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 June 30, 2018, the Company had a working capital deficit of
approximately $2.3 million and continues to have losses from
operations due to its research and development
activities.
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
Interim Reporting
The accompanying unaudited condensed consolidated financial
statements have been prepared in accordance with accounting
principles generally accepted in the United States (“U.S.
GAAP”) for interim financial information and with the
instructions to Form 10-Q and Article 10 of Regulation S-X.
Accordingly, certain information and footnote disclosures normally
included in annual financial statements prepared in accordance with
U.S. GAAP have been condensed or omitted pursuant to such
Securities and Exchange Commission (“SEC”) rules and
regulations and accounting principles applicable for interim
periods. In the opinion of management, all adjustments (consisting
of normal recurring accruals) considered necessary for a fair
presentation have been included. Events subsequent to the balance
sheet date have been evaluated for inclusion in the accompanying
condensed consolidated financial statements through the date of
issuance. Operating results for the three months ended June 30,
2018 are not necessarily indicative of the results that may be
expected for the year ending March 31, 2019. These unaudited
condensed consolidated financial statements should be read in
conjunction with the consolidated financial statements and the
notes thereto included in the Annual Report on Form 10-K for the
fiscal year ended March 31, 2018.
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 and the reported amounts of expenses during the year.
Management bases its estimates on historical experience and on
other assumptions considered to be reasonable under the
circumstances. However, actual results may differ from the
estimates.
Earnings (Loss) per Share
The Company calculates earnings per share using basic net income
(loss) per common share be computed by dividing net income (loss)
for the period by the weighted average number of common shares
outstanding during the period. The Company does not compute diluted
earnings per share because to do so would be
anti-dilutive.
5
CANTABIO PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Potentially dilutive securities
|
|
|
|
|
|
|
|
|
Convertible
debentures (Note 6)
|
25,007,000
|
5,865,000
|
|
Convertible debt
related party (Note 7)
|
5,908,000
|
-
|
|
Stock
subscriptions
|
530,000
|
530,000
|
|
|
|
|
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 became effective the Company for us on
April 1, 2018. The new standard does not have a material impact on
our financial statements.
Recently Issued Accounting Pronouncements
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.
In June 2018, the FASB issued Accounting Standards Update (ASU)
2018-07 intended to reduce cost and complexity and to improve
financial reporting for nonemployee share-based payments.
Currently, the accounting requirements for nonemployee and employee
share-based payment transactions are significantly different. This
ASU expands the scope of Topic 718, Compensation-Stock Compensation
(which currently only includes share-based payments to employees)
to include share-based payments issued to nonemployees for goods or
services. Consequently, the accounting for share-based payments to
nonemployees and employees will be substantially aligned. This ASU
supersedes Subtopic 505-50, Equity-Equity-Based Payments to
Nonemployees. The amendments in this ASU are effective for public
companies for fiscal years beginning after December 15, 2018,
including interim periods within that fiscal year. For all other
companies, the amendments are effective for fiscal years beginning
after December 15, 2019, and interim periods within fiscal years
beginning after December 15, 2020. Early adoption is permitted, but
no earlier than a company's adoption date of Topic 606, Revenue
from Contracts with Customers. 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.
6
CANTABIO PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 4 – RELATED PARTY TRANSACTIONS
There have been no changes to the Company’s related party
consulting arrangements as they have been disclosed in our most
recently filed form 10K.
7
CANTABIO PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
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 June 30,
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
Toth and Associates LTD
|
$
44,000
|
$
40,000
|
|
Capro LTD
|
24,000
|
33,000
|
|
Eden Professional LTD
|
23,000
|
21,000
|
|
Max Zhu Consulting
(1)
|
3,000
|
6,000
|
|
|
|
|
|
Total related party
transactions
|
$
94,000
|
$
100,000
|
|
|
|
|
(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 $0.7 and $0.6 million for the period ended June
30, 2018 and March 31, 2018, respectively.
NOTE 5 – CONVERTIBLE DEBENTURES AS AMENDED
New issuance
On June 5, 2018 the Company entered into a new securities purchase
agreement with an accredited investor to place Convertible
Debentures (as amended the “Debentures”) in the
aggregate principal amount of up to $300,000
net
of issuance costs of $35,000 (the “Transaction”). The
Debentures bear interest at the rate of 5% per annum with a
maturity date of June 5, 2019, as may be extended at the option of
the note holder. In addition, the Company must pay to the holder an
annual 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 $0.05 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 and the conversion price
is never lower than a stated floor price.
At the same time all previous debentures were amended to align them
with the new agreement. All the Debentures may be converted at any
time on or prior to maturity at the lower of $0.05 or
(rather
than $0.10 as previously) 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 and the conversion price is never lower than a
stated floor price.
The
Company accounted for the amendment as a debt modification which
resulted in $76,000 impact that was recorded in the change in fair
value of embedded derivatives in the Company’s statements of
operations.
8
CANTABIO PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
Embedded Derivatives
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 June 30, 2018 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 June 30, 2018 was calculated using the following
key inputs:
|
|
|
|
|
Stock
price
|
$
0.04
|
$
0.06
|
|
Probability
of Triggering Date
|
100
%
|
100
%
|
|
Volatility
|
300
%
|
300
%
|
|
Risk-free
rate
|
1
%
|
1
%
|
|
Discount
rate
|
0
%
|
0
%
|
Due to the extinguishment of the notes and the Company’s
sequencing policy the amended notes the Company recorded an
embedded derivative associated with the conversion feature. The
following are the inputs associated with the conversion
feature.
|
|
|
|
|
Stock
price
|
$
0.04 - $0.06
|
$
0.06
|
|
Exercise
price
|
$
0.04 - $0.06
|
$
0.06
|
|
Volatility
|
300
%
|
300
%
|
|
Contractual
term
|
0.42 - 1 year
|
1 year
|
|
Risk-free
rate
|
1
%
|
1
%
|
|
Discount
rate
|
0
%
|
0
%
|
The fair value estimate of the embedded derivatives is a Level 3
measurement. The roll-forward of the Level 3 fair value
measurement, for the three months ended June 30, 2018, is as
follows:
Balance
at
March
31, 2018
|
Issuance
of new debentures
|
Change
due to modification
|
Net
unrealized (gain)/loss
|
|
|
736,000
|
$
281,000
|
$
76,000
|
$
(195,000
)
|
$
898,000
|
The approximate carrying value of the Debentures, as of June 30,
2018 and March 31, 2018 is comprised of the following:
|
|
|
|
|
Principal value of
5%, convertible, net of conversion
|
$
1,000,000
|
$
750,000
|
|
Fair value of
embedded derivative
|
898,000
|
736,000
|
|
Accrued
interest
|
23,000
|
22,264
|
|
Debt
discount
|
(550,000
)
|
(561,104
)
|
|
Carrying
value of Secured Convertible Debenture Note
|
$
1,371,000
|
$
947,160
|
As of June 30, 2018, the estimated aggregate fair value of
outstanding convertible notes payable is approximately $1.4
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.
Convertible debenture
During the three months ended June 30, 2018, holders of
approximately $0.1 million in principal amount and accrued interest
with respect to Secured Convertible Debentures exercised the
conversion option and converted into 1.6 million shares of common
stock.
Events of Default or Financial covenants
The Company is in compliance with all terms associated with the
convertible note.
9
CANTABIO PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 6 – CONVERTIBLE DEBT RELATED PARTY
The analysis utilized in calculating the embedded derivative at
June 30, 2018 and March 31, 2018 was calculated using the following
key inputs:
|
|
|
|
|
Stock
price
|
$
0.04
|
$
0.02- $0.07
|
|
Contractual
term
|
0.1 - 0.5
years
|
0.1 - 1.0
years
|
|
Volatility
|
300
%
|
275% - 300
%
|
|
Risk-free
rate
|
1
%
|
1
%
|
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 June 30, 2018, is as
follows:
Balance
at
March 31, 2018
|
Net
unrealized (gain)/loss
|
|
|
$
156,000
|
$
(1,000
)
|
$
157,000
|
The carrying value of the Notes, as of June 30, 2018 and March 31,
2018 is comprised of the following:
|
|
|
|
|
Principal value of
5%, convertible
|
$
220,000
|
$
220,000
|
|
Fair value of
embedded conversion option
|
157,000
|
156,000
|
|
Accrued
Interest
|
23,704
|
15,204
|
|
Debt
discount
|
(100,192
)
|
(133,590
)
|
|
Carrying
value of Secured Convertible Debenture Note
|
$
300,512
|
$
257,614
|
As of June 30, 2018, the estimated aggregate fair value of
outstanding convertible notes payable is approximately $0.2
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.
Technical default
The notes which are due in January 2018 are in technical default,
although the obligation has not been called by the lender. The note
agreement provided for such circumstances with the effect that the
Company is currently accruing the interest at the default interest
rate of 28%.
10
CANTABIO PHARMACEUTICALS, INC.
Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 7 – CAPITAL STOCK
Issuance of shares for consulting services.
During the three months ended June 30, 2018 the Company issued
approximately 0.4 million shares with a fair value of approximately
$10,000 as compensation for services performed.
NOTE 8 – SUBSEQUENT EVENTS
On July 26, 2018 a holder of convertible debentures converted
approximately $0.1 million of principal and interest into
approximately 2.6 million shares of common stock.
11