The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2017
(UNAUDITED)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Cure Pharmaceutical Holding Corp (the “Company”), formerly known as Makkanotti Group Corp, was incorporated in the State of Nevada on May 15, 2014. The Company was formed to engage in the business of manufacturing food paper bags in Nicosia, Cyprus. On November 7, 2016, the Company changed its name to Cure Pharmaceutical Holding Corp.
On November 7, 2016, the Company, in a reverse take-over transaction, acquired Cure Pharmaceutical Corporation (“Cure Pharmaceutical”), a specialty pharmaceutical and bioscience company based in California that specializes in drug delivery technologies, by executing a Share Exchange Agreement and Conversion Agreement (“Exchange Agreement”) by and among the Company and a holder of a majority of the issued and outstanding capital stock of the registrant prior to the closing (the “Majority Stockholder”), on the one hand, and Cure Pharmaceutical, a California corporation, all of the shareholders of Cure Pharmaceutical’s issued and outstanding share capital (the “Cure Pharm Shareholders”) and the holders of certain convertible promissory notes of Cure Pharmaceutical (“Cure Pharm Noteholders”), on the other hand. Hereinafter, this share exchange transaction is described as the “Share Exchange.” As a result of the Share Exchange, Cure Pharmaceutical became a wholly owned subsidiary of the Company, and the Cure Pharm Shareholders and Cure Pharm Noteholders became the controlling shareholders of the Company.
For accounting purposes, Cure Pharmaceutical shall be the surviving entity. The transaction is accounted for using the reverse acquisition method of accounting. As a result of the recapitalization and change in control, Cure Pharmaceutical is the acquiring entity in accordance with ASC 805, Business Combinations.
Cure Pharmaceutical Corporation is a specialty pharmaceutical and bioscience company with a focus in drug delivery technologies. Cure leverages novel drug delivery technologies to develop and commercialize new applications of proven therapeutics through Oral Thin Film (“OTF”) via our proprietary patented CureFilm™ Technology as well as through transdermal applications. Our micro encapsulation of drug actives in our CureFilm™ Technology allows for a higher volume of an active and if required, multiple actives to be produced on a single oral thin film strip.
The Company is focused on partnering with pharmaceutical and biotech companies seeking to deliver drug actives utilizing and benefitting from our proprietary OTF and transdermal applications and when preferable to take our own products from clinical process to commercialization. We are focused on both the human and veterinary prescription, OTC and nutraceutical markets. Cure represents the complete solution for OTF drug delivery therapeutics from inception to finished product utilizing our CGMP/FDA registered manufacturing facility and processes.
In July 2017, the Company, Therapix Biosciences Ltd. (“Therapix”), a specialty clinical-stage pharmaceutical company dedicated to the development of cannabinoid-based drugs headquartered in Israel, and Assuta Medical Centers, Ltd., a medical services center located in Israel, entered into a nonbinding memorandum of understanding to collaborate to advance, research, develop and commercialize potential therapeutic products in the fields of personalized medicine and cannabinoids. On October 27, 2017, the Company entered into a development agreement with Therapix where the Company will formulate and develop pharmaceutical products using Therapix’s proprietary compounds while utilizing the Company’s proprietary OTF technology.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation and Basis of Presentation
The condensed consolidated financial statements include the accounts of Cure Pharmaceutical Holding Corp (“CPHC”) and its wholly-owned subsidiary, Cure Pharmaceutical Corporation (“Cure”), collectively referred to as (“Cure”, “we”, “us”, “our” or the “Company” All significant inter-company balances and transactions have been eliminated in consolidation. The Company’s film strip product represents the principal operations of the Company.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by accounting principles generally accepted in the United States of America for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of September 30, 2017, and the results of operations and cash flows for the periods presented. The results of operations for the three and nine months ended September 30, 2017 and 2016, are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in Form 10-K for the fiscal period ended December 31, 2016 filed with the Securities and Exchange Commission (the “SEC”) on April 17, 2017.
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements. These estimates and assumptions also affect the reported amounts of revenues, costs and expenses during the reporting period. Management evaluates these estimates and assumptions on a regular basis. Actual results could differ from those estimates.
Cash and Cash Equivalents
The Company considers all cash on hand and in banks, including accounts in book overdraft positions, certificates of deposit and other highly-liquid investments with maturities of three months or less, when purchased, to be cash and cash equivalents. As of September 30, 2017 and December 31, 2016, the Company had no cash equivalents. At September 30, 2017 and December 31, 2016, the Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation (“FDIC”) in accounts that at times may be in excess of the federally insured limit of $250,000 per bank. The Company minimizes this risk by placing its cash deposits with major financial institutions.
Investment in Associates
An associate is an entity over which the Company has significant influence through a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but not control or joint control over those policies.
The results of assets and liabilities of associates are incorporated in the condensed consolidated financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Company’s share of the net assets of the associate, less any impairment in the value of the investment. Losses of an associate in excess of the Company’s interest in that associate are not recognized. Additional losses are provided for, and a liability is recognized, only to the extent that the Company has incurred legal or constructive obligations or made payments on behalf of the associate.
Any excess of the cost of acquisition over the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognized at the date of acquisition is recognized as goodwill. The goodwill is included within the carrying amount of the investment.
On January 8, 2016, the Company received 50% ownership in Cure Innovations, Inc (“CI”). CI was created in 2015 by IncuBrands Studio, Inc (“IncuBrands”). The Company and IncuBrands each own 50% of the common stock of CI. The Company and IncuBrands entered into a Joint Venture agreement in 2013 to distribute several OTF products utilizing IncuBrands marketing and contacts in various industries as well as utilize the Company’s technology and capabilities of manufacturing OTF’s.
On December 6, 2016, the Company entered into a Joint Venture Agreement (“Joint Venture”) with Pace Wellness, Inc. (“Pace”) to jointly develop three Active Pharmaceutical Ingredients (“API”) within the nonprescription and/or Over-the-Counter (OTC) medicines specifically utilizing the Company’s patented and proprietary CureFilm™ Technology. The three API’s to be jointly developed are Diphenhydramine HCL, Omeprazole and a third API to be determined at a later date (“Products”). Pace shall be the exclusive global distributor of the Products under the Solves Strips® branding or other private or branded labels. All benefits, advantages, and liabilities derived from, or incurred in respect of the Joint Venture shall be borne by the parties in proportion of their respective participating interests of 50/50 equal interest.
Property and Equipment
The Company capitalizes expenditures related to property and equipment, subject to a minimum rule, that have a useful life greater than one year for: (1) assets purchased; (2) existing assets that are replaced, improved or the useful lives have been extended; or (3) all land, regardless of cost. Acquisitions of new assets, additions, replacements and improvements (other than land) costing less than the minimum rule in addition to maintenance and repair costs, including any planned major maintenance activities, are expensed as incurred. Depreciation has been provided using the straight-line method on the following estimated useful lives:
Manufacturing equipment
|
|
5-7 Years
|
Computer and other equipment
|
|
3-7 Years
|
Leasehold Improvements
|
|
Lesser of useful life or the term of the lease
|
Accounts Receivable
Accounts receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied against the allowance for doubtful accounts.
Impairment of Long-Lived Assets
Long-lived assets include equipment and intangible assets other than those with indefinite lives. We assess the carrying value of our long-lived asset groups when indicators of impairment exist and recognize an impairment loss when the carrying amount of a long-lived asset is not recoverable when compared to undiscounted cash flows expected to result from the use and eventual disposition of the asset.
Indicators of impairment include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically a discounted cash flow analysis, and an impairment charge is recorded for the excess of carrying value over fair value. There were no impairments on our long-lived assets during the three and nine month periods ended September 30, 2017 and 2016.
Revenue Recognition
The Company recognizes revenue in accordance with the FASB ASC 605, Revenue Recognition. ASC 605 requires that four basic criteria must be met before revenue can be recognized: (1) persuasive evidence of an arrangement exists; (2) delivery has occurred and/or service has been performed; (3) the selling price is fixed and determinable; and (4) collectability is reasonably assured. The Company believes that these criteria are satisfied upon shipment from our facility. Freight billed to customers is presented as revenues, and the related freight costs are presented as cost of goods sold. Deferred revenue is recognized when earned and all significant obligations have been satisfied.
Advertising Expense
The Company expenses marketing, promotions and advertising costs as incurred. Such costs are included in general and administrative expense in the accompanying statements of operations. The Company recorded advertising costs of $8,567 and $13,062, for the three and nine month periods ended September 30, 2017, respectively, and $10,000 for the three and nine month periods ended September 30, 2016.
Research and Development
Costs incurred in connection with the development of new products and processes are charged to research and development expenses as incurred. The Company recorded research and development expenses of $239,663 and $664,931 for the three and nine month periods ended September 30, 2017, respectively, and $214,478 and $513,276 for the three and nine month periods ended September 30, 2016, respectively.
Income Taxes
The Company utilizes FASB ASC 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is recorded when it is “more likely-than-not” that a deferred tax asset will not be realized.
The Company generated a deferred tax asset through net operating loss carry-forward. However, a valuation allowance of 100% has been established due to the uncertainty of the Company’s realization of the net operating loss carry forward prior to its expiration.
Stock-Based Compensation
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
Pursuant to ASC Topic 505-50, for share-based payments to consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the reporting date.
Fair Value Measurements
The Company adopted the provisions of ASC Topic 820, “Fair Value Measurements and Disclosures”, which defines fair value as used in numerous accounting pronouncements, establishes a framework for measuring fair value and expands disclosure of fair value measurements.
The estimated fair value of certain financial instruments, including cash and cash equivalents are carried at historical cost basis, which approximates their fair values because of the short-term nature of these instruments.
ASC 820 defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. ASC 820 also establishes a fair value hierarchy, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. ASC 820 describes three levels of inputs that may be used to measure fair value:
Level 1 — quoted prices in active markets for identical assets or liabilities
Level 2 — quoted prices for similar assets and liabilities in active markets or inputs that are observable
Level 3 — inputs that are unobservable (for example cash flow modeling inputs based on assumptions)
The Company has assets or liabilities valued at fair value on a recurring basis for the nine months ended September 30, 2017. The Company did not have assets or liabilities valued at fair value on a recurring basis for the year ended December 31, 2016.
Basic and diluted loss per share
Basic loss per share is computed by dividing the net loss to common stockholders for the period by the weighted average number of common shares outstanding during the period. Diluted loss per share is computed by dividing the net loss for the period by the weighted average number of common and dilutive common equivalent shares outstanding during the period. Common equivalent shares, which consist of stock options, warrants, and convertible notes payable, have been excluded from the diluted loss per share calculation because their effect is anti-dilutive.
Going Concern
The Company’s financial statements are prepared using U.S. GAAP applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company had an accumulated deficit at September 30, 2017 of $17,688,778. The Company had a working capital deficit of $964,087 as of September 30, 2017. These factors raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the financial statements. The ability of the Company to continue as a going concern is dependent on the Company obtaining adequate capital to fund operating losses until it establishes a revenue stream and becomes profitable. The Company is continually analyzing its current costs and is attempting to make additional cost reductions where possible. We expect that we will continue to generate losses from operations throughout 2017.
Historically, the Company has had operating losses and negative cash flows from operations which cast significant doubt upon the Company’s ability to continue as a going concern. The Company will need to raise capital in order to fund its operations. This need may be adversely impacted by uncertain market conditions and changes in the regulatory environment. To address its financing requirements, the Company intends to seek financing through debt and equity issuances to existing stockholders.
Specifically, management has identified that a minimum of $4,000,000 of capital is needed over the next 12 months in order sustain operations. These capital needs to take into account, among other things, management's plans to advance intellectual property, maintenance of patents, upgrades for manufacturing and to hire personnel for business development. Management has outlined a plan to raise $10,000,000 in capital over the next 12 months through the issuance of shares of the Company's common stock to accredited investors. Management believes that the capital raised through these methods will be sufficient to sustain operations for the next 12 months. However, the outcome of these matters cannot be predicted with certainty at this time.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary if the Company is unable to continue as a going concern.
Recently Issued Standards
In January 2016, the FASB issued ASU 2016-01, Recognition and Measurement of Financial Assets and Financial Liabilities. The purpose is to enhance the reporting model for financial instruments to provide users of financial statements with more decision-useful information. This ASU is effective for the Company in the first quarter of 2018. Early adoption is not permitted except for limited provisions. The Company does not expect the adoption of this amendment to have a material effect on its financial condition and results of operations.
In February 2016, the FASB issued ASU 2016-02—Leases (Topic 842), requiring lessees to recognize a right-of-use asset and a lease liability on the balance sheet for all leases with the exception of short-term leases. For lessees, leases will continue to be classified as either operating or finance leases in the income statement. The effective date of the new standard for public companies is for fiscal years beginning after December 15, 2018 and interim periods within those fiscal years. Early adoption is permitted. The new standard must be adopted using a modified retrospective transition and requires application of the new guidance at the beginning of the earliest comparative period presented. The Company is evaluating the effect that the updated standard will have on its financial statements and related disclosures.
In March 2016, the FASB issued ASU No. 2016-09, Compensation-Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting. The new standard requires recognition of the income tax effects of vested or settled awards in the income statement and involves several other aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. This new standard became effective for the Company on January 1, 2017. The adoption of this standard did not have a material impact on its financial position, results of operations or statements of cash flows upon adoption.
In May 2016, the FASB issued ASU No. 2016-12, “
Revenue from Contracts with Customers (Topic 606): Narrow-Scope Improvements and Practical Expedients
”, to clarify certain core recognition principles including collectability, sales tax presentation, noncash consideration, contract modifications and completed contracts at transition and disclosures no longer required if the full retrospective transition method is adopted. The effective date and transition requirements for these amendments are annual reporting periods beginning after December 15, 2017, including interim reporting periods therein, and that would also permit public entities to elect to adopt the amendments as of the original effective date as applicable to reporting periods beginning after December 15, 2016. The new guidance allows for the amendment to be applied either retrospectively to each prior reporting period presented or retrospectively as a cumulative-effect adjustment as of the date of adoption. The Company expects to adopt the standard and is currently evaluating the impact of this amendment on its financial statements.
In August, 2016, the FASB issued Accounting Standards Update No. 2016-15, Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (“ASU 2016-15”). The amendments in ASU 2016-15 address eight specific cash flow issues and apply to all entities that are required to present a statement of cash flows under ASC Topic 230, Statement of Cash Flows. The amendments in ASU 2016-15 are effective for public business entities for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption during an interim period. The Company has not yet completed the analysis of how adopting this guidance will affect its consolidated financial statements.
In January 2017, the FASB issued ASU No. 2017-01, Business Combinations (Topic 805): Clarifying the Definition of a Business. This new standard clarifies the definition of a business and provides a screen to determine when an integrated set of assets and activities is not a business. The screen requires that when substantially all of the fair value of the gross assets acquired (or disposed of) is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. This new standard will be effective for the Company on January 1, 2018; however, early adoption is permitted with prospective application to any business development transaction.
In May 2017, the FASB issued ASU No. 2017-09,
Compensation-Stock Compensation: Scope of Modification Accounting,
which provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should only be applied if there is a change to the value, vesting conditions or award classification and would not be required if the changes are considered non-substantive. The amendments of this ASU are effective for the Company in the first quarter of 2018, with early adoption permitted. The adoption of ASU 2017-09 is not expected to have an impact on the Company’s consolidated financial statements.
There are various other updates recently issued, however, they are not expected to a have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
NOTE 3 - INVENTORY
Inventory consists of raw materials, packaging components, work-in-process and finished goods. The Company’s inventory is stated at net realized value applied on a FIFO basis. The carrying value of inventory consisted of the following at September 30, 2017 and December 31, 2016:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Raw materials
|
|
$
|
70,058
|
|
|
$
|
68,047
|
|
Packaging components
|
|
|
87,626
|
|
|
|
84,927
|
|
Work-in-process
|
|
|
28,245
|
|
|
|
17,406
|
|
|
|
|
185,929
|
|
|
|
170,380
|
|
Reserve for obsolescence
|
|
|
(96,736
|
)
|
|
|
(89,095
|
)
|
Total inventory
|
|
$
|
89,193
|
|
|
$
|
81,285
|
|
NOTE 4 - PREPAID EXPENSES AND OTHER ASSETS
As of September 30, 2017 and December 31, 2016, prepaid expenses and other assets consisted of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Prepaid consulting services
|
|
$
|
822,973
|
|
|
$
|
150,168
|
|
Prepaid clinical study
|
|
|
642,500
|
|
|
|
-
|
|
Prepaid insurance
|
|
|
8,931
|
|
|
|
42,785
|
|
Other Receivables
|
|
|
10,233
|
|
|
|
10,948
|
|
Prepaid inventory
|
|
|
20,157
|
|
|
|
13,178
|
|
Prepaid expenses
|
|
|
5,900
|
|
|
|
6,800
|
|
Property and Equipment, net
|
|
$
|
1,510,694
|
|
|
$
|
223,879
|
|
NOTE 5 - PROPERTY AND EQUIPMENT AND INTANGIBLE ASSETS
As of September 30, 2017 and December 31, 2016, property and equipment and intangible assets consisted of the following:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Manufacturing equipment
|
|
$
|
779,196
|
|
|
$
|
769,074
|
|
Computer and other equipment
|
|
|
150,191
|
|
|
|
116,747
|
|
Leasehold improvements
|
|
|
36,066
|
|
|
|
36,066
|
|
Less accumulated depreciation
|
|
|
(649,563
|
)
|
|
|
(551,239
|
)
|
Property and Equipment, net
|
|
$
|
315,890
|
|
|
$
|
370,648
|
|
Depreciation expense for the three and nine months ended September 30, 2017 was $21,882 and $98,325, respectively. Depreciation expense for the three and nine months ended September 30, 2016 was $37,984 and $92,046, respectively.
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Intellectual Property
|
|
$
|
814,582
|
|
|
$
|
814,582
|
|
Patents
|
|
|
213,402
|
|
|
|
175,047
|
|
Less accumulated amortization
|
|
|
(122,472
|
)
|
|
|
(95,119
|
)
|
Intangible assets, net
|
|
$
|
905,512
|
|
|
$
|
894,510
|
|
The Company incurred $43,621 and $45,930 of legal patent costs that were capitalized during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. The Company did not write off any intangibles during the nine months ended September 30, 2017 and wrote off $58,522 of intangibles during the year ended December 31, 2016. Amortization expense for the three and nine months ended September 30, 2017 was $10,899 and $30,619, respectively. Amortization expense for the three and nine months ended September 30, 2016 was $10,667 and $31,997, respectively.
The estimated aggregate amortization expense over each of the next five years is as follows:
2017
|
|
$
|
10,899
|
|
2018
|
|
|
43,518
|
|
2019
|
|
|
43,518
|
|
2020
|
|
|
43,518
|
|
2021
|
|
|
43,518
|
|
Thereafter
|
|
|
557,303
|
|
Total Amortization
|
|
$
|
742,273
|
|
NOTE 6 – LOAN PAYABLE
Loan payable consists of the following at September 30, 2017 and December 31, 2016:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Note to a company due September 29, 2017 including interest at 13.25% per annum; unsecured; interest due monthly
|
|
$
|
-
|
|
|
$
|
33,277
|
|
Current portion of loan payable
|
|
|
-
|
|
|
|
33,277
|
|
Loan payable, less current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest expense for the three and nine months ended September 30, 2017 was $281 and $1,946, respectively. Interest expense for the three and nine months ended September 30, 2016 was $113 and $833, respectively.
NOTE 7 – NOTES PAYABLE
Notes payable consist of the following at September 30, 2017 and December 31, 2016:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Note to a company amended on August 27, 2017 and due on or before one month from the amended date and the maturity date shall be extended for one month periods as long as the Company is not in default, interest shall accrue at 10% per annum, secured by the Company’s intellectual property
|
|
$
|
650,000
|
|
|
$
|
-
|
|
Notes to a company of $65,000 and $100,000 due September 30, 2017 and October 30, 2017, respectively, including interest of $3,500 and $5,000, respectively, unsecured, principal and interest due at maturity, principal and interest repaid on September 30, 2017 and October 31, 2017, respectively
|
|
|
100,000
|
|
|
|
-
|
|
Note to an individual, non-interest bearing, unsecured and has no fixed terms of repayment
|
|
|
50,000
|
|
|
|
50,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
800,000
|
|
|
|
50,000
|
|
Current portion of loan payable
|
|
|
800,000
|
|
|
|
50,000
|
|
Loan payable, less current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
During the three and nine months ended September 30, 2017, the Company incurred $4,750 and $10,000, respectively, amortization of discount. During the three and nine months ended September 30, 2016, the Company incurred $0 amortization of discount. Interest expense for the three and nine months ended September 30, 2017 was $8,842. Interest expense for the three and nine months ended September 30, 2016 was $0.
NOTE 8 – CONVERTIBLE PROMISSORY NOTES
Convertible promissory notes consist of the following at September 30, 2017 and December 31, 2016:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
|
|
|
|
|
|
|
Convertible promissory notes totaling $1,300,000 due between November 11, 2017 and March 5, 2018, interest payable at 8% per annum; unsecured; principal and accrued interest convertible into common stock at the lower of $7.00 per share or the price per share of the latest closing of a debt or equity offering by the Company greater than $3,000,000; accrued interest due between November 11, 2017 and March 5, 2018
|
|
$
|
1,300,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,300,000
|
|
|
|
-
|
|
Unamortized discount
|
|
|
(650,634
|
)
|
|
|
-
|
|
Current portion of convertible promissory notes
|
|
|
649,366
|
|
|
|
-
|
|
Convertible promissory notes, less current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
During the three and nine months ended September 30, 2017, the Company incurred $477,285 and $554,968, respectively, amortization of discount. During the three and nine months ended September 30, 2016, the Company incurred $0 amortization of discount. Interest expense for the three and nine months ended September 30, 2017 was $23,617 and $26,922, respectively. Interest expense for the three and nine months ended September 30, 2016 was $0.
NOTE 9 – DERIVATIVE LIABILITY
The following table summarizes fair value measurements by level at September 30, 2017 for assets and liabilities measured at fair value on a recurring basis:
|
|
Level I
|
|
|
Level II
|
|
|
Level III
|
|
|
Total
|
|
Cash
|
|
$
|
127,816
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
127,816
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability
|
|
|
—
|
|
|
|
—
|
|
|
$
|
(482,837
|
)
|
|
$
|
(482,837
|
)
|
No financial assets or liabilities were measured on a recurring basis as of December 31, 2016.
The Company has issued convertible promissory notes during 2017. The convertible notes require us to record the value of the conversion feature as a liability, at fair value, pursuant to ASC 815, including provisions in the notes that protect the holders from declines in the Company’s stock price, which is considered outside the control of the Company. The derivative liabilities are marked-to-market each reporting period and changes in fair value are recorded as a non-operating gain or loss in our statement of operations, until they are completely settled. The fair value of the conversion feature is determined each reporting period using the Black-Scholes option pricing model, and is affected by changes in inputs to that model including our stock price, expected stock price volatility, interest rates and expected term. The assumptions used in valuing the derivative liability during 2017 were as follows:
|
|
September 30,
2017
|
|
Significant assumptions (weighted-average):
|
|
|
|
Risk-free interest rate at grant date
|
|
|
1.92
|
%
|
Expected stock price volatility
|
|
|
84.43
|
%
|
Expected dividend payout
|
|
|
-
|
|
Expected option life (in years)
|
|
|
1
|
|
Expected forfeiture rate
|
|
|
0
|
%
|
The following is a reconciliation of the derivative liability for 2017:
|
|
September 30,
2017
|
|
Value at December 31, 2016
|
|
$
|
-
|
|
Initial value at the debt issuance
|
|
|
658,430
|
|
Decrease in value
|
|
|
(175,593
|
)
|
Value at September 30, 2017
|
|
$
|
482,837
|
|
NOTE 10 – WARRANT AGREEMENTS
On January 3, 2017, the Company issued 1,300,000 warrants in connection with commissions earned in relation to the Company’s Private Label Exclusive Distribution and License agreement with Red Barn Pet Products, LLC.
From May 11, 2017 to September 30, 2017, the Company issued 260,000 warrants in connection with the issuance of $1,300,000 convertible promissory notes.
Warrants that vest at the end of a one-year period are amortized over the vesting period using the straight-line method.
The Company’s warrant activity was as follows:
|
|
Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted Average Contractual Remaining Life
|
|
Outstanding, December 31, 2016
|
|
|
4,392,107
|
|
|
|
1.97
|
|
|
|
6.17
|
|
Granted
|
|
|
1,560,000
|
|
|
|
2.83
|
|
|
|
0.67
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding, September 30, 2017
|
|
|
5,952,107
|
|
|
|
2.19
|
|
|
|
4.18
|
|
Exercisable at September 30, 2017
|
|
|
3,750,665
|
|
|
|
2.34
|
|
|
|
2.70
|
|
The change in warrant value for the three and nine months ended September 30, 2017 was ($157,013) and $2,560,607, respectively. The change in warrant expense for the three and nine months ended September 30, 2016 was $0.
Range of
Exercise Price
|
|
Number of
Warrants
|
|
|
Weighted Average Remaining Contractual Life (years)
|
|
|
Weighted Average Exercise Price
|
|
|
Number of Warrants Exercisable
|
|
|
Weighted Average Exercise Price
|
|
$1.00 - $7.00
|
|
|
5,952,107
|
|
|
|
4.18
|
|
|
$
|
2.19
|
|
|
|
3,750,665
|
|
|
$
|
2.34
|
|
|
|
|
5,952,107
|
|
|
|
4.18
|
|
|
$
|
2.19
|
|
|
|
3,750,665
|
|
|
$
|
2.34
|
|
The weighted-average fair value of warrants granted to during the three months ended September 30, 2017 and year ended December 31, 2016, and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes-Merton (“Black-Scholes”) option pricing model are as follows:
|
|
September 30,
2017
|
|
|
December 31,
2016
|
|
Significant assumptions (weighted-average):
|
|
|
|
|
|
|
Risk-free interest rate at grant date
|
|
|
1.92
|
%
|
|
|
1.83
|
%
|
Expected stock price volatility
|
|
|
84.43
|
%
|
|
|
84.42
|
%
|
Expected dividend payout
|
|
|
-
|
|
|
|
-
|
|
Expected option life (in years)
|
|
|
3
|
|
|
|
3
|
|
Expected forfeiture rate
|
|
|
0
|
%
|
|
|
0
|
%
|
NOTE 11 – STOCKHOLDERS’ EQUITY
Authorized Stock
The Company has authorized to issue is 75,000,000 common shares with a par value of $0.001 per share.
As of September 30, 2017 and December 31, 2016, there were 23,851,252 and 23,336,673, shares of the Company’s common stock issued and outstanding, respectively.
Common Share Issuances
On April 7, 2017, the Company issued 14,579 common stock shares at $6.86 per share for consulting services to be performed over a one year period. The total value of this issuance was $100,000 and as of September 30, 2017, $51,781 is included in prepaid expenses and other assets.
On April 24, 2017, the Company issued 100,000 common stock shares at $7.00 per share for consulting services to be performed over a six month period. The total value of this issuance was $700,000 and as of September 30, 2017, $91,803 is included in prepaid expenses and other assets.
On May 18, 2017, the Company issued 300,000 common stock shares at $2.10 per share for consulting services to be performed over a one year period. The total value of this issuance was $630,000 and as of September 30, 2017, $198,493 is included in prepaid expenses and other assets.
On August 21, 2017, the Company issued 100,000 common stock shares at $5.30 per share for consulting services to be performed over a four month period. The total value of this issuance was $530,000 and as of September 30, 2017, $356,230 is included in prepaid expenses and other assets.
NOTE 12 - COMMITMENTS AND CONTINGENCIES
Litigation:
From time to time the Company may become a party to litigation in the normal course of business. Management believes that there are no current legal matters that would have a material effect on the Company’s financial position or results of operations.
Operating leases
The Company maintains its corporate offices and manufacturing facility at 1620 Beacon Place, Oxnard, CA 93033, which contains approximately 25,000 square feet. The Company is currently on a month-to-month lease.
The Company also leases additional office and warehouse space at 1610 and 1612 Fiske Place, Oxnard, CA 93033, which contains approximately 6,547 square feet. The Company is currently on a month-to-month lease.
Total rent expense for the three and nine month periods ended September 30, 2017 was $73,415 and $219,230, respectively. Total rent expense for the three and nine month periods ended September 30, 2016 was $71,235 and $213,804, respectively.
NOTE 13 – LEGAL PROCEEDINGS
From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business. The only significant matter of which the Company is aware of is discussed below.
On May 22, 2017, Sandy Sierra Garate (“Applicant”), an employee of the Company, filed an application for benefits due to serious and willful misconduct of the employer pursuant to labor code section 4553 with the State of California Workers’ Compensation Appeals Board (WCAB Case No: ADJ 10686812) resulting in injury arising out of and in the course of the Applicant’s employment on August 5, 2016. The Applicant is requesting relief in this matter for a one half increase in all compensation recoverable in connection with the injury of August 5, 2016, for the allowance of costs and expenses in an amount to be determined and for such further relief as in deemed appropriate. The Company is currently unable to determine what the additional expenses will be incurred in order to defend this matter. As such, the Company cannot determine whether there is a reasonable possibility that a loss will be incurred nor can it estimate the range of any such potential loss. Accordingly, the Company has not accrued an amount for any potential loss associated with this action.
NOTE 14 – SUBSEQUENT EVENTS
On October 25, 2017, the Company received $250,000 by issuing a convertible promissory note (“Convertible Note”) to an individual that is due April 25, 2018 (“Maturity Date”). The Convertible Note shall accrue interest at 8% per annum and is unsecured. The conversion price of the Common Stock into which the Principal Amount, or the then outstanding interest due thereon, shall be the lower of $7.00 or the price per share of the latest closing of a debt or equity offering by the Company greater than $3,000,000. Pursuant to issuing this Convertible Note, the Company issued to the holder of this Convertible Note a warrant to purchase 50,000 shares of Common Stock at an exercise price at the lower of $7.00 per share or the price per share of the latest closing of a debt or equity offering by the Company greater than $3,000,000.
On October 15, 2017, the Company entered into an advisory board member consulting agreement with Brent McMahon (“Consultant”). The term of this consulting agreement is for one year. As consideration for entering into this consulting agreement, the Company shall grant 100,000 shares of the Company’s Common Stock shares (“Performance Shares”) based on the following timeline: (a) the first 50,000 Performance Shares will be granted to the Consultant upon execution of the consulting agreement and (b) the second 50,000 Performance Shares will be granted to the Consultant within ninety (90) days from the execution of the consulting agreement. On October 30, 2017, the Company issued 50,000 common stock shares at $3.50 per share for consulting services to be performed over a one-year period. The total value of this issuance was $175,000
On November 8, 2017, the Company received $250,000 by issuing a convertible promissory note (“Convertible Note”) to an individual that is due May 8, 2018 (“Maturity Date”). The Convertible Note shall accrue interest at 8% per annum and is unsecured. The conversion price of the Common Stock into which the Principal Amount, or the then outstanding interest due thereon, shall be the lower of $7.00 or the price per share of the latest closing of a debt or equity offering by the Company greater than $3,000,000. Pursuant to issuing this Convertible Note, the Company issued to the holder of this Convertible Note a warrant to purchase 50,000 shares of Common Stock at an exercise price at the lower of $7.00 per share or the price per share of the latest closing of a debt or equity offering by the Company greater than $3,000,000.
On October 27, 2017 the Company entered into a development agreement with Therapix Biosciences Ltd. (“Therapix”), a specialty clinical-stage pharmaceutical company dedicated to the development of cannabinoid-based drugs headquartered in Israel. The Company will formulate and develop pharmaceutical products using Therapix's proprietary compounds while utilizing the Company’s proprietary OTF technology. Total cost of the project is $140,000.
On November 10, 2017, the Company entered into an Assignment Agreement (“Assignment”) with CK Sciences, LLC (“CKS”) where CKS entered into a Sponsored Research Agreement (“SRA”) with The Technion Research & Development Foundation Ltd. (“TRDF”), effective February 2, 2017. The Company previously advanced TRDF $642,500 to commence the Research Project (“Payment”). As consideration for the Payment CKS agrees to assign the rights to CURE granted to CKS under section 6 of the SRA (“Intellectual Property Rights”) to make, use and sell products that are regulated by FDA and a foreign equivalent body using oral thin film technology or transdermal technology (“CURE Field”). The Company shall negotiate any license directly with TRDF and CKS will retain all rights under Section 6 of the SRA to make use and sell products in any field other than the CURE Field. The term of the Assignment is from March 2, 2017 to March 2, 2018.
On November 10, 2017, The Company received 269,000 shares of a private company, Oak Therapeutics, Inc. (“Oak”), for partial consideration for the grant rights by the Company to Oak under a license agreement between the Company and Oak. As a result of the Company receiving shares of Oak, the Company will own approximately 60% of Oak and therefore the Company will consolidate Oak’s financial statements during the fourth quarter 2017.