NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
Note
1 – Description of Business and Liquidity
Nature
of Operations
Hillstream
BioPharma, Inc. (“HBI” or the “Company”) was incorporated on March 28, 2017, as a Delaware C-corporation. At March 31, 2023, Hillstream
BioPharma, Inc. had one wholly-owned subsidiary: HB Pharma Corp. (“HB”).
HBI is a pre-clinical biotechnology
company developing novel therapeutic candidates targeting ferroptosis, an emerging new anti-cancer mechanism resulting in iron
mediated cell death (“IMCD”), and targeted immuno-oncology novel biologics, for the treatment drug resistant cancers.
The Company’s most advanced product candidate, HSB-1216, is an IMCD inducer, targeting a variety of solid tumors. In a
clinical pilot study conducted at the University of Heidelberg, Germany, the active drug in HSB-1216 was found to reduce tumor
burden in treatment resistant cancers, including triple negative breast cancer and epithelial carcinomas. The Company utilizes
Quatramer™, its proprietary tumor targeting platform, to enhance the uptake of HSB-1216 in the tumor microenvironment with an
extended duration of action and minimal off-target toxicity. The Company’s goal is to submit an investigational new drug
application (“IND”) to the U.S. Food and Drug Administration (“FDA”) and initiate a clinical study with
HSB-1216 in late 2023 or early 2024; however, no assurance can be provided that the Company’s IND will be accepted by the FDA
in 2023 or early 2024, if at all. If the Company’s IND is accepted by the FDA, the Company’s HSB-1216 clinical studies will focus on
expanding upon the clinical pilot study conducted in Germany. If the Company is able to initiate its clinical study with HSB-1216 in
2024, it anticipates that clinical data from such trial will be released in 2025. HSB-3215,
the Company’s second product candidate, is an anti-HER2 monoclonal antibody
candidate. The ErbB or HER family of cell surface proteins are some of the most well-known and validated oncology drug targets
including ErbB2 or HER2 (human epidermal growth factor receptor) and Erb3 or HER3. The Applied Biomedical Science Institute has
granted the Company an exclusive option to license technology from it to develop HER2 and HER3 antibodies, including multi-specific
and Quatramer™-based therapeutics incorporating portions of the antibodies. The
option terminates on September 30, 2023, unless extended by the parties. The Company intends to submit an IND to the FDA to
gain approval to initiate clinical studies in 2025 for HSB-3215. HSB-1940, the Company’s third product candidate, is
a Quatrabody, a proprietary immune-oncology (“IO”) biologic, in
development targeting programed cell death protein 1 (“PD-1”). In
November 2022, the Company entered into a research collaboration and product license agreement with Minotaur Therapeutics, Inc.
(“Minotaur”) and a commercial license agreement with Taurus Biosciences, LLC (“Taurus”), for use of certain
technology, including OmniAb antibodies, to advance Picobodies™ against novel, undruggable epitopes in high-value
validated IO targets starting with PD-1.
Liquidity
and Going Concern
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 three months
ended March 31, 2023, the Company incurred operating losses in the amount of approximately $2.7 million, expended approximately $3.5
million in cash used in operating activities, and had an accumulated deficit of approximately $18.1 million as of March 31, 2023. The
Company financed its working capital requirements through March 31, 2023 primarily through the issuance of common stock in its initial
public offering (“IPO”) on January 14, 2022. Net proceeds to the Company from the IPO were approximately $13.0 million. See
Note 5 to the condensed consolidated financial statements for details regarding the IPO. Additionally, the Company closed a public offering of its common stock
on May 2, 2023. Net proceeds to the Company from such offering were approximately $2.2 million. See Note 9 to the condensed consolidated
financial statements for details regarding the Offering. The shares of the Company’s common stock
began trading on The Nasdaq Capital Market on January 12, 2022 under the ticker symbol “HILS.”
Based
on the Company’s limited operating history, recurring negative cash flows from operations, current plans and available resources,
the Company will need substantial additional funding to support future operating activities. The Company has concluded that the prevailing
conditions and ongoing liquidity risks faced raise substantial doubt about the Company’s ability to continue as
a going concern for at least one year following the date these condensed consolidated financial statements are issued. The accompanying
condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue
as a going concern.
The
Company may seek to raise additional funding through the sale of additional equity or debt securities, enter into strategic partnerships,
grants or other arrangements or a combination of the foregoing to support its future operations; however, there can be no assurance that the Company
will be able to obtain additional capital on terms acceptable to the Company, on a timely basis or at all. The failure to obtain sufficient
additional funding could adversely affect the Company’s ability to achieve its business objectives and product development timelines
and may result in the Company delaying or terminating clinical trial activities which could have a material adverse effect on the Company’s
results of operations.
Other
Risks and Uncertainties
There
can be no assurance that the Company’s products, if approved, will be accepted in the marketplace, nor can there be any assurance
that any future products can be developed or manufactured at an acceptable cost and with appropriate performance characteristics, or
that such products will be successfully marketed, if at all. The Company is subject to risks common to biopharmaceutical companies including,
but not limited to, the development of new technological innovations, dependence on key personnel, protection of proprietary technology,
compliance with government regulations, product liability, uncertainty of market acceptance of products and the need to obtain additional
financing. The Company is dependent on third party suppliers. The Company’s products require approval or clearance from the FDA
prior to commencing commercial sales in the United States. Approvals or clearances are also required in foreign jurisdictions in which
the Company may license or sell its products. There can be no assurance that the Company’s products will receive all of the required
approvals or clearances.
COVID-19
Considerations
On
March 11, 2020, the World Health Organization characterized the outbreak of a novel strain of coronavirus (“COVID-19”) as
a pandemic, prompting many national, regional, and local governments to implement preventative or protective measures, such as travel
and business restrictions, temporary store closures and capacity limitations, and wide-sweeping quarantines and stay-at-home orders.
As a result, COVID-19 and the related restrictive measures have had a significant adverse impact upon many sectors of the economy.
As a result of the COVID-19 pandemic, the Company had to delay the start
of its IND enabling studies for over a year. 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.
Note
2 – Summary of Significant Accounting Policies
Basis
of Presentation
These
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 months ended
March 31, 2023 are not necessarily indicative of the results that may be expected for the fiscal year ending December 31, 2023 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, 2022 included
in the Company’s Annual Report on Form 10-K filed with the SEC on March 16, 2023. The Company
operates in one segment.
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. On February 27, 2023, the Company filed a Certificate of
Cancellation with the Delaware Secretary of State with respect to Farrington Therapeutics LLC.
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, and cash flow assumptions regarding going concern considerations. Although management believes
the estimates that have been used are reasonable, actual results could vary from the estimates that were used.
Concentration
of Credit Risk
The
Company maintains cash balances with various financial institutions. Account balances at these institutions are insured by the Federal
Deposit Insurance Corporation up to $250,000 per depositor. At various times during the year, bank account balances may have been in
excess of federally insured limits. The Company has not experienced losses in such accounts. The
Company believes that it is not subject to unusual credit risk beyond the normal credit risk associated with commercial banking relationships.
Cash and Cash Equivalents
The Company
considers all highly liquid investments with an original maturity of three months or less at the date of purchase to be cash and cash
equivalents. Cash equivalents are stated at cost and consist primarily of money market accounts.
Research
and Development
Research
and development costs are expensed as incurred. Research and development expenses include personnel costs associated with research and
development activities, including third party contractors to perform research, conduct clinical trials, and manufacture drug supplies
and materials. The Company accrues for costs incurred by external service providers, including contract research organizations and clinical
investigators, based on its estimates of service performed and costs incurred. These estimates include the level of services performed
by third parties, patient enrollment in clinical trials, administrative costs incurred by third parties, and other indicators of the
services completed. Approximately $61,000 of prepaid expenses at March 31, 2023 and December 31, 2022 relate to a manufacturing services
agreement.
Stock
Based Compensation
The
Company recognizes compensation costs resulting from the issuance of stock-based awards to employees, non-employees, and directors as
an expense in the 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
the 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 only been publicly traded since that date. As a
result, the Company has lacked company-specific historical and implied volatility information. Therefore, it has estimated its expected
stock volatility based on the historical data regarding the volatility of a publicly traded set of peer companies. The expected term
of stock options granted was between five and seven years. The risk-free interest rate was determined by reference to the U.S. Treasury
yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award.
Common
Stock Valuations
Prior
to the IPO, the Company was required to periodically estimate the fair value of common stock with the assistance of an independent third-party
valuation expert when issuing stock options and computing its estimated stock-based compensation expense and value of shares issued in
acquiring product candidates. The assumptions underlying these valuations represented management’s best estimates, which involved
inherent uncertainties and the application of significant levels of management judgment. In order to determine the fair value, the Company
considered, among other things, contemporaneous valuations of the Company’s common stock; the Company’s business, financial
condition and results of operations, including related industry trends affecting its operations; the likelihood of achieving various
liquidity events; the lack of marketability of the Company’s common stock; the market performance of comparable publicly traded
companies; and U.S. and global economic and capital market conditions. After the closing of the Company’s IPO on January 14, 2022,
the fair value of common stock is determined by using the closing price of the Company’s common stock on The Nasdaq Capital Market.
Treasury
Stock
The
Company’s board of directors authorized the repurchase of up to $1 million of shares of the Company’s common stock, from
time to time, until December 31, 2022, in the open market or through privately-negotiated transactions, at such times and at such
prices as the Company’s management may decide. Treasury stock purchases are accounted for under the cost method whereby the entire
cost of the acquired common stock is recorded as treasury stock.
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
was 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.
The
Company accounts for derivative instruments in accordance with Financial Accounting Standards Board (“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 cash equivalents, prepaid expenses, accounts payable, and accrued expenses approximate fair
value because of the short-term maturity of these condensed consolidated 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.
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 prior to the IPO consisted of legal, accounting, printing, and filing fees that the Company capitalized which were offset against
the proceeds from the IPO. Deferred offering costs at March 31, 2023 consist of professional services incurred for filing of the Company’s
Registration Statement on Form S-3 using a “shelf” registration process for additional securities offerings which will be
offset against the proceeds from public offering of shares of the Company’s common stock which closed on May 2, 2023. See Note 9
to the condensed consolidated financial statements.
Insurance Premium Financing Liability
Relating
to the directors’ and officers’ insurance premium with an effective date of January 2022, the Company entered into an insurance
premium financing agreement for $1,207,200, with a term of 10 months and an annual interest rate of 3.5%. The
Company made a down payment of $289,728 and was required to make monthly principal and interest payments of $93,225 over the term of the
agreement, which was repaid in full in November 2022.
Relating to the directors’
and officers’ insurance premium with an effective date of January 2023, the Company entered into an insurance premium financing
agreement for $955,700, with a term of nine months and an annual interest rate of 5.25%. The Company made a down payment of $238,925 and
was required to make monthly principal and interest payments of $81,394 over the term of the agreement, which comes due in October 2023.
Related prepaid insurance at March 31, 2023 of $716,774 is included in prepaid expenses and other current assets on the accompanying condensed
consolidated balance sheet.
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 March 31, 2023 and December 31, 2022, the Company had no unrecognized uncertain income
tax positions, and therefore no amounts have been recognized in the condensed consolidated financial statements.
Net
Loss per Share
The
Company reports loss per share in accordance with FASB ASC 260-10, Earnings Per Share, which provides for calculation of basic
and diluted earnings per share. Basic earnings per share includes no dilution and is computed by dividing net income or loss available
to common stockholders by the weighted average common shares outstanding for the period. Diluted earnings per share reflect the potential
dilution of securities that could share in the earnings of an entity. The calculation of diluted net earnings (loss) per share gives
effect to common stock equivalents; however, potential common shares are excluded if their effect is anti-dilutive.
Potentially
dilutive securities not included in the computation of loss per share for the three months ended March 31, 2023 and 2022 included options
to purchase 2,143,940
and 1,819,339
shares of common stock, respectively. Other potentially
dilutive securities also not included in the computation of loss per share for the three months ended March 31, 2023 and 2022 included
warrants to purchase 187,500
shares of the Company’s common stock.
Reclassifications
Certain items have been reclassified
on the March 31, 2022 condensed consolidated statement of cash flows for comparison purposes with the December 31, 2022 consolidated statement
of cash flows. Interest and the original issuance discount on promissory notes was added to the net cash used in operating activities
and proceeds from promissory notes and repayments of promissory notes were added net cash provided by (used in) financing activities.
Recently
Adopted Accounting Pronouncements
The
Company has evaluated all recent accounting pronouncements that were required to be adopted and believes that none of them will have
a material effect on the Company’s financial position, results of operations, or cash flows.
Recent
Accounting Pronouncements Not Yet Adopted
Debt
with Conversion and Other Options and Derivatives and Hedging
The
FASB issued Accounting Standards Update (“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 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 5% per annum,
computed on the basis of the actual number of days elapsed and a year of 365 days. Unless earlier converted into shares of the Company’s
common stock or preferred stock (collectively, the “Equity Securities”), the principal and accrued interest was to be due
and payable by the Company on demand by the Holders at any time after the earlier of (i) the Maturity Date (as defined in each Agreement)
and (ii) the closing of the Next Equity Financing. “Next Equity Financing” means the next sale, or series of related sales,
by the Company of its Equity Securities pursuant to which the Company received gross proceeds of not less than $5.0 million for Notes
issued in 2017 and through November 2020 and $7.5 million for Notes issued after November 2020 (including the aggregate amount of debt
securities converted into Equity Securities upon conversion or cancellation of the Notes). The Company’s IPO qualified as a Next
Equity Financing.
In
general, the stated maturity date was two years from the date of issuance, except for the Notes issued in December 2020 and thereafter
(in the aggregate principal amount of approximately $2.1 million) which had a stated maturity date of three years. For Notes issued in
2017 and through September 2018, the default interest rate of 20% was added to the Notes for the period after the stated maturity date.
The
Notes were to automatically convert into the type of Equity Securities issued in the Next Equity Financing upon closing. The number of
shares of such Equity Securities to be issued was equal to the quotient obtained by dividing the outstanding principal and unpaid accrued
interest due on the Note on the date of conversion by the lesser of (i) 80% of the price paid per share for Equity Securities by the
investors in the Next Equity Financing, or (ii) an equity valuation of $25 million ($50 million for Notes issued after December 2020).
On January 14, 2022, all outstanding Notes and accrued interest were converted into an aggregate of 1,225,384 shares of the Company’s
common stock as the IPO qualified as a Next Equity Financing.
Certain
embedded features contained in the Notes in the aggregate were embedded derivative instruments, which were recorded as a debt discount
and derivative liability at the issuance date at their estimated fair value for all Notes of approximately $2.4 million. Amortization
of debt discount for the Notes recorded as interest expense was approximately $1.6 million for the three months ended March 31, 2022.
This amount contains amortization charged to interest expense of approximately $34,000 up to the date of the IPO and the full amount
of the unamortized debt discount of approximately $1.5 million charged to interest expense on the date of the IPO.
Accrued
interest expense associated with the Notes at the date of the IPO was approximately $187,000 and was converted into common stock as the
IPO qualified as a Next Equity Financing. Total interest expense, including accrued interest and amortization of the debt discount, amounted
to approximately $1.6 million for the three months ended March 31, 2022.
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
prior to the IPO was based upon the actual incremental value derived by the Holders at the IPO date. The balance of approximately
$980,000 as of the date of the IPO was converted into common stock in connection with the related-party
convertible debt to which it related.
Note
5 – Common Stock
Pursuant
to an amendment to the Company’s Certificate of Incorporation filed in April 2019, the Company increased the number of authorized
shares of common stock to 250,000,000 shares. On September 16, 2021, the Company effectuated a
reverse split of shares of its common stock at a ratio of 1-for-26.4 pursuant to an amendment to the Company’s Certificate of Incorporation,
as amended, filed with the Delaware Secretary of State and approved by the Company’s board of directors and stockholders. The par
value of the Company’s common stock was not adjusted as a result of the reverse split.
On
January 14, 2022, the Company closed the IPO pursuant to which it issued 3,750,000 shares of its common stock at a public offering price
of $4.00 per share. The gross proceeds to the Company from the IPO were $15.0 million, prior to deducting underwriting discounts of approximately
$1.1 million and commissions and other offering expenses of approximately $1.0 million. Other offering expenses include deferred offering
costs of approximately $547,000 that were capitalized and additional costs incurred prior to the date of the IPO. The net proceeds to
the Company from the IPO were approximately $13.0 million. The Company granted the underwriters a 45-day option to purchase up to an
additional 562,500 shares of common stock at the public offering price less discounts and commissions, to cover over-allotments; however,
this option expired unexercised. Additionally, and as a result of the completion of the IPO, all of the Company’s convertible debt
and accrued interest was converted into an aggregate of 1,225,384 shares of the Company’s common stock pursuant to the terms of
the Notes. Outstanding principal of approximately $3.7 million, accrued interest of approximately $187,000, and a redemption liability
of approximately $980,000 were converted to common stock as the IPO qualified as a Next Equity Financing. In addition, the Company issued
warrants in connection with the IPO. See Note 6 to the condensed consolidated financial statements for a discussion of the warrants issued.
On
February 16, 2022, the Company entered into an agreement for marketing and investor related consulting services. Pursuant to the agreement,
compensation includes a monthly fee and an upfront issuance of shares of the Company’s common stock. On the effective date of February
16, 2022, the Company issued 31,746 shares of common stock with a per share value of $3.15 and a total value of $100,000 as compensation
expense.
On
March 17, 2023, the Company filed a Registration Statement on Form S-3 with the SEC using a “shelf” registration process
pursuant to which it may sell, from time to time in one or more offerings, shares of common stock and preferred stock, various
series of debt securities and/or warrants to purchase any of such securities, either individually or as units comprised of a
combination of one or more of the other securities in one or more offerings up to a total dollar amount of $75
million. Also see Note 9 to the condensed consolidated financial statements for discussion of the April 27, 2023 underwriting
agreement.
Note
6 – Stock Based Compensation
Incentive
Plans and Options
Under
the Company’s 2017 Stock Incentive Plan (the “2017 Stock Incentive Plan”) the Company may grant incentive stock options,
non-statutory stock options, rights to purchase common stock, stock appreciation rights, restricted stock, performance shares, and performance
units to employees, directors, and consultants of the Company and its affiliates. Up to 94,696 shares of the Company’s common stock
may be issued pursuant to the 2017 Stock Incentive Plan.
The
Company has granted options to acquire 92,801 shares of common stock at $13.20 per share under the 2017 Stock Incentive Plan, and 1,895
shares remain available for issuance. At both March 31, 2023 and December 31, 2022, there were options outstanding to acquire 92,801
shares of common stock. As of both March 31, 2023 and December 31, 2022, all such options were fully vested, and the weighted average
remaining contractual life for such options was approximately 4.9 and 5.2 years, respectively.
In
July 2019, the Company authorized a new plan (the “2019 Stock Incentive Plan”). The Company initially reserved 284,090 shares
of its common stock for issuance pursuant to the 2019 Stock Incentive Plan in the form of incentive stock options, non-statutory stock
options, rights to purchase common stock, stock appreciation rights, restricted stock, performance shares, and performance units to employees,
directors, and consultants of the Company and its affiliates. On August 30, 2019, the Company approved an increase in the number of shares
authorized for issuance under the 2019 Stock Incentive Plan by 2,575,757 shares. In January 2021, the Company approved an increase in
the number of shares reserved for issuance under the 2019 Stock Incentive Plan by 574,494 shares. On May 31, 2021, the Company approved
an increase in the number of shares reserved for issuance under the 2019 Stock Incentive Plan by 467,171 shares. At both March 31, 2023
and December 31, 2022, a total of 3,901,512 shares were authorized for issuance under the 2019 Stock Incentive Plan.
The
Company has granted options to acquire 3,901,512 and 3,386,385 shares of common stock under the 2019 Stock Incentive Plan, and 0 and
515,127 shares of common stock remain available for issuance under the 2019 Stock Incentive Plan at March 31, 2023 and December 31, 2022,
respectively. There are stock options outstanding to acquire 2,051,139 and 1,536,012 shares of common stock with weighted average exercise
prices of $2.95 and $3.80 and weighted average contractual terms of 8.6 years and 8.4 years at March 31, 2023 and December 31, 2022,
respectively.
The
following table summarizes stock-based activities under the 2017 Stock Incentive Plan and 2019 Stock Incentive Plans:
Schedule
of Stock Option Activity
| |
| | |
Weighted | | |
Weighted |
| |
Shares | | |
Average | | |
Average |
| |
Underlying | | |
Exercise | | |
Contractual |
| |
Options | | |
Price | | |
Terms |
| |
| | |
| | |
|
Outstanding at December 31, 2022 | |
| 1,628,813 | | |
$ | 4.34 | | |
8.2 years |
Granted | |
| 515,127 | | |
$ | 0.39 | | |
|
Outstanding at March 31, 2023 | |
| 2,143,940 | | |
$ | 3.39 | | |
8.4 years |
| |
| | | |
| | | |
|
Exercisable options at March 31, 2023 | |
| 1,591,858 | | |
$ | 3.19 | | |
8.3 years |
| |
| | | |
| | | |
|
Vested and expected to vest at March 31, 2023 | |
| 2,143,940 | | |
$ | 3.39 | | |
8.4 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.
Stock
options granted during the three months ended March 31, 2023 and 2022 were valued using the Black-Scholes option-pricing model with the
following weighted average assumptions:
Schedule
of Options Weighted Average Assumptions
| |
For the three months ended March 31, | |
| |
2023 | | |
2022 | |
| |
| | |
| |
Expected volatility | |
| 95.1 | % | |
| 111.3 | % |
Risk-free interest rate | |
| 3.99 | % | |
| 2.33 | % |
Expected dividend yield | |
| 0 | % | |
| 0 | % |
Expected life of options in years | |
| 5.0 | | |
| 5.5 – 7.0 | |
Estimated fair value of options granted | |
$ | 0.29 | | |
$ | 1.33 | |
The
weighted average grant date fair value of stock options granted during the three months ended March 31, 2023 and 2022 was approximately
$0.29 and $1.05, respectively. The weighted average fair value of stock options vested during the three months ended March 31, 2023 and
2022 was approximately $0.57 and $0.08, respectively.
Included
in the above table are stock options granted in 2019 to purchase 231,058 shares of the Company’s common stock at an exercise price
of $0.08 per share, which vested 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:
Schedule
of Stock Based Compensation Expense
| |
2023 | | |
2022 | |
| |
For the three months ended March 31, | |
| |
2023 | | |
2022 | |
Research and development | |
$ | 161,509 | | |
$ | 11,595 | |
General and administrative | |
| 183,923 | | |
| 7,786 | |
Total stock based compensation | |
$ | 345,432 | | |
$ | 19,381 | |
At
March 31, 2023, the total unrecognized compensation expense related to non-vested options was approximately $1.7 million and is expected
to be recognized over the remaining weighted average service period of approximately 2.7 years.
Warrants
In
connection with the IPO, the Company issued warrants to purchase such number of shares of the Company’s common stock equal to 5%
of the total shares of common stock issued in the IPO. The warrants are exercisable at $5.00 per
share, were not exercisable within the first six months after issuance, and may, under certain circumstances, be exercised on a cashless
basis. The exercise price of the warrants is subject to standard antidilutive provision adjustments for stock splits, stock combinations,
or similar events affecting the Company’s common stock. The Company has determined that these warrants should be classified as
equity instruments since they do not require the Company to repurchase the underlying common stock and do not require the Company to
issue a variable amount of common stock. In addition, these warrants are indexed to common stock and do not have any unusual antidilution
rights. Terms of the warrants outstanding at March 31, 2023 are as follows:
Schedule
of Warrants
| |
Initial | |
| |
Exercise | | |
Warrants | | |
Warrants | | |
Warrants | |
Issuance Date | |
Exercise Date | |
Expiration Date | |
Price | | |
Issued | | |
Exercised | | |
Outstanding | |
| |
| |
| |
| | | |
| | | |
| | | |
| | |
January 14, 2022 | |
July 10, 2022 | |
January 11, 2027 | |
$ | 5.00 | | |
| 187,500 | | |
| - | | |
| 187,500 | |
Also see Note 9 to the
condensed consolidated financial statements for discussion of the issuance of additional warrants in conjunction with the April 27, 2023
underwriting agreement.
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.
On
January 4, 2022 and January 6, 2022, the Company issued unsecured promissory notes in the aggregate principal amount of approximately
$139,000 (including an original issuance discount of an aggregate of approximately $14,000)
to three related-party investors. The notes were to accrue interest at a rate of 12% per annum and matured upon the earlier of (i) June
30, 2022, and (ii) the closing of a subsequent equity financing. “Subsequent equity financing” means the next sale (or series
of related sales) by the Company of its equity securities following the date of the notes pursuant to which the Company receives gross
proceeds of not less than $5.0 million. The notes were repaid in full on January 21, 2022 following the Company’s IPO on January
14, 2022 as the IPO was considered a subsequent Equity Financing.
Note
8 – Commitments and Contingencies
Small
Molecule Analogues
On
December 30, 2019, the
Company acquired a series of small molecule analogues pursuant to an Asset Purchase Agreement (“APA”). Pursuant to the APA,
the Company is required to make a payment of $50,000 upon raising of at least $2.0 million in funding, and up to approximately $1.75
million based upon successfully meeting clinical and sales milestones. As
of March 31, 2023 and December 31, 2022, such fund-raising requirement was not met and no
payments were made pursuant to the APA. The Company
included, in accounts payable at both March 31, 2023 and December 31, 2022, the $50,000
required initial payment. Milestone based payments,
if any, will be expensed as incurred.
Research
Collaboration and Product License Agreement with Minotaur Therapeutics, Inc. (“Minotaur”) and Commercial License Agreement
with Taurus Biosciences, LLC (“Taurus”)
The
Company has entered into a research collaboration and product license agreement with Minotaur (the “Minotaur Agreement”)
and a commercial license agreement with Taurus (the “Taurus Agreement”) to advance Picobodies against novel, unreachable
and undruggable epitopes in high-value validated targets starting with PD-1. The Minotaur Agreement and Taurus Agreement are for the
development of proprietary targeted biologics, Knob Quatrabodies™ (HSB-1940), against PD-1. The technologies of Hillstream
and Minotaur will be combined under the license from Taurus to discover, develop and advance biotherapeutics against high-value validated
IO targets. Picobodies are bovine-derived antibody “knob” domains comprised of cysteine-rich ultralong complementary determining
region H3 sequences of 30-40 amino acids weighing ~3-4KDa, which have the potential to access challenging epitopes better than full size
antibodies can. By combining Quatramers with their long half-life coated with a PD-1 Picobody™ to create HSB-1940, the Company
believes it could more efficiently target novel epitopes with greater binding affinity than approved anti-PD-1 antibodies. The Company
further believes that the development of HSB-1940 is a step toward enabling Hillstream to enter the rapidly growing IO market with additional
targets thereafter.
The Minotaur Agreement included an up-front payment of $150,000, which was paid in January 2023. In addition, the Company shall fund the
discovery and characterization study performed by Minotaur as set forth in the Minotaur Agreement. Pursuant to the Minotaur Agreement,
the Company shall pay Minotaur a milestone payment of $1,000,000 for each first Product (as defined in the
Minotaur Agreement) directed against a target and first regulatory approval in the U.S. In addition, the Company shall pay a low single
digit royalty on net sales until the later of (i) ten years after the First Commercial Sale (as defined in the Minotaur Agreement) of
such Product in such country and (ii) the expiration of the last-to-expire Valid Claim (as defined in the Minotaur Agreement) of a Collaboration
Patent (as defined in the Minotaur Agreement) or MINT Patent (as defined in the Minotaur Agreement) covering the manufacture, use,
or sale of such Product. The Taurus Agreement contains single digit payments
on net product sales and certain development milestone payments tied to the advancement through clinical trials and final regulatory approval.
Employment
Agreement
In
January 2019, the Company entered into a three-year employment agreement with its CEO which provided a specified base salary and bonus.
The employment agreement also provided the CEO with certain benefits while employed and if employment ceases. The Company accrued $200,000
in 2019 related to the CEO’s base salary as per the employment agreement, which was paid in full on April 1, 2022. No bonus was
approved by the board of directors of the Company for any period through March 31, 2023.
In
January 2020, the Company amended the employment agreement pursuant to which, in lieu of a cash base salary, the CEO was to be compensated
with stock options to purchase 7,575 shares of the Company’s common stock per month (at an exercise price based upon the Company’s
most recent 409A valuation at the date of the grant) effective January 1, 2020 until the Company received a minimum of $3.0 million of
gross proceeds from the sale of its securities, after which time, cash compensation, pursuant to the employment agreement, would be paid.
Effective
January 1, 2021, the Company amended the employment agreement with its CEO to provide a revised base salary pre-funding (as defined in
the employment agreement). In lieu of cash base salary, the CEO was to be compensated with stock options to purchase 18,939 shares of
the Company’s common stock per month at an exercise price of $7.82 per share effective January 1, 2021 until funding met or exceeded
$5.0 million, after which time, cash compensation, pursuant to his employment agreement, would be paid. The amended employment agreement
also provided for a future base salary for the CEO after the Company received funding greater than $5.0 million or completed an initial
public offering or similar transaction as set forth in the employment agreement. In addition, if the CEO acted as the “finder”
of an investor who purchased more than $5.0 million of the Company’s equity, he would receive a grant of stock options to acquire
757,575 shares of common stock of the Company at an exercise price equal to the most recent fair value of the Company’s common
stock at the time of grant.
On
June 1, 2021, the Company entered into an Amended and Restated Employment Agreement, as amended on September 24, 2021 (the “Amended
and Restated Employment Agreement”) with the Company’s CEO. The term of the Amended and Restated Employment Agreement commenced
upon the closing of the Company’s IPO and continues for a period of five years and automatically renews for successive one-year
periods at the end of each term unless either party provides written notice of their intent not to renew at least 60 days prior to the
expiration of the then effective term. Pursuant to the Amended and Restated Employment Agreement, the CEO will receive an annual base
salary of $485,000, which may be increased from time to time, and shall be eligible to receive an annual cash bonus equal to 55% of his
then base salary based upon the achievement of Company and individual performance targets established by the Company’s board of
directors. In addition, in the first year in which the Company’s market capitalization (as defined in the Amended and Restated
Employment Agreement) equals or exceeds (i) $250 million, the CEO shall receive a cash payment of $150,000; (ii) $500 million, the CEO
shall receive a cash payment of $350,000; and (iii) $1.0 billion, the CEO shall receive a cash payment of $750,000. Furthermore, following
the date of the Company’s IPO, the CEO was issued an option to purchase 757,575 shares of the Company’s common stock at an
exercise price of $4.00 per share, which options shall vest over a 48-month period commencing 12 months after the date of grant. This
shall be in addition to any additional equity-based compensation awards the Company may grant the CEO from time to time.
On
January 1, 2023, in lieu of half of his 2023 salary, the CEO was issued options to purchase up to 515,127 shares of the Company’s
common stock at an exercise price of $0.39 per share, which options vested immediately on the date of grant.
Note
9 – Subsequent Events
Except as follows, there
were no material subsequent events that required recognition or additional disclosure in these condensed consolidated financial statements.
Underwriting Agreement
In connection with the Company’s filing of a
Registration Statement on Form S-3 with the SEC using a “shelf” registration process as disclosed in Note 5 to the condensed
consolidated financial statements, on April 27, 2023 (the “Effective Date”), the Company
entered into an underwriting agreement (the “Underwriting Agreement”) with ThinkEquity LLC (“ThinkEquity”), as
representative of several underwriters (the “Underwriters”), relating to the public offering (the “Offering”)
of 5,300,000 shares (the “Shares”) of the Company’s common stock at a price to the public of $0.50 per Share (the “Offering
Price”). Pursuant to the terms of the Underwriting Agreement, the Company has also granted the Underwriters a 45-day option to purchase
up to an additional 795,000 shares of common stock (the “Option Shares” and together with the Shares, the “Securities”)
to cover over-allotments, if any, at the Offering Price less the underwriting discounts and commissions. The net proceeds to the Company
from the sale of the Shares, after deducting the underwriting discounts and commissions and other estimated offering expenses payable
by the Company, were approximately $2.2 million assuming no exercise by the Underwriters
of their over-allotment option for the Option Shares, or approximately $2.6 million if the
Underwriters exercise their over-allotment option for the Option Shares in full.
Also, in connection
with the Offering, the Company issued designees of ThinkEquity warrants (the “Representative’s Warrants”) to purchase
such number of shares of the Company’s common stock equal to 3% of the number of Securities sold in the Offering at an initial exercise
price of $0.625 per share, subject to adjustment. The Representative’s Warrants are exercisable at any time and from time to time,
in whole or in part, during the four and one half year period commencing 180 days from the commencement of sales of the shares of common
stock in the Offering.