NLS Pharmaceutics .(US:NLSP)2024-05-15 20:02PART I Key Information The company's investment profile is marked by significant risks in business operations, financial stability, and regulatory compliance Risk Factors The company faces substantial risks from its product dependency, financial losses, capital needs, and internal control weaknesses - The company's 2023 financial statements include a "going concern" disclosure, with an accumulated deficit of approximately $70.4 million48121 - NLS is heavily dependent on the success of its two main product candidates, Quilience and Nolazol, and failure to obtain regulatory approval would severely harm the business4351 - The company relies on a single manufacturer for its mazindol drug substance, posing significant supply chain risk48140 - Material weaknesses were identified in internal financial controls due to insufficient trained accounting professionals and a lack of appropriate segregation of duties182184 - The company has received delisting warnings from Nasdaq for failing to meet minimum bid price and stockholders' equity requirements190192 Information on the Company The company is a clinical-stage biopharmaceutical firm focused on developing therapies for rare CNS disorders using its lead compound, Mazindol ER History and Development of the Company Established in 2015, the company operates as an emerging growth company and foreign private issuer under SEC rules - The company was established on June 10, 2015, and acquired patents for its lead compound mazindol in 2016 from Assistance Publique - Hopitaux de Paris (AP-HP)226227 - It qualifies as an "emerging growth company" and "foreign private issuer", granting it exemptions from certain SEC reporting and governance requirements229230 Business Overview The company's pipeline is led by Quilience (Mazindol ER) for narcolepsy, with Nolazol for ADHD and other earlier-stage compounds - The company's lead product candidate is Quilience (Mazindol ER) for the treatment of narcolepsy, with a Phase 2 trial showing positive results235249 - The follow-on candidate, Nolazol (Mazindol ER) for ADHD, has completed a Phase 2 trial, but further development is on hold235 - Mazindol has a unique dual mechanism of action as a triple monoamine reuptake inhibitor and a partial orexin receptor 2 (OX2R) agonist233237239 - In March 2024, NLS secured an exclusive global license for Aexon Labs' Dual Orexin Receptor Agonists platform of over 300 new molecular entities355356 - The research pipeline includes NLS-4 for chronic fatigue associated with Long-COVID, NLS-3 for ADHD, and other compounds for cognitive improvement345349350 Organizational Structure NLS Pharmaceutics Ltd is a Swiss stock corporation with a wholly owned U.S. subsidiary, NLS Pharmaceutics Inc - The company is a Swiss stock corporation headquartered in Zurich, Switzerland388 - It has a wholly owned U.S. subsidiary, NLS Pharmaceutics Inc, which was incorporated in Delaware in April 2021389 Property, Plant and Equipment The company leases approximately 270 square feet of shared office space in Zurich, which management considers sufficient - The company leases approximately 270 square feet of shared office space in Zurich, Switzerland, which it deems sufficient for its current operations390391 Operating and Financial Review and Prospects The company reported a lower net loss of $12.2 million in 2023, but its low cash balance raises substantial doubt about its going concern status Operating Results The net loss for 2023 decreased to $12.2 million from $16.5 million in 2022, driven by a 34.2% reduction in R&D expenses | | For the Year Ended December 31, | | |---|---|---| | | 2023 | 2022 | | Research and development expenses | $5,908,288 | $8,976,643 | | General and administrative expenses | $5,898,775 | $6,505,721 | | Operating loss | ($11,807,063) | ($15,482,364) | | Net loss | ($12,172,029) | ($16,495,680) | - The significant decrease in R&D expenses in 2023 was attributed to the absence of active clinical trials during the year428 - The decrease in G&A expenses was due to lower costs for directors and officers insurance, accounting services, and legal counsel429 Liquidity and Capital Resources Cash and cash equivalents fell to $0.9 million at year-end 2023, an amount insufficient to fund operations for the next year - The company's cash and cash equivalents decreased to $0.9 million as of December 31, 2023, from $8.9 million as of December 31, 2022396436 - Management has concluded that existing cash is not sufficient to fund operations for one year, raising substantial doubt about the company's ability to continue as a going concern396440447 | Cash Flow Summary | 2023 | 2022 | |---|---|---| | Net cash used in operating activities | $(9,684,466) | $(13,879,371) | | Net cash used in investing activities | $0 | $0 | | Net cash provided by financing activities | $1,633,746 | $17,396,669 | - Financing activities in 2023 consisted of $1.6 million in proceeds from short-term loans from existing shareholders442 Critical Accounting Estimates Key accounting estimates involve deferred revenue from a license agreement, pension obligations, and a full valuation allowance on deferred tax assets - Revenue from the Eurofarma License Agreement, including a $2.5 million upfront payment, remains deferred as of December 31, 2023459 - The company maintains a full valuation allowance against its deferred tax assets due to a history of losses and uncertainty about future profitability461709 Directors, Senior Management and Employees The company's leadership includes a six-member board and key executives, with total 2023 compensation for management at $2.0 million Directors and Senior Management The leadership team includes the CEO, CFO, CMO, and CSO, overseen by a six-member board of directors elected for one-year terms - The board of directors consists of six members: Ronald Hafner (Chairman), Alexander Zwyer (CEO), Florence Allouche Aknin, Claudio L. A. Bassetti, Audrey Greenberg, and Gian-Marco Rinaldi462484 Compensation Aggregate compensation for all directors and senior management was approximately $2.0 million in 2023 | Compensation for All Directors and Senior Management (10 persons) - 2023 | Amount (in thousands) | |---|---| | Salary, Bonuses and Related Benefits | $1,631 | | Pension, Retirement and Other Similar Benefits | $111 | | Share Based Compensation | $272 | | Total | $2,014 | Board Practices The board has five independent directors and two standing committees, following Swiss home country governance practices for certain rules - The board has determined that five of its six directors are independent under Nasdaq rules486 - The board has an Audit Committee and a Compensation, Nomination and Governance Committee487 - The company follows Swiss home country rules for its compensation and nomination committee practices, which vary from Nasdaq listing rules491492 Major Shareholders and Related Party Transactions Major shareholders include BVF Partners L.P. (26.5%), with related party transactions consisting of management agreements and director loans Major Shareholders As of May 2024, the largest shareholder is BVF Partners L.P. with 26.5%, while all directors and management as a group own 14.8% | Holder | Percentage Owned (%) | |---|---| | BVF Partners L.P. | 26.5% | | Lind Global Fund II LP | 9.9% | | YA II PN, Ltd. | 9.1% | | Felix Grisard | 7.5% | | Magnetic Rock Investment AG | 6.6% | | All directors and senior management as a group | 14.8% | Related Party Transactions The company has employment and consulting agreements with senior management and has received short-term loans from directors - The company has employment agreements with its CEO, Alexander Zwyer, and CMO, George Apostol, and consulting agreements with its CSO, Eric Konofal503505506507 - The company has entered into short-term loan agreements with directors and major shareholders to provide working capital509 Financial Information The company faces demands for over $2.2 million in unpaid service fees from vendors and has no history of paying dividends - The company has received demands for payment for services rendered from multiple vendors including Cambrex Corporation ($492,723), Clinilabs, Inc. ($793,112), and CoreRX, Inc. ($1,007,701)513514515 - The company has never declared or paid cash dividends and does not intend to in the foreseeable future, subject to Swiss law restrictions516517 Additional Information As a Swiss corporation, shareholders are subject to a 35% withholding tax on dividends and potential classification as a PFIC for U.S. holders - As a Swiss corporation, dividends are generally subject to a 35% Swiss federal withholding tax, though refunds may be available under tax treaties205534 - There is a risk that the company could be classified as a Passive Foreign Investment Company (PFIC) for U.S. tax purposes, which could result in adverse tax consequences for U.S. Holders187571 Quantitative and Qualitative Disclosures About Market Risk The company's primary market risk is foreign currency exposure, as 33% of its 2023 expenses were in CHF and EUR - The company is exposed to foreign currency exchange risk, with about 26% of its 2023 expenses in CHF and 7% in EUR595 - The company does not currently engage in formal currency hedging transactions596 PART II Controls and Procedures Disclosure controls were deemed ineffective as of year-end 2023 due to material weaknesses in internal financial reporting controls - Management concluded that disclosure controls and procedures were not effective as of December 31, 2023, due to material weaknesses in internal control605610 - Identified material weaknesses include a lack of sufficient U.S. GAAP-trained professionals and a lack of appropriate segregation of duties609 - Remediation steps taken during 2023 include insourcing accounting processes and appointing a new Chief Financial Officer612 Other Items Key disclosures include the change of the certifying accountant and details of the company's cybersecurity risk management program Principal Accountant Fees and Services Fees billed by PricewaterhouseCoopers AG totaled $332,690 in 2023 and $330,015 in 2022, exclusively for audit services | Fee Type | 2023 | 2022 | |---|---|---| | Audit fees | $332,690 | $330,015 | | Audit-related fees | $0 | $0 | | Tax fees | $0 | $0 | | All other fees | $0 | $0 | | Total | $332,690 | $330,015 | Change in Registrant's Certifying Accountant PricewaterhouseCoopers AG notified the company it will decline to stand for re-election as the independent auditor - PricewaterhouseCoopers AG notified the company on May 15, 2024, that it will not stand for re-election as the company's auditor619 - PwC's audit report for FY 2023 included an explanatory paragraph about the company's ability to continue as a going concern620 - There were no disagreements between the company and PwC on any matter of accounting principles or practices during the past two fiscal years621 Corporate Governance As a foreign private issuer, the company follows Swiss home country governance practices in lieu of certain Nasdaq requirements - The company, as a foreign private issuer, elects to follow Swiss law instead of certain Nasdaq corporate governance rules625 - Key differences include not requiring a majority-independent board and following Swiss law for compensation and nomination committee practices626627 Cybersecurity Cybersecurity risk management is overseen by the audit committee and integrated into the company's overall risk management program - The audit committee oversees cybersecurity risk management, which is integrated into the company's overall risk management program631634 - The company has not experienced any cybersecurity attacks that have materially affected its business, strategy, or financial condition635 PART III Financial Statements The audited financial statements reflect the company's clinical-stage status and include a going concern warning from the auditor Report of Independent Registered Public Accounting Firm The auditor's report highlights substantial doubt about the company's ability to continue as a going concern due to operating losses - The auditor's report contains a paragraph expressing substantial doubt about the Company's ability to continue as a going concern, citing operating losses and insufficient cash653 Financial Statements Data The company's financial position deteriorated in 2023, with total liabilities of $10.7 million exceeding total assets of $1.8 million | Balance Sheet Highlights | Dec 31, 2023 | Dec 31, 2022 | |---|---|---| | Cash and cash equivalents | $897,680 | $8,948,400 | | Total assets | $1,846,641 | $9,276,643 | | Total liabilities | $10,680,204 | $5,995,804 | | Total shareholders' equity (deficit) | $(8,833,563) | $3,280,839 | | Statement of Operations Highlights | Year Ended Dec 31, 2023 | Year Ended Dec 31, 2022 | |---|---|---| | Total operating expenses | $11,807,063 | $15,482,364 | | Net loss | $(12,172,029) | $(16,495,680) | | Basic and diluted net loss per common share | $(0.32) | $(0.84) | Notes to Financial Statements Notes reiterate the going concern issue, detail deferred revenue, and outline commitments, contingencies, and recent financing activities - The company's cash of $0.9 million as of Dec 31, 2023, is not sufficient to fund operations for one year, raising substantial doubt about its ability to continue as a going concern675 - The company has commitments for potential milestone payments to Novartis, including $750,000 following an end-of-Phase 2 FDA meeting and $2 million upon marketing authorization756 - The company has received demands for unpaid services from Cambrex ($492,723), Clinilabs ($793,112), and CoreRX ($1,007,701)758759760 - In March 2024, the company closed a registered direct offering for gross proceeds of $1.75 million by selling 7 million common shares at $0.25 per share808