Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You should read the following discussion and analysis of Peak Bio’s financial condition and results of operations together with Peak Bio’s audited consolidated financial statements and notes thereto included elsewhere in this Annual Report on Form 10-K. Certain of the information contained in this discussion and analysis or set forth elsewhere in this Annual Report on Form 10-K, including information with respect to plans and strategy for Peak Bio’s business, includes forward-looking statements that involve risks and uncertainties. As a result of many factors, including those factors set forth in the section entitled “Risk Factors,” Peak Bio’s actual results could differ materially from the results described in or implied by the forward-looking statements contained in the following discussion and analysis. You should carefully read the section entitled “Risk Factors” to gain an understanding of the important factors that could cause actual results to differ materially from Peak Bio’s forward-looking statements. Please also see the section entitled “Cautionary Note Regarding Forward-Looking Statements.”
Unless otherwise indicated or the context otherwise requires, references in this Peak Bio’s Management’s Discussion and Analysis of Financial Condition and Results of Operations section to “Peak Bio,” “we,” “us,” “our” and other similar terms refer to Peak Bio Co., Ltd. prior to the Business Combination and to Peak Bio, Inc. and its consolidated subsidiaries after giving effect to the Business Combination.
Overview
Peak Bio is a clinical-stage biopharmaceutical company focused on developing therapeutics addressing significant unmet need in the areas of oncology, inflammation and rare diseases. Our management team has a combined 50 years of industry experience in the areas of small molecules, antibodies, and antibody-drug-conjugates (ADC).
With our current strategic focus, we have leveraged two decades of industry learning in the antibody-drug-conjugate (ADC) field to develop a platform of proprietary technologies that enable us to design ADCs to have improved efficacy, safety, and tolerability relative to existing antibody or ADC therapies. Our most advanced platform, PH-1 or Thailanstatin is being used to generate a pipeline of proprietary ADC product candidates to address patient populations with improved efficacy relative to traditional ADC-based therapies. Our second product candidate is an ADC targeting Trop2, an antigen broadly expressed in solid tumors. We expect our Trop2 ADC to enter clinical development by late 2024. Our Trop2 ADC and other undisclosed discovery-stage product candidates are based on our proprietary PH-1 platform of toxin payloads targeting RNA splicing.
Despite commercial success of the ADCs currently on the market, there continues to be a need for ADCs that not only deliver antibody-directed payloads selectively to their tumors, but to also release them safely via improved linker technology and avoid off- target toxicities. Secondly, we believe that adding an immunomodulatory effect to our toxin(s) that engages our immune systems to assist in the cancer killing would contribute to improved tumor killing.
Our lead product candidate for which we are seeking a strategic partner for, PHP-303 is a small molecule, 5th generation Phase 2 clinical-ready neutrophil elastase (NE) inhibitor (NEI). We are planning a Phase 2 clinical study in Alpha-1 anti-trypsin deficiency (AATD) patients. We have completed two Phase 1 trials of PHP-303 in healthy volunteers testing higher doses of PHP-303 by single-ascending dose (SAD) and multiple-ascending dose (MAD). PHP-303 demonstrated dose- dependent pharmacokinetics and the recommended Phase 2 dose was achieved in these trials. A maximum tolerated dose for PHP-303 was not achieved in these Phase 1 trials.
We do not have any products available for commercial sale, and we have not generated any product revenue from our portfolio of product candidates or other sources. Our ability to generate revenue sufficient to achieve profitability, if ever, will depend on the successful development and eventual commercialization of our potential therapies, which we expect, if it ever occurs, will take a number of years. The research and development efforts require significant amounts of additional capital and adequate personnel infrastructure. There can be no assurance that our research and development activities will be successfully completed, or that our potential therapies will be commercially viable.
We have incurred significant losses since the commencement of our operations. Our net loss was $12.8 million and $13.1 million for the years ended December 31, 2023 and 2022, respectively. Since the beginning of 2024, we raised aggregate gross proceeds of approximately $0.7 million from the issuance of December 2023 Convertible Notes, $0.75 million from the issuance of secured Founder promissory notes, and $3.5 million from the issuance of May 2024 Convertible Notes. We expect to incur significant expenses and operating losses for the foreseeable future as we continue our efforts to identify product candidates and seek regulatory approvals within our portfolio.
We will need additional financing to fund our ongoing activities and to close the Merger with Akari (defined below). We may raise this additional funding through the sale of equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions and funding under government contracts.
On November 1, 2022, we received written notice (the “Notice”) from the Staff of the Listing Qualifications Department (the “Staff”) of the Nasdaq Stock Market LLC (“Nasdaq”) stating that the Staff determined that we had not complied with the
listing requirements because (i) we had not demonstrated that our common stock complied with the minimum 1,000,000 unrestricted publicly held shares requirement. We requested, and received, a hearing with the Hearings Panel (the “Panel”) on December 8, 2022 to appeal Nasdaq’s determination, which request stayed the suspension of our common stock and warrants and the filing by Nasdaq of a Form 25-NSE pending the Panel’s decision.
On January 6, 2023, we received the determination letter (the “Determination Letter”) from the Panel to delist our common stock and warrants from Nasdaq. Nasdaq suspended trading in our common stock and warrants effective at the open of business on January 10, 2023. Upon suspension from Nasdaq, our securities began trading on the OTC Markets’ “OTC Pink Market” tier.
We may be unable to raise additional funds or enter into other arrangements when needed on favorable terms, or at all. There can be no assurances that other sources of financing will be available. Due to these uncertainties, there is substantial doubt about our ability to continue as a going concern.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. The consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or classification of liabilities that might result from the outcome of the uncertainties discussed above.
Recent Developments
Akari Merger
Merger Agreement
On March 4, 2024, we entered into an Agreement and Plan of Merger (the “Merger Agreement”) with Akari Therapeutics, Plc, a public company limited by shares incorporated in England and Wales (“Akari”), and Pegasus Merger Sub, Inc., a Delaware corporation and a wholly-owned subsidiary of Akari (“Merger Sub”), pursuant to which, upon the terms and subject to the conditions thereof, Merger Sub will be merged with and into Peak Bio (the “Merger”), with Peak Bio surviving the Merger as a wholly-owned subsidiary of Akari.
Pursuant to the Merger Agreement, and upon the terms and subject to the conditions thereof, at the effective time of the Merger (the “Effective Time”), each issued and outstanding share of Common Stock (other than (x) shares of Common Stock held by us as treasury stock, or shares of Common Stock owned by Akari, Merger Sub or any direct or indirect wholly-owned subsidiaries of Akari and (y) Dissenting Shares (as defined in the Merger Agreement)), will be converted into the right to receive Akari American Depositary Shares (“Akari ADSs”) representing a number of Akari ordinary shares, par value $0.0001 per share (the “Akari Ordinary Shares”), equal to an exchange ratio calculated in accordance with the Merger Agreement (the “Exchange Ratio”), each such share duly and validly issued against the deposit of the requisite number of Akari Ordinary Shares in accordance with the Deposit Agreement (as defined in the Merger Agreement). The Exchange Ratio will be calculated such that the total number of shares of Akari ADSs to be issued as merger consideration for the Peak Common Stock will be expected to be, upon issuance, approximately 50% of the outstanding shares of Akari ADSs (provided, certain adjustments to this ratio will be made in respect of the net cash, as determined in accordance with the Merger Agreement, of each of Peak Bio and Akari at the close of business one business day prior to the anticipated consummation of the Merger). The Merger Agreement provides that, under certain circumstances, additional Akari ADSs may be issued to the holders of shares of Peak Common Stock following the consummation of the Merger equal to an exchange ratio calculated in accordance with the Merger Agreement (the “Additional Exchange Ratio”).
At the Effective Time, each warrant to purchase capital stock of Peak Bio (“Peak Warrant”) outstanding immediately prior to the Effective Time will be converted into and exchangeable for warrants to purchase a number of Akari Ordinary Shares or Akari ADSs, as determined by Akari (each, an “Adjusted Warrant”), on substantially similar terms and subject to substantially similar conditions as were applicable to such Peak Warrant immediately prior to the Effective Time, except (i) for terms rendered inoperative by reason of the transactions contemplated by the Merger Agreement, (ii) as provided in the following sentence and (iii) such amendments to the terms of the Adjusted Warrants as are necessary to comply with applicable Law (as defined in the Merger Agreement). The number of Akari Ordinary Shares (or the number of Akari Ordinary Shares underlying Akari ADSs, as applicable) subject to each Adjusted Warrant will be equal to the number of shares of Peak Common Stock issuable upon exercise of such Peak Warrant immediately prior to the Effective Time multiplied by the Exchange Ratio, with any fractional Akari Ordinary Shares or Akari ADSs rounded down to the nearest whole Akari Ordinary Share or Akari ADS, as applicable, and the exercise price with respect to each Akari Ordinary Share (or each Akari Ordinary Share underlying Akari ADSs, as applicable) underlying such Adjusted Warrant will be equal to the exercise price of such Peak Warrant immediately prior to the Time divided by the Exchange Ratio. The grant of the Adjusted Warrants will be effected as of the Time, or as soon
thereafter as is reasonably practicable, taking into account Parent’s administrative procedures. The Adjusted Warrants will be further adjusted, if applicable, to give effect to the impact of the Additional Exchange Ratio.
Each option to acquire shares of Peak Common Stock (“Peak Option”) that is outstanding and unexercised immediately prior to the Effective Time, whether or not vested, will be assumed and converted into an option to purchase a number of Akari ordinary shares or Akari ADSs, as determined by Akari (each, an “Adjusted Option”). The number of Akari Ordinary Shares (or the number of Akari Ordinary Shares underlying Akari ADSs, as applicable) subject to the Adjusted Option will be equal to the product of (i) the total number of shares of Peak Common Stock subject to such Peak Option immediately prior to the Effective Time multiplied by (ii) the Exchange Ratio, with any fractional Akari Ordinary Shares or Akari ADSs rounded down to the nearest whole Akari Ordinary Share or Akari ADS, as applicable, and the exercise price per share of each Adjusted Option will be equal to the exercise price of such Peak Option immediately prior to the Effective Time divided by the Exchange Ratio. The Adjusted Options will be further adjusted, if applicable, to give effect to the impact of the Additional Exchange Ratio.
Voting Agreements
Concurrently with the Merger Agreement, we and Akari entered into voting and support agreements (the “Voting Agreements”) with certain stockholders of Peak Bio (the “Peak Stockholders”) and certain shareholders of Akari (the “Akari Shareholders” and, together with the Peak Stockholders, the “Supporting Holders”). The Supporting Holders have agreed to, among other things, vote their shares in favor of the Merger Agreement and the Merger or the issuance of Akari Ordinary Shares in connection therewith, as applicable, in accordance with the recommendation of the respective boards of directors of Peak Bio and Akari.
Bylaws Amendment
In connection with the execution of the Merger Agreement, on March 3, 2024, our Board approved an amendment to our Amended and Restated Bylaws (the “Bylaws Amendment”), which became effective immediately. The Bylaws Amendment requires that, unless we consent in writing to the selection of an alternative forum, the sole and exclusive forum for (i) any derivative action or proceeding brought on behalf of the Company, (ii) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, employee or stockholder (including a beneficial owner) of the Company to the Company or the Company’s stockholders, (iii) any action asserting a claim against any director, officer, employee or stockholder (including a beneficial owner) of the Company arising under any provision of the Delaware General Corporation Law (“DGCL”) or the bylaws or the certificate of incorporation of the Company, or (iv) any action asserting a claim governed by the internal affairs doctrine shall, to the fullest extent permitted by law, be the Court of Chancery of the State of Delaware (or if the Court of Chancery for the State of Delaware does not have jurisdiction, a state court located within the State of Delaware or, if no state court located within the State of Delaware has subject matter jurisdiction, the federal district court for the District of Delaware). In addition, the Bylaws Amendment provides that unless the Company consents in writing to the selection of an alternative forum, the federal district courts of the United States shall be the forum for the resolution of any claim or cause of action arising under the Securities Act of 1933, as amended.
Financing
Key Company Stockholder Agreements
In May 2021, we received proceeds from a loan in the amount of approximately $750,000 Dr. Huh. The loan, which was scheduled to mature on May 31, 2022, bore interest at a rate of 1.0% per annum. The loan could be prepaid by the Company at any time prior to maturity with no prepayment penalties. In August 2021, we received proceeds from the additional loan in the amount of approximately $750,000 from Dr. Huh. The loan, which was scheduled to mature on July 31, 2022, bore interest at a rate of 1.0% per annum. The loan could be prepaid by the Company at any time prior to maturity with no prepayment penalties.
We made a $150,000 payment on the Founder Loans in December 2022. On April 28, 2023, $448,940 of the principal balance of this related party loan, and $26,830 of accrued interest, was settled through the issuance of the April 2023 Convertible Notes, related party (see below). As of December 31, 2023 and 2022, $901,060 and $1,375,000 was outstanding under this loan.
In March 2023, we received proceeds from an additional Founder Loans in the amount of $250,000. The loan had the maturity date of December 31, 2023 and bore interest at a rate of 5.0% per annum. The loan could be prepaid by us at any time prior to maturity without the consent of the lender. On April 28, 2023, this related party loan, including the accrued interest of $1,199, was settled through the issuance of the April 2023 Convertible Notes, related party (see below).
In January 2024, we received proceeds from a Senior Secured Promissory Note (the “Secured Note”) in the amount of $750,000 from our founder and director, Hoyoung Huh (the “Key Company Stockholder”). In accordance with the terms of the
Secured Note, the Company, together with its subsidiaries, also entered into a Security Agreement with Dr. Huh (the “Security Agreement”). The Secured Note has a maturity date on January 23, 2025 and carries an interest rate of 15% per annum. As security for payment of the Secured Note, the Security Agreement grants and assigns to Dr. Huh a security interest in all of the assets of the Company and its subsidiaries.
Convertible Notes
2022 Convertible Note
On November 1, 2022, we issued a $1,512,500 convertible note to EarlyBirdCapital, Inc., the sole book running manager of Ignyte’s IPO, in lieu of the deferred underwriting fee that was payable at the Closing. The convertible note accrued interest at a rate of 8% per annum and was payable on October 31, 2023, provided however that we agree to make mandatory prepayments on this note (which shall first be applied to accrued interest and then to principal) from time to time in amounts equal to 15% of the gross proceeds received by us from any equity lines, forward purchase agreements or other equity financings consummated by us prior to the maturity date.
On the maturity date, the note holder had the right, in its sole and absolute discretion, to convert all or part of the principal and/or accrued interest of this convertible note into shares of our common stock of at a per share conversion price equal to 90% of the volume weighted average price of a share of our common stock for the five trading days immediately prior to the maturity date.
On November 1, 2023, we entered into an amended and restated promissory note whereby the principal amount was reduced to $650,000. The loan matures on December 31, 2024, bears interest at a rate of 6.0% per annum, and has no conversion features. Further, the loan required us to make a payment of $300,000 by December 31, 2023, which was paid.
April 2023 Convertible Note
In April 2023, we entered into separate subscription agreements for the issuance of convertible promissory notes (the “April 2023 Convertible Notes”) in the aggregate principal amount of $2,195,034 and an aggregate amount of 3,658,390 warrants (the “April 2023 Convertible Note Warrants”). The April 2023 Convertible Notes are convertible into shares of our common stock at $0.60 per share. For each share into which an April 2023 Convertible Note is convertible, the investor received April 2023 Convertible Note Warrants to purchase an equal amount of shares of our common stock at $0.60 per share, exercisable for a period of 5 years. In connection with the issuance of the April 2023 Convertible Notes and the April 2023 Convertible Note Warrants, in consideration for its services in respect of the financing described above, we also issued the Placement Agent purchase warrants (the “Placement Agent Warrant”) to purchase 209,670 shares of our common stock at a price per share of $0.60. The Placement Agent Warrant has a 5-year term. In addition, we paid the Placement Agent a commission of approximately $125,000.
In April 2023, we entered into a subscription agreement with Dr. Huh to settle $1,130,775 in related party loans made to us. We issued a $1,130,775 related party unsecured convertible promissory note, with the same terms as the April 2023 Convertible Notes, and warrants to purchase 1,884,625 shares of our common stock, with the same terms as the April 2023 Convertible Note Warrants.
As at December 31, 2023, the April 2023 Convertible Notes were in default.
December 2023 Convertible Note
In December 2023, we entered into additional subscription agreements for the issuance of convertible promissory notes, pursuant to which we issued convertible notes in the aggregate principal amount of $1,000,000 (the “December 2023 Convertible Notes”). In addition, certain holders of April 2023 Convertible Notes agreed to exchange the aggregate amount of $187,950 of April 2023 Convertible Notes, including the accrued interest, into the same amount of December 2023 Convertible Notes.
In January 2024, we completed an additional close of the December 2023 Convertible Notes pursuant to which (i) we issued December 2023 Convertible Notes in the aggregate principal amount of $675,000 and (ii) certain April 2023 Convertible Notes previously issued in the aggregate original principal amount of $240,000 were exchanged for December 2023 Convertible Notes.
In February 2024, we completed a final closing of the December 2023 Convertible Notes and entered into separate subscription agreements in the aggregate principal amount of $63,000.
The December 2023 Convertible Notes bear an interest rate of 10% per annum and have a maturity date of December 18, 2024. The terms of the December 2023 Convertible Notes provide for automatic conversion of the outstanding principal amount of the December 2023 Convertible Notes and all accrued and unpaid interest upon a business combination (as defined in the agreement) into our common stock at the Conversion Price (the “Automatic Conversion Feature”). The Conversion Price is determined by reference to the purchase price payable in connection with such business combination, multiplied by 70%, where
the price per share of the common stock is determined by reference to the 30-day volume weighted average price of our common stock on the public exchange immediately prior to conversion, resulting in 43% discount on the issuance price in the a business combination (the Automatic Discount”). If a business combination does not occur prior to the maturity date of the December 2023 Convertible Notes and if our Common Stock is listed on a public exchange as of such date, then the holders have the right, at their option, to convert the outstanding principal amount of the December 2023 Convertible Notes (and all accrued and unpaid interest thereof) into the shares of our common stock at a price equal to the 30-day volume weighted average price of our common stock on the public exchange on which it is traded multiplied by 90% (the “Optional Conversion Feature”).
In consideration for its services in respect of the financing described above, we paid the Placement Agent a commission of $147,040. Further, upon conversion of the December 2023 Convertible Notes into our Common Stock, the Placement Agent will receive shares of our restricted Common Stock equal to (i) 4% of the total number of shares of Common Stock received upon conversion of the December 2023 Convertible Notes issued for the aggregate principal of $1,738,000 new capital and (ii) 1% of the total number of shares of Common Stock received upon conversion of the December 2023 Convertible Notes issued for the aggregate principal of $420,000 in exchange of the April 2023 Convertible Notes.
In December 2023, we issued a $500,000 related party December 2023 Convertible Note to Dr. Huh. This note has the same terms as the December 2023 Convertible Notes outlined above.
May 2024 Convertible Notes
In May 2024, the Company entered into a secured convertible promissory note agreement pursuant to which the Company issued convertible notes in the aggregate principal amount of $1,324,500 (the “May 2024 Convertible Notes”).
In July 2024, the Company completed a final closing of the May 2024 Convertible Notes and entered into a secured convertible promissory note agreement pursuant to which the Company issued convertible notes in the aggregate principal amount of $2,175,000 (the “May 2024 Convertible Notes”).
The May 2024 Convertible Notes carry an interest rate of 10% per annum, have a maturity date of December 18, 2024. The terms of the May 2024 Convertible Notes provide for automatic conversion of the outstanding principal amount of the notes and all accrued and unpaid interest upon a business combination (as defined in the agreement) into the Company common stock at the Conversion Price. The Conversion Price is determined by reference to the purchase price payable in connection with such business combination, multiplied by 50%, where the price per share of the common stock is determined by reference to the 30-day volume weighted average price of our common stock on the public exchange immediately prior to conversion. In conjunction with the May 2024 Convertible Notes, we entered into the Security Agreement which grants and assigns the May 2024 convertible note holders a senior security interest in all of the assets of the Company and its subsidiaries.
In consideration for its services in respect of the financing described above, the Company paid Paulson Investment Company, LLC (the “May 2024 Placement Agent”) the commission of $200,000. Further, upon conversion of the May 2024 Convertible Notes into Common Stock of the Company, the May 2024 Placement Agent will receive shares of restricted common stock of the Company equal to 4% of the total number of shares of common stock received upon conversion of May 2024 Convertible Notes on certain notes with a principal value of $2,500,000.
White Lion Common Stock Purchase and Registration Rights Agreements
On November 3, 2022, we entered into a Common Stock Purchase Agreement (the “White Lion Purchase Agreement”) and Registration Rights (the “White Lion RRA”) with White Lion Capital, LLC, a Delaware limited liability company (“White Lion”). Pursuant to the White Lion Purchase Agreement, we have the right, but not the obligation, to require White Lion to purchase, from time to time, up to $100,000,000 in aggregate gross purchase price of newly issued shares of our Common Stock, subject to certain limitations and conditions set forth in the White Lion Purchase Agreement. Capitalized terms used but not otherwise defined in this section shall have the meanings given to such terms by the White Lion Purchase Agreement and the White Lion RRA.
We are obligated under the White Lion Purchase Agreement and the White Lion RRA to file a registration statement with the SEC to register the Common Stock under the Securities Act, for the resale by White Lion of shares of Common Stock that we may issue to White Lion under the White Lion Purchase Agreement.
Subject to the satisfaction of certain customary conditions including, without limitation, the effectiveness of a registration statement registering the shares issuable pursuant to the White Lion Purchase Agreement, our right to sell shares to White Lion will commence on the effective date of the registration statement and extend until November 1, 2025. During such term, subject to the terms and conditions of the White Lion Purchase Agreement, we may notify White Lion when we exercise our right to sell shares (the effective date of such notice, a “Notice Date”).
The number of shares sold pursuant to any such notice may not exceed (i) the lower of (a) the Purchase Notice Fixed Limit (described below) and (b) the product of (1) the Average Daily Trading Volume (as defined in the White Lion Purchase
Agreement), and (2) the applicable Percentage Limit (as defined in the White Lion Purchase Agreement). The Purchase Notice Fixed Limit is $500,000 upon payment of the Initial Commitment Shares (as defined in the White Lion Purchase Agreement) and can be increased in two tranches: (A) to $1,000,000 following an aggregate purchase of $5,000,000 shares and issuance by us to White Lion of an additional $250,000 in Commitment Shares, and (B) to $2,000,000 following an aggregate purchase of $10,000,000 shares and issuance by the for payment of an additional $250,000 in Commitment Shares (as defined in the White Lion Purchase Agreement).
The applicable Percentage Limit is 40% or 150% depending on the price we agree to sell shares to White Lion. At an applicable Percentage Limit of 40%, the Purchase Price to be paid by White Lion for any such shares will equal 97% of lowest daily volume-weighted average price of Common Stock during a period of two consecutive Trading Days following the applicable Purchase Notice Date (as defined in the White Lion Purchase Agreement) until an aggregate of $50,000,000 in Purchase Notice Shares (as defined in the White Lion Purchase Agreement) have been purchased under White Lion Purchase Agreement, at which point the Purchase Price (as defined in the White Lion Purchase Agreement) to be paid by White Lion will equal 98% of the lowest daily volume-weighted average price of Common Stock during a period of two consecutive Trading Days following the applicable Purchase Notice Date. At an applicable Percentage Limit of 150%, the Purchase Price to be paid by White Lion for any such shares will equal 94.5% of the lowest daily volume-weighted average price of Common Stock during a period of three consecutive Trading Days following the applicable Purchase Notice Date.
We will have the right to terminate the White Lion Purchase Agreement at any time after commencement, at no cost or penalty, upon three (3) Trading Days’ prior written notice. Additionally, White Lion will have the right to terminate the White Lion Purchase Agreement upon three (3) days’ prior written notice to us if (i) there is a Fundamental Transaction (as defined in the White Lion Purchase Agreement), (ii) we are in breach or default in any material respect of the White Lion RRA, (iii) there is a lapse of the effectiveness, or unavailability of, the registration statement for a period of 45 consecutive Trading Days or for more than an aggregate of 90 Trading Days in any 365-day period, (iv) the suspension of trading of the Common Stock for a period of five (5) consecutive Trading Days, (v) the material breach of the White Lion Purchase Agreement by us, which breach is not cured within the applicable cure period or (vi) a Material Effect (as defined in the White Lion Purchase Agreement) has occurred and is continuing. No of the White Lion Purchase Agreement will affect the registration rights provisions contained in the White Lion RRA.
In consideration for the commitments of White Lion, as described above, we have agreed that it will issue to White Lion shares of Common Stock having a value of $250,000 based upon the Closing Sale Price (as defined in the White Lion Purchase Agreement) of Common Stock two Trading Days prior to the filing of the Initial Registration Statement as Initial Commitment Shares. We may increase the number of shares it may sell to White Lion by issuing additional Commitment Shares in two additional tranches of $250,000 each. We issued Initial Commitment Shares of 50,200 shares of Common Stock to White Lion, based upon the Closing Sale Price of our Common Stock of $4.98 per share on November 30, 2022.
Concurrently with the execution of the White Lion Purchase Agreement, we entered into the White Lion RRA with White Lion in which we have agreed to register the shares of Common Stock purchased by White Lion with the SEC for resale within 30 days of the consummation of a business combination. The White Lion RRA also contains usual and customary damages provisions for failure to file and failure to have the registration statement declared effective by the SEC within the time periods specified.
The White Lion Purchase Agreement and the White Lion RRA contain customary representations, warranties, conditions and indemnification obligations of the parties. The representations, warranties and covenants contained in such agreements were made only for purposes of such agreements and as of specific dates, were solely for the benefit of the parties to such agreements and may be subject to limitations agreed upon by the contracting parties.
In March 2023, we entered into an amendment to the White Lion Purchase Agreement to give us the right, but not the obligation to require White Lion to purchase shares of our common stock while trading on the OTC Market. Under the terms of the amendment, we will issue to White Lion within five (5) Trading Days following the effective date of the amendment fully paid, non-assessable shares of our Common Stock equal to the quotient obtained by dividing (i) $250,000 and (ii) the lowest traded sale price of the common stock of the 10 (ten) Trading Days prior to the effective date of the amendment, minus 50,200. In March 2023, as compensation for its commitment to enter into the amendment, we issued 412,763 shares of our common stock to White Lion.
In August 2023, we and White Lion entered into a second amendment to the Common Stock Purchase Agreement (the “Second Amendment”). The Second Amendment includes, among other things, the right of the Company to issue a Purchase Notice (defined in the Second Amendment as an “Accelerated Purchase Notice”) requesting White Lion to purchase newly issued shares of common stock from us, subject to acceptance by White Lion, with pricing of the shares to be sold by us to White Lion under such Accelerated Purchase Notice determined on the date of issuance by us of the Accelerate Purchase Notice and acceptance by White Lion (the date of such notice defined as the “Accelerated Valuation Period”). Such accelerated purchases pursuant to an Accelerated Purchase Notice will be sold to White Lion at a price, defined as an “Accelerated Purchase Price,”
equal to the lower of (i) the opening price of common stock during the Accelerated Valuation Period, (ii) the closing price of the common stock during Accelerated Valuation Period, or (iii) the volume weighted average price of the common stock during Accelerated Valuation Period; provided, however, that if at the time we deliver an Accelerated Purchase Notice to Investor the price of the common stock is lower than the opening price of the common stock during the Accelerated Valuation Period, the Accelerated Purchase Price will be discounted by 20%. In addition, the Second Amendment provides for an “Accelerated Purchase Notice Limit” equal to 200%.
In addition, in the event we do not issue Purchase Notices (as defined in the White Lion Purchase Agreement) to White Lion providing for the purchase of at least $1,250,000 of Purchase Shares (as defined in the White Lion Purchase Agreement and Second Amendment) in the aggregate within 180 days following the effective date of the amendment, we will issue to White Lion an additional number of fully paid, non-assessable shares of common stock equal to the quotient obtained by dividing (i) $150,000 and (ii) the lowest Closing Sale Price (as defined in the White Lion Purchase Agreement and Second Amendment) of common stock of the 10 (ten) Trading Days prior to the 180th day following the effective date of the amendment.
During September 2023, we issued the notices to purchase the total of 729,000 common shares to White Lion for the total proceeds of $105,317.
Release of Certain Lock-Up Restrictions
In order to comply with Nasdaq listing requirements, on January 4, 2023, we released 30% of the Target Consideration Shares (excluding shares held by Dr. Huh) from the six-month lock-up restrictions entered into in connection with the Business Combination (representing a total of 3,057,599 shares for release, of which, we estimate that approximately one-third will have been purchased below the closing price of our Common Stock of $4.21 on December 29, 2022). The release of those shares from lock-up restrictions may cause the market price of our securities to decline or increase the volatility in the market price of our securities. Additionally, since the Target Consideration Shares that may be offered for resale pursuant to this prospectus represent approximately 88% of the shares outstanding as of December 29, 2022 (after giving effect to redemptions and repurchases), the sale of all the securities being offered in this prospectus, or the perception that these sales could occur, could result in a significant decline in the public trading price of our securities.
Components of Results of Operations
Results prior to the Spin-Off
Prior to March 1, 2022, we operated as pH Pharma Ltd, a Korean company. Effective March 1, 2022, we spun off certain assets to a newly formed company in Korea (the “Spin-Off”). The Spin-Off resulted in the Company retaining the PHP-303 and PH-1 ADC Platform programs. Prior to April 1, 2022, our consolidated financial statements have been extracted from the accounting records of pH Pharma, Ltd. on a carve-out basis. The historical results of operations, financial position, and cash flows may not be indicative of what we would have been had we been a separate stand-alone entity, nor are they indicative of what the results of operations, financial position and cash flows may be in the future.
The consolidated financial statements prior to the Spin-Off have been extracted from the accounting records of pH Pharma, Ltd. The historical results of operations, financial position, and cash flows may not be indicative of what we would have been had we been a separate stand-alone entity, nor are they indicative of what the results of operations, financial position and cash flows may be in the future.
Revenue
Our revenue has historically been generated through grants from government organizations. We currently have no commercially approved products. Grant revenue is recognized during the period that the research and development services occur, as qualifying expenses are incurred or conditions of the grants are met. Qualifying expenses are recognized when incurred as research and development expenses. Expenses for grants are tracked by using a project code specific to the grant, and the employees also track hours worked by using the project code.
Grant Revenue
Our grant revenues are derived from research programs with the Department of Defense, US Army Medical Research Acquisition Activity for work on a COVID-19 therapeutic.
Grants awarded to us for research and development by government entities are outside the scope of the contracts with customers and contributions guidance. This is because these granting entities are not considered to be customers and are not receiving reciprocal value for their grant support provided to us. These grants provide us with payments for certain types of expenditures in return for research and development activities over a contractually defined period.
We recognize grant revenue based on the reimbursable costs that are incurred during the period, up to pre-approved award limits. The expenses associated with these reimbursements are reflected as a component of research and development expense in our consolidated statements of operations and comprehensive loss.
Research and Development Expense
We expense research and development costs as incurred. Research and development expense consist primarily of costs related to personnel, including salaries and other personnel related expenses, contract manufacturing and supply, consulting fees, and the cost of facilities and support services used in drug development. Assets acquired that are used for research and development and have no future alternative use are expensed as in-process research and development.
General and Administrative Expenses
General and administrative expenses consist primarily of salaries and related benefits, including stock-based compensation, related to our executive, finance, business development, legal, human resources and support functions. Other general and administrative expenses include professional fees for auditing, tax, consulting and patent-related services, rent and utilities and insurance.
Results of Operations for the Years Ended December 31, 2023 and 2022
The following table provides selected financial information for the years ended December 31, 2023 and 2022:
Year Ended December 31,
Change
Amount
Revenues
Operating expenses
Research and development
General and administrative
Impairment Loss
Total operating expenses
Loss from operations
Other income (expense), net
Loss before income tax expense
Revenue
Our revenue has historically been generated through grants from government organizations. The total revenue for government grants was $367,877 and $607,681, respectively, for the years ended December 31, 2023 and 2022.
Research and Development Expense
The following table summarizes our research and development expenses:
Year Ended December 31,
Third-party direct project expenses
PHP-303
PH-1 ADC Platform
General program expenses and other pre-clinical programs
Total third-party direct project expenses
Other research and development costs
Personnel costs
Facilities and other costs
Total other research and development costs
Total research and development costs
Research and development expense decreased by $2.3 million during the year ended December 31, 2023 compared to the prior year. The decrease was primarily due to decreases in direct project expenses related to the PHP-303 program of $68,682, the PH-1 ADC Platform of $309,298 and other general and pre-clinical programs of $222,365 as a result of delays in our ongoing and planned research activities. In addition, there was a decrease in personnel costs and facilities costs of $0.6 million and $1 million
driven by a reduction of staff and overhead. We reduced our average headcount from 21 to 6 employees as well as moved to a smaller facility as a result of scaling back our clinical activities.
General and Administrative Expense
General and administrative expense decreased by $0.2 million during the year ended December 31, 2023 compared to the prior year. The decrease was primarily driven by a reduction in facilities expenses and reduction in headcount for general and administrative employees.
Impairment Loss on Operating Lease Right-of-Use Asset
We recognized an impairment loss on the operating lease right-of-use asset of $3.5 million due to the abandonment of the premises in Palo Alto, California during the year ended December 31, 2023.
Other Income (Expense), Net
Other income (expense), net increased by $1.6 million during the year ended December 31, 2023 as compared to the prior year, primarily due to the gain from the changes in the fair value of the warrant liability and derivative liabilities, partially offset by the increase in interest expense.
We recognized additional $2.7 million in interest expense, including the amortization of related discounts, during the year ended December 31, 2023 as compared to the prior year, related to the November 2022 Convertible Notes, April 2023 Convertible Notes and December 2023 Convertible Notes.
During the year ended December 31, 2023, we recognized a $2.1 million gain from the change in the fair value of the warrant liability primarily related to the warrants issued in April 2023 to the holders of the April 2023 Convertible Notes. We recognized $0.8 million gain from the change in the fair value of the derivative liabilities related to the April 2023 Convertible Notes and December 2023 Convertible notes. These gains are related to the decrease in the price of the Company’s stock.
During the year ended December 31, 2022, we recognized a $1.2 million loss on the change in the fair value of the convertible notes primarily related to increase in the fair value of the 2022 Pre-Business Combination Convertible Notes between their issuance date and the closing date of the Ignyte Business Combination.
Liquidity and Capital Resources
Sources of Liquidity
Since our inception, we have not generated any revenue from product sales and have incurred significant operating losses and negative cash flows from our operations. Our net loss was $12.8 million and $13.1 million for the years ended December 31, 2023 and 2022, respectively. At December 31, 2023 we had cash of $0.4 million. In 2023, we received proceeds of $3.7 million from the issuance of convertible debt and $250,000 from a loan with our founder and director, Dr. Huh. Our primary uses of cash to date have been to fund our research and development activities, business planning, establishing and maintaining our intellectual property portfolio, capital investments and providing general and administrative support for our operations.
Since the beginning of 2024, we raised aggregate gross proceeds of approximately $0.7 million from the issuance of December 2023 Convertible Notes and $1.3 million from the issuance of May 2024 Convertible Notes.
Funding Requirements
We expect to incur losses from operations for the foreseeable future primarily due to research and development expenses, including expenses related to conducting research activities, pre-clinical expenses and clinical trials. Our future capital requirements will depend on a number of factors, including:
the scope, progress, results and costs of our clinical trials, including but not limited to PHP-303 and our PH-1 ADC Platform;
the cost of manufacturing drug supply for our clinical and preclinical studies;
the future results of on-going preclinical research and subsequent clinical trials for treatments for oncology, genetic disease, liver disease, inflammation, and other pipeline candidates we may identify from time to time, including our ability to obtain regulatory approvals;
any changes in regulatory standards relating to the review of our product candidates; and our ability to timely obtain such required regulatory approvals;
the number and development requirements of other product candidates that we pursue;
the emergence of competing technologies and other adverse market developments;
our ability, and the ability of our third-party manufacturers, to manufacture or supply sufficient quantities of clinical products;
the costs of future commercialization activities, if any, including establishing sales, marketing, manufacturing and distribution capabilities, for any of our product candidates for which we receive marketing approval;
our ability to achieve the degree of market acceptance necessary for future commercial success of our product candidates for which we receive marketing approval, if any;
the costs of preparing, filing, and prosecuting patent applications and maintaining, enforcing, and defending intellectual property-related claims;
the impact of litigation that may be brought against us or of litigation that we may pursue against others;
the extent to which we acquire or invest in businesses, products, and technologies;
our ability to successfully integrate acquired products and technologies into our business, including the possibility that the expected benefits of the transactions will not be fully realized by us or may take longer to realize than expected;
our ability to establish and maintain collaborations, partnerships or other similar arrangements and to obtain or satisfy any milestone, royalty, or other payments from any such collaborations;
the extent to which our business could be adversely impacted by the effects of COVID-19 outbreak, including due to actions by us, governments, suppliers or other third parties to control the spread of COVID-19, or by other health epidemics or pandemics; and
the costs of operating as a public company.
We expect to incur significant expenses and operating losses for the foreseeable future as we continue our efforts to identify product candidates and seek regulatory approvals within our gene therapy portfolio.
Additional financing will be needed to fund our ongoing activities. We may raise this additional funding through the sale of equity, debt financings or other capital sources, including potential collaborations with other companies or other strategic transactions and funding under government contracts. We may be unable to raise additional funds or enter into such other arrangements or arrangement when needed on favorable terms, or at all. If we are unable to raise capital when needed or on attractive terms, we could be forced to delay, reduce or eliminate certain of our research and development programs. There can be no assurances that other sources of financing would be available. Due to these uncertainties, there is substantial doubt about our ability to continue as a going concern.
Our future operations are highly dependent on a combination of factors, including (i) the timely and successful completion of additional financing; (ii) the success of our research and development programs; (iii) the development of competitive therapies by other biotechnology and pharmaceutical companies, (iv) our ability to attract and retain key employees, (v) our ability to manage growth of the organization; (vi) our ability to protect our proprietary technology; and ultimately (vii) regulatory approval and market acceptance of our product candidates.
Cash Flows Discussion
The following table summarizes our cash flows for the periods indicated:
Year Ended December 31,
Net cash used in operating activities
Net cash used in investing activities
Net cash provided by financing activities
Net (decrease) increase in cash, cash equivalents and restricted cash
Operating Activities
Net cash used in operating activities was approximately $4.8 million and $7.5 million for the years ended December 31, 2023 and 2022, respectively. The decrease in operating spending was a result of our reduction in facilities expenses, reduction in headcount of general and administrative employees,and decreases in direct project expenses related to the PHP-303 program, the
PH-1 ADC Platform, and other general and pre-clinical programs as a result of delays in our ongoing and planned research activities.
Investing Activities
During the year ended December 31, 2022, net cash used in investing activities was $142,249, primarily due to capital expenditures for furniture and fixtures related to the office in South San Francisco, California.
Financing Activities
During the year ended December 31, 2023 net cash provided by financing activities was $4.2 million, including the proceeds from the issuance of convertible notes of $3.4 million, proceeds from a related party loan of $0.25 million, proceeds from the issuance of common stock for $1.1 million partially offset by repayments on convertible notes of $0.3 million and repayments on insurance financing of $0.3 million.
During the year ended December 31, 2022, net cash provided by financing activities was $8.1 million including the proceeds from the issuance of long-term debt of $1.3 million, proceeds from a related party loan of $0.5 million, proceeds from the Business Combination with Ignyte of $3.9 million, and the issuance of common stock for $5.2 million partially offset by the $3.8 million settlement of the Forward Share Purchase agreement assumed from Ignyte in the Business Combination.
Contractual Obligations and Commitments
In October 2021, we entered into a lease for laboratory and office facilities in Palo Alto, California that expires in March 2027 with a five-year renewal option and opened a secured letter of credit with a third-party financial institution in lieu of a security deposit for $177,000. Base rent for this sublease is approximately $89,000 monthly with annual escalations of 3%. In March 2023, we vacated the premises and returned possession of the premises to the landlord in April 2023. We are still responsible for the outstanding payments under the lease.
At the date of the Spin-Off, we and pH Pharma Co., Ltd entered into an administrative services and facilities agreement whereby pH Pharma Co., Ltd would perform services, functions and responsibilities for us. Under the agreement, we paid pH Pharma Co., Ltd $100,000 per month through August 30, 2022 and $15,000 per month from September 1, 2022 through February 28, 2023 based on the estimated value of the level of service to be performed. Additionally, we reimbursed pH Pharma Co., Ltd $3,000 per month in lease payments from the date of the Spin-Off through February 28, 2023. At December 31, 2023 and 2022, the amounts payable to pH Pharma Co., Ltd under this agreement totaled $309,534 and $426,673, respectively, included in accounts payable in the consolidated balance sheets. On January 31, 2024, we and pH Pharma Co., Ltd entered into a settlement agreement, settled the outstanding debt for a one-time payment of $85,000, resulting in a gain on debt extinguishment of $207,967, and terminated the administrative services and facilities agreement.
Off-Balance Sheet Arrangements
We had no off-balance sheet arrangements as of December 31, 2023 and 2022.
Critical Accounting Policies and Significant Judgments and Estimates
Our discussion and analysis of our financial condition and results of operations are based on our consolidated financial statements included within this Annual Report on Form 10-K, which we have prepared in accordance with U.S. GAAP. The preparation of these consolidated financial statements requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the consolidated financial statements, as well as the reported expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those described in greater detail below. We base our estimates on historical experience and on various other factors that we believe are reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions.
We believe that the following discussion represents our critical accounting policies.
Grant Revenue
Our grant revenues are derived from research programs with the Department of Defense, US Army Medical Research Acquisition Activity for work on a COVID-19 therapeutic.
Grants awarded to us for research and development by government entities are outside the scope of the contracts with customers and contributions guidance. This is because these granting entities are not considered to be customers and are not receiving reciprocal value for their grant support provided to us. These grants provide us with payments for certain types of expenditures in return for research and development activities over a contractually defined period.
We recognize grant revenue based on the reimbursable costs that are incurred due the period, up to pre-approved award limits. The expenses associated with these reimbursements are reflected as a component of research and development expense in the accompanying consolidated statements of operations and comprehensive loss.
Share-based Compensation
We account for stock option awards in accordance with ASC 718, Compensation-Stock Compensation (“ASC 718”). The estimated grant date fair value of the stock option awards are recognized as compensation expense over the requisite service period of the awards (usually the vesting period) on a straight-line basis. We estimate the fair value of each stock-based award on the date of grant using the Black-Scholes option pricing model. The Black-Scholes option pricing model incorporates various assumptions, such as the value of the underlying common stock, the risk-free interest rate, expected volatility, expected dividend yield, and expected life of the options. Expected volatility is based on the historical volatility of a publicly traded set of peer companies. Our historical share option exercise experience does not provide a reasonable basis upon which to estimate an expected term because of a lack of sufficient data. Therefore, we estimate the expected term by using the simplified method, which calculates the expected term as the average of the time-to-vesting and the contractual life of the options. The risk-free interest rate is based on U.S. Treasury, zero-coupon issues with a remaining term equal to the expected life assumed at the date of grant (or modification, as applicable). Equity-based compensation expense is classified in the statements of operations in the same manner in which the award recipients’ payroll costs or service payments are classified. are recognized as a reduction of stock-based compensation expense as they occur.
Derivative Instruments
We issued warrants to its investors and accounts for warrant instruments as either equity-classified or liability-classified instruments based on an assessment of the specific terms of the warrants and applicable authoritative guidance in ASC 480 and ASC 815, “Derivatives and Hedging” (“ASC 815”). The assessment considers whether the warrants are freestanding financial instruments pursuant to ASC 480, meet the definition of a liability pursuant to ASC 480, and meet all of the requirements for equity classification under ASC 815, including whether the warrants are indexed to our own stock and whether the holders of the warrants could potentially require “net cash settlement” in a circumstance outside of the Company’s control, among other conditions for equity classification.
The Key Company Stockholder Forward Purchase Liability entered into on April 28, 2022 resulted in us holding a put option on shares to be purchased. The Forward Share Purchase Agreement entered into on October 22, 2022 resulted in us holding a put option on shares to be purchased. The White Lion Purchase Agreement includes an embedded put option and an embedded forward option (see Note 11). Pursuant to ASC 815, these instruments meet the definition of a derivative and accordingly were recognized at fair value and are remeasured at fair value at each period end.
Recently Issued Accounting Standards
A description of recently issued accounting pronouncements that may potentially impact our financial position and results of operations is disclosed in Note 2, Summary of Significant Accounting Policies, to our audited consolidated financial statements appearing elsewhere in this Annual Report on Form 10-K.
Internal Control Over Financial Reporting
Internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements in accordance with U.S. GAAP. Under standards established by the Public Company Accounting Oversight Board, or PCAOB, a deficiency in internal control over financial reporting exists when the design or operation of a control does not allow management or personnel, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis. The PCAOB defines a material weakness as a deficiency, or combination of deficiencies, in internal control over financial reporting, such that there is a reasonable possibility that a material misstatement of annual or interim financial statements will not be prevented, or detected and corrected, on a timely basis.
JOBS Act Accounting Election
We qualify as an “emerging growth company” as defined in the JOBS Act. An emerging growth company may take advantage of reduced reporting requirements that are not otherwise applicable to public companies. These provisions include, but are not limited to:
being permitted to present only two years of audited financial statements and only two years of related Management’s Discussion and Analysis of Financial Condition and Results of Operations in this Annual Report on Form 10-K;
not being required to comply with the auditor attestation requirements on the effectiveness of our internal controls over financial reporting;
not being required to comply with any requirement that may be adopted by the PCAOB regarding mandatory audit firm rotation or a supplement to the auditor’s report providing additional information about the audit and the financial statements (auditor discussion and analysis);
reduced disclosure obligations regarding executive compensation arrangements; and
exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved.
We may use these provisions until the last day of our fiscal year in which the fifth anniversary of the completion of this offering occurs. However, if certain events occur prior to the end of such five-year period, including if we become a “large accelerated filer,” our annual gross revenue exceeds $1.235 billion, or we issue more than $1.0 billion of non-convertible debt in any three-year period, we will cease to be an emerging growth company prior to the end of such five-year period.
We have elected to take advantage of certain of the reduced disclosure obligations in this Annual Report on Form 10-K and may elect to take advantage of other reduced reporting requirements in future filings. As a result, the information that we provide to our shareholders may be different than the information you receive from other public companies in which you hold stock.
The JOBS Act provides that an emerging growth company can take advantage of an extended transition period for complying with new or revised accounting standards, until those standards apply to private companies. We have elected to take advantage of the benefits of this extended transition period and, therefore, we will not be subject to the same new or revised accounting standards as other public companies that are not emerging growth companies. Our financial statements may therefore not be comparable to those of companies that comply with such new or revised accounting standards. Until the date that we are no longer an emerging growth company or affirmatively and irrevocably opt out of the exemption provided by Section 7(a)(2)(B) of the Securities Act upon issuance of a new or revised accounting standard that applies to our financial statements and that has a different effective date for public and private companies, we will disclose the date on which we will adopt the recently issued accounting standard.
Item 7A. Quantitative and Qualitati ve Disclosures About Market Risk.
Concentration of Credit Risk
We received 100% of our revenue through a grant from a government organization during the years ended December 31, 2023 and 2022. To date, no receivables have been written off.
Interest Rate Risk
As of December 31, 2023 and 2022, we had a cash balance of $0.4 million and $0.6 million, respectively, all of which were maintained in business checking accounts and money market accounts in the U.S. and South Korea. Our primary exposure to market risk is to interest income volatility, which is affected by changes in the general level of interest rates. As such rates are at a near record low, a 10% change in the market interest rates would not have a material effect on our business, financial condition or results of operations.
Foreign Currency Risk
We conduct our business in U.S. dollars and, thus, are not exposed to financial risks from exchange rate fluctuations between the U.S. dollar and other currencies.
