Notes to Condensed Financial Statements
(Unaudited)
Note 1-Organization and description
of business operations
Hoth Therapeutics, Inc. (the “Company”)
was incorporated under the laws of the State of Nevada on May 16, 2017. The Company’s primary asset is a sublicense
agreement with Chelexa Biosciences, Inc. (“Chelexa”) pursuant to which Chelexa has granted the Company an exclusive
sublicense to use its BioLexa Platform, a proprietary, patented, drug compound platform developed at the University of Cincinnati.
The license enables the Company to develop the platform for all indications in humans. The Company’s initial focus will
be on the treatment of eczema. The BioLexa Platform combines a U.S. Food and Drug Administration (“FDA”) approved
zinc chelator with one or more approved antibiotics in a topical dosage form to address unchecked eczema flare-ups by preventing
the formation of infectious biofilms and the resulting clogging of sweat ducts which trigger symptoms. To the Company’s
knowledge, it is the first product candidate intended to prevent the symptom triggering flare-ups rather than simply treating
symptoms when they occur.
On May 26, 2017, the Company entered into
a sublicense agreement with Chelexa, as amended on August 22, 2018 and August 29, 2018, pursuant to which Chelexa granted the
Company an exclusive sublicense to make, use, have made, import, offer for sale, and sell products based upon or involving the
use of (i) topical compositions comprising a zinc chelator and gentamicin and (ii) zinc chelators to inhibit biofilm formation
(the “BioLexa Platform” or “BioLexa”), which rights were originally granted to Chelexa pursuant to an
exclusive license agreement with the University of Cincinnati. In addition, Chelexa granted the Company the right to issue exclusive
and nonexclusive sublicenses (with the right to further sublicense to third parties) to make, use, have made, import, offer for
sale, and sell products based upon the BioLexa Platform.
Company’s IPO
On February 15, 2019, the Company announced
the pricing of its initial public offering (the “IPO”) of 1,250,000 shares of its common stock at an initial offering
price to the public of $5.60 per share. In addition, the Company granted the underwriters a 45-day option to purchase
up to an additional 187,500 shares of common stock at the initial public offering price, less the underwriting discount, to cover
over-allotments (the “Green-shoe”), if any. The underwriters did not exercise any portion of the Green-shoe. Therefore,
the Company issued 1,250,000 shares of common stock and received net proceeds of $5.8 million from the IPO.
The Company’s common stock commenced
trading on The Nasdaq Capital Market, on February 15, 2019 under the ticker symbol “HOTH”. The IPO closed on
February 20, 2019.
On February 14, 2019, the Company entered
into an underwriting agreement with Laidlaw & Co. (UK) Ltd. (“Laidlaw”) pursuant to which the Company paid Laidlaw
a fee in the amount of 7% of the gross proceeds of the IPO, or $490,000. The Company also reimbursed Laidlaw for certain out-of-pocket
expenses, including the fees and disbursements of their counsel, up to an aggregate of $0.2 million. In addition, Laidlaw
received five-year warrants to purchase 50,000 shares of common stock of the Company at an exercise price of $7.00 per share.
Liquidity and capital resources
The Company has incurred substantial operating
losses since inception and expects to continue to incur significant operating losses for the foreseeable future and may never
become profitable. As of March 31, 2019, the Company had cash of approximately $5.2 million, working capital of approximately
$5.2 million and an accumulated deficit of approximately $5.3 million.
The Company has funded its operations
from proceeds from the sale of equity and debt securities. The Company will require significant additional capital to make the
investments it needs to execute its longer-term business plan. The Company’s ability to successfully raise sufficient funds
through the sale of debt or equity securities when needed is subject to many risks and uncertainties and, even if it were successful,
future equity issuances would result in dilution to its existing stockholders and any future debt securities may contain covenants
that limit the Company’s operations or ability to enter into certain transactions.
The proceeds from the Company’s initial
public offering and the current cash and cash equivalents are sufficient to fund operations for at least the next 12 months; however,
the Company will need to raise additional funding through strategic relationships, public or private equity or debt financings,
grants or other arrangements to develop and seek regulatory approvals for the Company’s existing and new product candidates.
If such funding is not available, or not available on terms acceptable to the Company, the Company’s current development
plan and plans for expansion of its general and administrative infrastructure may be curtailed.
Note 2-Significant accounting
policies
Basis
of presentation
The accompanying unaudited interim condensed
financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America
(“GAAP”) for interim financial information and the instructions to Form 10-Q and Article 8 of Regulation S-X. Accordingly,
they do not include all of the information and footnotes required by GAAP for complete financial statements. In the opinion of
management, the unaudited interim condensed financial statements reflect all adjustments, which include only normal recurring
adjustments necessary for the fair statement of the balances and results for the periods presented. Certain information and footnote
disclosures normally included in the Company’s annual financial statements prepared in accordance with GAAP have been condensed
or omitted. These condensed financial statement results are not necessarily indicative of results to be expected for the full
fiscal year or any future period. The unaudited condensed financial statements and notes should be read in conjunction with the financial
statements and notes for the year ended December 31, 2018.
Use
of estimates
The preparation of financial statements
in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses
during the reporting periods. The most significant estimates in the Company’s financial statements relate to the valuation
of preferred and common stock, stock-based compensation and the valuation allowance of deferred tax assets resulting from net
operating losses. These estimates and assumptions are based on current facts, historical experience and various other factors
believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying
values of assets and liabilities and the recording of expenses that are not readily apparent from other sources. Actual results
may differ materially and adversely from these estimates. To the extent there are material differences between the estimates and
actual results, the Company’s future results of operations will be affected.
Significant Accounting Policies
There have been no material changes to
the Company’s significant accounting policies previously disclosed in the Company’s Annual Report on Form 10-K for
the fiscal year ended December 31, 2018 as filed with the Securities and Exchange Commission (“SEC”) on April 1, 2019.
Restricted Cash
In November 2016, the Financial Accounting
Standards Board (“FASB”) issued
Accounting Standards Update
(“ASU
”) No. 2016-18, Statement
of Cash Flows (Topic 230): Restricted Cash
(“ASU 2016-18”)
,
which clarifies the presentation
of restricted cash in the statements of cash flows. Under ASU 2016-18, restricted cash is included with cash and cash
equivalents when reconciling the beginning-of-period and end-of-period total amounts shown on the statements of cash flows. The
Company adopted ASU 2016-18 during the three months ended March 31, 2019 on a retrospective basis. The following is a
summary of the Company’s cash and restricted cash total as presented in the consolidated statements of cash flows for the
three months ended March 31, 2019:
Restricted cash
|
|
Number of Units
|
|
Cash
|
|
$
|
5,166,166
|
|
Restricted cash
|
|
|
200,000
|
|
Total cash and restricted cash
|
|
$
|
5,366,166
|
|
Stock-based compensation
The Company expenses stock-based compensation to employees and
non-employees over the requisite service period based on the estimated grant-date fair value of the awards. Stock-based awards
with graded-vesting schedules are recognized on a straight-line basis over the requisite service period for each separately vesting
portion of the award. The Company records the expense for stock-based compensation awards subject to performance-based milestone
vesting over the remaining service period when management determines that achievement of the milestone is probable. Management
evaluates when the achievement of a performance-based milestone is probable based on the expected satisfaction of the performance
conditions at each reporting date. All stock-based compensation costs are recorded in general and administrative or research and
development costs in the statements of operations based upon the underlying employees’ or non-employees’ roles within
the Company.
Net loss per share
Net loss per share is computed by dividing
net loss by the weighted average number of common stock outstanding during the period. Since the Company had a net loss in the
periods presented, basic and diluted net loss per common share are the same. The following were excluded from the computation
of diluted shares outstanding due to the losses for each period presented, as they would have had an anti-dilutive impact on the
Company’s net loss:
|
|
As of March 31,
|
|
Potentially dilutive securities
|
|
2019
|
|
|
2018
|
|
Series A Convertible Preferred Stock (Common Stock Equivalent)
|
|
|
-
|
|
|
|
3,102,480
|
|
Warrants
|
|
|
1,041,367
|
|
|
|
991,367
|
|
Non-vested restricted stock units
|
|
|
19,448
|
|
|
|
-
|
|
Total
|
|
|
1,060,815
|
|
|
|
4,093,847
|
|
Recent
accounting pronouncements
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
,
which supersedes FASB ASC Topic 840, Leases (Topic 840) and provides principles for the recognition, measurement, presentation
and disclosure of leases for both lessees and lessors. The new standard requires lessees to apply a dual approach, classifying
leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase
by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or
on a straight-line basis over the term of the lease, respectively. A lessee is also required to record a right-of-use asset and
a lease liability for all leases with a term of greater than twelve months regardless of classification. Leases with a term of
twelve months or less will be accounted for similar to existing guidance for operating leases. The standard is effective for annual
and interim periods beginning after December 15, 2018, with early adoption permitted upon issuance. The Company does not have
any long-term leases, therefore the adoption of this standard on January 1, 2019 did not have an impact on the Company’s
condensed financial position and results of operations.
In June 2018, the FASB issued ASU 2018-07,
Compensation—Stock
Compensation (Topic 718): Improvements to Non-employee Share-Based Payment Accounting
(“ASU 2018-07”). ASU 2018-07 simplifies
several aspects of the accounting for non-employee share-based payment transactions resulting from expanding the scope of Topic
718, Compensation—Stock Compensation, to include share-based payment transactions for acquiring goods and services from non-employees.
ASU 2018-07 is effective for public business entities for fiscal years beginning after December 15, 2018, including interim
periods within that fiscal year. The Company adopted ASU 2018-07 on January 1, 2019. Subsequent to the adoption of ASU 2018-07,
the Company recognizes non-employees compensation costs over the requisite service period based on a measurement of fair value
for each stock award.
In August 2018, the SEC adopted the final
rule under SEC Release No. 33-10532,
Disclosure Update and Simplification
, amending certain disclosure requirements that
were redundant, duplicative, overlapping, outdated or superseded. In addition, the amendments expanded the disclosure requirements
on the analysis of stockholders’ equity for interim financial statements. Under the amendments, an analysis of changes in
each caption of stockholders’ equity presented in the balance sheet must be provided in a note or separate statement. The
analysis should present a reconciliation of the beginning balance to the ending balance of each period for which a statement of
comprehensive income is required to be filed. This final rule became effective on November 5, 2018. The Company included the required
presentation of changes in stockholders’ equity in this Form 10-Q. The adoption of this standard on January 1, 2019 did
not have an impact on the Company’s condensed financial position and results of operations.
Note 3-License agreement
Chelexa
BioSciences, Inc.
The Company is subject to total milestone
payments of $3.5 million, royalty payments and has agreed to fund all development and commercialization costs related to the licensed
products.
University
of Maryland and Isoprene Pharmaceuticals, Inc.
On March 8, 2019, the Company, the University
of Maryland, Baltimore (“UMD”) and Isoprene Pharmaceuticals, Inc. (“Isoprene”) entered into a commercial
evaluation sublicense and option agreement. In consideration of the rights granted under the agreement, the Company paid an initial
option and material access fee of $5,000 to UMD and $5,000 to Isoprene.
Note 4-Stockholders’ Equity
Preferred Stock
The Company is authorized to issue up
to 10,000,000 shares of preferred stock. This preferred stock may be issued in one or more series, and shall have such designations,
preferences and relative, participating, optional or other special rights and qualifications, limitations or restrictions thereof
as shall be determined at the time of issuance by its board of directors without further action by shareholders. As of March 31,
2019, 5,000,000 shares of the Company’s preferred stock has been designated as Series A Preferred Stock. At the time of
the IPO, 3,102,480 shares of Series A Preferred Stock which were previously issued were converted into common stock and 1,897,520
shares of Series A Preferred Stock remained authorized.
Common Shares
On February 15, 2019, the Company announced
the pricing of its initial public offering of 1,250,000 shares of its common stock at an initial offering price to the public
of $5.60 per share. The Company issued an aggregate of 1,250,000 shares of common stock and received net proceeds of $5.8 million
from the IPO.
2019 Equity Grants
Restricted Stock Awards
A summary of the Company’s restricted
stock awards activities under the Company’s 2018 Equity Incentive Plan (the “2018 Plan”) during the three months
ended March 31, 2019 is as follows:
|
|
Number of Units
|
|
|
Weighted Average Grant Day Fair Value
|
|
Nonvested at December 31, 2018
|
|
|
21,530
|
|
|
$
|
0.25
|
|
Vested
|
|
|
(2,082
|
)
|
|
$
|
0.25
|
|
Nonvested at March 31, 2019
|
|
|
19,448
|
|
|
$
|
0.25
|
|
As of March 31, 2019, the Company had
approximately $11,000 of unrecognized stock-based compensation expense which was related to restricted stock awards. The weighted
average remaining contractual terms of unvested restricted stock awards is approximately 1.14 years at March 31, 2019.
Stock Options
On March 6, 2019, the Company granted
50,000 options to purchase common stock of the Company to its CFO pursuant to the 2018 Plan. The aggregate grant date fair value
of these options was approximately $0.2 million. The stock options vested in full upon grant.
Stock Based Compensation
Stock-based compensation expense for the
three months ended March 31, 2019 and 2018 was approximately $0.2 million and $15,000, respectively, and was comprised of the
following:
|
|
For the Three Months
Ended March 31,
|
|
|
|
2019
|
|
|
2018
|
|
Employee common stock awards
|
|
$
|
-
|
|
|
$
|
15,000
|
|
Employee stock option awards
|
|
|
199,181
|
|
|
|
-
|
|
Employee restricted stock awards
|
|
|
3,528
|
|
|
|
-
|
|
|
|
$
|
202,709
|
|
|
$
|
15,000
|
|
In addition, the Company recorded $0 and
$11,000 of stock issued for research and development services for the three months ended March 31, 2019 and 2018, respectively.
Warrant Activity
A summary of warrant activity for the
three months ended March 31, 2019 is presented below:
|
|
Number of Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average Remaining Contractual Life (in years)
|
|
Outstanding as of December 31, 2018
|
|
|
991,367
|
|
|
$
|
1.00
|
|
|
$
|
-
|
|
|
|
5.7
|
|
Issued
|
|
|
50,000
|
|
|
|
7.00
|
|
|
|
-
|
|
|
|
4.9
|
|
Outstanding as of March 31, 2019
|
|
|
1,041,367
|
|
|
$
|
1.29
|
|
|
$
|
4,114,173
|
|
|
|
5.6
|
|
Warrants exercisable as of March 31, 2019
|
|
|
991,367
|
|
|
$
|
1.00
|
|
|
$
|
4,114,173
|
|
|
|
5.8
|
|
On February 20, 2019, Laidlaw received
five-year warrants to purchase 50,000 shares of the Company’s common stock at an exercise price of $7.00 per share. These
warrants are not exercisable prior to August 13, 2019.
The Company has determined that the warrants should be accounted
as a component of stockholders’ equity.
Note 5-Commitments and contingencies
Office lease
The Company leases office space that commenced
on July 15, 2017, for approximately $2,000 a month. Rent expense for the three months ended March 31, 2019 and 2018 was approximately
$7,000 and $6,000, respectively. The term of the lease expires on July 31, 2019. In accordance with ASC 842, this lease meets the
definition of a short term lease and accordingly, is not subject to capitalization.
Litigation
The Company is not a party to any material
legal proceedings and is not aware of any pending or threatened claims. From time to time, the Company may be subject to various
legal proceedings and claims that arise in the ordinary course of its business activities.