Company Quick10K Filing
TYG Solutions
Price-0.00 EPS-0
Shares74 P/E0
MCap-0 P/FCF0
Net Debt-0 EBIT-3
TEV-0 TEV/EBIT0
TTM 2019-09-30, in MM, except price, ratios
10-Q 2020-09-30 Filed 2020-11-12
S-1 2020-09-22 Public Filing
10-Q 2020-06-30 Filed 2020-08-12
10-Q 2020-03-31 Filed 2020-05-14
10-K 2019-12-31 Filed 2020-03-30
10-Q 2019-09-30 Filed 2019-11-13
10-Q 2019-06-30 Filed 2019-08-13
10-Q 2019-03-31 Filed 2019-05-14
10-K 2018-12-31 Filed 2019-04-09
S-1 2018-10-05 Public Filing
10-Q 2018-09-30 Filed 2018-11-14
10-Q 2018-06-30 Filed 2018-07-24
10-K 2018-03-31 Filed 2018-07-24
10-K 2017-12-31 Filed 2018-07-24
10-Q 2017-09-30 Filed 2017-11-14
10-Q 2017-06-30 Filed 2017-08-18
10-Q 2017-03-31 Filed 2017-05-22
10-K 2016-12-31 Filed 2017-03-30
10-Q 2016-09-30 Filed 2016-11-21
10-Q 2016-06-30 Filed 2016-08-29
8-K 2020-11-17
8-K 2020-11-04
8-K 2020-09-18
8-K 2020-06-23
8-K 2020-06-08
8-K 2020-03-12
8-K 2020-01-28
8-K 2018-10-04
8-K 2018-07-25
8-K 2018-07-24
8-K 2018-05-01
8-K 2018-04-23
8-K 2018-04-12
8-K 2018-03-05

TYGS 10Q Quarterly Report

Part I - Financial Information
Item 1. Financial Statements (Unaudited)
Note 1 - Organization and Nature of Operations
Note 2 - Summary of Significant Accounting Policies
Note 3 - Going Concern and Management's Liquidity Plans
Note 4 - Fair Value Measurements
Note 5 - Accounts Payable and Accrued Expenses
Note 6 - Payroll and Related Liabilities
Note 7 - Loan Payable
Note 8 - Loan Payable - Related Party
Note 9 - Capital Lease Obligations
Note 10 - Convertible Notes Payable
Note 11 - Convertible Notes Payable - Related Party
Note 12 - Derivative Liabilities
Note 13 - Commitments and Contingencies
Note 14 - Stockholders' Deficit
Note 15 - Related Party Transactions
Note 16 - Subsequent Events
Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations.
Item 3. Quantitative and Qualitative Disclosures About Market Risk.
Item 4. Controls and Procedures.
Part Ii&Mdash;Other Information
Item 1. Legal Proceedings.
Item 1A. Risk Factors.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds.
Item 3. Defaults Upon Senior Securities.
Item 4. Mine Safety Disclosures.
Item 5. Other Information.
Item 6. Exhibits.
EX-31.1 ex31_1.htm
EX-31.2 ex31_2.htm
EX-32.1 ex32_1.htm
EX-32.2 ex32_2.htm

TYG Solutions Earnings 2020-09-30

Balance SheetIncome StatementCash Flow
4.13.12.11.00.0-1.02015201620182020
Assets, Equity
0.1-0.1-0.4-0.6-0.9-1.12015201620182020
Rev, G Profit, Net Income
0.90.50.2-0.2-0.5-0.92015201620182020
Ops, Inv, Fin

10-Q 1 nptx093020form10q.htm 10-Q

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

FORM 10-Q

 

☒ 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: 000-55657

 

NEUROPATHIX, INC.

(Exact name of registrant as specified in its charter)

 

Delaware   46-2645343
(State or other jurisdiction of incorporation or organization)   (I.R.S. Employer Identification No.)

 

3805 Old Easton Road

Doylestown, PA 18902

(Address of principal executive offices including Zip Code)

 

(858) 883-2642

(Registrant’s telephone number, including area code)

 

KANNALIFE, INC.

(Former Name, former address and former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Trading Symbol(s) Name of each exchange on which registered
None    

 

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 every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) 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 the 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. ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No ☒

 

As of November 10, 2020, the issuer had 75,252,189 shares of common stock (par value $0.0001) outstanding.

 

 1 

 

 

Table of Contents

 

  Page
PART I - FINANCIAL INFORMATION  
Item 1. Financial Statements  
Unaudited Condensed Consolidated Balance Sheets 3
Unaudited Condensed Consolidated Statements of Operations 4
Unaudited Condensed Consolidated Statements of Stockholders' Equity (Deficit) 5
Unaudited Condensed Consolidated Statements of Cash Flows 6
Notes to Unaudited Condensed Consolidated Financial Statements 7
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations 19
Item 3. Quantitative and Qualitative Disclosures About Market Risk 29
Item 4. Controls and Procedures 29
PART II - OTHER INFORMATION  
Item 1. Legal Proceedings 31
Item 1A. Risk Factors 33
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 33
Item 3. Defaults Upon Senior Securities 34
Item 4. Mine Safety Disclosures 34
Item 5. Other Information 34
Item 6. Exhibits 35
Signatures 36

 

 2 

 

 

PART I – FINANCIAL INFORMATION

 

Item 1. Financial Statements (unaudited)

 

NEUROPATHIX, INC.
(FORMERLY KNOWN AS KANNALIFE, INC. )
CONDENSED CONSOLIDATED BALANCE SHEETS
Unaudited
       
    September 30, 2020    December 31, 2019 
ASSETS          
CURRENT ASSETS:          
Cash and cash equivalents  $14,450   $121,455 
Prepaid expenses   250,000    9,000 
Other receivables   400    400 
Total Current Assets   264,850    130,855 
           
NON-CURRENT ASSETS:          
Property and equipment, net   63,299    75,401 
Security deposits   17,121    17,121 
Total Non-Current Assets   80,420    92,522 
TOTAL ASSETS  $345,270   $223,377 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
           
CURRENT LIABILITIES:          
Accounts payable and accrued expenses  $537,213   $389,195 
Payroll and related liabilities   351,797    243,208 
Loan payable   771,456    620,000 
Loan payable - related party   42,092    42,092 
Convertible notes payable, net of $249,244 debt discount   147,756    —   
Capital lease obligations   7,757    7,533 
Due to related party, net   47,354    25,349 
Derivative liabilities   186,721    —   
Total Current Liabilities   2,092,146    1,327,377 
           
LONG TERM LIABILITIES:          
Loan payable - long term   32,744    —   
Convertible notes payable - long term, net of $60,548 debt discount   415,825    378,839 
Convertible notes payable - long term, net of $98,943 debt discount - related party   51,507    —   
Capital lease obligation - long term   21,974    27,764 
Derivative liabilities - long term   467,393    183,451 
Total Long Term Liabilities   989,443    590,054 
TOTAL LIABILITIES   3,081,589    1,917,431 
           
Commitments and contingencies (Note 13)   —      —   
           
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, 74,797,037 and 74,225,141 issued and outstanding, respectively   7,480    7,422 
Additional paid-in capital   8,729,879    6,794,612 
Accumulated deficit   (11,473,678)   (8,496,088)
TOTAL STOCKHOLDERS' DEFICIT   (2,736,319)   (1,694,054)
TOTAL LIABILITIES AND STOCKHOLDERS' DEFICIT  $345,270   $223,377 
           
The accompanying notes are an integral part of these condensed consolidated financial statements

 

 3 

 

 

NEUROPATHIX, INC.
(FORMERLY KNOWN AS KANNALIFE, INC. )
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
Unaudited
             
   Three Months Ended September 30,  Nine Months Ended September 30,
   2020  2019  2020  2019
NET REVENUES:                    
Grant revenue  $—     $23,968   $—     $126,027 
TOTAL NET REVENUES   —      23,968    —      126,027 
                     
OPERATING EXPENSES:                    
Research and development   68,546    189,443    375,938    439,680 
General and administrative   737,123    601,567    2,303,537    1,511,334 
TOTAL OPERATING EXPENSES   805,669    791,010    2,679,475    1,951,014 
                     
LOSS FROM OPERATIONS   (805,669)   (767,042)   (2,679,475)   (1,824,987)
                     
OTHER INCOME (EXPENSE):                    
Interest expense, net   (151,845)   (17,794)   (766,212)   (49,754)
Net gains and losses recognized on marketable security   —      (301,661)   —      (844,671)
Change in fair value of derivative liabilities   346,708    —      468,097    —   
TOTAL OTHER INCOME (EXPENSE)   194,863    (319,455)   (298,115)   (894,425)
                     
NET LOSS BEFORE INCOME TAX  $(610,806)  $(1,086,497)  $(2,977,590)  $(2,719,412)
                     
Income tax expense   —      —      —      —   
                     
NET LOSS  $(610,806)  $(1,086,497)  $(2,977,590)  $(2,719,412)
                     
Net loss attributable to noncontrolling interests   —      (1,953)   —      (6,828)
                     
Net loss attributable to Kannalife, Inc.  $(610,806)  $(1,084,544)  $(2,977,590)  $(2,712,584)
                     
Loss attributable to Kannalife, Inc. per common share - basic  $(0.01)  $(0.02)  $(0.04)  $(0.04)
Loss attributable to Kannalife, Inc. per common share - diluted  $(0.01)  $(0.02)  $(0.04)  $(0.04)
                     
Weighted average common shares outstanding - basic   74,258,962    70,934,271    74,241,419    70,218,141 
Weighted average common shares outstanding - diluted   74,258,962    70,934,271    74,241,419    70,218,141 
                     
The accompanying notes are an integral part of these condensed consolidated financial statements

 

 4 

 

 

NEUROPATHIX, INC.
(FORMERLY KNOWN AS KANNALIFE, INC. )
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
Unaudited
                               
    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 June 30, 2019   75   $—      75   $—      69,854,141   $6,985   $6,386,793   $(6,680,091)  $(10,631)  $(296,944)
Issuance of stock options for services   —      —      —      —      —      —      840    —      —      840 
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 income   —      —      —      —      —      —      —      (1,084,544)   (1,953)   (1,086,497)
Balance at September 30, 2019   75   $—      75   $—      74,225,141   $7,422   $6,794,612   $(7,764,635)  $—     $(962,601)
                                                   
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   —      —      —      —      —      —      —      (2,712,584)   (6,828)   (2,719,412)
Balance at September 30, 2019   75   $—      75   $—      74,225,141   $7,422   $6,794,612   $(7,764,635)  $—     $(962,601)
                                                   
Balance at June 30, 2020   75   $—      75   $—      74,250,141   $7,425   $7,989,878   $(10,862,872)  $—     $(2,865,569)
Stock based compensation   —      —      —      —      —      —      306,596    —      —      306,596 
Issuance of common stock for conversion of notes payable and accrued interest   —      —      —      —      46,896    5    20,595    —      —      20,600 
Issuance of common stock for services   —      —      —      —      500,000    50    399,950    —      —      400,000 
Reduction of derivative liability   —      —      —      —      —      —      12,860    —      —      12,860 
Net loss   —      —      —      —      —      —      —      (610,806)   —      (610,806)
Balance at September 30, 2020   75   $—      75   $—      74,797,037   $7,480   $8,729,879   $(11,473,678)  $—     $(2,736,319)
                                                   
Balance at December 31, 2019   75   $—      75   $—      74,225,141   $7,422   $6,794,612   $(8,496,088)  $—     $(1,694,054)
Stock based compensation   —      —      —      —      —      —      1,488,615    —      —      1,488,615 
Issuance of common stock for acquisition of intellectual property   —      —      —      —      25,000    3    13,247    —      —      13,250 
Issuance of common stock for conversion of notes payable and accrued interest   —      —      —      —      46,896    5    20,595    —      —      20,600 
Issuance of common stock for services   —      —      —      —      500,000    50    399,950    —      —      400,000 
Reduction of derivative liability   —      —      —      —      —      —      12,860    —      —      12,860 
Net loss   —      —      —      —      —      —      —      (2,977,590)   —      (2,977,590)
Balance at September 30, 2020   75   $—      75   $—      74,797,037   $7,480   $8,729,879   $(11,473,678)  $—     $(2,736,319)
                                                   
The accompanying notes are an integral part of these condensed consolidated financial statements

 

 5 

 

 

NEUROPATHIX, INC.
(FORMERLY KNOWN AS KANNALIFE, INC. )
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
Unaudited
       
   Nine Months Ended September 30,
   2020  2019
CASH FLOWS FROM OPERATING ACTIVITIES:          
Net loss  $(2,977,590)  $(2,719,412)
Adjustments to reconcile net loss to net cash used in operating activities:          
Depreciation   12,102    1,430 
Amortization of debt discount   254,249    —   
Stock based compensation   1,488,615    275,878 
Issuance of common stock for acquisition of intellectual property   13,250    —   
Non-cash interest expense   430,070    —   
Change in fair value of derivative liabilities   (468,097)   —   
Net gains and losses recognized on marketable security   —      301,661 
Changes in operating assets and liabilities:        —   
Prepaid expenses   9,000    —   
Other receivables   —      90,392 
Accounts payable and accrued expenses   150,018    32,698 
Payroll and related liabilities   108,589    1,007 
Due to related party, net   22,005    16,334 
NET CASH USED IN OPERATING ACTIVITIES   (807,789)   (2,000,012)
           
CASH FLOWS FROM INVESTING ACTIVITIES:          
Proceeds from sale of marketable securities   —      1,882,774 
Purchase of equipment   —      (41,950)
Purchase of other asset   —      (27,490)
NET CASH PROVIDED BY INVESTING ACTIVITIES   —      1,813,334 
           
CASH FLOWS FROM FINANCING ACTIVITIES:          
Principal payments toward capital lease obligations   (5,566)   —   
Proceeds from loan payable   184,200    —   
Proceeds from convertible notes payable, net of OID   372,150    —   
Proceeds from convertible notes payable - related party   150,000    97 
NET CASH PROVIDED BY FINANCING ACTIVITIES   700,784    97 
           
Net decrease in cash   (107,005)   (186,581)
           
Cash and cash equivalents, beginning of period   121,455    307,131 
Cash and cash equivalents, end of period  $14,450   $120,550 
           
SUPPLEMENTAL CASH FLOW INFORMATION:          
Cash paid for interest  $2,905   $—   
Cash paid for taxes  $—     $—   
           
NON-CASH ACTIVITIES:          
Issuance of common stock for conversion of notes payable and accrued interest  $20,000   $150,000 
Issuance of common stock for services  $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   $—   
Reduction of derivative liability  $12,860   $—   
           
The accompanying notes are an integral part of these condensed consolidated financial statements

 

 6 

 

 

NEUROPATHIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(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 2020. 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, 2019, included in the Company’s Annual Report on Form 10-K filed with the SEC on March 30, 2020.

 

Note 2 - Summary of Significant Accounting Policies

 

The significant accounting policies used in the preparation of the condensed consolidated financial statements are as follows:

 

Basis of Presentation

 

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.

 

 7 

 

 

NEUROPATHIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(UNAUDITED)

 

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 September 30, 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.

 

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 12,642,869 for the three and nine months ended September 30, 2020. The weighted average number of common stock equivalents not included in diluted income per share, because the effects are anti-dilutive, was 4,113,729 for the three and nine months ended September 30, 2019.

 

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 September 30, 2020 and 2019, were $68,546 and $189,443, respectively. Total R&D costs for the nine months ended September 30, 2020 and 2019, were $375,938 and $439,680, respectively.

 

 8 

 

 

NEUROPATHIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(UNAUDITED)

 

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 $2,679,475 and $1,824,987 for the nine months ended September 30, 2020 and 2019, respectively. The net cash used in operations were $807,789 and $2,000,012 for the nine months ended September 30, 2020 and 2019, respectively. Additionally, the Company had an accumulated deficit of $11,473,678 at September 30, 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 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.

 

 9 

 

 

NEUROPATHIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(UNAUDITED)

  

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 September 30, 2020 and December 31, 2019, on a recurring basis:

 

   September 30, 2020   
   Level 1  Level 2  Level 3 

Total Carrying

Value

Derivative liabilities   —      —      654,114   $654,114 

 

   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 September 30, 2020 and December 31, 2019 consisted of the following:

 

  

September 30,

2020

  December 31, 2019
Accounts payable and accrued expenses  $382,096   $309,231 
Accrued interest   155,117    79,964 
Totals  $537,213   $389,195 

 

 10 

 

 

NEUROPATHIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(UNAUDITED)

 

NOTE 6 – PAYROLL AND RELATED LIABILITIES

 

Payroll and related liabilities at September 30, 2020 and December 31, 2019 consisted of the following:

 

  

September 30,

2020

  December 31, 2019
Payroll  $119,291   $—   
Payroll taxes   232,506    243,208 
Totals  $351,797   $243,208 

 

As of the nine months period ended September 30, 2020 and the year ended December 31, 2019, the Company has accrued payroll and payroll taxes in connection with salaries paid and accrued to four officers of the Company.

 

NOTE 7 – LOAN PAYABLE

 

      September 30, 2020  December 31, 2019
Loan payable at 8%, matures 12/31/2020   * {a}   $720,000   $620,000 
Loan payable at 1%, matures 4/23/2022   *    84,200    —   
Total        804,200    620,000 
Less: short term loans        771,456    620,000 
Total long-term loans       $32,744   $—   
                
{a} - On July 1, 2020, the Company extended the note to December 31, 2020 based on the same terms and conditions. On October 7, 2020, borrowed an additional $80,000 based on the same terms and conditions.
* - unsecured note               

 

Total interest expense on notes payable, amounted to $13,753 and $12,230 for the three months ended September 30, 2020 and 2019, respectively. Total interest expense on notes payable, amounted to $38,352 and $36,690 for the nine months ended September 30, 2020 and 2019, respectively Accrued interest related to these notes was $111,732 and $73,381 as of September 30, 2020 and December 31, 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 September 30, 2020 and December 31, 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 $29,731, secured by equipment with carrying value of $53,601, as of September 30, 2020.

 

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.

 

 11 

 

 

NEUROPATHIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(UNAUDITED)

 

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. 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. 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. The outstanding balance on these convertible notes after the conversion was $192,000.

 

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 12) resulting in full discount of the 12% Note. 

 

 12 

 

 

NEUROPATHIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(UNAUDITED)

 

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 third quarter of 2020, the anti-dilution clause was triggered and the exercise price was reset to $0.40 resulting in the number of warrants to be increased to 378,694. 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 12) resulting in full discount of the note. 

 

Total interest expense on convertible notes payable, inclusive of amortization of debt discount of $92,466 and $0, amounted to $107,161 and $3,750 for the three months ended September 30, 2020 and 2019, respectively. Total interest expense on convertible notes payable, inclusive of amortization of debt discount of $195,616 and $0, amounted to $226,240 and $11,250 for the nine months ended September 30, 2020 and 2019, respectively.

 

Total accrued interest on convertible notes payable, as of September 30, 2020 and December 31, 2019, was $31,421 and $200, 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 12) 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 12) 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 $0, amounted to $21,493 and $0 for the three months ended September 30, 2020 and 2019, respectively. Total interest expense on convertible notes payable – related party, inclusive of amortization of debt discount of $51,507 and $0, amounted to $59,685 and $0 for the nine months ended September 30, 2020 and 2019, respectively.

 

Total accrued interest on convertible notes payable – related party, as of September 30, 2020 and December 31, 2019, was $8,178 and $0, respectively.

 

NOTE 12 – 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. 

 

 13 

 

  

NEUROPATHIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(UNAUDITED)

 

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 nine months ended September 30, 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   (409,165)   (58,932)   (468,097)
Change due to exercise / redemptions   (12,860)   —      (12,860)
Balance as of September 30, 2020  $237,246   $416,868   $654,114 

 

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   $0.58 - 1.80 
Expected volatility   93.4% - 107.3% 
Expected term (in years)   0.48 – 1.59 
Risk-free interest rate   0.12% - 0.18% 

 

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 - 1.10 
Expected volatility   108.8% - 143.6% 
Expected term (in years)   2.48 - 4.97 
Risk-free interest rate   0.23% - 0.36%  

 

NOTE 13 – 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.

 

 14 

 

 

NEUROPATHIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(UNAUDITED)

 

NOTE 14 – 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.

 

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.

 

As of September 30, 2020 and December 31, 2019, there were 74,797,037 and 74,225,141 shares of common stock issued and outstanding, respectively.

 

Stock Options

 

On September 1, 2017, the Company entered into an agreement for consulting services. As compensation the Company granted options to purchase 100,000 shares of common stock at a price of $2.00 per share and are exercisable for five years. The stock option vests in equal monthly installments of 24 months. These options were valued at $20,154 using a Black-Scholes options pricing model.

 

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 $35,295 using a Black-Scholes Options Pricing Model.

 

 15 

 

 

NEUROPATHIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(UNAUDITED)

 

On September 14, 2020, the Company granted options to purchase 250,000 shares of common stock at a price of $0.84 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 $192,975 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 $0.84 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 $141,840 using a Black-Scholes Options Pricing Model.

 

The remaining expense outstanding through December 31, 2022 is $2,033,545.

 

For the three months ended September 30, 2020 and 2019, the Company recorded $267,521 and $840, respectively, as stock based compensation which is included in the general and administrative expenses in the condensed consolidated statement of operations and $39,075 and $0 respectively, as research and development expense.

 

For the nine months ended September 30, 2020 and 2019, the Company recorded $1,215,090 and $5,878, respectively, as stock based compensation which is included in the general and administrative expenses in the condensed consolidated statement of operations and $273,525 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   $0.40 - 0.84 
Exercise price   $0.51 - 2.00 
Expected volatility   100% - 138% 
Expected term (in years)   5 - 10 
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 September 30, 2020 a total of 6,050,000 are outstanding.

 

The following is a summary of outstanding and exercisable options: 

 

  

Number of

Shares

 

 

Weighted Average

Exercise Price

Balance at December 31, 2019    100,000   $2.00 
Issued    6,575,000    0.59 
Expired    —      —   
Balance at September 30, 2020    6,675,000   $0.61 

 

At September 30, 2020, 2,908,594 options for common stock were exercisable and the intrinsic value of these options was $1,460,334 and the weighted average remaining contractual life for options outstanding was 9.51 years.

 

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NEUROPATHIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(UNAUDITED)

 

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 third quarter of 2020, the anti-dilution clause was triggered and the exercise price was reset to $0.40 resulting in the number of warrants to be increased to 378,694. 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 
Issued   565,360    0.92 
Expired   —      —   
Balance at September 30, 2020   665,360   $0.56 

 

At September 30, 2020, 665,360 warrants for common stock were exercisable and the intrinsic value of these warrants was $130,233 and the weighted average remaining contractual life for warrants outstanding was 3.68 years.

 

NOTE 15 – 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 September 30, 2020, the Company owes the CEO $47,354 for expenses the CEO incurred on behalf of the Company.

 

See Notes 8, 11 and 14 for additional related party transactions.

 

 17 

 

 

NEUROPATHIX, INC.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2020
(UNAUDITED)

 

NOTE 16 – SUBSEQUENT EVENTS

 

On October 7, 2020, borrowed an additional $80,000 from a note holder based on the same terms and conditions. See Note 7.

 

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.

 

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.

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations. 

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with our consolidated financial statements and related notes included elsewhere in this quarterly report. This discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed in the section titled “Risk Factors” in our Form 10-K filed with the Securities and Exchange Commission on March 30, 2020.

 

Forward-Looking Statements

 

This quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact contained in this quarterly report, including statements regarding our future operating results, financial position and cash flows, our business strategy and plans and our objectives for future operations, are forward-looking statements. These statements involve known and unknown risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by the forward-looking statements. This quarterly report on Form 10-Q also contains estimates and other statistical data made by independent parties and by us relating to market size and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk. In some cases, you can identify forward-looking statements by terms such as “may,” “will,” “would,” “could,” “should,” “expect,” “plan,” “anticipate,” “could,” “intend,” “target,” “project,” “contemplate,” “believe,” “estimate,” “predict,” “potential” or “continue” or the negative of these terms or other similar expressions. The forward-looking statements in this quarterly report are only predictions. We have based these forward-looking statements largely on our current expectations and projections about future events and financial trends that we believe may affect our financial condition, operating results, business strategy, short-term and long-term business operations and objectives. These forward looking statements speak only as of the date of this quarterly report and are subject to a number of risks, uncertainties and assumptions. The events and circumstances reflected in our forward-looking statements may not be achieved or occur, and actual results could differ materially from those projected in the forward-looking statements. Moreover, we operate in a very competitive and rapidly changing environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances or otherwise.

 

Business Developments

 

The Company was originally incorporated in the State of Delaware on March 25, 2013, under the name of 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”), and certain stockholders of Kannalife (the “Kannalife Stockholders”). Pursuant to the terms of the Share Exchange Agreement, the Company acquired 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 common stock of the Company (the “Share Exchange”). As a result of the Share Exchange, Kannalife became a wholly-owned subsidiary of the Company. The business operations of the Company shall continue uninterrupted, and, by virtue of the Share Exchange, the Company acquired the business of Kannalife including all of its assets. The Share Exchange was accounted for as a reverse acquisition and change in reporting entity, whereby Kannalife was the accounting acquirer.

 

Kannalife was incorporated in the State of Delaware on August 11, 2010. Kannalife 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 that changed its name to Kannalife, Inc.

 

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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.

Business Overview

As a result of the Share Exchange, the Company’s core businesses are comprised of the following:

 

  A drug development company focused on the research and development (R&D) of synthetic and phyto-medical products from:

 

  o naturally recurring sources, including but not limited to cannabis, hemp, and other similar species of plantae;

 

  o semi-synthetic sources; and

 

  o synthetic and bio-synthetic sources.

 

  Drug discovery platform to evaluate and potentially treat neurological and oxidative stress related disorders such as Overt Hepatic Encephalopathy (“OHE”), Chronic Traumatic Encephalopathy (“CTE”) and Chemotherapy Induced Peripheral Neuropathy (“CIPN ”) with high quality assured, quality controlled cGMP pharmaceutical grade semi-synthetic and synthetic cannabinoids, cannabidiol (“CBD”), and cannabidiol-like molecules.

 

  Topical skin care pre-clinical program designed to 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. Anti-pruritics are known as anti-itch drugs and medications that inhibit the itching often associated with a variety of disorders and diseases.

 

The Company is primarily involved in the research and development of novel therapeutic agents for use in and as U.S. Food and Drug Administration (“FDA”) approved ethical pharmaceuticals (available by doctor prescription); FDA Monograph topical solutions; and Personal Care Products Council (“PCPC”) / International Nomenclature of Cosmetic Ingredients (“INCI”). The primary focus of the Company’s research and development revolves around its patented, proprietary cannabidiol-derived new chemical entities and cannabidiol. In preclinical testing, certain molecules under U.S. 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 been the only licensee from the National Institutes of Health (“NIH”) for the licensed use of the U.S. Government’s patent 6,630,507 – “Cannabinoids as Antioxidants and Neuroprotectants” (the “’507 Patent”) in the disease indications of hepatic encephalopathy (“HE”) and Chronic Traumatic Encephalopathy (“CTE”). Having been the only licensee to the ‘507 Patent has given the Company an early start in the research and development of cannabinoid therapeutics within this emerging market. The Company is the only company that has had use of the ‘507 Patent and corresponding licenses from NIH-OTT.

 

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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 were good until April 21, 2019.

 

The Company believes that these licenses with the NIH have given the Company, through the years, the preclinical lead time to evaluate both HE and CTE without stress of competition. The Company also believes that such advances in preclinical have led to a drug development program regarding cannabidiol based therapeutics that focuses on neurodegenerative and oxidative stress related diseases described in the ‘507 Patent, and also the development of the Company’s own intellectual property underlying U.S. Patents 9,611,213 and 10,004,722.

 

Furthermore, it is on the Company’s belief and knowledge that while the U.S. Government patent 6,630,507 expired on April 21, 2019, there may be additional opportunities related to the original licensing of the ‘507 Patent in which the Company may engage with the NIH and certain collaborators of the aforementioned patent to enter into a Cooperative Research and Development Agreement (“CRADA”) with the NIH for one or more disease indications underlying the ‘507 Patent, including but not limited to HE and CTE. Moreover, the weight of the Company’s future success regarding its drug development program in relation to cannabidiol based therapeutics is not centered on the ‘507 Patent, but rather its own intellectual property underlying U.S. Patents 9,611,213 and 10,004,722.

 

We intend to study KLS-13019 in patients with chemotherapy induced neuropathic pain, and we intend to study KLS-13023 in patients with mild traumatic brain injury.

 

We believe these product candidates will provide new treatment options for patients, as well as additional treatment options for patients not currently receiving adequate relief from current treatment regimens.

 

We are still conducting pre-clinical studies and have not yet commenced our clinical program or tested KLS-13019 or KLS-13023 in humans. For KLS-13019, we plan to conduct Phase 1, and possibly Phase 2, clinical trials in either the United States or Australia, subject to applicable regulatory approval. We plan to conduct our Phase 1 clinical trials for KLS-13023 in either the United States or Australia, subject to applicable regulatory approval. We plan to submit New Drug Applications (NDAs) for KLS-13019 and KLS-13023 to the FDA upon completion of all requisite clinical trials. We expect to initiate clinical trials for KLS-13019 and KLS-13023 in the first half of 2021.

 

We plan to conduct our Phase 1, and possibly Phase 2, clinical trials for KLS-13019 in 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.

  

We plan to seek orphan drug designation for KLS-13023 in Overt Hepatic Encephalopathy.

 

Cannabinoids are a class of molecules derived from Cannabis plants. The two primary cannabinoids contained in Cannabis are cannabidiol, or 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, KLS-13019 and KLS-13023 may potentially offer first-line therapies to patients suffering from chemotherapy induced peripheral neuropathy and mild traumatic brain injury, respectively.

 

KLS-13023 is a target drug candidate that includes a synthetic CBD formulated in a gel capsule designed for potential use in humans. 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.

 

 21 

 

 

In addition to KLS-13023, the Company has developed a proprietary patented new chemical entity (NCE), KLS-13019. This NCE is a cannabidiol derived molecule which has undergone pre-clinical studies for the treatment of overt hepatic encephalopathy and chemotherapy induced peripheral neuropathy.

 

In pre-clinical studies, 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 U.S. Food and Drug Administration or any other healthcare authority in the world.

 

These 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.

 

The Company has filed for orphan designation with the U.S. Food and Drug Administration’s (“FDA”) Office of Orphan Products Development (the “OOPD”) for the use of CBD in the treatment of overt hepatic encephalopathy (“OHE”). The Company has received notice from the OOPD that its current application qualifies for a patient population of less than 200,000, but is currently in abeyance to resolve clinical use of CBD in this sub-set of hepatic encephalopathy. The Company has retained Coté Orphan to continue the process of responding to the OOPD’s abeyance letter. On November 5, 2018, the OOPD has granted the Company a one year extension to respond to the abeyance letter until November 30, 2019. On June 28, 2019, the Company sent its response to the OOPD's abeyance letter dated November 5, 2019. On August 28, 2019, the OOPD replied with certain objections associated with the Company's request for orphan drug designation. The OOPD has given the Company until August 28, 2020 to respond to the abeyance letter dated August 28, 2019.

 

KLS-13023 is a proprietary formulation containing CBD that intends to enable more effective delivery of CBD via a gel capsule. In addition, we expect that KLS-13023 will be classified by the FDA as a new chemical entity, or NCE. In our preclinical animal studies, KLS-13023 demonstrated effective intervention of neurodegeneration in the OHE disease state. Our key development programs and expected timelines for the development of KLS-13019 and KLS-13023 are shown in the table below:

 

Clinical Timelines

 

As a result of the unprecedented effects of COVID-19, the Company has updated its clinical timelines to give effect to the significant interruption to business and financial operations worldwide as a result of the COVID-19 crisis. The Company will continue to monitor the progress of the shutdowns currently in effect and revise its clinical timelines accordingly.

 

Product

Candidate

Target Indication Delivery Method

Current

Development

Status

Expected Next Steps
KLS-13019 Chemotherapy Induced Oral Gel Capsule Preclinical 3Q21: Initiate Phase 1
  Peripheral Neuropathy      
  Mild Traumatic Brain Injury Oral Gel Capsule Preclinical 2Q22: Initiate Phase 1
KLS-13023 Overt Hepatic Encephalopathy Oral Gel Capsule Preclinical 1Q22: Initiate Phase 1
   Mild Traumatic Brain Injury Oral Gel Capsule Preclinical 3Q22: Initiate Phase 1

 

With respect to certain other proprietary compounds underlying U.S. Patent 9,611,213, the Company plans on pursuing topical solutions as potential relief creams and/or ointments for neuropathic pain, anti-inflammation, anti-pruritic and skin ulcers. The Company is considering commercialization routes that include, but are not limited to, filing and FDA Monograph and/or pursing a path to the marketplace through INCI certification and registration with the PCPC. In preclinical testing, certain molecules under U.S. 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.

 

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The Company believes it will be able to raise the 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 second quarter 2021. The Company plans on entering into clinical trials sometime in the fourth quarter 2021. Additionally, the Company believes it will be able to raise the 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 second quarter 2021. 

 

The Company intends on seeking additional capital to proceed forth with its business plan regarding additional drug pipeline opportunities.

 

Our net losses were $2,977,590 and $2,719,412 for the nine months ended September 30, 2020 and 2019, 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.

  

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We expect that our research and development expenses in 2020 and for the next several years will be higher than in 2019 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 2020 and for the next several years will be higher than in 2019 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 expense consists of interest expense on our notes payable. Interest income consists primarily of interest earned on our money market bank account.

 

Income Taxes

 

As of December 31, 2019, we had $4,248,000 of federal operating loss carryforwards. These operating loss carryforwards will begin to expire in 2031. 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.

 

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The closing of the Share Exchange, 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 financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these 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 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 and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe to be appropriate under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.

 

While our significant accounting policies are more fully discussed in Note 2 to our condensed consolidated financial statements appearing above, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our financial statements.

 

Research and Development Expenses

 

We rely on third parties to conduct our preclinical studies and to provide services, including data management, statistical analysis and electronic compilation. Once our clinical trials begin, at the end of each reporting period, we will compare the payments made to each service provider to the estimated progress towards completion of the related project. Factors that we will consider in preparing these estimates include the number of patients enrolled in studies, milestones achieved and other criteria related to the efforts of our vendors. These estimates will be subject to change as additional information becomes available. Depending on the timing of payments to vendors and estimated services provided, we will record net prepaid or accrued expenses related to these costs.

 

Fair Value of Common Stock and Stock-Based Compensation

 

We account for grants of stock options and restricted stock to employees based on their grant date fair value, and recognize compensation expense over the vesting periods. We estimate the fair value of stock options as of the date of grant using the Black-Scholes option pricing model, and we estimate the fair value of restricted stock based on the fair value of the underlying common stock as determined by our board of directors or the value of the services provided, whichever is more readily determinable. We account for stock options and restricted stock awards to non-employees using the fair value approach. Stock options and restricted stock awards to non-employees are subject to periodic revaluation over their vesting terms.

 

In the absence of a public trading market for our common stock, on each grant date, we develop an estimate of the fair value of our common stock for the option and restricted stock grants based in part on input from an independent third-party valuation firm. We determined the fair value of our common stock using methodologies, approaches and assumptions consistent with the AICPA Practice Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation. In addition, our board of directors considered various objective and subjective factors, along with input from management and an independent third-party valuation firm, to estimate the fair value of our common stock, including external market conditions affecting the pharmaceutical industry, trends within the pharmaceutical industry, the prices at which we sold shares of our different series of preferred stock, the superior rights and preferences of each series of preferred stock relative to our common stock at the time of each grant, our results of operations and financial position, the status of our research and development efforts and progress of our preclinical programs, our stage of development and business strategy, the lack of an active public market for our common and our preferred stock, and the likelihood of achieving a liquidity event.

 

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Results of Operations – For the Three Month Periods Ended September 30, 2020 and 2019

 

Revenues

 

Revenues for the three months ended September 30, 2020, was $0 compared to $23,968 for the three months ended September 30, 2019. Our decrease in revenue was the result of a decrease of grant revenue due to reaching the maximum amount of the grant.

 

Research and Development Expenses

 

Research and development expenses decreased by $120,897 or 64%, to $68,546 for the three months ended September 30, 2020, from $189,443 for the three months ended September 30, 2019. The decrease was primarily the result of reduction in grant revenue used in research and development.

 

General and Administrative Expenses

 

General and administrative expenses increased by $135,556 or 23%, to $737,123 for the three months ended September 30, 2020, from $601,567 for the three months ended September 30, 2019. This increase was primarily due to an increase in stock based compensation issued to employees and consultants.

 

Results of Operations – For the Nine Month Periods Ended September 30, 2020 and 2019

 

Revenues

 

Revenues for the nine months ended September 30, 2020, was $0 compared to $126,027 for the nine months ended September 30, 2019. Our decrease in revenue was the result of a decrease of grant revenue due to reaching the maximum amount of the grant.

 

Research and Development Expenses

 

Research and development expenses decreased by $63,742 or 15%, to $375,938 for the nine months ended September 30, 2020, from $439,680 for the nine months ended September 30, 2019. The decrease was primarily the result of reduction in grant revenue used in research and development.

 

General and Administrative Expenses

 

General and administrative expenses increased by $792,203 or 52%, to $2,303,537 for the nine months ended September 30, 2020, from $1,511,334 for the nine months ended September 30, 2019. 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 September 30, 2020, our principal sources of liquidity were our cash and cash equivalents, which totaled $14,450. Our working capital deficit was $(1,827,296) as of September 30, 2020.

 

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Equity Financings

 

For the nine months ended September 30, 2020, and year ended December 31, 2019, we received net proceeds of $706,350 and $100,000, respectively, from the sale of convertible notes and promissory notes.

 

Debt

 

We had the following schedule of debt as of September 30, 2020 and December 31, 2019:

 

  

September 30,

2020

 

December 31,

2019

Outstanding Debt Obligations:          
Loan payable  $804,200   $620,000 
Loan payable - related party   42,092    42,092 
Convertible notes payable   563,581    378,839 
Convertible notes payable – related party   51,507    —   
Capital lease obligations   29,731    35,297 
Total All Debt Obligations  $1,491,111   $1,076,228 

 

Future Capital Requirements

 

The Company is currently raising capital and we anticipate raising funds sufficient to commence 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.

  

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.

 

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Our future use of operating cash and capital requirements will depend on many forward-looking factors, including 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 nine months ended September 30, 2020, and 2019.

 

  

Nine Months Ended

September 30,

   2020  2019
Statement of Cash Flows Data:      
Total net cash provided by (used in):          
Operating activities  $(807,789)  $(2,000,012)
Investing activities   —      1,813,334 
Financing activities   700,784    97 
Decrease in cash  $(107,005)  $(186,581)

 

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Operating Activities

 

Net cash used in operating activities for the nine months ended September 30, 2020 was $807,789, including $1,730,189 of net non-cash expenses and a $289,612 net change in operating assets and liabilities. The net noncash expenses were predominantly related to the stock based compensation of $1,488,615, non-cash interest expense of $430,070, amortization of debt discount of $254,249 and change in fair value of derivative liabilities of $(468,097). The change in operating assets and liabilities was primarily due to a $150,018 increase in accounts payable and accrued expenses, a $108,589 increase in payroll and related liabilities and a $22,005 increase in due to related party and prepaid expenses.

 

Net cash used in operating activities for the nine months ended September 30, 2019 was $2,000,012, including $578,969 of net non-cash expenses and a $140,431 net change in operating assets and liabilities. The net noncash expenses were predominantly related to the net gains and losses on marketable security of $301,661. The change in operating assets and liabilities was primarily due to a $90,392 decrease on other receivables and a $32,698 increase in accounts payable and accrued expenses.

 

Investing Activities

 

Net cash provided by investing activities for the nine months ended September 30, 2020 was $0.

 

Cash provided by investing activities from the cash received from the sale of marketable securities was $1,882,774 offset by a purchase of an asset and equipment for ($69,440), for the nine months ended September 30, 2019.

 

Financing Activities

 

For the nine months ended September 30, 2020, cash provided by financing activities was $700,784 compared to $97 for the nine months ended September 30, 2019. This was due to a significant increase of proceeds from convertible notes payable and notes payable in 2020 from 2019.

 

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.

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk.

 

Not applicable.