Item
1. Financial Statements (unaudited)
| Neuropathix,
Inc. |
| Notes
to Condensed Consolidated Financial Statements |
| For
the Three Months Ended March 31, 2022 |
Note
1 – Organization and Nature of Operations
Neuropathix,
Inc. (the “Company”) was incorporated under the laws of the state of Delaware on March
25, 2013 under the name TYG Solutions Corp. The Company consummated a share exchange transaction on July 25, 2018 (the
“Share Exchange”) with Kannalife Sciences, Inc. (“Kannalife”), a privately held Delaware corporation formed
in 2010, the accounting acquirer. Upon completion of the share exchange transaction, Kannalife was treated as the surviving entity
and accounting acquirer although the Company was the legal acquirer. Accordingly, the Company’s historical financial
statements are those of Kannalife the surviving entity and accounting acquirer. All references that refer to (the
“Company” or “we” or “us” or “our”) are Kannalife, unless otherwise differentiated.
The Company is a phytomedical/pharmaceutical company that specializes in the research and development of synthetic molecules and
therapeutic products derived from botanical sources, including the cannabis taxa.
On
November 9, 2018, the Company filed an amendment to its certificate of incorporation with the Delaware Secretary of State that changed
its name to Kannalife, Inc.
On
November 4, 2020, the Company filed an amendment to its certificate of incorporation with the Delaware Secretary of State that changed
its name to Neuropathix, Inc. The Company concurrently submitted a request to FINRA for approval of the name change as well as a ticker
symbol change from “KLFE” to “NPTX.” The Company’s name change and ticker symbol change was reviewed and
processed by FINRA and went effective November 6, 2020.
Note
2 - Summary of Significant Accounting Policies
The
significant accounting policies used in the preparation of the condensed consolidated financial statements are as follows:
Basis
of Presentation
We
have prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities and
Exchange Commission (the “SEC”) for interim financial reporting. These condensed consolidated financial statements are unaudited
and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation
of our balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented are not
necessarily indicative of the results that may be expected for 2022. Certain information and footnote disclosures normally included in
consolidated financial statements prepared in accordance with accounting principles generally accepted in the United States (“GAAP”)
have been omitted in accordance with the rules and regulations of the SEC. These condensed consolidated financial statements should be
read in conjunction with our audited financial statements and accompanying notes for the year ended December 31, 2021, included in the
Company’s Annual Report on Form 10-K filed with the SEC on March 31, 2022.
Significant
Risks and Uncertainties
The
Company’s operations are subject to a number of factors that can affect its operating results and financial condition. Such factors
include, but are not limited to: the results of clinical testing and trial activities of the Company’s products, the Company’s
ability to obtain regulatory approval to market its products, competition from products manufactured and sold or being developed by other
companies, the price of, and demand for, Company products, the Company’s ability to negotiate favorable licensing or other manufacturing
and marketing agreements for its products, and the Company’s ability to raise capital.
The
Company currently has no commercially approved products and there can be no assurance that the Company’s research and development
will be successfully commercialized. Developing and commercializing a product requires significant time and capital and is subject to
regulatory review and approval as well as competition from other biotechnology and pharmaceutical companies. The Company operates in
an environment of rapid change and is dependent upon the continued services of its employees and consultants and obtaining and protecting
intellectual property.
In
December 2019, a novel strain of coronavirus, commonly known as COVID-19, surfaced. The spread of COVID-19 around the world since
2020 has caused significant volatility in U.S. and international markets. There is significant uncertainty around the
breadth and duration of business disruptions related to COVID-19, as well as its impact on the U.S. and international economies and,
as such, the Company is unable to determine if it will have a material impact to its operations. The Company’s operations as
of March 31, 2022 have not been significantly affected, but may be affected in the future, by the ongoing outbreak of COVID-19 which
was declared a pandemic by the World Health Organization. The ultimate disruption which may be caused by the outbreak is uncertain;
however, it may result in a material adverse impact on the Company’s financial position, operations and cash flows. Possible
areas that may be affected include, but are not limited to, disruption to the Company’s labor workforce, unavailability of
products and supplies used in operations, and the decline in value of assets held by the Company.
Revenue
Recognition
It
is the Company’s policy that revenues are recognized in accordance with ASC 606 “Revenue Recognition.” Five basic steps
must be followed before revenue can be recognized; (1) Identifying the contract(s) with a customer that creates enforceable rights and
obligations; (2) Identifying the performance obligations in the contract, such as promising to transfer goods or services to a customer;
(3) Determining the transaction price, meaning the amount of consideration in a contract to which an entity expects to be entitled in
exchange for transferring promised goods or services to a customer; (4) Allocating the transaction price to the performance obligations
in the contract, which requires the company to allocate the transaction price to each performance obligation on the basis of the relative
standalone selling prices of each distinct good or services promised in the contract; and (5) Recognizing revenue when (or as) the entity
satisfies a performance obligation by transferring a promised good or service to a customer. The amount of revenue recognized is the
amount allocated to the satisfied performance obligation. Adoption of ASC 606 has not changed the timing and nature of the Company’s
revenue recognition and there has been no material effect on the Company’s financial statements.
Our
revenues consist of state and federal research grants and fees received from research services for third-party product development. These
revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the
price is fixed or determinable and collectability is reasonably assured.
On
September 28, 2021, the Company received a notice of award for a $2.97 million Phase 2 STTR Study Grant (the “NINDS Study Grant
Award”) from National Institutes of Health (“NIH”) – National Institute of Neurological Disorders and Stroke
(“NINDS”). The NINDS Study Grant Award is funded through the NIH HEAL Initiative (“Helping End Addiction Long-Term”)
for Development of Therapies and Technologies Directed at Enhanced Pain Management and will provide funding specifically in the Development
of KLS-13019 for Neuropathic Pain. The NINDS Study Grant Award sets forth the funding allocation of $977,054 in year 1; $991,944 in year
2; and $1,001,774 in year 3. The Company is able to draw down on the grant to reimburse approved research and development activities.
As of March 31, 2022, the Company recognized $207,980 in grant revenue in connection with this grant.
Use
of Estimates
The
preparation of consolidated financial statements and accompanying notes in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the
dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the periods. Actual results
could differ from those estimates. Significant matters requiring the use of estimates and assumptions include, but are not necessarily
limited to, establishing the fair value of marketable securities and periodically evaluating marketable securities for potential impairment,
fair value of the Company’s stock, stock-based compensation, valuation of derivative liabilities and valuation allowance relating
to the Company’s deferred tax assets. Management believes that its estimates and assumptions are reasonable, based on information
that is available at the time they are made.
Net
Loss per Share
Basic
net loss per share is calculated by dividing the net loss for the period by the weighted-average number of common shares outstanding
during the period. Diluted net income per share is calculated by dividing income for the period by the weighted-average number of common
shares outstanding during the period, increased by potentially dilutive common shares ("dilutive securities") that were outstanding
during the period. Dilutive securities include stock options and warrants granted, convertible debt, and convertible preferred stock.
The
weighted average number of common stock equivalents not included in diluted income per share, because the effects are anti-dilutive,
was 65,074,895 and 29,446,224 for the three months ended March 31, 2022 and 2021, respectively.
Research
and Development
In
accordance with FASB ASC 730, Research and Development (“ASC 730”) research and development (“R&D”)
costs are expensed when incurred. R&D costs include supplies, clinical trial and related clinical manufacturing costs, contract and
other outside service and facilities and overhead costs. Total R&D costs for the three months ended March 31, 2022 and 2021, were
$219,760 and $128,648, respectively.
Stock
Based Compensation
The
Company accounts for share-based compensation in accordance with the fair value recognition provision of FASB ASC 718, Compensation – Stock
Compensation (“ASC 718”), prescribes accounting and reporting standards for all share-based payment transactions in which
employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options, and
other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees,
including grants of employee stock options, are recognized as compensation expense, which is included in the general and administrative
expense in the consolidated financial statements based on the estimated grant date fair values. That expense is recognized over the period
during which an employee is required to provide services in exchange for the award, known as the requisite service period (usually the
vesting period).
Recently adopted accounting standards
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).
ASU 2016-02 requires that a lessee recognize the assets and liabilities that arise from operating leases. A lessee should recognize in
the statement of financial position a liability to make lease payments (the lease liability) and a right of use asset representing its
right to use the underlying asset for the lease term. For leases with a term of 12 months or less, a lessee is permitted to make an accounting
policy election by class of underlying asset not to recognize lease assets and lease liabilities. In transition, lessees and lessors
are required to recognize and measure leases at the beginning of the earliest period presented using a modified retrospective approach.
Public business entities should apply the amendments in ASU 2016-02 for fiscal years beginning after December 15, 2018, including interim
periods within those fiscal years. Early application is permitted for all public business entities and all nonpublic business entities
upon issuance. The Company (as an EGC) that is taking advantage of the extended transition period offered to private entities would apply
this for fiscal years beginning after December 15, 2021. On January 1, 2022, the Company adopted ASU 2016-02 and its related amendments,
which changed our accounting for leases. As a result of this change, we recognized right-of-use assets and lease liabilities on the consolidated
balance sheet for all leases with a term longer than 12 months and classified them as operating leases. The right-of-use assets and lease
liabilities have been measured by the present value of remaining lease payments over the lease term using our incremental borrowing rates
or implicit rates, when readily determinable.
Note
3 – Going Concern and Management’s Liquidity Plans
The
Company’s condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the realization
of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in our accompanying condensed
consolidated financial statements, the Company has had a loss from operations of $1,595,605 and $1,328,574 for the three months ended
March 31, 2022 and 2021, respectively. Additionally, the Company had an accumulated deficit of $18,186,754 at March 31, 2022 and has
not yet established an adequate ongoing source of revenues sufficient to cover its operating costs and to allow it to continue as a going
concern. These factors raise substantial doubt about its ability to continue as a going concern.
In
order to continue as a going concern, the Company will need, among other things, additional capital resources. Management plans to
raise additional capital through the sale common stock and/or preferred stock or traditional debt. However, there are no assurances
that such additional funding will be achieved or that management’s plans will be successful. The accompanying condensed
consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded asset
amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going
concern.
Note
4 – Fair Value Measurements
The
Company follows FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) to measure and disclosure
the fair value of its financial instruments. ASC 820 establishes a framework for measuring fair value in U.S. GAAP and expands disclosures
about fair value measurements and establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used to measure
fair value into three broad levels. The three levels of fair value hierarchy defined by ASC 820 are described below:
Level
1 - Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level
2 - Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
Level
3 - Pricing inputs that are generally unobservable inputs and not corroborated by market data.
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or similar
techniques and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities and
the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within more than
one level described above, the categorization is based on the lowest level input that is significant to the fair value measurement of
the instrument.
The
carrying amounts reported in the Company’s condensed consolidated financial statements for cash, accounts payable and accrued expenses
approximate their fair value because of the immediate or short-term nature of these financial instruments.
Transactions
involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive,
free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the related
party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such representations
can be substantiated.
The
following table presents liabilities that are measured and recognized at fair value as of March 31, 2022 and December 31, 2021, on a
recurring basis:
| Fair Value, Liabilities Measured on Recurring Basis | |
| | | |
| | | |
| | | |
| | |
| | |
March 31, 2022 | |
|
| | |
Level 1 | |
Level 2 | |
Level 3 | |
Total Carrying Value |
| Derivative liabilities | |
$ | — | | |
$ | — | | |
$ | 1,769,043 | | |
$ | 1,769,043 | |
| | |
December 31, 2021 | |
|
| | |
Level 1 | |
Level 2 | |
Level 3 | |
Total Carrying Value |
| Derivative liabilities | |
$ | — | | |
$ | — | | |
$ | 430,678 | | |
$ | 430,678 | |
NOTE
5 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses at March 31, 2022 and December 31, 2021 consisted of the following:
| Accounts payable and accrued expenses | |
| | | |
| | |
| | |
March 31, 2022 | |
December 31, 2021 |
| Accounts payable and accrued expenses | |
$ | 478,762 | | |
$ | 485,628 | |
| Accrued interest | |
| 346,015 | | |
| 314,275 | |
| Totals | |
$ | 824,777 | | |
$ | 799,903 | |
NOTE
6 – PAYROLL AND RELATED LIABILITIES
Payroll
and related liabilities at March 31, 2022 and December 31, 2021 consisted of the following:
| Schedule of Payroll and Related Liabilities | |
| | | |
| | |
| | |
March 31, 2022 | |
December 31, 2021 |
| Payroll | |
$ | 279,963 | | |
$ | 288,780 | |
| Payroll taxes | |
| 241,594 | | |
| 241,409 | |
| Totals | |
$ | 521,557 | | |
$ | 530,189 | |
As
of March 31, 2022, the Company has accrued payroll and payroll taxes in connection with salaries paid and accrued to four officers of
the Company which includes $214,463 accrued for the CEO.
As
of December 31, 2021, the Company has accrued payroll and payroll taxes in connection with salaries paid and accrued to four officers
of the Company which includes $190,000 accrued for the CEO, and $75,000 accrued for executive management.
NOTE
7 – LOAN PAYABLE
| Schedule of Loans Payable | |
| | | |
| | | |
| | |
| | |
| |
March 31, 2022 | |
December 31, 2021 |
| Loan payable at 8%, matured December 31, 2021 | |
| * | | |
$ | 850,000 | | |
$ | 850,000 | |
| Loan payable at 0%, matured June 11, 2021 | |
| * | | |
| 50,000 | | |
| 50,000 | |
| Loan payable at 0.25%, matures July 26, 2023 | |
| * | | |
| 107,910 | | |
| 107,910 | |
| Total | |
| | | |
| 1,007,910 | | |
| 1,007,910 | |
| Less: short term loans | |
| | | |
| 900,000 | | |
| 900,000 | |
| Total long-term loans | |
| | | |
$ | 107,910 | | |
$ | 107,910 | |
| * - unsecured note | |
| | | |
| | | |
| | |
Total
interest expense on notes payable, amounted to $16,830 and $16,767 for the three months ended March 31, 2022 and 2021, respectively.
Accrued interest related to these notes was $211,827 and $194,997 as of March 31, 2022 and December 31, 2021, respectively.
NOTE
8 – LOAN PAYABLE – RELATED PARTY
As
previously reported, the Company borrowed $42,092
and issued a promissory note with a maturity
date of March 31, 2020 which was later extended to March
31, 2022. No demand letter has been received
and the Company is in negotiations to extend the maturity date of the note.
The
loans represent working capital advances from shareholders, bear interest at 0.5%, and grant a security interest in the Company’s
assets as collateral. In March 2018, this note was amended, and the original note holder assigned the note to Kettner Investments, LLC,
a significant shareholder. The note is now non-interest bearing. Accrued interest related to this note is $226 as of March 31, 2022 and
December 31, 2021, respectively.
NOTE
9 – FINANCE LEASE OBLIGATIONS
In
September 2019, the Company entered into a lease agreement with Thermo Fisher Scientific to acquire equipment with 48 monthly payments
of $941, payable through September 1, 2023, with an effective interest rate of 12% per annum. The outstanding balance of this finance
lease was $17,016, secured by equipment with carrying value of $33,346, as of March 31, 2022.
In
March 2021, the Company entered into another lease agreement with Thermo Fisher Scientific to acquire equipment with 36 monthly payments
of $699, payable through February 29, 2024, with an effective interest rate of 13% per annum. The outstanding balance of this finance
lease was $13,203, secured by equipment with carrying value of $19,399, as of March 31, 2022.
NOTE
10 – CONVERTIBLE NOTES PAYABLE
Prior
to the Share Exchange, discussed in Note 1, the Company issued a convertible note to an investor, face value of $500,000,
in exchange for $500,000
in cash. The note is unsecured, bears interest at the rate of 3%
per annum and matures on February
16, 2030. The note is convertible into common stock of the Company at $0.10
per share at any time at the option of the holder, subject to a 4.9% blocking provision which prohibits the holder from converting
into common stock of the Company if such conversion results in the holder owning greater than 4.9% of the outstanding common stock
of the Company after giving effect to such conversion. On September 26, 2019, the Company issued 1,500,000
shares of common stock for the conversion of $123,627
convertible notes payable and $26,373
of related accrued interest. The outstanding balance on this convertible note was $376,373 as
of March 31, 2022 and December 31, 2021.
In
December 2019, the Company entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed to sell
to the investor a $100,000
convertible note bearing interest at 8%
per annum (the “Note”). The Note matured two years from the date of issuance. The Note is convertible at the option of the
holder at any time into shares of the Company’s common stock at an effective conversion price of 75% of the average closing price
of the Company’s common stock on the fifteen days prior to conversion. The Company may not prepay this Note within the first six
months. The Company is in negotiations to extend the maturity date of the note. If, after the first six months of the Note the
Company:
| |
(a) |
elects
to repay the Note, it must do so at a premium of one hundred and twenty five percent (125%) of the face amount of the Note, together
with all unpaid and accrued interest to the date of repayment. |
| |
(b) |
elects
to involuntarily exercise conversion of this Note to the Holder, the Company must provide written notice to the Holder along with
an executed copy of the Company’s Notice of Conversion, specifying that the Note shall be converted into shares of the Company’s
Common Stock based upon at an effective conversion price of 75% of the average closing price of the Company’s common stock
on the fifteen days prior to conversion. |
The
embedded conversion feature of this Note was deemed to require bifurcation and liability classification, at fair value. Pursuant to the
Securities Purchase Agreement, the Company also sold warrants to the investors to purchase up to an aggregate of 100,000 shares of common
stock. The fair value of the derivative liability and warrants as of the date of issuance was in excess of the Note (see Note 12) resulting
in full discount of the Note at issuance.
On
June 8, 2020, the Company entered into a securities purchase agreement, dated as of June 2, 2020 (the “Purchase Agreement”),
with an accredited investor pursuant to which the investor purchased a 12% unsecured convertible promissory note (the “12% Note”)
from the Company. The 12% Note has a principal amount of $165,000 less a $9,000 original issue discount (“OID”) for a purchase
price of $156,000, of which $52,000 was paid on June 8, 2020 less $3,100 in transaction fees. The 12%
Note matured 12 months from the effective date of each tranche. This note is in default as of June 8, 2021, which may trigger cross defaults
on other notes. The Company is in negotiations to extend the maturity date of the Note. All principal amounts and the interest thereon
are convertible into shares of the Company’s common stock at the option of the Investor, after six (6) months from the date of
the 12% Note. All closings occurred following the satisfaction of customary closing conditions. The 12% Note is convertible at the option
of the holder at any time into shares of the Company’s common stock at an effective conversion price of the lesser of (i) 68% multiplied
by the lowest Trading Price (representing a discount rate of 32%) during the previous fifteen (15) trading day period ending on the latest
complete trading day prior to the date of the 12% Note or (ii) the Variable Conversion Price. In connection with the Purchase Agreement
and the 12% Note, the Company issued a common stock purchase warrant to purchase 36,666 shares of the Company’s common stock at
$0.75 per share (the “Warrant”) which may be exercised by cashless exercise, exercisable for a period of three years. The
12% Note has a variable conversion price and the Company recorded embedded derivative liabilities. The fair value of the derivative liability
and warrants as of the date of issuance was in excess of the 12% Note (see Note 13) resulting in full discount of the 12% Note.
On
June 23, 2020, the Company entered into a securities purchase agreement, dated as of June 19, 2020, with an accredited investor
pursuant to which the investor purchased a 12%
convertible promissory note in the principal amount of $150,000,
less $20,750
in transaction-related, broker, legal and due diligence expenses. The note matured on June
19, 2021. This note is in default as of June 19, 2021, which may trigger cross defaults on other notes. The Company is in
negotiations to extend the maturity date of the Note. Principal payments on the note shall be made in six (6) installments, each in
the amount of $25,000,
starting on December 19, 2020, and continuing thereafter each thirty (30) days for five (5) months. Notwithstanding the foregoing,
the final payment of principal, and accrued and unpaid interest shall be due on the June 19, 2021. The investor is entitled to, at
its option, convert all or any amount of the principal amount and any accrued but unpaid interest of the note into shares of the
Company’s common stock, at any time upon an event of default, at a conversion price for each share of common stock equal to
the lesser of (i) the lowest trading price during the previous five (5) trading day period ending on the latest complete trading day
prior to the date of the note, or (ii) the Variable Conversion Price, subject to certain equitable adjustments. Furthermore, in
connection with the securities purchase agreement and the note, the Company issued two common stock purchase warrants each to
purchase 115,385
shares of the Company’s common stock at $1.30
per share which may be exercised by cashless exercise, exercisable for a period of five years. One of the warrants only became
exercisable upon default of the note. During the third quarter of 2021, the anti-dilution clause was triggered and the exercise
price was reset to $0.03 resulting in the number of warrants to be increased to 5,000,568.
On March 15, 2022, the anti-dilution clause was triggered in one of the Company’s warrants and the exercise price was reset to
$0.01 resulting in the number of those warrants to be increased by 9,499,482 to 15,000,050. The note has a variable conversion price
and the Company recorded embedded derivative liabilities. The fair value of the derivative liability and warrants as of the date of
issuance was in excess of the note (see Note 13) resulting in full discount of the note.
On
March 21, 2022, the Company issued three convertible notes for cash on identical terms to three investors for an aggregate face
value of $150,000,
of which $100,000 was with related parties. These convertible notes are unsecured and bear interest at the rate of 3%
per annum. These notes mature on March
21, 2032 and are convertible into restricted shares of common stock at a conversion price equal to the lesser of $0.01
or 70% of the average of the two lowest closing prices of the Company’s common stock in the ten trading days preceding any
particular conversion. The embedded beneficial conversion feature of these notes meets the definition of a derivative and requires
bifurcation and liability classification, at fair value. The fair value of the derivative liabilities as of the date of issuance
was in excess of the note (see Note 13) resulting in full discount of the note.
Total
interest expense on convertible notes payable, was $15,663
and $94,194 for the three months ended March 31, 2022 and 2021, respectively.
Total
accrued interest on convertible notes payable, as of March 31, 2022 and December 31, 2021, was $82,689 and $109,102, respectively.
NOTE
11 – CONVERTIBLE NOTES PAYABLE – RELATED PARTY
In
January 2020, the Company sold $100,000, convertible note to Kettner Investments, LLC, a significant shareholder, under the Note and
sold warrants to purchase up to an aggregate of 100,000 shares of common stock under the Securities Purchase Agreement. The fair value
of the derivative liability and warrants as of the date of issuance was in excess of the Note (see Note 13) resulting in full discount
of the Note.
In
February 2020, the Company sold an additional $50,000,
to the CEO of MJNA, a significant shareholder, under the Note and sold warrants to purchase up to an aggregate of 50,000
shares of common stock under the Securities Purchase
Agreement. The fair value of the derivative liability and warrants as of the date of issuance was in excess of the Note (see Note 13)
resulting in full discount of the Note.
On March 21, 2022, the Company issued and aggregate
of $100,000 of convertible notes payable to relates parties, see Note 10.
Total
interest expense on convertible notes payable – related party, inclusive of amortization of debt discount of $6,028 and $18,493,
amounted to $9,028 and $21,493 for the three months ended March 31, 2022 and 2021, respectively.
Total
accrued interest on convertible notes payable – related party, as of March 31, 2022 and December 31, 2021, was $26,178 and $23,178,
respectively.
NOTE
12 – PATENT PURCHASE LIABILITY
On
December 15, 2021, the Company entered into an amendment agreement with AND/Brenneman that modified the schedule of issuance of shares
to the following:
All
future Issuances of Shares under the IP Purchase and Transfer Agreement shall commence only upon the earlier of (a.) a full sale and
acquisition of Neuropathix, Inc. to a third party acquiror and based upon the price per share of said acquisition of Neuropathix, Inc.
by a third party, or (b.) the commencement of a human clinical trial of one or more of the AND Assets.
In
the event of the commencement of a human clinical trial, an installment process will commence with 1/5th of the transaction or $60,000
will be exchanged for a certain number of shares of restricted common stock of Neuropathix based upon the average five (5) day closing
price of Neuropathix, Inc. common stock prior to December 31st of each year subsequent the commencement of human clinical trials. Future
installment issuance of shares of restricted common stock of Neuropathix, Inc. shall have a floor price of $0.05 per share and a ceiling
price of $0.60 per share. As a result of the amendment, the shares issued to Brenneman were clawed back in 2021 and amounts originally
classified as short term, were reclassified as long term.
NOTE
13 – DERIVATIVE LIABILITIES
The
Company issued debts that consist of the issuance of convertible notes with variable conversion provisions. In addition, the Company
issued warrants with variable conversion provisions. The conversion terms of the convertible notes and warrants are variable based on
certain factors, such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based
on the future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory
note is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and warrants and
shares to be issued were recorded as derivative liabilities on the issuance date.
Based
on the various convertible notes described in Note 10 and 11, the fair value of applicable derivative liabilities on notes, warrants
and change in fair value of derivative liability are as follows for the three months ended March 31, 2022:
| Schedule of Derivative Liabilities | |
| | | |
| | | |
| | |
| | |
Derivative Liability - Convertible Notes | |
Derivative Liability - Warrants | |
Total |
| Balance as of December 31, 2021 | |
$ | 89,171 | | |
$ | 341,507 | | |
$ | 430,678 | |
| Change in fair value | |
| 746,023 | | |
| 178,669 | | |
| 924,692 | |
| Change due to exercise / redemptions | |
| — | | |
| — | | |
| — | |
| Change due to issuances | |
| 413,673 | | |
| — | | |
| 413,673 | |
| Balance as of March 31, 2022 | |
$ | 1,248,867 | | |
$ | 520,176 | | |
$ | 1,769,043 | |
NOTE
14 – COMMITMENTS AND CONTINGENCIES
Legal
Proceedings
From
time to time the Company may get involved in legal proceedings arising in the ordinary course of business. Other than as set forth in
“Legal Proceedings” in Part II below, the Company believes there is no litigation pending that could have, individually or
in the aggregate, a material adverse effect on its results of operations or financial condition.
Concentrations
All
revenue recognized in the three months ended March 31, 2022 and 2021 was grant revenue. While the Company expects to
maintain this contract for the entire term, loss of the grant would significantly impact its operations.
NOTE
15 – STOCKHOLDERS’ DEFICIT
Series
A Preferred Stock
Effective
May 3, 2018, the Company’s Board of Directors authorized and designated 75 shares of the Company’s Preferred Stock as Series
A Preferred Stock. Each share of the Series A Preferred Stock is entitled to a liquidation preference of $1,000 per share and is convertible
into 1,000 shares of the Company’s common stock. The holders of a majority of the Series A Preferred Stock are entitled to elect
up to four (4) directors to the Company’s board of directors and have preferential rights in regard to the election of Series A
directors. In all other voting matters, the holders of Series A Preferred Stock are entitled to cast 1,000 votes per share.
Series
B Preferred Stock
Effective
May 3, 2018, the Company’s Board of Directors authorized and designated 75 shares of the Company’s Preferred Stock as Series
B Preferred Stock. Each share of the Series B Preferred Stock is entitled to a liquidation preference of $1,000 per share and is convertible
into 1,000 shares of the Company’s common stock. The holders of a majority of the Series B Preferred Stock are entitled to elect
up to three (3) directors to the Company’s board of directors and have preferential rights in regard to the election of Series
B directors. In all other voting matters, the holders of Series B Preferred Stock are entitled to cast 1,000 votes per share.
Common
Stock
The
Company is authorized to issue 200,000,000 shares of common stock, par value of $0.0001 per share. All common stock shares have equal
voting rights, are non-assessable and have one vote per share. Voting rights are not cumulative and, therefore, the holders of more than
50% of the common stock could, if they choose to do so, elect all of the directors of the Company, subject to the rights of the preferred
stockholders.
Equity
Purchase Agreement with Cross & Company
On
September 18, 2020, the Company entered into an Equity Purchase Agreement with Cross and Company. We have the right to “put,”
or sell, up to 8,108,108 shares of our common stock to Cross. Unless terminated earlier, Cross’s purchase commitment will
automatically terminate on the earlier of the date on which Cross shall have purchased shares pursuant to the Equity Purchase Agreement
for an aggregate purchase price of $6,000,000 or September 18, 2023. The purchase price per share is calculated at a fifteen percent
discount of the lowest trading price of the Company’s common stock during the ten days after Cross and Co. receives the shares.
During
the period ending March 31, 2021, the Company issued 3,768,188 shares of common stock to Cross and Co for net proceeds of $463,758.
During
the period ending March 31, 2022, the Company issued 2,000,000 shares of common stock to Cross and Co. for net proceeds of $53,610.
Stock
Options
During
the period ending March 31, 2022, the Company granted options to purchase 250,000
shares of common stock at price $0.12
per share to a certain vendor of the Company that are exercisable for ten 10
years from the date of issuance. These options were valued at $12,450
using Black-Scholes Options Pricing Model.
The
remaining expense to be recognized for outstanding stock options through March 2024 is $1,017,335.
For
the three months ended March 31, 2022 and 2021, the Company recorded $250,139
and $382,473,
respectively, as stock based compensation related to the vesting options which is included in the general and administrative
expenses in the condensed consolidated statement of operations and $27,015 and $71,477, respectively, as research and development
expense.
The
fair value of the options is estimated using a Black-Scholes Options Pricing Model with the following assumptions for the
three months ended March 31, 2022:
| Schedule of share-based payment award, stock options, valuation assumptions | |
| | |
| Market value of common stock on issuance date | |
$ |
0.05 |
|
| Exercise price | |
$ |
0.12 |
|
| Expected volatility | |
| 234.81 | % |
| Expected term (in years) | |
| 10 | |
| Risk-free interest rate | |
| 1.78 | % |
| Expected dividend yields | |
| — | |
On
March 12, 2021, the Company executed a second amendment to its 2019 Equity Incentive Plan to (i) replace all references to
“Kannalife, Inc.,” the Company’s former name, to “Neuropathix, Inc.,” and (ii) increase the number of
shares of Company common stock authorized for issuance thereunder 20,000,000 shares (the “Second Plan
Amendment”).
The
Second Plan Amendment was approved by the Company’s Board of Directors on March 12, 2021. The Second Plan Amendment remains subject
to shareholder approval, which the Company shall undertake to obtain as soon as reasonably practicable, but in no event later than one
year from the amendment date. In the event that the Company does not obtain the requisite shareholder approval of the Second Plan Amendment
within one year, the Second Plan Amendment shall not be effective. On March 11, 2022, the majority
of shareholders of the Common Stock of the Company voted to ratify the 2019 Plan as amended.
As
of March 31, 2022, there were 13,000,000 shares of Company common stock issued and outstanding under the 2019 Plan, as amended.
The
following is a summary of outstanding and exercisable options:
| Schedule of outstanding and exercisable options | |
| | | |
| | | |
| | |
| | |
Numbers of Options | |
Weighted Avg Exercise Price | |
Weighted Avg Remaining Years |
| Outstanding as of December 31, 2021 | |
| 15,550,000 | | |
$ | 0.34 | | |
| 8.81 | |
| Granted | |
| 250,000 | | |
| 0.12 | | |
| 9.79 | |
| Exercised | |
| — | | |
| — | | |
| — | |
| Forfeited | |
| — | | |
| — | | |
| — | |
| Expired | |
| — | | |
| — | | |
| — | |
| Outstanding as of March 31, 2022 | |
| 15,800,000 | | |
$ | 0.33 | | |
| 8.59 | |
| Outstanding as of March 31, 2022, vested | |
| 10,122,396 | | |
$ | 0.39 | | |
| 8.45 | |
Warrants
On
February 10, 2021, the Company entered into a letter agreement with Lyons Capital, pursuant to which the Company agreed to issue and
sell 3,500,000 shares of the Company’s common stock, par value $0.0001 per share, and two warrants to purchase an aggregate of
3,500,000 additional shares of Common Stock, the terms of such warrants are further discussed below, for an aggregate purchase price
of $1,207,500. The first warrant grants Lyons Capital the right to purchase up to 1,750,000 shares of common stock at an exercise price
of $0.22 per share. The second warrant grants Lyons Capital the right to purchase up to an additional 1,750,000 shares of common stock
at an exercise price of $0.27 per share. The warrants are exercisable immediately, will expire five years from the date of issuance,
and contain customary provisions allowing for adjustment to the exercise price and number of shares of common stock issuable upon
exercise in the event of any stock dividend, recapitalization, reorganization, reclassification, or similar transaction. Lyons Capital
has the right to exercise the warrants at any time; provided, however, that subject to limited exceptions, Lyons Capital may not
exercise any portion of the warrants if Lyons Capital, together with any of its affiliates, would beneficially own in excess of 4.99%
of the number of shares of the Company’s common stock outstanding immediately after giving effect to such exercise.
On
March 15, 2022, the anti-dilution clause was triggered in one of the Company’s warrants and the exercise price was reset to $0.01
resulting in the number of those warrants to be increased by 9,499,482 to 15,000,050.
The
following is a summary of outstanding and exercisable warrants:
| Schedule of outstanding and exercisable warrants | | |
| | | |
| | |
| | |
Number of Shares | |
Weighted Average Exercise Price |
| Balance at December 31, 2021 | | |
| 9,287,234 | | |
$ | 0.11 | |
| Issued | | |
| — | | |
| — | |
| Reset | | |
| 9,499,482 | | |
| 0.01 | |
| Expired | | |
| — | | |
| — | |
| Balance at March 31, 2022 | | |
| 18,786,716 | | |
$ | 0.06 | |
At
March 31, 2022, 18,786,716 warrants for common stock were exercisable and the intrinsic value of these warrants was $362,422 and the weighted
average remaining contractual life for warrants outstanding was 3.31 years.
NOTE
16 – RELATED PARTY TRANSACTIONS
The
Company’s Chief Executive Officer (“CEO”) shares the use of the leased office space for personal living quarters. The
CEO reimburses the Company for 50% of the monthly rent, or $2,800 per month.
On
March 12, 2021, the Company issued its CEO 692,308 shares of common stock at $0.13 a share in lieu of $90,000 of accrued compensation.
See
Notes 8, 11, 14 and 15 for additional related party transactions.
NOTE
17 – LEASES
On
April 1, 2014, the Company entered into a one year lease arrangement for office space, with the option to renew the lease annually. The
lease has been renewed through May 2023. The monthly rent payment is $5,600 and the security deposit is $15,000. In May 2022, the monthly
rent increased to $5,800.
On
July 1, 2018, we entered into a one year lease arrangement for additional office space, with the option to renew the lease annually.
On July 1, 2021, the lease was renewed for three 3 years and the monthly rent payment is $6,203.
At
March 31, 2022, the future undiscounted minimum lease payments under the noncancellable leases are as follows:
| Schedule of Future Minimum Rental Payments for Operating Leases | |
| | |
| For the nine month period ending December 31, 2022 | |
$ | 94,844 | |
| Year ending December 31, 2023 | |
| 88,309 | |
| Year ending December 31, 2024 | |
| 30,747 | |
| Total undiscounted finance lease payments | |
$ | 213,898 | |
| Less: Imputed interest | |
| 15,759 | |
| Present value of finance lease liabilities | |
| 198,140 | |
The
operating lease liabilities of $198,140 as of March 31, 2022, represents the discounted (at a 8% incremental borrowing rate) value of
the future lease payments at March 31, 2022.
For
the three months ended March 31, 2022 and 2021, occupancy expense attributed to these leases were $31,081 and 46,309, respectively.
NOTE
18 – SUBSEQUENT EVENTS
In
April and May 2022, the Company, exercised put options and sold and aggregate of 750,000, of its common stock to one of its investors
under terms of the Equity Purchase Agreement for an aggregate value to be determined after the issuance of this report.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
You
should read the following discussion and analysis of our financial condition and operating results together with our condensed consolidated
financial statements and related notes included elsewhere in this Quarterly Report on Form 10-Q (this “Report”). This discussion
and analysis and other parts of this Report contain forward-looking statements based upon current beliefs, plans and expectations that
involve various risks, uncertainties and assumptions. Our actual results may differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under “Risk Factors” or in other parts of this Report
and in the “Risk Factors” section of our Annual Report on Form 10-K, filed with the Securities and Exchange Commission (the
“SEC”) on April 15, 2022.
Forward-Looking
Statements
This
Report, the other reports, statements, and information that the Company has previously filed with or furnished to, or that we may subsequently
file with or furnish to, the SEC and public announcements that we have previously made or may subsequently make include, may include,
or may incorporate by reference certain statements that may be deemed to be “forward-looking statements” within the meaning
of the Private Securities Litigation Reform Act of 1995, as amended, and that are intended to enjoy the protection of the safe harbor
for forward-looking statements provided by that Act. To the extent that any statements made in this Report contain information that is
not historical, these statements are forward-looking. Forward-looking statements can be identified by the use of words such as “anticipate,”
“estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,”
“believe,” “intend,” “may,” “will,” “should,” “could,” and other
words of similar meaning. These statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently,
actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties
include, without limitation, marketability of our products; legal and regulatory risks associated with our business and trading publicly;
our ability to raise additional capital to finance our activities; the future trading of our common stock; our ability to operate as
a public company; our ability to protect our proprietary information; general economic and business conditions; the volatility of our
operating results and financial condition; our ability to attract or retain qualified senior management personnel and research and development
staff; and other risks detailed from time to time in our filings with the SEC, or otherwise.
Information
regarding market and industry statistics contained in this Report is included based on information available to us that we believe is
accurate. It is generally based on industry and other publications that are not produced for purposes of securities offerings or economic
analysis. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the
additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. We
do not undertake any obligation to publicly update any forward-looking statements. As a result, investors should not place undue reliance
on these forward-looking statements.
Business
Developments
The
Company was originally incorporated in the State of Delaware on March 25, 2013 under the name TYG Solutions Corp. Our original business
plan was to develop iPhone and Android smartphone apps for companies who need an app for their internal and external operations. We subsequently
expanded our operations to offering corporate website design services.
On
July 25, 2018, the Company entered into a Share Exchange Agreement with Kannalife Sciences, Inc., a Delaware corporation (“Kannalife
Sciences”), and certain stockholders of Kannalife Sciences (the “Kannalife Sciences Stockholders”). Pursuant to the
terms of the Share Exchange Agreement, the Company acquired substantially all of the issued and outstanding shares of Kannalife Sciences
by means of a share exchange with the Kannalife Sciences Stockholders in exchange for newly issued shares of the common stock of the
Company (the “Share Exchange”). As a result of the Share Exchange, Kannalife Sciences became a 99.7% owned subsidiary of
the Company. The business operations of the Company regarding iPhone and Android smartphone apps was reduced significantly to focus efforts
on target therapeutics and drug discovery, and accordingly, by virtue of the Share Exchange, the Company acquired the business of Kannalife
Sciences including all of its assets. The Share Exchange was accounted for as a reverse acquisition and change in reporting entity, whereby
Kannalife Sciences was the accounting acquirer.
Kannalife
Sciences was incorporated in the State of Delaware on August 11, 2010. Kannalife Sciences is a developmental stage phyto-medical/pharmaceutical
and drug discovery company that specializes in the research, development of cannabinoid and cannabinoid-based therapeutic products derived
from synthetic and botanical sources, including the Cannabis “taxa” (the word “taxa” is the plural of “taxon,”
which defines a group of one or more populations of an organism or organisms to form a unit). Kannalife Sciences remains a wholly owned
operational subsidiary of the Company.
On
November 9, 2018, the Company filed an amendment to its certificate of incorporation with the Delaware Secretary of State to change its
name to Kannalife, Inc. The Company concurrently submitted a request to FINRA for approval of the name change as well as a ticker symbol
change to “KLFE,” and such action went effective on January 17, 2019.
On
November 4, 2020, the Company filed an amendment to its certificate of incorporation with the Delaware Secretary of State to change its
name to “Neuropathix, Inc.” The Company concurrently submitted a request to FINRA for approval of the name change as well
as a ticker symbol change from “KLFE” to “NPTX.” The Company’s name and ticker symbol change was
reviewed and processed by FINRA, and went effective November 6, 2020.
On
August 16, 2021, the Company established and incorporated a new wholly owned subsidiary named Dermique Incorporated (“Dermique”).
Dermique was established by the Company to hold, operate and commercialize all intellectual property associated with Kannalife Sciences’
previous research and development efforts to create and commercialize novel therapeutic topical over-the-counter cosmeceutical compounds
to treat a variety of skin disorders, including but not limited to atopic dermatitis.
Business
Overview
As
a result of the Share Exchange, our core businesses are comprised of the following:
| |
• |
A
drug development company focused on the research and development (“R&D”) of synthetic and phyto-medical products
from: |
| |
o |
naturally
recurring sources, including but not limited to cannabis, hemp, and other similar species of plantae; |
| |
o |
semi-synthetic
sources; and |
| |
o |
synthetic
and bio-synthetic sources. |
| |
• |
Drug
discovery platform to evaluate and potentially treat neurological and oxidative stress related disorders such as overt hepatic encephalopathy
(“OHE”), chronic traumatic encephalopathy (“CTE”) and chemotherapy induced peripheral neuropathy (“CIPN”)
with high quality assured, quality controlled cGMP pharmaceutical grade semi-synthetic and synthetic cannabinoids, cannabidiol (“CBD”),
and CBD-like molecules. |
| |
• |
Topical
skincare pre-clinical program designed to some of our patented, proprietary CBD-derived new chemical entities (“NCEs”),
for use as topical solutions, ointments, and creams for disorders such as diabetic neuropathies, diabetic ulcers, and for use as
an anti-pruritic. Anti-pruritics are known as anti-itch drugs and medications that inhibit the itching often associated with a variety
of disorders and diseases. |
Phyto
cannabinoids are a class of molecules derived from cannabis plants. The two primary cannabinoids contained in Cannabis are CBD and D9-tetrahydrocannabinol
(“THC”). Clinical and preclinical data suggest that CBD has positive effects on treating refractory epilepsy, FXS and arthritis,
and THC has positive effects on treating pain. Interest in cannabinoid therapeutics has increased significantly over the past several
years as preclinical and clinical data has emerged highlighting the potential efficacy and safety benefits of cannabinoid therapeutics.
The cannabinoid therapeutics market is expected to grow significantly due to the potential benefits these products may provide over existing
therapies.
We
are principally involved in the research and development of NCEs such as KLS-13019; KLS-13022 (“linoneyldihydroxybenzyl ethoxycarbonyl
azetidine” or “LEAÔ”); its related molecules; and synthetic CBD therapeutics
through pre-clinical drug discovery and development processes. We have developed our own intellectual property portfolio and established
relationships with third parties who are considered leaders in active pharmaceutical (“APIC”) contract manufacturing, formulation;
and contract bulk drug manufacturing. Most of our operations have been in the pre-clinical stage of drug discovery. In 2019, we began
commercialization efforts for over-the-counter cosmeceutical uses of LEAÔ, our lead
compound designed to address topical skin disorders.
KLS-13019’s
advanced formulation is designed to improve on some of the limitations associated with CBD, including but not limited to CBD’s
low bioavailability and limited drug like properties. However, KLS-13019 has not been reviewed or approved for patient use by the FDA
or any other healthcare authority in the world. Our pre-clinical studies suggest increased bioavailability, consistent plasma levels
and the avoidance of first-pass liver metabolism. In addition, an in vitro study performed by us demonstrated that CBD is degraded
to THC in an acidic environment such as the stomach.
In
the past three years, our most recent research and development efforts have been centered on the use of KLS-13019 as a neuroprotectant
and therapeutic agent to treat chronic and neuropathic pain. There is currently no FDA approved drug to treat CIPN. Our preclinical efforts
in the research and development of treating CIPN with our lead compound KLS-13019 have been fostered by a successful study grant from
NIH-NIDA that compared KLS-13019 to CBD in the prevention and reversal of neuropathic pain in animal models. As a result of the outcome
of this and other preclinical studies, we believe there is strong evidence to support the use of KLS-13019 as a non-opioid solution to
chronic and neuropathic pain in human clinical trials.
We
intend to study KLS-13019 in patients with chemotherapy induced neuropathic pain, and we intend to study KLS-13023 in patients with mild
traumatic brain injury. We believe that the claims made in the Pat. 9,611,213 and Pat. 10,004,722 sufficiently cover the use of the novel
molecule KLS-13019 in the treatment of neuropathic pain, which is broadly defined and includes chemotherapy induced neuropathic pain
(a/k/a: chemotherapy induced peripheral neuropathy).
To
date, we have synthesized, pre-clinically tested and patented our proprietary CBD like NCEs, including KLS-13019, and also formulated
a new CBD based molecule, KLS-13023. KLS-13023 is a target drug candidate that includes a synthetic CBD formulated in a gel capsule designed
for potential use in humans, which is intended to enable more effective delivery of CBD. The formulation of this product is proprietary
and currently held as a trade secret of the Company. CBD is the primary non-psychoactive component of cannabis. KLS-13023 has undergone
a manufacturing feasibility study to improve some of the limitations associated with CBD, including but not limited to CBD’s low
bioavailability and limited drug like properties and improvement of the delivery of CBD through the first pass in the gut and into the
circulatory system. In our preclinical animal studies, KLS-13023 demonstrated effective intervention of neurodegeneration in the OHE
disease state. We intend to study KLS-13023 in patients with mild traumatic brain injury. In our preclinical animal studies, KLS-13023
demonstrated effective intervention of neurodegeneration in the OHE disease state.
We
believe these product candidates will provide new treatment options for patients, as well as additional treatment options for patients
not currently receiving adequate relief from current treatment regimens.
We
are still conducting pre-clinical studies and have not yet commenced our clinical program or tested KLS-13019 or KLS-13023 in humans.
For KLS-13019, we plan to conduct Phase 1, and possibly Phase 2, clinical trials in either the United States or Australia, subject to
applicable regulatory approval. We plan to conduct our Phase 1 clinical trials for KLS-13023 in either the United States or Australia,
subject to applicable regulatory approval. We must file an investigational new drug application (“IND”) with the FDA and
receive approval from the U.S. Drug Enforcement Agency (“DEA”) prior to commencement of any clinical trials in the United
States. We expect to initiate clinical trials for KLS-13019 and KLS-13023 in the first half of 2024. We plan to submit New Drug Applications
(“NDAs”) for KLS-13019 and KLS-13023 to the FDA upon completion Phase 3 clinical trials, regardless of where we conduct Phase
1 and Phase 2 clinical trials.
Pharmacokinetic
and Pharmacodynamic Comparison Between KLS-13019 and CBD
Results
from pharmacokinetic (“PK”) and Pharmacodynamic (“PD”) studies performed in evaluating CBD versus KLS-13019 have
shown KLS-13019 to be superior in aqueous solubility (potential for drug absorption after oral administration); Log P (ratio which measures
difference in solubility in two phases); bioavailability (proportion of the drug that enters the circulation); and C max at 10 mg/kg,
p.o. (peak serum concentration).
Results
from our pre-clinical efforts in the potential treatment of OHE and the potential treatment of CIPN have shown a marked improvement over
99.7% pure pharmaceutical grade synthetic CBD in side by side pre-clinical comparison. In a pre-clinical comparison for neuroprotection
between CBD and KLS-13019, results indicated increased potency for the new molecule (KLS-13019) as determined by six assays, while both
molecules exhibited efficacy in preventing oxidative stress-related toxicities back to control values.
Treatment
with KLS-13019 alone, however, was 5-fold less toxic than CBD. Previous studies suggested that CBD targeted the Na+ Ca2+ (sodium-calcium)
exchanger in mitochondria to regulate intracellular calcium levels, an important determinant of neuronal survival. After treatment with
an inhibitor, the mNCX inhibitor (“CGP-37157”), no detectable neuroprotection from ethanol toxicity was observed for either
CBD or KLS-13019. Furthermore, AM630 (a CB2 antagonist) significantly attenuated CBD-mediated neuroprotection, while having no detectable
effect on KLS-13019 neuroprotection. Our studies indicated KLS-13019 was more potent and less toxic than CBD. Both molecules can act
through mNCX. Based on these results, amongst other things, we believe that KLS-13019 may provide an alternative to CBD as a therapeutic
candidate to treat disease associated with oxidative stress.
As
previously noted, comparisons between CBD and KLS-13019 have been published in peer reviewed articles in ACS Medicinal Chemistry Letters
(2016, 7, 424-428) and Journal of Molecular Neuroscience (14 August 2018).
Additional
follow on studies recently published on May 10, 2019 in the Journal of Molecular Neuroscience have further advanced our studies on the
mechanism of action for CBD and KLS-13019 in pre-clinical testing for the treatment of CIPN. The mechanism of action for CBD-and KLS-13019-mediated
protection now has been explored with dissociated dorsal root ganglion (“DRG”) cultures using small interfering RNA (siRNA)
to the mitochondrial Na+ Ca2+ exchanger-1 (“mNCX-1”). Treatment with this siRNA produced a 50–55% decrease in the immunoreactive
(“IR”) area for mNCX-1 in neuronal cell bodies and a 72–80% decrease in neuritic IR area as determined with high-content
image analysis. After treatment with 100 nM KLS-13019 and siRNA, DRG cultures exhibited a 75 ±5% decrease in protection from paclitaxel-induced
toxicity, whereas siRNA studies with 10 μM CBD produced a 74± 3% decrease in protection. Treatment with mNCX-1 siRNA alone
did not produce toxicity. The protective action of cannabidiol and KLS-13019 against paclitaxel-induced toxicity during a 5-h test period
was significantly attenuated after a 4-day knockdown of mNCX-1 that was not attributable to toxicity. This data indicates that decreases
in neuritic mNCX-1 corresponded closely with decreased protection after siRNA treatment. Pharmacological blockade of mNCX-1 with CGP-37157
produced complete inhibition of cannabinoid-mediated protection from paclitaxel in DRG cultures, supporting the observed siRNA effects
on mechanism.
Sodium-Calcium
Exchanger (“NCX”) (often denoted Na+/Ca2+ exchanger, NCX, or exchange protein) is an antiporter membrane protein that removes
calcium from cells. The exchanger exists in many different cell types and animal species. The NCX is considered to be one of the most
important cellular mechanisms for removing Ca2+ (calcium ions) from cells. The exchanger is usually found in the plasma membranes and
the mitochondria and endoplasmic reticulum of excitable cells.
Mitochondria
is a double-membrane-bound organelle found in most eukaryotic organisms. Mitochondria generate most of the cell’s supply of adenosine
triphosphate (“ATP”), used as a source of chemical energy. ATP is a complex organic chemical that provides energy to drive
many processes in living cells, including muscle contractions, nerve impulse propagation and chemical synthesis.
According
to the October 1, 2021 journal article “Navigating Opioids and Other Strategies for Managing Cancer Pain” published in Targeted
Therapies in Oncology, “The American Cancer Society estimates that more than 17 million Americans life with Cancer, and many of
them hurt. Up to 60% of the patients undergoing active treatment and a third of cancer survivors report significant pain stemming either
from their cancer itself or their cancer treatments. The most common treatment for significant cancer-related pain is opioid medication.
A retrospective analysis of data from 169,162 people who took the National Survey on Drug Use and Health from January 2015 to December
2018 found that 54.3% of the 1,243 recent cancer survivors and 39.2% of the 3,896 less recent cancer survivors were actively using prescription
opioids. There are currently no FDA approved non-opioid treatments for patients who do not respond to, or experience negative side effects
with, opioid medications. We believe that KLS-13019 has the potential to address a significant unmet need in this large market by treating
patients with a product that employs a differentiated non-opioid mechanism of action, and offers the prospect of pain relief without
increasing opioid-related adverse side effects.
In
addition to the ACS publication, our research and development efforts with KLS-13019 were also the subject of peer reviewed, preclinical
studies published in April 2021 in the British Journal of Pharmacology, “Behavioral and Pharmacological Effects of Cannabidiol
(CBD) and the Cannabidiol Analogue KLS-13019 in Mouse Models of Pain and Reinforcement” reported the following key results:
| • | | Like CBD, KLS-13019
prevented the development of mechanical sensitivity associated with paclitaxel administration. |
| • | | In contrast to
CBD, KLS-13019 was also effective at reversing established mechanical sensitivity. |
| • | | KLS-13019 significantly
attenuated acetic acid-induced stretching and produced modest effects in the hot plate assay. |
| • | | KLS-13019 was devoid
of activity at μ-, δ- or κ-opioid receptors. Lastly, KLS-13019, but not CBD, attenuated the reinforcing effects of palatable
food or morphine. |
The
following chart indicates opioid inhibition percentages for both CBD and KLS-13019:
The
study also reported the following conclusions and Implications:
KLS-13019,
like CBD, prevented the development of CIPN, while KLS-13019 uniquely attenuated established CIPN. Because KLS-13019 binds to fewer biological
targets, this will help to identifying molecular mechanisms shared by these two compounds and those unique to KLS-13019. Lastly, KLS-13019
may possess the ability to attenuate reinforced behavior, an effect not observed in the present study with CBD.
Clinical
Timelines
As
a result of the unprecedented effects of COVID-19, we have updated our clinical timelines to give effect to the significant interruption
to business and financial operations worldwide as a result of the COVID-19 crisis. We will continue to monitor the progress of the shutdowns
currently in effect, and revise our clinical timelines accordingly.
| Product
Candidate |
|
Target
Indication |
|
Delivery
Method |
|
Current
Development Status |
|
Expected
Next Steps |
| KLS-13019 |
|
Chemotherapy
Induced |
|
Oral
Gel Capsule |
|
Preclinical |
|
2Q24:
Initiate Phase 1 |
| |
|
Peripheral
Neuropathy |
|
|
|
|
|
|
| |
|
Mild
Traumatic Brain Injury |
|
Oral
Gel Capsule |
|
Preclinical |
|
1Q25:
Initiate Phase 1 |
| KLS-13023 |
|
Overt
Hepatic Encephalopathy |
|
Oral
Gel Capsule |
|
Preclinical |
|
3Q24:
Initiate Phase 1 |
| |
|
Mild
Traumatic Brain Injury |
|
Oral
Gel Capsule |
|
Preclinical |
|
1Q25:
Initiate Phase 1 |
With
respect to certain other proprietary compounds underlying Pat. 9,611,213, we plan on pursuing topical solutions as potential relief creams
and/or ointments for neuropathic pain, anti-inflammation, anti-pruritic and skin ulcers. We are considering commercialization routes
that include, but are not limited to, filing an FDA Monograph and have already pursued and completed a commercialization path to the
marketplace having received INCI certification and registration with the PCPC for LEAÔ.
In
preclinical testing, certain molecules under Pat. 9,611,213 were screened for neuroprotection and may have the potential mechanism of
action for reducing inflammation and neuropathic pain. These molecules indicate that they are more soluble than CBD, also deemed a neuroprotectant
with potential anti-inflammatory properties. A molecule that is potentially more water soluble than CBD in this regard may be good candidate(s)
for use in topical applications.
We
believe that we will be able to raise sufficient capital to proceed forth with a Phase 1a human safety trial for the treatment of Chemotherapy
Induced Peripheral Neuropathy. All preclinical work in this indication, including animal toxicity studies, are expected to be completed
before the end of the third quarter 2023. We plan on entering into clinical trials sometime in the second quarter 2024.
Additionally,
we believe that we will be able to raise sufficient capital to proceed forth with a Phase 1a human safety trial for the treatment of
OHE. All preclinical work in this indication, including animal toxicity studies, are expected to be completed before the end of the first
quarter 2024. We plan on entering into clinical trials sometime in the third quarter 2024.
We
intend to seek additional capital to proceed with our business plan regarding additional drug pipeline opportunities.
NIH-NINDS
Phase 2 STTR Study Grant Award
On
September 28, 2021, we received a notice of award for a $2.97 million Phase 2 STTR Study Grant (the “NINDS Study Grant Award”)
from National Institutes of Health (“NIH”) – National Institute of Neurological Disorders and Stroke (“NINDS”).
The NINDS Study Grant Award is funded through the NIH HEAL Initiative (“Helping End Addiction Long-Term”) for Development
of Therapies and Technologies Directed at Enhanced Pain Management and will provide funding specifically in the Development of KLS-13019
for Neuropathic Pain. The NINDS Study Grant Award sets forth the funding allocation of $977,054 in year 1; $991,944 in year 2; and $1,001,774
in year 3. Of significant collateral importance is the current epidemic of opioid addiction and abuse by patients in the United States
and around the globe. Adding to the equation is the off-label use of opioids and gabapentinoids for chronic and neuropathic pain as a
result of the unmet medical need and no FDA approved non-opioid drug to treat chronic and neuropathic pain, specifically chemotherapy-induced
peripheral neuropathy (“CIPN”).
Components
of Results of Operations
Our
net losses were $1,595,605 and $ 1,328,574 for the three months ended March 31, 2022 and 2021, respectively. We expect to incur losses
for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals for,
our product candidates. Because of the numerous risks and uncertainties associated with product development, we are unable to predict
the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability.
Financial
Operations Overview
The
following discussion sets forth certain components of our statements of operations as well as factors that impact those items.
Revenues
Our revenues consist of state and federal research
grants and fees received from research services for third-party product development. Grant revenue
is recognized when qualifying costs are incurred and there is reasonable assurance that the conditions of the award have been met for
collection. Proceeds received prior to the costs being incurred or the conditions of the award being met are recognized as deferred revenue
until the services are performed and the conditions of the award are met.
On September 28, 2021, the Company received a
notice of award for a $2.97 million Phase 2 STTR Study Grant (the “NINDS Study Grant Award”) from National Institutes of Health
(“NIH”) – National Institute of Neurological Disorders and Stroke (“NINDS”). The NINDS Study Grant Award
is funded through the NIH HEAL Initiative (“Helping End Addiction Long-Term”) for Development of Therapies and Technologies
Directed at Enhanced Pain Management and will provide funding specifically in the Development of KLS-13019 for Neuropathic Pain. The NINDS
Study Grant Award sets forth the funding allocation of $977,054 in year 1; $991,944 in year 2; and $1,001,774 in year 3. The Company is
able to draw down on the grant to reimburse approved research and development activities. As of March 31, 2022, the Company recognized
$207,980 in grant revenue in connection with this grant.
Research
and Development Expenses
Our
research and development expenses consist of expenses incurred in development and preclinical studies relating to our product candidates,
including:
| • | | expenses associated
with preclinical development; |
| • | | personnel-related
expenses, such as salaries, benefits, travel and other related expenses, including stock-based compensation; |
| • | | payments to third-party
contract research organizations (“CROs”) contractor laboratories and independent contractors; and |
| • | | depreciation, maintenance
and other facility-related expenses. |
We
expense all research and development costs as incurred. Preclinical development expenses for our product candidates are a significant
component of our current research and development expenses. Product candidates in later stage clinical development generally have higher
research and development expenses than those in earlier stages of development, primarily due to increased size and duration of the clinical
trials. We track and record information regarding external research and development expenses for each grant, study or trial that we conduct.
From time to time, we intend to use third-party CROs, and have used contractor laboratories and independent contractors in preclinical
studies. We recognize the expenses associated with third parties performing these services for us in our preclinical studies based on
the percentage of each study completed at the end of each reporting period.
We
incurred research and development expenses of $219,760
and $128,648 for the three months ended March 31, 2022 and 2021, respectively.
We
expect that our research and development expenses in 2022 and for the next several years will be higher than in 2021 as a result of the
work needed for our expected initiation of our Phase 1 clinical trials of KLS-13019 and KLS-13023. These expenditures are subject to
numerous uncertainties regarding timing and cost to completion. Completion of our preclinical development and clinical trials may take
several years or more and the length of time generally varies according to the type, complexity, novelty and intended use of a product
candidate. The cost of clinical trials may vary significantly over the life of a project as a result of differences arising during clinical
development, including, among others:
| • | | the number of sites
included in the clinical trials; |
| • | | the length of time
required to enroll suitable patients; |
| • | | the size of patient
populations participating in the clinical trials; |
| • | | the duration of
patient follow-ups; |
| • | | the development
stage of the product candidates; and |
| • | | the efficacy and
safety profile of the product candidates. |
Due
to the early stages of our research and development, we are unable to determine the duration or completion costs of our development of
KLS-13019 and KLS-13023. As a result of the difficulties of forecasting research and development costs of KLS-13019 and KLS-13023 as
well as the other uncertainties discussed above, we are unable to determine when and to what extent we will generate revenues from the
commercialization and sale of an approved product candidate.
General
and Administrative Expenses
General
and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation, for
personnel serving in our executive, finance, accounting, legal and human resource functions. Our general and administrative expenses
also include facility and related costs not included in research and development expenses, professional fees for legal services, including
patent-related expenses, consulting, tax and accounting services, insurance and general corporate expenses. We expect that our general
and administrative expenses will increase with the continued development and potential commercialization of our product candidates.
We
expect that our general and administrative expenses in 2022 and for the next several years will be higher than in 2021 as we increase
our headcount. We also anticipate increased expenses relating to our operations as a public company, including increased costs for the
hiring of additional personnel, and for payment to outside consultants, including lawyers and accountants, to comply with additional
regulations, corporate governance, internal control and similar requirements applicable to public companies, as well as increased costs
for insurance.
Interest
Income (Expense), net
Interest
income consists primarily of interest earned on our money market bank account. Interest expense consists of interest expense on our notes
payable.
Income
Taxes
We
file income tax returns in the United States federal jurisdiction and in various state and local jurisdictions. In the normal course
of business, we are subject to examination by taxing authorities. The tax years ending 2018 through 2021 remain subject to examination
for federal tax purposes and remain subject to examination in significant state tax jurisdictions.
As
of December 31, 2021, we had approximately $8.8 million of federal operating loss carryforwards. These operating loss carryforwards will
begin to expire in 2033. The Tax Reform Act of 1986, or the Act, provides for limitation on the use of net operating loss and research
and development tax credit carryforwards following certain ownership changes (as defined by the Act) that could limit our ability to
utilize these carryforwards. We may have experienced various ownership changes, as defined by the Act, as a result of past financings.
Accordingly, our ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit the time during
which these carryforwards may be applied against future taxes; therefore, we may not be able to take full advantage of these carryforwards
for federal income tax purposes.
The
closing of the Share Exchange transaction, together with private placements and other transactions that have occurred since our inception,
may trigger, or may have already triggered, an “ownership change” pursuant to Section 382 of the Internal Revenue Code of
1986. If an ownership change is triggered, it will limit our ability to use some of our net operating loss carryforwards. In addition,
since we will need to raise substantial additional funding to finance our operations, we may undergo further ownership changes in the
future, which could further limit our ability to use net operating loss carryforwards. As a result, if we generate taxable income, our
ability to use some of our net operating loss carryforwards to offset U.S. federal taxable income may be subject to limitations, which
could result in increased future tax liability to us.
Critical
Accounting Policies and Use of Estimates
We
have based our management’s discussion and analysis of financial condition and results of operations on our consolidated financial
statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation
of these consolidated financial statements requires us to make estimates 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
revenues and expenses during the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related
to preclinical development expenses, stock-based compensation, convertible debt and derivative liabilities. We base our estimates on
historical experience and on various other factors that we believe to be appropriate under the circumstances. Actual results may differ
from these estimates under different assumptions or conditions.
While
our significant accounting policies are more fully discussed in Note 2 to our condensed consolidated financial statements appearing above,
we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation
of our financial statements.
Research
and Development Expenses
We
rely on third parties to conduct our preclinical studies and to provide services, including data management, statistical analysis and
electronic compilation. Once our clinical trials begin, at the end of each reporting period, we will compare the payments made to each
service provider to the estimated progress towards completion of the related project. Factors that we will consider in preparing these
estimates include the number of patients enrolled in studies, milestones achieved and other criteria related to the efforts of our vendors.
These estimates will be subject to change as additional information becomes available. Depending on the timing of payments to vendors
and estimated services provided, we will record net prepaid or accrued expenses related to these costs.
Fair
Value of Common Stock and Stock-Based Compensation
We
account for grants of stock options and restricted stock to employees based on their grant date fair value, and recognize compensation
expense over the vesting periods. We estimate the fair value of stock options as of the date of grant using the Black-Scholes option
pricing model, and we estimate the fair value of restricted stock based on the fair value of the underlying common stock as determined
by our board of directors or the value of the services provided, whichever is more readily determinable. We account for stock options
and restricted stock awards to non-employees using the fair value approach. Stock options and restricted stock awards to non-employees
are subject to periodic revaluation over their vesting terms.
In
the absence of a public trading market for our common stock, on each grant date, we develop an estimate of the fair value of our common
stock for the option and restricted stock grants based in part on input from an independent third-party valuation firm. We determined
the fair value of our common stock using methodologies, approaches and assumptions consistent with the AICPA Practice Guide, Valuation
of Privately-Held Company Equity Securities Issued as Compensation. In addition, our board of directors considered various objective
and subjective factors, along with input from management and an independent third-party valuation firm, to estimate the fair value of
our common stock, including external market conditions affecting the pharmaceutical industry, trends within the pharmaceutical industry,
the prices at which we sold shares of our different series of preferred stock, the superior rights and preferences of each series of
preferred stock relative to our common stock at the time of each grant, our results of operations and financial position, the status
of our research and development efforts and progress of our preclinical programs, our stage of development and business strategy, the
lack of an active public market for our common and our preferred stock, and the likelihood of achieving a liquidity event.
Derivative
liabilities
FASB
ASC 815, Derivatives and Hedging, requires all derivatives to be recorded on the consolidated balance sheet at fair value. As a
result, certain derivative warrant liabilities (namely those with a price protection feature) are separately valued and accounted for
on our balance sheet, with any changes in fair value recorded in earnings. On our consolidated balance sheets as of March 31, 2022
and December 31, 2021, we engaged a specialist who used the Monte Carlo model to estimate the fair value of these warrants. Key assumptions
of the Monte Carlo model include the market price of our stock, the exercise price of the warrants, applicable volatility rates, risk-free
interest rates, expected dividends and the instrument’s remaining term. These assumptions require significant management judgment. In
addition, changes in any of these variables during a period can result in material changes in the fair value (and resultant gains or
losses) of this derivative instrument.
Equity
Purchase Agreement with Cross & Company
On
September 18, 2020, the Company entered into an Equity Purchase Agreement with Cross and Company. We have the right to “put,”
or sell, up to 8,108,108 shares of our common stock to Cross. Unless terminated earlier, Cross’s purchase commitment will
automatically terminate on the earlier of the date on which Cross shall have purchased shares pursuant to the Equity Purchase Agreement
for an aggregate purchase price of $6,000,000 or September 18, 2023. The purchase price per share is calculated at a fifteen percent
discount of the lowest trading price of the Company’s common stock during the ten days after Cross and Co. receives the shares.
Results
of Operations – For the Three Month Periods Ended March 31, 2022 and 2021
Revenues
Revenues
for the three months ended March 31, 2022, was $207,980 compared to $32,000 for the three months ended March 31, 2021. The increase in
revenue was the result of the NIH grant received in September 2021.
Research
and Development Expenses
Research
and development expenses increased by $91,112, or 71%, to $219,760 for the three months ended March 31, 2022, from $128,648 for the three
months ended March 31, 2021. The increase in spending was primarily made possible by the
NIH grant received in September 2021.
General
and Administrative Expenses
General
and administrative expenses decreased by $632,609, or 64%, to $354,580 for the three months ended March 31, 2022, from $987,189 for the
three months ended March 31, 2021. This decrease was primarily due to a decrease in compensation to consultants and stock based compensation.
Liquidity
and Capital Resources
Since our inception, we have devoted most of our
cash resources to research and development and general and administrative activities. We have financed our operations primarily with the
proceeds from the sale of preferred stock and convertible promissory notes, state and federal grants and research services. To date, we
have not generated any revenues from the sale of products, and we do not anticipate generating any revenues from the sales of products
for the foreseeable future. We have incurred losses and generated negative cash flows from operations since inception. As of March 31,
2022, our principal source of liquidity was through financing activities, which included proceeds from the issuance of convertible debt
of $150,000, sale and issuance of equity securities, and the receipt of grants. Our working capital deficit was $3,489,930 as of March
31, 2022.
As discussed elsewhere in this Report, on September
18, 2020, the Company entered into an Equity Purchase Agreement with Cross and Company, pursuant to which we have the right to “put,”
or sell, up to 8,108,108 shares of our common stock to Cross. Unless terminated earlier, Cross’s purchase commitment will automatically
terminate on the earlier of the date on which Cross shall have purchased shares pursuant to the Equity Purchase Agreement for an aggregate
purchase price of $6,000,000 or September 18, 2023. The purchase price per share is calculated at a fifteen percent discount of the lowest
trading price of the Company’s common stock during the ten days after Cross and Co. receives the shares. As of March 31, 2022, we
had sold an aggregate of 2,000,000 shares under the Equity Purchase Agreement for total gross proceeds to the Company of $53,610.
On
September 28, 2021, we received a notice of award for the $2.97 NINDS Study Grant Award from the NIH –NINDS. The NINDS Study Grant
Award sets forth the funding allocation of $977,054 in year 1; $991,944 in year 2; and $1,001,774 in year 3. During the three months
ended March 31, 2022, the Company recognized $207,980 in grant revenue in connection with this grant.
On
March 21, 2022, we issued three convertible promissory notes to certain investors, which promissory notes have an aggregate face value
of $150,000. Each of the promissory notes is (i) unsecured; (ii) bears interest at a rate of 3% per annum; (iii) matures on March 21,
2032; and (iv) in the sole discretion of the holder, is convertible, in whole or in part, into restricted shares of our common stock
at a conversion price equal to the lesser of $0.01 or 70% of the average of the two lowest closing prices of our common stock in the
ten trading days preceding any particular conversion, provided, the holder is prohibited from converting the convertible note, or portion
thereof, if such conversion would result in beneficial ownership by the holder and its affiliates of more than 4.9% of our issued and
outstanding common stock as of the date of the conversion.
Our
sources of liquidity and cash flows are used to fund ongoing operations and research and development projects for our product candidates.
In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies,
and minority equity investments. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary
products or businesses or minority equity investments. Such potential transactions may require substantial capital resources, which may
require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition
or investment candidates, complete acquisitions or investments, integrate acquired businesses into our current operations, or expand
into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame
and on commercially reasonable terms, if at all.
Equity
Financings
For
the three months ended March 31, 2022, we received net proceeds of $53,610 for the sale of common stock. For the three months ended March
31, 2021, we received net proceeds of $757,320 for the sale of common stock.
Debt
Financings
For
the three months ended March 31, 2022, we received net proceeds of $150,000 from the sale of convertible notes.
Future
Capital Requirements
We
have not yet achieved profitability and anticipate that we will continue to incur net losses for the foreseeable future. As discussed
in further detail below, we expect that our expenses will continue to grow and, as a result, we will need to generate significant product
revenues to achieve profitability. We may never achieve profitability. As such, we are dependent on obtaining, and are continuing to
pursue, the necessary funding from outside sources, including obtaining additional funding from the sale of securities in order to continue
our operations. Without adequate funding, we may not be able to meet our obligations. We believe these conditions raise substantial doubt
about our ability to continue as a going concern.
We
are currently raising capital and we anticipate raising funds sufficient to commence a Phase 1a and 1b clinical trials for KLS-13019
for patients with chemotherapy induced peripheral neuropathy. We anticipate, based on current estimates, that costs associated Phase
1a and 1b clinical trials for KLS-13019 will be approximately $2.30 million.
Management
of the Company believes that it will need to seek additional sources of capital to facilitate and carry out its business plan of proceeding
forth with commencing a Phase 2a clinical trial for KLS-13019 for patients with chemotherapy induced peripheral neuropathy; commencing
a Phase 1a clinical trial for KLS-13019 for patients suffering from the effects of mild traumatic brain injury; and commencing a Phase
1a clinical trial for KLS-13023 for patients suffering with overt hepatic encephalopathy. The cost of commencing and conducting these
trials will likely be in the tens of millions of dollars.
Furthermore,
it is difficult to predict our spending for our product candidates prior to obtaining FDA approval. Moreover, changing circumstances
may cause us to expend cash significantly faster than we currently anticipate, and we may need to spend more cash than currently expected
because of circumstances beyond our control.
Our
expectations regarding future cash requirements do not reflect the potential impact of any future acquisitions, mergers, dispositions,
joint ventures or investments that we make in the future. We have no current understandings, agreements or commitments for any material
acquisitions or licenses of any products, businesses or technologies. We may need to raise substantial additional capital in order to
engage in any of these types of transactions.
We
expect to continue to incur substantial additional operating losses for at least the next several years as we continue to develop our
product candidates and seek marketing approval and, subject to obtaining such approval, the eventual commercialization of our product
candidates. If we obtain marketing approval for either of our product candidates, we will incur significant sales, marketing and outsourced
manufacturing expenses. In addition, we expect to incur additional expenses to add operational, financial and information systems and
personnel, including personnel to support our planned product commercialization efforts. We also expect to incur significant costs to
comply with corporate governance, internal controls and similar requirements applicable to us as a public company.
Our
future use of operating cash and capital requirements will depend on many forward-looking factors, including, without limitation, the
following:
| • | | the initiation,
progress, timing, costs and results of preclinical studies and clinical trials for our product candidates; |
| • | | the clinical development
plans we establish for these product candidates; |
| • | | the number and
characteristics of product candidates that we develop or may in-license; |
| • | | the terms of any
collaboration agreements we may choose to execute; |
| • | | the outcome, timing
and cost of meeting regulatory requirements established by the DEA, the FDA, the EMA or other comparable foreign regulatory authorities; |
| • | | the cost of filing,
prosecuting, defending and enforcing our patent claims and other intellectual property rights; |
| • | | the cost of defending
intellectual property disputes, including patent infringement actions brought by third parties against us; |
| • | | costs and timing
of the implementation of commercial scale manufacturing activities; and |
| • | | the cost of establishing,
or outsourcing, sales, marketing and distribution capabilities for any product candidates for which we may receive regulatory approval
in regions where we choose to commercialize our products on our own. |
To
the extent that our capital resources are insufficient to meet our future operating and capital requirements, we will need to finance
our cash needs through public or private equity offerings, debt financings, collaboration and licensing arrangements or other financing
alternatives. We have no committed external sources of funds. Additional equity or debt financing or collaboration and licensing arrangements
may not be available on acceptable terms, if at all.
If
we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available, would
result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting our ability to
take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any debt financing or additional
equity that we raise may contain terms, such as liquidation and other preferences that are not favorable to us or our stockholders. If
we raise additional funds through collaboration and licensing arrangements with third parties, it may be necessary to relinquish valuable
rights to our technologies, future revenue streams or product candidates or to grant licenses on terms that may not be favorable to us.