Claritas Pharmaceuticals Inc V.KLY

MD&A....

[Maui527]

KALYTERA THERAPEUTICS, INC. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS As of September 30, 2020 For the year ended December 31, 2019 This management discussion and analysis (“MD&A”) of Kalytera Therapeutics, Inc. (the “Company” or “Kalytera”) is for the year ended December 31, 2019 and is performed by management using information available as of September 30, 2020. Kalytera has prepared this MD&A with reference to National Instrument 51-102 “Continuous Disclosure Obligations” of the Canadian Securities Administrators. This MD&A should be read in conjunction with the Company’s audited financial statements for the year ended December 31, 2019 and the related notes thereto (“Annual Financial Statements”). The Company’s Annual Financial Statements are prepared in accordance with International Financial Reporting Standards (“IFRS”) As issued by the International Accounting Standards Board ("IASB"). All amounts are expressed in United States dollars unless otherwise indicated. This MD&A contains certain “forward-looking statements” and certain “forward-looking information” as defined under applicable Canadian securities laws that may not be based on historical fact, including, without limitation, statements containing the words “believe”, “may”, “plan”, “will”, “estimate”, “continue”, “anticipate”, “intend”, “expect” and similar expressions. Forward-looking statements are necessarily based on estimates and assumptions made by us in light of Kalytera’s experience and perception of historical trends, current conditions and expected future developments, as well as the factors Kalytera believes are appropriate. Forward-looking statements in this MD&A include but are not limited to statements relating to: • the initiation, timing, cost, progress and success of Kalytera’s research and development programs, pre-clinical studies and clinical trials; • Kalytera’s ability to advance product candidates into, and successfully complete, clinical trials; • Kalytera’s ability to recruit sufficient numbers of patients for Kalytera’s future clinical trials; • Kalytera’s ability to achieve profitability; • Kalytera’s ability to obtain sufficient funding for Kalytera’s operations, including funding for research and commercial activities; • Kalytera’s ability to establish and maintain relationships with collaborators with acceptable development, regulatory and commercialization expertise and the benefits to be derived from such collaborative efforts; • whether Kalytera’s third party collaborators will maintain their intellectual property rights in the technology Kalytera licenses; • the implementation of Kalytera’s business model and strategic plans; • Kalytera’s ability to develop and commercialize product candidates; • Kalytera’s anticipated regulatory submissions and commercial activities; • Kalytera’s estimates of the size and characteristics of the potential markets for its product candidates; • Kalytera’s commercialization, marketing and manufacturing capabilities and strategy; 39161-2001 27553992.1 - 2 - • Kalytera’s ability to protect its intellectual property and operate its business without infringing upon the intellectual property rights of others; • Kalytera’s expectations regarding federal, provincial and foreign regulatory requirements; • whether the Company will receive, and the timing and costs of obtaining, regulatory approvals in the U.S., Canada, the European Union and other jurisdictions; • the therapeutic benefits, effectiveness and safety of Kalytera’s product candidates; • the rate and degree of market acceptance and clinical utility of Kalytera’s future products, if any; • the timing of, and Kalytera’s ability and its collaborators’ ability, if any, to obtain and maintain regulatory approvals for its product candidates; • Kalytera’s expectations regarding market risk, including interest rate changes and foreign currency fluctuations; • Kalytera’s ability to engage and retain the employees required to grow its business; • the compensation that is expected to be paid to employees of the Company; • Kalytera’s future financial performance and projected expenditures; • developments relating to Kalytera’s competitors and its industry, including the success of competing therapies that are or may become available; and • estimates of Kalytera’s expenses, future revenue, capital requirements and its needs for additional financing. • Kalytera’s ability to continue as a going concern. Such statements reflect Kalytera’s current views with respect to future events and are subject to risks and uncertainties and are necessarily based upon a number of estimates and assumptions that, while considered reasonable by Kalytera, are inherently subject to significant business, economic, competitive, political and social uncertainties and contingencies. Many factors could cause Kalytera’s actual results, performance or achievements to be materially different from any future results, performance, or achievements that may be expressed or implied by such forward-looking statements. In making the forward looking statements included in this MD&A, the Company has made various material assumptions, including, but not limited to: (i) enrollment in, completion of and obtaining positive results from clinical trials; (ii) obtaining regulatory approvals; (iii) general business and economic conditions; (iv) the Company’s ability to develop and commercialize, or otherwise monetize, its product candidates and inlicense and develop new products; (v) the assumption that Kalytera’s current good relationships with its collaborators, licensors and other third parties will be maintained; (vi) the availability of financing on reasonable terms; (vii) the Company’s ability to attract and retain skilled staff; (viii) the products and technology offered by the Company’s competitors; and (ix) the Company’s ability to protect patents and proprietary rights. In evaluating forward-looking statements, current and prospective shareholders should specifically consider various factors, including the risks outlined under the heading “Financial Instruments and Risks” and under the heading “Risk Factors” in the Company’s 2019 Annual Information Form (“2019 AIF”) filed on SEDAR (www.sedar.com). Should one or more of these risks or uncertainties, or a risk that is not currently known to us materializes, or should assumptions underlying those forward-looking statements prove incorrect, actual results may vary materially from those described herein. These forward-looking statements are made as of the date of this MD&A, and Kalytera does not intend, and does not assume any obligation, to update these forward-looking statements, except as required by applicable securities laws. Investors are cautioned that forward-looking statements are not guarantees of future 39161-2001 27553992.1 - 3 - performance and are inherently uncertain. Accordingly, investors are cautioned not to put undue reliance on forward-looking statements. OVERVIEW OF THE COMPANY Kalytera is a clinical-stage specialty pharmaceutical company developing a portfolio of pharmaceutical products. Kalytera currently has no product candidate that has received regulatory approval. Lead Program in Prevention and Treatment of Graft Versus Host Disease As of December 31, 2019, Kalytera’s lead clinical-stage program was evaluating cannabidiol (“CBD”) formulations for both treatment and prevention of acute graft versus host disease (“GVHD”). Kalytera’s GVHD program was acquired through Kalytera’s acquisition of Talent Biotechs Ltd. (“Talent”), a privately held entity organized under the laws of Israel and a developer of CBD therapeutics, as announced on February 16, 2017. Kalytera, through its wholly-owned subsidiary Talent, has the right to pursue the commercialization and development of CBD for the prevention and treatment of GVHD as the licensee under the world-wide exclusive Materials License agreement (the “Mor License”).. Kalytera conducted a Phase II, open label, multicenter clinical study to evaluate the safety, pharmacokinetics, pharmacodynamics, efficacy and dose ranging of CBD for the prevention of GVHD following bone marrow transplantation procedures (the “GVHD Prevention Study”). Patients enrolled in this clinical study were administered CBD at doses of 75 and 150 mg twice daily beginning 7 days prior to their bone marrow transplant procedure, and for up to 98 days after such transplant procedure. The study enrolled a total of 23 patients. As announced on August 19, 2019, due to the favourable interim results obtained in the GVHD Prevention Study at the 75 mg and 150 mg doses, Kalytera did not proceed with the previously planned additional 12 patient cohort that would have received a 300 mg dose twice daily. The study was conducted at four sites in Israel. To obtain regulatory approval in the United States and successfully commercialize CBD for the treatment of acute grade 3 and grade 4 GVHD, or for the prevention of acute grades 2-4 GVHD, it will be necessary to complete at least one Phase 2-3 pivotal registration study in each of these indications. These pivotal registration studies would take approximately 18 - 24 months to complete. Prior to the initiation of a pivotal registration study in prevention of GVHD, the U.S. FDA would also require completion of a study in healthy volunteers to assess the effect of food intake on the absorption of oral CBD. This study is intended to evaluate the effect of food on the pharmacokinetics of CBD, along with robust ECG monitoring in 32 healthy volunteers, and was conducted at a single site in Melbourne, Australia (the “Food Effect Study”). The Food Effect Study has been completed by the Company, as announced on July 16, 2019. The FDA will also 39161-2001 27553992.1 - 4 - require the Company to complete, prior to the initiation of a pivotal registration study, a drugdrug interaction study that will measure the effect of certain anti-fungal drugs upon metabolism of CBD, and this study is also expected to be conducted at a single site in Melbourne, Australia (the “Drug Interaction Study”). The estimated remaining costs to substantially complete the Drug Interaction Study are approximately $1.1 million. Following the completion of the Food Effect Study and the Drug Interaction Study, it would be necessary to complete a Phase 3 pivotal registration study for use of CBD in prevention of GVHD before the U.S. FDA will accept a New Drug Applications (“NDA”) for the approval of CBD in the prevention of GVHD.. The cost of this Phase 3 pivotal registration study in the prevention of GVHD is expected to be at least approximately $10 million. The Company does not have sufficient resources to fund the approximate $1.1 million cost of the Drug Interaction Study and the approximate $10 million cost of a Phase 3 pivotal registration study. In May 2019, the Company engaged Echelon Wealth Partners (“Echelon”) to assist with the review of potential out-licensing and divestment opportunities for the commercial rights to the its program evaluating CBD in the prevention and treatment of GVHD. In conjunction with Echelon, Kalytera engaged in an extensive effort to out-license or sell. Kalytera reached out to several dozen companies in the pharmaceutical and cannabis industries, and engaged in negotiations with several potential corporate partners, but did not receive an acceptable offer for either a license or sale of the program. The Company is continuing its efforts to either out-license or sell its program evaluating CBD in the prevention and treatment of GVHD, and is currently engaged in discussions regarding a potential sale of the GVHD program. However, there is no assurance that the Company will have success in these efforts. Status of Debt Owed to Former Shareholders of Talent Biotechs, Ltd. Kalytera’s wholly owned subsidiary, Kalytera Therapeutics Israel, Ltd. (“Kalytera Israel”) acquired Talent Biotechs Ltd. (“Talent”) in 2017 from the former shareholders of Talent (the “Former Shareholders”), under the terms of a share purchase agreement (the “SPA”) between Kalytera, Kalytera Israel, Talent and the Former Shareholders. Under the terms of the SPA, Kalytera Israel is obligated to make certain milestone payments (the “Milestone Payments”) to the Former Shareholders. Kalytera Israel failed to pay certain Milestone Payments when they became due under the SPA, and issued a promissory note (the “Note”) in favor of the Former Shareholders evidencing such debt. Kalytera Israel is obligated to pay approximately $3 million to the Former Shareholders under the terms of the Note. Kalytera Israel is in default under the terms of the SPA and the Note, and has received a formal notice of default from the representative of the Former Shareholders. The obligations of Kalytera Israel under the Note are guaranteed by Talent, and both Kalytera Israel and Talent 39161-2001 27553992.1 - 5 - are parties to a Security Agreement, under which they have secured their obligations under the Note by pledging certain assets to the Former Shareholders as security for the Note (the “Pledged Assets’). The Pledged Assets are the assets of the Company’s program evaluating CBD in the prevention and treatment of GVHD. The Pledged Assets are both tangible and intangible assets, consisting primarily of tangible assets, such as patient blood samples, and intangible assets, such as contract rights, clinical and preclinical data, know how, and intellectual property rights that are held under a license agreement between MOR Research Applications, Ltd. and Talent. The Pledged Assets also include all shares of the Company’s two subsidiaries, Kalytera Israel and Talent. The Company and the representative of the Former Shareholders are in discussions regarding a contemplated agreement under which Kalytera Israel will transfer ownership of all Pledged Assets, other than the shares of Kalytera Israel, to the Former Shareholders in consideration for the release and discharge by the Former Shareholders of all obligations the Company and its subsidiaries may have to such Former Shareholders, including all obligations under the Note and SPA. If the Company does not complete an out-license or sale of its GVHD program prior to the Company’s next annual meeting of shareholders, the Company and the representative of the Former Shareholders will enter into the Agreement subject to approval by the Company’s shareholders and the TSXV as applicable. The Company will schedule an annual meeting of shareholders at which it will seek such approval. The Company anticipates that it will schedule such annual meeting of shareholders in November 2020. Product Development Program in Treatment of Acute and Chronic Pain Kalytera is also developing a novel, proprietary CBD analogue for the treatment of acute and chronic pain. A provisional U.S. patent application for this compound is pending, and Kalytera had obtained an exclusive, worldwide license for this compound from Beetlebung Pharma, Ltd. (“BPL”), an affiliate of the Salzman Group. However, this program has not advanced beyond the preclinical research stage, and in order to conserve cash and eliminate expenses as required by certain arrangements entered into with the former shareholders of Talent in November 2019, Kalytera has placed this program on hold. Corporate Developments during the Fiscal Year Ended December 31, 2019 On January 14, 2019, the Company announced that it had elected to issue 9,387,831 Common Shares of the Company to The Salzman Group in payment of invoices issued under the payments agreement with The Salzman Group previously announced on December 7, 2017 (the “December 2017 Agreement”), and the additional payments agreement announced on June 15, 2018 which expired on March 1, 2019 (the “June 2018 Agreement”, and together with the December 2017 Agreement, the “Salzman Payments Agreements”). The Common Shares were issued at a deemed issue price of CDN$0.081 per Common Share as payment of invoiced amounts of USD$573,508 at a 10% discount from the price of the Company’s Common Shares 39161-2001 27553992.1 - 6 - based on the closing price of the Common Shares on the trading day prior to the Company’s election to pay the debt in Common Shares. On January 15, 2019, the Company announced the closing of a private placement (the “January 15 Private Placement”) of units of the Company at an issue price of CDN$0.0525 per unit (consisting of one Common Share and one Common Share purchase warrant) for aggregate gross proceeds of CDN$605,430. The units issued in the January 15 Private Placement consisted of an aggregate of 11,532,000 Common Shares and 11,532,000 Common Share purchase warrants, with each warrant being exercisable for one Common Share at an exercise price of CDN$0.07 per Common Share. Alere Financial Partners (“Alere”) acted as agent for the Company and was paid a cash commission in the amount of CDN$48,434, and was issued an aggregate of 922,560 Common Share purchase warrants, each exercisable for one Common Share at an exercise price of CDN$0.07 per Common Share. The net proceeds of the January 15 Private Placement were used for working capital and general corporate purposes. On January 22, 2019, the Company announced the closing of a private placement (the “January 22 Private Placement”), and together with the January 15 Private Placement, the “January 2019 Private Placements”) of units of the Company (with each unit consisting of one Common Share and one Common Share purchase warrant) at an issue price of CDN$0.075 per unit for gross proceeds of CDN$266,893. The units consisted of an aggregate of 3,558,573 Common Shares and 3,558,573 Common Share purchase warrants, with each warrant being exercisable for one Common Share at an exercise price of CDN$0.10 per Common Share. Alere acted as agent for the Company and was paid a cash commission in the amount of CDN$16,851 and was issued an aggregate of 204,687 Common Share purchase warrants, exercisable for one Common Share at an exercise price of CDN$0.10 per Common Share. The net proceeds of the January 22 Private Placement were used for working capital and general corporate purposes. On January 25, 2019, the Company granted 5,004,728 stock options to certain directors and employees of the Company. The stock options have an exercise price of CDN$0.085 per Common share and expire ten years from the date of grant. One third of the options granted will vest on January 25, 2020 and the remaining options will vest in twenty-four (24) equal monthly installments commencing February 2020. On January 31, 2019, the Company announced that the Company had elected to issue 13,085,677 Common Shares to The Salzman Group in payment of invoices issued under the Salzman Payments Agreements, which were also amended to expand the scope of services thereunder to include, among other things, services relating to the Food Effect Study and the Drug Interaction Study. The Common Shares were issued at a deemed issue price of CDN$0.072 per Common Share as payment of invoiced amounts of USD$714,197 at a 10% discount from the price of the Company’s Common Shares based on the closing price of the Common Shares on the trading day prior to the Company’s election to pay the debt in Common Shares. On February 5, 2019, the Company announced additional positive interim data from the GVHD Prevention Study, indicating that, during the 6 weeks following Kalytera’s December 20, 2018 announcement of interim results of the GVHD Prevention Study, no additional patients have developed GVHD of any grade. These positive interim results led the data safety monitoring 39161-2001 27553992.1 - 7 - board, an independent group of physicians with expertise in GVHD, to approve dose escalation for a second 12-patient cohort at a dosage level twice that administered to patients in the first 12- pateint cohort. On February 8, 2019, Kalytera completed certain transactions that were contemplated by the arrangements reached with the former shareholders of Talent (the “Talent Sellers”) on terms that were previously announced in August 2018. As described above, a promissory note bearing interest at the rate of 8% per annum was issued with an effective date of August 8, 2018, which evidences the milestone payments that remain due to the Talent Sellers in the principal amount of $1,988,620 . This promissory note was issued by a subsidiary of the Company and is secured by the rights of Talent as licensee under its exclusive license agreement with Mor. This promissory note matured on July 31, 2019. In connection with the deferral arrangement with the former Talent shareholders discussed above, the Talent Sellers also became entitled to an additional payment in the amount of CDN$1,038,218.73 (the “Deferral Amount”). Further to the agreement announced by the Company in August 2018, the Deferral Amount owing to the Talent Sellers was extinguished through the issuance of 9,438,352 units bearing the same terms as the August Units issued in the Company’s August Offering. The units are subject to a four month hold period. On February 26, 2019, the Company announced that the Company has elected to issue 15,262,540 Common Shares to The Salzman Group in payment of invoices issued under the Salzman Payments Agreements. The Common Shares were issued at a deemed issue price of CDN$0.063 per Common Share as payment of invoiced amounts of USD$729,877 at a 10% discount from the price of the Company’s Common Shares based on the closing price of the Common Shares on the trading day prior to the Company’s election to pay the debt in Common Shares. On March 6, 2019, Kalytera announced that it had initiated the Food Effect Study. On March 6, 2019 the Company closed a non-brokered private placement (the “March Offering”) under which it sold CDN$787,500 aggregate principal amount of convertible debenture units for an aggregate purchase price of CDN$750,000 (representing an original issue discount equal to 5% of the purchase price). The convertible debenture units consist of an aggregate of CDN$787,500 principal amount of 10.0% secured convertible debentures maturing March 5, 2021 (the “March 2019 Convertible Debentures”) and an aggregate of 12,115,384 common share purchase warrants (each, a “March Warrant”). The March 2019 Convertible Debentures will mature on March 6, 2021 and will be guaranteed by the Company’s material subsidiaries, and such guarantee obligations will be secured by substantially all of the assets of such subsidiaries. The March 2019 Convertible Debentures are convertible at the option of the holder into Common Shares of the Company at any time prior to the close of business on the earlier of the third business day prior to the Maturity Date and the third business day prior to any date fixed for redemption or repayment of the Convertible Debentures, at a conversion price of (i) CDN$0.065 per Common Share for the first twelve (12) month period following the closing date of the March Offering and (ii) CDN$0.10 per Common Share for the second twelve (12) month period following the closing date of the March Offering, in each case subject to customary adjustments in certain events. Each March 2019 Warrant is exercisable to acquire one Common Share at an exercise price of CDN$0.065 per Common Share for a period of two years following 39161-2001 27553992.1 - 8 - the closing date of the March Offering, subject to customary adjustments in certain events and, provided that if, at any time following the date that is four months following the closing date of the March Offering, the volume weighted average trading price of the Common Shares equals or exceeds CDN$0.13 for a period of 20 consecutive trading days, the Company may, on prior written notice, accelerate the expiry date of the March 2019 Warrants to the date that is 20 business days from the date of such notice. The March 2019 Convertible Debentures and the March 2019 Warrants constituting the convertible debenture units and any Common Shares issuable upon conversion or exercise thereof, as applicable, will be subject to a statutory hold period until July 7, 2019. On April 26, 2019, the Company announced the closing of the first tranche of a public offering (the “April/May Offering”) of units of Kalytera (“April/May Units”) for aggregate gross proceeds of CDN$6,758,300. Each April/May Unit consists of one Common Share of Kalytera and one Common Share purchase warrant (an “April/May Warrant”). Echelon and Paradigm Capital Inc. acted as agents for and on behalf of Kalytera in connection with the April/May Offering. The April/May Offering was made by way of a short form prospectus in British Columbia, Alberta and Ontario. The net proceeds of the April/May Offering were used by Kalytera to pay research and development expenses and for general and administration expenses. Pursuant to the first tranche of the April/May Offering, Kalytera issued a total of 135,166,000 April/May Units at an issue price of CDN$0.05 per April/May Unit. Each April/May Warrant will entitle the holder thereof to acquire one Common Share of the Company at a price of CDN$0.065 (subject to customary adjustments for certain events) for a period of 36 months from the closing date of the April/May Offering. On the first closing of the April/May Offering, the agents were paid a commission consisting of a cash fee in the amount of CDN$506,873 and were issued an aggregate of 10,137,450 agent warrants. Each agent warrant is exercisable for Common Shares at a price of CDN$0.05 until two years after the issuance date thereof. On May 14, 2019 the Company announced the second closing under the April/May Offering for aggregate gross proceeds of CDN$1,617,500. The Company issued a total of 32,350,000 additional April/May Units consisting of 32,350,000 common shares in the Company and 32,350,000 April/May Warrants. In connection with this second closing of the April/May Offering, the agents were paid a commission comprised of a cash fee in the aggregate amount of CDN$121,312.50 and were issued an aggregate of 2,426,250 broker warrants. Each broker warrant is exercisable for one Common Share at a price of CAD$0.05 until May 13, 2021. On May 21, 2019, the Company announced the engagement of Echelon Wealth Partners to determine the value, on a risk-adjusted basis, of its CBD therapeutic products for the prevention and treatment of GVHD, and to assist with the review of potential out-licensing opportunities for the commercial rights to these products. On May 29, 2019, the Company announced the submission of patent application to the U.S. Patent and Trademark Office. The claims under this provisional patent cover the treatment of ulcerative colitis, Crohn’s Disease, inflammatory bowel disease, GVHD and other inflammatory diseases of the GI tract. On June 18, 2019, the Company announced that, as part of its program in treatment of chronic and acute pain, it has invented a novel first-in-class cannabinoid molecule, designated KAL-1816 39161-2001 27553992.1 - 9 - that strongly and selectively binds with and activates the alpha3 glycine pain receptor. Activation of the alpha3 glycine receptor shuts down pain transmission in inflammatory conditions, such as arthritis, colitis, and sciatica. On June 19, 2019, Mr. Gary Leong resigned as a director of Kalytera, and Mr. Robin Hutchison joined the board of directors of the Company to fill the vacancy resulting from Mr. Leong’s resignation. On June 21, 2019 the Company announced that it has granted stock options to the directors of the Company. The stock options have an exercise price of $0.05 per common share and expire ten years from the date of grant. One third of the options granted will vest on June 19, 2020 and the remaining options will vest in twenty-four (24) equal monthly installments commencing July 2020. Stock options to purchase 68,698 common shares of Kalytera were granted to Ron Erickson, stock options to purchase 254,345 common shares were granted to Jeff Paley, and stock options to purchase 1,000,000 common shares were granted to Rob Hutchison, who very recently joined the Company’s board of directors. In addition, stock options to purchase 11,095,907 common shares of Kalytera were issued to Robert Farrell, a director and the Chief Executive Officer of the Company. On June 25, 2019, the Company provided an update on its lead product development program evaluating CBD for the prevention of acute graft versus host disease GVHD. The results of Kalytera’s Phase 2 clinical study were positive and encouraging. No patients in the first (low dose) cohort developed grades 3 or 4 acute GVHD while receiving oral CBD treatment, and only one patient developed grade 2 acute GVHD. Patients in the low dose cohort received doses of 75 mg of CBD administered twice daily. On July 1, 2019, the Company signed a non-binding Letter of Intent (“LOI”) to acquire a majority interest in Oregon 01, LLC (“Oregon”, doing business as “Clean Bi Design”), which will operate a hemp-based cannabidiol (“CBD”) extraction facility in Amity, Oregon. Under the LOI, the Company intended to invest $3,500,000 (the "First Tranche") for the acquisition of shares representing a 51% interest in Oregon. Additional amounts of up to $1,000,000 that may have been required for contingencies would have been funded by the Company as unsecured loans to Oregon (the “Second Tranche”). Any amounts funded by the Company in excess of the First Tranche and the Second Tranche (cumulatively $4,500,000) would be treated as additional capital contributions to Oregon in exchange for additional shares. For a period of 120 days from the date of the LOI (the “Exclusivity Period”), the Company had the exclusive right to negotiate the investment in the equity of Oregon, and Oregon is bound by a standard “no-shop” covenant, provided that the parties may mutually decide to extend the Exclusivity Period as needed to facilitate the closing of the acquisition described above. The closing is subject to various conditions, including the Company obtaining the necessary equity financing for the investment. In connection with the LOI, on June 28, 2019, the Company provided Oregon with an unsecured loan (“Bridge Funding”) in the amount of $360,000. The loan bears interest at an annual rate of 5%. The principal and accrued interest on the loan are repayable in two years from the date of the loan. If there had been a closing of the Company’s acquisition of the shares of Oregon as described above, the principal and accrued interest on the Bridge Funding would have been 39161-2001 27553992.1 - 10 - applied towards the First Tranche consideration. Otherwise, the Bridge Funding will remain outstanding. Oregon has the right to prepay the Bridge Funding at any time. The LOI with Oregon was terminated by the Company in October 2019, as further described below. On July 16, 2019, the Company announced that it had completed Study KAL-07, the Food Effect Study, that is part of the Company’s product development program evaluating CBD for the prevention of acute graft versus host disease GVHD. Preliminary results for the Food Effect Study were positive and as expected. CBD was well tolerated, there were no safety concerns and the EKG data that is required to evaluate the effects of CBD on cardiac rhythm have been obtained. On August 19, 2019 the Company announced that given significantly positive interim results from the GVHD Prevention Study, the Company no longer expected to enroll the high dose cohort that had been expected to be a part of the GVHD Prevention Study. On August 21, 2019, the Company announced that it intended to raise up to approximately CAD $1.5 million ($1.13 million) in a private placement (the “Private Placement”) of common shares and common share purchase warrants. The terms of the Private Placement were amended on September 11, 2019, with each unit consisting of one common share and one common share purchase warrant to be issued at a price of CAD$0.045 per unit, except for units issued to certain members of the board of directors (Robert Farrell and Ron Erickson), which were issued at a price of CAD$0.05 per unit. The common share purchase warrants issued in the Private Placement have an exercise price of CAD $0.05, and a term of 36 months from the date of issuance. The first tranche of the Private Placement was facilitated by Alere Financial Partners, a division of Cova Capital Partners LLC (the “Agent”). In connection with the services to be performed by the Agent, the Agent received a cash commission equal to 8% of the aggregate gross proceeds of the Private Placement attributable to investors introduced to the Company by the Agent. In addition, the Agent was also granted a number of broker warrants (“Broker Warrants”) to acquire that number of common shares equal to 8% of the aggregate number of common shares sold in the Private Placement to investors introduced to the Company by the Agent. All of the securities sold pursuant to the Private Placement, (including any common shares issuable upon exercise of the common share purchase warrants) will be subject to a four month hold period which will expire four months and one day from the date of closing of the Private Placement. On September 16, 2019, the Company announced the closing of the first tranche of the Private Placement, for 10,946,423 common shares of the Company and 10,946,423 common share purchase warrants for aggregate gross proceeds of CAD$505,084.38. The agent received a cash commission equal to CAD$30,410.47 and was issued 675,788 warrants bearing the same terms as those issued in the Private Placement. On September 9, 2019, the Company announced that it had elected to make an interest payment under the CAD$787,500 principal amount secured convertible debenture issued in a private placement on March 6, 2019, through the issuance of common shares in the capital of the Company (“Common Shares”). The interest payment owing was in the amount of CAD$19,849.32. This payment was satisfied through the issuance of 396,987 Common Shares 39161-2001 27553992.1 - 11 - on October 23, 2019. The number of Common Shares to be issued was based on a deemed issue price of CAD$0.05 per Common Share. On October 2, 2019, the Company announced that the European Patent Office has issued a Notice of Allowance for EU Patent Application Number 14791611.8 covering the use of CBD in the treatment of GVHD. Kalytera has exclusive worldwide rights to this patent through an exclusive Materials License Agreement with MOR Research Applications, Ltd. of Israel. To complete the procedures for issuance of this EU patent, Kalytera prepared and filed translations of the patent claims into French and German. Kalytera completed these procedures prior to the January 2020 deadline, and the EU patent issued shortly thereafter. This was the third issued patent that Kalytera received for the use of CBD in the prevention and treatment of GVHD. In April and May last year, Kalytera announced that it had received notice of issuance from the U.S. Patent and Trademark Office for its two U.S. patents covering the use of CBD in the prevention and treatment of GVHD. In addition to its U.S. and EU patents, Kalytera also obtained four orphan drug designations for the treatment and prevention of GVHD in the U.S. and Europe. On October 17, 2019, the Company announced that, due to a decline in the market price for CBD isolate, it decided not to proceed with its previously announced plan to acquire a majority interest in Oregon 01, LLC (“Oregon”), and has terminated its Letter of Intent (“LOI”) with Oregon. Under the LOI, Kalytera was to invest USD $3.5 million for the acquisition of a 51% interest in Oregon. The principal product that Oregon planned to produce was CBD isolate extracted from hemp. During the past several months, market prices for CBD isolate have steadily declined. This price erosion made the acquisition of this business less attractive to Kalytera, and for this reason the Company has terminated its plan to acquire Oregon. On September 17, 2019 the Company received $180,000 as a partial repayment of the Bridge Funding it had loaned to Oregon. Company management believes that the balance of the loan is unlikely to be collected due to the adverse financial position of Oregon. Accordingly, an impairment loss of $180,000 was recorded in the financial statements for the three months ended September 30, 2019, in general and administrative expenses. On October 21, 2019, the Company announced that it had closed an additional tranche of its Private Placement, for 1,974,445 common shares of the Company and 1,974,445 common share purchase warrants for aggregate gross proceeds of approximately CAD$88,850. All securities issued in this tranche are subject to a hold period expiring on February 17, 2020 in accordance with applicable securities laws. On October 30, 2019, the Company announced that it had closed an additional and final tranche of its Private Placement, for 2,811,111 common shares of the Company and 2,811,111 common share purchase warrants for aggregate gross proceeds of approximately CAD$126,500. Industrial Alliance Securities Inc. received compensation in connection with this tranche of the private placement consisting of a cash commission equal to CAD$10,120 and were issued 224,889 warrants bearing the same terms as those issued in the offering. All securities issued in this tranche are subject to a hold period expiring on February 26, 2020 in accordance with applicable securities laws. 39161-2001 27553992.1 - 12 - On October 30, 2019, Kalytera also announced that it had entered into an agreement to amend the terms of the convertible debenture units issued to a single investor in a private placement on March 6, 2019. The convertible debentures units consist of CAD$787,500 principal amount of 10.0% secured convertible debenture (the “Convertible Debenture”) maturing on March 6, 2021 and 12,115,384 common share purchase warrants (the “Debenture Warrants”) initially expiring on March 6, 2021. Under the amendments, the conversion price of the Convertible Debenture (for the first 12 months following the issuance date) and the exercise price of the Debenture Warrants were reduced to CAD$0.05 from CAD$0.065. The Convertible Debenture was also amended to provide that quarterly interest payments may only be made in cash, and to provide that 10% of the aggregate net proceeds received from any new equity or debt financing undertaken by Kalytera shall be used towards the repayment of principal and any outstanding interest under the Convertible Debenture. In addition, the holder of the Convertible Debenture may require that the Convertible Debenture be repaid in full if any equity or debt financing undertaken by Kalytera involves the issuance of securities at a price of less than CAD$0.04 per common share. The expiry date of the Debenture Warrants was changed to March 6, 2020, provided that if the closing price of Kalytera’s common shares on the TSXV exceeds the new exercise price of the Debenture Warrants by 25% or more for any ten consecutive trading days, then the Debenture Warrants will expire on the 30th business day calculated from the day that is the seventh calendar day after the last day of the above-mentioned ten day trading period. In November 2019, the Company completed the process of negotiating an agreement to extend the maturity date of the promissory note owing to the former shareholders of Talent (see discussion under “Liquidity and Capital Resources”) to March 15, 2020. In connection with the extension of the maturity date of the promissory note, the Company amended the milestone payment schedule under the share purchase agreement with the former shareholders of Talent, as further described under the heading “Liquidity and Capital Resources”. The promissory note and the milestone payments are secured by the rights of Talent as licensee under the Mor License and clinical data generated in connection therewith, in addition to a second ranking lien on the shares of certain of the Company’s subsidiaries, being Talent and Kalytera Therapeutics Israel Ltd. In connection with such amendments, and in order to preserve cash and eliminate expenses, the Company agreed to cease making additional payments to one of its significant research and development consultants, the Salzman Group (except as required to complete the current Phase 2 clinical study). On December 3, 2019 the Company issued 1,000,000 Common Shares in exchange for March 2019 debentures CAD 50,000 partial conversion. On December 20, 2019, the Company announced that it has not paid the principal (in the amount of C$453,000) and interest (in the amount of C$19,323.96) owing on its 9% secured convertible debentures due December 20, 2019 (the “Debentures”). Corporate Developments Subsequent to December 31, 2019 On January 21, 2020 the Company issued 1,000,000 Common Shares in exchange for March 2019 debentures CAD 50,000 partial conversion. 39161-2001 27553992.1 - 13 - On February 5, 2020, the Company announced that the United States Patent and Trademark Office (the “USPTO”) issued a Notice of Allowance for US Patent Application 15/905/050 covering the use of cannabidiol (“CBD”) in the prevention and treatment of GVHD. On February 18, 2020, the Company announced that it had completed a transaction under the payments agreement with the Salzman Group of Israel (the “Agreement”), under which Kalytera paid the Salzman Group USD$300,000 (CDN$399,150) through the issuance of Common Shares of the Company (“Common Shares”) at a deemed issued price of CDN$0.05 per Common Share, for certain services previously provided to the Company by the Salzman Group. The Company also announced that no additional shares will be issued to the Salzman Group under the Agreement. On February 29, 2020 the Company agreed to amend the Principal Amount of the 2019 Convertible Debentures to include CDN $17,345.89 of interest owing from December 1, 2019 until February 29, 2020, and CDN $1,130 for legal fees. The amended principal amount is now CDN $705,975.89. The Company also agreed to amend the interest rate in section 4.1 of the 2019 Convertible Debenture Certificate to increase such interest rate from 10% to 15%. On March 16, 2020, the Company announced that the Company and the former shareholders of the Company’s subsidiary, Talent Biotechs Ltd.,agreed to extend the maturity date of the secured promissory note in favor of such shareholders (the “Promissory Note”) to May 15, 2020, which was further extended to June 20, 2020, as discussed below. During the first quarter of 2020, the Company determined that it did not have sufficient resources to continue research and development activities in the program evaluating CBD in the prevention of GVHD. The Company is continuing its efforts to either out-license or sell its program evaluating CBD in the prevention and treatment of GVHD, and is currently engaged in discussions regarding a potential sale of the GVHD program. However, there is no assurance that the Company will have success in this effort. Kalytera Israel is in default under the terms of the share purchase agreement with Talent and shareholders of Talent and the Promissory Note, and has received a formal notice of default from the representative of the Former Shareholders. The obligations of Kalytera Israel under the Promissory Note are guaranteed by Talent, and both Kalytera Israel and Talent are parties to a Security Agreement, under which they have secured their obligations under the Promissory Note by pledging certain assets to the Former Shareholders as security for the Promissory Note (the “Pledged Assets’). The Pledged Assets are the assets of the Company’s program evaluating CBD in the prevention and treatment of GVHD. The Company and the representative of the Former Shareholders are in discussions regarding a contemplated agreement under which Kalytera Israel will transfer ownership of all Pledged Assets, other than the shares of Kalytera Israel, to the Former Shareholders in consideration for the release and discharge by the Former Shareholders of all obligations the Company and its subsidiaries may have to such Former Shareholders, including all obligations under the Note and SPA. If the Company does not complete an outlicense or sale of its GVHD program prior to the Company’s next annual meeting of shareholders, the Company and the representative of the Former Shareholders will enter into the Agreement subject to approval by the Company’s shareholders and the TSXV as applicable. The Company will schedule an annual meeting of shareholders at which it will seek such approval. 39161-2001 27553992.1 - 14 - The Company anticipates that it will schedule such annual meeting of shareholders in November 2020. Assuming that Kalytera and the former shareholders of Talent (the “Former Shareholders”) agree that the Company will return the GVHD program to the Former Shareholders, and such agreement is approved by Kalytera’s shareholders and the TSXV, the Company will owe no further amounts to the Former Shareholders. On May 19, 2020, the Company announced that it has signed a binding Letter of Intent dated May 12, 2020 (the “LOI”) to acquire Salzman Group, Inc., a privately held company located in West Tisbury, MA (“Salzman Group”). Salzman Group is the owner of R-107, a proprietary drug with issued and pending composition of matter and method of use patents in approximately 40 countries, including the U.S., Australia, Brazil, China, Europe, India, Japan, Russia and South Korea. Salzman Group is developing R-107 for treatment of COVID-19 associated lung disease, chlorine inhalation lung injury (“CILI”) and pulmonary arterial hypertension (“PAH”). On September 16, 2020, BARDA informed Salzman Group that BARDA was terminating the BARDA Contract and diverting its funding under the BARDA Contract, and all similar contracts, to support projects developing vaccines for for prevention of COVID-19 infection. The Company’s board of directors determined that, following termination of the BARDA Contract, it was no longer in the best interests of the Company to go forward with the acquisition of the Salzman Group. Instead, the Company will proceed to develop R-107 under the Company’s exclusive world-wide license for the development and commercialization of R-107 for the treatment of coronavirus and COVID-19 infection. On July 15, 2020, the Company announces that it has received conditional approval from the TSX Venture Exchange (“TSXV”) and partial revocation orders from the British Columbia and Ontario Securities Commissions to commence an offering to raise up to approximately $485,000 in a non-brokered private placement of units (the “Private Placement”). The Company offered up to approximately CDN $485,000 of units at a price of $0.015 per unit in the Private Placement. The Company received final acceptance for the Private Placement on July 24, 2020, and completed escrow closing and post-closing matters, culminating in a final raised amount of gross proceeds of CDN $309,430.50 from the issuance of 20,628,700 shares and 10,314,350 warrants. Each unit had a purchase price of $0.015 per unit. Each full common share purchase warrant will have an exercise price of CDN $0.05, and a term of 24 months. On July 16, 2020, the Company announced that it has entered into a License Agreement (the “License Agreement”) with Salzman Group, Inc. (“Salzman Group”), under which Salzman Group has granted to Kalytera an exclusive, worldwide license to develop and commercialize Salzman Group’s proprietary drug, R-107, for the treatment of coronavirus and COVID-19 infection. On August 7, 2020, the Company closed in escrow a non-brokered private placement (the “Private Placement”) of units comprised of common shares (“Shares”) and one half common share purchase warrants (“Warrants”) in the capital of the Company. The Company confirms that 39161-2001 27553992.1 - 15 - it received final acceptance for the Private Placement on July 24, 2020, and has completed escrow closing and post-closing matters, culminating in a final raised amount of gross proceeds of CAD $309 thousands from the issuance of 20,628,700 shares and 10,314,350 warrants. Each unit had a purchase price of $0.015 per unit. Each full common share purchase warrant will have an exercise price of CAD $0.05, and a term of 24 months. At any time on or after the date that is 4 months from the closing date, if the daily volume weighted average trading price of the common shares on the TSX Venture Exchange (the “TSXV”) equals or exceeds CAD $0.10 for a period of at least 10 consecutive trading days, the Company shall be entitled to accelerate the expiration date of the Warrants to the date that is 30 days from the date that notice of such acceleration is given. From and after the new accelerated expiration date, no Warrant may be exercised, and all unexercised Warrants shall be void. The company paid a cash commission of 8% of the gross proceeds raised and closed in respect of the offering to Echelon Wealth Partners Inc. (“Echelon”) with respect of the funds raised by it, and broker’s warrants to this finder, exercisable within 30 months following the relevant closing date, to acquire in aggregate that number of common shares which is equal to 8% of the number of units sold under the offering with respect of the funds raised by it, which warrants expiry 30 months from issuance (closing date of July 22, 2020) and are exercisable at $0.05 per warrant. Accordingly, Echelon received a cash finder fee of $20,000.04 and 1,333,336 broker warrants. Except for the mentioned commission and warrants to Echelon, no bonus, finder’s fee, commission, agent’s option, or similar compensation, whether in cash or securities, has been paid or is payable in connection with the Private Placement. On August 31, 2020, the Company announced that Kost Forer Gabbay & Kasierer/Ernst & Young Global (“E&Y”), at the request of the Company, resigned as auditors of the Company, effective August 20, 2020. The Company further announced that the Board of Directors appointed BDO Ziv Haft /BDO Israel (“BDO”) as auditors of the Company effective August 20, 2020. Public health epidemics or outbreaks could adversely impact our business. In late 2019, a novel strain of COVID-19, also known as coronavirus, was reported in Wuhan, China. While initially the outbreak was largely concentrated in China, it has now spread to several other countries, including in Israel, and infections have been reported globally. The extent to which the coronavirus impacts the Company’s operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration and severity of the outbreak, and the actions that may be required to contain the coronavirus or treat its impact. In particular, the continued spread of the coronavirus globally, could adversely impact the Company’s operations and workforce, including other Company’s research and clinical trials and its ability to raise capital, which in turn could have an adverse impact on Company’s business, financial condition and results of operation. OVERALL PERFORMANCE Dollar amounts in this section are specified in thousands unless otherwise specified. 39161-2001 27553992.1 - 16 - Since its inception in July 2014, Kalytera has accumulated a deficit of $ 59,217 as at December 31, 2019. The Company did not generate any revenue from product sales during 2019. Kalytera expects its operating losses to continue in the next fiscal year as it invests in its product development programs. The Company has funded its operations with proceeds from equity and convertible debt financings and expects to seek additional funding through equity financings and partnership collaborations to finance its product development, and corporate growth. However, if Kalytera’s product development activities do not show positive progress, or if capital market conditions in general or with respect to the life sciences sector or development stage companies such as Kalytera are unfavorable, its ability to obtain additional funding will be adversely affected. SELECTED ANNUAL FINANCIAL INFORMATION Dollar amounts in this section are specified in thousands unless otherwise specified. The following table sets forth selected financial information for the fiscal year ended December 31, 2019 (“Fiscal 2019”), comparable fiscal year ended December 31, 2018 (“Fiscal 2018”), and the fiscal year ended December 31, 2017 (“Fiscal 2017”). The selected financial information set out below has been derived from the Annual Financial Statements and accompanying notes, in each case prepared in accordance with IFRS. The selected financial information set out below may not be indicative of the Company’s future performance. The following discussion should be read in conjunction with the Annual Financial Statements. Fiscal 2019 Fiscal 2018 Fiscal 2017 Net loss (income) for the fiscal period $21,212 $(6,935) $31,863 Basic earnings (loss) and per share (in U.S. dollars) $(0.05) $0.04 $(0.26) Diluted earnings (loss) per share $(0.05) $(0.01) $(0.26) Total assets $25,255 $59,610 $65,276 Total non-current financial liabilities $22,930 $42,026 $72,901 Cash dividends declared per Common Share - - - Revenues Kalytera did not generate any revenue from product sales in Fiscal 2019. The time required for Kalytera to have the ability to generate revenue and to become profitable depends upon the Company’s ability to complete the development, obtain regulatory approval for, and successfully commercialize, product candidates that Kalytera develops or acquires in the future, and a variety of other factors, including as set out under the heading “Financial Instruments and Risks – Additional risk factors – Lack of Revenue”. 39161-2001 27553992.1 - 17 - Discussion of Operations Kalytera recorded a net loss of $21,212 ($0.05 loss per Common Share) in Fiscal 2019, and net income of $6,935 ($0.04 earnings per Common Share) in Fiscal 2018. The net loss in 2019 was primarily due to $33,769 loss from impairment of intangible assets which was offset by a $17,344 gain from changes in fair value of contingent consideration. The change between 2019 and 2018 was due to $31,276 increase in loss from impairment of intangible assets and $13,471 decrease in income in connection with derivative instruments which was set off by $10,830 increase in gain from changes in fair value of contingent consideration, $4,523 increase in tax benefit and $1,960 decrease in research and development expenses. The following table provides an overview of the financial results in Fiscal 2019 as compared to those in Fiscal 2018: Fiscal 2019 Fiscal 2018 Research and development expenses $5,790 $7,750 General and administrative expenses 3,661 3,352 Gain from changes in fair value of contingent consideration (17,344) (6,514) Loss from impairment of intangible assets 33,769 2,493 Total operating expenses 25,876 7,081 Finance expenses 704 354 Finance (income) (746) (14,271) Income taxes (4,622) (99) Net (income) loss $21,212 $(6,935) Research and Development Expenses Kalytera incurred total research and development expenses of $5,790 in Fiscal 2019 as compared to $7,750 in Fiscal 2018. The decrease in research and development expenses by $1,960 was primarily due the fact that the Company put its program in treatment of acute and chronic pain on hold. The decrease in research and development expenses in 2019 compared to 2018 was mainly a result of decrease in subcontractor development costs due to putting one of Company’s programs on hold and due to agreement termination of one of Company’s subcontractors. The following table summarizes the Company’s research and development expenditures in Fiscal 2019 and Fiscal 2018: Fiscal 2019 Fiscal 2018 Salaries and benefits $ 233 $ 270 Share-based payments 141 178 Subcontract research costs 5,310 7,150 Laboratory supplies 102 140 Travel and accommodation 4 12 Total $5,790 $7,750 39161-2001 27553992.1 - 18 - General Administration Expenses Generally, general administration expenditures in 2019 were $3,661 compared to $3,352 in 2018. The change in general and administration expenses in the amount of $309 is mainly due to increase in legal and professional fees in the amount of $484, increase in insurance expenses of $159 and increase in share-based payment expense of $101, which were set-off by decrease in investor relations in the amount of $272 and decrease in salaries and benefits expenses of $100. The following table summarizes the Company’s general administration expenditures in Fiscal 2019 and Fiscal 2018: Fiscal 2019 Fiscal 2018 Consulting and management fees $ 539 $ 564 Investor relations 66 338 Legal and professional fees 1,168 684 Salaries and benefits 314 414 Share-based payments 794 693 Board member fees 178 194 Audit fees 171 173 Insurance 324 165 Other expenses 107 127 Total $ 3,661 $ 3,352 Changes in fair value of contingent consideration and impairment of intangible assets Changes in fair value of contingent consideration and in-process research and development in the amount of $16,425 during the year ended December 31, 2019, were recognized for contingent liabilities and in-process research and development in respect of the Talent acquisition which was due, in part, to putting the GVHD treatment program on hold, due to the lack of funds required to complete the required clinical trials. In addition, assuming that the Company obtains the necessary resources to complete the Drug Interaction and Phase 3 pivotal registration studies, the Company would expect that it could first achieve commercial sales of its product for the prevention of GVHD in the beginning of 2025, instead of September 2022 and due to increase of Company’s specific risk in computation of Company’s weighted average cost of capital. QUARTERLY FINANCIAL INFORMATION The following table summarizes selected unaudited consolidated financial data for each of the last eight fiscal quarters, prepared in accordance with IFRS (expressed in thousands): Quarter Ended 31-Dec-19 30-Sep-19 30-Jun-19 31-Mar-19 Unaudited Unaudited Unaudited Unaudited (“Q4 (“Q3 2019”) (“Q2 (“Q1 39161-2001 27553992.1 - 19 - 2019”) 2019”) 2019”) Research and development expenses 55 1,037 1,867 2,831 General and administrative expenses 481 1,140 1,272 768 Gain (loss) from changes in fair value of contingent consideration (3,073) 1,157 (18,221) 2,793 Loss (gain) from impairment (reversal) of intangible assets 10,482 (2,291) 26,161 (583) Finance expense 391 40 197 76 Finance income 155 (633) (646) 378 Income taxes (benefit) (7) 526 (5,272) 131 Net loss for the period 8,484 976 5,358 6,394 Basic loss per common share 0.017 0.002 0.01 0.021 Diluted loss per common share 0.017 0.002 0.01 0.021 Quarter Ended 31-Dec-18 30-Sep-18 30-Jun-18 31-Mar-18 Unaudited Unaudited Unaudited Unaudited (“Q4 2018”) (“Q3 2018”) (“Q2 2018”) (“Q1 2018”) Research and development expenses 2,286 1,864 2,313 1,287 General administration expenses 992 802 760 798 Gain (loss) from changes in fair value of contingent consideration 3,098 (12,908) (890) 4,186 Loss from impairment of intangible assets (7,718) 10,211 - - Finance expense 22 181 (74) 225 Finance income (1,745) (41) (7,912) (4,573) Income taxes (benefit) 1,890 (1,910) (79) - Net loss (income) for the period (1,175) (1,801) (5,882) 1,923 Basic loss (earning) per Common Share (0.00) (0.01) (0.04) 0.01 Diluted loss (earning) per Common Share (0.00) (0.01) (0.01) 0.01 39161-2001 27553992.1 - 20 - Variations in the Company’s net losses and expenses for the periods above resulted primarily from the following factors: • In general, research and development expenditures trended upwards as Kalytera continued to advance its lead product development program in prevention and treatment of GVHD. • The general and administrative expenses remained similar in recent quarters. However, expenditures fluctuated more significantly in certain quarters due to the costs associated with legal expenses, the August 2018 financing and the April/May 2019 financing. • In Q2 of 2019, the Company performed a valuation analysis on the assets acquired in the Talent acquisition in 2017 and the contingent payments that the Company may be required to make to the former shareholders of Talent if certain milestone events are achieved. Based on the valuations performed, the Company recognized other expenses of $7,940 due to adjustments in the revaluation of the intellectual property acquired in the Talent acquisition and the amounts of contingent payment obligations that the Company may be required to make to the former shareholders of Talent if certain milestone events are achieved. • In Q3 of 2018, the Company performed an impairment analysis on the assets acquired in the Talent acquisition in 2017. Based on the valuation performed, the Company recognized other expenses of $10,211 due to the revaluation of the intellectual property acquired in the Talent acquisition. This was then adjusted in Q4 of 2018 based on a more favorable valuation by $7,718. LIQUIDITY AND CAPITAL RESOURCES Dollar amounts (other than per share amounts) in this section are specified in thousands unless otherwise specified. The Company has not yet generated revenues and has incurred losses from operations since its inception. As of December 31, 2019, the Company has a working capital deficiency of $5,609 and an accumulated deficit of $59,217. Continuation as a going concern is dependent upon obtaining additional capital. The Company will require a substantial amount of additional funds to complete the development of its products, to build a sales and marketing organization, and to fund additional losses, which the Company expects to incur over the next few years. The management of the Company intends to seek additional funding through private placements and public offerings, which will be utilized to fund product development and continue operations. The Company recognizes that, if it is unable to raise additional capital, it may find it necessary to substantially reduce or cease operations. The Company’s operational activities during the year ended December 31, 2019 were financed mainly by private placement financings that closed in January 2019, March 2019, September 2019 and October 2019, and a public offering that closed in April/May 2019. At December 31, 2019, the Company’s cash and cash equivalents decreased to $32 from $227 at December 31, 2018. Negative working capital at December 31, 2019 decreased to $5,609 as compared to $7,073 at December 31, 2018. The decrease in working capital is mainly due to decrease in accounts payable and a decrease in short-term contingent payments related to the Talent acquisition in February 2017 and a decrease in other payables. 39161-2001 27553992.1 - 21 - In 2017, Kalytera’s wholly owned subsidiary, Kalytera Therapeutics Israel, Ltd. (“Kalytera Israel”) acquired Talent Biotechs Ltd. (“Talent”) from the former shareholders of Talent (the “Former Shareholders”, under the terms of a share purchase agreement (the “SPA”) between Kalytera, Kalytera Israel, Talent and the Former Shareholders. The consideration for the acquisition of Talent included a combination of cash, securities, and future contingent payments to the Former Shareholders. To date, Kalytera has made cash payments to the Former Shareholders totaling $12,761, and in addition, the Company has issued 29,623,095 Common Shares and 4,719,176 Common Share purchase warrants to the Former Shareholders. Under the terms of the SPA, Kalytera Israel is also obligated to make certain milestone payments (the “Milestone Payments”) to the Former Shareholders. In July 2018, the Company announced that it had reached an agreement with the Former shareholders modifying the Company’s obligation to make $4,000 in milestone payments that had been triggered as a result of the issuance of certain patents exclusively licensed by Kalytera. Under such agreement, Kalytera made a minimum payment to the Former Shareholders of approximately $2,011 following the closing of the Company’s August 2018 public offering. The remaining balance of approximately $1,989 not paid at closing of such public offering was evidenced through a promissory note bearing interest at 8% annually (from August 8, 2019) and initially maturing July 31, 2019. In order to be able to continue to advance its GVHD program and to conserve cash, Kalytera has, to date, only repaid $200 of the principal amount of this note. In November 2019, Kalytera negotiated an extension to the maturity date of the promissory note to March 15, 2020, which was then further extended to June 20, 2020. In connection with the extension of the maturity date of the promissory note to March 15, 2020, the Company amended the milestone payment schedule under the share purchase agreement with the former shareholders of Talent. The milestone payment schedule was amended in order to reduce the number and amount of milestone payments that the Company will be required to make in the short term, and subject to approval of the TSX Venture Exchange, grants the Company the ability to defer 50% of certain milestone payments for up to one year, provided that the Company issues to the Talent Sellers 13.32 Common Shares for each dollar deferred. Kalytera has placed its program evaluating CBD in the prevention and treatment of GVHD on hold. Kalytera Israel did not pay the promissory note on its extended maturity date of June 20, 2020, and is in default under the terms of the SPA and the note, and has received a formal notice of default from the representative of the Former Shareholders. The obligations of Kalytera Israel under the promissory note are guaranteed by Talent, and both Kalytera Israel and Talent are parties to a Security Agreement, under which they have secured their obligations under the Note by pledging certain assets to the Former Shareholders as security for the Note (the “Pledged Assets’). The Pledged Assets are the assets of the Company’s product development program under which the Company was evaluating CBD in the prevention and treatment of GVHD. The Pledged Assets are both tangible and intangible assets, consisting primarily of tangible assets, such as patient blood samples, and intangible assets, such as contract rights, clinical and preclinical data, know how, and intellectual property rights that are held under a 39161-2001 27553992.1 - 22 - license agreement between MOR Research Applications, Ltd. and Talent. The Pledged Assets also include all shares of the Company’s two subsidiaries, Kalytera Israel and Talent. The Company and the representative of the Former Shareholders are in discussions regarding a contemplated agreement (the “Agreement”) under which Kalytera Israel will transfer ownership of all Pledged Assets, other than the shares of Kalytera Israel, to the Former Shareholders in consideration for the release and discharge by the Former Shareholders of all obligations the Company and its subsidiaries may have to such Former Shareholders, including all obligations under the promissory note and SPA. The Company and the representative of the Former Shareholders expect to complete discussions regarding the contemplated Agreement, and will enter into the Agreement subject to approval by the Company’s shareholders and the TSXV as applicable. The Company will schedule a meeting of shareholders at which it will seek such approval. While the Company is engaged in efforts to complete the foregoing, there can be no assurance that it will be successful in doing so in a timely manner or at all. In December 2017, the Company issued CDN$5,750 aggregate principal amount of convertible debentures as part of a private placement of convertible debenture units. Following conversion of these debentures throughout the course of 2018, only CDN$453 principal amount of such convertible debentures remain outstanding. These convertible debentures are secured by the assets of the Company, bear interest at the rate of 9% per annum, are convertible into Common Shares at a price per share of CDN$0.13, with a maturity date of December 20, 2019. The Company did not have sufficient resources to pay the principal (in the amount of C$453,000) and interest (in the amount of CDN$19,323. 96) due on the maturity date of December 20, 2019. The Company is seeking approval from the holders of outstanding Debentures (collectively, the “Holders”) to extend the maturity date thereof to November 15, 2020. On March 6, 2019, the Company issued CDN$787.5 aggregate principal amount of convertible debentures as part of another private placement of convertible debenture units, which debentures remain outstanding. These convertible debentures are secured by the assets of the Company’s subsidiaries, bear interest at the rate of 10% per annum, are convertible into Common Shares at price per share of CDN$0.05 per Common Share (after taking into account amendments made in October 2019) for the first year following the issuance thereof and CDN$0.10 for the second year, and mature on March 6, 2021. As a result of amendments entered into in October 2019, 10% of the aggregate net proceeds received from any new equity or debt financing undertaken by Kalytera shall be used towards the repayment of principal and any outstanding interest under such convertible debentures, and in addition, any equity or debt financing undertaken by Kalytera that involves the issuance of securities at a price of less than CDN$0.04 per Common Share will be an event of default thereunder. Transaction with the Salzman Group On May 19, 2020, Kalytera announced that it had signed a Letter of Intent dated May 12, 2020 (the “LOI”) to acquire Salzman Group, Inc. (“Salzman Group”), a privately held company located in West Tisbury, MA (the “Acquisition”). Salzman Group is the owner of R-107, a proprietary drug with issued and pending composition of matter and method of use patents in 39161-2001 27553992.1 - 23 - approximately 40 countries, including the U.S., Australia, Brazil, China, Europe, India, Japan, Russia and South Korea. Kalytera has decided not to proceed with the acquisition of Salzman Group. Instead, the Company will proceed to develop R-107 for the treatment of coronavirus and COVID-19 infection under the Company’s exclusive world-wide license for the development and commercialization of R-107, as discussed below. Exclusive World-wide License to Develop and Commercialize R-107 for Treatment of Coronavirus and COVID-19 Infection On July 16, 2020, Kalytera announced that it had entered into a License Agreement (the “License Agreement”) with Salzman Group, under which Salzman Group has granted to Kalytera an exclusive, worldwide license to develop and commercialize Salzman Group’s proprietary drug, R-107, for the treatment of coronavirus and COVID-19 infection. Kalytera’s rationale for entering into this license was based on the following facts: (1) R-107 is a liquid prodrug of nitric oxide; (2) nitric oxide gas has shown clinical evidence of antiviral activity against strains of coronavirus; and (3) nitric oxide gas was being evaluated by both industry and academic groups as a potential treatment for coronavirus and COVID-19 infection. Initial data from some of these studies have been recently announced. These data are exceptionally positive. For example: • Recently announced in vitro data demonstrate that nitric oxide can inhibit viral reproduction of SARS-CoV-2, the human coronavirus that causes COVID-19.These milestone in-vitro studies were conducted by testing multiple nitric oxidereleasing compounds against wild type SARS-CoV-2 virus. Therapeutic doses (<200 µM) were applied to infected cells and demonstrated a dose-dependent effect on viral replication. The result was a greater than 99.9% reduction in virus observed after 24 hours versus virus observed on untreated cells. • Recently announced data from a clinical study conducted by Massachusetts General hospital in pregnant patients with severe and critical COVID-19 infection demonstrated viral clearance by 22 days after COVID-19 diagnosis in 5 of 6 patients who received inhaled nitric oxide gas but no other antiviral medication. R-107 is a liquid prodrug of nitric oxide that can be administered by injection, unlike nitric oxide gas, which requires a special type of delivery device, and complex administration by trained respiratory therapists. When administered by injection, R-107 is slowly hydrolyzed, releasing its active moiety, R100, which in turn steadily and slowly releases nitric oxide into the lung tissue. Put simply, following injection, R-107 is metabolized, and releases R-100, which in turn releases nitric oxide into the tissues of the lung. R-100 is the pharmaceutically active payload of R-107. Based on these exceptionally positive data with nitric oxide gas, Kalytera will not proceed with the acquisition of Salzman Group, but instead will focus all its resources on the development of R-107 for treatment of coronavirus and COVID-19 infection. By not acquiring Salzman Group at this time, the Company will avoid the substantial dilution that would have resulted from the issuance of shares to the shareholders of Salzman Group, as well as the dilution of the Company’s resources that would have resulted from the acquisition of an additional product development program. Due to the exceptionally positive data that have recently been announced regarding the anti-viral activity of nitric oxide, the Company believes that its best use of resources will be in the development of R-107 for treatment of coronavirus and COVID-19 infection. 39161-2001 27553992.1 - 24 - Highlights of the License Agreement • R-107 is a liquid prodrug of nitric oxide. Based on the fact that nitric oxide is an approved treatment for acute respiratory failure in newborns, and the clinical evidence of nitric oxide’s antiviral activity against strains of coronavirus, Salzman Group will develop R107 for treatment of coronavirus and COVID-19 associated lung infection. • Following completion of a Phase 1 clinical safety and pharmacokinetic study, Kalytera intends to apply for funding from the U.S. Department of Health and Human Services for the costs of Phase 2 and Phase 3 clinical studies of R-107 in coronavirus and COVID-19 infection. • If the application for a new BARDA contract for development of R-107 for treatment of coronavirus and COVID-19 infection is successful, Salzman Group may receive an additional USD $20 million under this BARDA contract. • Kalytera expects the Phase 1 clinical safety and pharmacokinetic study to be completed in the first half of 2021. • Under the terms of the License Agreement, Kalytera will pay a $1.2 million cash license fee to Salzman Group, and also issue to the former shareholders of Salzman Group 130 million Kalytera common shares. As of September 30, 2020, Kalytera has made partial payments of the $1.2 million cash license fee to the former shareholders of Salzman Group in the total amount of approximately $315,000. R-107 in Treatment of Coronavirus and COVID-19 Infection R-107 is a proprietary and novel molecule that acts as a nitric oxide donor. Nitric oxide normally exists in a gaseous state, and is approved as such by the FDA for administration to patients via inhalation therapy requiring a special type of delivery device, and complex administration by trained respiratory therapists. R-107, in contrast, is a liquid that is readily administered by a single intramuscular injection. In addition to its clear advantages in simplicity of administration, R-107 does not lose its potency after prolonged periods of administration. In contrast, other nitric oxide donors in liquid form, such as nitroglycerin, rapidly induce tolerance and lose biological activity after more than a single dose. Accordingly, R-107 is poised to be the first liquid nitric oxide donor that is easy and inexpensive to administer and provides sustained and biologically effective delivery. Gaseous nitric oxide is already approved by the FDA as an inhalation therapy for treating newborns with acute pulmonary hypertension and respiratory failure, and has shown clinical evidence of antiviral activity against strains of coronavirus. For example, inhaled nitric oxide has demonstrated an inhibitory effect on the replication of the SARS virus (“SARSCoV”). The SARS virus is a coronavirus. Inhalable nitric oxide will also be evaluated in a Phase 2 clinical study sponsored by Massachusetts General Hospital in severe acute respiratory syndrome in COVID-19. Respiratory viruses, such as SARS-CoV and COVID-19, can cause acute respiratory distress syndrome (“ARDS”), in which fluid leaks into the lungs, making breathing difficult or impossible. The prognosis with COVID-19 can be poor if the patient develops respiratory disease. R-107 will be developed for COVID-19 associated lung disease, and, because there 39161-2001 27553992.1 - 25 - are no existing therapies or vaccines to effectively treat or prevent COVID-19, it is anticipated that the FDA will allow an expedited clinical development pathway for R-107 in this indication. There is currently a critical global shortage of devices for delivery of inhalable nitric oxide, and, even if such devices were to become available, administration of gaseous nitric oxide would be complex and labor-intensive, substantially limiting the number of patients that could be treated at any one time. The Company believes that its R-107 drug will allow for multiple patients to be treated simultaneously, in a potentially safe and less labor-intensive manner, without the need for special delivery equipment. Salzman Group has spoken with BARDA regarding a new BARDA contract to support the development of R-107 for coronavirus and COVID-19 infection. If awarded, the new contract would support a clinical trial in intubated and mechanically ventilated patients with COVID-19 associated pulmonary failure. The goals of this treatment would be to reduce fluid congestion in the lungs, improve oxygenation, decrease length of mechanical ventilation and ICU care, and reduce mortality. Planned Phase 1 Clinical Study to Evaluate Safety and Pharmacokinetics of R-107 Given the data demonstrating the antiviral activity of nitric oxide against coronaviruses, as well as the even greater body of data demonstrating the potential activity of nitric oxide in treatment of viral-associated lung disease, Kalytera and Salzman Group are working together to advance R-107 into Phase 1 clinical testing. Salzman Group intends to submit Investigational New Drug Application (IND) to the Australian Therapeutic Goods Administration (TGA) and the U.S Food and Drug Authority (FDA) in support of a first-inhuman Phase 1 clinical trial. This Phase 1 safety and pharmacokinetic study of intramuscular R-107 using a single dose escalation design in 32 healthy middle-aged volunteers will be conducted at CMAX, a clinical contract research organization located at Royal Adelaide Hospital in Australia. The study is expected it to be completed during the first half of 2021. Professor Salvatore Cuzzocrea, President of the University of Messina and former President of the European Shock Society is working with Salzman Group and Kalytera. Professor Cuzzocrea has deep expertise regarding the medical use of nitric oxide and nitric oxide donors, and has published more than 600 papers on nitric oxide. He has conducted research and experiments with nitric oxide and nitric oxide donors since 1994, and worked closely as an advisor with the Salzman Group team that designed and invented R-107. Issuance of Cease Trading Order by British Columbia Securities Commission On June 22, 2020, the British Columbia Securities Commission (the “BCSC”) issued a Failureto-File Cease Trade Order against the Company (the “FFCTO”) due to the Company’s failure to file by the prescribed filing deadlines its annual financial statements for the year ending December 31, 2019, and the accompanying Management’s Discussion and Analysis and certifications, (the “Filings”). The Company is working with its auditors, BDO, to complete the Filings, and anticipates that final approval and posting of the Filings on www.sedar.com will 39161-2001 27553992.1 - 26 - be completed in October 2020. Upon filing of the Filings, the Company will apply to have the FFCTO fully revoked, at which time after the FFCTO has been lifted, the Company will issue the license fee of 130 million Kalytera common shares to Salzman Group. The Company will not be able to continue to operate beyond year-end 2020 unless it is able to raise at least $1.5 million to fund its G&A expenses for a period of six months, because there is not currently sufficient working capital to continue to further fund the Company’s operations without raising additional capital in the near term. Management also plans to raise additional capital through equity or debt financing in the near term to finance at least six months of working capital, which amount will also be sufficient to pay off the 2017 Debenture. The Company’s future cash requirements may vary materially from those expected now due to a number of factors, including costs associated with product development and strategic opportunities. As a result, it may be necessary to raise further additional funds sooner than currently expected. These funds may come from sources such as the issuance of shares from treasury, or alternative sources of financing. However, there can be no assurance that the Company will successfully raise such funds. Sources and Uses of Cash Sources and Uses of Cash Fiscal 2019 Fiscal 2018 Cash used in operating activities ($6,483) ($4,848) Cash used in investing activities (188) - Cash provided by financing activities 6,476 1,389 Net (decrease) increase in cash and cash equivalents ($195) ($3,459) Cash used in operating activities was comprised of net loss, add-back of non-cash expenses, and net change in non-cash working capital items. Cash used in operating activities increased to $6,483 in Fiscal year 2019 from $4,848 in Fiscal year 2018. This increase was primarily due to increase in net loss of $28,147, increase in gain from change in fair value of contingent consideration of $10,830, Change in deferred tax liability, net of $4,402 and decrease in shares issued for services of $2,184, which were offset by change in fair value of derivatives of $13,651, increase in impairment of IP Research and Development Asset of $31,155. Cash used in investing activities increased to $188 in 2019 from Nil in 2018. This was due to the Bridge funding provided, net. Cash provided by financing activities increased by $5,087 from Fiscal 2018 to Fiscal 2019. This was due to the receipts of funds by the company in 2019 from private placement financings that closed in January 2019, March 2019, September 2019 and October 2019, and a public offering that closed in April/May 2019 in a total net proceeds of $6,676 and partial repayment of promissory note of $200, offset by payment of $2,561 to the Talent Sellers in 2018 and from proceeds from August 2018 financing of $3,233. OUTSTANDING SHARE CAPITAL As of September 30, 2020, there were 546,075,967 Common Shares issued and outstanding, and other securities convertible into Common Shares as summarized in the following table: 39161-2001 27553992.1 - 27 - Number Outstanding as of September 30, 2020 Common Shares issued and outstanding 515,464,267 Options(1) 39,847,788 2017 Convertible debentures principal amount (2) C$453,000 August 2018 Investors Warrants(3) 22,462,950 August 2018 Broker Warrants(4) 2,246,295 January 2019 Investors Warrants(5) 15,090,573 January 2019 Broker Warrants(6) 1,127,247 February 2019 Talent Warrants(7) 4,719,176 March 2019 Warrants (8) 12,115,384 March 2019 Convertible debentures principal amount (9) C$705,976 April/May 2019 Investors Warrants(10) 167,515,000 April/May 2019 Broker Warrants(11) 12,563,700 September 2019 Investors Warrants(11) 10,946,423 September 2019 Broker Warrants(11) 675,788 October 21, 2019 Investors Warrants(11) 1,974,445 October 25, 2019 Investors Warrants(11) 2,811,111 October 25, 2019 Compensation Warrants(11) 224,889 July 2020 Investors Warrants(11) 10,314,350 July 2020 Broker Warrants(11) 1,333,336 Notes: (1) Out of the 39,847,788 options outstanding, 26,781,865 are vested and exercisable at a weighted average price of C$0.17 per Common Share. The remaining 13,065,923 options are not vested and have a weighted average price of C$0.09 per Common Share. (2) The convertible debentures issued in the Company’s December 2017 private placement are convertible by the holder into Common Shares at a conversion price of CDN$0.13 per Common Share. (3) Each warrant issued to investors in the August Offering entitles the holder to acquire one Common Share at a price of C$0.155 per Common Share. (4) Each warrant issued to the agent in the August Offering entitles the holder to acquire one Common Share at a price of C$0.11 per Common Share. (5) Of the 15,090,573 warrants issued to investors in the January 2019 Private Placements, 11,532,000 warrants entitle the holder to acquire one Common Share at a price of C$0.07 per Common Share and 3,558,573 warrants entitle the holder to acquire one Common Share at a price of C$0.10 per Common Share. (6) Of the 1,127,247 warrants issued to the agent in the January 2019 Private Placements, 922,560 warrants entitle the holder to acquire one Common Share at a price of C$0.07 per Common Share and 204,687 warrants entitle the holder to acquire one Common Share at a price of C$0.10 per Common Share. (7) Each warrant issued to the Talent Sellers in February 2019 bears the same terms as the August Warrants and entitles the holder to acquire one Common Share at a price of C$0.155 per Common Share. (8) Each March 2019 Warrant entitles the holder to acquire one Common Share at a price of C$0.065 per Common Share. (9) The March 2019 Convertible Debentures are convertible by the holder into Common Shares at a conversion price of CDN$0.05 per Common Share during the first twelve months of their term and at a conversion price of CDN$0.10 per Common Share in the following period. (10) Each warrant issued to investors in the April Offering entitles the holder to acquire one Common Share at a price of C$0.065 per Common Share. (11) Each warrant issued entitles the holder to acquire one Common Share at a price of C$0.05 per Common Share. 39161-2001 27553992.1 - 28 - OFF-BALANCE SHEET ARRANGEMENTS The Company has no undisclosed off-balance sheet arrangements that have or are reasonably likely to have, a current or future effect on its results of operations, financial condition, revenues or expenses, liquidity, capital expenditures or capital resources that is material to investors. RELATED PARTY TRANSACTIONS [a] Transactions with related parties Related parties include members of the Board and officers of the Company, and enterprises controlled by these individuals. The following table summarizes compensation to key management personnel and transactions with related parties which were incurred in the normal course of business (expressed in thousands): Fiscal 2019 Fiscal 2018 Board Member Fees(1) 178 194 Officer Salaries & Benefits(2) 646 673 Share based payments 925 840 TOTAL 1,749 1,707 Notes: (1) Board member fees for the year ended December 31, 2019 are in respect of Ron Erickson $96, Jeffrey Paley $38, Gary Leong (former director) $25 and Rob Hutchison $19. (2) Officer Salaries & Benefits for the year ended December 31, 2019 are in respect of Robert Farrell $339, Victoria Rudman $75, Sari Prutchi-Sagiv $146 and Dr. Moshe Yeshurun $86. (3) Share-based compensation for the year ended December 31, 2019 are in respect of the Company's directors Gary Leong ($ 41), Jeffrey Paley $ 128, Ron Erickson $ 130, Rob Hutchison $10 and officers of the Company Robert Farrell $534, Dr. Moshe Yeshurun $76, Sari Prutchi-Sagiv $66 and Victoria Rudman $22. Ron Erickson and Robert Farrell participated in the Company’s Private Placement in September 2019 as disclosed above, at a subscription price of CDN$0.05 per unit (each unit consisting of one common share and one common share purchase warrant). Robert Farrell purchased 1,972,950 units while Ron Erickson purchased 526,120 units. PROPOSED TRANSACTIONS There are at present no transactions outstanding that have been proposed but not approved by either the Company or regulatory authorities. CHANGES IN OR ADOPTION OF ACCOUNTING POLICIES New Standards Recently Adopted IFRIC 23: In June 2017, the IASB issued IFRIC 23, "Uncertainty over Income Tax Treatments" ("the Interpretation"). The Interpretation clarifies the accounting for recognition and measurement of assets or liabilities in accordance with the provisions of IAS 12, "Income Taxes", in situations 39161-2001 27553992.1 - 29 - of uncertainty involving income taxes. The Interpretation provides guidance on considering whether some tax treatments should be considered collectively, examination by the tax authorities, measurement of the effects of uncertainty involving income taxes in the financial statements and accounting for changes in facts and circumstances in respect of the uncertainty. The initial adoption on January 1, 2019 of the Interpretation did not have a material effect on the consolidated financial statements. IFRS 16, "Leases": In January 2016, the IASB issued IFRS 16, "Leases" ("the new Standard"). According to the new Standard, a lease is a contract, or part of a contract, that conveys the right to use an asset for a period of time in exchange for consideration. The effects of the adoption of the new Standard are as follows: • According to the new Standard, lessees are required to recognize all leases in the statement of financial position. Lessees will recognize a liability for lease payments with a corresponding right-of-use asset, similar to the accounting treatment for finance leases under the existing standard, IAS 17, "Leases". Lessees will also recognize interest expense and depreciation expense separately. • Variable lease payments that are not dependent on changes in the Consumer Price Index ("CPI") or interest rates, but are based on performance or use are recognized as an expense by the lessees as incurred and recognized as income by the lessors as earned. • In the event of change in variable lease payments that are CPI-linked, lessees are required to remeasure the lease liability and record the effect of the remeasurement as an adjustment to the carrying amount of the right-of-use asset. • The accounting treatment by lessors remains substantially unchanged from the existing standard, namely classification of a lease as a finance lease or an operating lease. The adoption on January 1, 2019, of the new Standard did not have a material effect on the consolidated financial statements. CRITICAL ACCOUNTING ESTIMATES AND JUDGEMENTS The preparation of the financial statements to which this MD&A applies requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and reported amounts of expenses during the reporting period. Actual outcomes could differ from these estimates. The financial statements include estimates which, by their nature, are uncertain. The impacts of such estimates are pervasive throughout the financial statements and may require accounting adjustments based on future occurrences. Revisions to accounting estimates are recognized in the period in which the estimate is revised and also in future periods when the revision affects both current and future periods. Below is a list of the critical accounting estimates and judgments applied in this MD&A which may have a significant effect on the figures recognized in the financial statements. Derivatives 39161-2001 27553992.1 - 30 - Warrants issued that are exercisable in cash or on a cashless basis, that contain non-standard anti-dilution protection provisions, or that are denominated in a foreign currency resulting in a variable number of shares being issued are considered a liability and therefore measured at fair value. The Company uses the Black-Scholes option pricing model to estimate fair value at each reporting date. The key assumptions used in the model are the expected future volatility in the price of the Company's shares and the expected life of the warrants. Fair value measurement of financial instruments When the fair values of financial assets and financial liabilities recorded in the statement of financial position cannot be measured based on quoted prices in active markets, their fair value is measured using valuation techniques including the discounted cash flow (DCF) model. The inputs to these models are taken from observable markets where possible, but where this is not feasible, a degree of judgment is required in establishing fair values. Judgments include considerations of inputs such as liquidity risk, credit risk and volatility. Changes in assumptions relating to these factors could affect the reported fair value of financial instruments. Contingent consideration, resulting from business combinations, is valued at fair value at the acquisition date as part of the business combination. When the contingent consideration meets the definition of a financial liability, it is subsequently remeasured to fair value at each reporting date. The determination of the fair value is based on discounted cash flows. The key assumptions take into consideration the probability of meeting each performance target and the discount factor. FINANCIAL INSTRUMENTS AND RISKS Dollar amounts in this section are specified in thousands unless otherwise specified. The Company’s financial instruments at December 31, 2019 and 2018 consist of the following: December 31, 2019 December 31, 2018 Financial Liabilities Derivative liability 2,712 299 Conversion option 55 7 Earn-Out and contingent liability related to the acquisition of Talent 16,393 34,732 Convertible Debenture 736 246 The Company has designated its cash and cash equivalents as fair value through profit or loss, which is measured at fair value. Amounts receivable are classified as loans and receivables, which are measured at amortized cost. Accounts payable and accrued liabilities are classified as other financial liabilities, which are measured at amortized cost. 39161-2001 27553992.1 - 31 - Fair value IFRS 13 establishes a fair value hierarchy for financial instruments measured at fair value that reflects the significance of inputs used in making fair value measurements as follows: Level 1 - quoted prices in active markets for identical assets or liabilities; Level 2 - inputs other than quoted prices included in Level 1 that are observable for the asset or liabilities, either directly (i.e. as prices) or indirectly (i.e. from derived prices); and Level 3 - inputs for the asset or liability that are not based upon observable market data. The fair value of cash and cash equivalents is based on Level 1 inputs. [a] Credit risk Credit risk is the risk of a financial loss to the Company if a counterparty to a financial instrument fails to meet its contractual obligations. Credit risk arises for the Company from its cash on deposits and amounts receivable. The Company has adopted practices to mitigate against the deterioration of principal, to enhance the Company’s ability to meet its liquidity needs, and to optimize yields within those parameters. Liquidity risk Liquidity risk is the risk that the Company will not be able to meet its obligations as they come due. The Company’s exposure to liquidity risk is dependent on its purchasing commitments and obligations and its ability to raise funds to meet commitments and sustain operations. The Company manages liquidity risk by continuously monitoring its actual and forecasted working capital requirements, and actively managing its financing activities. As of December 31, 2019, the Company had working capital of ($5,609) (December 31, 2017 - ($7,073). [c] Market risk Liquidity Interest rate risk Interest rate risk is the risk that the future cash flows of a financial instrument will fluctuate because of changes in the market interest rates. During the period ended December 31, 2019 and 2018, fluctuations in the market interest rates had no significant impact on its interest income. [ii] Currency risk The Company is exposed to the financial risk related to the fluctuation of foreign exchanges rates. The Company has a portion of its operating expenses in Canadian dollars and in Israeli new shekels (NIS). The Company has not entered into foreign exchange derivative contracts. A significant change in the currency exchange rate between the Canadian dollar or the NIS relative to the U.S. dollar could have an effect on the Company’s results of operations, financial position or cash flows. As at December 31, 2019 and December 31, 2018, the Company had the following assets and liabilities denominated in Canadian dollars (in thousands): 39161-2001 27553992.1 - 32 - December 31, 2019 December 31, 2018 CAD CAD Cash - 233 Other payables and accrued expenses - (859) Convertible debentures (736) (335) Total (736) (961) Based on the above net exposure as at December 31, 2019, assuming that all other variables remain constant, a 5% appreciation or deterioration of the Canadian dollar against the US dollar would result in a change of $28 in the Company’s net loss and comprehensive loss in US dollars. As at December 31, 2019 and December 31, 2018, the Company had the following assets and liabilities denominated in NIS (in thousands): December 31, 2019 December 31, 2018 NIS NIS Cash 4 16 Other receivables and prepaid expenses 7 301 Other payables and accrued expenses (189) (375) Total (178) (58) Based on the above net exposure as at December 31, 2019, assuming that all other variables remain constant, a 5% appreciation or deterioration of the NIS against the US dollar would result in $3 change in the Company’s net loss and comprehensive loss in US dollars. [d] Additional risk factors Current and prospective shareholders should specifically consider various factors, including the risks outlined below and under the heading “Risk Factors” in the Company’s 2019 AIF filed on SEDAR (www.sedar.com). Should one or more of these risks or uncertainties, including the risks listed below, or a risk that is not currently known to us materialize, or should assumptions underlying forward-looking statements prove incorrect, actual results may vary materially from those described above. Volatility of Market Price Securities markets have a high level of price and volume volatility, and the market price of securities of many companies has experienced substantial volatility in the past. This volatility may affect the ability of holders of Common Shares to sell their securities at an advantageous price. Market price fluctuations in the Common Shares may be due to the Company’s operating results failing to meet expectations of securities analysts or investors in any period, downward revision in securities analysts’ estimates, adverse changes in general market conditions or economic trends, acquisitions, dispositions or other material public announcements by the Company or its competitors, along with a variety of additional factors. These broad market fluctuations may adversely affect the market price of the Common Shares. 39161-2001 27553992.1 - 33 - Financial markets historically at times experienced significant price and volume fluctuations that have particularly affected the market prices of equity securities of companies and that have often been unrelated to the operating performance, underlying asset values or prospects of such companies. Accordingly, the market price of the Common Shares may decline even if the Company’s operating results, underlying asset values or prospects have not changed. Additionally, these factors, as well as other related factors, may cause decreases in asset values that are deemed to be other than temporary, which may result in impairment losses. There can be no assurance that continuing fluctuations in price and volume will not occur. If such increase levels of volatility and market turmoil continue, the Company’s operations could be adversely impacted and the trading price of the Common Shares may be materially adversely affected. Positive Return in an Investment in the Common Shares of the Company is Not Guaranteed There is no guarantee that an investment in the Company will earn any positive return in the short term or long term. A purchase of the shares involves a high degree of risk and should be undertaken only by purchasers whose financial resources are sufficient to enable them to assume such risks and who have no need for immediate liquidity in their investment. An investment in the Common Shares is appropriate only for purchasers who have the capacity to absorb a loss of some or all of their investment. Dilution The Company may issue additional securities in the future, which may dilute a shareholder’s holdings in the Company. The Company’s articles permit the issuance of an unlimited number of Common Shares. The Company’s shareholders do not have pre-emptive rights in connection with any future issuances of securities by the Company. The directors of the Company have discretion to determine the price and the terms of further issuances. Moreover, additional Common Shares will be issued by the Company on the exercise of stock options under the Company’s stock option plan and upon the exercise of outstanding warrants. Negative Cash Flow from Operations During the fiscal years ended December 31, 2019 and 2018, the Company had negative cash flows from operating activities. To the extent that the Company has negative cash flow in any future period, proceedings from equity, debt or alternative financing sources may be used to fund such negative cash flow from operating activities. Development Costs and Timing Kalytera may be unable to initiate or complete development of its product candidates on Kalytera’s currently expected timeline, or at all. The timing for the completion of the studies for Kalytera’s product candidates will require funding beyond the Company’s existing cash and cash equivalents. In addition, if regulatory authorities require additional time or studies to assess the safety or efficacy of a product candidate, Kalytera may not have or be able to obtain adequate 39161-2001 27553992.1 - 34 - funding to complete the necessary steps for approval for its product candidates. Additional delays may result if the FDA or other regulatory authority recommends non-approval or restrictions on approval. Studies required to demonstrate the safety and efficacy of Kalytera’s product candidates are time consuming, expensive and together take several years or more to complete. In addition, approval policies, regulations or the type and amount of clinical data necessary to gain approval may change during the course of a product candidate’s clinical development and may vary among jurisdictions. Kalytera has not obtained regulatory approval for any product candidate and it is possible that none of its existing product candidates or any product candidates it may seek to develop in the future will ever obtain regulatory approval. Delays in regulatory approvals or rejections of applications for regulatory approval in Canada, the United States, Europe, Japan or other markets may result from a number of factors, many of which are outside of Kalytera’s control. The lengthy and unpredictable approval process, as well as the unpredictability of future clinical trial results, may result in Kalytera’s failure to obtain regulatory approval to market any of its product candidates, which would significantly harm Kalytera’s business, results of operations and prospects. Change in Laws, Regulations, and Related Issues The Company's operations are subject to a variety laws, regulations and guidelines including relating to the manufacture, management, transportation, storage, and disposal of controlled substances as well as laws and regulations relating to health and safety, the conduct of operations and the protection of the environment. Approval policies, laws, regulations and guidelines may change during the course of a product candidate’s clinical development and may vary among jurisdictions. Any delays in obtaining, or failure to obtain regulatory approvals, including at the pre-clinical, clinical or marketing stage, would significantly delay the development of markets and products and could have a material adverse effect on the business, results of operations and financial condition of the Company. Dependence on Key Personnel The Company strongly depends on the business and technical expertise of its key management and service providers and it is unlikely that this dependence will decrease in the near term. Loss of the Company’s key personnel or service providers could slow the Company’s ability to innovate, although the effect on ongoing operations would be manageable as experienced key operations personnel and other service providers could be put in place. As the Company’s operations expand, additional general management resources will be required. If the Company expands its operations, the ability of the Company to recruit, train, integrate and manage a large number of new employees is uncertain and failure to do so would have a negative impact on the Company’s business plans. Intellectual Property Our success depends on our ability to protect our proprietary rights and operate without infringing the proprietary rights of others; we may incur significant expenses or be prevented 39161-2001 27553992.1 - 35 - from developing and/or commercializing products as a result of an intellectual property infringement claim. Our success will depend in part on our ability and that of our corporate collaborators to obtain and enforce patents and maintain trade secrets, both in the United States and in other countries. The patent positions of biotechnology and biopharmaceutical companies, including us, is highly uncertain and involves complex legal and technical questions for which legal principles are not firmly established. The degree of future protection for our proprietary rights, therefore, is highly uncertain. In this regard there can be no assurance that patents will issue from any of the pending patent applications. In addition, there may be issued patents and pending applications owned by others directed to technologies relevant to our or our corporate collaborators’ research, development and commercialization efforts. There can be no assurance that our or our corporate collaborators’ technology can be developed and commercialized without a license to such patents or that such patent applications will not be granted priority over patent applications filed by us or one of our corporate collaborators. Our commercial success depends significantly on our ability to operate without infringing the patents and proprietary rights of third parties, and there can be no assurance that our and our corporate collaborators’ technologies and products do not or will not infringe the patents or proprietary rights of others. There can be no assurance that third parties will not independently develop similar or alternative technologies to ours, duplicate any of our technologies or the technologies of our corporate collaborators or our licensors, or design around the patented technologies developed by us, our corporate collaborators or our licensors. The occurrence of any of these events would have a material adverse effect on our business, financial condition and results of operations. Litigation may also be necessary to enforce patents issued or licensed to us or our corporate collaborators or to determine the scope and validity of a third party’s proprietary rights. We could incur substantial costs if litigation is required to defend ourselves in patent suits brought by third parties, if we participate in patent suits brought against or initiated by our corporate collaborators or if we initiate such suits, and there can be no assurance that funds or resources would be available in the event of any such litigation. An adverse outcome in litigation or an interference to determine priority or other proceeding in a court or patent office could subject us to significant liabilities, require disputed rights to be licensed from other parties or require us or our corporate collaborators to cease using certain technology or products, any of which may have a material adverse effect on our business, financial condition and results of operations. Lack of Revenue The ability to generate revenue depends upon the ability to obtain regulatory approval for, and successfully commercialize, product candidates that Kalytera develops or acquires in the future. As of the date of this MD&A, there is no expectation to generate revenue in the foreseeable future, except as discussed above with respect to revenues that the Company will receive under the BARDA contract following close of the acquisition of Salzman Group. 39161-2001 27553992.1 - 36 - There is no assurance that Kalytera can generate revenues even if regulatory approvals are achieved for its product candidates. The ability to generate revenue depends on a number of factors, including: • successful completion of development activities, including the additional preclinical studies and planned clinical trials for the product candidates; • completion and submission of applications for regulatory approval in select jurisdictions, including New Drug Applications to the FDA in the United States, Marketing Authorization Applications to the European Medicines Agency, and New Drug Submissions to Health Canada; • obtaining regulatory approval from the FDA, European Medicines Agency and Health Canada for indications for which there is a commercial market; • completion and submission of applications to, and obtaining regulatory approval from, other foreign regulatory authorities; • raising substantial additional capital to fund operations; • manufacturing or acquiring CBD and approved products and in commercial quantities and on commercially reasonable terms; • developing a commercial organization, or finding suitable partners, to market, sell and distribute approved products in the markets in which Kalytera have obtained commercialization rights; • achieving acceptance among patients, clinicians and advocacy groups for any developed products; • obtaining coverage and adequate reimbursement from third parties, including government payors; and • selling approved products at a commercially viable price in countries subject to price controls. ADDITIONAL INFORMATION Additional information about the Company, including the Annual Financial Statements, is available on SEDAR at www.sedar.com.