LIPO US Equity☆

UNITED

STATES

SECURITIES

AND EXCHANGE COMMISSION

WASHINGTON,

DC 20549

FORM

10-K

(Mark

One)

☒ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

☒

For the fiscal year ended December 31, 2023

or

☐TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For

the transition period from ___________ to ___________

Commission

file number: 001-41575

Lipella

Pharmaceuticals Inc.

(Exact

name of registrant as specified in its charter)

(State or other jurisdiction of (I.R.S. Employer

incorporation or organization) Identification No.)

7800

Susquehanna St., Suite 505

Pittsburgh,

PA15208

(Address

of principal executive offices) (Zip Code)

Registrant’s

telephone number, including area code: (412)901-0315

Securities

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

Title of each class: Trading Symbol Name of each exchange on which registered:

Common Stock, par value $0.0001 per share LIPO Nasdaq Capital Market

Securities

registered pursuant to Section 12(g) of the Act:

None

(Title

of class)

Indicate

by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ☐ No

☒

Indicate

by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ☐

No ☒

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 has filed a report on and attestation to its management’s assessment of the effectiveness

of its internal control over financial reporting under Section 404(b) of the Sarbanes-Oxley Act (15 U.S.C. 7262(b)) by the registered

public accounting firm that prepared or issued its audit report. ☐

If

securities are registered pursuant to Section 12(b) of the Act, indicate by check mark whether the financial statements of the

registrant included in the filing reflect the correction of an error to previously issued financial statements. ☐

Indicate

by check mark whether any of those error corrections are restatements that required a recovery analysis of incentive-based compensation

received by any of the registrant’s executive officers during the relevant recovery period pursuant to §240.10D-1(b).

☐

Indicate

by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ☐ No ☒

The

aggregate market value of common stock held by non-affiliates of the registrant, based on the closing price for the registrant’s

common stock on June 30, 2023 (the last business day of the second quarter of the registrant’s current fiscal year), was

$9,608,436.

The

registrant had 6,250,034 shares of its common stock outstanding as of February 23, 2024.

References

in this Annual Report on Form 10-K to the “Company,” “Lipella,” “we,” “us,” or

“our” mean Lipella Pharmaceuticals Inc. unless otherwise expressly stated or the context indicates otherwise.

Documents

Incorporated By Reference: None.

SPECIAL

NOTE REGARDING FORWARD-LOOKING STATEMENTS

This

Annual Report on Form 10-K (this “Report”) contains “forward-looking statements” within the meaning of

the Private Securities Litigation Reform Act of 1995, Section 27A of the Securities Act of 1933, as amended (the “Securities

Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). Forward-looking

statements include information concerning our strategy, future operations, future financial position, future revenue, projected

expenses, prospects and plans and objectives of management. Forward-looking statements include all statements that are not historical

facts and can be identified by terms such as “anticipate,” “believe,” “continue,” “could,”

“estimate,” “expect,” “intend,” “may,” “plan,” “potential,”

“predict, “project,” “seek,” “should,” “target,” “will,” “would”

or similar expressions and the negatives of those terms.

Forward-looking

statements contained in this Report include, but are not limited to, statements about the following:

● our research and development programs for our product candidates;

● our ability to identify and develop new product candidates;

● our ability to identify, recruit and retain key personnel;

● our commercialization, marketing and manufacturing capabilities and strategy;

● our competitive position;

● our financial performance;

● developments and projections relating to our competitors and our industry;

● the impact of laws and regulations;

i

Forward-looking

statements are subject to a number of risks, uncertainties and assumptions, including those described in “Risk Factors”

and elsewhere in this Report. Moreover, we operate in a very competitive and rapidly changing environment, and new risks emerge

from time to time. It is not possible for our management to predict all risks, nor can we assess the impact of all factors on

our business or the extent to which any factor, or combination of factors, may cause actual results to differ materially from

those contained in any forward-looking statements we may make. In light of these risks, uncertainties and assumptions, the forward-looking

events and circumstances discussed in this Report may not occur and actual results could differ materially and adversely from

those anticipated or implied in the forward-looking statements. Given these uncertainties, you should not place undue reliance

on these forward-looking statements. Also, forward-looking statements represent our management’s beliefs and assumptions

only as of the date of this Report. You should read this Report and the documents that we have filed as exhibits hereto completely

and with the understanding that our actual future results may be materially different from what we expect.

Except

as required by law, we assume no obligation to update these forward-looking statements publicly, or to update the reasons actual

results could differ materially from those anticipated in these forward-looking statements, even if new information becomes available

in the future.

For

discussion of factors that we believe could cause our actual results to differ materially from expected and historical results,

see “Item 1A - Risk Factors” below. These and other factors could cause results to differ materially from those

expressed in the estimates made by the independent parties and by us.

ii

TABLE

OF CONTENTS

PART I 1

Item 1. Business 1

Item 1A. Risk Factors 20

Item 1B. Unresolved Staff Comments 50

Item 1C. Cybersecurity 50

Item 2. Properties 50

Item 3. Legal Proceedings 51

Item 4. Mine Safety Disclosures 51

Item 6. [Reserved] 52

Item 7A. Quantitative and Qualitative Disclosures about Market Risk 62

Item 8. Financial Statements and Supplementary Data 63

Item 9A. Controls and Procedures 63

Item 9B. Other Information 63

Item 9C. Disclosure Regarding Foreign Jurisdictions That Prevent Inspections 63

PART III 64

Item 10. Directors, Executive Officers and Corporate Governance 64

Item 11. Executive Compensation 70

Item 14. Principal Accountant Fees and Services 82

Item 15. Exhibits and Financial Statement Schedules 83

iii

pART

i

Item

1. Business

Overview

We

are a clinical-stage biotechnology company that was incorporated under the laws of the State of Delaware in February 2005. We

are focused on developing new drugs by reformulating the active agents in existing generic drugs and optimizing these reformulations

for new applications.

We

believe that our strategy combines many of the cost efficiencies and risk abatements derived from using existing generic drugs

with potential patent protections for our proprietary formulations; this strategy allows us to expedite, protect, and monetize

our product candidates. Additionally, we maintain a therapeutic focus on diseases with significant, unaddressed morbidity and

mortality where no approved drug therapy currently exists. We believe that this focus can potentially help reduce the cost, time

and risk associated with obtaining marketing approval. We have not yet commercialized any products, and we do not expect to generate

revenue from sales of any product candidates for several years.

Our

Lead Product Candidates: LP-10, LP-310 and LP-410

Consistent

with our strategy, the initial indication that we are currently addressing (via development of our product candidate, which we

have designated as LP-10) is “hemorrhagic cystitis” (“HC”), which is chronic, uncontrolled urinary blood

loss that results from certain chemotherapies (such as alkylating agents) or pelvic radiation therapy (also called “radiation

cystitis”). Many radiation cystitis patients experience severe morbidity (and in some cases, mortality), and currently,

there is no therapy for their condition approved by the FDA, or, to our knowledge, any other regulatory body.

LP-10 is the development name of our

reformulation of tacrolimus (an approved generic active agent) specifically optimized for topical deposition to the internal surface

of the urinary bladder lumen using a proprietary drug delivery platform that we have developed and that we refer to as our metastable

liposome drug delivery platform (our “Platform”). We are developing LP-10 and our Platform to be, to our knowledge,

the first drug candidate and drug delivery technology that could be successful in treating cancer survivors who acquire HC. Our

first issued U.S. patent covering LP-10 expires July 11, 2035, unless extended for regulatory delay (up to 14 years), and our

second issued U.S. patent covering the method of making LP-10 expires November 9, 2034, unless extended for regulatory delay.

Our issued Australian patent covering LP-10 expires October 22, 2034. The Canadian patent, issued on August 23, 2022, expires

October 22, 2034. The European patent, issued on June 7, 2023, expires October 22, 2034. We also have a corresponding patent application

pending in the U.S. (U.S.S.N. 17/829,960). We also have a pending U.S. patent application on an improvement to the technology.

We have received FDA “orphan drug” designation covering LP-10 and plan to apply for additional regulatory designations

in the event we achieve qualifying results in the current phase 2a clinical trial for LP-10. Market data exclusivity may be available

in the US and other jurisdictions in which regulatory approval is obtained for the Company’s product, regardless of patent

status.

The

safety and efficacy of LP-10 was evaluated in a 13-subject, open-label, multi-center, dose-escalation, phase 2a clinical trial

in patients experiencing complications associated with a rare but highly morbid disease called “radiation-induced hemorrhagic

cystitis” or “radiation cystitis.” This phase 2a clinical trial commenced on February 15, 2021, and we reported

the trial’s summary results in the first quarter of 2023. There is currently no FDA approved drug therapy available for

radiation cystitis patients, who are all cancer survivors who received pelvic radiation therapy to treat solid pelvic tumors,

including prostate and ovarian cancers and who are now dealing with therapy-associated complications, including urinary bleeding

(a radiation cystitis symptom). LP-10’s active ingredient, tacrolimus, which has a well-known pharmacology and toxicology,

addresses a reduction (or cessation) of uncontrolled urinary bleeding.

In

a second program, we are developing a product candidate, which we have designated LP-310 and which employs a formulation similar

to LP-10, for the treatment of oral lichen planus (“OLP”). OLP is a chronic, T-cell-mediated, autoimmune oral mucosal

disease, and LP-310 contains tacrolimus which inhibits T-lymphocyte activation. Symptoms of OLP include painful burning sensations,

bleeding and irritation with tooth brushing, painful, thickened patches on the tongue, and discomfort when speaking, chewing or

swallowing. These symptoms frequently cause weight loss, nutritional deficiency, anxiety, depression, and scarring from erosive

lesions. OLP can also be a precursor to cancer, predominately squamous cell carcinoma, with a malignant transformation rate of

approximately one percent.

LP-310 is the development name of our

oral, liposomal formulation of tacrolimus (the same approved generic active agent in LP-10) specifically optimized for local delivery

to oral mucosa. We believe that our approach of using metastable liposomal tacrolimus as a treatment for OLP is novel. To date,

upon review of relevant FDA public data resources on approved drugs and biologics, we are not aware of any other liposomal products

developed to treat such disease. We have received investigational new drug (“IND”) approval from the FDA regarding

LP-310 in the third quarter of 2023. Our issued U.S. and Australian patents covering LP-310 expire July 11, 2035, October 22,

2034 and October 22, 2034, respectively. The Canadian patent, issued on August 23, 2022, expires October 22, 2034. The European

patent, issued on June 7, 2023, expires October 22, 2034. We also have a corresponding patent application pending in the U.S.

(U.S.S.N. 17/829,960). We also have a pending U.S. patent application on an improvement to the technology. As noted above, patent

term extensions may be available in Europe, Canada and the US for regulatory delay. Market data exclusivity is also applicable

in many jurisdictions, regardless of patent status. Approval of a 505(b)(1) or 505(b)(2) application can result in five or three

years of such exclusivity, respectively. Additional exclusivity may also be available for our products that receive “orphan

drug” designations.

1

In a third program, Lipella is also

developing an oral, liposomal formulation of tacrolimus, LP-410, for the treatment of oral graft-versus-host disease (“GVHD”).

LP-410 is an oral rinse, similar to LP-310, but will have a different containment system. Hematopoietic cell transplantation (“HCT”)

is used to treat a wide range of malignancies, hematologic and immune deficiency states, and autoimmune diseases. GVHD is a clinical

syndrome where donor-derived immunocompetent T-cells react against patient tissues directly or through exaggerated inflammatory

responses following HCT. Oral GVHD is a rare and serious disease, with a prevalence of approximately 30,000 patients in the US

annually in 2023 (Bachier et al., 2019; Bachier et al., 2021, Orphanet 2023). GVHD remains a major cause of morbidity and mortality

with patients who undergo HCT treatment, with chronic GVHD being the leading cause of non-malignant fatality for such patients

who receive such HCT treatments.

Topical and local management of symptomatic

oral GVHD can reduce oral symptoms that can interfere with oral function and quality of life and can reduce the need for more intensive

immunosuppressive systemic therapies. However, there is currently no FDA approved local drug treatment of oral GVHD (Martini et

al., 2022).

Lipella has developed LP-410 for the topical delivery directly to the mouth surface. LP-410 targets the

underlying mechanisms of oral GVHD, potentially providing a safe and effective treatment option for affected individuals. Lipella

received orphan designation approval, on November 11, 2023, for tacrolimus for the treatment of oral GVHD. An IND application for

LP-410’s treatment of oral GVHD was submitted to the FDA on January 30, 2024.

Our

Metastable Liposome Drug Delivery Platform

We have developed a proprietary technology,

referred to as our Platform, which is optimized for local hydrophobic drug delivery to body cavities having endothelial surfaces.

Our process employs liposomal technology protected by issued patents in the United States, Australia, and Canada. We also have

a corresponding patent application pending in the U.S. (U.S.S.N. 17/829,960) and a corresponding European Patent, issued on June

7, 2023. This technology involves direct drug delivery to the urinary bladder mucosa, and, we believe, has the potential to improve

efficacy (by increasing drug concentration at the site of injury) and to reduce the possibility of side effects (by reducing the

drug’s exposure to unrelated organs). The first body-cavity application for which we intend to utilize our Platform is the

urinary bladder, which has been designed to deliver LP-10. We are also developing an oral cavity product for the treatment of OLP

and oral GVHD using our Platform (liposomal-tacrolimus). We are continuing to research and develop products for additional body

cavities, including the anal-rectal cavity (radiation proctitis) and the esophagus (eosinophilic esophagitis). We have a pending

U.S. patent application on a new embodiment of this technology.

We

predict that our Platform will provide a superior approach for treating inflammatory urinary bladder conditions compared to other

delivery mechanisms and that certain inherent features of the metastable liposomes, combined with our intravesical formulations,

provides our Platform with several advantages over existing bladder drug delivery methodologies in current clinical practice for

inflammatory bladder applications. These advantageous characteristics include the following:

● large payload capacity of hydrophobic agents (10% by mass);

● urothelial affinity, which results in efficient drug transfer;

● low systemic distribution (large particle size);

● reproducible manufacturing and scalability; and

● prior clinical experience utilizing the liposomal delivery vehicle.

The

following table summarizes our therapeutic candidate pipeline and discovery research programs:

Figure

1

2

Our

Strengths

We believe we are uniquely positioned to

employ liposome technology in the development of intravesical treatments for urinary bladder and oral indications due, in part,

to our particular strengths, including:

o our receipt of FDA “orphan drug” designations covering LP-10 and LP-410;

Our

Strategy

We are, to our

knowledge, currently developing the first drug candidate and proprietary drug delivery platform that could be successful in treating

cancer survivors who acquire HC and we intend to apply our proprietary drug delivery technology to the oral mucosa for the treatment

of OLP and oral GVHD. Our development programs are designed to address opportunities for capital efficient drug discovery and development,

especially research programs that reposition existing therapeutics for new indications that exploit new formulations. The key elements

of the strategy that we are employing to achieve our goals are:

3

Our

product development strategy involves combining intellectual property protection for novel formulations and indications for approved

active pharmaceutical ingredients (“APIs”) with regulatory efficiencies provided by obtaining FDA designations that

make our product candidates eligible for certain incentives that expedite development and review. We believe that this product

development strategy is more capital efficient compared to traditional discovery of a new chemical entity because the safety and

mechanisms of the approved APIs for the novel formulations of our product candidates are better understood and established. In

the United States, approval of API products follows the “505(b)(2) regulatory pathway”; which permits us to rely on

existing research and development (“R&D”) data pertaining to the generic active ingredient. The 505(b)(2) regulatory

pathway often provides an alternate path to FDA approval for new or improved formulations or new uses of previously approved products.

Using a 505(b)(2) new drug application (“NDA”), we expect to reduce the cost, time and risk that would otherwise be

associated with bringing these programs to market. See “Government Regulation Applicable To Our Business –

The 505(b)(2) NDA Regulatory Pathway” below for more information.

LP-10

and the Intended Treatment of HC

We completed our phase 2a clinical trial

of LP-10 and reported top-line results in January 2023. LP-10 relies on intravesical vasoconstrictive and anti-inflammatory drug

therapy for our intended treatment of HC, a rare and severe consequence of cancer therapy for which there is currently no approved

treatment. HC affects the bladder lining and is caused by the protein-cross-linking effects of chemotherapy as well as longer-term

effects from radiation-induced damage to urothelial tissue. In HC patients, the urothelial damage results in significant urinary

bleeding, inducing the need for blood transfusions. Those cancer patients who acquire HC suffer from pain and discomfort that accompanies

their bleeding. Based on information from the American Cancer Society as well as published reports on the incidence of HC resulting

from either chemo or radiation therapy, we believe there are approximately 72,000 patients annually in the United States who suffer

from a severe form of radiation-induced HC and an estimated 60,000 patients annually with systemic chemotherapy-induced HC. We

received “orphan drug” designation from the FDA for the use of tacrolimus (including LP-10) for the treatment of HC.

We

believe that our approach of using metastable liposomal tacrolimus as a treatment for HC, which has not yet been approved by the

FDA, is novel. To date, we are not aware of any other liposomal products developed for clinical urinary bladder instillation.

The current standard of care for HC patients is limited to measures such as irrigation and cauterization, which seek to reduce

or halt the urinary bleeding of HC but often do not work effectively. There is no approved treatment for HC, and there are currently

no other drug treatments for HC in clinical development of which we are aware. LP-10 is designed to be an acute treatment for

HC to be administered via urinary catheter either at a hospital or doctor’s office within 30 minutes, which would be repeated

daily for a total of four instillations in the same number of days. LP-10 seeks to treat HC via two mechanisms: high local vasoconstriction

and longer-term anti-inflammation.

4

On December 23, 2019, we received IND approval

from the FDA for LP-10, including approval for LP-10’s proposed clinical protocol, and central investigational review board

(“IRB”) approval of our IND-approved clinical protocol, as well as approval for the investigator’s brochure and

patient’s informed consent associated with LP-10. From 2020 to 2022, we signed clinical trial agreements in connection with

eight clinical sites to conduct the dose-escalation, phase 2a clinical trial of LP-10. We completed the phase 2a dose-escalation

trial (reporting results in January 2023) and intend to apply for FDA accelerated approval pathways, and the design of a pivotal

phase 2b well-controlled clinical trial. If successful, a pivotal phase 3 trial can be requested and we believe the results of

an LP-10 phase 3 trial could support the submission of an NDA for LP-10 to the FDA through the 505(b)(2) regulatory pathway and

a Marketing Authorization Application (“MAA”) to the EMA in Europe. However, there can be no assurance that we will

obtain such designation from, or be permitted to use such pathway by, the FDA, who is ultimately responsible for making such determinations.

Background

on HC

HC

is characterized by the presence of sustained hematuria and lower urinary tract symptoms in the absence of active tumor and other

conditions or infections that cause excessive bleeding, (Gorzynska et al. 2005). Urologic adverse events caused by HC include

frequency, dysuria, urgency, nocturia, suprapubic pain, bladder infection, fatigue and both microscopic and gross hematuria.

Bleeding

from HC ranges from non-visible (or microscopic) hematuria to gross (visible) hematuria with clots (Decker et al. 2009). Moderately

severe cases of HC involve massive bleeding and clot formation. Severe HC is a challenging condition to treat and may give rise

to serious complications, leading to prolonged hospitalization and/or mortality (Decker et al. 2009; Mukhtar and Woodhouse 2010)

and HC cases resulting from chemotherapy are reported to have a mortality rate approaching 4% (Rastinehad et al. 2007). Even mild

cases of HC can cause disabling symptoms (e.g., frequency, urgency and pelvic pain, often localized to the bladder or urethra)

(Payne et al. 2013). A standardized grading system (Droller et al. 1982) to classify the severity of HC has been proposed, which

is shown in Figure 2 below:

Figure

2

HC

can be classified as early- or late-onset (Zwaans et al. 2016). HC can also develop weeks to months after treatment in 20%–25%

of patients who receive high doses of cyclophosphamide. The effects of radiation-induced HC may be acute or delayed, occurring

long after radiation treatment has ended, from two months to 15 years later (Zwaans et al. 2018; Manikandan et al. 2010).

5

Prevalence

At the suggestion of the FDA’s Office

of Orphan Products Development, we have measured annual cyclophosphamide and ifosphamide use in a large commercial database for

private health plans between 2008 and 2010 and, based on guidance from the FDA, applied a 40% rate of HC in such patient database.

The information from the database, combined with the FDA’s recommended guidance, results in a prevalence of consequential

HC to potentially reach 60,000 new cases per year in the United States. This methodology implicitly assumes that the prevalence

of use observed in private health plans (including Medicare beneficiaries enrolled in private plans) is generalizable to the nation

as a whole, and such figure represents our conservative estimate of the number of new cases per year after applying the FDA’s

recommended 40% rate to the figures in such patient database. HC resulting from pelvic radiation therapy (occurring in the prostate,

rectum and uterine corpus) is less common than HC resulting from chemotherapy and is believed to be proportional to the incidence

of the “primary neoplasia” (the original malignancy). Such incidence of HC is based on a combined estimate of the incidence

of both chemotherapy-induced HC and radiation-induced HC from (i) peer-reviewed literature estimating the proportion of cyclophosphamide

and ifosphamide recipients that acquire chemotherapy-induced HC after undergoing chemotherapy, as applied to a national chemotherapy

incidence measurement study, and (ii) peer-reviewed literature containing estimates of the proportion of cancers treated with pelvic

radiation therapy and the number of years patients survive post-radiation therapy, in addition to pelvic cancer incidence estimates

publicly available from sources such as the American Cancer Society. According to the American Cancer Society publication Cancer

Facts & Figures 2023 (available at: https://www.cancer.org/content/dam/cancer-org/research/cancer-facts-and-statistics/annual-cancer-facts-and-figures/2023/2023-cancer-facts-and-figures.pdf),

there are an estimated 288,300 new cases of prostate cancer in the U.S. each year, 153,020 new cases of rectum and colon cancer

in the U.S. each year, and 66,200 cases new cases of uterine corpus cancer in the U.S. each year. Based, in part, on this data,

we estimate the U.S. incidence of HC to be in the range of approximately 100,000 to 200,000 cases per year.

Existing

Treatment Options

There

is currently no standard therapy available for patients with HC, and there are no guidelines available on how HC should be optimally

managed. Current HC treatments are regarded as ineffective, risky, or both. Such treatments include general medical management

(e.g., estrogens, pentosan-polysulfate, and hyperbaric oxygen (“HBO”)), instillation therapy (e.g., aminocaproic-acid,

alum, silver-nitrate, formalin, and fibrin glue), embolization and surgery (e.g., coagulation and cystectomy). The moderately

severe cases of HC involve massive bleeding as well as clot formations that require evacuation. The most severe cases require

surgical intervention (e.g., urinary diversion or cystectomy) (Sant 2002; Perez-Brayfield and Kirsch 2009). In addition, we believe

current treatments pose significant patient risk: interventional fulguration of bleeding sites rarely works and exposes sick,

frail patients to surgical risks; treatment with aminocaprotic acid often leads to dangerous clots; treatment with silver nitrate

can cause bladder perforation or kidney failure; and treatment with formalin significantly reduces bladder functionality and causes

excruciating pain (Vicente, Rios et al. 1990).

HBO

treatments for HC may decrease and prevent the risk of bleeding but cannot treat ongoing bleeding, in part because therapy takes

up to 40 sessions over a period of two to three months. Cystectomy causes significant morbidity and is generally an option of

last resort; in some cases where cystectomy is conducted, old and/or frail patients can bleed to death. There are no other products

in development of which we are aware that are indicated for the treatment of HC. Should LP-10 ultimately receive FDA market approval,

we believe it will address this unmet medical need and provide a benefit over existing products while fitting into the existing

treatment algorithm as a treatment for refractory HC.

LP-10’s

Mechanisms of Action – Tacrolimus

LP-10’s

API tacrolimus has been approved by the FDA for systemic use for inhibiting transplant rejection and as topical ointment for moderate

to severe atopic dermatitis. Tacrolimus acts by inhibition of IL-2-dependent T-cell activation and has a direct inhibitory effect

on cell-mediated immunity (Kino et al., 1987; Tamura et al., 2002). Tacrolimus prolongs the survival of the host and transplanted

graft in animal transplant models of liver, kidney, heart, bone marrow, small bowel and pancreas, lung and trachea, skin, cornea

and limb. In animals, tacrolimus has been demonstrated to suppress some humoral immunity and, to a greater extent, cell-mediated

reactions such as allograft rejection, delayed type hypersensitivity, collagen-induced arthritis, experimental allergic encephalomyelitis

and graft versus host disease. Tacrolimus inhibits T-lymphocyte activation, though the exact mechanism is not known. Experimental

evidence suggests that tacrolimus binds to an intracellular protein named FKBP-12. A complex molecule comprising tacrolimus-FKBP-12,

calcium, calmodulin and calcineurin is formed and the phosphatase activity of calcineurin is inhibited. This effect may prevent

the dephosphorylation and translocation of the nuclear factor of activated T-cells, a nuclear component thought to initiate gene

transcription for the formation of lymphokines (such as interleukin-2, gamma interferon). The net result is the inhibition of

T-lymphocyte activation (i.e., immunosuppression).

6

The

urothelium is the primary site of tissue damage in the general pathophysiology of cystitis (Erdogan et al. 2002). Recent studies

have highlighted the overexpression of genes related to immune and inflammatory responses, including activation of CD4+ T-helper

type-1-related chemokines in general cystitis (Trompeter et al. 2002; Almawi and Melemedjian 2000). Expression of chemokines precedes

infiltration of immune cells and elevation of chemokines is an established signature of the inflammatory phenotype in bladder

pain. Many of the symptoms of HC are related to inflammation of urothelial tissues. We believe that our application of the liposomal

tacrolimus could potentially have a two-fold effect of (i) inhibiting calcineurin and the related response, and (ii) causing acute

arteriole vasoconstriction to suppress HC (see Figure 2 above). Calcineurin inhibition is the well-known tacrolimus intracellular

signal transduction mechanism that impairs the ability of certain immune cells to activate, and tacrolimus’ vasoconstrictive

properties are referenced, for example, in section “5.7 Nephrotoxicity” of the Label (prescribing information) associated

with the “PROGRAF® (tacrolimus) injection (for intravenous use) Initial U.S. Approval: 1994.”

Non-Clinical

Study Results Involving Intravesical Tacrolimus

The

following is a summary of non-clinical studies conducted with rats and dogs that were sponsored by the Company or conducted in

collaboration with Company scientists. Results from animal studies are not always predictive of results of subsequent human clinical

trials:

Effect

of intravesical-tacrolimus on chemotherapy-induced HC

In

September 2010, the effect of intravesical-tacrolimus was examined in a rat model for chemotherapy-induced, intraperitoneal injection

of cyclophosphamide (200 mg/kg; i.p.) HC. This study demonstrated that cyclophosphamide-induced hyperactivity (i.e., decrease

in inter-contraction interval) was suppressed in rats with intravesical LP-10 treatment but not in the rat groups left untreated

(sham) or treated with empty liposomes (vehicle control) (Chuang et al. 2010). This result indicates that liposomal tacrolimus

may mitigate cyclophosphamide injury in an animal model (Neurology and Urodynamics 30:421-427 (2011)).

Effect

of intravesical-tacrolimus on radiation-induced HC

In

October 2012, the efficacy of intravesical-tacrolimus was also examined in a rat model for radiation-induced HC. A 40 Gy radiation

dose induced statistically significant reductions in the intermicturition interval recorded during metabolic urination patterns.

Irradiated rats were randomly assigned to receive a single instillation of saline or intravesical-tacrolimus. Intravesical-tacrolimus

increased the post-irradiation intermicturition intervals (p <0.001). Rat bladders that were harvested six weeks after the

40 Gy irradiation doses and two weeks after saline instillation showed edematous changes accompanying infiltration of inflammatory

cells and hyperplastic urothelial changes. In contrast, bladder from group treated with intravesical-tacrolimus shows minimal

edematous change, consistent with the hypothesis that the intravesical-tacrolimus had an anti-inflammatory effect (J. of Urology

194, 578-584 (2015)).

Pharmacokinetics

of sphingomyelin formulated tacrolimus

A

2013 study examined levels of tacrolimus in blood, urine and bladder tissue following a single dose of liposome formulated tacrolimus

instilled in the bladder of rats under anesthesia as compared to intravesical instillation of tacrolimus or intraperitoneal injection

of tacrolimus in other rat groups. The tacrolimus dose was constant in all formulations at 200g/ml. At different times, blood,

urine and bladder samples were collected. Tacrolimus levels in samples were analyzed using microparticle enzyme immunoassay. The

area under curve (“AUC”) of liposome tacrolimus in serum at 0 to 24 hours was significantly lower than that of tacrolimus

instillation or injection. Non-compartmental pharmacokinetic data analysis revealed maximum concentration of liposomal tacrolimus

and tacrolimus in blood and urine at one and at two hours, respectively. Urine AUC (0–24 hours) after intravesical administration

was significantly higher than in the intraperitoneal group (p < 0.05). Bladder tacrolimus AUC (0–24 hours) did not differ

significantly between the groups. Single dose pharmacokinetics revealed that bladder instillation of liposome tacrolimus significantly

decreased systemic exposure to instilled tacrolimus. This appears to indicate that a reduction in systemic exposure helps to limit

the potential side effects of the tacrolimus by concentrating the dose to only one organ (J. of Urology Vol. 189, 1553-1558 (2013)).

7

LP-10

Toxicology Studies

In

2018, we completed chronic toxicology studies in rats and dogs, which were the two species of animals that we agreed to study

in the course of our pre-IND communications with the FDA. The completion of such studies is normally required prior to requesting

IND approval. The in-life phase of the toxicology rat study was performed between February and March 2018 and the in-life phase

of the dog toxicology study was performed in March 2018. Such studies were company-sponsored and conducted by qualified vendors

specializing in good laboratory practice in-vivo toxicology studies. The animals in such 2018 studies were assessed for morbidity,

mortality, clinical observations and weekly body weight. Full sets of standard tissues, including urinary tract tissues, were

collected and weighed and histopathology evaluations were conducted from all such animals. The studies concluded that no significant

local and systemic toxicity resulted from the administration of LP-10 by intravesical instillation in either rats or dogs.

LP-10’s

Addressable Market

LP-10

has been designed for the approximately one million cancer survivors in the United States today who have had pelvic radiation

therapy and are at risk for HC. Based on the managed care database study that we sponsored in 2012 as part of our approved request

for FDA “orphan drug” designation of tacrolimus for HC, approximately 72,000 of these patients annually experience

severe chronic bladder bleeding that is often fatal. LP-10 has been developed to address this form of bleeding, as well as bladder

bleeding associated with breast cancer patients who are taking systemic cyclophosphamide or ifosfamide, leading to chemotherapy-related

cystitis experienced by an estimated 60,000 patients annually in the United States, inferring an addressable market in excess

of 120,000 patients annually.

Figure

3

(1) American Cancer Society Cancer Facts

and Figures 2023, (2) derived from a Company-sponsored study, (3) based on the Company’s 40% estimate, (4) American Cancer

Society Cancer Treatment and Survivorship Fact and Figures 2022-2024, (5) based on the Company’s 30% estimate (6) 8% estimate,

(7) based on the Company’s estimate, (8) $20,000 average revenue per each of an estimated 60,000 patients treated per year.

Figure

3 above illustrates the potential sources of revenue for LP-10. LP-10 is not currently approved for any indication; however, if

clinical development is successful and we receive marketing approval for LP-10, we estimate the average LP-10 price to exceed

$20,000 per patient-year domestically. This estimate is based on costs of HBO therapy, which is an option for patients with mild

cases. HBO therapy can cost approximately $15,000 for a course of 30 sessions. Our price estimate also includes the potential

for associated reductions in direct medical expenditures, especially for severe cases. We estimate the peak demand, at this price,

to be, approximately 60,000 patients annually, which represents an approximate 50% market penetration in the U.S. Based on such

price and demand estimates, we believe there is potential to receive up to $1.2 billion in annual gross revenue.

8

Our

Lead Drug Candidate, LP-10, and Our Product Pipeline

Five fundamental aspects of our LP-10 drug

candidate make it an excellent fit for our strategy (see Figure 4 below). First, our API has a well-known mechanism of action.

Second, published non-clinical studies involving animals, which are described above, demonstrate the potential for significant

efficacy in our intended indication and route of administration. Third, we are fortunate to have had a successful human experience

with intravesical tacrolimus (Dave et. al. Int Urol Nephrol 2015). Fourth, we believe we can take advantage of accelerated regulatory

approval pathways for LP-10; we have already received “orphan drug” designation from the FDA that grants us product

exclusivity, and we plan to apply for designations under one or more of the FDA’s expedited development and review programs.

Fifth, we believe that the revenue potential for LP-10 could be significant. We believe our focus on capital-efficient drug development

provides us with additional opportunities as we evaluate potential drug candidates for other rare diseases, especially those associated

with locally delivering drugs to body cavities. When evaluating opportunities, we ensure that both the indication as

well as the regulatory pathway are conducive to capital-efficient drug development. Our product candidate pipeline

includes product candidates that could treat OLP and oral GVHD (LP-310). Most recently, on November 10, 2023, we received the FDA’s

IND approval for a Phase 2a dose escalation clinical trial regarding LP-310, and we were granted “orphan drug” designation

for LP-410 the treatment of oral GVHD in November 2023. We plan to submit a Phase 2a IND for this indication in the first quarter

of 2024. We believe that our current product candidate pipeline could enable us to apply our drug delivery technology (our Platform)

for multiple types of severe, rare diseases, and in the future, could enable us to address additional broader indications associated

with endothelial inflammation. Local delivery often allows us to avert known risk factors by only locally applying the effective

dose.

Figure

4

We

are currently evaluating several potential product candidates for additional indications (including radiation proctitis and eosinophilic

esophagitis).

LP-10’s

Regulatory Status

In 2019, we completed the required manufacturing

and toxicology program to submit an IND request to the FDA to begin testing LP-10 in human subjects. We submitted the IND request

in September 2019 and received approval from the FDA within 30 days of submission to begin a clinical study involving LP-10. In

December 2019, we received an advice letter from the FDA recommending several modifications to our proposed clinical protocol for

LP-10, which we accommodated. We also submitted and received approval from the FDA for the trial’s associated investigator

brochure and the proposed documentation of patient consent. Both of these documents, in addition to the clinical protocol, were

submitted to Adverra, our central IRB, and we subsequently received IRB approval to conduct our clinical trial. In February 2020,

the first patient was dosed in LP-10’s FDA phase 2a open-label, dose-escalation clinical trial for patients experiencing

moderate to severe HC, which is intended to demonstrate proof-of-concept in humans. We reported summary results from LP-10’s

phase 2a clinical trial in January 2023. We had a type-C meeting with the FDA on November 7, 2023, during which we agreed on a

submission of a well-controlled phase 2b double-blind placebo-controlled trial with gross hematuria as assessed by patient report

outcome as primary endpoint.

9

LP-10’s

FDA “Orphan Drug” Designation Status

In

2010, we submitted a request to the FDA for “orphan drug” designation covering LP-10 and subsequently received approval

for such designation in July 2012. This provides us with marketing exclusivity and permits us to benefit from shorter FDA review

periods and reduced regulatory fees for LP-10. We intend to apply for similar “orphan drug” designations in additional

jurisdictions, including Europe and Japan, as well as additional regulatory classifications, such as the FDA’s Breakthrough

Therapy and Fast Track designations, in the United States. We expect that any designations that we have received, or may in the

future receive, will confer additional advantages during LP-10’s development. However, there can be no assurance that we

will obtain such designations from the FDA, who is ultimately responsible for making such determinations.

LP-10’s

Clinical Status

Our

multi-center, open-label dose-escalation phase 2a LP-10 clinical trial involved a total of thirteen subjects who received tacrolimus

doses in one or two instillations of 2, 4 or 8mg via a pre-liposomal lyophilate reconstituted in 40 milliliters of sterile water.

Subjects were cancer survivors with a history of pelvic radiotherapy who developed moderate to severe HC refractory to conventional

therapy. The study was IRB-approved at nine clinical sites within the FDA’s jurisdiction.

Four

subjects were enrolled in the 2mg group, four subjects were enrolled in the 4mg group, and five subjects were enrolled in the

8mg group. All subjects were male, with a median age of 67 years. Nine of the thirteen subjects had a history of prostate cancer

and had been previously treated with external beam radiation. Two of the thirteen subjects had a history of lymphoma previously

treated with radiation, and two had a history of bladder cancer previously treated with radiation.

The

last subject of the LP-10 phase 2a study completed the last visit in October 2022. We reported top-line data from this trial in

January 2023. All twenty-three LP-10 instillations in the 2mg, 4 mg and 8mg groups were well-tolerated by all thirteen subjects without

related adverse events or elevated blood tacrolimus levels. For multiple subjects, hematuria and urinary symptoms improved, and

cystoscopic bleeding and ulceration sites decreased. There was a complete response in three of the subjects, a partial response

in seven of the subjects and no response in three of the subjects. We believe that such data and instillation safety findings

indicate LP-10’s tolerability in HC patients and evidence LP-10’s potential use for the treatment of HC.

The

results of the LP-10 phase-2a clinical trial have been published in the journal of International Urology and Nephrology, on September

19, 2023 (Hafron J. et al. Int. Urol. Nephrol. September 2023, Springer).

LP-310

and the Intended Treatment of OLP

LP-310

is currently in pre-clinical development. LP-310 uses immunosuppressive and anti-inflammatory drug therapy to treat OLP, which

is a chronic immune-mediated mucosal disease characterized by ulcerative lesions in the oral cavity. To date, upon review

of relevant FDA public data resources on approved drugs and biologics, we are not aware of any other liposomal products developed

to treat OLP. Patients are currently treated with off-label steroids for managing painful, erosive or ulcerative lesions. Yet,

there are virtually no steroids formulated for topical drug delivery to lesions in the mouth. For severe and difficult-to-treat

lesions, systemic steroids, and other immunosuppressive agents (e.g., hydroxychloroquin) are often needed, even though OLP is

localized. Creams, gels and ointments do not adhere to oral mucosa and are easily swallowed, while mouthwashes and steroid inhalers

have extremely short contact time with lesions. For severe and difficult-to-treat lesions, systemic steroids are often needed,

even though OLP is localized. As a result, we believe there is great unmet medical need for this disease.

We

believe that our approach of using metastable liposomal tacrolimus as a treatment for OLP, which has not yet been approved by

the FDA, is novel. Tacrolimus has been used as an off-label oral treatment of OLP and it has been shown to be effective based

on systematic review and meta-analysis (Sun et al., 2019), which we believe is indicative of a rationale for using tacrolimus

to treat OLP. Twenty-one trials involving 965 patients were included in this meta-analysis that concluded, in part, that

treatment with tacrolimus may be an alternative approach when OLP does not respond to the standard protocols.

10

Background

on OLP

OLP

is a chronic T-cell-mediated mucosal disease that affects more than 1% of the global population, or more than 6 million people

in the U.S. and Europe, according to González-Moles et. al., Oral Diseases 27(4):813-828 May 2021, “Worldwide

prevalence of oral lichen planus: A systematic review and meta-analysis.” OLP is generally divided into three clinical subtypes:

reticular, atrophic or erythematous, and erosive and/or ulcerative. Although lichen planus can be found on other areas of the

body, such as with cutaneous lichen planus (“LP”), OLP has a chronic course, with little chance for spontaneous resolution,

and most therapies that are currently available are palliative rather than curative. Based on peer-reviewed medical literature,

OLP has a prevalence ranging from 1-2%, and females twice as likely as men to have the disease. The age on onset is generally

between 30-60 years. Although cutaneous LP is associated with approximately 15% of OLP cases, OLP is associated with approximately

75% of patients with cutaneous LP.

Symptoms

vary, but the disease is typically characterized by white reticular changes, erythema and painful ulcerative lesions in the oral

cavity, accompanied by inflammation and severe pain. The precise cause is unknown, although an autoreactive immune process is

suspected by most experts in the field. OLP is most frequently located bilaterally on the buccal mucosa (the inside lining of

the cheeks and floor of the mouth), but can also appear on the tongue, palatal mucosa, gingiva and lips. Because of the long-lasting