Notes to the Unaudited Financial
Statements
Note 1 – Nature of Business
CNS Pharmaceuticals, Inc. (the “Company”) is a pharmaceutical
company organized as a Nevada corporation on July 27, 2017 to focus on the clinical development of anti-cancer drug candidates.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation - The accompanying unaudited
financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United
Stated of America (“U.S. GAAP”) for interim unaudited financial information. Accordingly, they do not include all of
the information and footnotes required by generally accepted accounting principles for complete financial statements. The
unaudited financial statements include all adjustments (consisting of normal recurring adjustments) which are, in the opinion of
management, necessary in order to make the condensed financial statements not misleading. Operating results for the three
and nine months ended September 30, 2019 are not necessarily indicative of the final results that may be expected for the year
ended December 31, 2019. For more complete financial information, these unaudited financial statements should be read in conjunction
with the audited financial statements for the period ended December 31, 2018 included in our Form S-1 filed with the SEC on October
7, 2019 (“Form S-1”). Notes to the financial statements which would substantially duplicate the disclosures contained
in the audited financial statements for the most recent fiscal period, as reported in the Form S-1, have been omitted.
Going Concern - These financial statements have been
prepared on a going concern basis, which assumes the Company will continue to realize its assets and discharge its liabilities
in the normal course of business. On November 13, 2019, the Company closed its initial public offering (“IPO”) of 2,125,000
shares of its common stock at a price to the public of $4.00 per share, followed shortly by the exercise of the over-allotment
option issued to the underwriter which resulted in an additional 318,750 shares of common stock being issued at the IPO price of
$4.00 per share. Management believes that the proceeds from the IPO and its cash on hand are sufficient to fund its planned operations
beyond the near term. These factors alleviate the substantial doubt regarding the Company’s ability to continue as a going
concern as previously reported.
Restricted Cash - The following table provides a reconciliation
of cash and restricted cash reported within the balance sheet that sum to the total of the same such amounts shown in the statement
of cash flows. Restricted cash are funds related to the SAFE agreements that will not be released to the Company until successfully
acquiring the patent rights from HPI and upon the Company’s spending on Phase II clinical trials of an amount equal to at
least half of the escrow funds prior to December 28, 2019. The Company successfully met the release requirements of the restricted
cash upon the closing of the IPO on November 13, 2019 and as such the funds have now been released to the Company
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September 30,
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|
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December 31,
|
|
|
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2019
|
|
|
2018
|
|
Cash and cash equivalents
|
|
$
|
630,109
|
|
|
$
|
282,736
|
|
Restricted cash
|
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269,399
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|
|
|
272,397
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Total
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$
|
899,508
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|
|
$
|
555,133
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|
Loss Per Common Share - Basic loss per common share is
computed by dividing net loss available to common shareholders by the weighted-average number of common shares outstanding during
the period. Diluted loss per common share is determined using the weighted-average number of common shares outstanding during the
period, adjusted for the dilutive effect of common stock equivalents. In periods when losses are reported, the weighted-average
number of common shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive. For the
nine months ended September 30, 2019, the Company’s potentially dilutive shares and options, which were not included in the
calculation of net loss per share, included notes convertible into 200,000 common shares, warrants to purchase 3,837,880 common
shares, and options to purchase 1,564,500 common shares. For the nine months ended September 30, 2018, the Company’s potentially
dilutive shares and options, which were not included in the calculation of net loss per share, included notes convertible into
4,260,942 common shares, warrants to purchase 1,220,059 common shares, and options to purchase 675,000 common shares.
Recent Accounting Pronouncements - In
February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). Under ASU 2016-02, an entity is required to recognize right-of-use
assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. ASU 2016-02 offers specific
accounting guidance for a lessee, a lessor and sale and leaseback transactions. Lessees and lessors are required to disclose qualitative
and quantitative information about leasing arrangements to enable a user of the financial statements to assess the amount, timing
and uncertainty of cash flows arising from leases. For public companies, ASU 2016-02 is effective for annual reporting periods
beginning after December 15, 2018, including interim periods within that reporting period, and requires a modified retrospective
adoption. The adoption of this standard did not have an impact on the Company’s financial statements due to the lack of lease
agreements for the Company at this time.
Note 3 –Notes Payable
Convertible Notes Payable
On June 14, 2018, the Company entered into an agreement to issue
a 10% convertible note in an aggregate of $300,000 in principal amount of convertible notes, which principal and accrued interest
automatically converted into shares of common stock upon the closing of a public offering at a conversion rate of $1.50 per share.
In conjunction with this convertible note payable a placement fee of 14,000 warrants were issued. The warrants have a 5-year life
and an exercise price of $1.50. These warrants were recorded for $15,163 as a debt discount. In addition, $21,000 of placement
agent fees were paid related to this note which was also recorded as a debt discount. As of September 30, 2019, the discount was
fully amortized. On November 13, 2019, upon the closing of the IPO, the 10% convertible note of $300,000 in principal plus accrued
interest of $42,494 automatically converted into 228,329 shares of common stock at a conversion rate of $1.50 per share.
Notes Payable
During 2017, the Company issued two notes payable for total
cash proceeds of $35,000. The notes bore interest at the rate of 10% per year and originally matured on January 31, 2018. Prior
to maturity, the notes were extended through September 30, 2018, and again extended through December 31, 2018. The notes and accrued
interest were paid in full in January 2019.
Note 4 – SAFE Agreements
During the year ended December 31, 2018, the Company entered
into SAFE agreements (Simple Agreement for Future Equity) with investors through a Regulation Crowdfunding campaign in exchange
for cash investments totaling $628,558. Upon an initial public offering of the Company’s common shares or a change of control,
the amount invested under the SAFE agreements automatically converted into the Company’s common shares. The number of shares
the SAFE agreement investors received was based on a 16% discount to the pricing in the triggering equity financing. The SAFE agreements
did not limit the number of shares that the issuer could be required to issue upon conversion. The SAFE agreements had no interest
rate or maturity date and the SAFE investors had no voting right prior to conversion.
In accordance with the SAFE agreements, 50% of the funds raised,
net of all fees associated with the use of a campaign platform was held in an escrow account and are included in Restricted Cash.
The escrow funds were released to the Company upon successfully acquiring the patent rights from HPI and upon the Company’s
spending on Phase II clinical trials of an amount equal to at least half of the escrow funds prior to December 28, 2019. If the
escrow funds were not released to the Company before December 28, 2019, the funds were to be distributed to the SAFE agreement
investors. Such distribution would not have reduced the number of common shares that the investors would receive upon conversion.
As of September 30, 2019, the SAFE agreements had not yet converted
as a qualifying financing had not yet occurred. The SAFE agreements are recorded as a liability until conversion occurs. On November
13, 2019, upon the closing of the IPO, the amount invested under the SAFE agreements automatically converted into 191,151 common
shares, and the funds held in escrow have been released to the Company.
Note 5 – Equity
Stock Options
In 2017, the Board of Directors of the Company approved the
CNS Pharmaceuticals, Inc. 2017 Stock Plan (the “Plan”). The Plan allows for the Board of Directors to grants various
forms of incentive awards for up to 2,000,000 shares of common stock. No key employee may receive more than 500,000 shares of common
stock (or options to purchase more than 500,000 shares of common stock) in a single year.
On June 28, 2019, the Board of Directors approved a grant 889,500
to officers and employees of the Company. The options will vest in four equal annual installments beginning on the first anniversary
following issuance. The options have a ten-year term and have an exercise price of $2.00 per share. The fair value of the options
at issuance was $1,631,737.
During the nine months ended September 30, 2019 and 2018, the
Company recognized $237,432 and $58,724 of stock-based compensation, respectively, related to outstanding stock options. At September
30, 2019, the Company had $1,899,006 of unrecognized expenses related to options.
The following table summarizes the stock option activity for
the nine months ended September 30, 2019:
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Options
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Weighted-Average Exercise Price Per Share
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Outstanding, December 31, 2018
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675,000
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$
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0.91
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Granted
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889,500
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|
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2.00
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Exercised
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|
|
–
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|
|
|
–
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Forfeited
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|
|
–
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|
|
|
–
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Expired
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–
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–
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Outstanding, September 30, 2019
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1,564,500
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$
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1.53
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The following table discloses information regarding outstanding
and exercisable options at September 30, 2019:
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Outstanding
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Exercisable
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Exercise
Price
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Number of
Option Shares
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Weighted Average
Exercise Price
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Weighted Average Remaining Life (Years)
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Number of Option
Shares
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Weighted Average
Exercise Price
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$2.00
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|
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889,500
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9.75
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–
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$1.50
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400,000
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8.67
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150,751
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$0.045
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275,000
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|
|
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8.15
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146,723
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|
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Total
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1,564,500
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$
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1.53
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9.19
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297,474
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$
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0.78
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As of September 30, 2019, the aggregate intrinsic value of options
vested and outstanding was $362,219. As of September 30, 2019, there are 435,500 awards remaining to be issued under the Plan.
Stock Warrants
The following table summarizes the stock warrant activity for
the nine months ended September 30, 2019:
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Warrants
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Weighted-Average Exercise Price
Per Share
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Outstanding, December 31, 2018
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3,674,130
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$
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4.08
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Granted
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163,750
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|
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1.85
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Exercised
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|
–
|
|
|
|
–
|
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Forfeited
|
|
|
–
|
|
|
|
–
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Expired
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|
|
–
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|
|
|
–
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Outstanding, September 30, 2019
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3,837,880
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$
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3.99
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|
In April 2019, the Company entered into two consulting agreements
with consultants to provide services and advice related to company operations, investor relations, marketing, corporate structure,
financing and public markets. The initial term of the agreement is eighteen months. As consideration for entering into this agreement
the Company issued each consultant 50,000 common stock warrants with a term of five years and an exercise price of $1.75. The warrants
vest over an eighteen-month period in equal monthly installments provided that the consultant is providing services on each vesting
date. In addition, each consultant will earn $5,000 per month for these services. Payment of the cash portion of the fee accrued
until the Company completed its initial public offering.
The common stock warrants were valued at $161,500 and will be
recognized over the 18-month vesting term. During the nine months ended September 30, 2019, $49,346 has been recognized as an expense.
At September 30, 2019, the Company had $112,154 of unrecognized expenses related to options.
The following table discloses information regarding outstanding
and exercisable warrants at September 30, 2019
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Outstanding
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Exercisable
|
|
Exercise
Price
|
|
|
Number of Warrant Shares
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|
|
Weighted Average
Exercise Price
|
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Weighted Average Remaining Life (Years)
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Number of Warrant Shares
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Weighted Average
Exercise Price
|
|
|
$11.00
|
|
|
|
1,206,059
|
|
|
|
|
|
|
|
2.89
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|
|
|
1,206,059
|
|
|
|
|
|
|
$2.00
|
|
|
|
63,750
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|
|
|
|
|
|
|
4.68
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|
|
|
63,750
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|
|
|
|
|
|
$1.75
|
|
|
|
100,000
|
|
|
|
|
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4.54
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|
|
|
11,111
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|
|
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$1.50
|
|
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14,000
|
|
|
|
|
|
|
|
3.70
|
|
|
|
14,000
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|
|
|
|
|
|
$0.70
|
|
|
|
2,454,071
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|
|
|
|
|
|
|
4.25
|
|
|
|
2,454,071
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|
|
|
|
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Total
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|
|
|
3,837,880
|
|
|
$
|
3.99
|
|
|
|
3.84
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|
|
|
3,748,991
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|
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$
|
4.04
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|
As of September 30, 2019, the aggregate intrinsic value of warrants
vested and outstanding was $3,200,070.
Other
On April 11, 2019, the Company’s board of directors approved
a private placement of up to a maximum of 817,500 shares of common stock at $2.00 per share. As of September 30, 2019, 817,500
shares had been sold for proceeds net of fundraising expenses of $1,507,169.
On April 17, 2019, the Company entered into an agreement with
a foreign registered broker dealer to assist in fundraising on the Company’s behalf. Fees for these services consisted of
a cash fee of 10% of amounts raised and an equity fee of 10% of the amounts raised. The equity fee will be payable in five-year
common stock warrants with an exercise price of $2.00 per share. As of September 30, 2019, 63,750 warrants with a fair value of
$101,206 were issued under this agreement.
On April 10, 2018, the
Company engaged Boustead Securities, LLC (“Boustead”) to act as exclusive financial advisor related to the Company’s
IPO. The agreement expired in April 2019 prior to the Company completing its IPO. In addition, an entity related to Boustead is
a holder of the Company’s outstanding convertible debt as of September 30, 2019.
On April 11, 2019, the Company entered into a consulting agreement
with a consultant to provide services and advice related to social media, investor relations, marketing and public markets. The
initial term of the agreement is twelve months. As consideration for entering into this agreement the Company issued a total of
75,000 shares of common stock. The shares will vest over an eight-month period in equal monthly installments provided that the
consultant is providing services on each vesting date. If the agreement is terminated prior to full vesting the Company shall have
the right to repurchase unvested shares from the consultant for $0.001 per share. During the nine months ended September 30, 2019,
$105,430 of expense has been recognized related to this agreement.
On June 3, 2019, the Company
engaged The Benchmark Company, LLC (“Benchmark”) to act as exclusive financial advisor related to the Company’s
IPO. Benchmark was compensated with a success fee of 7% of the gross offering proceeds, expense allowance of 1% of the gross offering
proceeds and warrants equal to 7% of the shares sold with a five-year term and an exercise price equal to the price of the initial
public offering. In addition, the Company agreed to reimburse Benchmark for expenses. The agreement can be terminated by either
party with 30 days written notice.
Note 6 – Commitments and Contingencies
Employment and Consulting Agreements
On September 1, 2017, the Company entered into an employment
agreement with Mr. John Climaco pursuant to which Mr. Climaco agreed to serve as Chief Executive Officer of the Company commencing
on such date for an initial term of three years. The agreement provides for an initial annual salary of $150,000. The annual salary
increased at the completion of the Company’s initial public offering to an annual salary of $300,000. Pursuant to the employment
agreement, the Company and Mr. Climaco agreed to issue Mr. Climaco 900,000 shares of common stock in exchange for $900, which purchase
was finalized on September 30, 2017. The common shares could have been reacquired by the Company if employment was terminated prior
to the initial public offering. After the completion of the initial public offering a portion of the shares may be reacquired by
the Company if employment is terminated prior to the expiration of the agreement. Effective March 1, 2019, the employment agreement
was amended to increase the annual salary to $186,000 and establish Mr. Climaco as a full-time employee. Effective June 28, 2019,
the employment agreement was amended to increase the annual base salary to $440,000 and Mr. Climaco will be entitled to a cash
bonus with a target of 55% of his base salary following the initial public offering.
On July 27, 2017, the Company entered into a consulting agreement
with a company owned by Mr. Matthew Lourie pursuant to which Mr. Lourie agreed to serve as Chief Financial Officer of the Company
on a part time basis commencing on such date for an initial term of one year, which will be automatically renewed for additional
one-year terms unless either party chooses to cancel the agreement with 30 days-notice. The agreement provides for a monthly compensation
of $5,000 and a one-time right to purchase 15,000 shares of common stock at $0.001 per share. The common shares may be reacquired
by the Company if the agreement is terminated by Mr. Lourie prior to the initial public offering. After the completion of the initial
public offering a portion of the shares may be reacquired by the Company if the agreement is terminated by Mr. Lourie prior to
two years after the initial public offering. The board agreed to waive the reacquisition right on these shares. On November 13,
2019, upon the closing of the IPO, Mr. Lourie resigned as Chief Financial Officer but will continue to provide consulting services
based on an hourly rate.
On September 14, 2019, the Company, entered into an employment
agreement with Christopher Downs to serve as its Chief Financial Officer commencing on the closing date of the Company’s
IPO, which occurred on November 13, 2019. The initial term of the Employment Agreement will continue for a period of three years.
The Employment Agreement provides for an initial annual base salary of $300,000. Mr. Downs may receive an annual bonus (pro rated
for 2019), targeted at 35% of base salary. Under the agreement, upon the closing of the IPO, Mr. Downs was granted a ten-year option
to purchase 300,000 shares at an exercise price per share equal to the public offering price per share of the shares sold in the
IPO. The option vests in four equal installments on each of the succeeding four anniversary dates of the option grant, provided
Mr. Downs is employed by the Company on each such vesting date.
WP744 Portfolio (Berubicin)
On November 21, 2017, the Company entered into a Collaboration
and Asset Purchase Agreement with Reata Pharmaceuticals, Inc. (“Reata”). Through this agreement, the Company purchased
all of Reata’s rights, title, interest and previously conducted research and development results in the chemical compound
commonly known as Berubicin. In exchange for these rights, the Company agreed to pay Reata an amount equal to 2.25% of the net
sales of Berubicin for a period of 10 years from the Company’s first commercial sale of Berubicin plus $10,000.
On December 28, 2017, the Company entered into a Technology
Rights and Development Agreement with Houston Pharmaceuticals, Inc. (“HPI”), a related party. Dr. Waldemar Priebe,
our founder and largest shareholder, is also the founder and a shareholder of HPI. Pursuant to this agreement, the Company obtained
a worldwide exclusive license to the chemical compound commonly known as WP744. In exchange for these rights, the Company agreed
to pay consideration to HPI as follows: (i) a royalty of 2% of net sales of any product utilizing WP744 for a period of ten years
after the first commercial sale of such; and (ii) $100,000 upon beginning Phase II clinical trials; and (iii) $200,000 upon the
approval by the FDA of a New Drug Application for any product utilizing WP744; and (iv) a series of quarterly development payments
totaling $750,000 beginning immediately after the Company’s raise of $7,000,000 of investment capital. In addition, the Company
issued 200,000 shares of the Company’s common stock valued at $0.045 per share to HPI upon execution of the agreement. Our
rights pursuant to the HPI License were contingent on us raising at least $7.0 million within 12 months from the effective date
of the HPI License, a date which was extended by an additional 12 months by the payment of $40,000. On November 13, 2019, the Company
closed its IPO and as a result completed the acquisition of the intellectual property discussed in the HPI agreement.
On August 30, 2018, we entered into a sublicense agreement with
WPD Pharmaceuticals, Inc. (“WPD”), a related party based in Poland. Dr. Waldemar Priebe, our founder and largest shareholder,
is also the founder and shareholder of WPD. Pursuant to the agreement, the Company granted WPD an exclusive sublicense, even as
to us, for the patent rights we licensed pursuant to the HPI License within the following countries: Poland, Estonia, Latvia, Lithuania,
Belarus, Ukraine, Moldova, Romania, Bulgaria, Serbia, Macedonia, Albania, Armenia, Azerbaijan, Georgia, Montenegro, Bosnia, Croatia,
Slovenia, Slovakia, Czech Republic, Hungary, Chechnya, Uzbekistan, Kazakhstan, Kyrgyzstan, Tajikistan, Turkmenistan, Greece, Austria,
and Russia. The sublicense agreement provides that WPD must use commercially reasonable development efforts to attempt to develop
and commercialize licensed products in the above mentioned territories, which means the expenditure of at least $2.0 million on
the development, testing, regulatory approval or commercialization of the licensed products during the three year period immediately
following the date of the sublicense agreement. In the event that WPD fails to use commercially reasonable development efforts
by the foregoing three-year deadline, we have the right to terminate this sublicense agreement. In consideration for the rights
granted under the sublicense agreement, to the extent we are required to make any payments to HPI pursuant to the HPI License as
a result of this sublicense agreement, WPD agreed to advance us such payments, and to pay us a royalty equal to 1% of such payments.
On August 31, 2018, the Company entered into a sublicense agreement
with Animal Life Sciences, LLC (“ALI”), a related party, pursuant to which we granted ALI an exclusive sublicense,
even as to us, for the patent rights we licensed pursuant to the HPI License solely for the treatment of cancer in non-human animals
through any type of administration. In consideration for the rights granted under the sublicense agreement, ALI agreed to issue
us membership interests in ALI equal to 1.52% of the outstanding ALI membership interests. As additional consideration for the
rights granted, to the extent we are required to make any payments to HPI pursuant to the HPI License as a result of this sublicense
agreement, ALI agreed to advance us such payments, and to pay us a royalty equal to 1% of such payments. Dr. Waldemar Priebe, our
founder and largest shareholder, is also the founder and a shareholder of ALI, holds 38% of the membership interests of ALI.
Other
On January 29, 2019, the Company entered into a consulting agreement
with WPD, a related party. The agreement is for a period of one year, with compensation of $5,000 per month. The consulting services
include the full-time services of a technical researcher currently employed by WPD. The Company paid $30,000 for the first six
months upon execution of the agreement and has accrued $10,000 as a liability as of September 30, 2019.
Note 7 – Subsequent Events
On November 13, 2019, the Company closed its initial public
offering of 2,125,000 shares of its common stock at a price to the public of $4.00 per share. The gross proceeds from the offering,
before deducting underwriting discounts and commissions and other offering expenses payable by the Company, were $8.5 million.
In conjunction with the closing the underwriters were issued 148,750 common stock warrants with a term of five years and an exercise
price of $4.00. The warrants become exercisable on May 5, 2020. In addition, the Company granted the underwriters a 45-day over-allotment
option to purchase up to an additional 318,750 shares of common stock at the initial price to the public less underwriting discounts
and commissions. On November 20, 2019, pursuant to the over-allotment option, the underwriters purchased 318,750 shares of common
stock at the initial price to the public of $4.00 per share less underwriting discounts and commissions of $89,250.