Item
1. Financial Statements (unaudited)
KANNALIFE, INC.
|
CONDENSED CONSOLIDATED BALANCE SHEETS
|
(Unaudited)
|
|
|
|
|
|
|
|
|
September
30, 2019
|
|
|
|
December
31, 2018
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
120,550
|
|
|
$
|
307,131
|
|
Marketable security (available for sale)
|
|
|
395,205
|
|
|
|
2,579,640
|
|
Other receivables
|
|
|
9,299
|
|
|
|
99,691
|
|
Due from related party,
net
|
|
|
—
|
|
|
|
16,334
|
|
Total Current Assets
|
|
|
525,054
|
|
|
|
3,002,796
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT ASSETS:
|
|
|
|
|
|
|
|
|
Other assets
|
|
|
27,490
|
|
|
|
—
|
|
Property and equipment, net
|
|
|
79,480
|
|
|
|
3,074
|
|
Security deposits
|
|
|
17,121
|
|
|
|
17,121
|
|
Total Non-Current Assets
|
|
|
124,091
|
|
|
|
20,195
|
|
TOTAL
ASSETS
|
|
$
|
649,145
|
|
|
$
|
3,022,991
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
290,321
|
|
|
$
|
283,996
|
|
Payroll and related liabilities
|
|
|
247,074
|
|
|
|
246,067
|
|
Loan payable
|
|
|
620,000
|
|
|
|
—
|
|
Loan payable - related party
|
|
|
42,092
|
|
|
|
16,173
|
|
Capital lease obligations
|
|
|
7,460
|
|
|
|
—
|
|
Total Current Liabilities
|
|
|
1,206,947
|
|
|
|
546,236
|
|
|
|
|
|
|
|
|
|
|
LONG TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Loan payable - long term
|
|
|
—
|
|
|
|
620,000
|
|
Loan payable - related party - long term
|
|
|
—
|
|
|
|
25,822
|
|
Convertible notes payable - long term
|
|
|
376,373
|
|
|
|
500,000
|
|
Capital lease obligation
- long term portion
|
|
|
28,426
|
|
|
|
—
|
|
Total Long Term Liabilities
|
|
|
404,799
|
|
|
|
1,145,822
|
|
TOTAL
LIABILITIES
|
|
|
1,611,746
|
|
|
|
1,692,058
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS' EQUITY (DEFICIT):
|
|
|
|
|
|
|
|
|
Preferred stock, $0.0001 par value, 5,000,000
shares authorized
|
|
|
|
|
|
|
|
|
Series A preferred stock, 75 shares designated,
75 issued and outstanding (Liquidation preference of $75,000)
|
|
|
—
|
|
|
|
—
|
|
Series B preferred stock, 75 shares designated,
75 issued and outstanding (Liquidation preference of $75,000)
|
|
|
—
|
|
|
|
—
|
|
Common stock, $0.0001 par value, 200,000,000
authorized, 74,225,141 and 69,854,141 issued and outstanding, respectively
|
|
|
7,422
|
|
|
|
6,985
|
|
Additional paid-in capital
|
|
|
6,794,612
|
|
|
|
6,381,755
|
|
Accumulated deficit
|
|
|
(7,764,635
|
)
|
|
|
(5,052,051
|
)
|
Non-controlling interest
|
|
|
—
|
|
|
|
(5,756
|
)
|
TOTAL
STOCKHOLDERS' EQUITY (DEFICIT)
|
|
|
(962,601
|
)
|
|
|
1,330,933
|
|
TOTAL
LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT)
|
|
$
|
649,145
|
|
|
$
|
3,022,991
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
condensed consolidated financial statements
|
KANNALIFE, INC.
|
CONDENSED CONSOLIDATED STATEMENTS
OF OPERATIONS
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
Three
Months Ended September 30,
|
|
Nine
Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
NET REVENUES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Grant Revenue
|
|
$
|
23,968
|
|
|
$
|
38,101
|
|
|
$
|
126,027
|
|
|
$
|
104,965
|
|
TOTAL
NET REVENUES
|
|
|
23,968
|
|
|
|
38,101
|
|
|
|
126,027
|
|
|
|
104,965
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OPERATING EXPENSES:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Research and development
|
|
|
189,443
|
|
|
|
67,059
|
|
|
|
439,680
|
|
|
|
125,696
|
|
General and administrative
|
|
|
601,567
|
|
|
|
349,782
|
|
|
|
1,511,334
|
|
|
|
537,217
|
|
TOTAL
OPERATING EXPENSES
|
|
|
791,010
|
|
|
|
416,841
|
|
|
|
1,951,014
|
|
|
|
662,913
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
LOSS FROM OPERATIONS
|
|
|
(767,042
|
)
|
|
|
(378,740
|
)
|
|
|
(1,824,987
|
)
|
|
|
(557,948
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
OTHER (EXPENSE) INCOME:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest expense, net
|
|
|
(17,794
|
)
|
|
|
(6,962
|
)
|
|
|
(49,754
|
)
|
|
|
(15,112
|
)
|
Other (expense) income, net
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
31,183
|
|
Loss on conversion of convertible debt
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(61,815
|
)
|
Realized gain on investment
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
3,901,974
|
|
Net gains and losses recognized
during the period on marketable security
|
|
|
(301,661
|
)
|
|
|
(415,833
|
)
|
|
|
(844,671
|
)
|
|
|
(415,833
|
)
|
TOTAL OTHER (EXPENSE) INCOME
|
|
|
(319,455
|
)
|
|
|
(422,795
|
)
|
|
|
(894,425
|
)
|
|
|
3,440,397
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME BEFORE
INCOME TAX
|
|
$
|
(1,086,497
|
)
|
|
$
|
(801,535
|
)
|
|
$
|
(2,719,412
|
)
|
|
$
|
2,882,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax expense (benefit)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
772,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NET (LOSS) INCOME
|
|
$
|
(1,086,497
|
)
|
|
$
|
(801,535
|
)
|
|
$
|
(2,719,412
|
)
|
|
$
|
2,110,449
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to noncontrolling interests
|
|
|
(1,953
|
)
|
|
|
(2,272
|
)
|
|
|
(6,828
|
)
|
|
|
(2,272
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net (loss) income attributable to Kannalife,
Inc.
|
|
$
|
(1,084,544
|
)
|
|
$
|
(799,263
|
)
|
|
$
|
(2,712,584
|
)
|
|
$
|
2,112,721
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(Loss) income attributable to Kannalife,
Inc. per common share - basic
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.03
|
|
(Loss) income attributable to Kannalife,
Inc. per common share - diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.01
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
0.03
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average common shares outstanding - basic
|
|
|
70,934,271
|
|
|
|
67,264,467
|
|
|
|
70,218,141
|
|
|
|
62,585,619
|
|
Weighted average common shares outstanding - diluted
|
|
|
70,934,271
|
|
|
|
67,264,467
|
|
|
|
70,218,141
|
|
|
|
67,828,952
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these
condensed consolidated financial statements
|
KANNALIFE, INC.
|
CONDENSED CONSOLIDATED STATEMENTS
OF CASH FLOWS
|
(Unaudited)
|
|
|
|
|
|
|
|
Nine
Months Ended September 30,
|
|
|
2019
|
|
2018
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net (loss) income
|
|
$
|
(2,719,412
|
)
|
|
$
|
2,110,449
|
|
Adjustments to reconcile net (loss) income to
net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Loss on issuance of stock for conversion of
notes payable and accrued salaries
|
|
|
—
|
|
|
|
61,815
|
|
Realized gain on investment
|
|
|
—
|
|
|
|
(3,901,974
|
)
|
Net gains and losses recognized during the
period on marketable security
|
|
|
301,661
|
|
|
|
415,833
|
|
Depreciation
|
|
|
1,430
|
|
|
|
—
|
|
Stock based compensation
|
|
|
275,878
|
|
|
|
7,558
|
|
Provision for deferred income taxes
|
|
|
—
|
|
|
|
772,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Security deposits
|
|
|
—
|
|
|
|
(2,121
|
)
|
Other receivables
|
|
|
90,392
|
|
|
|
(19,651
|
)
|
Accounts payable and accrued expenses
|
|
|
32,698
|
|
|
|
(148,192
|
)
|
Payroll and related liabilities
|
|
|
1,007
|
|
|
|
6,662
|
|
Due from related party,
net
|
|
|
16,334
|
|
|
|
(65,326
|
)
|
|
|
|
|
|
|
|
|
|
NET CASH USED IN OPERATING
ACTIVITIES
|
|
|
(2,000,012
|
)
|
|
|
(762,947
|
)
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Cash received upon acquisition
|
|
|
—
|
|
|
|
289,654
|
|
Proceeds from sale of marketable securities
|
|
|
1,882,774
|
|
|
|
—
|
|
Purchase of equipment
|
|
|
(41,950
|
)
|
|
|
—
|
|
Purchase of other asset
|
|
|
(27,490
|
)
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY INVESTING
ACTIVITIES
|
|
|
1,813,334
|
|
|
|
289,654
|
|
|
|
|
|
|
|
|
|
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds from issuance of Series A Preferred
stock
|
|
|
—
|
|
|
|
75,000
|
|
Proceeds from issuance of Series B Preferred
stock
|
|
|
—
|
|
|
|
75,000
|
|
Proceeds from issuance of common stock
|
|
|
—
|
|
|
|
203,000
|
|
Proceeds from notes payable
|
|
|
—
|
|
|
|
345,000
|
|
Proceeds from notes payable
- related party
|
|
|
97
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
NET CASH PROVIDED BY FINANCING
ACTIVITIES
|
|
|
97
|
|
|
|
698,000
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(186,581
|
)
|
|
|
224,707
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents,
beginning of period
|
|
|
307,131
|
|
|
|
4,326
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents,
end of period
|
|
$
|
120,550
|
|
|
$
|
229,033
|
|
|
|
|
|
|
|
|
|
|
NON-CASH ACTIVITIES:
|
|
|
|
|
|
|
|
|
Issuance of common stock
for conversion of notes payable and accrued interest
|
|
$
|
150,000
|
|
|
$
|
236,104
|
|
Issuance of common stock
for remaining share of non-controlling interest
|
|
$
|
12,584
|
|
|
|
—
|
|
Property and equipment
financed through capital leases
|
|
$
|
35,886
|
|
|
|
—
|
|
Issuance of common stock
for conversion of notes payable and accrued interest - related party
|
|
$
|
—
|
|
|
$
|
356,176
|
|
Issuance of common stock
for conversion of accrued salaries
|
|
$
|
—
|
|
|
$
|
2,812,810
|
|
Net liabilities assumed
from reverse acquisition
|
|
$
|
—
|
|
|
$
|
130,346
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements
|
KANNALIFE, INC.
|
CONDENSED CONSOLIDATED STATEMENTS
OF STOCKHOLDERS' EQUITY (DEFICIT)
|
(Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock
|
|
|
|
Series
B Preferred Stock
|
|
|
|
Common
Stock
|
|
|
|
Additional
Paid-In Capital
|
|
|
|
Accumulated
Deficit
|
|
|
|
Non-controlling
interest
|
|
|
|
Total
Stockholders' Equity (Deficit)
|
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at December 31, 2017
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
53,281,932
|
|
|
$
|
5,328
|
|
|
$
|
2,683,776
|
|
|
$
|
(5,988,866
|
)
|
|
$
|
—
|
|
|
$
|
(3,299,762
|
)
|
Issuance of stock options for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,558
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,558
|
|
Issuance of common stock for conversion of notes
payable
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,537,009
|
|
|
|
153
|
|
|
|
653,940
|
|
|
|
—
|
|
|
|
—
|
|
|
|
654,093
|
|
Issuance of common stock for conversion of accrued
salaries
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,505,200
|
|
|
|
551
|
|
|
|
2,812,260
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,812,811
|
|
Issuance of common stock for cash
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,030,000
|
|
|
|
203
|
|
|
|
202,797
|
|
|
|
—
|
|
|
|
—
|
|
|
|
203,000
|
|
Issuance of Series A Preferred stock for cash
|
|
|
75
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75,000
|
|
Issuance of Series B Preferred stock for cash
|
|
|
—
|
|
|
|
—
|
|
|
|
75
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75,000
|
|
Effect of reverse recapitalization transaction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,500,000
|
|
|
|
750
|
|
|
|
(131,096
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(130,346
|
)
|
Net income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,112,721
|
|
|
|
(2,272
|
)
|
|
|
2,110,449
|
|
Balance at September 30, 2018
|
|
|
75
|
|
|
$
|
—
|
|
|
|
75
|
|
|
$
|
—
|
|
|
|
69,854,141
|
|
|
$
|
6,985
|
|
|
$
|
6,379,235
|
|
|
$
|
(3,876,145
|
)
|
|
$
|
(2,272
|
)
|
|
$
|
2,507,803
|
|
Balance at June 30, 2018
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
|
$
|
—
|
|
|
|
60,324,141
|
|
|
$
|
6,032
|
|
|
$
|
6,155,015
|
|
|
$
|
(3,076,882
|
)
|
|
$
|
—
|
|
|
$
|
3,084,165
|
|
Issuance of stock options for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,519
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,519
|
|
Issuance of common stock for cash
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,030,000
|
|
|
|
203
|
|
|
|
202,797
|
|
|
|
—
|
|
|
|
—
|
|
|
|
203,000
|
|
Issuance of Series A Preferred stock for cash
|
|
|
75
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75,000
|
|
Issuance of Series B Preferred stock for cash
|
|
|
—
|
|
|
|
—
|
|
|
|
75
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75,000
|
|
|
|
—
|
|
|
|
—
|
|
|
|
75,000
|
|
Effect of reverse recapitalization transaction
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
7,500,000
|
|
|
|
750
|
|
|
|
(131,096
|
)
|
|
|
—
|
|
|
|
—
|
|
|
|
(130,346
|
)
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(799,263
|
)
|
|
|
(2,272
|
)
|
|
|
(801,535
|
)
|
Balance at September 30, 2018
|
|
|
75
|
|
|
$
|
—
|
|
|
|
75
|
|
|
$
|
—
|
|
|
|
69,854,141
|
|
|
$
|
6,985
|
|
|
$
|
6,379,235
|
|
|
$
|
(3,876,145
|
)
|
|
$
|
(2,272
|
)
|
|
$
|
2,507,803
|
|
Balance at December 31, 2018
|
|
|
75
|
|
|
$
|
—
|
|
|
|
75
|
|
|
$
|
—
|
|
|
|
69,854,141
|
|
|
$
|
6,985
|
|
|
$
|
6,381,755
|
|
|
$
|
(5,052,051
|
)
|
|
$
|
(5,756
|
)
|
|
$
|
1,330,933
|
|
Issuance of stock options for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,878
|
|
|
|
—
|
|
|
|
—
|
|
|
|
5,878
|
|
Issuance of common stock for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,750,000
|
|
|
|
175
|
|
|
|
174,825
|
|
|
|
—
|
|
|
|
—
|
|
|
|
175,000
|
|
Issuance of common stock to board members for
services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
950,000
|
|
|
|
95
|
|
|
|
94,905
|
|
|
|
—
|
|
|
|
—
|
|
|
|
95,000
|
|
Issuance of common stock for conversion of notes
payable and accrued interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,500,000
|
|
|
|
150
|
|
|
|
149,850
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150,000
|
|
Issuance of common stock for remaining share
of non-controlling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
171,000
|
|
|
|
17
|
|
|
|
(12,601
|
)
|
|
|
—
|
|
|
|
12,584
|
|
|
|
—
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(2,712,584
|
)
|
|
|
(6,828
|
)
|
|
|
(2,719,412
|
)
|
Balance at September 30, 2019
|
|
|
75
|
|
|
$
|
—
|
|
|
|
75
|
|
|
$
|
—
|
|
|
|
74,225,141
|
|
|
$
|
7,422
|
|
|
$
|
6,794,612
|
|
|
$
|
(7,764,635
|
)
|
|
$
|
—
|
|
|
$
|
(962,601
|
)
|
Balance at June 30, 2019
|
|
|
75
|
|
|
$
|
—
|
|
|
|
75
|
|
|
$
|
—
|
|
|
|
69,854,141
|
|
|
$
|
6,985
|
|
|
$
|
6,386,793
|
|
|
$
|
(6,680,091
|
)
|
|
$
|
(10,631
|
)
|
|
$
|
(296,944
|
)
|
Issuance of stock options for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
840
|
|
|
|
—
|
|
|
|
—
|
|
|
|
840
|
|
Issuance of common stock for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,750,000
|
|
|
|
175
|
|
|
|
174,825
|
|
|
|
—
|
|
|
|
—
|
|
|
|
175,000
|
|
Issuance of common stock to board members for
services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
950,000
|
|
|
|
95
|
|
|
|
94,905
|
|
|
|
—
|
|
|
|
—
|
|
|
|
95,000
|
|
Issuance of common stock for conversion of notes
payable and accrued interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
1,500,000
|
|
|
|
150
|
|
|
|
149,850
|
|
|
|
—
|
|
|
|
—
|
|
|
|
150,000
|
|
Issuance of common stock for remaining share
of non-controlling interest
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
171,000
|
|
|
|
17
|
|
|
|
(12,601
|
)
|
|
|
—
|
|
|
|
12,584
|
|
|
|
—
|
|
Net loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(1,084,544
|
)
|
|
|
(1,953
|
)
|
|
|
(1,086,497
|
)
|
Balance at September 30, 2019
|
|
|
75
|
|
|
$
|
—
|
|
|
|
75
|
|
|
$
|
—
|
|
|
|
74,225,141
|
|
|
$
|
7,422
|
|
|
$
|
6,794,612
|
|
|
$
|
(7,764,635
|
)
|
|
$
|
—
|
|
|
$
|
(962,601
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements
|
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
September
30, 2019
|
(UNAUDITED)
|
Note
1 – Organization and Nature of Operations
Kannalife,
Inc. (the “Company”) was incorporated under the laws of the state of Delaware on March 25, 2013, under the name TYG
Solutions Corp. The Company consummated a share exchange transaction on July 25, 2018, with Kannalife Sciences, Inc. (“Kannalife”),
a privately held Delaware corporation formed in 2010, the accounting acquirer. Upon completion of the share exchange transaction,
Kannalife is treated as the surviving entity and accounting acquirer although the Company was the legal acquirer. Accordingly,
the Company’s historical financial statements are those of Kannalife the surviving entity and accounting acquirer. All references
that refer to (the “Company” or “we” or “us” or “our”) are Kannalife, unless otherwise
differentiated. Kannalife is a phytomedical/pharmaceutical company that specializes in the research and development of synthetic
molecules and therapeutic products derived from botanical sources, including the cannabis taxa.
Share
Exchange and Corporate Restructuring
On
July 25, 2018, the Company entered into a Share Exchange Agreement (the “Share Exchange Agreement”) with Kannalife
Sciences, Inc., a Delaware corporation (“Kannalife”), and certain stockholders of Kannalife (the “Kannalife
Stockholders”).
Pursuant
to the terms of the Share Exchange Agreement, the Company acquired approximately 99.7% of the issued and outstanding shares of
Kannalife by means of a share exchange with the Kannalife Stockholders in exchange for 60,324,141 newly issued shares of the common
stock of the Company (the “Share Exchange”), which increased the Company's issued and outstanding shares of common
stock to 69,854,141. As a result of the Share Exchange, Kannalife became a 99.7% owned subsidiary of the Company, which on a going
forward basis will result in consolidated financial reporting by the Company to include the results of Kannalife. The initial
closing of the Share Exchange occurred concurrently with entry into the Share Exchange Agreement (the “Initial Closing”).
After the Initial Closing and for a period of no more than 120 days thereafter, unless extended in the sole discretion of the
Company, the Company may issue, on the same terms and conditions as those contained in the Share Exchange Agreement, additional
shares of the common stock of the Company to Kannalife Stockholders that did not participate in the Initial Closing, provided
that each additional Kannalife Stockholder becomes a party to the transaction documents (the “Additional Closing”).
On August 30, 2019, the Company acquired the remaining non-controlling interest in Kannalife Sciences, Inc. (which represented
0.30% equity interest held by the original shareholders of Kannalife before the Share Exchange), bringing our ownership interest
in Kannalife from 99.7% to 100%.
The
Share Exchange has been accounted for as a reverse acquisition of the Company by Kannalife but in substance as a capital transaction,
rather than a business combination since the Company had nominal operations and assets prior to and as of the closing of the Share
Exchange. The former stockholders of Kannalife represent a significant constituency of the Company’s voting power immediately
following the Share Exchange, and Kannalife’s management has assumed operational, financial and governance control. The
transaction is deemed a reverse recapitalization and the accounting is similar to that resulting from a reverse acquisition, except
that no goodwill or other intangible assets should be recorded. For accounting purposes, Kannalife is treated as the surviving
entity and accounting acquirer although the Company was the legal acquirer. Accordingly, the Company’s historical financial
statements are those of Kannalife.
All
references to common stock, share and per share amounts have been retroactively restated to reflect the reverse recapitalization
as if the transaction had taken place as of the beginning of the earliest period presented.
Company
assets and liabilities pre-acquisition:
Cash
and cash equivalents
|
|
$
|
289,654
|
|
Note
receivable
|
|
|
142,500
|
|
Total
assets
|
|
$
|
432,154
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
20,504
|
|
Loan
payable - related party - long term
|
|
|
41,995
|
|
Convertible
notes payable - related party
|
|
|
500,000
|
|
Total
liabilities
|
|
|
562,499
|
|
Total
liabilities assumed
|
|
$
|
(130,345
|
)
|
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
September
30, 2019
|
(UNAUDITED)
|
The
following summarized unaudited consolidated pro forma information shows the results of operations of the Company had the reverse
acquisition occurred on January 1, 2018:
|
|
Pro
Forma (Unaudited)
Nine
Months Ended
September
30,
|
|
|
2018
|
Total
revenues
|
|
$
|
104,965
|
|
Net
income
|
|
$
|
2,028,921
|
|
Net
income per common share, basic
|
|
$
|
0.03
|
|
Net
income per common share, diluted
|
|
$
|
0.03
|
|
The
summarized unaudited consolidated pro forma results are not necessarily indicative of results which would have occurred if the
acquisition had been in effect for the period presented. Further, the summarized unaudited consolidated pro forma results are
not intended to be a projection of future results.
Name
Change
On
November 9, 2018, the Company filed an amendment to its certificate of incorporation with the Delaware Secretary of State that
changed its name to Kannalife, Inc. The Company concurrently submitted a request to FINRA for approval of the name change as well
as a ticker symbol change. The Company’s name change and ticker symbol change was reviewed and processed by FINRA and went
effective January 17, 2019.
Unaudited
Interim Financial Information
We
have prepared the accompanying consolidated financial statements pursuant to the rules and regulations of the Securities and Exchange
Commission (the “SEC”) for interim financial reporting. These consolidated financial statements are unaudited and,
in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary for a fair presentation
of our balance sheets, operating results, and cash flows for the periods presented. Operating results for the periods presented
are not necessarily indicative of the results that may be expected for 2019. Certain information and footnote disclosures normally
included in consolidated financial statements prepared in accordance with accounting principles generally accepted in the United
States (“GAAP”) have been omitted in accordance with the rules and regulations of the SEC. These consolidated financial
statements should be read in conjunction with our audited financial statements and accompanying notes for the year ended December
31, 2018, included in the Company’s Annual Report on Form 10-K filed with the SEC on April 9, 2019.
Note
2 - Summary of Significant Accounting Policies
The
significant accounting policies used in the preparation of the consolidated financial statements are as follows:
Basis
of Presentation
The
accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted
in the United States, or GAAP.
Principles
of Consolidation
The
Company evaluates the need to consolidate affiliates based on standards set forth in ASC 810 Consolidation (“ASC 810”).
The
consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, Kannalife Sciences, Inc.
All significant consolidated transactions and balances have been eliminated in consolidation. The operations of Kannalife Sciences,
Inc. are included in the consolidated financial statements from the date of the Share Exchange.
Significant
risks and uncertainties
The
Company’s operations are subject to a number of factors that can affect its operating results and financial condition. Such
factors include, but are not limited to: the results of clinical testing and trial activities of the Company’s products,
the Company’s ability to obtain regulatory approval to market its products, competition from products manufactured and sold
or being developed by other companies, the price of, and demand for, Company products, the Company’s ability to negotiate
favorable licensing or other manufacturing and marketing agreements for its products, and the Company’s ability to raise
capital.
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
SEPTEMBER
30, 2019
|
(UNAUDITED)
|
The
Company currently has no commercially approved products, and there can be no assurance that the Company’s research and development
will be successfully commercialized. Developing and commercializing a product requires significant time and capital, and is subject
to regulatory review and approval as well as competition from other biotechnology and pharmaceutical companies. The Company operates
in an environment of rapid change, and is dependent upon the continued services of its employees and consultants and obtaining
and protecting intellectual property.
Use
of Estimates
The
preparation of consolidated financial statements and accompanying notes in conformity with GAAP requires management to make estimates
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities
at the dates of the consolidated financial statements, and the reported amounts of revenues and expenses during the periods. Actual
results could differ from those estimates. Significant matters requiring the use of estimates and assumptions include, but are
not necessarily limited to, establishing the fair value of marketable securities and periodically evaluating marketable securities
for potential impairment, fair value of the Company’s stock, stock based compensation, and valuation allowance relating
to the Company’s deferred tax assets. Management believes that its estimates and assumptions are reasonable, based on information
that is available at the time they are made.
Concentration
Risks
During
the nine months ended September 30, 2019, the Company’s revenue had a concentration of 100% from one grant. The concentration
of the Company’s revenue creates a potential risk to future working capital in the event that the Company is not able to
continue receiving the grant revenue.
Joint
Venture
On
June 18, 2019, the Company, along with MJNA, which is a significant shareholder, and AXIM biotechnologies, whose president is
affiliated with a shareholder, entered into a joint venture agreement with an industrial hemp production farm for the supply of
certain industrial hemp CBD crops. The purpose of the joint venture is to share in the harvested yield of the hemp production
which the Company hopes to result in a steady supply of industrial hemp CBD for research and development purposes. The Company
accounts for its participation in the joint venture under the equity method of accounting.
Revenue
Recognition
The
FASB issued Accounting Standards Update (“ASU”) No. 2014-09, codified as ASC 606: Revenue from Contracts with Customers,
which provides a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers.
The Company adopted ASC 606 effective January 1, 2018, using modified retrospective basis and the cumulative effect was immaterial
to the consolidated financial statements.
Revenue
consists of research funding from the Company’s National Institute of Health (“NIH”) Grant. Grant revenue is
recognized when qualifying costs are incurred and there is reasonable assurance that the conditions of the award have been met
for collection. Proceeds received prior to the costs being incurred or the conditions of the award being met are recognized as
deferred revenue until the services are performed and the conditions of the award are met.
Stock
Based Compensation
The
Company accounts for share-based compensation in accordance with the fair value recognition provision of FASB ASC 718, Compensation
– Stock Compensation (“ASC 718”), prescribes accounting and reporting standards for all share-based payment
transactions in which employee services are acquired. Transactions include incurring liabilities, or issuing or offering to issue
shares, options, and other equity instruments such as employee stock ownership plans and stock appreciation rights. Share-based
payments to employees, including grants of employee stock options, are recognized as compensation expense in the consolidated
financial statements based on the estimated grant date fair values. That expense is recognized over the period during which an
employee is required to provide services in exchange for the award, known as the requisite service period (usually the vesting
period).
The
Company accounts for stock-based compensation issued to non-employees and consultants in accordance with the provisions of FASB
ASC 505, Equity–based Payments to Non-Employees (“ASC 505”). Measurement of share-based payment
transactions with non-employees is based on the fair value of whichever is more reliably measurable: (a) the goods or services
received; or (b) the equity instruments issued. The fair value of the share-based payment transaction is determined at the earlier
of performance commitment date or performance completion date.
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
SEPTEMBER
30, 2019
|
(UNAUDITED)
|
Net
Income (Loss) per Share
Basic
net loss per share is calculated by dividing the net loss for the period by the weighted-average number of common shares outstanding
during the period. Diluted net income per share is calculated by dividing income for the period by the weighted-average number
of common shares outstanding during the period, increased by potentially dilutive common shares ("dilutive securities")
that were outstanding during the period. Dilutive securities include stock options and warrants granted, convertible debt, and
convertible preferred stock.
The weighted average number of common stock
equivalents not included in diluted income per share, because the effects are anti-dilutive, was 4,013,729 for the three and
nine months ended September 30, 2019.
In accordance with ASC 260, “Earnings
Per Share”, the following table reconciles basic shares outstanding to fully diluted shares outstanding for the nine months
ended September 30, 2018:
|
|
September
30,
2018
|
Weighted average number of common shares outstanding
- Basic
|
|
|
62,585,619
|
|
Potentially dilutive
common stock equivalents
|
|
|
5,243,333
|
|
Weighted average number of common and
equivalent shares outstanding-Diluted
|
|
|
67,828,952
|
|
Common stock equivalents
are included in the diluted income per share calculation only when option exercise prices are lower than the average market price
of the common shares for the period presented. One hundred thousand (100,000) options were not included in the calculation
of net loss per common share for the three and nine months ended September 30, 2019 and 2018 because their effect would be anti-dilutive.
The
weighted average number of common stock equivalents not included in diluted income per share, because the effects are anti-dilutive,
was 5,343,333 for the three months ended September 30, 2018.
Research
and Development
In
accordance with FASB ASC 730, Research and Development (“ASC 730”) research and development (“R&D”)
costs are expensed when incurred. R&D costs include supplies, clinical trial and related clinical manufacturing costs, contract
and other outside service and facilities and overhead costs. Total R&D costs for the three months ended September 30, 2019,
and 2018, were $189,443 and $67,059, respectively. Total R&D costs for the nine months ended September 30, 2019, and 2018,
were $439,680 and $125,696, respectively.
Recently
Issued Authoritative Guidance
In
February 2016, the FASB issued ASU, Leases, which requires lessees to recognize most leases on their balance sheets as a right-of-use
asset with a corresponding lease liability. Lessor accounting under the standard is substantially unchanged. Additional qualitative
and quantitative disclosures are also required. The Company adopted the standard effective January 1, 2019, using the cumulative-effect
adjustment transition method, which applies the provisions of the standard at the effective date without adjusting the comparative
periods presented. The Company adopted the following practical expedients and elected the following accounting policies related
to this standard update:
|
•
|
The
option to not reassess prior conclusions related to the identification, classification and accounting for initial direct costs
for leases that commenced prior to January 1, 2019.
|
|
•
|
Short-term
lease accounting policy election allowing lessees to not recognize right-of-use assets and liabilities for leases with a term
of 12 months or less; and
|
|
•
|
The
option to not separate lease and non-lease components for certain equipment lease asset categories such as freight car, vehicles
and work equipment.
|
|
•
|
The
package of practical expedients applied to all of its leases, including (i) not reassessing whether any expired or existing
contracts are or contain leases, (ii) not reassessing the lease classification for any expired or existing leases, and (iii)
not reassessing initial direct costs for any existing leases.
|
The
Company has inventoried all leases where the Company is a lessee as of the initial date of application, and has examined other
contracts with suppliers, vendors, customers and other outside parties to identify whether such contracts contain an embedded
lease as defined under the new guidance. The Company’s lease population comprises of an office and lab, which is immaterial
to the consolidated financial statements.
As
a result of the above, the adoption of ASC 842 did not have a material effect on the financial statements. The Company will review
for the existence of embedded leases in future agreements.
In
June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718): Improvements to Nonemployee
Share-Based Payment Accounting.” These amendments expand the scope of Topic 718, Compensation - Stock Compensation (which
currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or
services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. The
ASU supersedes Subtopic 505-50, Equity - Equity-Based Payments to Non-Employees. This standard is effective for public companies
for annual periods beginning after December 15, 2018, including interim periods within those fiscal years, with early adoption
permitted as long as ASU 2014-09 has been adopted. The Company adopted the guidance on January 1, 2019. The adoption did not have
a material impact on our consolidated financial statements.
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
SEPTEMBER
30, 2019
|
(UNAUDITED)
|
Note
3 – Going Concern and Management’s Liquidity Plans
The
Company’s condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in our
accompanying condensed consolidated financial statements, the Company has had a net loss from operations of $1,824,987 and $557,948
for the nine months ended September 30, 2019, and 2018, respectively. The net cash used in operations were $2,000,012 and $762,947
for the nine months ended September 30, 2019, and 2018, respectively. Additionally, the Company had an accumulated deficit of
$7,764,635 at September 30, 2019, and has not yet established an adequate ongoing source of revenues sufficient to cover its operating
costs and to allow it to continue as a going concern.
As
of September 30, 2019, we had $120,550 in cash and cash equivalents. Additionally, we had $395,205 in marketable securities (available
for sale). Management plans to raise additional capital through the sale of our marketable securities. We expect that between
our existing cash, cash equivalents and marketable securities, we will be able to sufficiently fund our operations and capital
requirements for the next 12 months.
The
Company’s history of recurring losses, and uncertainties as to whether its operations will become profitable and generate
operating cash flows, raise substantial doubt about its ability to continue as a going concern. The accompanying condensed consolidated
financial statements do not include any adjustments related to the recoverability and classification of recorded asset amounts
and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note
4 – Fair Value Measurements
The
Company follows FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) to measure and disclose the
fair value of its financial instruments. ASC 820 establishes a framework for measuring fair value in U.S. GAAP and expands disclosures
about fair value measurements and establishes a fair value hierarchy which prioritizes the inputs to valuation techniques used
to measure fair value into three broad levels. The three levels of fair value hierarchy defined by ASC 820 are described below:
Level
1 Quoted market prices available in active markets for identical assets or liabilities as of the reporting date.
Level
2 Pricing inputs other than quoted prices in active markets included in Level 1, which are either directly or indirectly observable
as of the reporting date.
Level
3 Pricing inputs that are generally unobservable inputs and not corroborated by market data.
Financial
assets are considered Level 3 when their fair values are determined using pricing models, discounted cash flow methodologies or
similar techniques, and at least one significant model assumption or input is unobservable.
The
fair value hierarchy gives the highest priority to quoted prices (unadjusted) in active markets for identical assets or liabilities,
and the lowest priority to unobservable inputs. If the inputs used to measure the financial assets and liabilities fall within
more than one level described above, the categorization is based on the lowest level input that is significant to the fair value
measurement of the instrument.
The
carrying amounts reported in the Company’s consolidated financial statements for cash, accounts payable and accrued expenses
approximate their fair value because of the immediate or short-term nature of these financial instruments.
Transactions
involving related parties cannot be presumed to be carried out on an arm's-length basis, as the requisite conditions of competitive,
free-market dealings may not exist. Representations about transactions with related parties, if made, shall not imply that the
related party transactions were consummated on terms equivalent to those that prevail in arm's-length transactions unless such
representations can be substantiated.
On
March 7, 2014, Kannalife Sciences, Inc. (“Kannalife”) entered into an agreement with General Hemp LLC (“General
Hemp”) through its wholly-owned subsidiary, Kannaway LLC (“Kannaway”), for certain rights and agreements to
where each company would exchange 4.99% of each company’s equity, by way of a stock swap. As such, Kannalife would receive
a 4.99% equity stake in Kannaway, and Kannaway would receive 6,408,980 shares of restricted common stock of Kannalife.
On
or about April 2014, Kannalife delivered 6,408,980 of the aforementioned Kannalife restricted common stock to General Hemp on
behalf of Kannaway, and such shares were made to Kannaway as the beneficiary. The Company recorded the fair market value of the
common stock at $256,359 or $0.04 per share. The Company valued the shares based upon other transactions of the Company's common
stock around the same time frame. The Company accounted for the transaction as a cost investment.
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
SEPTEMBER
30, 2019
|
(UNAUDITED)
|
On
or about December 2015, Medical Marijuana, Inc. (“MJNA”) purchased Kannaway from General Hemp for which due to a dispute
between the Company and General Hemp, the Company wasn't provided any of the consideration. On June 1, 2018, the Company received
41,583,333 shares of MJNA common stock pursuant to a settlement agreement effective July 15, 2017. MJNA is a significant shareholder
of the Company, and their Chief Executive Officer is also on the Company's Board of Directors.
The
following table presents assets that are measured and recognized at fair value as of September 30, 2019, on a recurring basis:
|
|
September
30, 2019
|
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
Carrying
Value
|
Marketable
securities – Medical Marijuana, Inc.
|
|
$
|
395,205
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
395,205
|
|
Note
5 – Accrued Payroll and Payroll Taxes
Accrued
payroll and payroll taxes at September 30, 2019, and December 31, 2018, consisted of the following:
|
|
2019
|
|
2018
|
Payroll
|
|
$
|
—
|
|
|
$
|
—
|
|
Payroll
taxes
|
|
|
247,074
|
|
|
|
246,067
|
|
Totals
|
|
$
|
247,074
|
|
|
$
|
246,067
|
|
As
of September 30, 2019, and December 31, 2018, the Company had accrued payroll taxes in connection with salaries paid and accrued
to four officers of the Company.
In
July of 2018, the Company entered into a new employment agreement with its CEO. The initial term of the agreement was for two
years, and the agreement automatically renews for successive one year terms.
In
July of 2018, the Company entered into new employment agreements with three officers. The initial term of these agreements were
for one year, and these agreements automatically renew for successive six month terms.
See
Note 14 for discussion of accrued payroll converted into common stock.
Note
6 – Notes Payable
During
the year ended December 31, 2017, the Company borrowed $367,500 and issued a promissory note with a maturity date of October 18,
2017. This note was later amended to extend the maturity to April 18, 2019. During the year ended December 31, 2018, the Company
borrowed an additional $352,500 and issued a promissory note with a maturity date of April 18, 2019. These loans incurred 3% interest
per annum. On June 29, 2018, these notes were amended to extend the maturity date to July 1, 2020, and the interest rate was changed
to 8% per annum. All accrued interest prior to the amendment date was forgiven. Accrued interest related to these notes is $36,690
and $24,460 as of September 30, 2019, and December 31, 2018, respectively.
Upon
the consolidation of the Company and Kannalife, $100,000 of the above-mentioned borrowings was eliminated due to it being an intercompany
transaction. The total, above mentioned, notes payable due was $620,000 as of September 30, 2019, and December 31, 2018.
Total
interest expense on notes payable amounted to $12,230 and $4,441 for the three months ended September 30, 2019, and 2018, respectively.
Total interest expense on notes payable amounted to $36,690 and $12,591 for the nine months ended September 30, 2019, and 2018,
respectively.
NOTE
7 – NOTES PAYABLE – RELATED PARTY
Prior
to the share exchange agreement, the Company borrowed $25,822 and issued a promissory note with a maturity date of March 31, 2020.
Additionally, the note holder advan c ed the Company $16,270 for working capi t al. The loans represent working capital
advances from shareholders, bear interest at 0.5%, and grant a security interest in the Company’s assets as collateral.
In March 2019, this note was amended and is now non-interest bearing. Accrued interest related to this note is $226 as of September
30, 2019, and December 31, 2018.
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
SEPTEMBER
30, 2019
|
(UNAUDITED)
|
NOTE
8 – CONVERTIBLE NOTES PAYABLE
On
May 15, 2015, the Company borrowed $35,000 and issued a convertible promissory note with a maturity date of April 30, 2016. The
loan incurs 10% interest per annum. This note is convertible to the Company’s common stock at a price of $1.00 per share.
In addition, the Company issued 17,500 warrants to purchase common stock with an exercise price of $1.50 per share and a term
of two years. These warrants were valued at $7,525 on a relative fair value basis and were recorded as a debt discount to be amortized
over the term. See below for discussion of settlement of liability through share exchange.
On
August 13, 2015, the Company borrowed $50,000 and issued a convertible promissory note with a maturity date of August 12, 2016.
The loan incurs 10% interest per annum and increases to 17% per annum in the event of a default. This note is convertible to the
Company’s common stock at a price of $1.00 per share. In addition, the Company issued 25,000 warrants to purchase common
stock with an exercise price of $1.50 per share and a term of two years. These warrants were valued at $10,751 on a relative fair
value basis and were recorded as a debt discount to be amortized over the term. See below for discussion of settlement of liability
through share exchange.
On
November 25, 2015, the Company borrowed $100,000 and issued a convertible promissory note with a maturity date of November 24,
2016. The loan incurs 10% interest per annum and increases to 14% per annum in the event of a default. This note is convertible
to the Company’s common stock at a price of $1.00 per share. In addition, the Company issued 50,000 warrants to purchase
common stock with an exercise price of $1.50 per share and a term of two years. These warrants were valued at $21,500 on a relative
fair value basis and were recorded as a debt discount to be amortized over the term. See below for discussion of settlement of
liability through share exchange.
Prior
to the Share Exchange, the Company issued a convertible note to an investor, face value of $500,000, in exchange for $500,000
in cash. The note is unsecured, bears interest at the rate of 3% per annum and matures on February 16, 2030. The note is convertible
into common stock of the Company at $0.10 per share at any time at the option of the holder, subject to a 4.9% blocking provision
which prohibits the holder from converting into common stock of the Company if such conversion results in the holder owning greater
than 4.9% of the outstanding common stock of the Company after giving effect to the conversion. See below for discussion of settlement
of liability through share exchange. On September 26, 2019, the Company issued 1,500,000 shares of common stock for the conversion
of $123,627 convertible notes payable and $26,373 of related accrued interest. The outstanding balance on this convertible note
after the conversion is $376,373.
On
January 3, 2018, prior to the Share Exchange, the Company issued 563,063 shares of common stock (on a post-Share Exchange basis)
for the conversion of $236,104 convertible notes payable and related accrued interest.
The
Company determined that the transaction should be recorded at fair value due to the difference between the conversion price and
the price per the agreements.
NOTE
9 – CONVERTIBLE NOTES PAYABLE - RELATED PARTY
On
December 27, 2014, the Company borrowed $150,000 from a stockholder and issued a convertible promissory note with a maturity date
of December 31, 2015. The loan incurs 10% interest per annum and increases to 17% per annum in the event of a default. This note
is convertible to the Company’s common stock at a price of $1.00 per share. See below for discussion of settlement of liability
through share exchange.
During
the year ended December 31, 2015, the Company borrowed $120,000 from the Chief Executive Officer and issued convertible promissory
notes that are due on demand. The loans incur 10% interest per annum. These notes are convertible to the Company’s common
stock at a price of $1.00 per share.
On
November 20, 2015, the Company borrowed $5,000 from the Chief Executive Officer and issued a convertible promissory note that
is due on demand. The loan incurs 10% interest per annum. This note is convertible to the Company’s common stock at a price
of $0.40 per share.
During
the year ended December 31, 2016, the Company borrowed $15,000 from the Chief Executive Officer and issued convertible promissory
notes that are due on demand. The loans incur 10% interest per annum. These notes are convertible to the Company’s common
stock at a price of $0.40 per share.
During
the year ended December 31, 2016, the Company borrowed $10,000 from the Chief Executive Officer and issued convertible promissory
notes with a maturity date of December 31, 2016. The loans incur 10% interest per annum and increases to 17% per annum in the
event of a default. These notes are convertible to the Company’s common stock at a price of $0.40 per share.
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
SEPTEMBER
30, 2019
|
(UNAUDITED)
|
During
the year ended December 31, 2017, the Company borrowed $20,000 from the Chief Executive Officer and issued convertible promissory
notes with a maturity date of December 31, 2017. The loans incur 10% interest per annum and increases to 17% per annum in the
event of a default. These notes are convertible to the Company’s common stock at a price of $0.40 per share.
During
the year ended December 31, 2017, the Company repaid $23,828 of principal and $16,522 of accrued interest towards the outstanding
notes payable.
On
January 3, 2018, prior to the Share Exchange, the Company converted these notes into 973,946 shares of common stock (on a post-Share
Exchange basis) for the conversion of $356,176 convertible notes payable and related accrued interest. The difference of the $58,300
balance of the notes and the fair value of the shares issued was recorded as a loss on conversion of debt.
The
Company determined that the transaction should be recorded at fair value due to the difference between the conversion price and
the price per the agreements.
Note
10 – Capital lease obligations
In
September 2019, the Company entered into a lease agreement with Thermo Fisher Scientific to acquire equipment with 48 monthly
payments of $941, payable through September 1, 2023, with an effective interest rate of 12% per annum. The outstanding balance
of this capital lease was $35,886 as of September 30, 2019.
Note
11 – Commitments and Contingencies
Legal
Proceedings
From
time to time, the Company may get involved in legal proceedings arising in the ordinary course of business. Other than as set
forth in “Legal Proceedings” in Part II below, the Company believes there is no litigation pending that could have,
individually or in the aggregate, a material adverse effect on its results of operations or financial condition.
Occupancy
Leases
On
April 1, 2014, the Company entered into a month-to-month lease arrangement for office space. The monthly rent payment is $5,400,
and the security deposit is $15,000.
On
September 15, 2015, the Company entered into a one year lease arrangement for office space. The Company has amended this lease
to extend the term through September 30, 2019. The monthly rent payment is $249, and the security deposit is $183.
On
February 1, 2018, the Company entered into a month-to-month lease arrangement for laboratory space. The monthly rent payment is
$500.
On
July 1, 2018, the Company entered into a one year lease arrangement for office space, with the option to renew the lease annually.
The Company has amended this lease to extend the term through July 1, 2020. On September 1, 2018, the Company subleased this office
space to a third party. The Sublessee will pay 100% of the rent for months September through November 2018, and will pay 50% of
the rent until expiration of the lease. The monthly rent payment is $2,723, and the security deposit is $2,121.
Royalty
Agreements
On
June 12, 2012, the Company entered into a Patent License Agreement (the “License Agreement”) with agencies of the
United States Public Health Services within the Department of Health and Human Services (“PHS”). Under the License
Agreement, PHS granted the Company an exclusive right to use and develop certain patents relating to Cannabinoids as Antioxidants
and Neuroprotectants (the “License”). In exchange for the License, the Company has agreed to the following payments:
|
•
|
a
$30,000 license issue royalty within 90 days of the execution of the agreement
|
|
•
|
a
minimum annual royalty in the amount of $10,000
|
|
•
|
3%
royalty on net sales from any sales of licensed products or practice of licensed processes
|
|
•
|
milestone
payment of $40,000 upon initiation of first Phase I clinical trial
|
|
•
|
milestone
payment of $100,000 upon initiation of first Phase II clinical trial
|
|
•
|
milestone
payment of $250,000 upon completion of first Phase III clinical trial
|
|
•
|
milestone
payment of $500,000 upon first marketing approval by FDA
|
|
•
|
a
sublicensing royalty of 12% on the fair market value of any consideration received for granting each sublicense
|
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
SEPTEMBER
30, 2019
|
(UNAUDITED)
|
On
December 31, 2014, the Company executed five exclusive pharmaceutical license agreements with the Company’s CEO, the Company’s
CMO, three advisory board members of the Company, and an unrelated third party. These agreements provide the Company the worldwide
exclusive rights to certain drug technologies and methods (and systems) for collection, processing and use of data for the dispensing
of phyto-medical and botanically derived materials for consumption. The license agreements granted the Company the rights to develop,
market, make, use, and sell certain drug formulations, which are applied to humans through the use of certain drug technology.
In return for these exclusive rights from the inventors, the Company has agreed to compensate the inventors under the agreements
with royalties ranging from 1.5% to 2.5% on all net sales by the Company of licensed products covered by a valid claim of a patent
or patent application of the inventor patent rights. Additionally, the Company retains the rights to sublicense the drug formulations,
and upon such sublicense, shall pay the inventors from 1.5% up to 5% of all royalties and sublicense fees paid to the Company
on account of sublicenses under the inventor patent rights and inventor technology rights, less all appropriate expenses associated
with such sublicenses incurred by the Company. However, if the inventor supplies licensed products to sublicensees of the Company
pursuant to such sublicenses, the inventor shall supply such licensed products at its cost. Prior to the Share Exchange, this
royalty agreement was terminated.
Note
12 – Related Party Transactions
The
Company’s Chief Executive Officer shares the use of the leased office space for personal living quarters.
From
time to time, the Company sends money to Golden Gate Capital (“GGCP”), a company owned by our CEO, for the advances
of certain expenses and to be deposited into the bank account of Kannalife. Due to the timing of the funds transferred and expenses
incurred, at times, there remains a balance due from GGCP. As of September 30, 2019, $0 is due from GGCP.
See
Notes 7, 9 and 14 for additional related party transactions.
Note
13 – Marketable Security
On
June 1, 2018, the Company received 41,583,333 shares of common stock of Medical Marijuana, Inc. (“MJNA”) pursuant
to a settlement agreement. In 2014, the Company entered into a revenue sharing agreement with Kannaway LLC, whereas, among the
considerations and obligations, the parties agreed to a share exchange, whereby the Company issued 6,408,980 shares of its common
stock in exchange for 4.99% ownership of Kannaway. A significant shareholder of the Company owned the remaining ownership of Kannaway
LLC. Subsequently, Kannaway was sold by its parent company to MJNA for 833,333,333 shares of MJNA common stock. The settlement
agreement called for the release of all obligations in exchange for the issuance of 41,583,333 shares of common stock in MJNA
to the Company.
The
investment in MJNA has been recorded as an investment in non-consolidated entities, and is revalued every quarter with fluctuations
in fair value recorded to earnings. The fair value of the investment is based on the closing price of the shares reported on the
principal stock exchange on which they are traded. At September 30, 2019, the Company held 11,939,732 shares of MJNA which traded
at a closing price of $0.0331, or value of $395,205. In the following table, gains/losses on equity securities sold in the period
reflect the difference between proceeds from sales and the fair value of the equity security sold at the beginning of the period
or the purchase date, if later. See Note 4 for additional information.
The
following table summarizes the gains and losses recognized during the three month period ending September 30, 2019:
Net
gains and (losses) recognized during the period on equity securities
|
|
$
|
(301,66 1
|
)
|
Less:
Net gains and (losses) recognized during the period on equity securities sold during the period
|
|
|
55,702
|
|
Unrealized
gains and (losses) recognized during the period on equity securities still held at the reporting date
|
|
$
|
(245,95 9
|
)
|
The
following table summarizes the gains and losses recognized during the nine month period ending September 30, 2019:
Net gains and (losses) recognized during the period on equity securities
|
|
$
|
(844,671
|
)
|
Less: Net gains and (losses) recognized during the period on equity securities
sold during the period
|
|
|
146,713
|
|
Unrealized gains and (losses) recognized during the period on equity
securities still held at the reporting date
|
|
$
|
(697,958
|
)
|
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
SEPTEMBER
30, 2019
|
(UNAUDITED)
|
Note
14 – Stockholders’ Equity
Series
A Preferred Stock – Kannalife Pre-Share Exchange
In
July 2018, prior to the Share Exchange, the Company converted 4,893,510 shares of preferred stock into 4,893,510 shares of common
stock (on a post-Share Exchange basis).
Series
A Preferred Stock
Effective
May 3, 2018, the Company’s Board of Directors authorized and designated 75 shares of the Company’s Preferred Stock
as Series A Preferred Stock. Each share of the Series A Preferred Stock is entitled to a liquidation preference of $1,000 per
share, and is convertible into 1,000 shares of the Company’s common stock. The holders of a majority of the Series A Preferred
Stock are entitled to elect up to four (4) directors to the Company’s board of directors, and have preferential rights in
regard to the election of Series A directors. In all other voting matters, the holders of Series A Preferred Stock are entitled
to cast 1,000 votes per share.
In
July 2018, the Company issued 75 shares of Series A Preferred Stock to Naturewell, Inc., an entity controlled by the former CEO
of TYG Solutions, Inc., in exchange for $75,000.
Series
B Preferred Stock
Effective
May 3, 2018, the Company’s Board of Directors authorized and designated 75 shares of the Company’s Preferred Stock
as Series B Preferred Stock. Each share of the Series B Preferred Stock is entitled to a liquidation preference of $1,000 per
share, and is convertible into 1,000 shares of the Company’s common stock. The holders of a majority of the Series B Preferred
Stock are entitled to elect up to three (3) directors to the Company’s board of directors, and have preferential rights
in regard to the election of Series B directors. In all other voting matters, the holders of Series B Preferred Stock are entitled
to cast 1,000 votes per share.
In
July 2018, the Company issued 75 shares of Series B Preferred Stock to our CEO in exchange for $75,000.
Common
Stock
The
Company is authorized to issue 200,000,000 shares of common stock, par value $0.0001. All common stock shares have equal voting
rights, are non-assessable and have one vote per share. Voting rights are not cumulative, and therefore, the holders of more than
50% of the common stock could, if they choose to do so, elect all of the directors of the Company, subject to the rights of the
preferred stockholders.
On
January 3, 2018, prior to the Share Exchange, the Company issued 5,505,200 shares of common stock (on a post-Share Exchange basis)
to four officers, valued at $2,342,813, for the conversion of accrued salaries. The difference of $469,997 between the balance
of accrued salaries and the fair value of the shares issued was recorded as a capital contribution recorded within additional
paid-in capital. The transaction was viewed as being on behalf of the Company in connection with the pending share exchange transaction.
In
July 2018, the Company issued 2,030,000 shares of common stock to an entity commonly controlled by the $500,000 convertible note
holder in exchange for $203,000.
In
August 2019, the Company issued 950,000 shares of common stock at the price of $0.10 per share to board members for general compensation
for services rendered.
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
SEPTEMBER
30, 2019
|
(UNAUDITED)
|
In
August 2019, the Company issued 500,000 shares of common stock at the price of $0.10 per share to an investor relations consultant
for services rendered.
In
August 2019, the Company issued 150,000 shares of common stock at the price of $0.10 per share to a product development consultant
for services rendered.
In
August 2019, the Company issued 400,000 shares of common stock at the price of $0.10 per share to a marketing consultant for services
rendered.
In
August 2019, the Company issued 700,000 shares of common stock at the price of $0.10 per share to consultants for
general compensation for services rendered. This compensation is included in research and development on the condensed
consolidated statement of operations.
On
August 30, 2019, the Company issued 171,000 shares of common stock at a price of $0.07 per share to acquire the remaining non-controlling
interest in Kannalife Sciences, Inc., bringing our ownership interest from 99.7% to 100%.
On
September 26, 2019, the Company issued 1,500,000 shares of common stock at a price of $0.10 per share for the conversion of $123,627
convertible notes payable and $26,373 of related accrued interest.
As
of September 30, 2019, and December 31, 2018, there were 74,225,141 and 69,854,141 shares of common stock issued and outstanding,
respectively.
See
Note 8 and 9 for discussion of the conversion of notes payable and accrued interest into common stock.
The
Company determined fair value of its shares of common and preferred stock based on the price at which the Company was selling
its shares of common and preferred stock to third party investors and based on the conversion price of convertible debt.
Stock Based Compensation
The following table shows share-based compensation
expense included in the condensed consolidated statement of operations for the three and nine month periods ended September 30,
2019 and 2018:
|
|
Three Months Ended September 30,
|
|
Nine Months Ended September 30,
|
|
|
2019
|
|
2018
|
|
2019
|
|
2018
|
Research and Development
|
|
$
|
90,000
|
|
|
$
|
—
|
|
|
$
|
90,000
|
|
|
$
|
—
|
|
General and Administrative
|
|
$
|
180,840
|
|
|
$
|
2,519
|
|
|
$
|
185,878
|
|
|
$
|
7,558
|
|
Stock
Options
On
September 1, 2017, the Company entered into an agreement for consulting services. As compensation, the Company issued a stock
option to purchase 100,000 shares of common stock at a price of $2.00 per share and is exercisable for five years. The stock option
vests in equal monthly installments over 24 months. These options were valued at $20,154 using a Black-Scholes Options Pricing
Model.
Note
15 – Subsequent Events
From
October 1, 2019 through the issuance of these condensed consolidated financial statements, the Company sold an additional 6,839,732
shares of MJNA stock. The net proceeds from these sales were $165,276.
The
following table summarizes the gains and losses recognized on marketable securities from October 1, 2019 through the issuance
of these condensed consolidated financial statements:
Net
gains and losses recognized during the period on equity securities
|
|
$
|
(76,929
|
)
|
Less:
Net gains and losses recognized during the period on equity securities sold during the period
|
|
|
61,119
|
|
Unrealized
gains and losses recognized during the period on equity securities still held at the reporting date
|
|
$
|
(15,810
|
)
|
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this quarterly report. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors
that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed
in the section titled “Risk Factors” in our Registration Statement on Form S-1, as amended, and Form 10-K filed with
the Securities and Exchange Commission on August 8, 2019, and April 9, 2019, respectively.
Forward-Looking
Statements
This
quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact contained in this quarterly
report, including statements regarding our future operating results, financial position and cash flows, our business strategy
and plans and our objectives for future operations, are forward-looking statements. These statements involve known and unknown
risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or implied by the forward-looking statements. This quarterly
report on Form 10-Q also contains estimates and other statistical data made by independent parties and by us relating to market
size and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned
not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and
the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk. In
some cases, you can identify forward-looking statements by terms such as “may,” “will,” “would,”
“could,” “should,” “expect,” “plan,” “anticipate,” “could,”
“intend,” “target,” “project,” “contemplate,” “believe,” “estimate,”
“predict,” “potential” or “continue” or the negative of these terms or other similar expressions.
The forward-looking statements in this quarterly report are only predictions. We have based these forward-looking statements largely
on our current expectations and projections about future events and financial trends that we believe may affect our financial
condition, operating results, business strategy, short-term and long-term business operations and objectives. These forward looking
statements speak only as of the date of this quarterly report and are subject to a number of risks, uncertainties and assumptions.
The events and circumstances reflected in our forward-looking statements may not be achieved or occur, and actual results could
differ materially from those projected in the forward-looking statements. Moreover, we operate in a very competitive and rapidly
changing environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to
predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise
any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances
or otherwise.
Business
Developments
The
Company was originally incorporated in the State of Delaware on March 25, 2013, under the name of TYG Solutions Corp. Our original
business plan was to develop iPhone and Android smartphone apps for companies who need an app for their internal and external
operations. We subsequently expanded our operations to offering corporate website design services.
On
July 25, 2018, the Company entered into a Share Exchange Agreement with Kannalife Sciences, Inc., a Delaware corporation (“Kannalife”),
and certain stockholders of Kannalife (the “Kannalife Stockholders”). Pursuant to the terms of the Share Exchange
Agreement, the Company acquired nearly all of the issued and outstanding shares of Kannalife by means of a share exchange with
the Kannalife Stockholders in exchange for newly issued shares of common stock of the Company (the “Share Exchange”).
As a result of the Share Exchange, Kannalife became a wholly-owned subsidiary of the Company. The business operations of the Company
shall continue uninterrupted, and, by virtue of the Share Exchange, the Company will acquire the business of Kannalife including
all of its assets. The Share Exchange was accounted for as a reverse acquisition and change in reporting entity, whereby Kannalife
was the accounting acquirer.
Kannalife
was incorporated in the State of Delaware on August 11, 2010. Kannalife is a developmental stage phyto-medical/pharmaceutical
and drug discovery company that specializes in the research, development of cannabinoid and cannabinoid-based therapeutic products
derived from synthetic and botanical sources, including the Cannabis “taxa” (the word “taxa”
is the plural of “taxon” which defines a group of one or more populations of an organism or organisms to form a unit.)
On
November 9, 2018, the Company filed an amendment to its certificate of incorporation with the Delaware Secretary of State to change
its name to Kannalife, Inc. The Company concurrently submitted a request to FINRA for approval of the name change as well as a
ticker symbol change. The Company’s name change and ticker symbol change was reviewed and processed by FINRA and went effective
January 17, 2019.
Business
Overview
As
a result of the Share Exchange, the Company’s core businesses are comprised of the following:
|
•
|
A
drug development company focused on the research and development (R&D) of synthetic and phyto-medical products from:
|
|
o
|
naturally
recurring sources, including but not limited to cannabis, hemp, and other similar species of plantae;
|
|
o
|
semi-synthetic
sources; and
|
|
o
|
synthetic
and bio-synthetic sources.
|
|
•
|
Drug
discovery platform to evaluate and potentially treat neurological and oxidative stress related disorders such as Overt Hepatic
Encephalopathy (“OHE”), Chronic Traumatic Encephalopathy (“CTE”) and Chemotherapy Induced Peripheral
Neuropathy (“CIPN ”) with high quality assured, quality controlled cGMP pharmaceutical grade semi-synthetic and
synthetic cannabinoids, cannabidiol (“CBD”), and cannabidiol-like molecules.
|
|
•
|
Topical
skin care pre-clinical program designed to some of its patented, proprietary cannabidiol-derived new chemical entities (“NCEs”),
for use as topical solutions, ointments, and creams for disorders such as diabetic neuropathies, diabetic ulcers, and for
use as an anti-pruritic. Anti-pruritics are known as anti-itch drugs and medications that inhibit the itching often associated
with a variety of disorders and diseases.
|
The
Company is primarily involved in the research and development of novel therapeutic agents for use in and as U.S. Food and Drug
Administration (“FDA”) approved ethical pharmaceuticals (available by doctor prescription); FDA Monograph topical
solutions; and Personal Care Products Council (“PCPC”) / International Nomenclature of Cosmetic Ingredients (“INCI”).
The primary focus of the Company’s research and development revolves around its patented, proprietary cannabidiol-derived
new chemical entities and cannabidiol. In preclinical testing, certain molecules under U.S. Patent 9,611,213 were screened for
neuroprotection, and may have the potential mechanism of action for reducing inflammation and neuropathic pain. These molecules
indicate that they are more soluble than cannabidiol, also deemed a neuroprotectant with potential anti-inflammatory properties.
A molecule that is potentially more water soluble than cannabidiol in this regard may be good candidate(s) for use in topical
applications.
The
Company has been the only licensee from the National Institutes of Health (“NIH”) for the licensed use of the U.S.
Government’s patent 6,630,507 – “Cannabinoids as Antioxidants and Neuroprotectants” (the “’507
Patent”) in the disease indications of hepatic encephalopathy (“HE”) and Chronic Traumatic Encephalopathy (“CTE”).
Having been the only licensee to the ‘507 Patent has given the Company an early start in the research and development of
cannabinoid therapeutics within this emerging market. The Company is the only company that has had use of the ‘507 Patent
and corresponding licenses from NIH-OTT.
The
jurisdictions in which the ‘507 Patent is valid are: the U.S., the U.K., Ireland,
the E.U., and Australia. The patent life in these jurisdictions are good until April 21, 2019.
The
Company believes that these licenses with the NIH have given the Company, through the years, the preclinical lead time to evaluate
both HE and CTE without stress of competition. The Company also believes that such advances in preclinical have led to a drug
development program regarding cannabidiol based therapeutics that focuses on neurodegenerative and oxidative stress related diseases
described in the ‘507 Patent, and also the development of the Company’s own intellectual property underlying U.S.
Patents 9,611,213 and 10,004,722.
Furthermore,
it is on the Company’s belief and knowledge that while the U.S. Government patent 6,630,507 expired on April 21, 2019, there
may be additional opportunities related to the original licensing of the ‘507 Patent in which the Company may engage with
the NIH and certain collaborators of the aforementioned patent to enter into a Cooperative Research and Development Agreement
(“CRADA”) with the NIH for one or more disease indications underlying the ‘507 Patent, including but not limited
to HE and CTE. Moreover, the weight of the Company’s future success regarding its drug development program in relation to
cannabidiol based therapeutics is not centered on the ‘507 Patent, but rather its own intellectual property underlying U.S.
Patents 9,611,213 and 10,004,722.
We
intend to study KLS-13019 in patients with chemotherapy induced neuropathic pain, and we intend to study KLS-13023 in patients
with mild traumatic brain injury.
We
believe these product candidates will provide new treatment options for patients, as well as additional treatment options for
patients not currently receiving adequate relief from current treatment regimens.
We
are still conducting pre-clinical studies and have not yet commenced our clinical program or tested KLS-13019 or KLS-13023 in
humans. For KLS-13019, we plan to conduct Phase 1, and possibly Phase 2, clinical trials in Australia, subject to applicable regulatory
approval. We plan to conduct our Phase 1 clinical trials for KLS-13023 in Australia, subject to applicable regulatory approval.
We plan to submit New Drug Applications (NDAs) for KLS-13019 and KLS-13023 to the FDA upon completion of all requisite clinical
trials. We expect to initiate clinical trials for KLS-13019 and KLS-13023 in the second half of 2019.
We
plan to conduct our Phase 1, and possibly Phase 2, clinical trials for KLS-13019 in Australia, subject to applicable regulatory
approval, and do not expect at this time to file an investigational new drug application, or IND, with the U.S. Food and Drug
Administration, or the FDA, prior to the commencement of those clinical trials. We must file an IND with the FDA and receive approval
from the U.S. Drug Enforcement Agency, or DEA, prior to commencement of any clinical trials in the United States.
We
plan to seek orphan drug designation for KLS-13023 in Overt Hepatic Encephalopathy.
Cannabinoids
are a class of molecules derived from Cannabis plants. The two primary cannabinoids contained in Cannabis are cannabidiol, or
CBD, and D9-tetrahydrocannabinol, or THC. Clinical and preclinical data suggest that CBD has positive effects on treating refractory
epilepsy, FXS and arthritis, and THC has positive effects on treating pain. Interest in cannabinoid therapeutics has increased
significantly over the past several years as preclinical and clinical data has emerged highlighting the potential efficacy and
safety benefits of cannabinoid therapeutics. The cannabinoid therapeutics market is expected to grow significantly due to the
potential benefits these products may provide over existing therapies. In addition, KLS-13019 and KLS-13023 may potentially offer
first-line therapies to patients suffering from chemotherapy induced peripheral neuropathy and mild traumatic brain injury, respectively.
KLS-13023
is a target drug candidate that includes a synthetic CBD formulated in a gel capsule designed for potential use in humans. The
formulation of this product is proprietary and currently held as a trade secret of the Company. CBD is the primary non-psychoactive
component of Cannabis. KLS-13023 has undergone a manufacturing feasibility study to improve some of the limitations associated
with CBD, including but not limited to CBD’s low bioavailability and limited drug like properties and improvement of the
delivery of CBD through the first pass in the gut and into the circulatory system.
In
addition to KLS-13023, the Company has developed a proprietary patented new chemical entity (NCE), KLS-13019. This NCE is a cannabidiol
derived molecule which has undergone pre-clinical studies for the treatment of overt hepatic encephalopathy and chemotherapy induced
peripheral neuropathy.
In
pre-clinical studies, KLS-13019's advanced formulation is designed to improve on some of the limitations associated with CBD,
including but not limited to CBD’s low bioavailability and limited drug like properties.
These
pre-clinical studies suggest increased bioavailability, consistent plasma levels and the avoidance of first-pass liver metabolism.
In addition, an in vitro study performed by us demonstrated that CBD is degraded to THC in an acidic environment such as
the stomach.
The
Company has filed for orphan designation with the U.S. Food and Drug Administration (“FDA”) for the use of CBD in
the treatment of overt hepatic encephalopathy (“OHE”). The Company has received notice from the FDA that its current
application qualifies for a patient population of less than 200,000, but is currently in abeyance to resolve clinical use of CBD
in this sub-set of hepatic encephalopathy. The Company has retained Coté Orphan to continue the process of responding to
the FDA’s abeyance letter. On November 5, 2018, the FDA has granted the Company a one year extension to respond to the abeyance
letter until November 30, 2019.
KLS-13023
is a proprietary formulation containing CBD that intends to enable more effective delivery of CBD via a gel capsule. The use of
CBD in this form remains patent-protected via the ‘507 Patent through 2019. In addition, we expect that KLS-13023 will be
classified by the FDA as a new chemical entity, or NCE. In our preclinical animal studies, KLS-13023 demonstrated effective intervention
of neurodegeneration in the OHE disease state. Our key development programs and expected timelines for the development of KLS-13019
and KLS-13023 are shown in the table below:
Clinical
Timelines
Product
Candidate
|
|
Target
Indication
|
|
Delivery
Method
|
|
Current
Development
Status
|
|
Expected
Next Steps
|
KLS-13019
|
|
Chemotherapy
Induced
|
|
Oral
Gel Capsule
|
|
Preclinical
|
|
2Q20:
Initiate Phase 1
|
|
|
Peripheral
Neuropathy
|
|
|
|
|
|
|
|
|
Mild
Traumatic Brain Injury
|
|
Oral
Gel Capsule
|
|
Preclinical
|
|
2Q21:
Initiate Phase 1
|
KLS-13023
|
|
Overt
Hepatic Encephalopathy
|
|
Oral
Gel Capsule
|
|
Preclinical
|
|
4Q20:
Initiate Phase 1
|
|
|
Mild
Traumatic Brain Injury
|
|
Oral
Gel Capsule
|
|
Preclinical
|
|
2Q21:
Initiate Phase 1
|
With
respect to certain other proprietary compounds underlying U.S. Patent 9,611,213, the Company plans on pursuing topical solutions
as potential relief creams and/or ointments for neuropathic pain, anti-inflammation, anti-pruritic and skin ulcers. The Company
is considering commercialization routes that include, but are not limited to, filing and FDA Monograph and/or pursing a path to
the marketplace through INCI certification and registration with the PCPC. In preclinical testing, certain molecules under U.S.
Patent 9,611,213 were screened for neuroprotection, and may have the potential mechanism of action for reducing inflammation and
neuropathic pain. These molecules indicate that they are more soluble than cannabidiol, also deemed a neuroprotectant with potential
anti-inflammatory properties. A molecule that is potentially more water soluble than cannabidiol in this regard may be good candidate(s)
for use in topical applications.
The
Company believes it has the sufficient capital to proceed forth with a Phase 1 human safety trial for the treatment of Chemotherapy
Induced Peripheral Neuropathy. All preclinical work in this indication, including animal toxicity studies, are expected to be
completed before the end of 2019. The Company plans on entering into clinical trials sometime in the first quarter 2020. Additionally,
the Company believes it has the sufficient capital to proceed forth with a Phase 1 human safety trial for the treatment of Overt
Hepatic Encephalopathy. All preclinical work in this indication, including animal toxicity studies, are expected to be completed
before the end of 2019.
The
Company intends on seeking additional capital to proceed forth with its business plan regarding additional drug pipeline opportunities.
Our
net losses were $1,086,497 and $2,719,412 for the three and nine months ended September 30, 2019, respectively. We expect to incur
losses for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory
approvals for, our product candidates. Because of the numerous risks and uncertainties associated with product development, we
are unable to predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability.
Financial
Operations Overview
The
following discussion sets forth certain components of our statements of operations as well as factors that impact those items.
Revenues
Our
revenues consist of state and federal research grants and fees received from research services for third-party product development.
These revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered,
the price is fixed or determinable and collectability is reasonably assured.
Research
and Development Expenses
Our
research and development expenses consist of expenses incurred in development and preclinical studies relating to our product
candidates, including:
|
•
|
expenses
associated with preclinical development;
|
|
•
|
personnel-related
expenses, such as salaries, benefits, travel and other related expenses, including stock-based compensation;
|
|
•
|
payments
to third-party contract research organizations, or CROs, contractor laboratories and independent contractors; and
|
|
•
|
depreciation,
maintenance and other facility-related expenses.
|
We
expense all research and development costs as incurred. Preclinical development expenses for our product candidates are a significant
component of our current research and development expenses. Product candidates in later stage clinical development generally have
higher research and development expenses than those in earlier stages of development, primarily due to increased size and duration
of the clinical trials. We track and record information regarding external research and development expenses for each grant, study
or trial that we conduct. From time to time, we intend to use third-party CROs, and have used contractor laboratories and independent
contractors in preclinical studies. We recognize the expenses associated with third parties performing these services for us in
our preclinical studies based on the percentage of each study completed at the end of each reporting period.
We
expect that our research and development expenses in 2019 and for the next several years will be higher than in 2018 as a result
of the work needed for our expected initiation of our Phase 1 clinical trials of KLS-13019 in the second half of 2019 and KLS-13023
by early 2020. These expenditures are subject to numerous uncertainties regarding timing and cost to completion. Completion of
our preclinical development and clinical trials may take several years or more, and the length of time generally varies according
to the type, complexity, novelty and intended use of a product candidate. The cost of clinical trials may vary significantly over
the life of a project as a result of differences arising during clinical development, including, among others:
|
•
|
the
number of sites included in the clinical trials;
|
|
•
|
the
length of time required to enroll suitable patients;
|
|
•
|
the
size of patient populations participating in the clinical trials;
|
|
•
|
the
duration of patient follow-ups;
|
|
•
|
the
development stage of the product candidates; and
|
|
•
|
the
efficacy and safety profile of the product candidates.
|
Due
to the early stages of our research and development, we are unable to determine the duration or completion costs of our development
of KLS-13019 and KLS-13023. As a result of the difficulties of forecasting research and development costs of KLS-13019 and KLS-13023,
as well as the other uncertainties discussed above, we are unable to determine when and to what extent we will generate revenues
from the commercialization and sale of an approved product candidate.
General
and Administrative Expenses
General
and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation,
for personnel serving in our executive, finance, accounting, legal and human resource functions. Our general and administrative
expenses also include facility and related costs not included in research and development expenses, professional fees for legal
services, including patent-related expenses, consulting, tax and accounting services, insurance and general corporate expenses.
We expect that our general and administrative expenses will increase with the continued development and potential commercialization
of our product candidates.
We
expect that our general and administrative expenses in 2019 and for the next several years will be higher than in 2018 as we increase
our headcount. We also anticipate increased expenses relating to our operations as a public company, including increased costs
for the hiring of additional personnel, and for payment to outside consultants, including lawyers and accountants, to comply with
additional regulations, corporate governance, internal control and similar requirements applicable to public companies, as well
as increased costs for insurance.
Interest
Income (Expense), net
Interest
expense consists of interest expense on our notes payable. Interest income consists primarily of interest earned on our money
market bank account.
Income
Taxes
As
of December 31, 2018, we had $862,000 of federal operating loss carryforwards. These operating loss carryforwards will begin to
expire in 2031. The Tax Reform Act of 1986, or the Act, provides for limitation on the use of net operating loss and research
and development tax credit carryforwards following certain ownership changes (as defined by the Act) that could limit our ability
to utilize these carryforwards. We may have experienced various ownership changes, as defined by the Act, as a result of past
financings. Accordingly, our ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit
the time during which these carryforwards may be applied against future taxes; therefore, we may not be able to take full advantage
of these carryforwards for federal income tax purposes.
The
closing of the share exchange transaction, together with private placements and other transactions that have occurred since our
inception, may trigger, or may have already triggered, an "ownership change" pursuant to Section 382 of the Internal
Revenue Code of 1986. If an ownership change is triggered, it will limit our ability to use some of our net operating loss carryforwards.
In addition, since we will need to raise substantial additional funding to finance our operations, we may undergo further ownership
changes in the future, which could further limit our ability to use net operating loss carryforwards. As a result, if we generate
taxable income, our ability to use some of our net operating loss carryforwards to offset U.S. federal taxable income may be subject
to limitations, which could result in increased future tax liability to us.
Critical
Accounting Policies and Use of Estimates
We
have based our management's discussion and analysis of financial condition and results of operations on our financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of
these financial statements requires us to make estimates that affect the reported amounts of assets and liabilities, and the disclosure
of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during
the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to preclinical development
expenses and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe
to be appropriate under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
While
our significant accounting policies are more fully discussed in Note 2 to our condensed consolidated financial statements appearing
above, we believe that the following accounting policies are critical to the process of making significant judgments and estimates
in the preparation of our financial statements.
Research
and Development Expenses
We
rely on third parties to conduct our preclinical studies and to provide services, including data management, statistical analysis
and electronic compilation. Once our clinical trials begin, at the end of each reporting period, we will compare the payments
made to each service provider to the estimated progress towards completion of the related project. Factors that we will consider
in preparing these estimates include the number of patients enrolled in studies, milestones achieved and other criteria related
to the efforts of our vendors. These estimates will be subject to change as additional information becomes available. Depending
on the timing of payments to vendors and estimated services provided, we will record net prepaid or accrued expenses related to
these costs.
Fair
Value of Common Stock and Stock-Based Compensation
We
account for grants of stock options and restricted stock to employees based on their grant date fair value, and recognize compensation
expense over the vesting periods. We estimate the fair value of stock options as of the date of grant using the Black-Scholes
option pricing model, and we estimate the fair value of restricted stock based on the fair value of the underlying common stock
as determined by our board of directors or the value of the services provided, whichever is more readily determinable. We account
for stock options and restricted stock awards to non-employees using the fair value approach. Stock options and restricted stock
awards to non-employees are subject to periodic revaluation over their vesting terms.
In
the absence of a public trading market for our common stock, on each grant date, we develop an estimate of the fair value of our
common stock for the option and restricted stock grants based in part on input from an independent third-party valuation firm.
We determined the fair value of our common stock using methodologies, approaches and assumptions consistent with the AICPA Practice
Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation. In addition, our board of directors considered
various objective and subjective factors, along with input from management and an independent third-party valuation firm, to estimate
the fair value of our common stock, including external market conditions affecting the pharmaceutical industry, trends within
the pharmaceutical industry, the prices at which we sold shares of our different series of preferred stock, the superior rights
and preferences of each series of preferred stock relative to our common stock at the time of each grant, our results of operations
and financial position, the status of our research and development efforts and progress of our preclinical programs, our stage
of development and business strategy, the lack of an active public market for our common and our preferred stock, and the likelihood
of achieving a liquidity event.
Results
of Operations – For the Three Month Periods Ended September 30, 2019 and 2018
Revenues
Revenues
for the three months ended September 30, 2019, was $23,968 compared to $38,101 for the three months ended September 30, 2018.
Our decrease in revenue was primarily the result of a decrease of grant revenue due to reaching the maximum amount of the grant.
Research
and Development Expenses
Research
and development expenses increased by $122,384 or 183%, to $189,443 for the three months ended September 30, 2019, from $67,059
for the three months ended September 30, 2018. The increase was primarily the result of increased consulting and compensation
expense related to increased product development activities. This is due to three quarters of research done though our sub award
contractor vs two quarters of research done in 2018.
General
and Administrative Expenses
General
and administrative expenses increased by $251,785 or 72%, to $601,567 for the three months ended September 30, 2019, from $349,782
for the three months ended September 30, 2018. This increase was due to operating as a public company, including increased costs
for the hiring of additional personnel, and for payment to outside consultants, including lawyers and accountants, to comply with
additional regulations, corporate governance, internal control and similar requirements applicable to public companies.
Results
of Operations – For the Nine Month Periods Ended September 30, 2019 and 2018
Revenues
Revenues
for the nine months ended September 30, 2019, was $126,027 compared to $104,965 for the nine months ended September 30, 2018.
Our increase in revenue in 2019 was primarily the result of an increase of grant revenue due to more product development done
by the sub contractor for research and development.
Research
and Development Expenses
Research
and development expenses increased by $313,984 or 250%, to $439,680 for the nine months ended September 30, 2019, from $125,696
for the nine months ended September 30, 2018. The increase was primarily the result of increased consulting and compensation expense
due to increased product development activities.
General
and Administrative Expenses
General
and administrative expenses increased by $974,117 or 181%, to $1,511,334 for the nine months ended September 30, 2019, from $537,217
for the nine months ended September 30, 2018. This increase was due to operating as a public company, including increased costs
for the hiring of additional personnel, and for payment to outside consultants, including lawyers and accountants, to comply with
additional regulations, corporate governance, internal control and similar requirements applicable to public companies.
Liquidity
and Capital Resources
Since
our inception in 2010, we have devoted most of our cash resources to research and development and general and administrative activities.
We have financed our operations primarily with the proceeds from the sale of preferred stock and convertible promissory notes,
state and federal grants and research services. To date, we have not generated any revenues from the sale of products, and we
do not anticipate generating any revenues from the sales of products for the foreseeable future. We have incurred losses and generated
negative cash flows from operations since inception. As of September 30, 2019, our principal sources of liquidity were our cash
and cash equivalents, which totaled $120,550 and marketable securities, which totaled $395,205. Our working capital deficit was
$(681,893) as of September 30, 2019.
Equity
Financings
For
the nine months ended September 30, 2019, and year ended December 31, 2018, we received net proceeds of $0 and $352,000, respectively,
from the sale of convertible notes and promissory notes. Immediately prior to the Share Exchange, the Company received proceeds
of $150,000 for the sale of 75 shares of Series A preferred stock and 75 shares of Series B preferred stock. Additionally, the
Company received $203,000 for the sale of 2,030,000 shares of common stock.
Debt
We
had the following schedule of debt as of December 31, 2018, and September 30, 2019:
|
|
December
31,
2018
|
|
September
30,
2019
|
Outstanding
Debt Obligations:
|
|
|
|
|
|
|
|
|
Loan
payable
|
|
$
|
620,000
|
|
|
$
|
620,000
|
|
Loan
payable - related party
|
|
|
25,822
|
|
|
|
42,092
|
|
Convertible
notes payable
|
|
|
500,000
|
|
|
|
376,373
|
|
Capital
lease obligations
|
|
|
—
|
|
|
|
35,886
|
|
Total
All Debt Obligations
|
|
$
|
1,145,822
|
|
|
$
|
1,074,351
|
|
In
January 2018, prior to the Share Exchange, all Convertible Junior Debenture holders and all Senior Convertible Debenture holders
accepted the Company’s offer to exchange their debt instruments, including accrued interest thereunder for restricted common
stock. The holders of the Convertible Junior Debentures, related parties, accepted a total of 973,946 shares of restricted common
stock (on a post-Share Exchange basis) of the Company in exchange for the repayment of a total of $356,176 in debt, inclusive
of accrued interest of $67,195. In addition to the conversion of the Convertible Junior Debentures, the holders of the Senior
Convertible Debentures accepted a total of 563,063 shares of restricted common stock of the Company (on a post-Share Exchange
basis) in exchange for the repayment of a total of $236,184 in debt, inclusive of accrued interest of $51,104.
In
January 2018, prior to the Share Exchange, we converted outstanding accrued executive management salaries totaling $2,812,810,
which had accrued from September 2014 through December 2017, in exchange for a total of 5,505,200 shares of restricted common
stock of the Company (on a post-Share Exchange basis).
On
September 26, 2019, the Company issued 1,500,000 shares of common stock for the conversion of $123,627 convertible notes payable
and $26,373 of related accrued interest.
Future
Capital Requirements
Prior
to the Share Exchange, the Company issued a convertible note to an investor, face value $500,000, in exchange for $500,000 in
cash. The note is unsecured, bears interest at the rate of 3% per annum and matures on February 16, 2030. The note is convertible
into common stock of the Company at $0.10 per share at any time at the option of the holder, subject to a 4.9% blocking provision
which prohibits the holder from converting into common stock of the Company if such conversion results in the holder owning greater
than 4.9% of the outstanding common stock of the Company after giving effect to the conversion. On September 26, 2019, the Company
issued 1,500,000 shares of common stock for the conversion of $123,627 convertible notes payable and $26,373 of related accrued
interest. The outstanding balance on this convertible note after the conversion is $376,373.
We
expect that our existing cash and cash equivalents and securities held for sale on the Company’s consolidated balance sheet
will be sufficient to fund our operations and capital requirements through December 2019. We believe that the Company will be
able to raise additional capital to commence a Phase 1 clinical trial for KLS-13019 for patients with chemotherapy induced peripheral
neuropathy. We anticipate, based on current estimates, that costs associated with a Phase 1 clinical trial for KLS-13019 will
be approximately $2.75 million.
Our
investment in Medical Marijuana, Inc. (“MJNA”) represents a sizable portion of the total assets of the Company. On
June 1, 2018, the Company received 41,583,333 shares of MJNA common stock pursuant to a settlement agreement. In 2014, the Company
entered into a revenue sharing agreement with Kannaway LLC, whereas, among the considerations and obligations, the parties agreed
to a share exchange, whereby the Company issued 6,408,980 shares of its common stock in exchange of 4.99% ownership of Kannaway.
A
significant shareholder of the Company owned the remaining ownership of Kannaway LLC. Subsequently, Kannaway was sold by its parent
company to MJNA for 833,333,333 shares of MJNA common stock. The settlement agreement called for the release of all obligations
in exchange for the issuance of 41,583,333 shares of common stock in MJNA to the Company. For the year ended December 31, 2018,
the Company recorded a realized gain of $3,901,974 upon the settlement and receipt of these shares and an unrealized loss of $873,693
related to the investment in MJNA. The gain was netted against the Company's cost basis investment in Kannaway LLC.
The
Company’s shares in MJNA are eligible for re-sale under Rule 144 of the Securities Act, and the Company intends to liquidate
its holdings in MJNA in its discretion to help fund its operations. There are no contractual, affiliate or other restrictions
on the Company’s ability to re-sell its shares in MJNA. In the event that we are unable to sell our shares in MJNA, management
believes that it can locate additional sources of capital to facilitate and carry out its business plan and the Company’s
ability to conduct its business operations and clinical trials is not dependent on our ability to sell the Company’s shares
in MJNA.
Management
of the Company believes that it will need to seek additional sources of capital to facilitate and carry out its business plan
of proceeding forth with commencing a Phase 2 clinical trial for KLS-13019 for patients with chemotherapy induced peripheral neuropathy;
commencing a Phase 1 clinical trial for KLS-13019 for patients suffering from the effects of mild traumatic brain injury; and
commencing a Phase 1 clinical trial for KLS-13023 for patients suffering with overt hepatic encephalopathy. The cost of commencing
and conducting these trials will likely be in the tens of millions of dollars.
Furthermore,
it is difficult to predict our spending for our product candidates prior to obtaining FDA approval. Moreover, changing circumstances
may cause us to expend cash significantly faster than we currently anticipate, and we may need to spend more cash than currently
expected because of circumstances beyond our control.
Our
expectations regarding future cash requirements do not reflect the potential impact of any future acquisitions, mergers, dispositions,
joint ventures or investments that we make in the future. We have no current understandings, agreements or commitments for any
material acquisitions or licenses of any products, businesses or technologies. We may need to raise substantial additional capital
in order to engage in any of these types of transactions.
We
expect to continue to incur substantial additional operating losses for at least the next several years as we continue to develop
our product candidates and seek marketing approval and, subject to obtaining such approval, the eventual commercialization of
our product candidates. If we obtain marketing approval for either of our product candidates, we will incur significant sales,
marketing and outsourced manufacturing expenses. In addition, we expect to incur additional expenses to add operational, financial
and information systems and personnel, including personnel to support our planned product commercialization efforts. We also expect
to incur significant costs to comply with corporate governance, internal controls and similar requirements applicable to us as
a public company.
Our
future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:
|
•
|
the
initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates;
|
|
•
|
the
clinical development plans we establish for these product candidates;
|
|
•
|
the
number and characteristics of product candidates that we develop or may in-license;
|
|
•
|
the
terms of any collaboration agreements we may choose to execute;
|
|
•
|
the
outcome, timing and cost of meeting regulatory requirements established by the DEA, the FDA, the EMA or other comparable foreign
regulatory authorities;
|
|
•
|
the
cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;
|
|
•
|
the
cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us;
|
|
•
|
costs
and timing of the implementation of commercial scale manufacturing activities; and
|
|
•
|
the
cost of establishing, or outsourcing, sales, marketing and distribution capabilities for any product candidates for which
we may receive regulatory approval in regions where we choose to commercialize our products on our own.
|
To
the extent that our capital resources are insufficient to meet our future operating and capital requirements, we will need to
finance our cash needs through public or private equity offerings, debt financings, collaboration and licensing arrangements or
other financing alternatives. We have no committed external sources of funds. Additional equity or debt financing or collaboration
and licensing arrangements may not be available on acceptable terms, if at all.
If
we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available,
would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting
our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any
debt financing or additional equity that we raise may contain terms, such as liquidation and other preferences that are not favorable
to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it
may be necessary to relinquish valuable rights to our technologies, future revenue streams or product candidates or to grant licenses
on terms that may not be favorable to us.