Capnia, Inc.

We are a clinical-stage biopharmaceutical company focused on the development and commercialization of novel therapeutics for the treatment of rare diseases. Our lead drug, Diazoxide Choline Controlled-Release tablets (DCCR), is a potent ATP-sensitive potassium (K_{ATP) channel activator.  The KATP} channel plays a central role in the regulation of a number of physiological processes, and the pathophysiology of several diseases. In the context of the underlying genetic or structural defects in many forms of hyperphagic obesity, including Prader-Willi syndrome (PWS), these pathophysiological processes may cumulatively contribute to increases in appetite and aggressive food seeking, lack of satiety, accumulation of excess body fat and the establishment and perpetuation of the obese state.  

_{DCCR tablets consist of the active ingredient diazoxide choline, a choline salt of diazoxide, which is a benzothiadiazine. Once solubilized from the formulation, diazoxide choline is rapidly converted to diazoxide prior to absorption. Diazoxide acts by stimulating ion flux through KATP. Diazoxide appears to act on signs and symptoms of PWS in a variety of ways. Activating the KATP} ^{channel in NPY/AgRP neurons in the hypothalamus results in the hyperpolarization of the plasma membrane and thereby reduces secretion of neuropeptide Y (NPY), Agouti-related peptile (AgRP) and likely gamma-amino butyric acid (GABA) contributing to a reduction in hyperphagia.} _{Activating the KATP channel in the dorsal motor nucleus of vagus has the potential to potentiate the effects of leptin, insulin and α-melanocortin stimulating hormone to reduce hyperinsulinemia, and improve appetite and satiety. Activating the KATP in pancreatic β-cells can further reduce the contribution of hyperinsulinemia in the accumulation of excess body fat and the progression to insulin resistance and to the establishment of leptin resistance. Activating the KATP} channel in adipocytes has the potential to decrease de-novo triglyceride synthesis and increase β-oxidation of fat reducing fat mass.  

We could be subject to substantial penalties for violations of these laws, including denial of payment and refunds, suspension of payments from Medicare, Medicaid or other federal healthcare programs and exclusion from participation in the federal healthcare programs, as well as civil monetary and criminal penalties and imprisonment. One of these statutes, the False Claims Act, is a key enforcement tool used by the government to combat healthcare fraud. The False Claims Act imposes liability on any person who, among other things, knowingly presents, or causes to be presented, a false or fraudulent claim for payment by a federal healthcare program. In addition, violations of the federal physician self-referral laws, such as the Stark laws discussed below, may also violate false claims laws. Liability under the False Claims Act can result in treble damages and imposition of penalties. For example, we could be subject to penalties of $11,665 to $23,331 per false claim, and each use of our product could potentially be part of a different claim submitted to the government. Separately, the HHS office of the Office of Inspector General, or OIG, can exclude providers found liable under the False Claims Act from participating in federally funded healthcare programs, including Medicare and Medicaid. The steep penalties that may be imposed on laboratories and other providers under this statute may be disproportionate to the relatively small dollar amounts of the claims made by these providers for reimbursement. In addition, even the threat of being excluded from participation in federal healthcare programs can have significant financial consequences on a provider.

If we do not achieve one or more of these factors in a timely manner or at all, we could experience significant delays or an inability to successfully commercialize DCCR, which would materially harm our business. For example, on November 12, 2020, pursuant to our request to the FDA, we held a Type C meeting with the FDA to provide an update on our DCCR clinical and development process. Following the meeting, on December 10, 2020, we received the FDA’s minutes for this meeting, which included their comments about the ability of our data to deliver substantial evidence of effectiveness and therefore the FDA did not rule out the need for us to conduct additional clinical trial(s). Notwithstanding these statements from the FDA, we remain optimistic that it may be possible to obtain regulatory approval of DCCR for use in PWS in the U.S. without any additional clinical trials; however, we cannot rule out the possibility that we will not be successful in convincing the FDA of our position and that the FDA will require us to do an additional clinical trial(s) before any such approval is granted.

To evaluate the accrual for clinical expenses, our audit procedures included, among others, testing the completeness and accuracy of the underlying data used in the estimates and evaluating the significant assumptions including, but not limited to, subject visit dates and costs per subject visit, that are used by management to estimate the recorded accruals. To assess the reasonableness of the significant assumptions, we obtained an understanding the Company’s estimation process relating to accrual for clinical trial costs, corroborated the progress of clinical trials with the Company’s clinical team and obtained confirmations directly from third parties related to active patient sites, currently enrolled patients, and subject visit dates. We also tested a sample of subsequent payments to assess the impact to the accrual through the balance sheet date and compared that to the Company’s estimates.