting, printing, and filing fees that we capitalized which were offset against the proceeds from the IPO.
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 shares of our common stock at the date of the IPO, the unamortized debt discount was charged to interest expense. In accordance with FASB ASU 2015-03, Interest - Imputation of Interest, the unamortized debt discount at December 31, 2021 was presented in the accompanying condensed consolidated balance sheets as a direct deduction from the carrying amount of the related debt.
We account for derivative instruments in accordance with FASB ASC 815, Derivative and Hedging, which establishes accounting and reporting standards for derivative instruments, including certain derivative instruments embedded in other financial instruments or contracts and requires recognition of all derivatives on the balance sheet at fair value. Our derivative financial instrument consisted of an embedded feature contained in our convertible debt that was bifurcated and accounted for separately. See Note 3 to the condensed consolidated financial statements for further details.
Recently Issued and Adopted Accounting Standards
See Note 2 to our condensed consolidated financial statements included elsewhere in this quarterly Report on Form 10-Q.
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.
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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 (“PCAOB”) 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 $1.07 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 3. 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.
ITEM 4. CONTROLS AND PROCEDURES.
Evaluation of Disclosure Controls and Procedures
Our principal executive officer and principal financial officer evaluated the effectiveness of our “disclosure controls and procedures” as of June 30, 2022, the end of the period covered by this Quarterly Report on Form 10-Q. The term “disclosure controls and procedures” as defined in Rules 13a-15(e) and 15d-15(e) under the Exchange Act, means controls and other procedures of a company that are designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is recorded, processed, summarized and reported, within the time periods specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by a company in the reports that it files under the Exchange Act is accumulated and communicated to a company’s management, including its principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure. In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, cannot provide absolute assurance that the objectives of the controls system are met, and no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within a company have been detected. Based on the evaluation of our disclosure controls and procedures as of June 30, 2022, our Chief Executive Officer and our Chief Financial Officer concluded that, as of such date, our disclosure controls and procedures were not effective due to a material weakness with respect to the lack of control(s) to review the completeness and accuracy of contracts with a financial reporting implication and the timely communication of the terms and conditions to the financial reporting function. Effective internal control contemplates an appropriate level of review to ensure timely preparation and completeness and accuracy of the financial statements and disclosures.
Remediation Plans
We intend to remediate the material weakness by hiring qualified personnel to address adequate controls over the review of the completeness and accuracy of contracts.
Changes in Internal Control
There have been no changes in our internal control over financial reporting that occurred during the three months ended June 30, 2022 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
PART II — OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS.
From time to time, we may become involved in various lawsuits and legal proceedings, which arise in the ordinary course of business. Litigation is subject to inherent uncertainties and an adverse result in these or other matters may arise from time to time that may harm our business. We are currently not aware of any such legal proceedings or claims that will have, individually or in the aggregate, a material adverse effect on our business, financial condition or operating results.
ITEM 1A. RISK FACTORS.
Risk factors that affect our business and financial results are discussed in Part I, Item 1A “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2021 as filed with the SEC on April 1, 2022 (“Annual Report”). There have been no material changes in our risk factors from those previously disclosed in our Annual Report. You should carefully consider the risks described in our Annual Report, which could materially affect our business, financial condition or future results. The risks described in our Annual Report are not the only risks we face. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition, and/or operating results. If any of the risks actually occur, our business, financial condition, and/or results of operations could be negatively affected.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS.
Issuer Purchases of Equity Securities
The following table provides information about our purchases of equity securities during the quarter ended June 30, 2022. During the quarter ended June 30, 2022, we repurchased 30,000 shares of our common stock at a cost of $24,703 and $975,297 remains authorized for share repurchase.
| Period | Total Number of Shares Purchased | Average Price Paid per Share (1) | Total Number of Shares Purchased as Part of Publicly Announced Plans or Programs (2) | Approximate Dollar Value of Shares that May Yet Be Purchased Under the Plans or Programs | ||||||||||||
| (in thousands) | ||||||||||||||||
| 4/1/2022 - 4/30/2022 | - | $ | - | - | $ | 1,000 | ||||||||||
| 5/1/2022 - 5/31/2022 | - | $ | - | - | $ | 1,000 | ||||||||||
| 6/1/2022 - 6/30/2022 | 30,000 | $ | 0.7995 | 30,000 | $ | 975 | ||||||||||
| Total | 30,000 | $ | 0.7995 | 30,000 | ||||||||||||
(1) The average price paid per share and approximate dollar value of shares that may yet be purchased under the share repurchase program exclude fees, commissions, and other charges for the related transactions.
(2) On June 9, 2022, our Board of Directors authorized the repurchase of up to $1,000,000 shares of our common stock until December 31, 2022. On June 10, 2022, we entered into a Repurchase Agreement (the “Repurchase Agreement”) with a financial institution pursuant to which such financial institution may purchase shares of our 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 Exchange Act. Shares of our common stock may be repurchased in open market or through privately-negotiated transactions. Pursuant to the Repurchase Agreement, the financial institution shall cease purchasing shares of our common stock upon 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 we give notice of termination of the Repurchase Agreement to the financial institution. We will determine the timing and amount of any repurchases based upon our evaluation of market conditions, applicable SEC guidelines and regulations, and other factors.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES.
None.
ITEM 4. MINE SAFETY DISCLOSURES.
Not applicable.
ITEM 5. OTHER INFORMATION.
None.
ITEM 6. EXHIBITS.
| * | Filed herewith. |
| ** | Furnished herewith. |
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| HILLSTREAM BIOPHARMA, INC. | ||
| Date: August 11, 2022 | By: | /s/ Randy Milby |
| Randy Milby | ||
| Chief Executive Officer | ||
| (Principal Executive Officer) | ||
| Date: August 11, 2022 | By: | /s/ Thomas Hess |
| Thomas Hess, | ||
| Chief Financial Officer | ||
| (Principal Financial and Accounting Officer) | ||
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