CNS Pharmaceuticals, Inc 10-Q for FY2020 Q3
CNS Pharmaceuticals, Inc. (CNSP)
About this 10-Q
CNS Pharmaceuticals, Inc filed this 10-Q on November 12, 2020, covering the quarter ended September 30, 2020 (FY2020 Q3).
Headline figures
Quarter ended September 30, 2020, as reported in this filing, compared with the same period a year earlier where the filing states it.
- Net loss
- $2.01M
- compared with a net loss of $706.66K a year earlier
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| ☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2020
OR
| ☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from ________ to__________
Commission file number: 001-39126
CNS Pharmaceuticals, Inc.
(Exact Name of Registrant as Specified in Its Charter)
| Nevada | 82-2318545 | |
|
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) |
|
2100 West Loop South, Suite 900 Houston, Texas |
77027 | |
| (Address of Principal Executive Offices) | (Zip Code) |
800-946-9185
(Registrant's Telephone Number, Including Area Code)
(Former Name, Former Address and Former Fiscal Year, if Changed Since Last Report)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes ☒ No ☐
Indicate by check mark whether the registrant has submitted electronically if any, every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes ☒ No ☐
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 definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
| Large Accelerated Filer ☐ | Accelerated Filer ☐ |
| Non-Accelerated Filer ☒ | Smaller Reporting Company ☒ |
| Emerging Growth Company ☒ |
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 13(a) of the Exchange Act. ☐
Securities registered pursuant to Section 12(b) of the Exchange Act:
| Title of each class | Trading Symbol(s) | Name of each exchange on which registered |
| Common Stock | CNSP | The NASDAQ Stock Market LLC |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ☐ No ☒
The registrant had 16,652,225 shares of common stock outstanding at November 12, 2020.
| 2 |
PART I – FINANCIAL INFORMATION
| Item 1. |
Financial Statements |
CNS Pharmaceuticals, Inc.
(Unaudited)
| September 30, 2020 | December 31, 2019 | |||||||
| Assets | ||||||||
| Current Assets: | ||||||||
| Cash and cash equivalents | $ | 1,307,098 | $ | 7,241,288 | ||||
| Prepaid expenses | 1,209,079 | 652,622 | ||||||
| Total current assets | 2,516,177 | 7,893,910 | ||||||
| Noncurrent Assets: | ||||||||
| Furniture and equipment, net | 28,158 | 18,165 | ||||||
| Deferred offering costs | 440,902 | – | ||||||
| Total noncurrent assets | 469,060 | 18,165 | ||||||
| Total Assets | $ | 2,985,237 | $ | 7,912,075 | ||||
| Liabilities and Stockholders' Equity | ||||||||
| Current Liabilities: | ||||||||
| Accounts payable | $ | 250,181 | $ | 243,666 | ||||
| Accounts payable and accrued expenses - related party | – | 45,833 | ||||||
| Accrued expenses | 260,601 | 21,500 | ||||||
| Total current liabilities | 510,782 | 310,999 | ||||||
| Total Liabilities | 510,782 | 310,999 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' Equity: | ||||||||
| Preferred stock, $0.001 par value, 5,000,000 shares authorized and 0 shares issued and outstanding | – | – | ||||||
| Common stock, $0.001 par value, 75,000,000 shares authorized and 16,652,225 and 16,450,234 shares issued and outstanding, respectively | 16,652 | 16,450 | ||||||
| Additional paid-in capital | 20,399,241 | 19,073,098 | ||||||
| Accumulated deficit | (17,941,438 | ) | (11,488,472 | ) | ||||
| Total Stockholders' Equity | 2,474,455 | 7,601,076 | ||||||
| Total Liabilities and Stockholders' Equity | $ | 2,985,237 | $ | 7,912,075 | ||||
See accompanying notes to the unaudited financial statements.
| 3 |
CNS Pharmaceuticals, Inc.
(Unaudited)
| Three Months Ended September 30, 2020 | Three Months Ended September 30, 2019 | Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | |||||||||||||
| Operating expenses: | ||||||||||||||||
| General and administrative | $ | 968,790 | $ | 373,460 | $ | 3,305,330 | $ | 892,575 | ||||||||
| Research and development | 1,042,274 | 325,634 | 3,147,636 | 416,671 | ||||||||||||
| Total operating expenses | 2,011,064 | 699,094 | 6,452,966 | 1,309,246 | ||||||||||||
| Loss from operations | (2,011,064 | ) | (699,094 | ) | (6,452,966 | ) | (1,309,246 | ) | ||||||||
| Other expenses: | ||||||||||||||||
| Interest expense | – | (7,561 | ) | – | (22,535 | ) | ||||||||||
| Amortization of debt discount | – | – | – | (18,082 | ) | |||||||||||
| Total other expenses | – | (7,561 | ) | – | (40,617 | ) | ||||||||||
| Net loss | $ | (2,011,064 | ) | $ | (706,655 | ) | $ | (6,452,966 | ) | $ | (1,349,863 | ) | ||||
| Loss per share - basic and diluted | $ | (0.12 | ) | $ | (0.05 | ) | $ | (0.39 | ) | $ | (0.10 | ) | ||||
| Weighted average shares outstanding - basic and diluted | 16,483,529 | 13,573,817 | 16,461,332 | 13,173,180 | ||||||||||||
See accompanying notes to the unaudited financial statements.
| 4 |
CNS Pharmaceuticals, Inc.
Statements of Stockholders' Equity
(Unaudited)
| Additional | Total | |||||||||||||||||||
| Common Stock | Paid-in | Accumulated | Stockholders' | |||||||||||||||||
| Shares | Amount | Capital | Deficit | Equity | ||||||||||||||||
| Balance December 31, 2019 | 16,450,234 | $ | 16,450 | $ | 19,073,098 | $ | (11,488,472 | ) | $ | 7,601,076 | ||||||||||
| Stock-based compensation | – | – | 242,209 | – | 242,209 | |||||||||||||||
| Net loss | – | – | – | (1,968,131 | ) | (1,968,131 | ) | |||||||||||||
| Balance March 31, 2020 | 16,450,234 | 16,450 | 19,315,307 | (13,456,603 | ) | 5,875,154 | ||||||||||||||
| Stock-based compensation | – | – | 323,224 | – | 323,224 | |||||||||||||||
| Net loss | – | – | – | (2,473,771 | ) | (2,473,771 | ) | |||||||||||||
| Balance June 30, 2020 | 16,450,234 | 16,450 | 19,638,531 | (15,930,374 | ) | 3,724,607 | ||||||||||||||
| Common stock issued for deferred offering costs | 201,991 | 202 | 395,700 | – | 395,902 | |||||||||||||||
| Stock-based compensation | – | – | 365,010 | – | 365,010 | |||||||||||||||
| Net loss | – | – | – | (2,011,064 | ) | (2,011,064 | ) | |||||||||||||
| Balance September 30, 2020 | 16,652,225 | $ | 16,652 | $ | 20,399,241 | $ | (17,941,438 | ) | $ | 2,474,455 | ||||||||||
| Balance December 31, 2018 | 12,694,504 | $ | 12,695 | $ | 7,049,268 | $ | (7,611,261 | ) | $ | (549,298 | ) | |||||||||
| Stock-based compensation | – | – | 44,016 | – | 44,016 | |||||||||||||||
| Net loss | – | – | – | (211,501 | ) | (211,501 | ) | |||||||||||||
| Balance March 31, 2019 | 12,694,504 | 12,695 | 7,093,284 | (7,822,762 | ) | (716,783 | ) | |||||||||||||
| Common stock issued for cash, net | 767,500 | 767 | 1,406,402 | – | 1,407,169 | |||||||||||||||
| Common stock issued for services | 75,000 | 75 | 49,105 | – | 49,180 | |||||||||||||||
| Stock-based compensation | – | – | 69,845 | – | 69,845 | |||||||||||||||
| Net loss | – | – | – | (431,707 | ) | (431,707 | ) | |||||||||||||
| Balance June 30, 2019 | 13,537,004 | 13,537 | 8,618,636 | (8,254,469 | ) | 377,704 | ||||||||||||||
| Common stock issued for cash | 50,000 | 50 | 99,950 | – | 100,000 | |||||||||||||||
| Common stock issued for services | – | – | 56,250 | – | 56,250 | |||||||||||||||
| Stock-based compensation | – | – | 172,917 | – | 172,917 | |||||||||||||||
| Net loss | – | – | – | (706,655 | ) | (706,655 | ) | |||||||||||||
| Balance September 30, 2019 | 13,587,004 | 13,587 | 8,947,753 | (8,961,124 | ) | 216 | ||||||||||||||
See accompanying notes to the unaudited financial statements.
| 5 |
CNS Pharmaceuticals, Inc.
(Unaudited)
| Nine Months Ended September 30, 2020 | Nine Months Ended September 30, 2019 | |||||||
| Cash Flows from Operating Activities: | ||||||||
| Net loss | $ | (6,452,966 | ) | $ | (1,349,863 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation | 930,443 | 286,778 | ||||||
| Common stock issued for services | – | 105,430 | ||||||
| Amortization of debt discount | – | 18,082 | ||||||
| Deferred financing cost | – | 102,225 | ||||||
| Depreciation | 7,952 | 865 | ||||||
| Changes in operating assets and liabilities: | ||||||||
| Prepaid expenses | (556,457 | ) | (423,355 | ) | ||||
| Accounts payable | 6,515 | 150,270 | ||||||
| Accounts payable and accrued expenses - related party | (45,833 | ) | 9,206 | |||||
| Accrued expenses | 239,101 | 22,470 | ||||||
| Net cash used in operating activities | (5,871,245 | ) | (1,077,892 | ) | ||||
| Cash Flows from Investing Activities: | ||||||||
| Purchase of furniture and equipment | (17,945 | ) | (8,377 | ) | ||||
| Net cash used in investing activities | (17,945 | ) | (8,377 | ) | ||||
| Cash Flows from Financing Activities: | ||||||||
| Payment of deferred offering cost | (45,000 | ) | (41,525 | ) | ||||
| Payments on notes payable | – | (35,000 | ) | |||||
| Proceeds from sale of common stock | – | 1,507,169 | ||||||
| Net cash provided by (used in) financing activities | (45,000 | ) | 1,430,644 | |||||
| Net change in cash and cash equivalents and restricted cash | (5,934,190 | ) | 344,375 | |||||
| Cash and cash equivalents and restricted cash, at beginning of period | 7,241,288 | 555,133 | ||||||
| Cash and cash equivalents and restricted cash, at end of period | $ | 1,307,098 | $ | 899,508 | ||||
| Supplemental disclosures of cash flow information: | ||||||||
| Cash paid for interest | $ | – | $ | 3,993 | ||||
| Cash paid for income taxes | $ | – | $ | – | ||||
| Supplemental disclosure of non-cash investing and financing activities: | ||||||||
| Common stock issued for deferred offering costs | $ | 395,902 | $ | – | ||||
See accompanying notes to the unaudited financial statements.
| 6 |
CNS Pharmaceuticals, Inc.
Notes to the Financial Statements
(Unaudited)
Note 1 – Nature of Business
CNS Pharmaceuticals, Inc. (the “Company”) is a clinical pharmaceutical company organized as a Nevada corporation on July 27, 2017 to focus on the development of anti-cancer drug candidates.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation - The accompanying unaudited financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United Stated of America (“U.S. GAAP”) for interim unaudited financial information. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. The unaudited financial statements include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of management, necessary in order to make the condensed financial statements not misleading. Operating results for the three and nine months ended September 30, 2020 are not necessarily indicative of the final results that may be expected for the year ended December 31, 2020. For more complete financial information, these unaudited financial statements should be read in conjunction with the audited financial statements for the period ended December 31, 2019 included in our Form 10-K filed with the SEC on March 12, 2020 (“Form 10-K”). Notes to the financial statements which would substantially duplicate the disclosures contained in the audited financial statements for the most recent fiscal period, as reported in the Form 10-K, have been omitted.
Liquidity and Going Concern - These financial statements have been prepared on a going concern basis, which assumes the Company will continue to realize its assets and discharge its liabilities in the normal course of business. The continuation of the Company as a going concern is dependent upon the ability of the Company to obtain equity financings to continue operations. The Company has a history of and expects to continue to report negative cash flows from operations and a net loss. Management believes that the cash on hand is sufficient to fund its planned operations into but not beyond the near term. These factors raise substantial doubt regarding the Company’s ability to continue as a going concern. These financial statements do not include any adjustments 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. The Company may seek additional funding through a combination of equity offerings, debt financings, government or other third-party funding, commercialization, marketing and distribution arrangements, other collaborations, strategic alliances and licensing arrangements and delay planned cash outlays or a combination thereof. Management cannot be certain that such events or a combination thereof can be achieved.
Cash and Cash Equivalents - The Company considers all highly liquid accounts with original maturities of three months or less at the date of acquisition to be cash equivalents. Periodically, the Company may carry cash balances at financial institutions in excess of the federally insured limit of $250,000. The amount in excess of the FDIC insurance at September 30, 2020 was $1,057,098. The Company has not experienced any losses in such accounts and management believes the Company is not exposed to any significant credit risk on its cash balances.
| 7 |
Loss Per Common Share - Basic loss per common share is computed by dividing net loss available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted loss per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, the weighted-average number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. For the nine months ended September 30, 2020, the Company’s potentially dilutive shares and options, which were not included in the calculation of net loss per share, included warrants to purchase 3,986,630 common shares, and options for 2,200,736 common shares. For the nine months ended September 30, 2019, the Company’s potentially dilutive shares and options, which were not included in the calculation of net loss per share, included notes convertible to 200,000 common shares, warrants to purchase 3,837,880 common shares, and options for 1,564,500 common shares.
Restricted Cash - The following table provides a reconciliation of cash and restricted cash reported within the balance sheet that sum to the total of the same such amounts shown in the statement of cash flows. Restricted cash are funds related to the SAFE agreements that were released to the Company on November 13, 2019.
| September 30 | September 30 | |||||||
| 2020 | 2019 | |||||||
| Cash and cash equivalents | $ | 1,307,098 | $ | 630,109 | ||||
| Restricted cash | – | 269,399 | ||||||
| Total | $ | 1,307,098 | $ | 899,508 | ||||
Reclassification - Certain reclassifications may have been made to our prior year’s financial statements to conform to our current year presentation. These reclassifications had no effect on our previously reported results of operations or accumulated deficit.
Note 3 – Equity
Common Stock
On September 15, 2020, Company entered into a purchase agreement (the “Purchase Agreement”), and a registration rights agreement (the “Registration Rights Agreement”), with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park has committed to purchase up to $15.0 million worth of the Company’s common stock, $0.001 par value per share (the “Common Stock”).
Under the terms and subject to the conditions of the Purchase Agreement, the Company has the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $15.0 million worth of shares of the Company’s Common Stock. Such sales of Common Stock by the Company, if any, will be subject to certain limitations, and may occur from time to time, at the Company’s sole discretion, over the 36-month period commencing on the date that a registration statement covering the resale of shares of Common Stock that have been and may be issued under the Purchase Agreement, which the Company agreed to file with the Securities and Exchange Commission (the “SEC”) pursuant to the Registration Rights Agreement, is declared effective by the SEC and a final prospectus in connection therewith is filed and the other conditions set forth in the purchase agreement are satisfied, all of which are outside the control of Lincoln Park (such date on which all of such conditions are satisfied, the “Commencement Date”)
| 8 |
Thereafter, under the Purchase Agreement, on any business day selected by the Company that the closing sale price of the Common Stock equals or exceeds the threshold price set forth in the Purchase Agreement, the Company may direct LPC to purchase up to 30,000 shares of Company Common Stock on such business day (each, a “Regular Purchase”), provided, however, that (i) the Regular Purchase may be increased to up to 50,000 shares, provided that the closing sale price of the Common Stock is not below $2.00 on the purchase date; (ii) the Regular Purchase may be increased to up to 75,000 shares, provided that the closing sale price of the Common Stock is not below $2.50 on the purchase date; (iii) the Regular Purchase may be increased to up to 100,000 shares, provided that the closing sale price of the Common Stock is not below $3.00 on the purchase date; and (iv) the Regular Purchase may be increased to up to 150,000 shares, provided that the closing sale price of the Common Stock is not below $4.00 on the purchase date. In each case, Lincoln Park’s maximum commitment in any single Regular Purchase may not exceed $1,000,000. In addition, after the Commencement Date, the Company may direct Lincoln Park to purchase, on two separate occasions that must be at least 30 business days apart, $1,000,000 worth of Common Stock per such purchase (each, a “Tranche Purchase”). The purchase price per share for each Regular Purchase and each Tranche Purchase will be based on prevailing market prices of the Common Stock immediately preceding the time of sale. There are no upper limits on the price per share that Lincoln Park must pay for shares of Common Stock under the Purchase Agreement. In addition to Regular Purchases and Tranche Purchases, the Company may also direct Lincoln Park to purchase other amounts as accelerated purchases or as additional accelerated purchases if the closing sale price of the Common Stock equals or exceeds the threshold price at the times set forth in the Purchase Agreement. The above-referenced share amount limitations and closing sale price thresholds are subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in the Purchase Agreement.
As consideration for entering into the purchase agreement, the Company issued 201,991 shares of common stock to Lincoln Park as a commitment fee which were valued at $395,902. The commitment shares are direct professional fees incurred in connection with the Company’s equity offerings and are capitalized on the balance sheet. The deferred offering costs will be charged against paid-in capital upon future proceeds from the sale of common stock under this agreement.
Stock Options
In 2017, the Board of Directors of the Company approved the CNS Pharmaceuticals, Inc. 2017 Stock Plan (the “2017 Plan”). The 2017 Plan allows for the Board of Directors to grants various forms of incentive awards for up to 2,000,000 shares of common stock. No key employee may receive more than 500,000 shares of common stock (or options to purchase more than 500,000 shares of common stock) in a single year.
In 2020, the Board of Directors of the Company approved the CNS Pharmaceuticals, Inc. 2020 Stock Plan (the “2020 Plan”). The 2020 Plan allows for the Board of Directors to grants various forms of incentive awards for up to 3,000,000 shares of common stock. No key employee may receive more than 750,000 shares of common stock (or options to purchase more than 750,000 shares of common stock) in a single year.
During the nine months ended September 30, 2020, the Board of Directors approved grants of 561,236 options to employees, Scientific Advisory Board members and members of the Board of Directors. The exercise price of the options ranges from $2.06 to $2.47 and expire ten-years following issuance. The total fair value of these option grants at issuance was $1,115,508. 300,000 of the issued options vest in four equal annual installments beginning on the first anniversary following issuance. 261,236 of the issued options vest in one annual installment on the first anniversary of the grant date.
During the nine months ended September 30, 2020 and 2019, the Company recognized $930,443 and $286,778 of stock-based compensation, respectively, related to outstanding stock options. At September 30, 2020, the Company had $2,621,446 of unrecognized expenses related to options.
| 9 |
The following table summarizes the stock option activity for the nine months ended September 30, 2020:
Options | Weighted-Average Exercise Price Per Share | |||||||||
| Outstanding, December 31, 2019 | 1,764,500 | $ | 1.92 | |||||||
| Granted | 561,236 | 2.27 | ||||||||
| Exercised | – | – | ||||||||
| Forfeited | (125,000 | ) | 2.20 | |||||||
| Expired | – | – | ||||||||
| Outstanding, September 30, 2020 | 2,200,736 | $ | 2.00 | |||||||
The following table discloses information regarding outstanding and exercisable options at September 30, 2020:
| Outstanding | Exercisable | |||||||||||||||||||||
Exercise Price | Number of Option/Warrant Shares | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | Number of Option Shares | Weighted Average Exercise Price | |||||||||||||||||
| $4.00 | 300,000 | 9.11 | – | |||||||||||||||||||
| $2.47 | 186,236 | 9.70 | – | |||||||||||||||||||
| $2.21 | 175,000 | 9.45 | – | |||||||||||||||||||
| $2.06 | 75,000 | 9.95 | – | |||||||||||||||||||
| $2.00 | 789,500 | 8.75 | 197,375 | |||||||||||||||||||
| $1.50 | 400,000 | 7.67 | 275,018 | |||||||||||||||||||
| $0.045 | 275,000 | 7.14 | 231,960 | |||||||||||||||||||
| Total | 2,200,736 | $ | 2.00 | 8.58 | 704,353 | $ | 1.16 | |||||||||||||||
As of September 30, 2020, the aggregate intrinsic value of options vested and outstanding was $469,316. As of September 30, 2020, there are no awards remaining to be issued under the 2017 Plan and 2,799,264 awards remaining to be issued under the 2020 Plan.
Stock Warrants
The following table summarizes the stock warrant activity for the nine months ended September 30, 2020:
| Warrants | Weighted-Average Exercise Price Per Share | |||||||||
| Outstanding, December 31, 2019 | 3,986,630 | $ | 3.99 | |||||||
| Granted | – | – | ||||||||
| Exercised | – | – | ||||||||
| Forfeited | – | – | ||||||||
| Expired | – | – | ||||||||
| Outstanding, September 30, 2020 | 3,986,630 | $ | 3.99 | |||||||
| 10 |
The following table discloses information regarding outstanding and exercisable warrants at September 30, 2020:
| Outstanding | Exercisable | |||||||||||||||||||||
Exercise Price | Number of Option/Warrant Shares | Weighted Average Exercise Price | Weighted Average Remaining Life (Years) | Number of Option Shares | Weighted Average Exercise Price | |||||||||||||||||
| $11.00 | 1,206,059 | 1.89 | 1,206,059 | |||||||||||||||||||
| $4.00 | 148,750 | 4.11 | 148,750 | |||||||||||||||||||
| $2.00 | 63,750 | 3.68 | 63,750 | |||||||||||||||||||
| $1.75 | 100,000 | 3.54 | 94,452 | |||||||||||||||||||
| $1.50 | 14,000 | 2.70 | 14,000 | |||||||||||||||||||
| $0.70 | 2,454,071 | 3.25 | 2,454,071 | |||||||||||||||||||
| Total | 3,986,630 | $ | 3.99 | 2.88 | 3,981,082 | $ | 3.99 | |||||||||||||||
As of September 30, 2020, the aggregate intrinsic value of warrants vested and outstanding was $2,605,900.
Note 4 – Commitments and Contingencies
Executive Employment Agreements
On September 1, 2017, the Company entered into an employment agreement with Mr. John Climaco pursuant to which Mr. Climaco agreed to serve as Chief Executive Officer and Director of the Company commencing on such date for an initial term of three years. Pursuant to the employment agreement, the Company agreed to issue Mr. Climaco 900,000 shares of common stock in exchange for $900, which purchase was finalized on September 30, 2017. On June 28, 2019, the compensation committee of the board of directors set Mr. Climaco’s compensation to an annual base salary to $440,000 and Mr. Climaco will be entitled to a cash bonus with a target of 55% of his base salary. On September 1, 2020, the Company entered into an amendment to the employment agreement with Mr. Climaco. The amendment extends the term of employment under the Employment Agreement, which was originally for a three-year period, for additional twelve-month periods, unless and until either the Company or Mr. Climaco provides written notice to the other party not less than sixty days before such anniversary date that such party is electing not to extend the term. If the Company provides notice of its election not to extend the term, Mr. Climaco may terminate his employment at any time prior to the expiration of the term by giving written notice to the Company at least thirty days prior to the effective date of termination, and upon the earlier of such effective date of termination or the expiration of the term, Mr. Climaco shall be entitled to receive the same severance benefits as are provided upon a termination of employment by the Company without cause. Pursuant to the amendment, the severance benefits shall be twelve months of Mr. Climaco’s base salary. Such severance payment shall be made in a single lump sum sixty days following the termination, provided that Mr. Climaco has executed and delivered to the Company, and has not revoked a general release of the Company.
On June 28, 2019, the Company entered into employment letters with Drs. Silberman and Picker pursuant to which it agreed to the following compensation terms: (i) Dr. Silberman agreed to commit 50% of her time to Company matters in exchange for a base salary, commencing upon the successful closing of the IPO, of $175,000; commencing at the end of 2019, an annual cash bonus target of 28% of her base salary (prorated for any partial years); and a ten-year option to purchase 125,000 shares of common stock with an exercise price of $2.00 per share vesting annually in four equal installments; and (ii) Dr. Picker agreed to commit 25% of his time to Company matters in exchange for a base salary, commencing upon the successful closing of the IPO, of $91,000; commencing at the end of 2019, an annual cash bonus target of 36% of his base salary (prorated for any partial years); and a ten-year option to purchase 100,000 shares of common stock with an exercise price of $2.00 per share vesting annually in four equal installments.
| 11 |
On September 14, 2019, the Company, entered into an employment agreement with Christopher Downs to serve as its Chief Financial Officer commencing on the closing date of the Company’s IPO, which occurred on November 13, 2019. The initial term of the Employment Agreement will continue for a period of three years. The Employment Agreement provides for an initial annual base salary of $300,000. Mr. Downs may receive an annual bonus (pro rated for 2019), targeted at 35% of base salary. Under the agreement, upon the closing of the IPO, Mr. Downs was granted a ten-year option to purchase 300,000 shares at an exercise price per share equal to the public offering price per share of the shares sold in the IPO. The option vests in four equal installments on each of the succeeding four anniversary dates of the option grant, provided Mr. Downs is employed by the Company on each such vesting date.
WP744 Portfolio (Berubicin)
On November 21, 2017, the Company entered into a Collaboration and Asset Purchase Agreement with Reata Pharmaceuticals, Inc. (“Reata”). Through this agreement, the Company purchased all of Reata’s rights, title, interest and previously conducted research and development results in the chemical compound commonly known as Berubicin. In exchange for these rights, the Company agreed to pay Reata an amount equal to 2.25% of the net sales of Berubicin for a period of 10 years from the Company’s first commercial sale of Berubicin plus $10,000. Reata also agreed to collaborate with the Company on the development of Berubicin, from time to time.
On December 28, 2017, the Company entered into a Technology Rights and Development Agreement with Houston Pharmaceuticals, Inc. (“HPI”). HPI is owned by the person who controls a majority of our shares. Pursuant to this agreement, the Company obtained a worldwide exclusive license to the chemical compound commonly known as WP744. In exchange for these rights, the Company agreed to pay consideration to HPI as follows: (i) a royalty of 2% of net sales of any product utilizing WP744 for a period of ten years after the first commercial sale of such; and (ii) $100,000 upon beginning Phase II clinical trials; and (iii) $200,000 upon the approval by the FDA of a New Drug Application for any product utilizing WP744; and (iv) a series of quarterly development payments totaling $750,000 beginning immediately after the Company’s raise of $7,000,000 of investment capital. In addition, the Company issued 200,000 shares of the Company’s common stock valued at $0.045 per share to HPI upon execution of the agreement. Our rights pursuant to the HPI License are contingent on us raising at least $7.0 million within 12 months from the effective date of the HPI License, a date which was extended by an additional 12 months by the payment of $40,000. On November 13, 2019, the Company closed its IPO and as a result completed the acquisition of the intellectual property discussed in the HPI agreement. As of September 30, 2020 and December 31, 2019, $0 and $45,833 is payable to HPI related to the above agreements, respectively. During the nine months ended September 30, 2020 and 2019, the Company recognized $150,000 and $0, respectively related to this agreement.
On August 30, 2018, we entered into a sublicense agreement with WPD Pharmaceuticals, Inc. (“WPD”). Pursuant to the agreement, the Company granted WPD an exclusive sublicense, even as to us, for the patent rights we licensed pursuant to the HPI License within the following countries: Poland, Estonia, Latvia, Lithuania, Belarus, Ukraine, Moldova, Romania, Bulgaria, Serbia, Macedonia, Albania, Armenia, Azerbaijan, Georgia, Montenegro, Bosnia, Croatia, Slovenia, Slovakia, Czech Republic, Hungary, Chechnya, Uzbekistan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Greece, Austria, and Russia. The sublicense agreement provides that WPD must use commercially reasonable development efforts to attempt to develop and commercialize licensed products in the above mentioned territories, which means the expenditure of at least $2.0 million on the development, testing, regulatory approval or commercialization of the licensed products during the three year period immediately following the date of the sublicense agreement. In the event that WPD fails to use commercially reasonable development efforts by the foregoing three-year deadline, we have the right to terminate this sublicense agreement. In consideration for the rights granted under the sublicense agreement, to the extent we are required to make any payments to HPI pursuant to the HPI License as a result of this sublicense agreement, WPD agreed to advance us such payments, and to pay us a royalty equal to 1% of such payments. WPD is a Polish corporation that is majority-owned by an entity controlled by Dr. Priebe, our founder and largest shareholder.
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On August 31, 2018, the Company entered into a sublicense agreement with Animal Life Sciences, LLC (“ALI”), a related party, pursuant to which we granted ALI an exclusive sublicense, even as to us, for the patent rights we licensed pursuant to the HPI License solely for the treatment of cancer in non-human animals through any type of administration. In consideration for the rights granted under the sublicense agreement, ALI agreed to issue us membership interests in ALI equal to 1.52% of the outstanding ALI membership interests. As additional consideration for the rights granted, to the extent we are required to make any payments to HPI pursuant to the HPI License as a result of this sublicense agreement, ALI agreed to advance us such payments, and to pay us a royalty equal to 1% of such payments. Dr. Waldemar Priebe, our founder and largest shareholder, is also the founder and a shareholder of ALI, holds 38% of the membership interests of ALI.
WP1244 Portfolio
On January 10, 2020, Company entered into a Patent and Technology License Agreement (“Agreement”) with The Board of Regents of The University of Texas System, an agency of the State of Texas, on behalf of The University of Texas M. D. Anderson Cancer Center (“UTMDACC”). Pursuant to the Agreement, the Company obtained a royalty-bearing, worldwide, exclusive license to certain intellectual property rights, including patent rights, related to the Company’s recently announced WP1244 drug technology. In consideration, the Company must make payments to UTMDACC including an up-front license fee, annual maintenance fee, milestone payments and royalty payments (including minimum annual royalties) on sales of licensed products developed under the Agreement. The term of the Agreement expires on the last to occur of: (a) the expiration of all patents subject to the Agreement, or (b) fifteen years after execution; provided that UTMDACC has the right to terminate this Agreement in the event that the Company fails to meet certain commercial diligence milestones. The commercial diligence milestones are as follows (i) initiated PC toxicology to support filing of Investigational New Drug Application (“IND”) or New Drug Application (“NDA”) for the Licensed Product within the eighteen (18) month period following the Effective Date (ii) file and IND for the Licensed Product within three (3) year period following the Effective Date and (iii) Commencement of Phase I Study within the five (5) year period following the Effective Date. During the nine months ended September 30, 2020, the Company paid $138,018 to UTMDACC related to this agreement.
On May 7, 2020, pursuant to the WP1244 Portfolio license agreement described above, the Company entered into a Sponsored Research Agreement with UTMDACC to perform research relating to novel anticancer agents targeting CNS malignancies. The Company agreed to fund approximately $1,134,000 over a two-year period. The Company will pay and record $734,000 in 2020 related to this agreement in research and development expenses in the Company’s Statements of Operations. The remainder will be paid and recorded in 2021. The principal investigator for this agreement is Dr. Waldemar Priebe, who controls a majority of the Company’s share. During the nine months ended September 30, 2020, the Company paid $334,000 to UTMDACC related to this agreement. As of September 30, 2020, the Company has accrued $200,000 in research and development expenses to UTMDACC.
Anti-Viral Portfolio
On March 20, 2020, the Company entered into a Development Agreement (“Agreement”) with WPD Pharmaceuticals (“WPD”), a company founded by Dr. Waldemar Priebe, the founder of the Company. Pursuant to the Agreement, WPD agreed to use its commercially reasonable efforts in good faith to develop and commercialize certain products that WPD had previously sublicensed, solely in the field of pharmaceutical drug products for the treatment of any viral infection in humans, with a goal of eventual approval of in certain territories consisting of: Germany, Poland, Estonia, Latvia, Lithuania, Belarus, Ukraine, Romania, Armenia, Azerbaijan, Georgia, Slovakia, Czech Republic, Hungary, Uzbekistan, Kazakhstan, Greece, Austria, Russia, Netherlands, Turkey, Belgium, Switzerland, Sweden, Portugal, Norway, Denmark, Ireland, Finland, Luxembourg, Iceland.
Pursuant to the Agreement, the Company agreed to pay WPD the following payments: (i) an upfront payment of $225,000 to WPD (paid in April 2020); and (ii) within thirty days of the verified achievement of the Phase II Milestone, (such verification shall be conducted by an independent third party mutually acceptable to the parties hereto), the Company will make a payment of $775,000 to WPD. WPD agreed to pay the Company a development fee of 50% of the net sales for any products in the above territories; provided that Poland shall not be included as a territory after WPD receives marketing approval for a product in one-half of the countries included in the agreed upon territories or upon the payment by WPD to the Company of development fees of $1.0 million. The term of the Agreement will expire on the expiration of the sublicense pursuant to which WPD has originally sublicensed the products.
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| Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations |
You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the related notes appearing elsewhere in this Form 10-Q. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties. See Item 1A. “Risk Factors” of our Form 10-K for the year ended December 31, 2019, available on the Security and Exchange Commission's (“SEC”) EDGAR website at www.sec.gov, for a discussion of the uncertainties, risks and assumptions associated with these statements. Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this Form 10-Q.
CAUTIONARY NOTE REGARDING FORWARD-LOOKING STATEMENTS
We make forward-looking statements under the “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and in other sections of this Form 10-Q. In some cases, you can identify these statements by forward-looking words such as “may,” “might,” “should,” “would,” “could,” “expect,” “plan,” “anticipate,” “intend,” “believe,” “estimate,” “predict,” “potential” or “continue,” and the negative of these terms and other comparable terminology. These forward-looking statements, which are subject to known and unknown risks, uncertainties and assumptions about us, may include projections of our future financial performance based on our growth strategies and anticipated trends in our business. These statements are only predictions based on our current expectations and projections about future events. There are important factors that could cause our actual results, level of activity, performance or achievements to differ materially from the results, level of activity, performance or achievements expressed or implied by the forward-looking statements. In particular, you should consider the numerous risks and uncertainties described under Item 1A. “Risk Factors” of our Form 10-K for the year ended December 31, 2019 and in other filings made by us from time to time with the SEC.
While we believe we have identified material risks, these risks and uncertainties are not exhaustive. Other sections of this Form 10-Q may describe additional factors that could adversely impact our business and financial performance. Moreover, we operate in a very competitive and rapidly changing environment. New risks and uncertainties emerge from time to time, and it is not possible to predict all risks and uncertainties, nor can we assess the impact of all factors on our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from those contained in any forward-looking statements.
Although we believe the expectations reflected in the forward-looking statements are reasonable, we cannot guarantee future results, level of activity, performance or achievements. Moreover, neither we nor any other person assumes responsibility for the accuracy or completeness of any of these forward-looking statements. You should not rely upon forward-looking statements as predictions of future events. We are under no duty to update any of these forward-looking statements after the date of this Form 10-Q to conform our prior statements to actual results or revised expectations, and we do not intend to do so.
Forward-looking statements include, but are not limited to, statements about:
| · | the economic and market uncertainty caused by the COVID-19 outbreak; |
| · | our ability to obtain additional funding to develop our product candidates; |
| · | the need to obtain regulatory approval of our product candidates; |
| · | the success of our clinical trials through all phases of clinical development; |
| · | compliance with obligations under intellectual property licenses with third parties; |
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| · | any delays in regulatory review and approval of product candidates in clinical development; |
| · | our ability to commercialize our product candidates; |
| · | market acceptance of our product candidates; |
| · | competition from existing products or new products that may emerge; |
| · | potential product liability claims; |
| · | our dependency on third-party manufacturers to supply or manufacture our products; |
| · | our ability to establish or maintain collaborations, licensing or other arrangements; |
| · | our ability and third parties’ abilities to protect intellectual property rights; |
| · | our ability to adequately support future growth; and |
| · | our ability to attract and retain key personnel to manage our business effectively. |
We caution you not to place undue reliance on the forward-looking statements, which speak only as of the date of this Form 10-Q in the case of forward-looking statements contained in this Form 10-Q.
You should not rely upon forward-looking statements as predictions of future events. Our actual results and financial condition may differ materially from those indicated in the forward-looking statements. We qualify all of our forward-looking statements by these cautionary statements. Although we believe that the expectations reflected in the forward looking-statements are reasonable, we cannot guarantee future results, levels of activity, performance or achievements. Therefore, you should not rely on any of the forward-looking statements. In addition, with respect to all of our forward-looking statements, we claim the protection of the safe harbor for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995.
Overview
We are a clinical pharmaceutical company organized as a Nevada corporation in July 2017 to focus on the development of anti-cancer drug candidates for the treatment of brain and central nervous system tumors, based on intellectual property that we license under license agreements with HPI and The University of Texas M.D. Anderson Cancer Center and own pursuant to a collaboration and asset purchase agreement with Reata.
We believe our lead drug candidate, Berubicin, if approved by the FDA, may be a significant discovery in the treatment of glioblastoma. Glioblastoma are tumors that arise from astrocytes, which are star-shaped cells making up the supportive tissue of the brain. These tumors are usually highly malignant (cancerous) because the cells reproduce quickly, and they are supported by a large network of blood vessels. Berubicin is an anthracycline, which is a class of drugs that are among the most powerful chemotherapy drugs known. Based on limited clinical data, we believe Berubicin is the first anthracycline that appears to have crossed the blood brain barrier and target brain cancer cells. While our current focus is solely on the development of Berubicin, we are also in the process of attempting to secure intellectual property rights in additional compounds that may be developed into drugs to treat cancers.
Berubicin was discovered at MD Anderson by Dr. Waldemar Priebe, the founder of the Company. Through a series of transactions, Berubicin was initially licensed to Reata. Reata conducted a Phase I clinical trial on Berubicin but subsequently allowed their IND with the FDA to lapse for strategic reasons. This will require us to obtain a new IND for Berubicin before beginning further clinical trials.
We do not have manufacturing facilities and all manufacturing activities are contracted out to third parties. Additionally, we do not have a sales organization.
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On November 21, 2017, we entered into a Collaboration and Asset Purchase Agreement with Reata (the “Reata Agreement”). Pursuant to the Reata Agreement we purchased all of Reata’s intellectual property and development data regarding Berubicin, including all trade secrets, knowhow, confidential information and other intellectual property rights, which we refer to as the Reata Data.
On December 28, 2017, we obtained the rights to a worldwide, exclusive royalty-bearing, license to the chemical compound commonly known as Berubicin from HPI in an agreement we refer to as the HPI License. HPI is affiliated with Dr. Priebe, who controls a majority of our shares. Under the HPI License we obtained the exclusive right to develop certain chemical compounds for use in the treatment of cancer anywhere in the world. In the HPI License we agreed to pay HPI: (i) development fees of $750,000 over a three-year period beginning November 2019; (ii) a 2% royalty on net sales; (iii) a $50,000 per year license fee; (iv) milestone payments of $100,000 upon the commencement of a Phase II trial and $1.0 million upon the approval of an NDA for Berubicin; and (v) 200,000 shares of our common stock. The patents we licensed from HPI expired in March 2020.
On June 10, 2020, the FDA granted Orphan Drug Designation (“ODD”) for Berubicin for the treatment of malignant gliomas. ODD from the FDA is available for drugs targeting diseases with less than 200,000 cases per year. ODD may enable market exclusivity of 7 years from the date of approval of a New Drug Application (“NDA”) in the United States. During that period the FDA generally could not approve another product containing the same drug for the same designated indication. Orphan drug exclusivity will not bar approval of another product under certain circumstances, including if a subsequent product with the same active ingredient for the same indication is shown to be clinically superior to the approved product on the basis of greater efficacy or safety, or providing a major contribution to patient care, or if the company with orphan drug exclusivity is not able to meet market demand. The ODD now constitutes our primary intellectual property protections although the Company is exploring if there are other patents that could be filed related to Berubicin to extend additional protections.
With the Reata Agreement and the HPI License, we believe we have obtained all rights and intellectual property necessary to develop Berubicin. As stated earlier, it is our plan to obtain additional intellectual property covering other compounds which, subject to the receipt of additional financing, may be developed into drugs for brain and other cancers.
On January 10, 2020, we entered into a Patent and Technology License Agreement (the “1244 Agreement”) with The Board of Regents of The University of Texas System, an agency of the State of Texas, on behalf of The University of Texas M. D. Anderson Cancer Center (“UTMDACC”). Pursuant to the 1244 Agreement, we obtained a royalty-bearing, worldwide, exclusive license to certain intellectual property rights, including patent rights, related to our WP1244 drug technology. In consideration, we must make payments to UTMDACC including an up-front license fee, annual maintenance fee, milestone payments and royalty payments (including minimum annual royalties) for sales of licensed products developed under the 1244 Agreement. The term of the 1244 Agreement expires on the last to occur of: (a) the expiration of all patents subject to the 1244 Agreement, or (b) fifteen years after execution; provided that UTMDACC has the right to terminate the 1244 Agreement in the event that we fail to meet certain commercial diligence milestones.
On March 20, 2020, we entered into a Development Agreement with WPD Pharmaceuticals (“WPD”) (the “Development Agreement”), a company founded by Dr. Priebe. Pursuant to the Development Agreement, WPD agreed to use its commercially reasonable efforts in good faith to develop and commercialize certain products that WPD had previously sublicensed, solely in the field of pharmaceutical drug products for the treatment of any viral infection in humans, with a goal of eventual approval of in certain territories consisting of: Poland, Estonia, Latvia, Lithuania, Belarus, Ukraine, Romania, Armenia, Azerbaijan, Georgia, Slovakia, Czech Republic, Hungary, Uzbekistan, Kazakhstan, Greece, Austria, Russia, Netherlands, Turkey, Belgium, Switzerland, Sweden, Portugal, Norway, Denmark, Ireland, Finland, Luxembourg, Iceland. Pursuant to the Development Agreement, we agreed to pay WPD the following payments: (i) an upfront payment of $225,000 to WPD (paid in April 2020); and (ii) within thirty days of the verified achievement of the Phase II Milestone, (such verification shall be conducted by an independent third party mutually acceptable to the parties hereto), we will make a payment of $775,000 to WPD. WPD agreed to pay us a development fee of 50% of the net sales for any products in the above territories; provided that Poland shall not be included as a territory after WPD receives marketing approval for a product in one-half of the countries included in the agreed upon territories or upon the payment by WPD to us of development fees of $1.0 million. The term of the Development Agreement will expire on the expiration of the sublicense pursuant to which WPD has originally sublicensed the products.
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On May 7, 2020, pursuant to the WP1244 Portfolio license agreement described above, the Company entered into a Sponsored Research Agreement with UTMDACC to perform research relating to novel anticancer agents targeting CNS malignancies. The Company agreed to fund approximately $1,134,000 over a two-year period. The Company will pay and record $734,000 in 2020 related to this agreement in research and development expenses in the Company’s Statements of Operations. The remainder will be paid and recorded in 2021. The principal investigator for this agreement is Dr. Priebe. As of September 30, 2020, the Company has paid $334,000 in research and development expenses to UTMDACC.
On May 1, 2020, the Securities and Exchange Commission (“SEC”) announced a temporary suspension of trading in our securities due to statements made by us and others in press releases issued between March 23, 2020 and April 13, 2020 concerning our business, including the status of development of a drug candidate labeled WP1122, the status of testing WP1122's impact on COVID-19, and the ability to expedite regulatory approval of any such treatment. Pursuant to the suspension order, the trading halt was initiated at 9:30 a.m. EDT on May 4, 2020 and terminated at 11:59 p.m. EDT on May 15, 2020. Commencing May 18, 2020, the Nasdaq Stock Market placed a halt on the trading of our common stock pending the receipt of additional information. This halt was lifted on May 28, 2020. We believe in the accuracy and adequacy of our public disclosures, but can provide no assurances that we will not encounter future similar actions, which may adversely affect the holders of our common stock.
On September 15, 2020, we entered into a purchase agreement, and a registration rights agreement, with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park committed to purchase up to $15.0 million worth of our common stock. Under the terms and subject to the conditions of the purchase agreement, we have the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $15.0 million worth of shares of our common stock. Such sales of common stock, if any, will be subject to certain limitations, and may occur from time to time, at our sole discretion, over the 36-month period. As consideration for Lincoln Park’s irrevocable commitment to purchase our common stock upon the terms of and subject to satisfaction of the conditions set forth in the purchase agreement, upon execution of the purchase agreement, we issued 201,991 shares of common stock to Lincoln Park as commitment shares.
Results of Operations for the Three Months Ended September 30, 2020 Compared to the Three Months Ended September 30, 2019
General and Administrative Expense
General and administrative expense was approximately $969,000 for the three months ended September 30, 2020 compared to approximately $373,000 for the comparable period in 2019. The increase in general and administrative expense, was mainly the result of closing our IPO in November 2019 which allowed us to substantially increase our operations. The details of the change is attributable to an increase of approximately $122,000 for stock-based compensation, an increase of $118,000 in employee compensation and taxes, compensation to the Board of Directors of $49,000, an increase of $69,000 in professional fees, an increase of $92,000 in advertising and marketing, an increase of $149,000 in insurance expenses which were offset with a $15,000 decrease in travel expenses.
Research and Development Expense
Research and development expense was approximately $1,042,000 for the three months ended September 30, 2020 compared to approximately $325,000 for the comparable period in 2019. The increase in research and development expenses was mainly the result of closing our IPO in November 2019 which allowed us to substantially increase our operations. The expenses incurred during the period were related to drug manufacturing and labor related to the preparation of our Phase II study. We expect to incur increased research and development costs in the future as our product development activities expand.
Net Loss
The net loss for the three months ended September 30, 2020 was approximately $2,011,000 compared to approximately $707,000 for the comparable period in 2019. The change in net loss is attributable to increased personnel and activity associated with preparing for our clinical trials in 2020.
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Results of Operations for the Nine Months Ended September 30, 2020 Compared to the Nine Months Ended September 30, 2019
General and Administrative Expense
General and administrative expense was approximately $3,305,000 for the nine months ended September 30, 2020 compared to approximately $893,000 for the comparable period in 2019. The increase in general and administrative expense, was mainly the result of closing our IPO in November 2019 which allowed us to substantially increase our operations The details of the change is attributable to an increase of approximately $396,000 for stock-based compensation, an increase of $599,000 in employee compensation and taxes, compensation to the Board of Directors of $150,000, an increase of $321,000 in professional fees, an increase of $433,000 in advertising and marketing and an increase of $431,000 in insurance expenses.
Research and Development Expense
Research and development expense was approximately $3,148,000 for the nine months ended September 30, 2020 compared to approximately $417,000 for the comparable period in 2019. The increase in research and development expenses was mainly the result of closing our IPO in November 2019 which allowed us to substantially increase our operations. The expenses incurred during the period were related to drug manufacturing and labor related to the preparation of our Phase II study. We expect to incur increased research and development costs in the future as our product development activities expand.
Net Loss
The net loss for the nine months ended September 30, 2020 was approximately $6,453,000 compared to approximately $1,350,000 for the comparable period in 2019. The change in net loss is attributable to increased personnel and activity associated with preparing for our clinical trials in 2020.
Liquidity and Capital Resources
On September 30, 2020, we had cash of approximately $1,307,000 and we had working capital of approximately $2,005,000. We have historically funded our operations from proceeds from debt and equity sales.
Our plan of operations is primarily focused on our Phase II clinical trial for Berubicin. We estimate that we will require additional financing of approximately $30.0 to $35.0 million to complete the trial in accordance with the new trial design, approximately $2.0 million to support near-term WP1244 preclinical work, plus such additional working capital to fund our operations during the pendency of the trial. The increased estimated cost of the clinical trial is due to the revised trial design which now encompasses an expanded patient population and a control arm receiving standard of care. Each of these components of the design are critical to ensuring that, if the trial data is positive, we will have the quantity and quality of data needed to present a reasonable case to the FDA for an expedited pathway for continued development or to approval of a New Drug Application (“NDA”). We can neither predict nor guarantee what the agency’s response to such a request, if made, may be. The timing and costs of clinical trials are difficult to predict and as such the foregoing estimates may prove to be inaccurate.
We will need to raise additional capital in the near term in order to meet our obligations and execute our business plan. If we are unable to raise sufficient funds, we will be required to develop and implement an alternative plan to further extend payables, reduce overhead or scale back our business plan until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful.
In September 2020, we entered into a purchase agreement, and a registration rights agreement, with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park committed to purchase up to $15.0 million worth of our common stock. Under the terms and subject to the conditions of the purchase agreement, we have the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $15.0 million worth of shares of our common stock. Such sales of common stock, if any, will be subject to certain limitations, and may occur from time to time, at our sole discretion, over the 36-month period. As consideration for Lincoln Park’s irrevocable commitment to purchase our common stock upon the terms of and subject to satisfaction of the conditions set forth in the purchase agreement, upon execution of the purchase agreement, we issued 201,991 shares of common stock to Lincoln Park as commitment shares.
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Summary of Cash Flows
Cash used in operating activities
Net cash used in operating activities was approximately $5,871,000 and $1,078,000 for the nine months ended September 30, 2020 and 2019, respectively, and mainly included payments made for clinical trial preparation, officer compensation, stock based compensation, insurance, marketing and professional fees to our consultants, attorneys and accountants.
Cash used in investing activities
Net cash used by investing activities was approximately $18,000 and $8,000 for the nine months ended September 30, 2020 and 2019, respectively. The amount used in 2020 is related to the purchase of furniture and equipment.
Cash provided by (used in) financing activities
Net cash used in financing activities was $45,000 for the nine months ended September 30, 2020 and net cash provided by financing activities was approximately $1,431,000 for the nine months ended September 30, 2019. The amounts provided by in 2019 are related to the sale of common stock, repayment of a loan and payment of deferred issuance costs.
Off-balance Sheet Arrangements
As of September 30, 2020, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes.
Purchase Commitments
We do not have any material commitments for capital expenditures, although we are required to pay certain development fees to HPI and WPD as described in the section “Overview” above.
JOBS Act Accounting Election
The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, exempts an “emerging growth company” such as us from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used.
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Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements, including the notes thereto. We consider critical accounting policies to be those that require more significant judgments and estimates in the preparation of our financial statements, including the following: long lived assets; intangible assets valuations; and income tax valuations. Management relies on historical experience and other assumptions believed to be reasonable in making its judgment and estimates. Actual results could differ materially from those estimates.
Management believes its application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are periodically reevaluated, and adjustments are made when facts and circumstances dictate a change.
Stock-based Compensation - Employee and non-employee share-based compensation is measured at the grant date, based on the fair value of the award, and is recognized as an expense over the requisite service period.
Research and Development Costs - Research and development costs are expensed as incurred.
| Item 3. | Quantitative and Qualitative Disclosures About Market Risk |
We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.
| Item 4. | Controls and Procedures |
Evaluation of Disclosure Controls and Procedures and Changes in Internal Control over Financial Reporting
We maintain a set of disclosure controls and procedures designed to ensure that material information required to be disclosed in our filings under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms and that material information is accumulated and communicated to our management, including our Chief Executive Officer (“CEO”) and Chief Financial Officer (“CFO”), as appropriate, to allow timely decisions regarding required disclosures.
Under the supervision, and with the participation of our management, including our CEO and CFO, we conducted an evaluation of the effectiveness, as of September 30, 2020, of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended, or the Exchange Act. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by an issuer in the reports that it files or submits under the Exchange Act is accumulated and communicated to the issuer’s management, including its principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.
Based upon such evaluation, our CEO and CFO have concluded that, as of September 30, 2020, our disclosure controls and procedures were not effective because of the material weaknesses in our internal control over financial reporting as described below. Our management concluded that our internal control over financial reporting were, and continue to be ineffective, due to material weaknesses in our internal controls due to the lack of sufficient personnel to allow for segregation of duties.
In light of the material weakness described above, we continue to perform additional analysis and other post-closing procedures to ensure our financial statements are prepared in accordance with GAAP. Accordingly, we believe that the financial statements included in this report fairly present, in all material respects, our financial condition, results of operations and cash flows for the periods presented. Additional experienced personnel will be hired in the accounting and finance department, appropriate consultants will be retained, and our accounting system will be upgraded as soon as it becomes economically feasible and sustainable.
Other than as described above, there has been no change in our internal control over financial reporting during our most recent calendar quarter that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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| Item 1. | Legal Proceedings |
From time to time in the ordinary course of our business, we may be involved in legal proceedings, the outcomes of which may not be determinable. The results of litigation are inherently unpredictable. Any claims against us, whether meritorious or not, could be time consuming, result in costly litigation, require significant amounts of management time and result in diversion of significant resources. We are not able to estimate an aggregate amount or range of reasonably possible losses for those legal matters for which losses are not probable and estimable. We have insurance policies covering potential losses where such coverage is cost effective.
We are not at this time involved in any legal proceedings.
| Item 1A. | Risk Factors |
In addition to the other information set forth in this report, you should carefully consider the factors discussed in the section entitled “Risk Factors” in our 2019 Annual Report on Form 10-K and in our Form 10-Qs for the quarters ended March 31, 2020 and June 30, 2020, filed with the SEC, which are incorporated herein by reference. The risks described in such reports are not the only risks facing our Company. Additional risks and uncertainties not currently known to us or that we currently deem to be immaterial also may materially adversely affect our business, financial condition and/or operating results. Except as set forth below, there have been no material changes to our risk factors from those set forth in the 2019 Annual Report on Form 10-K and in our Form 10-Q for the quarters ended March 31, 2020 and June 30, 2020.
The sale or issuance of our common stock to Lincoln Park may cause dilution and the sale of the shares of common stock acquired by Lincoln Park, or the perception that such sales may occur, could cause the price of our common stock to fall.
On September 15, 2020, we entered into a purchase agreement with Lincoln Park, pursuant to which Lincoln Park has committed to purchase up to $15,000,000 of our common stock. Upon the execution of the purchase agreement, we issued 201,991 shares of common stock to Lincoln Park as a fee for its commitment to purchase shares of our common stock under the purchase agreement. The remaining shares of our common stock that may be issued under the purchase agreement may be sold by us to Lincoln Park at our discretion from time to time over a 36-month period commencing after the satisfaction of certain conditions set forth in the purchase agreement. The purchase price for the shares that we may sell to Lincoln Park under the purchase agreement will fluctuate based on the price of our common stock. Depending on market liquidity at the time, sales of such shares may cause the trading price of our common stock to fall.
We generally have the right to control the timing and amount of any future sales of our shares to Lincoln Park. Additional sales of our common stock, if any, to Lincoln Park will depend upon market conditions and other factors to be determined by us. We may ultimately decide to sell to Lincoln Park all, some or none of the additional shares of our common stock that may be available for us to sell pursuant to the purchase agreement. If and when we do sell shares to Lincoln Park, after Lincoln Park has acquired the shares, Lincoln Park may resell all, some or none of those shares at any time or from time to time in its discretion. Therefore, sales to Lincoln Park by us could result in substantial dilution to the interests of other holders of our common stock. Additionally, the sale of a substantial number of shares of our common stock to Lincoln Park, or the anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and at a price that we might otherwise wish to effect sales.
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We may require additional financing to sustain our operations, without which we may not be able to continue operations, and the terms of subsequent financings may adversely impact our stockholders.
We may direct Lincoln Park to purchase up to $15,000,000 worth of shares of our common stock under our agreement over a 36-month period generally in amounts up to 30,000 shares of our common stock, which may be increased to up to 150,000 shares of our common stock depending on the market price of our common stock at the time of sale, and, in each case, subject to a maximum limit of $1,000,000 per purchase, on any single business day (such share amounts being subject to adjustment for any reorganization, recapitalization, non-cash dividend, stock split, reverse stock split or other similar transaction as provided in the purchase agreement). Assuming a purchase price of $1.95 per share (the closing sale price of the common stock on September 15, 2020) and the purchase by Lincoln Park of 1,898,009 purchase shares, proceeds to us would only be approximately $3.7 million.
The extent we rely on Lincoln Park as a source of funding will depend on a number of factors including the prevailing market price of our common stock and the extent to which we are able to secure working capital from other sources. If obtaining sufficient funding from Lincoln Park were to prove unavailable or prohibitively dilutive, we will need to secure another source of funding in order to satisfy our working capital needs. Even if we sell all $15,000,000 under the purchase agreement to Lincoln Park, we may still need additional capital to finance our future production plans and working capital needs, and we may have to raise funds through the issuance of equity or debt securities. Depending on the type and the terms of any financing we pursue, stockholders’ rights and the value of their investment in our common stock could be reduced. A financing could involve one or more types of securities including common stock, convertible debt or warrants to acquire common stock. These securities could be issued at or below the then prevailing market price for our common stock. In addition, if we issue secured debt securities, the holders of the debt would have a claim to our assets that would be prior to the rights of stockholders until the debt is paid. Interest on these debt securities would increase costs and negatively impact operating results. If the issuance of new securities results in diminished rights to holders of our common stock, the market price of our common stock could be negatively impacted. Should the financing we require to sustain our working capital needs be unavailable or prohibitively expensive when we require it, the consequences could be a material adverse effect on our business, operating results, financial condition and prospects.
Our management will have broad discretion over the use of the net proceeds from our sale of shares of common stock to Lincoln Park, shareholders may not agree with how we use the proceeds and the proceeds may not be invested successfully.
Our management will have broad discretion as to the use of the net proceeds from our sale of shares of common stock to Lincoln Park. Accordingly, shareholders will be relying on the judgment of our management with regard to the use of those net proceeds, and shareholders will not have the opportunity to assess whether the proceeds are being used appropriately. It is possible that, pending their use, we may invest those net proceeds in a way that does not yield a favorable, or any, return for us. The failure of our management to use such funds effectively could have a material adverse effect on our business, financial condition, operating results and cash flows.
| Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds |
In September 2020, we entered into a purchase agreement, and a registration rights agreement, with Lincoln Park Capital Fund, LLC (“Lincoln Park”), pursuant to which Lincoln Park committed to purchase up to $15.0 million worth of our common stock. Under the terms and subject to the conditions of the purchase agreement, we have the right, but not the obligation, to sell to Lincoln Park, and Lincoln Park is obligated to purchase up to $15.0 million worth of shares of our common stock. Such sales of common stock, if any, will be subject to certain limitations, and may occur from time to time, at our sole discretion, over the 36-month period. As consideration for Lincoln Park’s irrevocable commitment to purchase our common stock upon the terms of and subject to satisfaction of the conditions set forth in the purchase agreement, upon execution of the purchase agreement, we issued 201,991 shares of common stock to Lincoln Park as commitment shares.
Lincoln Park represented to us, among other things, that it was an “accredited investor” (as such term is defined in Rule 501(a) of Regulation D under the Securities Act of 1933, as amended (the “Securities Act”)), and we sold the securities in reliance upon an exemption from registration contained in Section 4(a)(2) of the Securities Act and Regulation D promulgated thereunder.
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| Item 3. | Defaults Upon Senior Securities |
None.
| Item 4. | Mine Safety Disclosures |
Not applicable.
| Item 5. | Other Information |
None.
| Item 6. | Exhibits |
INDEX TO EXHIBITS
| * | Filed herewith. |
| ** | Management contract or compensatory plan, contract or arrangement. |
| (1) | The certifications on Exhibit 32 hereto are deemed not “filed” for purposes of Section 18 of the Exchange Act or otherwise subject to the liability of that Section. Such certifications will not be deemed incorporated by reference into any filing under the Securities Act or the Exchange Act. |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
CNS PHARMACEUTICALS, INC.
| SIGNATURE | TITLE | DATE | ||
|
|
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| /s/ John Climaco | Chief Executive Officer and Director | November 12, 2020 | ||
| John Climaco | (principal executive officer) | |||
| /s/ Christopher Downs | Chief Financial Officer | November 12, 2020 | ||
| Christopher Downs | (principal financial and accounting officer) |
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Exhibit 31.1
CERTIFICATION BY CHIEF EXECUTIVE OFFICER
I, John Climaco, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CNS Pharmaceuticals, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
November 12, 2020
By: /s/ John Climaco
John Climaco
Chief Executive Officer
(Principal executive officer)
Exhibit 31.2
CERTIFICATION BY CHIEF FINANCIAL OFFICER
I, Christopher Downs, certify that:
1. I have reviewed this quarterly report on Form 10-Q of CNS Pharmaceuticals, Inc.;
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
a. designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared;
b. designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c. evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and
d. disclosed in this report any change in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter (the registrant’s fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant’s internal control over financial reporting.
5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit committee of the registrant’s board of directors (or persons performing the equivalent functions):
a. all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and
b. any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.
November 12, 2020
By: /s/ Christopher Downs
Christopher Downs
Chief Financial Officer
(Principal financial and accounting officer)
Exhibit 32.1
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of CNS Pharmaceuticals, Inc., a Nevada corporation (the "Company"), does hereby certify, to such officer’s knowledge, that:
The quarterly report on Form 10-Q for the quarter ended September 30, 2020 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
November 12, 2020
By: /s/ John Climaco
John Climaco
Chief Executive Officer
(Principal Executive Officer)
Exhibit 32.2
CERTIFICATION OF CHIEF EXECUTIVE OFFICER
Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
(Subsections (a) and (b) of Section 1350, Chapter 63 of Title 18, United States Code)
Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), the undersigned officer of CNS Pharmaceuticals, Inc., a Nevada corporation (the "Company"), does hereby certify, to such officer’s knowledge, that:
The quarterly report on Form 10-Q for the quarter ended September 30, 2020 (the "Form 10-Q") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended and information contained in the Form 10-Q fairly presents, in all material respects, the financial condition and results of operations of the Company.
November 12, 2020
By: /s/ Christopher Downs
Christopher Downs
Chief Financial Officer
(Principal financial and accounting officer)