NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
YEAR ENDED SEPTEMBER 30, 2016
NOTE 1 - NATURE OF OPERATIONS
The
Company was incorporated in Nevada on December 18, 2007. After a
number of name changes, we again changed our name to Peak
Pharmaceuticals, Inc. on December 23, 2014. This name was
consistent with our business operations and plans relating to
development, manufacturing and marketing of hemp-based
nutraceutical and supplement products for the human and animal
health markets. On October 1, 2015, we discontinued certain
operations of the Company.
Throughout
this report, the terms “our,” “we,”
“us,” and the “Company” refer to Peak
Pharmaceuticals, Inc. and its subsidiary, Peak BioPharma
Corp.
NOTE 2 - BASIS OF PRESENTATION AND SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The
accompanying audited consolidated financial statements of the
Company have been prepared in accordance with accounting principles
generally accepted in the United States of America (“U.S.
GAAP”).
Basis of Consolidation
The
consolidated financial statements include the financial statements
of the Company and our wholly owned subsidiary Peak BioPharma Corp.
All inter-company balances and transactions among the companies
have been eliminated upon consolidation.
Use of Estimates
The
preparation of consolidated financial statements in conformity with
U.S. GAAP requires management to make estimates and assumptions
that affect the amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of
the consolidated financial statements and the reported amounts
of expenses during the reporting period. Actual results could
differ from those estimates.
Significant
estimates made in connection with the accompanying consolidated
financial statements include the estimate of valuation of
stock-based compensation, and valuation allowances against net
deferred tax assets.
Revenue Recognition and Cost of Sales
We
recognize revenue from products sold when there is persuasive
evidence of an arrangement, delivery has occurred or services have
been rendered, the sales price is determinable and collection is
reasonably assured. Revenue represents the sale of products and
related shipping fees. Revenue is included in income from
operations of BioPharma’s discontinued CannaPet
component, Cost of sales includes the cost of products sold and
shipping costs attributable to the revenue. Cost of sales is
included in income from operations of BioPharma’s
discontinued CannaPet component.
Cash and Cash Equivalents
The
Company considers all highly liquid investments with an original
maturity of three months or less when purchased to be cash
equivalents. As of September 30, 2016, the Company does not have
any cash equivalents.
Inventory
Inventory,
which is included in assets of discontinued operations held for
sale, is stated at the lower of cost or market on a first in first
out basis.
Equipment
Equipment
consists of computer equipment and is recorded at cost less
accumulated depreciation. The Company’s equipment is
amortized on a straight-line basis over its estimated
life.
Net Loss Per Share of Common Stock
The
Company follows
ASC Topic 260
Earnings per Share
, which provides for calculation of
“basic” and “diluted” earnings (loss) per
share. Basic earnings (loss) per share includes no dilution and is
computed by dividing net income (loss) available to common
shareholders by the weighted average common shares outstanding for
the period. Diluted earnings (loss) per share reflect the potential
dilution of securities that could share in the earnings of an
entity similar to fully diluted earnings (loss) per share. The
Company excludes equity instruments from the calculation of diluted
earnings per share if the effect of including such instruments is
anti-dilutive. As of September 30, 2016, the Company has 3,291,000
stock options outstanding and no warrants outstanding. As of
September 30, 2015, the Company had 7,791,000 stock options
outstanding and no warrants outstanding.
Income Taxes
Income
taxes are provided based upon the liability method of accounting
pursuant to the
ASC Topic 740
Income Taxes
. Under this approach, deferred income taxes are
recorded to reflect the tax consequences in future years of
differences between the tax basis of assets and liabilities and
their financial reporting amounts at each year-end. A valuation
allowance is recorded against the deferred tax asset if management
does not believe the Company has met the “more likely than
not” standard to allow recognition of such an
asset.
Equity Based Payments
Equity
based payments are accounted for in accordance with
ASC Topic 718, Compensation – Stock
Compensation
. The compensation cost is based upon fair value
of the equity instrument at the date grant. The fair value has been
estimated using the BlackSholes option pricing model. In
addition, payments made to nonemployees are accounted for in
accordance with
ASC Topic 505,
EquityBased payments to
NonEmployees.
Fair Value Measurements
Financial
Accounting Standards Board (“FASB”)
ASC Topic 820, Fair Value Measurements and
Disclosures
("ASC 820"), provides a comprehensive framework
for measuring fair value and expands disclosures which are required
about fair value measurements. Specifically, ASC 820 sets forth a
definition of fair value and establishes a hierarchy prioritizing
the inputs to valuation techniques, giving the highest priority to
quoted prices in active markets for identical assets and
liabilities and the lowest priority to unobservable value inputs.
ASC 820 defines the hierarchy as follows:
Level 1
- Quoted prices are available in active markets for identical
assets or liabilities as of the reported date. The types of assets
and liabilities included in Level 1 are highly liquid and actively
traded instruments with quoted prices.
Level 2
- Pricing inputs are other than quoted prices in active markets,
but are either directly or indirectly observable as of the reported
date. The types of assets and liabilities in Level 2 are typically
either comparable to actively traded securities or contracts, or
priced with models using highly observable inputs.
Level 3
- Significant inputs to pricing that are unobservable as of the
reporting date. The types of assets and liabilities included in
Level 3 are those with inputs requiring significant management
judgment or estimation, such as complex and subjective models and
forecasts used to determine the fair value of financial
transmission rights.
The
Company’s financial instruments consist of cash, accounts
receivable, and accounts payable. The estimated fair value of these
financial instruments approximate their carrying amounts due to the
short-term nature of these instruments.
Certain
non-financial assets are measured at fair value on a nonrecurring
basis. Accordingly, these assets are not measured and adjusted to
fair value on an ongoing basis, but are subject to periodic
impairment tests. These items primarily include long-lived assets
and other intangible assets.
Intangible Asset
The
intangible asset is our website that was being amortized over the
expected useful life which we estimated to be three years. During
the year ended September 30, 2016, it was determined the website is
fully impaired as it is no longer used and as such we expensed the
remaining balance to amortization expense. Amortization expense
charged to operations for the twelve-month period ended September
30, 2016 and 2015, was $18,245 and $11,894,
respectively.
Long-lived Assets
On a
periodic basis, management assesses whether there are any
indicators that the value of our long-lived assets may be impaired.
An asset’s value may be impaired only if management’s
estimate of the aggregate future cash flows, on an undiscounted
basis, to be generated by the asset are less than the carrying
value of the asset.
Our
only long lived assets are our website and computer equipment. If
impairment has occurred, the loss is measured as the excess of the
carrying amount of the asset over its fair value. Our estimates of
aggregate future cash flows expected to be generated by our
long-lived asset are based on several assumptions that are subject
to economic and market uncertainties. As these factors are
difficult to predict, and are subject to future events that may
alter management’s assumptions, the future cash flows
estimated by management in their impairment analyses may not be
achieved. During the twelve months ended September 30, 2016, we
charged $18,245 to amortization expense for the impairment of our
website.
Recently Issued Accounting Pronouncements
From
time to time, new accounting pronouncements are issued that we
adopt as of the specified effective date. We believe that the
impact of recently issued standards that are not yet effective may
have an impact on our results of operations and financial position.
The FASB issued Accounting Standards Update (“ASU”)
201415 Presentation of Financial Statements Going
Concern (Sub Topic 20540) issued August 27, 2014 defines
management’s responsibility to evaluate whether there is
substantial doubt about an organization’s ability to continue
as a going concern. The additional disclosure requirement is
effective after December 15, 2016 and will be evaluated as to
impact and implemented accordingly.
In
addition, the FASB issued ASU No. 201409 (Revenue from
Contracts with Customers), which is effective for annual reporting
periods beginning after December 15, 2016. We have not yet assessed
the impact, if any, of adopting this standard.
NOTE 3 – GOING CONCERN AND MANAGEMENT’S LIQUIDITY
PLANS
As of
September 30, 2016, and 2015, the Company had an accumulated
deficit of $5,004,860 and $6,167,095 respectively. The Company has
a working capital deficiency of $141,458. During the years ended
September 30, 2016 and 2015, the Company used cash in operating
activities of $200,352 and $247,589, respectively. These conditions
raise substantial doubt about the Company’s ability to
continue as a going concern. The Company recognizes it will need to
raise additional capital in order to fund operations, and meet its
payment obligations. There is no assurance that additional
financing will be available when needed or that management will be
able to obtain financing on terms acceptable to the Company and
whether the Company will generate revenues, become profitable and
generate positive operating cash flow. If the Company is unable to
raise sufficient additional funds on favorable terms, it will have
to develop and implement a plan to further extend payables and to
raise capital through the issuance of debt or equity on less
favorable terms until sufficient additional capital is raised to
support further operations. There can be no assurance that such a
plan will be successful.
Accordingly,
the accompanying consolidated financial statements have been
prepared in conformity with U.S. GAAP, which contemplates
continuation of the Company as a going concern and the realization
of assets and the satisfaction of liabilities in the normal course
of business. The carrying amounts of assets and liabilities
presented in the consolidated financial statements do not
necessarily represent realizable or settlement values. The
consolidated financial statements do not include any adjustments
that might result from the outcome of this
uncertainty.
NOTE 4 – DISCONTINUED OPERATIONS
Based
upon recent regulatory activity related to imposition of
restrictions and limitations on the sale of hemp-based health
products for pets, we elected to terminate our license agreement
with the Licensor, effective as of October 1, 2015, and to cease
all operations relating to sale of hemp-based products for
pets.
On
October 12, 2015, we entered into an agreement for the termination
(“Termination Agreement”) of the License Agreement,
effectively selling the discontinued operations. The Termination
Agreement contained the following provisions:
●
Termination of
License: The parties agreed to terminate the License Agreement
effective as of October 1, 2015, this termination was made by
mutual agreement of the parties pursuant to and in accordance with
the provisions of the License Agreement.
●
Return of Licensed
Intellectual Property: We agreed to return all Licensed
Intellectual Property to the Licensor, and our right to use all, or
any portion, of the Licensed Intellectual Property ceased effective
as of October 1, 2015, pursuant to the terms of the License
Agreement, the Licensed Intellectual Property included the brand
name “Canna-Pet” and certain related intellectual
property, including, but not limited, trademarks and copyrights,
formulations, recipes, production processes and systems, websites,
domain names, customer lists, supplier lists trade secrets and
know- how, and other related intellectual property.
●
Return of Other
Property: In addition to return of the Licensed Intellectual
Property, we agreed to transfer to Licensor all product inventory,
Colorado hemp with permits and authorization, all
production/fulfillment contracts, all e-commerce accounts and
processing, all non-disclosure and research agreements and any and
all other property in our possession which was used by us in the
conduct of our business related to production and sale of medical
cannabis products for pets made from hemp and low-THC cannabis
plants.
●
Office Space and
Equipment: In conjunction with the execution of the Termination
Agreement, we granted the Licensor the right to use our office
space, for the three-month period from October 1, 2015 through
December 31, 2015, on a rent-free basis.
●
Consideration: As
consideration for the cancellation of the License Agreement and the
return of other property, as described above, the Licensor agreed
to waive payment by us and to release us from liability for payment
of any and all unpaid royalties, invoices and other amounts which
were otherwise currently due and payable by us to Licensor for
sales of Canna-Pet products for all periods through and including
September 30, 2016.
●
Collections: On
October 15, 2015, we forwarded to the Licensor all payments
received by us after September 30, 2015 (net of amounts received by
us for taxes, duties, governmental charges, freight or shipping
charges, and the like) for Canna- Pet products sold on or after
October 1, 2015.
The
following is a summary of the net assets sold as initially
determined at Septembers 30, 2015:
|
|
Inventory
|
$
41,705
|
Prepaid
expenses
|
-
|
Deposits
|
8,678
|
Total
assets
|
$
50,383
|
|
|
Accounts
payable
|
124,396
|
Royalties
payable
|
39,506
|
Accrued
liabilities
|
15,341
|
Total
liabilities
|
179,243
|
Net assets
sold
|
$
128,860
|
The
income from discontinued operations presented in the statements of
operations consists of the following for the twelve-month periods
ended September 30, 2016 and 2015, respectively:
|
|
|
Revenues
|
$
-
|
$
1,039,393
|
Cost of goods
sold
|
-
|
(305,295
)
|
General and
administrative expenses, including
depreciation and
amortization
|
(6,197
)
|
(700,106
)
|
Depreciation
|
-
|
(850
)
|
Interest
expense
|
-
|
(48
)
|
Gain on disposal of
discontinued operations
|
80,903
|
-
|
Income from
discontinued operations
|
$
74,706
|
$
33,040
|
NOTE 5 – INTANGIBLE ASSETS
Intangible
assets at September 30, 2016 and September 30, 2015, consist of
website costs of $35,000, less accumulated amortization of $35,000
and $16,755, respectively. The website costs have been fully
amortized.
NOTE 6 – RELATED PARTY TRANSACTIONS
Parties,
which can be corporations or individuals, are considered to be
related if they have the ability, directly or indirectly, to
control the other party or exercise significant influence over the
other party in making financial and operating decisions. Companies
are also considered to be related if they are subject to common
control or common significant influence.
Accounts
payable – related parties are the amounts payable to officers
and directors of the Company for reimbursement of expenses they
incurred on behalf of the Company as well as Directors’ fees
and salaries. Included in general and administrative expense for
the years ended September 30, 2016 and September 30, 2015 are
$24,000 and $94,647 of consulting fees, $24,000 and $0 of
Directors’ fees, and $46,355 and $187,409 of salaries to paid
to officers and directors of the Company,
respectively.
NOTE 7 – COMMITMENTS AND CONTINGENCIES
We have
no commitments or contingencies as of September 30, 2016.
Commitments that existed at September 30, 2015 ceased to exist
during the year ended September 30, 2016.
NOTE 8 – COMMON STOCK
We had
no preferred or common stock transactions during the year ended
September 30, 2016.
On
December 22, 2014, pursuant to a Placement Agent Agreement, we
issued 200,000 restricted shares of our common stock. The shares
were valued at $36,000, $0.18 per share, the trading value, and
charged to stock based compensation.
NOTE 9 - OPTIONS
No
stock options were granted during the years ended September 30,
2016 and 2015.
As per
guidance in the ASC Topic 718, Compensation - Stock Compensation
(“ASC 718”), we are amortizing the fair value of the
options on a straight-line basis over the requisite service period
for each separately vesting portion of the award as if the award
was, in-substance, multiple awards (graded vesting attribution
method).
During
the year ended September 30, 2016, officers holding 4,500,000
options resigned and the options were no longer exercisable. In
accordance with ASC 718, previously expensed equity based
compensation which requisite service will not be provided and are
forfeited and reversed. As a result, previously recorded equity
based compensation of $1,296,431 was reversed and credited to
equity based compensation expense during the year ended September
30, 2016.
The
following is a summary of outstanding stock options issued to
employees and directors as of September 30, 2016:
|
Number
of Options
|
|
Exercise
Price per
Share
|
|
Average
Remaining
Term
in
Years
|
|
Aggregate
Intrinsic
Value
at Date
of
Grant
|
|
|
|
|
|
|
|
|
Outstanding
October 1, 2014
|
7,416,000
|
|
$0.0067
- $0.20
|
|
|
|
-
|
Issued
|
-
|
|
|
|
|
|
-
|
Cancelled
|
-
|
|
|
|
|
|
-
|
Outstanding
September 30, 2015
|
7,416,000
|
|
$0.0067
- $0.20
|
|
|
|
-
|
Issued
|
-
|
|
|
|
|
|
-
|
Cancelled
|
(4,500,000)
|
|
|
|
|
|
-
|
Outstanding
September 30, 2016
|
2,916,000
|
|
$0.0067
|
|
7.45
|
|
-
|
Exercisable
|
2,916,000
|
|
$0.0067
|
|
7.45
|
|
-
|
The
following is a summary of outstanding stock options issued to
non-employees, excluding directors, as of September 30,
2016:
|
Number
of Options
|
|
Exercise
Price per
Share
|
|
Average
Remaining
Term
in
Years
|
|
Aggregate
Intrinsic
Value
at Date
of
Grant
|
|
|
|
|
|
|
|
|
Outstanding
October 1, 2014
|
375,000
|
|
$0.0067
|
|
|
|
-
|
Issued
|
-
|
|
|
|
|
|
-
|
Cancelled
|
-
|
|
|
|
|
|
-
|
Outstanding
September 30, 2015
|
375,000
|
|
$0.0067
|
|
|
|
-
|
Issued
|
-
|
|
|
|
|
|
-
|
Cancelled
|
-
|
|
|
|
|
|
-
|
Outstanding
September 30, 2016
|
375,000
|
|
|
|
|
|
-
|
Exercisable
|
375,000
|
|
$0.0067
|
|
7.22
|
|
-
|
Total
equity based compensation for the twelve months ended September 30,
2016 and 2015 was ($1,296,431) and $1,864,297,
respectively.
NOTE 9 – DEFERRED INCOME TAX
Deferred
income tax provision for the years ended September 30, 2016 and
2015 is summarized below:
|
|
|
Federal
|
$
(64,500
)
|
$
(155,900
)
|
State
|
(5,900
)
|
(14,200
)
|
Total
deferred
|
(70,400
)
|
(170,100
)
|
Increase in
valuation allowance
|
70,400
|
170,100
|
|
$
-
|
$
-
|
The
provision for income taxes differs from the amount computed by
applying the statutory federal income tax rate before provision for
income taxes. The sources and tax effect of the differences are as
follows:
|
|
|
Income tax
provision – federal rate
|
34.0
%
|
34.0
%
|
State income taxes,
net of federal benefit
|
3.1
%
|
3.1
%
|
Effect of net
operating loss
|
(37.1
%)
|
(37.1
%)
|
|
-
|
-
|
The net
deferred income tax assets at September 30, 2016 and 2015 were
$382,200 and $311,800, respectively.
ASC 740
requires a valuation allowance to reduce the deferred tax assets
reported if, based on the weight of evidence, it is more than
likely than not that some portion or all of the deferred tax assets
will not be recognized. After consideration of all the evidence,
both positive and negative, management has determined that a full
valuation allowance at September 30, 2016 and 2015, respectively,
is necessary to reduce the deferred tax assets to the amount that
more likely than not be realized. The change in valuation allowance
for the current year is $70,400.
As of
September 30, 2016, we have a net operating loss carry forward of
approximately $1,030,100 (2015: $840,500). The loss will be
available to offset future taxable income. If not used, this carry
forward will expire in 2036.
There
are open statutes of limitations for taxing authorities in federal
and state jurisdictions to audit our tax returns from 2011 through
the current period. Our policy is to account for income tax related
interest and penalties in income tax expense in the statement of
operations. There have been no income tax related interest or
penalties assessed or recorded.
ASC 740
prescribes a recognition threshold and measurement attribute for
the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This
pronouncement also provides guidance on derecognition,
classification, interest and penalties, accounting in interim
periods, disclosure, and transition.
For the
year ended September 30, 2016 and 2015 we did not have any interest
and penalties associated with tax positions. As of September 30,
2016 we did not have any significant unrecognized uncertain tax
positions.
NOTE 10 – RECLASSIFICATION OF COMPARATIVE
FIGURES
Certain
prior year amounts included in the consolidated statements of
operations have been reclassified to conform to the current year
presentation. Such reclassifications had no impact on previously
reported net loss.
F-13