You should read the following discussion and analysis of our financial condition
and operating results together with our consolidated financial statements and
related notes included elsewhere in this Annual Report on Form 10-K. This
discussion and analysis and other parts of this Annual Report on Form 10-K
contain forward-looking statements based upon current beliefs, plans and
expectations that involve risks, uncertainties and assumptions. Our actual
results may differ materially from those anticipated in these forward-looking
statements as a result of various factors, including those set forth under "Risk
Factors" or in other parts of this annual report. The last day of our fiscal
year is
Business Developments
The Company was originally incorporated in the
On
On
On
Business Overview
As a result of the Share Exchange, our core businesses are comprised of the following:
º A drug development company focused on the research and development (R&D) of synthetic and phyto-medical products from: º naturally recurring sources, including but not limited to cannabis, hemp, and other similar species of plantae; º semi-synthetic sources; and º synthetic and bio-synthetic sources. • Drug discovery platform to evaluate and potentially treat neurological and oxidative stress related disorders such as OHE, CTE and CIPN with high quality assured, quality controlled cGMP pharmaceutical grade semi-synthetic and synthetic cannabinoids, CBD, and CBD-like molecules. • Topical skincare pre-clinical program designed to some of our patented, proprietary CBD-derived 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. 69
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 to KLS-13019 and KLS-13023 potentially offering first-line therapies to patients suffering from chemotherapy induced peripheral neuropathy and mild traumatic brain injury, respectively.
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. However, KLS-13019 has not been reviewed or approved for patient use by the FDA or any other healthcare authority in the world. Our 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.
In the past three years, our most recent research and development efforts have been centered on the use of KLS-13019 as a neuroprotectant and therapeutic agent to treat chronic and neuropathic pain. There is currently no FDA approved drug to treat CIPN. Our preclinical efforts in the research and development of treating CIPN with our lead compound KLS-13019 have been fostered by a successful study grant from NIH-NIDA that compared KLS-13019 to CBD in the prevention and reversal of neuropathic pain in animal models. As a result of the outcome of this and other preclinical studies, we believe there is strong evidence to support the use of KLS-13019 as a non-opioid solution to chronic and neuropathic pain in human clinical trials.
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 that 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).
To date, we have synthesized, pre-clinically tested and patented our proprietary CBD like NCEs, including KLS-13019, and also formulated a new CBD based molecule, KLS-13023. KLS-13023 is a target drug candidate that includes a synthetic CBD formulated in a gel capsule designed for potential use in humans, which is intended to enable more effective delivery of CBD. 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 our preclinical animal studies, KLS-13023 demonstrated effective intervention of neurodegeneration in the OHE disease state. We intend to study KLS-13023 in patients with mild traumatic brain injury. In addition, we expect that KLS-13023 will be classified by the FDA as an NCE. In our preclinical animal studies, KLS-13023 demonstrated effective intervention of neurodegeneration in the OHE disease state.
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
We plan to conduct our Phase 1, and possibly Phase 2, clinical trials for
KLS-13019 in the
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Pharmacokinetic and Pharmacodynamic Comparison Between KLS-13019 and CBD
Results from PK and 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).
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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.
Treatment with KLS-13019 alone, however, 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. Based on these results, amongst other things, we believe that KLS-13019 may provide an alternative to CBD as a therapeutic candidate to treat disease associated with oxidative stress.
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As previously noted, comparisons between CBD and KLS-13019 have been published
in peer reviewed articles in ACS Medicinal Chemistry Letters (2016, 7, 424-428)
and
Additional follow on studies recently published on
71
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 to be 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. 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/
Clinical Timelines
As a result of the unprecedented effects of COVID-19, we have updated our clinical timelines to give effect to the significant interruption to business and financial operations worldwide as a result of the COVID-19 crisis. We will continue to monitor the progress of the shutdowns currently in effect, and revise our clinical timelines accordingly.
Current Product Target Development Expected Candidate Indication Delivery Method Status Next Steps KLS-13019 Chemotherapy Oral Gel Capsule Preclinical 2Q22: Induced Initiate Phase 1 Peripheral Neuropathy Mild Traumatic Oral Gel Capsule Preclinical 1Q23: Brain Injury Initiate Phase 1 KLS-13023 Overt Hepatic Oral Gel Capsule Preclinical 4Q22: Encephalopathy Initiate Phase 1 Mild Traumatic Oral Gel Capsule Preclinical 1Q23: Brain Injury Initiate Phase 1
With respect to certain other proprietary compounds underlying Pat. 9,611,213, we plan on pursuing topical solutions as potential relief creams and/or ointments for neuropathic pain, anti-inflammation, anti-pruritic and skin ulcers. We are 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 CBD, also deemed a neuroprotectant with potential anti-inflammatory properties. A molecule that is potentially more water soluble than CBD in this regard may be good candidate(s) for use in topical applications.
We believe that we will be able to raise 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. We plan on entering into clinical trials sometime in the third quarter 2021.
Additionally, we believe that we will be able to raise 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. We plan on entering into clinical trials sometime in the first quarter 2022.
We intend to seek additional capital to proceed with our business plan regarding additional drug pipeline opportunities.
72
Components of Results of Operations
For the year ended
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 incurred research and development expenses of
We expect that our research and development expenses in 2021 and for the next several years will be higher than in 2020 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:
• the number of sites included in the clinical trials;
• the length of time required to enroll suitable patients;
• the size of patient populations participating in the clinical trials;
• the duration of patient follow-ups;
• the development stage of the product candidates; and
• the efficacy and safety profile of the product candidates.
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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 2021 and for the next several years will be higher than in 2020 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 income consists primarily of interest earned on our money market bank account. Interest expense consists of interest expense on our notes payable.
Income Taxes
As of
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
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 consolidated financial statements, which have
been prepared in accordance with accounting principles generally accepted in
While our significant accounting policies are more fully discussed in note 2 to our audited consolidated financial statements appearing at the end of this annual report, we believe that the following accounting policies are critical to the process of making significant judgments and estimates in the preparation of our consolidated financial statements.
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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.
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.
Results of Operations
Comparison of the Years Ended
Revenues
Revenues for the year ended
75
Research and Development Expenses
Research and development expenses increased by
General and Administrative Expenses
General and administrative expenses increased by
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
Our sources of liquidity and cash flows are used to fund ongoing operations and research and development projects for our product candidates. In addition, as part of our business strategy, we occasionally evaluate potential acquisitions of businesses, products and technologies, and minority equity investments. Accordingly, a portion of our available cash may be used at any time for the acquisition of complementary products or businesses or minority equity investments. Such potential transactions may require substantial capital resources, which may require us to seek additional debt or equity financing. We cannot assure you that we will be able to successfully identify suitable acquisition or investment candidates, complete acquisitions or investments, integrate acquired businesses into our current operations, or expand into new markets. Furthermore, we cannot provide assurances that additional financing will be available to us in any required time frame and on commercially reasonable terms, if at all.
76 Future Capital Requirements
We have not yet achieved profitability and anticipate that we will continue to incur net losses for the foreseeable future. As discussed in further detail below, we expect that our expenses will continue to grow and, as a result, we will need to generate significant product revenues to achieve profitability. We may never achieve profitability. As such, we are dependent on obtaining, and are continuing to pursue, the necessary funding from outside sources, including obtaining additional funding from the sale of securities in order to continue our operations. Without adequate funding, we may not be able to meet our obligations. We believe these conditions raise substantial doubt about our ability to continue as a going concern.
We are 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
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, without limitation, 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. 77
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 years ended
Years Ended December 31, 2020 2019 Statement of Cash Flows Data: Total net cash provided by (used in): Operating activities$ (944,198 ) $ (1,894,085 ) Investing activities - 1,567,218 Financing activities 844,617 141,191 Decrease in cash$ (99,581 ) $ (185,676 ) Operating Activities
Net cash used in operating activities for the year ended
Net cash used in operating activities for the year ended
Investing Activities
There were no investing activities for the year ended
Net cash provided by investing activities for the year ended
78 Financing Activities
For the year ended
Inflation
We have not been affected materially by inflation during the periods presented, and no material effect is expected in the near future.
Known Trends or Uncertainties
We have seen some consolidation in our industry during economic downturns. These consolidations have not had a negative effect on us to date; however, should consolidations and downsizing in the industry continue to occur, those events could adversely impact our future revenues and earnings, if any.
As discussed in this Annual Report on Form 10-K, the world has been affected due to the COVID-19 pandemic. Until the pandemic has passed, there remains uncertainty as to the effect of COVID-19 on our business in both the short and long-term.
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
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