Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF THE
BUSINESS
Cantabio Pharmaceuticals Inc. (the “Company” or
“Cantabio”) is a preclinical stage biotechnology
company focusing on commercializing novel therapies and the
intellectual property generated from research and development
activities for Parkinson’s disease (PD) and Alzheimer’s
disease (AD). The Company’s strategy involves integration of
therapeutic focus, the targeting of family biophysics, drug
discovery technology and expertise into an innovative drug
discovery approach, which synergizes to identify and develop small
molecule pharmacological chaperones for clinical trials. In
addition, the Company’s research efforts concentrate on the
development of therapeutic proteins that can pass through the
blood-brain barrier and supplement in vivo levels of proteins with
display loss of function during disease conditions.
NOTE 2 – LIQUIDITY AND GOING CONCERN
As of September 30, 2017, the Company had a working capital deficit
of approximately $1.4 million and losses from operations of
approximately $0.6 million.
The Company typically raises capital which it spends on maintaining
its research and corporate operations. At this early stage in the
life of the Company funding is often short term in nature. While
the Company has been proficient in raising funds in the past the
short-term nature of these funding cycles raises substantial doubt
about the Company's ability to continue as a going concern within
one year from the date of this filing.
Management is addressing going concern risk by seeking new sources
of capital and is continuing initiatives to raise capital through
private placements, related party loans and other institutional
sources to meet future working capital requirements. Furthermore,
strategic partnerships, most likely with larger pharmaceutical
industry companies, will be needed to continue to fund research and
development costs as our projects expand. These measures, if
successful, may contribute to reduce the risk of going concern
uncertainties for the Company for at least twelve months from
issuance of these condensed consolidated financial
statements.
The ability of the Company to continue as a going concern is
dependent upon its ability to raise additional capital and achieve
profitable operations. The accompanying financial statements do not
include any adjustments that might be necessary if the Company is
unable to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The Company has developed the additional accounting policies below.
Aside from these additions to the Company’s accounting
policies there have been no material changes in the Company’s
significant accounting policies to those previously disclosed in
the Company’s annual report on Form 10-K, which was filed
with the SEC on June 30, 2017.
Warrant Liability
The Company accounts for certain common stock warrants outstanding
as a liability at fair value and adjusts the instruments to fair
value at each reporting period. This liability is subject to
re-measurement at each balance sheet date until exercised, and any
change in fair value is recognized in the Company's statements of
operations. The fair value of the warrants issued by the Company
has been estimated using a valuation pricing model, at each
measurement date that incorporates various inputs including
remaining contractual term, stock volatility, risk free rate and
dividend yield.
5
Equity-linked Financial Instruments
Certain of the Company’s debt instruments include embedded
derivatives that require bifurcation from the host contract under
the provisions of ASC 815, Derivatives and Hedging. Under this
guidance, the Company recognizes the embedded derivatives at fair
value and records a gain or loss resulting from the change in fair
values at the end of each reporting period. In connection with
issuance of the Company’s Zhu Notes, beginning on July 3,
2017, the Company became contingently obligated to issue shares in
excess of the 250 million authorized by shareholders. Consequently,
the ability to settle these obligations with shares would be
unavailable causing these and other share-settled obligations to
potentially be settled in cash. The Company applies a sequencing
policy regarding share settlement wherein equity-linked financial
instruments with the earliest issuance date would be settled first.
Thus, all equity-linked financial instruments, which are
convertible or exercisable into common stock, issued concurrent or
subsequent to the Zhu Notes are classified as derivative
liabilities, with the exception of instruments related to employee
share-based compensation.
Sequencing
As of July 3, 2017, the Company adopted a sequencing policy whereby
all future equity-linked instruments may be classified as a
derivative liability with the exception of instruments related to
share-based compensation issued to employees or
directors.
Recent Accounting Standards
Fiscal 2019 Accounting Pronouncement Adoptions
In August 2016, the FASB issued ASU No.
2016-15,
Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash
Payments
. This new standard
clarifies certain aspects of the statement of cash flows, including
the classification of debt prepayment or debt extinguishment costs
or other debt instruments with coupon interest rates that are
insignificant in relation to the effective interest rate of the
borrowing, contingent consideration payments made after a business
combination, proceeds from the settlement of insurance claims,
proceeds from the settlement of corporate-owned life insurance
policies, distributions received from equity method investees and
beneficial interests in securitization transactions. This new
standard also clarifies that an entity should determine each
separately identifiable source of use within the cash receipts and
payments on the basis of the nature of the underlying cash flows.
In situations in which cash receipts and payments have aspects of
more than one class of cash flows and cannot be separated by source
or use, the appropriate classification should depend on the
activity that is likely to be the predominant source or use of cash
flows for the item. This new standard will be effective for us on
April 1, 2018. The Company is currently evaluating the impact
of this new standard and does not expect it to have a material
impact on our financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).
ASU 2016-02 increases the transparency and comparability among
organizations by recognizing lease assets and lease liabilities on
the balance sheet and disclosing key information about leasing
arrangements. Certain qualitative and quantitative disclosures are
required, as well as a retrospective recognition and measurement of
impacted leases. The new ASU is effective for fiscal years and
interim periods within those years beginning after December 15,
2018, with early adoption permitted. The Company is currently
evaluating the impact of this new standard and does not expect it
to have a material impact on our financial statements.
NOTE 4 – MATERIAL AGREEMENTS
There have been no material changes in the Company’s material
agreements to those previously disclosed in the Company’s
annual report on Form 10-K, which was filed with the SEC on
September 30, 2017.
6
NOTE 5 – RELATED PARTY TRANSACTIONS
Toth and Associates LTD
On July 1, 2016, the Company entered into a consulting agreement
with Toth and Associates LTD for Dr. Toth to act as the
Company’s CEO. The standard monthly fee is approximately
$13,000 plus any additional uncontracted hours at the same rate,
and bonuses as follows (A) upon raising of capital on behalf of, or
as part of the Company, an amount equal to 1.5% of the capital
raised, (B) increasing the performance of the Company as measured
by valuation in either an agreed valuation in the context of an
investment or, in the case of a public company, market
capitalization reaching $30.0 million, a fixed bonus of $50,000,
payable wholly or in mutually agreed tranches over a 6 month period
subsequent to the valuation event, (C) on the issuance of new stock
for the purposes of a capital raise of an amount over $5.0 million,
common stock equal to 1% of the Company’s post-investment
issued share capital and (D) in the event of the Company, including
any affiliated entities, securing a licensing agreement with any
third party, an amount equivalent to 1.5% of any payments to the
Company under such licensing agreement.
Capro LTD
On July 1, 2016, the Company entered a consulting agreement with
Capro, LTD for Dr. Thomas Sawyer to act as the Company’s
COO. The standard monthly fee is approximately $11,000
plus any additional uncontracted hours at the same rate, and
bonuses as follows (A) upon raising of capital on behalf of, or as
part of the Company, an amount equal to 1.5% of the capital raised,
(B) increasing the performance of the Company as measured by
valuation in either an agreed valuation in the context of an
investment or, in the case of a public company, market
capitalization reaching $30.0 million, a fixed bonus of $50,000,
payable wholly or in mutually agreed tranches over a 6 month period
subsequent to the valuation event and (C) on the issuance of new
stock for the purposes of a capital raise of an amount over $5.0
million, common stock equal to 1% of the Company’s
post-investment issued share capital and (D) in the event of the
Company, including any affiliated entities, securing a licensing
agreement with any third party, an amount equivalent to 1.5% of any
payments to the Company under such licensing
agreement.
Eden Professional LTD
On July 1, 2016, the Company entered a consulting agreement with
Eden Professional LTD for Mr. Simon Peace to act as the
Company’s CFO. The standard monthly fee is
approximately $7,000 plus any additional uncontracted hours at the
same rate, and bonuses as follows (A) upon raising of capital on
behalf of, or as part of the Company, an amount equal to 1.5% of
the capital raised, (B) increasing the performance of the Company
as measured by valuation in either an agreed valuation in the
context of an investment or, in the case of a public company,
market capitalization reaching $30.0 million, a fixed bonus of
$50,000, payable wholly or in mutually agreed tranches over a 6
month period subsequent to the valuation event and (C) on the
issuance of new stock for the purposes of a capital raise of an
amount over $5.0 million, common stock equal to 1% of the
Company’s post-investment issued share capital and (D) in the
event of the Company, including any affiliated entities, securing a
licensing agreement with any third party, an amount equivalent to
1.5% of any payments to the Company under such licensing
agreement.
7
Costs incurred associated with related party transactions noted
above included in general and administrative in the statement of
operations are as follows:
|
For
the three months ended September 30,
|
For
the six months ended September 30,
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
Toth and Associates LTD
|
$
40,000
|
$
36,000
|
$
80,000
|
$
72,000
|
Capro LTD
|
33,000
|
30,000
|
66,000
|
60,000
|
Eden Professional LTD
|
21,000
|
19,000
|
42,000
|
38,000
|
Max Zhu Consulting
(1)
|
6,000
|
6,000
|
12,000
|
12,000
|
|
|
|
|
|
Total related party
transactions
|
$
100,000
|
$
91,000
|
$
200,000
|
$
182,000
|
|
|
|
|
|
(1)
Max
Zhu, an investor in and lender to the Company, also works as Head
of Computer Aided Drug Design for the Company under a consultancy
contract.
Accounts payable and accrued expenses includes amounts payable to
related parties of $0.4 and $0.2 million for the period ended
September 30, 2017 and March 31, 2017, respectively.
NOTE 6 – CONVERTIBLE DEBENTURES
On January 25, 2017, the Company entered into a securities purchase
agreement with an accredited investor to place Convertible
Debentures (as amended the “Debentures”) with a
maturity date of January 25, 2018 in the aggregate principal amount
of up to $600,000 (the “Transaction”), provided that in
case of an event of default, the Debentures may become at the
holder’s election immediately due and payable. The initial
closing of the Transaction occurred on January 25, 2017 when the
Company issued a Debenture for $300,000. A second closing for
$150,000 occurred on March 2, 2017 and a third closing for $150,000
occurred on May 3, 2017. The Debentures bear interest at the rate
of 5% per annum. In addition, the Company must pay to the holder a
fee equal to 7% of the amount of the Debentures to assist in their
monitoring costs for the Debentures. The net proceeds of the
financing were used for general corporate matters and for other
expenses.
The Debentures may be converted at any time on or prior to maturity
at the lower of $0.3107 or 93% of the average of the three lowest
daily volume weighted average price (“VWAP”) during the
10 consecutive trading days immediately preceding the conversion
date, provided that as long as we are not in default under the
Debenture, the conversion price may never be less than
$0.05.
Any time after the six-month anniversary of the issuance of a
Debenture that the daily VWAP is less than $0.05 for a period of
twenty consecutive trading days (the “Triggering Date”)
and only for so long as such conditions exist after a Triggering
Date, the Company shall make monthly payments beginning on the last
calendar day of the month when the Triggering Date occurred. Each
monthly payment shall be in an amount equal to the sum of (i) the
principal amount outstanding as of the Triggering Date divided by
the number of such monthly payments until maturity, (ii) a
redemption premium of 20% in respect of such principal amount and
(iii) accrued and unpaid interest hereunder as of each payment
date. The Company may, no more than twice, obtain a thirty-day
deferral of a monthly payment due as a result of a Triggering Date
through the payment of a deferral fee in the amount equal to 10% of
the total amount of such monthly payment. Each deferral payment may
be paid by the issuance of such number of shares as is equal to the
applicable deferral payment divided by a price per share equal to
93% of the average of the four lowest daily VWAPs during the 10
consecutive Trading Days immediately preceding the due date in
respect of such monthly payment begin deferred, provided that such
shares issued will be immediately freely tradable shares in the
hands of the holder.
8
Debt discount, embedded redemption feature and beneficial
conversion feature
Upon issuance of the Debentures in the three closings, the Company
recognized an aggregate debt discount of approximately $239,000 to
the aggregate $600,000 principal value of Debentures, comprised
approximately of the following:
Fees paid to an
affiliate of the lender
|
|
$
109,000
|
Beneficial
conversion feature
|
|
103,000
|
Estimated fair
value of embedded derivative
|
|
27,000
|
Aggregate
discount amount
|
|
$
239,000
|
The debenture is presented net of the related debt discount and the
discount is amortized to interest expense over the
Debenture’s term using the effective interest
method.
Beneficial Conversion Feature
At the time of each closing, the Debenture’s effective
conversion price was below the quoted market price of the
Company’s common stock. As such, the Company recognized a
beneficial conversion feature equal to the intrinsic value of the
conversion feature on each issuance date, resulting in a discount
to the Debenture with a corresponding credit to additional paid-in
capital.
Embedded Derivative
The monthly payment provision within the Debentures is a
contingent put option that is required to be separately measured at
fair value, with subsequent changes in fair value recognized in the
Condensed Consolidated Statements of Operations. The Company
estimated the fair value of the monthly payment provision, as of
the issuance date and September 30, 2017 using probability analysis
of the occurrence of a Triggering Date applied to the
discounted maximum redemption premium for any given payment. The
probability analysis utilized in calculating the embedded
derivative upon issuance and at September 30, 2017 was calculated
using the following key inputs:
|
|
Stock
price
|
$
0.052 - $0.23
|
Probability
of Triggering Date
|
5.8–40.9
%
|
Volatility
|
213.7
%
|
Risk-free
rate
|
0.82–1.20
%
|
Discount
rate
|
39.6
%
|
The maximum redemption was discounted at 39.6%, the calculated
effective rate of the Debenture before measurement of the
contingent put option. The fair value estimate of the embedded
derivative is a Level 3 measurement. The roll-forward of the Level
3 fair value measurement, for the three months ended September 30,
2017, is as follows:
Balance
at
March
31, 2017
|
|
Net
unrealized (gain)/loss
|
Balance
at
September
30, 2017
|
24,000
|
$$6,000
|
$ $(3,000
)
|
$$27,000
|
9
The carrying value of the Debentures, as of September 30, 2017, is
comprised of the following:
Secured
Convertible Debenture at September 30, 2017:
|
|
Principal value of
5%, convertible
|
$
575,000
|
Fair value of
embedded derivative
|
27,000
|
Accrued
Interest
|
14,399
|
Debt
discount
|
(93,991
)
|
Carrying
value of Secured Convertible Debenture Note
|
$
522,408
|
As of September 30, 2017, the estimated aggregate fair value of
outstanding convertible notes payable is approximately $0.6
million. The fair value estimate is based on the estimated option
value of the conversion terms. The estimated fair value represents
a Level 3 measurement.
On August 16, 2017, holders of approximately $27,000 in principal
amount and accrued interest with respect to Secured Convertible
Debentures exercised the conversion option and converted into 0.3
million shares of common stock. The Company recognized additional
interest expense of approximately $6,000 upon the conversion
resulting from the remaining unamortized debt
discount.
Events of Default or Financial covenants
The Company is in compliance with all terms associated with the
convertible note.
NOTE 7 – CONVERTIBLE DEBT RELATED PARTY
On July 3, 2017 and August 31, 2017, the Company issued convertible
notes payable to Max Zhu for an aggregate principal balance of
$220,000, in exchange for cash of $175,000 and the exchange of a
note payable to Mr. Zhu with a principal balance of $45,000. The
extinguished notes payable was fully matured.
The convertible notes payable have a six-month term and incurs
interest at rates ranging from 18% to 23% through maturity. If the
notes are not repaid within the six-month term, the interest rate
increases on each note to rates ranging from 23% to 28%. The
Company has the option to settle the principal and all accrued
interest of each note in cash or shares and the Company may prepay
the principal and all accrued interest, in cash or shares, without
penalty. The note holder has the right to convert all or any
portion of the outstanding principal and accrued interest of each
note into common shares of the Company at a conversion price of the
lesser of: (i) $0.08 per share, or (ii) a price equal to 80% of the
lowest VWAP during the five consecutive days before the notice of
conversion.
Upon issuance of the convertible notes, the Company recognized an
aggregate debt discount of approximately $0.2 million relating to
the bifurcated embedded conversion option. At the end of the fiscal
period, the bifurcated embedded conversion option was measured at
fair value of $0.1 million, resulting in a gain of $0.1
million.
The analysis utilized in calculating the embedded derivative upon
issuance and at September 30, 2017 was calculated using the
following key inputs:
|
|
Stock
price
|
$$0.05- $0.11
|
Contractual
term
|
|
Volatility
|
124.2-159.3
%
|
Risk-free
rate
|
1.1
%
|
10
The fair value estimate of the embedded derivative is a Level 3
measurement. The roll-forward of the Level 3 fair value
measurement, for the three months ended September 30, 2017, is as
follows:
|
Net
unrealized (gain)/loss
|
Balance
at
September
30, 2017
|
159,000
|
$ $(52,000
)
|
$$107,000
|
The carrying value of the Notes, as of September 30, 2017, is
comprised of the following:
Secured
Convertible Debenture at September 30, 2017:
|
|
Principal value of
5%, convertible
|
$
220,000
|
Fair value of
embedded conversion option
|
107,000
|
Accrued
Interest
|
6,730
|
Debt
discount
|
(124,347
)
|
Carrying
value of Secured Convertible Debenture Note
|
$
209,383
|
As of September 30, 2017, the estimated aggregate fair value of
outstanding convertible notes payable is approximately $0.3
million. The fair value estimate is based on the estimated option
value of the conversion terms. The estimated fair value represents
a Level 3 measurement.
NOTE 8 – CAPITAL STOCK
Issuance of shares for consulting services.
Through September 30, 2017 the Company issued approximately 0.3
million shares with a fair value of approximately $40,000 as
compensation for services performed.
Issuance of shares for conversions of debt
On August 16, 2017, the Company issued 0.3 million shares upon
conversion of approximately $27,000 of debentures and accrued
interest by an investor.
Potentially dilutive securities
|
|
|
|
|
|
Potentially dilutive securities
|
|
|
Convertible
debentures (Note 6)
|
11,331,000
|
-
|
Convertible debt
related party (Note 7)
|
5,450,000
|
-
|
|
|
|
Note 9 – SUBSEQUENT EVENTS
During October 2017, the Company issued approximately 1.6 million
shares upon conversion of approximately $76,000 of
debentures.
11