PART
I
Our
Business
We
are a biopharmaceutical company focused on discovering, developing and commercializing novel therapeutics from our proprietary
cannabinoid product platform in a broad range of disease areas. In our 8 years of operations, we have been principally involved
in the research and development of new chemical entities (“NCEs”) such as KLS-13019, and its related molecules, and
synthetic cannabidiol (“CBD”) therapeutics through pre-clinical drug discovery and development processes. We have
developed our own intellectual property portfolio and established relationships with third parties who are considered leaders
in active pharmaceutical (“API”) contract manufacturing, formulation; and contract bulk drug manufacturing. All of
the operations of the Company to date have been in the pre-clinical stage of drug discovery.
CBD
is a naturally occurring cannabinoid constituent of cannabis. It was discovered in 1940 and is known to exhibit neuroprotective
properties in many experimental systems. However, development of CBD as a drug has been confounded by the following: 1) low potency;
2) a large number of molecular targets; 3) marginal pharmacokinetic properties; and 4) designation as a schedule 1 controlled
substance. Our present work has compared the properties of CBD with our patented novel cannabidiol derived molecule, KLS-13019,
that has structural similarities to CBD. The design strategy for KLS-13019 was to increase hydrophilicity while optimizing neuroprotective
potency against oxidative stress toxicity relevant to hepatic encephalopathy. In early pre-clinical studies, the responses of
CBD and KLS-13019 were compared in dissociated rat hippocampal cultures in a pre-clinical model for overt hepatic encephalopathy
(“OHE”) and also chemotherapy induced peripheral neuropathy (“CIPN”).
Comparisons
between CBD and KLS-13019 have been published in peer reviewed articles in ACS Medicinal Chemistry Letters (2016, 7, 424-428)
and Journal of Molecular Neuroscience (14 August 2018).
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 expired on 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, drug development program regarding 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.
HE,
is an altered level of consciousness as a result of liver failure. Onset may be gradual or sudden. Other symptoms
may include movement problems, changes in mood, or changes in personality. In the advanced stages it can result in a coma.
CTE, formerly
known as dementia pugilistica, is a neurodegenerative disease found in people who have had multiple head injuries. Symptoms may
include behavioral problems, mood problems, and problems with thinking.
The
Company’s lead target drug candidate, KLS-13019, is part of an estate of new chemical entities (NCEs) underlying U.S. Patent
9,611,213 titled “Functionalized 1,3 Benzene-diols and their Method of Use for the Treatment of Hepatic Encephalopathy”.
This patent is part of a divisional patent application by the Company to the USPTO whereby the Company sought separate claims
for composition of matter, covered in Pat. 9,611,213 and separate claims for method for treatment; and U.S. Patent 10,004,722
titled “Method for Treating Hepatic Encephalopathy or a Disease Associated with Free Radical Mediate Stress and Oxidative
Stress with Novel Functionalized 1,3 Benzene-diols.”
KLS-13019
and its related molecules under the aforementioned patents, describe novel functionalized 1,3-benzenediols (“Cannabidiol
Derived Molecules”) and methods that may be useful and have potential for the treatment of hepatic encephalopathy and related
conditions. The present invention further describes a novel chemotype that may be useful and have potential for the treatment
of diseases associated with hepatic encephalopathy. The present invention further describes a novel chemotype that may be useful
and have potential as neuroprotective agents. The Cannabidiol Derived Molecules under the present invention may be useful and
have potential for treating and preventing diseases associated with free radical mediated stress and oxidative stress including,
for example, as previously mentioned, hepatic encephalopathy, Parkinson’s disease, Alzheimer’s, Huntington’s
disease, traumatic head injury, stroke, epilepsy, neuropathic pain, Chronic Traumatic Encephalopathy (CTE), Post Cardiac Arrest
Hypoxic Ischemic Encephalopathy, and Epileptic Encephalopathy.
To
date, we have synthesized, pre-clinically tested and patented our proprietary CBD derived new chemical entities (“NCEs”),
including KLS-13019 and also formulated a new CBD based molecule, KLS-13023.
In
pre-clinical studies performed pursuant to a Phase 1 small business technology transfers (“STTR”) agreement between
us, and Temple University, funded by the National Institutes of Health – National Institute on Drug Abuse (“NIH-NIDA”),
our research determined that one of our patented CBD derived target drug candidates, KLS-13019 was superior to CBD and morphine
in the potential treatment of chemotherapy induced peripheral neuropathy (“CIPN”).
Results
from pharmacokinetic (“PK”) and pharmacodynamic (“PD”) studies performed in evaluating CBD versus KLS-13019
have shown KLS-13019 to be superior in aqueous solubility (potential for drug absorption after oral administration); Log P (ratio
which measures difference in solubility in two phases); bioavailability (proportion of the drug that enters the circulation);
and C max at 10 mg/kg, p.o. (peak serum concentration).
Results
from our pre-clinical efforts in the potential treatment of OHE and the potential treatment of CIPN have shown a marked improvement
over 99.7% pure pharmaceutical grade synthetic CBD in side by side pre-clinical comparison. In a pre-clinical comparison for neuroprotection
between CBD and KLS-13019, results indicated increased potency for the new molecule (KLS-13019) as determined by six assays, while
both molecules exhibited efficacy in preventing oxidative stress-related toxicities back to control values.
However,
treatment with KLS-13019 alone was 5-fold less toxic than CBD. Previous studies suggested that CBD targeted the Na+ Ca2+ (sodium-calcium)
exchanger in mitochondria to regulate intracellular calcium levels, an important determinant of neuronal survival. After treatment
with an inhibitor, the mNCX inhibitor (“CGP-37157”), no detectable neuroprotection from ethanol toxicity was observed
for either CBD or KLS-13019. Furthermore, AM630 (a CB2 antagonist) significantly attenuated CBD-mediated neuroprotection, while
having no detectable effect on KLS-13019 neuroprotection. Our studies indicated KLS-13019 was more potent and less toxic than
CBD. Both molecules can act through mNCX. KLS-13019 may provide an alternative to CBD as a therapeutic candidate to treat disease
associated with oxidative stress.
Again,
here, comparisons between CBD and KLS-13019 have been published in peer reviewed articles in ACS Medicinal Chemistry Letters (2016,
7, 424-428) and Journal of Molecular Neuroscience (14 August 2018).
According
to Fallon, et al. in the March/April 2006 edition of Clinical Medicine, pain is uncontrolled with opioid treatments in approximately
20% of patients with advanced cancer, or 420,000 people in the United States. There are currently no approved non-opioid treatments
for patients who do not respond to, or experience negative side effects with, opioid medications. We believe that KLS-13019 has
the potential to address a significant unmet need in this large market by treating patients with a product that employs a differentiated
non-opioid mechanism of action, and offers the prospect of pain relief without increasing opioid-related adverse side effects.
We
expect to open an Investigational New Drug Application, or IND to pursue a clinical development program with either the U.S. Food
and Drug Administration (“FDA”) or the Therapeutic Goods Administration
(“TGA”), the regulatory body for therapeutic goods (including
medicines, medical devices, gene technology, and blood products) in Australia.
Additionally,
the Company plans on screening and conducting preliminary research and development of 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.
To
date there has been only one cannabidiol based medicament, EpidiolexÒ approved for use in humans by the U.S. Food and
Drug Administration (“FDA”). The drug, EpidiolexÒ, is used to treat seizures due
to certain medical conditions (such as Lennox-Gastaut syndrome, Dravet syndrome). It is not known how this medication
works for these seizures. Cannabidiol belongs to a class of drugs known as cannabinoids. Additionally, the FDA’s Office
of Orphan Products Development (“OOPD”) has designated cannabidiol eighteen (18) times since 2013 for a multitude
of diseases ranging from rare forms of epilepsy to prevention of reperfusion injury due to organ transplantation to glioblastoma
multiforme to autoimmune hepatitis. While the Company’s primary indications of OHE and CIPN have not, heretofore, been targeted
by CBD-based or CBD-derived drugs and cleared by the FDA or other foreign regulatory agency, neither have the aforementioned eighteen
orphan designated indications targeted by cannabidiol.
Corporate
Strengths and Weaknesses
We
believe that we offer the following key distinguishing characteristics:
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We
believe we are the first commercial drug discovery company in the cannabinoid therapeutics
space to successfully synthesize CBD derived new chemical entities and pre-clinically
test lead NCEs for potential treatment of oxidative stress related diseases, including
OHE and CIPN.
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We
are the only commercial drug discovery company in the cannabinoid therapeutics space
to license the ‘507 Patent from NIH on two separate occasions.
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We
have completed pharmacokinetic and pharmacodynamic pre-clinical studies with high purity
scale, pharmaceutical grade CBD and KLS-13019 for potential treatment of oxidative stress
related disease – OHE and CIPN.
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We
anticipate commencing a Phase 1 trial in CIPN sometime in the 3rd quarter
of 2021.
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We
anticipate commencing a Phase 1 trial in OHE sometime in the 1st quarter of
2022.
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We
anticipate commencing a Phase 1 trial in Mild Traumatic Brain Injury in the 3rd
quarter of 2022.
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We
have a firm understanding of the mechanism of action of CBD and KLS-13019 in certain
oxidative stress related disorders.
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We
believe we have a strong next generation intellectual property estate on cannabidiol
derived NCEs. On this basis, we believe we can expand the approved indications KLS-13019
and develop additional cannabinoid therapeutic agents to add to our IP portfolio.
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We
believe that our pre-clinical drug development program points to a significant opportunity
in cancer pain, a large market.
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We
believe that our pre-clinical drug development program points to a significant opportunity
in opioid replacement / reduction market.
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While
the Company believes it is well positioned to be competitive in the cannabinoid therapeutics space, it also believes it will face
significant challenges in successfully completing one or more clinical trials. In addition, there is a competitive landscape that
exists in the market for the Company’s target indications of OHE and CIPN. The competitive landscape is challenging. Competition
in OHE and CIPN is well established, with significantly greater resources than the Company and leaders in the current standard
of care for these diseases.
The
current standard of care for patients suffering with OHE is 550mg of XifaxanÒ, originally an antibiotic useful in treating
traveler’s diarrhea and irritable bowel syndrome. It’s exact mechanism of action is not known, however it is theorized
that XifaxanÒ clinical activity may be attributed to effects on metabolic function of gut microbiota, rather than a
change in the relative bacterial abundance. Currently, there is no drug in the market for OHE that is being used to treat the
toxic effects on the hippocampus, the cognitive and behavioral dysfunction associated with OHE, and the action of neuroprotection
from ammonia and ethanol toxicity.
Given
the competitive landscape in OHE, the Company believes it can participate in the OHE market with primary and adjunctive therapeutics
currently under pre-clinical development, and potentially obtain orphan drug designation for one or more of its target therapeutic
agents.
With
respect to competitive landscape for CIPN, eight agents have been studied in randomized
controlled trials for the treatment of CIPN, but there has been limited success. The characteristics and results of these studies
are summarized in the study and abstract “Management of Chemotherapy Induced Peripheral Neuropathy” (Physician’s
Education Resource LLC, Meghna S. Trivedi, MD; Dawn L. Hershman, MD, MS; Katherine D. Crew, MD, MS). Clinical trials of the
antiepileptic agents gabapentin and lamotrigine and the antidepressants nortriptyline and amitriptyline have
all been negative.
Additionally,
there have been several small placebo-controlled trials which have shown that intravenous administration of glutathione with platinum-based
chemotherapy regimens can decrease the incidence of neurotoxicity without diminishing the effect of chemotherapy. In a North
Central Cancer Treatment Group / Alliance trial in 2014, this trial studied the use of glutathione with carboplatin and paclitaxel
and found no improvement in neurotoxicity symptoms, suggesting that glutathione may not help in taxane-induced CIPN.
Furthermore,
the continuous use of opiates in the current standard of care to treat CIPN have resulted in mixed results, addiction problems
and dose tolerance problems.
The
Company believes that, while the current standard of care is well positioned in the market, there is an unmet need for the treatment
of CIPN in the reduction of use of opiates. This presents itself as an opportunity for the Company to participate with a novel
therapeutic agent to treat CIPN.
Clinical
Timelines
As
a result of the unprecedented effects of COVID-19, the Company has updated its clinical timelines to give effect to the significant
interruption to business and financial operations worldwide as a result of the COVID-19 crisis. The Company will continue to monitor
the progress of the shutdowns currently in effect and revise its clinical timelines accordingly.
Product
Candidate
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Target
Indication
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Delivery
Method
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Current
Development
Status
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Expected
Next Steps
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KLS-13019
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Chemotherapy Induced
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Oral Gel Capsule
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Preclinical
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3Q21: Initiate Phase
1
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Peripheral Neuropathy
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Mild Traumatic Brain
Injury
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Oral Gel Capsule
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Preclinical
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2Q22: Initiate Phase
1
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KLS-13023
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Overt Hepatic Encephalopathy
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Oral Gel Capsule
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Preclinical
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1Q22: Initiate Phase
1
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Mild Traumatic Brain
Injury
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Oral Gel Capsule
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Preclinical
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3Q22: Initiate Phase
1
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Corporate
History
TYG
Solutions Corp. was incorporated in the State of Delaware on March 25, 2013. 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
Sciences”) and certain stockholders of Kannalife Sciences (the “Kannalife Sciences Stockholders”). Pursuant
to the terms of the Share Exchange Agreement, the Company acquired approximately nearly all of the issued and outstanding shares
of Kannalife Sciences by means of a share exchange with the Kannalife Sciences Stockholders in exchange for newly issued shares
of the common stock of the Company (the “Share Exchange”). As a result of the Share Exchange, Kannalife Sciences became
a 99.7% owned subsidiary of the Company. The business operations of the Company regarding iPhone and Android smartphone apps shall
be reduced significantly to focus efforts on target therapeutics and drug discovery, and accordingly, by virtue of the Share Exchange,
the Company acquired the business of Kannalife Sciences including all of its assets. The Share Exchange was accounted for as a
reverse acquisition and change in reporting entity, whereby Kannalife Sciences was the accounting acquirer.
Kannalife
Sciences was incorporated in the State of Delaware on August 11, 2010. Kannalife Sciences 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 to “KLFE” and such action went effective on January 17, 2019.
Controlled
Substances Laws and Regulations
Our
drug candidates contain controlled substances as defined in the Controlled Substances Act (CSA). Controlled substances that are
pharmaceutical products are subject to a high degree of regulation under the CSA, which establishes, among other things, certain
registration, manufacturing quotas, security, recordkeeping, reporting, import, export and other requirements administered by
the DEA.
Despite
recent approvals by the FDA and DEA for a newly approved medication which contains cannabidiol (CBD), the scheduling of these
substances, many of which are beyond our control, could jeopardize our ability to obtain regulatory approval for and successfully
market KLS-13019 or KLS-13023. Moreover, because our business is almost entirely dependent upon these two product candidates,
any such setback in our pursuit of regulatory approval would have a material adverse effect on our business and prospects. See
our full description of the impact controlled substances laws and regulations have on our business in the “Risk Factors”
section of this annual report.
KLS-13019
does not contain cannabidiol and is a new chemical entity that would not fall under the Controlled Substances Act (“CSA”)
or be deemed a Schedule 1 controlled substance.
KLS-13023
is a formulation that does contain cannabidiol. At present, cannabidiol is deemed a Schedule 1 controlled substance by the U.S.
Drug Enforcement Agency under the Controlled Substances Act. And like the drug molecule EpidiolexÒ, which was recently approved
by the FDA for marketing and sale for use in treating Dravet’s Syndrome and Lennox-Gasteau Syndrome (forms of child epilepsy),
KLS-13023 would need to follow the guidance set forth by the CSA, complete a successful human clinical trial and apply for rescheduling,
as was the case with EpidiolexÒ, now a Schedule 5 drug.
On
January 14, 2019, the Company received written notice from the Drug Enforcement Administration (“DEA”) Drug and Chemical
Evaluation Section, as follows: “Please be advised that your material meets the definition of ‘Hemp’ and is
not regulated under the CSA, as long as it consists of high purity Cannabidiol (CBD) that contains approximately 0.1% delta-9-
THC. (However, if it contains more than 0.3% delta-9 THC, it is considered ‘Marihuana’ and would be in Schedule 1
of the CSA).” While this notice is an official notice from the DEA regarding the scheduling of high purity CBD, the Company
will continue to abide by the CSA in all respects with regards to its treatment and handling of CBD.
Corporate
Operations
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 / International Nomenclature of Cosmetic Ingredients (“INCI”) registered.
The primary focus of the Company’s research and development revolves around its patented, proprietary cannabidiol-derived
new chemical entities and cannabidiol.
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 expired on 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 is due to expire in 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, drug development program regarding 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.
The
Company’s lead target drug candidate, KLS-13019, is part of an estate of new chemical entities (NCEs) underlying U.S. Patent
9,611,213 titled “Functionalized 1,3 Benzene-diols and their Method of Use for the Treatment of Hepatic Encephalopathy”.
This patent is part of a divisional patent application by the Company to the USPTO whereby the Company sought separate claims
for composition of matter, covered in Pat. 9,611,213 and separate claims for method for treatment; and U.S. Patent 10,004,722
titled “Method for Treating Hepatic Encephalopathy or a Disease Associated with Free Radical Mediate Stress and Oxidative
Stress with Novel Functionalized 1,3 Benzene-diols.”
KLS-13019
and its related molecules under the aforementioned patents, describe novel functionalized 1,3-benzenediols (“Cannabidiol
Derived Molecules”) and methods that may be useful and have potential for the treatment of hepatic encephalopathy and related
conditions. The present invention further describes a novel chemotype that may be useful and have potential for the treatment
of diseases associated with hepatic encephalopathy. The present invention further describes a novel chemotype that may be useful
and have potential as neuroprotective agents. The Cannabidiol Derived Molecules under the present invention may be useful and
have potential for treating and preventing diseases associated with free radical mediated stress and oxidative stress including,
for example, as previously mentioned, hepatic encephalopathy, Parkinson’s disease, Alzheimer’s, Huntington’s
disease, traumatic head injury, stroke, epilepsy, neuropathic pain, traumatic head injury, stroke, Chronic Traumatic Encephalopathy
(CTE), Post Cardiac Arrest Hypoxic Ischemic Encephalopathy, and Epileptic Encephalopathy.
Management
believes the claims made in the Pat. 9,611,213 and Pat. 10,004,722 sufficiently cover the use of the novel molecule KLS-13019
in the treatment of neuropathic pain, which is broadly defined and includes chemotherapy induced neuropathic pain (a/k/a: chemotherapy
induced peripheral neuropathy).
The
Company’s core businesses are comprised of the following:
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A
drug development company focused on the research and development (R&D) of synthetic
and phyto-medical products from:
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onaturally
recurring sources, including but not limited to cannabis, hemp, and other similar species of plantae;
osemi-synthetic
sources; and
osynthetic
and bio-synthetic sources.
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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.
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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.
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With
respect to certain other proprietary molecules underlying Pat. 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 Pat. 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 will be able to raise 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 the second quarter 2021. The Company plans on entering into clinical trials sometime
in the fourth quarter 2021. Additionally, the Company believes it will be able to raise 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 the second quarter 2021.
The
Company intends on seeking additional capital to proceed forth with its business plan regarding additional drug pipeline opportunities.
The
Company’s current relationships with Noramco, a supplier of bulk active pharmaceutical ingredients (APIs), specifically
pharmaceutical grade cannabidiol, and Catalent Pharma Solutions, a manufacturer of formulated and packaged pharmaceuticals, will
enable the Company to meet its objectives in the production of target drug candidates that can be used in clinical trials and,
beyond successful clinical trials, meet patient demand in commercial sales for each of the Company’s target disease indications.
The
Company has estimated that the cost of a Phase 1 trial, limited to 100 patients in CINP and 76 patients in the OHE indication
will cost approximately $1,800,000 and $1,600,000, respectively. As part of the Company’s plans to initiate Phase 1 clinical
trials in Australia, the Australian government has provided incentives that provide for research and development rebates.
Research
& Development tax incentives offered by the government actively encourage overseas sponsors to conduct research in Australia.
These incentives have also made it attractive for global companies to access Australian research facilities, as holding the intellectual
property within Australia is not mandatory. Sponsors wishing to be eligible for this benefit can either establish an affiliate
company in Australia (which may take from 1 week to 1 month) or choose a Contract Research Organization (CRO) to act on their
behalf. Non-Australian Sponsors should consider these options and how they can impact on eligibility for the 43.5% R&D tax
incentive provided by the Australian government before proceeding.
U.S.
Food and Drug Administration (FDA)
The
Food and Drug Administration (FDA) is responsible for advancing the public health by helping to speed innovations that make medicines
safer and more effective and by helping the public get the accurate, science-based information it needs to use medicines to maintain
and improve public health. In 2004, the FDA provided a guidance document for innovations, challenges, and solutions for new drug
products that examine the critical path needed to bring therapeutic products to completion, and how the FDA can collaborate in
the process, from laboratory to production to end use, to make medical breakthroughs available to those in need as quickly as
possible.
FDA
Approval – What It Means
FDA
approval of a drug means that data on the drug’s effects have been reviewed by CDER, and the drug is determined to provide
benefits that outweigh its known and potential risks for the intended population. The drug approval process takes place within
a structured framework that includes:
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Analysis
of the target condition and available treatments—FDA reviewers analyze the
condition or illness for which the drug is intended and evaluate the current treatment
landscape, which provide the context for weighing the drug’s risks and benefits.
For example, a drug intended to treat patients with a life-threatening disease for which
no other therapy exists may be considered to have benefits that outweigh the risks even
if those risks would be considered unacceptable for a condition that is not life threatening.
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Assessment
of benefits and risks from clinical data—FDA reviewers evaluate clinical benefit
and risk information submitted by the drug maker, taking into account any uncertainties
that may result from imperfect or incomplete data. Generally, the agency expects that
the drug maker will submit results from two well-designed clinical trials, to be sure
that the findings from the first trial are not the result of chance or bias. In certain
cases, especially if the disease is rare and multiple trials may not be feasible, convincing
evidence from one clinical trial may be enough. Evidence that the drug will benefit the
target population should outweigh any risks and uncertainties.
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Strategies
for managing risks—All drugs have risks. Risk management strategies include
an FDA-approved drug label, which clearly describes the drug’s benefits and risks,
and how the risks can be detected and managed. Sometimes, more effort is needed to manage
risks. In these cases, a drug maker may need to implement a Risk Management and Mitigation
Strategy (REMS).
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Although
many of the FDA’s risk-benefit assessments and decisions are straightforward, sometimes the benefits and risks are uncertain
and may be difficult to interpret or predict. The agency and the drug maker may reach different conclusions after analyzing the
same data, or there may be differences of opinion among members of the FDA’s review team. As a science-led organization,
FDA uses the best scientific and technological information available to make decisions through a deliberative process.
Accelerated
Approval
In
some cases, the approval of a new drug is expedited. Accelerated Approval can be applied to promising therapies that treat a serious
or life-threatening condition and provide therapeutic benefit over available therapies. This approach allows for the approval
of a drug that demonstrates an effect on a “surrogate endpoint” that is reasonably likely to predict clinical benefit,
or on a clinical endpoint that occurs earlier but may not be as robust as the standard endpoint used for approval. This approval
pathway is especially useful when the drug is meant to treat a disease whose course is long, and an extended period of time is
needed to measure its effect. After the drug enters the market, the drug maker is required to conduct post-marketing clinical
trials to verify and describe the drug’s benefit. If further trials fail to verify the predicted clinical benefit, FDA may
withdraw approval.
Since
the Accelerated Approval pathway was established in 1992, many drugs that treat life-threatening diseases have successfully been
brought to market this way and have made a significant impact on disease course. For example, many antiretroviral drugs used to
treat HIV/AIDS entered the market via accelerated approval, and subsequently altered the treatment paradigm. A number of targeted
cancer-fighting drugs also have come onto the market through this pathway.
Drug
Development Designations
The
agency also employs several approaches to encourage the development of certain drugs, especially drugs that may represent the
first available treatment for an illness, or ones that have a significant benefit over existing drugs. These approaches, or designations,
are meant to address specific needs, and a new drug application may receive more than one designation, if applicable. Each designation
helps ensure that therapies for serious conditions are made available to patients as soon as reviewers can conclude that their
benefits justify their risks.
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Fast
Track is a process designed to facilitate the development and advance the review
of drugs that treat serious conditions, and fill an unmet medical need, based on promising
animal or human data. Fast tracking can get important new drugs to the patient earlier.
The drug company must request the Fast Track process. More information about the Fast
Track process is here.
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Breakthrough
Therapy designation expedites the development and review of drugs that are intended
to treat a serious condition, and preliminary clinical evidence indicates that the drug
may demonstrate substantial improvement over available therapy. A drug with Breakthrough
Therapy designation is also eligible for the Fast Track process. The drug company must
request a Breakthrough Therapy designation. More information about Breakthrough Therapy
designation is here.
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Priority
Review means that FDA aims to take action on an application within six months,
compared to 10 months under standard review. A Priority Review designation directs attention
and resources to evaluate drugs that would significantly improve the treatment, diagnosis,
or prevention of serious conditions. More information about Priority Review is here.
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FDA
Human Clinical Trials
Phase
I studies assess the safety of a drug or device. This initial phase of testing, which can take several months to complete,
usually includes a small number of healthy volunteers (20 to 100), who are generally paid for participating in the study. The
study is designed to determine the effects of the drug or device on humans including how it is absorbed, metabolized, and excreted.
This phase also investigates the side effects that occur as dosage levels are increased. About 70% of experimental drugs pass
this phase of testing.
Phase
II studies test the efficacy of a drug or device. This second phase of testing can last from several months to two years,
and involves up to several hundred patients. Most phase II studies are randomized trials where one group of patients receives
the experimental drug, while a second "control" group receives a standard treatment or placebo. Often these studies
are "blinded" which means that neither the patients nor the researchers know who has received the experimental drug.
This allows investigators to provide the pharmaceutical company and the FDA with comparative information about the relative safety
and effectiveness of the new drug. About one-third of experimental drugs successfully complete both Phase I and Phase II studies.
Phase
III studies involve randomized and blind testing in several hundred to several thousand patients. This large-scale testing,
which can last several years, provides the pharmaceutical company and the FDA with a more thorough understanding of the effectiveness
of the drug or device, the benefits and the range of possible adverse reactions. 70% to 90% of drugs that enter Phase III studies
successfully complete this phase of testing. Once Phase III is complete, a pharmaceutical company can request FDA approval for
marketing the drug.
Phase
IV studies, often called Post Marketing Surveillance Trials, are conducted after a drug or device has been approved for consumer
sale. Pharmaceutical companies have several objectives at this stage: (1) to compare a drug with other drugs already in the market;
(2) to monitor a drug's long-term effectiveness and impact on a patient's quality of life; and (3) to determine the cost-effectiveness
of a drug therapy relative to other traditional and new therapies. Phase IV studies can result in a drug or device being taken
off the market or restrictions of use could be placed on the product depending on the findings in the study.
Therapeutic
Goods Administration (TGA) – Australia
Clinical
trials conducted in Australia are subject to various regulatory controls to ensure the safety of participants. The TGA regulates
the use of therapeutic goods supplied in clinical trials in Australia under the therapeutic goods legislation.
Clinical
trial sponsors must be aware of the requirements to import, export, manufacture and supply therapeutic goods in Australia. The
following avenues provide for the importation into and/or supply in Australia of 'unapproved' therapeutic goods for use in a clinical
trial:
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Clinical
Trial Notification (CTN) scheme; and
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Clinical
Trial Exemption (CTX) scheme.
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The
CTN Scheme is a notification process involving the following:
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The
Australian clinical trial sponsor must notify us of the intent to sponsor a clinical
trial involving an 'unapproved' therapeutic good. This must take place before starting
to use the goods. The notification form must be submitted online and accompanied by the
relevant fee.
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The
TGA may give the sponsor of the trial written notice to provide specified information
relating to goods notified in the CTN form.
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The
TGA does not evaluate any data relating to the clinical trial at the time of submission.
The Human Research Ethics Committee (HREC) reviews the scientific validity of the trial
design, the balance of risk versus harm of the therapeutic good, the ethical acceptability
of the trial process, and approves the trial protocol. The HREC is also responsible for
monitoring the conduct of the trial.
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The
institution or organization at which the trial will be conducted, referred to as the
'Approving Authority', gives the final approval for the conduct of the trial at the site,
having due regard to advice from the HREC.
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It
is the responsibility of the sponsor to ensure that all relevant approvals are in place
before supplying the 'unapproved' therapeutic goods in the clinical trial.
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The
CTX Scheme is an approval process involving the following:
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A
sponsor submits an application to us seeking approval to supply 'unapproved' therapeutic
goods in a clinical trial. The application must be accompanied by the relevant fee.
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The
TGA evaluates summary information about the product including relevant, but limited,
scientific data (which may be preclinical and early clinical data) prior to the start
of a trial.
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The
HREC is responsible for considering the scientific and ethical issues of the proposed
trial protocol.
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The
sponsor must notify us of each trial conducted using the unapproved therapeutic good(s)
approved in the CTX application.
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Clinical
trials that do not involve 'unapproved' therapeutic goods are not subject to requirements of the CTN or CTX schemes. It is the
responsibility of the Australian clinical trial sponsor to determine whether a product is considered an 'unapproved' therapeutic
good.
Clinical
trials that do not involve 'unapproved' therapeutic goods are not subject to requirements of the CTN or CTX schemes. It is the
responsibility of the Australian clinical trial sponsor to determine whether a product is considered an 'unapproved' therapeutic
good.
On
September 27, 2013, the TGA approved Nabiximols (Sativex ®), a pharmaceutical manufactured by GW Pharmaceuticals
for its collaborator Novartis Pharmaceuticals Australia Pty Limited in the treatment for symptom improvement in patients with
moderate to severe spasticity due to multiple sclerosis (MS) who have not responded adequately to other anti-spasticity medication
and who demonstrated clinically significant improvement in spasticity related symptoms during the initial trial of therapy.
In
Australia, in 2014, the Advisory Council on Medicines Scheduling recommended rescheduling cannabidiol from a prohibited substance
to being a prescription medicine because, according to the Advisory Council on Medicines Scheduling, “there is a low risk
of misuse or abuse as cannabidiol does not possess psychoactive properties”. The TGA accepted this recommendation and the
decision took effect in July 2015.
Cannabidiol
(CBD) is one of the cannabinoids which may be extracted as a therapeutic good from cannabis. From 1 June 2015, cannabidiol has
been included under Schedule 4 (S4) Prescription Only Medicine of the Poisons Standard when preparations for therapeutic use contain
2% or less of other cannabinoids found in cannabis.
In
February 2016, the Australian Federal Government passed legislation that amended the Narcotic Drugs Act, allowing the supply of
suitable medicinal cannabis products for the management of painful and chronic conditions. This legislation does not relate to
the decriminalization of cannabis for general cultivation or recreational use and it does not include the provision of medicinal
grade herbal cannabis, only processed, non-smokable medicinal grade products.
Much
of the detail remains unclear. For example, the legislation does not specify which products will be covered under the amendment,
and it does not specify which particular conditions or symptoms will be eligible for treatment with cannabis-based products. Before
products can be prescribed, they must be registered with the Therapeutic Goods Administration (TGA) or, in rare circumstances,
receive special approval from the TGA. The registration process requires evidence of testing and efficacy and it is therefore
unlikely Australia will see a TGA registered medicinal cannabis product that GPs can prescribe any time soon.
Whilst
there are currently no cannabis-based products that are lawfully produced in Australia, the medicinal use of pharmaceutical products
containing cannabinoids is not prohibited, as long as authorization for prescribing is granted from the Commonwealth Therapeutic
Goods Administration and at this point in time, NSW Health.
Kannalife
Intellectual Properties
Kannalife
PCT Patent – PCT/US2015/010827
On
January 13, 2014, the Company filed for a provisional patent with the USPTO for its “Novel Functionalized 1, 3-Benzene-diols
and Their Treatment of Hepatic Encephalopathy”, under application 61/926,869.
On
January 9, 2015, the Company filed a non-provision patent application Patent Cooperation Treaty (“PCT”) Application
under application number PCT/US2015/010827 titled, “Novel Functionalized 1,3-Benzene Diols and Their Method of Use for the
Treatment of Hepatic Encephalopathy” (the “PCT Patent”). Under the PCT Patent, the present invention describes
novel functionalized 1,3-benzenediols (“Cannabidiol Derived Molecules”) and methods that may be useful and have potential
for the treatment of hepatic encephalopathy and related conditions. The present invention further describes a novel chemotype
that may be useful and have potential for the treatment of diseases associated with hepatic encephalopathy. The present invention
further describes a novel chemotype that may be useful and have potential as neuroprotective agents.
The
Cannabidiol Derived Molecules under the present invention that may be useful and have potential for treating and preventing diseases
associated with free radical mediated stress and oxidative stress including, for example, as previously mentioned, hepatic encephalopathy,
Parkinson’s disease, Alzheimer’s, Huntington’s disease, traumatic head injury, stroke, epilepsy, neuropathic
pain, traumatic head injury, stroke, Chronic Traumatic Encephalopathy (CTE), Post Cardiac Arrest Hypoxic Ischemic Encephalopathy,
and Epileptic Encephalopathy.
Regarding
one of the Company’s target indications, overt hepatic encephalopathy (“OHE”), it is a sub-set of the disease
hepatic encephalopathy (HE), a neuropsychiatric disorder that includes learning deficits and impairment of long-term memory. If
left unchecked, HE can progress to hepatic coma (also referred to as coma hepaticum) and ultimately death (Cordoba, 2011). The
pathogenesis of HE includes damage to the prelimbic cortex, striatum and the hippocampus (Aria et al., 2013). Hepatic encephalopathy
is caused by accumulation of toxic substances in the bloodstream that are normally removed by the liver.
The
hippocampus, is a major component of the brains of humans and other vertebrates. The hippocampus belongs to the limbic system
and plays important roles in the consolidation of information from short-term memory to long-term memory, and in spatial memory
that enables navigation.
It
has been previously demonstrated that impaired liver function and liver disease is associated with the production of free radical
and oxidative stress (Bailey and Cunningham, 1998). The accumulation of these free radicals and oxidative stress contribute to
cognitive impairment, learning deficits, memory impairment, as well as damage and death of neuronal tissue. There is a long felt
need for neuroprotective agents that are both disease-modifying and effective in treating patients that are experiencing HE. The
present invention addresses the need to prevent free radical mediated stress and oxidative stress, as well as to prevent the neural
damage associated with HE. The present invention further addresses the need to prevent cognitive impairment, learning deficits,
memory impairment, as well as damage and death of neuronal tissue associated with HE. Cognitive
impairment is when a person has trouble remembering, learning new things, concentrating, or making decisions that affect their
everyday life. Cognitive impairment ranges from mild to severe.
On
November 29, 2016, as part of the Company’s patent cooperation treaty global patent application the United States Patent
and Trademark Office (“USPTO”) granted allowance on the composition of matter portion, covering claims 1 through 14
of the Company’s PCT Patent covering claims of its novel cannabidiol derived molecule. In January 2017, the Company filed
a divisional application with the USPTO to cover the method claims, which were originally covered in claims 15 through 22 of the
original PCT Patent. The Company currently holds a valid allowance in the United States on the composition of matter for a new
cannabidiol derived molecules.
On
April 4, 2017 the Company was awarded U.S. Patent 9,611,213 titled “Functionalized 1,3 Benzene-diols and their Method of
Use for the Treatment of Hepatic Encephalopathy”. This patent is part of a divisional patent application by the Company
to the USPTO whereby the Company sought separate claims for composition of matter, covered in Pat. 9,611,213 and separate claims
for method for treatment.
On
June 26, 2018, the Company was awarded U.S. Patent 10,004,722 titled “Method for Treating Hepatic Encephalopathy or a Disease
Associated with Free Radical Mediate Stress and Oxidative Stress with Novel Functionalized 1,3 Benzene-diols.”
The
Company has patent pending status of the same PCT Patent in Canada, the European Union, Brazil, Russia, India, China, Japan and
Australia.
National
Institutes of Health – Office of Technology Transfer (“NIH-OTT”) – Patent 6,630,507
On
June 12, 2010 the Company filed an application for an exclusive license with National Institutes of Health – Office
of Technology Transfer (“NIH-OTT”), for the development and commercialization of a target drug candidate to be used
in the treatment of patients suffering with hepatic encephalopathy (“HE”). The application for exclusive license was
made for the license and use of U.S. patent 6,630,507 “Cannabinoids as Antioxidants and Neuroprotectants (the “‘507
Patent”).
On
November 17, 2011 the Company received notice of publication in the Federal Register of NIH-OTT’s Prospective Grant of Exclusive
License – Development of Cannabinoid(s) and Cannabidiol(s) Based Therapeutics
to treat hepatic encephalopathy in humans.
On
June 12, 2012, the Company entered into
an exclusive license with NIH-OTT for the use of the ‘507 Patent in the commercialization of one or more cannabinoid therapeutics
to treat HE.
In
addition to the exclusive use of the ‘507 Patent for the treatment of hepatic encephalopathy, On July 16, 2014, the Company
formally entered into a second license agreement with NIH-OTT for the non-exclusive license of the ‘507 Patent for the treatment
of Chronic Traumatic Encephalopathy (“CTE”).
The
Company is the only company that has 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 expired on April 21, 2019.
To
date, while the Company has properly maintained and paid all of the minimum annual royalties and past prosecution fees underlying
its two (2) licenses of the ‘507 Patent, the Company has not been able to secure the necessary funds to advance its drug
discovery efforts into human clinical trials and met the additional financial benchmarks set forth in the NIH licenses L-113-2012/0
and L-302-2014/0.
From
the time of the issuance of the L-113 License on June 15, 2012 and the issuance of the L-302 License on July 17, 2014, the Company
has paid initial license fees of $25,000 per license, minimum annual royalties of $10,000 per license; and a total of approximately
$100,000 in past patent prosecution fees on the ‘507 Patent (covering both the L-113 and L-302 Licenses). The Company’s
commitment to date to NIH has totaled approximately $290,000.
Pursuant
to Section 6 of both the L-113 and L-302 Licenses, “a patent or patent application licensed under this Agreement shall cease
to fall within the Licensed Patent Rights for the purpose of computing earned royalty payments in any given country on the earliest
of the dates that: (a) the patent application has been abandoned and not continued; (b) the patent expires or irrevocably lapses;
or (c) the patent has been held to be invalid or unenforceable by an unappealed or unappealable decision of a court of competent
jurisdiction or administrative agency.”
The
‘507 Patent, underlying both the L-113 and L-302 Licenses, expired on April 21, 2019 in the remaining jurisdictions of the
United States, Australia and Europe and the Company’s obligation to NIH effectively ends under both, the L-113 and L-302
License agreements.
PRE-CLINICAL
DRUG DISCOVERY
Since
inception in 2010, the Company’s primary drug discovery plans have revolved around neuroprotection and the use of cannabidiol
as well as the development of proprietary cannabidiol-derived molecules as a target drug candidates to treat neurodegenerative
and oxidative stress related diseases.
Conceptual
Drug Discovery of Cannabidiol Derived Molecules
An
emerging concept is that blockade of free radical mediated stress and oxidative stress will prevent the neural damage associated
with hepatic encephalopathy and prevent cognitive impairment, learning deficits, memory impairment, as well as damage and death
of neuronal tissue associated with HE. Cannabidiol Derived Molecules may have the potential of acting as neuroprotective agents
by blocking the damage caused by free radicals and oxidative stress may prevent the neural damage associated with hepatic encephalopathy
and may also prevent cognitive impairment, learning deficits, memory impairment, as well as damage and death of neuronal tissue
associated with HE.
It
has been discovered that prevention of free radical mediated stress and oxidative stress can prevent damage and death of neuronal
tissue, as well as prevent cognitive impairment, learning deficits, and memory impairment associated with damage and death of
neuronal tissue. Without wishing to be limited by theory, it is believed that the neuroprotective agents of the disclosure can
ameliorate, abate, otherwise cause to be controlled, diseases associated free radical mediated stress and oxidative stress.
Free
radical mediated stress and oxidative stress is also known to contribute to additional pathological conditions including, but
not limited to epilepsy, neuropathic pain, traumatic head injury, stroke, Chronic Traumatic Encephalopathy (CTE), Post Cardiac
Arrest Hypoxic Ischemic Encephalopathy, Epileptic Encephalopathy, and neurodegenerative diseases such as Parkinson’s disease,
Alzheimer’s, Huntington’s disease, and amyotrophic lateral sclerosis (ALS). Under the present invention, these Cannabidiol
Derived Molecules, may be capable of acting as neuroprotective agents, and may be useful for the treatment of epilepsy, neuropathic
pain, traumatic head injury, stroke, Chronic Traumatic Encephalopathy (CTE), Post Cardiac Arrest Hypoxic Ischemic Encephalopathy,
Epileptic Encephalopathy, and neurodegenerative diseases such as Parkinson’s disease, Alzheimer’s, Huntington’s
disease, and amyotrophic lateral sclerosis (ALS).
Current
Pre-clinical Discovery Efforts
The
Company’s research and development efforts at the Pennsylvania Biotechnology Center are centered on the creation of novel
synthetic cannabinoid and cannabinoid-like molecules, the pre-clinical and in vitro efficacy of CBD, a non-psychotropic
molecule, and the testing and control of Kannalife’s lead target drug candidates alongside CBD for the treatment of OHE
and CTE. As part of the Company’s research and development efforts, the Company has sought to establish the pre-clinical
efficacy of CBD, which along with Kannalife’s novel and proprietary lead target molecules, have shown to have neuroprotective
properties. The Company is currently conducting preclinical evaluation and formulation of a CBD based target drug candidate that
the Company is calling KLS-13023, and the subject of the Company’s ongoing feasibility study with Catalent Pharma Solutions.
While the Company has evaluated CBD on its own, in a highly purified form, its plans on bringing a CBD based target drug therapeutic
revolve around a formulated product in oral dose administration capsule (KLS-13023) which is currently the subject of the Company’s
ongoing feasibility study with Catalent Pharma Solutions.
As
of October 2013, the Company had performed six (6) distinct pre-clinical studies on murine specimens, including functional assay
screens on twenty-four (24) viable analogues and pre-clinical studies against CBD as a therapeutic control. Analogues are compounds
or molecules having a structure similar to that of another compound or molecule, but differing from it in respect to a certain
component.
As
a result of the screening process, the Company found that there were four (4) target candidates along with CBD that were screened
for final pre-clinical in vitro testing for pharmacokinetics (“PK”), CACO permeability, lethal dose (“LD”),
EC50 and IC90 testing. “Pharmacokinetics” or “PK” relate to the branch of pharmacology concerned with
the movement of drugs within the body. Factors in PK studies include CACO permeability which relates to assays that measure the
ability of a drug to be absorbed from the gastrointestinal tract and thereby to evaluate whether the drug can be suitably dosed
via an oral route. EC50 and IC90 relate to the concentration of a drug, antibody or
toxicant which induces a response halfway between the baseline and maximum after a specified exposure time. It is commonly used
as a measure of a drug's potency (EC50); and the concentration of a medication in the blood that will inhibit the
replication of a specified percentage of microorganisms (IC90).
The
Company’s lead target drug candidate was then analyzed using a mouse model to determine, among other things, blood brain
barrier concentrations, tissue and organ distribution, bioavailability, administration (IV vs. Oral), spinal fluid concentration,
and blood plasma concentration. A route of “administration” in pharmacology
and toxicology is the path by which a drug, fluid, poison, or other substance is taken into the body. Whereas, “bioavailability’
is a subcategory of absorption and relates to a fraction of an administered dose of a drug that reaches systemic circulation in
the body. “Blood plasma concentration”, otherwise known as volume of distribution is a theoretic concept
that relates the amount of drug in the body (dose) to the concentration (C) of drug that is measured (in blood, plasma, and unbound
in tissue water).
In
May 2014, the Company commissioned the first of two animal behavioral studies via research pact with Temple University. The aim
of the study was to test the effects of CBD and KLS-13019 on cognitive function in a mouse model of overt hepatic encephalopathy
(OHE) in support of the identification of molecules with in vivo efficacy. An established model of OHE, the thioacetamide model
(TAA, 200 mg/kg i.p.), was used to assess the effect of CBD (5.0 mg/kg i.p.) and KLS-13019 (0.5 – 5.0 mg/kg i.p.) on
learning and memory in male C57Bl6 mice. The autoshaping procedure, an operant learning and memory assay that rapidly assesses
acquisition and retention of a simple task, was the primary cognitive assay used. The task is an operant conditioning task wherein
food restricted mice are placed in experimental chambers and must learn how to make a behavioral response to gain access to food
rewards.
In
summary, thioacetamide induced a robust but variable toxicity associated with cognitive impairment, morbidity, and mortality.
KLS13019, administered in the absence of thioacetamide, produced no negative behavioral or general health effects, and actually
appeared to improve cognitive functioning in the behavioral task. The 5.0 mg/kg dose of KLS 13019 also significantly prevented
thioacetamide-induced cognitive performance deficit, and the lower dose of 1.0 mg/kg showed a trend in this direction.
Dr.
Ward is regarded as one of the foremost experts in pre-clinical and clinical animal model based behavioral studies using cannabinoid
molecules and agents. The Company believes that upon successful conclusion of this study and conclusive animal toxicity studies
to be performed thereafter, that it will be able to file an IND with the FDA for the use of the Company’s novel target drug
candidate in the treatment of overt hepatic encephalopathy.
The
Company believes that, as a result of the completion of most of its pharmacokinetic (“PK”) and pharmacodynamics (“PD”)
studies to date, that to complete the remainder of its pre-clinical evaluation and drug master file, what remains in the most
part, is one animal toxicity study and one drug interaction study before the Company can file an investigative new drug application
with the FDA, for the clinical evaluation of KLS-13023 (containing CBD) in OHE.
Results
from pharmacokinetic (“PK”) and pharmacodynamic (“PD”) studies performed in evaluating CBD versus KLS-13019
have shown KLS-13019 to be superior in aqueous solubility (potential for drug absorption after oral administration); Log P (ratio
which measures difference in solubility in two phases); bioavailability (proportion of the drug that enters the circulation);
and C max at 10 mg/kg, p.o. (peak serum concentration).
Results
from our pre-clinical efforts in the potential treatment of OHE and the potential treatment of CIPN have shown a marked improvement
over 99.7% pure pharmaceutical grade synthetic CBD in side by side pre-clinical comparison. In a pre-clinical comparison for neuroprotection
between CBD and KLS-13019, results indicated increased potency for the new molecule (KLS-13019) as determined by six assays, while
both molecules exhibited efficacy in preventing oxidative stress-related toxicities back to control values.
However,
treatment with KLS-13019 alone was 5-fold less toxic than CBD. Previous studies suggested that CBD targeted the Na+ Ca2+ (sodium-calcium)
exchanger in mitochondria to regulate intracellular calcium levels, an important determinant of neuronal survival. After treatment
with an inhibitor, the mNCX inhibitor (“CGP-37157”), no detectable neuroprotection from ethanol toxicity was observed
for either CBD or KLS-13019. Furthermore, AM630 (a CB2 antagonist) significantly attenuated CBD-mediated neuroprotection, while
having no detectable effect on KLS-13019 neuroprotection. Our studies indicated KLS-13019 was more potent and less toxic than
CBD. Both molecules can act through mNCX. KLS-13019 may provide an alternative to CBD as a therapeutic candidate to treat disease
associated with oxidative stress.
Again,
here, comparisons between CBD and KLS-13019 have been published in peer reviewed articles in ACS Medicinal Chemistry Letters (2016,
7, 424-428) and Journal of Molecular Neuroscience (14 August 2018).
Additional
follow on studies recently published on May 10, 2019 in the Journal of Molecular Neuroscience has further advanced
the Company’s studies on the mechanism of action for CBD and KLS-13019 in pre-clinical testing for the treatment of CIPN. The
mechanism of action for CBD-and KLS-13019-mediated protection now has been explored with dissociated dorsal root ganglion (DRG)
cultures using small interfering RNA (siRNA) to the mitochondrial Na+ Ca2+ exchanger-1 (mNCX-1). Treatment with this siRNA produced
a 50–55% decrease in the immunoreactive (IR) area for mNCX-1 in neuronal cell bodies and a 72–80% decrease in neuritic
IR area as determined with high-content image analysis. After treatment with 100 nM KLS-13019 and siRNA, DRG cultures exhibited
a 75 ±5% decrease in protection from paclitaxel-induced toxicity; whereas siRNA studies with 10 μM CBD produced a 74±
3% decrease in protection. Treatment with mNCX-1 siRNA alone did not produce toxicity. The protective action of cannabidiol and
KLS-13019 against paclitaxel-induced toxicity during a 5-h test period was significantly attenuated after a 4-day knockdown of
mNCX-1 that was not attributable to toxicity. These data indicate that decreases in neuritic mNCX-1 corresponded closely with
decreased protection after siRNA treatment. Pharmacological blockade of mNCX-1 with CGP-37157 produced complete inhibition of
cannabinoid-mediated protection from paclitaxel in DRG cultures, supporting the observed siRNA effects on mechanism.
Sodium-Calcium
Exchanger (“NCX”) (often denoted
Na+/Ca2+ exchanger, NCX, or exchange protein) is an antiporter membrane protein that removes calcium
from cells. The exchanger exists in many different cell types and animal species. The NCX is considered one of the most important
cellular mechanisms for removing Ca2+ (calcium ions) from cells. The exchanger is usually found in the plasma
membranes and the mitochondria and endoplasmic reticulum of excitable cells.
Mitochondria is
a double-membrane-bound organelle found
in most eukaryotic organisms. Mitochondria generate most of the cell's
supply of adenosine triphosphate (“ATP”), used as a source
of chemical energy. Adenosine Triphosphate (“ATP”) is a complex
organic chemical that provides energy to drive many processes in living cells, including muscle contractions, nerve impulse propagation
and chemical synthesis.
According
to Fallon, et al. in the March/April 2006 edition of Clinical Medicine, pain is uncontrolled with opioid treatments in approximately
20% of patients with advanced cancer, or 420,000 people in the United States. There are currently no approved non-opioid treatments
for patients who do not respond to, or experience negative side effects with, opioid medications. We believe that KLS-13019 has
the potential to address a significant unmet need in this large market by treating patients with a product that employs a differentiated
non-opioid mechanism of action, and offers the prospect of pain relief without increasing opioid-related adverse side effects.
Kannalife
Studies on CBD
In
March 2013, the Company began its pre-clinical research and discovery efforts at the Pennsylvania Biotechnology Center/Baruch
Blumberg Institute in Doylestown, PA. The Company began the research and development, and pre-clinical work focused on the identification,
synthesis and/or extraction of novel Cannabis-derived molecules for the treatment of impairments associated with oxidative stress
in overt hepatic encephalopathy (OHE). Prior research (published on April 16, 2011, in the British Journal of Pharmacology under
the title “Cannabidiol Improves Brain and Liver Function in a Fulminant Hepatic Failure Induced Model of Hepatic Encephalopathy
in Mice”) has produced substantial behavioral and histochemical evidence demonstrating the effectiveness of certain Cannabis-derived
molecules such as CBD in the improvement of brain and liver function in fulminant hepatic failure. Findings from the above referenced
study include reversal of locomotors and cognitive pathologies, reversal of structural changes such as Alzheimer’s Type
II astrogliosis, and reversal of increases in ammonia levels.
The
Company published an abstract on its completed studies regarding CBD at the 24th Annual International Cannabinoid Research Society
symposium, titled “Cannabidiol Provides Protection from Ethanol and Ammonium Toxicity in a Hippocampal Model of Hepatic
Encephalopathy.” In the present study, an in vitro model of HE has been utilized to evaluate the protective properties of
CBD, a substance with demonstrated protective properties against oxidative stress in pre-clinical studies targeting the OHE range
of neuronal toxicity.
HE
is a known oxidative stress related disorder. Although ammonia is considered the main
factor involved in the pathogenesis of hepatic encephalopathy (HE), it correlates well with the severity of HE in acute liver
failure, but not in chronic liver disease. Oxidative stress is another factor believed to play a role in the pathogenesis of this
syndrome; it represents an imbalance between the production and neutralization of reactive oxygen species, which leads to cellular
dysfunction (“Oxidative Stress: A Systemic Factor Implicated in the Pathogenisis of Hepatic Encephalopathy”, Metabolic
Brain Disease, 28 June 2013, 175-178).
On
January 22, 2015, the Company signed an agreement with Catalent Pharma Solutions LLC (“Catalent”), a $3.9 billion
pharmaceutical manufacturer, for the performance of a feasibility study named “Solution for Cannabidiol Softgel Feasibility”
(the “CBD OTC Feasibility Study”). Catalent has over seventy-five (75) years of experience in capsule and softgel
manufacturing capabilities and experience.
The
purpose of the CBD OTC Feasibility Study with Catalent is to advance the Company’s plans to one or more products for FDA
clinical trials to treat certain oxidative stress related and neurodegenerative related diseases such as Traumatic Brain Injury
(“TBI”).
Traumatic
Brain Injury (“TBI”), also known as intracranial injury, occurs when an
external force injures the brain. TBI can be classified based on severity, mechanism (closed or penetrating head injury), or other
features (e.g., occurring in a specific location or over a widespread area). Head injury is a broader category that may involve
damage to other structures such as the scalp and skull. TBI can result in physical, cognitive, social, emotional, and behavioral
symptoms, and outcome can range from complete recovery to permanent disability or death.
The
Centers for Disease Control and Prevention (the “CDC”) has compiled statistics on traumatic brain injury (TBI), which
occurs more with children and older adults. According to the CDC, total combined rates for traumatic brain injury (TBI)-related
emergency department (ED) visits, hospitalizations and deaths have increased over the past decade. Total combined rates of TBI-related
hospitalizations, ED visits, and deaths climbed slowly from a rate of 521.0 per 100,000 in 2001 to 615.7 per 100,000 in 2005.
The rates then dipped to 595.1 per 100,000 in 2006 and 566.7 per 100,000 in 2007. The rates then spiked sharply in 2008 and continued
to climb through 2010 to a rate of 823.7 per 100,000 according to the CDC. See Rates of TBI-Related Emergency Department
Visits, Hospitalizations, and Deaths – United States 2001-2010, Centers for Disease Control and Prevention, January
22, 2016.
On
March 4, 2015, the Company and Catalent commenced the feasibility study named “Solution for Cannabidiol Softgel Feasibility.”
On
March 16, 2015, the Company received notice from Catalent that the U.S. Drug Enforcement Agency (“DEA”) that the cannabidiol
(CBD) drug code 7360 has been added to Catalent’s Schedule 1 registration and that a quota for a certain quantum of cannabidiol
was successfully submitted for the importation of 150 grams of 99.7% pure synthetic cannabidiol from Noramco.
Additionally,
on July 13, 2018, the Company received notice from the DEA that it was approved for its own Schedule 1 Controlled Substance license
for the purpose of research activity. The addition of this license will further assist the Company in the bailment and delivery
of cannabidiol to and from research collaborators like Catalent and Temple University as well as others.
The
Company’s relationship with Catalent was founded on the Company’s efforts to produce a formulated version of a CBD
based gel capsule, herein referred to as KLS-13023 for further advancements in the treatment of oxidative stress related disorders,
such as overt hepatic encephalopathy. Catalent does not share in any royalties, or ownership of intellectual property that is
provided to Catalent by the Company or developed under the feasibility study with Catalent described herein. The current feasibility
study being performed is for the Company’s efforts to create a high quality controlled and assured pharmaceutical grade
product for use in an FDA clinical trial to treat patients suffering with overt hepatic encephalopathy. Catalent’s efforts
in this instance is as a contract manufacturer involved in the advancement of the Company’s intellectual property and for
Catalent to be a third party contract manufacturer for the commercial production of KLS-13023.
A
satisfactory and successful completion of the feasibility study with Catalent, followed by the completion of the Company’s
pre-clinical evaluation of KLS-13023 in and animal toxicity model, and thereafter the application of KLS-13023 under an NDA with
the FDA would lead to a bulk commercial drug manufacturing agreement between the Company and Catalent. The Company has only committed
to completing the feasibility study with Catalent and is under no obligation to enter into a commercial drug manufacturing agreement
with Catalent. Thereafter the completion of its feasibility study with Catalent, management believes the logical next step in
its commercial development plans for KLS-13023 is to engage with Catalent as its contract drug manufacturer for KLS-13023.
CBD
Reclassified by DEA for Epidiolex
In
a significant decision relating to the classification of CBD, currently a Schedule I narcotic by the DEA under the Controlled
Substances Act, on September 27, 2018, the Department of Justice and the DEA announced
that Epidiolex, the newly approved medication by the Food & Drug Administration, is being placed in schedule V of the Controlled
Substances Act, the least restrictive schedule of the CSA. On June 26 2018,
the FDA announced it approved Epidiolex for the treatment of seizures associated with two rare and severe forms of epilepsy, Lennox-Gastaut
syndrome and Dravet syndrome, in patients two years of age and older. Epidiolex
contains cannabidiol (CBD), a chemical constituent of the cannabis plant (commonly referred to as marijuana). The CBD in Epidiolex
is extracted from the cannabis plant and is the first FDA-approved drug to contain a purified extract from the plant. Schedule
V drugs represents the least potential for abuse. Schedule V drugs, substances, or chemicals are defined as drugs
with lower potential for abuse than Schedule IV and consist of preparations containing limited quantities of certain narcotics.
We
believe this is a significant reclassification that validates the efforts by the Company in the research and development of ethical
pharmaceuticals containing CBD as an active pharmaceutical ingredient and reduces the regulatory and market risks associated with
the use of CBD, currently and still a Schedule I narcotic.
The
Company has maintained since its inception, that the only clear path to reclassification is to follow the regulatory path of proving
medical purpose through traditional Phase 1 through Phase 3 clinical trials. The approval of Epidiolex by the FDA on June 26,
2018 and reclassification of CBD as it relates to Epidiolex by the DEA on September 27, 2018, is clear evidence of the need to
follow the regulatory path in order to meet the requirements of reclassification of a Schedule I controlled substance.
Kannalife
CBD Target Drug Candidate – Orphan Drug Potential for OHE
An
Orphan Drug is a pharmaceutical agent that has been developed specifically to treat
a rare medical condition, the condition itself being referred to as an orphan disease. In the US and EU it is easier to gain marketing
approval for an orphan drug, and there may be other financial incentives,
such as extended exclusivity periods, all intended to encourage the development of drugs which might otherwise lack a sufficient
profit motive. The target threshold in epidemiology for patient population in any rare disease is 200,000.
The
assignment of orphan status to a disease and to any drugs developed to treat it is a matter of public policy in many countries,
and has resulted in medical breakthroughs
that may not have otherwise been achieved due to the economics of drug research and development. Existing data on CBD, as well
as the Company’s target drug candidate have indicated that cannabinoids may be effective for use in clinical trials for
the treatment of HE and would, thus provide a new mechanism of action as well as be useful as an adjuvant in combination with
existing treatments.
This
combination of mechanisms of action could lead to additive or synergistic effects. Existing treatment methods, such as lactulose,
Rifaximin and others under study (e.g., AST-120), manage symptoms by reducing ammonia uptake in the digestive system. However,
once blood ammonia levels have increased, they putatively provide limited benefits. CBD, as well as the Company’s target
drug candidate, instead, act in the central nervous system ameliorating the downstream pathological effects of ammonia.
In
June 2016, the Company filed for Orphan Drug Designation with the Office of Orphan Products Development (“OOPD”) at
the U.S. Food and Drug Administration (“FDA”) for the use of CBD to treat a sub-set of hepatic encephalopathy. It
is estimated that approximately 121,000 +/- hospitalizations occur every year from overt hepatic encephalopathy ammonia neurotoxicity
traumas, which put the patient in severe cognitive and behavioral impairment. The current standard of care for the treatment of
these traumatic events includes diuretics and anti-biotics, but none currently deal with the neurotoxic aspects of the brain.
In
November 2016, the Company received an initial abeyance letter from the OOPD regarding the Company’s orphan drug application.
The abeyance letter seeks clarification on the epidemiology regarding the Company’s target sub-set of the HE disease. In
October 2017, the Company responded to the questions set forth in the epidemiology and disease sub-set. The Company received a
response on November 30, 2017 from the OOPD agreeing with the Company’s position on the orphan disease threshold of patients
suffering from the target sub-set of the HE disease. However, the OOPD requested additional information to support the limiting
use for hospitalized patients in the sub-set of the HE disease. The Company believes it has the necessary information and data
to support its position in requesting orphan drug designation for CBD (as the active pharmaceutical ingredient) in the target
sub-set of the HE disease, also referred to as OHE. Accordingly, the Company plans to provide adequate rationale for limiting
use of the drug to the orphan sub-set of HE patients requiring inpatient hospital treatment by November 2019.
Kannalife
Strategic Third Party Business Relationships, Licenses and Joint Ventures
Natural
Products Discovery Institute – Pennsylvania Biotechnology Center
In
December 2013, the Company entered into a Materials Transfer and Testing Agreement (“MTTA”) with the Institute for
Hepatitis and Virus Research and their division, the Natural Products Discovery Institute (“NPDI”) located at Pennsylvania
Biotechnology Center in Doylestown, PA. The purpose of the MTTA, is among other things, the research of original material made
up of plants, plant matter, and plant extracts (the “Plant Materials”) to identify bioactive molecules contained in
these Plant Materials which may lead to the commercial production of bioactive molecules. To date, the Company has screened one
plant source and has fractionated extracts to determine its neuroprotective activity. This plant source and extracted material
has shown a high degree of neuroprotectant factor in the face of ethanol and ammonium toxicity in neuronal cell cultures. The
Company plans on furthering the commercial development of this material and also filing for patent protection on the process,
method and use of this material in the treatment of neurodegenerative diseases.
Under
the terms of the MTTA, once the Company agrees to license the biologically active compound from the NPDI, the Company will pay
the Baruch S. Blumberg Institute (“BSBI”), the parent of the NPDI, (1.) an upfront license fee of $30,000, followed
by minimum annual royalties of $10,000; (2.) a three percent (3%) net sales royalty; (3.) milestone payments as follows: (a.)
$40,000 upon initiation of Phase 1 clinical trial or foreign equivalent, (b.) $100,000 upon initiation of Phase 2 clinical trial
or foreign equivalent, (c.) $250,000 upon initiation of Phase 3 clinical trial or foreign equivalent, and (d.) $500,000 upon first
marketing approval by FDA or foreign equivalent; and (4.) additional sub-licensing royalties of twelve percent (12%) on the fair
market value of any consideration received for granting each sub-license. The MTTA was entered into December 18, 2013 and had
a five (5) year term. The MTTA has effectively expired, with the exception of the terms of confidentiality and ownership of the
material and modifications associated with the MTTA.
With
respect to “material”, “modifications” and “ownership” terms under the MTTA, the NPDI retains
all ownership of the original material (i.e. – raw plant source material, biomass, starting point extracts). The Company
and the NPDI shall jointly own modifications and those substances created through the use of the material or modifications, and
including progeny, unmodified derivatives or modifications.
The
NPDI, as an institute, is dedicated to making productive use of one of the world’s greatest collections of natural products.
The NPDI provides microbial and plant extracts, fermentation optimization, purification chemistry to support bioassay driven fractionation,
and structure elucidation. It houses a collection of >30,000 fungi and actinomycete microorganisms, and genomic DNA. This previously
private collection of natural products is provided to qualified researchers in academia and industry. Research activity has led
to the discovery of novel molecules with biological activity and to the formation of new life sciences companies that will seek
to commercialize discoveries centered on natural products. Businesses include those developing pharmaceutical, nutritional, flavor
enhancing, cosmetic ingredient, agricultural, and animal health products.
To
date, the Company’s research and development efforts with NPDI have been centered on selective screening of certain natural
product for the purpose of identifying extracts and further isolating molecules that may be effective as potential anti-inflammatory,
neuro-protective and oxidative stress relieving molecules. The Company has identified one or more selected extracts that it will
continue pre-clinical screening for furtherance of developing potential novel therapeutic agents. The Company’s agreement
with NPDI, provides for certain royalties to be paid to NPDI in connection with the commercialization of products derived from
its research and development efforts with NPDI.
Kannaway LLC
– Product Development and Marketing Agreement
On
March 29, 2014 we signed a five (5) year product development agreement with Kannaway LLC (“Kannaway”), a lifestyle
network and relationship marketing company that sells lifestyle products containing ingredients derived from cannabidiol (CBD)
rich hemp oil and hemp based (i.) botanical products, (ii.) naturopathic and nutritional supplements, and (iii.) nutraceuticals.
Kannaway currently has over 50,000 independent sales and marketing representatives in its network. Kannaway sells lifestyle products
containing ingredients derived from cannabidiol (CBD) rich hemp oil and hemp based (i.) botanical products, (ii.) naturopathic
and nutritional supplements, and (iii.) nutraceuticals. The product development agreement between Kannaway and the Company includes,
among other things, product development milestone revenues for the Company totaling $750,000 and a stock swap of 4.99% of the
Common Stock of the Company in exchange for 4.99% interest in Kannaway.
In
January 2015, after we entered into the product development agreement with Kannaway, Kannaway was sold, by its parent company,
to MJNA for 833,333,333 shares of MJNA common stock. We made demands upon MJNA and Kannaway’s former parent company to deliver
41,583,333 shares of MJNA common stock as part of the stock swap in the product development agreement between us and Kannaway.
A dispute arose between us, MJNA and Kannaway’s former parent which held up the delivery of the 41,583,333 shares of common
stock to the Company. The dispute between the Company and MJNA revolved around a corporate relocation clause found in the terms
underlying the product development agreement.
In
June 2018, we entered into a settlement agreement with MJNA, Kannaway, and the former parent company of Kannaway. 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.On June 1, 2018, the Company received 41,583,333 shares of Medical Marijuana, Inc. (“MJNA”) common
stock pursuant to a settlement agreement as part of the cancellation of the above agreement.
Temple
University – Animal Behavioral/Pre-Clinical Model
On
May 1, 2014, the Company signed a Research Services Agreement with Temple University to test the effects of cannabidiol and cannabidiol
like molecules in a hepatic encephalopathy model of cognitive impairment in support of the identification of molecules with in
vivo efficacy. The tests were performed by Temple University in the pre-clinical model for hepatic encephalopathy have
involved a mouse model of overt hepatic encephalopathy (“OHE”) and administration of CBD and KLS-13019 conducted by
Dr. Sara Jane Ward and Dr. Ronald Tuma, with the study titled – “Cognitive, neurological, and motor function
in a mouse model of hepatic encephalopathy: effects of CBD and CBD analogues (KLS-13019).” The results of this study have
shown that KLS-13019 is superior to CBD in the intervention of cognitive impairment from associated neurotoxicity in the OHE model.
On
January 4, 2017, the Company applied for a Phase 1 Small Business Technology Transfer (“STTR”) grant from the National
Institutes of Health – National Institute on Drug Abuse (“NIH-NIDA”). This grant application was made in collaboration
with Temple University and titled “Development of KLS-13019 for Chemotherapy Induced Peripheral Neuropathy and Drug Dependence”.
In December 2017, the Company was informed that the Phase 1 grant was awarded.
The
following is a summary outline of the aims proposed in the aforementioned grant.
Chemotherapy-induced
peripheral neuropathy (CIPN) can be a chronic, severely debilitating consequence of cancer therapy for which there are no effective
management strategies. Moreover, upwards of 80% of CIPN patients reported using prescription opioids for pain management despite
the fact that there is only weak evidence that the long-term continuation of opiods provides clinically significant pain relief
in these patients.
Mitochondrial
dysfunction, oxidative stress, and inflammation have all been implicated in its etiology. We have shown that the non-psychoactive
cannabinoid cannabidiol (CBD) prevents the development of CIPN in a mouse model of paclitaxel-induced cold and mechanical allodynia.
This target, allodynia, refers to central pain sensitization (increased response of neurons) following normally non-painful, often
repetitive stimulation. It can lead to the triggering of pain response from stimuli which normally do not provoke pain.
In
vitro, we observe that paclitaxel increases microglial expression of several putative mediators of neuropathic pain, and that
this effect can be blocked by CBD in a mitochondrial Na+/Ca2+ exchanger (mNCX)- dependent manner. We have also recently shown
that a more potent, hydrophilic analogue of CBD, KLS-13019, protects against paclitaxel-induced oxidative stress in cultured dorsal
root ganglia neurons, and that the mechanism underlying this neuroprotection is also regulation of intracellular calcium via the
mNCX. Preliminary results demonstrate that KLS-13019 can attenuate mechanical sensitivity associated with CIPN while also reducing
microglial activation and T cell infiltration into the spinal cord.
Dorsal
root ganglia (“DRG”) is a cluster of neurons (a ganglion) in the dorsal root of a spinal nerve. The cell bodies of
sensory neurons known as the first-order neurons are located in the dorsal root ganglia. Even
though dorsal root ganglia are a part of the system of peripheral nerves, they lie very close to the spine, and therefore to the
central nervous system. That makes them an important connection between the two systems. These nerve clusters help transmit messages
toward the brain and play a key role in neuropathic pain development and maintenance. Peripheral nerve injury-induced neuropathic
pain is one of major clinical disorders characterized by spontaneous ongoing or intermittent burning pain, sensory abnormalities
(dysesthesia), an increased response to painful stimuli (hyperalgesia), and pain in response to normally innocuous stimuli (allodynia).
Our
central hypothesis is that administration of CBD or KLS-13019 helps preserve Ca2+ homeostasis by promoting activity of the mNCX,
which in turn protects from both mitochondrial dysfunction and microglial activation to prevent the neuronal and glial changes
associated with the development and maintenance of paclitaxel-induced neuropathic pain. Results from experiments in AIM 1 will
demonstrate that the neuroprotective properties of CBD and KLS-13019 can be reduced by pharmacological or gene knockdown of the
mNCX in a statistically significant manner. Results from experiments in AIM 2 will further confirm the i.p. and p.o. efficacy
of KLS-13019 vs CBD to prevent or reverse mechanical sensitivity and neuroinflammation in a mouse model of paclitaxel-induced
neuropathic pain and that repeated administration of these molecules does not lead to analgesic tolerance. Remarkably, the non-psychoactive
CBD has also been shown to inhibit cue-induced heroi-seeking and neurochemical correlates thereof in a rat model of relapse and
decrease heroin craving in a small human study. Experiments in AIM 3 are designed to test the hypothesis that KLS-13019 and CBD
will attenuate reinstatement of morphine seeking behavior in a rat model of opioid relapse. The overall impact of the results
from the proposed research will be significant advancements into 1) identification of specific mechanisms that induce CIPN, 2)
application of this knowledge to facilitate design of novel treatment strategies for neuropathic pain, and 3) novel treatment
strategies to reduce or replace prescription opioid use and decrease prescription opioid abuse.
Chemotherapy-induced
peripheral neuropathy (CIPN) can be a chronic, severely debilitating consequence of cancer therapy for which there are no effective
management strategies. Moreover, upwards of 80% of CIPN patients reported using prescription opioids for pain management, despite
the weak evidence of their efficacy and the risks of long term dependence. Mitochondrial dysfunction, calcium dysregulation, oxidative
stress, and inflammation have all been implicated in its etiology. In pre-clinical studies, cannabidiol (CBD), a non-psychoactive
component of cannabis sativa, has shown evidence in a murine model to be a potentially effective treatment for CIPN and relieving
opiate dependence currently experienced by certain patients undergoing current therapeutic chemotherapy and pain management regimens
in cancer treatment. However, CBD has severe limitations in terms of potency, safety, oral bioavailability, and regulatory restrictions.
KLS-13019 is a novel new chemical entity that, as per pre-clinical testing, may be able to target these problems. This grant research
seeks to demonstrate the efficacy of KLS- 13019 in models of CIPN and opiate dependence, and also further elucidate its mechanism
of action in regulation of calcium levels and inflammatory sequelae.
Proposed
Study for Traumatic Brain Injury
To
investigate the mechanisms of action through which cannabidiol and a cannabinoid analogue (KLS-13019) provide neuroprotection
form neurotoxicity factors (glutamate and CCL11) relevant to TBI. Neural damage associated with TBI has been associated with multiple
processes including excitotoxicity, oxidative stress and neuroinflammation. Because of the recognized protective effects of cannabinoids
on all of these toxic processes, we have chosen to explore the effects and mechanism of action of two molecules: 1) cannabidiol
(CBD), a substance found in cannabis; and 2) KLS-13019, a novel CBD-like analogue that has been shown to protective from various
toxicity associated with oxidative stress (Kinney et al., 2016). In this proposal, we intend to investigate the protective mechanisms
related to the attenuation of CCL11 for both molecules in disease-relevant in vitro test systems that utilized glutatmate as a
relevant toxin and then explore their effectiveness in animal models of TBI.
Catalent
Pharma Solutions
In
December 2014, the Company signed a feasibility study contract with Catalent Pharma Solutions (“Catalent”), for among
other things, to commence a feasibility
study on a dose controlled soft-gel containing cannabidiol as the main active pharmaceutical ingredient (the “CBD Feasibility
Study”). The purpose of the CBD Feasibility Study with Catalent is to enable the Company to develop a proprietary drug product
formulation using CBD that has suitable solubility and stability characteristics for IND enabling pre-clinical studies in animals
and clinical studies in humans, as part of Kannalife’s ongoing research and development of a cannabinoid therapeutic for
the treatment of neurodegenerative diseases, including chronic traumatic encephalopathy (CTE) and overt hepatic encephalopathy
(OHE). Catalent is the leading global provider of advanced delivery technologies and development solutions for drugs, biologics,
consumer health and animal health products. With over 80 years serving the industry, Catalent has proven expertise in bringing
more customer products to market faster, enhancing product performance and ensuring
reliable clinical and commercial product supply. Catalent employs approximately 8,700 people, including over 1,000 scientists,
at 31 facilities across 5 continents, and in fiscal 2015 generated more than $1.8 billion in annual revenue. Catalent is headquartered
in Somerset, N.J.
Noramco,
Inc.
In
April 2015, the Company entered into discussions with Noramco, Inc. (“Noramco”), for among other things, the long
term supply of high purity, pharmaceutical
grade, synthetic cannabidiol for the purpose of delivering CBD as an active pharmaceutical ingredient to Catalent in connection
with the Company’s CBD Feasibility Study.
In
addition to the procurement of CBD through Noramco, the Company and Noramco have discussed an additional feasibility study for
the scale-up and commercial production of KLS-13019.
Noramco,
Inc. (“Noramco”) was formed in 1979 to provide a secure source of Codeine Phosphate. With the acquisition of Tasmanian
Alkaloids and addition of the Athens, Georgia site in 1982, and continuous expansions over the past three decades at both US facilities,
Noramco now contributes to billion dollar affiliate franchises, as well as to significant 3rd party generic and branded pharmaceutical
products worldwide.
Noramco
is a world leader in specialty active pharmaceutical ingredients, with a particular focus in controlled substances. The Company’s
headquarters and primary production facility is in Wilmington DE, with additional sites in Athens, GA and Schaffhausen Switzerland.
SK
Capital Partners (“SK Capital”) acquired Noramco from Johnson & Johnson in July 2016. SK
Capital is a private investment firm with a disciplined focus on the specialty materials, chemicals and healthcare sectors. The
firm builds strong and growing businesses that generate substantial long-term value for our investors. SK Capital utilizes its
industry, operating and investment experience to identify opportunities
to transform businesses into higher performing organizations with improved strategic positioning, growth and profitability as
well as lower operating risk. The firm currently has more than $1.5 billion of third party capital under management.
Quintiles
IMS / IQVIA (formerly Coté Orphan LLC)
In
May 2016, the Company engaged with Coté Orphan LLC (“Coté Orphan”) to assist the Company in its filing
of an application with the FDA for Orphan Drug Designation in the use of CBD to treat a sub-set of HE. (also referred to herein
as OHE).Coté Orphan is a boutique full-service regulatory group with a primary focus on Orphan Drugs. From the lab to the
market, Coté Orphan takes concepts to Orphan Drug and Clinical Trial applications before the FDA and EMA for approval.
Coté Orphan is led by Dr. Tim Coté, the former Director of the FDA’s Office of Orphan Products Development
(“OOPD”).
The
advantages of having a strategic relationship with Coté Orphan is as follows:
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As
director of the OOPD at the FDA, Dr. Tim Coté personally signed off on 1,400 orphan
designation applications, awarding designations to 800 and withholding approval of 600.
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Oversaw
the progress to full marketing approval of 150+ orphan drugs from 2007 to 2011.
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Team
of twenty-five (25) professionals of whom over seventy percent (>70%) are doctoral-level
trained.
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Regulatory
scientists who have deep knowledge and experience in the “unwritten rules”
of the FDA regarding orphan drugs.
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•
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Coté
Orphan is the largest submitter of FDA and EMA orphan designations worldwide.
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Coté
Orphan does not merely opine, they do the work of creating quality regulatory filings.
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On
June 2, 2017, Coté Orphan LLC was purchased and is now wholly owned by Quintiles IMS. The Company has continued its efforts
through IQVIA, a division of Quintiles IMC, in petitioning the FDA’s OOPD in furtherance of the Company’s application
for orphan designation for CBD to treat a sub-set of HE.
The
Company has filed for orphan designation with the U.S. Food and Drug Administration (“FDA”) for the use of CBD in
the treatment 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.
PRIMARY
TARGETS FOR DRUG DISCOVER AND MARKET SIZE
Target
1:Hepatic Encephalopathy – $2+ Billion Market in the U.S.
Hepatic
encephalopathy (a complication of liver cirrhosis) is one of the most important clinical manifestations in decompensated liver
cirrhosis. Accepted concepts regarding the pathophysiology of hepatic encephalopathy are that the endogenous neurotoxic substances,
including ammonia: (i.) escape from catabolism by the liver due both to the impaired function of the cirrhotic liver and also
to the presence of portal systemic shunting; (ii.) circulate at elevated concentrations in the systemic blood flow; (iii.) reach
the brain through the blood-brain barrier; and (iv.) impair cerebral function leading to disturbances of consciousness. See Discovery
of KLS-13019, a Cannabidiol-Derived Neuroprotective Agent, with Improved Potency, Safety, and Permeability. William A.
Kinney, Mark E. McDonnell, Hua Marlon Zhong, Chaomin Liu, Lanyi Yang, Wei Ling, Tao Qian, Yu Chen, Zhijie Cai, Dean Petkanas,
and Douglas E. Brenneman – ACS Med. Chem. Lett., 2016, 7 (4), pp 424–428.
The
majority of these toxins are produced in the intestine by the bacterial flora, and are absorbed into the portal venous flow. In
spite of improved therapeutic options for encephalopathy, the long-term survival is still low. Thus, hepatic encephalopathy remains
a serious complication of liver cirrhosis. We believe that the establishment of truly effective prevention modalities and broader
application of liver transplantation will help rescue patients suffering from this complication of liver cirrhosis in the near
future.
The
Company’s exclusive license and use of the ‘507 Patent and the Company’s commercial development plan will focus
on the identification, synthesis and/or extraction of novel Cannabis-derived molecules for the treatment of impairments associated
with oxidative stress in Hepatic Encephalopathy (HE).
According
to an article published in the British Journal of Pharmacology Research over the past decade has produced substantial behavioral
and histochemical evidence demonstrating the effectiveness of certain Cannabis-derived molecules such as Cannabidiol (“CBD”)
in the improvement of brain and liver function in fulminant hepatic failure. Findings include reversal of locomotors and cognitive
pathologies, reversal of structural changes such as Alzheimer’s Type II astrogliosis, and reversal of increases in ammonia
levels. Beyond the supportive preclinical evidence, multiple factors provide reasons for enthusiasm in the pursuit of the HE indication:
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New
mechanism of action: Cannabinoids, if shown effective in clinical trials, would provide
a new mechanism of action and thus be an incremental clinical tool to combine with existing
treatments. This combination of mechanisms of action could lead to additive or synergistic
effects. Existing treatment methods, such as lactulose, Rifaximin and others under study
(e.g., AST-120), manage symptoms by reducing ammonia uptake in the digestive system.
However, once blood ammonia levels have increased, they putatively provide limited benefits.
Cannabinoids, instead, act in the central nervous system ameliorating the downstream
pathological effects of ammonia.
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Multiple
preventive benefits: According to National Institute of Health, pre-clinical
studies have shown that CBD, the major constituent in Kannalife’s intended lead
target drug molecule and candidate, may provide benefits in the secondary prevention
of HE.
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o
Steatosis: In vitro studies have shown CBD to reverse the histopathology associated with steatosis or fatty liver
syndrome. This is particularly relevant because fatty liver is a major cause of liver cirrhosis, and has no current drug-based
treatment. In addition, multiple currently marketed drugs are known to induce steatosis. These include steroids (e.g., triamcinolone,
cortisone, prednisone), the anti-cancer drug Tamoxifen (a breast cancer drug), HIV anti-retrovirals and anti-arrythmic drug Amiodarone.
o
Fibrogenesis: Animal studies have shown that endocannabinoids are involved in the regulation of fibrogenesis in the liver. CB2
-/- mice show increased fibrogenesis in response to CCl4 injection, whereas CB1 -/- mice have decreased hepatic fibrogenesis.
This suggests an opportunity to modulate fibrogenesis, a critical intermediate step in liver cirrhosis, through a proper selection
of cannabinoid antagonists.
Hepatic
encephalopathy (HE) is a neuropsychiatric disorder that includes learning deficits and impairment of long-term memory. Hepatic
encephalopathy can be caused by chronic and excessive ethanol ingestion along with the accumulation of toxic substances that are
normally removed by the liver. The pathogenesis of HE in the central nervous system includes damage to the pre-limbic cortex,
striatum and the hippocampus, and this pathology is believed to be mediated by the accumulation of free radicals and oxidative
stress. Hepatic encephalopathy has primary epidemiological precursors in cirrhosis, hepatitis B, hepatitis C, and portal hypertension.
The incidence rate of HE among alcohol induced cirrhosis patients is as high as 45%, making HE a leading opportunistic disease
stemming from alcoholism. If left unchecked, HE can progress to hepatic coma and ultimately
death. The pathogenesis of HE includes damage to the prelimbic cortex, striatum, and the hippocampus. Hepatic encephalopathy is
caused by accumulation of toxic substances in the bloodstream that are normally removed by the liver.
It
has been previously demonstrated that impairment of hepatocytes by ethanol is associated with the production of free radical and
oxidative stress. The accumulation of these free radicals and oxidative stress contribute to cognitive impairment, learning deficits,
memory impairment, as well as damage and death of neuronal tissue. An emerging concept is that blockade of free radical mediated
stress and oxidative stress will prevent the neural damage associated with hepatic encephalopathy and prevent cognitive impairment,
learning deficits, memory impairment, as well as damage and death of neuronal tissue associated with HE.
The
Company’s proposed commercialization of the ‘507 Patent is intended to benefit the public health by reducing the oxidative
stresses and neurological complications that are prevalent in patients suffering with hepatic encephalopathy.
Currently
in the United States, there are over 1.5 million sufferers of HE across four stages, including approximately 121,000 patients
hospitalized each year from the overt hepatic encephalopathy (OHE)
stage of the disease.
Cannabidiol
(CBD) vs. KLS-13019 in Overt Hepatic Encephalopathy (OHE)
In
a publication in American Chemical Society Medicinal Chemistry Letters on February
10, 2016, our abstract read as follows:
“Cannabidiol
is the nonpsychoactive natural component of C. sativa (cannabis sativa) that has been shown to be neuroprotective in multiple
animal models. Our interest is to advance a therapeutic candidate for the orphan indication overt hepatic encephalopathy (OHE).
OHE is a serious neurological disorder that occurs in patients with cirrhosis or liver failure. Although cannabidiol has
shown evidence in a murine model to be a potentially effective treatment for OHE, it has
limitations in terms of safety and oral bioavailability. Herein, we describe a series of side chain modified resorcinols that
were designed for greater hydrophilicity and “drug likeness”, while varying hydrogen bond donors, acceptors, architecture,
basicity, neutrality, acidity, and polar surface area within the pendent group. Our primary screen evaluated the ability of the
test agents to prevent damage to hippocampal neurons induced by ammonium acetate and ethanol at clinically relevant concentrations.
Notably, KLS-13019 was 50-fold more potent and >400-fold safer than cannabidiol and exhibited an in vitro profile consistent
with improved oral bioavailability.”
Cannabidiol
has been shown to be neuroprotective by blocking the damage caused by free radicals and oxidative stress. This effect was independent
of cannabinoid receptors because it could not be blocked by a cannabinoid antagonist. CBD has
shown evidence in two a murine models to be a potentially effective treatment for HE, thioacetamide
induced and bile duct ligation induced liver damage, at a dose of 5 mg/kg IP (intraperitoneal injection). Importantly, CBD treated
animals in the first study exhibited improvements in both liver and brain function as compared to untreated control animals.
Free
radical mediated stress and oxidative stress are also known to contribute to additional pathological conditions including epilepsy,
neuropathic pain, traumatic head injury, stroke, chronic traumatic encephalopathy (CTE), and neurodegenerative diseases such as
Parkinson’s disease, Alzheimer’s disease, Huntington’s disease, and amyotrophic lateral sclerosis (ALS).
Other
examples of neuroprotection by CBD include use in hypoxia-ischemia and stroke models. A wide range of possible mechanisms have
been attributed for CBD’s neuroprotective effects including antioxidant, anti-inflammatory, adenosine signaling, cannabinoid
receptor GPR55 (G Protein-coupled receptor 55), and serotonin mediated pathways; however, mitochondrial calcium modulation is
fundamental. The GPR55 receptor is a G protein receptor in humans that is encoded by the GPR55 gene. The GPR55 receptor has been
identified as a novel cannabinoid receptor. Receptors are sensing molecules which communicate signals between cells to illicit
physiological changes in the body. To hedge our bets, we chose to interrogate the hippocampal neuron, as a phenotypic screen that
will measure neuroprotection independent of a mechanism.
Target
2:Chronic Traumatic Encephalopathy (CTE) – $2+ Billion Market in the U.S.
Not
unlike Overt hepatic encephalopathy, chronic traumatic encephalopathy is a neuro-degenerative disease of the brain and is associated
with repeated head traumas like concussions. In the National Football League (“NFL”), the statistics are alarming.
In 2010 there were .679 concussions per game (218 in 321 combined pre-season and regular season games). While there was a decrease
in incidents in 2011 (.594 concussions per game), the statistics are still the source of significant concern. See NFL
to Follow Army’s Lead on Helmet Sensors in Attempt to Prevent Head Injury – L. Madden, SportsMoney,
July 26, 2012.
Chronic
Traumatic Encephalopathy (“CTE”) is a form of encephalopathy that is a progressive neuro-degenerative disease, which
can only be definitively diagnosed postmortem, in individuals with a history of multiple concussions and other forms of head injury.
The disease was previously called dementia pugilistica (“DP”), as it was initially found in those with a history of
boxing. CTE has been most commonly found in professional athletes participating in American football, ice hockey, professional
wrestling and other contact sports who have experienced repetitive brain trauma.
It
has also been found in soldiers exposed to a blast or a concussive injury, in both cases resulting in characteristic degeneration
of brain tissue and the accumulation of tau protein. Individuals with CTE may show symptoms of dementia, such as memory loss,
aggression, confusion and depression, which generally appear years or many decades after the trauma. Repeated concussions and
injuries less serious than concussions (“sub-concussions”) incurred during the play of contact sports over a long
period can result in CTE. In the case of blast injury, a single exposure to a blast and the subsequent violent movement of the
head in the blast wind can cause the condition.
The
primary physical manifestations of CTE include a reduction in brain weight, associated with atrophy of the frontal and temporal
cortices and medial temporal lobe. The lateral ventricles and the third ventricle are often enlarged, with rare instances of dilation
of the fourth ventricle.
Other
physical manifestations of CTE include pallor of the substantia nigra and locus ceruleus, and atrophy of the olfactory bulbs,
thalamus, mammillary bodies, brainstem and cerebellum. As CTE progresses, there may be marked atrophy of the hippocampus, entorhinal
cortex, and amygdala.
On
a microscopic scale the pathology includes neuronal loss, tau deposition, TAR DNA- binding Protein 43 (TDP 43) beta-amyloid deposition,
white matter changes, and other abnormalities. The tau deposition occurs as dense neurofibrillary tangles (NFT), neurites, and
glial tangles, which are made up of astrocytes and other glial cells Beta-amyloid deposition is relatively uncommon feature of
CTE.
A
small group of individuals with CTE have chronic traumatic encephalo-myopathy (CTEM), characterized by motor neuron disease symptoms
and mimics Amyotrophic Lateral Sclerosis (ALS) or Lou Gehrig’s disease. Progressive muscle weakness and balance and gait
problems seem to be early signs of CTEM.
Target
3:Chemotherapy Induced Peripheral Neuropathy (CIPN) – $3+ Billion Market in U.S.
In
December 2016, as part of a Small Business Technology Transfer (“STTR”) program, the Company, in cooperation with
Temple University, Kannalife and Temple University filed an STTR grant proposal with the National Cancer Institute (“NCI”)
to demonstrate improved in vivo efficacy of an orally administered KLS-13019, Kannalife’s lead target drug candidate in
a head-to-head comparison to intraperitoneal injection (“IP Injection”) of CBD in a model of chemotherapy-induced
peripheral neuropathy.
At
the conclusion of Phase I STTR application, we will demonstrate that KLS-13019 (Per os – taken through the mouth) can
control mechanical sensitivity and inflammation associated with CIPN in the absence of tolerance development, and also reduce
opioid craving behavior with comparable efficacy to cannabidiol (intraperitoneal injection). In Phase II STTR, we will investigate
a back-up series and will execute the CMC, pharmacokinetic, safety pharmacology, and toxicology assessments required for IND filing
on KLS-13019.
A
visual image of the chemical structure of cannabidiol and KLS-13019 can be seen as follows, along with selected data describing
EC50 (the concentration of a drug that give half-maximum response); Safety Margin (pre-clinical toxicity), and
Bioavailability (seen as “F”):
KLS-13019
does not contain cannabidiol and is a new chemical entity that would not fall under the Controlled Substances Act (“CSA”)
or be deemed a Schedule 1 controlled substance.
KLS-13023
is a formulation that does contain cannabidiol. At present, cannabidiol is deemed a Schedule 1 controlled substance by the U.S.
Drug Enforcement Agency under the Controlled Substances Act. And like the drug molecule EpidiolexÒ, which was recently approved
by the FDA for marketing and sale for use in treating Dravet’s Syndrome and Lennox-Gasteau Syndrome (forms of child epilepsy),
KLS-13023 would need to follow the guidance set forth by the CSA, complete a successful human clinical trial and apply for rescheduling,
as was the case with EpidiolexÒ, now a Schedule 5 drug.
The
Company plans on using KLS-13019 as its lead target drug candidate for the treatment of CIPN.
A
priority therapeutic opportunity is the treatment of chemotherapy-induced peripheral neuropathy (CIPN), because to date no one
drug or drug class is considered to be safe and effective in this disabling disease. Tricyclic antidepressants are often the first
choice in most patients but are associated with significant side effects including sedation and cardiovascular complications as
well as marginal efficacy (Wolf et al 2008). Anticonvulsants, despite their efficacy in animal models of CIPN, are only partially
effective in the majority of patients (Bosnjak et al 2002).
Even
more problematic, upwards of 80% of CIPN patients report using prescription opioids for pain management despite lacking strong
evidence for efficacy and increasing safety concerns in the face of the current devastating opioid epidemic. The exact mechanism
of CIPN has not been fully elucidated and can differ across classes of chemotherapeutic agents. It is therefore necessary to identify
novel therapies to prevent or treat CIPN that target one or more of these putative mechanisms. Recently there has been resurgence
in interest in the potential medical utility of the Cannabis plant and its constituents, and mechanism-based basic research is
warranted to develop safe and effective cannabinoid-based pain treatments. CBD is a non-psychoactive component of Cannabis sativa
that is neuroprotective, independent of cannabinoid receptors (Hampson 1998).
Prior
studies at Temple University revealed that CBD prevents the development of paclitaxel-induced mechanical sensitivity in mice in
vivo (Ward et al 2011, 2014). Additionally, CBD attenuates morphine reward and heroin seeking behavior in animal models (Ren,
Whittard et al. 2009; Katsidoni, Anagnostou et al. 2013) and a small trial in humans suggests attenuation of heroin craving in
humans (Hurd, Yoon et al. 2015). However, CBD has limitations in terms of potency, safety, and oral bioavailability. The Company
believes it may be able to address these problems in its fully owned series of side chain modified derivatives, which have been
protected in a non-provisional patent application WO2015/106108A2.
One
of the molecules covered by the patent is KLS-13019, which in pre-clinical studies, including PK studies, has shown evidence of
improved in vitro efficacy, improved safety, and improved oral bioavailability over CBD in side by side preclinical evaluation,
and is not a controlled substance. (Pharmacological Comparisons Between Cannabidiol and KLS-13019, Journal of Molecular Neuroscience,
14 August 2018)
Preliminary
Effects of KLS-13019 in CIPN model: In a preliminary study, we treated 8 mice with saline and 16 mice with paclitaxel
(Days 1, 3, 5, and 7, 8.0 mg/kg IP). Half of the paclitaxel-treated mice were pretreated with KLS-13019 (2.5 mg/kg IP) and half
were pretreated with its vehicle alone. On days 9, 14, and 21 post initiation of injections, mechanical sensitivity was tested
using von Frey filaments and compared with baseline sensitivities prior to treatment (Fig. 3). One-way ANOVA revealed a significant
effect of KLS-13019 on Day 14 to prevent the development of paclitaxel-induced mechanical sensitivity [F(2, 21) =
4.67, p<0.05]. Dunnett’s multiple comparison’s test revealed a significant difference between the saline and paclitaxel
treated groups, but not between the saline and KLS-13019+paclitaxel treated groups. Preliminary flow cytometry results with pooled
cords from three mice in each group revealed that paclitaxel-treated mice had increased numbers of CD4+ T cells and microglia
in the whole spinal cord, and that this increase is prevented by KLS-13019 treatment.
E1.
Aim 1.Research Plan.Determine target for the neuroprotective actions of CBD and KLS-13019. As mentioned above, DRG neurons
are a primary cytotoxic target of chemotherapeutic agents. In addition, spinal microglia have been heavily implicated in the development
and maintenance of neuropathic pain and have shown to become activated in animal models of CIPN. At the conclusion of
Aim 1, we will demonstrate that the neuroprotective properties can be reduced by pharmacological or gene knock-down of a relevant
target in a statically significant manner.
E2.
Aim 2.Assess KLS-13019, CBD, and morphine against paclitaxel-induced peripheral neuropathy. At the conclusion of Aim
2, we will have demonstrated that KLS-13019 performs as well as CBD (ip and po) against CIPN and CNS inflammation and shows no
antinociceptive tolerance as compared to morphine.
CIPN
procedure: Experiments are designed to test the efficacy of novel CBD analogues in attenuating established mechanical
sensitivity and inflammation associated with CIPN. Dr. Ward’s laboratory has been using the CIPN procedure for eight years
and has demonstrated that CBD treatment can both prevent the development of (Ward et al 2011, 2014) and reverse established (King
et al in revision, British Journal of Pharmacology) CIPN in mouse models. CBD and KLS-13019 and their vehicle controls
will be tested in groups of mice treated with paclitaxel (8.0 mg/kg IP, days 1, 3, 5 and 7). Testing of each dose for each molecule
will require a final sample size of 8. Molecules will be administered daily for three weeks, starting on Day 11 when peak mechanical
allodynia has already been achieved. In the initial study, CBD (0.05 - 5 mg/kg ip) will be compared with three doses of KLS-13019
(e.g., 0.05, 0.5 and 5 mg/kg ip) and three doses of morphine (1.0 – 10 mg/kg ip; Neelakantan et al 2016). This will
be followed by a study in which KLS-13019 will be assessed at three oral doses. In preliminary studies, we have dosed the mice
with KLS-13019 (2.5 - 5 mg/kg ip) with no adverse effects. In addition, KLS-13019 was shown to produce no impairment in the mouse
rotorod test at 100 mg/kg po in studies conducted at the Anticonvulsant Screening Program (NIH).
Neuroinflammation
assessment: Immunohistochemistry and flow cytometry will run in the PIs laboratory to evaluate markers of pain and inflammation
associated with neuropathic pain, including astrocytic and microglial activation, CGRP, and T cell infiltration. Given the fact
that we are observing CNS infiltration of T cells that is reversed by treatment with KLS-13019, cranial windows will be surgically
implanted (as described in Ni, Tuma et al 2004) in additional groups of vehicle or KLS-13019 + paclitaxel treated mice prior to
treatment to longitudinally assess the effect of paclitaxel with or without cannabinoid treatment on leukocyte rolling and adhesion
across the development of CIPN.
E2.
Aim 3.Assess KLS-13019 and CBD against reinstatement of morphine seeking. At the conclusion of Aim 3, we will have
demonstrated that KLS-13019 attenuates opioid-seeking behavior as well as CBD.
Morphine
Reinstatement: The Principal Investigator has 20 years of experience with behavioral assays with specific expertise in
rodent models of substance abuse, including opioid self-administration. A standard rat model of morphine seeking will be used
(Vassoler et al 2017) wherein rats make lever presses to receive infusions of morphine. Rats will be surgically implanted with
chronically indwelling jugular catheters and trained to self-administer morphine (0.75 mg/kg/inf) in the presence of auditory
and visual cues daily for 20 days, followed by 10 days of extinction wherein the morphine is replaced with saline and the conditioned
cues are eliminated. During the last three days of extinction, rats will be treated with vehicle, CBD (5.0 mg/kg IP), or KLS-13019
(0.5 – 5.0 mg/kg IP). The following day rats will be exposed to a single reinstatement session wherein lever presses
are again paired with auditory and visual cues but saline is delivered instead of morphine. This experimental design is based
on Ren et al 2009 results with CBD on cue-induced reinstatement of heroin seeking in rats.
Status
of Phase 1 STTR Grant Research
On
January 4, 2017, the Company applied for a Phase 1 Small Business Technology Transfer (“STTR”) grant from the NIH-NIDA.
This grant application was made in collaboration with Temple University and titled “Development of KLS-13019 for Chemotherapy
Induced Peripheral Neuropathy and Drug Dependence”. In December 2017, the Company was informed that the Phase 1 grant was
awarded.
The
Company has completed all of its work related to the aforementioned grant and is currently in a peer review submission of its
research results to the Journal of Molecular Neuroscience. Temple University has completed two of the three aims outlined in the
grant proposal and is currently in the process of completing the third and final aim, morphine reinstatement. The Company believes
that the grant study will be completed on or about June 2019 and the results will be published by Temple University.
On
December 31, 2019, the Company and Temple University filed a completion report with NIH-NIDA regarding the Phase 1STTR grant.
The results of this study were promising and have set forth the Company’s plans to file for a Phase 2 grant due for filing
on or before April 7, 2020.
The
Company and Temple University believe that there is strong potential for a follow on Phase 2 STTR grant to further the research
and development of the Company’s treatment for CIPN. Phase 2 is focused
on the development, demonstration and delivery of the innovation. Only Phase 2 contract awardees are eligible to submit a proposal
for a Phase II funding agreement.
Reduction
in Addiction Based Opiate Dependency
The
abuse of and addiction to opioids such as heroin, morphine, and prescription pain relievers is a serious global problem that affects
the health, social, and economic welfare of all societies. It is estimated that between 26.4 million and 36 million people abuse
opioids worldwide, with an estimated 2.1 million people in the United States suffering from substance use disorders related to
prescription opioid pain relievers in 2012 and an estimated 467,000 addicted to heroin. The consequences of this abuse have been
devastating and are on the rise. For example, the number of unintentional overdose deaths from prescription pain relievers has
soared in the United States, more than quadrupling since 1999. There is also growing evidence to suggest a relationship between
increased non-medical use of opioid analgesics and heroin abuse in the United States. See America’s Addiction to
Opioids: Heroin and Prescription Drug Abuse – N.D. Volkow, MD, Senate Caucus on International Narcotics Control,
May 14, 2014.
NIDA
Activities to Stem the Tide of Prescription Opioid and Heroin Abuse
The
National Institute on Drug Abuse (“NIDA”) first launched its prescription drug abuse public health initiative in 2001.
Our evidence-based strategy calls for a comprehensive three-pronged approach consisting of (1) enhancing our understanding of
pain and its management; (2) preventing overdose deaths; and (3) effectively treating opioid addiction.
Research
on Pain and Next Generation Analgesics
Although
opioid medications effectively treat acute pain and help relieve chronic pain for some patients, their addiction risk presents
a dilemma for healthcare providers who seek to relieve suffering while preventing drug abuse and addiction. Little is yet known
about the risk for addiction among those being treated for chronic pain or about how basic pain mechanisms interact with prescription
opioids to influence addiction potential. To better understand this, NIDA launched a research initiative on "Prescription
Opioid Use and Abuse in the Treatment of Pain." This initiative encourages a multidisciplinary approach using both human
and animal studies to examine factors (including pain itself) that predispose or protect against opioid abuse and addiction. Funded
grants cover clinical neurobiology, genetics, molecular biology, prevention, treatment, and services research. This type of information
will help develop screening and diagnostic tools that physicians can use to assess the potential for prescription drug abuse in
their patients. Because opioid medications are prescribed for all ages and populations, NIDA is also encouraging research that
assesses the effects of prescription opioid abuse by pregnant women, children, and adolescents, and how such abuse in these vulnerable
populations might increase the lifetime risk of substance abuse and addiction.
Another
important initiative pertains to the development of new approaches to treat pain. This includes research to identify new pain
relievers with reduced abuse, tolerance, and dependence risk, as well as devising alternative delivery systems and formulations
for existing drugs that minimize diversion and abuse (e.g., by preventing tampering and/or releasing the drug over
a longer period of time) and reduce the risk of overdose deaths. New molecules are being developed that exhibit novel properties
as a result of their combined activity on two different opioid receptors (i.e., mu and delta). Pre-clinical studies
show that these molecules can induce strong analgesia but fail to produce tolerance or dependence. Researchers are also getting
closer to developing a new generation of non–opioid-based medications for severe pain that would circumvent the brain reward
pathways, thereby greatly reducing abuse potential. This includes molecules that work through a type of cannabinoid receptor found
primarily in the peripheral nervous system. NIDA is also exploring the use of non-medication strategies for managing pain.
An
example is the use of “neurofeedback,” a novel modality of the general biofeedback approach, in which patients learn
to regulate specific regions in their brains by getting feedback from real-time brain images. This technique has shown promising
results for altering the perception of pain in healthy adults and chronic pain patients and could even evolve into a powerful
psychotherapeutic intervention capable of rescuing the circuits and behaviors impaired by addiction.
PRIMARY
TARGETS FOR TOPICAL MEDICAMENTS AND MARKET SIZE
The
Company plans on screening and conducting preliminary research and development of 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. (see: Business – Kannalife Intellectual Properties)
In
preclinical testing, certain molecules under Pat. 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.
Neuropathic
Pain, Anti-Inflammation, Anti-Pruritic & Skin Ulcers
Target
1:Anti-Puritics (Anti-Itch) – $16+ Billion Market in U.S.
Global
Pruritus Therapeutics Market is expected to reach USD 16.38 Billion by 2025, according to a new study by Grand View Research,
Inc. Growing worldwide prevalence of atopic dermatitis, allergic contact dermatitis and urticaria is expected to drive market
growth during the forecast period. Introduction of new products based on scientific mechanistic understanding such as the identification
of new T-cell subsets, particularly Th17, and Th22 and the patent expiration of PROTOPIC (tacrolimus) is expected to open up new
avenues for manufacturers to capitalize on over the forecast period.
Corticosteroids
were the leading product segment in 2013 owing to high efficacy exhibited by this class of drugs in treating pruritic conditions
by reducing inflammation and itching. Topical applications of corticosteroids have been found to be extremely effective in the
treatment and maintenance therapies pertaining to pruritus.
Itching
is a sensation that, if sufficiently strong, will provoke scratching or the desire to scratch. It is a frequent and distressing
symptom of various dermatological and systemic diseases. It can also occur in some patients without any skin symptoms. Knowledge
has accumulated about the initiation of itch by external stimuli, but the neuronal substrate in the skin has not been completely
identified. This has fortunately changed to some degree since a group of histamine-sensitive C-fibers were recently identified,
which probably represent the afferent units that mediate itch sensations. Histamine, derived from mast cells, is the best known
pruritogen. It induces different degrees of itching when applied in different concentrations into the skin. In most dermatological
and systemic diseases, except urticaria, histamine is not the main mediator. There are other proinflammatory mediators to consider
such as substance P, proteases, interleukin-2, acetylcholine, vasoactive intestinal peptide (VIP) and opioid peptides. The different
types of pruritus (see Table 2) have different etiological factors, which in most cases have not yet been clarified. As well,
the mechanisms of excitatory and inhibitory processing in the central nervous system are not defined. See Systemic Drugs
with Antipruritic Potency – E. Weisshar, MD, H. Gollnick, MD, PhD., Departments of Dermatology and Venerology,
Otto-von-Guericke-University, Magdeburg, Germany, Skin Therapy Letter, Vol. 5 Number 5
•
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Calcineurin
inhibitor is identified as the most lucrative segment of the market on account of high
usage rate of these drugs in combination therapy for the treatment of pruritus in patients
suffering from chronic pruritus and growing market penetration rates. Moreover, the introduction
of new products such as Pimecrolimus cream and Tacrolimus ointment is expected to further
drive this market.
|
•
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|
Anti-histamines
owing to its growing use as a first line treatment and presence of drugs in pipeline
with expected commercialization is also expected to grow at a healthy rate during the
forecast period.
|
•
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|
North
America led the overall market in terms of revenue in 2013 majorly on account of the
presence of high prevalence of diseases associated with pruritus, introduction of new
products targeting the unmet medical needs and growing patient awareness levels.
|
•
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|
The
Asia Pacific pruritus therapeutics market is expected to grow at a CAGR of over 5.0%
during the forecast period. Presence of high unmet healthcare needs and increasing prevalence
of allergic contact dermatitis and urticaria in this region are some factors attributing
to its rapid growth rate.
|
•
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Some
key participants of the pruritus therapeutics market include Sanofi, Pfizer, Tai Guk
Pharmaceutical Company, Actavis, Trevi Therapeutics, Cara Therapeutics, Ocera Therapeutics
Inc. and NeRRe Therapeutics.
|
•
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|
Manufacturers
adhere to rigorous R&D in an attempt to develop cost effective products and avoid
barriers such as product recalls. In addition, this strategy is implemented keeping the
unmet needs in consideration. For Instance, Creabilis has a molecule in the pipeline
– CT327, which caters to the unmet needs associated with pruritus in patients
suffering from psoriasis.
|
Target
2:Anti Inflammatory – $80+ Billion Market in U.S.
Anti-Inflammatory
Therapeutics Market is expected to garner $106.1 billion by 2020, registering a CAGR of 5.9% during the forecast period 2015-2020.
Inflammation is triggered by the defense system of the body in response to harmful stimuli, damaged cells, irritants and microorganisms.
Inflammation is the mechanism of innate immunity, which seeks to eliminate the cause of injury, clear dead and necrotic cells
and heal injured tissues. Sometimes, the body defense system inappropriately triggers inflammation against its own cells, resulting
in incurable inflammatory autoimmune diseases such as arthritis, asthma and chronic obstructive pulmonary disease (COPD). See Anti-Inflammatory
Therapeutics Market by Indication (Arthritis, Respiratory Diseases, Multiple Sclerosis, Psoriasis, Inflammatory Bowel Disease)
and Drug Class (Anti-Inflammatory Biologics, Non-Steroidal Anti-Inflammatory Drugs (NSAIDs), Corticosterioids) – Global
Opportunity Analysis and Industry Forecast, 2014-2020 – O. Sumant, Allied Market Research – September
2015.
According
to World Health Organization (WHO), approximately 235 million people suffer from asthma in the world. Symptomatic relief during
the inflammation provides relief to the patients suffering from inflammatory autoimmune diseases. Although there are multiple
anti-inflammatory drugs approved in the market, there is an indispensable need for better and novel anti-inflammatory therapeutics
with lesser side effects and better efficacy.
In
addition, they are also difficult to imitate due to their complex molecular structure and origin. The global anti-inflammatory
market has been driven by factors such as increasing autoimmune and respiratory conditions, new drugs in pipeline and increasing
adoption of anti-inflammatory drugs.
Moreover,
increasing awareness of anti-inflammatory therapeutics and attractive government initiatives in the Asia-Pacific and LAMEA region
are expected to drive the market during the analysis period. Factors, such as side effects of anti-inflammatory drugs and patent
expiry issues of blockbuster drugs (such as Remicade), are known to impede the market growth.
The
global anti-inflammatory therapeutics market is segmented on the basis of indication, drug class and geography. The indications
considered in this report include arthritis, respiratory diseases, multiple sclerosis, psoriasis, inflammatory bowel disease and
other inflammatory diseases. Among indications, arthritis holds tremendous potential for growth accounting for 38.2% of the global
anti-inflammatory therapeutics market. Anti-inflammatory biologics are the most preferred drugs for treatment of arthritis. On
the basis of drug class, the market is segmented into anti-inflammatory biologics, non-steroidal anti-inflammatory drugs (NSAIDs)
and corticosteroids. Anti-inflammatory biologics holds the largest share among drug classes accounting for 54.8% share of the
global anti-inflammatory therapeutics market, and is expected grow rapidly during the forecast period.
Geographically,
the market is segmented into four regions namely North America, Europe, Asia-Pacific and LAMEA. Among regions, North America holds
the largest share accounting for 45.7% share of the global anti-inflammatory therapeutics market; however, the Asia-Pacific region
is expected to exhibit the fastest growth during the forecast period. Major market players have adopted innovative strategies
such novel drug development and product launch (novel and indication expansion) to increase their market presence. In 2014, AstraZeneca
had five anti-inflammatory drugs in the final stages of drug development. These drugs are lesinurad, sifalimumab, anifrolumab,
mavrilimumab and brodalumab. The companies have filed new patents to overcome the issues of patent expiries of their existing
drugs, and to gain a prominent market share. The key companies profiled in this report include Pfizer, Inc., Abbvie, Inc., Johnson
& Johnson, GlaxoSmithKline, Merck & CO., Inc., Novartis, F. Hoffman, La Roche AG, Eli Lily and Company, AstraZeneca PLC,
and Amgen.
Target
3:Eczema – $3+ Billion Market in U.S.
They
estimated the global eczema therapeutics market to value $2.035 billion in 2010. It is expected to grow a Molecule Annual Growth
Rate (CAGR) of 8.2% to $3.834 billion by 2018. This growth is primarily attributed to an increased prevalence rate and increased
patient awareness of the disease pattern. In 2010, the prevalence of eczema reported in seven major geographies (the US, the UK,
Germany, France, Spain, Italy and Japan), was between 10-20%. GlobalData expects that the number of eczema patients will increase,
along with an increase in prevalence. See Eczema Therapeutics Market is Forecast to Show Significant Growth Until 2018 – February
23, 2012, ASDMedia BV, Amsterdam.
Some
factors associated with an increased risk of eczema include environmental factors, hygiene conditions, lack of awareness and levels
of education. In the pipeline, presence of novel molecules with improved safety, efficacy and tolerability is expected to further
drive the market during the forecast period. However, an increase in product competition due to genericization is a barrier for
the market which will decrease the growth over the forecast period in comparison to historic growth.
Another
factor that could restrain the market is that patients are opting for alternative therapies over conventional therapies. Different
forms of complementary or alternative treatment options for eczema are meant to compliment drug treatment, not replace them. Complementary
or alternative medicine can be classified as herbal therapies (treatments using plant species), and nonherbal therapies, such
as homeopathy, acupuncture and aromatherapy. The most commonly used herbal formulations are based on Traditional Chinese Medicines
(TCM). Increasing acceptance of these therapies is proving to be a negative growth factor for existing therapeutics products.
Globally, the US is the major contributor to the overall eczema therapeutics market, followed by Japan.
The
Eczema Therapeutics Market is Dominated by Topical Corticosteroids (TCSs)
Current
competition in the eczema therapeutics market is weak. The market contains conventional forms of therapy such as topical corticosteroids,
topical immunomodulators and emollients as the most prominent therapies. Among all the available treatment options, topical corticosteroids
hold a large share and dominate the market. Topical corticosteroids are available in various strengths (mild, moderate, potent
and very potent) and formulations (ointment, cream, lotion and many more), so that they can be used according to the severity
of eczema. Calceurin inhibitors (Protopic (tacrolimus) and Elidel (pimecrolimus)) showed higher efficacy in comparison to corticosteroids
and these products were widely used after their respective launches. However, in 2005 the FDA issued black box warnings for the
calceurin inhibitors (Protopic and Elidel), this has resulted in declining sales of these products. Emollients have good efficacy
as well as good safety. They hydrate, moisturize and repair the skin. These products do not offer first line treatment but they
are useful as maintenance therapy in eczema patients.
Strong
Pipeline Molecules Would Lead to a Significant Impact in the Eczema Therapeutics Market in Forecast Period
The
analyze that the eczema therapeutics pipeline is strong; with 65 molecules in various stages of clinical development. Out of these
molecules, one molecule is in filed stage, four molecules are in Phase III. 32 molecules are in Phase II, seven in Phase I and
21 molecules are in preclinical stage. There are 41 FIC, six me-too, one product extension and one generic molecule in the total
pipeline. Research is prominent in Phase II, which contains 19 FIC, five me-too and one product extension. Only one molecule is
in filed stage; the LAS41002, which belongs to me-too class. These novel molecules target unmet need through the provision of
better safety and efficacy profiles.
Significant
Unmet Need in Eczema Therapeutics Market Could Drive Market
Eczema
is a chronic condition characterized by frequent relapses known as flare-ups. The market has various products which are effective,
but their safety profile is not always satisfactory, leaving a significant unmet need in the market. The unmet need is also a
result of the lack of effective treatment options for severe conditions; the need for a controlled and targeted drug delivery
system; low patience compliance and the black box warnings issued to Elidel and Protopic. The unmet need in eczema therapeutics
could be filled by a new entrant with a better safety profile; enhanced patient compliance and competitive pricing with respect
to the available products.
TNF-α
inhibitors were the first class of biologics that succeeded in delivering clinical improvements to moderate to severe psoriasis
patients while still having manageable safety profiles. Enbrel was the first TNF-α inhibitor to be approved (2004), followed
by Remicade (2006) and Humira (2008). Within a span of five years before the next biologic with a new mode of action became available
in the United States, the psoriasis market skyrocketed from $700 M (2003) to $2 B (2009). In 2009, biologics accounted for 70%
of total sales in psoriasis.
This
was primarily driven by these agents’ potent efficacy, and increasing physician familiarity and comfort with the use of
biologics, which elevated the overall biologic treatment rate. Among the TNF-α inhibitors approved for psoriasis, Remicade
is the most effective as measured by PASI 75 response rates at 3 months, while Enbrel is slightly weaker than the rest of the
agents in this class. Although Humira was the third TNF-α inhibitor approved for psoriasis in the United States, it quickly
gained market share on the strengths of its positive clinical profile, subcutaneous formulation compared with intravenous formulation
for Remicade, and more-convenient dosing schedule compared with Enbrel (every other week instead of once or twice weekly).
On
the safety side, Enbrel is generally considered the safest TNF-α inhibitor, which has helped maintain its preferred first-line
biologic position among some dermatologists.
In
a 2008 study titled “Mediation of Cannabidiol Anti-inflammation in the Retina by Equilibrative Nucleoside Transporter and
A2A Adenosine Receptor”, published in Investigative Ophthalmology & Visual Science, cannabidiol was evaluated for adenosine
signaling and the release of TNF-α.
Target
4:Psoriasis – $5+ Billion Market in U.S.
Psoriasis
is a common chronic skin disorder affecting approximately 9.3 million Americans. It is also associated with several comorbidities
such as obesity, hypertension, psoriatic arthritis, depression, and diabetes. Psoriasis is characterized by skin flares and inflammation
that vary in severity, from minor localized patches to substantial body surface involvement. Around 20% of diagnosed patients
have moderate to severe psoriasis. Currently, in the United States, psoriasis is a $5 billion market, of which 90% are from drugs
targeting moderate to severe psoriasis patients where the skin manifestation affects more than 3% of the body. See Treatment
of Psoriasis in Adults – Steven R. Feldman, MD, PhD, August 24, 2018. For such patients, psoriasis is often
a debilitating condition impacting their quality of life and psychological well-being. Over the past decade, biologics have altered
the landscape in the management of moderate to severe psoriasis by achieving improved skin clearance, control of symptoms and
quality of life for hundreds of thousands of individuals affected.
Psoriasis
is linked to pathogenesis caused by dysregulation of T-cell-dependent immune response, as well as hyperproliferation of keratinocytes,
the predominant cell type on the outer layer of skin. Biologics target the cytokines usually upregulated as a result of the abnormal
immune response. Currently, there are six FDA-approved biologics for the treatment of psoriasis belonging to three separate drug
classes: TNF-α inhibitors including Humira (adalimumab, AbbVie), Enbrel (etanercept, Amgen), and Remicade (infliximab, Janssen
Biotech), the IL-12/23 inhibitor Stelara (ustekinumab, Janssen Biotech), and the IL-17 inhibitors Cosentyx (secukinumab, Novartis)
and Taltz (ixekizumab, Elli Lilly). Two biologics, Amevive (alefacept, Astellas Pharma) and Raptiva (efalizumab, Merck Serono),
initially approved for psoriasis in 2003 were withdrawn from the market in 2011 and 2009 respectively due to insufficient response
in patients on Amevive and safety concerns with Raptiva. See Biologics continue to flare up the psoriasis market, indicating
opportunities in the larger dermatology space – Decision Resources Group – DRG Blog.
Target
5:Diabetic Foot Ulcers – $3+ Billion Market in U.S.
The
market for Diabetic Foot Ulcers in the U.S. is $3+ billion and growing. There are 29 million people living with diabetes and 86
million pre-diabetics in the U.S. Approximately 25% of diabetics will acquire a non-healing ulcer in their lifetime which equates
to approximately 3 million diabetic ulcers annually. Diabetic foot ulcers lead to over 73,000 amputations annually at a cost that
is estimated to exceed $5 billion annually. Hospitalization costs are approximately $20,000 per patient with diabetic foot ulcers
and $70,000 for an amputation. The global numbers are more startling. 400 million people are currently living with diabetes worldwide
and that number is expected to increase to approximately 600 million by 2035.
The
current approach to treating diabetic foot ulcers requires offloading the wound by using appropriate therapeutic footwear, daily
saline or similar dressings to provide a moist wound environment, debridement when necessary, antibiotic therapy
if osteomyelitis or cellulitis is present, optimal control of blood glucose, and evaluation and correction of
peripheral arterial insufficiency. Wound coverage by cultured human cells or heterogeneic dressings/grafts, application
of recombinant growth factors, and hyperbaric oxygen treatments also may be beneficial at times, but only if arterial
insufficiency is not present. Among people with diabetes, most severe foot infections that ultimately require some part of the
toe, foot or lower leg to be amputated start as a foot ulcer. See Diabetic Ulcers Treatment & Management, V.L.
Rowe, MD, R. Khardori MD, PhD, FACP, Medscape, March 12, 2018.
Foot
ulcers are especially common in people who have one or more of the following health problems:
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Peripheral
neuropathy. This is nerve damage in the feet or lower legs. Diabetes is the
most common cause of peripheral neuropathy. When nerves in the feet are damaged, they
can no longer warn about pain or discomfort. When this happens, tight-fitting shoes can
trigger a foot ulcer by rubbing on a part of the foot that has become numb. People with
peripheral neuropathy may not be able to feel when they've stepped on something sharp
or when they have an irritating pebble in their shoes. They can injure their feet significantly
and never know it, unless they examine their feet routinely for injury.
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Many
elderly people and diabetics with vision problems also can't see their feet well enough to examine them for problems.
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Circulatory
problems. Any illness that decreases circulation to the feet can cause foot
ulcers. Less blood reaches the feet, which deprives cells of oxygen. This makes the skin
more vulnerable to injury. And it slows the foot's ability to heal.
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Poor
circulation in the leg arteries is called peripheral artery disease. It also causes pain in the leg or buttock during walking.
It is caused by atherosclerosis. This is a disease in which fatty deposits of cholesterol build up inside arteries.
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Abnormalities
in the bones or muscles of the feet. Any condition that distorts the normal
anatomy of the foot can lead to foot ulcers. This is particularly true if the foot is
forced into shoes that don't fit the foot's altered shape. Examples are claw feet, feet
with fractures, and cases of severe arthritis.
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More
than any other group, people with diabetes have a particularly high risk of developing foot ulcers. This is because the long-term
complications of diabetes often include neuropathy and circulatory problems. Without prompt and proper treatment, a foot ulcer
may require hospital treatment. Or, it may lead to deep infection or gangrene and amputation.
Governmental
Regulations
Manufacturing
Although
the Company would be reliant upon the manufacturing of its target drug candidate and API from well-established manufacturers,
manufacturers of therapeutic products and their facilities are subject to continual review and periodic inspections by the FDA,
the EMA and other comparable foreign regulatory authorities for compliance with current good manufacturing practices (“cGMP”)
regulations.
Further,
manufacturers of controlled substances must obtain and maintain necessary DEA and state registrations and registrations with applicable
foreign regulatory authorities and must establish and maintain processes to ensure compliance with DEA and state requirements
and requirements of applicable foreign regulatory authorities governing, among other things, the storage, handling, security,
recordkeeping and reporting for controlled substances.
If
we or a regulatory agency discover previously unknown problems with a product, such as adverse events of unanticipated severity
or frequency, or problems with the facility where the product is manufactured, a regulatory agency may impose restrictions on
that product, the manufacturing facility or us, including requiring recall or withdrawal of the product from the market or suspension
of manufacturing. If we, our product candidates or the manufacturing facilities for our product candidates fail to comply with
applicable regulatory requirements, a regulatory agency may, among other things:
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issue
untitled letters or warning letters;
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mandate
modifications to promotional materials or require us to provide corrective information
to healthcare practitioners;
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require
us to enter into a consent decree, which can include imposition of various fines, reimbursements
for inspection costs, required due dates for specific actions and penalties for noncompliance;
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seek
an injunction or impose civil or criminal penalties or monetary fines;
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suspend
or withdraw regulatory approval;
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suspend
any ongoing clinical trials;
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refuse
to approve pending applications or supplements to applications filed by us; or
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require
us to initiate a product recall.
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The
occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and may otherwise
have a material adverse effect on our business, financial condition and results of operations.
Regulation
of CBD
KLS-13023
contains controlled substances as defined in the CSA. Controlled substances that are pharmaceutical products are subject to a
high degree of regulation under the CSA, which establishes, among other things, certain registration, manufacturing quotas, security,
recordkeeping, reporting, import, export and other requirements administered by the DEA. The DEA classifies controlled substances
into five schedules: Schedule I, II, III, IV or V substances. Schedule I substances by definition have a high potential for abuse,
have no currently “accepted medical use” in the United States, lack accepted safety for use under medical supervision,
and may not be prescribed, marketed or sold in the United States. Pharmaceutical products approved for use in the United States
may be listed as Schedule II, III, IV or V, with Schedule II substances considered to present the highest potential for abuse
or dependence and Schedule V substances the lowest relative risk of abuse among such substances. Schedule I and II drugs are subject
to the strictest controls under the CSA, including manufacturing and procurement quotas, security requirements and criteria for
importation. In addition, dispensing of Schedule II drugs is further restricted. For example, they may not be refilled without
a new prescription.
While
Cannabis is a Schedule I controlled substance, products approved for medical use in the United States that contain Cannabis or
Cannabis extracts must be placed in Schedules II - V, since approval by the FDA satisfies the “accepted medical use”
requirement. If and when KLS-13023 receives FDA approval, the DEA will make a scheduling determination and place it in a schedule
other than Schedule I in order for it to be prescribed to patients in the United States. If approved by the FDA, we expect the
finished dosage forms of KLS-13023 to be listed by the DEA as a Schedule II or III controlled substance. Consequently, their manufacture,
importation, exportation, domestic distribution, storage, sale and legitimate use will be subject to a significant degree of regulation
by the DEA. The scheduling process may take one or more years beyond FDA approval, thereby significantly delaying the launch of
KLS-13023. Furthermore, if the FDA, DEA or any foreign regulatory authority determines that KLS-13023 may have potential for abuse,
it may require us to generate more clinical data than that which is currently anticipated, which could increase the cost and/or
delay the launch of KLS-13023.
Because
KLS-13023 contains active ingredients of Cannabis, which are Schedule I substances, to conduct pre-clinical studies and clinical
trials with KLS-13023 in the United States prior to approval, each of our research sites must submit a research protocol to the
DEA and obtain and maintain a DEA researcher registration that will allow those sites to handle and dispense KLS-13023 and to
obtain the product from our manufacturer. If the DEA delays or denies the grant of a research registration to one or more research
sites, the pre-clinical studies or clinical trials could be significantly delayed, and we could lose and be required to replace
clinical trial sites, resulting in additional costs.
We
expect that KLS-13023 will be scheduled as Schedule II or III, as a result of which we will also need to identify wholesale distributors
with the appropriate DEA registrations and authority to distribute the products to pharmacies and other healthcare providers,
and these distributors would need to obtain Schedule II or III distribution registrations. The failure to obtain, or delay in
obtaining, or the loss of any of those registrations could result in increased costs to us. If KLS-13023 is a Schedule II drug,
pharmacies would have to maintain enhanced security with alarms and monitoring systems and they must adhere to recordkeeping and
inventory requirements. This may discourage some pharmacies from carrying the product. Furthermore, state and federal enforcement
actions, regulatory requirements, and legislation intended to reduce prescription drug abuse, such as the requirement that physicians
consult a state prescription drug monitoring program, may make physicians less willing to prescribe, and pharmacies to dispense,
Schedule II products.
We
may manufacture the commercial supply of KLS-13023 outside of the United States. If KLS-13023 is approved by the FDA and classified
as a Schedule II or III substance, an importer can import for commercial purposes if it obtains from the DEA an importer registration
and files an application with the DEA for an import permit for each import. The DEA provides annual assessments/estimates to the
International Narcotics Control Board which guides the DEA in the amounts of controlled substances that the DEA authorizes to
be imported. The failure to identify an importer or obtain the necessary import authority, including specific quantities, could
affect the availability of KLS-13023 and have a material adverse effect on our business, results of operations and financial condition.
In addition, an application for a Schedule II importer registration must be published in the Federal Register, and there is a
waiting period for third party comments to be submitted.
Individual
states have also established controlled substance laws and regulations. Though state-controlled substance laws often mirror federal
law, because the states are separate jurisdictions, they may separately schedule our product candidates as well. While some states
automatically schedule a drug based on federal action, other states schedule drugs through rulemaking or a legislative action.
State scheduling may delay commercial sale of any product for which we obtain federal regulatory approval and adverse scheduling
could have a material adverse effect on the commercial attractiveness of such product. We or our partners must also obtain separate
state registrations, permits or licenses in order to be able to obtain, handle, and distribute controlled substances for clinical
trials or commercial sale, and failure to meet applicable regulatory requirements could lead to enforcement and sanctions by the
states in addition to those from the DEA or otherwise arising under federal law.
We
currently obtain the API for KLS-13023 from a bulk manufacturer of pharmaceutical grade API in Switzerland. For KLS-13023, we
plan to conduct Phase 1 clinical trials in Australia, subject to applicable regulatory approval. In addition, we may decide to
develop, manufacture or commercialize our product candidates in additional countries. As a result, KLS-13023 will also be subject
to controlled substance laws and regulations from the Therapeutic Goods Administration in Australia, Health Canada’s Office
of Controlled Substances in Canada, and from other regulatory agencies in other countries where we may develop, manufacture or
commercialize KLS-13023 in the future. We plan to submit NDA for KLS-13023 to the FDA upon completion of all requisite clinical
trials and will require additional DEA approvals at such time as well.
September
27, 2018, the Department of Justice and Drug Enforcement Administration announced that
Epidiolex, the newly approved medication by the Food & Drug Administration, is being placed in Schedule V of the Controlled
Substances Act, the least restrictive schedule of the CSA. On June 26 2018,
the FDA announced it approved Epidiolex for the treatment of seizures associated with two rare and severe forms of epilepsy, Lennox-Gastaut
syndrome and Dravet syndrome, in patients two years of age and older. Epidiolex
contains cannabidiol (CBD), a chemical constituent of the cannabis plant (commonly referred to as marijuana).
The
CBD in Epidiolex is extracted from the cannabis plant and is the first FDA-approved drug to contain a purified extract from the
plant. Schedule V drugs represents the least potential for abuse. Schedule
V drugs, substances, or chemicals are defined as drugs with lower potential for abuse than Schedule IV and consist of preparations
containing limited quantities of certain narcotics. Schedule V drugs are generally used for antidiarrheal, antitussive, and analgesic
purposes. Some examples of Schedule V drugs are: cough preparations with less than 200 milligrams of codeine or per 100 milliliters
(Robitussin AC), Lomotil, Motofen, Lyrica, Parepectolin.
Despite
the approvals by the FDA and DEA for Epidiolex, any of these foregoing factors, many of which are beyond our control, could jeopardize
our ability to obtain regulatory approval for and successfully market KLS-13019 or KLS-13023. Moreover, because our business is
almost entirely dependent upon these two product candidates, any such setback in our pursuit of regulatory approval would have
a material adverse effect on our business and prospects.
KLS-13019
does not contain cannabidiol and is a new chemical entity that would not fall under the Controlled Substances Act (“CSA”)
or be deemed a Schedule 1 controlled substance.
KLS-13023
is a formulation that does contain cannabidiol. At present, cannabidiol is deemed a Schedule 1 controlled substance by the U.S.
Drug Enforcement Agency under the Controlled Substances Act. And like the drug molecule EpidiolexÒ, which was recently approved
by the FDA for marketing and sale for use in treating Dravet’s Syndrome and Lennox-Gasteau Syndrome (forms of child epilepsy),
KLS-13023 would need to follow the guidance set forth by the CSA, complete a successful human clinical trial and apply for rescheduling,
as was the case with EpidiolexÒ, now a Schedule 5 drug.
On
January 14, 2019, the Company received written notice from the Drug Enforcement Administration (“DEA”) Drug and Chemical
Evaluation Section, as follows: “Please be advised that your material meets the definition of ‘Hemp’ and is
not regulated under the CSA, as long as it consists of high purity Cannabidiol (CBD) that contains approximately 0.1% delta-9-
THC. (However, if it contains more than 0.3% delta-9 THC, it is considered ‘Marihuana’ and would be in Schedule 1
of the CSA).” While this notice is an official notice from the DEA regarding the scheduling of high purity CBD, the Company
will continue to abide by the CSA in all respects with regards to its treatment and handling of CBD.
Foreign
Regulatory Agencies
EMA
In
order to market and sell our products in jurisdictions other than the United States and the European Union, we must obtain separate
marketing approvals and comply with numerous and varying regulatory requirements. The regulatory approval process outside the
United States and the European Union generally includes all of the risks associated with obtaining FDA and EMA approval, but can
involve additional testing. We may need to partner with third parties in order to obtain approvals outside the United States and
the European Union. In addition, in many countries worldwide, it is required that the product be approved for reimbursement before
the product can be approved for sale in that country. We may not obtain approvals from regulatory authorities outside the United
States and the European Union on a timely basis, if at all. Even if we were to receive approval in the United States or the European
Union, approval by the FDA or the EMA does not ensure approval by regulatory authorities in other countries or jurisdictions.
Similarly, approval by one regulatory authority outside the United States and the European Union would not ensure approval by
regulatory authorities in other countries or jurisdictions or by the FDA or the EMA. We may not be able to file for marketing
approvals and may not receive necessary approvals to commercialize our products in any market. If we are unable to obtain approval
of our product candidates by regulatory authorities in other foreign jurisdictions, the commercial prospects of those product
candidates may be significantly diminished and our business prospects could decline.
Therapeutic
Goods Administration (TGA)
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Clinical
trials conducted in Australia are subject to various regulatory controls to ensure the
safety of participants. The TGA regulates the use of therapeutic goods supplied in clinical
trials in Australia under the therapeutic goods legislation.
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Clinical
trial sponsors must be aware of the requirements to import, export, manufacture and supply
therapeutic goods in Australia. The following avenues provide for the importation into
and/or supply in Australia of 'unapproved' therapeutic goods for use in a clinical trial:
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Clinical
Trial Notification (CTN) scheme; and
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Clinical
Trial Exemption (CTX) scheme.
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The
CTN Scheme is a notification process involving the following:
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The
Australian clinical trial sponsor must notify us of the intent to sponsor a clinical
trial involving an 'unapproved' therapeutic good. This must take place before starting
to use the goods. The notification form must be submitted online and accompanied by the
relevant fee.
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We
may give the sponsor of the trial written notice to provide specified information relating
to goods notified in the CTN form.
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We
do not evaluate any data relating to the clinical trial at the time of submission. The
Human Research Ethics Committee (HREC) reviews the scientific validity of the trial design,
the balance of risk versus harm of the therapeutic good, the ethical acceptability of
the trial process, and approves the trial protocol. The HREC is also responsible for
monitoring the conduct of the trial.
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The
institution or organization at which the trial will be conducted, referred to as the
'Approving Authority', gives the final approval for the conduct of the trial at the site,
having due regard to advice from the HREC.
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It
is the responsibility of the sponsor to ensure that all relevant approvals are in place
before supplying the 'unapproved' therapeutic goods in the clinical trial.
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The
CTX Scheme is an approval process involving the following:
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A
sponsor submits an application to us seeking approval to supply 'unapproved' therapeutic
goods in a clinical trial. The application must be accompanied by the relevant fee.
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We
evaluate summary information about the product including relevant, but limited, scientific
data (which may be preclinical and early clinical data) prior to the start of a trial.
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The
HREC is responsible for considering the scientific and ethical issues of the proposed
trial protocol.
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The
sponsor must notify us of each trial conducted using the unapproved therapeutic good(s)
approved in the CTX application.
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Clinical
trials that do not involve 'unapproved' therapeutic goods are not subject to requirements of the CTN or CTX schemes. It is the
responsibility of the Australian clinical trial sponsor to determine whether a product is considered an 'unapproved' therapeutic
good.
Clinical
trials that do not involve 'unapproved' therapeutic goods are not subject to requirements of the CTN or CTX schemes. It is the
responsibility of the Australian clinical trial sponsor to determine whether a product is considered an 'unapproved' therapeutic
good.
On
September 27, 2013, the TGA approved Nabiximols (Sativex ®), a pharmaceutical manufactured by GW Pharmaceuticals
for its collaborator Novartis Pharmaceuticals Australia Pty Limited in the treatment for symptom improvement in patients with
moderate to severe spasticity due to multiple sclerosis (MS) who have not responded adequately to other anti-spasticity medication
and who demonstrated clinically significant improvement in spasticity related symptoms during the initial trial of therapy.
In
Australia, in 2014, the Advisory Council on Medicines Scheduling recommended rescheduling cannabidiol from a prohibited substance
to being a prescription medicine because, according to the Advisory Council on Medicines Scheduling, “there is a low risk
of misuse or abuse as cannabidiol does not possess psychoactive properties”. The TGA accepted this recommendation and the
decision took effect in July 2015.
Cannabidiol
(CBD) is one of the cannabinoids which may be extracted as a therapeutic good from cannabis. From 1 June 2015, cannabidiol has
been included under Schedule 4 (S4) Prescription Only Medicine of the Poisons Standard (/publication/poisonsstandard-susmp) when
preparations for therapeutic use contain 2% or less of other cannabinoids found in cannabis.
In
February 2016, the Australian Federal Government passed legislation that amended the Narcotic Drugs Act, allowing the supply of
suitable medicinal cannabis products for the management of painful and chronic conditions8. This legislation does not
relate to the decriminalization of cannabis for general cultivation or recreational use and it does not include the provision
of medicinal grade herbal cannabis, only processed, non-smokable medicinal grade products.
Much
of the detail remains unclear. For example, the legislation does not specify which products will be covered under the amendment,
and it does not specify which particular conditions or symptoms will be eligible for treatment with cannabis-based products. Before
products can be prescribed, they must be registered with the Therapeutic Goods Administration (TGA) or, in rare circumstances,
receive special approval from the TGA. The registration process requires evidence of testing and efficacy and it is therefore
unlikely Australia will see a TGA registered medicinal cannabis product that GPs can prescribe any time soon. Whilst there are
currently no cannabis-based products that are lawfully produced in Australia, the medicinal use of pharmaceutical products containing
cannabinoids is not prohibited, as long as authorization for prescribing is granted from the Commonwealth Therapeutic Goods Administration
and at this point in time, NSW Health.
Facilities
Our
principal executive offices are located at 3805 Old Easton Road, Doylestown, PA 18902. Our telephone number at that address is
(858) 883-2642. We have additional offices located at 4 Knoll Court, Lloyd Harbor, N.Y. 11743. On April 1, 2014, the Company entered
into a one year lease arrangement for office space, with the option to renew the lease annually. The monthly rent payment is $5,400
and a security deposit of $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 October 31, 2020. The monthly rent payment is $359 and a security
deposit of $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. On September 1, 2018, the Company subleased this office space to a third party. The Subleasee will
pay 100% of rent for months September through November 2018 and will pay 50% of rent until expiration of lease on June 30, 2019.
The monthly rent payment is $2,723 and a security deposit of $2,121.
Employees
We
currently have five full time employees and two part time employees. We plan to increase the number of employees in the areas
of regulatory affairs, clinical research and testing, and marketing in 2020. There are no collective-bargaining agreements with
our employees, and we have not experienced work interruptions or strikes. We believe our relationship with employees is good and
we provide health and life insurance for all employees.
ITEM
1A. RISK FACTORS.
Investing
in our common stock involves a high degree of risk. You should carefully consider the risks described below, as well as the other
information in this annual report on Form 10-K, including our consolidated financial statements and the related notes and “Management’s
Discussion and Analysis of Financial Condition and Results of Operations,” before deciding whether to invest in our common
stock. The occurrence of any of the events or developments described below could harm our business, financial condition, operating
results, and growth prospects. In such an event, the market price of our common stock could decline, and you may lose all or part
of your investment. Additional risks and uncertainties not presently known to us or that we currently deem immaterial also may
impair our business operations.
Risks
Related to Our Financial Position and Capital Needs
We
have incurred significant losses since our inception and anticipate that we will continue to incur losses in the future.
We
are a preclinical stage specialty pharmaceutical company, engaged in developing next-generation synthetic cannabinoid therapeutics.
Since our inception in August 2010, we have devoted substantially all of our resources to the development of our product candidates,
KLS-13019 and KLS-13023. We have generated significant operating losses since our inception. Our net (losses) income for the years
ended December 31, 2019 and 2018 were approximately $(3.5 million) and $1.0 million, respectively. As of December 31, 2019, we
had an accumulated deficit of $8,496,088. Substantially all of our losses have resulted from expenses incurred in connection with
our research and development programs and from general and administrative costs associated with our operations.
We
expect to continue to incur significant expenses and operating losses for the foreseeable future. We anticipate these losses will
increase as we continue the research and development of, and clinical trials for, our product candidates. In addition to budgeted
expenses, we may encounter unforeseen expenses, difficulties, complications, delays and other unknown factors that may adversely
affect our business. If either of our product candidates fails in clinical trials or does not gain regulatory approval, or even
if approved, fails to achieve market acceptance, we may never become profitable. Even if we achieve profitability in the future,
we may not be able to sustain profitability in subsequent periods.
Due
to our limited operating history and history of losses, any predictions about our future success, performance or viability may
not be accurate.
We
currently have no commercial revenue and may never become profitable.
To
date, the only revenue we have generated has been from the receipt of research grants and payments for research services. Our
ability to generate revenue and become profitable depends upon our ability to obtain regulatory approval for, and successfully
commercialize, KLS-13019, KLS-13023 or other product candidates that we may develop, in-license or acquire in the future.
Even
if we are able to successfully achieve regulatory approval for these product candidates, we do not know what the reimbursement
status of our product candidates will be or when any of these products will generate revenue for us, if at all. We have not generated,
and do not expect to generate, any product revenue for the foreseeable future, and we expect to continue to incur significant
operating losses for the foreseeable future due to the cost of research and development, preclinical studies and clinical trials
and the regulatory approval process for our product candidates. The amount of future losses is uncertain and will depend, in part,
on the rate of growth of our expenses. Our ability to generate revenue from our product candidates also depends on a number of
additional factors, including our ability to:
-
successfully
complete development activities, including the remaining preclinical studies and planned clinical trials for our product candidates;
-
complete
and submit New Drug Applications (“NDAs”), to the U.S. Food and Drug Administration (the “FDA”), and Marketing
Authorization Applications (“MAAs”), to the European Medicines Agency (the “EMA”), and obtain regulatory
approval for indications for which there is a commercial market;
-
complete
and submit applications to, and obtain regulatory approval from, other foreign regulatory authorities;
-
manufacture
any approved products in commercial quantities and on commercially reasonable terms;
-
develop
a commercial organization, or find suitable partners, to market, sell and distribute approved products in the markets in which
we have retained commercialization rights;
-
achieve
acceptance among patients, clinicians and advocacy groups for any products we develop;
-
obtain
coverage and adequate reimbursement from third parties, including government payors; and
-
set
a commercially viable price for any products for which we may receive approval.
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.
Even if we are able to complete the processes described above, we anticipate incurring significant costs associated with commercializing
our product candidates.
There
is substantial doubt about our ability to continue as a going concern.
On
March 30, 2020, the report of our independent registered public accounting firm on our December 31, 2019 audited financial
statements includes an explanatory paragraph referring to our ability to continue as a going concern. As of December
31, 2019 and 2018, we had cash balances of $121,455 and $307,131, respectively. Management plans to raise additional capital
through the issuance of convertible debt. We expect that between our existing cash, cash equivalents and cash raised through
our debt offering we will be able to sufficiently fund our operations and capital requirements for the next 12 months.
Additional funding will be required to continue our R&D and other operating activities as we have not reached
successful commercialization of our product. These circumstances cast significant doubt as to our ability to continue as a
going concern.
We
will require additional capital to fund our operations and if we fail to obtain necessary financing, we will not be able to complete
the development and commercialization of KLS-13019 or KLS-13023.
Our
operations have consumed substantial amounts of cash since inception. We expect to continue to spend substantial and increasing
amounts to conduct further research and development, preclinical testing and clinical trials of our product candidates, to seek
regulatory approvals and reimbursement for our product candidates and to launch and commercialize any product candidates for which
we receive regulatory approval.
As
of December 31, 2019, we had $121,455 in cash and cash equivalents. We expect that between our existing cash, cash equivalents
and continuing cash raises through our debt offering we will be able to sufficiently fund our operations and capital requirements
through June 2021. We believe that these available funds will be sufficient to complete a Phase 1 clinical trials for KLS-13019
for patients with chemotherapy induced peripheral neuropathy. We anticipate, based on current estimates, that costs associated
Phase 1 clinical trials for KLS-13019 will be approximately $2.75 million.
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.
The
progress of KLS-13019 and KLS-13023 for the target indication is uncertain due to numerous factors, including, without limitation,
the rate of progress of clinical trials, the results of preclinical studies and clinical trials for such indication, the costs
and timing of seeking and obtaining FDA and other regulatory approvals for clinical trials and FDA guidance regarding clinical
trials for such indication. In addition, 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. For these reasons, we
are unable to estimate the actual funds we will require for development and any approved marketing and commercialization activities.
Our future funding requirements, both near and long-term, will depend on many factors, including, but not limited to:
-
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 U.S. Drug Enforcement Administration (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;
-
the
effect of competing product and market developments;
-
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.
We
cannot be certain that additional funding will be available on acceptable terms, or at all. If we are unable to raise additional
capital in sufficient amounts or on terms acceptable to us, we may have to significantly delay, scale back or discontinue the
development or commercialization of one or more of our product candidates or one or more of our other research and development
initiatives.
Our
federal and state government grants could subject us to audits and could require us to repay substantial amounts of funds previously
awarded to us.
To
date, most of our revenue has been from the receipt of state and federal research grants. As of December 31, 2019 we have been
granted approximately $300,000 in federal research grants. In connection with these grants, we may be subject to routine audits
by government agencies. As part of an audit, these agencies may review our performance, cost structures and compliance with applicable
laws, regulations, policies and standards and the terms and conditions of the grant. If any of our expenditures are found to be
unallowable or allocated improperly or if we have otherwise violated terms of the grant, the expenditures may not be reimbursed
and/or we may be required to repay funds already disbursed. Accordingly, an audit could result in a material adjustment to our
results of operations and financial condition.
Raising
additional capital may cause dilution to our existing stockholders, restrict our operations or require us to relinquish rights
to our technologies or product candidates.
We
may seek additional capital through a combination of private and public equity offerings, debt financings, strategic partnerships
and alliances and licensing arrangements. To the extent that we raise additional capital through the sale of equity or convertible
debt securities, existing ownership interests will be diluted and the terms of such financings may include liquidation or other
preferences that adversely affect the rights of existing stockholders. Debt financings may be coupled with an equity component,
such as warrants to purchase shares, which could also result in dilution of our existing stockholders’ ownership. The incurrence
of indebtedness would result in increased fixed payment obligations and could also result in certain restrictive covenants, such
as limitations on our ability to incur additional debt, limitations on our ability to acquire or license intellectual property
rights and other operating restrictions that could adversely impact our ability to conduct our business and may result in liens
being placed on our assets and intellectual property. If we were to default on such indebtedness, we could lose such assets and
intellectual property. If we raise additional funds through strategic partnerships and alliances and licensing arrangements with
third parties, we may have to relinquish valuable rights to our product candidates, or grant licenses on terms that are not favorable
to us.
Risks
Related to our Business and Industry
We
are largely dependent on the success of our product candidates, KLS-13019 and KLS-13023, which are still in preclinical development
and will require significant capital resources and years of clinical development effort.
We
currently have no products on the market, and our product candidates, KLS-13019 and KLS-13023, are still in preclinical development.
Our business depends almost entirely on the successful clinical development, regulatory approval and commercialization of KLS-13019
and KLS-13023, and additional preclinical testing and substantial clinical development and regulatory approval efforts will be
required before we are permitted to commence commercialization, if ever. It will be several years before we can commence and complete
a pivotal study for KLS-13019 or KLS-13023, if ever. For KLS-13019 and KLS-13023, we plan to conduct Phase 1, and possibly Phase
2, clinical trials in Australia, subject to applicable regulatory approval.
We
plan to submit NDAs for KLS-13019 and KLS-13023 to the FDA upon completion of all requisite clinical trials. The clinical trials
and manufacturing and marketing of KLS-13019 and KLS-13023 will be subject to extensive and rigorous review and regulation by
numerous government authorities in the United States, Australia, the European Union, Canada, and other jurisdictions where we
intend to test and, if approved, market our product candidates. Before obtaining regulatory approvals for the commercial sale
of any product candidate, we must demonstrate through preclinical testing and clinical trials that the product candidate is safe
and effective for use in each target indication, and potentially in specific patient populations. This process can take many years
and may include post-marketing studies and surveillance, which would require the expenditure of substantial resources. Of the
large number of drugs in development for approval in the United States and the European Union, only a small percentage successfully
complete the FDA or EMA regulatory approval processes, as applicable, and are commercialized. Accordingly, even if we are able
to obtain the requisite financing to continue to fund our research, development and clinical programs, we cannot assure you that
any of our product candidates will be successfully developed or commercialized.
Because
the results of preclinical testing are not necessarily predictive of future results, KLS-13019 and KLS-13023 may not have favorable
results in our planned clinical trials.
Any
positive results from our preclinical testing of KLS-13019 and KLS-13023 may not necessarily be predictive of the results from
our planned clinical trials in humans. Many companies in the pharmaceutical and biotechnology industries have suffered significant
setbacks in clinical trials after achieving positive results in preclinical development, and we cannot be certain that we will
not face similar setbacks. These setbacks have been caused by, among other things, preclinical findings made while clinical trials
were underway or safety or efficacy observations made in clinical trials, including adverse events. Moreover, preclinical and
clinical data are often susceptible to varying interpretations and analyses, and many companies that believed their product candidates
performed satisfactorily in preclinical studies and clinical trials nonetheless failed to obtain FDA or EMA approval. If we fail
to produce positive results in our clinical trials of KLS-13019 and KLS-13023, the development timeline and regulatory approval
and commercialization prospects for KLS-13019 and KLS-13023, and, correspondingly, our business and financial prospects, would
be materially adversely affected.
We
may not be able to commence clinical trials in 2019; even if KLS-13019 and KLS-13023 advance into clinical trials, we may experience
difficulties in managing our growth and expanding our operations.
We
have not begun clinical trials for any of our product candidates. While we expect to commence clinical trials in Australia in
2019 for KLS-13019 and KLS-13023, we have limited resources to carry out these objectives. Our company has no history of conducting
clinical trials, which is a time-consuming, expensive and uncertain process. In addition, while we have experienced management
and expect to contract out many of the activities related to conducting clinical trials, we are a small company with only five
employees and therefore have limited internal resources both to conduct clinical trials and to monitor third-party providers.
As our product candidates enter into and advance through preclinical studies and any clinical trials, we will need to expand our
development, regulatory and manufacturing operations, either by expanding our internal capabilities or contracting with other
organizations to provide these capabilities for us. In the future, we expect to have to manage additional relationships with collaborators
or partners, suppliers and other organizations. Our ability to manage our operations and future growth will require us to continue
to improve our operational, financial and management controls, reporting systems and procedures.
Failures
or delays in the completion of our preclinical studies or the commencement and completion of our planned clinical trials of KLS-13019
or KLS-13023 could result in increased costs to us and could delay, prevent or limit our ability to generate revenue and continue
our business.
To
date, we have not commenced any clinical trials for KLS-13019 or KLS-13023. Successful completion of such clinical trials is a
prerequisite to submitting an NDA to the FDA or an MAA to the EMA. Clinical trials are expensive, difficult to design and implement,
can take many years to complete and are uncertain as to outcome. A product candidate can unexpectedly fail at any stage of clinical
development. The historic failure rate for product candidates is high due to scientific feasibility, safety, efficacy, changing
standards of medical care and other variables. We expect to initiate clinical trials for KLS-13019 and KLS-13023 in the second
half of 2019. However, we do not know whether our clinical trials will begin or be completed on schedule, if at all, as the commencement
and completion of clinical trials can be delayed or prevented for a number of reasons, including, among others:
-
delays
in reaching or failing to reach agreement on acceptable terms with prospective clinical trial sites, the terms of which can be
subject to extensive negotiation and may vary significantly among different clinical trial sites;
-
delays
or inability in manufacturing or obtaining sufficient quantity or quality of a product candidate or other materials necessary
to conduct clinical trials due to regulatory and manufacturing constraints;
-
difficulties
obtaining institutional review board, or IRB, DEA or comparable foreign regulatory authority, or ethics committee approval to
conduct a clinical trial at a prospective site or sites;
-
challenges
in recruiting and enrolling patients to participate in clinical trials, including the size and nature of the patient population,
the proximity of patients to clinical trial sites, eligibility criteria for the clinical trial, the nature of the clinical trial
protocol, the availability of approved effective treatments for the relevant indication and competition from other clinical trial
programs for similar indications;
-
severe
or unexpected toxicities or drug-related side effects experienced by patients in our clinical trials or by individuals using drugs
similar to our product candidates;
-
DEA
or comparable foreign regulatory authority-related recordkeeping, reporting or security violations at a clinical trial site, leading
the DEA, state authorities or comparable foreign regulatory authorities to suspend or revoke the site’s controlled substance
license and causing a delay or termination of planned or ongoing clinical trials;
-
regulatory
concerns with cannabinoid products generally and the potential for abuse of those products;
-
difficulties
retaining patients who have enrolled in a clinical trial who may withdraw due to lack of efficacy, side effects, personal issues
or loss of interest;
-
ambiguous
or negative interim results; or
-
lack
of adequate funding to continue the clinical trial.
In
addition, a clinical trial may be suspended or terminated by us, the FDA, IRBs, ethics committees, data safety monitoring board
or other foreign regulatory authorities overseeing the clinical trial at issue or other regulatory authorities due to a number
of factors, including, among others:
-
failure
to conduct the clinical trial in accordance with regulatory requirements or our clinical trial protocols;
-
inspection
of the clinical trial operations or clinical trial sites by the FDA, the DEA, the EMA or other foreign regulatory authorities
that reveals deficiencies or violations that require us to undertake corrective action, including the imposition of a clinical
hold;
-
unforeseen
safety issues, including any safety issues that could be identified in our ongoing toxicology studies;
-
adverse
side effects or lack of effectiveness; and
-
changes
in government regulations or administrative actions.
We
intend to expend our limited resources to pursue KLS-13019 and KLS-13023 for certain indications, and may fail to capitalize on
other product candidates or other indications for KLS-13019 or KLS-13023 that may be more profitable or for which there is a greater
likelihood of success.
Because
we have limited financial and managerial resources, we are focusing on research programs relating to KLS-13019 and KLS-13023 for
certain indications, which concentrates the risk of product failure in the event KLS-13019 or KLS-13023 proves to be unsafe or
ineffective or inadequate for clinical development or commercialization. In particular, we intend to study KLS-13019 in patients
with chemotherapy induced peripheral neuropathy, and we intend to study KLS-13023 in patients with mild traumatic brain injury.
As a result, we may forego or delay pursuit of opportunities with other product candidates or for other indications for KLS-13019
or KLS-13023 that could later prove to have greater commercial potential. Our resource allocation decisions may cause us to fail
to capitalize on viable commercial products or profitable market opportunities. Our spending on proprietary research and development
programs relating to KLS-13019 and KLS-13023 may not yield any commercially viable products. If we do not accurately evaluate
the commercial potential or target market for KLS-13019 and KLS-13023, we may relinquish valuable rights to KLS-13019 or KLS-13023
through collaboration, licensing or other royalty arrangements in cases in which it would have been more advantageous for us to
retain sole development and commercialization rights to KLS-13019 or KLS-13023.
The
regulatory approval processes of the FDA, the EMA and other comparable foreign regulatory authorities are lengthy, time-consuming
and inherently unpredictable, and if we are ultimately unable to obtain regulatory approval for our product candidates, our business
will be substantially harmed.
We
are not permitted to market our product candidates in the United States or the European Union until we receive approval of an
NDA from the FDA or an MAA from the EMA, respectively, or in any foreign countries until we receive the requisite approval from
such countries. Prior to submitting an NDA to the FDA or an MAA to the EMA for approval of our product candidates we will need
to complete our ongoing preclinical studies, as well as Phase 1, Phase 2 and Phase 3 clinical trials. We are still conducting
preclinical 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 NDAs for KLS-13019 and KLS-13023 to the FDA upon completion of all requisite clinical trials. Successfully initiating and
completing our clinical program and obtaining approval of an NDA or MAA is a complex, lengthy, expensive and uncertain process,
and the FDA or EMA may delay, limit or deny approval of our product candidates for many reasons, including, among others, because:
-
we
may not be able to demonstrate that our product candidates are safe and effective in treating patients to the satisfaction of
the FDA or EMA;
-
the
results of our clinical trials may not meet the level of statistical or clinical significance required by the FDA or EMA for marketing
approval;
-
the
FDA or EMA may disagree with the number, design, size, conduct or implementation of our clinical trials;
-
the
FDA or EMA may require that we conduct additional clinical trials;
-
the
FDA or EMA or other applicable foreign regulatory authorities may not approve the formulation, labeling or specifications of our
product candidates;
-
the
contract research organizations, or CROs, and other contractors that we may retain to conduct our clinical trials may take actions
outside of our control that materially adversely impact our clinical trials;
-
the
FDA or EMA may find the data from preclinical studies and clinical trials insufficient to demonstrate that KLS-13019’s or
KLS-13023’s clinical and other benefits outweigh its safety risks;
-
the
FDA or EMA may disagree with our interpretation of data from our preclinical studies and clinical trials;
-
the
FDA or EMA may not accept data generated at our clinical trial sites or may disagree with us over whether to accept efficacy results
from clinical trial sites outside the United States where the standard of care is potentially different from that in the United
States;
-
if
and when our NDAs or MAAs are submitted to the FDA or EMA, as applicable, the regulatory agency may have difficulties scheduling
the necessary review meetings in a timely manner, may recommend against approval of our application or may recommend or require,
as a condition of approval, additional preclinical studies or clinical trials, limitations on approved labeling or distribution
and use restrictions;
-
the
FDA may require development of a Risk Evaluation and Mitigation Strategy, or REMS, which would use risk minimization strategies
beyond the professional labeling to ensure that the benefits of certain prescription drugs outweigh their risks, as a condition
of approval or post-approval, and the EMA may grant only conditional approval or impose specific obligations as a condition for
marketing authorization, or may require us to conduct post-authorization safety studies;
-
the
FDA, EMA, DEA or other applicable foreign regulatory agencies may not approve the manufacturing processes or facilities of third-party
manufacturers with which we contract or DEA or other applicable foreign regulatory agency quotas may limit the quantities of controlled
substances available to our manufacturers; or
-
the
FDA or EMA may change their approval policies or adopt new regulations.
On
September 27, 2018, the Department of Justice and Drug Enforcement Administration announced
that Epidiolex, the newly approved medication by the Food & Drug Administration, is being placed in Schedule V of the Controlled
Substances Act, the least restrictive schedule of the federal Controlled Substances Act of 1970 (the “CSA”).
On June 26, 2018, the FDA announced it approved Epidiolex for the treatment of seizures
associated with two rare and severe forms of epilepsy, Lennox-Gastaut syndrome and Dravet syndrome, in patients two years of age
and older. Epidiolex contains cannabidiol (CBD), a chemical constituent of the cannabis plant (commonly referred to as marijuana).
The CBD in Epidiolex is extracted from the cannabis plant and is the first FDA-approved drug to contain a purified extract from
the plant. Schedule V drugs represents the least potential for abuse. Schedule V drugs, substances, or chemicals are defined
as drugs with lower potential for abuse than Schedule IV and consist of preparations containing limited quantities of certain
narcotics. Schedule V drugs are generally used for antidiarrheal, antitussive, and analgesic purposes. Some examples of Schedule
V drugs are: cough preparations with less than 200 milligrams of codeine or per 100 milliliters (Robitussin AC), Lomotil, Motofen,
Lyrica, Parepectolin.
Despite
the approvals by the FDA and DEA for Epidiolex, any of these foregoing factors, many of which are beyond our control, could jeopardize
our ability to obtain regulatory approval for and successfully market KLS-13019 or KLS-13023. Moreover, because our business is
almost entirely dependent upon these two product candidates, any such setback in our pursuit of regulatory approval would have
a material adverse effect on our business and prospects.
Therapeutic
Goods Administration (TGA)
Clinical
trials conducted in Australia are subject to various regulatory controls to ensure the safety of participants. The TGA regulates
the use of therapeutic goods supplied in clinical trials in Australia under the therapeutic goods legislation.
Clinical
trial sponsors must be aware of the requirements to import, export, manufacture and supply therapeutic goods in Australia. The
following avenues provide for the importation into and/or supply in Australia of 'unapproved' therapeutic goods for use in a clinical
trial:
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•
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Clinical
Trial Notification (CTN) scheme; and
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Clinical
Trial Exemption (CTX) scheme.
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The
CTN Scheme is a notification process involving the following:
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•
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The
Australian clinical trial sponsor must notify us of the intent to sponsor a clinical
trial involving an 'unapproved' therapeutic good. This must take place before starting
to use the goods. The notification form must be submitted online and accompanied by the
relevant fee.
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We
may give the sponsor of the trial written notice to provide specified information relating
to goods notified in the CTN form.
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•
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We
do not evaluate any data relating to the clinical trial at the time of submission. The
Human Research Ethics Committee (HREC) reviews the scientific validity of the trial design,
the balance of risk versus harm of the therapeutic good, the ethical acceptability of
the trial process, and approves the trial protocol. The HREC is also responsible for
monitoring the conduct of the trial.
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The
institution or organization at which the trial will be conducted, referred to as the
'Approving Authority', gives the final approval for the conduct of the trial at the site,
having due regard to advice from the HREC.
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•
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It
is the responsibility of the sponsor to ensure that all relevant approvals are in place
before supplying the 'unapproved' therapeutic goods in the clinical trial.
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The
CTX Scheme is an approval process involving the following:
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•
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A
sponsor submits an application to us seeking approval to supply 'unapproved' therapeutic
goods in a clinical trial. The application must be accompanied by the relevant fee.
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We
evaluate summary information about the product including relevant, but limited, scientific
data (which may be preclinical and early clinical data) prior to the start of a trial.
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The
HREC is responsible for considering the scientific and ethical issues of the proposed
trial protocol.
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•
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The
sponsor must notify us of each trial conducted using the unapproved therapeutic good(s)
approved in the CTX application.
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Clinical
trials that do not involve 'unapproved' therapeutic goods are not subject to requirements of the CTN or CTX schemes. It is the
responsibility of the Australian clinical trial sponsor to determine whether a product is considered an 'unapproved' therapeutic
good.
Clinical
trials that do not involve 'unapproved' therapeutic goods are not subject to requirements of the CTN or CTX schemes. It is the
responsibility of the Australian clinical trial sponsor to determine whether a product is considered an 'unapproved' therapeutic
good.
On
September 27, 2013, the TGA approved Nabiximols (Sativex ®), a pharmaceutical manufactured by GW Pharmaceuticals for its collaborator
Novartis Pharmaceuticals Australia Pty Limited in the treatment for symptom improvement in patients with moderate to severe spasticity
due to multiple sclerosis (MS) who have not responded adequately to other anti-spasticity medication and who demonstrated clinically
significant improvement in spasticity related symptoms during the initial trial of therapy.
In
Australia, in 2014, the Advisory Council on Medicines Scheduling recommended rescheduling cannabidiol from a prohibited substance
to being a prescription medicine because, according to the Advisory Council on Medicines Scheduling, “there is a low risk
of misuse or abuse as cannabidiol does not possess psychoactive properties”. The TGA accepted this recommendation and the
decision took effect in July 2015.
Cannabidiol
(CBD) is one of the cannabinoids which may be extracted as a therapeutic good from cannabis. From 1 June 2015, cannabidiol has
been included under Schedule 4 (S4) Prescription Only Medicine of the Poisons Standard (/publication/poisonsstandard-susmp) when
preparations for therapeutic use contain 2% or less of other cannabinoids found in cannabis.
In
February 2016, the Australian Federal Government passed legislation that amended the Narcotic Drugs Act, allowing the supply of
suitable medicinal cannabis products for the management of painful and chronic conditions8. This legislation does not
relate to the decriminalization of cannabis for general cultivation or recreational use and it does not include the provision
of medicinal grade herbal cannabis, only processed, non-smokable medicinal grade products.
Much
of the detail remains unclear. For example, the legislation does not specify which products will be covered under the amendment,
and it does not specify which particular conditions or symptoms will be eligible for treatment with cannabis-based products. Before
products can be prescribed, they must be registered with the Therapeutic Goods Administration (TGA) or, in rare circumstances,
receive special approval from the TGA. The registration process requires evidence of testing and efficacy and it is therefore
unlikely Australia will see a TGA registered medicinal cannabis product that GPs can prescribe any time soon.
Whilst
there are currently no cannabis-based products that are lawfully produced in Australia, the medicinal use of pharmaceutical products
containing cannabinoids is not prohibited, as long as authorization for prescribing is granted from the Commonwealth Therapeutic
Goods Administration and at this point in time, NSW Health.
We
plan to conduct clinical trials for KLS-13019 and KLS-13023 outside the United States and the FDA may not accept data from such
trials.
We
plan to conduct clinical trials outside the United States. 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 NDAs for KLS-13019 or KLS-13023 to the FDA upon completion
of all requisite clinical trials. Although the FDA may accept data from clinical trials conducted outside the United States, acceptance
of such study data by the FDA is subject to certain conditions. For example, the clinical trial must be conducted in accordance
with Good Clinical Practices (“GCP”) requirements and the FDA must be able to validate the data from the clinical
trial through an onsite inspection if it deems such inspection necessary. Where data from foreign clinical trials are intended
to serve as the sole basis for marketing approval in the United States, the FDA will not approve the application on the basis
of foreign data alone unless those data are applicable to the U.S. population and U.S. medical practice, the clinical trials were
performed by clinical investigators of recognized competence, and the data is considered valid without the need for an on-site
inspection by the FDA or, if the FDA considers such an inspection to be necessary, the FDA is able to validate the data through
an on-site inspection or other appropriate means. In addition, such clinical trials would be subject to the applicable local laws
of the foreign jurisdictions where the clinical trials are conducted. There can be no assurance the FDA will accept data from
clinical trials conducted outside of the United States. If the FDA does not accept any such data, it would likely result in the
need for additional clinical trials, which would be costly and time-consuming and delay aspects of our development plan. In addition,
the conduct of clinical trials outside the United States could have a significant impact on us. Risks inherent in conducting international
clinical trials include:
-
foreign
regulatory requirements that could burden or limit our ability to conduct our clinical trials;
-
administrative
burdens of conducting clinical trials under multiple foreign regulatory schema;
-
foreign
exchange fluctuations;
-
manufacturing,
customs, shipment and storage requirements;
-
cultural
differences in medical practice and clinical research; and
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diminished
protection of intellectual property in some countries.
Even
if KLS-13019 or KLS-13023 receive regulatory approval, they may still face future development and regulatory difficulties.
If
we obtain regulatory approval for KLS-13019 or KLS-13023, such approval would be subject to extensive ongoing requirements by
the DEA, FDA, EMA and other foreign regulatory authorities related to the manufacture, quality control, further development, labeling,
packaging, storage, distribution, safety surveillance, import, export, advertising, promotion, recordkeeping and reporting of
safety and other post-market information. The safety profile of any product will continue to be closely monitored by the FDA,
EMA and other comparable foreign regulatory authorities. If the FDA, EMA or any other comparable foreign regulatory authority
becomes aware of new safety information after approval of any of our product candidates, these regulatory authorities may require
labeling changes or establishment of a REMS, impose significant restrictions on a product’s indicated uses or marketing,
impose ongoing requirements for potentially costly post-approval studies or post-market surveillance or impose a recall.
In
addition, manufacturers of therapeutic products and their facilities are subject to continual review and periodic inspections
by the FDA, the EMA and other comparable foreign regulatory authorities for compliance with current good manufacturing practices
(“cGMP”) regulations. Further, manufacturers of controlled substances must obtain and maintain necessary DEA and state
registrations and registrations with applicable foreign regulatory authorities, and must establish and maintain processes to ensure
compliance with DEA and state requirements and requirements of applicable foreign regulatory authorities governing, among other
things, the storage, handling, security, recordkeeping and reporting for controlled substances. If we or a regulatory agency discover
previously unknown problems with a product, such as adverse events of unanticipated severity or frequency, or problems with the
facility where the product is manufactured, a regulatory agency may impose restrictions on that product, the manufacturing facility
or us, including requiring recall or withdrawal of the product from the market or suspension of manufacturing. If we, our product
candidates or the manufacturing facilities for our product candidates fail to comply with applicable regulatory requirements,
a regulatory agency may, among other things:
-
issue
untitled letters or warning letters;
-
mandate
modifications to promotional materials or require us to provide corrective information to healthcare practitioners;
-
require
us to enter into a consent decree, which can include imposition of various fines, reimbursements for inspection costs, required
due dates for specific actions and penalties for noncompliance;
-
seek
an injunction or impose civil or criminal penalties or monetary fines;
-
suspend
or withdraw regulatory approval;
-
suspend
any ongoing clinical trials;
-
refuse
to approve pending applications or supplements to applications filed by us; or
-
require
us to initiate a product recall.
The
occurrence of any event or penalty described above may inhibit our ability to commercialize our product candidates and may otherwise
have a material adverse effect on our business, financial condition and results of operations.
KLS-13023
will be subject to controlled substance laws and regulations; failure to receive necessary approvals may delay the launch of our
products and failure to comply with these laws and regulations may adversely affect the results of our business operations.
KLS-13023
contains controlled substances as defined in the CSA. Controlled substances that are pharmaceutical products are subject to a
high degree of regulation under the CSA, which establishes, among other things, certain registration, manufacturing quotas, security,
recordkeeping, reporting, import, export and other requirements administered by the DEA. The DEA classifies controlled substances
into five schedules: Schedule I, II, III, IV or V substances. Schedule I substances by definition have a high potential for abuse,
have no currently “accepted medical use” in the United States, lack accepted safety for use under medical supervision,
and may not be prescribed, marketed or sold in the United States. Pharmaceutical products approved for use in the United States
may be listed as Schedule II, III, IV or V, with Schedule II substances considered to present the highest potential for abuse
or dependence and Schedule V substances the lowest relative risk of abuse among such substances. Schedule I and II drugs are subject
to the strictest controls under the CSA, including manufacturing and procurement quotas, security requirements and criteria for
importation. In addition, dispensing of Schedule II drugs is further restricted. For example, they may not be refilled without
a new prescription.
While
Cannabis is a Schedule I controlled substance, products approved for medical use in the United States that contain Cannabis or
Cannabis extracts must be placed in Schedules II - V, since approval by the FDA satisfies the “accepted medical use”
requirement. If and when KLS-13023 receives FDA approval, the DEA will make a scheduling determination and place it in a schedule
other than Schedule I in order for it to be prescribed to patients in the United States. If approved by the FDA, we expect the
finished dosage forms of KLS-13023 to be listed by the DEA as a Schedule II or III controlled substance. Consequently, their manufacture,
importation, exportation, domestic distribution, storage, sale and legitimate use will be subject to a significant degree of regulation
by the DEA. The scheduling process may take one or more years beyond FDA approval, thereby significantly delaying the launch of
KLS-13023. Furthermore, if the FDA, DEA or any foreign regulatory authority determines that KLS-13023 may have potential for abuse,
it may require us to generate more clinical data than that which is currently anticipated, which could increase the cost and/or
delay the launch of KLS-13023.
Because
KLS-13023 contains active ingredients of Cannabis, which are Schedule I substances, to conduct preclinical studies and clinical
trials with KLS-13023 in the United States prior to approval, each of our research sites must submit a research protocol to the
DEA and obtain and maintain a DEA researcher registration that will allow those sites to handle and dispense KLS-13023 and to
obtain the product from our manufacturer. If the DEA delays or denies the grant of a research registration to one or more research
sites, the preclinical studies or clinical trials could be significantly delayed, and we could lose and be required to replace
clinical trial sites, resulting in additional costs.
We
expect that KLS-13023 will be scheduled as Schedule II or III, as a result of which we will also need to identify wholesale distributors
with the appropriate DEA registrations and authority to distribute the products to pharmacies and other healthcare providers,
and these distributors would need to obtain Schedule II or III distribution registrations. The failure to obtain, or delay in
obtaining, or the loss of any of those registrations could result in increased costs to us. If KLS-13023 is a Schedule II drug,
pharmacies would have to maintain enhanced security with alarms and monitoring systems and they must adhere to recordkeeping and
inventory requirements. This may discourage some pharmacies from carrying the product. Furthermore, state and federal enforcement
actions, regulatory requirements, and legislation intended to reduce prescription drug abuse, such as the requirement that physicians
consult a state prescription drug monitoring program, may make physicians less willing to prescribe, and pharmacies to dispense,
Schedule II products.
We
may manufacture the commercial supply of KLS-13023 outside of the United States. If KLS-13023 is approved by the FDA and classified
as a Schedule II or III substance, an importer can import for commercial purposes if it obtains from the DEA an importer registration
and files an application with the DEA for an import permit for each import. The DEA provides annual assessments/estimates to the
International Narcotics Control Board which guides the DEA in the amounts of controlled substances that the DEA authorizes to
be imported. The failure to identify an importer or obtain the necessary import authority, including specific quantities, could
affect the availability of KLS-13023 and have a material adverse effect on our business, results of operations and financial condition.
In addition, an application for a Schedule II importer registration must be published in the Federal Register, and there is a
waiting period for third party comments to be submitted.
Individual
states have also established controlled substance laws and regulations. Though state-controlled substance laws often mirror federal
law, because the states are separate jurisdictions, they may separately schedule our product candidates as well. While some states
automatically schedule a drug based on federal action, other states schedule drugs through rulemaking or a legislative action.
State scheduling may delay commercial sale of any product for which we obtain federal regulatory approval and adverse scheduling
could have a material adverse effect on the commercial attractiveness of such product. We or our partners must also obtain separate
state registrations, permits or licenses in order to be able to obtain, handle, and distribute controlled substances for clinical
trials or commercial sale, and failure to meet applicable regulatory requirements could lead to enforcement and sanctions by the
states in addition to those from the DEA or otherwise arising under federal law.
We
currently obtain the API for KLS-13023 from a bulk manufacturer of pharmaceutical grade API in Switzerland. For KLS-13023, we
plan to conduct Phase 1 clinical trials in Australia, subject to applicable regulatory approval. In addition, we may decide to
develop, manufacture or commercialize our product candidates in additional countries. As a result, KLS-13023 will also be subject
to controlled substance laws and regulations from the Therapeutic Goods Administration in Australia, Health Canada’s Office
of Controlled Substances in Canada, and from other regulatory agencies in other countries where we may develop, manufacture or
commercialize KLS-13023 in the future. We plan to submit NDA for KLS-13023 to the FDA upon completion of all requisite clinical
trials and will require additional DEA approvals at such time as well.
On
September 27, 2018, the Department of Justice and Drug Enforcement Administration announced
that Epidiolex, the newly approved medication by the Food & Drug Administration, is being placed in Schedule V of the Controlled
Substances Act, the least restrictive schedule of the CSA. On June 26, 2018, the
FDA announced it approved Epidiolex for the treatment of seizures associated with two rare and severe forms of epilepsy, Lennox-Gastaut
syndrome and Dravet syndrome, in patients two years of age and older. Epidiolex contains cannabidiol (CBD), a chemical constituent
of the cannabis plant (commonly referred to as marijuana). The CBD in Epidiolex is extracted from the cannabis plant and is the
first FDA-approved drug to contain a purified extract from the plant. Schedule V drugs represents the least potential for abuse.
Schedule V drugs, substances, or chemicals are defined as drugs with lower potential for abuse than Schedule IV and consist
of preparations containing limited quantities of certain narcotics. Schedule V drugs are generally used for antidiarrheal, antitussive,
and analgesic purposes. Some examples of Schedule V drugs are: cough preparations with less than 200 milligrams of codeine or
per 100 milliliters (Robitussin AC), Lomotil, Motofen, Lyrica, Parepectolin.
KLS-13023
is a formulation that does contain cannabidiol. At present, cannabidiol is deemed a Schedule 1 controlled substance by the U.S.
Drug Enforcement Agency under the Controlled Substances Act. And like the drug molecule EpidiolexÒ, which was recently
approved by the FDA for marketing and sale for use in treating Dravet’s Syndrome and Lennox-Gasteau Syndrome (forms of child
epilepsy), KLS-13023 would need to follow the guidance set forth by the CSA, complete a successful human clinical trial and apply
for rescheduling, as was the case with EpidiolexÒ, now a Schedule 5 drug.
Despite
the approvals by the FDA and DEA for Epidiolex, any of these foregoing factors, many of which are beyond our control, could jeopardize
our ability to obtain regulatory approval for and successfully market KLS-13019 or KLS-13023. Moreover, because our business is
almost entirely dependent upon these two product candidates, any such setback in our pursuit of regulatory approval would have
a material adverse effect on our business and prospects.
On
January 14, 2019, the Company received written notice from the Drug Enforcement Administration (“DEA”) Drug and Chemical
Evaluation Section, as follows: “Please be advised that your material meets the definition of ‘Hemp’ and is
not regulated under the CSA, as long as it consists of high purity Cannabidiol (CBD) that contains approximately 0.1% delta-9-
THC. (However, if it contains more than 0.3% delta-9 THC, it is considered ‘Marihuana’ and would be in Schedule 1
of the CSA).” While this notice is an official notice from the DEA regarding the scheduling of high purity CBD, the Company
will continue to abide by the CSA in all respects with regards to its treatment and handling of CBD.
Cannabis
remains illegal under Federal law.
Despite
the development of a regulated cannabis industry under the laws of certain states, these state laws regulating medical and adult
cannabis use are in conflict with the CSA, which classifies cannabis as a Schedule I controlled substance and makes cannabis use
and possession illegal on a national level. The United States Supreme Court has ruled that the Federal government has the right
to regulate and criminalize cannabis, even for medical purposes, and thus Federal law criminalizing the use of cannabis preempts
state laws that regulate its use.
On
August 29, 2013, United States Deputy Attorney General James Cole issued the Cole Memo to United States attorneys guiding them
to prioritize enforcement of Federal law away from the cannabis industry operating as permitted under certain state laws, so long
as:
|
•
|
cannabis
is not being distributed to minors and dispensaries are not located around schools and
public buildings;
|
|
•
|
the
proceeds from sales are not going to gangs, cartels or criminal enterprises;
|
|
•
|
cannabis
grown in states where it is legal is not being diverted to other states;
|
|
•
|
cannabis-related
businesses are not being used as a cover for sales of other illegal drugs or illegal
activity;
|
|
•
|
there
is not any violence or use of firearms in the cultivation and sale of marijuana;
|
|
•
|
there
is strict enforcement of drugged-driving laws and adequate prevention of adverse health
consequences; and
|
|
•
|
cannabis
is not grown, used, or possessed on Federal properties.
|
The
Cole Memo was a guide for United States attorneys and did not alter in any way the Department of Justice’s authority to
enforce Federal law, including Federal laws relating to cannabis, regardless of state law. As described below, as a result of
the issuance of the Sessions Memo by the Department of Justice on January 4, 2018, the Cole memo was rescinded. We cannot provide
assurance that our actions are or will be in compliance with the Cole Memo, the Sessions Memo or any other laws or regulations
that currently exist or may be amended or adopted in the future.
On
January 4, 2018, former Attorney General Jefferson B. Sessions, III issued a memo on federal marijuana enforcement policy announcing
a return to the rule of law and the rescission of previous nationwide guidance by the Department of Justice (including, but not
limited to, the Cole Memo). In the memorandum, Attorney General Jefferson Sessions directs all U.S. attorneys to enforce the laws
enacted by Congress and to follow well established principles when pursuing prosecutions related to marijuana activities. These
principles include weighing all relevant considerations, including federal law enforcement priorities set by the Attorney General,
the seriousness of the crime, the deterrent effect of criminal prosecution, and the cumulative impact of particular crimes on
the community. The effect of this memo is to shift federal policy from a hands-off approach adopted by the Obama administration
to permitting federal prosecutors across the country to determine how to prioritize resources to regulate marijuana possession,
distribution and cultivation in states where marijuana use is legal.
Although
the prior administration determined that it was not an efficient use of resources to direct Federal law enforcement agencies to
prosecute those lawfully abiding by state laws allowing the use and distribution of medical and recreational cannabis, the current
administration issued the Sessions Memo announcing a return to the rule of law and the rescission of previous guidance documents.
The Sessions Memo rescinds the Cole Memo which was adopted by the Obama administration as a policy of non-interference with marijuana-friendly
state laws. The Sessions Memo shifts federal policy from a hands-off approach adopted by the Obama administration to permitting
federal prosecutors across the country to decide how to prioritize resources to regulate marijuana possession, distribution and
cultivation in states where marijuana use is regulated. There can be no assurance that federal prosecutors will not prosecute
and dedicate resources to regulate marijuana possession, distribution and cultivation in states where marijuana use is regulated
which may cause states to reconsider their regulation of marijuana which would have a detrimental effect on the marijuana industry.
Any such change in state laws based upon the Sessions Memo and the Federal government’s enforcement of Federal laws could
cause significant financial damage to us and our stockholders.
Product
shipment delays could have a material adverse effect on our business, results of operations and financial condition.
The
shipment, import and export of KLS-13023 and the API used to manufacture KLS-13023 will require import and export licenses. In
the United States, the FDA, U.S. Customs and Border Protection, and the DEA, in Canada, where our API is manufactured, the Canada
Border Services Agency and Health Canada, in Australia, where we will commence clinical trials, the Australian Customs and Board
Protection Service and the Therapeutic Goods Administration, and in other countries, similar regulatory authorities, regulate
the import and export of pharmaceutical products that contain controlled substances. Specifically, the import and export process
requires the issuance of import and export licenses by the relevant controlled substance authority in both the importing and exporting
country. We may not be granted, or if granted, maintain, such licenses from the authorities in certain countries. Even if we obtain
the relevant licenses, shipments of API and our product candidates may be held up in transit, which could cause significant delays
and may lead to product batches being stored outside required temperature ranges. Inappropriate storage may damage the product
shipment resulting in delays in clinical trials or, upon commercialization, a partial or total loss of revenue from one or more
shipments of API or KLS-13023. A delay in a clinical trial or, upon commercialization, a partial or total loss of revenue from
one or more shipments of API or KLS-13023 could have a material adverse effect on our business, results of operations and financial
condition.
Failure
to obtain regulatory approval in jurisdictions outside the United States and the European Union would prevent our product candidates
from being marketed in those jurisdictions.
In
order to market and sell our products in jurisdictions other than the United States and the European Union, we must obtain separate
marketing approvals and comply with numerous and varying regulatory requirements. The regulatory approval process outside the
United States and the European Union generally includes all of the risks associated with obtaining FDA and EMA approval, but can
involve additional testing. We may need to partner with third parties in order to obtain approvals outside the United States and
the European Union. In addition, in many countries worldwide, it is required that the product be approved for reimbursement before
the product can be approved for sale in that country. We may not obtain approvals from regulatory authorities outside the United
States and the European Union on a timely basis, if at all. Even if we were to receive approval in the United States or the European
Union, approval by the FDA or the EMA does not ensure approval by regulatory authorities in other countries or jurisdictions.
Similarly, approval by one regulatory authority outside the United States and the European Union would not ensure approval by
regulatory authorities in other countries or jurisdictions or by the FDA or the EMA. We may not be able to file for marketing
approvals and may not receive necessary approvals to commercialize our products in any market. If we are unable to obtain approval
of our product candidates by regulatory authorities in other foreign jurisdictions, the commercial prospects of those product
candidates may be significantly diminished and our business prospects could decline.
Healthcare
legislation, including potentially unfavorable pricing regulations or other healthcare reform initiatives, may increase the difficulty
and cost for us to obtain marketing approval of and commercialize our product candidates.
In
the United States there have been a number of legislative and regulatory changes and proposed changes regarding the healthcare
system that could prevent or delay marketing approval of our product candidates, restrict or regulate post-approval activities
or affect our ability to profitably sell any product candidates for which we obtain marketing approval.
The
Patient Protection and Affordable Care Act, as amended by the Health Care and Education Reconciliation Act, or Affordable Care
Act, among other things, imposes a significant annual fee on companies that manufacture or import branded prescription drug products.
It also contains substantial provisions intended to broaden access to health insurance, reduce or constrain the growth of healthcare
spending, enhance remedies against healthcare fraud and abuse, add new transparency requirements for the healthcare and health
insurance industries, impose new taxes and fees on pharmaceutical and medical device manufacturers, and impose additional health
policy reforms, any of which could negatively impact our business. A significant number of provisions are not yet, or have only
recently become effective, but the Affordable Care Act is likely to continue the downward pressure on pharmaceutical and medical
device pricing, especially under the Medicare program, and may also increase our regulatory burdens and operating costs.
In
addition, other legislative changes have been proposed and adopted since passage of the Affordable Care Act. The Budget Control
Act of 2011, among other things, created the Joint Select Committee on Deficit Reduction to recommend to Congress proposals in
spending reductions. The Joint Select Committee did not achieve a targeted deficit reduction of an amount greater than $1.2 trillion
for the fiscal years 2012 through 2021, triggering the legislation’s automatic reduction to several government programs.
This included aggregate reductions to Medicare payments to healthcare providers of up to 2.0% per fiscal year, which went into
effect in April 2013. In January 2013, President Obama signed into law the American Taxpayer Relief Act of 2012, which, among
other things, reduced Medicare payments to several categories of healthcare providers and increased the statute of limitations
period for the government to recover overpayments to providers from three to five years. If we ever obtain regulatory approval
and successfully commercialize KLS-13019, KLS-13023 or other product candidates that we may develop, these new laws may result
in additional reductions in Medicare and other healthcare funding, which could have a material adverse effect on our customers
and accordingly, our financial operations.
We
expect that the Affordable Care Act, as well as other healthcare reform measures that have been and may be adopted in the future,
may result in more rigorous coverage criteria and in additional downward pressure on the price that we receive for any approved
product, and could seriously harm our future revenues. Any reduction in reimbursement from Medicare or other government programs
may result in a similar reduction in payments from private payors. The implementation of cost containment measures or other healthcare
reforms may compromise our ability to generate revenue, attain profitability or commercialize our products.
On
December 2, 2017, the U.S. Senate passed the Tax Cut and Jobs Act of 2017. The Senate bill
repeals the individual mandate that requires all Americans under 65 to have health insurance or pay a penalty, effective starting
in 2019. The CBO initially estimated that 13 million fewer persons would have health insurance by 2025, including 8 million fewer
on the Affordable Care Act exchanges and 5 million fewer on Medicaid. Fewer persons with healthcare means lower costs for the
government, so CBO estimated over $300 billion in savings. This allowed Republicans to increase the size of the tax cuts in the
bill. Health insurance premiums on the exchanges could rise as much as 10 percentage points more than they would otherwise. CBO
later revised this estimate in 2018 to 7 million fewer insured by 2026.
In
addition to these changes, the corporate tax
rate would fall from 35% to 21%, while some related business deductions and credits would either be reduced or eliminated. The
Act would also change the U.S. from a global to a territorial tax system with respect to corporate income tax. Instead of a corporation
paying the U.S. tax rate (35%) for income earned in any country (less a credit for taxes paid to that country), each subsidiary
would pay the tax rate of the country in which it is legally established.
We
plan to seek orphan drug status for KLS-13023 for the treatment of Overt Hepatic Encephalopathy, but we may be unable to obtain
such designation or to maintain the benefits associated orphan drug status, including market exclusivity, which may cause our
revenue, if any, to be reduced.
Regulatory
authorities in some jurisdictions, including the United States and European Union, may designate drugs for relatively small patient
populations as orphan drugs. The FDA may grant Orphan Drug Designation to drugs intended to treat a rare disease or condition
that affects fewer than 200,000 individuals annually in the United States, or, if the disease or condition affects more than 200,000
individuals annually in the United States, if there is no reasonable expectation that the cost of developing and making the drug
would be recovered from sales in the United States. In the European Union, the EMA’s Committee for Orphan Medicinal Products
grants Orphan Drug Designation to promote the development of products that are intended for the diagnosis, prevention or treatment
of life-threatening or chronically debilitating conditions affecting not more than five in 10,000 persons in the European Union
community. Additionally, designation is granted for products intended for the diagnosis, prevention or treatment of a life-threatening,
seriously debilitating or serious and chronic condition and when, without incentives, it is unlikely that sales of the drug in
the European Union would be sufficient to justify the necessary investment in developing the drug.
In
the United States, Orphan Drug Designation entitles a party to financial incentives, such as opportunities for grant funding towards
clinical trial costs, tax credits for certain research and user fee waivers under certain circumstances. In addition, if a product
receives the first FDA approval for the indication for which it has orphan designation, the product is entitled to seven years
of market exclusivity, which means the FDA may not approve any other application for the same drug for the same indication for
a period of seven years, except in limited circumstances, such as a showing of clinical superiority over the product with orphan
exclusivity. Orphan drug exclusivity does not prevent the FDA from approving a different drug for the same disease or condition,
or the same drug for a different disease or condition. In the European Union, Orphan Drug Designation also entitles a party to
financial incentives such as reduction of fees or fee waivers and ten years of market exclusivity following drug approval. This
period may be reduced to six years if the Orphan Drug Designation criteria are no longer met, including where it is shown that
the product is sufficiently profitable so that market exclusivity is no longer justified.
As
a result, even if KLS-13023 receives orphan exclusivity in Overt Hepatic Encephalopathy, the FDA or EMA can still approve other
drugs that have a different active ingredient for use in treating the same indication. Furthermore, the FDA can waive orphan exclusivity
if we are unable to manufacture sufficient supply of KLS-13023 or the EMA could reduce the term of exclusivity if KLS-13023 is
sufficiently profitable.
We
plan to seek orphan drug designation for KLS-13023 in Overt Hepatic Encephalopathy, but exclusive marketing rights in the United
States may be limited if we seek approval for an indication broader than the orphan designated indication and may be lost if the
FDA or EMA later determines that the request for designation was materially defective or if the manufacturer is unable to assure
sufficient quantities of the product to meet the needs of patients with the rare disease or condition. In addition, although we
intend to seek orphan drug designation for KLS-13023, we may never receive such designation, or there may be a delay in receiving
such designation that would impact our expected timeframe for clinical development.
In
June 2016, the Company filed for Orphan Drug Designation with the Office of Orphan Products Development (“OOPD”) at
the U.S. Food and Drug Administration (“FDA”) for the use of CBD to treat a sub-set of hepatic encephalopathy. It
is estimated that approximately 121,000 +/- hospitalizations occur every year from overt hepatic encephalopathy ammonia neurotoxicity
traumas, which put the patient in severe cognitive and behavioral impairment. The current standard of care for the treatment of
these traumatic events includes diuretics and anti-biotics, but none currently deal with the neurotoxic aspects of the brain.
In
November 2016, the Company received an initial abeyance letter from the OOPD regarding the Company’s orphan drug application.
The abeyance letter seeks clarification on the epidemiology regarding the Company’s target sub-set of the HE disease (also
referred to herein as overt hepatic encephalopathy (OHE)). In October 2017, the Company responded to the questions set forth in
the epidemiology and disease sub-set. The Company received a response on November 30, 2017 from the OOPD agreeing with the Company’s
position on the orphan disease threshold of patients suffering from the target sub-set of the HE disease. However, the OOPD requested
additional information to support the limiting use for hospitalized patients in the sub-set of the HE disease. The Company believes
it has the necessary information and data to support its position in requesting orphan drug designation for CBD in the treatment
of the target sub-set of the HE disease. Accordingly, the Company plans to provide adequate rationale for limiting use of the
drug to the orphan sub-set of HE patients requiring inpatient hospital treatment by November 2018.
There
can be no assurance that the Company will be successful in obtaining orphan drug status for the target sub-set of the HE disease.
Failure to obtain orphan designation in this instance may affect the Company’s plans to pursue a clinical treatment for
the sub-set of the HE disease using CBD as the primary active pharmaceutical ingredient in a proposed target drug candidate to
treat the sub-set of the HE disease.
Even
if we are able to commercialize KLS-13019 or KLS-13023, the products may not receive coverage and adequate reimbursement from
third-party payors, which could harm our business.
The
availability of reimbursement by governmental and private payors is essential for most patients to be able to afford expensive
treatments. Sales of our product candidates, if approved, will depend substantially on the extent to which the costs of these
product candidates will be paid by health maintenance, managed care, pharmacy benefit and similar healthcare management organizations,
or reimbursed by government health administration authorities, private health coverage insurers and other third-party payors.
If reimbursement is not available, or is available only to limited levels, we may not be able to successfully commercialize KLS-13019
or KLS-13023. Even if coverage is provided, the approved reimbursement amount may not be high enough to allow us to establish
or maintain pricing sufficient to realize a sufficient return on our investment.
In
the United States, the Medicare Prescription Drug, Improvement, and Modernization Act of 2003, or Medicare Modernization Act,
established the Medicare Part D program and provided authority for limiting the number of drugs that will be covered in any therapeutic
class thereunder. The Medicare Modernization Act, including its cost reduction initiatives, could decrease the coverage and reimbursement
rate that we receive for any of our approved products. Furthermore, private payors often follow Medicare coverage policies and
payment limitations in setting their own reimbursement rates. Therefore, any reduction in reimbursement that results from the
Medicare Modernization Act may result in a similar reduction in payments from private payors.
There
is significant uncertainty related to the insurance coverage and reimbursement of newly approved products. In the United States,
the principal decisions about reimbursement for new medicines are typically made by the Centers for Medicare & Medicaid Services,
or CMS, an agency within the U.S. Department of Health and Human Services, or HHS, as CMS decides whether and to what extent a
new medicine will be covered and reimbursed under Medicare. Private payors tend to follow CMS to a substantial degree.
The
intended use of a drug product by a physician can also affect pricing. For example, CMS could initiate a National Coverage Determination
administrative procedure, by which the agency determines which uses of a therapeutic product would and would not be reimbursable
under Medicare. This determination process can be lengthy, thereby creating a long period during which the future reimbursement
for a particular product may be uncertain.
Outside
the United States, particularly in member states of the European Union, the pricing of prescription drugs is subject to governmental
control. In these countries, pricing negotiations or the successful completion of health technology assessment procedures with
governmental authorities can take considerable time after receipt of marketing approval for a product. In addition, there can
be considerable pressure by governments and other stakeholders on prices and reimbursement levels, including as part of cost containment
measures. Certain countries allow companies to fix their own prices for medicines, but monitor and control company profits. Political,
economic and regulatory developments may further complicate pricing negotiations, and pricing negotiations may continue after
reimbursement has been obtained. Reference pricing used by various European Union member states and parallel distribution, or
arbitrage between low-priced and high-priced member states, can further reduce prices. In some countries, we or our collaborators
may be required to conduct a clinical trial or other studies that compare the cost-effectiveness of our product candidates to
other available therapies in order to obtain or maintain reimbursement or pricing approval. Publication of discounts by third-party
payors or authorities may lead to further pressure on the prices or reimbursement levels within the country of publication and
other countries. If reimbursement of any product candidate approved for marketing is unavailable or limited in scope or amount,
or if pricing is set at unsatisfactory levels, our business, financial condition, results of operations or prospects could be
adversely affected.
Our
relationships with customers and third-party payors will be subject to applicable anti-kickback, fraud and abuse and other healthcare
laws and regulations, which could expose us to criminal sanctions, civil penalties, contractual damages, reputational harm and
diminished profits and future earnings.
Healthcare
providers, physicians and third-party payors play a primary role in the recommendation and prescription of any product candidates
for which we obtain marketing approval. Our future arrangements with third-party payors and customers may expose us to broadly
applicable fraud and abuse and other healthcare laws and regulations that may constrain the business or financial arrangements
and relationships through which we market, sell and distribute our products for which we obtain marketing approval. As a pharmaceutical
company, even though we do not and will not control referrals of healthcare services or bill directly to Medicare, Medicaid or
other third-party payors, certain federal and state healthcare laws and regulations pertaining to fraud and abuse and patients’
rights are and will be applicable to our business. Restrictions under applicable federal and state healthcare laws and regulations
that may affect our ability to operate include the following:
-
the
U.S. federal healthcare Anti-Kickback Statute impacts our marketing practices, educational programs, pricing policies and relationships
with healthcare providers or other entities, by prohibiting, among other things, persons from knowingly and willfully soliciting,
offering, receiving or providing remuneration, directly or indirectly, in cash or in kind, to induce or reward, or in return for,
either the referral of an individual for, or the purchase, order or recommendation of, any good or service, for which payment
may be made under a federal healthcare program such as Medicare and Medicaid;
-
federal
civil and criminal false claims laws and civil monetary penalty laws impose criminal and civil penalties, including through civil
whistleblower or qui tam actions, against individuals or entities for knowingly presenting, or causing to be presented, to the
federal government, including the Medicare and Medicaid programs, claims for payment that are false or fraudulent (including through
impermissible promotion of our products for off-label uses) or making a false statement or record to avoid, decrease or conceal
an obligation to pay money to the federal government;
-
the
U.S. federal Health Insurance Portability and Accountability Act of 1996, or HIPAA, imposes criminal and civil liability for executing
a scheme to defraud any healthcare benefit program and also created federal criminal laws that prohibit knowingly and willfully
falsifying, concealing or covering up a material fact or making any materially false statements in connection with the delivery
of or payment for healthcare benefits, items or services;
-
HIPAA,
and the rules and regulations promulgated thereunder, establish federal standards for maintaining the privacy and security of
certain patient health information known as Protected Health Information, or PHI. As amended by the Health Information Technology
for Economic and Clinical Health Act, or HITECH, HIPAA establishes federal standards for administrative, technical and physical
safeguards relevant to the electronic transmission of PHI and imposes notification obligations in the event of a breach of the
privacy or security of PHI. In addition to adhering to the requirements of HIPAA, entities considered “covered entities”
under HIPAA (such as health plans, healthcare clearinghouses, and certain healthcare providers) are required to obtain assurances
in the form of a written contract from certain business associates to which they transmit PHI (or who create, receive, transmit
or maintain PHI on the covered entity’s behalf) to ensure that the privacy and security of such information is maintained
in accordance with HIPAA requirements. HITECH made changes to HIPAA including extending the reach of HIPAA beyond HIPAA covered
entities to business associates, increased the maximum civil monetary penalties for violations of HIPAA, and granted enforcement
authority to state attorneys general. Failure to comply with HIPAA/HITECH can result in civil and criminal liability, including
civil monetary penalties, fines and imprisonment;
-
the
U.S. federal physician payment transparency requirements under the Affordable Care Act require applicable manufacturers of covered
drugs, devices, biologics and medical supplies to report annually to HHS information related to payments and other transfers of
value to physicians, certain other healthcare providers, and teaching hospitals, and ownership and investment interests held by
physicians and certain other healthcare providers and their immediate family members and applicable group purchasing organizations;
and
-
analogous
state laws and regulations, such as state anti-kickback and false claims laws, may apply to sales or marketing arrangements and
claims involving healthcare items or services reimbursed by non-governmental third-party payors, including private insurers. Some
state laws require pharmaceutical companies to comply with the pharmaceutical industry’s voluntary compliance guidelines
and the relevant compliance guidance promulgated by the federal government and may require drug manufacturers to report information
related to payments and other transfers of value to physicians and certain other healthcare providers or marketing expenditures.
Additionally, state and foreign laws govern the privacy and security of health information in certain circumstances, many of which
differ from each other in significant ways and often are not preempted by HIPAA/HITECH, thus complicating compliance efforts.
Comparable
laws and regulations exist in the countries within the European Economic Area (“EEA”). Although such laws are partially
based upon European Union law, they may vary from country to country. Healthcare specific, as well as general European Union and
national laws, regulations and industry codes constrain, for example, our interactions with government officials and healthcare
practitioners, and the handling of healthcare data. Non-compliance with any of these laws or regulations could lead to criminal
or civil liability.
Efforts
to ensure that our business arrangements with third parties will comply with applicable healthcare laws and regulations will involve
substantial costs. It is possible that governmental authorities will conclude that our business practices may not comply with
current or future statutes, regulations or case law involving applicable fraud and abuse or other healthcare laws and regulations.
If our operations are found to be in violation of any of these laws or any other governmental regulations that may apply to us,
we may be subject to significant civil, criminal and administrative penalties, damages, fines, imprisonment, exclusion from government
funded healthcare programs, such as Medicare and Medicaid, and the curtailment or restructuring of our operations. If any physicians
or other healthcare providers or entities with whom we expect to do business are found to not be in compliance with applicable
laws, they may be subject to criminal, civil or administrative sanctions, including exclusions from government funded healthcare
programs.
Also,
the U.S. Foreign Corrupt Practices Act and similar worldwide anti-bribery laws generally prohibit companies and their intermediaries
from making improper payments to non-U.S. officials for the purpose of obtaining or retaining business. Our internal control policies
and procedures may not protect us from reckless or negligent acts committed by our employees, future distributors, licensees or
agents. Violations of these laws, or allegations of such violations, could result in fines, penalties or prosecution and have
a negative impact on our business, results of operations and reputation.
Our
employees may engage in misconduct or other improper activities, including noncompliance with regulatory standards and requirements,
which could subject us to significant liability and harm our reputation.
We
are exposed to the risk of employee fraud or other misconduct. Misconduct by employees could include intentional failures to comply
with DEA, FDA or EMA regulations or similar regulations of other foreign regulatory authorities or to provide accurate information
to the DEA, FDA, EMA or other foreign regulatory authorities. In addition, misconduct by employees could include intentional failures
to comply with certain manufacturing standards, to comply with U.S. federal and state healthcare fraud and abuse laws and regulations
and similar laws and regulations established and enforced by comparable foreign regulatory authorities, to report financial information
or data accurately or to disclose unauthorized activities to us. In particular, sales, marketing and business arrangements in
the healthcare industry are subject to extensive laws and regulations intended to prevent fraud, kickbacks, self-dealing and other
abusive practices. These laws and regulations may restrict or prohibit a wide range of pricing, discounting, marketing and promotion,
sales commission, customer incentive programs and other business arrangements. Employee misconduct could also involve the improper
use of information obtained in the course of clinical trials, which could result in regulatory sanctions and serious harm to our
reputation. We plan to adopt, and will implement and enforce, a Code of Business Conduct and Ethics, but it is not always possible
to identify and deter employee misconduct, and the precautions we take to detect and prevent this activity, such as employee training
on enforcement of the Code of Business Conduct and Ethics, may not be effective in controlling unknown or unmanaged risks or losses
or in protecting us from governmental investigations or other actions or lawsuits stemming from a failure to be in compliance
with such laws or regulations. If any such actions are instituted against us, and we are not successful in defending ourselves
or asserting our rights, those actions could have a significant impact on our business and results of operations, including the
imposition of significant fines or other sanctions.
If
we are unable to develop sales, marketing and distribution capabilities or enter into agreements with third parties to perform
these functions on acceptable terms, we may be unable to generate revenue.
We
do not currently have any sales, marketing or distribution capabilities. If KLS-13019 or KLS-13023 is approved, we will need to
develop internal sales, marketing and distribution capabilities to commercialize such products, which would be expensive and time-consuming,
or enter into collaborations with third parties to perform these services. If we decide to market our products directly, we will
need to commit significant financial and managerial resources to develop a marketing and sales force with technical expertise
and supporting distribution, administration and compliance capabilities. If we rely on third parties with such capabilities to
market our products or decide to co-promote products with collaborators, we will need to establish and maintain marketing and
distribution arrangements with third parties, and there can be no assurance that we will be able to enter into such arrangements
on acceptable terms or at all. In entering into third-party marketing or distribution arrangements, any revenue we receive will
depend upon the efforts of the third parties and there can be no assurance that such third parties will establish adequate sales
and distribution capabilities or be successful in gaining market acceptance of any approved product. If we are not successful
in commercializing any product approved in the future, either on our own or through third parties, our business, financial condition
and results of operations could be materially adversely affected.
Our
product candidates, if approved, may be unable to achieve broad market acceptance and, consequently, limit our ability to generate
revenue from new products.
Even
when product development is successful and regulatory approval has been obtained, our ability to generate significant revenue
depends on the acceptance of our products by physicians and patients. The market acceptance of any product depends on a number
of factors, including the indication statement and warnings approved by regulatory authorities in the product label, continued
demonstration of efficacy and safety in commercial use, physicians’ willingness to prescribe the product, reimbursement
from third-party payors such as government healthcare systems and insurance companies, the price of the product, the nature of
any post-approval risk management plans mandated by regulatory authorities, competition, and marketing and distribution support.
Any factors preventing or limiting the market acceptance of our product candidates could have a material adverse effect on our
business, results of operations and financial condition.
If
we receive regulatory approvals, we intend to market KLS-13019 and KLS-13023 in multiple jurisdictions where we have limited or
no operating experience and may be subject to increased business and economic risks that could affect our financial results.
If
we receive regulatory approvals, we plan to market KLS-13019 and KLS-13023 in jurisdictions where we have limited or no experience
in marketing, developing and distributing our products. Certain markets have substantial legal and regulatory complexities that
we may not have experience navigating. We are subject to a variety of risks inherent in doing business internationally, including
risks related to the legal and regulatory environment in non-U.S. jurisdictions, including with respect to privacy and data security,
trade control laws and unexpected changes in laws, regulatory requirements and enforcement, as well as risks related to fluctuations
in currency exchange rates and political, social and economic instability in foreign countries. If we are unable to manage our
international operations successfully, our financial results could be adversely affected.
In
addition, controlled substance legislation may differ in other jurisdictions and could restrict our ability to market our products
internationally. Most countries are parties to the Single Convention on Narcotic Drugs 1961, which governs international trade
and domestic control of narcotic substances, including Cannabis extracts. Countries may interpret and implement their treaty obligations
in a way that creates a legal obstacle to us obtaining marketing approval for KLS-13019 or KLS-13023 in those countries. These
countries may not be willing or able to amend or otherwise modify their laws and regulations to permit KLS-13019 or KLS-13023
to be marketed, or achieving such amendments to the laws and regulations may take a prolonged period of time. We would be unable
to market KLS-13019 or KLS-13023 in countries with such obstacles in the near future or perhaps at all without modification to
laws and regulations.
KLS-13023
contains a controlled substance, the use of which may generate public controversy.
Since
our product candidates contain controlled substances, their regulatory approval may generate public controversy. Political and
social pressures and adverse publicity could lead to delays in approval of, and increased expenses for, our product candidates.
These pressures could also limit or restrict the introduction and marketing of our product candidates. Adverse publicity from
Cannabis misuse or adverse side effects from Cannabis or other cannabinoid products may adversely affect the commercial success
or market penetration achievable by our product candidates. The nature of our business attracts a high level of public and media
interest, and in the event of any resultant adverse publicity, our reputation may be harmed.
KLS-13023
is a formulation that does contain cannabidiol. At present, cannabidiol is deemed a Schedule 1 controlled substance by the U.S.
Drug Enforcement Agency under the Controlled Substances Act. And like the drug molecule EpidiolexÒ, which was recently approved
by the FDA for marketing and sale for use in treating Dravet’s Syndrome and Lennox-Gasteau Syndrome (forms of child epilepsy),
KLS-13023 would need to follow the guidance set forth by the CSA, complete a successful human clinical trial and apply for rescheduling,
as was the case with EpidiolexÒ, now a Schedule 5 drug.
On
January 14, 2019, the Company received written notice from the Drug Enforcement Administration (“DEA”) Drug and Chemical
Evaluation Section, as follows: “Please be advised that your material meets the definition of ‘Hemp’ and is
not regulated under the CSA, as long as it consists of high purity Cannabidiol (CBD) that contains approximately 0.1% delta-9-
THC. (However, if it contains more than 0.3% delta-9 THC, it is considered ‘Marihuana’ and would be in Schedule 1
of the CSA).” While this notice is an official notice from the DEA regarding the scheduling of high purity CBD, the Company
will continue to abide by the CSA in all respects with regards to its treatment and handling of CBD.
Any
inability to attract and retain qualified key management and technical personnel would impair our ability to implement our business
plan.
Our
success largely depends on the continued service of key management and other specialized personnel, including Dean Petkanas, our
chairman and chief executive officer, William A. Kinney, our chief scientific officer, Mark Corrao, our chief financial officer,
and Thomas Kikis, our chief communications officer. The loss of one or more members of our management team or other key employees
could delay our research and development programs and materially harm our business, financial condition, results of operations
and prospects. The relationships that our team has cultivated within the life sciences industry makes us particularly dependent
upon their continued employment with us. Because our management team is not obligated to provide us with continued service, they
could terminate their employment or services with us at any time without penalty, subject to providing any required advance notice.
We do not maintain key person life insurance policies for any members of our management team.
Our
future success and growth will depend in large part on our continued ability to attract and retain other highly qualified scientific,
technical and management personnel, as well as personnel with expertise in clinical testing, manufacturing, governmental regulation
and commercialization. We face competition for personnel from other companies, universities, public and private research institutions,
government entities and other organizations.
We
face substantial competition, which may result in others discovering, developing or commercializing products before or more successfully
than we do.
The
development and commercialization of drugs is highly competitive. We compete with a variety of multinational pharmaceutical companies
and specialized biotechnology companies, as well as products and processes being developed at universities and other research
institutions. Our competitors have developed, are developing or will develop product candidates and processes competitive with
our product candidates. Competitive therapeutic treatments include those that have already been approved and accepted by the medical
community and any new treatments that enter the market. We believe that a significant number of products are currently available,
under development, and may become commercially available in the future, for the treatment of indications for which we may try
to develop product candidates. If either of our product candidates, KLS-13019 or KLS-13023, is approved for the indications we
are currently pursuing, it will compete with a range of therapeutic treatments that are either in development or currently marketed.
We
are aware of multiple companies that are working in the Cannabis therapeutic area, including pharmaceutical companies such as
GW Pharmaceuticals PLC, or GW, which markets Sativex, a botanical cannabinoid oral mucosal for the treatment of spasticity due
to multiple sclerosis and which is also in development in neuropathic pain in several foreign countries and is seeking FDA approval
in the United States, and is developing Epidiolex, a liquid formulation of highly purified CBD extract, as a treatment for Dravet’s
Syndrome, Lennox Gastaut Syndrome, and various childhood epilepsy syndromes; Insys Therapeutics, Inc., which is seeking FDA approval
for an orally-administered liquid formulation of its synthetic CBD molecule as a treatment for Dravet’s Syndrome, Lennox
Gastaut Syndrome, and other childhood epilepsy syndromes; and Nemus Bioscience, Inc. which is focused on the discovery, development
and commercialization of Cannabis therapeutics.
On
September 27, 2018, the Department of Justice and Drug Enforcement Administration announced
that Epidiolex, the newly approved medication by the Food & Drug Administration, is being placed in Schedule V of the Controlled
Substances Act, the least restrictive schedule of the CSA. On June 26, 2018, the
FDA announced it approved Epidiolex for the treatment of seizures associated with two rare and severe forms of epilepsy, Lennox-Gastaut
syndrome and Dravet syndrome, in patients two years of age and older. Epidiolex contains cannabidiol (CBD), a chemical constituent
of the cannabis plant (commonly referred to as marijuana). The CBD in Epidiolex is extracted from the cannabis plant and is the
first FDA-approved drug to contain a purified extract from the plant. Schedule V drugs represents the least potential for abuse.
We
are also aware of Zynerba Pharmaceuticals, Inc. and its patent-protected synthetic transdermal cannabinoid product candidates,
ZYN002 and ZYN001. These cannabinoid product candidates represent cannabinoid therapeutics for several indications including refractory
epilepsy, FXS, OA, fibromyalgia and peripheral neuropathic pain. According to Zynerba Pharmaceuticals, Inc., ZYN002 is the first
and only synthetic CBD formulated as a permeation-enhanced gel for transdermal delivery, and is patent-protected through 2030.
More
established companies may have a competitive advantage over us due to their greater size, cash flows and institutional experience.
Compared to us, many of our competitors may have significantly greater financial, technical and human resources. As a result of
these factors, our competitors may have an advantage in marketing their approved products and may obtain regulatory approval of
their product candidates before we are able to, which may limit our ability to develop or commercialize our product candidates.
Our competitors may also develop drugs that are safer, more effective, more widely used and less expensive than ours, and may
also be more successful than us in manufacturing and marketing their products. These advantages could materially impact our ability
to develop and commercialize KLS-13019 or KLS-13023 successfully
Our
product candidates, most notably KLS-13023, may compete with non-synthetic cannabinoid drugs, including therapies such as GW’s
Sativex. Our product candidates may also compete with medical and recreational marijuana, in markets where the recreational and/or
medical use of marijuana is legal. There is support in the United States for further legalization of marijuana. In markets where
recreational and/or medical marijuana is not legal, our product candidates may compete with marijuana purchased in the illegal
drug market. We cannot assess the extent to which patients may utilize marijuana obtained illegally for the treatment of the indications
for which we are developing KLS-13019 and KLS-13023.
Mergers
and acquisitions in the pharmaceutical and biotechnology industries may result in even more resources being concentrated among
a smaller number of our competitors. Smaller and other early-stage companies may also prove to be significant competitors, particularly
through collaborative arrangements with large and established companies. These third parties compete with us in recruiting and
retaining qualified scientific, management and commercial personnel, establishing clinical trial sites and subject registration
for clinical trials, as well as in acquiring technologies complementary to, or necessary for, our programs.
The
market opportunity for chemotherapy induced peripheral neuropathy will be limited to those patients who are not currently receiving
adequate relief from current treatment regimens, which may reduce our targeted market.
Pre-existing
treatments may be adequate to treat certain patients with chemotherapy induced peripheral neuropathy. Whenever the first-line
therapy fails or is unsuccessful, then second-line therapy may be administered. For chemotherapy induced peripheral neuropathy,
KLS-13019 is particularly targeted to provide an additional treatment option for patients not currently receiving adequate relief
from current treatment regimens. If a more successful first-line therapy is developed, it may significantly reduce the patient
population to which we can supply, which may affect our ability to successfully commercialize KLS-13019 for chemotherapy induced
peripheral neuropathy.
Product
liability lawsuits against us could cause us to incur substantial liabilities.
Our
planned use of KLS-13019 and KLS-13023 in clinical trials and the sale of KLS-13019 and KLS-13023, if approved, exposes us to
the risk of product liability claims. Product liability claims might be brought against us by patients, healthcare providers or
others selling or otherwise coming into contact with KLS-13019 or KLS-13023. For example, we may be sued if any product we develop
allegedly causes injury or is found to be otherwise unsuitable during product testing, manufacturing, marketing or sale. Any such
product liability claims may include allegations of defects in manufacturing, defects in design, a failure to warn of dangers
inherent in the product, including as a result of interactions with alcohol or other drugs, negligence, strict liability, and
a breach of warranties. Claims could also be asserted under state consumer protection acts. If we become subject to product liability
claims and cannot successfully defend ourselves against them, we could incur substantial liabilities. In addition, regardless
of merit or eventual outcome, product liability claims may result in, among other things:
-
withdrawal
of patients from our clinical trials;
-
substantial
monetary awards to patients or other claimants;
-
decreased
demand for KLS-13019 or KLS-13023 following marketing approval, if obtained;
-
damage
to our reputation and exposure to adverse publicity;
-
increased
FDA or EMA warnings on product labels;
-
litigation
costs;
-
distraction
of management’s attention from our primary business;
-
loss
of revenue; and
-
the
inability to successfully commercialize KLS-13019 or KLS-13023, if approved.
We
will need to obtain product liability insurance coverage for our clinical trials. We may not be able to obtain such coverage at
a reasonable cost or in sufficient amounts to protect us against losses, including if insurance coverage becomes increasingly
expensive. Large judgments have been awarded in class action lawsuits based on drugs that had unanticipated side effects. The
cost of any product liability litigation or other proceedings, even if resolved in our favor, could be substantial, particularly
in light of the size of our business and financial resources. A product liability claim or series of claims brought against us
could cause our share price to decline and, if we are unsuccessful in defending such a claim or claims and the resulting judgments
exceed our insurance coverage, our financial condition, results of operations, business and prospects could be materially adversely
affected.
Our
business and operations would suffer in the event of computer system failures.
Despite
the implementation of security measures, our information technology and other internal infrastructure systems and those of our
CROs and other contractors and consultants are vulnerable to damage from computer viruses, unauthorized access, natural disasters,
terrorism, war and telecommunication and electrical failures. A significant disruption in the availability of our information
technology and other internal infrastructure systems could cause delays in our research and development work. For instance, the
loss of preclinical data or data from any future clinical trial involving our product candidates could result in delays in our
development and regulatory filing efforts and significantly increase our costs. To the extent that any disruption or security
breach were to result in a loss of, or damage to, our data, or inappropriate disclosure of confidential or proprietary information,
we could incur liability and the development of our product candidates could be delayed.
COVID-19,
a pandemic, epidemic or outbreak of an infectious disease in the United States or elsewhere may adversely affect our business.
If
a pandemic, epidemic or outbreak of an infectious disease occurs in the United States or elsewhere, our business may be adversely
affected. In December 2019, a novel strain of coronavirus, COVID-19, was identified in Wuhan, China. Currently, his virus
continues to spread globally and, as of March 2020, has spread globally, including the United States. The spread of COVID-19 from
China to other countries has resulted in the World Health Organization declaring the outbreak of COVID-19 as a “pandemic,”
or a worldwide spread of a new disease, on March 11, 2020. Many countries around the world, including the United States, have
imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus. In response to this, many
employers throughout the United States and elsewhere (including us) are preparing and increasing as much as possible the capacity
and arrangement for employees to work remotely. However, we are still assessing the effect on our business, from the spread of
COVID-19 and the actions implemented by the governments of the United States and elsewhere across the globe.
The
spread of COVID-19 (and other infectious diseases) may also result in the inability of our vendors, suppliers, and manufacturers
to deliver supplies or raw materials on a timely basis. In addition, announcements from health professionals or governmental agencies
may have the effect of reducing our in-person staffing or postpone meetings with vendors, suppliers, and manufacturers in response
to the spread of COVID-19 (and other infectious diseases). Such events may result in a period of business disruption, and in reduced
operations, any of which could materially affect our business, financial condition and results of operations. The full extent
to which COVID-19 could impact our business depends on future developments, which are highly uncertain and cannot be predicted,
including new information which may emerge concerning the severity of COVID-19 and the actions to contain COVID-19 or treat its
impact, among others.
Risks
Related to Our Dependence on Third Parties
We
rely on third parties to conduct our preclinical studies and clinical trials. If these third parties do not successfully carry
out their contractual duties or meet expected deadlines, we may not be able to obtain regulatory approval for or commercialize
our product candidates.
We
rely on CROs, clinical data management organizations and consultants to design, conduct, supervise and monitor preclinical studies
of our product candidates and may do the same for our planned clinical trials. We and our prospective CROs are required to comply
with various regulations, including GCP, which are enforced by the FDA, and guidelines of the Competent Authorities of Member
States of the EEA and comparable foreign regulatory authorities to ensure that the health, safety and rights of patients are protected
in clinical development and clinical trials, and that trial data integrity is assured. Regulatory authorities ensure compliance
with these requirements through periodic inspections of trial sponsors, principal investigators and trial sites. Our reliance
on third parties that we do not control does not relieve us of these responsibilities and requirements. If we or any of our prospective
CROs fail to comply with applicable requirements, the clinical data generated in our clinical trials may be deemed unreliable
and the FDA, EMA or other comparable foreign regulatory authorities may require us to perform additional clinical trials before
approving our marketing applications. We cannot assure you that upon inspection by a given regulatory authority, such regulatory
authority will determine that any of our clinical trials comply with such requirements. In addition, our clinical trials must
be conducted with products produced under cGMP requirements, which mandate the methods, facilities and controls used in manufacturing,
processing and packaging of a drug product to ensure its safety and identity. Failure to comply with these regulations may require
us to repeat preclinical and clinical trials, which would delay the regulatory approval process.
Our
prospective CROs are not our employees, and except for remedies available to us under future agreements with such prospective
CROs, we cannot control whether or not they devote sufficient time and resources to our ongoing clinical and preclinical programs.
If the prospective CROs do not successfully carry out their contractual duties or obligations or meet expected deadlines or if
the quality or accuracy of the clinical data they obtain is compromised due to the failure to adhere to our clinical protocols,
regulatory requirements or for other reasons, our clinical trials may be extended, delayed or terminated and we may not be able
to obtain regulatory approval for or successfully commercialize our product candidates. As a result, our operations and the commercial
prospects for our product candidates would be harmed, our costs could increase and our ability to generate revenues could be delayed.
Because
we have relied on third parties, our internal capacity to perform these functions is limited. Outsourcing these functions involves
risk that third parties may not perform to our standards, may not produce results in a timely manner or may fail to perform at
all. In addition, the use of third-party service providers requires us to disclose our proprietary information to these parties,
which could increase the risk that this information will be misappropriated. We currently have a small number of employees, which
limits the internal resources we have available to identify and monitor our third-party providers. To the extent we are unable
to identify and successfully manage the performance of third-party service providers in the future, our business may be adversely
affected. Though we carefully manage our relationships with our prospective CROs, there can be no assurance that we will not encounter
similar challenges or delays in the future or that these delays or challenges will not have a material adverse impact on our business,
financial condition and prospects.
We
rely on third-party manufacturers and suppliers and we intend to rely on third parties to produce preclinical, clinical and commercial
supplies of active pharmaceutical ingredients, or APIs, for KLS-13019 and KLS-13023.
We
rely on third parties to supply the materials for, and manufacture, our research and development, preclinical and clinical trial
APIs. We do not own manufacturing facilities or supply sources for such components and materials. There can be no assurance that
our supply of research and development, preclinical and clinical development drugs and other materials will not be limited, interrupted,
restricted in certain geographic regions or of satisfactory quality or continue to be available at acceptable prices. In particular,
any replacement of our API manufacturer could require significant effort and expertise because there may be a limited number of
qualified manufacturers.
The
manufacturing process for our product candidates is subject to FDA, EMA, DEA and other foreign regulatory authority review. Suppliers
and manufacturers must meet applicable manufacturing requirements and undergo rigorous facility and process validation tests required
by regulatory authorities in order to comply with regulatory standards such as cGMP. In addition, our manufacturers must ensure
therapeutic consistency among batches, including preclinical, clinical and, if approved, marketing batches. Demonstrating such
consistency may require typical manufacturing controls as well as clinical data. Our manufacturers must also ensure that our batches
conform to complex release specifications. Further, manufacturers of controlled substances must obtain and maintain necessary
DEA and state registrations and registrations with applicable foreign regulatory authorities, and must establish and maintain
processes to ensure compliance with DEA and state requirements and requirements of applicable foreign regulatory authorities governing,
among other things, the storage, handling, security, recordkeeping and reporting for controlled substances. In the event that
any of our suppliers or manufacturers fails to comply with such requirements or to perform its obligations to us in relation to
quality, timing or otherwise, or if our supply of components or other materials becomes limited or interrupted for other reasons,
we may be forced to manufacture the materials ourselves, for which we currently do not have the capabilities or resources, or
enter into an agreement with another third party, which we may not be able to do on reasonable terms, if at all. In some cases,
the technical skills or technology required to manufacture our product candidates may be unique or proprietary to the original
manufacturer and we may have difficulty, or there may be contractual restrictions prohibiting us from, transferring such skills
or technology to another third party and a feasible alternative may not exist. These factors would increase our reliance on such
manufacturer or require us to obtain a license from such manufacturer in order to have another third party manufacture our product
candidates. If we are required to change manufacturers for any reason, we will be required to verify that the new manufacturer
maintains facilities and procedures that comply with quality standards and with all applicable regulations and guidelines. The
delays associated with the verification of a new manufacturer could negatively affect our ability to develop product candidates
in a timely manner or within budget.
We
expect to continue to rely on third-party manufacturers if we receive regulatory approval for any product candidate. To the extent
that we have existing, or enter into future, manufacturing arrangements with third parties, we will depend on these third parties
to perform their obligations in a timely manner consistent with contractual and regulatory requirements, including those related
to quality control and assurance. If we are unable to obtain or maintain third-party manufacturing for product candidates, or
to do so on commercially reasonable terms, we may not be able to develop and commercialize our product candidates successfully.
Our or a third party’s failure to execute on our manufacturing requirements could adversely affect our business in a number
of ways, including:
-
an
inability to initiate or continue preclinical studies or clinical trials of product candidates under development;
-
delay
in submitting regulatory applications, or receiving regulatory approvals, for product candidates;
-
loss
of the cooperation of a collaborator;
-
subjecting
our product candidates to additional inspections by regulatory authorities; and
-
in
the event of approval to market and commercialize a product candidate, an inability to meet commercial demands for our products.
If
a collaborative partner terminates or fails to perform its obligations under an agreement with us, the commercialization of KLS-13019
or KLS-13023, if approved, could be delayed or terminated.
We
are not currently party to any collaborative arrangements for the commercialization of KLS-13019 or KLS-13023, if approved, or
similar arrangements, although we may pursue such arrangements before any commercialization of KLS-13019 or KLS-13023, if approved.
If we entered into future collaborative arrangements for the commercialization of any product candidate or similar arrangements
and any of our collaborative partners does not devote sufficient time and resources to a collaboration arrangement with us, we
may not realize the potential commercial benefits of the arrangement, and our results of operations may be materially adversely
affected. In addition, if any such future collaboration partner were to breach or terminate its arrangements with us, the commercialization
of any product candidate could be delayed, curtailed or terminated.
Much
of the potential revenue from future collaborations may consist of contingent payments, such as payments for achieving regulatory
milestones or royalties payable on sales of drugs. The milestone and royalty revenue that we may receive under these collaborations
will depend upon our collaborators’ ability to successfully develop, introduce, market and sell new products. In addition,
collaborators may decide to enter into arrangements with third parties to commercialize products developed under collaborations
using our technologies, which could reduce the milestone and royalty revenue that we may receive, if any. Future collaboration
partners may fail to develop or effectively commercialize products using our products or technologies, which could have a material
adverse effect on our operating results and financial condition.
Business
disruptions affecting our third-party suppliers, manufacturers and CROs could harm our future revenues and financial condition
and increase our costs and expenses.
We
rely on third parties to supply the materials for, and manufacture our APIs for, our preclinical and clinical trials. There are
only a limited number of suppliers and manufacturers of our APIs and our ability to obtain these materials could be disrupted
if the operations of these manufacturers is affected by earthquakes, power shortages, telecommunications failures, water shortages,
floods, hurricanes, typhoons, fires, extreme weather conditions, medical epidemics and other natural or man-made disasters or
business interruptions. We also rely on CROs, clinical data management organizations and consultants to design, conduct, supervise
and monitor preclinical studies of our product candidates and will do the same for our planned clinical trials. If their facilities
are unable to operate because of an accident or incident, even for a short period of time, some or all of our research and development
programs may be harmed or delayed and our operations and financial condition could suffer.
Our
third-party manufacturers may use hazardous materials, and any claims relating to improper handling, storage or disposal of these
materials could be time consuming or costly.
Our
third-party manufacturers may use hazardous materials, including chemicals and molecules that could be dangerous to human health
and safety or the environment. The operations of our third-party manufacturers may also produce hazardous waste products. Federal,
state and local laws and regulations govern the use, generation, manufacture, storage, handling and disposal of these materials
and wastes. In the event of contamination or injury, our third-party manufacturers could be held liable for damages or be penalized
with fines in an amount exceeding their resources, which could result in our clinical trials or regulatory approvals being delayed
or suspended.
Risks
Related to Our Intellectual Property
If
we are unable to protect our intellectual property rights or if our intellectual property rights are inadequate for our technology
and product candidates, our competitive position could be harmed.
Our
commercial success will depend in large part on our ability to obtain and maintain patent and other intellectual property protection
in the U.S. and other countries with respect to our proprietary technology and products. We rely on trade secret, patent, copyright
and trademark laws, and confidentiality and other agreements with employees and third parties, all of which offer only limited
protection. We seek to protect our proprietary position by filing and prosecuting patent applications in the United States and
abroad related to our novel technologies and products that are important to our business.
The
patent positions of biotechnology and pharmaceutical companies generally are highly uncertain, involve complex legal and factual
questions and have in recent years been the subject of much litigation. As a result, the issuance, scope, validity, enforceability
and commercial value of our patents are highly uncertain. The steps we have taken to protect our proprietary rights may not be
adequate to preclude misappropriation of our proprietary information or infringement of our intellectual property rights, both
inside and outside the United States. Our pending applications cannot be enforced against third parties practicing the technology
claimed in such applications unless and until a patent issues from such applications. Further, the examination process may require
us to narrow the claims for our pending patent applications, which may limit the scope of patent protection that may be obtained
if these applications issue. We do not know whether any of the pending patent applications for any of our product candidates will
result in the issuance of patents that protect our technology or products, or if any of our issued patents will effectively prevent
others from commercializing competitive technologies and products. The rights already granted under any of our currently issued
patents and those that may be granted under future issued patents may not provide us with the proprietary protection or competitive
advantages we are seeking. If we are unable to obtain and maintain patent protection for our technology and products, or if the
scope of the patent protection obtained is not sufficient, our competitors could develop and commercialize technology and products
similar or superior to ours, and our ability to successfully commercialize our technology and products may be adversely affected.
It is also possible that we will fail to identify patentable aspects of inventions made in the course of our development and commercialization
activities before it is too late to obtain patent protection on them.
Because
the issuance of a patent is not conclusive as to its inventorship, scope, validity or enforceability, our issued patents may be
challenged in the courts or patent offices in the U.S. and abroad. Such challenges may result in the loss of patent protection,
the narrowing of claims in such patents or the invalidity or unenforceability of such patents, which could limit our ability to
stop others from using or commercializing similar or identical technology and products, or limit the duration of the patent protection
for our technology and products. Publications of discoveries in the scientific literature often lag behind the actual discoveries,
and patent applications in the United States and other jurisdictions are typically not published until 18 months after filing.
Therefore, we cannot be certain that we were the first to make the inventions claimed in our owned patents or pending patent applications,
or that we were the first to file for patent protection of such inventions.
Protecting
against the unauthorized use of our patented technology, trademarks and other intellectual property rights is expensive, difficult
and may in some cases not be possible. In some cases, it may be difficult or impossible to detect third-party infringement or
misappropriation of our intellectual property rights, even in relation to issued patent claims, and proving any such infringement
may be even more difficult.
Obtaining
and maintaining our patent protection depends on compliance with various procedural, document submission, fee payment and other
requirements imposed by governmental patent agencies, and our patent protection could be reduced or eliminated for non-compliance
with these requirements.
The
United States Patent and Trademark Office (the “USPTO”), and various foreign national or international patent agencies
require compliance with a number of procedural, documentary, fee payment and other similar provisions during the patent application
process. Periodic maintenance fees on any issued patent are due to be paid to the USPTO and various foreign national or international
patent agencies in several stages over the lifetime of the patent. While an inadvertent lapse can in many cases be cured by payment
of a late fee or by other means in accordance with the applicable rules, there are situations in which noncompliance can result
in abandonment or lapse of the patent or patent application, resulting in partial or complete loss of patent rights in the relevant
jurisdiction. Non-compliance events that could result in abandonment or lapse of patent rights include, but are not limited to,
failure to timely file national and regional stage patent applications based on our international patent application, failure
to respond to official actions within prescribed time limits, non-payment of fees and failure to properly legalize and submit
formal documents. If we fail to maintain the patents and patent applications covering our product candidates, our competitors
might be able to enter the market, which would have a material adverse effect on our business.
We
may become subject to claims by third parties asserting that we or our employees have misappropriated their intellectual property,
or claiming ownership of what we regard as our own intellectual property.
Our
commercial success depends upon our ability to develop, manufacture, market and sell our product candidates, and to use our related
proprietary technologies without violating the intellectual property rights of others. We may become party to, or threatened with,
future adversarial proceedings or litigation regarding intellectual property rights with respect to our product candidates, including
interference or derivation proceedings before the USPTO. Third parties may assert infringement claims against us based on existing
patents or patents that may be granted in the future. If we are found to infringe a third party’s intellectual property
rights, we could be required to obtain a license from such third party to continue commercializing our product candidates. However,
we may not be able to obtain any required license on commercially reasonable terms or at all. Under certain circumstances, we
could be forced, including by court order, to cease commercializing the applicable product candidate. In addition, in any such
proceeding or litigation, we could be found liable for monetary damages. A finding of infringement could prevent us from commercializing
our product candidates or force us to cease some of our business operations, which could materially harm our business. Any claims
by third parties that we have misappropriated their confidential information or trade secrets could have a similar negative impact
on our business.
While
our preclinical studies and clinical trials are ongoing, we believe that the use of KLS-13019 and KLS-13023 in these preclinical
studies and clinical trials falls within the scope of the exemptions provided by 35 U.S.C. Section 271(e) in the United States,
which exempts from patent infringement liability activities reasonably related to the development and submission of information
to the FDA, or the Clinical Development Exemption. As KLS-13019 and KLS-13023 progress toward commercialization, the possibility
of a patent infringement claim against us increases. We attempt to ensure that our product candidates and the methods we employ
to manufacture them, as well as the methods for their uses we intend to promote, do not infringe other parties’ patents
and other proprietary rights. There can be no assurance they do not, however, and competitors or other parties may assert that
we infringe their proprietary rights in any event.
We
may become involved in lawsuits to protect or enforce our intellectual property, which could be expensive, time consuming and
unsuccessful and have a material adverse effect on the success of our business.
Competitors
may infringe our patents or misappropriate or otherwise violate our intellectual property rights. To counter infringement or unauthorized
use, litigation may be necessary in the future to enforce or defend our intellectual property rights, to protect our trade secrets
or to determine the validity and scope of our own intellectual property rights or the proprietary rights of others. Also, third
parties may initiate legal proceedings against us to challenge the validity or scope of intellectual property rights we own. These
proceedings can be expensive and time consuming. Many of our current and potential competitors have the ability to dedicate substantially
greater resources to defend their intellectual property rights than we can. Accordingly, despite our efforts, we may not be able
to prevent third parties from infringing upon or misappropriating our intellectual property. Litigation could result in substantial
costs and diversion of management resources, which could harm our business and financial results. In addition, in an infringement
proceeding, a court may decide that a patent owned by us is invalid or unenforceable, or may refuse to stop the other party from
using the technology at issue on the grounds that our patents do not cover the technology in question. An adverse result in any
litigation proceeding could put one or more of our patents at risk of being invalidated, held unenforceable or interpreted narrowly.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there
is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. There could
also be public announcements of the results of hearings, motions or other interim proceedings or developments. If securities analysts
or investors perceive these results to be negative, it could have a material adverse effect on the price of shares of our common
stock.
If
we are not able to adequately prevent disclosure of trade secrets and other proprietary information, the value of our technology
and products could be significantly diminished.
We
rely on trade secrets to protect our proprietary technologies, especially where we do not believe patent protection is appropriate
or obtainable. However, trade secrets are difficult to protect. We rely in part on confidentiality agreements with our current
and former employees, consultants, outside scientific collaborators, sponsored researchers, contract manufacturers, vendors and
other advisors to protect our trade secrets and other proprietary information. These agreements may not effectively prevent disclosure
of confidential information and may not provide an adequate remedy in the event of unauthorized disclosure of confidential information.
In addition, we cannot guarantee that we have executed these agreements with each party that may have or have had access to our
trade secrets. Any party with whom we or they have executed such an agreement may breach that agreement and disclose our proprietary
information, including our trade secrets, and we may not be able to obtain adequate remedies for such breaches.
Enforcing
a claim that a party illegally disclosed or misappropriated a trade secret is difficult, expensive and time-consuming, and the
outcome is unpredictable. In addition, some courts inside and outside the United States are less willing or unwilling to protect
trade secrets. If any of our trade secrets were to be lawfully obtained or independently developed by a competitor, we would have
no right to prevent them, or those to whom they disclose such trade secrets, from using that technology or information to compete
with us. If any of our trade secrets were to be disclosed to or independently developed by a competitor or other third-party,
our competitive position would be harmed.
We
may not be able to protect our intellectual property rights throughout the world.
Filing,
prosecuting and defending patents on all of our product candidates throughout the world would be prohibitively expensive. Therefore,
we have filed applications and/or obtained patents only in key markets such as the United States, Canada, Japan and Europe. Competitors
may use our technologies in jurisdictions where we have not obtained patent protection to develop their own products and, further,
may be able to export otherwise infringing products to territories where we have patent protection but where enforcement is not
as strong as that in the United States. These products may compete with our products in jurisdictions where we do not have any
issued patents and our patent claims or other intellectual property rights may not be effective or sufficient to prevent them
from so competing.
Many
companies have encountered significant problems in protecting and defending intellectual property rights in certain foreign jurisdictions.
The legal systems of certain countries, particularly certain developing countries, do not favor the enforcement of patents and
other intellectual property protection, particularly those relating to pharmaceuticals, which could make it difficult for us to
stop the infringement of our patents or marketing of competing products in violation of our proprietary rights generally. For
example, an April 2014 report from the Office of the United States Trade Representative identified a number of countries, including
India and China, where challenges to the procurement and enforcement of patent rights have been reported. Several countries, including
India and China, have been listed in the report every year since 1989. As a result, proceedings to enforce our patent rights in
certain foreign jurisdictions could result in substantial cost and divert our efforts and attention from other aspects of our
business and could be unsuccessful.
Patent
terms may be inadequate to protect our competitive position on our product candidates for an adequate amount of time.
Given
the amount of time required for the development, testing and regulatory review of new product candidates, patents protecting such
candidates might expire before or shortly after such candidates are commercialized. We expect to seek extensions of patent terms
in the United States and, if available, in other countries where we are prosecuting patents. In the United States, the Drug Price
Competition and Patent Term Restoration Act of 1984 permits a patent term extension of up to five years beyond the normal expiration
of the patent, which is limited to the approved indication (or any additional indications approved during the period of extension).
However, the applicable authorities, including the FDA and the USPTO, and any equivalent regulatory authorities in other countries,
may not agree with our assessment of whether such extensions are available, and may refuse to grant extensions to our patents,
or may grant more limited extensions than we request. If this occurs, our competitors may be able to take advantage of our investment
in development and clinical trials by referencing our clinical and preclinical data and launch their product earlier than might
otherwise be the case.
Intellectual
property rights do not necessarily address all potential threats to our competitive advantage.
The
degree of future protection afforded by our intellectual property rights is uncertain because intellectual property rights have
limitations, and may not adequately protect our business, or permit us to maintain our competitive advantage. The following examples
are illustrative:
-
others
may be able to make molecules that are the same as or similar to our product candidates but that are not covered by the claims
of the patents that we own;
-
we
might not have been the first to make the inventions covered by the issued patents or pending patent applications that we own;
-
we
might not have been the first to file patent applications covering certain of our inventions;
-
others
may independently develop similar or alternative technologies or duplicate any of our technologies without infringing our intellectual
property rights;
-
it
is possible that our pending patent applications will not lead to issued patents;
-
issued
patents that we own may not provide us with any competitive advantages, or may be held invalid or unenforceable as a result of
legal challenges;
-
our
competitors might conduct research and development activities in the United States and other countries that provide a safe harbor
from patent infringement claims for certain research and development activities, as well as in countries where we do not have
patent rights and then use the information learned from such activities to develop competitive products for sale in our major
commercial markets;
-
we
may not develop additional proprietary technologies that are patentable; and
-
the
patents of others may have an adverse effect on our business.
Risks
Related to Ownership of Our Common Stock
We
do not know whether an active, liquid and orderly trading market will develop for our common stock or what the market price of
our common stock will be and as a result it may be difficult for you to sell your shares of our common stock.
Historically,
there has not been a market for shares of our common stock. An active trading market for our shares may never develop or be sustained
in the future. The lack of an active market may impair the ability of our stockholders to sell their shares at the time and at
such price as they consider reasonable. The lack of an active market may also reduce the fair market value of shares of our common
stock. Further, an inactive market may also impair our ability to raise capital by selling shares of our common stock and may
impair our ability to enter into collaborations or acquire companies or products by using our shares of common stock as consideration.
The
market price of our stock may be volatile, and stockholders could lose all or part of their investment.
Our
common stock currently does not trade. In the event we do develop a trading market in our common stock, the trading price of our
common stock is likely to be highly volatile and could be subject to wide fluctuations in response to various factors, some of
which are beyond our control. In addition to the factors discussed in this “Risk Factors” section and elsewhere in
this annual report, these factors include:
-
trading
volatility of low-priced stock;
-
the
success of competitive products;
-
regulatory
actions with respect to our product candidates or our competitors’ products and product candidates;
-
actual
or anticipated changes in our growth rate relative to our competitors;
-
announcements
by us or our competitors of significant acquisitions, strategic partnerships, joint ventures, collaborations or capital commitments;
-
results
of clinical trials of KLS-13019, KLS-13023 or product candidates of our competitors;
-
regulatory
or legal developments in the United States and other countries;
-
developments
or disputes concerning patent applications, issued patents or other proprietary rights;
-
the
recruitment or departure of key personnel;
-
the
level of expenses related to our preclinical and clinical development programs;
-
the
results of our efforts to in-license or acquire additional product candidates or products;
-
actual
or anticipated changes in estimates as to financial results, development timelines or recommendations by securities analysts;
-
variations
in our financial results or those of companies that are perceived to be similar to us;
-
fluctuations
in the valuation of companies perceived by investors to be comparable to us;
-
share
price and volume fluctuations attributable to inconsistent trading volume levels of our common stock;
-
announcement
or expectation of additional financing efforts;
-
sales
of our common stock by us, our insiders or our other stockholders;
-
changes
in the structure of healthcare payment systems;
-
market
conditions in the pharmaceutical sector; and
-
general
economic, industry and market conditions.
In
addition, the stock market in general, and pharmaceutical companies in particular, have experienced extreme price and volume fluctuations
that have often been unrelated or disproportionate to the operating performance of these companies. Broad market and industry
factors may negatively affect the market price of our common stock, regardless of our actual operating performance. Moreover,
some institutional investors and mutual funds cannot invest in stocks priced below $5.00 per share. The realization of any of
these risks or any of a broad range of other risks, including those described in these “Risk Factors,” could have
a dramatic and material adverse impact on the market price of our common stock.
We
may be subject to securities litigation, which is expensive and could divert our management’s attention.
The
market price of our common stock may be volatile, and in the past companies that have experienced volatility in the market price
of their stock have been subject to securities class action litigation. We may be the target of this type of litigation in the
future. Securities litigation against us could result in substantial costs and divert our management’s attention from other
business concerns, which could seriously harm our business.
Our
common stock is classified as a “penny stock” under SEC Rules and Regulations, which means there may be very limited
trading market for our shares.
Our
common stock is deemed to be “penny stock” as that term is defined in Rule 3a51-1 of the Securities Exchange Act of
1934, as amended (“the Exchange Act”). Penny stocks are stocks (i) with a price of less than five dollars per share;
(ii) that are not traded on a “recognized” national exchange; (iii) whose prices are not quoted on an automated quotation
system sponsored by a registered national securities association; or (iv) whose issuer has net tangible assets less than $2,000,000
(if the issuer has been in continuous operation for at least three years); or $5,000,000 (if in continuous operation for less
than three years); or with average revenues of less than $6,000,000 for the last three years.
Section
15(g) of the Exchange Act and Rule 15g-2 promulgated thereunder require broker dealers dealing in penny stocks to provide potential
investors with a document disclosing the risks of penny stocks and to obtain a manually signed and dated written receipt of the
document before effecting any transaction in a penny stock for the investor’s account. Potential investors in our common
stock are urged to obtain and read such disclosure carefully before purchasing any shares that are deemed to be “penny stock.”
Moreover,
Rule 15g-9 of the Exchange Act requires broker dealers in penny stocks to approve the account of any investor for transactions
in such stocks before selling any penny stock to that investor. This procedure requires the broker dealer to (i) obtain from the
investor information concerning his, her or its financial situation, investment experience and investment objectives; (ii) reasonably
determine, based on that information, that transactions in penny stocks are suitable for the investor, and that the investor has
sufficient knowledge and experience as to be reasonably capable of evaluating the risks of penny stock transactions; (iii) provide
the investor with a written statement setting forth the basis on which the broker dealer made the determination in (ii) above;
and (iv) receive a signed and dated copy of such statement from the investor, confirming that it accurately reflects the investor’s
financial situation, investment experience and investment objectives. Compliance with these requirements may make it more difficult
for investors in our common stock to resell their shares to third parties or to otherwise dispose of such shares.
Insiders
have substantial influence over us and could delay or prevent a change in corporate control.
As
of March 6, 2020, our executive officers, directors, and holders of 5.0% or more of our capital stock collectively beneficially
owned approximately 79.2% of our voting stock. This concentration of ownership could harm the market price of our common stock
by:
-
delaying,
deferring or preventing a change in control of our company;
-
impeding
a merger, consolidation, takeover or other business combination involving our company; or
-
discouraging
a potential acquirer from making a tender offer or otherwise attempting to obtain control of our company.
The
interests of this group of stockholders may not always coincide with your interests or the interests of other stockholders and
they may act in a manner that advances their best interests and not necessarily those of other stockholders, including by seeking
a premium value for their common stock, and might negatively affect the prevailing market price for our common stock.
If
we are unable to maintain effective internal control over our financial reporting, the reputational effects could materially adversely
affect our business.
Under
the provisions of Section 404(a) of the Sarbanes-Oxley Act of 2002, as amended by the Dodd Frank Wall Street Reform and Consumer
Protection Act of 2010, the SEC adopted rules requiring public companies to perform an evaluation of Internal Control over Financial
Reporting (Internal Controls) and to report on our evaluation in our Annual Report on Form 10-K. Our Internal Controls constitute
a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial
statements in accordance with GAAP. In the event we discover material weakness in our internal controls and our remediation of
such reported material weakness is ineffective, or if in the future we are unable to maintain effective Internal Controls, additional
resulting material restatements could occur, regulatory actions could be taken, and a resulting loss of investor confidence in
the reliability of our financial statements could occur.
Our
disclosure controls and procedures may not prevent or detect all errors or acts of fraud.
We
are subject to the periodic reporting requirements of the Exchange Act. Our disclosure controls and procedures are designed to
reasonably assure that information required to be disclosed by us in reports we file or submit under the Exchange Act is accumulated
and communicated to management, recorded, processed, summarized and reported within the time periods specified in the rules and
forms of the SEC. We believe that any disclosure controls and procedures or internal controls and procedures, no matter how well
conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met.
These
inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because
of simple error or mistake. Additionally, controls can be circumvented by the individual acts of some persons, by collusion of
two or more people or by an unauthorized override of the controls. Accordingly, because of the inherent limitations in our control
system, misstatements or insufficient disclosures due to error or fraud may occur and not be detected.
Because
we do not anticipate paying any cash dividends on our capital stock in the foreseeable future, capital appreciation, if any, will
be your sole source of gain.
We
have never declared or paid cash dividends on our capital stock. We currently intend to retain all of our future earnings, if
any, to finance the growth and development of our business. In addition, the terms of any future debt agreements may preclude
us from paying dividends. As a result, capital appreciation, if any, of our common stock will be your sole source of gain for
the foreseeable future.
We
have issued Preferred Stock.
Our
Certificate of Incorporation authorizes the issuance of up to 5,000,000 shares of Preferred Stock with designations, rights and
preferences determined from time to time by the Board of Directors. There are currently 75 shares of Series A Preferred Stock
and 75 shares of Series B Preferred Stock outstanding. The holders of our Preferred Stock have voting control of the Company.
Accordingly, our Board of Directors is empowered, without stockholder approval, to issue Preferred Stock with dividend, liquidation,
conversion, voting, or other rights which could adversely affect the voting power or other rights of the holders of the Common
Stock. The issuance of Preferred Stock could be utilized, under certain circumstances, as a method of discouraging, delaying or
preventing a change in control of the Company. See “Description of Capital Stock” for more information.
ITEM
1B. UNRESOLVED STAFF COMMENTS.
None.
ITEM
2. PROPERTIES.
Our
principal executive offices are located at 3805 Old Easton Road, Doylestown, PA 18902. Our telephone number at that address
is (858) 883-2642. We have additional offices located at 4 Knoll Court, Lloyd Harbor, N.Y. 11743. On April 1, 2014, the
Company entered into a one year lease arrangement for office space, with the option to renew the lease annually. The monthly
rent payment is $5,400 and a security deposit of $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 October 31, 2020. The monthly
rent payment is $359 and a security deposit of $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. On September 1, 2018, the Company subleased
this office space to a third party. The Subleasee will pay 100% of rent for months September through November 2018 and will
pay 50% of rent until expiration of lease on June 30, 2019. This lease has been extended through June 30, 2020. The monthly
rent payment is $2,723 and a security deposit of $2,121.
ITEM
3. LEGAL PROCEEDINGS.
On
or about September 18, 2013, a lawsuit was filed by two individuals against the Company and the Company’s CEO. The plaintiffs
allege that they provided business services to Kannalife Sciences, Inc. (“Kannalife”) in the amount of $150,000, including
but not limited to providing strategic introductions to Kannalife and Mr. Petkanas and were seeking 17% of the issued and outstanding
stock of Kannalife. The Company believed, at all times, that the allegations to be without merit and vigorously defended itself.
On
or about September 30, 2013, Kannalife and Mr. Petkanas filed a motion to dismiss all five causes of action alleged against Kannalife
and Mr. Petkanas.
On
May 12, 2014, the court dismissed all five causes of action alleged by one plaintiff against Kannalife and Mr. Petkanas.
On
March 27, 2015, the court granted permission to this plaintiff to replead his complaint (the “Repleading Plaintiff”).
On
July 14, 2015, the court denied the Repleading Plaintiff’s motion to reargue, affirming the dismissal of all of the Repleading
Plaintiff’s causes of action, which left, three causes of action remain open relating to the remaining plaintiff (the “Remaining
Plaintiff”).
In
December 2016, Kannalife and Mr. Petkanas filed a motion for summary judgment to seek the court’s decision in dismissing
the remainder of the claims alleged by the Remaining Plaintiff.
On
June 30, 2017, the motion for summary judgment made by Kannalife and Mr. Petkanas was granted. All remaining causes of action
by the Remaining Plaintiff were dismissed.
On
February 7, 2018, the Remaining Plaintiff, (the “Plaintiff-Appellant”) appealed from the June 30, 2017 decision and
order of the lower court, which granted the Kannalife’s and Mr. Petkanas’ (Defendants-Respondents) motion for summary
judgment dismissing all of Plaintiff-Appellant’s claims. In his amended complaint, Plaintiff-Appellant alleged the existence
of an oral agreement between himself and Kannalife and Mr. Petkanas for the exchange of investments (including both money and
services) from Plaintiff-Appellant in return for the transfer of 17% of Kannalife’s shares. However, Plaintiff-Appellant’s
allegations consisted of nothing more than vague statements regarding what he promised to provide to Kannalife and to Mr. Petkanas
in exchange for nearly one-fifth of Kannalife’s shares. And after years of litigation, including extensive depositions and
document exchanges, the evidence elicited by both parties failed to clarify either the precise terms of the alleged oral agreement
or that Plaintiff-Appellant actually made any investments as he allegedly promised to do. In the lower court, Kannalife and Mr.
Petkanas moved for summary judgment dismissing Plaintiff-Appellant’s claims based on certain undisputed facts: that no evidence
existed to show that Plaintiff-Appellant–or Stone Engineering, P.C., which is Plaintiff-Appellant’s S Corporation–made
any investment at all in Kannalife; that even if Plaintiff-Appellant did make any investments, the alleged agreement is unenforceable
pursuant to General Obligations Law § 5-701(a)(1) (the Statue of Frauds) because the terms cannot be completed within one
year; and the contract is unenforceable as a matter of hornbook law because Plaintiff-Appellant’s own testimony establishes
that he and Kannalife and Mr. Petkanas never reached a “meeting of the minds” with respect to the contours of Plaintiff-Appellant’s
supposed offer of investments or the time period for transferring the shares to Plaintiff-Appellant.
On
appeal, Plaintiff-Appellant argues the lower court’s decision was wrong because: (1) it was based upon an erroneous finding
that Plaintiff-Appellant lacks standing to recover his shares in Kannalife; and (2) enforcement of the alleged contract is not
barred by the Statute of Frauds because (a) its terms were capable of being performed within one year and (b) the alleged agreement
constitutes a securities contract under UCC § 8-113 that does not require a writing to be enforceable. However, in Opposition
Kannalife and Mr. Petkanas argued that the lower court’s decision should primarily be affirmed based upon an argument raised
by Kannalife and Mr. Petkanas in their motion: the undisputed evidence shows that there was no meeting of the minds between Plaintiff-Appellant,
and Kannalife and Mr. Petkanas regarding the terms of the alleged oral agreement. Moreover, the terms of the alleged agreement
that Plaintiff-Appellant himself asserted–if they are assumed to be true for purposes of the motion and appeal–indicate
that it was impossible for him to perform his obligations within one year; and a review of UCC § 8-113 along with interpretive
case law requires a conclusion that the alleged agreement in this case does not constitute the type of securities contract that
does not require a writing to be enforceable. Thus, to the extent an oral agreement between Plaintiff-Appellant, and Kannalife
and Mr. Petkanas was ever actually created, then its enforcement is barred by the Statute of Frauds—and the lower court’s
decision to dismiss Plaintiff-Appellant’s claim seeking enforcement of the alleged oral agreement was properly reached for
these reasons. Accordingly, Kannalife and Mr. Petkanas believe that the 2nd Department will affirm the lower court’s decision
and order entirely.
On
September 28, 2018, in an attempt to correct fatal flaws in the Plaintiff-Appellant’s original case dismissed on June 30,
2017. the Plaintiff-Appellant filed a new lawsuit against Kannalife and Mr. Petkanas, alleging much, if not all of the same claims
as in the original case filed by the Plaintiff-Appellant, a case which was dismissed on June 30, 2017. This new lawsuit now seeks,
instead of the relief sought in the case previously dismissed, a sum of no less than $21,250,000.
Subsequently,
Kannalife and Mr. Petkanas filed a motion to dismiss the new lawsuit on grounds of res judicata. The Plaintiff-Appellant filed
a cross-motion for a stay.
On
October 30, 2019, the Court ruled in favor of Kannalife and Mr. Petkanas, stating "The motion to dismiss is granted to the
extent that the matter is dismissed on the ground of res judicata, and cross-motion for a stay is denied, in accordance with the
reasons set forth in the Court's oral decision of October 30, 2019, following oral argument. This constitutes the Decision and
Order of this Court".
Other
than aforementioned, there are no pending legal proceeding relating to our company and its CEO to which we are a party, and to
our knowledge there are no material proceedings to which any of our directors, executive officers or affiliates is a party adverse
to us or which have a material interest adverse to us.
ITEM
4. MINE SAFETY DISCLOSURES.
Not
applicable.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
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- reverse 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 – long term
|
|
|
500,000
|
|
Total
liabilities
|
|
|
562,499
|
|
Total
liabilities assumed
|
|
$
|
(130,345
|
)
|
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
NOTE
1 – ORGANIZATION AND NATURE OF OPERATIONS (CONTINUED)
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)
Year
Ended
December
31,
|
|
|
2018
|
Total
revenues
|
|
$
|
173,889
|
|
Net income
|
|
$
|
819,105
|
|
Net income per common
share, basic
|
|
$
|
0.01
|
|
Net income per common
share, diluted
|
|
$
|
0.01
|
|
The
summarized consolidated pro forma results are not necessarily indicative of results which would have occurred if the reverse acquisition
had been in effect for the periods 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 to change
its name to Kannalife, Inc. The Company has concurrently submitted a request to FINRA for approval of the name change as well
as a ticker symbol change and is awaiting approval. The Company’s name change and ticker change was reviewed and processed
by FINRA and went effective January 17, 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. All significant
consolidated transactions and balances have been eliminated in consolidation. The operations of Kannalife, Inc. are included in
the consolidated financial statement from the date of the Share Exchange.
Noncontrolling
Interests
The
Company accounts for its less than 100% interests in Kannalife in accordance with ASC Topic 810, Consolidation, and accordingly
the Company presents noncontrolling interests as a component of equity on its consolidated balance sheet and reports the noncontrolling
interest’s share of Kannalife’s net loss attributable to noncontrolling interests in the 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%.
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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.
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, valuation of derivative liabilities 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.
Cash
and Cash Equivalents
Our
cash and cash equivalents include short-term, highly liquid investments with original maturities of three months or less when
purchased. At times throughout the year, the Company may maintain bank balances that could exceed Federal Deposit Insurance Corporation
insured limits. The Company maintains its cash deposit accounts with high credit quality financial institutions, and therefore
believes that its loss exposure is minimal.
Accounts
Receivable
Accounts
receivable are carried at original invoice amount less an estimate made for doubtful accounts based on a review of all outstanding
amounts. Management determines the allowance for doubtful accounts by regularly evaluating individual customer receivables and
considering a customer’s financial condition, credit history and current economic conditions and sets up an allowance for
doubtful accounts when collection is uncertain. Customers’ accounts are written off when all attempts to collect have been
exhausted. Recoveries of accounts receivable previously written off are recorded as income when received. As of December 31, 2019
and 2018, the Company had no allowance for doubtful account.
Property
and Equipment
Property
and equipment are stated at cost, less accumulated depreciation and amortization. Expenditures for maintenance and repairs are
charged to expense when incurred, while renewals and betterments that materially extend the life of an asset are capitalized.
When assets are sold, retired or otherwise disposed of, the cost and accumulated depreciation are removed from the balance sheets
and any resulting gain or loss is reflected in the statements of operations and members’ deficit in the period realized.
Depreciation
is provided using the straight-line method over the estimated useful lives of the assets, which are as follows:
Furniture
and equipment
|
5 years
|
Concentration
Risks
As
of December 31, 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.
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Joint
Venture
On
June 18, 2019, the Company, along with MJNA, which is a significant shareholder, and AXIM Biotechnologies, Inc., 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. The Company has no control or influence
over the joint venture and for the year ending December 31, 2019 the Company recorded a loss in investment in the amount of $27,490.
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
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. As of December 31, 2019, the grant
has ended.
Equity
Investments
Effective
January 1, 2018, with the adoption of ASU 2016-01, our accounting treatment for equity investments differs for those with and
without readily determinable fair values. Equity investments with readily determinable fair values are recorded at fair value
with changes in fair value recorded in “Unrealized Gain/Loss On Investments.” For equity investments without readily
determinable fair values we have elected the “measurement alternative,” and therefore carry these investments at cost,
less impairment (if any), plus or minus changes in observable prices. On a quarterly basis, we review our equity investments without
readily determinable fair values for impairment. We consider a number of qualitative factors such as whether there is a significant
deterioration in earnings performance, credit rating, asset quality, or business prospects of the investee in determining if impairment
exists. If the investment is considered impaired, an impairment loss equal to the amount by which the carrying value exceeds its
fair value is recorded through a charge to earnings. The impairment loss may be reversed in a subsequent period if there are observable
transactions for the identical or similar investment of the same issuer at a higher amount than the carrying amount that was established
when the impairment was recognized. Impairment as well as upward or downward adjustments resulting from observable price changes
in orderly transactions for identical or similar investments are included in “Income - other.”
Realized
gains or losses resulting from the sale of equity investments are calculated using the specific identification method and are
included in “Net gains and losses recognized on marketable security".
Income
Taxes
The
Company accounts for income taxes under FASB ASC Topic 740, Income Taxes (“ASC 740”). Deferred income tax assets
and liabilities are determined based upon differences between the financial reporting and tax bases of assets and liabilities
and are measured using the enacted tax rates and laws that will be in effect when the differences are expected to reverse. Deferred
tax assets are reduced by a valuation allowance to the extent management concludes it is more likely than not that the assets
will not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income
in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and
liabilities of a change in tax rates is recognized in the statements of operations in the period that includes the enactment date.
Preferred
Stock
The
Company applies the guidance enumerated in FASB ASC Topic 480, Distinguishing Liabilities from Equity (“ASC 480”),
when determining the classification and measurement of preferred stock. Preferred shares subject to mandatory redemption (if any)
are classified as liability instruments and are measured at fair value. The Company classifies conditionally redeemable preferred
shares (if any), which includes preferred shares that feature redemption rights that are either within the control of the holder
or subject to redemption upon the occurrence of uncertain events not solely within the Company’s control, as temporary equity.
At all other times, the Company classifies its preferred shares in stockholders’ equity. The Company’s preferred shares
do not feature any redemption rights within the holders’ control or conditional redemption features not within the Company’s
sole control as of December 31, 2019 and 2018. Accordingly, all issuances of preferred stock are presented as a component of stockholders’
equity.
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Convertible
Instruments
The
Company evaluates and accounts for conversion options embedded in convertible instruments in accordance with ASC Topic 815, Derivatives
and Hedging Activities (“ASC 815”).
Applicable
U.S. GAAP requires companies to bifurcate conversion options from their host instruments and account for them as free standing
derivative financial instruments according to certain criteria. The criteria includes circumstances in which (a) the economic
characteristics and risks of the embedded derivative instrument are not clearly and closely related to the economic characteristics
and risks of the host contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract
is not re-measured at fair value under otherwise applicable generally accepted accounting principles with changes in fair value
reported in earnings as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would
be considered a derivative instrument.
The
Company accounts for convertible instruments (when the Company has determined that the embedded conversion options should not
be bifurcated from their host instruments) as follows. The Company records, when necessary, deemed dividends for the intrinsic
value of conversion options embedded in preferred shares based upon the differences between the fair value of the underlying common
stock at the commitment date of the transaction and the effective conversion price embedded in the preferred shares.
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.
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 4,029,433 for the year ended December 31, 2019.
In
accordance with ASC 260, “Earnings Per Share”, the following table reconciles basic shares outstanding to fully diluted
shares outstanding for the year ended December 31, 2018:
|
|
December
31,
2018
|
Weighted average number of
common shares outstanding - Basic
|
|
|
64,417,684
|
|
Series A preferred
stock
|
|
|
37,603
|
|
Series B preferred
stock
|
|
|
37,603
|
|
Convertible
notes payable
|
|
|
4,356,164
|
|
Weighted average
number of common and equivalent shares outstanding-Diluted
|
|
|
68,849,054
|
|
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
NOTE
2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
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 years ended December 31, 2018 because their effect would be anti-dilutive.
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 years ended December 31, 2019 and 2018
were $554,701 and $224,933, 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 consolidated 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 CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
In
June 2016, the FASB issued ASU 2016-13, “Financial Instruments – Credit Losses” to improve information on credit
losses for financial assets and net investment in leases that are not accounted for at fair value through net income. ASU 2016-13
replaces the current incurred loss impairment methodology with a methodology that reflects expected credit losses. In April 2019
and May 2019, the FASB issued ASU No. 2019-04, “Codification Improvements to Topic 326, Financial Instruments-Credit
Losses, Topic 815, Derivatives and Hedging, and Topic 825, Financial Instruments” and ASU No. 2019-05, “Financial
Instruments-Credit Losses (Topic 326): Targeted Transition Relief” which provided additional implementation guidance
on the previously issued ASU. In November 2019, the FASB issued ASU 2019-10, “Financial Instruments - Credit Loss (Topic
326), Derivatives and Hedging (Topic 815), and Leases (Topic 842),” which defers the effective date for public filers that
are considered small reporting companies (“SRC”) as defined by the Securities and Exchange Commission to fiscal years
beginning after December 15, 2022, including interim periods within those fiscal years. Since the Company is an SRC, implementation
is not needed until January 1, 2023. The Company will continue to evaluate the effect of adopting ASU 2016-13 will have on the
Company’s consolidated financial statements.
NOTE
3 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY PLANS
The
Company’s 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
consolidated financial statements, the Company has had a net loss from operations of $2,329,117 and $1,061,808 for the years ended
December 31, 2019 and 2018, respectively. The net cash used in operations were $1,894,085 and $1,210,907 for the years ended December
31, 2019 and 2018, respectively. Additionally, the Company had an accumulated deficit of $8,496,088 at December 31, 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.
In order to continue as a going concern, the
Company will need, among other things, additional capital resources. Management plans to raise additional capital through the sale
of convertible debt securities offering. However, there are no assurances that such additional funding will be achieved.
The Company does not have sufficient cash flow
for the next twelve months from the issuance of these audited consolidated financial statements. 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 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.
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
NOTE
4 – FAIR VALUE MEASUREMENTS
The
Company follows FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) to measure and disclosure
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. 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.
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 December 31, 2018, on a recurring basis:
|
|
December
31, 2018
|
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
Carrying
Value
|
Marketable
securities – Medical Marijuana, Inc.
|
|
$
|
2,579,640
|
|
|
|
—
|
|
|
|
—
|
|
|
$
|
2,579,640
|
|
As
of December 31, 2019, the Company did not own any shares of MJNA stock.
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
The
following table presents liabilities that are measured and recognized at fair value as of December 31, 2019, on a recurring basis:
|
|
December
31, 2019
|
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
Carrying
Value
|
Derivative
liabilities
|
|
$
|
—
|
|
|
|
—
|
|
|
|
183,451
|
|
|
$
|
183,451
|
|
NOTE
5 – MARKETABLE SECURITY
On
June 1, 2018, the Company received 41,583,333 shares of Medical Marijuana, Inc. (“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.
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 December 31, 2019, the Company held zero (0) shares of MJNA. 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 year ending December 31, 2019:
Net gains
and (losses) recognized during the period on equity securities
|
|
$
|
(942,982
|
)
|
Less:
Net gains and (losses) recognized during the period on equity securities sold during the period
|
|
|
942,982
|
|
Unrealized
gains and (losses) recognized during the period on equity securities still held at the reporting date
|
|
$
|
—
|
|
The
following table summarizes the gains and losses recognized during the year ending December 31, 2018:
Net gains
and (losses) recognized during the period on equity securities
|
|
$
|
(1,040,727
|
)
|
Less:
Net gains and (losses) recognized during the period on equity securities sold during the period
|
|
|
167,034
|
|
Unrealized
gains and (losses) recognized during the period on equity securities still held at the reporting date
|
|
$
|
(873,693
|
)
|
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
NOTE
6 – PAYROLL AND RELATED LIABILITIES
Accrued
payroll and payroll taxes at December 31, 2019 and 2018 consisted of the following:
|
|
2019
|
|
2018
|
Payroll
|
|
$
|
—
|
|
|
$
|
—
|
|
Payroll
taxes
|
|
|
243,208
|
|
|
|
246,067
|
|
Totals
|
|
$
|
243,208
|
|
|
$
|
246,067
|
|
As
of December 31, 2019, and 2018, the Company has 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 our CEO. The initial term of the agreement is for two years
and 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 are
for one year and automatically renew for successive six month terms.
See
Note 14 for discussion of accrued payroll converted into common stock.
NOTE
7 – LOAN 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 the amendment date was forgiven. Accrued interest related to these notes is $73,381
and $24,460 as of December 31, 2019 and 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 is $620,000 as of December 31, 2019.
Total
interest expense on notes payable, amounted to $48,921 and $24,460 for the years ended December 31, 2019 and 2018, respectively.
NOTE
8 – LOAN 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 advanced the Company $16,270 for working capital. 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 December 31, 2019 and
2018.
Note
9 – 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 $35,297, secured by equipment with carrying value of $63,747, as of December 31, 2019.
The
future payments under Capital Lease Obligations as of December 31, 2019, are as follows:
|
|
Future
Minimum Principal Payments
|
Twelve
Months ended December 31,
|
|
|
|
|
2020
|
|
$
|
7,533
|
|
2021
|
|
|
8,471
|
|
2022
|
|
|
9,525
|
|
2023
|
|
|
9,768
|
|
Total
capital lease obligations
|
|
|
35,297
|
|
Less:
current portion
|
|
|
(7,533
|
)
|
Total
non-current term loan obligations
|
|
$
|
27,764
|
|
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
NOTE
10 – 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 increasing 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 increasing 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.
In
December 2019, the Company entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed
to sell the investor a $100,000 convertible note bearing interest at 8% per annum (the “Note”). The Note matures two
years from the date of issuance. The Note is convertible at the option of the holder at any time into shares of the Company’s
common stock at an effective conversion price of 75% of the average closing price of the Company’s common stock on the fifteen
days prior to conversion. The Company may not prepay this Note within the first six months. If, after the first six months until
the maturity of the Note the Company:
|
(c)
|
elects
to repay the Note, it must do so at a premium of one hundred and twenty five percent
(125%) of the face amount of the note, together with all unpaid and accrued interest
to the date of repayment.
|
|
(d)
|
elects
to involuntarily exercise conversion of this Note to the Holder, the Company must provide
written notice to the Holder along with an executed copy of the Company’s Notice
of Conversion, specifying that the Note shall be converted into shares of the Company’s
Common Stock based upon at an effective conversion price of 75% of the average closing
price of the Company’s common stock on the fifteen days prior to conversion.
|
The
embedded conversion feature of this Note was deemed to require bifurcation and liability classification, at fair value. Pursuant
to the Securities Purchase Agreement, the Company also sold warrants to the investors to purchase up to an aggregate 100,000 shares
of common stock. The fair value of the derivative liability and warrants as of the date of issuance was in excess of the Note
(see Note 14) resulting in full discount of the Note.
Total
interest expense on convertible notes payable, inclusive of amortization of debt discount of $2,466 and $0, amounted to $16,739
and $6,250 for the years ended December 31, 2019 and 2018, respectively.
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
NOTE
11 – 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 increasing 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.
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 increasing 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 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 increasing 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.
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) valued at $414,476. 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.
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
NOTE
12 – DERIVATIVE LIABILITIES
The Company issued
debts that consist of the issuance of convertible notes with variable conversion provisions. In addition, the Company issued warrants
with variable conversion provisions. The conversion terms of the convertible notes and warrants are variable based on certain factors,
such as the future price of the Company’s common stock. The number of shares of common stock to be issued is based on the
future price of the Company’s common stock. The number of shares of common stock issuable upon conversion of the promissory
note is indeterminate. Pursuant to ASC 815-15 Embedded Derivatives, the fair values of the variable conversion option and warrants
and shares to be issued were recorded as derivative liabilities on the issuance date.
Based
on the various convertible notes described in Note 10, the fair value of applicable derivative liabilities on notes, warrants
and change in fair value of derivative liability are as follows as of December 31, 2019:
The
following table presents the activity for derivative liabilities measured at estimated fair value:
|
|
Derivative
Liability - Convertible Notes
|
|
Derivative
Liability - Warrants
|
|
Total
|
Balance
as of December 31, 2018
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Additions
during the period
|
|
|
61,321
|
|
|
|
117,763
|
|
|
|
179,084
|
|
Change
in fair value
|
|
|
109
|
|
|
|
4,258
|
|
|
|
4,367
|
|
Change
due to exercise / redemptions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance
as of December 31, 2019
|
|
$
|
61,430
|
|
|
$
|
122,021
|
|
|
$
|
183,451
|
|
The
fair value of the derivative liability – convertible notes is estimated using a Monty Carlo Pricing Model with the following
assumptions:
Market
value of common stock on issuance date
|
|
$
|
4.20
|
|
Expected volatility
|
|
|
100
|
%
|
Expected term (in years)
|
|
|
1
|
|
Risk-free interest
rate
|
|
|
2.00
|
%
|
The
fair value of the derivative liability – warrants is estimated using a Monty Carlo Pricing Model with the following assumptions:
Market
value of common stock on issuance date
|
|
$
|
4.20
|
|
Expected volatility
|
|
|
122
|
%
|
Expected term (in years)
|
|
|
3
|
|
Risk-free interest
rate
|
|
|
2.16
|
%
|
NOTE
13 – 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 one year lease arrangement for office space, with the option to renew the lease annually.
The lease has been renewed through April 2020. 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 October 31, 2020. The monthly rent payment is $359, 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 June 30, 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.
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
NOTE
13 – COMMITMENTS AND CONTINGENCIES (CONTINUED)
Royalty
Agreements
On
June 12, 2012, the Company entered into a Patent 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. 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
|
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 grant to the Company from the inventors
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 these royalty agreements were terminated. In August 2019, the Company issued shares of common stock to the Company’s
CEO, the Company’s CMO, three advisory board members of the Company, and an unrelated third party in exchange for them giving
up their rights to any future royalty payments.
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
NOTE
14 – STOCKHOLDERS’ EQUITY (DEFICIT)
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 any annual or special meeting
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 Corp. in exchange for $75,000.
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
NOTE
14 – STOCKHOLDERS’ EQUITY (DEFICIENCY) (CONTINUED)
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 any annual or special meeting
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 $0.0001 par value common stock. 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.
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 December 31, 2019 and 2018, there were 74,225,141 and 69,854,141 shares of common stock issued and outstanding, respectively.
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
See
Note 10 and 11 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 consolidated statement of operations for the years ended
December 31, 2019 and 2018:
|
|
Year
Ended December 31,
|
|
|
2019
|
|
2018
|
Research
and Development
|
|
$
|
90,000
|
|
|
$
|
—
|
|
General and Administrative
|
|
$
|
185,878
|
|
|
$
|
10,077
|
|
Stock
Options
On
September 1, 2017, the Company entered into an agreement for consulting services. As compensation the Company granted options
to purchase 100,000 shares of common stock at a price of $2.00 per share and are exercisable for five years. The stock option
vests in equal monthly installments of 24 months. These options were valued at $20,154 using a Black-Scholes Options Pricing Model.
For the years ended December 31, 2019 and 2018, the Company recorded $5,878 and $10,077, respectively, as stock based compensation
which is included in the general and administrative expenses in the consolidated statement of operations. The remaining compensation
expense outstanding for future periods is $0.
The
fair value of the options is estimated using a Black-Scholes Options Pricing Model with the following assumptions:
Market
value of common stock on issuance date
|
|
$
|
0.40
|
|
Exercise price
|
|
$
|
2.00
|
|
Expected volatility
|
|
|
100
|
%
|
Expected term (in years)
|
|
|
5
|
|
Risk-free interest
rate
|
|
|
1.73
|
%
|
Expected dividend yields
|
|
|
—
|
|
On
August 14, 2019, the Board authorized the Kannalife, Inc. 2019 Equity Incentive Plan (the “2019 Plan”) in order to
facilitate the grant of cash and equity incentives to directors, employees (including our named executive officers) and consultants
of our company and certain of its affiliates and to enable our company and certain of its affiliates to obtain and retain services
of these individuals, which is essential to our long-term success. Our 2019 Plan allows for the grant of a variety of equity vehicles
to provide flexibility in implementing equity awards, including incentive stock options, non-qualified stock options, restricted
stock grants, unrestricted stock grants and restricted stock units.
Authorized
Shares. A total of 7,500,000 shares of common stock were authorized under the 2019 Plan.
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
NOTE
14 – STOCKHOLDERS’ EQUITY (DEFICIT) (CONTINUED)
Warrants
In December 2019,
the Company entered into a Securities Purchase Agreement with an investor pursuant to which the Company agreed to sell the investor
a $100,000 convertible note bearing interest at 8% per annum (the “Note”). The Company also sold warrants to the investors
to purchase up to an aggregate 100,000 shares of common stock at a per share purchase price of one hundred twenty five percent
(125%) of the voluntary or involuntary conversion price of the Company’s 8% convertible note. The warrant is fully vested
and was fully expensed as of the issuance date with an exercise term of three (3) years. See Note 10 and 12.
The
following is a summary of outstanding and exercisable warrants:
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
Balance
at December 31, 2017
|
|
|
—
|
|
|
|
—
|
|
Issued
|
|
|
—
|
|
|
|
—
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Balance
at December 31, 2018
|
|
|
—
|
|
|
|
—
|
|
Issued
|
|
|
100,000
|
|
|
|
3.26
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Balance
at December 31, 2019
|
|
|
100,000
|
|
|
|
3.26
|
|
As
of December 31, 2019, 100,000 warrants for common stock were exercisable and the intrinsic value of these warrants was $108,750.
As of December 31, 2019, the weighted average remaining contractual life was 2.98 years for warrants outstanding.
The
Company did not issue any warrants for the year ended December 31, 2018.
NOTE
15 – RELATED PARTY TRANSACTIONS
The
Company’s Chief Executive Officer shares the use of the leased office space for personal living quarters. The CEO reimburses
the Company for 50% of the monthly rent, or $2,700 per month.
As
of December 31, 2019, the Company owes the CEO $25,349 for expenses the CEO incurred on behalf of the Company. This loan is non-interest
bearing and due on demand.
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 December 31, 2019, $0 is due from GGCP.
See
Notes 8, 11, 14 and 17 for additional related party transactions.
NOTE
16 – INCOME TAXES
We
file income tax returns in the United States federal jurisdiction and in various state and local jurisdictions. In the normal
course of business, we are subject to examination by taxing authorities. The tax years ending 2016 through 2019 remain subject
to examination for federal tax purposes and remain subject to examination in significant state tax jurisdictions.
On
December 22, 2017, the United States enacted significant changes to the U.S. tax law following the passage and signing of H.R.1,
"An Act to Provide for Reconciliation Pursuant to Titles II and V of the Concurrent Resolution on the Budget for Fiscal Year
2018" (the "Tax Act") (previously known as "The Tax Cuts and Jobs Act"). The Tax Act significantly revised
the U.S. corporate income tax regime by, among other things, lowering the corporate tax rate from 35% to 21%. The Tax Act reduced
the U.S. corporate income tax rate reduction to 21% becomes effective January 1, 2018. The Company re-measured its deferred tax
assets and liabilities as of December 31, 2017, applying the reduced corporate income tax rate and recorded a provisional decrease
to the deferred tax assets of $787,700, with a corresponding adjustment to the valuation allowance.
As
of December 31, 2019, and 2018, the Company had federal and state net operating loss carry forwards of $4,248,000 and
$862,000, respectively, of which $.8 million of the 2019 amount will expire in 2032 through 2037, and $3.4 million will not
expire. The non-expiring portion is limited to 80% of the current year taxable income of the respective entity
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
NOTE
16 – INCOME TAXES (CONTINUED)
The
reconciliation of income tax expense computed at the U.S. federal statutory rate to the income tax provision for the years ended
December 31, 2019 and 2018 is as follows:
|
|
For
the Years ended December 31,
|
|
|
2019
|
|
2018
|
|
|
|
%
|
|
|
|
%
|
|
Statutory
federal tax rate
|
|
|
21.0
|
|
|
|
21.0
|
|
State taxes, net
of federal benefit
|
|
|
4.7
|
|
|
|
2.8
|
|
Valuation allowance
|
|
|
(20.0
|
)
|
|
|
22.2
|
|
Permanent items
|
|
|
(5.2
|
)
|
|
|
—
|
|
Other,
net
|
|
|
(.5
|
)
|
|
|
0.6
|
|
Provision
for income taxes
|
|
|
—
|
|
|
|
46.6
|
|
The
change in the Company's net increase in the valuation allowance was caused by the change in estimation of NOL utilization.
Deferred
income taxes reflect the net tax effects of: (a) temporary differences between the carrying amounts of assets and liabilities
for financial reporting purposes and the amounts used for income tax purposes; and (b) operating loss and tax credit carry-forwards.
We record net deferred tax assets to the extent we believe these assets will more likely than not be realized. In making such
determination, we consider all available positive and negative evidence, including future reversals of existing taxable temporary
differences, projected future taxable income, tax planning strategies and recent financial operations. Significant components
of deferred tax assets as December 31, 2019 and 2018 were as follows:
|
|
For the Years ended December 31,
|
|
|
2019
|
|
2018
|
Deferred Tax Assets:
|
|
|
|
|
|
|
|
|
Federal net operating loss carryforwards
|
|
$
|
892,000
|
|
|
$
|
181,023
|
|
Capital Losses over Capital Gains
|
|
|
—
|
|
|
|
(17,290
|
)
|
Non-cash interest
|
|
|
39,954
|
|
|
|
29,132
|
|
Non-cash accrued compensation
|
|
|
794,880
|
|
|
|
825,713
|
|
Mark to Market Adjustment - Investments held for sale
|
|
|
—
|
|
|
|
240,965
|
|
State taxes
|
|
|
316,238
|
|
|
|
92,298
|
|
Net deferred tax assets before valuation allowance
|
|
|
2,043,072
|
|
|
|
1,351,841
|
|
Valuation Allowance
|
|
|
(2,043,072
|
)
|
|
|
(1,351,841
|
)
|
Net Deferred Tax Assets
|
|
$
|
—
|
|
|
$
|
—
|
|
KANNALIFE,
INC.
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
DECEMBER
31, 2019
NOTE
16 – INCOME TAXES (CONTINUED)
Utilization
of the net operating losses (NOL) carryforwards may be subject to a substantial annual limitation due to ownership change limitations
that may have occurred or that could occur in the future, as required by Section 382 of the Internal Revenue Code (IRC) of 1986,
as amended (the Code), as well as similar state provisions. These ownership changes may limit the amount of NOL carryforwards
that can be utilized annually to offset future taxable income. In general, an “ownership change” as defined by Section
382 of the Code results from a transaction or series of transactions over a three-year period resulting in an ownership change
of more than 50 percentage points of the outstanding stock of a company by certain stockholders. At the time of closing the books,
the Company had not yet completed a study to determine the extent of the limitation.
NOTE
17 – SUBSEQUENT EVENTS
In January
2020, the Company sold an additional $100,000, to Kettner Investments, LLC, a significant shareholder, under the Note and sold
warrants to purchase up to an aggregate 100,000 shares of common stock to an investor under the Securities Purchase
Agreement. See Note 10.
In February 2020,
the Company sold an additional $50,000, to the CEO of MJNA, a significant shareholder, under the Note and sold warrants to purchase
up to an aggregate 50,000 shares of common stock to an investor under the Securities Purchase Agreement. See Note 10.
On March 12,
2020, Kannalife, Inc., a Delaware corporation (the “Company”) entered into securities purchase agreements (the “Purchase
Agreements”) with two different accredited investors (each an “Investor”, and together the “Investors”)
pursuant to which each Investor purchased an 8% unsecured convertible promissory note (each a “Note”, and together
the “Notes”) from the Company. The terms and conditions of each of the Notes are substantially the same. Each Note
has a principal amount of $105,000 less a $5,000 original issue discount (“OID”) for a purchase price of $100,000,
with a maturity date of March 12, 2021. All principal amounts and the interest thereon are convertible into shares of the Company’s
common stock (the “Common Stock”) at the option of each Investor, after six (6) months from the date of the Notes.
These Notes have a variable conversion price and the Company expects to record embedded derivative
liabilities.
In December 2019, a novel strain of coronavirus
(Item 5-19) surfaced. The spread of COVID-19 around the world in the first quarter of 2020 has caused significant volatility in
U.S. and international markets. There is significant uncertainty around the breadth and duration of business disruptions related
to COVID-19, as well as its impact on the U.S. and international economies and, as such, the Company is unable to determine if
it will have a material impact to its operations. The Company’s operations may be affected by the recent and ongoing outbreak
of the coronavirus disease 2019 (COVID-19) which in March 2020, was declared a pandemic by the World Health Organization. The ultimate
disruption which may be caused by the outbreak is uncertain; however, it may result in a material adverse impact on the Company’s
financial position, operations and cash flows. Possible areas that may be affected include, but are not limited to, disruption
to the Company’s labor workforce, unavailability of products and supplies used in operations, and the decline in value of
assets held by the Company.