PART
I – FINANCIAL INFORMATION
Item
1. Financial Statements (unaudited)
KANNALIFE,
INC.
|
CONDENSED
CONSOLIDATED BALANCE SHEETS
|
Unaudited
|
|
|
|
|
|
|
|
|
March
31, 2020
|
|
|
|
December
31,
2019
|
|
ASSETS
|
|
|
|
|
|
|
|
|
CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents
|
|
$
|
114,582
|
|
|
$
|
121,455
|
|
Prepaid
expenses
|
|
|
6,000
|
|
|
|
9,000
|
|
Other
receivables
|
|
|
400
|
|
|
|
400
|
|
Total
Current Assets
|
|
|
120,982
|
|
|
|
130,855
|
|
|
|
|
|
|
|
|
|
|
NON-CURRENT
ASSETS:
|
|
|
|
|
|
|
|
|
Property
and equipment, net
|
|
|
71,367
|
|
|
|
75,401
|
|
Security
deposits
|
|
|
17,121
|
|
|
|
17,121
|
|
Total
Non-Current Assets
|
|
|
88,488
|
|
|
|
92,522
|
|
TOTAL
ASSETS
|
|
$
|
209,470
|
|
|
$
|
223,377
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES
AND STOCKHOLDERS' DEFICIT
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT
LIABILITIES:
|
|
|
|
|
|
|
|
|
Accounts
payable and accrued expenses
|
|
$
|
384,159
|
|
|
$
|
389,195
|
|
Payroll
and related liabilities
|
|
|
273,510
|
|
|
|
243,208
|
|
Loan
payable
|
|
|
620,000
|
|
|
|
620,000
|
|
Loan
payable - related party
|
|
|
42,092
|
|
|
|
42,092
|
|
Convertible
notes payable, net of $192,740 debt discount
|
|
|
17,260
|
|
|
|
—
|
|
Capital
lease obligations
|
|
|
7,757
|
|
|
|
7,533
|
|
Due
to related party, net
|
|
|
49,261
|
|
|
|
25,349
|
|
Derivative
liabilities
|
|
|
194,350
|
|
|
|
—
|
|
Total
Current Liabilities
|
|
|
1,588,389
|
|
|
|
1,327,377
|
|
|
|
|
|
|
|
|
|
|
LONG
TERM LIABILITIES:
|
|
|
|
|
|
|
|
|
Convertible
notes payable - long term, net of $85,205 debt discount
|
|
|
391,167
|
|
|
|
378,839
|
|
Convertible
notes payable - long term, net of $135,479 debt discount - related party
|
|
|
14,521
|
|
|
|
—
|
|
Capital
lease obligation - long term
|
|
|
25,739
|
|
|
|
27,764
|
|
Derivative
liabilities - long term
|
|
|
191,540
|
|
|
|
183,451
|
|
Total
Long Term Liabilities
|
|
|
622,967
|
|
|
|
590,054
|
|
TOTAL
LIABILITIES
|
|
|
2,211,356
|
|
|
|
1,917,431
|
|
|
|
|
|
|
|
|
|
|
Commitments
and contingencies (Note 13)
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
STOCKHOLDERS'
DEFICIT:
|
|
|
|
|
|
|
|
|
Preferred
stock, $0.0001 par value, 5,000,000 shares authorized
|
|
|
|
|
|
|
|
|
Series
A preferred stock, 75 shares designated, 75 issued and outstanding (Liquidation preference of $75,000)
|
|
|
—
|
|
|
|
—
|
|
Series
B preferred stock, 75 shares designated, 75 issued and outstanding (Liquidation preference of $75,000)
|
|
|
—
|
|
|
|
—
|
|
Common
stock, $0.0001 par value, 200,000,000 authorized, 74,225,141 issued and outstanding
|
|
|
7,422
|
|
|
|
7,422
|
|
Additional
paid-in capital
|
|
|
6,794,612
|
|
|
|
6,794,612
|
|
Accumulated
deficit
|
|
|
(8,803,920
|
)
|
|
|
(8,496,088
|
)
|
TOTAL
STOCKHOLDERS' DEFICIT
|
|
|
(2,001,886
|
)
|
|
|
(1,694,054
|
)
|
TOTAL
LIABILITIES AND STOCKHOLDERS' DEFICIT
|
|
$
|
209,470
|
|
|
$
|
223,377
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
|
KANNALIFE,
INC.
|
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
|
Unaudited
|
|
|
|
Three
Months Ended March 31,
|
|
|
2020
|
|
2019
|
NET
REVENUES:
|
|
|
|
|
|
|
|
|
Grant
revenue
|
|
$
|
—
|
|
|
$
|
49,291
|
|
TOTAL
NET REVENUES
|
|
|
—
|
|
|
|
49,291
|
|
|
|
|
|
|
|
|
|
|
OPERATING
EXPENSES:
|
|
|
|
|
|
|
|
|
Research
and development
|
|
|
19,727
|
|
|
|
101,278
|
|
General
and administrative
|
|
|
364,107
|
|
|
|
451,186
|
|
TOTAL
OPERATING EXPENSES
|
|
|
383,834
|
|
|
|
552,464
|
|
|
|
|
|
|
|
|
|
|
LOSS
FROM OPERATIONS
|
|
|
(383,834
|
)
|
|
|
(503,173
|
)
|
|
|
|
|
|
|
|
|
|
OTHER
INCOME (EXPENSE):
|
|
|
|
|
|
|
|
|
Interest
expense, net
|
|
|
(215,163
|
)
|
|
|
(15,980
|
)
|
Net
gains and losses recognized on marketable security
|
|
|
—
|
|
|
|
(329,346
|
)
|
Change
in fair value of derivative liabilities
|
|
|
291,165
|
|
|
|
—
|
|
TOTAL
OTHER INCOME (EXPENSE)
|
|
|
76,002
|
|
|
|
(345,326
|
)
|
|
|
|
|
|
|
|
|
|
NET
LOSS BEFORE INCOME TAX
|
|
$
|
(307,832
|
)
|
|
$
|
(848,499
|
)
|
Income
tax expense
|
|
|
—
|
|
|
|
—
|
|
NET
LOSS
|
|
$
|
(307,832
|
)
|
|
$
|
(848,499
|
)
|
Net
loss attributable to noncontrolling interests
|
|
|
—
|
|
|
|
(2,534
|
)
|
Net
loss attributable to Kannalife, Inc.
|
|
$
|
(307,832
|
)
|
|
$
|
(845,965
|
)
|
|
|
|
|
|
|
|
|
|
Loss
attributable to Kannalife, Inc. per common share - basic
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
Loss
attributable to Kannalife, Inc. per common share - diluted
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
|
|
|
|
|
|
|
|
|
Weighted
average common shares outstanding - basic
|
|
|
74,225,141
|
|
|
|
69,854,141
|
|
Weighted
average common shares outstanding - diluted
|
|
|
74,225,141
|
|
|
|
69,854,141
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
|
KANNALIFE,
INC.
|
CONDENSED
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY (DEFICIT)
|
Unaudited
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Series
A Preferred Stock
|
|
|
|
Series
B Preferred Stock
|
|
|
|
Common
Stock
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Shares
|
|
|
|
Amount
|
|
|
|
Additional
Paid-In Capital
|
|
|
|
Accumulated
Deficit
|
|
|
|
Non-controlling
Interest
|
|
|
|
Total
Stockholders’ Equity (Deficit)
|
|
Balance
at December 31, 2018
|
|
|
75
|
|
|
$
|
—
|
|
|
|
75
|
|
|
$
|
—
|
|
|
|
69,854,141
|
|
|
$
|
6,985
|
|
|
$
|
6,381,755
|
|
|
$
|
(5,052,051
|
)
|
|
$
|
(5,756
|
)
|
|
$
|
1,330,933
|
|
Issuance
of stock options for services
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,519
|
|
|
|
—
|
|
|
|
—
|
|
|
|
2,519
|
|
Net
income
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(845,965
|
)
|
|
|
(2,534
|
)
|
|
|
(848,499
|
)
|
Balance
at March 31, 2019
|
|
|
75
|
|
|
$
|
—
|
|
|
|
75
|
|
|
$
|
—
|
|
|
|
69,854,141
|
|
|
$
|
6,985
|
|
|
$
|
6,384,274
|
|
|
$
|
(5,898,016
|
)
|
|
$
|
(8,290
|
)
|
|
$
|
484,953
|
|
Balance
at December 31, 2019
|
|
|
75
|
|
|
|
—
|
|
|
|
75
|
|
|
|
—
|
|
|
|
74,225,141
|
|
|
|
7,422
|
|
|
|
6,794,612
|
|
|
|
(8,496,088
|
)
|
|
|
—
|
|
|
|
(1,694,054
|
)
|
Net
loss
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
(307,832
|
)
|
|
|
—
|
|
|
|
(307,832
|
)
|
Balance
at March 31, 2020
|
|
|
75
|
|
|
$
|
—
|
|
|
|
75
|
|
|
$
|
—
|
|
|
|
74,225,141
|
|
|
$
|
7,422
|
|
|
$
|
6,794,612
|
|
|
$
|
(8,803,920
|
)
|
|
|
—
|
|
|
$
|
(2,001,886
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
|
KANNALIFE,
INC.
|
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
Unaudited
|
|
|
|
|
|
|
|
Three
Months Ended March 31,
|
|
|
2020
|
|
2019
|
CASH
FLOWS FROM OPERATING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Net
loss
|
|
$
|
(307,832
|
)
|
|
$
|
(848,499
|
)
|
Adjustments
to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Net
gains and losses recognized on marketable security
|
|
|
—
|
|
|
|
329,346
|
|
Depreciation
|
|
|
4,034
|
|
|
|
152
|
|
Amortization
of debt discount
|
|
|
44,109
|
|
|
|
—
|
|
Issuance
of options for services
|
|
|
—
|
|
|
|
2,519
|
|
Non-cash
interest expense
|
|
|
149,604
|
|
|
|
—
|
|
Change
in fair value of derivative liabilities
|
|
|
(291,165
|
)
|
|
|
—
|
|
Changes
in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid
expenses
|
|
|
3,000
|
|
|
|
—
|
|
Other
receivables
|
|
|
—
|
|
|
|
50,000
|
|
Security
deposits
|
|
|
—
|
|
|
|
(14,641
|
)
|
Accounts
payable and accrued expenses
|
|
|
(5,036
|
)
|
|
|
—
|
|
Payroll
and related liabilities
|
|
|
30,302
|
|
|
|
1,329
|
|
Due
to related party, net
|
|
|
23,912
|
|
|
|
6,535
|
|
NET
CASH USED IN OPERATING ACTIVITIES
|
|
|
(349,072
|
)
|
|
|
(473,259
|
)
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM INVESTING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Proceeds
from sale of marketable securities
|
|
|
—
|
|
|
|
725,294
|
|
NET
CASH PROVIDED BY INVESTING ACTIVITIES
|
|
|
—
|
|
|
|
725,294
|
|
|
|
|
|
|
|
|
|
|
CASH
FLOWS FROM FINANCING ACTIVITIES:
|
|
|
|
|
|
|
|
|
Principal
payments toward capital lease obligations
|
|
|
(1,801
|
)
|
|
|
—
|
|
Proceeds
from convertible notes payable
|
|
|
194,000
|
|
|
|
—
|
|
Proceeds
from convertible notes payable - related party
|
|
|
150,000
|
|
|
|
97
|
|
NET
CASH PROVIDED BY FINANCING ACTIVITIES
|
|
|
342,199
|
|
|
|
97
|
|
Net
(decrease) increase in cash
|
|
|
(6,873
|
)
|
|
|
252,132
|
|
|
|
|
|
|
|
|
|
|
Cash
and cash equivalents, beginning of period
|
|
|
121,455
|
|
|
|
307,131
|
|
Cash
and cash equivalents, end of period
|
|
$
|
114,582
|
|
|
$
|
559,263
|
|
|
|
|
|
|
|
|
|
|
NON-CASH
ACTIVITIES:
|
|
|
|
|
|
|
|
|
Debt
discount upon the issuance of convertible note payable
|
|
$
|
194,000
|
|
|
$
|
—
|
|
Debt
discount upon the issuance of convertible note payable - related party
|
|
$
|
150,000
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
The
accompanying notes are an integral part of these condensed consolidated financial statements
|
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
MARCH
31, 2020
|
(UNAUDITED)
|
Note
1 – Organization and Nature of Operations
Kannalife,
Inc. (the “Company”) was incorporated under the laws of the state of Delaware on March 25, 2013 under the name TYG
Solutions Corp. The Company consummated a share exchange transaction on July 25, 2018 with Kannalife Sciences, Inc. (“Kannalife”),
a privately held Delaware corporation formed in 2010, the accounting acquirer. Upon completion of the share exchange transaction,
Kannalife is treated as the surviving entity and accounting acquirer although the Company was the legal acquirer. Accordingly,
the Company’s historical financial statements are those of Kannalife the surviving entity and accounting acquirer. All references
that refer to (the “Company” or “we” or “us” or “our”) are Kannalife, unless otherwise
differentiated. Kannalife is a phytomedical/pharmaceutical company that specializes in the research and development of synthetic
molecules and therapeutic products derived from botanical sources, including the cannabis taxa.
Name
Change
On
November 9, 2018, the Company filed an amendment to its certificate of incorporation with the Delaware Secretary of State that
changed its name to Kannalife, Inc. The Company concurrently submitted a request to FINRA for approval of the name change as well
as a ticker symbol change. The Company’s name change and ticker symbol change was reviewed and processed by FINRA and went
effective January 17, 2019.
Unaudited
Interim Financial Information
We
have prepared the accompanying condensed consolidated financial statements pursuant to the rules and regulations of the Securities
and Exchange Commission (the “SEC”) for interim financial reporting. These condensed consolidated financial statements
are unaudited and, in our opinion, include all adjustments, consisting of normal recurring adjustments and accruals necessary
for a fair presentation of our balance sheets, operating results, and cash flows for the periods presented. Operating results
for the periods presented are not necessarily indicative of the results that may be expected for 2020. Certain information and
footnote disclosures normally included in consolidated financial statements prepared in accordance with accounting principles
generally accepted in the United States (“GAAP”) have been omitted in accordance with the rules and regulations of
the SEC. These condensed consolidated financial statements should be read in conjunction with our audited financial statements
and accompanying notes for the year ended December 31, 2019, included in the Company’s Annual Report on Form 10-K filed
with the SEC on March 30, 2020.
Note
2 - Summary of Significant Accounting Policies
The
significant accounting policies used in the preparation of the condensed consolidated financial statements are as follows:
Basis
of Presentation
The
accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally
accepted in the United States, or GAAP.
Significant
Risks and Uncertainties
The
Company’s operations are subject to a number of factors that can affect its operating results and financial condition. Such
factors include, but are not limited to: the results of clinical testing and trial activities of the Company’s products,
the Company’s ability to obtain regulatory approval to market its products, competition from products manufactured and sold
or being developed by other companies, the price of, and demand for, Company products, the Company’s ability to negotiate
favorable licensing or other manufacturing and marketing agreements for its products, and the Company’s ability to raise
capital.
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
MARCH
31, 2020
|
(UNAUDITED)
|
The
Company currently has no commercially approved products and there can be no assurance that the Company’s research and development
will be successfully commercialized. Developing and commercializing a product requires significant time and capital and is subject
to regulatory review and approval as well as competition from other biotechnology and pharmaceutical companies. The Company operates
in an environment of rapid change and is dependent upon the continued services of its employees and consultants and obtaining
and protecting intellectual property.
In
December 2019, a novel strain of coronavirus 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 as of March 31, 2020
have not been affected, but may be affected in the future, 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.
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.
Net
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 4,898,092 for the three months
ended March 31, 2020. The weighted average number of common stock equivalents not included in diluted income per share, because
the effects are anti-dilutive, was 5,150,000 for the three months ended March 31, 2019.
Common
stock equivalents are included in the diluted income per share calculation only when option or warrant exercise prices are lower
than the average market price of the common shares for the period presented. One hundred thousand (100,000) options and two hundred
and fifty thousand (250,000) warrants were not included in the calculation of net loss per common share for the three months ended
March 31, 2020 and One hundred thousand (100,000) options were not included in the calculation of net loss per common share for
the three months ended March 31, 2019 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 three months ended March 31, 2020, and
2019, were $19,727 and $101,278, respectively.
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
MARCH
31, 2020
|
(UNAUDITED)
|
Recently
Issued Authoritative Guidance
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 condensed consolidated financial statements have been prepared on a going concern basis, which contemplates the
realization of assets and the settlement of liabilities and commitments in the normal course of business. As reflected in our
accompanying condensed consolidated financial statements, the Company has had a net loss from operations of $383,834 and $503,173
for the three months ended March 31, 2020 and 2019, respectively. The net cash used in operations were $349,072 and $473,259 for
the three months ended March 31, 2020 and 2019, respectively. Additionally, the Company had an accumulated deficit of $8,803,920
at March 31, 2020 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 condensed 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 condensed
consolidated financial statements do not include any adjustments related to the recoverability and classification of recorded
asset amounts and classification of liabilities that might be necessary should the Company be unable to continue as a going concern.
Note
4 – Fair Value Measurements
The
Company follows FASB ASC 820, Fair Value Measurements and Disclosures (“ASC 820”) to measure and
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.
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
MARCH
31, 2020
|
(UNAUDITED)
|
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 condensed 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.
The
following table presents liabilities that are measured and recognized at fair value as of March 31, 2020 and December 31, 2019,
on a recurring basis:
|
|
March
31, 2020
|
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
Carrying
Value
|
Derivative
liabilities
|
|
$
|
—
|
|
|
|
—
|
|
|
|
385,890
|
|
|
$
|
385,890
|
|
|
|
December
31, 2019
|
|
|
|
|
Level
1
|
|
Level
2
|
|
Level
3
|
|
Total
Carrying
Value
|
Derivative
liabilities
|
|
$
|
—
|
|
|
|
—
|
|
|
|
183,451
|
|
|
$
|
183,451
|
|
NOTE
5 – ACCOUNTS PAYABLE AND ACCRUED EXPENSES
Accounts
payable and accrued expenses at March 31, 2020 and December 31, 2019 consisted of the following:
|
|
March
31,
2020
|
|
December
31, 2019
|
Accounts
payable and accrued expenses
|
|
$
|
284,031
|
|
|
$
|
309,231
|
|
Accrued
interest
|
|
|
100,128
|
|
|
|
79,964
|
|
Totals
|
|
$
|
384,159
|
|
|
$
|
389,195
|
|
NOTE
6 – PAYROLL AND RELATED LIABILITIES
Payroll
and related liabilities at March 31, 2020 and December 31, 2019 consisted of the following:
|
|
March
31,
2020
|
|
December
31, 2019
|
Payroll
|
|
$
|
30,000
|
|
|
$
|
—
|
|
Payroll
taxes
|
|
|
243,510
|
|
|
|
243,208
|
|
Totals
|
|
$
|
273,510
|
|
|
$
|
243,208
|
|
As of the three months period ended March 31,
2020 and the year ended December 31, 2019, the Company has accrued payroll taxes in connection with salaries paid and accrued to
four officers of the Company.
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
MARCH
31, 2020
|
(UNAUDITED)
|
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 notes incurred 3% interest
per annum. On June 29, 2018, these notes were amended to extend the maturity date to July 1, 2020 and the interest rate was changed
to 8% per annum. All accrued
interest
prior to the amendment date was forgiven.
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 March 31, 2020.
Total
interest expense on notes payable, amounted to $12,230 for the three months ended March 31, 2020 and 2019, respectively. Accrued
interest related to these notes is $85,611 and $73,381 as of March 31, 2020 and December 31, 2019, 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 2018, this note was amended, and the original note holder assigned the note to Kettner Investments,
LLC, a significant shareholder. The note is now non-interest bearing. Accrued interest related to this note is $226 as of March
31, 2020 and December 31, 2019, respectively.
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 $33,496, secured by equipment with carrying value of $56,982, as of March 31, 2020.
NOTE
10 – CONVERTIBLE NOTES PAYABLE
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. 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 was $376,373.
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
MARCH
31, 2020
|
(UNAUDITED)
|
In
December 2019, the Company entered into a Securities Purchase Agreement with an investor pursuant to which the Company
agreed to sell to 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:
|
(a)
|
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.
|
|
(b)
|
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
of 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 12) resulting in full discount of the Note.
On
March 12, 2020, the Company entered into securities 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 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 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 recorded embedded derivative liabilities.
Total
interest expense on convertible notes payable, inclusive of amortization of debt discount of $29,589 and $0, amounted to $32,522
and $3,750 for the three months ended March 31, 2020 and 2019, respectively.
NOTE
11 – CONVERTIBLE NOTES PAYABLE – RELATED PARTY
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
of 100,000 shares of common stock to an investor under the Securities Purchase Agreement. The fair value of the derivative liability
and warrants as of the date of issuance was in excess of the Note (see Note 12) resulting in full discount of the Note.
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 of 50,000
shares of common stock to an investor under the Securities Purchase Agreement. The fair value of the derivative liability and warrants
as of the date of issuance was in excess of the Note (see Note 12) resulting in full discount of the Note.
Total
interest expense on convertible notes payable – related party, inclusive of amortization of debt discount of $14,521 and
$0, amounted to $16,698 and $0 for three months ended March 31, 2020 and 2019, respectively.
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.
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
MARCH
31, 2020
|
(UNAUDITED)
|
Based on the various convertible notes described
in Note 10 and 11, the fair value of applicable derivative liabilities on notes, warrants and change in fair value of derivative
liability are as follows for the three months ended March 31, 2020:
|
|
Derivative Liability - Convertible Notes
|
|
Derivative Liability - Warrants
|
|
Total
|
Balance as of December 31, 2019
|
|
$
|
61,430
|
|
|
$
|
122,021
|
|
|
$
|
183,451
|
|
Additions during the period
|
|
|
317,034
|
|
|
|
176,570
|
|
|
|
493,604
|
|
Change in fair value
|
|
|
(97,232
|
)
|
|
|
(193,933
|
)
|
|
|
(291,165
|
)
|
Change due to exercise / redemptions
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance as of March 31, 2020
|
|
$
|
281,232
|
|
|
$
|
104,658
|
|
|
$
|
385,890
|
|
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
|
$0.58
- 1.80
|
Expected
volatility
|
100.9%
- 146.7%
|
Expected
term (in years)
|
0.73
– 2
|
Risk-free
interest rate
|
1.98%
- 2.08%
|
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
|
$0.58
|
Expected
volatility
|
147%
|
Expected
term (in years)
|
2.73
- 2.84
|
Risk-free
interest rate
|
0.27%
- 0.55%
|
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 2021. The monthly rent payment is $5,400 and the security deposit is $15,000.
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
MARCH
31, 2020
|
(UNAUDITED)
|
NOTE
14 – STOCKHOLDERS’ DEFICIT
Series
A Preferred Stock
Effective
May 3, 2018, the Company’s Board of Directors authorized and designated 75 shares of the Company’s Preferred Stock
as Series A Preferred Stock. Each share of the Series A Preferred Stock is entitled to a liquidation preference of $1,000 per
share and is convertible into 1,000 shares of the Company’s common stock. The holders of a majority of the Series A Preferred
Stock are entitled to elect up to four (4) directors to the Company’s board of directors and have preferential rights in regard to the election of Series A directors. In all other voting matters, the holders of Series
A Preferred Stock are entitled to cast 1,000 votes per share.
Series
B Preferred Stock
Effective
May 3, 2018, the Company’s Board of Directors authorized and designated 75 shares of the Company’s Preferred Stock
as Series B Preferred Stock. Each share of the Series B Preferred Stock is entitled to a liquidation preference of $1,000 per
share and is convertible into 1,000 shares of the Company’s common stock. The holders of a majority of the Series B Preferred
Stock are entitled to elect up to three (3) directors to the Company’s board of directors and have preferential rights in regard to the election of Series B directors. In all other voting matters, the holders of Series
B Preferred Stock are entitled to cast 1,000 votes per share.
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.
As
of March 31, 2020 and December 31, 2019, there were 74,225,141 shares of common stock issued and outstanding, respectively.
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 three months ended March 31, 2020 and 2019, the Company recorded $0 and $2,519, respectively, as stock based compensation
which is included in the general and administrative expenses in the condensed 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.
KANNALIFE,
INC.
|
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
|
MARCH
31, 2020
|
(UNAUDITED)
|
Authorized Shares. A total of 7,500,000
shares of common stock were authorized under the 2019 Plan for which as of March 31, 2020 a total of 100,000 are outstanding. See
Note 16 for subsequent issuances.
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 of 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.
In January and February 2020, the Company
entered into a Securities Purchase Agreement with investors pursuant to which the Company agreed to sell the investors a $100,000
and $50,000 convertible note bearing interest at 8% per annum (the “Note”), respectively. The Company also sold warrants
to the investors to purchase up to an aggregate of 100,000 and 50,000 shares of common stock, respectively, 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 warrants are fully vested and was fully expensed as of the issuance date with an exercise term of three (3) years. See
Note 11.
The
following is a summary of outstanding and exercisable warrants:
|
|
Number
of
Shares
|
|
Weighted
Average
Exercise
Price
|
Balance
at December 31, 2019
|
|
|
100,000
|
|
|
$
|
3.26
|
|
Issued
|
|
|
150,000
|
|
|
|
2.27
|
|
Expired
|
|
|
—
|
|
|
|
—
|
|
Balance
at March 31, 2020
|
|
|
250,000
|
|
|
$
|
0.63
|
|
At
March 31, 2020, 250,000 warrants for common stock were exercisable and the intrinsic value of these warrants was $29,939.
At
March 31, 2020, the weighted average remaining contractual life was 2.75 years for warrants outstanding.
NOTE
15 – RELATED PARTY TRANSACTIONS
The
Company’s Chief Executive Officer (“CEO”) 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 March 31, 2020, the Company owes the CEO $49,261 for expenses the CEO incurred on behalf of the Company.
See
Notes 8 and 11 for additional related party transactions.
NOTE
16 – SUBSEQUENT EVENTS
On April 23, 2020, the Company received a loan
from PNC Bank (the “Lender”) in the amount of $84,200, pursuant to the Paycheck Protection Program (the “PPP”)
under the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”), which was enacted March 27, 2020.
On April 28, 2020, the Company executed an
intellectual property rights purchase and transfer agreement whereby this agreement grants certain IP to the Company. In connection
with the execution of this agreement, the Company issued 25,000 shares of the Company’s common stock to the research organization.
On May 4, 2020, the Company granted 4,850,000
options to purchase shares of the Company’s common stock at an exercise price of $0.57 per share to certain directors and
employees of the Company (including our named executive officers). One quarter of these options vest on the grant day, and the
remainder of the options vest equally over thirty six (36) months starting January 1, 2020.
Item
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
The
following discussion and analysis of our financial condition and results of operations should be read in conjunction with our
consolidated financial statements and related notes included elsewhere in this quarterly report. This discussion contains forward-looking
statements that involve risks and uncertainties. Our actual results could differ materially from those discussed below. Factors
that could cause or contribute to such differences include, but are not limited to, those identified below, and those discussed
in the section titled “Risk Factors” in our Form 10-K filed with the Securities and Exchange Commission on March 30,
2020.
Forward-Looking
Statements
This
quarterly report on Form 10-Q contains forward-looking statements within the meaning of Section 21E of the Securities Exchange
Act of 1934, as amended, or the Exchange Act. All statements other than statements of historical fact contained in this quarterly
report, including statements regarding our future operating results, financial position and cash flows, our business strategy
and plans and our objectives for future operations, are forward-looking statements. These statements involve known and unknown
risks, uncertainties and other important factors that may cause our actual results, performance or achievements to be materially
different from any future results, performance or achievements expressed or implied by the forward-looking statements. This quarterly
report on Form 10-Q also contains estimates and other statistical data made by independent parties and by us relating to market
size and growth and other data about our industry. This data involves a number of assumptions and limitations, and you are cautioned
not to give undue weight to such estimates. In addition, projections, assumptions and estimates of our future performance and
the future performance of the markets in which we operate are necessarily subject to a high degree of uncertainty and risk. In
some cases, you can identify forward-looking statements by terms such as “may,” “will,” “would,”
“could,” “should,” “expect,” “plan,” “anticipate,” “could,”
“intend,” “target,” “project,” “contemplate,” “believe,” “estimate,”
“predict,” “potential” or “continue” or the negative of these terms or other similar expressions.
The forward-looking statements in this quarterly report are only predictions. We have based these forward-looking statements largely
on our current expectations and projections about future events and financial trends that we believe may affect our financial
condition, operating results, business strategy, short-term and long-term business operations and objectives. These forward looking
statements speak only as of the date of this quarterly report and are subject to a number of risks, uncertainties and assumptions.
The events and circumstances reflected in our forward-looking statements may not be achieved or occur, and actual results could
differ materially from those projected in the forward-looking statements. Moreover, we operate in a very competitive and rapidly
changing environment. New risk factors and uncertainties may emerge from time to time, and it is not possible for management to
predict all risk factors and uncertainties. Except as required by applicable law, we do not plan to publicly update or revise
any forward-looking statements contained herein, whether as a result of any new information, future events, changed circumstances
or otherwise.
Business
Developments
The
Company was originally incorporated in the State of Delaware on March 25, 2013, under the name of TYG Solutions Corp. Our original
business plan was to develop iPhone and Android smartphone apps for companies who need an app for their internal and external
operations. We subsequently expanded our operations to offering corporate website design services.
On
July 25, 2018, the Company entered into a Share Exchange Agreement with Kannalife Sciences, Inc., a Delaware corporation (“Kannalife”),
and certain stockholders of Kannalife (the “Kannalife Stockholders”). Pursuant to the terms of the Share Exchange
Agreement, the Company acquired nearly all of the issued and outstanding shares of Kannalife by means of a share exchange with
the Kannalife Stockholders in exchange for newly issued shares of common stock of the Company (the “Share Exchange”).
As a result of the Share Exchange, Kannalife became a wholly-owned subsidiary of the Company. The business operations of the Company
shall continue uninterrupted, and, by virtue of the Share Exchange, the Company will acquire the business of Kannalife including
all of its assets. The Share Exchange was accounted for as a reverse acquisition and change in reporting entity, whereby Kannalife
was the accounting acquirer.
Kannalife
was incorporated in the State of Delaware on August 11, 2010. Kannalife is a developmental stage phyto-medical/pharmaceutical
and drug discovery company that specializes in the research, development of cannabinoid and cannabinoid-based therapeutic products
derived from synthetic and botanical sources, including the Cannabis “taxa” (the word “taxa”
is the plural of “taxon” which defines a group of one or more populations of an organism or organisms to form a unit.)
On
November 9, 2018, the Company filed an amendment to its certificate of incorporation with the Delaware Secretary of State to change
its name to Kannalife, Inc. The Company concurrently submitted a request to FINRA for approval of the name change as well as a
ticker symbol change. The Company’s name change and ticker symbol change was reviewed and processed by FINRA and went effective
January 17, 2019.
Business
Overview
As
a result of the Share Exchange, the Company’s core businesses are comprised of the following:
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•
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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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|
o
|
naturally
recurring sources, including but not limited to cannabis, hemp, and other similar species of plantae;
|
|
o
|
semi-synthetic
sources; and
|
|
o
|
synthetic
and bio-synthetic sources.
|
|
•
|
Drug
discovery platform to evaluate and potentially treat neurological and oxidative stress related disorders such as Overt Hepatic
Encephalopathy (“OHE”), Chronic Traumatic Encephalopathy (“CTE”) and Chemotherapy Induced Peripheral
Neuropathy (“CIPN ”) with high quality assured, quality controlled cGMP pharmaceutical grade semi-synthetic and
synthetic cannabinoids, cannabidiol (“CBD”), and cannabidiol-like molecules.
|
|
•
|
Topical
skin care pre-clinical program designed to some of its patented, proprietary cannabidiol-derived new chemical entities (“NCEs”),
for use as topical solutions, ointments, and creams for disorders such as diabetic neuropathies, diabetic ulcers, and for
use as an anti-pruritic. Anti-pruritics are known as anti-itch drugs and medications that inhibit the itching often associated
with a variety of disorders and diseases.
|
The
Company is primarily involved in the research and development of novel therapeutic agents for use in and as U.S. Food and Drug
Administration (“FDA”) approved ethical pharmaceuticals (available by doctor prescription); FDA Monograph topical
solutions; and Personal Care Products Council (“PCPC”) / International Nomenclature of Cosmetic Ingredients (“INCI”).
The primary focus of the Company’s research and development revolves around its patented, proprietary cannabidiol-derived
new chemical entities and cannabidiol. In preclinical testing, certain molecules under U.S. Patent 9,611,213 were screened for
neuroprotection, and may have the potential mechanism of action for reducing inflammation and neuropathic pain. These molecules
indicate that they are more soluble than cannabidiol, also deemed a neuroprotectant with potential anti-inflammatory properties.
A molecule that is potentially more water soluble than cannabidiol in this regard may be good candidate(s) for use in topical
applications.
The
Company has been the only licensee from the National Institutes of Health (“NIH”) for the licensed use of the U.S.
Government’s patent 6,630,507 – “Cannabinoids as Antioxidants and Neuroprotectants” (the “’507
Patent”) in the disease indications of hepatic encephalopathy (“HE”) and Chronic Traumatic Encephalopathy (“CTE”).
Having been the only licensee to the ‘507 Patent has given the Company an early start in the research and development of
cannabinoid therapeutics within this emerging market. The Company is the only company that has had use of the ‘507 Patent
and corresponding licenses from NIH-OTT.
The
jurisdictions in which the ‘507 Patent is valid are: the U.S., the U.K., Ireland,
the E.U., and Australia. The patent life in these jurisdictions were good until April 21, 2019.
The
Company believes that these licenses with the NIH have given the Company, through the years, the preclinical lead time to evaluate
both HE and CTE without stress of competition. The Company also believes that such advances in preclinical have led to a drug
development program regarding cannabidiol based therapeutics that focuses on neurodegenerative and oxidative stress related diseases
described in the ‘507 Patent, and also the development of the Company’s own intellectual property underlying U.S.
Patents 9,611,213 and 10,004,722.
Furthermore,
it is on the Company’s belief and knowledge that while the U.S. Government patent 6,630,507 expired on April 21, 2019, there
may be additional opportunities related to the original licensing of the ‘507 Patent in which the Company may engage with
the NIH and certain collaborators of the aforementioned patent to enter into a Cooperative Research and Development Agreement
(“CRADA”) with the NIH for one or more disease indications underlying the ‘507 Patent, including but not limited
to HE and CTE. Moreover, the weight of the Company’s future success regarding its drug development program in relation to
cannabidiol based therapeutics is not centered on the ‘507 Patent, but rather its own intellectual property underlying U.S.
Patents 9,611,213 and 10,004,722.
We
intend to study KLS-13019 in patients with chemotherapy induced neuropathic pain, and we intend to study KLS-13023 in patients
with mild traumatic brain injury.
We
believe these product candidates will provide new treatment options for patients, as well as additional treatment options for
patients not currently receiving adequate relief from current treatment regimens.
We
are still conducting pre-clinical studies and have not yet commenced our clinical program or tested KLS-13019 or KLS-13023 in
humans. For KLS-13019, we plan to conduct Phase 1, and possibly Phase 2, clinical trials in either the United States or Australia,
subject to applicable regulatory approval. We plan to conduct our Phase 1 clinical trials for KLS-13023 in either the United States
or Australia, subject to applicable regulatory approval. We plan to submit New Drug Applications (NDAs) for KLS-13019 and KLS-13023
to the FDA upon completion of all requisite clinical trials. We expect to initiate clinical trials for KLS-13019 and KLS-13023
in the first half of 2021.
We
plan to conduct our Phase 1, and possibly Phase 2, clinical trials for KLS-13019 in Australia, subject to applicable regulatory
approval, and do not expect at this time to file an investigational new drug application, or IND, with the U.S. Food and Drug
Administration, or the FDA, prior to the commencement of those clinical trials. We must file an IND with the FDA and receive approval
from the U.S. Drug Enforcement Agency, or DEA, prior to commencement of any clinical trials in the United States.
We
plan to seek orphan drug designation for KLS-13023 in Overt Hepatic Encephalopathy.
Cannabinoids
are a class of molecules derived from Cannabis plants. The two primary cannabinoids contained in Cannabis are cannabidiol, or
CBD, and D9-tetrahydrocannabinol, or THC. Clinical and preclinical data suggest that CBD has positive effects on treating refractory
epilepsy, FXS and arthritis, and THC has positive effects on treating pain. Interest in cannabinoid therapeutics has increased
significantly over the past several years as preclinical and clinical data has emerged highlighting the potential efficacy and
safety benefits of cannabinoid therapeutics. The cannabinoid therapeutics market is expected to grow significantly due to the
potential benefits these products may provide over existing therapies. In addition, KLS-13019 and KLS-13023 may potentially offer
first-line therapies to patients suffering from chemotherapy induced peripheral neuropathy and mild traumatic brain injury, respectively.
KLS-13023
is a target drug candidate that includes a synthetic CBD formulated in a gel capsule designed for potential use in humans. The
formulation of this product is proprietary and currently held as a trade secret of the Company. CBD is the primary non-psychoactive
component of Cannabis. KLS-13023 has undergone a manufacturing feasibility study to improve some of the limitations associated
with CBD, including but not limited to CBD’s low bioavailability and limited drug like properties and improvement of the
delivery of CBD through the first pass in the gut and into the circulatory system.
In
addition to KLS-13023, the Company has developed a proprietary patented new chemical entity (NCE), KLS-13019. This NCE is a cannabidiol
derived molecule which has undergone pre-clinical studies for the treatment of overt hepatic encephalopathy and chemotherapy induced
peripheral neuropathy.
In
pre-clinical studies, KLS-13019's advanced formulation is designed to improve on some of the limitations associated with CBD,
including but not limited to CBD’s low bioavailability and limited drug like properties.
These
pre-clinical studies suggest increased bioavailability, consistent plasma levels and the avoidance of first-pass liver metabolism.
In addition, an in vitro study performed by us demonstrated that CBD is degraded to THC in an acidic environment such as
the stomach.
The Company has filed for orphan designation
with the U.S. Food and Drug Administration’s (“FDA”) Office of Orphan Products Development (the “OOPD”)
for the use of CBD in the treatment of overt hepatic encephalopathy (“OHE”). The Company has received notice from the
OOPD 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 OOPD’s abeyance letter. On November 5, 2018, the OOPD has granted the Company a one year extension to
respond to the abeyance letter until November 30, 2019. On June 28, 2019, the Company sent its response to the OOPD's abeyance
letter dated November 5, 2019. On August 28, 2019, the OOPD replied with certain objections associated with the Company's request
for orphan drug designation. The OOPD has given the Company until August 28, 2020 to respond to the abeyance letter dated August
28, 2019.
KLS-13023
is a proprietary formulation containing CBD that intends to enable more effective delivery of CBD via a gel capsule. The use of
CBD in this form remains patent-protected via the ‘507 Patent through 2019. In addition, we expect that KLS-13023 will be
classified by the FDA as a new chemical entity, or NCE. In our preclinical animal studies, KLS-13023 demonstrated effective intervention
of neurodegeneration in the OHE disease state. Our key development programs and expected timelines for the development of KLS-13019
and KLS-13023 are shown in the table below:
Clinical
Timelines
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
|
|
Target
Indication
|
|
Delivery
Method
|
|
Current
Development
Status
|
|
Expected
Next Steps
|
KLS-13019
|
|
Chemotherapy
Induced
|
|
Oral
Gel Capsule
|
|
Preclinical
|
|
3Q21:
Initiate Phase 1
|
|
|
Peripheral
Neuropathy
|
|
|
|
|
|
|
|
|
Mild
Traumatic Brain Injury
|
|
Oral
Gel Capsule
|
|
Preclinical
|
|
2Q22:
Initiate Phase 1
|
|
|
|
|
|
|
|
|
|
KLS-13023
|
|
Overt
Hepatic Encephalopathy
|
|
Oral
Gel Capsule
|
|
Preclinical
|
|
1Q22:
Initiate Phase 1
|
|
|
Mild
Traumatic Brain Injury
|
|
Oral
Gel Capsule
|
|
Preclinical
|
|
3Q22:
Initiate Phase 1
|
With
respect to certain other proprietary compounds underlying U.S. Patent 9,611,213, the Company plans on pursuing topical solutions
as potential relief creams and/or ointments for neuropathic pain, anti-inflammation, anti-pruritic and skin ulcers. The Company
is considering commercialization routes that include, but are not limited to, filing and FDA Monograph and/or pursing a path to
the marketplace through INCI certification and registration with the PCPC. In preclinical testing, certain molecules under U.S.
Patent 9,611,213 were screened for neuroprotection, and may have the potential mechanism of action for reducing inflammation and
neuropathic pain. These molecules indicate that they are more soluble than cannabidiol, also deemed a neuroprotectant with potential
anti-inflammatory properties. A molecule that is potentially more water soluble than cannabidiol in this regard may be good candidate(s)
for use in topical applications.
The
Company believes it 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.
Our
net losses were $307,832 and $848,499 for the three months ended March 31, 2020 and 2019, respectively. We expect to incur losses
for the foreseeable future, and we expect these losses to increase as we continue our development of, and seek regulatory approvals
for, our product candidates. Because of the numerous risks and uncertainties associated with product development, we are unable
to predict the timing or amount of increased expenses or when, or if, we will be able to achieve or maintain profitability.
Financial
Operations Overview
The
following discussion sets forth certain components of our statements of operations as well as factors that impact those items.
Revenues
Our
revenues consist of state and federal research grants and fees received from research services for third-party product development.
These revenues are recognized when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered,
the price is fixed or determinable and collectability is reasonably assured.
Research
and Development Expenses
Our
research and development expenses consist of expenses incurred in development and preclinical studies relating to our product
candidates, including:
|
•
|
expenses
associated with preclinical development;
|
|
•
|
personnel-related
expenses, such as salaries, benefits, travel and other related expenses, including stock-based compensation;
|
|
•
|
payments
to third-party contract research organizations, or CROs, contractor laboratories and independent contractors; and
|
|
•
|
depreciation,
maintenance and other facility-related expenses.
|
We
expense all research and development costs as incurred. Preclinical development expenses for our product candidates are a significant
component of our current research and development expenses. Product candidates in later stage clinical development generally have
higher research and development expenses than those in earlier stages of development, primarily due to increased size and duration
of the clinical trials. We track and record information regarding external research and development expenses for each grant, study
or trial that we conduct. From time to time, we intend to use third-party CROs, and have used contractor laboratories and independent
contractors in preclinical studies. We recognize the expenses associated with third parties performing these services for us in
our preclinical studies based on the percentage of each study completed at the end of each reporting period.
We
expect that our research and development expenses in 2020 and for the next several years will be higher than in 2019 as a result
of the work needed for our expected initiation of our Phase 1 clinical trials of KLS-13019 and KLS-13023. These expenditures are
subject to numerous uncertainties regarding timing and cost to completion. Completion of our preclinical development and clinical
trials may take several years or more, and the length of time generally varies according to the type, complexity, novelty and
intended use of a product candidate. The cost of clinical trials may vary significantly over the life of a project as a result
of differences arising during clinical development, including, among others:
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•
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the
number of sites included in the clinical trials;
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•
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the
length of time required to enroll suitable patients;
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•
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the
size of patient populations participating in the clinical trials;
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•
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the
duration of patient follow-ups;
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•
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the
development stage of the product candidates; and
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•
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the
efficacy and safety profile of the product candidates.
|
Due
to the early stages of our research and development, we are unable to determine the duration or completion costs of our development
of KLS-13019 and KLS-13023. As a result of the difficulties of forecasting research and development costs of KLS-13019 and KLS-13023,
as well as the other uncertainties discussed above, we are unable to determine when and to what extent we will generate revenues
from the commercialization and sale of an approved product candidate.
General
and Administrative Expenses
General
and administrative expenses consist primarily of salaries, benefits and other related costs, including stock-based compensation,
for personnel serving in our executive, finance, accounting, legal and human resource functions. Our general and administrative
expenses also include facility and related costs not included in research and development expenses, professional fees for legal
services, including patent-related expenses, consulting, tax and accounting services, insurance and general corporate expenses.
We expect that our general and administrative expenses will increase with the continued development and potential commercialization
of our product candidates.
We
expect that our general and administrative expenses in 2020 and for the next several years will be higher than in 2019 as we increase
our headcount. We also anticipate increased expenses relating to our operations as a public company, including increased costs
for the hiring of additional personnel, and for payment to outside consultants, including lawyers and accountants, to comply with
additional regulations, corporate governance, internal control and similar requirements applicable to public companies, as well
as increased costs for insurance.
Interest
Income (Expense), net
Interest
expense consists of interest expense on our notes payable. Interest income consists primarily of interest earned on our money
market bank account.
Income
Taxes
As
of December 31, 2019, we had $4,248,000 of federal operating loss carryforwards. These operating loss carryforwards will begin
to expire in 2031. The Tax Reform Act of 1986, or the Act, provides for limitation on the use of net operating loss and research
and development tax credit carryforwards following certain ownership changes (as defined by the Act) that could limit our ability
to utilize these carryforwards. We may have experienced various ownership changes, as defined by the Act, as a result of past
financings. Accordingly, our ability to utilize the aforementioned carryforwards may be limited. Additionally, U.S. tax laws limit
the time during which these carryforwards may be applied against future taxes; therefore, we may not be able to take full advantage
of these carryforwards for federal income tax purposes.
The
closing of the share exchange transaction, together with private placements and other transactions that have occurred since our
inception, may trigger, or may have already triggered, an "ownership change" pursuant to Section 382 of the Internal
Revenue Code of 1986. If an ownership change is triggered, it will limit our ability to use some of our net operating loss carryforwards.
In addition, since we will need to raise substantial additional funding to finance our operations, we may undergo further ownership
changes in the future, which could further limit our ability to use net operating loss carryforwards. As a result, if we generate
taxable income, our ability to use some of our net operating loss carryforwards to offset U.S. federal taxable income may be subject
to limitations, which could result in increased future tax liability to us.
Critical
Accounting Policies and Use of Estimates
We
have based our management's discussion and analysis of financial condition and results of operations on our financial statements,
which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of
these financial statements requires us to make estimates that affect the reported amounts of assets and liabilities, and the disclosure
of contingent assets and liabilities at the date of the financial statements as well as the reported revenues and expenses during
the reporting periods. On an ongoing basis, we evaluate our estimates and judgments, including those related to preclinical development
expenses and stock-based compensation. We base our estimates on historical experience and on various other factors that we believe
to be appropriate under the circumstances. Actual results may differ from these estimates under different assumptions or conditions.
While
our significant accounting policies are more fully discussed in Note 2 to our condensed consolidated financial statements appearing
above, we believe that the following accounting policies are critical to the process of making significant judgments and estimates
in the preparation of our financial statements.
Research
and Development Expenses
We
rely on third parties to conduct our preclinical studies and to provide services, including data management, statistical analysis
and electronic compilation. Once our clinical trials begin, at the end of each reporting period, we will compare the payments
made to each service provider to the estimated progress towards completion of the related project. Factors that we will consider
in preparing these estimates include the number of patients enrolled in studies, milestones achieved and other criteria related
to the efforts of our vendors. These estimates will be subject to change as additional information becomes available. Depending
on the timing of payments to vendors and estimated services provided, we will record net prepaid or accrued expenses related to
these costs.
Fair
Value of Common Stock and Stock-Based Compensation
We
account for grants of stock options and restricted stock to employees based on their grant date fair value, and recognize compensation
expense over the vesting periods. We estimate the fair value of stock options as of the date of grant using the Black-Scholes
option pricing model, and we estimate the fair value of restricted stock based on the fair value of the underlying common stock
as determined by our board of directors or the value of the services provided, whichever is more readily determinable. We account
for stock options and restricted stock awards to non-employees using the fair value approach. Stock options and restricted stock
awards to non-employees are subject to periodic revaluation over their vesting terms.
In
the absence of a public trading market for our common stock, on each grant date, we develop an estimate of the fair value of our
common stock for the option and restricted stock grants based in part on input from an independent third-party valuation firm.
We determined the fair value of our common stock using methodologies, approaches and assumptions consistent with the AICPA Practice
Guide, Valuation of Privately-Held Company Equity Securities Issued as Compensation. In addition, our board of directors considered
various objective and subjective factors, along with input from management and an independent third-party valuation firm, to estimate
the fair value of our common stock, including external market conditions affecting the pharmaceutical industry, trends within
the pharmaceutical industry, the prices at which we sold shares of our different series of preferred stock, the superior rights
and preferences of each series of preferred stock relative to our common stock at the time of each grant, our results of operations
and financial position, the status of our research and development efforts and progress of our preclinical programs, our stage
of development and business strategy, the lack of an active public market for our common and our preferred stock, and the likelihood
of achieving a liquidity event.
Results
of Operations – For the Three Month Periods Ended March 31, 2020 and 2019
Revenues
Revenues
for the three months ended March 31, 2020, was $0 compared to $49,291 for the three months ended March 31, 2019. Our decrease
in revenue was primarily the result of a decrease of grant revenue due to reaching the maximum amount of the grant.
Research
and Development Expenses
Research
and development expenses decreased by $81,551 or 81%, to $19,727 for the three months ended March 31, 2020, from $101,278 for
the three months ended March 31, 2019. The decrease was primarily the result of decreased consulting and compensation expense
related to decreased product development activities. This is due to research done though our sub award contractor in 2019 vs none
in 2020.
General
and Administrative Expenses
General
and administrative expenses decreased by $87,079 or 19%, to $364,107 for the three months ended March 31, 2020, from $451,186
for the three months ended March 31, 2019. This decrease was due to decreased costs for outside consultants and travel expense
due to the effects of COVID-19.
Liquidity
and Capital Resources
Since
our inception in 2010, we have devoted most of our cash resources to research and development and general and administrative activities.
We have financed our operations primarily with the proceeds from the sale of preferred stock and convertible promissory notes,
state and federal grants and research services. To date, we have not generated any revenues from the sale of products, and we
do not anticipate generating any revenues from the sales of products for the foreseeable future. We have incurred losses and generated
negative cash flows from operations since inception. As of March 31, 2020, our principal sources of liquidity were our cash and
cash equivalents, which totaled $114,582. Our working capital deficit was $(1,467,407) as of March 31, 2020.
Equity
Financings
For
the three months ended March 31, 2020, and year ended December 31, 2019, we received net proceeds of $344,000 and $100,000, respectively,
from the sale of convertible notes and promissory notes.
Debt
We
had the following schedule of debt as of March 31, 2020 and December 31, 2019:
|
|
March
31,
2020
|
|
December
31,
2019
|
Outstanding
Debt Obligations:
|
|
|
|
|
|
|
|
|
Loan
payable
|
|
$
|
620,000
|
|
|
$
|
620,000
|
|
Loan
payable - related party
|
|
|
42,092
|
|
|
|
42,092
|
|
Convertible
notes payable
|
|
|
408,427
|
|
|
|
378,839
|
|
Convertible
notes payable – related party
|
|
|
14,521
|
|
|
|
—
|
|
Capital
lease obligations
|
|
|
33,496
|
|
|
|
35,297
|
|
Total
All Debt Obligations
|
|
$
|
1,118,536
|
|
|
$
|
1,076,228
|
|
Future
Capital Requirements
The
Company is currently raising capital and we anticipate raising funds sufficient to commence 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.
Furthermore,
it is difficult to predict our spending for our product candidates prior to obtaining FDA approval. Moreover, changing circumstances
may cause us to expend cash significantly faster than we currently anticipate, and we may need to spend more cash than currently
expected because of circumstances beyond our control.
Our
expectations regarding future cash requirements do not reflect the potential impact of any future acquisitions, mergers, dispositions,
joint ventures or investments that we make in the future. We have no current understandings, agreements or commitments for any
material acquisitions or licenses of any products, businesses or technologies. We may need to raise substantial additional capital
in order to engage in any of these types of transactions.
We
expect to continue to incur substantial additional operating losses for at least the next several years as we continue to develop
our product candidates and seek marketing approval and, subject to obtaining such approval, the eventual commercialization of
our product candidates. If we obtain marketing approval for either of our product candidates, we will incur significant sales,
marketing and outsourced manufacturing expenses. In addition, we expect to incur additional expenses to add operational, financial
and information systems and personnel, including personnel to support our planned product commercialization efforts. We also expect
to incur significant costs to comply with corporate governance, internal controls and similar requirements applicable to us as
a public company.
Our
future use of operating cash and capital requirements will depend on many forward-looking factors, including the following:
|
•
|
the
initiation, progress, timing, costs and results of preclinical studies and clinical trials for our product candidates;
|
|
•
|
the
clinical development plans we establish for these product candidates;
|
|
•
|
the
number and characteristics of product candidates that we develop or may in-license;
|
|
•
|
the
terms of any collaboration agreements we may choose to execute;
|
|
•
|
the
outcome, timing and cost of meeting regulatory requirements established by the DEA, the FDA, the EMA or other comparable foreign
regulatory authorities;
|
|
•
|
the
cost of filing, prosecuting, defending and enforcing our patent claims and other intellectual property rights;
|
|
•
|
the
cost of defending intellectual property disputes, including patent infringement actions brought by third parties against us;
|
|
•
|
costs
and timing of the implementation of commercial scale manufacturing activities; and
|
|
•
|
the
cost of establishing, or outsourcing, sales, marketing and distribution capabilities for any product candidates for which
we may receive regulatory approval in regions where we choose to commercialize our products on our own.
|
To
the extent that our capital resources are insufficient to meet our future operating and capital requirements, we will need to
finance our cash needs through public or private equity offerings, debt financings, collaboration and licensing arrangements or
other financing alternatives. We have no committed external sources of funds. Additional equity or debt financing or collaboration
and licensing arrangements may not be available on acceptable terms, if at all.
If
we raise additional funds by issuing equity securities, our stockholders will experience dilution. Debt financing, if available,
would result in increased fixed payment obligations and may involve agreements that include covenants limiting or restricting
our ability to take specific actions, such as incurring additional debt, making capital expenditures or declaring dividends. Any
debt financing or additional equity that we raise may contain terms, such as liquidation and other preferences that are not favorable
to us or our stockholders. If we raise additional funds through collaboration and licensing arrangements with third parties, it
may be necessary to relinquish valuable rights to our technologies, future revenue streams or product candidates or to grant licenses
on terms that may not be favorable to us.
Cash
Flows
The
following table summarizes our cash flows from operating, investing and financing activities for the three months ended March
31, 2020, and 2019.
|
|
Three
Months Ended
March
31,
|
|
|
2020
|
|
2019
|
Statement
of Cash Flows Data:
|
|
|
|
|
Total
net cash provided by (used in):
|
|
|
|
|
|
|
|
|
Operating
activities
|
|
$
|
(349,072
|
)
|
|
$
|
(473,259
|
)
|
Investing
activities
|
|
|
—
|
|
|
|
725,294
|
|
Financing
activities
|
|
|
342,199
|
|
|
|
97
|
|
(Decrease)
Increase in cash
|
|
$
|
(6,873
|
)
|
|
$
|
252,132
|
|
Operating
Activities
Net
cash used in operating activities for the three months ended March 31, 2020 was $349,072, including $93,418 of net non-cash expenses
and a $52,178 net change in operating assets and liabilities. The net noncash expenses were predominantly related to the non-cash
interest expense of $149,604, amortization of debt discount of $44,109 and change in fair value of derivative liabilities of ($291,165).
The change in operating assets and liabilities was primarily due to a $(5,036) decrease in accounts payable and accrued expenses,
a $30,302 increase in payroll and related liabilities and a $23,912 increase in due to related party.
Net
cash used in operating activities for the three months ended March 31, 2019 was $473,259, including $332,017 of net non-cash expenses
and a $43,223 net change in operating assets and liabilities. The net noncash expenses were predominantly related to the net gains
and losses on marketable security of $329,346. The change in operating assets and liabilities was primarily due to a $50,000 increase
on other receivables and a $14,641 decrease in accounts payable and accrued expenses.
Investing
Activities
Net
cash provided by investing activities for the three months ended March 31, 2020 was $0.
Cash
provided by investing activities from the cash received from the sale of marketable securities was $725,2940 for the three
months ended March 31, 2019.
Financing
Activities
For
the three months ended March 31, 2020, cash provided by financing activities was $342,199 compared to $97 for the three months
ended March 31, 2019. This was due to a significant increase of proceeds from convertible notes payable in 2020 from 2019.
Off-Balance
Sheet Arrangements
We
do not have any off-balance sheet arrangements, except for operating leases, or relationships with unconsolidated entities or
financial partnerships, such as entities often referred to as structured finance or special purpose entities.
Recent
Accounting Pronouncements
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 condensed consolidated financial statements.
Item
3. Quantitative and Qualitative Disclosures About Market Risk.
Not
applicable.
Item
4. Controls and Procedures.
Disclosure
controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed
in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods
specified in the SEC’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures
designed to ensure that information required to be disclosed in our reports filed under the Exchange Act is accumulated and communicated
to management, including our principal executive officer and principal financial officer, as appropriate, to allow timely decisions
regarding required disclosure.
Management’s
Report on Internal Control over Financial Reporting
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting, as such term is
defined in Exchange Act Rules 13a-15(e) and 15d-15(e). Our internal control over financial reporting includes those policies and
procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions
and dispositions of the assets; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures are being
made only in accordance with authorizations of management and directors; and (iii) provide reasonable assurance regarding prevention
or timely detection of unauthorized acquisition, use, or disposition of our assets that could have a material effect on the financial
statements.
Under
the supervision and with the participation of management, including our chief executive officer and chief financial officer, we
conducted an evaluation of the effectiveness of our internal controls over financial reporting based on the framework in “Internal
Control Framework” issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based upon this evaluation,
management has concluded that our internal control over financial reporting was ineffective as of March 31, 2020, to ensure that
information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in SEC rules and forms. Our reporting was ineffective due to a lack of sufficient
resources to hire a support staff in order to separate duties between different individuals. The Company lacks the appropriate
personnel to handle all the varying recording and reporting tasks on a timely basis. Steps that the Company believes it must undertake
is to retain a consulting firm to, among other things, design and implement adequate systems of accounting and financial statement
disclosure controls during the current fiscal year to comply with the requirements of the SEC. We believe that the ultimate success
of our plan to improve our disclosure controls and procedures will require a combination of additional financial resources, outside
consulting services, legal advice, additional personnel, further reallocation of responsibility among various persons, and substantial
additional training of those of our officers, personnel and others, including certain of our directors such as our committee chairs,
who are charged with implementing and/or carrying out our plan.
Our
management is responsible for establishing and maintaining adequate internal control over financial reporting as required in Rule
13a-15(b). We are conducting an evaluation to design and implement adequate systems of accounting and financial statement disclosure
controls. We expect to complete this review during 2020 to comply with the requirement of the SEC. We believe that the ultimate
success of our plan to improve our internal control over financial reporting will require a combination of additional financial
resources, outside consulting services, legal advice, additional personnel, further reallocation of responsibility among various
persons, and substantial additional training of our officers, personnel and others, including certain of our directors such as
our Chairman of the Board and Chief Financial Officer, who are charged with implementing and/or carrying out our plan. It should
also be noted that the design of any system of controls and procedures is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential
future conditions, regardless of how remote.
Our
management, including our chief executive officer and chief financial officer, does not expect that our disclosure controls or
our internal control over financial reporting, or any system we design or implement in the future, will prevent or detect all
errors and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance
that the control system’s objectives will be met. The design of any system of controls is based in part on certain assumptions
about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals
under all potential future conditions.
Changes
in Internal Control
There
have not been any changes in our internal control over financial reporting during the three month period ended March 31, 2020,
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.