As
filed with the U.S. Securities and Exchange Commission on June 23, 2021.
Registration
No. 333-248966
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
D.C. 20549
POST-EFFECTIVE
AMENDMENT NO. 1
TO
FORM S-1
REGISTRATION
STATEMENT
UNDER
THE
SECURITIES ACT OF 1933
NEUROPATHIX,
INC.
(Exact
name of registrant as specified in its charter)
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Delaware
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7372
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46-2645343
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(State
or Other Jurisdiction of Incorporation)
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(Primary
Standard Industrial
Classification
Code Number)
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(I.R.S.
Employer
Identification
No.)
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3805
Old Easton Road
Doylestown,
PA 18902
(215)
695-6559
(Address,
including zip code, and telephone number, including area code, of registrant’s principal executive offices)
Dean
Petkanas
Chief
Executive Officer
Neuropathix,
Inc.
3805
Old Easton Road
Doylestown,
PA 18902
(858)
883-2642
(Name,
address, including zip code, and telephone number, including area code, of agent for service)
Copies
to:
John
P. Cleary, Esq.
Christopher
L. Tinen, Esq.
Procopio,
Cory, Hargreaves & Savitch LLP
12544
High Bluff Drive, Suite 400
San
Diego, California 92130
(619)
515-3221
Approximate
date of commencement of proposed sale to the public: From time to time after the effective date of this registration statement.
If
any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under
the Securities Act of 1933 check the following box: ☒
If
this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, please
check the following box and list the Securities Act registration statement number of the earlier effective registration statement
for the same offering. ☐
If
this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier registration statement for the same offering. ☐
If
this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list
the Securities Act registration statement number of the earlier registration statement for the same offering. ☐
Indicate
by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,”
“smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
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Large
accelerated filer ☐
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Accelerated
filer ☐
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Non-accelerated
filer ☒
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Smaller
reporting company ☒
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Emerging
growth company ☒
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If
an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act.
☐
The
Registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until
the Registrant shall file a further amendment that specifically states that this registration statement shall thereafter become
effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until the registration statement shall
become effective on such date as the Securities and Exchange Commission, acting pursuant to said Section 8(a), may determine.
EXPLANATORY
NOTE
On
September 22, 2020, Neuropathix, Inc. (the “Company”) filed a registration statement with the Securities
and Exchange Commission (the “SEC”) on Form S-1 (File No. 333-248966) (the “Registration Statement”)
covering the resale of up to up to 8,108,108 shares of the Company’s common stock, par value $0.0001 per share (“Common
Stock”), that the selling stockholder identified in the Registration Statement may acquire pursuant to that Equity Purchase
Agreement by and between the Company and Cross & Company, dated September 18, 2020. The Registration Statement was
originally declared effective by the SEC on October 2, 2020.
This
Post-Effective Amendment No. 1 to the Registration Statement (this “Post-Effective Amendment”) is being filed in order
to (i) include information from the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2020, which
was filed with the SEC on March 30, 2021, and the Company’s Quarterly Report on Form 10-Q for the quarter ended March 31,
2021, which was filed with the SEC on May 13, 2021; (ii) incorporate by reference all future filings that the Company makes with
the SEC under Sections 13(a), 13(c), 14 or 15 of the Securities Exchange Act of 1934, as amended, subsequent to the date hereof
until the termination of the offering of the securities made under this prospectus (excluding any documents or information or
portions of such documents that are deemed to be furnished and not filed with the SEC); and (iii) update certain other information
in the Registration Statement.
No
additional securities are being registered under this Post-Effective Amendment. Accordingly, this Post-Effective Amendment covers
only resales from time to time by the selling stockholder of up to 8,108,108 shares of Common Stock registered under the Registration
Statement. All applicable registration fees were paid at the time of the original filing of the Registration Statement.
The
information in this prospectus is not complete and may be changed. We may not sell these securities until the post-effective amendment
to the registration statement filed with the Securities and Exchange Commission is effective. This prospectus is not an offer
to sell these securities and it is not soliciting an offer to buy these securities in any state where the offer or sale is not
permitted.
SUBJECT
TO COMPLETION, DATED JUNE 23, 2021
PRELIMINARY
PROSPECTUS
Neuropathix,
Inc.
8,108,108
Shares of Common Stock
This
prospectus relates to the offer and resale of up to 8,108,108 shares of our common stock, par value $0.0001 per share, by the
selling stockholder identified on page 50. All such shares represent shares that Cross & Company (“Cross”)
has agreed to purchase from us pursuant to the terms and conditions of an Equity Purchase Agreement we entered into with
them on September 18, 2020 (the “Equity Purchase Agreement”). Subject to the terms and conditions of the Equity Purchase
Agreement, we have the right to “put,” or sell, up to $6,000,000 worth of shares of our common stock to Cross. This
arrangement is also sometimes referred to herein as the “Equity Line.” As of June 15, 2021, we have sold an aggregate
of 3,768,188 shares of our common stock to Cross under the Equity Line for a total of $463,757.31.
For
more information about the selling stockholder, please see the section of this prospectus entitled “Selling Stockholder”
beginning on page 50.
The
selling stockholder may sell any shares offered under this prospectus at fixed prices, prevailing market prices at the time of
sale, at varying prices or negotiated prices.
Cross
is an “underwriter” within the meaning of the Securities Act of 1933, as amended (the “Securities Act”),
in connection with the resale of our common stock under the Equity Line, and any broker-dealers or agents that are involved in
such resales may be deemed to be “underwriters” within the meaning of the Securities Act in connection therewith.
In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares purchased
by them may be deemed to be underwriting commissions or discounts under the Securities Act. For more information, please see the
section of this prospectus titled “Plan of Distribution” beginning on page 51.
We
will not receive any proceeds from the resale of shares of common stock by the selling stockholder. We will, however, receive
proceeds from the sale of shares directly to Cross pursuant to the Equity Line.
Our
common stock is quoted on the OTCQB Marketplace operated by the OTC Markets Group, Inc. under the ticker symbol “NPTX.”
On June 15, 2021, the average of the high and low sales prices for our common stock was $0.1225 per share, as quoted on the OTCQB
Marketplace.
Investing
in our common stock involves risks that are described in the “Risk Factors” section beginning on page 16 of this prospectus.
Neither
the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or
determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The
date of this prospectus is , 2021.
TABLE
OF CONTENTS
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SUMMARY
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6
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RISK
FACTORS
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16
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CAUTIONARY
STATEMENT ON FORWARD-LOOKING STATEMENTS
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46
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USE
OF PROCEEDS
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47
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THE
OFFERING
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48
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SELLING
STOCKHOLDER
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50
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PLAN
OF DISTRIBUTION
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51
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DESCRIPTION
OF SECURITIES WE ARE OFFERING
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52
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DIVIDEND
POLICY
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54
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MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
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55
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CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
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BUSINESS
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69
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MANAGEMENT
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112
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EXECUTIVE
COMPENSATION
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115
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CERTAIN
RELATIONSHIP AND RELATED PERSON TRANSACTIONS
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119
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PRINCIPAL
STOCKHOLDERS
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120
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MARKET
PRICE OF OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
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121
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LEGAL
MATTERS
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122
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EXPERTS
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122
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INTERESTS
OF NAMED EXPERTS AND COUNSEL
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122
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WHERE
YOU CAN FIND MORE INFORMATION
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122
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INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
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122
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DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
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123
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INDEX
TO FINANCIAL STATEMENTS
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124
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ABOUT
THIS PROSPECTUS
We
have not authorized anyone to provide you with information that is different from that contained in this prospectus or in any
free writing prospectus we may authorize to be delivered or made available to you. When you make a decision about whether to invest
in our securities, you should not rely upon any information other than the information in this prospectus or in any free writing
prospectus that we may authorize to be delivered or made available to you. Neither the delivery of this prospectus nor the sale
of our securities means that the information contained in this prospectus or any free writing prospectus is correct after the
date of this prospectus or such free writing prospectus. This prospectus is not an offer to sell or the solicitation of an offer
to buy our securities in any circumstances under which the offer or solicitation is unlawful.
For
investors outside the United States: we have not taken any action that would permit this offering or possession or distribution
of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. Persons outside
the United States who come into possession of this prospectus must inform themselves about, and observe any restrictions relating
to, the offering of the securities covered hereby and the distribution of this prospectus outside the United States.
Unless
otherwise indicated, information contained in this prospectus concerning our industry and the markets in which we operate, including
our general expectations and market position, market opportunity and market share, is based on information from our own management
estimates and research, as well as from industry and general publications and research, surveys and studies conducted by third
parties. Management estimates are derived from publicly available information, our knowledge of our industry and assumptions based
on such information and knowledge, which we believe to be reasonable. Our management estimates have not been verified by any independent
source, and we have not independently verified any third-party information. In addition, assumptions and estimates of our and
our industry’s future performance are necessarily subject to a high degree of uncertainty and risk due to a variety of factors,
including those described in “Risk Factors.” These and other factors could cause our future performance to differ
materially from our assumptions and estimates. See “Risk Factors” and “Special Note Regarding Forward-Looking
Statements.”
We
further note that the representations, warranties and covenants made by us in any agreement that is filed as an exhibit to the
registration statement of which this prospectus is a part were made solely for the benefit of the parties to such agreement, including,
in some cases, for the purpose of allocating risk among the parties to such agreements, and should not be deemed to be a representation,
warranty or covenant to you. Moreover, such representations, warranties or covenants were accurate only as of the date when made.
Accordingly, such representations, warranties and covenants should not be relied on as accurately representing the current state
of our affairs.
Unless
the context requires otherwise, references in this prospectus to “Neuropathix,” the “Company,” “we,”
“us,” and “our” refer to Neuropathix, Inc., a Delaware corporation, and its consolidated subsidiaries,
taken as a whole, as well as any predecessor entities.
Neuropathix,
Inc., the Neuropathix logo, and other trademarks or service marks of Neuropathix appearing in this prospectus are the property
of Neuropathix, Inc. This prospectus also includes trademarks, tradenames and service marks that are the property of other organizations.
Solely for convenience, trademarks and tradenames referred to in this prospectus appear without the ® and ™ symbols,
but those references are not intended to indicate, in any way, that we will not assert, to the fullest extent under applicable
law, our rights, or that the applicable owner will not assert its rights, to these trademarks and tradenames.
PROSPECTUS
SUMMARY
The
following summary highlights information contained elsewhere in this prospectus and does not contain all of the information that
you should consider in making your investment decision in our common stock. Before investing in our common stock, you should carefully
read this entire prospectus, including our financial statements and the related notes included in this prospectus and the information
set forth under the headings “Risk Factors” and “Management’s Discussion and Analysis of Financial Condition
and Results of Operations.” As used in this prospectus, unless the context otherwise requires, references to “we,”
“us,” “our,” “Company,” “Neuropathix” refer to Neuropathix, Inc.
Our
Business
We
are a biopharmaceutical company focused on discovering, developing and commercializing novel therapeutics from our proprietary
synthetic cannabinoid derivatives platform potentially useful for a broad range of inflammatory and neuropathic pain related diseases.
In our eleven (11) years of operations, dating back to August 2010 under the name Kannalife Sciences, Inc. we have been principally
involved in the research and development of new chemical entities (“NCEs”) such as KLS-13019; KLS-13022 (“linoneyldihydroxybenzyl
ethoxycarbonyl azetidine” or “LEA”); its related molecules; and synthetic cannabidiol (“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 (“API”) contract manufacturing,
formulation; and contract bulk drug manufacturing. All of the operations of the Company to date have been in the pre-clinical
stage of drug discovery.
Our
early research and development efforts began under an exclusive license with National Institutes of Health – Office of Technology
Transfer (“NIH-OTT”) for the use of the U.S. Government Patent 6,630,507 – “Cannabinoids as Antioxidants
and Neuroprotectants” (the “‘507 Patent”). Through the use of the ‘507 Patent, we centered our initial
research into the use of CBD for use in a variety of neurodegenerative and oxidative stress related diseases.
Our
core businesses are comprised of the following:
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A
drug development company focused on the research and development (R&D) of non-opioid based synthetic and chemical-medical
products from:
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naturally
recurring sources, including but not limited to cannabis, hemp, and other similar species of plantae;
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semi-synthetic
sources; and
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synthetic
and bio-synthetic sources.
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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, CBD, and cannabidiol-like molecules.
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Topical
skincare pre-clinical program designed to some of our patented, proprietary cannabidiol-derived 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.
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Cannabinoids
are a class of molecules derived from Cannabis plants. The two primary cannabinoids contained in Cannabis are CBD and D9-tetrahydrocannabinol,
or 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. In addition to KLS-13019 and KLS-13023 potentially offering first-line therapies to patients
suffering from chemotherapy induced peripheral neuropathy and mild traumatic brain injury, respectively.
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 National Institutes of Health – National Institute on Drug Abuse (“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.
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. We intend to study KLS-13023 in patients with mild traumatic brain
injury. In addition, we expect that KLS-13023 will be classified by the FDA as an NCE. 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 U.S. or Australia, subject
to applicable regulatory approval. We plan to conduct our Phase 1 clinical trials for KLS-13023 in either the U.S. or Australia,
subject to applicable regulatory approval. We plan to submit New Drug Applications (“NDAs”) for KLS-13019 and KLS-13023
to the FDA upon completion of Phase 3 clinical trials, regardless of where the Company conducts Phase 1 and Phase 2 clinical trials.
We expect to initiate clinical trials for KLS-13019 and KLS-13023 in the first half of 2022.
We
plan to conduct our Phase 1, and possibly Phase 2, clinical trials for KLS-13019 in the U.S. or Australia, subject to applicable
regulatory approval, and do not expect at this time to file an investigational new drug application, or IND, with the U.S. Food
and Drug Administration, or the FDA, prior to the commencement of those clinical trials. We must file an IND with the FDA and
receive approval from the U.S. Drug Enforcement Agency, or DEA, prior to commencement of any clinical trials in the United States.
In
preclinical studies performed pursuant to a small business technology transfers (“STTR”) agreement between us, and
Temple University, funded by the National Institutes of Health – National Institute on Drug Abuse (“NIH-NIDA”),
our research, the subject of two peer reviewed scientific publications in the Journal of Molecular Neuroscience, described how
KLS-13019, was superior to CBD and morphine in the potential to prevent and reverse neuropathic pain caused by paclitaxel, a chemotherapeutic
agent used to treat breast, ovarian and non-small cell lung cancer. (See: Business – Preclinical Studies for more information).
Upon
completion of all requisite preclinical studies, we expect to open an Investigational New Drug Application, or IND, to pursue
a clinical development program with either the U.S. Food and Drug Administration (“FDA”) in the U.S. or the Therapeutic
Goods Administration (“TGA”), the regulatory body for therapeutic goods (including medicines, medical devices,
gene technology, and blood products) in Australia.
Pharmacokinetic
and Pharmacodynamic Comparison Between KLS-13019 and CBD
Results
from PK and PD studies performed in evaluating CBD versus KLS-13019 (molecule name 16), has 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 Fallon, et al. in the March/April 2006 edition of Clinical Medicine, pain is uncontrolled with opioid treatments in approximately
20% of patients with advanced cancer, or 420,000 people in the United States. 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.
Corporate
Strengths and Weaknesses
We
believe that we offer the following key distinguishing characteristics:
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We
believe we are the first commercial drug discovery company in the cannabinoid therapeutics
space to successfully synthesize CBD derived new chemical entities and pre-clinically
test lead NCEs for potential treatment of oxidative stress related diseases, including
OHE and CIPN.
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We
were the only commercial drug discovery company in the cannabinoid therapeutics space
to license the ‘507 Patent, prior to its expiration, from NIH on two separate occasions.
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We
have completed pharmacokinetic and pharmacodynamic pre-clinical studies with high purity
scale, pharmaceutical grade CBD and KLS-13019 for potential treatment of oxidative stress
related disease – OHE and CIPN.
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We
anticipate commencing a Phase 1 trial in CIPN sometime in the 1st or
2nd quarter of 2022.
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We
anticipate commencing a Phase 1 trial in OHE sometime in the 3rd or 4th quarter
of 2022.
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We
anticipate commencing a Phase 1 trial in Mild Traumatic Brain Injury in the 1st or
2nd quarter of 2023.
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We
have a firm understanding of the mechanism of action of CBD and KLS-13019 in certain
oxidative stress related disorders.
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We
believe we have a strong next generation intellectual property estate on cannabidiol
derived NCEs. On this basis, we believe we can expand the approved indications KLS-13019
and develop additional cannabinoid therapeutic agents to add to our IP portfolio.
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We
believe that our pre-clinical drug development program points to a significant opportunity
in cancer pain, a large market.
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We
believe that our pre-clinical drug development program points to a significant opportunity
in opioid replacement / reduction market
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We
have not moved beyond pre-clinical studies of our drug candidates to date, and there can be no assurances that we will do so in
the near future, if ever. While we believe that we are well positioned to be competitive in advancing non-opioid solutions for
chronic and neuropathic pain, as well as the cannabinoid like therapeutics space, we also believe that we will face significant
challenges in successfully completing one or more clinical trials. In addition, there is a competitive landscape that exists in
the market for our target indications of OHE and CIPN. The competitive landscape is challenging. Competition in the OHE and CIPN
spaces is well established, and many companies have significantly greater resources than we do, some of which are viewed as leaders
in the current standard of care for these diseases.
The
current standard of care for patients suffering with OHE is 550mg of XifaxanÒ, originally an antibiotic useful in treating
traveler’s diarrhea and irritable bowel syndrome. Its exact mechanism of action is not known; however, it is theorized that
XifaxanÒ clinical activity may be attributed to effects on metabolic function of gut microbiota, rather than a change
in the relative bacterial abundance. Currently, there is no drug in the market for OHE that is being used to treat the toxic effects
on the hippocampus, the cognitive and behavioral dysfunction associated with OHE, and the action of neuroprotection from ammonia
and ethanol toxicity.
Given
the competitive landscape in OHE, we believe we can participate in the OHE market with primary and adjunctive therapeutics currently
under pre-clinical development, and potentially obtain orphan drug designation for one or more of our target therapeutic agents.
With
respect to competitive landscape for CIPN, nearly a dozen agents have been studied in randomized controlled trials for the
treatment of CIPN, but there has been limited success. The characteristics and results of these studies are summarized in the
study and abstract “Management of Chemotherapy Induced Peripheral Neuropathy” (Physician’s Education Resource
LLC, Meghna S. Trivedi, MD; Dawn L. Hershman, MD, MS; Katherine D. Crew, MD, MS). Clinical trials of the antiepileptic agents
gabapentin and lamotrigine and the antidepressants nortriptyline and amitriptyline have all been negative.
Additionally,
there have been several small placebo-controlled trials which have shown that intravenous administration of glutathione with platinum-based
chemotherapy regimens can decrease the incidence of neurotoxicity without diminishing the effect of chemotherapy. A North
Central Cancer Treatment Group / Alliance trial conducted in 2014 studied the use of glutathione with carboplatin and paclitaxel
for treatment of CIPN, and found no improvement in neurotoxicity symptoms, suggesting that glutathione may not help in taxane-induced
CIPN.
Furthermore,
the continuous use of opiates in the current standard of care to treat CIPN have resulted in mixed results, addiction problems
and dose tolerance problems.
We
believe that, while the current standard of care is well positioned in the market, there is an unmet need for the treatment of
CIPN in the reduction of use of opiates. We believe that this presents us with an opportunity to participate in the market with
a novel therapeutic agent to treat CIPN.
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.
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Product
Candidate
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Target
Indication
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Delivery
Method
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Current
Development Status
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Expected
Next Steps
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KLS-13019
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Chemotherapy
Induced
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Oral
Gel Capsule
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Preclinical
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2Q22:
Initiate Phase 1
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Peripheral
Neuropathy
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Mild
Traumatic Brain Injury
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Oral
Gel Capsule
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Preclinical
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1Q23:
Initiate Phase 1
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KLS-13023
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Overt
Hepatic Encephalopathy
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Oral
Gel Capsule
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Preclinical
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4Q22:
Initiate Phase 1
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Mild
Traumatic Brain Injury
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Oral
Gel Capsule
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Preclinical
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1Q23:
Initiate Phase 1
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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/or pursing a path to the marketplace through INCI certification
and registration with the PCPC. 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.
Corporate
History
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).
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 change and ticker symbol
change was reviewed and processed by FINRA, and went effective November 6, 2020.
Controlled
Substances Laws and Regulations
Our
drug candidates contain controlled substances as defined in the Controlled Substances Act (“CSA”). Controlled substances
that are pharmaceutical products are subject to a high degree of regulation under the CSA, which establishes, among other things,
certain registration, manufacturing quotas, security, recordkeeping, reporting, import, export and other requirements administered
by the DEA.
Despite
recent approvals by the FDA and DEA for a newly approved medication that contains CBD, the scheduling of these substances, many
of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully market KLS-13019
or KLS-13023. Moreover, because our business is almost entirely dependent upon these two product candidates, any such setback
in our pursuit of regulatory approval would have a material adverse effect on our business and prospects. See our full description
of the impact-controlled substances laws and regulations have on our business in the “Risk Factors” section of this
prospectus.
KLS-13019
does not contain CBD and is a new chemical entity that would not fall under the CSA or be deemed a Schedule 1 controlled substance.
A new chemical entity (“NCE”) is a molecule developed by the innovator company in the early drug discovery stage,
which, after undergoing clinical trials, could translate into a drug that could be a treatment for some disease. Under the Food
and Drug Administration Amendments Act of 2007, all NCE’s must first be reviewed by an advisory committee before the FDA
can approve these products.
KLS-13023
is a formulation that does contain CBD. At present, CBD is deemed a Schedule 1 controlled substance by the U.S. Drug Enforcement
Agency (“DEA”) under the CSA. Like the drug molecule EpidiolexÒ, which was recently approved by the FDA for
marketing and sale for use in treating Dravet’s Syndrome and Lennox-Gasteau Syndrome (forms of child epilepsy), KLS-13023
would need to follow the guidance set forth by the CSA, complete a successful human clinical trial, and apply for rescheduling,
as was the case with EpidiolexÒ, now a Schedule 5 drug, before it can be sold and marketed to the public.
On
January 14, 2019, we received written notice from the DEA and Chemical Evaluation Section, as follows: “Please be advised
that your material meets the definition of ‘Hemp’ and is not regulated under the CSA, as long as it consists of high
purity Cannabidiol (CBD) that contains approximately 0.1% delta-9- THC. (However, if it contains more than 0.3% delta-9 THC, it
is considered ‘Marihuana’ and would be in Schedule 1 of the CSA).” While this notice is an official notice from
the DEA regarding the scheduling of high purity CBD, we will continue to abide by the CSA in all respects with regards to its
treatment and handling of CBD.
The
active pharmaceutical ingredient (“API”) found in KLS-13023 is highly purified synthetic CBD produced by Purisys.
Purisys has been manufacturing cannabidiol since 2016 (DMF33223). Today, through our partnership with Purisys, we have the ability
to produce on the largest commercial scale. Purisys’ ultra-high purity CBD (“Purisys CBD”) is attractive for
drug development projects and falls significantly below the 0.3% THC limits set in the 2018 Farm Bill for use in consumer products. Purisys’
patent-protected manufacturing process produces a consistently odorless, tasteless white powder highest-purity form of CBD that
exhibits:
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No heavy
metals (e.g. lead) from soil;
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No environmental
influences on quality such as rain, sunlight & soil nutrients;
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•
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No plant
impurities to remove;
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No microbial
or mold proliferation; and
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No structural
(or stereo chemical) differences exist between an active cannabinoid ingredient manufactured by Purisys and those that are chemically
extracted and isolated from plants. They are, in effect, nature-identical.
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Purisys
currently has a drug master file (“DMF”) for its ultra-high purity CBD with the FDA. In November 2019, Purisys received
advise notice from the DEA that the Purisys CBD has been removed from Schedule 1 of the CSA.
Equity
Purchase Agreement with Cross & Company
On
September 18, 2020, we entered into the Equity Purchase Agreement with Cross, pursuant to which we have the right to “put,”
or sell, up to $6,000,000 worth of shares of our common stock to Cross. As provided in the Equity Purchase Agreement, we may require
Cross to purchase shares of our common stock from time to time by delivering a put notice to Cross specifying the total number
of shares to be purchased (such number of shares multiplied by the purchase price described below, the “Investment Amount”);
provided there must be a minimum of ten trading days between delivery of each put notice. We may determine the Investment Amount,
provided that such amount may not be more than 500% of the average daily trading volume in dollar amount for our common stock
during the five trading days preceding the date on which we deliver the applicable put notice, unless waived by Cross in its sole
discretion. Additionally, such amount may not be lower than $10,000 or higher than $1,000,000. Cross will have no obligation to
purchase shares under the Equity Line to the extent that such purchase would cause Cross to own more than 4.99% of our issued
and outstanding shares of common stock.
In
connection with the Equity Purchase Agreement, we agreed to prepare and file a registration statement registering the resale by
Cross of those shares of our common stock to be issued under the Equity Purchase Agreement. In accordance with this obligation,
on September 22, 2020, we filed the registration statement of which this prospectus is a part, registering the resale by Cross
of up to 8,108,108 shares that may be issued and sold to Cross under the Equity Line.
As
of June 15, 2021, we have sold an aggregate of 3,768,108 shares of our common stock to Cross under the Equity Line for a total
of $463,757.31.
Risk
Factors
Our
business is subject to substantial risk. Please carefully consider the section titled “Risk Factors” beginning on
page 16 of this prospectus for a discussion of the factors you should carefully consider before investing in our securities.
Additional
risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations.
You should be able to bear a complete loss of your investment.
Going
Concern
On
March 30, 2021, the report of our independent registered public accounting firm on our December 31, 2020 audited financial statements
includes an explanatory paragraph referring to our ability to continue as a going concern. The report of our independent registered
public accounting firm on our December 31, 2019 audited financial statements includes a similar paragraph. As of December 31,
2020 and 2019, we had cash balances of $21,874 and $121,455, respectively. Management plans to raise additional capital through
the issuance of convertible debt and sale of our marketable securities. We expect that between our existing cash, cash equivalents
and cash raised through our debt offering we will be able to sufficiently fund our operations and capital requirements for the
next 12 months. Additional funding will be required to continue our R&D and other operating activities as we have not reached
successful commercialization of our product. These circumstances cast significant doubt as to our ability to continue as a going
concern.
Principal
Offices
Our
principal executive office is located at 3805 Old Easton Road, Doylestown, PA 18902. Our telephone number is (858) 883-2642 and
our website is www.neuropathix.com. Unless expressly noted, none of the information on our website is part of this prospectus
or any prospectus supplement. Our common stock is quoted on the OTCQB Marketplace operated by the OTC Markets Group, Inc., under
the ticker symbol “NPTX.”
OFFERING
SUMMARY
|
Common
stock that may be offered by the Company
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8,108,108
shares, of which 3,768,188 have already been sold as of June 15, 2021
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Common
stock outstanding before this offering
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87,978,445
shares as of June 15, 2021
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Common
stock to be outstanding after this offering
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92,318,365
shares(1)
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Use
of proceeds
|
We
will not receive any proceeds from the resale or other disposition of the shares covered by this prospectus by the selling
stockholder. We will receive proceeds from the sale of shares to Cross. Cross has committed to purchase up to $6,000,000
worth of shares of our common stock over a period of time terminating on the earlier of the date on which Cross shall
have purchased shares under the Equity Purchase Agreement for an aggregate purchase price of $6,000,000 or September 18,
2023.
Cross
will pay a purchase price equal to 85% of the “Market Price,” which is defined as the lowest traded price
on the OTCQB Marketplace, as reported by Bloomberg Finance L.P., during the five consecutive trading days including and
immediately prior to the “Put Date,” or the date on which the applicable put notice is delivered to Cross
(the “Pricing Period”). In order to exercise the put, certain conditions must be met at each put notice date
including, but not limited to: (i) we must have an effective registration statement, (ii) our common stock must be deposit/withdrawal
at custodian (“DWAC”) eligible, (iii) the minimum price must exceed $0.01, and (iv) the number of shares to
be purchased by Cross may not exceed the number of shares that, when added to the number of shares of our common stock
then beneficially owned by Cross, would exceed 4.99% of our shares of common stock outstanding.
We
intend to use the net proceeds from the sale of shares to Cross for general corporate and working capital purposes and
acquisitions or assets, businesses or operations or for other purposes that our board of directors, in its good faith,
deems to be in the best interest of the Company, although we have no present commitments or agreements to make any such
acquisitions as of the date of this prospectus. See “Use of Proceeds.”
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Plan
of Distribution
|
The
selling stockholder may, from time to time, sell any or all of their shares of common stock on the stock exchange, market
or trading facility on which the shares are traded or in private transactions. These sales may be at fixed or negotiated prices.
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Risk
factors
|
You
should read the “Risk Factors” section of this prospectus and the other information in this prospectus for a discussion
of factors to consider carefully before deciding to invest in shares of our common stock.
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Market
Symbol and trading
|
Our
common stock is quoted on the OTCQB Marketplace under the symbol “NPTX.”
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(1)
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Assumes
the full sale and issuance of the 8,108,108 shares offered under this prospectus, which
shares are issuable to Cross under our Equity Purchase Agreement with Cross.
|
RISK
FACTORS
Investing
in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other
information in this prospectus, including our financial statements and the related notes and “Management’s Discussion
and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common stock. The
occurrence of any of the events or developments described below could harm our business, financial condition, operating results,
and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part of your
investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may impair
our business operations.
Summary
of Risk Factors
Below
is a summary of the principal factors that make an investment in our common stock speculative or risky. This summary does not
address all of the risks that we face. Additional discussion of the risks summarized in this risk factor summary, and other risks
that we face, can be found below and should be carefully considered, together with other information included in our Annual Report
on Form 10-K for the year ended December 31, 2020 and our other filings with the Securities and Exchange Commission.
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We
have never generated any product revenues, and do not expect to become profitable in the near future, if ever;
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We
have incurred significant losses since our inception and anticipate that we will continue to incur losses in the foreseeable
future;
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There
is substantial doubt about our ability to continue as a going concern, and we will require additional capital to fund
our operations, including clinical trials for our product candidates, which may not be available on favorable terms, if
at all;
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The
COVID-19 pandemic and actions taken by governmental authorities to mitigate its spread has significantly impacted economic
conditions, and a future outbreak of COVID-19 or another highly contagious disease, could adversely affect our business
activities, results of operations and financial condition;
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We
are largely dependent on the success of our product candidates, KLS-13019 and KLS-13023, which are still in preclinical
development and will require significant capital resources and years of clinical development effort;
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•
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We
may not be able to commence clinical trials in 2021, and even if our product candidates do advance into clinical trials,
we may experience difficulties in managing our growth and expanding our operations;
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We
are subject to significant regulatory requirements, both within the United States and in certain foreign jurisdictions,
which may result in, amongst other things, significant delays in our ability to commence clinical trials, if we are ever
approved to do so; failure to obtain regulatory approval for our product candidates; difficulties marketing our products,
if we obtain approval to do so; and significant costs;
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Cannabis,
including derivatives thereof, currently remain illegal under federal law, and it is unclear when, if ever, that may change;
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Our
product candidates, if approved, may be unable to achieve broad market acceptance and, consequently, limit our ability
to generate revenue from new products;
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Any
inability to attract and retain qualified key management and technical personnel would impair our ability to implement
our business plan;
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We
face significant competition, which may result in other discovering, developing or commercializing products before us
or more successfully than we do;
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We
rely on third parties to conduct, supervise and monitor our preclinical and clinical trials, and if those third parties
perform in an unsatisfactory manner, we may not be able to obtain regulatory approval for or commercialize our product
candidates;
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We
rely on third-party manufacturers and suppliers and we intend to rely on third parties to produce preclinical, clinical
and commercial supplies of active pharmaceutical ingredients, or APIs, for KLS-13019 and KLS-13023;
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If
we are unable to protect our intellectual property rights or if our intellectual property rights are inadequate to protect
our technology and product candidates, our competitive position could be harmed;
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We
may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time consuming
and unsuccessful and have a material adverse effect on the success of our business;
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We
may not be able to protect our intellectual property rights throughout the world, and in developing countries in particular;
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We
do not know whether an active, liquid and orderly trading market will develop for our common stock or what the market
price of our common stock will be and, as a result, it may be difficult for you to sell your shares of our common stock;
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The
market price of our stock may be volatile, and you could lose all or part of your investment;
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Our
common stock is classified as a “penny stock” under SEC Rules and Regulations, which means there may be very
limited trading market for our shares;
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Insiders
have substantial influence over us and could delay or prevent a change in corporate control;
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Because
we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if
any, will be your sole source of gain; and
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We
have issued preferred stock with designations, rights and preferences that are superior to that of our common stock, and we
may issue additional shares of preferred stock in the future.
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Risks
Related to Our Financial Position and Capital Needs
We
have incurred significant losses since our inception and anticipate that we will continue to incur losses in the future.
We
are a preclinical stage specialty pharmaceutical company, engaged in developing next-generation synthetic cannabinoid therapeutics.
Since our inception in August 2010, we have devoted substantially all of our resources to the development of our product candidates,
KLS-13019 and KLS-13023. We have generated significant operating losses since our inception. Our net (losses) income for the quarters
ended March 31, 2021 and 2020 were approximately $(1.3 million) and $(0.3 million), respectively. Our net (losses) income for
the years ended December 31, 2020 and 2019 were approximately $(4.5 million) and $(3.5 million), respectively. As of March 31,
2021 and December 31, 2020, we had an accumulated deficit of $ 14,361,937 and $13,033,363, respectively. Substantially all of
our losses have resulted from expenses incurred in connection with our research and development programs and from general and
administrative costs associated with our operations.
We
expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate these losses will
increase as we continue the research and development of, and clinical trials for, our product candidates. In addition to budgeted
expenses, we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely
affect our business. If either of our product candidates fails in clinical trials or does not gain regulatory approval, or even
if approved, fails to achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future,
we may not be able to sustain profitability in subsequent periods.
Due
to our limited operating history and history of losses, any predictions about our future success, performance or viability may
not be accurate.
We
currently have no commercial revenue and may never become profitable.
To
date, the only revenue we have generated has been from the receipt of research grants and payments for research services. Our
ability to generate revenue and become profitable depends upon our ability to obtain regulatory approval for, and successfully
commercialize, KLS-13019, KLS-13023 or other product candidates that we may develop, in-license or acquire in the future.
Even
if we are able to successfully achieve regulatory approval for these product candidates, we do not know what the reimbursement
status of our product candidates will be or when any of these products will generate revenue for us, if at all. We have not generated,
and do not expect to generate, any product revenue for the foreseeable future, and we expect to continue to incur significant
operating losses for the foreseeable future due to the cost of research and development, preclinical studies and clinical trials,
and the regulatory approval process for our product candidates. The amount of future losses is uncertain and will depend, in part,
on the rate of growth of our expenses. Our ability to generate revenue from our product candidates also depends on a number of
additional factors, including, without limitation, our ability to:
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successfully
complete development activities, including the remaining preclinical studies and planned clinical trials for our product candidates;
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complete
and submit New Drug Applications (“NDAs”) to the FDA, and Marketing Authorization Applications (“MAAs”)
to the European Medicines Agency (the “EMA”), and obtain regulatory approval for indications for which there is a
commercial market;
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complete
and submit applications to, and obtain regulatory approval from, other foreign regulatory authorities;
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manufacture
any approved products in commercial quantities and on commercially reasonable terms;
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develop
a commercial organization, or find suitable partners, to market, sell and distribute approved products in the markets in which
we have retained commercialization rights;
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achieve
acceptance among patients, clinicians and advocacy groups for any products we develop;
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obtain coverage
and adequate reimbursement from third parties, including government payors; and
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set a commercially
viable price for any products for which we may receive approval.
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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.
Even if we are able to complete the processes described above, we anticipate incurring significant costs associated with commercializing
our product candidates.
There
is substantial doubt about our ability to continue as a going concern.
On
March 30, 2021, the report of our independent registered public accounting firm on our December 31, 2020 audited financial statements
includes an explanatory paragraph referring to our ability to continue as a going concern. As of December 31, 2020 and 2019, we
had cash balances of $21,874 and $121,455, respectively. Management plans to raise additional capital through the issuance of
common stock shares through the sale of registered securities and private investment in public equity. We expect that between
our existing cash, cash equivalents and cash raised through our debt offering we will be able to sufficiently fund our operations
and capital requirements for the next 12 months. Additional funding will be required to continue our R&D and other operating
activities, as we have not reached successful commercialization of our products. These circumstances cast significant doubt as
to our ability to continue as a going concern.
We
will require additional capital to fund our operations, and if we fail to obtain necessary financing, we will not be able to complete
the development and commercialization of KLS-13019 or KLS-13023.
Our
operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial and increasing
amounts to conduct further research and development, preclinical testing and clinical trials of our product candidates, to seek
regulatory approvals and reimbursement for our product candidates, and to launch and commercialize any product candidates for
which we receive regulatory approval.
As
of March 31, 2021 and December 31, 2020, we had $323,190 and $21,874 in cash and cash equivalents, respectively. We expect that
between our existing cash, cash equivalents and continuing cash raises through our debt offering we will be able to sufficiently
fund our operations and capital requirements through June 2022. We believe that these available funds will be sufficient to complete
a Phase 1 clinical trials for KLS-13019 for patients with chemotherapy induced peripheral neuropathy. We anticipate, based on
current estimates, that costs associated Phase 1 clinical trials for KLS-13019 will be approximately $2.75 million.
Our
management believes that we will need to seek additional sources of capital to facilitate and carry out our business plan of proceeding
with commencing a Phase 2 clinical trial for KLS-13019 for patients with chemotherapy induced peripheral neuropathy; commencing
a Phase 1 clinical trial for KLS-13019 for patients suffering from the effects of mild traumatic brain injury; and commencing
a Phase 1 clinical trial for KLS-13023 for patients suffering with OHE. The cost of commencing and conducting these trials will
likely be in the tens of millions of dollars.
The
progress of KLS-13019 and KLS-13023 for the target indication is uncertain due to numerous factors, including, without limitation,
the rate of progress of clinical trials, the results of preclinical studies and clinical trials for such indication, the costs
and timing of seeking and obtaining FDA and other regulatory approvals for clinical trials, and FDA guidance regarding clinical
trials for such indication. In addition, 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. For these reasons, we
are unable to estimate the actual funds we will require for development and any approved marketing and commercialization activities.
Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:
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the initiation,
progress, timing, costs and results of preclinical studies and clinical trials for our product candidates;
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the clinical
development plans we establish for our product candidates;
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the number
and characteristics of product candidates that we develop or may in-license;
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the terms
of any collaboration agreements we may choose to execute;
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the outcome,
timing and cost of meeting regulatory requirements established by the DEA, the FDA, the EMA or other comparable foreign regulatory
authorities;
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the cost
of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;
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the cost
of defending intellectual property disputes, including patent infringement actions brought by third parties against us;
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the effect
of competing product and market developments;
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costs and
timing of the implementation of commercial scale manufacturing activities; and
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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.
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We
cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional
capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the
development or commercialization of one or more of our product candidates or one or more of our other research and development
initiatives.
Our
federal and state government grants could subject us to audits and could require us to repay substantial amounts of funds previously
awarded to us.
To
date, most of our revenue has been from the receipt of state and federal research grants. In connection with these grants, we
may be subject to routine audits by government agencies. As part of an audit, these agencies may review our performance, cost
structures and compliance with applicable laws, regulations, policies and standards and the terms and conditions of the grant.
If any of our expenditures are found to be unallowable or allocated improperly, or if we have otherwise violated terms of the
grant, the expenditures may not be reimbursed and/or we may be required to repay funds already disbursed. Accordingly, an audit
could result in a material adjustment to our results of operations and financial condition.
Raising
additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights
to our technologies or product candidates.
We
may seek additional capital through a combination of private and public equity offerings, debt financings, strategic partnerships
and alliances, and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible
debt securities, existing ownership interests will be diluted and the terms of such financings may include liquidation or other
preferences that adversely affect the rights of existing stockholders. Debt financings may be coupled with an equity component,
such as warrants to purchase shares, which could also result in dilution of our existing stockholders’ ownership. The incurrence
of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such
as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property
rights and other operating restrictions that could adversely impact our ability to conduct our business and may result in liens
being placed on our assets and intellectual property. If we were to default on such indebtedness, we could lose such assets and
intellectual property. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with
third parties, we may have to relinquish valuable rights to our product candidates, or grant licenses on terms that are not favorable
to us.
Risks
Related to our Business and Industry
Our
business may be subject to risks arising from pandemic, epidemic, or an outbreak of diseases, such as the outbreak of COVID-19.
If
a pandemic, epidemic or outbreak of an infectious disease occurs in the United States or elsewhere, our business may be adversely
affected.
COVID-19
has spread worldwide and has resulted in government authorities implementing numerous measures to try to contain it, such as travel
bans and restrictions, quarantines, shelter-in-place orders and shutdowns. These measures have impacted, and may further impact,
our workforce and operations, the operations of our partners, and those of our respective vendors and suppliers. Our critical
business operations, including our headquarters, are located in regions which have been impacted by COVID-19. Our suppliers and
partners worldwide have also been affected and may continue to be affected by COVID-19 related restrictions and closures.
The
spread of COVID-19 has caused us to modify our business practices as we comply with state mandated requirements for safety in
the workplace to ensure the health, safety and well-being of our employees. These measures include personal protective equipment,
social distancing, cleanliness of the facilities and daily monitoring of the health of employees in our facilities, as well as
modifying our policies on employee travel and the cancellation of physical participation in meetings, events and conferences.
We may take further actions as required by government authorities or that we determine are in the best interests of our employees,
partners and suppliers. However, we have not developed a specific and comprehensive contingency plan designed to address the challenges
and risks presented by the COVID-19 pandemic and, even if and when we do develop such a plan, there can be no assurance that such
plan will be effective in mitigating the potential adverse effects on our business, financial condition and results of operations.
In
addition, while the extent and duration of the COVID-19 pandemic on the global economy and our business in particular is difficult
to assess or predict, the pandemic has resulted in, and may continue to result in, significant disruption of global financial
markets, which may reduce our ability to access capital, which could negatively affect our liquidity. A recession or financial
market correction resulting from the lack of containment and spread of COVID-19 could impact overall technology spending, adversely
affecting demand for our products, our business and the value of our common stock.
The
ultimate impact of the COVID-19 pandemic or a similar health epidemic is highly uncertain and subject to change. The extent of
the impact of the COVID-19 pandemic on our operational and financial performance, including our ability to execute our business
strategies and initiatives in the expected time frame, will depend on future developments, including, but not limited to, the
duration and continued spread of the pandemic, its severity, the actions to contain the disease or treat its impact, further related
restrictions on travel, all of which are uncertain and cannot be predicted. An extended period of economic disruption as a result
of the COVID-19 pandemic could have a material negative impact on our business, results of operations, access to sources of liquidity
and financial condition, though the full extent and duration is uncertain.
We
are largely dependent on the success of our product candidates, KLS-13019 and KLS-13023, which are still in preclinical development
and will require significant capital resources and years of clinical development effort.
We
currently have no products on the market, and our product candidates, KLS-13019 and KLS-13023, are still in preclinical development.
Our business depends almost entirely on the successful clinical development, regulatory approval and commercialization of KLS-13019
and KLS-13023, and additional preclinical testing and substantial clinical development and regulatory approval efforts will be
required before we are permitted to commence commercialization, if ever. It will be several years before we can commence and complete
a pivotal study for KLS-13019 or KLS-13023, if ever. For KLS-13019 and KLS-13023, we plan to conduct Phase 1, and possibly Phase
2, clinical trials in Australia, subject to applicable regulatory approval.
We
plan to submit NDAs for KLS-13019 and KLS-13023 to the FDA upon completion of all requisite clinical trials. The clinical trials
and manufacturing and marketing of KLS-13019 and KLS-13023 will be subject to extensive and rigorous review and regulation by
numerous government authorities in the United States, Australia, the European Union, Canada, and other jurisdictions where we
intend to test and, if approved, market our product candidates. Before obtaining regulatory approvals for the commercial sale
of any product candidate, we must demonstrate through preclinical testing and clinical trials that the product candidate is safe
and effective for use in each target indication, and potentially in specific patient populations. This process can take many years
and may include post-marketing studies and surveillance, which would require the expenditure of substantial resources. Of the
large number of drugs in development for approval in the United States and the European Union, only a small percentage successfully
complete the FDA or EMA regulatory approval processes, as applicable, and are commercialized. Accordingly, even if we are able
to obtain the requisite financing to continue to fund our research, development and clinical programs, we cannot assure you that
any of our product candidates will be successfully developed or commercialized.
Because
the results of preclinical testing are not necessarily predictive of future results, KLS-13019 and KLS-13023 may not have favorable
results in our planned clinical trials.
Any
positive results from our preclinical testing of KLS-13019 and KLS-13023 may not necessarily be predictive of the results from
our planned clinical trials in humans. Many companies in the pharmaceutical and biotechnology industries have suffered significant
setbacks in clinical trials after achieving positive results in preclinical development, and we cannot be certain that we will
not face similar setbacks. These setbacks have been caused by, among other things, preclinical findings made while clinical trials
were underway or safety or efficacy observations made in clinical trials, including adverse events. Moreover, preclinical and
clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates
performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain FDA or EMA approval. If we fail
to produce positive results in our clinical trials of KLS-13019 and KLS-13023, the development timeline and regulatory approval
and commercialization prospects for KLS-13019 and KLS-13023, and, correspondingly, our business and financial prospects, would
be materially adversely affected.
We
may not be able to commence clinical trials in 2021; even if KLS-13019 and KLS-13023 advance into clinical trials, we may experience
difficulties in managing our growth and expanding our operations.
We
have not begun clinical trials for any of our product candidates. While we expect to commence clinical trials in the U.S. or Australia
in 2022 and/or 2023 for KLS-13019 and KLS-13023, we have limited resources to carry out these objectives. Our company has no history
of conducting clinical trials, which is a time-consuming, expensive and uncertain process. In addition, while we have experienced
management and expect to contract out many of the activities related to conducting clinical trials, we are a small company with
only seven employees and therefore have limited internal resources both to conduct clinical trials and to monitor third-party
providers. As our product candidates enter into and advance through preclinical studies and any clinical trials, we will need
to expand our development, regulatory and manufacturing operations, either by expanding our internal capabilities or contracting
with other organizations to provide these capabilities for us. In the future, we expect to have to manage additional relationships
with collaborators or partners, suppliers and other organizations. Our ability to manage our operations and future growth will
require us to continue to improve our operational, financial and management controls, reporting systems and procedures.
Failures
or delays in the completion of our preclinical studies or the commencement and completion of our planned clinical trials of KLS-13019
or KLS-13023 could result in increased costs to us and could delay, prevent or limit our ability to generate revenue and continue
our business.
To
date, we have not commenced any clinical trials for KLS-13019 or KLS-13023. Successful completion of such clinical trials is a
prerequisite to submitting an NDA to the FDA or an MAA to the EMA. Clinical trials are expensive, difficult to design and implement,
can take many years to complete, and are uncertain as to outcome. A product candidate can unexpectedly fail at any stage of clinical
development. The historic failure rate for product candidates is high due to scientific feasibility, safety, efficacy, changing
standards of medical care and other variables. We expect to initiate clinical trials for KLS-13019 and KLS-13023 in 2022 and/or
2023. However, we do not know whether our clinical trials will begin or be completed on schedule, if at all, as the commencement
and completion of clinical trials can be delayed or prevented for a number of reasons, including, among others:
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delays in
reaching or failing to reach agreement on acceptable terms with prospective clinical trial sites, the terms of which can be subject
to extensive negotiation and may vary significantly among different clinical trial sites;
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delays or
inability in manufacturing or obtaining sufficient quantity or quality of a product candidate or other materials necessary to
conduct clinical trials due to regulatory and manufacturing constraints;
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difficulties
obtaining institutional review board, or IRB, DEA or comparable foreign regulatory authority, or ethics committee approval to
conduct a clinical trial at a prospective site or sites;
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challenges
in recruiting and enrolling patients to participate in clinical trials, including the size and nature of the patient population,
the proximity of patients to clinical trial sites, eligibility criteria for the clinical trial, the nature of the clinical trial
protocol, the availability of approved effective treatments for the relevant indication and competition from other clinical trial
programs for similar indications;
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severe or
unexpected toxicities or drug-related side effects experienced by patients in our clinical trials or by individuals using drugs
similar to our product candidates;
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DEA or comparable
foreign regulatory authority-related recordkeeping, reporting or security violations at a clinical trial site, leading the DEA,
state authorities or comparable foreign regulatory authorities to suspend or revoke the site’s controlled substance license
and causing a delay or termination of planned or ongoing clinical trials;
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regulatory
concerns with cannabinoid products generally and the potential for abuse of those products;
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difficulties
retaining patients who have enrolled in a clinical trial who may withdraw due to lack of efficacy, side effects, personal issues
or loss of interest;
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ambiguous
or negative interim results; or
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lack of
adequate funding to continue the clinical trial.
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In
addition, a clinical trial may be suspended or terminated by us, the FDA, IRBs, ethics committees, data safety monitoring board
or other foreign regulatory authorities overseeing the clinical trial at issue or other regulatory authorities due to a number
of factors, including, among others:
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failure
to conduct the clinical trial in accordance with regulatory requirements or our clinical trial protocols;
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inspection
of the clinical trial operations or clinical trial sites by the FDA, the DEA, the EMA or other foreign regulatory authorities
that reveals deficiencies or violations that require us to undertake corrective action, including the imposition of a clinical
hold;
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unforeseen
safety issues, including any safety issues that could be identified in our ongoing toxicology studies;
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adverse
side effects or lack of effectiveness; and
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changes
in government regulations or administrative actions.
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We
intend to expend our limited resources to pursue KLS-13019 and KLS-13023 for certain indications, and may fail to capitalize on
other product candidates or other indications for KLS-13019 or KLS-13023 that may be more profitable or for which there is a greater
likelihood of success.
Because
we have limited financial and managerial resources, we are focusing on research programs relating to KLS-13019 and KLS-13023 for
certain indications, which concentrates the risk of product failure in the event KLS-13019 or KLS-13023 proves to be unsafe or
ineffective or inadequate for clinical development or commercialization. In particular, we intend to study KLS-13019 in patients
with chemotherapy induced peripheral neuropathy, and we intend to study KLS-13023 in patients with mild traumatic brain injury.
As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications for KLS-13019
or KLS-13023 that could later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail
to capitalize on viable commercial products or profitable market opportunities. Our spending on proprietary research and development
programs relating to KLS-13019 and KLS-13023 may not yield any commercially viable products. If we do not accurately evaluate
the commercial potential or target market for KLS-13019 and KLS-13023, we may relinquish valuable rights to KLS-13019 or KLS-13023
through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to
retain sole development and commercialization rights to KLS-13019 or KLS-13023.
The
regulatory approval processes of the FDA, the EMA and other comparable foreign regulatory authorities are lengthy, time-consuming
and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, our business
will be substantially harmed.
We
are not permitted to market our product candidates in the United States or the European Union until we receive approval of an
NDA from the FDA or an MAA from the EMA, respectively, or in any foreign countries until we receive the requisite approval from
such countries. Prior to submitting an NDA to the FDA or an MAA to the EMA for approval of our product candidates, we will need
to complete our ongoing preclinical studies, as well as Phase 1, Phase 2 and Phase 3 clinical trials. We are still conducting
preclinical 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 in the U.S. or Australia, subject to applicable regulatory approval.
We plan to conduct our Phase 1 clinical trials for KLS-13023 in U.S. or Australia, subject to applicable regulatory approval.
We plan to submit NDAs for KLS-13019 and KLS-13023 to the FDA upon completion of all requisite clinical trials. Successfully initiating
and completing our clinical program and obtaining approval of an NDA or MAA is a complex, lengthy, expensive and uncertain process,
and the FDA or EMA may delay, limit or deny approval of our product candidates for many reasons, including, among others, because:
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we may not
be able to demonstrate that our product candidates are safe and effective in treating patients to the satisfaction of the FDA
or EMA;
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the results
of our clinical trials may not meet the level of statistical or clinical significance required by the FDA or EMA for marketing
approval;
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the FDA
or EMA may disagree with the number, design, size, conduct or implementation of our clinical trials;
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the FDA
or EMA may require that we conduct additional clinical trials;
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the FDA
or EMA or other applicable foreign regulatory authorities may not approve the formulation, labeling or specifications of our product
candidates;
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the contract
research organizations, or CROs, and other contractors that we may retain to conduct our clinical trials may take actions outside
of our control that materially adversely impact our clinical trials;
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the FDA
or EMA may find the data from preclinical studies and clinical trials insufficient to demonstrate that KLS-13019’s or KLS-13023’s
clinical and other benefits outweigh its safety risks;
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the FDA
or EMA may disagree with our interpretation of data from our preclinical studies and clinical trials;
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the FDA
or EMA may not accept data generated at our clinical trial sites or may disagree with us over whether to accept efficacy results
from clinical trial sites outside the United States where the standard of care is potentially different from that in the United
States;
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if and when
our NDAs or MAAs are submitted to the FDA or EMA, as applicable, the regulatory agency may have difficulties scheduling the necessary
review meetings in a timely manner, may recommend against approval of our application or may recommend or require, as a condition
of approval, additional preclinical studies or clinical trials, limitations on approved labeling or distribution and use restrictions;
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the FDA
may require development of a Risk Evaluation and Mitigation Strategy, or REMS, which would use risk minimization strategies beyond
the professional labeling to ensure that the benefits of certain prescription drugs outweigh their risks, as a condition of approval
or post-approval, and the EMA may grant only conditional approval or impose specific obligations as a condition for marketing
authorization, or may require us to conduct post-authorization safety studies;
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the FDA,
EMA, DEA or other applicable foreign regulatory agencies may not approve the manufacturing processes or facilities of third-party
manufacturers with which we contract or DEA or other applicable foreign regulatory agency quotas may limit the quantities of controlled
substances available to our manufacturers; or
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the FDA
or EMA may change their approval policies or adopt new regulations.
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On
September 27, 2018, the DOJ and DEA announced that Epidiolex, the newly approved medication by the Food & Drug Administration,
was being placed in Schedule V of the Controlled Substances Act, the least restrictive schedule of the federal CSA. On June 26,
2018, the FDA announced it approved Epidiolex for the treatment of seizures associated with two rare and severe forms of epilepsy,
Lennox-Gastaut syndrome and Dravet syndrome, in patients two years of age and older. Epidiolex contains CBD. The CBD in Epidiolex
is extracted from the cannabis plant and is the first FDA-approved drug to contain a purified extract from the plant. Schedule
V drugs represent the least potential for abuse. Schedule V drugs, substances, or chemicals are defined as drugs with lower potential
for abuse than Schedule IV and consist of preparations containing limited quantities of certain narcotics. Schedule V drugs are
generally used for antidiarrheal, antitussive, and analgesic purposes. Some examples of Schedule V drugs are: cough preparations
with less than 200 milligrams of codeine or per 100 milliliters (Robitussin AC), Lomotil, Motofen, Lyrica, Parepectolin.
Despite
the approvals by the FDA and DEA for Epidiolex, any of these foregoing factors, many of which are beyond our control, could jeopardize
our ability to obtain regulatory approval for and successfully market KLS-13019 or KLS-13023. Moreover, because our business is
almost entirely dependent upon these two product candidates, any such setback in our pursuit of regulatory approval would have
a material adverse effect on our business and prospects.
Therapeutic
Goods Administration (TGA)
Clinical
trials conducted in Australia are subject to various regulatory controls to ensure the safety of clinical trial participants.
The TGA regulates the use of therapeutic goods supplied in clinical trials in Australia under the therapeutic goods legislation.
Clinical trial sponsors must comply with various import, export, manufacture and supply requirements promulgated by the TGA, the
compliance with which are not always clear and require a significant amount of subjective interpretation on the part of the Australian
clinical trial sponsor.
In
2014, the Australian Advisory Council on Medicines Scheduling recommended rescheduling CBD from a prohibited substance to being
a prescription medicine because, according to the Advisory Council on Medicines Scheduling, “there is a low risk of misuse
or abuse as cannabidiol does not possess psychoactive properties.” The TGA accepted this recommendation and the decision
took effect in July 2015. From 1 July 2015, CBD has been included under Schedule 4 (S4) Prescription Only Medicine of the
Poisons Standard when preparations for therapeutic use contain 2% or less of other cannabinoids found in cannabis.
In
February 2016, the Australian Federal Government passed legislation that amended the Narcotic Drugs Act, allowing the supply of
suitable medicinal cannabis products for the management of painful and chronic conditions. This legislation does not relate to
the decriminalization of cannabis for general cultivation or recreational use and it does not include the provision of medicinal
grade herbal cannabis, only processed, non-smokable medicinal grade products. Much of the detail remains unclear.
For example, the legislation does not specify which products will be covered under the amendment, and it does not specify which
particular conditions or symptoms will be eligible for treatment with cannabis-based products. Before products can be prescribed,
they must be registered with the TGA or, in rare circumstances, receive special approval from the TGA. The registration process
requires evidence of testing and efficacy, and it is therefore unlikely Australia will see a TGA registered medicinal cannabis
product that GPs can prescribe any time soon.
Whilst
there are currently no cannabis-based products that are lawfully produced in Australia, the medicinal use of pharmaceutical products
containing cannabinoids is not prohibited, as long as authorization for prescribing is granted from the TGA and at this point
in time, NSW Health.
Despite
the 2016 legislation discussed above, there are many factors, a significant number of which are beyond our control, that could
jeopardize our ability to obtain regulatory approval to commence our KLS-13019 and KLS-13023 clinical trials in Australia. If
we are unable to obtain the necessary regulatory approvals in Australia, we will have to consider alternative locations for our
clinical trials, including the United States, which may be more costly or have stringent regulatory requirements of their own,
and which would likely delay aspects of our development plan.
We
plan to conduct clinical trials for KLS-13019 and KLS-13023 outside the United States and the FDA may not accept data from such
trials.
We
plan to conduct clinical trials outside the United States. For KLS-13019, we plan to conduct Phase 1, and possibly Phase 2, clinical
trials in Australia, subject to applicable regulatory approval. We plan to conduct our Phase 1 clinical trials for KLS-13023 in
U.S. or Australia, subject to applicable regulatory approval. We plan to submit NDAs for KLS-13019 or KLS-13023 to the FDA upon
completion of all requisite clinical trials. Although the FDA may accept data from clinical trials conducted outside the United
States, acceptance of such study data by the FDA is subject to certain conditions. For example, the clinical trial must be conducted
in accordance with Good Clinical Practices (“GCP”) requirements, and the FDA must be able to validate the data from
the clinical trial through an onsite inspection if it deems such inspection necessary. Where data from foreign clinical trials
are intended to serve as the sole basis for marketing approval in the United States, the FDA will not approve the application
on the basis of foreign data alone unless those data are applicable to the U.S. population and U.S. medical practice, the clinical
trials were performed by clinical investigators of recognized competence, and the data is considered valid without the need for
an on-site inspection by the FDA or, if the FDA considers such an inspection to be necessary, the FDA is able to validate the
data through an on-site inspection or other appropriate means. In addition, such clinical trials would be subject to the applicable
local laws of the foreign jurisdictions where the clinical trials are conducted. There can be no assurance the FDA will accept
data from clinical trials conducted outside of the United States. If the FDA does not accept any such data, it would likely result
in the need for additional clinical trials, which would be costly and time-consuming and delay aspects of our development plan.
In addition, the conduct of clinical trials outside the United States could have a significant impact on us. Risks inherent in
conducting international clinical trials include:
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foreign
regulatory requirements that could burden or limit our ability to conduct our clinical trials;
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administrative
burdens of conducting clinical trials under multiple foreign regulatory schema;
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foreign
exchange fluctuations;
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manufacturing,
customs, shipment and storage requirements;
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cultural
differences in medical practice and clinical research; and
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diminished
protection of intellectual property in some countries.
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Even
if KLS-13019 or KLS-13023 receive regulatory approval, they may still face future development and regulatory difficulties.
If
we obtain regulatory approval for KLS-13019 or KLS-13023, such approval would be subject to extensive ongoing requirements by
the DEA, FDA, EMA and other foreign regulatory authorities related to the manufacture, quality control, further development, labeling,
packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of
safety and other post-market information. The safety profile of any product will continue to be closely monitored by the FDA,
EMA and other comparable foreign regulatory authorities. If the FDA, EMA or any other comparable foreign regulatory authority
becomes aware of new safety information after approval of any of our product candidates, these regulatory authorities may require
labeling changes or establishment of a REMS, impose significant restrictions on a product’s indicated uses or marketing,
impose ongoing requirements for potentially costly post-approval studies or post-market surveillance or impose a recall.
In
addition, manufacturers of therapeutic products and their facilities are subject to continual review and periodic inspections
by the FDA, the EMA and other comparable foreign regulatory authorities for compliance with current good manufacturing practices
(“cGMP”) regulations. Further, manufacturers of controlled substances must obtain and maintain necessary DEA and state
registrations and registrations with applicable foreign regulatory authorities, and must establish and maintain processes to ensure
compliance with DEA and state requirements and requirements of applicable foreign regulatory authorities governing, among other
things, the storage, handling, security, recordkeeping and reporting for controlled substances. If we or a regulatory agency discover
previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the
facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility
or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. If we, our product
candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements,
a regulatory agency may, among other things:
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issue untitled
letters or winning letters;
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mandate
modifications to promotional materials or require us to provide corrective information to healthcare practitioners;
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require
us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required
due dates for specific actions and penalties for noncompliance;
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seek an
injunction or impose civil or criminal penalties or monetary fines;
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suspend
or withdraw regulatory approval;
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suspend
any ongoing clinical trials;
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refuse to
approve pending applications or supplements to applications filed by us; or
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require
us to initiate a product recall.
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The
occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and may otherwise
have a material adverse effect on our business, financial condition and results of operations.
KLS-13023
will be subject to controlled substance laws and regulations; failure to receive necessary approvals may delay the launch of our
products and failure to comply with these laws and regulations may adversely affect the results of our business operations.
KLS-13023
contains controlled substances as defined in the CSA. Controlled substances that are pharmaceutical products are subject to a
high degree of regulation under the CSA, which establishes, among other things, certain registration, manufacturing quotas, security,
recordkeeping, reporting, import, export and other requirements administered by the DEA. The DEA classifies controlled substances
into five schedules: Schedule I, II, III, IV or V substances. Schedule I substances by definition have a high potential for abuse,
have no currently “accepted medical use” in the United States, lack accepted safety for use under medical supervision,
and may not be prescribed, marketed or sold in the United States. Pharmaceutical products approved for use in the United States
may be listed as Schedule II, III, IV or V, with Schedule II substances considered to present the highest potential for abuse
or dependence and Schedule V substances the lowest relative risk of abuse among such substances. Schedule I and II drugs are subject
to the strictest controls under the CSA, including manufacturing and procurement quotas, security requirements and criteria for
importation. In addition, dispensing of Schedule II drugs is further restricted. For example, they may not be refilled without
a new prescription.
While
cannabis is a Schedule I controlled substance, products approved for medical use in the United States that contain cannabis or
cannabis extracts must be placed in Schedules II - V, since approval by the FDA satisfies the “accepted medical use”
requirement. If and when KLS-13023 receives FDA approval, the DEA will make a scheduling determination and place it in a schedule
other than Schedule I in order for it to be prescribed to patients in the United States. If approved by the FDA, we expect the
finished dosage forms of KLS-13023 to be listed by the DEA as a Schedule II or III controlled substance. Consequently, their manufacture,
importation, exportation, domestic distribution, storage, sale and legitimate use will be subject to a significant degree of regulation
by the DEA. The scheduling process may take one or more years beyond FDA approval, thereby significantly delaying the launch of
KLS-13023. Furthermore, if the FDA, DEA or any foreign regulatory authority determines that KLS-13023 may have potential for abuse,
it may require us to generate more clinical data than that which is currently anticipated, which could increase the cost and/or
delay the launch of KLS-13023.
Because
KLS-13023 contains active ingredients of cannabis, which are Schedule I substances, to conduct preclinical studies and clinical
trials with KLS-13023 in the United States prior to approval, each of our research sites must submit a research protocol to the
DEA and obtain and maintain a DEA researcher registration that will allow those sites to handle and dispense KLS-13023 and to
obtain the product from our manufacturer. If the DEA delays or denies the grant of a research registration to one or more research
sites, the preclinical studies or clinical trials could be significantly delayed, and we could lose and be required to replace
clinical trial sites, resulting in additional costs.
We
expect that KLS-13023 will be scheduled as Schedule II or III, as a result of which we will also need to identify wholesale distributors
with the appropriate DEA registrations and authority to distribute the products to pharmacies and other healthcare providers,
and these distributors would need to obtain Schedule II or III distribution registrations. The failure to obtain, or delay in
obtaining, or the loss of any of those registrations could result in increased costs to us. If KLS-13023 is scheduled as a Schedule
II drug, pharmacies would have to maintain enhanced security with alarms and monitoring systems and adhere to recordkeeping and
inventory requirements. This may discourage some pharmacies from carrying the product. Furthermore, state and federal enforcement
actions, regulatory requirements, and legislation intended to reduce prescription drug abuse, such as the requirement that physicians
consult a state prescription drug monitoring program, may make physicians less willing to prescribe, and pharmacies to dispense,
Schedule II products.
We
may manufacture the commercial supply of KLS-13023 outside of the United States. If KLS-13023 is approved by the FDA and classified
as a Schedule II or III substance, an importer can import for commercial purposes if it obtains from the DEA an importer registration
and files an application with the DEA for an import permit for each import. The DEA provides annual assessments/estimates to the
International Narcotics Control Board, which guides the DEA in the amount of controlled substances that the DEA authorizes to
be imported. The failure to identify an importer or obtain the necessary import authority, including specific quantities, could
affect the availability of KLS-13023 and have a material adverse effect on our business, results of operations and financial condition.
In addition, an application for a Schedule II importer registration must be published in the Federal Register, and there is a
waiting period for third party comments to be submitted.
Individual
states have also established controlled substance laws and regulations. Though state-controlled substance laws often mirror federal
law, because the states are separate jurisdictions, they may separately schedule our product candidates as well. While some states
automatically schedule a drug based on federal action, other states schedule drugs through rulemaking or a legislative action.
State scheduling may delay commercial sale of any product for which we obtain federal regulatory approval and adverse scheduling
could have a material adverse effect on the commercial attractiveness of such product. We or our partners must also obtain separate
state registrations, permits or licenses in order to be able to obtain, handle, and distribute controlled substances for clinical
trials or commercial sale, and failure to meet applicable regulatory requirements could lead to enforcement and sanctions by the
states in addition to those from the DEA or otherwise arising under federal law.
We
currently obtain the API for KLS-13023 from a bulk manufacturer of pharmaceutical grade API in Switzerland. For KLS-13023, we
plan to conduct Phase 1 clinical trials in the U.S. or Australia, subject to applicable regulatory approval. In addition, we may
decide to develop, manufacture or commercialize our product candidates in additional countries. As a result, KLS-13023 will also
be subject to controlled substance laws and regulations from the TGA in Australia, Health Canada’s Office of Controlled
Substances in Canada, and from other regulatory agencies in other countries where we may develop, manufacture or commercialize
KLS-13023 in the future. We plan to submit NDA for KLS-13023 to the FDA upon completion of all requisite clinical trials and will
require additional DEA approvals at such time as well.
KLS-13023
is a formulation that does contain CBD. At present, CBD is deemed a Schedule 1 controlled substance by the U.S. Drug Enforcement
Agency under the CSA. And like the drug molecule EpidiolexÒ, which was recently approved by the FDA for marketing and sale
for use in treating Dravet’s Syndrome and Lennox-Gasteau Syndrome (forms of child epilepsy), KLS-13023 would need to follow
the guidance set forth by the CSA, complete a successful human clinical trial and apply for rescheduling, as was the case with
EpidiolexÒ, now a Schedule 5 drug.
Despite
the approvals by the FDA and DEA for Epidiolex, any of these foregoing factors, many of which are beyond our control, could jeopardize
our ability to obtain regulatory approval for and successfully market KLS-13019 or KLS-13023. Moreover, because our business is
almost entirely dependent upon these two product candidates, any such setback in our pursuit of regulatory approval would have
a material adverse effect on our business and prospects.
On
January 14, 2019, the Company received written notice from the Drug Enforcement Administration (“DEA”) Drug and Chemical
Evaluation Section, as follows: “Please be advised that your material meets the definition of ‘Hemp’ and is
not regulated under the CSA, as long as it consists of high purity Cannabidiol (CBD) that contains approximately 0.1% delta-9-
THC. (However, if it contains more than 0.3% delta-9 THC, it is considered ‘Marihuana’ and would be in Schedule 1
of the CSA).” While this notice is an official notice from the DEA regarding the scheduling of high purity CBD, the Company
will continue to abide by the CSA in all respects with regards to its treatment and handling of CBD.
Cannabis
remains illegal under Federal law.
Despite
the development of a regulated cannabis industry under the laws of certain states, these state laws regulating medical and adult
cannabis use are in conflict with the CSA, which classifies cannabis as a Schedule I controlled substance and makes cannabis use
and possession illegal on a national level. The United States Supreme Court has ruled that the Federal government has the right
to regulate and criminalize cannabis, even for medical purposes, and thus federal law criminalizing the use of cannabis preempts
state laws that regulate its use.
On
August 29, 2013, United States Deputy Attorney General James Cole issued the Cole Memo to United States attorneys guiding them
to prioritize enforcement of Federal law away from the cannabis industry operating as permitted under certain state laws, so long
as:
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cannabis
is not being distributed to minors and dispensaries are not located around schools and public buildings;
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the proceeds
from sales are not going to gangs, cartels or criminal enterprises;
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cannabis
grown in states where it is legal is not being diverted to other states;
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cannabis-related
businesses are not being used as a cover for sales of other illegal drugs or illegal activity;
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there is
not any violence or use of firearms in the cultivation and sale of marijuana;
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there is
strict enforcement of drugged-driving laws and adequate prevention of adverse health consequences; and
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cannabis
is not grown, used, or possessed on Federal properties.
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The
Cole Memo was a guide for United States attorneys and did not alter in any way the DOJ’s authority to enforce federal law,
including federal laws relating to cannabis, regardless of state law. As described below, as a result of the issuance of the Sessions
Memo by the Department of Justice on January 4, 2018, the Cole memo was rescinded. We cannot provide assurance that our actions
are or will be in compliance with the Cole Memo, the Sessions Memo or any other laws or regulations that currently exist or may
be amended or adopted in the future.
On
January 4, 2018, former Attorney General Jefferson B. Sessions, III issued a memo on federal marijuana enforcement policy announcing
a return to the rule of law and the rescission of previous nationwide guidance by the DOJ (including, but not limited to, the
Cole Memo). In the memorandum, Attorney General Jefferson Sessions directs all U.S. attorneys to enforce the laws enacted by Congress
and to follow well established principles when pursuing prosecutions related to marijuana activities. These principles include
weighing all relevant considerations, including federal law enforcement priorities set by the Attorney General, the seriousness
of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on the community. The
effect of this memo was to shift federal policy from a hands-off approach adopted by the Obama administration to permitting federal
prosecutors across the country to determine how to prioritize resources to regulate marijuana possession, distribution and cultivation
in states where marijuana use is legal.
Although
the Obama administration determined that it was not an efficient use of resources to direct Federal law enforcement agencies to
prosecute those lawfully abiding by state laws allowing the use and distribution of medical and recreational cannabis, the last
administration issued the Sessions Memo announcing a return to the rule of law and the rescission of previous guidance documents.
The Sessions Memo rescinds the Cole Memo, which was adopted by the Obama administration as a policy of non-interference with marijuana-friendly
state laws. The Sessions Memo shifts federal policy from a hands-off approach adopted by the Obama administration to permitting
federal prosecutors across the country to decide how to prioritize resources to regulate marijuana possession, distribution and
cultivation in states where marijuana use is regulated. The current administration has not yet weighed in on the issue of enforcement
of federal laws related to the use and distribution of medical and recreational cannabis, and it is currently unknow what their
stance is likely to be if and when they do.
There
can be no assurance that federal prosecutors will not prosecute and dedicate resources to regulate marijuana possession, distribution
and cultivation in states where marijuana use is regulated which may cause states to reconsider their regulation of marijuana
which would have a detrimental effect on the marijuana industry. Any such change in state laws based upon the Sessions Memo and
the Federal government’s enforcement of Federal laws could cause significant financial damage to us and our stockholders.
On
March 11, 2021, the chairman of the House Judiciary Committee, announced that the Marijuana Opportunity, Reinvestment and Expungement
(MORE) Act, introduced in 2019, which passed in the U.S. House of Representatives in December 2020, will be re-filed in 2021,
seeking ratification by the Senate. If passed by the U.S. Senate, the MORE Act would de-schedule cannabis from the Controlled
Substances Act and enact various criminal and social justice reforms to cannabis, including the expungement of prior convictions.
The MORE Act also seeks to tax cannabis products at 5% to fund criminal and social reform projects, including an Office of Cannabis
Justice within the Department of Justice Office of Justice Programs responsible for administering grants to aid communities negatively
affected by the war on drugs. (See: Controlled Substances Laws and Regulations)
Product
shipment delays could have a material adverse effect on our business, results of operations and financial condition.
The
shipment, import and export of KLS-13023 and the API used to manufacture KLS-13023 will require import and export licenses. In
the United States, the FDA, U.S. Customs and Border Protection, and the DEA, and in Canada, where our API is manufactured, the
Canada Border Services Agency and Health Canada, and in Australia, where we intend to commence clinical trials, the Australian
Customs and Board Protection Service and the Therapeutic Goods Administration, and in other countries, similar regulatory authorities,
regulate the import and export of pharmaceutical products that contain controlled substances. Specifically, the import and export
process requires the issuance of import and export licenses by the relevant controlled substance authority in both the importing
and exporting country. We may not be granted, or if granted, maintain, such licenses from the authorities in certain countries.
Even if we obtain the relevant licenses, shipments of API and our product candidates may be held up in transit, which could cause
significant delays and may lead to product batches being stored outside required temperature ranges. Inappropriate storage may
damage the product shipment, resulting in delays in clinical trials or, upon commercialization, a partial or total loss of revenue
from one or more shipments of API or KLS-13023. A delay in a clinical trial or, upon commercialization, a partial or total loss
of revenue from one or more shipments of API or KLS-13023 could have a material adverse effect on our business, results of operations
and financial condition.
Failure
to obtain regulatory approval in jurisdictions outside the United States and the European Union would prevent our product candidates
from being marketed in those jurisdictions.
In
order to market and sell our products in jurisdictions other than the United States and the European Union, we must obtain separate
marketing approvals and comply with numerous and varying regulatory requirements. The regulatory approval process outside the
United States and the European Union generally includes all of the risks associated with obtaining FDA and EMA approval, but can
involve additional testing. We may need to partner with third parties in order to obtain approvals outside the United States and
the European Union. In addition, in many countries worldwide, it is required that the product be approved for reimbursement before
the product can be approved for sale in that country. We may not obtain approvals from regulatory authorities outside the United
States and the European Union on a timely basis, if at all. Even if we were to receive approval in the United States or the European
Union, approval by the FDA or the EMA does not ensure approval by regulatory authorities in other countries or jurisdictions.
Similarly, approval by one regulatory authority outside the United States and the European Union would not ensure approval by
regulatory authorities in other countries or jurisdictions or by the FDA or the EMA. We may not be able to file for marketing
approvals and may not receive necessary approvals to commercialize our products in any market. If we are unable to obtain approval
of our product candidates by regulatory authorities in other foreign jurisdictions, the commercial prospects of those product
candidates may be significantly diminished and our business prospects could decline.
Healthcare
legislation, including potentially unfavorable pricing regulations or other healthcare reform initiatives, may increase the difficulty
and cost for us to obtain marketing approval of and commercialize our product candidates.
In
the United States there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare
system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities,
or affect our ability to profitably sell any product candidates for which we obtain marketing approval.
The
Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or Affordable Care
Act, among other things, imposes a significant annual fee on companies that manufacture or import branded prescription drug products.
It also contains substantial provisions intended to broaden access to health insurance, reduce or constrain the growth of healthcare
spending, enhance remedies against healthcare fraud and abuse, add new transparency requirements for the healthcare and health
insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers, and impose additional health
policy reforms, any of which could negatively impact our business. Certain of provisions have only recently become effective,
but the Affordable Care Act is likely to continue the downward pressure on pharmaceutical and medical device pricing, especially
under the Medicare program, and may also increase our regulatory burdens and operating costs.
In
addition, other legislative changes have been proposed and adopted since passage of the Affordable Care Act. The Budget Control
Act of 2011, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in
spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of an amount greater than $1.2 trillion
for the fiscal years 2012 through 2021, triggering the legislation’s automatic reduction to several government programs.
This included aggregate reductions to Medicare payments to healthcare providers of up to 2.0% per fiscal year, which went into
effect in April 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among
other things, reduced Medicare payments to several categories of healthcare providers and increased the statute of limitations
period for the government to recover overpayments to providers from three to five years. If we ever obtain regulatory approval
and successfully commercialize KLS-13019, KLS-13023 or other product candidates that we may develop, these new laws may result
in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our customers
and accordingly, our financial operations.
We
expect that the Affordable Care Act, as well as other healthcare reform measures that have been and may be adopted in the future,
may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved
product, and could seriously harm our future revenues. Any reduction in reimbursement from Medicare or other government programs
may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare
reforms may compromise our ability to generate revenue, attain profitability or commercialize our products.
On
December 2, 2017, the U.S. Senate passed the Tax Cut and Jobs Act of 2017. The Senate bill repealed the individual mandate that
requires all Americans under 65 to have health insurance or pay a penalty, effective starting in 2019. The CBO initially estimated
that 13 million fewer persons would have health insurance by 2025, including 8 million fewer on the Affordable Care Act exchanges
and 5 million fewer on Medicaid. Fewer persons with healthcare means lower costs for the government, so CBO estimated over $300
billion in savings. This allowed Republicans to increase the size of the tax cuts in the bill. Health insurance premiums on the
exchanges could rise as much as 10 percentage points more than they would otherwise. CBO later revised this estimate in 2018 to
7 million fewer insured by 2026.
In
addition to these changes, the corporate tax rate was reduced from 35% to 21%, while some related business deductions and credits
were either reduced or eliminated. The Act also changes the U.S. from a global to a territorial tax system with respect to corporate
income tax. Instead of a corporation paying the U.S. tax rate (35%) for income earned in any country (less a credit for taxes
paid to that country), each subsidiary would pay the tax rate of the country in which it is legally established.
Even
if we are able to commercialize KLS-13019 or KLS-13023, the products may not receive coverage and adequate reimbursement from
third-party payors, which could harm our business.
The
availability of reimbursement by governmental and private payors is essential for most patients to be able to afford expensive
treatments. Sales of our product candidates, if approved, will depend substantially on the extent to which the costs of these
product candidates will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations,
or reimbursed by government health administration authorities, private health coverage insurers and other third-party payors.
If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize KLS-13019
or KLS-13023. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us to establish
or maintain pricing sufficient to realize a sufficient return on our investment.
In
the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or Medicare Modernization Act,
established the Medicare Part D program and provided authority for limiting the number of drugs that will be covered in any therapeutic
class thereunder. The Medicare Modernization Act, including its cost reduction initiatives, could decrease the coverage and reimbursement
rate that we receive for any of our approved products. Furthermore, private payors often follow Medicare coverage policies and
payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the
Medicare Modernization Act may result in a similar reduction in payments from private payors.
There
is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. In the United States,
the principal decisions about reimbursement for new medicines are typically made by the Centers for Medicare & Medicaid Services,
or CMS, an agency within the U.S. Department of Health and Human Services, or HHS, as CMS decides whether and to what extent a
new medicine will be covered and reimbursed under Medicare. Private payors tend to follow CMS to a substantial degree.
The
intended use of a drug product by a physician can also affect pricing. For example, CMS could initiate a National Coverage Determination
administrative procedure, by which the agency determines which uses of a therapeutic product would and would not be reimbursable
under Medicare. This determination process can be lengthy, thereby creating a long period during which the future reimbursement
for a particular product may be uncertain.
Outside
the United States, particularly in member states of the European Union, the pricing of prescription drugs is subject to governmental
control. In these countries, pricing negotiations or the successful completion of health technology assessment procedures with
governmental authorities can take considerable time after receipt of marketing approval for a product. In addition, there can
be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment
measures. Certain countries allow companies to fix their own prices for medicines, but monitor and control company profits. Political,
economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after
reimbursement has been obtained. Reference pricing used by various European Union member states and parallel distribution, or
arbitrage between low-priced and high-priced member states, can further reduce prices. In some countries, we or our collaborators
may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of our product candidates to
other available therapies in order to obtain or maintain reimbursement or pricing approval. Publication of discounts by third-party
payors or authorities may lead to further pressure on the prices or reimbursement levels within the country of publication and
other countries. If reimbursement of any product candidate approved for marketing is unavailable or limited in scope or amount,
or if pricing is set at unsatisfactory levels, our business, financial condition, results of operations or prospects could be
adversely affected.
Our
relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse, and other healthcare
laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and
diminished profits and future earnings.
Healthcare
providers, physicians and third-party payors will play a primary role in the recommendation and prescription of any product candidates
for which we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly
applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements
and relationships through which we market, sell and distribute our products for which we obtain marketing approval. As a pharmaceutical
company, even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or
other third-party payors, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’
rights are and will be applicable to our business. Restrictions under applicable federal and state healthcare laws and regulations
that may affect our ability to operate include the following:
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the U.S.
federal healthcare Anti-Kickback Statute impacts our marketing practices, educational programs, pricing policies and relationships
with healthcare providers or other entities, by prohibiting, among other things, persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for,
either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment
may be made under a federal healthcare program such as Medicare and Medicaid;
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federal
civil and criminal false claims laws and civil monetary penalty laws impose criminal and civil penalties, including through civil
whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the
federal government, including the Medicare and Medicaid programs, claims for payment that are false or fraudulent (including through
impermissible promotion of our products for off-label uses) or making a false statement or record to avoid, decrease or conceal
an obligation to pay money to the federal government;
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the U.S.
federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing
a scheme to defraud any healthcare benefit program and also created federal criminal laws that prohibit knowingly and willfully
falsifying, concealing or covering up a material fact or making any materially false statements in connection with the delivery
of or payment for healthcare benefits, items or services;
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HIPAA, and
the rules and regulations promulgated thereunder, establish federal standards for maintaining the privacy and security of certain
patient health information known as Protected Health Information, or PHI. As amended by the Health Information Technology for
Economic and Clinical Health Act, or HITECH, HIPAA establishes federal standards for administrative, technical and physical safeguards
relevant to the electronic transmission of PHI and imposes notification obligations in the event of a breach of the privacy or
security of PHI. In addition to adhering to the requirements of HIPAA, entities considered “covered entities” under
HIPAA (such as health plans, healthcare clearinghouses, and certain healthcare providers) are required to obtain assurances in
the form of a written contract from certain business associates to which they transmit PHI (or who create, receive, transmit or
maintain PHI on the covered entity’s behalf) to ensure that the privacy and security of such information is maintained in
accordance with HIPAA requirements. HITECH made changes to HIPAA including extending the reach of HIPAA beyond HIPAA covered entities
to business associates, increased the maximum civil monetary penalties for violations of HIPAA, and granted enforcement authority
to state attorneys general. Failure to comply with HIPAA/HITECH can result in civil and criminal liability, including civil monetary
penalties, fines and imprisonment;
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the U.S.
federal physician payment transparency requirements under the Affordable Care Act require applicable manufacturers of covered
drugs, devices, biologics and medical supplies to report annually to HHS information related to payments and other transfers of
value to physicians, certain other healthcare providers, and teaching hospitals, and ownership and investment interests held by
physicians and certain other healthcare providers and their immediate family members and applicable group purchasing organizations;
and
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analogous
state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and
claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers. Some
state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines
and the relevant compliance guidance promulgated by the federal government and may require drug manufacturers to report information
related to payments and other transfers of value to physicians and certain other healthcare providers or marketing expenditures.
Additionally, state and foreign laws govern the privacy and security of health information in certain circumstances, many of which
differ from each other in significant ways and often are not preempted by HIPAA/HITECH, thus complicating compliance efforts.
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laws and regulations exist in the countries within the European Economic Area (“EEA”). Although such laws are partially
based upon European Union law, they may vary from country to country. Healthcare specific, as well as general European Union and
national laws, regulations and industry codes constrain, for example, our interactions with government officials and healthcare
practitioners, and the handling of healthcare data. Non-compliance with any of these laws or regulations could lead to criminal
or civil liability.
Efforts
to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve
substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with
current or future statutes, regulations or case law involving applicable fraud and abuse, or other healthcare laws and regulations.
If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us,
we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from government
funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any physicians
or other healthcare providers or entities with whom we expect to do business are found to not be in compliance with applicable
laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare
programs.
In
addition, the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and their
intermediaries from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our internal
control policies and procedures may not protect us from reckless or negligent acts committed by our employees, future distributors,
licensees or agents. Violations of these laws, or allegations of such violations, could result in fines, penalties or prosecution
and have a negative impact on our business, results of operations and reputation.
Our
employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements,
which could subject us to significant liability and harm our reputation.
We
are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply
with DEA, FDA or EMA regulations or similar regulations of other foreign regulatory authorities, or to provide accurate information
to the DEA, FDA, EMA or other foreign regulatory authorities. In addition, misconduct by employees could include intentional failures
to comply with certain manufacturing standards, to comply with U.S. federal and state healthcare fraud and abuse laws and regulations
and similar laws and regulations established and enforced by comparable foreign regulatory authorities, to report financial information
or data accurately, or to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in
the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other
abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion,
sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper
use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our
reputation. We plan to adopt, and will implement and enforce, a Code of Business Conduct and Ethics, but it is not always possible
to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity, such as employee training
on enforcement of the Code of Business Conduct and Ethics, may not be effective in controlling unknown or unmanaged risks or losses
or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance
with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves
or asserting our rights, those actions could have a significant impact on our business and results of operations, including the
imposition of significant fines or other sanctions.
If
we are unable to develop sales, marketing and distribution capabilities or enter into agreements with third parties to perform
these functions on acceptable terms, we may be unable to generate revenue.
We
do not currently have any sales, marketing or distribution capabilities. If KLS-13019 or KLS-13023 is approved, we will need to
develop internal sales, marketing and distribution capabilities to commercialize such products, which would be expensive and time-consuming,
or enter into collaborations with third parties to perform these services. If we decide to market our products directly, we will
need to commit significant financial and managerial resources to develop a marketing and sales force with technical expertise
and supporting distribution, administration and compliance capabilities. If we rely on third parties with such capabilities to
market our products or decide to co-promote products with collaborators, we will need to establish and maintain marketing and
distribution arrangements with third parties, and there can be no assurance that we will be able to enter into such arrangements
on acceptable terms, or at all. In entering into third-party marketing or distribution arrangements, any revenue we receive will
depend upon the efforts of the third parties, and there can be no assurance that such third parties will establish adequate sales
and distribution capabilities or be successful in gaining market acceptance of any approved product. If we are not successful
in commercializing any product approved in the future, either on our own or through third parties, our business, financial condition
and results of operations could be materially adversely affected.
Our
product candidates, if approved, may be unable to achieve broad market acceptance and, consequently, limit our ability to generate
revenue from new products.
Even
when product development is successful and regulatory approval has been obtained, our ability to generate significant revenue
depends on the acceptance of our products by physicians and patients. The market acceptance of any product depends on a number
of factors, including the indication statement and warnings approved by regulatory authorities in the product label, continued
demonstration of efficacy and safety in commercial use, physicians’ willingness to prescribe the product, reimbursement
from third-party payors such as government healthcare systems and insurance companies, the price of the product, the nature of
any post-approval risk management plans mandated by regulatory authorities, competition, and marketing and distribution support.
Any factors preventing or limiting the market acceptance of our product candidates could have a material adverse effect on our
business, results of operations and financial condition.
If
we receive regulatory approvals, we intend to market KLS-13019 and KLS-13023 in multiple jurisdictions where we have limited or
no operating experience and may be subject to increased business and economic risks that could affect our financial results.
If
we receive regulatory approvals, we plan to market KLS-13019 and KLS-13023 in jurisdictions where we have limited or no experience
in marketing, developing and distributing our products. Certain markets have substantial legal and regulatory complexities that
we may not have experience navigating. We are subject to a variety of risks inherent in doing business internationally, including
risks related to the legal and regulatory environment in non-U.S. jurisdictions, including with respect to privacy and data security,
trade control laws and unexpected changes in laws, regulatory requirements and enforcement, as well as risks related to fluctuations
in currency exchange rates and political, social and economic instability in foreign countries. If we are unable to manage our
international operations successfully, our financial results could be adversely affected.
In
addition, controlled substance legislation may differ in other jurisdictions and could restrict our ability to market our products
internationally. Most countries are parties to the Single Convention on Narcotic Drugs 1961, which governs international trade
and domestic control of narcotic substances, including cannabis extracts. Countries may interpret and implement their treaty obligations
in a way that creates a legal obstacle to us obtaining marketing approval for KLS-13019 or KLS-13023 in those countries. These
countries may not be willing or able to amend or otherwise modify their laws and regulations to permit KLS-13019 or KLS-13023
to be marketed, or achieving such amendments to the laws and regulations may take a prolonged period of time. We would be unable
to market KLS-13019 or KLS-13023 in countries with such obstacles in the near future or perhaps at all without modification to
laws and regulations.
KLS-13023
contains a controlled substance, the use of which may generate public controversy.
Since
our product candidates contain controlled substances, their regulatory approval may generate public controversy. Political and
social pressures and adverse publicity could lead to delays in approval of, and increased expenses for, our product candidates.
These pressures could also limit or restrict the introduction and marketing of our product candidates. Adverse publicity from
cannabis misuse or adverse side effects from cannabis or other cannabinoid products may adversely affect the commercial success
or market penetration achievable by our product candidates. The nature of our business attracts a high level of public and media
interest, and in the event of any resultant adverse publicity, our reputation may be harmed.
KLS-13023
is a formulation that contains CBD. At present, CBD is deemed a Schedule 1 controlled substance by the DEA under the CSA. Like
the drug molecule EpidiolexÒ, which was recently approved by the FDA for marketing and sale for use in treating Dravet’s
Syndrome and Lennox-Gasteau Syndrome (forms of child epilepsy), KLS-13023 would need to follow the guidance set forth by the CSA,
complete a successful human clinical trial and apply for rescheduling, as was the case with EpidiolexÒ, now a Schedule
5 drug.
On
January 14, 2019, we received written notice from the DEA Drug and Chemical Evaluation Section, as follows: “Please be advised
that your material meets the definition of ‘Hemp’ and is not regulated under the CSA, as long as it consists of high
purity Cannabidiol (CBD) that contains approximately 0.1% delta-9- THC. (However, if it contains more than 0.3% delta-9 THC, it
is considered ‘Marihuana’ and would be in Schedule 1 of the CSA).” While this notice is an official notice from
the DEA regarding the scheduling of high purity CBD, we will continue to abide by the CSA in all respects with regards to its
treatment and handling of CBD.
Any
inability to attract and retain qualified key management and technical personnel would impair our ability to implement our business
plan.
Our
success largely depends on the continued service of key management and other specialized personnel, including Dean Petkanas, our
chairman and chief executive officer, William A. Kinney, our chief scientific officer, Mark Corrao, our chief financial officer,
and Thomas Kikis, our chief communications officer. The loss of one or more members of our management team or other key employees
could delay our research and development programs and materially harm our business, financial condition, results of operations
and prospects. The relationships that our team has cultivated within the life sciences industry makes us particularly dependent
upon their continued employment with us. Because our management team is not obligated to provide us with continued service, they
could terminate their employment or services with us at any time without penalty, subject to providing any required advance notice.
We do not maintain key person life insurance policies for any members of our management team.
Our
future success and growth will depend in large part on our continued ability to attract and retain other highly qualified scientific,
technical and management personnel, as well as personnel with expertise in clinical testing, manufacturing, governmental regulation
and commercialization. We face competition for personnel from other companies, universities, public and private research institutions,
government entities and other organizations.
We
face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully
than we do.
The
development and commercialization of drugs is highly competitive. We compete with a variety of multinational pharmaceutical companies
and specialized biotechnology companies, as well as products and processes being developed at universities and other research
institutions. Our competitors have developed, are developing or will develop product candidates and processes competitive with
our product candidates. Competitive therapeutic treatments include those that have already been approved and accepted by the medical
community and any new treatments that enter the market. We believe that a significant number of products are currently available,
under development, and may become commercially available in the future, for the treatment of indications for which we may try
to develop product candidates. If either of our product candidates, KLS-13019 or KLS-13023, is approved for the indications we
are currently pursuing, it will compete with a range of therapeutic treatments that are either in development or currently marketed.
We
are aware of multiple companies that are working in the cannabis therapeutic area, including pharmaceutical companies such as
GW Pharmaceuticals PLC (“GW”), which markets Sativex, a botanical cannabinoid oral mucosal for the treatment of spasticity
due to multiple sclerosis and which is also in development in neuropathic pain in several foreign countries and is seeking FDA
approval in the United States, and is developing Epidiolex, a liquid formulation of highly purified CBD extract, as a treatment
for Dravet’s Syndrome, Lennox Gastaut Syndrome, and various childhood epilepsy syndromes; Insys Therapeutics, Inc., which
is seeking FDA approval for an orally-administered liquid formulation of its synthetic CBD molecule as a treatment for Dravet’s
Syndrome, Lennox Gastaut Syndrome, and other childhood epilepsy syndromes; and Nemus Bioscience, Inc., which is focused on the
discovery, development and commercialization of cannabis therapeutics.
On
September 27, 2018, the DOJ and DEA announced that Epidiolex, the recently approved medication by the FDA, is being placed in
Schedule V of the CSA, the least restrictive schedule of the CSA. On June 26, 2018, the FDA announced it approved Epidiolex for
the treatment of seizures associated with two rare and severe forms of epilepsy, Lennox-Gastaut syndrome and Dravet syndrome,
in patients two years of age and older. Epidiolex contains CBD. The CBD in Epidiolex is extracted from the cannabis plant, and
is the first FDA-approved drug to contain a purified extract from the plant. Schedule V drugs represents the least potential for
abuse.
We
are also aware of Zynerba Pharmaceuticals, Inc. and its patent-protected synthetic transdermal cannabinoid product candidates,
ZYN002 and ZYN001. These cannabinoid product candidates represent cannabinoid therapeutics for several indications, including
refractory epilepsy, FXS, OA, fibromyalgia and peripheral neuropathic pain. According to Zynerba Pharmaceuticals, Inc., ZYN002
is the first and only synthetic CBD formulated as a permeation-enhanced gel for transdermal delivery, and is patent-protected
through 2030.
More
established companies may have a competitive advantage over us due to their greater size, cash flows and institutional experience.
Compared to us, many of our competitors may have significantly greater financial, technical and human resources. As a result of
these factors, our competitors may have an advantage in marketing their approved products and may obtain regulatory approval of
their product candidates before we are able to, which may limit our ability to develop or commercialize our product candidates.
Our competitors may also develop drugs that are safer, more effective, more widely used and less expensive than ours, and may
also be more successful than us in manufacturing and marketing their products. These advantages could materially impact our ability
to develop and commercialize KLS-13019 or KLS-13023 successfully
Our
product candidates, most notably KLS-13023, may compete with non-synthetic cannabinoid drugs, including therapies such as GW’s
Sativex. Our product candidates may also compete with medical and recreational marijuana, in markets where the recreational and/or
medical use of marijuana is legal. There is support in the United States for further legalization of marijuana. In markets where
recreational and/or medical marijuana is not legal, our product candidates may compete with marijuana purchased in the illegal
drug market. We cannot assess the extent to which patients may utilize marijuana obtained illegally for the treatment of the indications
for which we are developing KLS-13019 and KLS-13023.
Mergers
and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among
a smaller number of our competitors. Smaller and other early-stage companies may also prove to be significant competitors, particularly
through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and
retaining qualified scientific, management and commercial personnel, establishing clinical trial sites and subject registration
for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
The
market opportunity for chemotherapy induced peripheral neuropathy will be limited to those patients who are not currently receiving
adequate relief from current treatment regimens, which may reduce our targeted market.
Pre-existing
treatments may be adequate to treat certain patients with chemotherapy induced peripheral neuropathy. Whenever the first-line
therapy fails or is unsuccessful, then second-line therapy may be administered. For chemotherapy induced peripheral neuropathy,
KLS-13019 is particularly targeted to provide an additional treatment option for patients not currently receiving adequate relief
from current treatment regimens. If a more successful first-line therapy is developed, it may significantly reduce the patient
population to which we can supply, which may affect our ability to successfully commercialize KLS-13019 for chemotherapy induced
peripheral neuropathy.
Product
liability lawsuits against us could cause us to incur substantial liabilities.
Our
planned use of KLS-13019 and KLS-13023 in clinical trials and the sale of KLS-13019 and KLS-13023, if approved, exposes us to
the risk of product liability claims. Product liability claims might be brought against us by patients, healthcare providers or
others selling or otherwise coming into contact with KLS-13019 or KLS-13023. For example, we may be sued if any product we develop
allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such
product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers
inherent in the product, including as a result of interactions with alcohol or other drugs, negligence, strict liability, and
a breach of warranties. Claims could also be asserted under state consumer protection acts. If we become subject to product liability
claims and cannot successfully defend ourselves against them, we could incur substantial liabilities. In addition, regardless
of merit or eventual outcome, product liability claims may result in, among other things:
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withdrawal
of patients from our clinical trials;
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substantial
monetary awards to patients or other claimants;
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decreased
demand for KLS-13019 or KLS-13023 following marketing approval, if obtained;
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damage to
our reputation and exposure to adverse publicity;
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increased
FDA or EMA warnings on product labels;
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significant
litigation costs;
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distraction
of management’s attention from our primary business;
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the inability
to successfully commercialize KLS-13019 or KLS-13023, if approved.
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We
will need to obtain product liability insurance coverage for our clinical trials. We may not be able to obtain such coverage at
a reasonable cost or in sufficient amounts to protect us against losses, including if insurance coverage becomes increasingly
expensive. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. The
cost of any product liability litigation or other proceedings, even if resolved in our favor, could be substantial, particularly
in light of the size of our business and financial resources. A product liability claim or series of claims brought against us
could cause our share price to decline and, if we are unsuccessful in defending such a claim or claims and the resulting judgments
exceed our insurance coverage, our financial condition, results of operations, business and prospects could be materially adversely
affected.
Our
business and operations would suffer in the event of computer system failures.
Despite
the implementation of security measures, our information technology and other internal infrastructure systems and those of our
CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters,
terrorism, war and telecommunication and electrical failures. A significant disruption in the availability of our information
technology and other internal infrastructure systems could cause delays in our research and development work. For instance, the
loss of preclinical data or data from any future clinical trial involving our product candidates could result in delays in our
development and regulatory filing efforts and significantly increase our costs. To the extent that any disruption or security
breach were to result in a loss of, or damage to, our data, or inappropriate disclosure of confidential or proprietary information,
we could incur liability and the development of our product candidates could be delayed.
Risks
Related to Our Dependence on Third Parties
We
rely on third parties to conduct our preclinical studies and clinical trials. If these third parties do not successfully carry
out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize
our product candidates.
We
rely on CROs, clinical data management organizations and consultants to design, conduct, supervise and monitor preclinical studies
of our product candidates and may do the same for our planned clinical trials. We and our prospective CROs are required to comply
with various regulations, including GCP, which are enforced by the FDA, and guidelines of the Competent Authorities of Member
States of the EEA and comparable foreign regulatory authorities to ensure that the health, safety and rights of patients are protected
in clinical development and clinical trials, and that trial data integrity is assured. Regulatory authorities ensure compliance
with these requirements through periodic inspections of trial sponsors, principal investigators and trial sites. Our reliance
on third parties that we do not control does not relieve us of these responsibilities and requirements. If we or any of our prospective
CROs fail to comply with applicable requirements, the clinical data generated in our clinical trials may be deemed unreliable
and the FDA, EMA or other comparable foreign regulatory authorities may require us to perform additional clinical trials before
approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory
authority will determine that any of our clinical trials comply with such requirements. In addition, our clinical trials must
be conducted with products produced under cGMP requirements, which mandate the methods, facilities and controls used in manufacturing,
processing and packaging of a drug product to ensure its safety and identity. Failure to comply with these regulations may require
us to repeat preclinical and clinical trials, which would delay the regulatory approval process.
Our
prospective CROs are not our employees, and except for remedies available to us under future agreements with such prospective
CROs, we cannot control whether or not they devote sufficient time and resources to our ongoing clinical and preclinical programs.
If the prospective CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines, or if
the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols,
regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able
to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our operations and the commercial
prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.
Because
we have relied on third parties, our internal capacity to perform these functions is limited. Outsourcing these functions involves
risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at
all. In addition, the use of third-party service providers requires us to disclose our proprietary information to these parties,
which could increase the risk that this information will be misappropriated. We currently have a small number of employees, which
limits the internal resources we have available to identify and monitor our third-party providers. To the extent we are unable
to identify and successfully manage the performance of third-party service providers in the future, our business may be adversely
affected. Though we carefully manage our relationships with our prospective CROs, there can be no assurance that we will not encounter
similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business,
financial condition and prospects.
We
rely on third-party manufacturers and suppliers, and we intend to rely on third parties to produce preclinical, clinical and commercial
supplies of active pharmaceutical ingredients, or APIs, for KLS-13019 and KLS-13023.
We
rely on third parties to supply the materials for, and manufacture, our research and development, preclinical and clinical trial
APIs. We do not own manufacturing facilities or supply sources for such components and materials. There can be no assurance that
our supply of research and development, preclinical and clinical development drugs and other materials will not be limited, interrupted,
restricted in certain geographic regions or of satisfactory quality or continue to be available at acceptable prices. In particular,
any replacement of our API manufacturer could require significant effort and expertise because there may be a limited number of
qualified manufacturers.
The
manufacturing process for our product candidates is subject to FDA, EMA, DEA and other foreign regulatory authority review. Suppliers
and manufacturers must meet applicable manufacturing requirements and undergo rigorous facility and process validation tests required
by regulatory authorities in order to comply with regulatory standards such as cGMP. In addition, our manufacturers must ensure
therapeutic consistency among batches, including preclinical, clinical and, if approved, marketing batches. Demonstrating such
consistency may require typical manufacturing controls as well as clinical data. Our manufacturers must also ensure that our batches
conform to complex release specifications. Further, manufacturers of controlled substances must obtain and maintain necessary
DEA and state registrations and registrations with applicable foreign regulatory authorities, and must establish and maintain
processes to ensure compliance with DEA and state requirements and requirements of applicable foreign regulatory authorities governing,
among other things, the storage, handling, security, recordkeeping and reporting for controlled substances. In the event that
any of our suppliers or manufacturers fails to comply with such requirements or to perform its obligations to us in relation to
quality, timing or otherwise, or if our supply of components or other materials becomes limited or interrupted for other reasons,
we may be forced to manufacture the materials ourselves, for which we currently do not have the capabilities or resources, or
enter into an agreement with another third party, which we may not be able to do on reasonable terms, if at all. In some cases,
the technical skills or technology required to manufacture our product candidates may be unique or proprietary to the original
manufacturer and we may have difficulty, or there may be contractual restrictions prohibiting us from, transferring such skills
or technology to another third party and a feasible alternative may not exist. These factors would increase our reliance on such
manufacturer or require us to obtain a license from such manufacturer in order to have another third party manufacture our product
candidates. If we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer
maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The
delays associated with the verification of a new manufacturer could negatively affect our ability to develop product candidates
in a timely manner or within budget.
We
expect to continue to rely on third-party manufacturers if we receive regulatory approval for any product candidate. To the extent
that we have existing, or enter into future, manufacturing arrangements with third parties, we will depend on these third parties
to perform their obligations in a timely manner consistent with contractual and regulatory requirements, including those related
to quality control and assurance. If we are unable to obtain or maintain third-party manufacturing for product candidates, or
to do so on commercially reasonable terms, we may not be able to develop and commercialize our product candidates successfully.
Our or a third party’s failure to execute on our manufacturing requirements could adversely affect our business in a number
of ways, including:
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an inability
to initiate or continue preclinical studies or clinical trials of product candidates under development;
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delay in
submitting regulatory applications, or receiving regulatory approvals, for product candidates;
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loss of
the cooperation of a collaborator;
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subjecting
our product candidates to additional inspections by regulatory authorities; and
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in the event
of approval to market and commercialize a product candidate, an inability to meet commercial demands for our products.
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If
a collaborative partner terminates or fails to perform its obligations under an agreement with us, the commercialization of KLS-13019
or KLS-13023, if approved, could be delayed or terminated.
We
are not currently party to any collaborative arrangements for the commercialization of KLS-13019 or KLS-13023, if approved, or
similar arrangements, although we may pursue such arrangements before any commercialization of KLS-13019 or KLS-13023, if approved.
If we enter into future collaborative arrangements for the commercialization of any product candidate or similar arrangements
and any of our collaborative partners does not devote sufficient time and resources to a collaboration arrangement with us, we
may not realize the potential commercial benefits of the arrangement, and our results of operations may be materially adversely
affected. In addition, if any such future collaboration partner were to breach or terminate its arrangements with us, the commercialization
of any product candidate could be delayed, curtailed or terminated.
Much
of the potential revenue from future collaborations may consist of contingent payments, such as payments for achieving regulatory
milestones or royalties payable on sales of drugs. The milestone and royalty revenue that we may receive under these collaborations
will depend upon our collaborators’ ability to successfully develop, introduce, market and sell new products. In addition,
collaborators may decide to enter into arrangements with third parties to commercialize products developed under collaborations
using our technologies, which could reduce the milestone and royalty revenue that we may receive, if any. Future collaboration
partners may fail to develop or effectively commercialize products using our products or technologies, which could have a material
adverse effect on our operating results and financial condition.
Business
disruptions affecting our third-party suppliers, manufacturers and CROs could harm our future revenues and financial condition
and increase our costs and expenses.
We
rely on third parties to supply the materials for, and manufacture our APIs for, our preclinical and clinical trials. There are
only a limited number of suppliers and manufacturers of our APIs and our ability to obtain these materials could be disrupted
if the operations of these manufacturers are affected by earthquakes, power shortages, telecommunications failures, water shortages,
floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or man-made disasters or
business interruptions. We also rely on CROs, clinical data management organizations and consultants to design, conduct, supervise
and monitor preclinical studies of our product candidates and will do the same for our planned clinical trials. If their facilities
are unable to operate because of an accident or incident, even for a short period of time, some or all of our research and development
programs may be harmed or delayed and our operations and financial condition could suffer.
Our
third-party manufacturers may use hazardous materials, and any claims relating to improper handling, storage or disposal of these
materials could be time consuming or costly.
Our
third-party manufacturers may use hazardous materials, including chemicals and molecules that could be dangerous to human health
and safety or the environment. The operations of our third-party manufacturers may also produce hazardous waste products. Federal,
state and local laws and regulations govern the use, generation, manufacture, storage, handling and disposal of these materials
and wastes. In the event of contamination or injury, our third-party manufacturers could be held liable for damages or be penalized
with fines in an amount exceeding their resources, which could result in our clinical trials or regulatory approvals being delayed
or suspended.
Risks
Related to Our Intellectual Property
If
we are unable to protect our intellectual property rights or if our intellectual property rights are inadequate for our technology
and product candidates, our competitive position could be harmed.
Our
commercial success will depend in large part on our ability to obtain and maintain patent and other intellectual property protection
in the U.S. and other countries with respect to our proprietary technology and products. We rely on trade secret, patent, copyright
and trademark laws, and confidentiality and other agreements with employees and third parties, all of which offer only limited
protection. We seek to protect our proprietary position by filing and prosecuting patent applications in the United States and
abroad related to our novel technologies and products that are important to our business.
The
patent positions of biotechnology and pharmaceutical companies generally are highly uncertain, involve complex legal and factual
questions and have in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability
and commercial value of our patents are highly uncertain. The steps we have taken to protect our proprietary rights may not be
adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, both
inside and outside the United States. Our pending applications cannot be enforced against third parties practicing the technology
claimed in such applications unless and until a patent issues from such applications. Further, the examination process may require
us to narrow the claims for our pending patent applications, which may limit the scope of patent protection that may be obtained
if these applications issue. We do not know whether any of the pending patent applications for any of our product candidates will
result in the issuance of patents that protect our technology or products, or if any of our issued patents will effectively prevent
others from commercializing competitive technologies and products. The rights already granted under any of our currently issued
patents and those that may be granted under future issued patents may not provide us with the proprietary protection or competitive
advantages we are seeking. If we are unable to obtain and maintain patent protection for our technology and products, or if the
scope of the patent protection obtained is not sufficient, our competitors could develop and commercialize technology and products
similar or superior to ours, and our ability to successfully commercialize our technology and products may be adversely affected.
It is also possible that we will fail to identify patentable aspects of inventions made in the course of our development and commercialization
activities before it is too late to obtain patent protection on them.
Because
the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, our issued patents may be
challenged in the courts or patent offices in the U.S. and abroad. Such challenges may result in the loss of patent protection,
the narrowing of claims in such patents or the invalidity or unenforceability of such patents, which could limit our ability to
stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection
for our technology and products. Publications of discoveries in the scientific literature often lag behind the actual discoveries,
and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing.
Therefore, we cannot be certain that we were the first to make the inventions claimed in our owned patents or pending patent applications,
or that we were the first to file for patent protection of such inventions.
Protecting
against the unauthorized use of our patented technology, trademarks and other intellectual property rights is expensive, difficult
and may in some cases not be possible. In some cases, it may be difficult or impossible to detect third-party infringement or
misappropriation of our intellectual property rights, even in relation to issued patent claims, and proving any such infringement
may be even more difficult.
Obtaining
and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other
requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance
with these requirements.
The
USPTO, and various foreign national or international patent agencies require compliance with a number of procedural, documentary,
fee payment and other similar provisions during the patent application process. Periodic maintenance fees on any issued patent
are due to be paid to the USPTO and various foreign national or international patent agencies in several stages over the lifetime
of the patent. While an inadvertent lapse can in many cases be cured by payment of a late fee or by other means in accordance
with the applicable rules, there are situations in which noncompliance can result in abandonment or lapse of the patent or patent
application, resulting in partial or complete loss of patent rights in the relevant jurisdiction. Non-compliance events that could
result in abandonment or lapse of patent rights include, but are not limited to, failure to timely file national and regional
stage patent applications based on our international patent application, failure to respond to official actions within prescribed
time limits, non-payment of fees and failure to properly legalize and submit formal documents. If we fail to maintain the patents
and patent applications covering our product candidates, our competitors might be able to enter the market, which would have a
material adverse effect on our business.
We
may become subject to claims by third parties asserting that we or our employees have misappropriated their intellectual property,
or claiming ownership of what we regard as our own intellectual property.
Our
commercial success depends upon our ability to develop, manufacture, market and sell our product candidates, and to use our related
proprietary technologies without violating the intellectual property rights of others. We may become party to, or threatened with,
future adversarial proceedings or litigation regarding intellectual property rights with respect to our product candidates, including
interference or derivation proceedings before the USPTO. Third parties may assert infringement claims against us based on existing
patents or patents that may be granted in the future. If we are found to infringe a third party’s intellectual property
rights, we could be required to obtain a license from such third party to continue commercializing our product candidates. However,
we may not be able to obtain any required license on commercially reasonable terms or at all. Under certain circumstances, we
could be forced, including by court order, to cease commercializing the applicable product candidate. In addition, in any such
proceeding or litigation, we could be found liable for monetary damages. A finding of infringement could prevent us from commercializing
our product candidates or force us to cease some of our business operations, which could materially harm our business. Any claims
by third parties that we have misappropriated their confidential information or trade secrets could have a similar negative impact
on our business.
While
our preclinical studies and clinical trials are ongoing, we believe that the use of KLS-13019 and KLS-13023 in these preclinical
studies and clinical trials falls within the scope of the exemptions provided by 35 U.S.C. Section 271(e) in the United States,
which exempts from patent infringement liability activities reasonably related to the development and submission of information
to the FDA, or the Clinical Development Exemption. As KLS-13019 and KLS-13023 progress toward commercialization, the possibility
of a patent infringement claim against us increases. We attempt to ensure that our product candidates and the methods we employ
to manufacture them, as well as the methods for their uses we intend to promote, do not infringe other parties’ patents
and other proprietary rights. There can be no assurance they do not, however, and competitors or other parties may assert that
we infringe their proprietary rights in any event.
We
may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time consuming and
unsuccessful and have a material adverse effect on the success of our business.
Competitors
may infringe our patents or misappropriate or otherwise violate our intellectual property rights. To counter infringement or unauthorized
use, litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets
or to determine the validity and scope of our own intellectual property rights or the proprietary rights of others. Also, third
parties may initiate legal proceedings against us to challenge the validity or scope of intellectual property rights we own. These
proceedings can be expensive and time consuming. Many of our current and potential competitors have the ability to dedicate substantially
greater resources to defend their intellectual property rights than we can. Accordingly, despite our efforts, we may not be able
to prevent third parties from infringing upon or misappropriating our intellectual property. Litigation could result in substantial
costs and diversion of management resources, which could harm our business and financial results. In addition, in an infringement
proceeding, a court may decide that a patent owned by us is invalid or unenforceable, or may refuse to stop the other party from
using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any
litigation proceeding could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there
is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could
also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts
or investors perceive these results to be negative, it could have a material adverse effect on the price of shares of our common
stock.
If
we are not able to adequately prevent disclosure of trade secrets and other proprietary information, the value of our technology
and products could be significantly diminished.
We
rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate
or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our current
and former employees, consultants, outside scientific collaborators, sponsored researchers, contract manufacturers, vendors and
other advisors to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure
of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information.
In addition, we cannot guarantee that we have executed these agreements with each party that may have or have had access to our
trade secrets. Any party with whom we or they have executed such an agreement may breach that agreement and disclose our proprietary
information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches.
Enforcing
a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the
outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect
trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have
no right to prevent them, or those to whom they disclose such trade secrets, from using that technology or information to compete
with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor or other third-party,
our competitive position would be harmed.
We
may not be able to protect our intellectual property rights throughout the world.
Filing,
prosecuting and defending patents on all of our product candidates throughout the world would be prohibitively expensive. Therefore,
we have filed applications and/or obtained patents only in key markets such as the United States, Canada, Japan and parts of Europe.
Competitors may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products
and, further, may be able to export otherwise infringing products to territories where we have patent protection but where enforcement
is not as strong as that in the United States. These products may compete with our products in jurisdictions where we do not have
any issued patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them
from so competing.
Many
companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions.
The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and
other intellectual property protection, particularly those relating to pharmaceuticals, which could make it difficult for us to
stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. For
example, an April 2014 report from the Office of the United States Trade Representative identified a number of countries, including
India and China, where challenges to the procurement and enforcement of patent rights have been reported. Several countries, including
India and China, have been listed in the report every year since 1989. As a result, proceedings to enforce our patent rights in
certain foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our
business and could be unsuccessful.
Patent
terms may be inadequate to protect our competitive position on our product candidates for an adequate amount of time.
Given
the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such
candidates might expire before or shortly after such candidates are commercialized. We expect to seek extensions of patent terms
in the United States and, if available, in other countries where we are prosecuting patents. In the United States, the Drug Price
Competition and Patent Term Restoration Act of 1984 permits a patent term extension of up to five years beyond the normal expiration
of the patent, which is limited to the approved indication (or any additional indications approved during the period of extension).
However, the applicable authorities, including the FDA and the USPTO, and any equivalent regulatory authorities in other countries,
may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents,
or may grant more limited extensions than we request. If this occurs, our competitors may be able to take advantage of our investment
in development and clinical trials by referencing our clinical and preclinical data and launch their product earlier than might
otherwise be the case.
Intellectual
property rights do not necessarily address all potential threats to our competitive advantage.
The
degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have
limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples
are illustrative:
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others may
be able to make molecules that are the same as or similar to our product candidates but that are not covered by the claims of
the patents that we own;
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we might
not have been the first to make the inventions covered by the issued patents or pending patent applications that we own;
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we might
not have been the first to file patent applications covering certain of our inventions;
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others may
independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual
property rights;
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it is possible
that our pending patent applications will not lead to issued patents;
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issued patents
that we own may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of legal challenges;
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our competitors
might conduct research and development activities in the United States and other countries that provide a safe harbor from patent
infringement claims for certain research and development activities, as well as in countries where we do not have patent rights
and then use the information learned from such activities to develop competitive products for sale in our major commercial markets;
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we may not
develop additional proprietary technologies that are patentable; and
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the patents
of others may have an adverse effect on our business.
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Risks
Related to This Offering and Ownership of Our Common Stock
We
do not know whether an active, liquid and orderly trading market will develop for our common stock or what the market price of
our common stock will be, and as a result, it may be difficult for you to sell your shares of our common stock.
Historically,
there has not been an active market for shares of our common stock. An active trading market for our shares may never develop
or be sustained in the future. The lack of an active market may impair the ability of our stockholders to sell their shares at
the time and at such price as they consider reasonable. The lack of an active market may also reduce the fair market value of
shares of our common stock. Further, an inactive market may also impair our ability to raise capital by selling shares of our
common stock and may impair our ability to enter into collaborations or acquire companies or products by using our shares of common
stock as consideration.
The
market price of our stock may be volatile, and stockholders could lose all or part of their investment.
The
trading price of our common stock may be highly volatile and could be subject to wide fluctuations in response to various factors,
some of which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere
in this prospectus, these factors include, without limitation:
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trading
volatility of low-priced stock;
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the success
of competitive products;
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regulatory
actions with respect to our product candidates or our competitors’ products and product candidates;
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actual or
anticipated changes in our growth rate relative to our competitors;
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announcements
by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;
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results
of clinical trials of KLS-13019, KLS-13023 or product candidates of our competitors;
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regulatory
or legal developments in the United States and other countries;
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developments
or disputes concerning patent applications, issued patents or other proprietary rights;
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the recruitment
or departure of key personnel;
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the level
of expenses related to our preclinical and clinical development programs;
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the results
of our efforts to in-license or acquire additional product candidates or products;
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actual or
anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;
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variations
in our financial results or those of companies that are perceived to be similar to us;
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fluctuations
in the valuation of companies perceived by investors to be comparable to us;
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share price
and volume fluctuations attributable to inconsistent trading volume levels of our common stock;
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announcement
or expectation of additional financing efforts;
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sales of
our common stock by us, our insiders or our other stockholders;
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changes
in the structure of healthcare payment systems;
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market conditions
in the pharmaceutical sector; and
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general
economic, industry and market conditions.
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In
addition, the stock market in general, and pharmaceutical companies in particular, have experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry
factors may negatively affect the market price of our common stock, regardless of our actual operating performance. Moreover,
some institutional investors and mutual funds cannot invest in stocks priced below $5.00 per share. The realization of any of
these risks or any of a broad range of other risks, including those described in these “Risk Factors,” could have
a dramatic and material adverse impact on the market price of our common stock.
We
may be subject to securities litigation, which is expensive and could divert our management’s attention.
The
market price of our common stock may be volatile, and in the past certain companies that have experienced volatility in the market
price of their stock have been subject to securities class action litigation. We may be the target of this type of litigation
in the future. Securities litigation against us could result in substantial costs and divert our management’s attention
from other business concerns, which could seriously harm our business.
Our
common stock is classified as a “penny stock” under SEC Rules and Regulations, which means there may be very limited
trading market for our shares.
Our
common stock is deemed to be “penny stock” as that term is defined in Rule 3a51-1 of the Securities Exchange Act of
1934, as amended (“the Exchange Act”). Penny stocks are stocks (i) with a price of less than five dollars per share;
(ii) that are not traded on a “recognized” national exchange; (iii) whose prices are not quoted on an automated quotation
system sponsored by a registered national securities association; or (iv) whose issuer has net tangible assets less than $2,000,000
(if the issuer has been in continuous operation for at least three years); or $5,000,000 (if in continuous operation for less
than three years); or with average revenues of less than $6,000,000 for the last three years.
Section
15(g) of the Exchange Act and Rule 15g-2 promulgated thereunder require broker dealers dealing in penny stocks to provide potential
investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the
document before effecting any transaction in a penny stock for the investor’s account. Potential investors in our common
stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be “penny stock.”
Moreover,
Rule 15g-9 of the Exchange Act requires broker dealers in penny stocks to approve the account of any investor for transactions
in such stocks before selling any penny stock to that investor. This procedure requires the broker dealer to (i) obtain from the
investor information concerning his, her or its financial situation, investment experience and investment objectives; (ii) reasonably
determine, based on that information, that transactions in penny stocks are suitable for the investor, and that the investor has
sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide
the investor with a written statement setting forth the basis on which the broker dealer made the determination in (ii) above;
and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s
financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult
for investors in our common stock to resell their shares to third parties or to otherwise dispose of such shares.
Insiders
have substantial influence over us and could delay or prevent a change in corporate control.
As
of March 31, 2021, our executive officers, directors, and holders of 5.0% or more of our capital stock collectively beneficially
owned approximately 68.3% of our voting stock. This concentration of ownership could harm the market price of our common stock
by:
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delaying,
deferring or preventing a change in control of our company;
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impeding
a merger, consolidation, takeover or other business combination involving our company; or
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discouraging
a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.
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The
interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders and
they may act in a manner that advances their best interests and not necessarily those of other stockholders, including by seeking
a premium value for their common stock, and might negatively affect the prevailing market price for our common stock.
If
we are unable to maintain effective internal control over our financial reporting, the reputational effects could materially adversely
affect our business.
Under
the provisions of Section 404(a) of the Sarbanes-Oxley Act of 2002, as amended by the Dodd Frank Wall Street Reform and Consumer
Protection Act of 2010, the SEC adopted rules requiring public companies to perform an evaluation of Internal Control over Financial
Reporting (Internal Controls) and to report on our evaluation in our Annual Report on Form 10-K. Our Internal Controls constitute
a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements in accordance with GAAP. In the event we discover material weakness in our internal controls and our remediation of
such reported material weakness is ineffective, or if in the future we are unable to maintain effective Internal Controls, additional
resulting material restatements could occur, regulatory actions could be taken, and a resulting loss of investor confidence in
the reliability of our financial statements could occur.
Our
disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We
are subject to the periodic reporting requirements of the Exchange Act. Our disclosure controls and procedures are designed to
reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated
and communicated to management, recorded, processed, summarized and reported within the time periods specified in the rules and
forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These
inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control
system, misstatements or insufficient disclosures due to error or fraud may occur and not be detected.
Because
we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will
be your sole source of gain.
We
have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if
any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude
us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for
the foreseeable future.
We
have issued Preferred Stock.
Our
Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares of Preferred Stock with designations, rights and
preferences determined from time to time by the Board of Directors. There are currently 75 shares of Series A Preferred Stock
and 75 shares of Series B Preferred Stock outstanding. The holders of our Preferred Stock have voting control of the Company.
Accordingly, our Board of Directors is empowered, without stockholder approval, to issue Preferred Stock with dividend, liquidation,
conversion, voting, or other rights which could adversely affect the voting power or other rights of the holders of the Common
Stock. The issuance of Preferred Stock could be utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company.
CAUTIONARY
STATEMENT ON FORWARD-LOOKING STATEMENTS
This
prospectus may contain certain “forward-looking” statements as such term is defined by the Securities and Exchange
Commission in its rules, regulations and releases, which represent the registrant’s expectations or beliefs, including but
not limited to, statements concerning the registrant’s operations, economic performance, financial condition, growth and
acquisition strategies, investments, and future operational plans. For this purpose, any statements contained herein that are
not statements of historical fact may be deemed to be forward-looking statements. Without limiting the generality of the foregoing,
words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intend,”
“could,” “estimate,” “might,” “plan,” “predict,” “project,”
“target,” “potential,” “continue,” “could,” “should,” or “will”
or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These
statements by their nature involve substantial risks and uncertainties, certain of which are beyond the registrant’s control,
and actual results may differ materially depending on a variety of important factors, including uncertainty related to acquisitions,
governmental regulation, managing and maintaining growth, the operations of the company and its subsidiaries, volatility of stock
price, commercial viability of our product candidates and any other factors discussed in this and other registrant filings with
the Securities and Exchange Commission.
These
risks and uncertainties and other factors include, but are not limited to those listed in the “Risk Factors” section
of this prospectus. Given these risks and uncertainties, readers are cautioned not to place undue reliance on our forward-looking
statements. All subsequent written and oral forward-looking statements attributable to us or to persons acting on our behalf are
expressly qualified in their entirety by these cautionary statements. Except as otherwise required by applicable law, we undertake
no obligation to publicly update or revise any forward-looking statements or the risk factors described in this prospectus or
in the documents we incorporate by reference, whether as a result of new information, future events, changed circumstances or
any other reason after the date of this prospectus.
The
forward-looking statements included in this prospectus include, among other things, statements regarding, among other things:
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our ability
to continue as a going concern;
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our anticipated
needs for working capital; or
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our ability
to secure financing;
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we have
incurred significant losses since our inception and anticipate that we will continue to incur losses in the future as we continue
research and development of our product candidates
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regulatory
or legal developments in the United States and other countries
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developments
or disputes concerning patent applications, issued patents or other proprietary rights
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the level
of expenses related to our preclinical and clinical development programs; and
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the results
of our efforts to in-license or acquire additional product candidates or products.
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Actual
events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including,
without limitation, the risks outlined under “Risk Factors” and matters described in prospectus generally. In light
of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this prospectus will
in fact occur. We caution you not to place undue reliance on these forward-looking statements. In addition to the information
expressly required to be included in this prospectus, we will provide such further material information, if any, as may be necessary
to make the required statements, in light of the circumstances under which they are made, not misleading.
These
risks and uncertainties and other factors include, but are not limited to, those set forth under “Risk Factors.”
All subsequent written and oral forward-looking statements attributable to the company or to persons acting on our behalf are
expressly qualified in their entirety by these cautionary statements. Except as required by federal securities laws, we do not
intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.
USE
OF PROCEEDS
We
will not receive any proceeds from the sale of the common stock by the selling stockholder. However, we will receive proceeds
from the sale of shares of our common stock to Cross under the Equity Purchase Agreement. Cross has committed to purchase up to
$6,000,000 worth of shares of our common stock over a period of time terminating on the earlier of the date on which Cross shall
have purchased an aggregate of $6,000,000 shares of common stock under the Equity Purchase Agreement or September 18, 2023. See
the section of this prospectus entitled “The Offering” for additional information regarding the terms of the Equity
Purchase Agreement.
We
intend to use the net proceeds, if any, from
the sale and issuance of shares to Cross under the Equity Purchase Agreement for general
corporate and working capital purposes and acquisitions of assets, businesses or operations or for other purposes that our board
of directors, in its good faith, deems to be in the best interest of the Company, although we have no present commitments or agreements
to make any such acquisitions as of the date of this prospectus. Our management will have broad discretion as to the allocation
of the net proceeds from the sale and issuance of shares to Cross under the Equity Purchase Agreement, and could use them for
purposes other than those contemplated at the time of commencement of this offering. We have agreed to bear the expenses
relating to the registration of the offer and resale by the selling stockholder of the shares of our common stock being offered
under this prospectus.
THE
OFFERING
The
selling stockholder may offer and resale of up to 8,108,108 shares of our common stock, par value $0.0001 per share, pursuant
to this prospectus. All of such shares represent shares that Cross has agreed to purchase from us pursuant to
the terms and conditions of an Equity Purchase Agreement we entered into with them on September 18, 2020 (the “Equity Purchase
Agreement”), which are described below.
Equity
Purchase Agreement with Cross & Company
Subject
to the terms and conditions of the Equity Purchase Agreement, we have the right to “put,” or sell, up to $6,000,000
worth of 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. We have no obligation to sell any shares under the Equity Purchase
Agreement. This arrangement is also sometimes referred to herein as the “Equity Line.”
As
provided in the Equity Purchase Agreement, we may require Cross to purchase shares of common stock from time to time by delivering
a put notice to Cross specifying the total number of shares to be purchased (such number of shares multiplied by the purchase
price described below, the “Investment Amount”); provided there must be a minimum of ten trading days between delivery
of each put notice. We may determine the Investment Amount, provided that such amount may not be more than 500% of the average
daily trading volume in dollar amount for our common stock during the 5 trading days preceding the date on which we deliver the
applicable put notice, unless waived by Cross in its sole discretion. Additionally, such amount may not be lower than $10,000
or higher than $1,000,000. Cross will have no obligation to purchase shares under the Equity Line to the extent that such purchase
would cause Cross to own more than 4.99% of our common stock.
For
each share of the our common stock purchased under the Equity Line, Cross will pay a purchase price equal to 85% of the “Market
Price,” which is defined as the lowest closing traded price on the OTCQB Marketplace, as reported by Bloomberg Finance L.P.,
during the five consecutive trading days including and immediately prior to the settlement date of the sale, which in most circumstances
will be the trading day immediately following the “Put Date,” or the date that a put notice is delivered to Cross
(the “Pricing Period”). On the settlement date, Cross will purchase the applicable number of shares subject
to customary closing conditions, including without limitation a requirement that a registration statement remain effective registering
the resale by Cross of the shares to be issued under the Equity Line. The Equity Purchase Agreement is not transferable
and any benefits attached thereto may not be assigned.
The
Equity Purchase Agreement contains covenants, representations and warranties of us and Cross that are typical for transactions
of this type. In addition, we and Cross have granted each other customary indemnification rights in connection with the Equity
Purchase Agreement. The Equity Purchase Agreement may be terminated by us at any time.
In
connection with the Equity Purchase Agreement, we have agreed to prepare and file a registration statement registering the resale
by Cross of shares to be issued under the Equity Line. In accordance with this obligation, on September 22, 2020, we filed the
registration statement of which this prospectus is a part registering the resale by Cross of up to 8,108,108 shares that may be
issued and sold to Cross under the Equity Line. As of June 15, 2021, we have sold an aggregate of 3,768,188 shares of our common
stock to Cross under the Equity Line for a total of $463,757.31.
The
8,108,108 shares being offered pursuant to this prospectus by Cross will represent approximately 29.06% of our shares of common
stock issued and outstanding held by non-affiliates of our Company and 9.21% of all of our shares of common stock issued and outstanding
overall as of the date of this prospectus assuming the offering is fully subscribed.
The
foregoing description of the terms of the Equity Purchase Agreement does not purport to be complete and is subject to and qualified
in its entirety by reference to the agreement itself, a copy of which is filed as Exhibit 10.1 to our Current Report on Form 8-K
dated September 22, 2020, and incorporated into this prospectus by reference. The benefits and representations and warranties
set forth in such agreement is not intended to and does not constitute continuing representations and warranties of the Company
or any other party to persons not a party thereto.
We
intend to sell Cross periodically our common stock under the Equity Purchase Agreement and Cross may, in turn, sell such shares
to investors in the market at the market price or at negotiated prices. This may cause our stock price to decline, which will
require us to issue increasing numbers of common shares to Cross to raise the intended amount of funds, as our stock price declines.
Likelihood
of Accessing the Full Amount of the Equity Line
Notwithstanding
that the Equity Line is in an amount of $6,000,000, we anticipate that the actual likelihood that we will be able access the full
amount of the Equity Line is low due to several factors, including that our ability to access the Equity Line is impacted by our
average daily trading volume, which may limit the maximum dollar amount of each put we deliver to Cross, and our stock price.
Our use of the Equity Line will continue to be limited and restricted if our share trading volume and/or and market price of our
stock continue at their current levels or decrease further in the future from the volume and stock prices reported over the past
year. Our ability to issue shares in excess of the 8,108,108 shares covered by the registration statement of which this prospectus
is a part will be subject to our filing a subsequent registration statement with the SEC and the SEC declaring it effective.
Accordingly,
because our ability to deliver puts to Cross under the Equity Purchase Agreement is subject to a number of conditions, there is
no guarantee that we will receive all or any portion of the $6,000,000 that is available to us under the Equity Line.
SELLING
STOCKHOLDER
This
prospectus covers the resale by the selling stockholder or its permitted transferees of 8,108,108 shares of our common stock
that may be sold and issued by us to Cross under the Equity Purchase Agreement. Cross is an “underwriter” within the
meaning of the Securities Act in connection with its resale of our common stock pursuant to this prospectus. The selling stockholder
has not had any position or office, or other material relationship with us or any of our affiliates over the past three years.
The following table sets forth certain information regarding the beneficial ownership of shares of common stock by the selling
stockholder as of June 15, 2021 and the number of shares of our common stock being offered pursuant to this prospectus.
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Name
of selling
stockholder
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Shares
beneficially
owned
as of the date
of this prospectus(1)
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Number
of shares
being
offered
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Number
of shares of common stock
to
be beneficially owned and
percentage
of beneficial
ownership
after the offering (1)(2)
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Number
of
shares
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Percentage
of
class
(3)
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Cross
& Company (4)
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1,071,424
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8,108,108(5)
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1,071,424
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13.21%
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(1)
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Beneficial
ownership is determined in accordance with Securities and Exchange Commission rules and
generally includes voting or investment power with respect to shares of common stock.
Shares of common stock subject to options and warrants currently exercisable, or exercisable
within 60 days, are counted as outstanding for computing the beneficial ownership percentage
of the person holding such options or warrants but are not counted as outstanding for
computing the beneficial ownership percentage of any other person.
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(2)
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The
amount and percentage of shares of our common stock that will be beneficially owned by
the selling stockholder after completion of the offering assumes that the selling stockholder
will sell all shares of our common stock being offered pursuant to this prospectus.
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(3)
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Based
on 87,978,445 shares of our common stock issued and outstanding as of June 15, 2021.
All shares of our common stock being offered pursuant to this prospectus by the selling
stockholder are counted as outstanding for computing the percentage beneficial ownership
of such selling stockholder. The percentage set forth in this column does not give effect
to the 4.99% beneficial ownership limitation set forth in the Equity Purchase Agreement.
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(4)
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James
Arabia is the president and possesses sole voting and investment control over shares
owned by Cross & Company. Cross & Company is wholly-owned by the spouse of James
R. Arabia.
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(5)
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As
of June 15, 2021, we have sold an aggregate of 3,768,188 shares of our common stock out
of the 8,108,108 being registered hereby to Cross under the Equity Line for a total of
$463,757.31.
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PLAN
OF DISTRIBUTION
The
selling stockholder or its respective permitted transferees may, from time to time, sell any or all of shares of our common stock
covered hereby on the OTCQB Marketplace operated by the OTC Markets Group, Inc., or any other stock exchange, market or trading
facility on which the shares are traded or in private transactions. The selling stockholder may sell all or a portion of the shares
being offered pursuant to this prospectus at fixed prices, at prevailing market prices at the time of sale, at varying prices
or at negotiated prices. The selling stockholder may use any one or more of the following methods when selling securities:
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ordinary
brokerage transactions and transactions in which the broker-dealer solicits purchasers;
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block trades
in which the broker-dealer will attempt to sell the shares as agent but may position and resell a portion of the block as principal
to facilitate the transaction;
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purchases
by a broker-dealer as principal and resale by the broker-dealer for its account;
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an exchange
distribution in accordance with the rules of the applicable exchange;
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privately
negotiated transactions;
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in transactions
through broker-dealers that agree with the selling stockholder to sell a specified number of such securities at a stipulated price
per security;
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through
the writing or settlement of options or other hedging transactions, whether through an options exchange or otherwise;
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a combination
of any such methods of sale; or
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any other
method permitted pursuant to applicable law.
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The
selling stockholder may also sell securities under Rule 144 under the Securities Act, if available, rather than under this prospectus.
Broker-dealers
engaged by the selling stockholder may arrange for other brokers-dealers to participate in sales. Broker-dealers may receive commissions
or discounts from the selling stockholder (or, if any broker-dealer acts as agent for the purchaser of securities, from the purchaser)
in amounts to be negotiated, provided such amounts are in compliance with FINRA Rule 2121. Discounts, concessions, commissions
and similar selling expenses, if any, that can be attributed to the sale of common stock will be paid by the selling stockholder
and/or the purchasers.
Cross
& Company is an underwriter within the meaning of the Securities Act and any broker-dealers or agents that are involved in
selling the shares may be deemed to be “underwriters” within the meaning of the Securities Act in connection with
such sales. In such event, any commissions received by such broker-dealers or agents and any profit on the resale of the shares
purchased by them may be deemed to be underwriting commissions or discounts under the Securities Act. Because Cross is an underwriter
within the meaning of the Securities Act, it will be subject to the prospectus delivery requirements of the Securities Act.
Under
applicable rules and regulations under the Exchange Act, any person engaged in the distribution of the resale securities may not
simultaneously engage in market making activities with respect to the common stock for the applicable restricted period, as defined
in Regulation M, prior to the commencement of the distribution. In addition, the selling stockholder will be subject to applicable
provisions of the Exchange Act and the rules and regulations thereunder, including Regulation M, which may limit the timing of
purchases and sales of securities of the common stock by the selling stockholder or any other person. We will make copies of this
prospectus available to the selling security holders and have informed them of the need to deliver a copy of this prospectus to
each purchaser at or prior to the time of the sale.
Although
Cross has agreed not to enter into any “short sales” of our common stock, sales after delivery of a put notice
of a number of shares reasonably expected to be purchased under a put notice shall not be deemed a “short sale.” Accordingly,
Cross may enter into arrangements it deems appropriate with respect to sales of shares of our common stock after it receives a
put notice under the Equity Purchase Agreement so long as such sales or arrangements do not involve more than the number of put
shares reasonably expected to be purchased by Cross under such put notice.
DESCRIPTION
OF SECURITIES WE ARE OFFERING
Capital
Stock
Pursuant
to our certificate of incorporation, as amended to date, our authorized
capital stock consisting of (a) 200,000,000 shares of common stock, $0.0001 par value per share (“Common Stock”),
and (b) 5,000,000 shares of preferred stock, $0.0001 par value per share (“Preferred Stock”), of which 75 shares have
been designated as “Series A Preferred Stock” and 75 shares have been designated as “Series B Preferred Stock.”
As
of June 15, 2021, there were 87,978,445 shares of common stock, 75 shares of
Series A Preferred Stock, and 75 shares of Series B Preferred Stock issued and outstanding. Our common stock is quoted on the
OTCQB Marketplace operated by the OTC Markets Group, Inc. under the ticker symbol “NPTX.”
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 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.
Common
Stock
Each
share of common stock shall have one (1) vote per share for all purposes. Our common stock does not provide a preemptive, subscription
or conversion rights and there are no redemption or sinking fund provisions or rights. Our common stock holders are not entitled
to cumulative voting for election of Board of Directors.
Preferred
Stock
Our
certificate of incorporation, as amended to date, provides for “blank check” Preferred Stock whereby the Board may
designate series of Preferred Stock, and issue shares of Preferred Stock pursuant to any such designation, without further shareholder
approval and to set forth in any designation of Preferred Stock the rights, privileges, preferences and obligations of holders
of the Preferred Stock being issued pursuant to its designation.
Series
A Preferred Stock
Effective
May 3, 2018, the Board 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) Series A Directors to the Company’s Board at any annual or special meeting or without a meeting and without
prior notice upon the written consent of the holders of a majority of the Series A Preferred Stock. The holders of the Series
A Preferred Stock have exclusive rights in regard to the election or removal 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 Board 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) Series B Directors to the Company’s Board at any annual or special meeting or without a meeting and without
prior notice upon the written consent of the holders of a majority of the Series B Preferred Stock. The holders of the Series
B Preferred Stock have exclusive rights in regard to the election or removal 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.
Transfer
Agent
The
transfer agent and registrar for our common stock is Securities Transfer Corporation. The transfer agent and registrar’s
address is 2901 N. Dallas Parkway, Suite 380, Plano, Texas 75093 and its telephone number is (469) 633-0101.
Anti-Takeover
Effects of Delaware Law and Our Certificate of Incorporation and Bylaws
Some
provisions of Delaware law, our certificate of incorporation and our amended and restated bylaws contain provisions that could
make the following transactions more difficult: an acquisition of us by means of a tender offer; an acquisition of us by means
of a proxy contest or otherwise; or the removal of our incumbent officers and directors. It is possible that these provisions
could make it more difficult to accomplish or could deter transactions that stockholders may otherwise consider to be in their
best interest or in our best interests, including transactions which provide for payment of a premium over the market price for
our shares.
These
provisions, summarized below, are intended to discourage coercive takeover practices and inadequate takeover bids. These provisions
are also designed to encourage persons seeking to acquire control of us to first negotiate with our board of directors. We believe
that the benefits of the increased protection of our potential ability to negotiate with the proponent of an unfriendly or unsolicited
proposal to acquire or restructure us outweigh the disadvantages of discouraging these proposals because negotiation of these
proposals could result in an improvement of their terms.
Undesignated
Preferred Stock
The
ability of our board of directors, without action by the stockholders, to issue up to 4,999,850 shares of undesignated preferred
stock with voting or other rights or preferences as designated by our board of directors could impede the success of any attempt
to change control of us. These and other provisions may have the effect of deferring hostile takeovers or delaying changes in
control or management of our company.
Removal
of Directors
Our
bylaws provide that (i) members of our board of directors appointed by holders of Series A Preferred Stock may only be removed,
with or without cause, by the affirmative vote or consent of two-thirds (2/3) of the then outstanding Series A Preferred Stock,
(ii) members of our board of directors appointed by holders of Series B Preferred Stock may only be removed, with or without cause,
by the affirmative vote or consent of two-thirds (2/3) of the then outstanding Series B Preferred and (iii) regular directors
may be removed at any time, with or without cause, by a vote of two-thirds (2/3) of the stockholders entitled to vote upon the
matter.
Stockholders
Not Entitled to Cumulative Voting
Our
certificate of incorporation does not permit stockholders to cumulate their votes in the election of directors. Accordingly, other
than any directors that holders of our preferred stock may be entitled to elect, holders of a majority of our capital stock can
elect all of the directors standing for election, if they choose.
Delaware
Anti-Takeover Statute
We
are subject to Section 203 of the Delaware General Corporation Law, which prohibits persons deemed to be “interested stockholders”
from engaging in a “business combination” with a publicly held Delaware corporation for three years following the
date these persons become interested stockholders unless the business combination is, or the transaction in which the person became
an interested stockholder was, approved in a prescribed manner or another prescribed exception applies. Generally, an “interested
stockholder” is a person who, together with affiliates and associates, owns, or within three years prior to the determination
of interested stockholder status did own, 15% or more of a corporation’s voting stock. Generally, a “business combination”
includes a merger, asset or stock sale, or other transaction resulting in a financial benefit to the interested stockholder. The
existence of this provision may have an anti-takeover effect with respect to transactions not approved in advance by the board
of directors.
Anti-Takeover
Provisions of Certificate of Incorporation
Any
proposed merger, consolidation or sale of substantially all of the assets of the Company (a “Business Transaction”)
with any stockholder that owns more than 5% of any class of equity security of the Company may not be effected without the consent
of holders of 75% of the voting securities of the Company, unless such Business Transaction has been approved by our board of
directors.
Amendment
of Charter Provisions
The
amendment of any of the above provisions, except for the provision making it possible for our board of directors to issue preferred
stock, would require approval by holders of at least a majority of the total voting power of all of our outstanding voting stock.
The
provisions of Delaware law, our certificate of incorporation and our amended and restated bylaws could have the effect of discouraging
others from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price
of our common stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect
of preventing changes in the composition of our board of directors and management. It is possible that these provisions could
make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.
Amendment
of Charter Provisions
The
amendment of any of the above provisions, except for the provision making it possible for our board of directors to issue preferred
stock, would require approval by holders of at least a majority of the total voting power of all of our outstanding voting stock.
The
provisions of Delaware law, our certificate of incorporation and our amended and restated bylaws could have the effect of discouraging
others from attempting hostile takeovers and, as a consequence, they may also inhibit temporary fluctuations in the market price
of our common stock that often result from actual or rumored hostile takeover attempts. These provisions may also have the effect
of preventing changes in the composition of our board of directors and management. It is possible that these provisions could
make it more difficult to accomplish transactions that stockholders may otherwise deem to be in their best interests.
DIVIDEND
POLICY
We
have never declared or paid cash dividends on our common stock. We currently intend to retain our future earnings, if any, for
use in our business and therefore do not anticipate paying cash dividends on our common stock in the foreseeable future. Payment
of future dividends, if any, will be at the discretion of our board of directors after taking into account various factors, including
our financial condition, operating results, and current and anticipated cash needs.
MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
Forward-Looking
Statements
You
should read the following discussion and analysis of our financial condition and operating results together with our consolidated
financial statements and related notes included elsewhere in this prospectus. This discussion and analysis and other parts of
this prospectus contain forward-looking statements based upon current beliefs, plans and expectations that involve 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 prospectus. The last
day of our fiscal year is December 31. Our fiscal quarters end on March 31, June 30, September 30, and December 31, and our latest
fiscal year ended on December 31, 2020.
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.
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 change and ticker symbol
change was reviewed and processed by FINRA, and went effective November 6, 2020.
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).
Business
Overview
As
a result of the Share Exchange, our core businesses are comprised of the following:
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A
drug development company focused on the research and development (R&D) of non-opioid based synthetic and chemical-medical
products from:
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naturally
recurring sources, including but not limited to cannabis, hemp, and other similar species of plantae;
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semi-synthetic
sources; and
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synthetic
and bio-synthetic sources.
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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, CBD, and cannabidiol-like molecules.
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Topical
skincare pre-clinical program designed to some of our patented, proprietary cannabidiol-derived 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.
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Cannabinoids
are a class of molecules derived from Cannabis plants. The two primary cannabinoids contained in Cannabis are CBD and D9-tetrahydrocannabinol,
or 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. In addition to KLS-13019 and KLS-13023 potentially offering first-line therapies to patients
suffering from chemotherapy induced peripheral neuropathy and mild traumatic brain injury, respectively.
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 National Institutes of Health – National Institute on Drug Abuse (“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.
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. We intend to study KLS-13023 in patients with mild traumatic brain
injury. In addition, we expect that KLS-13023 will be classified by the FDA as an NCE. 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 U.S. or Australia, subject
to applicable regulatory approval. We plan to conduct our Phase 1 clinical trials for KLS-13023 in either the U.S. or Australia,
subject to applicable regulatory approval. We plan to submit New Drug Applications (“NDAs”) for KLS-13019 and KLS-13023
to the FDA upon completion of Phase 3 clinical trials, regardless of where the Company conducts Phase 1 and Phase 2 clinical trials.
We expect to initiate clinical trials for KLS-13019 and KLS-13023 in the first half of 2022.
We
plan to conduct our Phase 1, and possibly Phase 2, clinical trials for KLS-13019 in the U.S. or Australia, subject to applicable
regulatory approval, and do not expect at this time to file an investigational new drug application, or IND, with the U.S. Food
and Drug Administration, or the FDA, prior to the commencement of those clinical trials. We must file an IND with the FDA and
receive approval from the U.S. Drug Enforcement Agency, or DEA, prior to commencement of any clinical trials in the United States.
In
preclinical studies performed pursuant to a small business technology transfers (“STTR”) agreement between us, and
Temple University, funded by the National Institutes of Health – National Institute on Drug Abuse (“NIH-NIDA”),
our research, the subject of two peer reviewed scientific publications in the Journal of Molecular Neuroscience, described how
KLS-13019, was superior to CBD and morphine in the potential to prevent and reverse neuropathic pain caused by paclitaxel, a chemotherapeutic
agent used to treat breast, ovarian and non-small cell lung cancer. (See: Business – Preclinical Studies for more information).
Upon
completion of all requisite preclinical studies, we expect to open an Investigational New Drug Application, or IND, to pursue
a clinical development program with either the U.S. Food and Drug Administration (“FDA”) in the U.S. or the Therapeutic
Goods Administration (“TGA”), the regulatory body for therapeutic goods (including medicines, medical devices,
gene technology, and blood products) in Australia.
Pharmacokinetic
and Pharmacodynamic Comparison Between KLS-13019 and CBD
Results
from PK and PD studies performed in evaluating CBD versus KLS-13019 (molecule name 16), has 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 Fallon, et al. in the March/April 2006 edition of Clinical Medicine, pain is uncontrolled with opioid treatments in approximately
20% of patients with advanced cancer, or 420,000 people in the United States. 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.
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.
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Product
Candidate
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Target
Indication
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Delivery
Method
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Current
Development Status
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Expected
Next Steps
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KLS-13019
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Chemotherapy
Induced
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Oral
Gel Capsule
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Preclinical
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2Q22:
Initiate Phase 1
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Peripheral
Neuropathy
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Mild
Traumatic Brain Injury
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Oral
Gel Capsule
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Preclinical
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1Q23:
Initiate Phase 1
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KLS-13023
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Overt
Hepatic Encephalopathy
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Oral
Gel Capsule
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Preclinical
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4Q22:
Initiate Phase 1
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Mild
Traumatic Brain Injury
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Oral
Gel Capsule
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Preclinical
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1Q23:
Initiate Phase 1
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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/or pursing a path to the marketplace through INCI certification
and registration with the PCPC. 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 1 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 first quarter 2022. We plan on entering into clinical trials sometime in the second
quarter 2022.
Additionally,
we believe that we will be able to raise sufficient capital to proceed forth with a Phase 1 human safety trial for the treatment
of Overt Hepatic Encephalopathy. All preclinical work in this indication, including animal toxicity studies, are expected to be
completed before the end of the third quarter 2022. We plan on entering into clinical trials sometime in the fourth quarter
2022.
We
intend to seek additional capital to proceed with our business plan regarding additional drug pipeline opportunities.
Components
of Results of Operation
For
the year ended December 31, 2020, our loss from operations was $4,473,728 and our net loss was $4,537,275. For the year ended
December 31, 2019, our loss from operations was $2,329,117 and our net loss was $3,450,865. Our net losses were $1,328,574 and
$307,832 for the three months ended March 31, 2021 and 2020, 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.
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.
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, or 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 $1,095,405 and $554,701 for the years ended December 31, 2020 and 2019, respectively.
We incurred research and development expenses of $128,648 and $19,727 for the three months ended March 31, 2021 and 2020, respectively.
We
expect that our research and development expenses in 2021 and for the next several years will be higher than in 2020 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 2021 and for the next several years will be higher than in 2020 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
As
of December 31, 2020, we had $7.00 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 audited consolidated financial statements appearing
elsewhere in this prospectus, we believe that the following accounting policies are critical to the process of making significant
judgments and estimates in the preparation of our consolidated 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.
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 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).
The
Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of FASB
ASC 505, Equity–based Payments to Non-Employees (“ASC 505”). Measurement of share-based
payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or
services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at
the earlier of performance commitment date or performance completion date.
Results
of Operations – For the Years Ended December 31, 2020 and 2019
Revenues
Revenues
for the year ended December 31, 2020, was $0 compared to $126,027 for the year ended December 31, 2019. Revenues in 2019 was entirely
related to work performed in connection with grants received.
Research
and Development Expenses
Research
and development expenses increased by $540,704 or 97%, to $1,095,405 for the twelve months ended December 31, 2020, from $554,701
for the twelve months ended December 31, 2019. The increase was primarily due to compensation through issuance of stock options
to the officers and research and development companies for their services rendered during the year and to the purchase of intellectual
property.
General
and Administrative Expenses
General
and administrative expenses increased by $1,477,880 or 78%, to $3,378,323 for the twelve months ended December 31, 2020, from
$1,900,443 for the twelve months ended December 31, 2019. This increase was primarily due to an increase in stock-based compensation
issued to employees and consultants.
Results
of Operations – For the Three Month Periods Ended March 31, 2021 and 2020
Revenues
Revenues
for the three months ended March 31, 2021, was $32,000 compared to $0 for the three months ended March 31, 2020. Our increase
in revenue was the result of a grant received during the quarter.
Research
and Development Expenses
Research
and development expenses increased by $108,921 or 552%, to $128,648 for the three months ended March 31, 2021, from $19,727 for
the three months ended March 31, 2020. The increase was primarily due to compensation
through issuance of stock options to the officers and research and development companies for their services rendered during the
three months ended March 31, 2021.
General
and Administrative Expenses
General
and administrative expenses increased by $623,082 or 171%, to $921,189 for the three months ended March 31, 2021, from $364,107
for the three months ended March 31, 2020. This increase was primarily due to an increase in stock based compensation issued to
employees and consultants.
Liquidity
and Capital Resources
Since
our inception in 2010, 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 December 31, 2020, our principal sources of liquidity were our cash and cash equivalents, which totaled $21,874. Our working
capital deficit was $2,362,404 at December 31, 2020. On March 30, 2021, the report of our independent registered public accounting
firm on our December 31, 2020 audited financial statements includes an explanatory paragraph referring to our ability to continue
as a going concern.
As
of March 31, 2021, our principal sources of liquidity were our cash and cash equivalents, which totaled $323,190. Our working
capital deficit was $2,023,236 as of March 31, 2021.
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, 2021, and year ended December 31, 2020, we received net proceeds of $0 and $522,150, respectively,
from the sale of convertible notes and promissory notes.
For
the three months ended March 31, 2021, and year ended December 31, 2020, we received net proceeds of $757,320 and $0, respectively,
from the sale of shares of our common stock.
Debt
We
had the following schedule of debt as of March 31, 2021 and December 31, 2020:
|
|
|
March
31,
2021
|
|
December
31,
2020
|
|
Outstanding
Debt Obligations:
|
|
|
|
|
|
|
|
|
|
Loan
payable
|
|
$
|
950,000
|
|
|
$
|
950,000
|
|
|
Loan
payable - related party
|
|
|
42,092
|
|
|
|
42,092
|
|
|
Convertible
notes payable
|
|
|
509,687
|
|
|
|
574,500
|
|
|
Convertible
notes payable – related party
|
|
|
150,000
|
|
|
|
70,000
|
|
|
Capital
lease obligations
|
|
|
42,276
|
|
|
|
27,764
|
|
|
Total
All Debt Obligations
|
|
$
|
1,694,055
|
|
|
$
|
1,664,356
|
|
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 Phase 1 clinical trials for KLS-13019 for
patients with chemotherapy induced peripheral neuropathy. We anticipate, based on current estimates, that costs associated Phase
1 clinical trials for KLS-13019 will be approximately $2.75 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 2 clinical trial for KLS-13019 for patients with chemotherapy induced peripheral neuropathy;
commencing a Phase 1 clinical trial for KLS-13019 for patients suffering from the effects of mild traumatic brain injury; and
commencing a Phase 1 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.
Cash
Flows
The
following table summarizes our cash flows from operating, investing and financing activities for the years ended December 31,
2020, and 2019.
|
|
|
Years Ended
December 31,
|
|
|
|
2020
|
|
2019
|
|
Statement of Cash Flows Data:
|
|
|
|
|
|
Total net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(944,198
|
)
|
|
$
|
(1,894,085
|
)
|
|
Investing activities
|
|
|
—
|
|
|
|
1,567,218
|
|
|
Financing activities
|
|
|
844,617
|
|
|
|
141,191
|
|
|
Decrease in cash
|
|
$
|
(99,581
|
)
|
|
$
|
(185,676
|
)
|
The
following table summarizes our cash flows from operating, investing and financing activities for the three months ended March
31, 2021, and 2020.
|
|
|
Three Months Ended
March 31,
|
|
|
|
2021
|
|
2020
|
|
Statement of Cash Flows Data:
|
|
|
|
|
|
Total net cash provided by (used in):
|
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
(445,879
|
)
|
|
$
|
(349,072
|
)
|
|
Investing activities
|
|
|
(8,100
|
)
|
|
|
—
|
|
|
Financing activities
|
|
|
755,295
|
|
|
|
342,199
|
|
|
Decrease in cash
|
|
$
|
301,316
|
|
|
$
|
(6,873
|
)
|
Operating
Activities
Net
cash used in operating activities for the year ended December 31, 2020 was $(944,198), including $2,990,990 of net non-cash expenses
and a $602,087 net change in operating assets and liabilities. The net noncash expenses were predominantly related to the stock-based
compensation of $1,722,600, non-cash interest expense of $432,170, amortization of debt discount of $376,661 and change in fair
value of derivative liabilities of $(752,495). The change in operating assets and liabilities was primarily due to a $338,145
increase in accounts payable and accrued expenses, a $136,033 increase in payroll and related liabilities and a $127,909 increase
in due to related party and prepaid expenses.
Net
cash used in operating activities for the year ended December 31, 2019 was $(1,894,045), including $1,337,776 of net non-cash
expenses and a $219,004 net change in operating assets and liabilities. The net noncash expenses were predominantly related to
the net gains and losses on marketable security of $942,982. The change in operating assets and liabilities was primarily due
to a $99,291 of other receivables and a $131,572 in accounts payable and accrued expenses.
Net
cash used in operating activities for the three months ended March 31, 2021 was $(445,879), including $826,092 of net non-cash
expenses and a $56,603 net change in operating assets and liabilities. The net noncash expenses were predominantly related to
the stock based compensation and issuance of common stock shares of $611,244, amortization of debt discount of $100,187 and change
in fair value of derivative liabilities of $110,216. The change in operating assets and liabilities was due to a $114,302 decrease
in accounts payable and accrued expenses, a $74,748 increase in payroll and related liabilities, a $123,000 increase in prepaid
expenses and a $26,843 decrease in due to related party and prepaid expenses.
Net
cash used in operating activities for the three months ended March 31, 2020 was $349,072, including $93,418 of net non-cash expenses
and a $52,178 net change in operating assets and liabilities. The net noncash expenses were predominantly related to the non-cash
interest expense of $149,604, amortization of debt discount of $44,109 and change in fair value of derivative liabilities of $291,165.
The change in operating assets and liabilities was primarily due to a $5,036 decrease in accounts payable and accrued expenses,
a $30,302 increase in payroll and related liabilities and a $23,912 increase in due to related party.
Investing
Activities
There
were no investing activities for the year ended December 31, 2020.
Net
cash provided by investing activities for the year ended December 31, 2019 was $1,567,218. Cash provided by investing activities
from the cash received from the sale of marketable securities was $1,636,658 for the year ended December 31, 2019. Cash used for
purchase of equipment was $41,950 and cash used for the purchase of investment was $27,490 for the year ended December 31, 2019.
Net
cash used in investing activities for the three months ended March 31, 2021 was $8,100 compared to $0 for the year ended December
31, 2020. This increase was due to the purchase of equipment in 2021.
Financing
Activities
For
the year ended December 31, 2020, cash provided by financing activities was $844,617 compared to $141,191 for the year ended December
31, 2019. This was due to a significant increase of proceeds from convertible notes payable and notes payable in 2020 from 2019.
For
the three months ended March 31, 2021, cash provided by financing activities was $755,295 compared to $342,199 for the three months
ended March 31, 2020. This increase was due to a significant increase of proceeds from the sale of common stock in 2021.
Inflation
We
have not been affected materially by inflation during the periods presented, and no material effect is expected in the near future.
Known
Trends or Uncertainties
We
have seen some consolidation in our industry during economic downturns. These consolidations have not had a negative effect on
us to date; however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact
our future revenues and earnings, if any.
As
discussed in this prospectus, the world has been affected due to the COVID-19 pandemic. Until the pandemic has passed, there remains
uncertainty as to the effect of COVID-19 on our business in both the short and long-term.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements, except for operating leases, or relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance or special purpose entities.
Recent
Accounting Pronouncements
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” to improve information on credit
losses for financial assets and net investment in leases that are not accounted for at fair value through net income. ASU 2016-13
replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses. In April 2019
and May 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit
Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” and ASU No. 2019-05, “Financial
Instruments-Credit Losses (Topic 326): Targeted Transition Relief” which provided additional implementation guidance
on the previously issued ASU. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments - Credit Loss (Topic
326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” which defers the effective date for public filers that
are considered small reporting companies (“SRC”) as defined by the Securities and Exchange Commission to fiscal years
beginning after December 15, 2022, including interim periods within those fiscal years. Since the Company is an SRC, implementation
is not needed until January 1, 2023. The Company will continue to evaluate the effect of adopting ASU 2016-13 will have on the
Company’s condensed consolidated financial statements.
BUSINESS
Our
Business
We
are a biopharmaceutical company focused on discovering, developing and commercializing novel therapeutics from our proprietary
synthetic cannabinoid derivatives platform potentially useful for a broad range of inflammatory and neuropathic pain related diseases.
In our eleven (11) years of operations, dating back to August 2010 under the name Kannalife Sciences, Inc. we have been principally
involved in the research and development of new chemical entities (“NCEs”) such as KLS-13019; KLS-13022 (“linoneyldihydroxybenzyl
ethoxycarbonyl azetidine” or “LEA”); its related molecules; and synthetic cannabidiol (“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 (“API”) contract manufacturing,
formulation; and contract bulk drug manufacturing. All of the operations of the Company to date have been in the pre-clinical
stage of drug discovery.
Our
early research and development efforts began under an exclusive license with National Institutes of Health – Office of Technology
Transfer (“NIH-OTT”) for the use of the U.S. Government Patent 6,630,507 – “Cannabinoids as Antioxidants
and Neuroprotectants” (the “‘507 Patent”). Through the use of the ‘507 Patent, we centered our initial
research into the use of CBD for use in a variety of neurodegenerative and oxidative stress related diseases.
Our
core businesses are comprised of the following:
|
•
|
|
A
drug development company focused on the research and development (R&D) of non-opioid based synthetic and chemical-medical
products from:
|
|
|
o
|
naturally
recurring sources, including but not limited to cannabis, hemp, and other similar species of plantae;
|
|
|
o
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semi-synthetic
sources; and
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o
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synthetic
and bio-synthetic sources.
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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, CBD, and cannabidiol-like molecules.
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Topical
skincare pre-clinical program designed to some of our patented, proprietary cannabidiol-derived 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.
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Cannabinoids
are a class of molecules derived from Cannabis plants. The two primary cannabinoids contained in Cannabis are CBD and D9-tetrahydrocannabinol,
or 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. In addition to KLS-13019 and KLS-13023 potentially offering first-line therapies to patients
suffering from chemotherapy induced peripheral neuropathy and mild traumatic brain injury, respectively.
CBD
is a naturally occurring cannabinoid constituent of cannabis. It was discovered in 1940 and is known to exhibit neuroprotective
properties in many experimental systems. However, our early research and development efforts revealed that there could be obstacles
for CBD as a drug. The FDA approval of EpidiolexÒ, a CBD based drug manufactured by GW Pharmaceuticals Ltd. for the treatment
of Dravet’s Syndrome and Lennox-Gastaut Syndrome, has indicated that there are certain safety issues. We also believe that
the development of CBD as a drug has been confounded by the following: (i) low potency; (ii) a large number of molecular targets;
(iii) marginal pharmacokinetic properties; and (iv) designation as a Schedule 1 controlled substance under the Controlled Substances
Act.
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 National Institutes of Health – National Institute on Drug Abuse (“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.
Our
current focus is centered around advancing KLS-13019 as a novel, non-opioid solution for the treatment of chronic and neuropathic
pain.
Our
present work involves comparing the properties of CBD with our patented novel cannabidiol derived molecule, KLS-13019, that has
structural similarities to CBD. The design strategy for KLS-13019 was to increase hydrophilicity while optimizing neuroprotective
potency against oxidative stress toxicity relevant to oxidative stress related diseases and neuro-inflammatory disorders. In early
pre-clinical studies, the responses of CBD and KLS-13019 were compared in dissociated rat hippocampal cultures in a pre-clinical
model for OHE and also CIPN.
HE
is a neuropsychiatric disorder that includes learning deficits and impairment of long-term memory. OHE it is a sub-set of HE.
HE is caused by accumulation of toxic substances in the bloodstream that are normally removed by the liver as a result of liver
failure. If left unchecked, HE can progress to hepatic coma (also referred to as coma hepaticum) and ultimately death (Cordoba,
2011). The pathogenesis of HE includes damage to the prelimbic cortex, striatum and the hippocampus (Aria et al., 2013). The hippocampus,
is a major component of the brains of humans and other vertebrates. The hippocampus belongs to the limbic system and plays important
roles in the consolidation of information from short-term memory to long-term memory, and in spatial memory that enables navigation.
It
has been previously demonstrated that impaired liver function and liver disease is associated with the production of free radical
and oxidative stress (Bailey and Cunningham, 1998). The accumulation of these free radicals and oxidative stress contribute to
cognitive impairment, learning deficits, memory impairment, as well as damage and death of neuronal tissue. Cognitive impairment
is when a person has trouble remembering, learning new things, concentrating, or making decisions that affect their everyday life.
Cognitive impairment resulting from H ranges from mild to severe. There is a long felt need for neuroprotective agents that are
both disease-modifying and effective in treating patients that are experiencing HE. Onset of HE symptoms may be gradual or sudden. Other
symptoms may include movement problems, changes in mood, or changes in personality. In the advanced stages, HE can result in a
coma.
CIPN,
is a progressive, enduring and often irreversible condition featuring pain, numbness, tingling and sensitivity to cold in the
hands and free (sometimes progressing to the arms and legs) that affects between 30% and 40% of patients undergoing chemotherapy.
CIPN often causes termination of chemotherapy in cancer patients and presents a two-fold problem, both in the ongoing chemotherapy
treatment regimen and the abundant use of opioids and gabapentinoids as the most widely used products to treat CIPN.
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). The studies and science referenced in these articles were performed by
Advanced Neural Dynamics (“AND”), a third party provider of preclinical pharmacology services and Iteramed (“Iteramed”),
a third party provider of medicinal chemistry consulting and synthesis. Both AND and Iteramed are operated by Douglas Brenneman,
Ph.D and William A. Kinney Ph.D, respectively. Both Mr. Brenneman and Mr. Kinney are shareholders of the Company, co-inventors
in our intellectual property underlying U.S. Patents 9,611,213 and 10,004,722, and with respect to Mr. Kinney, is our Chief Scientific
Officer. Mr. Brenneman is a member of our scientific advisory board.
In
the ACS abstract and paper, Notably, KLS-13019 was found to be 50-fold more potent and >400-fold safer than CBD and exhibited
an in vitro profile consistent with improved oral bioavailability. In the JOMN abstract and paper, the protective responses of
CBD and KLS-13019 were compared in dissociated rat hippocampal cultures co-treated with toxic levels of ethanol and ammonium acetate.
This comparison revealed that KLS-13019 was 31-fold more potent than CBD in preventing neuronal toxicity from the combined toxin
treatment, while both compounds exhibited protective efficacy back to control values. While results of the Company’s preclinical
studies on KLS-13019 have shown preclinical efficacy via in vitro studies in CIPN and HE, KLS-13019 will require
human clinical trials to determine both safety and efficacy and such matters are subject to clinical trial endpoints and FDA review,
with ultimate approval coming at the end of a successful human clinical trial study and new drug application (“NDA”).
Our
lead target drug candidate, KLS-13019, is part of an estate of new chemical entities (“NCEs”) underlying U.S. Patent
9,611,213 titled “Functionalized 1,3 Benzene-diols and their Method of Use for the Treatment of Hepatic Encephalopathy.”
This patent is part of a divisional patent application by the Company to the United States Patent and Trademark Office (“USPTO”)
whereby we sought claims for composition of matter, covered in Pat. 9,611,213, and separate claims for method for treatment, covered
by U.S. Patent 10,004,722 titled “Method for Treating Hepatic Encephalopathy or a Disease Associated with Free Radical Mediate
Stress and Oxidative Stress with Novel Functionalized 1,3 Benzene-diols.”
KLS-13019
and its related molecules under the aforementioned patents describe novel functionalized 1,3-benzenediols (“Cannabidiol
Derived Molecules”) and methods that may be useful and have potential for the treatment of HE and related conditions. The
present invention further describes (i) a novel chemotype that may be useful and have potential for the treatment of diseases
associated with HE, and (ii) a novel chemotype that may be useful and have potential as neuroprotective agents. The Cannabidiol
Derived Molecules under the present invention may be useful and have potential for treating and preventing diseases associated
with free radical mediated stress and oxidative stress including, for example, HE, Parkinson’s disease, Alzheimer’s,
Huntington’s disease, traumatic head injury, stroke, epilepsy, neuropathic pain, CTE, Post Cardiac Arrest Hypoxic Ischemic
Encephalopathy, and Epileptic Encephalopathy.
We
intend to study KLS-13019 in patients with chemotherapy induced neuropathic pain. 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. We intend to study KLS-13023 in patients with mild traumatic brain
injury. In addition, we expect that KLS-13023 will be classified by the FDA as an NCE. 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 U.S. or Australia, subject
to applicable regulatory approval. We plan to conduct our Phase 1 clinical trials for KLS-13023 in either the U.S. or Australia,
subject to applicable regulatory approval. We plan to submit New Drug Applications (“NDAs”) for KLS-13019 and KLS-13023
to the FDA upon completion of Phase 3 clinical trials, regardless of where the Company conducts Phase 1 and Phase 2 clinical trials.
We expect to initiate clinical trials for KLS-13019 and KLS-13023 in the first half of 2022.
We
plan to conduct our Phase 1, and possibly Phase 2, clinical trials for KLS-13019 in the U.S. or Australia, subject to applicable
regulatory approval, and do not expect at this time to file an investigational new drug application, or IND, with the U.S. Food
and Drug Administration, or the FDA, prior to the commencement of those clinical trials. We must file an IND with the FDA and
receive approval from the U.S. Drug Enforcement Agency, or DEA, prior to commencement of any clinical trials in the United States.
In
preclinical studies performed pursuant to a small business technology transfers (“STTR”) agreement between us, and
Temple University, funded by the National Institutes of Health – National Institute on Drug Abuse (“NIH-NIDA”),
our research, the subject of two peer reviewed scientific publications in the Journal of Molecular Neuroscience, described how
KLS-13019, was superior to CBD and morphine in the potential to prevent and reverse neuropathic pain caused by paclitaxel, a chemotherapeutic
agent used to treat breast, ovarian and non-small cell lung cancer. (See: Business – Preclinical Studies for more information).
Upon
completion of all requisite preclinical studies, we expect to open an Investigational New Drug Application, or IND, to pursue
a clinical development program with either the U.S. Food and Drug Administration (“FDA”) in the U.S. or the Therapeutic
Goods Administration (“TGA”), the regulatory body for therapeutic goods (including medicines, medical devices,
gene technology, and blood products) in Australia.
In
mid 2019, we began screening and conducting preliminary research and development of some of our patented, proprietary cannabidiol-derived
NCEs for use as active pharmaceutical ingredients (APIs) in topical solutions, ointments, and creams for various skin disorders
such as eczema, psoriasis, radiation dermatitis and excessive UVB radiation.
These
disorders generally lead to symptoms including neuropathies, inflammation and itch. The Company believes that successful development
of its topical APIs can be useful as anti-pruritics, also known as anti-itch drugs and medications that inhibit the itching often
associated with a variety of disorders and diseases.
We
are considering commercialization routes that include, but are not limited to, filing an FDA Monograph and/or pursing a path to
the marketplace through International Nomenclature of Cosmetic Ingredients (“INCI”) certification and registration
with the Personal Care Products Council (“PCPC”).
In
preclinical testing, KLS-13022, a molecule covered under Pat. 9,611,213 was screened for neuroprotection and may have the potential
mechanism of action for reducing inflammation, neuropathic pain and itch. This molecule indicated that it is 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.
To
date there has been only one cannabidiol based medicament, Epidiolex®, approved for use in humans by the FDA. The drug,
Epidiolex®, is used to treat seizures due to certain medical conditions (such as Lennox-Gastaut syndrome
and Dravet syndrome). It is not known how this medication works for these seizures. CBD belongs to a class of drugs
known as cannabinoids. Additionally, the FDA’s Office of Orphan Products Development (“OOPD”) has designated
cannabidiol twenty six times since 2013 for a multitude of diseases ranging from rare forms of epilepsy to prevention of reperfusion
injury due to organ transplantation to glioblastoma multiforme to autoimmune hepatitis. While our primary indications of OHE and
CIPN have not, heretofore, been targeted by CBD-based or CBD-derived drugs and cleared by the FDA or other foreign regulatory
agency, neither have the aforementioned twenty six orphan designated indications targeted by CBD.
OTC
Cosmetic Skin Care – KLS-13022
Since
mid 2019, the Company has been screening and conducting preliminary research and development of some of its patented, proprietary
cannabidiol-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. (see: Business – Neuropathix Intellectual
Properties)
In
preclinical testing, certain molecules under Patent 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 cannabidiol,
also deemed a neuroprotectant with potential anti-inflammatory properties. A molecule that is potentially more water soluble than
cannabidiol in this regard may be good candidate(s) for use in topical applications.
The
Company has completed the following relating to KLS-13022:
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Preclinical
screening for consumer OTC cosmetic use under CFR 21.
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Application
to International Nomenclature of Cosmetic Ingredients (INCI) completed to receive a compound nomenclature for KLS-13022 - Limonenyldihydroxybenzyl
Ethoxycarbonyl Azetidine (LEA).
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Received
a registered trademark from the U.S. Patent and Trademark Office (“USPTO”) for Atopidine®, to be used
as a branded product as a relief cream, containing LEA, to treat inflammatory disorders like eczema, psoriasis, radiation dermatitis
and excessive UVB radiation (post sun burn).
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Based
on preclinical testing of LEA versus CBD (cannabidiol) in cultured human epidermal keratinocytes:
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LEA provided
better anti-inflammatory activity compared to CBD for TNFa, IL-6 and significantly more potent that CBD for IL-1b inhibition in
UVB irradiation induced inflammation
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LEA decreased
CXCL5 levels by 100% after UVB irradiation with IC50 of 0.05 mM. (CXCL5 is a small cytokine belonging to the chemokine family
known as epithelial-derived neutrophil-activating peptide 78 (ENA-78). It is produced following the stimulation of cells with
the inflammatory cytokines TNFa and IL-1b.)
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LEA decreases
levels of four (4) inflammatory mediators at concentrations > 65 times less than toxic levels.
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LEA is an
antioxidant that does not exhibit cellular irritation and is locally restricted in its action (antioxidant activity of EC50 at
25 mM).
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The
Company has completed formulation of a topical relief cream for use as an OTC cosmetic skin care product to be marketed under
the trade name of Atopidine®.
Opioid
Crisis in America
In
2019, nearly 50,000 people in the United States died from opioid-involved overdoses (CDC/NCHS, National Vital
Statistics System, Mortality 2019). The misuse of and addiction to opioids—including prescription pain relievers, heroin,
and synthetic opioids such as fentanyl – is a serious national crisis that affects public health as well
as social and economic welfare. The Centers for Disease Control and Prevention estimates that the total economic burden of
prescription opioid misuse alone in the United States is $78.5 billion a year, including the costs of healthcare, lost productivity,
addiction treatment, and criminal justice involvement. (Med Care 2016; 54(10).
Since
February 2020, the Company’s lead compound, KLS-13019 has been in the preclinical screening program for pain (PSPP) at the
National Institutes of Health – National Institute of Neurological Disorders and Stroke (NIH-NINDS). This program is part
of the NIH HEAL (Helping to End Addiction Long-term) Initiative. With NIH-HEAL support, NINDS has developed the PSPP program to
facilitate the identification of potential non-addictive treatments (small molecules, biologics, devices, or natural products)
for acute and chronic pain conditions.
More
than 25 million Americans live with daily chronic pain and lack effective and safe non-opioid options for pain management. Research
offered by the PSPP will be a key step in transitioning HEAL preclinical programs into clinical programs, directly aligned with
the HEAL Initiative goal of accelerating the discovery and pre-clinical development of non-addictive pain treatments (NINDS –
Preclinical Screening Platform for Pain – ninds.nih.gov).
The
Company’s lead compound, KLS-13019, has already gone through Tier 1 evaluation under the PSPP which, among other things,
assesses targets and pharmacokinetics (PK) of KLS-13019 – compared against morphine and diazepam. Certain results from the
Tier 1 screening report under the PSPP indicate that KLS-13019 has a low abuse potential and acceptable PK to move to Tier 2 studies
for animal model assessment in pain and guardian behavior; wound healing and ability to recover; and Irwin testing for CNS toxicity.
Additionally,
after making several critical changes to the original application, in January 2021, the Company resubmitted its Phase 2 SBIR grant
application with NIH-NINDS. The re-resubmission of its original study grant application included new data on a novel inflammatory
sentinel and a revised budget, boosting the grant request to approximately $2.9 million.
On
March 10, 2021, the Company’s grant application was reviewed by the Scientific Review Group in the Study Section at NIH-NINDS
and received an impact score of 20 with a resume and summary of discussion that states, “This excellent STTR Phase II application
attempts to further establish a proprietary cannabidiol (CBD)-derived compound KLS-13019 as an effective neuroprotectant against
chemotherapy-induced peripheral neuropathy (CIPN)-associated neuropathic pain.” The summary concluded by stating, “Overall,
this objective is believed to be highly significant and promising.” According to NIH, “Generally
speaking, impact/priority scores of 10 to 30 are most likely to be funded; scores between 31 and 45 might be funded; scores greater
than 46 are rarely funded. Before 2009, NIH used a different score system, with final scores from 100 to 500, where 100 was best.”
Corporate
Strengths and Weaknesses
We
believe that we offer the following key distinguishing characteristics:
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We
believe we are the first commercial drug discovery company in the cannabinoid therapeutics
space to successfully synthesize CBD derived new chemical entities and pre-clinically
test lead NCEs for potential treatment of oxidative stress related diseases, including
OHE and CIPN.
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We
were the only commercial drug discovery company in the cannabinoid therapeutics space
to license the ‘507 Patent, prior to its expiration, from NIH on two separate occasions.
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We
have completed pharmacokinetic and pharmacodynamic pre-clinical studies with high purity
scale, pharmaceutical grade CBD and KLS-13019 for potential treatment of oxidative stress
related disease – OHE and CIPN.
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We
anticipate commencing a Phase 1 trial in CIPN sometime in the 1st or
2nd quarter of 2022.
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We
anticipate commencing a Phase 1 trial in OHE sometime in the 3rd or 4th quarter
of 2022.
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We
anticipate commencing a Phase 1 trial in Mild Traumatic Brain Injury in the 1st or
2nd quarter of 2023.
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We
have a firm understanding of the mechanism of action of CBD and KLS-13019 in certain
oxidative stress related disorders.
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We
believe we have a strong next generation intellectual property estate on cannabidiol
derived NCEs. On this basis, we believe we can expand the approved indications KLS-13019
and develop additional cannabinoid therapeutic agents to add to our IP portfolio.
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We
believe that our pre-clinical drug development program points to a significant opportunity
in cancer pain, a large market.
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We
believe that our pre-clinical drug development program points to a significant opportunity
in opioid replacement / reduction market
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We
have not moved beyond pre-clinical studies of our drug candidates to date, and there can be no assurances that we will do so in
the near future, if ever. While we believe that we are well positioned to be competitive in advancing non-opioid solutions for
chronic and neuropathic pain, as well as the cannabinoid like therapeutics space, we also believe that we will face significant
challenges in successfully completing one or more clinical trials. In addition, there is a competitive landscape that exists in
the market for our target indications of OHE and CIPN. The competitive landscape is challenging. Competition in the OHE and CIPN
spaces is well established, and many companies have significantly greater resources than we do, some of which are viewed as leaders
in the current standard of care for these diseases.
The
current standard of care for patients suffering with OHE is 550mg of XifaxanÒ, originally an antibiotic useful in treating
traveler’s diarrhea and irritable bowel syndrome. Its exact mechanism of action is not known; however, it is theorized that
XifaxanÒ clinical activity may be attributed to effects on metabolic function of gut microbiota, rather than a change
in the relative bacterial abundance. Currently, there is no drug in the market for OHE that is being used to treat the toxic effects
on the hippocampus, the cognitive and behavioral dysfunction associated with OHE, and the action of neuroprotection from ammonia
and ethanol toxicity.
Given
the competitive landscape in OHE, we believe we can participate in the OHE market with primary and adjunctive therapeutics currently
under pre-clinical development, and potentially obtain orphan drug designation for one or more of our target therapeutic agents.
With
respect to competitive landscape for CIPN, nearly a dozen agents have been studied in randomized controlled trials for the
treatment of CIPN, but there has been limited success. The characteristics and results of these studies are summarized in the
study and abstract “Management of Chemotherapy Induced Peripheral Neuropathy” (Physician’s Education Resource
LLC, Meghna S. Trivedi, MD; Dawn L. Hershman, MD, MS; Katherine D. Crew, MD, MS). Clinical trials of the antiepileptic agents
gabapentin and lamotrigine and the antidepressants nortriptyline and amitriptyline have all been negative.
Additionally,
there have been several small placebo-controlled trials which have shown that intravenous administration of glutathione with platinum-based
chemotherapy regimens can decrease the incidence of neurotoxicity without diminishing the effect of chemotherapy. A North
Central Cancer Treatment Group / Alliance trial conducted in 2014 studied the use of glutathione with carboplatin and paclitaxel
for treatment of CIPN, and found no improvement in neurotoxicity symptoms, suggesting that glutathione may not help in taxane-induced
CIPN.
Furthermore,
the continuous use of opiates in the current standard of care to treat CIPN have resulted in mixed results, addiction problems
and dose tolerance problems.
We
believe that, while the current standard of care is well positioned in the market, there is an unmet need for the treatment of
CIPN in the reduction of use of opiates. We believe that this presents us with an opportunity to participate in the market with
a novel therapeutic agent to treat CIPN.
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.
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Product
Candidate
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Target
Indication
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Delivery
Method
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Current
Development Status
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Expected
Next Steps
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KLS-13019
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Chemotherapy
Induced
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Oral
Gel Capsule
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Preclinical
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2Q22:
Initiate Phase 1
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Peripheral
Neuropathy
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Mild
Traumatic Brain Injury
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Oral
Gel Capsule
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Preclinical
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1Q23:
Initiate Phase 1
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KLS-13023
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Overt
Hepatic Encephalopathy
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Oral
Gel Capsule
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Preclinical
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4Q22:
Initiate Phase 1
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Mild
Traumatic Brain Injury
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Oral
Gel Capsule
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Preclinical
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1Q23:
Initiate Phase 1
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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/or pursing a path to the marketplace through INCI certification
and registration with the PCPC. 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 1 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 first quarter 2022. We plan on entering into clinical trials sometime in the second
quarter 2022.
Additionally,
we believe that we will be able to raise sufficient capital to proceed forth with a Phase 1 human safety trial for the treatment
of Overt Hepatic Encephalopathy. All preclinical work in this indication, including animal toxicity studies, are expected to be
completed before the end of the third quarter 2022. We plan on entering into clinical trials sometime in the fourth quarter
2022.
We
intend to seek additional capital to proceed with our business plan regarding additional drug pipeline opportunities.
We
believe that our current relationships with Purisys, LLC (formerly known as Noramco) (“Purisys”), a supplier of bulk
active pharmaceutical ingredients (APIs), specifically pharmaceutical grade CBD, and Catalent Pharma Solutions (“Catalent”),
a manufacturer of formulated and packaged pharmaceuticals, will enable us to meet our objectives in the production of target drug
candidates that can be used in clinical trials and, beyond successful clinical trials, meet patient demand in commercial sales
for each of our target disease indications.
We
have estimated that the cost of a Phase 1 trial, limited to 80 patients in CINP and 80 patients in the OHE, indication will cost
approximately $1,300,000 and $1,600,000, respectively. As part of our plans to initiate Phase 1 clinical trials in the U.S. or
Australia. The benefit of commencing Phase 1 clinical trials in Australia is that the Australian government has provided incentives
that provide for research and development rebates.
Research
& Development tax incentives offered by the government actively encourage overseas sponsors to conduct research in Australia.
These incentives have also made it attractive for global companies to access Australian research facilities, as holding the intellectual
property within Australia is not mandatory. Sponsors wishing to be eligible for this benefit can either establish an affiliate
company in Australia (which may take from 1 week to 1 month) or choose a Contract Research Organization (“CRO”) to
act on their behalf.
Controlled
Substances Laws and Regulations
Our
drug candidates contain controlled substances as defined in the Controlled Substances Act (“CSA”). Controlled substances
that are pharmaceutical products are subject to a high degree of regulation under the CSA, which establishes, among other things,
certain registration, manufacturing quotas, security, recordkeeping, reporting, import, export and other requirements administered
by the DEA.
Despite
recent approvals by the FDA and DEA for a newly approved medication that contains CBD, the scheduling of these substances, many
of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully market KLS-13019
or KLS-13023. Moreover, because our business is almost entirely dependent upon these two product candidates, any such setback
in our pursuit of regulatory approval would have a material adverse effect on our business and prospects. See our full description
of the impact-controlled substances laws and regulations have on our business in the “Risk Factors” section of this
prospectus.
KLS-13019
does not contain CBD and is a new chemical entity that would not fall under the CSA or be deemed a Schedule 1 controlled substance.
A new chemical entity (“NCE”) is a molecule developed by the innovator company in the early drug discovery stage,
which, after undergoing clinical trials, could translate into a drug that could be a treatment for some disease. Under the Food
and Drug Administration Amendments Act of 2007, all NCE’s must first be reviewed by an advisory committee before the FDA
can approve these products.
KLS-13023
is a formulation that does contain CBD. At present, CBD is deemed a Schedule 1 controlled substance by the U.S. Drug Enforcement
Agency (“DEA”) under the CSA. Like the drug molecule EpidiolexÒ, which was recently approved by the FDA for
marketing and sale for use in treating Dravet’s Syndrome and Lennox-Gasteau Syndrome (forms of child epilepsy), KLS-13023
would need to follow the guidance set forth by the CSA, complete a successful human clinical trial, and apply for rescheduling,
as was the case with EpidiolexÒ, now a Schedule 5 drug, before it can be sold and marketed to the public.
On
January 14, 2019, we received written notice from the DEA and Chemical Evaluation Section, as follows: “Please be advised
that your material meets the definition of ‘Hemp’ and is not regulated under the CSA, as long as it consists of high
purity Cannabidiol (CBD) that contains approximately 0.1% delta-9- THC. (However, if it contains more than 0.3% delta-9 THC, it
is considered ‘Marihuana’ and would be in Schedule 1 of the CSA).” While this notice is an official notice from
the DEA regarding the scheduling of high purity CBD, we will continue to abide by the CSA in all respects with regards to its
treatment and handling of CBD.
The
active pharmaceutical ingredient (“API”) found in KLS-13023 is highly purified synthetic CBD produced by Purisys.
Purisys has been manufacturing cannabidiol since 2016 (DMF33223). Today, through our partnership with Purisys, we have the ability
to produce on the largest commercial scale. Purisys’ ultra-high purity CBD (“Purisys CBD”) is attractive for
drug development projects and falls significantly below the 0.3% THC limits set in the 2018 Farm Bill for use in consumer products. Purisys’
patent-protected manufacturing process produces a consistently odorless, tasteless white powder highest-purity form of CBD that
exhibits:
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No heavy
metals (e.g. lead) from soil;
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No environmental
influences on quality such as rain, sunlight & soil nutrients;
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No plant
impurities to remove;
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No microbial
or mold proliferation; and
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No structural
(or stereo chemical) differences exist between an active cannabinoid ingredient manufactured by Purisys and those that are chemically
extracted and isolated from plants. They are, in effect, nature-identical.
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Purisys
currently has a drug master file (“DMF”) for its ultra-high purity CBD with the FDA. In November 2019, Purisys received
advise notice from the DEA that the Purisys CBD has been removed from Schedule 1 of the CSA.
U.S.
Food and Drug Administration (FDA)
The
FDA is responsible for advancing the public health by helping to speed innovations that make medicines safer and more effective
and by helping the public get the accurate, science-based information it needs to use medicines to maintain and improve public
health. In 2004, the FDA provided a guidance document for innovations, challenges, and solutions for new drug products that examine
the critical path needed to bring therapeutic products to completion, and how the FDA can collaborate in the process, from laboratory
to production to end use, to make medical breakthroughs available to those in need as quickly as possible.
FDA
Approval – What It Means
FDA
approval of a drug means that data on the drug’s effects have been reviewed by the Center for Drug Evaluation and Research,
and the drug is determined to provide benefits that outweigh its known and potential risks for the intended population. The drug
approval process takes place within a structured framework that includes:
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Analysis
of the target condition and available treatments—FDA reviewers analyze the condition or illness for which the drug is
intended and evaluate the current treatment landscape, which provide the context for weighing the drug’s risks and benefits.
For example, a drug intended to treat patients with a life-threatening disease for which no other therapy exists may be considered
to have benefits that outweigh the risks even if those risks would be considered unacceptable for a condition that is not life
threatening.
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Assessment
of benefits and risks from clinical data—FDA reviewers evaluate clinical benefit and risk information submitted by the
drug maker, taking into account any uncertainties that may result from imperfect or incomplete data. Generally, the agency expects
that the drug maker will submit results from two well-designed clinical trials, to be sure that the findings from the first trial
are not the result of chance or bias. In certain cases, especially if the disease is rare and multiple trials may not be feasible,
convincing evidence from one clinical trial may be enough. Evidence that the drug will benefit the target population should outweigh
any risks and uncertainties.
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Strategies
for managing risks—All drugs have risks. Risk management strategies include an FDA-approved drug label, which clearly
describes the drug’s benefits and risks, and how the risks can be detected and managed. Sometimes, more effort is needed
to manage risks. In these cases, a drug maker may need to implement a Risk Management and Mitigation Strategy (“REMS”).
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Although
many of the FDA’s risk-benefit assessments and decisions are straightforward, sometimes the benefits and risks are uncertain
and may be difficult to interpret or predict. The agency and the drug maker may reach different conclusions after analyzing the
same data, or there may be differences of opinion among members of the FDA’s review team. As a science-led organization,
the FDA uses the best scientific and technological information available to make decisions through a deliberative process.
Accelerated
Approval
In
some cases, the approval of a new drug is expedited. Accelerated Approval can be applied to promising therapies that treat a serious
or life-threatening condition and provide therapeutic benefit over available therapies. This approach allows for the approval
of a drug that demonstrates an effect on a “surrogate endpoint” that is reasonably likely to predict clinical benefit,
or on a clinical endpoint that occurs earlier but may not be as robust as the standard endpoint used for approval. This approval
pathway is especially useful when the drug is meant to treat a disease whose course is long, and an extended period of time is
needed to measure its effect. After the drug enters the market, the drug maker is required to conduct post-marketing clinical
trials to verify and describe the drug’s benefit. If further trials fail to verify the predicted clinical benefit, FDA may
withdraw approval.
Since
the Accelerated Approval pathway was established in 1992, many drugs that treat life-threatening diseases have successfully been
brought to market this way and have made a significant impact on disease course. For example, many antiretroviral drugs used to
treat HIV/AIDS entered the market via accelerated approval, and subsequently altered the treatment paradigm. A number of targeted
cancer-fighting drugs also have come onto the market through this pathway.
Drug
Development Designations
The
FDA also employs several approaches to encourage the development of certain drugs, especially drugs that may represent the first
available treatment for an illness, or ones that have a significant benefit over existing drugs. These approaches, or designations,
are meant to address specific needs, and a new drug application may receive more than one designation, if applicable. Each designation
helps ensure that therapies for serious conditions are made available to patients as soon as reviewers can conclude that their
benefits justify their risks.
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Fast
Track is a process designed to facilitate the development and advance the review of drugs that treat serious conditions,
and fill an unmet medical need, based on promising animal or human data. Fast tracking can get important new drugs to the patient
earlier. The drug company must request the Fast Track process.
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Breakthrough
Therapy designation expedites the development and review of drugs that are intended to treat a serious condition, and
preliminary clinical evidence indicates that the drug may demonstrate substantial improvement over available therapy. A drug with
Breakthrough Therapy designation is also eligible for the Fast Track process. The drug company must request a Breakthrough Therapy
designation.
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Priority
Review means that FDA aims to take action on an application within six months, compared to 10 months under standard review.
A Priority Review designation directs attention and resources to evaluate drugs that would significantly improve the treatment,
diagnosis, or prevention of serious conditions. More information about Priority Review is here.
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FDA
Human Clinical Trials
Phase
I studies assess the safety of a drug or device. This initial phase of testing, which can take several months to complete,
usually includes a small number of healthy volunteers (20 to 100), who are generally paid for participating in the study. The
study is designed to determine the effects of the drug or device on humans including how it is absorbed, metabolized, and excreted.
This phase also investigates the side effects that occur as dosage levels are increased. About 70% of experimental drugs pass
this phase of testing.
Phase
II studies test the efficacy of a drug or device. This second phase of testing can last from several months to two years,
and involves up to several hundred patients. Most Phase II studies are randomized trials where one group of patients receives
the experimental drug, while a second “control” group receives a standard treatment or placebo. Often these studies
are “blinded,” which means that neither the patients nor the researchers know who has received the experimental drug.
This allows investigators to provide the pharmaceutical company and the FDA with comparative information about the relative safety
and effectiveness of the new drug. Approximately one-third of experimental drugs successfully complete both Phase I and Phase
II studies.
Phase
III studies involve randomized and blind testing in several hundred to several thousand patients. This large-scale testing,
which can last several years, provides the pharmaceutical company and the FDA with a more thorough understanding of the effectiveness
of the drug or device, the benefits and the range of possible adverse reactions. Approximately 70% to 90% of drugs that enter
Phase III studies successfully complete this phase of testing. Once Phase III is complete, a pharmaceutical company can request
FDA approval for marketing the drug.
Phase
IV studies, often called Post Marketing Surveillance Trials, are conducted after a drug or device has been approved for consumer
sale. Pharmaceutical companies have several objectives at this stage: (1) to compare a drug with other drugs already in the market;
(2) to monitor a drug’s long-term effectiveness and impact on a patient’s quality of life; and (3) to determine the
cost-effectiveness of a drug therapy relative to other traditional and new therapies. Phase IV studies can result in a drug or
device being taken off the market or restrictions of use could be placed on the product depending on the findings in the study.
Therapeutic
Goods Administration (TGA) – Australia
Clinical
trials conducted in Australia are subject to various regulatory controls to ensure the safety of participants. The TGA regulates
the use of therapeutic goods supplied in clinical trials in Australia under the therapeutic goods legislation.
Clinical
trial sponsors must be aware of the requirements to import, export, manufacture and supply therapeutic goods in Australia. The
following avenues provide for the importation into and/or supply in Australia of ‘unapproved’ therapeutic goods for
use in a clinical trial:
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Clinical
Trial Notification (CTN) scheme; and
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Clinical
Trial Exemption (CTX) scheme.
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The
CTN Scheme is a notification process involving the following:
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The Australian
clinical trial sponsor must notify the TGA of the intent to sponsor a clinical trial involving an ‘unapproved’ therapeutic
good. This must take place before starting to use the goods. The notification form must be submitted online and accompanied by
the relevant fee.
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The TGA
may give the sponsor of the trial written notice to provide specified information relating to goods notified in the CTN form.
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The TGA
does not evaluate any data relating to the clinical trial at the time of submission. The Human Research Ethics Committee (“HREC”)
reviews the scientific validity of the trial design, the balance of risk versus harm of the therapeutic good, the ethical acceptability
of the trial process, and approves the trial protocol. The HREC is also responsible for monitoring the conduct of the trial.
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The institution
or organization at which the trial will be conducted, referred to as the ‘Approving Authority,’ gives the final approval
for the conduct of the trial at the site, having due regard to advice from the HREC.
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It is the
responsibility of the sponsor to ensure that all relevant approvals are in place before supplying the ‘unapproved’
therapeutic goods in the clinical trial.
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The
CTX Scheme is an approval process involving the following:
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A sponsor
submits an application to the TGA seeking approval to supply ‘unapproved’ therapeutic goods in a clinical trial. The
application must be accompanied by the relevant fee.
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The TGA
evaluates summary information about the product including relevant, but limited, scientific data (which may be preclinical and
early clinical data) prior to the start of a trial.
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The HREC
is responsible for considering the scientific and ethical issues of the proposed trial protocol.
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The sponsor
must notify us of each trial conducted using the unapproved therapeutic good(s) approved in the CTX application.
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Clinical
trials that do not involve ‘unapproved’ therapeutic goods are not subject to requirements of the CTN or CTX schemes.
It is the responsibility of the Australian clinical trial sponsor to determine whether a product is considered an ‘unapproved’
therapeutic good.
Clinical
trials that do not involve ‘unapproved’ therapeutic goods are not subject to requirements of the CTN or CTX schemes.
It is the responsibility of the Australian clinical trial sponsor to determine whether a product is considered an ‘unapproved’
therapeutic good.
In
Australia, in 2014, the Advisory Council on Medicines Scheduling recommended rescheduling CBD from a prohibited substance to being
a prescription medicine because, according to the Advisory Council on Medicines Scheduling, “there is a low risk of misuse
or abuse as cannabidiol does not possess psychoactive properties.” The TGA accepted this recommendation, and the decision
took effect in July 2015.
CBD
is one of the cannabinoids which may be extracted as a therapeutic good from cannabis. From June 1, 2015, CBD has been included
under Schedule 4 (S4) Prescription Only Medicine of the Poisons Standard when preparations for therapeutic use contain 2% or less
of other cannabinoids found in cannabis.
In
February 2016, the Australian Federal Government passed legislation that amended the Narcotic Drugs Act, allowing the supply of
suitable medicinal cannabis products for the management of painful and chronic conditions. This legislation does not relate to
the decriminalization of cannabis for general cultivation or recreational use and it does not include the provision of medicinal
grade herbal cannabis, but rather only covers processed, non-smokable medicinal grade products.
Much
of the detail remains unclear. For example, the legislation does not specify which products will be covered under the amendment,
and it does not specify which particular conditions or symptoms will be eligible for treatment with cannabis-based products. Before
products can be prescribed, they must be registered with the TGA or, in rare circumstances, receive special approval from the
TGA. The registration process requires evidence of testing and efficacy and it is therefore unlikely Australia will see a TGA
registered medicinal cannabis product that GPs can prescribe any time soon.
Whilst
there are currently no cannabis-based products that are lawfully produced in Australia, the medicinal use of pharmaceutical products
containing cannabinoids is not prohibited, as long as authorization for prescribing is granted from the Commonwealth Therapeutic
Goods Administration and at this point in time, NSW Health.
Neuropathix
Intellectual Properties
Neuropathix
PCT Patent – PCT/US2015/010827
On
January 13, 2014, we filed for a provisional patent with the USPTO for our “Novel Functionalized 1, 3-Benzene-diols and
Their Treatment of Hepatic Encephalopathy”, under application number 61/926,869.
On
January 9, 2015, we filed a non-provisional patent application Patent Cooperation Treaty (“PCT”) Application under
application number PCT/US2015/010827 titled, “Novel Functionalized 1,3-Benzene Diols and Their Method of Use for the Treatment
of Hepatic Encephalopathy” (the “PCT Patent”). Under the PCT Patent, the present invention describes novel functionalized
1,3-benzenediols (“Cannabidiol Derived Molecules”) and methods that may be useful and have potential for the treatment
of HE and related conditions. The present invention further describes a novel chemotype that may be useful and have potential
for the treatment of diseases associated with HE. The present invention further describes a novel chemotype that may be useful
and have potential as neuroprotective agents.
We
believe that the Cannabidiol Derived Molecules under the present invention have potential for treating and preventing diseases
associated with free radical mediated stress and oxidative stress including, for example, HE, Parkinson’s disease, Alzheimer’s,
Huntington’s disease, traumatic head injury, stroke, epilepsy, neuropathic pain, traumatic head injury, stroke, CTE, Post
Cardiac Arrest Hypoxic Ischemic Encephalopathy, and Epileptic Encephalopathy.
The
present invention addresses the need to prevent free radical mediated stress and oxidative stress, as well as to prevent the neural
damage associated with HE. The present invention further addresses the need to prevent cognitive impairment, learning deficits,
memory impairment, as well as damage and death of neuronal tissue associated with HE.
On
November 29, 2016, as part of our patent cooperation treaty global patent application, the USPTO granted allowance on the composition
of matter portion, covering claims 1 through 14 of the Company’s PCT Patent covering claims of our novel cannabidiol derived
molecule.
In
January 2017, we filed a divisional application with the USPTO to cover the method claims, which were originally covered in claims
15 through 22 of the original PCT Patent. We currently hold a valid allowance in the United States on the composition of matter
for a new cannabidiol derived molecules.
On
April 4, 2017, we were awarded U.S. Patent 9,611,213 titled “Functionalized 1,3 Benzene-diols and their Method of Use for
the Treatment of Hepatic Encephalopathy”. This patent is part of a divisional patent application by the Company to the USPTO
whereby we sought separate claims for composition of matter, covered in Pat. 9,611,213, and separate claims for method for treatment.
On
June 26, 2018, we were awarded U.S. Patent 10,004,722 titled “Method for Treating Hepatic Encephalopathy or a Disease Associated
with Free Radical Mediate Stress and Oxidative Stress with Novel Functionalized 1,3 Benzene-diols.”
We
have patent pending status of the same PCT Patent in Canada, the European Union, Brazil, Russia, India, China, Japan and Australia.
National
Institutes of Health – Office of Technology Transfer (NIH-OTT) – Patent 6,630,507
On
June 12, 2010, we filed an application for an exclusive license with the NIH-OTT for the development and commercialization of
a target drug candidate to be used in the treatment of patients suffering with HE. The application for exclusive license was made
for the license and use of U.S. patent 6,630,507 “Cannabinoids as Antioxidants and Neuroprotectants, ‘507 Patent.
On
November 17, 2011, we received notice of publication in the Federal Register of NIH-OTT’s Prospective Grant of Exclusive
License – Development of Cannabinoid(s) and Cannabidiol(s) Based Therapeutics to treat hepatic encephalopathy
in humans.
On
June 12, 2012, we entered into an exclusive license with NIH-OTT for the use of the ‘507 Patent in the commercialization
of one or more cannabinoid therapeutics to treat HE.
In
addition to the exclusive use of the ‘507 Patent for the treatment of hepatic encephalopathy, on July 16, 2014, we formally
entered into a second license agreement with NIH-OTT for the non-exclusive license of the ‘507 Patent for the treatment
of CTE.
Prior
to the expiration of the ‘507 Patent, we were the only company that had use of the ‘507 Patent and corresponding licenses
from NIH-OTT. The jurisdictions in which the ‘507 Patent is valid are: the U.S., the U.K., Ireland, the E.U., and Australia.
The patent life in these jurisdictions expired on April 21, 2019.
Although
we properly maintained and paid all of the minimum annual royalties and past prosecution fees underlying our two licenses of the
‘507 Patent during its lifetime and met the additional financial benchmarks set forth in the NIH licenses L-113-2012/0 and
L-302-2014/0, we were not able to secure the necessary funds to advance our drug discovery efforts into human clinical trials.
Our financial obligations to NIH-OTT terminated in 2019, effective upon expiration of the ‘507 Patent.
A
summary of the Company’s patents and status to each such patent is as set forth below:
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TITLE
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APPLICATION
NUMBER
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DATE
FILED
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COUNTRY
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STATUS
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NOVEL
FUNCTIONALIZED 1,3-BENZENE DIOLS AND THEIR METHOD OF USE FOR THE TREATMENT OF HEPATIC ENCEPHALOPATHY
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2015204609
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Jan
9, 2015
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AU
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Issued
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NOVEL
FUNCTIONALIZED 1,3-BENZENE DIOLS AND THEIR METHOD OF USE FOR THE TREATMENT OF HEPATIC ENCEPHALOPATHY
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BR1120160161386
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Jan
9, 2015
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BR
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Pending
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NOVEL
FUNCTIONALIZED 1,3-BENZENE DIOLS AND THEIR METHOD OF USE FOR THE TREATMENT OF HEPATIC ENCEPHALOPATHY
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2936506
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Jan
9, 2015
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CA
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Allowed
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FUNCTIONALIZED
1, 3-BENZENE DIOLS AND THEIR METHOD OF USE FOR THE TREATMENT OF HEPATIC ENCEPHALOPATHY
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2015800136466
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Jan
9, 2015
|
CN
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Issued
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NOVEL
FUNCTIONALIZED 1,3-BENZENE DIOLS AND THEIR METHOD OF USE FOR THE TREATMENT OF HEPATIC ENCEPHALOPATHY
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157348707
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Jan
9, 2015
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Europe
|
Issued
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NOVEL
FUNCTIONALIZED 1,3-BENZENE DIOLS AND THEIR METHOD OF USE FOR THE TREATMENT OF HEPATIC ENCEPHALOPATHY
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2016133213
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Jan
9, 2015
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RU
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Issued
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FUNCTIONALIZED
1,3-BENZENE DIOLS AND THEIR METHOD OF USE FOR THE TREATMENT OF HEPATIC ENCEPHALOPATHY
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J4044
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Jan
9, 2015
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MO
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Pending
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NOVEL
FUNCTIONALIZED 1,3-BENZENE DIOLS AND THEIR METHOD OF USE FOR THE TREATMENT OF HEPATIC ENCEPHALOPATHY
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2936506
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Jan
9, 2015
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CA
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Allowed
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PROCESS
FOR SYNTHESIZING CANNABINOIDS AND DERIVATIVES THEREOF
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US
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Unfiled
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USE
OF CERTAIN PHOSPHATIDYLCHOLINES CONTAINING LONG CHAIN POLYUNSATURATED FATTY ACIDS AS NEUROPROTECTIVE AGENTS
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PCTUS2020039860
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Jun
26, 2020
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WO
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Pending
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METHOD
FOR TREATING PERIPHERAL NEUROPATHIC PAIN
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US
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Unfiled
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GPR55
ANTAGONISTS AND ANTI-INFLAMMATORY THERAPY USING SAME
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US
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Unfiled
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PRE-CLINICAL
DRUG DISCOVERY
Since
inception in 2010, our primary drug discovery plans have revolved around neuroprotection and the use of CBD as well as the development
of proprietary CBD-derived molecules as target drug candidates to treat neurodegenerative and oxidative stress related diseases.
Conceptual
Drug Discovery of Cannabidiol Derived Molecules
An
emerging concept is that blockade of free radical mediated stress and oxidative stress will prevent the neural damage associated
with HE and prevent cognitive impairment, learning deficits, memory impairment, as well as damage and death of neuronal tissue
associated with HE. Cannabidiol Derived Molecules may have the potential of acting as neuroprotective agents by blocking the damage
caused by free radicals and oxidative stress, may prevent the neural damage associated with HE, and may also prevent cognitive
impairment, learning deficits, memory impairment, as well as damage and death of neuronal tissue associated with HE.
Around
1900, Moses Gomberg, a chemistry professor, discovered that prevention of free radical mediated stress and oxidative stress can
prevent damage and death of neuronal tissue, as well as prevent cognitive impairment, learning deficits, and memory impairment
associated with damage and death of neuronal tissue. Without wishing to be limited by theory, it is believed that the neuroprotective
agents of the disclosure can ameliorate, abate, and otherwise cause to be controlled, diseases associated free radical mediated
stress and oxidative stress.
Free
radical mediated stress and oxidative stress is also known to contribute to additional pathological conditions including, but
not limited to, epilepsy, neuropathic pain, traumatic head injury, stroke, CTE, Post Cardiac Arrest Hypoxic Ischemic Encephalopathy,
Epileptic Encephalopathy, and neurodegenerative diseases such as Parkinson’s disease, Alzheimer’s, Huntington’s
disease, and amyotrophic lateral sclerosis (“ALS”). Under the present invention, these Cannabidiol Derived Molecules
may be capable of acting as neuroprotective agents, and may be useful for the treatment of epilepsy, neuropathic pain, traumatic
head injury, stroke, CTE, Post Cardiac Arrest Hypoxic Ischemic Encephalopathy, Epileptic Encephalopathy, and neurodegenerative
diseases such as Parkinson’s disease, Alzheimer’s, Huntington’s disease, and ALS.
Current
Pre-clinical Discovery Efforts
Our
research and development efforts at the Pennsylvania Biotechnology Center are centered on the creation of novel synthetic cannabinoid
and cannabinoid-like molecules, the pre-clinical and in vitro efficacy of CBD, a non-psychotropic molecule, and
the testing and control of our lead target drug candidates alongside CBD for the treatment of OHE and CTE. As part of our research
and development efforts, we have sought to establish the pre-clinical efficacy of CBD, which, along with our novel and proprietary
lead target molecules, have shown to have neuroprotective properties. We are currently conducting preclinical evaluation and formulation
of our CBD based target drug candidate, KLS-13023, and the subject of our ongoing feasibility study with Catalent Pharma Solutions
(“Catalent”). While we have evaluated CBD on its own, in a highly purified form, we plan on bringing a CBD based target
drug therapeutic revolve around a formulated product in oral dose administration capsule (KLS-13023), which is currently the subject
of our ongoing feasibility study with Catalent Pharma Solutions (“Catalent”).
As
of October 2013, we had performed six distinct pre-clinical studies on murine specimens, including functional assay screens on
twenty-four viable analogues and pre-clinical studies against CBD as a therapeutic control. Analogues are compounds or molecules
having a structure similar to that of another compound or molecule, but differing from it in respect to a certain component.
As
a result of the screening process, we found that there were four target candidates along with CBD that were screened for final
pre-clinical in vitro testing for pharmacokinetics (“PK”), CACO permeability, lethal dose (“LD”), EC50
and IC90 testing. PK relate to the branch of pharmacology concerned with the movement of drugs within the body. Factors in PK
studies include CACO permeability, which relates to assays that measure the ability of a drug to be absorbed from the gastrointestinal
tract and thereby to evaluate whether the drug can be suitably dosed via an oral route. EC50 and IC90 relate to the concentration
of a drug, antibody or toxicant which induces a response halfway between the baseline and maximum after a specified exposure time.
It is commonly used as a measure of a drug’s potency (EC50), and the concentration of a medication in the blood that
will inhibit the replication of a specified percentage of microorganisms (IC90).
Our
lead target drug candidate was then analyzed using a mouse model to determine, among other things, blood brain barrier concentrations,
tissue and organ distribution, bioavailability, administration (IV vs. Oral), spinal fluid concentration, and blood plasma concentration. A
route of “administration” in pharmacology and toxicology is the path by which a drug, fluid, poison, or other substance
is taken into the body. “Bioavailability” is a subcategory of absorption and relates to a fraction of an administered
dose of a drug that reaches systemic circulation in the body. “Blood plasma concentration,” otherwise known as volume
of distribution, is a theoretic concept that relates the amount of drug in the body (dose) to the concentration (C) of drug
that is measured (in blood, plasma, and unbound in tissue water).
In
May 2014, we commissioned the first of two animal behavioral studies via research pact with Temple University. The aim of the
study was to test the effects of CBD and KLS-13019 on cognitive function in a mouse model of OHE in support of the identification
of molecules with in vivo efficacy. An established model of OHE, the thioacetamide model (TAA, 200 mg/kg i.p.), was used to assess
the effect of CBD (5.0 mg/kg i.p.) and KLS-13019 (0.5 – 5.0 mg/kg i.p.) on learning and memory in male C57Bl6 mice.
The autoshaping procedure, an operant learning and memory assay that rapidly assesses acquisition and retention of a simple task,
was the primary cognitive assay used. The task is an operant conditioning task wherein food restricted mice are placed in experimental
chambers and must learn how to make a behavioral response to gain access to food rewards.
In
summary, thioacetamide induced a robust, but variable, toxicity associated with cognitive impairment, morbidity, and mortality.
KLS13019, administered in the absence of thioacetamide, produced no negative behavioral or general health effects, and actually
appeared to improve cognitive functioning in the behavioral task. The 5.0 mg/kg dose of KLS 13019 also significantly prevented
thioacetamide-induced cognitive performance deficit, and the lower dose of 1.0 mg/kg showed a trend in this direction.
Pharmacokinetic
and Pharmacodynamic Comparison Between KLS-13019 and CBD
Results
from PK and PD studies performed in evaluating CBD versus KLS-13019 (molecule name 16), has 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 Fallon, et al. in the March/April 2006 edition of Clinical Medicine, pain is uncontrolled with opioid treatments in approximately
20% of patients with advanced cancer, or 420,000 people in the United States. 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.
Neuropathix
Studies on CBD
In
March 2013, we began our pre-clinical research and discovery efforts at the Pennsylvania Biotechnology Center/Baruch Blumberg
Institute in Doylestown, PA. We began the research and development, and pre-clinical work focused on the identification, synthesis
and/or extraction of novel Cannabis-derived molecules for the treatment of impairments associated with oxidative stress in OHE.
Prior research (published on April 16, 2011, in the British Journal of Pharmacology under the title “Cannabidiol Improves
Brain and Liver Function in a Fulminant Hepatic Failure Induced Model of Hepatic Encephalopathy in Mice”) produced substantial
behavioral and histochemical evidence demonstrating the effectiveness of certain Cannabis-derived molecules, such as CBD, in the
improvement of brain and liver function in fulminant hepatic failure. Findings from the above referenced study include reversal
of locomotors and cognitive pathologies, reversal of structural changes, such as Alzheimer’s Type II astrogliosis, and reversal
of increases in ammonia levels.
In
2014, we published an abstract on our completed studies regarding CBD at the 24th Annual International Cannabinoid Research Society
symposium, titled “Cannabidiol Provides Protection from Ethanol and Ammonium Toxicity in a Hippocampal Model of Hepatic
Encephalopathy.” In the present study, an in vitro model of HE has been utilized to evaluate the protective properties of
CBD, a substance with demonstrated protective properties against oxidative stress in pre-clinical studies targeting the OHE range
of neuronal toxicity.
HE
is a known oxidative stress related disorder. Although ammonia is considered the main factor involved in the pathogenesis
of HE, it correlates well with the severity of HE in acute liver failure, but not in chronic liver disease. Oxidative stress is
another factor believed to play a role in the pathogenesis of this syndrome; it represents an imbalance between the production
and neutralization of reactive oxygen species, which leads to cellular dysfunction (“Oxidative Stress: A Systemic Factor
Implicated in the Pathogenisis of Hepatic Encephalopathy”, Metabolic Brain Disease, 28 June 2013, 175-178).
On
January 22, 2015, we signed an agreement with Catalent Pharma Solutions LLC (“Catalent”), a $3.9 billion pharmaceutical
manufacturer, for the performance of a feasibility study named “Solution for Cannabidiol Softgel Feasibility” (the
“CBD OTC Feasibility Study”). Catalent has over eight years of experience in capsule and softgel manufacturing capabilities
and experience.
The
purpose of the CBD OTC Feasibility Study with Catalent is to advance our plans to submit one or more products for FDA clinical
trials to treat certain oxidative stress related and neurodegenerative related diseases such as Traumatic Brain Injury (“TBI”).
TBI, also
known as intracranial injury, occurs when an external force injures the brain. TBI can be classified based on severity, mechanism
(closed or penetrating head injury), or other features (e.g., occurring in a specific location or over a widespread area). Head
injury is a broader category that may involve damage to other structures, such as the scalp and skull. TBI can result in physical,
cognitive, social, emotional, and behavioral symptoms, and outcomes can range from complete recovery to permanent disability or
death.
The
Centers for Disease Control and Prevention (the “CDC”) has compiled statistics on TBI, which occurs more with children
and older adults. According to the CDC, total combined rates for TBI-related emergency department (“ED”) visits, hospitalizations
and deaths have increased over the past decade. In 2014, there were approximately 2.5 million TBI-related ED visits in the U.S.,
including over 812,000 among children. Unintentional falls, being unintentionally struck by or against an object, and motor vehicle
crashes were the most common mechanisms of injury contributing to a TBI diagnosis in the ED. These three principal mechanisms
of injury accounted for 47.9%, 17.1%, and 13.2%, respectively, of all TBI-related ED visits. Rates of TBI-related ED visits per
100,000 population were highest among older adults aged ≥ 75 years (1,682.0), young children aged 0-4 years (1,618.6), and
individuals 15-24 years (1,010.1).
On
March 4, 2015, the Company and Catalent commenced the feasibility study named “Solution for Cannabidiol Softgel Feasibility.”
On
March 16, 2015, we received notice from Catalent that the DEA advised them that the CBD drug code 7360 had been added to Catalent’s
Schedule 1 registration and that a quota for a certain quantum of CBD was successfully submitted for the importation of 150 grams
of 99.7% pure synthetic cannabidiol from Purisys.
Additionally,
on July 13, 2018, we received notice from the DEA that were approved for our own Schedule 1 Controlled Substance license for the
purpose of research activity. The addition of this license will further assist the Company in the bailment and delivery of CBD
to and from research collaborators like Catalent and Temple University, as well as others.
Our
relationship with Catalent was founded on our efforts to produce a formulated version of a CBD based gel capsule, herein referred
to as KLS-13023, for further advancements in the treatment of oxidative stress related disorders, such as OHE. Catalent does not
share in any royalties or ownership of intellectual property that we provide to Catalent or that is developed under the feasibility
study with Catalent described herein. The current feasibility study being performed is for our efforts to create a high quality
controlled and assured pharmaceutical grade product for use in an FDA clinical trial to treat patients suffering with OHE. Catalent’s
efforts in this instance is as a contract manufacturer involved in the advancement of our intellectual property and for Catalent
to be a third party contract manufacturer for the commercial production of KLS-13023.
A
satisfactory and successful completion of the feasibility study with Catalent, followed by the completion of our pre-clinical
evaluation of KLS-13023 in an animal toxicity model, and thereafter the application of KLS-13023 under an NDA with the FDA, would
likely lead to a bulk commercial drug manufacturing agreement between the Company and Catalent. We have only committed to completing
the feasibility study with Catalent, and are under no obligation to enter into a commercial drug manufacturing agreement with
Catalent. After the completion of our feasibility study with Catalent, we currently believe that the logical next step in our
commercial development plans for KLS-13023 is to engage with Catalent as our contract drug manufacturer for KLS-13023.
CBD
Reclassified by DEA for Epidiolex
On
September 27, 2018, in a significant decision relating to the classification of CBD, currently classified as a Schedule I
narcotic by the DEA under the Controlled Substances Act, the Department of Justice and the DEA announced that Epidiolex, the recently
approved medication by the FDA, was being placed in Schedule V of the Controlled Substances Act, the least restrictive schedule
of the CSA. On June 26, 2018, the FDA announced it approved Epidiolex for the treatment of seizures associated with
two rare and severe forms of epilepsy, Lennox-Gastaut syndrome and Dravet syndrome, in patients two years of age and older. Epidiolex
contains CBD. The CBD in Epidiolex is extracted from the cannabis plant and is the first FDA-approved drug to contain a purified
extract from the plant. Schedule V drugs represent the least potential for abuse. Schedule V drugs, substances, or chemicals
are defined as drugs with lower potential for abuse than Schedule IV and consist of preparations containing limited quantities
of certain narcotics.
We
believe this was a significant reclassification that validates our efforts in the research and development of ethical pharmaceuticals
containing CBD as an active pharmaceutical ingredient and reduces the regulatory and market risks associated with the use of CBD,
still a Schedule I narcotic.
We
have maintained since inception that the only clear path to reclassification is to follow the regulatory path of proving medical
purpose through traditional Phase 1 through Phase 3 clinical trials. We believe that the approval of Epidiolex by the FDA on June
26, 2018 and reclassification of CBD as it relates to Epidiolex by the DEA on September 27, 2018, is clear evidence of the need
to follow the regulatory path in order to meet the requirements of reclassification of a Schedule I controlled substance.
Neuropathix
Strategic Third Party Business Relationships, Licenses and Joint Ventures
Natural
Products Discovery Institute – Pennsylvania Biotechnology Center
In
December 2013, we entered into a Materials Transfer and Testing Agreement (“MTTA”) with the Institute for Hepatitis
and Virus Research and their division, the Natural Products Discovery Institute (“NPDI”), located at Pennsylvania
Biotechnology Center in Doylestown, PA. The purpose of the MTTA, is, among other things, the research of original material made
up of plants, plant matter, and plant extracts (the “Plant Materials”) to identify bioactive molecules contained in
these Plant Materials which may lead to the commercial production of bioactive molecules. To date, we have screened one plant
source and have fractionated extracts to determine its neuroprotective activity. This plant source and extracted material has
shown a high degree of neuroprotectant factor in the face of ethanol and ammonium toxicity in neuronal cell cultures. We plan
on furthering the commercial development of this material and also filing for patent protection on the process, method and use
of this material in the treatment of neurodegenerative diseases.
On
April 2, 2020, we entered into an Intellectual Property Rights Purchase and Transfer Agreement with the BSBI to purchase all of
the rights, titles, and interests that would otherwise belong to the BASBI solely under the MTTA Agreement. The purchase price
for the acquisition of these rights was twenty five thousand shares of the Company’s restricted common stock.
Subsequent
to this transaction with the BSBI, we filed for patent protection on this discovery, which patent describes claims on the process,
method and use of this material in the treatment of neurodegenerative diseases. (see: Neuropathix Intellectual Properties)
Temple
University – Animal Behavioral/Pre-Clinical Model
On
May 1, 2014, we signed a Research Services Agreement with Temple University to test the effects of CBD and CBD-like molecules
in an HE model of cognitive impairment in support of the identification of molecules with in vivo efficacy. The
tests were performed by Temple University in the pre-clinical model for HE, and involved a mouse model of OHE and administration
of CBD and KLS-13019 conducted by Dr. Sara Jane Ward and Dr. Ronald Tuma, with the study titled – “Cognitive,
neurological, and motor function in a mouse model of hepatic encephalopathy: effects of CBD and CBD analogues (KLS-13019).”
The results of this study showed that KLS-13019 is superior to CBD in the intervention of cognitive impairment from associated
neurotoxicity in the OHE model.
On
January 4, 2017, we applied for a Phase 1 Small Business Technology Transfer (“STTR”) grant from the National Institutes
of Health – National Institute on Drug Abuse (“NIH-NIDA”). This grant application was made in collaboration
with Temple University and titled “Development of KLS-13019 for Chemotherapy Induced Peripheral Neuropathy and Drug Dependence”.
In December 2017, we were informed that the Phase 1 grant was awarded.
The
following is a summary outline of the aims proposed in the aforementioned grant.
Chemotherapy-induced
peripheral neuropathy (CIPN) can be a chronic, severely debilitating consequence of cancer therapy for which there are no effective
management strategies. Moreover, upwards of 80% of CIPN patients reported using prescription opioids for pain management, despite
the fact that there is only weak evidence that the long-term continuation of opioids provides clinically significant pain relief
in these patients.
Mitochondrial
dysfunction, oxidative stress, and inflammation have all been implicated in its etiology. We have shown that the non-psychoactive
cannabinoid CBD prevents the development of CIPN in a mouse model of paclitaxel-induced cold and mechanical allodynia. This target,
allodynia, refers to central pain sensitization (increased response of neurons) following normally non-painful, often repetitive
stimulation. It can lead to the triggering of pain response from stimuli that normally do not provoke pain.
In
vitro, we observe that paclitaxel increases microglial expression of several putative mediators of neuropathic pain, and that
this effect can be blocked by CBD in a mitochondrial Na+/Ca2+ exchanger (mNCX)- dependent manner. We have also shown that a more
potent, hydrophilic analogue of CBD, KLS-13019, protects against paclitaxel-induced oxidative stress in cultured dorsal root ganglia
neurons, and that the mechanism underlying this neuroprotection is also regulation of intracellular calcium via the mNCX. Preliminary
results demonstrate that KLS-13019 can attenuate mechanical sensitivity associated with CIPN while also reducing microglial activation
and T cell infiltration into the spinal cord.
Dorsal
root ganglia (“DRG”) is a cluster of neurons (a ganglion) in the dorsal root of a spinal nerve. The cell bodies of
sensory neurons known as the first-order neurons are located in the dorsal root ganglia. Even though dorsal root ganglia
are a part of the system of peripheral nerves, they lie very close to the spine, and therefore to the central nervous system.
That makes them an important connection between the two systems. These nerve clusters help transmit messages toward the brain
and play a key role in neuropathic pain development and maintenance. Peripheral nerve injury-induced neuropathic pain is one of
major clinical disorders characterized by spontaneous ongoing or intermittent burning pain, sensory abnormalities (dysesthesia),
an increased response to painful stimuli (hyperalgesia), and pain in response to normally innocuous stimuli (allodynia).
Our
central hypothesis is that administration of CBD or KLS-13019 helps preserve Ca2+ homeostasis by promoting activity of the mNCX,
which in turn protects from both mitochondrial dysfunction and microglial activation to prevent the neuronal and glial changes
associated with the development and maintenance of paclitaxel-induced neuropathic pain. We believe that results from experiments
in AIM 1 will demonstrate that the neuroprotective properties of CBD and KLS-13019 can be reduced by pharmacological or gene knockdown
of the mNCX in a statistically significant manner. We believe that results from experiments in AIM 2 will further confirm the
i.p. and p.o. efficacy of KLS-13019 vs CBD to prevent or reverse mechanical sensitivity and neuroinflammation in a mouse model
of paclitaxel-induced neuropathic pain and that repeated administration of these molecules does not lead to analgesic tolerance.
Remarkably, the non-psychoactive CBD has also been shown to inhibit cue-induced heroin-seeking and neurochemical correlates thereof
in a rat model of relapse and decrease heroin craving in a small human study. Experiments in AIM 3 are designed to test the hypothesis
that KLS-13019 and CBD will attenuate reinstatement of morphine seeking behavior in a rat model of opioid relapse. The overall
impact of the results from the proposed research will be significant advancements into (i) identification of specific mechanisms
that induce CIPN, (ii) application of this knowledge to facilitate design of novel treatment strategies for neuropathic pain,
and (iii) novel treatment strategies to reduce or replace prescription opioid use and decrease prescription opioid abuse.
Chemotherapy-induced
peripheral neuropathy (CIPN) can be a chronic, severely debilitating consequence of cancer therapy for which there are no effective
management strategies. Moreover, upwards of 80% of CIPN patients reported using prescription opioids for pain management, despite
the weak evidence of their efficacy and the risks of long term dependence (Hirayama, ESMO Open 2016). Mitochondrial dysfunction,
calcium dysregulation, oxidative stress, and inflammation have all been implicated in its etiology. In pre-clinical studies, CBD,
a non-psychoactive component of cannabis sativa, has shown evidence in a murine model to be a potentially effective treatment
for CIPN and relieving opiate dependence currently experienced by certain patients undergoing current therapeutic chemotherapy
and pain management regimens in cancer treatment. However, CBD has severe limitations in terms of potency, safety, oral bioavailability,
and regulatory restrictions. KLS-13019 is a novel new chemical entity that, as per pre-clinical testing, may be able to target
these problems. In the NIH-NIDA Phase 1 STTR Study Grant completed in December 2019, our research efforts with Temple University
demonstrated the efficacy of KLS- 13019 in models of CIPN and opiate dependence, and also further elucidated its mechanism of
action in regulation of calcium levels and inflammatory sequelae.
We
have completed all of our work related to the aforementioned grant and are currently in a peer review submission of our research
results to the Journal of Molecular Neuroscience. Temple University has completed two of the three aims outlined in the grant
proposal, and is currently in the process of completing the third and final aim, morphine reinstatement. We believe that the grant
study will be completed on or about June 2019 and the results will be published by Temple University.
On
December 31, 2019, we, together with Temple University, filed a completion report with NIH-NIDA regarding the Phase 1 STTR grant.
The results of this study were promising and set forth our plans to file for a Phase 2 grant due for filing on or before April
7, 2020.
In
April 2020, the Company and Temple University filed for a Phase 2 SBIR Grant with National Institutes of Health – National
Institute of Neurological Disorders and Stroke (“NIH-NINDS”). Our application provided strong support to further the
research and development of our treatment for CIPN. Phase 2 is focused on the development, demonstration and delivery
of the innovation.
In
June 2020, the Company was informed that its Phase 2 SBIR grant application received an impact/priority score of 47. Generally
speaking, impact/priority scores of 10 to 30 are most likely to be funded. Scores between 31 and 45 might be funded; scores greater
than 46 are rarely funded. The Company believed that there were elements of its initial Phase 2 SBIR grant application that were
misunderstood and believed it still had a very strong application. After making several critical changes to the original application,
in January 2021, the Company resubmitted its Phase 2 SBIR grant application with NIH-NINDS.
On
March 10, 2021, the Company’s grant application was reviewed by the Scientific Review Group in the Study Section at NIH-NINDS
and received an impact score of 20 with a resume and summary of discussion that states, “This excellent STTR Phase II application
attempts to further establish a proprietary cannabidiol (CBD)-derived compound KLS-13019 as an effective neuroprotectant against
chemotherapy-induced peripheral neuropathy (CIPN)-associated neuropathic pain.” The summary concluded by stating, “Overall,
this objective is believed to be highly significant and promising.” According to NIH, “Generally
speaking, impact/priority scores of 10 to 30 are most likely to be funded; scores between 31 and 45 might be funded; scores greater
than 46 are rarely funded. Before 2009, NIH used a different score system, with final scores from 100 to 500, where 100 was best.”
Proposed
Study for Traumatic Brain Injury
To
investigate the mechanisms of action through which CBD and a cannabinoid analogue (KLS-13019) provide neuroprotection form neurotoxicity
factors (glutamate and CCL11) relevant to TBI. Neural damage associated with TBI has been associated with multiple processes including
excitotoxicity, oxidative stress and neuroinflammation. Because of the recognized protective effects of cannabinoids on all of
these toxic processes, we have chosen to explore the effects and mechanism of action of two molecules: (i) CBD, a substance found
in cannabis; and (ii) KLS-13019, a novel CBD-like analogue that has been shown to protect against various toxicity associated
with oxidative stress (Kinney et al., 2016). In this proposal, we intend to investigate the protective mechanisms related to the
attenuation of CCL11 for both molecules in disease-relevant in vitro test systems that utilized glutatmate as a relevant toxin
and then explore their effectiveness in animal models of TBI.
Catalent
Pharma Solutions
In
December 2014, we signed a feasibility study contract with Catalent Pharma Solutions (“Catalent”), to, among other
things, commence a feasibility study on a dose controlled soft-gel containing CBD as the main active pharmaceutical ingredient
(the “CBD Feasibility Study”). The purpose of the CBD Feasibility Study with Catalent is to enable us to develop a
proprietary drug product formulation using CBD that has suitable solubility and stability characteristics for IND, enabling pre-clinical
studies in animals and clinical studies in humans, as part of our ongoing research and development of a cannabinoid therapeutic
for the treatment of neurodegenerative diseases, including CTE and OHE. Catalent is the leading global provider of advanced delivery
technologies and development solutions for drugs, biologics, consumer health and animal health products. With over 80 years serving
the industry, Catalent has proven expertise in bringing more customer products to market faster, enhancing product performance
and ensuring reliable clinical and commercial product supply. Catalent employs approximately 13,900 people, including over 1,000
scientists, at 53 facilities across 4 continents, and in fiscal 2020 generated approximately $3.09 billion in annual revenue.
Catalent is headquartered in Somerset, N.J.
Purisys,
LLC (formerly Noramco, Inc.)
Noramco,
Inc. (“Noramco”) was formed in 1979 to provide a secure source of Codeine Phosphate. On October 1, 2019, Noramco spun
off its cannabinoid related business into a separate affiliated company, Purisys, LLC (“Purisys”). With Noramco’s
acquisition of Tasmanian Alkaloids and addition of their Athens, Georgia site in 1982, and continuous expansions over the past
three decades at both of its U.S. facilities, Noramco and Purisys, together, now contribute to billion dollar affiliate franchises,
as well as to significant third-party generic and branded pharmaceutical products worldwide.
Noramco
is a world leader in specialty active pharmaceutical ingredients, with a particular focus in controlled substances. Purisys is
the leader in manufacturing ultra-high purity cannabinoid ingredients. Purisys’ headquarters and primary production facility
is located in Athens, GA, with additional sites in Wilmington, DE and Schaffhausen Switzerland.
In
April 2015, we entered into discussions with Purisys (then, Noramco), for, among other things, the long term supply of high purity, pharmaceutical
grade, synthetic cannabidiol for the purpose of delivering CBD as an active pharmaceutical ingredient to Catalent in connection
with our CBD Feasibility Study.
In
addition to the procurement of CBD through Purisys, the Company and Purisys have discussed an additional feasibility study for
the scale-up and commercial production of KLS-13019.
SK
Capital Partners (“SK Capital”) acquired Noramco from Johnson & Johnson in July 2016. SK Capital is a private
investment firm with a disciplined focus on the specialty materials, chemicals and healthcare sectors.
PRIMARY
TARGETS FOR DRUG DISCOVER AND MARKET SIZE
Target
1:Hepatic Encephalopathy – $2+ Billion Market in the U.S.
HE
is one of the most important clinical manifestations in decompensated liver cirrhosis. Accepted concepts regarding the pathophysiology
of HE are that the endogenous neurotoxic substances, including ammonia: (i) escape from catabolism by the liver due both to the
impaired function of the cirrhotic liver and also to the presence of portal systemic shunting; (ii) circulate at elevated concentrations
in the systemic blood flow; (iii) reach the brain through the blood-brain barrier; and (iv) impair cerebral function leading to
disturbances of consciousness. See Discovery of KLS-13019, a Cannabidiol-Derived Neuroprotective Agent, with Improved
Potency, Safety, and Permeability. William A. Kinney, Mark E. McDonnell, Hua Marlon Zhong, Chaomin Liu, Lanyi Yang, Wei
Ling, Tao Qian, Yu Chen, Zhijie Cai, Dean Petkanas, and Douglas E. Brenneman – ACS Med. Chem. Lett., 2016, 7 (4), pp
424–428.
The
majority of these toxins are produced in the intestine by the bacterial flora, and are absorbed into the portal venous flow. In
spite of improved therapeutic options for encephalopathy, the long-term survival is still low. Thus, HE remains a serious complication
of liver cirrhosis. We believe that the establishment of truly effective prevention modalities and broader application of liver
transplantation will help rescue patients suffering from this complication of liver cirrhosis in the near future.
According
to an article published in the British Journal of Pharmacology Research, studies conducted over the past decade has produced substantial
behavioral and histochemical evidence demonstrating the effectiveness of certain Cannabis-derived molecules such as CBD in the
improvement of brain and liver function in fulminant hepatic failure. Findings include reversal of locomotors and cognitive pathologies,
reversal of structural changes such as Alzheimer’s Type II astrogliosis, and reversal of increases in ammonia levels. Beyond
the supportive preclinical evidence, multiple factors provide reasons for enthusiasm in the pursuit of the HE indication:
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New
mechanism of action: Cannabinoids, if shown effective in clinical trials, would provide a new mechanism of action, and
thus be an incremental clinical tool to combine with existing treatments. This combination of mechanisms of action could lead
to additive or synergistic effects. Existing treatment methods, such as lactulose, Rifaximin and others under study (e.g.,
AST-120), manage symptoms by reducing ammonia uptake in the digestive system. However, once blood ammonia levels have increased,
they putatively provide limited benefits. Cannabinoids, instead, act in the central nervous system ameliorating the downstream
pathological effects of ammonia.
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Multiple
preventive benefits: According to National Institute of Health, pre-clinical studies have shown that CBD, the major
constituent in our intended lead target drug molecule and candidate, may provide benefits in the secondary prevention of HE.
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o
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Steatosis: In
vitro studies have shown CBD to reverse the histopathology associated with steatosis or fatty liver syndrome. This
is particularly relevant because fatty liver is a major cause of liver cirrhosis, and has no current drug-based treatment.
In addition, multiple currently marketed drugs are known to induce steatosis. These include steroids (e.g., triamcinolone,
cortisone, prednisone), the anti-cancer drug Tamoxifen (a breast cancer drug), HIV anti-retrovirals and anti-arrythmic drug
Amiodarone.
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o
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Fibrogenesis:
Animal studies have shown that endocannabinoids are involved in the regulation of fibrogenesis in the liver. CB2 -/- mice
show increased fibrogenesis in response to CCl4 injection, whereas CB1 -/- mice have decreased hepatic fibrogenesis. This
suggests an opportunity to modulate fibrogenesis, a critical intermediate step in liver cirrhosis, through a proper selection
of cannabinoid antagonists.
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HE
is a neuropsychiatric disorder that includes learning deficits and impairment of long-term memory. HE can be caused by chronic
and excessive ethanol ingestion along with the accumulation of toxic substances that are normally removed by the liver. The pathogenesis
of HE in the central nervous system includes damage to the pre-limbic cortex, striatum and the hippocampus, and this pathology
is believed to be mediated by the accumulation of free radicals and oxidative stress. HE has primary epidemiological precursors
in cirrhosis, hepatitis B, hepatitis C, and portal hypertension. The incidence rate of HE among alcohol induced cirrhosis patients
is as high as 45%, making HE a leading opportunistic disease stemming from alcoholism. If left unchecked, HE can progress
to hepatic coma and ultimately death. The pathogenesis of HE includes damage to the prelimbic cortex, striatum, and the hippocampus.
HE is caused by accumulation of toxic substances in the bloodstream that are normally removed by the liver.
It
has been previously demonstrated that impairment of hepatocytes by ethanol is associated with the production of free radical and
oxidative stress. The accumulation of these free radicals and oxidative stress contribute to cognitive impairment, learning deficits,
memory impairment, as well as damage and death of neuronal tissue. An emerging concept is that blockade of free radical mediated
stress and oxidative stress will prevent the neural damage associated with hepatic encephalopathy and prevent cognitive impairment,
learning deficits, memory impairment, as well as damage and death of neuronal tissue associated with HE.
Currently
in the United States, there are over 1.5 million sufferers of HE across four stages, including approximately 121,000 patients
hospitalized each year from the OHE stage of the disease.
Cannabidiol
(CBD) vs. KLS-13019 in Overt Hepatic Encephalopathy
In
a publication in American Chemical Society Medicinal Chemistry Letters on February 10, 2016, our abstract read as follows:
“Cannabidiol
is the nonpsychoactive natural component of C. sativa (cannabis sativa) that has been shown to be neuroprotective in multiple
animal models. Our interest is to advance a therapeutic candidate for the orphan indication overt hepatic encephalopathy (OHE).
OHE is a serious neurological disorder that occurs in patients with cirrhosis or liver failure. Although cannabidiol has
shown evidence in a murine model to be a potentially effective treatment for OHE, it has limitations in terms of safety and oral
bioavailability. Herein, we describe a series of side chain modified resorcinols that were designed for greater hydrophilicity
and “drug likeness”, while varying hydrogen bond donors, acceptors, architecture, basicity, neutrality, acidity, and
polar surface area within the pendent group. Our primary screen evaluated the ability of the test agents to prevent damage to
hippocampal neurons induced by ammonium acetate and ethanol at clinically relevant concentrations. Notably, KLS-13019 was 50-fold
more potent and >400-fold safer than cannabidiol and exhibited an in vitro profile consistent with improved oral bioavailability.”
CBD
has been shown to be neuroprotective by blocking the damage caused by free radicals and oxidative stress. This effect was independent
of cannabinoid receptors because it could not be blocked by a cannabinoid antagonist. CBD has shown evidence in two murine
models to be a potentially effective treatment for HE, thioacetamide induced and bile duct ligation induced liver damage,
at a dose of 5 mg/kg IP (intraperitoneal injection). Importantly, CBD treated animals in the first study exhibited improvements
in both liver and brain function as compared to untreated control animals.
Free
radical mediated stress and oxidative stress are also known to contribute to additional pathological conditions including epilepsy,
neuropathic pain, traumatic head injury, stroke, CTE, and neurodegenerative diseases such as Parkinson’s disease, Alzheimer’s
disease, Huntington’s disease, and ALS.
Other
examples of neuroprotection by CBD include use in hypoxia-ischemia and stroke models. A wide range of possible mechanisms have
been attributed to CBD’s neuroprotective effects including antioxidant, anti-inflammatory, adenosine signaling, cannabinoid
receptor GPR55 (G Protein-coupled receptor 55), and serotonin mediated pathways; however, mitochondrial calcium modulation is
fundamental. The GPR55 receptor is a G protein receptor in humans that is encoded by the GPR55 gene. The GPR55 receptor has been
identified as a novel cannabinoid receptor. Receptors are sensing molecules which communicate signals between cells to illicit
physiological changes in the body. To hedge our bets, we chose to interrogate the hippocampal neuron, as a phenotypic screen that
will measure neuroprotection independent of a mechanism.
Target
2:Chronic Traumatic Encephalopathy (CTE) – $2+ Billion Market in the U.S.
Not
unlike OHE, CTE is a neuro-degenerative disease of the brain and is associated with repeated head traumas like concussions.
CTE
is a form of encephalopathy that is a progressive neuro-degenerative disease, which can only be definitively diagnosed postmortem,
in individuals with a history of multiple concussions and other forms of head injury. The disease was previously called dementia
pugilistica (“DP”), as it was initially found in those with a history of boxing. CTE has been most commonly found
in professional athletes participating in American football, ice hockey, professional wrestling and other contact sports who have
experienced repetitive brain trauma.
It
has also been found in soldiers exposed to a blast or a concussive injury, in both cases resulting in characteristic degeneration
of brain tissue and the accumulation of tau protein. Individuals with CTE may show symptoms of dementia, such as memory loss,
aggression, confusion and depression, which generally appear years or many decades after the trauma. Repeated concussions and
injuries less serious than concussions (“sub-concussions”) incurred during the play of contact sports over a long
period can result in CTE. In the case of blast injury, a single exposure to a blast and the subsequent violent movement of the
head in the blast wind can cause the condition.
The
primary physical manifestations of CTE include a reduction in brain weight, associated with atrophy of the frontal and temporal
cortices and medial temporal lobe. The lateral ventricles and the third ventricle are often enlarged, with rare instances of dilation
of the fourth ventricle.
Other
physical manifestations of CTE include pallor of the substantia nigra and locus ceruleus, and atrophy of the olfactory bulbs,
thalamus, mammillary bodies, brainstem and cerebellum. As CTE progresses, there may be marked atrophy of the hippocampus, entorhinal
cortex, and amygdala.
On
a microscopic scale, the pathology includes neuronal loss, tau deposition, TAR DNA- binding Protein 43 (TDP 43) beta-amyloid deposition,
white matter changes, and other abnormalities. The tau deposition occurs as dense neurofibrillary tangles (“NFT”),
neurites, and glial tangles, which are made up of astrocytes and other glial cells Beta-amyloid deposition is relatively uncommon
feature of CTE.
A
small group of individuals with CTE have chronic traumatic encephalo-myopathy (“CTEM”), characterized by motor neuron
disease symptoms, which mimics ALS, also known as Lou Gehrig’s disease. Progressive muscle weakness and balance and gait
problems seem to be early signs of CTEM.
Target
3:Chemotherapy Induced Peripheral Neuropathy (CIPN) – $3+ Billion Market in U.S.
In
December 2016, as part of a Small Business Technology Transfer (“STTR”) program, we, together with Temple University,
filed an STTR grant proposal with the National Cancer Institute (“NCI”) to demonstrate improved in vivo efficacy of
an orally administered KLS-13019, our lead target drug candidate, in a head-to-head comparison to intraperitoneal injection (“IP
Injection”) of CBD in a model of chemotherapy-induced peripheral neuropathy.
At
the conclusion of Phase I STTR application, we hope to demonstrate that KLS-13019 (Per os – taken through the mouth)
can control mechanical sensitivity and inflammation associated with CIPN in the absence of tolerance development, and also reduce
opioid craving behavior with comparable efficacy to CBD (intraperitoneal injection). In Phase II STTR, we will investigate a back-up
series and will execute the CMC, pharmacokinetic, safety pharmacology, and toxicology assessments required for IND filing on KLS-13019.
A
visual image of the chemical structure of cannabidiol and KLS-13019 can be seen as follows, along with selected data describing
EC50 (the concentration of a drug that give half-maximum response), Safety Margin (pre-clinical toxicity), and
Bioavailability (seen as “F”):
KLS-13019
does not contain CBD and is a new chemical entity that would not fall under the CSA be deemed a Schedule 1 controlled substance.
KLS-13023
is a formulation that does contain CBD. At present, CBD is deemed a Schedule 1 controlled substance by the DEA under the Controlled
Substances Act. Like the drug molecule EpidiolexÒ, which was recently approved by the FDA for marketing and sale for use
in treating Dravet’s Syndrome and Lennox-Gasteau Syndrome (forms of child epilepsy), KLS-13023 would need to follow the
guidance set forth by the CSA, complete a successful human clinical trial and apply for rescheduling, as was the case with EpidiolexÒ,
now a Schedule 5 drug.
We
currently plan on using KLS-13019 as our lead target drug candidate for the treatment of CIPN.
The
treatment of CIPN is a priority therapeutic opportunity because, to date, no one drug or drug class is considered to be safe and
effective in this disabling disease. Tricyclic antidepressants are often the first choice in most patients, but are associated
with significant side effects including sedation and cardiovascular complications as well as marginal efficacy (Wolf et al 2008).
Anticonvulsants, despite their efficacy in animal models of CIPN, are only partially effective in the majority of patients (Bosnjak
et al 2002).
Even
more problematic, upwards of 80% of CIPN patients report using prescription opioids for pain management despite lacking strong
evidence for efficacy and increasing safety concerns in the face of the current devastating opioid epidemic. The exact mechanism
of CIPN has not been fully elucidated and can differ across classes of chemotherapeutic agents. It is therefore necessary to identify
novel therapies to prevent or treat CIPN that target one or more of these putative mechanisms. Recently, there has been a resurgence
in interest in the potential medical utility of the cannabis plant and its constituents, and mechanism-based basic research is
warranted to develop safe and effective cannabinoid-based pain treatments. CBD is a non-psychoactive component of Cannabis sativa
that is neuroprotective, independent of cannabinoid receptors (Hampson 1998).
Prior
studies at Temple University revealed that CBD prevents the development of paclitaxel-induced mechanical sensitivity in mice in
vivo (Ward et al 2011, 2014). Additionally, CBD attenuates morphine reward and heroin seeking behavior in animal models (Ren,
Whittard et al. 2009; Katsidoni, Anagnostou et al. 2013) and a small trial in humans suggests attenuation of heroin craving in
humans (Hurd, Yoon et al. 2015). However, CBD has limitations in terms of potency, safety, and oral bioavailability. We believe
that we may be able to address these problems in our fully owned series of side chain modified derivatives, which have been protected
in a non-provisional patent application WO2015/106108A2.
One
of the molecules covered by the patent is KLS-13019, which in pre-clinical studies, including PK studies, has shown evidence of
improved in vitro efficacy, improved safety, and improved oral bioavailability over CBD in side by side preclinical evaluation,
and is not a controlled substance. (Pharmacological Comparisons Between Cannabidiol and KLS-13019, Journal of Molecular Neuroscience,
14 August 2018).
Preliminary
Effects of KLS-13019 in CIPN model: In a preliminary study, we treated eight mice with saline and sixteen mice with paclitaxel
(Days 1, 3, 5, and 7, 8.0 mg/kg IP). Half of the paclitaxel-treated mice were pretreated with KLS-13019 (2.5 mg/kg IP) and half
were pretreated with its vehicle alone. On days 9, 14, and 21 post initiation of injections, mechanical sensitivity was tested
using von Frey filaments and compared with baseline sensitivities prior to treatment (Fig. 3). One-way ANOVA revealed a significant
effect of KLS-13019 on Day 14 to prevent the development of paclitaxel-induced mechanical sensitivity [F(2, 21) =
4.67, p<0.05]. Dunnett’s multiple comparison’s test revealed a significant difference between the saline and paclitaxel
treated groups, but not between the saline and KLS-13019+paclitaxel treated groups. Preliminary flow cytometry results with pooled
cords from three mice in each group revealed that paclitaxel-treated mice had increased numbers of CD4+ T cells and microglia
in the whole spinal cord, and that this increase is prevented by KLS-13019 treatment.
E1.
Aim 1. Research Plan. Determine target for the neuroprotective actions of CBD and KLS-13019. As mentioned above, DRG
neurons are a primary cytotoxic target of chemotherapeutic agents. In addition, spinal microglia have been heavily implicated
in the development and maintenance of neuropathic pain and have shown to become activated in animal models of CIPN. At
the conclusion of Aim 1, we intend to demonstrate that the neuroprotective properties can be reduced by pharmacological or gene
knock-down of a relevant target in a statically significant manner.
E2.
Aim 2. Assess KLS-13019, CBD, and morphine against paclitaxel-induced peripheral neuropathy. At the conclusion of
Aim 2, we intend to have demonstrated that KLS-13019 performs as well as CBD (ip and po) against CIPN and CNS inflammation and
shows no antinociceptive tolerance as compared to morphine.
CIPN
procedure: Experiments are designed to test the efficacy of novel CBD analogues in attenuating established mechanical
sensitivity and inflammation associated with CIPN. Dr. Ward’s laboratory has been using the CIPN procedure for ten years
and has demonstrated that CBD treatment can both prevent the development of (Ward et al 2011, 2014) and reverse established (King
et al in revision, British Journal of Pharmacology) CIPN in mouse models. CBD and KLS-13019 and their vehicle controls
will be tested in groups of mice treated with paclitaxel (8.0 mg/kg IP, days 1, 3, 5 and 7). Testing of each dose for each molecule
will require a final sample size of eight. Molecules will be administered daily for three weeks, starting on Day 11 when peak
mechanical allodynia has already been achieved. In the initial study, CBD (0.05 - 5 mg/kg ip) will be compared with three doses
of KLS-13019 (e.g., 0.05, 0.5 and 5 mg/kg ip) and three doses of morphine (1.0 – 10 mg/kg ip; Neelakantan et al 2016).
This will be followed by a study in which KLS-13019 will be assessed at three oral doses. In preliminary studies, we have dosed
the mice with KLS-13019 (2.5 - 5 mg/kg ip) with no adverse effects. In addition, KLS-13019 was shown to produce no impairment
in the mouse rotorod test at 100 mg/kg po in studies conducted at the Anticonvulsant Screening Program (NIH).
Neuroinflammation
assessment: Immunohistochemistry and flow cytometry will run in the PIs laboratory to evaluate markers of pain and inflammation
associated with neuropathic pain, including astrocytic and microglial activation, CGRP, and T cell infiltration. Given the fact
that we are observing CNS infiltration of T cells that is reversed by treatment with KLS-13019, cranial windows will be surgically
implanted (as described in Ni, Tuma et al 2004) in additional groups of vehicle or KLS-13019 + paclitaxel treated mice prior to
treatment to longitudinally assess the effect of paclitaxel with or without cannabinoid treatment on leukocyte rolling and adhesion
across the development of CIPN.
E2.
Aim 3.Assess KLS-13019 and CBD against reinstatement of morphine seeking. At the conclusion of Aim 3, we intend to
have demonstrated that KLS-13019 attenuates opioid-seeking behavior as well as CBD.
Morphine
Reinstatement: The Principal Investigator has 20 years of experience with behavioral assays with specific expertise in
rodent models of substance abuse, including opioid self-administration. A standard rat model of morphine seeking will be used
(Vassoler et al 2017) wherein rats make lever presses to receive infusions of morphine. Rats will be surgically implanted with
chronically indwelling jugular catheters and trained to self-administer morphine (0.75 mg/kg/inf) in the presence of auditory
and visual cues daily for 20 days, followed by 10 days of extinction wherein the morphine is replaced with saline and the conditioned
cues are eliminated. During the last three days of extinction, rats will be treated with vehicle, CBD (5.0 mg/kg IP), or KLS-13019
(0.5 – 5.0 mg/kg IP). The following day rats will be exposed to a single reinstatement session wherein lever presses
are again paired with auditory and visual cues but saline is delivered instead of morphine. This experimental design is based
on Ren et al 2009 results with CBD on cue-induced reinstatement of heroin seeking in rats.
Status
of Phase 1 STTR Grant Research - NIDA
On
January 4, 2017, we applied for a Phase 1 Small Business Technology Transfer (“STTR”) grant from the NIH-NIDA. This
grant application was made in collaboration with Temple University and titled “Development of KLS-13019 for Chemotherapy
Induced Peripheral Neuropathy and Drug Dependence”. In December 2017, we were informed that the Phase 1 grant was awarded.
We
have completed all of our work related to the aforementioned grant and are currently in a peer review submission of our research
results to the Journal of Molecular Neuroscience. Temple University has completed all three aims outlined in the grant proposal.
On
December 31, 2019, we, together with Temple University, filed a completion report with NIH-NIDA regarding the Phase 1 STTR grant.
The results of this study were promising and set forth our plans to file for a Phase 2 grant due for filing on or before April
7, 2020.
In
April 2020, the Company and Temple University filed for a Phase 2 SBIR Grant with National Institutes of Health – National
Institute of Neurological Disorders and Stroke (“NIH-NINDS”). Our application provided strong support to further the
research and development of our treatment for CIPN. Phase 2 is focused on the development, demonstration and delivery
of the innovation.
Status
of Phase 2 STTR Grant Research - NINDS
In
June 2020, the Company was informed that its Phase 2 SBIR grant application received an impact/priority score of 47. Generally
speaking, impact/priority scores of 10 to 30 are most likely to be funded. Scores between 31 and 45 might be funded; scores greater
than 46 are rarely funded. The Company believed that there were elements of its initial Phase 2 SBIR grant application that were
misunderstood and believed it still had a very strong application. After making several critical changes to the original application,
in January 2021, the Company resubmitted its Phase 2 SBIR grant application with NIH-NINDS.
On
March 10, 2021, the Company’s grant application was reviewed by the Scientific Review Group in the Study Section at NIH-NINDS
and received an impact score of 20 with a resume and summary of discussion that states, “This excellent STTR Phase II application
attempts to further establish a proprietary cannabidiol (CBD)-derived compound KLS-13019 as an effective neuroprotectant against
chemotherapy-induced peripheral neuropathy (CIPN)-associated neuropathic pain.” The summary concluded by stating, “Overall,
this objective is believed to be highly significant and promising.” According to NIH, “Generally
speaking, impact/priority scores of 10 to 30 are most likely to be funded; scores between 31 and 45 might be funded; scores greater
than 46 are rarely funded. Before 2009, NIH used a different score system, with final scores from 100 to 500, where 100 was best.”
Reduction
in Addiction Based Opiate Dependency – HEAL
According
to statistics compiled by the National Institutes of Health for the HEAL Initiative (Helping End Addiction Long-term), the public
health crisis of opioid misuse and addiction in America is rapidly evolving. More than 47,000 Americans died of opioid overdose
in 2017, and more than 2 million Americans live with addiction to opioids. Moreover, more than 50 million Americans suffer
from chronic pain, and of those, 25 million live with daily chronic pain and lack effective and safe non-opioid options
for pain management. The widespread use of opioids to treat acute and chronic pain contributed to the approximately 10.3
million people aged 12 years and older in the United States in 2018 who misused opioids, including heroin. These staggering
numbers are likely underestimates. They fail to capture the full extent of the damage of the opioid crisis, which reaches across
every domain of family and community life – from lost productivity and economic opportunity, to intergenerational and
childhood trauma, to extreme strain on community resources, including first responders, emergency rooms, hospitals, and treatment
centers. With the full support of the administration, NIH launched the Helping to End Addiction Long-term Initiative,
or NIH HEAL Initiative, to provide scientific solutions to the opioid crisis and offer new hope for individuals, families,
and communities affected by this devastating crisis.
NIH-NINDS
HEAL Initiative
Launched
in April 2018, the NIH Helping to End Addiction Long-term (HEAL) Initiative is an aggressive, trans-agency effort to
speed scientific solutions to stem the national opioid public health crisis. The Initiative will advance research to reduce
the risks of opioid use and misuse and improve pain management, thereby reducing reliance on opioids. NINDS is the lead Institute
for pain research at NIH and leads the Executive Committee of the NIH Pain Consortium, which includes 23 Institutes
and Centers. The NIH Pain Consortium’s mission includes improving the treatment of a variety of pain conditions. NINDS will
focus efforts in the NIH HEAL Initiative in developing non-addictive pain treatments that may displace the need for
opioids, and importantly, serve as effective treatments for acute and chronic pain conditions for which opioids are not effective.
This work will be informed by partners from the government, industry, academia, and patients suffering from pain.
Research
on Pain and Next Generation Analgesics
Although
opioid medications effectively treat acute pain and help relieve chronic pain for some patients, their addiction risk presents
a dilemma for healthcare providers who seek to relieve suffering while preventing drug abuse and addiction. Little is yet known
about the risk for addiction among those being treated for chronic pain or about how basic pain mechanisms interact with prescription
opioids to influence addiction potential. To better understand this, NIDA launched a research initiative on “Prescription
Opioid Use and Abuse in the Treatment of Pain.” This initiative encourages a multidisciplinary approach using both human
and animal studies to examine factors (including pain itself) that predispose or protect against opioid abuse and addiction. Funded
grants cover clinical neurobiology, genetics, molecular biology, prevention, treatment, and services research. This type of information
will help develop screening and diagnostic tools that physicians can use to assess the potential for prescription drug abuse in
their patients. Because opioid medications are prescribed for all ages and populations, NIDA is also encouraging research that
assesses the effects of prescription opioid abuse by pregnant women, children, and adolescents, and how such abuse in these vulnerable
populations might increase the lifetime risk of substance abuse and addiction.
PRIMARY
TARGETS FOR TOPICAL MEDICAMENTS AND MARKET SIZE
The
Company has completed formulation of a topical relief cream for use as an OTC cosmetic skin care product to be marketed under
the trade name of Atopidine®.
Since
mid 2019, the Company has been screening and conducting preliminary research and development of some of its patented, proprietary
cannabidiol-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. (see: Business – Neuropathix Intellectual
Properties)
In
preclinical testing, certain molecules under Patent 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 cannabidiol,
also deemed a neuroprotectant with potential anti-inflammatory properties. A molecule that is potentially more water soluble than
cannabidiol in this regard may be good candidate(s) for use in topical applications.
The
Company has completed the following relating to KLS-13022:
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Preclinical
screening for consumer OTC cosmetic use under CFR 21.
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Application
to International Nomenclature of Cosmetic Ingredients (INCI) completed to receive a compound nomenclature for KLS-13022 - Limonenyldihydroxybenzyl
Ethoxycarbonyl Azetidine (LEA).
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Received
a registered trademark from the U.S. Patent and Trademark Office (“USPTO”) for Atopidine®, to be used
as a branded product as a relief cream, containing LEA, to treat inflammatory disorders like eczema, psoriasis, radiation dermatitis
and excessive UVB radiation (post sun burn).
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Based
on preclinical testing of LEA versus CBD (cannabidiol) in cultured human epidermal keratinocytes:
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LEA provided
better anti-inflammatory activity compared to CBD for TNFa, IL-6 and significantly more potent that CBD for IL-1b inhibition in
UVB irradiation induced inflammation.
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LEA decreased
CXCL5 levels by 100% after UVB irradiation with IC50 of 0.05 mM. (CXCL5 is a small cytokine belonging to the chemokine family
known as epithelial-derived neutrophil-activating peptide 78 (ENA-78). It is produced following the stimulation of cells with
the inflammatory cytokines TNFa and IL-1b.)
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LEA decreases
levels of four (4) inflammatory mediators at concentrations > 65 times less than toxic levels.
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LEA is an
antioxidant that does not exhibit cellular irritation and is locally restricted in its action (antioxidant activity of EC50 at
25 mM).
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Neuropathic
Pain, Anti-Inflammation, Anti-Pruritic & Skin Ulcers
Target
1: Anti-Puritics (Anti-Itch) – $3.85 Billion Global Market in 2019
In
2019 it is estimated that the top ten product segments for use in U.S. pruritus therapeutics market accounted for USD$448.7 million
in sales of products such as corticosteroids and antihistamines. The global compounded annual growth rate (“CAGR”)
is expected to be 12.5% annually, which predicts a global market size of USD$10.97 billion by 2030, with U.S. sales estimated
at USD$1.295 billion.
Growing
worldwide prevalence of atopic dermatitis, allergic contact dermatitis, and urticaria is expected to drive market growth during
the forecast period. The introduction of new products based on scientific mechanistic understanding such as the identification
of new T-cell subsets, particularly Th17, and Th22 and the patent expiration of PROTOPIC (tacrolimus) is expected to open up new
avenues for manufacturers to capitalize on over the forecast period.
Corticosteroids
remain the leading product segment. Topical applications of corticosteroids have been found to be extremely effective in the treatment
and maintenance therapies pertaining to pruritus. However, according to a 2007 article in American Family Physician, long-term
topical corticosteroid use is associated with local and systemic adverse effects that may lead to the underutilization of these
effective agents. Common local adverse effects include striae, petechiae, telangiectasia, skin thinning, atrophy, and worsening
acne. These effects are reported infrequently in clinical trials, although trials are primarily designed to assess effectiveness
rather than safety and tolerability. Most clinical trials of topical steroids are of short duration and, therefore, are unable
to evaluate long-term toxicity.
Itching
is a sensation that, if sufficiently strong, will provoke scratching or the desire to scratch. It is a frequent and distressing
symptom of various dermatological and systemic diseases. It can also occur in some patients without any skin symptoms. Knowledge
has been accumulated about the initiation of itch by external stimuli, but the neuronal substrate in the skin has not been completely
identified. This has, fortunately, changed to some degree since a group of histamine-sensitive C-fibers were recently identified,
which likely represent the afferent units that mediate itch sensations. Histamine, derived from mast cells, is the best known
pruritogen. It induces different degrees of itching when applied in different concentrations into the skin. In most dermatological
and systemic diseases, except urticaria, histamine is not the main mediator. There are other proinflammatory mediators to consider,
such as substance P, proteases, interleukin-2, acetylcholine, vasoactive intestinal peptide (VIP) and opioid peptides.
Several
key characteristics of the anti-puritics market are set forth below:
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Calcineurin
inhibitor is identified as the most lucrative segment of the market on account of high usage rate of these drugs in combination
therapy for the treatment of pruritus in patients suffering from chronic pruritus and growing market penetration rates. Moreover,
the introduction of new products such as Pimecrolimus cream and Tacrolimus ointment is expected to further drive this market.
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Anti-histamines
owing to its growing use as a first line treatment and presence of drugs in pipeline with expected commercialization is also expected
to grow at a healthy rate during the forecast period.
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Target
2: Anti Inflammatory – $74 Billion Global Market in 2019
In
a research study published in April 2018 – Global Anti-Inflammatory Therapeutics Market Size, Market Share, Application
Analysis, Regional Outlook, Growth Trends, Key Players, Competitive Strategies and Forecasts, 2018 to 2026 –the Anti-inflammatory
therapeutics market projected to US$ 130.6 Bn by 2026 with CAGR of 8.5% throughout the forecast period from 2018 to 2026. Biologics
and immune selective anti-inflammatory derivatives (ImSAIDs) are the promising drugs classes that will play the main role in the
market. Global anti-inflammatory therapeutics market from 2018-2026 study is based on exhaustive analysis with insights from industry
stakeholders. The detailed study incorporates the market landscape and its growth scenarios for the forecasting period from 2018-2026.
According
to World Health Organization (WHO), around 235 million individuals experience the ill effects of asthma around the globe. Symptomatic
help amid the inflammation gives alleviation to the patients suffering from inflammatory diseases. In spite of the fact that there
are numerous anti-inflammatory drugs present in the market, still, there is an essential requirement for better and novel anti-inflammatory
therapeutics drugs with slighter side effects and improved efficacy.
Based
on the drug types, the global anti-inflammatory therapeutics market is segmented into biologics, corticosteroids, immune selective
anti-inflammatory derivatives (ImSAIDs), and non-steroidal anti-inflammatory drugs (NSAIDs); additionally, the indication studied
in this report are categorized into COPD, multiple sclerosis, IBD, psoriatic arthritis, gout, and Others (Osteoarthritis, Systemic
Lupus, Psoriasis). Rising prevalence of inflammatory diseases and the strong drug pipeline would additionally boost the anti-inflammatory
therapeutics market.
In
addition, they are also difficult to imitate due to their complex molecular structure and origin. The global anti-inflammatory
market has been driven by factors such as increasing autoimmune and respiratory conditions, new drugs in pipeline and increasing
adoption of anti-inflammatory drugs.
In
2014, AstraZeneca had five anti-inflammatory drugs in the final stages of drug development. These drugs are lesinurad, sifalimumab,
anifrolumab, mavrilimumab and brodalumab. The companies have filed new patents to overcome the issues of patent expiries of their
existing drugs, and to gain a prominent market share. The key companies profiled in this report include Pfizer, Inc., Abbvie,
Inc., Johnson & Johnson, GlaxoSmithKline, Merck & CO., Inc., Novartis, F. Hoffman, La Roche AG, Eli Lily and Company,
AstraZeneca PLC, and Amgen.
Target
3: Atopic Dermatitis / Eczema – $3+ Billion Market in North America in 2020
In
a research study published in February 2020 – North America Atopic Dermatitis Treat Market Research Study – the size
of the atopic dermatitis treatment market in North America is valued at USD$2.95 billion in 2020 and is expected to grow at a
CAGR of 13.4% to reach USD$5.52 billion by 2025. Atopic dermatitis is an inflammatory skin disease. The degree of its severity
varies from patient to patient. It usually begins in childhood and is mostly confined to flexural surfaces of the body. It is
highly prevalent. It is more commonly known as eczema. Itching, redness of skin, cracking, and weeping are symptoms of it. It
is a long term disease. Low humidity, cold weather, seasonal allergies are the common causes of it. Pattern of the disease and
its severity determine the kind of treatment a patient with eczema is to receive.
The
Eczema Therapeutics Market is Dominated by Topical Corticosteroids (TCSs)
Current
competition in the eczema therapeutics market contains conventional forms of therapy such as topical corticosteroids, topical
immunomodulators and emollients as the most prominent therapies. Among all the available treatment options, topical corticosteroids
hold a large share and dominate the market. Topical corticosteroids are available in various strengths (mild, moderate, potent
and very potent) and formulations (ointment, cream, lotion and many more), so that they can be used according to the severity
of eczema. Calceurin inhibitors (Protopic (tacrolimus) and Elidel (pimecrolimus)) showed higher efficacy in comparison to corticosteroids
and these products were widely used after their respective launches. However, in 2005 the FDA issued black box warnings for the
calceurin inhibitors (Protopic and Elidel), which has resulted in declining sales of these products. Emollients have good efficacy
as well as good safety. They hydrate, moisturize and repair the skin. These products do not offer first line treatment, but they
are useful as maintenance therapy in eczema patients.
Significant
Unmet Need in Eczema Therapeutics Market Could Drive Market
Eczema
is a chronic condition characterized by frequent relapses known as flare-ups. The market has various products that are effective,
but their safety profile is not always satisfactory, leaving a significant unmet need in the market. The unmet need is also a
result of the lack of effective treatment options for severe conditions; the need for a controlled and targeted drug delivery
system; low patience compliance and the black box warnings issued to Elidel and Protopic. The unmet need in eczema therapeutics
could be filled by a new entrant with a better safety profile, enhanced patient compliance, and competitive pricing with respect
to the available products.
Target
4: Psoriasis – $5+ Billion Market in North America in 2019
Psoriasis
is a common chronic skin disorder. It is also associated with several comorbidities, such as obesity, hypertension, psoriatic
arthritis, depression, and diabetes. Psoriasis is characterized by skin flares and inflammation that vary in severity, from minor
localized patches to substantial body surface involvement. Around 20% of diagnosed patients have moderate to severe psoriasis.
Currently, in the United States, psoriasis is a $8.48 billion market in 2019, of which 90% are from drugs targeting moderate to
severe psoriasis patients where the skin manifestation affects more than 3% of the body. See Treatment of Psoriasis in
Adults – Steven R. Feldman, MD, PhD, August 24, 2018. For such patients, psoriasis is often a debilitating
condition impacting their quality of life and psychological well-being. Over the past decade, biologics have altered the landscape
in the management of moderate to severe psoriasis by achieving improved skin clearance, control of symptoms and quality of life
for hundreds of thousands of individuals affected.
Psoriasis
is linked to pathogenesis caused by dysregulation of T-cell-dependent immune response, as well as hyperproliferation of keratinocytes,
the predominant cell type on the outer layer of skin. Biologics target the cytokines usually upregulated as a result of the abnormal
immune response.
Target
5: Diabetic Foot Ulcers – $3+ Billion Market in U.S.
The
market for Diabetic Foot Ulcers in the U.S. is $3+ billion and growing. There are 29 million people living with diabetes and 86
million pre-diabetics in the U.S. Approximately 25% of diabetics will acquire a non-healing ulcer in their lifetime, which equates
to approximately 3 million diabetic ulcers annually. Diabetic foot ulcers lead to over 73,000 amputations annually at a cost that
is estimated to exceed $5 billion annually. Hospitalization costs are approximately $20,000 per patient with diabetic foot ulcers
and $70,000 for an amputation. The global numbers are more startling. 400 million people are currently living with diabetes worldwide
and that number is expected to increase to approximately 600 million by 2035.
The
current approach to treating diabetic foot ulcers requires offloading the wound by using appropriate therapeutic footwear, daily
saline or similar dressings to provide a moist wound environment, debridement when necessary, antibiotic therapy
if osteomyelitis or cellulitis is present, optimal control of blood glucose, and evaluation and correction of
peripheral arterial insufficiency. Wound coverage by cultured human cells or heterogeneic dressings/grafts, application
of recombinant growth factors, and hyperbaric oxygen treatments also may be beneficial at times, but only if arterial
insufficiency is not present. Among people with diabetes, most severe foot infections that ultimately require some part of the
toe, foot or lower leg to be amputated start as a foot ulcer. See Diabetic Ulcers Treatment & Management, V.L.
Rowe, MD, R. Khardori MD, PhD, FACP, Medscape, March 12, 2018.
Foot
ulcers are especially common in people who have one or more of the following health problems:
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Peripheral
neuropathy. This is nerve damage in the feet or lower legs. Diabetes is the most common cause of peripheral neuropathy.
When nerves in the feet are damaged, they can no longer warn about pain or discomfort. When this happens, tight-fitting shoes
can trigger a foot ulcer by rubbing on a part of the foot that has become numb. People with peripheral neuropathy may not be able
to feel when they've stepped on something sharp or when they have an irritating pebble in their shoes. They can injure their feet
significantly and never know it, unless they examine their feet routinely for injury.
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Many
elderly people and diabetics with vision problems also can't see their feet well enough to examine them for problems.
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Circulatory
problems. Any illness that decreases circulation to the feet can cause foot ulcers. Less blood reaches the feet, which
deprives cells of oxygen. This makes the skin more vulnerable to injury, and it slows the foot’s ability to heal.
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Poor
circulation in the leg arteries is called peripheral artery disease. It also causes pain in the leg or buttock during walking.
It is caused by atherosclerosis. This is a disease in which fatty deposits of cholesterol build up inside arteries.
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Abnormalities
in the bones or muscles of the feet. Any condition that distorts the normal anatomy of the foot can lead to foot ulcers.
This is particularly true if the foot is forced into shoes that don’t fit the foot’s altered shape. Examples are claw
feet, feet with fractures, and cases of severe arthritis.
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More
than any other group, people with diabetes have a particularly high risk of developing foot ulcers. This is because the long-term
complications of diabetes often include neuropathy and circulatory problems. Without prompt and proper treatment, a foot ulcer
may require hospital treatment. Or, it may lead to deep infection or gangrene and amputation.
Governmental
Regulations
Manufacturing
Although
we would be reliant upon the manufacturing of our target drug candidates and API from well-established manufacturers, manufacturers
of therapeutic products and their facilities are subject to continual review and periodic inspections by the FDA, the EMA and
other comparable foreign regulatory authorities for compliance with current good manufacturing practices (“cGMP”)
regulations.
Further,
manufacturers of controlled substances must obtain and maintain necessary DEA and state registrations and registrations with applicable
foreign regulatory authorities and must establish and maintain processes to ensure compliance with DEA and state requirements
and requirements of applicable foreign regulatory authorities governing, among other things, the storage, handling, security,
recordkeeping and reporting for controlled substances.
If
we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity
or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on
that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension
of manufacturing. If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with
applicable regulatory requirements, a regulatory agency may, among other things:
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issue untitled
letters or warning letters;
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mandate
modifications to promotional materials or require us to provide corrective information to healthcare practitioners;
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require
us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required
due dates for specific actions and penalties for noncompliance;
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seek an
injunction or impose civil or criminal penalties or monetary fines;
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suspend
or withdraw regulatory approval;
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suspend
any ongoing clinical trials;
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refuse to
approve pending applications or supplements to applications filed by us; or
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require
us to initiate a product recall.
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The
occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and may otherwise
have a material adverse effect on our business, financial condition and results of operations.
Regulation
of CBD
KLS-13023
contains controlled substances as defined in the CSA. Controlled substances that are pharmaceutical products are subject to a
high degree of regulation under the CSA, which establishes, among other things, certain registration, manufacturing quotas, security,
recordkeeping, reporting, import, export and other requirements administered by the DEA. The DEA classifies controlled substances
into five schedules: Schedule I, II, III, IV or V substances. Schedule I substances, by definition, have a high potential for
abuse, have no currently “accepted medical use” in the United States, lack accepted safety for use under medical supervision,
and may not be prescribed, marketed or sold in the United States. Pharmaceutical products approved for use in the United States
may be listed as Schedule II, III, IV or V, with Schedule II substances considered to present the highest potential for abuse
or dependence and Schedule V substances the lowest relative risk of abuse among such substances. Schedule I and II drugs are subject
to the strictest controls under the CSA, including manufacturing and procurement quotas, security requirements and criteria for
importation. In addition, dispensing of Schedule II drugs is further restricted. For example, they may not be refilled without
a new prescription.
While
cannabis is a Schedule I controlled substance, products approved for medical use in the United States that contain cannabis or
cannabis extracts must be placed in Schedules II - V, since approval by the FDA satisfies the “accepted medical use”
requirement. If and when KLS-13023 receives FDA approval, the DEA will make a scheduling determination and place it in a schedule
other than Schedule I in order for it to be prescribed to patients in the United States. If approved by the FDA, we expect the
finished dosage forms of KLS-13023 to be listed by the DEA as a Schedule II or III controlled substance. Consequently, their manufacture,
importation, exportation, domestic distribution, storage, sale and legitimate use will be subject to a significant degree of regulation
by the DEA. The scheduling process may take one or more years beyond FDA approval, thereby significantly delaying the launch of
KLS-13023. Furthermore, if the FDA, DEA or any foreign regulatory authority determines that KLS-13023 may have potential for abuse,
it may require us to generate more clinical data than that which is currently anticipated, which could increase the cost and/or
delay the launch of KLS-13023.
Because
KLS-13023 contains active ingredients of cannabis, which are Schedule I substances, to conduct pre-clinical studies and clinical
trials with KLS-13023 in the United States prior to approval, each of our research sites must submit a research protocol to the
DEA and obtain and maintain a DEA researcher registration that will allow those sites to handle and dispense with KLS-13023 and
to obtain the product from our manufacturer. If the DEA delays or denies the grant of a research registration to one or more research
sites, the pre-clinical studies or clinical trials could be significantly delayed, and we could lose and be required to replace
clinical trial sites, resulting in additional costs.
We
expect that KLS-13023 will be scheduled as Schedule II or III, as a result of which we will also need to identify wholesale distributors
with the appropriate DEA registrations and authority to distribute the products to pharmacies and other healthcare providers,
and these distributors would need to obtain Schedule II or III distribution registrations. The failure to obtain, or delay in
obtaining, or the loss of any of those registrations could result in increased costs to us. If KLS-13023 is a Schedule II drug,
pharmacies would have to maintain enhanced security with alarms and monitoring systems and they must adhere to recordkeeping and
inventory requirements. This may discourage some pharmacies from carrying the product. Furthermore, state and federal enforcement
actions, regulatory requirements, and legislation intended to reduce prescription drug abuse, such as the requirement that physicians
consult a state prescription drug monitoring program, may make physicians less willing to prescribe, and pharmacies to dispense,
Schedule II products.
We
may manufacture the commercial supply of KLS-13023 outside of the United States. If KLS-13023 is approved by the FDA and classified
as a Schedule II or III substance, an importer can import for commercial purposes if it obtains from the DEA an importer registration
and files an application with the DEA for an import permit for each import. The DEA provides annual assessments/estimates to the
International Narcotics Control Board, which guides the DEA in the amounts of controlled substances that the DEA authorizes to
be imported. The failure to identify an importer or obtain the necessary import authority, including specific quantities, could
affect the availability of KLS-13023 and have a material adverse effect on our business, results of operations and financial condition.
In addition, an application for a Schedule II importer registration must be published in the Federal Register, and there is a
waiting period for third party comments to be submitted.
Individual
states have also established controlled substance laws and regulations. Though state-controlled substance laws often mirror federal
law, because the states are separate jurisdictions, they may separately schedule our product candidates as well. While some states
automatically schedule a drug based on federal action, other states schedule drugs through rulemaking or a legislative action.
State scheduling may delay commercial sale of any product for which we obtain federal regulatory approval and adverse scheduling
could have a material adverse effect on the commercial attractiveness of such product. We or our partners must also obtain separate
state registrations, permits or licenses in order to be able to obtain, handle, and distribute controlled substances for clinical
trials or commercial sale, and failure to meet applicable regulatory requirements could lead to enforcement and sanctions by the
states in addition to those from the DEA or otherwise arising under federal law.
We
currently obtain the API for KLS-13023 from a bulk manufacturer of pharmaceutical grade API in Switzerland. For KLS-13023, we
plan to conduct Phase 1 clinical trials in Australia, subject to applicable regulatory approval. In addition, we may decide to
develop, manufacture or commercialize our product candidates in additional countries. As a result, KLS-13023 will also be subject
to controlled substance laws and regulations from the Therapeutic Goods Administration in Australia, Health Canada’s Office
of Controlled Substances in Canada, and from other regulatory agencies in other countries where we may develop, manufacture or
commercialize KLS-13023 in the future. We plan to submit NDA for KLS-13023 to the FDA upon completion of all requisite clinical
trials and will require additional DEA approvals at such time as well.
On
September 27, 2018, the DOJ and DEA announced that Epidiolex, the newly approved medication by the Food & Drug Administration,
was being placed in Schedule V of the Controlled Substances Act, the least restrictive schedule of the CSA. On June 26, 2018,
the FDA announced it approved Epidiolex for the treatment of seizures associated with two rare and severe forms of epilepsy, Lennox-Gastaut
syndrome and Dravet syndrome, in patients two years of age and older. Epidiolex contains CBD.
The
CBD in Epidiolex is extracted from the cannabis plant and is the first FDA-approved drug to contain a purified extract from the
plant. Schedule V drugs represents the least potential for abuse. Schedule V drugs, substances, or chemicals are defined
as drugs with lower potential for abuse than Schedule IV and consist of preparations containing limited quantities of certain
narcotics. Schedule V drugs are generally used for antidiarrheal, antitussive, and analgesic purposes. Some examples of Schedule
V drugs are: cough preparations with less than 200 milligrams of codeine or per 100 milliliters (Robitussin AC), Lomotil, Motofen,
Lyrica, Parepectolin.
Despite
the approvals by the FDA and DEA for Epidiolex, any of these foregoing factors, many of which are beyond our control, could jeopardize
our ability to obtain regulatory approval for and successfully market KLS-13019 or KLS-13023. Moreover, because our business is
almost entirely dependent upon these two product candidates, any such setback in our pursuit of regulatory approval would have
a material adverse effect on our business and prospects.
KLS-13019
does not contain CBD and is a new chemical entity that would not fall under the CSA or be deemed a Schedule 1 controlled substance.
KLS-13023
is a formulation that does contain CBD. At present, CBD is deemed a Schedule 1 controlled substance by the DEA under the CSA.
Like the drug molecule EpidiolexÒ, which was recently approved by the FDA for marketing and sale for use in treating Dravet’s
Syndrome and Lennox-Gasteau Syndrome (forms of child epilepsy), KLS-13023 would need to follow the guidance set forth by the CSA,
complete a successful human clinical trial and apply for rescheduling, as was the case with EpidiolexÒ, now a Schedule
5 drug.
On
January 14, 2019, we received written notice from the DEA Drug and Chemical Evaluation Section, as follows: “Please be advised
that your material meets the definition of ‘Hemp’ and is not regulated under the CSA, as long as it consists of high
purity Cannabidiol (CBD) that contains approximately 0.1% delta-9- THC. (However, if it contains more than 0.3% delta-9 THC, it
is considered ‘Marihuana’ and would be in Schedule 1 of the CSA).” While this notice is an official notice from
the DEA regarding the scheduling of high purity CBD, we will continue to abide by the CSA in all respects with regards to our
treatment and handling of CBD.
The
active pharmaceutical ingredient (“API”) found in KLS-13023 is highly purified synthetic CBD produced by Purisys.
Purisys has been manufacturing cannabidiol since 2016 (DMF33223). Today, through our partnership with Purisys, we have the ability
to produce on the largest commercial scale. Purisys’ ultra-high purity CBD (“Purisys CBD”) is attractive for
drug development projects and falls significantly below the 0.3% THC limits set in the 2018 Farm Bill for use in consumer products. Purisys’
patent-protected manufacturing process produces a consistently odorless, tasteless white powder highest-purity form of CBD that
exhibits:
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No heavy
metals (e.g. lead) from soil;
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No environmental
influences on quality such as rain, sunlight & soil nutrients;
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No plant
impurities to remove;
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No microbial
or mold proliferation; and
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No structural
(or stereo chemical) differences exist between an active cannabinoid ingredient manufactured by Purisys and those that are chemically
extracted and isolated from plants. They are, in effect, nature-identical.;
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Purisys
currently has a drug master file (“DMF”) for its ultra-high purity CBD with the FDA. In November 2019, Purisys received
advise notice from the DEA that the Purisys CBD has been removed from Schedule 1 of the CSA.
On
March 11, 2021, the chairman of the House Judiciary Committee, announced that the Marijuana Opportunity, Reinvestment and Expungement
(MORE) Act, introduced in 2019, which passed in the U.S. House of Representatives in December 2020, will be re-filed in 2021,
seeking ratification by the Senate.
If
passed by the U.S. Senate, the MORE Act would deschedule cannabis from the Controlled Substances Act and enact various criminal
and social justice reforms to cannabis, including the expungement of prior convictions. The MORE Act also seeks to tax cannabis
products at 5% to fund criminal and social reform projects, including an Office of Cannabis Justice within the Department of Justice
Office of Justice Programs responsible for administering grants to aid communities negatively affected by the war on drugs. (See:
Controlled Substances Laws and Regulations).
Foreign
Regulatory Agencies
EMA
In
order to market and sell our products in jurisdictions other than the United States and the European Union, we must obtain separate
marketing approvals and comply with numerous and varying regulatory requirements. The regulatory approval process outside the
United States and the European Union generally includes all of the risks associated with obtaining FDA and EMA approval, but can
involve additional testing. We may need to partner with third parties in order to obtain approvals outside the United States and
the European Union. In addition, in many countries worldwide, it is required that the product be approved for reimbursement before
the product can be approved for sale in that country. We may not obtain approvals from regulatory authorities outside the United
States and the European Union on a timely basis, if at all. Even if we were to receive approval in the United States or the European
Union, approval by the FDA or the EMA does not ensure approval by regulatory authorities in other countries or jurisdictions.
Similarly, approval by one regulatory authority outside the United States and the European Union would not ensure approval by
regulatory authorities in other countries or jurisdictions or by the FDA or the EMA. We may not be able to file for marketing
approvals and may not receive necessary approvals to commercialize our products in any market. If we are unable to obtain approval
of our product candidates by regulatory authorities in other foreign jurisdictions, the commercial prospects of those product
candidates may be significantly diminished and our business prospects could decline.
Therapeutic
Goods Administration (TGA)
Clinical
trials conducted in Australia are subject to various regulatory controls to ensure the safety of participants. The TGA regulates
the use of therapeutic goods supplied in clinical trials in Australia under the therapeutic goods legislation.
Clinical
trial sponsors must be aware of the requirements to import, export, manufacture and supply therapeutic goods in Australia. The
following avenues provide for the importation into and/or supply in Australia of ‘unapproved’ therapeutic goods for
use in a clinical trial:
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Clinical
Trial Notification (“CTN”) scheme; and
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Clinical
Trial Exemption (“CTX”) scheme.
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The
CTN Scheme is a notification process involving the following:
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The Australian
clinical trial sponsor must notify us of the intent to sponsor a clinical trial involving an ‘unapproved’ therapeutic
good. This must take place before starting to use the goods. The notification form must be submitted online and accompanied by
the relevant fee.
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We may give
the sponsor of the trial written notice to provide specified information relating to goods notified in the CTN form.
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We do not
evaluate any data relating to the clinical trial at the time of submission. The Human Research Ethics Committee (“HREC”)
reviews the scientific validity of the trial design, the balance of risk versus harm of the therapeutic good, the ethical acceptability
of the trial process, and approves the trial protocol. The HREC is also responsible for monitoring the conduct of the trial.
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The institution
or organization at which the trial will be conducted, referred to as the ‘Approving Authority,’ gives the final approval
for the conduct of the trial at the site, having due regard to advice from the HREC
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It is the
responsibility of the sponsor to ensure that all relevant approvals are in place before supplying the ‘unapproved’
therapeutic goods in the clinical trial.
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The
CTX Scheme is an approval process involving the following:
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A sponsor
submits an application to us seeking approval to supply ‘unapproved’ therapeutic goods in a clinical trial. The application
must be accompanied by the relevant fee.
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We evaluate
summary information about the product including relevant, but limited, scientific data (which may be preclinical and early clinical
data) prior to the start of a trial.
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The HREC
is responsible for considering the scientific and ethical issues of the proposed trial protocol.
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The sponsor
must notify us of each trial conducted using the unapproved therapeutic good(s) approved in the CTX application.
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Clinical
trials that do not involve ‘unapproved’ therapeutic goods are not subject to requirements of the CTN or CTX schemes.
It is the responsibility of the Australian clinical trial sponsor to determine whether a product is considered an ‘unapproved’
therapeutic good.
Clinical
trials that do not involve ‘unapproved’ therapeutic goods are not subject to requirements of the CTN or CTX schemes.
It is the responsibility of the Australian clinical trial sponsor to determine whether a product is considered an ‘unapproved’
therapeutic good.
On
September 27, 2013, the TGA approved Nabiximols (Sativex ®), a pharmaceutical manufactured by GW Pharmaceuticals
for its collaborator Novartis Pharmaceuticals Australia Pty Limited, in the treatment for symptom improvement in patients with
moderate to severe spasticity due to multiple sclerosis (“MS”) who have not responded adequately to other anti-spasticity
medication and who demonstrated clinically significant improvement in spasticity related symptoms during the initial trial of
therapy.
In
Australia, in 2014, the Advisory Council on Medicines Scheduling recommended rescheduling CBD from a prohibited substance to being
a prescription medicine because, according to the Advisory Council on Medicines Scheduling, “there is a low risk of misuse
or abuse as cannabidiol does not possess psychoactive properties.” The TGA accepted this recommendation, and the decision
took effect in July 2015.
CBD
is one of the cannabinoids which may be extracted as a therapeutic good from cannabis. From June 1, 2015, cannabidiol has been
included under Schedule 4 (S4) Prescription Only Medicine of the Poisons Standard (/publication/poisonsstandard-susmp) when preparations
for therapeutic use contain 2% or less of other cannabinoids found in cannabis.
In
February 2016, the Australian Federal Government passed legislation that amended the Narcotic Drugs Act, allowing the supply of
suitable medicinal cannabis products for the management of painful and chronic conditions. This legislation does not relate to
the decriminalization of cannabis for general cultivation or recreational use and it does not include the provision of medicinal
grade herbal cannabis, only processed, non-smokable medicinal grade products.
Much
of the detail remains unclear. For example, the legislation does not specify which products will be covered under the amendment,
and it does not specify which particular conditions or symptoms will be eligible for treatment with cannabis-based products. Before
products can be prescribed, they must be registered with the Therapeutic Goods Administration (TGA) or, in rare circumstances,
receive special approval from the TGA. The registration process requires evidence of testing and efficacy and it is therefore
unlikely Australia will see a TGA registered medicinal cannabis product that GPs can prescribe any time soon. Whilst there are
currently no cannabis-based products that are lawfully produced in Australia, the medicinal use of pharmaceutical products containing
cannabinoids is not prohibited, as long as authorization for prescribing is granted from the Commonwealth Therapeutic Goods Administration
and at this point in time, NSW Health.
Raw
Materials and Product Manufacturing
The
Company does not currently manufacture any API and relies solely upon third party manufacturers to produce research quantities
of its compounds, KLS-13019; KLS-13022; and KLS-13023, in the 5 gram to 100 gram scale for its preclinical research.
For
the KLS-13023 compound, the Company relies upon Purisys to produce a highly purified synthetic CBD. Purisys has been manufacturing
cannabidiol since 2016 (DMF33223). Today, through our partnership with Purisys, we have the ability to produce on the largest
commercial scale. Purisys’ ultra-high purity CBD (“Purisys CBD”) is attractive for drug development projects
and falls significantly below the 0.3% THC limits set in the 2018 Farm Bill for use in consumer products. Purisys’
patent-protected manufacturing process produces a consistently odorless, tasteless white powder highest-purity form of CBD that
exhibits:
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No heavy
metals (e.g. lead) from soil;
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•
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No environmental
influences on quality such as rain, sunlight & soil nutrients;
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No plant
impurities to remove;
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•
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No microbial
or mold proliferation; and
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No structural
(or stereo chemical) differences exist between an active cannabinoid ingredient manufactured by Purisys and those that are chemically
extracted and isolated from plants. They are, in effect, nature-identical.
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Purisys
currently has a drug master file (“DMF”) for its ultra-high purity CBD with the FDA. In November 2019, Purisys received
advise notice from the DEA that the Purisys CBD has been removed from Schedule 1 of the CSA.
In
the event the Company pursues a strategy to move KLS-13023 into FDA clinical trials, it has set up a manufacturing process utilizing
Purisys as the bulk API producer of ultra-high purity CBD and Catalent Pharma Solutions (“Catalent”), a manufacturer
of formulated and packaged pharmaceuticals, will enable us to meet our objectives in the production of target drug candidates
that can be used in clinical trials and, beyond successful clinical trials, meet patient demand in commercial sales for each of
our target disease indications. (See: Neuropathix Studies on CBD)
Environmental
Matters
No
significant pollution or other types of hazardous emission result from our current operations, and we do not anticipate that our
operations will be materially affected by federal, state or local provisions concerning environmental controls. Our costs of complying
with environmental, health and safety requirements have not been material. Furthermore, compliance with federal, state and local
requirements regulating the discharge of materials into the environment, or otherwise relating to the protection of the environment,
have not had, nor are they expected to have, any material effect on the capital expenditures, earnings or competitive position
of the Company. However, we will continue to monitor emerging developments in this area.
Competition
There
are several companies developing cannabinoid therapeutics for a range of medical indications. The cannabinoid therapeutic area
currently includes formulated extracts of the Cannabis plant and synthetic formulations. These formulations include
CBD or THC, or a combination of CBD and THC as the active pharmaceutical ingredient. Certain companies such as GW Pharmaceuticals
plc have focused on plant-based CBD formulations, while other companies such as Zynerba Pharmaceuticals, Inc. and Insys Therapeutics,
Inc. have focused on synthetic CBD formulations.
Employees
We
currently have seven full time employees. We plan to increase the number of employees in the areas of regulatory affairs, clinical
research and testing, and marketing in 2021. There are no collective-bargaining agreements with our employees, and we have not
experienced work interruptions or strikes. We believe our relationship with employees is good and we provide health and life insurance
for all employees.
Company
Website
We
maintain a corporate Internet website at: www.neuropathix.com. The contents of our website are not incorporated in or otherwise
to be regarded as part of this prospectus.
We
file reports with the Securities and Exchange Commission (“SEC”), which are available on our website free of charge.
These reports include annual reports on Form 10-K, quarterly reports on Form 10-Q, current reports on Form 8-K, “Section
16” filings on Form 3, Form 4, and Form 5, and other related filings, each of which is provided on our website as soon as
reasonably practical after we electronically file such materials with or furnish them to the SEC. In addition, the SEC maintains
a website (www.sec.gov) that contains reports, proxy and information statements, and other information regarding issuers that
file electronically with the SEC, including the Company.
Legal
Proceedings
On
or about September 18, 2013, a lawsuit was filed by two individuals against the Company and the Company’s CEO. The plaintiffs
allege that they provided business services to Kannalife Sciences, Inc. (“Kannalife”) in the amount of $150,000, including
but not limited to providing strategic introductions to Kannalife and Mr. Petkanas and were seeking 17% of the issued and outstanding
stock of Kannalife. The Company believed, at all times, that the allegations to be without merit and vigorously defended itself.
On
or about September 30, 2013, Kannalife and Mr. Petkanas filed a motion to dismiss all five causes of action alleged against Kannalife
and Mr. Petkanas.
On
May 12, 2014, the court dismissed all five causes of action alleged by one plaintiff against Kannalife and Mr. Petkanas.
On
March 27, 2015, the court granted permission to this plaintiff to replead his complaint (the “Repleading Plaintiff”).
On
July 14, 2015, the court denied the Repleading Plaintiff’s motion to reargue, affirming the dismissal of all of the Repleading
Plaintiff’s causes of action, which left three causes of action that remain open relating to the remaining plaintiff (the
“Remaining Plaintiff”).
In
December 2016, Kannalife and Mr. Petkanas filed a motion for summary judgment to seek the court’s decision in dismissing
the remainder of the claims alleged by the Remaining Plaintiff.
On
June 30, 2017, the motion for summary judgment made by Kannalife and Mr. Petkanas was granted. All remaining causes of action
by the Remaining Plaintiff were dismissed.
On
February 7, 2018, the Remaining Plaintiff, (the “Plaintiff-Appellant”) appealed from the June 30, 2017 decision and
order of the lower court, which granted the Kannalife’s and Mr. Petkanas’ (Defendants-Respondents) motion for summary
judgment dismissing all of Plaintiff-Appellant’s claims. In his amended complaint, Plaintiff-Appellant alleged the existence
of an oral agreement between himself and Kannalife and Mr. Petkanas for the exchange of investments (including both money and
services) from Plaintiff-Appellant in return for the transfer of 17% of Kannalife’s shares. However, Plaintiff-Appellant’s
allegations consisted of nothing more than vague statements regarding what he promised to provide to Kannalife and to Mr. Petkanas
in exchange for nearly one-fifth of Kannalife’s shares. After years of litigation, including extensive depositions and document
exchanges, the evidence elicited by both parties failed to clarify either the precise terms of the alleged oral agreement or that
Plaintiff-Appellant actually made any investments as he allegedly promised to do. In the lower court, Kannalife and Mr. Petkanas
moved for summary judgment dismissing Plaintiff-Appellant’s claims based on certain undisputed facts: that no evidence existed
to show that Plaintiff-Appellant–or Stone Engineering, P.C., which is Plaintiff-Appellant’s S Corporation–made
any investment at all in Kannalife; that even if Plaintiff-Appellant did make any investments, the alleged agreement is unenforceable
pursuant to General Obligations Law § 5-701(a)(1) (the Statue of Frauds) because the terms cannot be completed within one
year; and the contract is unenforceable as a matter of hornbook law because Plaintiff-Appellant’s own testimony establishes
that he and Kannalife and Mr. Petkanas never reached a “meeting of the minds” with respect to the contours of Plaintiff-Appellant’s
supposed offer of investments or the time period for transferring the shares to Plaintiff-Appellant.
On
appeal, Plaintiff-Appellant argues the lower court’s decision was wrong because: (1) it was based upon an erroneous finding
that Plaintiff-Appellant lacks standing to recover his shares in Kannalife; and (2) enforcement of the alleged contract is not
barred by the Statute of Frauds because (a) its terms were capable of being performed within one year and (b) the alleged agreement
constitutes a securities contract under UCC § 8-113 that does not require a writing to be enforceable. However, in Opposition
Kannalife and Mr. Petkanas argued that the lower court’s decision should primarily be affirmed based upon an argument raised
by Kannalife and Mr. Petkanas in their motion: the undisputed evidence shows that there was no meeting of the minds between Plaintiff-Appellant,
and Kannalife and Mr. Petkanas regarding the terms of the alleged oral agreement. Moreover, the terms of the alleged agreement
that Plaintiff-Appellant himself asserted–if they are assumed to be true for purposes of the motion and appeal–indicate
that it was impossible for him to perform his obligations within one year; and a review of UCC § 8-113 along with interpretive
case law requires a conclusion that the alleged agreement in this case does not constitute the type of securities contract that
does not require a writing to be enforceable. Thus, to the extent an oral agreement between Plaintiff-Appellant, and Kannalife
and Mr. Petkanas was ever actually created, then its enforcement is barred by the Statute of Frauds—and the lower court’s
decision to dismiss Plaintiff-Appellant’s claim seeking enforcement of the alleged oral agreement was properly reached for
these reasons. Accordingly, Kannalife and Mr. Petkanas believe that the 2nd Department will affirm the lower court’s decision
and order entirely.
On
September 28, 2018, in an attempt to correct fatal flaws in the Plaintiff-Appellant’s original case dismissed on June 30,
2017, the Plaintiff-Appellant filed a new lawsuit against Kannalife and Mr. Petkanas, alleging much, if not all of the same claims
as in the original case filed by the Plaintiff-Appellant, a case which was dismissed on June 30, 2017. This new lawsuit now seeks,
instead of the relief sought in the case previously dismissed, a sum of no less than $21,250,000.
Subsequently,
Kannalife and Mr. Petkanas filed a motion to dismiss the new lawsuit on grounds of res judicata. The Plaintiff-Appellant filed
a cross-motion for a stay.
On
October 30, 2019, the Court ruled in favor of Kannalife and Mr. Petkanas, stating “The motion to dismiss is granted to the
extent that the matter is dismissed on the ground of res judicata, and cross-motion for a stay is denied, in accordance with the
reasons set forth in the Court’s oral decision of October 30, 2019, following oral argument. This constitutes the Decision
and Order of this Court.”
On
February 3, 2021, the 2nd Department entered a final decision and order with respect to the first case, affirming the lower court’s
grant of the Company’s and Mr. Petkanas’ motion for summary judgment dismissing all of Plaintiff-Appellant’s
remaining claims based on its finding that the parties never reached a “meeting of the minds” with respect to the
contours of Plaintiff-Appellant’s supposed offer of investments or the time period for transferring the shares to Plaintiff-Appellant,
and therefore no enforceable contract was formed.
To
date, the Plaintiff-Appellant has not appealed the decision of the 2nd Department. However, if he does, we will continue to defend
ourselves vigorously and believe that we will likely be successful in such defense.
Other
than aforementioned, there are no pending legal proceeding relating to our company and its CEO to which we are a party, and to
our knowledge there are no material proceedings to which any of our directors, executive officers or affiliates is a party adverse
to us or which have a material interest adverse to us.
MANAGEMENT
The
following table sets forth the names, ages, and positions of our executive officers and directors:
|
Name
|
|
Age
|
|
Position
|
|
Dean
Petkanas
|
|
57
|
|
Chief
Executive Officer and Chairman of the Board
|
|
Mark
Corrao
|
|
63
|
|
Chief
Financial Officer
|
|
Thomas
Kikis
|
|
43
|
|
Chief
Communications Officer and Director
|
|
Dr.
William Kinney
|
|
63
|
|
Chief
Scientific Officer
|
|
Robert
Malasek
|
|
53
|
|
Director
|
|
Blake
Schroeder
|
|
42
|
|
Director
|
|
Dr.
Timothy R. Scott
|
|
68
|
|
Director
|
Executive
Officers
Dean
Petkanas was appointed as our Chief Executive Officer and Chairman of the Board of Directors on July 25, 2018. Mr. Petkanas
is a corporate finance and executive management professional with over 25 years of investment banking and capital markets experience.
In 2010, Mr. Petkanas co-founded Kannalife Sciences, Inc. and for the past 10 years was principally responsible for the creation
and execution of the Company’s business model, including the licensing of US Patent #6630507 from the National Institutes
of Health for disease indications HE and CTE. Mr. Petkanas is a co-inventor of US Patent #9611213 “Novel Functionalized
1,3 Benzene Diols and Their Method of Use for the Treatment of Hepatic Encephalopathy.” Mr. Petkanas’ background in
the pharmaceuticals extends to his work as investment banker and subsequently V.P. of Business Development for Xechem International,
Inc., where he was principally responsible for Xechem’s IPO and EXIM Bank rounds of financing. Mr. Petkanas was involved
with Xechem from 1992 to 2007. While at Xechem, he was involved in the financing of Xechem’s lead target drug candidate
(generic paclitaxel), and later on from 2003 to 2007, was the lead petitioner for Xechem International in steering their federal
anti-trust lawsuit against Bristol-Myers-Squibb for their illegal monopoly of the drug market for the anti-cancer drug, Taxol®.
Mr. Petkanas also was an integral part of the development team that named, trademarked and commercialized Hemoxin (Nicosan), a
phyto-pharmaceutical molecule for the treatment of Sickle Cell disease. Mr. Petkanas brings his extensive business and industry
experience to the board of directors as its chairman.
Mark
Corrao was appointed as our Chief Financial Officer on July 25, 2018. Prior to joining the Company, Mr. Corrao served
as the CFO of Kannalife Sciences, Inc. beginning in January 2012. Mr. Corrao currently serves as the Managing Director of The
CFO Squad LLC, a CFO and accounting consulting business, and as CFO of Generex Biotechnologies, Inc. beginning in January 2017.
Mr. Corrao was formerly a founder and CFO of Strikeforce Technologies, Inc., a publicly traded software development and services
company specializing in the development of a suite of integrated computer network security products. In addition to the ten years
of his service at Strikeforce, Mr. Corrao has spent numerous years in the public accounting arena specializing in certified auditing,
SEC accounting, corporate taxation and financial planning. Mr. Corrao’s background also includes numerous years on Wall
Street with Merrill Lynch, Spear Leeds & Kellogg and Greenfield Arbitrage Partners. While on Wall Street, Mr. Corrao was involved
in several initial public offerings and has been a guiding influence in several startup companies. Prior to joining StrikeForce,
he was the Director of Sales at Applied Digital Solutions from December 2000 through December 2001. Mr. Corrao was the Vice President
of Sales at Advanced Communications Sciences from March 1997 through December 2000. Mr. Corrao has a B.S. in Accounting from The
City University of New York. Mr. Corrao’s business and public company financial reporting experience is invaluable to the
board of directors.
Thomas
Kikis was appointed as our Chief Communications Officer and a director on July 25, 2018. Prior to his appointment, Mr.
Kikis co-founded Kannalife Sciences, Inc. in August 2010. Since co-founding Kannalife Sciences, Mr. Kikis has handled all communications
and marketing efforts of the Company, serving in various executive roles and as a member of its board of directors. Mr. Kikis
also designed and helped formulate Kannactiv – a skincare product line designed by the Company on behalf of Kannaway LLC.
Mr. Kikis is an entrepreneur who has a passion for great stories, new ideas, groundbreaking technologies, popular culture and
their collective point of impact. Most recently, Mr. Kikis has designed dozens of commercial typographical software distributed
for web, print and mobile applications and has produced several films and documentaries available on movie streaming platforms.
Mr. Kikis holds a Bachelor of Science in Communications Management from New York University. Mr. Kikis’ broad industry knowledge
and strategic communication experience make him an asset to the board of directors.
Dr.
William Kinney was appointed as our Chief Scientific Officer on July 25, 2018. Mr. Kinney is a medicinal chemist and
entrepreneur with more than 25 years of experience in large pharmaceutical (Wyeth, Johnson & Johnson), biotechnology (Magainin),
and non-profit (Blumberg Institute) research and development. He has demonstrated expertise in drug design; synthesis; lead optimization
and development of peptides, small molecules, and natural products; and is inventor of three molecules that advanced to human
clinical trials – Perzinfotel (CNS disorders and pain), Squalamine (oncology, AMD, Parkinson's Disease), and Trodusquemine
(obesity). Currently, Dr. Kinney is Senior VP at Enterin, Inc. (since July 2016) and the Company’s Chief Scientific Officer.
His scientific contributions include more than 70 publications and presentations; and inventorship on 38 issued U.S. patents.
Dr. Kinney is a co-inventor of our US Patent #9611213 “Novel Functionalized 1,3 Benzene Diols and Their Method of Use for
the Treatment of Hepatic Encephalopathy.” Dr. Kinney obtained his B.S. (1979) and Ph.D. (1984) degrees from the Ohio State
University. Dr. Kinney’s breadth of scientific research and development work and industry knowledge are a great benefit
to the board of directors.
Non-Employee
Directors
Robert
Malasek has served as a director of the Company since June 20, 2017 and previously served as its Chief Executive Officer
and Chief Financial Officer from June 20, 2017 to July 25, 2018. Mr. Malasek’s experience includes serving as the Assistant
Controller for Starwood Hotel & Resorts Worldwide, Inc. and as Chief Financial Officer for NatureWell, Inc. From 2011 to 2015,
Mr. Malasek served as the Chief Financial Officer, Secretary, Treasurer and a Director of Liberty Coal Energy Corp. Since 2015,
Mr. Malasek has served as the Chief Financial Officer of Cannalink, Inc. and currently serves as the Chief Financial Officer of
AXIM Biotechnologies, Inc. (OTC:AXIM). Mr. Malasek received his Bachelor of Science in Accountancy from San Diego State University.
Mr. Malasek’s public company governance and management experience make him a great fit to the board of directors.
Blake
Schroeder was appointed as a director of the Company on July 25, 2018. Mr. Schroeder’s career began as a litigator
at a commercial litigation firm in Salt Lake City, UT. Beginning in 2008, Mr. Schroeder became involved in the sale and marketing
of natural products, and opening international marketplaces to those products. From 2008 to 2015, Mr. Schroeder served in various
capacities at MonaVie LLC developing international business plans and growing international businesses. From August 2014 to February
2016, Mr. Schroeder served as the Chief Operating Officer of Forevergreen International, where he was responsible for global operation
and sales of the multinational organization, including oversight of a global supply chain. From 2016 to the present, Mr. Schroeder
serves as the Chief Executive Officer of Kannaway, LLC, a wholly-owned subsidiary of Medical Marijuana, Inc. Mr. Schroeder is
the COO for Medical Marijuana, Inc. and has served on the board of directors of Medical Marijuana, Inc. from March 2016 to the
present. Mr. Schroeder holds a B.S. in Finance from Utah State University and a J.D. from Syracuse University’s College
of Law. Mr. Schroeder’s blend of industry, legal and business knowledge give him and the board of directors a unique viewpoint
that is invaluable to the board of directors.
Dr.
Timothy R. Scott was appointed as a director of the Company on July 25, 2018. Mr. Scott brings years of enterprise board-level
management expertise, having served on the board of directors of NatureWell Inc. from 2001 to 2008. Prior to 2001, Mr. Scott served
on the board of directors of ICH Corporation, which owned 265 restaurants with approximately $265M in revenues and 7,800 employees.
Dr. Scott currently serves on the board of directors of Medical Marijuana, Inc. (OTC:MJNA) and Axim Biotechnologies, Inc. (OTC:AXIM).
Dr. Scott received his Ph.D. in theology from Christian University. Dr. Scott holds decades of experience at senior management
and board levels in public and private companies which is a great benefit to the company and its board of directors.
Scientific
Advisory Board
Douglas
Brenneman, Ph.D – Chief Biologist and Distinguished Senior Scientist – Scientific Advisory Board
Dr.
Brenneman has over 30 years of research experience as a Section Chief within the intramural program at NICHD and as a Senior Research
Fellow at Johnson & Johnson. He has more than 170 scientific publications and 15 patents focused on both evaluating neurotoxic
and neuroprotective substances with various Central Nervous System preparations. At Johnson & Johnson, he was a team leader
of the drug discovery group that advanced three compounds through discovery and preclinical testing. Two of these compounds are
currently in clinical trials. As a result of his NIH work, a neuroprotective peptide (davunetide) that he co-discovered is currently
in phase III clinical trials. Dr. Brenneman has demonstrated scientific experience to drive an innovative program of drug discovery
focused on diseases of the central nervous system. Dr. Brenneman is the founder and Chief Scientific Officer of Advanced Neural
Dynamics which is located at the Pennsylvania Biotechnology Center in Doylestown, PA.
Tage
Honoré - Chairman of Scientific Advisory Board
Dr.
Honoré is an experienced pharma and biotechnology executive, entrepreneur and pioneer with expert knowledge in the fields
of Alzheimer’s disease, amyotrophic lateral sclerosis, anxiety, cancer immunotherapy, chronic pain, depression, epilepsy,
female hormone replacement therapy, learning disorders, osteoporosis, Parkinson’s disease, stroke and schizophrenia. His
greatest scientific achievement was discovering and naming the AMPA subtype of Excitatory Amino Acid Receptors as well as the
AMPA antagonists CNQX and NBQX, which have been key tools for mapping the excitatory pathways in the central nervous system. Additionally,
Dr. Honoré has published more than 100 scientific papers, is inventor on 23 patents and championed 40 drugs to progress
from idea to clinical development including three products that entered the prescription drug market. He has held several positions,
including: VP Drug Discovery at Novo Nordisk A/S; Senior Executive VP Nervous System Research, Novartis Pharma Inc; VP Discovery
Research, Purdue Pharma LP and President and CEO, Aestus Therapeutics Inc.
Ryan
B. Turner, MD – Scientific Advisory Board
Dr.
Ryan Turner is a board certified dermatologist practicing general dermatology and has advanced training in Mohs Micrographic Surgery,
laser surgery, and light therapies. His clinical interests include skin cancer surgery and cosmetic treatments that enhance and
rejuvenate aging skin. He has extensive training in FRAXEL® laser treatments, which reduce photodamage, wrinkles, and stimulate
new collagen growth. His research interests vary from the treatment and management of skin cancers to the successful placement
of injectable dermal fillers. He graduated summa cum laude and valedictorian of the University of Maryland Baltimore County. He
received his Doctor of Medicine from Harvard Medical School and was honored with the Henry Asbury Christian Award for his research
accomplishments. He completed his internship in medicine and his dermatology residency at the Harvard affiliated Brigham and Women’s
Hospital and the Massachusetts General Hospital, respectively. He has also completed an ACGME accredited fellowship in Procedural
Dermatology at the Mt. Sinai Medical Center in NY.
Daniel
Richman, MD – Scientific Advisory Board
Dr.
Daniel Richman is an attending anesthesiologist and pain management physician at Hospital for Special Surgery in the Department
of Anesthesiology, Critical Care & Pain Management. Dr. Richman is also an assistant attending and clinical instructor within
the Tri-Institutional Pain Management Fellowship in conjunction with New York-Presbyterian Hospital and Memorial Sloan Kettering
Cancer Center. He is board certified in anesthesiology and pain medicine and has been practicing at HSS since 1991. Dr. Richman
specializes in orthopedic-related pain management with a specific interest in managing conditions related to the cervical, thoracic
and lumbar spine. He is an expert in interventional treatments such as epidural steroid injections, diagnostic nerve blocks both
under fluoroscopic and ultrasound guidance, radiofrequency denervation, sympathetic blockade and discography. Dr. Richman has
extensive knowledge of managing advanced pain with implantable technology such as intrathecal pumps and spinal cord stimulators.
He frequently works with both the inpatient and outpatient pain divisions within HSS as an expert in managing difficult perioperative
analgesia in the chronic pain patient.
Family
Relationships
There
are no family relationships between any director or executive officer.
Involvement
in Certain Legal Proceedings
During
the past ten years, none of our directors and executive officers has been involved in any of the events described in Item 401(f)
of Regulation S-K.
EXECUTIVE
COMPENSATION
The
following table sets forth, for the fiscal years ended December 31, 2020 and 2019, the dollar value of all cash and noncash compensation
earned by any person that was our principal executive officer, principal financial officer, and our two most highly compensated
executive officers (other than our principal financial and executive officers), during the preceding fiscal year.
Summary
Compensation Table
|
Name
and
Principal
Position
|
|
Year
|
|
Salary
($)
|
|
Bonus
($)
|
|
Stock
Awards
($)
|
|
Option
Awards
($)
|
|
Non-Equity
Incentive Plane Compensation ($)
|
|
Non-Qualified
Deferred Compensation Earnings
($)
|
|
All
Other Compensation ($)
|
|
Totals
($)
|
|
Dean
Petkanas,
|
|
|
2020
|
|
|
|
240,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
755,450(1)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
995,450
|
|
|
Chief
Executive Officer and Chairman
|
|
|
2019
|
|
|
|
240,000
|
|
|
|
—
|
|
|
|
20,000
(1)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
260,000
|
|
|
Thomas
Kikis,
|
|
|
2020
|
|
|
|
65,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
416,800(1)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
481,800
|
|
|
Chief
Communications Officer and Director
|
|
|
2019
|
|
|
|
125,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
125,000
|
|
|
Mark
Corrao,
|
|
|
2020
|
|
|
|
60,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
416,800(1)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
476,800
|
|
|
Chief
Financial Officer
|
|
|
2019
|
|
|
|
60,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
60,000
|
|
|
William
Kinney,
|
|
|
2020
|
|
|
|
30,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
468,900(1)
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
498,900
|
|
|
Chief
Scientific Officer
|
|
|
2019
|
|
|
|
30,000
|
|
|
|
—
|
|
|
|
20,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
(1)
|
Represents
the grant date fair value of restricted stock and stock options issued during the year
ended December 31, 2020, calculated in accordance with ASC Topic 718. The assumptions
used in the calculation of these amounts are included in Note 15 of the notes to the
consolidated financial statements contained in the Company’s Annual Report on Form
10-K, found elsewhere in this prospectus.
|
Narrative
Disclosure to the Summary Compensation Table
Base
Salary
See
below for a detailed explanation of each named executive officer’s employment agreements, including the annual base compensation
that each of such individuals is entitled to.
Stock
Awards
None.
Stock
Options
On
May 4, 2020, the Company granted options to purchase an aggregate of 3,950,000 shares of common stock at a price of $0.57 per
share to our named executive officers and are exercisable for ten years. One quarter of these options vested on the
grant day, and the remainder of the options vest equally over thirty-six (36) months starting January 1, 2020. These options were
valued at $2,057,950 using a Black-Scholes Options Pricing Model. On March 12, 2021, the Company granted options to purchase 3,950,000
shares of common stock at a price of $0.13 per share to our named executive officers and are exercisable for ten years. One
quarter of these options vest on the grant day, and the remainder of the options vest equally over thirty-six (36) months starting
January 1, 2021.
Executive
Employment Agreements
In
connection with the Share Exchange with Kannalife Sciences, Inc. on July 25, 2018, the newly-appointed officers entered into executive
employment agreements with the Company.
Dean
Petkanas
Mr.
Petkanas will receive an annual base salary of $240,000 and will be eligible to receive equity awards in the future, as determined
by the Board. In addition, Mr. Petkanas will have severance benefits in the form of salary continuation and health benefits through
the employment term remaining on the contract. The employment agreement has a two-year term, provided, however, after the end
of one year, the agreement will automatically renew for successive one year terms unless terminated by Mr. Petkanas or the Company.
Thomas
Kikis
Mr.
Kikis will receive an annual base salary of $60,000 (adjusted from his initial annual base salary of $150,000 as permitted in
his agreement) and will be eligible to receive equity awards in the future, as determined by the Board. In addition, Mr. Kikis
will have severance benefits in the form of salary continuation and health benefits through the employment term remaining on the
contract. The employment agreement has a one-year term, provided, however, after the end of one year, the agreement will automatically
renew for successive six month terms unless terminated by Mr. Petkanas or the Company.
Mark
Corrao
Mr.
Corrao will receive an annual base salary of $60,000 (adjusted from his initial annual base salary of $150,000 as permitted in
his agreement) and will be eligible to receive equity awards in the future, as determined by the Board. In addition, Mr. Corrao
will have severance benefits in the form of salary continuation and health benefits through the employment term remaining on the
contract. The employment agreement has a one-year term, provided, however, after the end of one year, the agreement will automatically
renew for successive six month terms unless terminated by Mr. Petkanas or the Company.
Dr.
William Kinney
Dr.
Kinney will receive an annual base salary of $30,000 (adjusted from his initial annual base salary of $150,000 as permitted in
his agreement) and will be eligible to receive equity awards in the future, as determined by the Board. In addition, Dr. Kinney
will have severance benefits in the form of salary continuation and health benefits through the employment term remaining on the
contract. The employment agreement has a one-year term, provided, however, after the end of one year, the agreement will automatically
renew for successive six month terms unless terminated by Mr. Petkanas or the Company.
Outstanding
Equity Incentive Awards at Fiscal Year-End
The
following table provides information regarding the outstanding equity awards held by our named executive officers as of December 31,
2020. All awards were granted pursuant to the Company 2017 Equity Incentive Plan. See below for additional information.
|
Name
and principal
position
|
|
Grant
Date
(1)
|
|
Vesting
Commencement Date
|
|
Number
of
securities
underlying
unexercised
options (#)
(exercisable)
|
|
Number
of
securities
underlying
unexercised
options (#)
(unexercisable)
|
|
Number
of
securities
underlying
unexercised
unearned
options (#)
|
|
Option
exercise
price ($)
|
|
Option
expiration
date
|
|
Dean
Petkanas
|
|
05/04/21
|
|
01/01/2020
|
|
|
725,000
|
|
|
|
725,000
|
|
|
|
—
|
|
|
$
|
0.57
|
|
|
05/03/2030
|
|
Chief
Executive Officer and Chairman
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Thomas
Kikis
|
|
05/04/21
|
|
01/01/2020
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
—
|
|
|
$
|
0.57
|
|
|
05/03/2030
|
|
Chief
Communications Officer and Director
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Mark
Carrao
|
|
05/04/21
|
|
01/01/2020
|
|
|
400,000
|
|
|
|
400,000
|
|
|
|
—
|
|
|
$
|
0.57
|
|
|
05/03/2030
|
|
Chief
Scientific Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
William
Kinney
|
|
05/04/21
|
|
01/01/2020
|
|
|
450,000
|
|
|
|
450,000
|
|
|
|
—
|
|
|
$
|
0.57
|
|
|
05/03/2030
|
|
Chief
Scientific Officer
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
There
were no stock options exercised during the fiscal year ended December 31, 2020, by the named executive officers named in the Summary
Compensation Table.
Equity
Incentive Plans
On
August 14, 2019, the Board approved the Kannalife, Inc. 2019 Equity Incentive Plan (the “2019 Plan”) in order to facilitate
the grant of cash and equity incentives to directors, employees (including our named executive officers) and consultants of our
company and certain of our affiliates and to enable us and certain of our affiliates to obtain and retain services of these individuals,
which is essential to our long-term success. Our 2019 Plan allows for the grant of a variety of equity vehicles to provide flexibility
in implementing equity awards, including incentive stock options, non-qualified stock options, restricted stock grants, unrestricted
stock grants and restricted stock units.
Subsequent
to the year end, on March 12, 2021, the Company amended the 2019 Plan to replace all references to “Kannalife” with
“Neuropathix” and to increase the number of shares of common stock authorized for issuance under the Plan from 11,250,000
to 20,000,000. The 2019 Plan amendment was approved by the Company’s Board of Directors on March 12, 2021, but 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
2019 Plan amendment within one year, the 2019 Plan amendment shall not be effective.
Authorized
Shares. As of December 31, 2020, a total of 11,250,000 shares of common stock were authorized under the 2019 Plan.
Plan
Administration. As used herein with respect to the 2019 Plan, the “Board of Directors” refers to any committee
the Board of Directors appoints as well as to the Board of Directors itself. Subject to the provisions of the 2019 Plan, the Board
of Directors has the power to construe and interpret the 2019 Plan and awards granted under it and to determine the persons to
whom and the dates on which awards will be granted, the number of shares of common stock to be subject to each award, the time
or times during the term of each award within which all or a portion of such award may be exercised, the exercise price, the type
of consideration and other terms of the award. Subject to the limitations set forth below, the Board of Directors will also determine
the exercise price of options granted under the 2019 Plan and, with the consent of any adversely affected option holder, may reduce
the exercise price of any outstanding option, cancel an outstanding option in exchange for a new option covering the same or a
different number of shares of common stock or another equity award or cash or other consideration, or any other action that is
treated as a repricing under generally accepted accounting principles. All decisions, determinations and interpretations by the
Board of Directors regarding the 2019 Plan shall be final and binding on all participants or other persons claiming rights under
the 2019 Plan or any award.
Options.
Options granted under the 2019 Plan may become exercisable in cumulative increments (“vest”) as determined by
the Board of Directors. Such increments may be based on continued service to the Company over a certain period of time, the occurrence
of certain performance milestones, or other criteria. Options granted under the 2019 Plan may be subject to different vesting
terms. The Board of Directors has the power to accelerate the time during which an option may vest or be exercised. In addition,
options granted under the 2019 Plan may permit exercise prior to vesting, but in such event the participant may be required to
enter into an early exercise stock purchase agreement that allows the Company to repurchase unvested shares, generally at their
exercise price, should the participant’s service terminate before vesting. To the extent provided by the terms of an option,
a participant may satisfy any federal, state or local tax withholding obligation relating to the exercise of such option by a
cash payment upon exercise, by authorizing the Company to withhold a portion of the stock otherwise issuable to the participant,
or by such other method as may be set forth in the option agreement. The maximum term of options under the 2019 Plan is 10 years,
except that in certain cases the maximum term of certain incentive stock options is five years. Options under the 2019 Plan generally
terminate three months after termination of the participant’s service. Incentive stock options are not transferable except
by will or by the laws of descent and distribution, provided that a participant may designate a beneficiary who may exercise an
option following the participant’s death. Nonstatutory stock options are transferable to the extent provided in the option
agreement.
Stock
Bonuses and Restricted Stock Awards. Subject to certain limitations, the consideration, if any, for restricted stock
unit awards must be at least the par value of our common stock. The consideration for a stock unit award may be payable in any
form acceptable to the Board of Directors and permitted under applicable law. The Board of Directors may impose any restrictions
or conditions upon the vesting of restricted stock unit awards, or that delay the delivery of the consideration after the vesting
of stock unit awards, that it deems appropriate. Restricted stock unit awards are settled in shares of the Company’s common
stock. Dividend equivalents may be credited in respect of shares covered by a restricted stock unit award, as determined by the
Board of Directors. At the discretion of the Board of Directors, such dividend equivalents may be converted into additional shares
covered by the restricted stock unit award. If a restricted stock unit award recipient’s service relationship
with the Company terminates, any unvested portion of the restricted stock unit award is forfeited upon the recipient’s termination
of service.
Certain
Adjustments. Transactions not involving receipt of consideration by the Company, such as a merger, consolidation, reorganization,
recapitalization, reincorporation, reclassification, stock dividend, dividend in property other than cash, stock split, liquidating
dividend, combination of shares, exchange of shares, or a change in corporate structure may change the type(s), class(es) and
number of shares of common stock subject to the 2019 Plan and outstanding awards. In that event, the 2019 Plan will be appropriately
adjusted as to the type(s), class(es) and the maximum number of shares of common stock subject to the 2019 Plan and the Section 162(m)
Limitation, and outstanding awards will be adjusted as to the type(s), class(es), number of shares and price per share of common
stock subject to such awards.
Long-Term
Incentive Plan (“LTIP”) Awards Table
There
were no awards made to a named executive officer in the last completed fiscal year under any LTIP.
CERTAIN
RELATIONSHIPS AND RELATED PERSON TRANSACTIONS
We
describe below the transactions and series of similar transactions, since January 1, 2020, to which we were a party or will be
a party, in which:
|
|
•
|
the
amounts involved exceeded or will exceed $120,000; and
|
|
|
•
|
any
of our directors, executive officers, holders of more than 5% of our capital stock or
any member of their immediate family had or will have a direct or indirect material interest,
other than equity and other compensation, termination, change in control and other arrangements
with directors and executive officers, which are described where required under the section
above titled “Executive Compensation.”
|
As
of March 31, 2021 and December 31, 2020, the Company owed the CEO $28,415 and $55,258, respectively, for expenses the CEO incurred
on behalf of the Company.
The
Company’s Chief Executive Officer 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.
Prior
to the share exchange agreement, the Company borrowed $25,822 and issued a promissory note with a maturity date of March 31, 2020,
which was later extended to March 31, 2022. Additionally, the note holder advanced the Company $16,270 for working capital, for
a total of $42,092.
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 was $226 as of March
31, 2021 and December 31, 2020, respectively.
In
January 2020, the Company sold an additional $100,000, to Kettner Investments, LLC, a significant shareholder, under a promissory
note and sold warrants to purchase up to an aggregate of 100,000 shares of common stock to an investor under a Securities Purchase
Agreement.
In
February 2020, the Company sold an additional $50,000, to the CEO of MJNA, a significant shareholder, under the promissory note
and sold warrants to purchase up to an aggregate of 50,000 shares of common stock to an investor under a Securities Purchase Agreement.
Total
accrued interest on convertible notes payable – related party, as of March 31, 2021 and December 31, 2020, was $14,178 and
$11,178, respectively.
On
September 23, 2020, the Company granted options to purchase 200,000 shares of common stock at a price of $0.80 per share to
a consultant, who is a related party, and are exercisable for ten years. One quarter of these options vest on the grant day,
and the remainder of the options vest equally over twenty four (24) months. These options were valued at $109,060 using a Black-Scholes
Options Pricing Model.
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.
PRINCIPAL
STOCKHOLDERS
The
following table sets forth certain information regarding the beneficial ownership of our outstanding common stock, as of June
15, 2021 by: (i) each of our directors, (ii) each of our named executive officers (as defined by Item 402(a)(3) of Regulation
S-K promulgated under the Exchange Act), (iii) all of our directors and named executive officers as a group, and (iv) each person
known to us to beneficially own more than 5% of our outstanding common stock.
Beneficial
ownership has been determined in accordance with Rule 13d-3 under the Exchange Act. The percentages in the table have been calculated
on the basis of treating as outstanding for a particular person, all shares of our common stock outstanding on that date and all
shares of our common stock issuable to that holder in the event of exercise of outstanding options, warrants, rights or conversion
privileges owned by that person at that date which are exercisable within sixty (60) days of that date. Except as otherwise indicated,
the persons listed below have sole voting and investment power with respect to all shares of our common stock owned by them, except
to the extent that power may be shared with a spouse. The Company does not know of any arrangements the operation of which may
at a subsequent date result in a change of control of the Company.
|
|
|
Common
Stock
|
|
Series
A Preferred Stock
|
|
Series
B Preferred Stock
|
|
%
of Total Voting Power
|
|
Name
of Beneficial Owner (1)
|
|
Shares
|
|
%
|
|
Shares
|
|
%
|
|
Shares
|
|
%
|
|
|
|
5%
or Greater Stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Medical
Marijuana, Inc.(2)
|
|
|
20,342,076
|
|
|
|
23.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
23.12
|
|
Kettner
Investments, LLC (3)
|
|
|
6,817,067
|
|
|
|
7.75
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
7.75
|
|
Naturewell,
Incorporated (11)
|
|
|
75,000
|
|
|
|
*
|
|
|
|
75
|
|
|
|
100
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Directors
and Executive Officers
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dean
Petkanas (4)
|
|
|
23,059,209
|
|
|
|
26.21
|
|
|
|
|
|
|
|
|
|
|
|
75
|
|
|
|
100
|
|
|
26.21
|
|
Thomas
Kikis (5)
|
|
|
5,454,125
|
|
|
|
6.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
6.20
|
|
Mark
Corrao (6)
|
|
|
1,546,875
|
|
|
|
1.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.76
|
|
William
Kinney (7)
|
|
|
1,526,875
|
|
|
|
1.74
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1.74
|
|
Timothy
R. Scott (8)
|
|
|
250,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Robert
Malasek (9)
|
|
|
250,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
Blake
Schroeder (10)
|
|
|
250,000
|
|
|
|
*
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
*
|
|
All
officers and directors as a group (7 persons) (12)
|
|
|
32,337,084
|
|
|
|
36.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
36.76
|
_______________
*
Less than 1%
|
|
(1)
|
3805
Old Easton Road, Doylestown, PA 18902, is the address for all stockholders in the table except otherwise stated below. Applicable
percentages are based on 87,978,445 shares of our common stock, issued and outstanding as of June 15, 2021, 75 shares of our
Series A Preferred Stock and 75 shares of our Series B Preferred Stock outstanding as of June 15, 2021, and are calculated
as required by rules promulgated by the SEC.
|
|
|
(2)
|
Consists
of 20,342,076 shares of common stock owned of record by Medical Marijuana, Inc. (OTC:MJNA). MJNA is a publicly-traded company.
MJNA’s Executive Committee has joint voting and investment control of its portfolio investments, including Neuropathix,
Inc. The Executive Committee consists of three of MJNA’s board members: Chris Prine, Robert L. Cunningham and Timothy
R. Scott, PhD. Each of these committee members disclaims beneficial ownership of MJNA’s portfolio securities, including
Neuropathix, Inc.
|
|
|
(3)
|
Consists
of 6,817,067 shares of common stock owned of record by Kettner Investments, LLC. Kettner Investments, LLC is managed by its
three Managers which share joint voting and investment control of the entity: John Huemoeller, Stuart W. Titus and Timothy
R. Scott, PhD. Each of these managers disclaims beneficial ownership of Kettner’s portfolio securities, including Neuropathix,
Inc.
|
|
|
(4)
|
Consists
of (i) 15,865,934 shares of common stock owned of record by Mr. Petkanas, (ii) 600,000 shares of common stock owned of record
by Powerlife Phytomedical, LLC of which Mr. Petkanas exercises shared voting and investment control, (iii) 6,518,095 shares
of common stock owned of record by Golden Gate Capital Partners, LLC of which Mr. Petkanas is the Managing Member and shares
voting and investment control, and (iv) 75,000 shares of common stock issuable to Mr. Petkanas on conversion of the 75 shares
of Series B Preferred Stock held by Mr. Petkanas individually.
|
|
|
(5)
|
Consists
of 5,454,125 shares of common stock owned of record by Mr. Kikis individually.
|
|
|
(6)
|
Consists
of 1,546,875 shares of common stock owned of record by Mr. Corrao individually.
|
|
|
(7)
|
Consists
of 1,526,875 shares of common stock owned of record by Dr. Kinney individually.
|
|
|
(8)
|
Consists
of 250,000 shares of common stock owned of record by Dr. Scott individually.
|
|
|
(9)
|
Consists
of 250,000 shares of common stock owned of record by Mr. Malasek individually.
|
|
|
(10)
|
Consists
of 250,000 shares of common stock owned of record by Mr. Schroeder individually.
|
|
|
(11)
|
Consists
of 75,000 shares of common stock issuable to Naturewell, Incorporated on conversion of the 75 shares of Series A Preferred
Stock held by Naturewell, Incorporated. Robert Plomgren is the Chief Executive Officer of Naturewell, Incorporated and possesses
voting and investment control of the shares.
|
|
|
(12)
|
Consists
of (i) 32,337,084 shares of common stock, and (ii) 75,000 shares of common stock issuable on conversion of the 75 shares of
Series B Preferred Stock within 60 days of June 15, 2021 beneficially owned by our current directors and executive officers.
|
MARKET
PRICE OF OUR COMMON STOCK AND RELATED STOCKHOLDER MATTERS
Market
Price
Our
common stock is quoted on the OTCQB Marketplace operated by the OTC Markets Group, Inc., under the ticker symbol “NPTX.”
There was no established public trading market in our securities from the time of our initial public offering went effective on
July 15, 2016 until a market established on or about December 5, 2019. Trading of securities on the OTCQB is often sporadic and
investors may have difficulty buying and selling or obtaining market quotations.
The
following table sets forth the reported high and low closing bid prices for our common stock as reported on the OTCQB for the
following periods. These market quotations reflect inter-dealer prices, do not include retail mark-ups, markdowns or commissions,
and may not necessarily represent actual transactions.
|
|
|
High ($)
|
|
Low ($)
|
|
Fiscal Year Ended December 31, 2021
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
0.35
|
|
|
|
0.101
|
|
|
Second Quarter (through June 15, 2021)
|
|
|
0.171
|
|
|
|
0.101
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2020
|
|
|
|
|
|
|
|
|
|
First Quarter
|
|
|
4.35
|
|
|
|
0.55
|
|
|
Second Quarter
|
|
|
1.45
|
|
|
|
0.34
|
|
|
Third Quarter
|
|
|
1.10
|
|
|
|
0.71
|
|
|
Fourth Quarter
|
|
|
0.76
|
|
|
|
0.14
|
|
|
|
|
|
|
|
|
|
|
|
|
Fiscal Year Ended December 31, 2019
|
|
|
|
|
|
|
|
|
|
Fourth Quarter (commencing December 5, 2019)
|
|
|
6.90
|
|
|
|
1.20
|
|
Holders
of Record
As
of June 15, 2021, there were approximately 1,096 holders of record of our common stock. This number was derived from our shareholder
records, and does not include beneficial owners of our common stock whose shares are held in the name of various dealers, clearing
agencies, banks, brokers and other fiduciaries.
LEGAL
MATTERS
Procopio,
Cory, Hargreaves & Savitch, LLP has provided us with an opinion on the validity of the shares of our common stock being offered
pursuant to this prospectus.
EXPERTS
The
financial statements of Neuropathix, Inc. as of and for the years ended December 31, 2020 and 2019, appearing in this prospectus
and the registration statement of which it is a part, have been audited by dbbmckennon, an independent registered public
accounting firm, as set forth in their report dated March 30, 2021 appearing elsewhere herein, and are included in reliance upon
such report given on the authority of such firm as experts in accounting and auditing.
INTEREST
OF NAMED EXPERTS AND COUNSEL
No
expert named in the registration statement of which this prospectus forms a part as having prepared or certified any part thereof
(or is named as having prepared or certified a report or valuation for use in connection with such registration statement) or
counsel named in this prospectus as having given an opinion upon the validity of the securities being offered pursuant to this
prospectus or upon other legal matters in connection with the registration or offering such securities was employed for such purpose
on a contingency basis. Also at the time of such preparation, certification or opinion or at any time thereafter, through the
date of effectiveness of such registration statement or that part of such registration statement to which such preparation, certification
or opinion relates, no such person had, or is to receive, in connection with the offering, a substantial interest, direct or indirect,
in our company or any of its parents or subsidiaries. Nor was any such person connected with our company or any of its parents
or subsidiaries as a promoter, managing or principal underwriter, voting trustee, director, officer or employee.
INCORPORATION
OF CERTAIN INFORMATION BY REFERENCE
All
documents that we file with the SEC under Sections 13(a), 13(c), 14 or 15(d) of the Exchange Act, on or after the date of this
prospectus and prior to the termination of this offering are also incorporated herein by reference and will automatically update
and, to the extent described above, supersede information contained or incorporated by reference in this prospectus and previously
filed documents that are incorporated by reference in this prospectus. However, anything herein to the contrary notwithstanding,
no document, exhibit or information or portion thereof that we have “furnished” or may in the future “furnish”
to (rather than “file” with) the SEC, including, without limitation, any document, exhibit or information filed pursuant
to Item 2.02, Item 7.01 and certain exhibits furnished pursuant to Item 9.01 of our Current Reports on Form 8-K, shall be incorporated
by reference into this prospectus.
We
will provide to each person, including any beneficial owner, to whom a prospectus is delivered, a copy of any or all of the reports
or documents that have been incorporated by reference into this prospectus but not delivered with this prospectus. We will provide
these reports upon written or oral request at no cost to the requester. Please direct your request, either in writing or by telephone,
to the Corporate Secretary, Neuropathix, Inc., 3805 Old Easton Road, Doylestown, Pennsylvania 18902, telephone number (858) 883-2642.
We maintain a website at www.neuropathix.com. You may access our annual reports on Form 10-K, quarterly reports on Form 10-Q,
current reports on Form 8-K and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Exchange
Act with the SEC free of charge at our website as soon as reasonably practicable after such material is electronically filed with,
or furnished to, the SEC. The information contained in, or that can be accessed through, our website is not incorporated by reference
in, and is not part of, this prospectus.
WHERE
YOU CAN FIND MORE INFORMATION
We
file annual, quarterly and current reports and other information with the Securities and Exchange Commission. Such filings are
available to the public over the Internet at the Securities and Exchange Commission’s website at http://www.sec.gov.
We
have filed with the Securities and Exchange Commission a registration statement on Form S-1 under the Securities Act with respect
to the securities offered under this prospectus. This prospectus, which forms a part of that registration statement, does not
contain all information included in the registration statement. Certain information is omitted and you should refer to the registration
statement and its exhibits.
You
may review a copy of the registration statement, and the reports and other information that we file with the Securities and Exchange
Commission by accessing the Securities and Exchange Commission’s website at http://www.sec.gov.
Statements
contained in this prospectus as to the contents of any contract or other document that we have filed as an exhibit to the registration
statement are qualified in their entirety by reference to the exhibits for a complete statement of their terms and conditions.
The
representations, warranties and covenants made by us in any agreement that is filed as an exhibit to the registration statement
of which this prospectus is a part were made solely for the benefit of the parties to such agreement, including, in some cases,
for the purpose of allocating risk among the parties to such agreements, and should not be deemed to be a representation, warranty
or covenant to you. Moreover, such representations, warranties or covenants were made as of an earlier date. Accordingly, such
representations, warranties and covenants should not be relied on as accurately representing the current state of our affairs.
DISCLOSURE
OF COMMISSION POSITION ON INDEMNIFICATION FOR SECURITIES ACT LIABILITIES
Pursuant
to our certificate of incorporation, as amended, and bylaws, as amended, we may indemnify an officer or director who is made a
party to any proceeding, because of his position as such, to the fullest extent authorized by the corporation laws of the State
of Delaware, as the same exists or may hereafter be amended. In certain cases, we may advance expenses incurred in defending any
such proceeding.
To
the extent that indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons
controlling our company pursuant to the foregoing provisions, we have been informed that, in the opinion of the Securities and
Exchange Commission, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.
If a claim for indemnification against such liabilities (other than the payment by us of expenses incurred or paid by a director,
officer or controlling person of our company in the successful defense of any action, suit or proceeding) is asserted by any of
our directors, officers or controlling persons in connection with the securities being registered, we will, unless in the opinion
of our counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question
whether such indemnification by us is against public policy as expressed in the Securities Act and will be governed by the final
adjudication of that issue.
NEUROPATHIX,
INC.
INDEX
TO CONSOLIDATED FINANCIAL STATEMENTS
|
Audited
Consolidated Financial Statements – December 31, 2020 and 2019 :
|
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Consolidated
Balance Sheet as of December 31, 2020 and 2019
|
F-2
|
|
Consolidated
Statements of Operations the years ended December 31, 2020 and 2019
|
F-3
|
|
Consolidated
Statement of Changes in Shareholders’ Deficit for the years ended December 31, 2020 and 2019
|
F-4
|
|
Consolidated
Statement of Cash Flows for the years ended December 31, 2020 and 2019
|
F-5
|
|
Notes
to the Consolidated Financial Statements
|
F-6
|
|
Unaudited
Consolidated Financial Statements – March 31, 2021 and 2020:
|
|
|
Condensed
Consolidated Balance Sheet as of March 31, 2021 (unaudited) and December 31, 2020
|
F-24
|
|
Condensed
Consolidated Statements of Operations for the three months periods ended March 31, 2021 and 2020 (unaudited)
|
F-25
|
|
Condensed
Consolidated Statement of Changes in Shareholders’ Deficit for the three ended March 31, 2021 and 2020 (unaudited)
|
F-26
|
|
Condensed
Consolidated Statement of Cash Flows for the three months ended March 31, 2021 and 2020 (unaudited)
|
F-27
|
|
Notes
to Condensed Consolidated Financial Statements (unaudited)
|
F-28
|
REPORT
OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To
the Board of Directors and
Stockholders
of Neuropathix, Inc.
Opinion
on the Financial Statements
We
have audited the accompanying consolidated balance sheets of Neuropathix, Inc. (the “Company”) as of December 31,
2020 and 2019, the related consolidated statements of operations, stockholders’ equity (deficit), and cash flows, for the
years then ended, and the related notes (collectively referred to as the “consolidated financial statements”). In
our opinion, the consolidated financial statements present fairly, in all material respects, the consolidated financial position
of the Company as of December 31, 2020 and 2019, and the results of its operations and its cash flows for the years then ended,
in conformity with accounting principles generally accepted in the United States of America.
Going
Concern
The
accompanying financial statements have been prepared assuming that the Company will continue as a going concern. As discussed
in Note 3 to the financial statements, the Company has suffered recurring losses from operations and has not generated revenues
from its intended operations, which raises substantial doubt about its ability to continue as a going concern. Management’s
plans in regard to these matters are also described in Note 3. The financial statements do not include any adjustments that might
result from the outcome of this uncertainty.
Basis
for Opinion
These
consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on the Company’s consolidated financial statements based on our audits. We are a public accounting firm registered
with the Public Company Accounting Oversight Board (United States) (“PCAOB”) and are required to be independent with
respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the Securities
and Exchange Commission and the PCAOB.
We
conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the audits
to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement, whether
due to error or fraud. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over
financial reporting. As part of our audits we are required to obtain an understanding of internal control over financial reporting
but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting.
Accordingly, we express no such opinion.
Our
audits included performing procedures to assess the risks of material misstatement of the consolidated financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the consolidated financial statements. Our audits also included evaluating the
accounting principles used and significant estimates made by management, as well as evaluating the overall presentation of the
consolidated financial statements. We believe that our audits provide a reasonable basis for our opinion.
/s/
dbbmckennon
We
have served as the Company's auditor since 2017.
San
Diego, California
March
30, 2021
|
NEUROPATHIX,
INC.
|
|
(FORMERLY
KNOWN AS KANNALIFE, INC.)
|
|
CONSOLIDATED
BALANCE SHEETS
|
|
|
|
|
|
|
|
|
|
|
|
|
December
31, 2020
|
|
|
|
December
31, 2019
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
21,874
|
|
|
$
|
121,455
|
|
|
Prepaid
expenses
|
|
|
161,000
|
|
|
|
9,000
|
|
|
Other
receivables
|
|
|
400
|
|
|
|
400
|
|
|
Total
Current Assets
|
|
|
183,274
|
|
|
|
130,855
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
59,266
|
|
|
|
75,401
|
|
|
Security
deposits
|
|
|
17,121
|
|
|
|
17,121
|
|
|
Total
Non-Current Assets
|
|
|
76,387
|
|
|
|
92,522
|
|
|
TOTAL
ASSETS
|
|
$
|
259,661
|
|
|
$
|
223,377
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
721,308
|
|
|
$
|
389,195
|
|
|
Payroll
and related liabilities
|
|
|
379,241
|
|
|
|
243,208
|
|
|
Loan
payable
|
|
|
950,000
|
|
|
|
620,000
|
|
|
Loan
payable - related party
|
|
|
42,092
|
|
|
|
42,092
|
|
|
Convertible
notes payable, net of $205,873 debt discount
|
|
|
198,127
|
|
|
|
—
|
|
|
Capital
lease obligations
|
|
|
8,471
|
|
|
|
7,533
|
|
|
Patent
purchase liability
|
|
|
53,135
|
|
|
|
—
|
|
|
Due
to related party, net
|
|
|
55,258
|
|
|
|
25,349
|
|
|
Derivative
liabilities
|
|
|
138,046
|
|
|
|
—
|
|
|
Total
Current Liabilities
|
|
|
2,545,678
|
|
|
|
1,327,377
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Convertible
notes payable - long term
|
|
|
376,373
|
|
|
|
378,839
|
|
|
Convertible
notes payable - long term, net of $80,000 debt discount - related party
|
|
|
70,000
|
|
|
|
—
|
|
|
Capital
lease obligation - long term
|
|
|
19,293
|
|
|
|
27,764
|
|
|
Patent
purchase liability - long term
|
|
|
264,826
|
|
|
|
—
|
|
|
Derivative
liabilities - long term
|
|
|
178,143
|
|
|
|
183,451
|
|
|
Total
Long Term Liabilities
|
|
|
908,635
|
|
|
|
590,054
|
|
|
TOTAL
LIABILITIES
|
|
|
3,454,313
|
|
|
|
1,917,431
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 14)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT:
|
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value, 5,000,000 shares authorized
|
|
|
|
|
|
|
|
|
|
Series
A preferred stock, 75 shares designated, 75 issued and outstanding (Liquidation preference of $75,000)
|
|
|
—
|
|
|
|
—
|
|
|
Series
B preferred stock, 75 shares designated, 75 issued and outstanding (Liquidation preference of $75,000)
|
|
|
—
|
|
|
|
—
|
|
|
Common
stock, $0.0001 par value, 200,000,000 authorized, 77,670,908 and 74,225,141 issued and outstanding, respectively
|
|
|
7,767
|
|
|
|
7,422
|
|
|
Additional
paid-in capital
|
|
|
9,830,944
|
|
|
|
6,794,612
|
|
|
Accumulated
deficit
|
|
|
(13,033,363
|
)
|
|
|
(8,496,088
|
)
|
|
TOTAL
STOCKHOLDERS' DEFICIT
|
|
|
(3,194,652
|
)
|
|
|
(1,694,054
|
)
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$
|
259,661
|
|
|
$
|
223,377
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these consolidated financial statements
|
|
NEUROPATHIX,
INC.
|
|
(FORMERLY
KNOWN AS KANNALIFE, INC.)
|
|
CONSOLIDATED
STATEMENTS OF OPERATIONS
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
NET
REVENUES:
|
|
|
|
|
|
|
|
|
|
Grant
revenue
|
|
$
|
—
|
|
|
$
|
126,027
|
|
|
TOTAL
NET REVENUES
|
|
|
—
|
|
|
|
126,027
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
1,095,405
|
|
|
|
554,701
|
|
|
General
and administrative
|
|
|
3,378,323
|
|
|
|
1,900,443
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
4,473,728
|
|
|
|
2,455,144
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(4,473,728
|
)
|
|
|
(2,329,117
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(924,227
|
)
|
|
|
(146,909
|
)
|
|
Other
(expense) income, net
|
|
|
108,185
|
|
|
|
—
|
|
|
Net
gains and losses recognized on marketable security
|
|
|
—
|
|
|
|
(942,982
|
)
|
|
Impairment
on investment
|
|
|
—
|
|
|
|
(27,490
|
)
|
|
Change
in fair value of derivative liabilities
|
|
|
752,495
|
|
|
|
(4,367
|
)
|
|
TOTAL
OTHER INCOME (EXPENSE)
|
|
|
(63,547
|
)
|
|
|
(1,121,748
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS BEFORE INCOME TAX
|
|
$
|
(4,537,275
|
)
|
|
$
|
(3,450,865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(4,537,275
|
)
|
|
$
|
(3,450,865
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to noncontrolling interests
|
|
|
—
|
|
|
|
(6,828
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Net
loss attributable to Neuropathix, Inc.
|
|
$
|
(4,537,275
|
)
|
|
$
|
(3,444,037
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
attributable to Neuropathix, Inc. per common share – basic and diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.05
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding – basic and diluted
|
|
|
74,623,944
|
|
|
|
71,228,125
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements
|
|
NEUROPATHIX,
INC.
|
|
(FORMERLY
KNOWN AS KANNALIFE, INC.)
|
|
CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock
|
|
|
|
Series
B Preferred Stock
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Additional
Paid-In Capital
|
|
|
|
Accumulated
Deficit
|
|
|
|
Non-controlling
interest
|
|
|
|
Total
Stockholders’ Equity (Deficit)
|
|
|
Balance at December 31, 2018
|
|
|
75
|
|
|
$
|
—
|
|
|
|
75
|
|
|
$
|
—
|
|
|
|
69,854,141
|
|
|
$
|
6,985
|
|
|
$
|
6,381,755
|
|
|
$
|
(5,052,051
|
)
|
|
$
|
(5,756
|
)
|
|
$
|
1,330,933
|
|
|
Issuance
of stock options for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,878
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,878
|
|
|
Issuance
of common stock for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,750,000
|
|
|
|
175
|
|
|
|
174,825
|
|
|
|
—
|
|
|
|
—
|
|
|
|
175,000
|
|
|
Issuance
of common stock to board members for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
950,000
|
|
|
|
95
|
|
|
|
94,905
|
|
|
|
—
|
|
|
|
—
|
|
|
|
95,000
|
|
|
Issuance
of common stock for conversion of notes payable and accrued interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,500,000
|
|
|
|
150
|
|
|
|
149,850
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150,000
|
|
|
Issuance
of common stock for remaining share of non-controlling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
171,000
|
|
|
|
17
|
|
|
|
(12,601
|
)
|
|
|
—
|
|
|
|
12,584
|
|
|
|
—
|
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(3,444,037
|
)
|
|
|
(6,828
|
)
|
|
|
(3,450,865
|
)
|
|
Balance at December
31, 2019
|
|
|
75
|
|
|
$
|
—
|
|
|
|
75
|
|
|
$
|
—
|
|
|
|
74,225,141
|
|
|
$
|
7,422
|
|
|
$
|
6,794,612
|
|
|
$
|
(8,496,088
|
)
|
|
$
|
—
|
|
|
$
|
(1,694,054
|
)
|
|
Stock
based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,722,599
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,722,599
|
|
|
Issuance
of common stock for acquisition of intellectual property
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,025,000
|
|
|
|
103
|
|
|
|
283,148
|
|
|
|
—
|
|
|
|
—
|
|
|
|
283,251
|
|
|
Issuance
of common stock for conversion of notes payable and accrued interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
570,767
|
|
|
|
57
|
|
|
|
119,675
|
|
|
|
—
|
|
|
|
—
|
|
|
|
119,732
|
|
|
Issuance
of common stock for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,850,000
|
|
|
|
185
|
|
|
|
844,523
|
|
|
|
—
|
|
|
|
—
|
|
|
|
844,708
|
|
|
Reduction
of derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,387
|
|
|
|
—
|
|
|
|
—
|
|
|
|
66,387
|
|
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(4,537,275
|
)
|
|
|
—
|
|
|
|
(4,537,275
|
)
|
|
Balance at December
31, 2020
|
|
|
75
|
|
|
$
|
—
|
|
|
|
75
|
|
|
$
|
—
|
|
|
|
77,670,908
|
|
|
$
|
7,767
|
|
|
$
|
9,830,944
|
|
|
$
|
(13,033,363
|
)
|
|
$
|
—
|
|
|
$
|
(3,194,652
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements
|
|
NEUROPATHIX,
INC.
|
|
(FORMERLY
KNOWN AS KANNALIFE, INC.)
|
|
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
|
|
|
|
|
|
|
|
|
|
Year
Ended December 31,
|
|
|
|
2020
|
|
2019
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(4,537,275
|
)
|
|
$
|
(3,450,865
|
)
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
16,135
|
|
|
|
5,509
|
|
|
Amortization
of debt discount
|
|
|
376,661
|
|
|
|
2,466
|
|
|
Stock
based compensation
|
|
|
1,722,600
|
|
|
|
275,878
|
|
|
Issuance
of common stock for services
|
|
|
594,708
|
|
|
|
—
|
|
|
Issuance
of common stock and debt for acquisition of intellectual property
|
|
|
601,211
|
|
|
|
—
|
|
|
Non-cash
interest expense
|
|
|
432,170
|
|
|
|
79,084
|
|
|
Change
in fair value of derivative liabilities
|
|
|
(752,495
|
)
|
|
|
4,367
|
|
|
Net
gains and losses recognized on marketable security
|
|
|
—
|
|
|
|
942,982
|
|
|
Impairment
on investment
|
|
|
—
|
|
|
|
27,490
|
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
|
98,000
|
|
|
|
(9,000
|
)
|
|
Other
receivables
|
|
|
—
|
|
|
|
99,291
|
|
|
Accounts
payable and accrued expenses
|
|
|
338,145
|
|
|
|
131,572
|
|
|
Payroll
and related liabilities
|
|
|
136,033
|
|
|
|
(2,859
|
)
|
|
Due
to related party, net
|
|
|
29,909
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(944,198
|
)
|
|
|
(1,894,085
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds
from sale of marketable securities
|
|
|
—
|
|
|
|
1,636,658
|
|
|
Purchase
of equipment
|
|
|
—
|
|
|
|
(41,950
|
)
|
|
Purchase
of other asset
|
|
|
—
|
|
|
|
(27,490
|
)
|
|
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY INVESTING ACTIVITIES
|
|
|
—
|
|
|
|
1,567,218
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Due
from related party, net
|
|
|
—
|
|
|
|
16,334
|
|
|
Due
to related party, net
|
|
|
—
|
|
|
|
25,349
|
|
|
Principal
payments toward capital lease obligations
|
|
|
(7,533
|
)
|
|
|
(589
|
)
|
|
Proceeds
from loan payable
|
|
|
330,000
|
|
|
|
—
|
|
|
Proceeds
from loan payable - related party
|
|
|
—
|
|
|
|
97
|
|
|
Proceeds
from convertible notes payable, net of OID
|
|
|
372,150
|
|
|
|
—
|
|
|
Proceeds
from convertible notes payable - related party
|
|
|
150,000
|
|
|
|
100,000
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
844,617
|
|
|
|
141,191
|
|
|
|
|
|
|
|
|
|
|
|
|
Net decrease in cash
|
|
|
(99,581
|
)
|
|
|
(185,676
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of year
|
|
|
121,455
|
|
|
|
307,131
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, end of year
|
|
$
|
21,874
|
|
|
$
|
121,455
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
16,262
|
|
|
$
|
—
|
|
|
Cash
paid for taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for conversion of notes payable and accrued interest
|
|
$
|
117,032
|
|
|
$
|
150,000
|
|
|
Issuance
of common stock for prepaid expenses
|
|
$
|
250,000
|
|
|
$
|
—
|
|
|
Issuance
of common stock for remaining share of non-controlling interest
|
|
$
|
—
|
|
|
$
|
12,584
|
|
|
Property
and equipment financed through capital leases
|
|
$
|
—
|
|
|
$
|
35,886
|
|
|
Debt
discount upon the issuance of convertible note payable
|
|
$
|
372,150
|
|
|
$
|
—
|
|
|
Debt
discount upon the issuance of convertible note payable - related party
|
|
$
|
150,000
|
|
|
$
|
100,000
|
|
|
Reduction
of derivative liability
|
|
$
|
66,387
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying
notes are an integral part of these consolidated financial statements
|
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
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 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. Kannalife 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.
Name
Change – Neuropathix, 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 consolidated financial statements are as follows:
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States, or GAAP.
Principles
of Consolidation
The
Company evaluates the need to consolidate affiliates based on standards set forth in ASC 810 Consolidation (“ASC 810”).
The
consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Kannalife. All significant
consolidated transactions and balances have been eliminated in consolidation.
Noncontrolling
Interests
The
Company accounts for its less than 100% interests in Kannalife in accordance with ASC Topic 810, Consolidation, and accordingly
the Company presents noncontrolling interests as a component of equity on its consolidated balance sheet and reports the noncontrolling
interest’s share of Kannalife’s net loss attributable to noncontrolling interests in the consolidated statement of
operations. On August 30, 2019, the Company issued 171,000 shares of common stock at a price of $0.07 per share to acquire the
remaining non-controlling interest in Kannalife Sciences, Inc., bringing our ownership interest from 99.7% to 100%.
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.
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
In
December 2019, a novel strain of coronavirus, commonly known as COVID-19, surfaced. The spread of COVID-19 around the world in
2020 has caused significant volatility in U.S. and international markets. The Company’s operations as of December 31, 2020
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.
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.
Cash
and Cash Equivalents
Our
cash and cash equivalents include short-term, highly liquid investments with original maturities of three months or less when
purchased. At times throughout the year, the Company may maintain bank balances that could exceed Federal Deposit Insurance Corporation
insured limits. The Company maintains its cash deposit accounts with high credit quality financial institutions, and therefore
believes that its loss exposure is minimal.
Accounts
Receivable
Accounts
receivable are carried at original invoice amount less an estimate made for doubtful accounts based on a review of all outstanding
amounts. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and
considering a customer’s financial condition, credit history and current economic conditions and sets up an allowance for
doubtful accounts when collection is uncertain. Customers’ accounts are written off when all attempts to collect have been
exhausted. Recoveries of accounts receivable previously written off are recorded as income when received. As of December 31, 2020
and 2019, the Company had no allowance for doubtful account.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation and amortization. Expenditures for maintenance and repairs are
charged to expense when incurred, while renewals and betterments that materially extend the life of an asset are capitalized.
When assets are sold, retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheets
and any resulting gain or loss is reflected in the statements of operations and members’ deficit in the period realized.
Depreciation
is provided using the straight-line method over the estimated useful lives of the assets, which are as follows:
|
Furniture
and equipment
|
5
years
|
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
Joint
Venture
On June 18, 2019, the Company, along with
MJNA, which is a significant shareholder, and AXIM Biotechnologies, Inc., whose president is affiliated with a shareholder, entered
into a joint venture agreement with an industrial hemp production farm for the supply of certain industrial hemp CBD crops. The
purpose of the joint venture is to share in the harvested yield of the hemp production which the Company hopes to result in a
steady supply of industrial hemp CBD for research and development purposes. The Company accounts for its participation in the
joint venture under the equity method of accounting. The Company has no control or influence over the joint venture and for the
year ending December 31, 2019 the Company recorded a loss in investment in the amount of $27,490. As of December 31, 2020, the
Company is no longer part of this joint venture.
Revenue
Recognition
The
FASB issued Accounting Standards Update (“ASU”) No. 2014-09, codified as ASC 606: Revenue from Contracts with Customers,
which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers.
Revenue
consists of research funding from the Company’s National Institute of Health (“NIH”) Grant. 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. For the year ended December 31, 2020,
the company recognized $0 in grant revenue.
Equity
Investments
Effective
January 1, 2018, with the adoption of ASU 2016-01, our accounting treatment for equity investments differs for those with and
without readily determinable fair values. Equity investments with readily determinable fair values are recorded at fair value
with changes in fair value recorded in “Unrealized Gain/Loss On Investments.” For equity investments without readily
determinable fair values we have elected the “measurement alternative,” and therefore carry these investments at cost,
less impairment (if any), plus or minus changes in observable prices. On a quarterly basis, we review our equity investments without
readily determinable fair values for impairment. We consider a number of qualitative factors such as whether there is a significant
deterioration in earnings performance, credit rating, asset quality, or business prospects of the investee in determining if impairment
exists. If the investment is considered impaired, an impairment loss equal to the amount by which the carrying value exceeds its
fair value is recorded through a charge to earnings. The impairment loss may be reversed in a subsequent period if there are observable
transactions for the identical or similar investment of the same issuer at a higher amount than the carrying amount that was established
when the impairment was recognized. Impairment as well as upward or downward adjustments resulting from observable price changes
in orderly transactions for identical or similar investments are included in “Income - other.”
Realized
gains or losses resulting from the sale of equity investments are calculated using the specific identification method and are
included in “Net gains and losses recognized on marketable security".
Income
Taxes
The
Company accounts for income taxes under FASB ASC Topic 740, Income Taxes (“ASC 740”). Deferred income
tax assets and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred
tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets
will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.
Preferred
Stock
The
Company applies the guidance enumerated in FASB ASC Topic 480, Distinguishing Liabilities from Equity (“ASC
480”), when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption
(if any) are classified as liability instruments and are measured at fair value. The Company classifies conditionally redeemable
preferred shares (if any), which includes preferred shares that feature redemption rights that are either within the control of
the holder or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as
temporary equity. At all other times, the Company classifies its preferred shares in stockholders’ equity. The Company’s
preferred shares do not feature any redemption rights within the holders’ control or conditional redemption features not
within the Company’s sole control as of December 31, 2020 and 2019. Accordingly, all issuances of preferred stock are presented
as a component of stockholders’ equity.
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
Convertible
Instruments
The
Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC Topic 815, Derivatives
and Hedging Activities (“ASC 815”).
Applicable
U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing
derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic
characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics
and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract
is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value
reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would
be considered a derivative instrument.
The
Company accounts for convertible instruments (when the Company has determined that the embedded conversion options should not
be bifurcated from their host instruments) as follows. The Company records, when necessary, deemed dividends for the intrinsic
value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common
stock at the commitment date of the transaction and the effective conversion price embedded in the preferred shares.
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 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).
The
Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of FASB
ASC 505, Equity–based Payments to Non-Employees (“ASC 505”). Measurement of share-based
payment transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or
services received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at
the earlier of performance commitment date or performance completion date.
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 17,174,152 and 4,029,433 for the years ended December 31, 2020 and 2019, 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 years ended December 31, 2020 and 2019,
were $1,095,405 and $554,701, respectively.
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
Recently
Issued Authoritative Guidance
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” to improve information on credit
losses for financial assets and net investment in leases that are not accounted for at fair value through net income. ASU 2016-13
replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses. In April 2019
and May 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit
Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” and ASU No. 2019-05, “Financial
Instruments-Credit Losses (Topic 326): Targeted Transition Relief” which provided additional implementation guidance
on the previously issued ASU. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments - Credit Loss (Topic
326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” which defers the effective date for public filers that
are considered small reporting companies (“SRC”) as defined by the Securities and Exchange Commission to fiscal years
beginning after December 15, 2022, including interim periods within those fiscal years. Since the Company is an SRC, implementation
is not needed until January 1, 2023. The Company will continue to evaluate the effect of adopting ASU 2016-13 will have on the
Company’s consolidated financial statements.
Note
3 – Going Concern and Management’s Liquidity Plans
The
Company’s 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
consolidated financial statements, the Company has had a net loss from operations of $4,473,728 and $2,329,117 for the years ended
December 31, 2020 and 2019, respectively. The net cash used in operations were $(944,198) and $(1,894,085) for the years ended
December 31, 2020 and 2019, respectively. Additionally, the Company had an accumulated deficit of $13,033,363 at December 31,
2020 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 of convertible debt securities offering. However, there are no assurances that such
additional funding will be achieved or that management’s plans will be successful. The accompanying 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.
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
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 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 December 31, 2020 and 2019, on a recurring
basis:
|
|
|
December
31, 2020
|
|
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
Carrying
Value
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
316,189
|
|
|
$
|
316,189
|
|
|
|
|
December
31, 2019
|
|
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
Carrying
Value
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
183,451
|
|
|
$
|
183,451
|
|
NOTE
5 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses at December 31, 2020 and 2019 consisted of the following:
|
|
|
December
31,
2020
|
|
December
31, 2019
|
|
Accounts
payable and accrued expenses
|
|
$
|
538,527
|
|
|
$
|
309,231
|
|
|
Accrued
interest
|
|
|
182,781
|
|
|
|
79,964
|
|
|
Totals
|
|
$
|
721,308
|
|
|
$
|
389,195
|
|
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
NOTE
6 – PAYROLL AND RELATED LIABILITIES
Payroll
and related liabilities at December 31, 2020 and 2019 consisted of the following:
|
|
|
December
31,
2020
|
|
December
31, 2019
|
|
Payroll
|
|
$
|
149,704
|
|
|
$
|
—
|
|
|
Payroll
taxes
|
|
|
229,537
|
|
|
|
243,208
|
|
|
Totals
|
|
$
|
379,241
|
|
|
$
|
243,208
|
|
As
of the year ended December 31, 2020, the Company has accrued payroll and payroll taxes in connection with salaries paid and accrued
to four officers of the Company, which includes $130,000 accrued for the CEO, and $12,500 accrued for executive management.
NOTE
7 – LOAN PAYABLE
|
|
|
|
|
December
31, 2020
|
|
December
31, 2019
|
|
Loan
payable at 8%, matures 12/31/2020
|
|
|
*
{a}
|
|
|
$
|
850,000
|
|
|
$
|
620,000
|
|
|
Loan
payable at 0%, matures 6/11/2021
|
|
|
*
|
|
|
|
100,000
|
|
|
|
—
|
|
|
Total
|
|
|
|
|
|
|
950,000
|
|
|
|
620,000
|
|
{a}
– The maturity date of the loan has been extended to December 31, 2021.
*
- unsecured note
Total
interest expense on notes payable, amounted to $54,444 and $48,921 for the years ended December 31, 2020 and 2019, respectively.
Accrued interest related to these notes was $127,825 and $73,381 as of December 31, 2020 and 2019, respectively.
NOTE
8 – LOAN PAYABLE – RELATED PARTY
Prior
to the share exchange agreement, the Company borrowed $25,822 and issued a promissory note with a maturity date of March 31, 2020
which was later extended to March 31, 2021. Additionally, the note holder advanced the Company $16,270 for working capital, for
a total of $42,092 – also see Note 16.
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 December
31, 2020 and 2019, respectively.
NOTE
9 – CAPITAL 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 capital lease was $27,764, secured by equipment with carrying value of $46,131, as of December 31, 2020.
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
NOTE
10 – CONVERTIBLE NOTES PAYABLE
Prior
to the Share Exchange, 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 after the conversion was $376,373.
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 matures
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. If, after the first six months until
the maturity 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 13) resulting in full discount of the Note.
On
March 12, 2020, the Company entered into securities purchase agreements with two different accredited investors (each an “Investor”,
and together the “Investors”) pursuant to which each Investor purchased an 8% unsecured convertible promissory note
(each a “8% Note”, and together the “8% Notes”) from the Company. The terms and conditions of each of
the 8% Notes are substantially the same. Each 8% Note has a principal amount of $105,000 less a $5,000 original issue discount
for a purchase price of $100,000, with a maturity date of March 12, 2021. All principal amounts and the interest thereon are convertible
into shares of the Company’s common stock at the option of each Investor, after six (6) months from the date of the 8% Notes. These
8% Notes have a variable conversion price and the Company recorded embedded derivative liabilities. 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 the lesser
of (i) $0.75 or (ii) 68% multiplied by the average of the two lowest trading closing prices of the Company’s common stock
on the fifteen days before the issue date of this note or (ii) 68% multiplied by the average of the two lowest trading closing
prices of the Company’s common stock on the fifteen days prior to conversion. The fair value of the derivative liability
and warrants as of the date of issuance was in excess of the 8% Note (see Note 13) resulting in full discount of the 8% Note. During
the year ended December 31, 2020, the Company issued 570,767 shares of common stock for the conversion of $111,000 convertible
notes payable and $6,032 of related accrued interest. The outstanding balance on these convertible notes after the conversion
was $99,000.
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 “First
Tranche”). The 12% Note matures 12 months from the effective date of each tranche. 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.
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
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 matures on June 19, 2021. 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 becomes exercisable upon default of the note. During the second half of 2020, the anti-dilution clause was triggered, and
the exercise price was reset to $0.15 resulting in the number of warrants to be increased to 1,002,677. 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.
Total
interest expense on convertible notes payable, inclusive of amortization of debt discount of $306,662 and $2,466, amounted to
$349,889 and $16,739 for the years ended December 31, 2020 and 2019, respectively.
Total
accrued interest on convertible notes payable, for the years ended December 31, 2020 and 2019, was $39,993 and $2,797, respectively.
NOTE
11 – CONVERTIBLE NOTES PAYABLE – RELATED PARTY
In
January 2020, the Company sold an additional $100,000, 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
loan is due by December 22, 2021 and accrues interest at a rate of 8% per annum. 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 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 loan is
due by February 2, 2022 and accrues interest at a rate of 8% per annum. 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 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.
Total
interest expense on convertible notes payable – related party, inclusive of amortization of debt discount of $70,000 and
$0, amounted to $81,178 and $0 for the years ended December 31, 2020 and 2019, respectively.
Total
accrued interest on convertible notes payable – related party, for the years ended December 31, 2020 and 2019, was $11,178
and $0, respectively.
The
following is a schedule by year of future debt payments at December 31, 2020.
|
Year
Ending December 31,
|
|
Loan
payable
|
|
Loan
payable - related party
|
|
Convertible
notes payable
|
|
Convertible
notes payable - related party
|
|
Total
|
|
2021
|
|
$
|
950,000
|
|
|
$
|
42,092
|
|
|
$
|
40,400
|
|
|
$
|
100,000
|
|
|
$
|
1,496,092
|
|
|
2022
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
50,000
|
|
|
$
|
50,000
|
|
|
2023
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
2024
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
2025
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
|
$
|
376,373
|
|
|
|
—
|
|
|
$
|
376,373
|
|
|
Total
|
|
$
|
950,000
|
|
|
$
|
42,092
|
|
|
$
|
780,373
|
|
|
$
|
150,000
|
|
|
$
|
1,922,465
|
|
NOTE
12 – PATENT PURCHASE LIABILITY
On
December 17, 2020, the Company entered into an Intellectual Property Rights Purchase and Transfer Agreement (the “IP Purchase
Agreement”) by and between Advanced Neural Dynamics (“AND”), Fox Chase, Dr. Douglas Brenneman (“Brenneman”)
and the Company to acquire the IP Rights and concurrently entered into a Pharmaceutical Royalty Agreement with AND and Fox Chase.
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
Pursuant
to the IP Purchase Agreement, the Company acquired the IP Assets for a $570,000 aggregate purchase price payable in restricted
common stock of the Company to Fox Chase, Brenneman and AND, payable as follows:
|
|
•
|
1,000,000
shares of restricted common stock of the Company were issued to Fox Chase at a price per share of $0.27 for an aggregate of
$270,000; and
|
|
|
•
|
$300,000
in common stock will be issued to AND/Brenneman in five annual installments which shall be calculated as $60,000 divided by
the average ten (10) day closing price prior to each installment date with the initial installment date occurring on January
5, 2021; provided, however, that for the initial installment issuance price only, the price per share shall not be below $0.30
or above $0.60 per share.
|
In
addition, AND/Brenneman shall receive cash payments of $15,000 annually, payable in quarterly installments to offset against tax
payments, netted out against actual tax costs incurred. In the event such payments are not made, there will be a 10% penalty assessed
on said late tax offset payment.
The
liabilities from the IP purchase agreement are recognized at the commencement date based on the present value of remaining payments
over the payment term using the Company’s secured incremental borrowing rates or implicit rates, when readily determinable.
The
Company’s IP purchase agreement does not provide an implicit rate that can readily be determined. Therefore, the Company
uses an 8% discount rate based on our incremental borrowing rate, which is determined using the average interest rate of our long-term
debt as of December 17, 2020.
For
the year ended December 31, 2020, the Company expensed $587,962 related to the patent purchase which was included in research
and development expenses on the accompanying consolidated statements of operations.
|
Maturity
of Patent Purchase Liability
|
|
|
|
2021
|
|
$
|
75,000
|
|
|
2022
|
|
|
75,000
|
|
|
2023
|
|
|
75,000
|
|
|
2024
|
|
|
75,000
|
|
|
2025
|
|
|
75,000
|
|
|
Total
undiscounted payments
|
|
$
|
375,000
|
|
|
Less:
imputed interest
|
|
|
57,038
|
|
|
Present
value of patent purchase liabilities
|
|
$
|
317,962
|
|
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.
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
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 year ended December 31, 2020:
|
|
|
Derivative
Liability - Convertible Notes
|
|
Derivative
Liability - Warrants
|
|
Total
|
|
Balance
as of December 31, 2019
|
|
$
|
61,430
|
|
|
$
|
122,021
|
|
|
$
|
183,451
|
|
|
Additions
during the period
|
|
|
597,841
|
|
|
|
353,779
|
|
|
|
951,620
|
|
|
Change
in fair value
|
|
|
(439,744
|
)
|
|
|
(312,751
|
)
|
|
|
(752,495
|
)
|
|
Change
due to exercise / redemptions
|
|
|
(66,387
|
)
|
|
|
—
|
|
|
|
(66,387
|
)
|
|
Balance
as of December 31, 2020
|
|
$
|
153,140
|
|
|
$
|
163,049
|
|
|
$
|
316,189
|
|
The
fair value of the derivative liability – convertible notes is estimated using a Monte Carlo pricing model with the following
assumptions:
|
Market
value of common stock
|
|
|
$0.14
– 0.58
|
|
|
Expected
volatility
|
|
|
87.9%
- 112.7%
|
|
|
Expected
term (in years)
|
|
|
0.19
– 2.00
|
|
|
Risk-free
interest rate
|
|
|
0.06%
- 1.55%
|
|
The
fair value of the derivative liability – warrants is estimated using a Monte Carlo pricing model with the following assumptions:
|
Market
value of common stock
|
|
|
$0.58
- 1.80
|
|
|
Expected
volatility
|
|
|
0.98%
- 160.1%
|
|
|
Expected
term (in years)
|
|
|
1.98
- 5.00
|
|
|
Risk-free
interest rate
|
|
|
0.18%
- 1.57%
|
|
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.
Occupancy
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 April 2021. The monthly rent payment is $5,600 and the security deposit is $15,000.
On
September 15, 2015, we entered into a one year lease arrangement for additional office space, the lease has been renewed is currently
scheduled to expire on September 30, 2021. The monthly rent payment is $359, and we provided a security deposit of $183.
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 September 1, 2018, we subleased this office space to a third party. The subleasee will pay 50% of the rent until expiration
of lease on June 30, 2021. The monthly rent payment is $2,723, and we provided a security deposit of $2,121.
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
Royalties
On
December 17, 2020, the Company entered into an Intellectual Property Rights Purchase and Transfer Agreement by and between Advanced
Neural Dynamics (“AND”), Fox Chase, Dr. Douglas Brenneman (“Brenneman”) and the Company to acquire the
IP Rights and concurrently entered into a Pharmaceutical Royalty Agreement (the “Royalty Agreement”) with AND and
Fox Chase.
Pursuant
to the Royalty Agreement, the following royalties and license fees are payable to Fox Chase and AND as well:
|
|
•
|
1%
royalties on net sales up to $500,000 per year per participant (for an aggregate maximum of 2% and up to $1,000,000);
|
|
|
•
|
1%
upfront sublicense fees per participant; and
|
|
|
•
|
1%
reversion rights to each participant (for 2% aggregate), which rights include future milestone payments.
|
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 a 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.
In
August 2019, the Company issued 950,000 shares of common stock at the price of $0.10 per share to board members for general compensation
for services rendered.
In
August 2019, the Company issued 500,000 shares of common stock at the price of $0.10 per share to an investor relations consultant
for services rendered.
In
August 2019, the Company issued 150,000 shares of common stock at the price of $0.10 per share to a product development consultant
for services rendered.
In
August 2019, the Company issued 400,000 shares of common stock at the price of $0.10 per share to a marketing consultant for services
rendered.
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
In
August 2019, the Company issued 700,000 shares of common stock at the price of $0.10 per share to consultants for general compensation
for services rendered. This compensation is included in research and development on the condensed consolidated statement of operations.
On
August 30, 2019, the Company issued 171,000 shares of common stock at a price of $0.07 per share to acquire the remaining non-controlling
interest in Kannalife Sciences, Inc., bringing our ownership interest from 99.7% to 100%.
On
September 26, 2019, the Company issued 1,500,000 shares of common stock at a price of $0.10 per share for the conversion of $123,627
convertible notes payable and $26,373 of related accrued interest.
On
April 28, 2020, the Company executed an intellectual property rights purchase and transfer agreement whereby this agreement grants
certain IP to the Company. In connection with the execution of this agreement, the Company issued 25,000 shares of the Company’s
common stock at $0.53 a share to the research organization.
On
September 24, 2020, the Company issued 46,896 shares of common stock for the conversion of $18,000 convertible notes payable and
$2,000 of related accrued interest.
On
September 25, 2020, the company issued 500,000 shares of the company’s common stock at $0.50 a share, which was a discount
to the trading price of $0.80 a share, to a consultant for investor relation services. The discount was expensed at issuance and
the rest of the expense will be amortized over the life of the agreement.
On
October 8, 2020, the company issued 350,000 shares of the company’s common stock at $0.48 a share, to a consultant for business
development services.
On
October 13, 2020, the Company issued 64,421 shares of common stock for the conversion of $18,000 convertible notes payable and
$2,000 of related accrued interest.
On
October 23, 2020, the Company issued 40,731 shares of common stock for the conversion of $10,000 convertible notes payable.
On
November 16, 2020, the Company issued 90,000 shares of the Company’s common stock at $0.17 a share for conversion of $15,000
convertible note payable.
On
November 23, 2020, the Company issued 122,051 shares of the Company’s common stock at $0.18 a share for conversion of $20,000
convertible note and $1,714 of related accrued interest.
On
December 8, 2020, the Company issued 135,695 shares of the Company’s common stock at $0.15 a share to the research organization.
On
December 11, 2020, the Company issued 1,000,000 shares of the Company’s common stock at $0.27 a share to a consulting company
for services.
On
December 17, 2020, the Company executed an intellectual property rights purchase and transfer agreement whereby this agreement
grants certain IP to the Company. In connection with the execution of this agreement, the Company issued 1,000,000 shares of the
Company’s common stock at $0.27 a share to the research organization.
On
December 18, 2020, the Company issued 70,973 shares of the Company’s common stock at $0.14 a share for the conversion of
$10,000 note payable with $318 of related accrued interest.
Stock
Options
On
May 4, 2020, the Company granted options to purchase 6,050,000 shares of common stock at a price of $0.57 per share to certain
directors and employees of the Company (including our named executive officers) and are exercisable for ten years. One quarter
of these options vest on the grant day, and the remainder of the options vest equally over thirty-six (36) months starting January
1, 2020. These options were valued at $3,152,050 using a Black-Scholes Options Pricing Model.
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
On
May 18, 2020, the Company granted options to purchase 75,000 shares of common stock at a price of $0.51 per share to a consultant
and are exercisable for ten years. One quarter of these options vest on the grant day, and the remainder of the options vest
equally over twelve (12) months. These options were valued at $34,260 using a Black-Scholes Options Pricing Model.
On
September 14, 2020 and December 24, 2020, the Company granted options to purchase 250,000 shares of common stock, respectively,
at a price of $0.84 and $0.20 per share, respectively, to a consultant and are exercisable for ten years. One quarter of
these options vest on the grant day, and the remainder of the options vest equally over twelve (12) months. These options were
valued at $180,950 using a Black-Scholes Options Pricing Model.
On
September 23, 2020, the Company granted options to purchase 200,000 shares of common stock at a price of $0.80 per share to
a consultant, who is a related party, and are exercisable for ten years. One quarter of these options vest on the grant day,
and the remainder of the options vest equally over twenty-four (24) months. These options were valued at $109,060 using a Black-Scholes
Options Pricing Model.
On
December 28, 2020, the Company granted options to purchase 200,000 shares of common stock at a price of $0.18 per share to
a consultant and are exercisable for ten years. One quarter of these options vest on the grant day, and the remainder of
the options vest equally over twelve (12) months. These options were valued at $26,720 using a Black-Scholes Options Pricing Model.
For
the years ended December 31, 2020 and 2019, the Company recorded $1,263,425 and $5,878, respectively, as stock-based compensation
which is included in the general and administrative expenses in the consolidated statement of operations and $459,175 and $0 respectively,
as research and development expense. The remaining expense outstanding through December 31, 2022 is $1,780,440.
The
fair value of the options is estimated using a Black-Scholes Options Pricing Model with the following assumptions:
|
Market
value of common stock on issuance date
|
|
|
$0.18
- 0.84
|
|
|
Exercise
price
|
|
|
$0.18
- 2.00
|
|
|
Expected
volatility
|
|
|
86%
- 138%
|
|
|
Expected
term (in years)
|
|
|
5.5
– 6.5
|
|
|
Risk-free
interest rate
|
|
|
0.64%
– 1.73
|
|
|
Expected
dividend yields
|
|
|
—
|
|
On
August 14, 2019, the Board authorized the Company’s 2019 Equity Incentive Plan (the “2019 Plan”) in order to
facilitate the grant of cash and equity incentives to directors, employees (including our named executive officers) and consultants
of our company and certain of its affiliates and to enable our company and certain of its affiliates to obtain and retain services
of these individuals, which is essential to our long-term success. Our 2019 Plan allows for the grant of a variety of equity vehicles
to provide flexibility in implementing equity awards, including incentive stock options, non-qualified stock options, restricted
stock grants, unrestricted stock grants and restricted stock units. A total of 7,500,000 shares of common stock were authorized
under the 2019 Plan, which was amended to 11,500,000 shares of common stock, for which as of December 31, 2020 a total of 6,050,000
are outstanding.
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
The
following is a summary of outstanding and exercisable options:
|
|
|
Number
of Options
|
|
Weighted
Avg Exercise Price
|
|
Weighted
Avg Remaining Years
|
|
Outstanding
as of December 31, 2019
|
|
|
100,000
|
|
|
$
|
2
|
|
|
|
9.51
|
|
|
Granted
|
|
|
7,025,000
|
|
|
|
0.56
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding
as of December 31, 2020
|
|
|
7,125,000
|
|
|
$
|
0.58
|
|
|
|
9.9
|
|
|
Outstanding
as of December 31, 2020, vested
|
|
|
3,478,906
|
|
|
$
|
0.61
|
|
|
|
9.13
|
|
Warrants
In
December 2019, the Company entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed
to sell the investor a $100,000 convertible note bearing interest at 8% per annum. The Company also sold warrants to the investors
to purchase up to an aggregate of 100,000 shares of common stock, with an exercise term of three (3) years, at a per share purchase
price of one hundred twenty five percent (125%) of the voluntary or involuntary conversion price of the Company’s 8% convertible
note. The warrants were deemed as a derivative liability and was recorded as a debt discount at date of issuance. See Note 10.
In
January and February 2020, the Company entered into a Securities Purchase Agreement with investors pursuant to which the Company
agreed to sell the investors a $100,000 and $50,000 convertible note bearing interest at 8% per annum, respectively. The Company
also sold warrants to the investors to purchase up to an aggregate of 100,000 and 50,000 shares of common stock, respectively,
with an exercise term of three (3) years, at a per share purchase price of one hundred twenty five percent (125%) of the voluntary
or involuntary conversion price of the Company’s 8% convertible note. The warrants were deemed as a derivative liability
and was recorded as a debt discount at date of issuance. See Note 10.
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. 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 which may be exercised by cashless exercise,
exercisable for a period of three years. The warrants were deemed as a derivative liability and was recorded as a debt discount
at date of issuance. See Note 10.
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 from the Company. 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 is to be issued only in the case of default on the note. During the year ended December 31, 2020, the
anti-dilution clause was triggered and the exercise price was reset to $0.15 resulting in the number of warrants to be increased
to 1,002,677. The warrants were deemed as a derivative liability and was recorded as a debt discount at date of issuance. See
Note 10.
The
following is a summary of outstanding and exercisable warrants:
|
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Balance
at December 31, 2019
|
|
|
100,000
|
|
|
$
|
3.26
|
|
|
Granted
|
|
|
1,189,343
|
|
|
|
0.44
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
Balance
at December 31, 2020
|
|
|
1,289,343
|
|
|
$
|
0.18
|
|
At
December 31, 2020, 1,289,343 warrants for common stock were exercisable and the intrinsic value of these warrants was $0. The
weighted average remaining contractual life for warrants outstanding was 3.93 years.
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
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.
As
of December 31, 2020, the Company owes the CEO $130,00 for accrued compensation and $55,258 for expenses the CEO incurred on behalf
of the Company.
See
Notes 8, 11 and 15 for additional related party transactions.
NOTE
17 – 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 2017 through 2020 remain subject
to examination for federal tax purposes and remain subject to examination in significant state tax jurisdictions.
As of December 31, 2020, and 2019, the Company
had federal and state net operating loss carry forwards of $7,000,000 and $4,220,000, respectively, of which $.8 million of the
2020 amount will expire in 2033 through 2037, and $6.2 million will not expire.
The reconciliation of income tax expense computed
at the U.S. federal statutory rate to the income tax provision for the years ended December 31, 2020 and 2019 is as follows:
|
|
|
For the Years
ended December 31,
|
|
|
|
2020
|
|
2019
|
|
|
|
|
%
|
|
|
|
%
|
|
|
Statutory federal tax rate
|
|
|
21.0
|
|
|
|
21.0
|
|
|
State taxes, net of federal benefit
|
|
|
6.4
|
|
|
|
4.7
|
|
|
Valuation allowance
|
|
|
(28.2
|
)
|
|
|
(20.0
|
)
|
|
Permanent items
|
|
|
1.4
|
|
|
|
(5.2
|
)
|
|
Other, net
|
|
|
(0.6
|
)
|
|
|
(0.5
|
)
|
|
Provision for income taxes
|
|
|
(0.0
|
)
|
|
|
—
|
|
The change in the Company's net increase in
the valuation allowance was caused by the change in estimation of NOL utilization.
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
Deferred
income taxes reflect the net tax effects of: (a) temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes; and (b) operating loss and tax credit carry-forwards.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such
determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary
differences, projected future taxable income, tax planning strategies and recent financial operations. Significant components
of deferred tax assets as December 31, 2020 and 2019 were as follows:
|
|
|
For
the Years ended December 31,
|
|
|
|
2020
|
|
2019
|
|
Deferred
Tax Assets:
|
|
|
|
|
|
|
|
|
|
Federal
net operating loss carryforwards
|
|
$
|
1,457,706
|
|
|
$
|
892,000
|
|
|
Stock
based compensation
|
|
|
476,938
|
|
|
|
—
|
|
|
Non-cash
interest
|
|
|
68,405
|
|
|
|
39,954
|
|
|
Non-cash
accrued compensation
|
|
|
877.976
|
|
|
|
794,880
|
|
|
Fixed
assets
|
|
|
3,616
|
|
|
|
—
|
|
|
State
taxes
|
|
|
408,828
|
|
|
|
316,238
|
|
|
Net
deferred tax assets before valuation allowance
|
|
|
3,293,468
|
|
|
|
2,043,072
|
|
|
Valuation
Allowance
|
|
|
(3,293,468
|
)
|
|
|
(2,043,072
|
)
|
|
Net
Deferred Tax Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
Utilization
of the net operating losses (NOL) carryforwards may be subject to a substantial annual limitation due to ownership change limitations
that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code (IRC) of 1986,
as amended (the Code), as well as similar state provisions. These ownership changes may limit the amount of NOL carryforwards
that can be utilized annually to offset future taxable income. In general, an “ownership change” as defined by Section
382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change
of more than 50 percentage points of the outstanding stock of a company by certain stockholders. At the time of closing the books,
the Company had not yet completed a study to determine the extent of the limitation.
NOTE
18 – SUBSEQUENT EVENTS
In
January 2021, the Company issued 313,972 shares of common stock at the price of $0.19 per share for the purchase of intellectual
property based on a five year installment sale. This compensation is included in research and development on the consolidated
statement of operations. The issuance was an error and was intended, as per agreement to be 200,000 shares at the floor price
of $.30 per share. The Company and the recipient have discussed the cancellation of 113,972 shares which will occur in the second
quarter of 2021. See Note 12.
In
January 2021, the Company repaid $20,000 to its Chief Executive Officer in exchange for the discharge of a portion of his accrued
expenses.
On
January 4, 2021, the Company issued 109,098 shares of common stock for the conversion of $10,000 convertible notes payable and
$272 of related accrued interest.
On
January 12, 2021, the Company issued 175,000 shares of common stock at the price of $0.10 per share in exchange for a settlement
of accrued expenses.
On
January 13, 2021, the Company issued 117,609 shares of common stock for the conversion of $10,000 convertible notes payable and
$97 of related accrued interest.
On
January 14, 2021, the Company sold 258,559 shares of common stock at the purchase price of $0.11 per share for a total purchase
price of $28,571.
On
January 15, 2021, the company issued 29,167 shares of the company’s common stock at $0.22 a share to a consultant for business
development services.
NEUROPATHIX, INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2020 AND 2019
On
January 27, 2021, the Company sold 388,583 shares of common stock at the purchase price of $0.13 per share for a total purchase
price of $51,410.
On
February 1, 2021, the Company issued 288,036 shares of common stock for the conversion of $25,000 convertible notes payable and
$162 of related accrued interest.
On
February 2, 2021, the Company issued 229,638 shares of common stock for the conversion of $20,000 convertible notes payable.
On
February 10, 2021, the Company issued 243,688 shares of common stock for the conversion of $20,000 convertible notes payable and
$4,200 of related accrued interest.
On
February 10, 2021, the Company sold 697,714 shares of common stock at the purchase price of $0.17 per share for a total purchase
price of $121,577.
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
February 22, 2021, the Company sold 715,893 shares of common stock at the purchase price of $0.16 per share for a total purchase
price of $115,617.
On
February 26, 2021, the Company sold 1,050,045 shares of common stock at the purchase price of $0.09 per share for a total purchase
price of $90,146.
On
March 2, 2021, the Company issued 520,000 shares of common stock at the price of $0.10 per share in exchange for a settlement
of accrued expenses.
On
March 4, 2021, the company issued 320,833 shares of the company’s common stock at $0.22 a share to a consultant for business
development services.
On
March 12, 2021, the Company granted options to purchase 7,350,000 shares of common stock at a price of $0.13 per share to
certain directors and employees of the Company (including our named executive officers) and are exercisable for ten years. One
quarter of these options vest on the grant day, and the remainder of the options vest equally over thirty-six (36) months starting
March 12, 2021. These options were valued at $732,795 using a Black-Scholes Options Pricing Model.
In
March 2021, the Company granted options to purchase 200,000 shares of common stock at a price of $0.13 per share to a certain
member of the Company’s corporate advisory board, as governed under agreement. One quarter of these options vested on the
grant day, and the remainder of the options vest equally over twenty four (24) months thereafter. These options were valued at
$19,940 using a Black-Scholes Options Pricing Model.
In
March 2021, the Company entered into a new lease agreement with Thermo Fisher Scientific to acquire another piece of equipment
with 36 monthly payments of $699 (including tax), payable through March 2024, with an effective interest rate of 13.4% per annum.
The outstanding balance of this capital lease as of March 30, 2021 was $24,637, with a carrying value of $24,637.
|
NEUROPATHIX, INC.
|
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
March 31, 2021
|
|
|
|
December 31, 2020
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
323,190
|
|
|
$
|
21,874
|
|
|
Prepaid expenses
|
|
|
38,000
|
|
|
|
161,000
|
|
|
Other receivables
|
|
|
56,838
|
|
|
|
400
|
|
|
Total Current Assets
|
|
|
418,028
|
|
|
|
183,274
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
|
Property and equipment, net
|
|
|
79,458
|
|
|
|
59,266
|
|
|
Security deposits
|
|
|
17,121
|
|
|
|
17,121
|
|
|
Total Non-Current Assets
|
|
|
96,579
|
|
|
|
76,387
|
|
|
TOTAL ASSETS
|
|
$
|
514,607
|
|
|
$
|
259,661
|
|
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
550,275
|
|
|
$
|
721,308
|
|
|
Payroll and related liabilities
|
|
|
363,989
|
|
|
|
379,241
|
|
|
Loan payable
|
|
|
950,000
|
|
|
|
950,000
|
|
|
Loan payable - related party
|
|
|
42,092
|
|
|
|
42,092
|
|
|
Convertible notes payable, net of $146,371 debt discount
|
|
|
194,821
|
|
|
|
198,127
|
|
|
Convertible notes payable, net of $61,507 debt discount - related party
|
|
|
88,493
|
|
|
|
—
|
|
|
Capital lease obligations
|
|
|
12,860
|
|
|
|
8,471
|
|
|
Patent purchase liability
|
|
|
53,135
|
|
|
|
53,135
|
|
|
Due to related party, net
|
|
|
28,415
|
|
|
|
55,258
|
|
|
Derivative liabilities
|
|
|
157,184
|
|
|
|
138,046
|
|
|
Total Current Liabilities
|
|
|
2,441,264
|
|
|
|
2,545,678
|
|
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
|
Convertible notes payable - long term
|
|
|
376,373
|
|
|
|
376,373
|
|
|
Convertible notes payable - long term - related party
|
|
|
—
|
|
|
|
70,000
|
|
|
Capital lease obligation - long term
|
|
|
29,416
|
|
|
|
19,293
|
|
|
Patent purchase liability - long term
|
|
|
204,826
|
|
|
|
264,826
|
|
|
Derivative liabilities - long term
|
|
|
201,149
|
|
|
|
178,143
|
|
|
Total Long Term Liabilities
|
|
|
811,764
|
|
|
|
908,635
|
|
|
TOTAL LIABILITIES
|
|
|
3,253,028
|
|
|
|
3,454,313
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies (Note 14)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' DEFICIT:
|
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 5,000,000 shares authorized
|
|
|
|
|
|
|
|
|
|
Series A preferred stock, 75 shares designated, 75 issued and outstanding (Liquidation preference of $75,000)
|
|
|
—
|
|
|
|
—
|
|
|
Series B preferred stock, 75 shares designated, 75 issued and outstanding (Liquidation preference of $75,000)
|
|
|
—
|
|
|
|
—
|
|
|
Common stock, $0.0001 par value, 200,000,000 authorized, 87,978,445 and 77,670,908 issued and outstanding, respectively
|
|
|
8,797
|
|
|
|
7,767
|
|
|
Additional paid-in capital
|
|
|
11,614,719
|
|
|
|
9,830,944
|
|
|
Accumulated deficit
|
|
|
(14,361,937
|
)
|
|
|
(13,033,363
|
)
|
|
TOTAL STOCKHOLDERS' DEFICIT
|
|
|
(2,738,421
|
)
|
|
|
(3,194,652
|
)
|
|
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$
|
514,607
|
|
|
$
|
259,661
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
|
|
NEUROPATHIX,
INC.
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2021
|
|
2020
|
|
NET
REVENUES:
|
|
|
|
|
|
|
|
|
|
Grant
revenue
|
|
$
|
32,000
|
|
|
$
|
—
|
|
|
TOTAL
NET REVENUES
|
|
|
32,000
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
128,648
|
|
|
|
19,727
|
|
|
General
and administrative
|
|
|
987,189
|
|
|
|
364,107
|
|
|
TOTAL
OPERATING EXPENSES
|
|
|
1,115,837
|
|
|
|
383,834
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(1,083,837
|
)
|
|
|
(383,834
|
)
|
|
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(134,521
|
)
|
|
|
(215,163
|
)
|
|
Change
in fair value of derivative liabilities
|
|
|
(110,216
|
)
|
|
|
291,165
|
|
|
TOTAL
OTHER INCOME (EXPENSE)
|
|
|
(244,737
|
)
|
|
|
76,002
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS BEFORE INCOME TAX
|
|
$
|
(1,328,574
|
)
|
|
$
|
(307,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Income
tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
NET
LOSS
|
|
$
|
(1,328,574
|
)
|
|
$
|
(307,832
|
)
|
|
|
|
|
|
|
|
|
|
|
|
Loss
per common share - basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic and diluted
|
|
|
82,806,466
|
|
|
|
74,225,141
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements
|
|
NEUROPATHIX, INC.
|
|
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' DEFICIT
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series A Preferred Stock
|
|
|
|
Series B Preferred Stock
|
|
|
|
Common Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Additional Paid-In Capital
|
|
|
|
Accumulated Deficit
|
|
|
|
Total Stockholders’ Deficit
|
|
|
Balance at December 31, 2019
|
|
|
75
|
|
|
$
|
—
|
|
|
|
75
|
|
|
$
|
—
|
|
|
|
74,225,141
|
|
|
$
|
7,422
|
|
|
$
|
6,794,612
|
|
|
$
|
(8,496,088
|
)
|
|
$
|
(1,694,054
|
)
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(307,832
|
)
|
|
|
(307,832
|
)
|
|
Balance at March 31, 2020
|
|
|
75
|
|
|
$
|
—
|
|
|
|
75
|
|
|
$
|
—
|
|
|
|
74,225,141
|
|
|
$
|
7,422
|
|
|
$
|
6,794,612
|
|
|
$
|
(8,803,920
|
)
|
|
$
|
(2,001,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2020
|
|
|
75
|
|
|
$
|
—
|
|
|
|
75
|
|
|
$
|
—
|
|
|
|
77,670,908
|
|
|
$
|
7,767
|
|
|
$
|
9,830,944
|
|
|
$
|
(13,033,363
|
)
|
|
$
|
(3,194,652
|
)
|
|
Stock based compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
453,950
|
|
|
|
—
|
|
|
|
453,950
|
|
|
Issuance of common stock for cash
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,268,188
|
|
|
|
727
|
|
|
|
813,030
|
|
|
|
—
|
|
|
|
813,757
|
|
|
Issuance of common stock for conversion of notes payable and accrued interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
988,069
|
|
|
|
99
|
|
|
|
89,632
|
|
|
|
—
|
|
|
|
89,731
|
|
|
Issuance of common stock for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
525,000
|
|
|
|
52
|
|
|
|
105,243
|
|
|
|
—
|
|
|
|
105,295
|
|
|
Issuance of common stock in lieu of deferred compensation
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
692,308
|
|
|
|
69
|
|
|
|
89,931
|
|
|
|
—
|
|
|
|
90,000
|
|
|
Issuance of common stock due to settlement of accrued expenses
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
520,000
|
|
|
|
52
|
|
|
|
103,948
|
|
|
|
—
|
|
|
|
104,000
|
|
|
Issuance of common stock for payment of patent purchase liability
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
313,972
|
|
|
|
31
|
|
|
|
59,969
|
|
|
|
—
|
|
|
|
60,000
|
|
|
Reduction of derivative liability due to conversions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
68,072
|
|
|
|
—
|
|
|
|
68,072
|
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,328,574
|
)
|
|
|
(1,328,574
|
)
|
|
Balance at March 31, 2021
|
|
|
75
|
|
|
$
|
—
|
|
|
|
75
|
|
|
$
|
—
|
|
|
|
87,978,445
|
|
|
$
|
8,797
|
|
|
$
|
11,614,719
|
|
|
$
|
(14,361,937
|
)
|
|
$
|
(2,738,421
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these consolidated financial statements
|
|
NEUROPATHIX,
INC.
|
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Unaudited
|
|
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
|
2021
|
|
2020
|
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(1,328,574
|
)
|
|
$
|
(307,832
|
)
|
|
Adjustments
to reconcile net loss to net cash
|
|
|
|
|
|
|
|
|
|
used
in operating activities:
|
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
4,445
|
|
|
|
4,034
|
|
|
Amortization
of debt discount
|
|
|
100,187
|
|
|
|
44,109
|
|
|
Stock
based compensation
|
|
|
453,950
|
|
|
|
—
|
|
|
Issuance
of common stock for services
|
|
|
157,294
|
|
|
|
—
|
|
|
Non-cash
interest expense
|
|
|
—
|
|
|
|
149,604
|
|
|
Change
in fair value of derivative liabilities
|
|
|
110,216
|
|
|
|
(291,165
|
)
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
|
123,000
|
|
|
|
3,000
|
|
|
Accounts
payable and accrued expenses
|
|
|
(114,302
|
)
|
|
|
(5,036
|
)
|
|
Payroll
and related liabilities
|
|
|
74,748
|
|
|
|
30,302
|
|
|
Due
to related party, net
|
|
|
(26,843
|
)
|
|
|
23,912
|
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(445,879
|
)
|
|
|
(349,072
|
)
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Purchase
of equipment
|
|
|
(8,100
|
)
|
|
|
—
|
|
|
NET
CASH USED IN INVESTING ACTIVITIES
|
|
|
(8,100
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Proceeds
from issuance of common stock
|
|
|
757,320
|
|
|
|
—
|
|
|
Principal
payments toward capital lease obligations
|
|
|
(2,025
|
)
|
|
|
(1,801
|
)
|
|
Proceeds
from loan payable - related party
|
|
|
—
|
|
|
|
150,000
|
|
|
Proceeds
from convertible notes payable, net of OID
|
|
|
—
|
|
|
|
194,000
|
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
755,295
|
|
|
|
342,199
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
increase (decrease) in cash
|
|
|
301,316
|
|
|
|
(6,873
|
)
|
|
Cash
and cash equivalents, beginning of period
|
|
|
21,874
|
|
|
|
121,455
|
|
|
Cash
and cash equivalents, end of period
|
|
$
|
323,190
|
|
|
$
|
114,582
|
|
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL
CASH FLOW INFORMATION:
|
|
|
|
|
|
|
|
|
|
Cash
paid for interest
|
|
$
|
798
|
|
|
$
|
—
|
|
|
Cash
paid for taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
ACTIVITIES:
|
|
|
|
|
|
|
|
|
|
Issuance
of common stock for conversion of notes payable and accrued interest
|
|
$
|
89,731
|
|
|
$
|
—
|
|
|
Issuance
of common stock for payment of patent purchase liability
|
|
$
|
60,000
|
|
|
$
|
—
|
|
|
Issuance
of common stock in lieu of deferred compensation
|
|
$
|
90,000
|
|
|
$
|
—
|
|
|
Receivable
upon the issuance of common shares
|
|
$
|
56,438
|
|
|
$
|
—
|
|
|
Property
and equipment financed through capital leases
|
|
$
|
16,537
|
|
|
$
|
—
|
|
|
Reduction
of derivative liability
|
|
$
|
68,072
|
|
|
$
|
—
|
|
|
Settlement
of accrued expenses through issuance of common stock
|
|
$
|
52,000
|
|
|
$
|
—
|
|
|
Debt
discount upon the issuance of convertible note payable
|
|
$
|
—
|
|
|
$
|
194,000
|
|
|
Debt
discount upon the issuance of convertible note payable - related party
|
|
$
|
—
|
|
|
$
|
150,000
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these consolidated financial statements
|
|
NEUROPATHIX,
INC.
|
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
|
MARCH
31, 2021
|
|
(UNAUDITED)
|
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 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. Kannalife 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.
Name
Change – Neuropathix, 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.
Unaudited
Interim Financial Information
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 2021. 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, 2020, included in the Company’s Annual Report on Form 10-K filed
with the SEC on March 30, 2021.
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
The
accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States, or GAAP.
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 in
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, 2021 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.
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 29,446,224 and 4,898,092 for
the three months ended March 31, 2021 and 2020, 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, 2021 and
2020, were $128,648 and $19,727, 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
Issued Authoritative Guidance
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” to improve information on credit
losses for financial assets and net investment in leases that are not accounted for at fair value through net income. ASU 2016-13
replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses. In April 2019
and May 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit
Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” and ASU No. 2019-05, “Financial
Instruments-Credit Losses (Topic 326): Targeted Transition Relief” which provided additional implementation guidance
on the previously issued ASU. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments - Credit Loss (Topic
326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” which defers the effective date for public filers that
are considered small reporting companies (“SRC”) as defined by the Securities and Exchange Commission to fiscal years
beginning after December 15, 2022, including interim periods within those fiscal years. Since the Company is an SRC, implementation
is not needed until January 1, 2023. The Company will continue to evaluate the effect of adopting ASU 2016-13 will have on the
Company’s consolidated financial statements.
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 net loss from operations of $1,083,837 and $383,834
for the three months ended March 31, 2021 and 2020, respectively. Additionally, the Company had an accumulated deficit of $14,361,937
at March 31, 2021 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 of convertible debt securities offering. 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, 2021 and December 31, 2020,
on a recurring basis:
|
|
|
March
31, 2021
|
|
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
Carrying
Value
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
358,333
|
|
|
$
|
358,333
|
|
|
|
|
December
31, 2020
|
|
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
Carrying
Value
|
|
Derivative
liabilities
|
|
|
—
|
|
|
|
—
|
|
|
|
316,189
|
|
|
$
|
316,189
|
|
NOTE
5 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses at March 31, 2021 and December 31, 2020 consisted of the following:
|
|
|
March
31,
2021
|
|
December
31, 2020
|
|
Accounts
payable and accrued expenses
|
|
$
|
339,961
|
|
|
$
|
538,527
|
|
|
Accrued
interest
|
|
|
210,314
|
|
|
|
182,781
|
|
|
Totals
|
|
$
|
550,275
|
|
|
$
|
721,308
|
|
NOTE
6 – PAYROLL AND RELATED LIABILITIES
Payroll
and related liabilities at March 31, 2021 and December 31, 2020 consisted of the following:
|
|
|
March
31,
2021
|
|
December
31, 2020
|
|
Payroll
|
|
$
|
120,234
|
|
|
$
|
149,704
|
|
|
Payroll
taxes
|
|
|
243,755
|
|
|
|
229,537
|
|
|
Totals
|
|
$
|
363,989
|
|
|
$
|
379,241
|
|
As
of March 31, 2021 and December 31, 2020, the Company has accrued payroll and payroll taxes in connection with salaries paid and
accrued to four officers of the Company which includes $100,000 accrued for the CEO, and $12,500 accrued for executive management.
NOTE
7 – LOAN PAYABLE
|
|
|
|
|
March
31, 2021
|
|
December
31, 2020
|
|
Loan
payable at 8%, matures December 31, 2021
|
|
|
*
|
|
|
$
|
850,000
|
|
|
$
|
850,000
|
|
|
Loan
payable at 1%, matures June 11, 2021
|
|
|
*
|
|
|
|
100,000
|
|
|
|
100,000
|
|
|
Total
|
|
|
|
|
|
|
950,000
|
|
|
|
950,000
|
|
|
Less:
short term loans
|
|
|
|
|
|
|
950,000
|
|
|
|
—
|
|
|
Total
long-term loans
|
|
|
|
|
|
$
|
—
|
|
|
$
|
950,000
|
|
|
*
- unsecured note
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
interest expense on notes payable, amounted to $16,767 and $12,230 for the three months ended March 31, 2021 and 2020, respectively.
Accrued interest related to these notes was $144,592 and $127,825 as of March 31, 2021 and December 31, 2020, respectively.
NOTE
8 – LOAN PAYABLE – RELATED PARTY
Prior
to the share exchange agreement, the Company borrowed $25,822 and issued a promissory note with a maturity date of March 31, 2020
which was later extended to March 31, 2022. Additionally, the note holder advanced the Company $16,270 for working capital, for
a total of $42,092 – also see Note 16.
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, 2021 and December 31, 2020, respectively.
NOTE
9 – CAPITAL 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 capital lease was $25,739, secured by equipment with carrying value of $29,221, as of March 31, 2021.
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 capital lease was $16,537, secured by equipment with carrying value of $24,226, as of March 31, 2021.
NOTE
10 – CONVERTIBLE NOTES PAYABLE
Prior
to the Share Exchange, 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 after the conversion was $376,373.
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 matures
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. If, after the first six months until
the maturity 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.
On March 12, 2020, the Company entered into
securities purchase agreements with two different accredited investors (each an “Investor”, and together the “Investors”)
pursuant to which each Investor purchased an 8% unsecured convertible promissory note (each a “8% Note”, and together
the “8% Notes”) from the Company. The terms and conditions of each of the 8% Notes are substantially the same. Each
8% Note has a principal amount of $105,000 less a $5,000 original issue discount for a purchase price of $100,000, with a maturity
date of March 12, 2021. This note is in default as of March 12, 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 each Investor, after six (6) months from the date of the 8% Notes. These
8% Notes have 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 8% Note (see Note 12) resulting in full discount of the
8% Note. During the three ended March 31, 2021, the Company issued 988,069 shares of common stock for the conversion of $85,000
convertible notes payable and $4,731 of related accrued interest. The outstanding balance on these convertible notes after the
conversion was $14,000.
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 “First
Tranche”). The 12% Note matures 12 months from the effective date of each tranche. 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 matures on June 19, 2021. 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 becomes exercisable upon default of the note. During the first quarter of 2021, the anti-dilution clause was triggered and
the exercise price was reset to $0.09 resulting in the number of warrants to be increased to 1,696,838. 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.
Total
interest expense on convertible notes payable, inclusive of amortization of debt discount of $81,694 and $29,589, amounted to
$94,194 and $32,522 for the three months ended March 31, 2021 and 2020, respectively.
Total
accrued interest on convertible notes payable, as of March 31, 2021 and December 31, 2020, was $41,367 and $39,993, respectively.
NOTE
11 – CONVERTIBLE NOTES PAYABLE – RELATED PARTY
In
January 2020, the Company sold an additional $100,000, 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.
Total
interest expense on convertible notes payable – related party, inclusive of amortization of debt discount of $18,493 and
$14,521, amounted to $21,493 and $16,698 for the three months ended March 31, 2021 and 2020, respectively.
Total
accrued interest on convertible notes payable – related party, as of March 31, 2021 and December 31, 2020, was $14,178 and
$11,178, respectively.
The
following is a schedule by year of future debt payments at March 31, 2021.
|
Year
Ending December 31,
|
|
Loan
payable
|
|
Loan
payable - related party
|
|
Convertible
notes payable
|
|
Convertible
notes payable - related party
|
|
Total
|
|
2021
– remainder of the year
|
|
$
|
950,000
|
|
|
$
|
42,092
|
|
|
$
|
319,000
|
|
|
$
|
100,000
|
|
|
$
|
1,411,092
|
|
|
2022
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
50,000
|
|
|
|
50,000
|
|
|
2023
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
2024
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
2025
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Thereafter
|
|
|
—
|
|
|
|
—
|
|
|
$
|
376,373
|
|
|
|
—
|
|
|
|
376,373
|
|
|
Total
|
|
$
|
950,000
|
|
|
$
|
42,092
|
|
|
$
|
695,373
|
|
|
$
|
150,000
|
|
|
$
|
1,837,465
|
|
NOTE
12 – PATENT PURCHASE LIABILITY
On
December 17, 2020, the Company entered into an Intellectual Property Rights Purchase and Transfer Agreement (the “IP Purchase
Agreement”) by and between Advanced Neural Dynamics (“AND”), Fox Chase, Dr. Douglas Brenneman (“Brenneman”)
and the Company to acquire the IP Rights and concurrently entered into a Pharmaceutical Royalty Agreement with AND and Fox Chase.
Pursuant
to the IP Purchase Agreement, the Company acquired the IP Assets for a $570,000 aggregate purchase price payable in restricted
common stock of the Company to Fox Chase, Brenneman and AND, payable as follows:
|
|
•
|
1,000,000
shares of restricted common stock of the Company were issued to Fox Chase at a price per share of $0.27 for an aggregate of
$270,000; and
|
|
|
•
|
$300,000
in common stock will be issued to AND/Brenneman in five annual installments which shall be calculated as $60,000 divided by
the average ten day closing price prior to each installment date with the initial installment date occurring on January 5,
2021; provided, however, that for the initial installment issuance price only, the price per share shall not be below $0.30
or above $0.60 per share.
|
In
addition, AND/Brenneman shall receive cash payments of $15,000 annually, payable in quarterly installments to offset against tax
payments, netted out against actual tax costs incurred. In the event such payments are not made, there will be a 10% penalty assessed
on said late tax offset payment.
The
liabilities from the IP purchase agreement are recognized at the commencement date based on the present value of remaining payments
over the payment term using the Company’s secured incremental borrowing rates or implicit rates, when readily determinable.
The
Company’s IP purchase agreement does not provide an implicit rate that can readily be determined. Therefore, the Company
uses an 8% discount rate based on our incremental borrowing rate, which is determined using the average interest rate of our long-term
debt as of December 17, 2020.
|
Maturity
of Patent Purchase Liability
|
|
|
|
Year
Ending December 31,
|
|
|
|
2021
- remainder of the year
|
|
$
|
15,000
|
|
|
2022
|
|
|
75,000
|
|
|
2023
|
|
|
75,000
|
|
|
2024
|
|
|
75,000
|
|
|
2025
|
|
|
75,000
|
|
|
Total
undiscounted payments
|
|
|
315,000
|
|
|
Less:
Imputed interest
|
|
|
(57,039
|
)
|
|
Present
value of Patent Purchase liabilities
|
|
$
|
257,961
|
|
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, 2021:
|
|
|
Derivative
Liability - Convertible Notes
|
|
Derivative
Liability - Warrants
|
|
Total
|
|
Balance
as of December 31, 2020
|
|
$
|
153,140
|
|
|
$
|
163,049
|
|
|
$
|
316,189
|
|
|
Additions
during the period
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Change
in fair value
|
|
|
72,116
|
|
|
|
38,100
|
|
|
|
110,216
|
|
|
Change
due to exercise / redemptions
|
|
|
(68,072
|
)
|
|
|
—
|
|
|
|
(68,072
|
)
|
|
Balance
as of March 31, 2021
|
|
$
|
157,184
|
|
|
$
|
201,149
|
|
|
$
|
358,333
|
|
The
fair value of the derivative liability – convertible notes is estimated using a Monte Carlo pricing model with the following
assumptions:
|
Market
value of common stock
|
|
$0.11
– 0.35
|
|
Expected
volatility
|
|
|
82%
- 103.1%
|
|
|
Expected
term (in years)
|
|
|
0.17
– 0.84
|
|
|
Risk-free
interest rate
|
|
|
0.00
|
%
|
The
fair value of the derivative liability – warrants is estimated using a Monte Carlo pricing model with the following assumptions:
|
Market
value of common stock
|
|
$0.11
– 0.11
|
|
Expected
volatility
|
|
|
99.9%
- 114.3%
|
|
|
Expected
term (in years)
|
|
|
1.73
– 4.22
|
|
|
Risk-free
interest rate
|
|
|
0.00
|
%
|
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.
Occupancy
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 April 2022. The monthly rent payment is $5,600 and the security deposit is $15,000.
On
September 15, 2015, we entered into a one year lease arrangement for additional office space, the lease has been renewed is currently
scheduled to expire on September 30, 2021. The monthly rent payment is $359, and we provided a security deposit of $183.
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 September 1, 2018, we subleased this office space to a third party. The subleasee will pay 50% of the rent until expiration
of lease on June 30, 2021. The monthly rent payment is $2,723, and we provided a security deposit of $2,121.
Royalties
On
December 17, 2020, the Company entered into an Intellectual Property Rights Purchase and Transfer Agreement by and between AND,
Fox Chase, Brenneman and the Company to acquire the IP Rights and concurrently entered into the “Royalty Agreement with
AND and Fox Chase.
Pursuant
to the Royalty Agreement, the following royalties and license fees are payable to Fox Chase and AND as well:
|
|
•
|
1%
royalties on net sales up to $500,000 per year per participant (for an aggregate maximum of 2% and up to $1,000,000);
|
|
|
•
|
1%
upfront sublicense fees per participant; and
|
|
|
•
|
1%
reversion rights to each participant (for 2% aggregate), which rights include future milestone payments.
|
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.
On
January 4, 2021, the Company issued 109,098 shares of common stock for the conversion of $10,000 convertible notes payable and
$272 of related accrued interest at $0.09 per share.
On
January 12, 2021, the Company issued 175,000 shares of common stock at the price of $0.18 per share in exchange for a settlement
of accrued expenses.
On
January 13, 2021, the Company issued 117,609 shares of common stock for the conversion of $10,000 convertible notes payable and
$97 of related accrued interest at $0.09 per share.
On January 14, 2021, the Company sold 258,559 shares of common stock at the purchase price
of $0.11 per share for a total purchase price of $28,571.
On
January 15, 2021, the Company issued 29,167 shares of common stock at $0.23 a share, to a consultant for business development
services.
On
January 15, 2021, the Company issued 313,972 shares of common stock at the price of $0.19 per share for the purchase of intellectual
property based on a five year installment sale. This compensation is included in research and development on the consolidated
statement of operations. The issuance was an error and was intended, as per agreement to be 200,000 shares at the floor price
of $.30 per share. The Company and the recipient have discussed the cancellation of 113,972 shares which will occur in the second
quarter of 2021.
On
January 28, 2021, the Company sold 388,583 shares of common stock at the purchase price
of $0.13 per share for a total purchase price of $51,410.
On
February 1, 2021, the Company issued 517,674 shares of common stock for the conversion of $45,000 convertible notes payable and
$162 of related accrued interest at $0.09 per share.
On
February 10, 2021, the Company issued 243,688 shares of common stock for the conversion of $20,000 convertible notes payable and
$4,200 of related accrued interest at $0.10 per share.
On
February 10, 2021, the Company issued 697,714 shares of common stock in exchange of cash at $0.17 per share for
a total purchase price of $121,577.
On
February 10, 2021, the Company issued 3,500,000 shares of common stock in exchange of cash at $0.10 per share for a total purchase
price of $350,000.
On
February 22, 2021, the Company issued 715,893 shares of common stock in exchange of cash at $0.16 per share for a total
purchase price of $115,617.
On
February 26, 2021, the Company issued 1,050,045 shares of common stock in exchange of cash at $0.09 per share for a total purchase
price of $90,146.
On
March 2, 2021, the Company issued 520,000 shares of common stock at the price of $0.10 per share in exchange for a settlement
of accrued expenses.
On
March 4, 2021, the Company issued 320,833 shares of common stock at $0.23 a share, to a consultant for business development services.
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 deferred salary.
On
March 25, 2021, the Company issued 657,394 shares of common stock in exchange of cash at $0.14 per share for a total purchase
price of $56,437.
Stock
Options
On
May 4, 2020, the Company granted options to purchase 6,050,000 shares of common stock at a price of $0.57 per share to certain
directors and employees of the Company (including our named executive officers) and are exercisable for ten years. One quarter
of these options vest on the grant day, and the remainder of the options vest equally over thirty six (36) months starting January
1, 2020. These options were valued at $3,152,050 using a Black-Scholes Options Pricing Model.
On
May 18, 2020, the Company granted options to purchase 75,000 shares of common stock at a price of $0.51 per share to a consultant
and are exercisable for ten years. One quarter of these options vest on the grant day, and the remainder of the options vest
equally over twelve (12) months. These options were valued at $34,260 using a Black-Scholes Options Pricing Model.
On
September 14, 2020 and December 24, 2020, the Company granted options to purchase 250,000 shares of common stock, respectively,
at a price of $0.84 and $0.20 per share, respectively, to a consultant and are exercisable for ten years. One quarter of
these options vest on the grant day, and the remainder of the options vest equally over twelve (12) months. These options were
valued at $180,950 using a Black-Scholes Options Pricing Model.
On
September 23, 2020, the Company granted options to purchase 200,000 shares of common stock at a price of $0.80 per share to
a consultant, who is a related party, and are exercisable for ten years. One quarter of these options vest on the grant day,
and the remainder of the options vest equally over twenty four (24) months. These options were valued at $109,060 using a Black-Scholes
Options Pricing Model.
On
December 28, 2020, the Company granted options to purchase 200,000 shares of common stock at a price of $0.18 per share to
a consultant and are exercisable for ten years. One quarter of these options vest on the grant day, and the remainder of
the options vest equally over twelve (12) months. These options were valued at $26,720 using a Black-Scholes Options Pricing Model.
On
March 12, 2021, the Company granted options to purchase 7,350,000 shares of common stock at a price of $0.13 per share to
certain directors and employees of the Company (including our named executive officers) and are exercisable for ten years. One
quarter of these options vested on the grant day, and the remainder of the options vest equally over thirty-six months starting
March 12, 2021. These options were valued at $732,795 using a Black-Scholes Options Pricing Model.
On
March 12, 2021, the Company granted options to purchase 200,000 shares of common stock at a price of $0.13 per share to a
certain member of the Company’s corporate advisory board, as governed under agreement. One quarter of these options vested
on the grant day, and the remainder of the options vest equally over twenty four months thereafter. These options were valued
at $19,940 using a Black-Scholes Options Pricing Model.
The
remaining expense outstanding through March 12, 2024 is $2,079,225.
For
the three months ended March 31, 2021 and 2020, the Company recorded $382,473 and $0, respectively, as stock based compensation
which is included in the general and administrative expenses in the condensed consolidated statement of operations and $71,477
and $0, 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:
|
Market
value of common stock on issuance date
|
|
|
$0.13
– 0.84
|
|
|
Exercise
price
|
|
|
$0.13
– 2.00
|
|
|
Expected
volatility
|
|
|
86
– 138%
|
|
|
Expected
term (in years)
|
|
|
5.50
– 6.50
|
|
|
Risk-free
interest rate
|
|
|
0.64
– 1.73%
|
|
|
Expected
dividend yields
|
|
|
—
|
|
On
August 14, 2019, the Board authorized the Company’s 2019 Equity Incentive Plan (the “2019 Plan”) in order to
facilitate the grant of cash and equity incentives to directors, employees (including our named executive officers) and consultants
of our company and certain of its affiliates and to enable our company and certain of its affiliates to obtain and retain services
of these individuals, which is essential to our long-term success. Our 2019 Plan allows for the grant of a variety of equity vehicles
to provide flexibility in implementing equity awards, including incentive stock options, non-qualified stock options, restricted
stock grants, unrestricted stock grants and restricted stock units. There were initially 7,500,000 shares of Company common stock
authorized for issuance under our 2019 Plan.
On
May 4, 2020, the Company amended its 2019 Plan to increase the number of shares of Company common stock authorized for issuance
thereunder to 11,500,000 shares. On March 12, 2021, the Company executed a second amendment to the 2019 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.
As
of March 31, 2021, 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:
|
|
|
Numbers
of Options
|
|
Weighted
Avg Exercise Price
|
|
Weighted
Avg Remaining Years
|
|
Outstanding
as of December 31,2020
|
|
|
7,125,000
|
|
|
$
|
0.58
|
|
|
|
9.30
|
|
|
Granted
|
|
|
7,550,000
|
|
|
|
0.13
|
|
|
|
9.95
|
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Forfeited
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
Outstanding
as of March 31,2021
|
|
|
14,675,000
|
|
|
$
|
0.35
|
|
|
|
9.52
|
|
|
Outstanding
as of March 31, 2021, vested
|
|
|
5,898,177
|
|
|
$
|
0.45
|
|
|
|
9.28
|
|
Warrants
In
January and February 2020, the Company entered into a Securities Purchase Agreement with investors pursuant to which the Company
agreed to sell the investors a $100,000 and $50,000 convertible note bearing interest at 8% per annum, respectively. The Company
also sold warrants to the investors to purchase up to an aggregate of 100,000 and 50,000 shares of common stock, respectively,
with an exercise term of three (3) years, at a per share purchase price of one hundred twenty five percent (125%) of the voluntary
or involuntary conversion price of the Company’s 8% convertible note. The warrants were deemed as a derivative liability
and was recorded as a debt discount at date of issuance. See Note 10.
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. 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 which may be exercised by cashless exercise,
exercisable for a period of three years. The warrants were deemed as a derivative liability and was recorded as a debt discount
at date of issuance. See Note 10.
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 from the Company. 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 is to be issued only in the case of default on the note. During the first quarter of 2021, the anti-dilution
clause was triggered and the exercise price was reset to $0.09 resulting in the number of warrants to be increased to 1,696,838.
The warrants were deemed as a derivative liability and was recorded as a debt discount at date of issuance. See Note 10.
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.
The
following is a summary of outstanding and exercisable warrants:
|
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
|
Balance
at December 31, 2020
|
|
|
1,289,343
|
|
|
$
|
0.18
|
|
|
Issued
|
|
|
4,194,161
|
|
|
|
0.25
|
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
|
Balance
at March 31, 2021
|
|
|
5,483,504
|
|
|
$
|
0.20
|
|
At
March 31, 2021, 5,483,504 warrants for common stock were exercisable and the intrinsic value of these warrants was $33,258 and
the weighted average remaining contractual life for warrants outstanding was 4.51 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.
As
of March 31, 2021, the Company owes the CEO $100,000 for accrued compensation and $28,415 for expenses incurred on behalf of the
Company.
During
the three months ended March 31, 2021, the Company repaid $40,000 to its CEO in exchange for the discharge of a portion of his
accrued expenses.
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 and 14 for additional related party transactions.
NOTE
17 – SUBSEQUENT EVENTS
In
May 2021, the Company repaid $10,000 to its CEO in exchange for the discharge of a portion of his accrued expenses.
Subject
to Completion, dated June 23, 2021
Prospectus
8,108,108
Shares
Common
Stock
PART
II
INFORMATION
NOT REQUIRED IN PROSPECTUS
ITEM
13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
The
following table sets forth the costs and expenses payable by us in connection with the issuance and distribution of the securities
being registered hereunder. All of the amounts shown are estimates, except for the Securities and Exchange Commission registration
fees.
|
Item
|
|
Amount
to be paid
|
|
SEC
registration fee
|
$
|
1,168.20
|
|
Legal
fees and expenses
|
|
15,000.00
|
|
Accounting
fees and expenses
|
|
10,000.00
|
|
Miscellaneous
fees and expenses
|
|
3,831.80
|
|
Total
|
$
|
30,000.00
|
ITEM
14. INDEMNIFICATION OF DIRECTORS AND OFFICERS.
As
permitted by Section 102 of the Delaware General Corporation Law, we adopted provisions in our amended and restated certificate
of incorporation and amended and restated bylaws that limit or eliminate the personal liability of our directors for a breach
of their fiduciary duty of care as a director. The duty of care generally requires that, when acting on behalf of the corporation,
directors exercise an informed business judgment based on all material information reasonably available to them. Consequently,
a director will not be personally liable to us or our stockholders for monetary damages for breach of fiduciary duty as a director,
except for liability for:
|
|
•
|
any
breach of the director’s duty of loyalty to us or our stockholders;
|
|
|
•
|
any
act or omission not in good faith or that involves intentional misconduct or a knowing
violation of law;
|
|
|
•
|
any
act related to unlawful stock repurchases, redemptions or other distributions or payment
of dividends; or
|
|
|
•
|
any
transaction from which the director derived an improper personal benefit.
|
These
limitations of liability do not affect the availability of equitable remedies such as injunctive relief or rescission. Our certificate
of incorporation also authorizes us to indemnify our officers, directors and other agents to the fullest extent permitted under
Delaware law.
As
permitted by Section 145 of the Delaware General Corporation Law, our amended and restated bylaws provide that:
|
|
•
|
we
may indemnify our directors, officers, and employees to the fullest extent permitted
by the Delaware General Corporation Law, subject to limited exceptions;
|
|
|
•
|
we
may advance expenses to our directors, officers and employees in connection with a legal
proceeding to the fullest extent permitted by the Delaware General Corporation Law, subject
to limited exceptions; and
|
|
|
•
|
the
rights provided in our amended and restated bylaws are not exclusive.
|
Our
amended and restated certificate of incorporation provides that we will indemnify each person who was or is a party or threatened
to be made a party to any threatened, pending or completed action, suit or proceeding (other than an action by or in the right
of us) by reason of the fact that he or she is or was, or has agreed to become, a director or officer, or is or was serving, or
has agreed to serve, at our request as a director, officer, partner, employee or trustee of, or in a similar capacity with, another
corporation, partnership, joint venture, trust or other enterprise (all such persons being referred to as an “Indemnitee”),
or by reason of any action alleged to have been taken or omitted in such capacity, against all expenses (including attorneys’
fees), judgments, fines and amounts paid in settlement actually and reasonably incurred in connection with such action, suit or
proceeding and any appeal therefrom, if such Indemnitee acted in good faith and in a manner he or she reasonably believed to be
in, or not opposed to, our best interests, and, with respect to any criminal action or proceeding, he or she had no reasonable
cause to believe his or her conduct was unlawful. Our certificate of incorporation provides that we will indemnify any Indemnitee
who was or is a party to an action or suit by or in the right of us to procure a judgment in our favor by reason of the fact that
the Indemnitee is or was, or has agreed to become, a director or officer, or is or was serving, or has agreed to serve, at our
request as a director, officer, partner, employee or trustee of, or in a similar capacity with, another corporation, partnership,
joint venture, trust or other enterprise, or by reason of any action alleged to have been taken or omitted in such capacity, against
all expenses (including attorneys’ fees) and, to the extent permitted by law, amounts paid in settlement actually and reasonably
incurred in connection with such action, suit or proceeding, and any appeal therefrom, if the Indemnitee acted in good faith and
in a manner he or she reasonably believed to be in, or not opposed to, our best interests, except that no indemnification shall
be made with respect to any claim, issue or matter as to which such person shall have been adjudged to be liable to us, unless
a court determines that, despite such adjudication but in view of all of the circumstances, he or she is entitled to indemnification
of such expenses. Notwithstanding the foregoing, to the extent that any Indemnitee has been successful, on the merits or otherwise,
he or she will be indemnified by us against all expenses (including attorneys’ fees) actually and reasonably incurred in
connection therewith. Expenses must be advanced to an Indemnitee under certain circumstances.
The
above discussion of our bylaws and Delaware law is not intended to be exhaustive and is respectively qualified in its entirety
by such bylaws and applicable Delaware law.
To
the extent that our directors and officers are indemnified under the provisions contained in our bylaws, Delaware law or contractual
arrangements against liabilities arising under the Securities Act of 1933, as amended (the “Securities Act”), we have
been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed
in the Securities Act, and is therefore unenforceable.
ITEM
15. RECENT SALES OF UNREGISTERED SECURITIES
Set
forth below is information regarding all securities sold by us within the last three years which were not registered under the
Securities Act. Also included is the consideration received by us for such securities and information relating to the section
of the Securities Act, or rule of the SEC, under which exemption from registration was claimed.
On
July 24, 2018, the Company sold 2,030,000 shares of common stock to an investor pursuant to a stock purchase agreement in a private
transaction in exchange for $203,000.
Immediately
prior to the Share Exchange, the Company received proceeds of $75,000 for the sale of 75 shares of Series A preferred stock and
$75,000 for the sale of 75 shares of Series B preferred stock in private transactions.
On
July 25, 2018, the Company entered into a Share Exchange Agreement with Kannalife Sciences, Inc., a Delaware corporation (“Kannalife”)
and certain stockholders of Kannalife (the “Kannalife Stockholders”). Pursuant to the terms of the Share Exchange
Agreement, TYYG acquired approximately nearly all of the issued and outstanding shares of Kannalife by means of a share exchange
with the Kannalife Stockholders in exchange for newly issued shares of the common stock of TYYG which constitutes approximately
86% of the number of shares of the issued and outstanding common stock of TYYG after giving effect to the Share Exchange Agreement.
In connection with the Share Exchange Agreement, each of the Kannalife Stockholders represented and warranted their status as
an accredited investor, no general solicitation or advertising was used in connection with the transaction which was limited to
stockholders of Kannalife, the Kannalife Stockholders had an opportunity to discuss the Company's business and financial affairs,
and the shares are restricted and subject to certain lock-up restrictions which limit an ability to transfer or distribute said
securities or act as underwriters of said securities.
In
August 2019, the Company issued 950,000 shares of common stock at the price of $0.10 per share to board members for general compensation
for services rendered.
In
August 2019, the Company issued 500,000 shares of common stock at the price of $0.10 per share to an investor relations consultant
for services rendered.
In
August 2019, the Company issued 150,000 shares of common stock at the price of $0.10 per share to a product development consultant
for services rendered.
In
August 2019, the Company issued 400,000 shares of common stock at the price of $0.10 per share to a marketing consultant for services
rendered.
In
August 2019, the Company issued 700,000 shares of common stock at the price of $0.10 per share to consultants for general compensation
for services rendered. This compensation is included in research and development on the statement of operations.
On
August 30, 2019, the Company issued 171,000 shares of common stock at a price of $0.07 per share to acquire the remaining non-controlling
interest in Kannalife Sciences, Inc., bringing our ownership interest from 99.7% to 100%.
On
September 26, 2019, the Company issued 1,500,000 shares of common stock at a price of $0.10 per share for the conversion of $123,627
convertible notes payable and $26,373 of related accrued interest.
In
December 2019, the Company entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed
to sell the investor a $100,000 convertible note bearing interest at 8% per annum (the “Note”). The Note matures 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. If, after the first six months until
the maturity 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.
|
In
addition, the Company also sold warrants to the investors to purchase up to an aggregate 100,000 shares of common stock (the “Warrant”).
The warrant is fully vested and was fully expensed as of the issuance date with an exercise term of three (3) years.
In
January 2020, the Company sold an additional $100,000, 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 to an investor under the Securities Purchase
Agreement.
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 to an investor under the Securities Purchase Agreement.
On
March 12, 2020, the Company entered into securities purchase agreements with two different accredited investors (each an “Investor”,
and together the “Investors”) pursuant to which each Investor purchased an 8% unsecured convertible promissory note
(each a “8% Note”, and together the “8% Notes”) from the Company. The terms and conditions of each of
the 8% Notes are substantially the same. Each 8% Note has a principal amount of $105,000 less a $5,000 original issue discount
for a purchase price of $100,000, with a maturity date of March 12, 2021. All principal amounts and the interest thereon are convertible
into shares of the Company’s common stock at the option of each Investor, after six (6) months from the date of the 8% Notes.
On
April 28, 2020, the Company issued 25,000 shares of common stock to a research organization in exchange for certain intellectual
property rights.
On
May 4, 2020, the Company granted options to purchase 6,050,000 shares of common stock at a price of $0.57 per share to certain
directors and employees of the Company (including our named executive officers) and are exercisable for ten years. One quarter
of these options vest on the grant day, and the remainder of the options vest equally over thirty six (36) months starting January
1, 2020.
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 “First
Tranche”). The 12% Note matures 12 months from the effective date of each tranche. 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.
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 matures on June 19, 2021. 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 becomes exercisable upon default of the note.
On
September 24, 2020, the Company issued 46,896 shares of common stock for the conversion of $18,000 convertible notes payable and
$2,000 of related accrued interest.
On
September 25, 2020, the Company issued 500,000 shares of the company’s common stock at $0.50 a share, which was a discount
to the trading price of $0.80 a share, to a consultant for investor relation services.
On
October 8, 2020, the company issued 350,000 shares of the company’s common stock at $0.48 a share, to a consultant for business
development services.
On
October 13, 2020, the Company issued 64,421 shares of common stock for the conversion of $18,000 convertible notes payable and
$2,000 of related accrued interest.
On
October 23, 2020, the Company issued 40,731 shares of common stock for the conversion of $10,000 convertible notes payable.
On
November 16, 2020, the Company issued 90,000 shares of the Company’s common stock at $0.17 a share for conversion of $15,000
convertible note payable.
On
November 23, 2020, the Company issued 122,051 shares of the Company’s common stock at $0.18 a share for conversion of $20,000
convertible note and $1,714 of related accrued interest.
On
December 8, 2020, the Company issued 135,695 shares of the Company’s common stock at $0.15 a share to the research organization.
On
December 11, 2020, the Company issued 1,000,000 shares of the Company’s common stock at $0.27 a share to a consulting company
for services.
On
December 17, 2020, the Company executed an intellectual property rights purchase and transfer agreement whereby this agreement
grants certain IP to the Company. In connection with the execution of this agreement, the Company issued 1,000,000 shares of the
Company’s common stock at $0.27 a share to the research organization.
On
December 18, 2020, the Company issued 70,973 shares of the Company’s common stock at $0.14 a share for the conversion of
$10,000 note payable with $318 of related accrued interest.
On
January 4, 2021, the Company issued 109,098 shares of common stock for the conversion of $10,000 convertible notes payable and
$272 of related accrued interest.
On
January 12, 2021, the Company issued 175,000 shares of common stock at the price of $0.10 per share in exchange for a settlement
of accrued expenses.
On
January 13, 2021, the Company issued 117,609 shares of common stock for the conversion of $10,000 convertible notes payable and
$97 of related accrued interest.
On
January 14, 2021, the Company sold 258,559 shares of common stock at the purchase price of $0.11 per share for a total purchase
price of $28,571.
On
January 15, 2021, the company issued 29,167 shares of the company’s common stock at $0.22 a share to a consultant for business
development services.
On
January 15, 2021, the Company issued 313,972 shares of common stock at the price of $0.19 per share for the purchase of intellectual
property based on a five year installment sale. The issuance was an error and was intended, as per agreement to be 200,000 shares
at the floor price of $.30 per share. The Company and the recipient have discussed the cancellation of 113,972 shares, which will
occur in the second quarter of 2021.
On
January 28, 2021, the Company sold 388,583 shares of common stock at the purchase price of $0.13 per share for a total purchase
price of $51,410.
On
February 1, 2021, the Company issued 288,036 shares of common stock for the conversion of $25,000 convertible notes payable and
$162 of related accrued interest.
On
February 2, 2021, the Company issued 229,638 shares of common stock for the conversion of $20,000 convertible notes payable.
On
February 10, 2021, the Company issued 243,688 shares of common stock for the conversion of $20,000 convertible notes payable and
$4,200 of related accrued interest.
On
February 10, 2021, the Company sold 697,714 shares of common stock at the purchase price of $0.17 per share for a total purchase
price of $121,577.
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
February 22, 2021, the Company sold 715,893 shares of common stock at the purchase price of $0.16 per share for a total purchase
price of $115,617.
On
February 26, 2021, the Company sold 1,050,045 shares of common stock at the purchase price of $0.09 per share for a total purchase
price of $90,146.
On
March 2, 2021, the Company issued 520,000 shares of common stock at the price of $0.10 per share in exchange for a settlement
of accrued expenses.
On
March 4, 2021, the company issued 320,833 shares of the company’s common stock at $0.22 a share to a consultant for business
development services.
On
March 25, 2021, the Company issued 657,394 shares of common stock in exchange of cash at $0.14 per share for a total purchase
price of $56,437.
Except
as otherwise noted, the securities in these transactions were sold in reliance on the exemption from registration provided in
Section 4(a)(2) of the Securities Act for transactions not involving any public offering. Each of the persons acquiring the foregoing
securities was an accredited investor (as defined in Rule 501(a) of Regulation D) and confirmed the foregoing and acknowledged,
in writing, that the securities must be acquired and held for investment. All certificates evidencing the shares sold bore a restrictive
legend. No underwriter participated in the offer and sale of these securities, and no commission or other remuneration was paid
or given directly or indirectly in connection therewith.
The
proceeds from these sales were used for general corporate purposes.
ITEM
16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES.
(a)
Exhibits.
The
registrant has filed the exhibits listed on the accompanying Exhibit Index of this registration statement.
(b)
Financial Statement Schedules.
All
financial statement schedules are omitted because the information called for is not required or is shown either in the financial
statements or in the notes thereto.
ITEM
17. UNDERTAKINGS.
The
undersigned registrant hereby undertakes:
|
|
1.
|
To
file, during any period in which offers or sales are being made, a post-effective amendment
to this registration statement:
|
|
|
(i)
|
To
include any prospectus required by section 10(a)(3) of the Securities Act of 1933;
|
|
|
(ii)
|
To
reflect in the prospectus any facts or events arising after the effective date of the
registration statement (or the most recent post-effective amendment thereof) which, individually
or in the aggregate, represent a fundamental change in the information set forth in the
registration statement. Notwithstanding the foregoing, any increase or decrease in volume
of securities offered (if the total dollar value of securities offered would not exceed
that which was registered) and any deviation from the low or high end of the estimated
maximum offering range may be reflected in the form of prospectus filed with the Securities
and Exchange Commission pursuant to Rule 424(b) if, in the aggregate, the changes in
volume and price represent no more than 20% change in the maximum aggregate offering
price set forth in the “Calculation of Registration Fee” table in the effective
registration statement.
|
|
|
(iii)
|
To
include any material information with respect to the plan of distribution not previously
disclosed in the registration statement or any material change to such information in
the registration statement, provided, however, that paragraphs (1)(i),
(1)(ii) and (1)(iii) do not apply if the information required to be included in a post-effective
amendment by those paragraphs is contained in reports filed with or furnished to the
Commission by the registrant pursuant to Section 13 or 15(d) of the Exchange Act
that are incorporated by reference in the registration statement.
|
|
|
2.
|
That,
for the purpose of determining any liability under the Securities Act of 1933, each such
post-effective amendment shall be deemed to be a new registration statement relating
to the securities offered therein, and the offering of such securities at that time shall
be deemed to be the initial bona fide offering thereof.
|
|
|
3.
|
To
remove from registration by means of a post-effective amendment any of the securities
being registered which remain unsold at the termination of the offering.
|
|
|
4.
|
That,
for the purpose of determining liability under the Securities Act of 1933 to any purchaser,
each prospectus filed pursuant to Rule 424(b) as part of a registration statement relating
to an offering, other than registration statements relying on Rule 430B or other than
prospectuses filed in reliance on Rule 430A, shall be deemed to be part of and included
in the registration statement as of the date it is first used after effectiveness. Provided,
however, that no statement made in a registration statement or prospectus that is part
of the registration statement or made in a document incorporated or deemed incorporated
by reference into the registration statement or prospectus that is part of the registration
statement will, as to a purchaser with a time of contract of sale prior to such first
use, supersede or modify any statement that was made in the registration statement or
prospectus that was part of the registration statement or made in any such document immediately
prior to such date of first use.
|
|
|
5.
|
That,
for the purpose of determining liability of the registrant under the Securities Act of
1933 to any purchaser in the initial distribution of the securities, regardless of the
underwriting method used to sell the securities to the purchaser, if the securities are
offered or sold to such purchaser by means of any of the following communications, the
registrant will be a seller to the purchaser and will be considered to offer or sell
such securities to such purchaser:
|
|
|
(i)
|
any
preliminary prospectus or prospectus of the registrant relating to the offering filed
pursuant to Rule 424;
|
|
|
(ii)
|
any
free writing prospectus relating to the offering prepared by or on behalf of the registrant
or used or referred to by the registrant;
|
|
|
(iii)
|
the
portion of any other free writing prospectus relating to the offering containing material
information about the registrant or its securities provided by or on behalf of the registrant;
and
|
|
|
(iv)
|
any
other communication that is an offer in the offering made by the registrant to the purchaser.
|
|
|
6.
|
That,
for purposes of determining any liability under the Securities Act of 1933, each filing
of the registrant’s annual report pursuant to Section 13(a) or 15(d) of the
Securities Exchange Act of 1934 (and, where applicable, each filing of an employee benefit
plan’s annual report pursuant to Section 15(d) of the Securities Exchange
Act of 1934) that is incorporated by reference in the registration statement shall be
deemed to be a new registration statement relating to the securities offered therein,
and the offering of such securities at that time shall be deemed to be the initial bona
fide offering thereof.
|
|
|
7.
|
Insofar
as indemnification for liabilities arising under the Securities Act of 1933 may be permitted
to directors, officers and controlling persons of the registrant pursuant to the foregoing
provisions, or otherwise, the registrant has been advised that in the opinion of the
Securities and Exchange Commission such indemnification is against public policy as expressed
in the Act and is, therefore, unenforceable. In the event that a claim for indemnification
against such liabilities (other than the payment by the registrant of expenses incurred
or paid by a director, officer or controlling person of the registrant in the successful
defense of any action, suit or proceeding) is asserted by such director, officer or controlling
person in connection with the securities being registered, the registrant will, unless
in the opinion of its counsel the matter has been settled by controlling precedent, submit
to a court of appropriate jurisdiction the question whether such indemnification by it
is against public policy as expressed in the Act and will be governed by the final adjudication
of such issue.
|
EXHIBIT
INDEX
|
Exhibit
Number
|
Description
|
Incorporated
By
Reference
(Form
Type)
|
Filing
Date
|
Filed
herewith
|
|
2.1
|
Share
Exchange Agreement, dated as of July 25, 2018 by and among TYG Solutions Corp., Kannalife Sciences, Inc. and its stockholders
|
8-K
|
7/31/2018
|
|
|
3.1
|
Certificate
of Incorporation, as filed with the Delaware Secretary of State on March 25, 2013
|
10-K
|
3/30/2017
|
|
|
3.2
|
Amended
and Restated Certificate of Incorporation of TYG Solutions Corp., as filed with the Delaware Secretary of State on May 1,
2018
|
8-K
|
5/4/2018
|
|
|
3.3
|
Certificate
of Designation of Series A Preferred Stock of TYG Solutions Corp. as filed with the Delaware Secretary of State on May 3,
2018
|
8-K
|
5/4/2018
|
|
|
3.4
|
Certificate
of Designation of Series B Preferred Stock of TYG Solutions Corp. as filed with the Delaware Secretary of State on May 3,
2018
|
8-K
|
5/4/2018
|
|
|
3.5
|
Bylaws
of TYG Solutions Corp.
|
10-K
|
3/30/2017
|
|
|
3.6
|
Amended
and Restated Bylaws of TYG Solution Corp.
|
8-K
|
5/4/2018
|
|
|
3.7
|
Amendment
to Amended and Restated Certificate of Incorporation, as filed with the Delaware Secretary of State on November 9, 2018
|
S-1/A
|
12/28/2018
|
|
|
4.1
|
Convertible
Note dated February 16, 2018
|
10-K
|
7/24/2018
|
|
|
4.2
|
Convertible
Note Purchase Agreement dated February 16, 2018
|
10-K
|
7/24/2018
|
|
|
5.1
|
Legal Opinion of Procopio, Cory, Hargreaves & Savitch LLP
|
S-1
|
09/22/2020
|
|
|
10.1
|
Form
of Lock-up Agreement (Kannalife Stockholders)
|
8-K
|
7/31/2018
|
|
|
10.2
|
Form
of Lock-up Agreement (Management Stockholders)
|
8-K
|
7/31/2018
|
|
|
10.3
|
Form
of Lock-up Agreement (Dean Petkanas Block)
|
8-K
|
7/31/2018
|
|
|
10.4+
|
Executive
Employment Agreement by and between TYG Solutions Corp. and Dean Petkanas
|
8-K
|
7/31/2018
|
|
|
10.5+
|
Executive
Employment Agreement by and between TYG Solutions Corp. and Thomas Kikis
|
8-K
|
7/31/2018
|
|
|
10.6+
|
Executive
Employment Agreement by and between TYG Solutions Corp. and Mark Corrao
|
8-K
|
7/31/2018
|
|
|
10.7+
|
Executive
Employment Agreement by and between TYG Solutions Corp. and William Kinney, PhD
|
8-K
|
7/31/2018
|
|
|
10.8
|
Settlement
Agreement by and between TYG Solutions Corp. and Medical Marijuana, Inc.
|
S-1/A
|
12/28/2018
|
|
|
10.9*
|
Exclusive
Patent License Agreement - Exclusive by and between the National Institutes of Health and Kannalife Sciences, Inc. for Hepatic
Encephalopathy (HE).
|
S-1/A
|
12/28/2018
|
|
|
10.10*
|
Nonexclusive
Patent License Agreement - Nonexclusive by and between the National Institutes of Health and Kannalife Sciences, Inc. for
Chronic Traumatic Encephalopathy (CTE).
|
S-1/A
|
12/28/2018
|
|
|
10.11*
|
Feasibility
Study Quotation by and between Kannalife Sciences, Inc. and Catalent Pharma Solutions, LLC.
|
S-1/A
|
12/28/2018
|
|
|
10.12
|
Stock
Purchase Agreement by and between Cross & Co. and the Company.
|
S-1/A
|
12/28/2018
|
|
|
10.13*
|
Materials
Transfer and Testing Agreement by and between Kannalife Sciences, Inc. and the Natural Products Discovery Institute.
|
S-1/A
|
3/8/2019
|
|
|
10.14
|
Kannalife,
Inc. 2019 Equity Incentive Plan and related form agreements.
|
10-K
|
3/30/2020
|
|
|
10.15
|
Form
of Junior Unsecured Convertible Note.
|
10-K
|
3/30/2020
|
|
|
10.16
|
Form
of Common Stock Purchase Warrant.
|
10-K
|
3/30/2020
|
|
|
10.17
|
Form
of Securities Purchase Agreement.
|
8-K
|
3/18/2020
|
|
|
10.18
|
Form
of Convertible Promissory Note.
|
8-K
|
3/18/2020
|
|
|
10.19
|
Form
of Irrevocable Transfer Agent Letter
|
8-K
|
3/18/2020
|
|
|
10.20
|
Form
of Securities Purchase Agreement.
|
8-K
|
6/11/2020
|
|
|
10.21
|
Form
of Convertible Promissory Note.
|
8-K
|
6/11/2020
|
|
|
10.22
|
Form
of Irrevocable Transfer Agent Letter.
|
8-K
|
6/11/2020
|
|
|
10.23
|
Form
of Warrant.
|
8-K
|
6/11/2020
|
|
|
10.24
|
Form
of Securities Purchase Agreement.
|
10-K
|
6/29/2020
|
|
|
10.25
|
Form
of Convertible Promissory Note.
|
8-K
|
6/29/2020
|
|
|
10.26
|
Form
of Irrevocable Transfer Agent Letter.
|
8-K
|
6/29/2020
|
|
|
10.27
|
Form
of Warrant.
|
8-K
|
6/29/2020
|
|
|
10.28
|
Equity
Purchase Agreement by and between the Company and Cross & Company, dated September 22, 2020.
|
8-K
|
9/22/2020
|
|
|
10.29
|
Binding
Letter of Intent, dated November 17, 2020
|
8-K
|
11/19/2020
|
|
|
10.30
|
Intellectual
Property Rights Purchase and Transfer Agreement, dated December 17, 2020
|
8-K
|
12/21/2020
|
|
|
10.31
|
Pharmaceutical
Royalty Agreement, dated December 17, 2020
|
8-K
|
12/21/2020
|
|
|
10.32
|
Common
Stock Purchase Agreement, dated February 17, 2020
|
8-K
|
2/23/2021
|
|
|
10.33
|
Warrant
No. 1, effective February 10, 2021
|
8-K
|
2/23/2021
|
|
|
10.34
|
Warrant
No. 2, effective February 10, 2021
|
8-K
|
2/23/2021
|
|
|
10.35+
|
Second
Amendment to Neuropathix, Inc. (formerly Kannalife, Inc.) 2019 Equity Incentive Plan, effective as of March 12, 2021
|
8-K
|
3/17/2021
|
|
|
21.1
|
Schedule
of Subsidiaries
|
S-1/A
|
12/28/2018
|
|
|
23.1
|
Consent of dbbmckennon, an independent registered public accounting firm
|
|
|
X
|
|
23.2
|
Consent of Procopio, Cory, Hargreaves & Savitch LLP (included in
Exhibit 5.1)
|
S-1
|
09/22/2020
|
|
|
24.1
|
Power of Attorney (included on the signature page of the
registration statement)
|
S-1
|
09/22/2020
|
|
+
Indicates management contract or compensatory plan.
*This
Exhibit has been filed separately with the Secretary of the Securities and Exchange Commission without the redaction pursuant
to a Confidential Treatment Request under Rule 24b-2 of the Securities Exchange Act of 1934, as amended, and Rule 406 of the Securities
Act of 1933, as amended.
SIGNATURES
Pursuant
to the requirements of the Securities Act of 1933, the registrant has duly caused this post-effective amendment to registration
statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Doylestown, State of Pennsylvania,
on June 23, 2021.
|
NEUROPATHIX,
INC.
|
|
|
|
|
|
By:
|
/s/
Dean Petkanas
Dean
Petkanas
Chief
Executive Officer and Chairman
(Principal
Executive Officer)
|
|
By:
|
/s/
Mark Corrao
Mark
Corrao
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
Pursuant
to the requirements of the Securities Act of 1933, this post-effective amendment to registration statement has been signed by
the following persons in the capacities and on the dates indicated.
|
Signature
|
|
Title
|
|
Date
|
|
|
|
|
|
|
|
/s/
Dean Petkanas
Dean
Petkanas
|
|
Chief
Executive Officer and Chairman
(Principal
Executive Officer)
|
|
June 23, 2021
|
|
/s/
Mark Corrao
Mark
Corrao
|
|
Chief
Financial Officer
(Principal
Financial and Accounting Officer)
|
|
June 23, 2021
|
|
/s/
Thomas Kikis
Thomas
Kikis
|
|
Chief
Communications Officer and Director
|
|
June 23, 2021
|
|
/s/
Dr. William Kinney
Dr.
William Kinney
|
|
Chief
Scientific Officer
|
|
June 23, 2021
|
|
/s/
Robert Malasek
Robert
Malasek
|
|
Director
|
|
June 23, 2021
|
|
/s/
Blake Schroeder
Blake
Schroeder
|
|
Director
|
|
June 23, 2021
|
|
/s/
Dr. Timothy R. Scott
Dr.
Timothy R. Scott
|
|
Director
|
|
June 23, 2021
|
*
By: /s/ Dean Petkanas
Attorney-in-fact
Neuropathix (CE) (USOTC:NPTX)
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