CNS Pharmaceuticals, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our financial condition and results of operations in conjunction with the financial statements and the related notes appearing elsewhere in this Form 10-K. This discussion contains forward-looking statements reflecting our current expectations that involve risks and uncertainties, including those set forth under “Cautionary Statement About Forward-Looking Statements.” Actual results and experience could differ materially from the anticipated results and other expectations expressed in our forward-looking statements as a result of a number of factors, including but not limited to those discussed in this Item and in Item 1A - “Risk Factors.” Actual results and the timing of events could differ materially from those discussed in our forward-looking statements as a result of many factors, including those set forth under “Risk Factors” and elsewhere in this Form 10-K. 35 Overview We are a clinical stage pharmaceutical company organized as a Nevada corporation in July 2017 to focus on the development of anti-cancer drug candidates for the treatment of brain and central nervous system tumors, based on intellectual property that we license under license agreements with HPI and UTMDACC and own pursuant to a collaboration and asset purchase agreement with Reata. We believe our lead drug candidate, Berubicin, may be a significant development in the treatment of Glioblastoma and other CNS malignancies, and if approved by the FDA could give Glioblastoma patients an important new therapeutic alternative to the current standard of care. Glioblastoma are tumors that arise from astrocytes, which are star-shaped cells making up the supportive tissue of the brain. These tumors are usually highly malignant (cancerous) because the cells reproduce quickly, and they are supported by a large network of blood vessels. Berubicin is an anthracycline, which is a class of drugs that are among the most powerful and extensively used chemotherapy drugs known. Based on limited clinical data, we believe Berubicin is the first anthracycline that appears to cross the blood brain barrier in significant concentrations targeting brain cancer cells. While our focus is currently on the development of Berubicin, we are also in the process of attempting to secure intellectual property rights to additional compounds that we plan to develop into drugs to treat CNS cancers. Berubicin was discovered at UTMDACC by Dr. Waldemar Priebe, the founder of the Company. Through a series of transactions, Berubicin was initially licensed to Reata. Reata initiated several Phase I clinical trials with Berubicin for CNS malignancies, one of which was for malignant gliomas, but subsequently allowed their IND with the FDA to lapse for strategic reasons. This required us to obtain a new IND for Berubicin before beginning further clinical trials. On December 17, 2020, we announced that our IND application with the FDA for Berubicin for the treatment of Glioblastoma Multiforme was in effect. We dosed the first patient in this trial during the third quarter of 2021. Correspondence between the Company and the FDA resulted in modifications to our initial trial design, including designating overall survival (OS) as the primary endpoint of the study. OS is a rigorous endpoint that the FDA has recognized as a basis for approval of oncology drugs when a statistically significant improvement can be shown relative to a randomized control arm. We do not have manufacturing facilities and all manufacturing activities are contracted out to third parties. Additionally, we do not have a sales organization. On November 21, 2017, we entered into a Collaboration and Asset Purchase Agreement with Reata (the “Reata Agreement”). Pursuant to the Reata Agreement we purchased all of Reata’s intellectual property and development data regarding Berubicin, including all trade secrets, knowhow, confidential information and other intellectual property rights. On December 28, 2017, we obtained the rights to a worldwide, exclusive royalty-bearing, license to the chemical compound commonly known as Berubicin from HPI in an agreement we refer to as the HPI License. HPI is affiliated with Dr. Priebe, who controls a majority of our shares. Under the HPI License we obtained the exclusive right to develop certain chemical compounds for use in the treatment of cancer anywhere in the world. In the HPI License we agreed to pay HPI: (i) development fees of $750,000 over a three-year period beginning November 2019; (ii) a 2% royalty on net sales; (iii) a $50,000 per year license fee; (iv) milestone payments of $100,000 upon the commencement of a Phase II trial and $1.0 million upon the approval of an NDA for Berubicin; and (v) 6,667 shares of our common stock. The patents we licensed from HPI expired in March 2020. With the Reata Agreement and the HPI License, we believe we have obtained all rights and intellectual property necessary to develop Berubicin. As stated earlier, it is our plan to obtain additional intellectual property covering other compounds which, subject to the receipt of additional financing, may be developed into drugs for brain and other cancers. 36 On January 10, 2020, we entered into a Patent and Technology License Agreement (the “WP1244 Agreement”) with The Board of Regents of The University of Texas System, an agency of the State of Texas, on behalf of The University of Texas M. D. Anderson Cancer Center (“UTMDACC”). Pursuant to the WP1244 Agreement, we obtained a royalty-bearing, worldwide, exclusive license to certain intellectual property rights, including patent rights, related to our WP1244 drug technology. In consideration, we must make payments to UTMDACC including an up-front license fee, annual maintenance fee, milestone payments and royalty payments (including minimum annual royalties) for sales of licensed products developed under the WP1244 Agreement. The term of the WP1244 Agreement expires on the last to occur of: (a) the expiration of all patents subject to the WP1244 Agreement, or (b) fifteen years after execution; provided that UTMDACC has the right to terminate the WP1244 Agreement in the event that we fail to meet certain commercial diligence milestones. On May 7, 2020, pursuant to the WP1244 Portfolio license agreement described above, the Company entered into a Sponsored Research Agreement with UTMDACC to perform research relating to novel anticancer agents targeting CNS malignancies. The Company agreed to fund approximately $1,134,000 over a two-year period, which has been fully paid by the Company in 2021. This agreement was extended and expired on March 31, 2023. The principal investigator for this agreement is Dr. Waldemar Priebe, our founder. Results of Operations for the Year Ended December 31, 2023 Compared to the Year Ended December 31, 2022 General and Administrative Expense General and administrative expense was approximately $4,770,000 for the year ended December 31, 2023 compared to approximately $5,967,000 for 2022. The decrease in general and administrative expense was mainly attributable to decreases of approximately $792,000 in professional expenses, $488,000 in employee compensation, $141,000 in stock-based compensation and $92,000 in insurance expenses. These changes were offset by increases of approximately $145,000 in travel expenses, board of director compensation of $96,000, advertising and marketing of $68,000 and other general and administrative expenses of $7,000. Research and Development Expense Research and development expense was approximately $14,096,000 for the year ended December 31, 2023 compared to approximately $9,300,000 for 2022. The increase in research and development expenses during the period was mainly attributed to the timing of research organization (CRO) expenses and patient treatment costs related to continued progress with our clinical trial for Berubicin. Our CRO expenditures are primarily for labor related to activating selected trial sites, managing patient enrollment processes, collecting and managing data from patient treatments throughout the trial, processing reimbursement to the sites for patient treatment, and assisting with necessary submissions to amend the IND. CRO expenditures are expected to begin to taper off throughout the remainder of the trial as we are no longer activating sites and no longer enrolling patients after January 2024. We expect our research and development costs to taper off in the future as we move toward completion of our clinical trial for Berubicin primarily due to patients moving from active treatment to follow-up leading to decreasing costs of treating and following these patients as more patients eventually succumb to their disease. Other income (expense) Interest income was approximately $28,000 and $0 for the years ended December 31, 2023 and 2022, respectively. Interest expense was approximately $14,000 and $7,000 for the years ended December 31, 2023 and 2022, respectively. Net Loss The net loss for the year ended December 31, 2023 was approximately $18,851,000 compared to approximately $15,274,000 for 2022. The change in net loss is primarily attributable to increased research and development costs. 37 Liquidity and Capital Resources On December 31, 2023, we had cash of approximately $549,000 and we had a working capital deficit of approximately $4,542,000. We have historically funded our operations from proceeds from debt and equity sales. In January 2022, we completed a financing with several institutional investors for the sale of (i) 316,316 shares of common stock, (ii) pre-funded warrants to purchase up to an aggregate of 87,193 shares of common stock and (iii) warrants to purchase up to an aggregate of 403,509 shares of common stock. The combined purchase price of one share of common stock (or one pre-funded warrant) and accompanying common warrant was $28.50. The gross proceeds from the private placement were approximately $11.5 million, before deducting the placement agent’s fees and other offering expenses. In November 2022, we completed a financing with an institutional investor for the sale of (i) 147,000 shares of common stock, (ii) pre-funded warrants to purchase up to an aggregate of 1,742,764 shares of common stock and (iii) warrants to purchase up to an aggregate of 1,889,764 shares of common stock. The combined purchase price of one share of common stock (or one pre-funded warrant) and accompanying common warrant was $3.175. The gross proceeds from the offering were approximately $5.98 million, before deducting the placement agent’s fees and other offering expenses. On January 29, 2024, we entered into a placement agency agreement with A.G.P./Alliance Global Partners (“AGP”) and Maxim Group LLC (“Maxim”) for the public offering of (i) 2,215,667 shares of our common stock; (ii) pre-funded warrants to purchase 11,117,667 shares of common stock; (iii) Series A Warrants to purchase up to an aggregate of 13,333,334 shares of common stock; and (iv) Series B Warrants to purchase up to an aggregate of 13,333,334 shares of common stock. The combined purchase price of one share of common stock and accompanying Series A & B common warrants was $0.30 and the combined purchase price of one pre-funded warrant and accompanying Series A & B common warrants was $0.299 (with the pre-funded warrants having an exercise price of $0.001). The closing of the sales of these securities occurred on February 1, 2024. The gross proceeds from the offering were approximately $4.0 million, before deducting the placement agent’s fees and other offering expenses. Our plan of operations is primarily focused on completing a clinical trial for Berubicin. We estimate that we will require additional financing of approximately $15 to $17 million to complete the potentially pivotal Phase 2 trial for Berubicin (taking into account our cash on hand as of December 31, 2023 of approximately $0.5 million) plus such additional working capital to fund our operations during the pendency of the trial (with such operations estimated at $4.5 to $5.0 million per annum). If capital is available to fund WP1244/WP1874 preclinical work to prepare for a Phase 1 trial, we would need to raise an additional $5.0 million to support near-term development of that program. Our current expectation is that our cash on hand, combined with capital raised subsequent to December 31, 2023, is sufficient to fund our operations into the latter half of the second quarter of 2024. The timing and costs of clinical trials are difficult to predict and trial plans may change in response to evolving circumstances and as such the foregoing estimates may prove to be inaccurate. We will need to raise very significant additional capital in the near term in order to meet our past due and future obligations and execute our business plan. If we are unable to raise sufficient funds, we will be required to develop and implement an alternative plan to further extend payables, reduce overhead or scale back our business plan until sufficient additional capital is raised to support further operations. There can be no assurance that such a plan will be successful and if it is not successful we may need to cease operations entirely. Summary of Cash Flows Cash used in operating activities Net cash used in operating activities was approximately $14,140,000 and $10,558,000 for the years ended December 31, 2023 and 2022, respectively, and mainly included payments made for drug development (including the cost of our potentially pivotal trial of Berubicin), contract labor, officer compensation, marketing and professional fees to our consultants, attorneys and accountants. 38 Cash used in investing activities Net cash used in investing activities was approximately $4,000 and $4,000 for the years ended December 31, 2023 and 2022 and included payments for furniture and equipment. Cash provided by financing activities Net cash provided by financing activities was approximately $4,637,000 and $15,613,000 for the years ended December 31, 2023 and 2022, respectively. We received net proceeds of approximately $2,318,000 from the issuance of common stock and $2,961,000 from the exercise of warrants during the year ended December 31, 2023. Off-balance Sheet Arrangements As of December 31, 2023, we did not have any relationships with unconsolidated entities or financial partnerships, such as entities often referred to as structured finance or special purpose entities, established for the purpose of facilitating off-balance sheet arrangements or other contractually narrow or limited purposes. Purchase Commitments We do not have any material commitments for capital expenditures, although we are required to pay certain milestone fees and royalties to HPI and Reata as described in the section “Overview” above. JOBS Act Accounting Election The Jumpstart Our Business Startups Act of 2012, or the JOBS Act, exempts an “emerging growth company” such as us from being required to comply with new or revised financial accounting standards until private companies are required to comply with the new or revised financial accounting standards. The JOBS Act provides that a company can elect to opt out of the extended transition period and comply with the requirements that apply to non-emerging growth companies but any such election to opt out is irrevocable. We elected not to opt out of such extended transition period which means that when a standard is issued or revised and it has different application dates for public or private companies, we, as an emerging growth company, can adopt the new or revised standard at the time private companies adopt the new or revised standard. This may make comparison of our financial statements with another public company which is neither an emerging growth company nor an emerging growth company which has opted out of using the extended transition period difficult or impossible because of the potential differences in accounting standards used. Critical Accounting Policies and Estimates The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates, assumptions and judgments that affect the amounts reported in the financial statements, including the notes thereto. We consider critical accounting policies to be those that require more significant judgments and estimates in the preparation of our financial statements. Management relies on historical experience and other assumptions believed to be reasonable in making its judgment and estimates. Actual results could differ materially from those estimates. Management believes its application of accounting policies, and the estimates inherently required therein, are reasonable. These accounting policies and estimates are periodically reevaluated, and adjustments are made when facts and circumstances dictate a change. 39 Item 7A. Quantitative and Qualitative Disclosure About Market Risk. We are a smaller reporting company as defined by Rule 12b-2 of the Exchange Act and are not required to provide the information required under this item.