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
JUNE 30, 2019
(UNAUDITED)
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Business Operations
CURE Pharmaceutical Holding Corp., and its wholly-owned subsidiaries, CURE Pharmaceutical Corporation (“CURE Pharmaceutical”) and CURE Chemistry, Inc. (collectively (the “Company,” “we,” “our,” “us,” or “CURE”) is an emerging growth company focusing on the development and manufacturing of drug formulation and delivery technologies in novel dosage forms to improve drug safety, efficacy and patient adherence. Our mission is to improve lives by redefining how medications are delivered and experienced. Our business strategy is to develop products using our proprietary technology, which may include clinical development and regulatory approval, and license the product rights to partners responsible for marketing, sales and distribution, while retaining exclusive manufacturing rights. We operate a 25,000 square foot cGMP manufacturing plant in Oxnard, CA.
Our CUREform
TM
technology platform focuses on improving oral drug delivery by combining drug encapsulation techniques with alternative dosage forms including CUREfilm
®,
oral dissolving films (ODF) and CUREpods
TM
, chewable products. We apply our technology to pharmaceutical drugs and dietary supplements. ODF products are about the size of a postage stamp and composed of excipients such as polymers, stabilizers, lipids and surfactants which are all generally recognized as safe. They can be designed to deliver active ingredients to the gastrointestinal tract (GI) when placed on the tongue and swallowed, or directly to the blood stream when placed under the tongue (sublingual) or on the inner lining of the cheek and lip (buccal).
We currently have two commercial products and several development programs underway.
Background
CURE, formerly known as Makkanotti Group Corp, was incorporated in the State of Nevada on May 15, 2014. The Company was originally 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 was the surviving entity. The transaction was accounted for using the reverse acquisition method of accounting. As a result of the recapitalization and change in control, CURE Pharmaceutical was the acquiring entity in accordance with ASC 805, Business Combinations.
We licensed our technology available to a private company, Oak Therapeutics (“Oak”), to develop products for sale in the developing world (“Territory”). On November 10, 2017, we received 269,000 shares of Oak as consideration for an exclusive license to our patent rights in the Territory, along with a royalty-free non-exclusive license to any improvements made by Oak. As a result of this transaction, we owned approximately 63% of Oak’s outstanding shares and consolidated Oak’s financial statements as of the fourth quarter 2017. Due to the lack of performance by Oak under the license agreement, on April 15, 2019, we terminated all contractual relationships with Oak, including the license and surrendered our Oak shares to Oak. The parties terminated all contractual relationships between them, whether written or verbal, express or implied. All license or other rights previously granted by Oak to the Company or the Company to Oak were terminated, including all licenses or rights of any kind granted by the Company. (See Note 13 for deconsolidation of Oak)
On May 14, 2019 (the “
Closing Date
”), the Company, and CURE Chemistry Inc., a Delaware corporation and wholly owned subsidiary of the Company (“
Merger Sub
”), completed the transactions contemplated by the Agreement and Plan of Merger and Reorganization, dated March 31, 2019 (the “
Merger Agreement
”), with Chemistry Holdings, Inc., a Delaware corporation (“
Chemistry Holdings
”). As agreed in the Merger Agreement, the Company acquired Chemistry Holdings pursuant to a merger of the Merger Sub with and into Chemistry Holdings (the “
Merger
”). Pursuant to the Merger, Chemistry Holdings became a wholly-owned subsidiary of the Company and the stockholders of Chemistry Holdings received shares of the Company’s common stock, par value $0.001 per share (the “
Common Stock
”) in exchange for all of the issued and outstanding shares of Chemistry Holdings. (See Note 13)
The Company was the acquiring entity in accordance with ASC 805, Business Combinations.
Liquidity and Capital Resources
In connection with preparing unaudited condensed consolidated financial statements for the three and six months ended June 30, 2019, management evaluated whether there were conditions and events, considered in the aggregate, that raised substantial doubt about the Company’s ability to continue as a going concern within one year from the date that the financial statements are issued. As part of the Company’s evaluation, the Company considered the following:
|
·
|
Its accumulated deficit of approximately $51.9 million,
|
|
·
|
Its cash balance of $7.6 million and working capital of approximately $6.8 million, which includes the addition of approximately $7.3 million of net cash from the acquisition of CHI,
|
|
·
|
No debt or other obligations due in the next 12 months,
|
|
·
|
Its continued progress towards increasing revenues from commercialization and the impact of increased manufacturing and related plant upgrades,
|
|
·
|
Its research and development strategic plans, including the filing and maintenance of patents, and
|
|
·
|
The forecasted hiring of personnel and other S,G&A costs.
|
Based on these considerations, the Company believes that its current cash reserves and its revenues shall be adequate to sustain operations over the next 12 months.
If the Company does require additional funds, it may do so through the sale of common stock, combined with or without warrants, the sale of notes, and, to a lesser extent, equipment financing facilities and secured loans.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial statements. Such financial statements and accompanying notes are the representations of Company’s management, who is responsible for their integrity and objectivity.
Principle of Consolidation and Basis of Presentation
The condensed consolidated financial statements include the accounts of CURE Pharmaceutical Holding Corp (“CPHC”) and its wholly-owned subsidiaries , CURE Pharmaceutical Corporation (“CURE”) Chemistry Holdings Inc. and related subsidiaries recently acquired (collectively referred to as “CHI”) and its 63% majority owned subsidiary Oak Therapeutics, Inc. (“Oak”) through April 15, 2019 as the Company entered into a Termination and Release Agreement with Oak to surrender all of the Company’s shares of Oak and terminate any rights the Company may have to acquire additional shares or interest in OAK, 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 June 30, 2019, and the results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2019 and 2018, 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, 2018 filed with the Securities and Exchange Commission (the “SEC”) on April 1, 2019.
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 June 30, 2019 and December 31, 2018, the Company had no cash equivalents. At June 30, 2019 and December 31, 2018, 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.
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. At June 30, 2019 and December 31, 2018, management determined that an allowance was necessary which amounted to approximately $0 and $7,500, respectively.
Inventory
Inventory is stated at the lower of cost or net realizable value. The Company determines the cost of its inventory, which includes amounts related to materials, direct labor, and manufacturing overhead, on a first-in, first-out basis. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period and writes down any excess and obsolete inventories to their realizable value in the period in which the impairment is first identified.
Impairment of Long-Lived Assets
We review all of our long-lived assets for impairment indicators throughout the year and perform detailed testing whenever impairment indicators are present. In addition, we perform detailed impairment testing for indefinite-lived intangible assets, at least annually, at December 31. When necessary, we record charges for impairments.
Specifically:
|
·
|
For finite-lived intangible assets, such as acquired developed technology rights, and for other long-lived assets, we compare the undiscounted amount of the projected cash flows associated with the asset, or asset group, to the carrying amount. If the carrying amount is found to be greater, we record an impairment loss for the excess of book value over fair value. In addition, in all cases of an impairment review, we re-evaluate the remaining useful lives of the assets and modify them, as appropriate; and
|
|
|
|
|
·
|
For indefinite-lived intangible assets, such as goodwill, each year and whenever impairment indicators are present, we determine the fair value of the asset and record an impairment loss for the excess of book value over fair value, if any.
|
Management determined that no impairment indicators were present and that no impairment charges were necessary as of June 30, 2019 or December 31, 2018.
Revenue Recognition
We recognize revenue in accordance with Accounting Standards Codification (“ASC”) 606, “Revenue Recognition”. The Company adopted Topic 606 using a modified retrospective approach for the years ended December 31, 2017 and prior and has been applied prospectively in the Company’s financial statements beginning January 1, 2018. Revenues under Topic 606 are required to be recognized either at a “point in time” or “over time”, depending on the facts and circumstances of the arrangement, and will be evaluated using a five-step model. The adoption of Topic 606 did not have a material impact on the Company’s financial statements, at initial implementation nor will it have a material impact on an ongoing basis.
To achieve the core principle of Topic 606, we perform the following steps:
1.
|
Identify the contract(s) with customer;
|
2.
|
Identify the performance obligations in the contract;
|
3.
|
Determine the transactions price;
|
4.
|
Allocate the transactions price to the performance obligations in the contract; and
|
5.
|
Recognize revenue when (or as) we satisfy a performance obligation.
|
We derive revenues from two primary sources: products and services. Product revenue includes the shipment of product according to the agreement with our customers. Services include research and development contracts for the development of products utilizing our CUREForm™ technology. Rarely, contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices are typically estimated based on observable transactions when these services are sold on a standalone basis.
The Company’s product development income includes services for the development of products utilizing our CUREForm™ technology. Our development contracts have up to four phases. Revenue is recognized based on progress toward completion of the performance obligation in each phase. The method to measure progress toward completion requires judgment and is based on the nature of the products or services to be provided. The Company generally uses the input method to measure progress for its contracts because it best depicts the transfer of assets to the customer, which occurs as the Company incurs costs for the contracts. Under the cost-to-cost measure of progress, the progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenue is recorded proportionally as costs are incurred. Costs to fulfill these obligations mainly include materials, labor, supplies and consultants.
Deferred revenue is shown separately in the condensed consolidated balance sheets. At June 30, 2019 and December 31, 2018 we had deferred revenues of $318,083 and $383,275, respectively.
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 $107,082 and $153,344, for the three and six month periods ended June 30, 2019, respectively. The Company recorded advertising costs of $58,984 and $98,823 for the three and six month periods ended June 30, 2018, respectively.
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 $733,167 and $1,094,037 for the three and six month periods ended June 30, 2019, respectively. The Company recorded research and development expenses of $366,840 and $803,369 for the three and six month periods ended June 30, 2018, 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. The Company uses the Black-Scholes option valuation model for estimating fair value at the date of grant.
The Company accounts for restricted stock awards and stock options issued at fair value, based on an exercise price per share equal to the volume-weighted average of the high and low selling prices of the Company’s common stock reported on the OTC Bulletin Board for the five (5) trading days in the Company’s common stock beginning with the third (3rd) such trading following the Filing Date and ending with the seventh (7th) such trading day following the Filing Date. Compensation expense is recognized for the portion of the award that is ultimately expected to vest over the period during which the recipient renders the required services to the Company generally using the straight-line single option method.
In the case of award modifications, The Company accounts for the modification in accordance with ASU No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, whereby the Company recognizes the effect of the modification in the period the award is modified.
As of January 1, 2019, the Company adopted ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns the accounting of share-based payment awards issued to employees and nonemployees. The adoption did not materially impact our condensed consolidated financial statements.
Convertible Debentures
Beneficial Conversion Feature
If the conversion features of conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method.
Derivative Liabilities
ASC 815-40 (formerly SFAS No. 133 “Accounting for derivative instruments and hedging activities”), requires that embedded derivative instruments be bifurcated and assessed, along with free-standing derivative instruments such as warrants, on their issuance date and in accordance with ASC 815-40-15 (formerly EITF 00-19 “Accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock”) to determine whether they should be considered a derivative liability and measured at their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option pricing formula and present value pricing. At June 30, 2019 and December 31, 2018, the Company adjusted its derivative liability to its fair value, and reflected the change in fair value, in its consolidated statement of operations and comprehensive loss.
Fair Value Measurements
The Company follows FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements and establishes a framework for measuring fair value and expands disclosure about such fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1:
|
Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
|
|
|
Level 2:
|
Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
|
|
|
Level 3:
|
Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
|
The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable, accrued expenses and notes and loans payable approximate their estimated fair market value based on the short-term maturity of these instruments. The carrying amount of the notes and convertible promissory notes approximates the estimated fair value for these instruments as management believes that such notes constitute substantially all of the Company’s debt and the interest payable on the notes approximates the Company’s incremental borrowing rate. We measured the liability for price adjustable warrants and embedded derivative features in the convertible notes, using the probability adjusted Black-Scholes option pricing model (“Black-Scholes”), which management has determined approximates values using more complex methods, using Level 3 inputs. (See Note 10)
The following table summarizes fair value measurements by level at June 30, 2019 for the contingent stock consideration measured at fair value on a recurring basis:
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Fair value of contingent stock consideration
|
|
$
|
23,152,000
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
23,152,000
|
|
The fair value of contingent stock consideration is evaluated each reporting period using projected financial information, discount rates, and key inputs. Projected contingent payment amounts are discounted back to the current period using a discount rate. Financial information is based on the Company’s most recent internal forecasts. Changes in projected financial information, the Company’s stock price, discount rate and time for settlement of milestones and earnouts may result in higher or lower fair value measurements. Increases (decreases) in any of those inputs in isolation may result in a significantly lower (higher) fair value measurement. For the period from the date of acquisition to June 30, 2019, the Company’s stock price increased resulting in a significant increase of the fair value of the contingent stock consideration.
Net Loss per Common Share
Basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period, excluding any unvested restricted stock awards. Diluted net loss per share includes the effect of common stock equivalents (stock options, unvested restricted stock, and warrants) when, under either the treasury or if-converted method, such inclusion in the computation would be dilutive. Net loss is adjusted for the dilutive effect of the change in fair value liability for price adjustable warrants, if applicable.
The following number of shares have been excluded from diluted net income (loss) since such inclusion would be anti-dilutive:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Restricted stock and stock options outstanding
|
|
|
1,743,673
|
|
|
|
97,742
|
|
Warrants
|
|
|
5,638,770
|
|
|
|
2,879,695
|
|
Shares to be issued upon conversion of convertible payable
|
|
|
115,047
|
|
|
|
236,475
|
|
Total
|
|
|
7,497,490
|
|
|
|
3,213,912
|
|
In connection with CHI acquisition, the Company estimated as of the Closing Date that approximately 8,410,875 common stock shares, of which 7,128,913 common stock shares are held in escrow, may be issued and released over a period of 5 months to 5 years. These potential post-closing claims relate to, among other things, breaches of representations, warranties and covenants contained in the Merger Agreement and the future earn-out and achievement of a variety of milestones as defined in the Merger Agreement. Additionally, a warrant was issued to purchase up 8,018,071 common stock shares which vest based on various revenue achievement during year 3 and year 4 post the CHI acquisition Closing Date. Due to the uncertainty of the number of shares to be issued and vested under the warrant, these shares were not included in the table above.
Recently Issued Standards
In February 2016, the FASB issued ASU 2016-02, “
Leases
” (“ASU 2016-02”). This guidance, as amended by subsequent ASU’s on the topic, improves transparency and comparability among companies by recognizing right of use (ROU) assets and lease liabilities on the balance sheet and by disclosing key information about leasing arrangements. ASU No. 2016-02 is effective for public business entities for annual periods, including interim periods within those annual periods, beginning after December 15, 2018, with early adoption permitted. We will adopt ASU No. 2016-02 in our fiscal year beginning January 1, 2019 and will use the alternative transition method provided by the FASB in ASU No. 2018-10, “Codification Improvements to Topic 842, Leases” and ASU No. 2018-11, “Leases (Topic 842): Targeted Improvements”, with no restatement of comparative periods.
The new standard provides optional practical expedients in transition. We expect to only elect the “package of practical expedients” where, under the new standard, prior conclusions about lease identification, lease classification and initial direct costs do not need to be reassessed. The new standard also provides practical expedients for ongoing accounting and we do not expect to elect any of these practical expedients on adoption. We continue to assess the impact of the new standard and believe it will not have a material effect on the condensed consolidated balance sheet.
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 the lower of cost (FIFO cost basis) or market. The carrying value of inventory consisted of the following at June 30, 2019 and December 31, 2018:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Raw materials
|
|
$
|
36,852
|
|
|
$
|
25,297
|
|
Packaging components
|
|
|
7,687
|
|
|
|
7,687
|
|
Work-in-process
|
|
|
8,162
|
|
|
|
8,162
|
|
|
|
|
52,701
|
|
|
|
41,146
|
|
Reserve for obsolescence
|
|
|
(3,382
|
)
|
|
|
(3,370
|
)
|
Total inventory
|
|
$
|
49,319
|
|
|
$
|
37,776
|
|
NOTE 4 - PREPAID EXPENSES AND OTHER ASSETS
As of June 30, 2019 and December 31, 2018, prepaid expenses and other assets consisted of the following:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Prepaid consulting services– stock-based compensation
|
|
$
|
685,537
|
|
|
$
|
935,883
|
|
Prepaid consulting services
|
|
|
65,167
|
|
|
|
82,167
|
|
Prepaid insurance
|
|
|
54,944
|
|
|
|
120,877
|
|
Other receivables
|
|
|
-
|
|
|
|
2,666
|
|
Prepaid expenses
|
|
|
216,756
|
|
|
|
37,200
|
|
Prepaid expenses and other assets
|
|
|
1,022,404
|
|
|
|
1,178,793
|
|
Current portion of prepaid expenses and other assets
|
|
|
(988,579
|
)
|
|
|
(946,386
|
)
|
Prepaid expenses and other assets less current portion
|
|
$
|
33,825
|
|
|
$
|
232,407
|
|
NOTE 5 - PROPERTY AND EQUIPMENT
As of June 30, 2019 and December 31, 2018, property and equipment consisted of the following:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Manufacturing equipment
|
|
$
|
1,527,446
|
|
|
$
|
841,098
|
|
Computer and other equipment
|
|
|
366,419
|
|
|
|
183,346
|
|
Leasehold improvements
|
|
|
51,788
|
|
|
|
48,488
|
|
Less accumulated depreciation
|
|
|
(829,293
|
)
|
|
|
(773,022
|
)
|
Property and Equipment, net
|
|
$
|
1,116,360
|
|
|
$
|
299,910
|
|
Depreciation expense for the three and six month periods ended June 30, 2019 was $30,064 and $56,271, respectively. Depreciation expense for the three and six month periods ended June 30, 2018 was $25,597 and $49,652, respectively, which includes depreciation of $2,160 and $4,320 for capitalized leased assets for the three and six months ended June 30, 2018, respectively. Accumulated depreciation for property held under capital leases was $43,201 as of June 30, 2019 and December 31, 2018.
NOTE 6 - INTANGIBLE ASSETS
The Company incurred $29,144 and $47,632 of legal patent costs that were capitalized during the six months periods ended June 30, 2019 and 2018, respectively. In addition, the Company acquired a patent and developed technology with a fair value of $650,000 and in-process research and development with a fair value of $14,460,000 as part of the CHI acquisition (See Note 13). No patents were acquired through issuance of common stock shares of the Company for the six months period ended June 30, 2019. The Company purchased $280,100 of patents through the issuance of 200,000 common stock shares of the Company during the year ended December 31, 2018.
Intangible Asset Summary
The following table summarizes the estimated fair values as of June 30, 2019 of the identifiable intangible assets acquired, their useful life, and method of amortization:
|
|
Estimated Fair Value
|
|
|
Remaining
Estimated
Useful Life
(Years)
|
|
|
Six Months
Amortization
Expense
|
|
Intellectual Property
|
|
$
|
814,582
|
|
|
|
13.91
|
|
|
$
|
20,412
|
|
Patents
|
|
|
1,258,307
|
|
|
|
13.83
|
|
|
|
18,317
|
|
In-process research and development technology
|
|
|
14,460,000
|
|
|
|
13.83
|
|
|
|
172,143
|
|
Total
|
|
$
|
16,532,889
|
|
|
|
|
|
|
$
|
210,872
|
|
Less: accumulated amortization
|
|
|
(398,606
|
)
|
|
|
|
|
|
|
|
|
Intellectual property and patents, net
|
|
|
16,134,283
|
|
|
|
|
|
|
|
|
|
Less: pending patents not subject to amortization
|
|
|
(279,779
|
)
|
|
|
|
|
|
|
|
|
Net intangible assets subject to amortization
|
|
$
|
15,854,504
|
|
|
|
|
|
|
|
|
|
The net intangible asset was $16,134,283, net of accumulated amortization of $398,606, as of June 30, 2019. Amortization expense was $196,641 and $210,872 for the three and six months periods ended June 30, 2019, respectively. Amortization expense was $11,613 and $22,512 for the three and six months periods ended June 30, 2018, respectively.
The estimated aggregate amortization expense over each of the next five years is as follows:
2019
|
|
$
|
575,730
|
|
2020
|
|
|
1,150,584
|
|
2021
|
|
|
1,150,584
|
|
2022
|
|
|
1,150,584
|
|
2023
|
|
|
1,150,584
|
|
Thereafter
|
|
|
10,676,438
|
|
Total Amortization
|
|
$
|
15,854,504
|
|
NOTE 7 – LOAN PAYABLE
Loan payable consists of the following at June 30, 2019 and December 31, 2018:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Notes to a company due September 29, 2019, including interest at 6.00% per annum; unsecured; interest due monthly
|
|
$
|
26,930
|
|
|
$
|
105,125
|
|
Current portion of loan payable
|
|
|
(26,930
|
)
|
|
|
(105,125
|
)
|
Loan payable, less current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest expense for the three and six months periods ended June 30, 2019 was $600 and $2,829, respectively. Interest expense for the three and six months periods ended June 30, 2018 was $496 and $1,296, respectively.
NOTE 8 – NOTES PAYABLE
Notes payable consist of the following at June 30, 2019 and December 31, 2018:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Note to a company amended on August 27, 2017 and February 27, 2019, 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. This note was repaid on May 21, 2019.
|
|
$
|
-
|
|
|
$
|
650,000
|
|
Note to an individual, non-interest bearing, unsecured and has no fixed terms of repayment.
|
|
|
50,000
|
|
|
|
50,000
|
|
Note to an individual due April 1, 2019, interest payable at 6% per annum, unsecured, principal and accrued interest due at maturity. The Company issued 50,000 shares of its common stock on October 18, 2018 at a price per share of $2.88 as an equity kicker. This note and accrued interest was repaid on April 2, 2019.
|
|
|
-
|
|
|
|
150,000
|
|
Note to a company due December 15, 2018, interest payable at 5% per annum, unsecured, principal and accrued interest due at maturity. If this note is still outstanding as of the date of any bona fide sale of the Company’s preferred stock or common stock in excess of $4,000,000 in gross proceeds, in one transaction or a serious of related transactions, which offering definitively sets a price per share of common stock and results in a listing of the Company’s common stock on a national securities exchange. On January 1, 2019, we entered into an Amendment to extend the maturity date to June 30, 2019. This note was repaid on May 29, 2019.
|
|
|
-
|
|
|
|
100,000
|
|
|
|
|
50,000
|
|
|
|
950,000
|
|
Unamortized discount
|
|
|
|
|
|
|
(30,000
|
)
|
Current portion of loan payable
|
|
|
(50,000
|
)
|
|
|
(920,000
|
)
|
Loan payable, less current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest expense for the three and six month periods ended June 30, 2019 was $6,497 and $28,158, respectively. Interest expense for the three and six month periods ended June 30, 2018 was $16,205 and $32,233, respectively.
NOTE 9 – CONVERTIBLE PROMISSORY NOTES
Convertible promissory notes consist of the following at June 30, 2019 and December 31, 2018:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
|
|
|
|
|
|
|
Convertible promissory notes totaling $1,400,000 due between December 31, 2018 and February 28, 2019, 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 December 31, 2018 and February 28, 2019. A total of $250,000 convertible promissory notes was repaid in 2018 and $450,000 convertible promissory notes were repaid in 2019. A total $400,000 of convertible promissory notes plus accrued interest of $71,342 have been converted in to 254,779 common stock shares of the Company in 2019. Remaining $550,000 of convertible promissory notes are currently in default.
|
|
$
|
550,000
|
|
|
$
|
1,400,000
|
|
Convertible promissory notes totaling $1,275,000 due November 30, 2018 and $750,000 due February 28, 2019, interest payable at 9% per annum; unsecured; principal and accrued interest convertible into common stock at either the price per share equal to the average closing price of the Company’s Common Stock on the OTC Markets for the five consecutive trading days prior to the delivery of a Notice of Conversion (“Optional Conversion”) or price per share equal to 75% of the price of the Company’s next bona fide sale of its preferred stock or Common Stock in excess of $4,000,000 in gross proceeds, in one transaction or a series of related transactions, which offering definitively sets a price per share of the Company’s Common Stock or preferred stock and enables the Company to list its common stock on a national securities exchange; accrued interest to be paid quarterly beginning September 30, 2018, which has not yet been paid. During the first quarter of 2019, the Company repaid $275,000. On February 13, 2019, $750,000 of convertible promissory notes plus accrued interest and penalties of $135,825 were converted into 479,144 common stock shares of the Company. On February 15, 2019, $1,000,000 of convertible promissory notes plus accrued interest and penalties of $94,750 were converted into 591,757 common stock shares of the Company.
|
|
|
-
|
|
|
|
2,025,000
|
|
Convertible promissory note totaling $500,000 due April 30, 2019, interest payable at 9% per annum; unsecured; principal and accrued interest convertible into common stock at a price per share (the “ Voluntary Conversion PPS “) equal to 75% of the average of the closing prices of the Company’s Common Stock on the OTC Market (or any other market on which the common stock of the Company is then listed for trading) over the thirty (30) consecutive trading days prior to the delivery of the notice of conversion by the Investor to the Company, or, if at the time of such conversion the shares of the Company’s Common Stock are not listed for trading, then the entire then outstanding Investment Amount shall be converted into that number of shares of the most senior class of shares of the Company existing at the time of such conversion, at a price per share equal to 75% of the fair market value of such Common Stock as shall be determined by the Board of Directors based on, among others, a valuation prepared by an independent third party and which shall have been submitted to the Company not more than 90 days prior to the date of such determination by the Board of Directors. In the event of the consummation by the Company, on or before the Maturity Date, of a transaction or series of related transactions in which the Company issues equity securities of the Company in consideration of at least US$4,000,000 (a “ Financing “), the then outstanding Investment Amount not previously converted hereunder shall be automatically converted, immediately prior to (but conditioned upon) the consummation of such Financing, into such number of shares (or a sub-class thereof) issued by the Company in the Financing, equal to the outstanding Investment Amount divided by a price per share equal to 75% of the lowest price per share paid to the Company in the Financing. In the event the Financing is not consummated by the Maturity Date, then the outstanding Investment Amount as of the Maturity Date not previously converted hereunder shall be automatically converted, on the Maturity Date, into such number of shares (or a sub-class thereof) issued by the Company in the Financing, equal to the outstanding Investment Amount divided by the Voluntary Conversion PPS. This convertible promissory note and accrued interest was repaid on April 29, 2019.
|
|
|
-
|
|
|
|
500,000
|
|
Convertible promissory note totaling $500,000 due December 31, 2018, interest payable at 9% per annum; secured by all assets of the company; principal and accrued interest convertible into common stock at either the price per share equal to the average closing price of the Company’s Common Stock on the OTC Markets for the five consecutive trading days prior to the delivery of a Notice of Conversion (“Optional Conversion”) or price per share equal to 75% of the price of the Company’s next bona fide sale of its preferred stock or Common Stock in excess of $4,000,000 in gross proceeds, in one transaction or a series of related transactions, which offering definitively sets a price per share of the Company’s Common Stock or preferred stock and enables the Company to list its common stock on a national securities exchange; accrued interest to be paid quarterly beginning September 30, 2018. In 2019, the noteholder of this convertible promissory note entered into a debt conversion agreement to convert this convertible promissory note plus accrued interest into common stock shares of the Company at a $1.85 conversion price.
|
|
|
-
|
|
|
|
500,000
|
|
Convertible promissory notes totaling $575,000 due June 27, 2019, interest payable at 9% per annum; unsecured; principal and accrued interest convertible into common stock at either the price per share equal to the average closing price of the Company’s Common Stock on the OTC Markets for the five consecutive trading days prior to the delivery of a Notice of Conversion (“Optional Conversion”) or price per share equal to 75% of the price of the Company’s next bona fide sale of its preferred stock or Common Stock in excess of $4,000,000 in gross proceeds, in one transaction or a series of related transactions, which offering definitively sets a price per share of the Company’s Common Stock or preferred stock and enables the Company to list its common stock on a national securities exchange; accrued interest to be paid quarterly beginning December 31, 2018. $575,000 convertible promissory notes due June 27, 2019 plus accrued interest and penalties of $78,034 have been converted into 353,221 common stock shares of the Company in 2019.
|
|
|
-
|
|
|
|
575,000
|
|
Convertible promissory notes totaling $2,000,000 due October 31, 2019, interest payable at 9% per annum; unsecured; principal and accrued interest convertible into common stock at either the price per share equal to the average closing price of the Company’s Common Stock on the OTC Markets for the five consecutive trading days prior to the delivery of a Notice of Conversion (“Optional Conversion”) or price per share equal to 75% of the price of the Company’s next bona fide sale of its preferred stock or Common Stock in excess of $4,000,000 in gross proceeds, in one transaction or a series of related transactions, which offering definitively sets a price per share of the Company’s Common Stock or preferred stock and enables the Company to list its common stock on a national securities exchange; accrued interest to be paid quarterly beginning December 31, 2018, which has not yet been paid. In 2019, the noteholder of this convertible promissory note entered into a debt conversion agreement to convert this convertible promissory note plus accrued interest into common stock shares of the Company at a $1.85 conversion price.
|
|
|
-
|
|
|
|
575,000
|
|
|
|
|
550,000
|
|
|
|
5,575,000
|
|
Unamortized discount
|
|
|
-
|
|
|
|
(332,569
|
)
|
Current portion of convertible promissory notes
|
|
|
550,000
|
|
|
|
5,242,431
|
|
Convertible promissory notes, less current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
During the three and six month periods ended June 30, 2019, the Company incurred $675,001 and $1,133,900, respectively, amortization of discount. Interest expense for the three and six month periods ended June 30, 2019 was $14,762 and $87,575, respectively. During the three and six month period ended June 30, 2018, the Company incurred $224,936 and $372,544, respectively, amortization of discount. Interest expense for the three and six month periods ended June 30, 2018 was $89,759 and $142,153, respectively.
NOTE 10 – DERIVATIVE LIABILITY
The Company evaluates its convertible instruments, options, warrants or other contracts, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense). Upon conversion or exercise of a derivative instruments, the instrument is marked to fair value at the conversion date then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.
The following table summarizes fair value measurements by level at June 30, 2019 for assets and liabilities measured at fair value on a recurring basis:
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Fair value of Derivative Liability
|
|
$
|
344,625
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
344,625
|
|
The following table summarizes fair value measurements by level at December 31, 2018 for assets and liabilities measured at fair value on a recurring basis:
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Fair value of Derivative Liability
|
|
$
|
617,628
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
617,628
|
|
The Company has issued convertible promissory notes during 2018 and 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, dividends, interest rates and expected term. The assumptions used in valuing the derivative liability during 2019 were as follows:
Significant assumptions:
|
|
|
|
Risk-free interest rate at grant date
|
|
|
1.76
|
%
|
Expected stock price volatility
|
|
|
129.01
|
%
|
Expected dividend payout
|
|
|
-
|
|
Expected option life (in years)
|
|
|
1
|
|
Expected forfeiture rate
|
|
|
0
|
|
The following table presents a reconciliation of the derivative liability and contingent stock consideration measured at fair value on a recurring basis from December 31, 2018 to June 30, 2019:
|
|
Fair value of derivative liabilities
|
|
Balance at December 31, 2018
|
|
$
|
617,628
|
|
Gain on change in fair value included in earnings
|
|
|
(273,003
|
)
|
Balance at June 30, 2019
|
|
$
|
344,625
|
|
NOTE 11 – STOCK BASED AWARDS
On December 29, 2017 (“Effective Date”), the Company adopted the CURE Pharmaceutical Holding Corp. 2017 Equity Incentive Plan (the “Plan”), pursuant to which an aggregate of 5,000,000 shares of the common stock of the Company are available for grant. The Board of Directors have determined that it is in the best interests of the Company and its stockholders to provide an additional incentive for certain employees, including executive officers, and non-employee members of the Board of Directors of the Company by granting to them awards with respect to the common stock of the Company pursuant to the Plan. The Plan seeks to achieve this purpose by providing for awards in the form of Options, Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Units, Performance Shares, Performance Units, Cash-Based Awards and Other Stock-Based Awards (“Awards”). The Plan will continue in effect until its termination by the Committee; provided, however, that all Awards must be granted, if at all, within ten (10) years from the Effective Date.
The Company issued 1,170,000 Nonstatutory Stock Options (“NSO”) to employees, including executive officers, and non-employee members of the Board of Directors of the Company during the six months period ended June 30, 2019. The Company did not issue any Restricted Common Stock (“RCS”), or Incentive Stock Options (“ISO”) to any employees, including executive officers, non-employee members of the Board of Directors of the Company, members of the Advisory Board Committee and consultants during the six months period ended June 30, 2019. Vesting periods for awarded RCS, NSO and ISO’s range from immediate to quarterly over a 4 year period. For NSO’s and ISO awarded, the term to exercise their NSO or ISO is 10 years.
Stock Options
The Company’s stock option activity was as follows:
|
|
Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Contractual Remaining Life
|
|
Outstanding, December 31, 2018
|
|
|
2,313,050
|
|
|
$
|
0.79
|
|
|
|
9.27
|
|
Granted
|
|
|
1,170,000
|
|
|
$
|
3.62
|
|
|
|
9.84
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
(89,544
|
)
|
|
$
|
0.74
|
|
|
|
-
|
|
Outstanding, June 30, 2019
|
|
|
3,393,506
|
|
|
$
|
1.77
|
|
|
|
9.17
|
|
Exercisable at June 30, 2019
|
|
|
1,252,631
|
|
|
$
|
1.09
|
|
|
|
8.92
|
|
Range of
Exercise Price
|
|
Number of Awards
|
|
|
Weighted Average Remaining Contractual Life (years)
|
|
|
Weighted Average Exercise Price
|
|
|
Number of Awards Exercisable
|
|
|
Weighted Average Exercise Price
|
|
$
|
0.61 - $4.01
|
|
|
3,393,506
|
|
|
|
9.17
|
|
|
$
|
1.77
|
|
|
|
1,252,631
|
|
|
$
|
1.09
|
|
|
|
|
|
3,393,506
|
|
|
|
9.17
|
|
|
$
|
1.77
|
|
|
|
1,252,631
|
|
|
$
|
1.09
|
|
The aggregate intrinsic value of options outstanding and exercisable at June 30, 2019 was $9,518.
The aggregate grant date fair value of options granted during the six months ended March 31, 2019 and year ended December 31, 2018 amounted to $5,500,284 and $1,541,353, respectively. Compensation expense related to stock options for the three and six months periods ended June 30, 2019 was $522,397 and $616,438, respectively. Compensation expense related to stock options for the three and six months periods ended June 30, 2018 was $313,730 for both periods.
As of June 30, 2019, the total unrecognized fair value compensation cost related to unvested stock options was $4,301,588, which is to be recognized over a remaining weighted average period of approximately 9.31 years.
The weighted-average fair value of options granted during the six months ended June 30, 2019 and year ended December 31, 2018, 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:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Significant assumptions (weighted-average):
|
|
|
|
|
|
|
Risk-free interest rate at grant date
|
|
|
1.76
|
%
|
|
|
2.51
|
%
|
Expected stock price volatility
|
|
|
129.01
|
%
|
|
|
156.15
|
%
|
Expected dividend payout
|
|
|
-
|
|
|
|
-
|
|
Expected option life (in years)
|
|
|
10
|
|
|
|
10
|
|
Expected forfeiture rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Restricted Stock
The Company’s restricted stock activity was as follows:
Compensation expense related to restricted shares for the three and six months periods ended June 30, 2019 was $136,250 and $272,500, respectively. Compensation expense related to restricted shares for the three and six months periods ended June 30, 2018 was $147,538 for both periods. Information relating to non-vested restricted award shares is as follows:
|
|
Restricted
Stock Shares
|
|
|
Weighted Average Grant Date Fair Value
|
|
Non-vested, December 31, 2018
|
|
|
317,708
|
|
|
|
1.44
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(187,500
|
)
|
|
|
1.45
|
|
Forfeited/Expired
|
|
|
-
|
|
|
|
-
|
|
Non-vested, June 30, 2019
|
|
|
130,208
|
|
|
|
1.42
|
|
NOTE 12 – WARRANT AGREEMENTS
On February 13, 2019, the Company issued 657,655 warrants at a fair market value of $1,792,965 and with an exercise price of $2.31 per share in connection with the conversion of $1,325,000 convertible promissory notes. The Company also issued 99,476 warrants at a fair market value of $271,202 and with an exercise price of $2.31 per share in connection with the broker fees earned from the conversion of those convertible promissory notes.
On February 15, 2019, the Company issued 312,500 warrants at a fair market value of $866,620 and with an exercise price of $2.00 per share in connection with the conversion of $500,000 convertible promissory notes.
On February 15, 2019, the Company issued 295,879 warrants at a fair market value of $814,834 and with an exercise price of $2.31 per share in connection with the conversion of $1,000,000 convertible promissory notes.
On May 14, 2019, in connection with the acquisition of CHI, the Company issued warrants to purchase up to 8,018,071 shares of the Company’s common stock at an exercise price of $5.01. The total number of shares to vest is subject to certain revenue milestones earned during the 3
rd
and 4
th
years post acquisition period and the warrant expires on May 14, 2024. The fair value of the warrants, assuming full vesting of all shares, was $4,642 and is used in the calculation of the acquisition price of CHI.
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, 2018
|
|
|
5,340,751
|
|
|
$
|
2.20
|
|
|
|
3.80
|
|
Granted
|
|
|
9,489,340
|
|
|
$
|
4.62
|
|
|
|
4.60
|
|
Exercised
|
|
|
(149,249
|
)
|
|
$
|
1.78
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
Outstanding, June 30, 2019
|
|
|
14,680,842
|
|
|
$
|
3.69
|
|
|
|
3.49
|
|
Exercisable at June 30, 2019
|
|
|
5,638,770
|
|
|
$
|
2.09
|
|
|
|
1.89
|
|
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
|
|
|
14,680,842
|
|
|
|
3.49
|
|
|
$
|
3.69
|
|
|
|
5,638,770
|
|
|
$
|
2.09
|
|
|
|
|
|
14,680,842
|
|
|
|
3.49
|
|
|
$
|
3.69
|
|
|
|
5,638,770
|
|
|
$
|
2.09
|
|
The weighted-average fair value of warrants granted to during the six months ended June 30, 2019 and year ended December 31, 2018, 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:
|
|
June 30,
2019
|
|
|
December 31,
2018
|
|
Significant assumptions (weighted-average):
|
|
|
|
|
|
|
Risk-free interest rate at grant date
|
|
|
1.76
|
%
|
|
|
2.51
|
%
|
Expected stock price volatility
|
|
|
129.01
|
%
|
|
|
156.15
|
%
|
Expected dividend payout
|
|
|
-
|
|
|
|
-
|
|
Expected option life (in years)
|
|
|
3
|
|
|
|
3
|
|
Expected forfeiture rate
|
|
|
0
|
%
|
|
|
0
|
%
|
NOTE 13 – BUSINESS COMBINATION AND DECONSOLIDATION OF SUBSIDIARY
CHI Acquisition
On May 14, 2019, the Company acquired all of the issued and outstanding stock of CHI for shares of the Company’s Common Stock. The maximum number of shares of Common Stock to be issued, including escrowed shares and shares issuable pursuant to a variety of earn-out provisions and warrants, is 32,072,283 shares. The shares are allocated as follows: (i) 5,700,000 shares of Common Stock as upfront consideration issued at the Closing (the “
Upfront Consideration Shares
”); (ii) 7,128,913 shares to be held in escrow, subject to indemnification and clawback rights that lapse upon the achievement of certain milestones (the “Clawback Shares”); (iii) up to 3,207,228 shares that may be issued pursuant to an earn-out over five years upon the achievement of certain technological implementations (“Achievement Shares”); (iv) up to 8,018,071 shares that may be issued pursuant to an earn-out over two years upon the achievement of certain revenue goals (“Earnout Shares”); and (v) up to 8,018,071 shares issuable upon exercise of warrants (“Acquisition Warrants”) that become exercisable upon achieving certain revenue goals between the second and fourth anniversary of the Closing Date at an exercise price of $5.01 per share, exercisable, to the extent vested, for five years from the Closing Date. In exchange for the assets and liabilities acquired, the Company received an investment of $2,000,000 (the “
Principal Amount
”) from Chemistry Holdings pursuant to a convertible note (the “
Note
”). Such Note, on the Closing Date, became an intercompany payable and was cancelled.
CHI has developed a novel chewable delivery system, nanoemulsions, microemulsions, microcapsules and taste masking solutions. These technologies complement and expand the CUREfilm™ platform to enable the delivery of a wider range of active ingredients at higher doses. The combined technologies create a versatile platform for both immediate and controlled-release drug delivery.
The acquisition was accounted for in accordance with ASC 805, Business Combinations. The equity consideration to be provided is subject to a variety of earn-out and milestone provisions thus of the 32,072,283 total potential shares to be issued, 26,372,283 shares are considered contingent shares to be release or issued over a period from 5 months to 5 years based on the various contingency as described in the Merger Agreement. (“Contingent Shares”). Under ASC 480-10-25, based on the variable number of shares to be issued as part of the acquisition, the fair value of the Contingent and Acquisition Warrant Shares of $14,632,000 will be recorded as a liability as contingent share consideration.
The Company estimated the fair value of the preliminary purchase price for the acquisition of CHI is approximately $34,069,942. The Company acquired CHI through the issuance of shares of Common Stock of the Company with no cash consideration provided. The preliminary total purchase price was determined based on the following: i) Company’s closing price ($3.34) on May 14, 2019 for the Upfront Consideration Share; ii) the estimated fair value using the Monte-Carlo simulation of stock price correlation, and other variables over a 66 month performance period applied to the total number of contingent shares, which consists of the Clawback Shares, Achievement Shares and Earnout Shares, as determined based on the weighted average present value probability of each the various estimates of milestones, earn-out amounts and achievements being accomplished (“Adjusted Contingent Shares”); iii) the fair value of the Acquisition Warrant Shares based on using the Black-Scholes valuation using the a risk free rate of 2.4%, stock price volatility of 134.7%, no dividend payout, 1 year expected life, exercise price of $5.01 and an estimated stock price of $0.39 based on the end of the earn-out period, year 4 (as determine by using a Monte-Carlo simulation model); and iv) the Company estimated acquisition costs of $399,942, of which $290,209 were included in general and administrative expenses for the period ended June 30, 2019.
|
|
Shares
|
|
|
Amount
|
|
Upfront Consideration Shares
|
|
|
5,700,000
|
|
|
$
|
19,038,000
|
|
Adjusted Contingent Shares
|
|
|
8,410,875
|
|
|
|
14,627,358
|
|
Acquisition Warrant Shares
|
|
|
8,018,071
|
|
|
|
4,642
|
|
Acquisition costs
|
|
|
-
|
|
|
|
399,942
|
|
Total purchase price
|
|
|
22,128,946
|
|
|
$
|
34,069,942
|
|
The Company estimated the fair value of acquired in-process research and development technology using the relief from royalty method. The fair values of acquired patents and developed technology were estimated using the multi-period excess earnings method. Under both the relief from royalty and multi-period excess earnings methods, the fair value models incorporate estimates of future cash flows, estimates of allocations of certain assets and cash flows, estimates of future growth rates, and management’s judgment regarding the applicable discount rates to use to discount such estimates of cash flows. The estimated useful lives of identifiable finite-lived intangible assets range from 11 to 14 years.
The Company allocated the acquisition consideration to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The fair value of the acquired tangible and identifiable intangible assets were determined based on inputs that are unobservable and significant to the overall fair value measurement. It is also based on estimates and assumptions made by management at the time of the acquisition. As such, this was classified as Level 3 fair value hierarchy measurements and disclosures.
The excess of the purchase price over the estimated fair values is assigned to goodwill.
The following table summarizes the preliminary estimated fair values of the assets and liabilities assumed in the CHI acquisition, which is subject to change during measurement period:
Net assets acquired:
|
|
|
|
Cash
|
|
$
|
8,487,489
|
|
Note receivable from CURE
|
|
|
2,000,000
|
|
Property, plant and equipment
|
|
|
82,700
|
|
Patents and development technology
|
|
|
650,000
|
|
In-process research and development
|
|
|
14,460,000
|
|
Goodwill
|
|
|
9,178,477
|
|
Accounts payable
|
|
|
(353,856
|
)
|
Payroll tax liabilities
|
|
|
(834,810
|
)
|
Net assets acquired
|
|
|
33,670,000
|
|
Acquisition costs
|
|
|
399,942
|
|
Net assets acquired and acquisition costs incurred
|
|
$
|
34,069,942
|
|
Information regarding identifiable intangible assets acquired in the CHI acquisition is presented below:
|
|
Weighted-average Estimated
useful life
|
|
Preliminary Estimated Asset Fair Value
|
|
Finite-lived intangible assets:
|
|
|
|
|
|
Patent and developed technology
|
|
11.0 years
|
|
$
|
650,000
|
|
In-Process research and development
|
|
14.0 years
|
|
|
14,460,000
|
|
Total finite-lived intangible assets acquired
|
|
14.0 years
|
|
|
15,110,000
|
|
Supplemental Pro
Forma Information
The following unaudited supplemental pro forma financial information is based on our historical condensed consolidated financial statements and CHI’s historical condensed consolidated financial statements as adjusted to give effect to the May 14, 2019 acquisition of CHI’s. The unaudited supplemental pro forma financial information for the periods presented gives effect to the acquisition as if it had occurred on January 1, 2018.
This unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have resulted had the acquisition been in effect at the beginning of the periods presented. In addition, the unaudited pro forma results are not intended to be a projection of future results and do not reflect any operating efficiencies or cost savings that might be achievable.
The following table presents pro forma sales, net income attributable to Cure Pharmaceuticals Holding, Inc., and net income attributable to CURE per common share data assuming CHI was acquired at the beginning of the 2018 fiscal year:
|
|
Three Months Ended June 30,
|
|
|
Six Months Ended June 30,
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
Net revenues
|
|
$
|
107,926
|
|
|
$
|
407,588
|
|
|
$
|
182,426
|
|
|
$
|
838,774
|
|
Net loss
|
|
|
(14,590,578
|
|
|
|
(2,344,350
|
|
|
|
(24,739,485
|
|
|
|
(4,200,631
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Cure per common share, basic
|
|
$
|
(0.36
|
)
|
|
$
|
(0.08
|
)
|
|
$
|
(0.67
|
)
|
|
|
(0.14
|
|
Net loss attributable to Cure per common share, diluted
|
|
|
(0.36
|
|
|
|
(0.08
|
|
|
|
(0.67
|
|
|
|
(0.14
|
|
Deconsolidation of Oak Therapeutics, Inc.
On April 15, 2019, the Company entered into a Termination and Release Agreement (“Agreement”) with Oak Therapeutics (“Oak”) to surrender all of its Oak shares to Oak and terminating any rights the Company might have to acquire additional shares or interest in Oak. The parties terminated all contractual relationships between them, whether written or verbal, express or implied. All license or other rights previously granted by Oak to the Company or the Company to Oak were terminated, including all licenses or rights of any kind granted by the Company. As of the date of deconsolidation, Oak has a negative net assets, which resulted in a gain of $80,868.
In the Company’s condensed consolidated financial statements for the six months period ended June 30, 2019, the Company’s investment in Oak has been written off and was reflected at a value of zero.
The following information summarizes the results of operations of Oak for the period January 1, 2019 through April 15, 2019, the date of deconsolidation:
|
|
January 1, 2019 through April 15, 2019
|
|
Revenue
|
|
$
|
-
|
|
Net loss
|
|
$
|
29,185
|
|
NOTE 14 – STOCKHOLDERS’ EQUITY
Common Share Issuances
On December 14, 2018, the Company entered into an Advisory Consulting Agreement (“Agreement”). Per the terms of the Agreement, the Company is to issue 50,000 common stock shares of the Company that vest 30 days from December 14, 2018 and an additional 250,000 common stock shares of the Company that vest monthly over 24 months. On January 14, 2019, the Company issued 50,000 common stock shares of the Company at $1.84 per share per the terms of this Agreement. From February 14, 2019 through May 14, 2019, the Company issued a total of 41,666 common stock shares of the Company at prices per share ranging from $1.52 to $3.85 per the terms of this Agreement.
On December 14, 2018, the Company entered into a Securities Purchase Agreement (the “SPA”) with an accredited investor for the purchase of 833,333 shares of common stock of the Company (the “Shares” or “Securities”) at $1.20 per share (the “Share Price”) for a total purchase price of One Million Dollars ($1,000,000) (the “Purchase Price”). Per the terms of the SPA, the Company and the investor agreed to multiple Closings and Closing Dates (as hereinafter defined): (1) a Closing of $250,000 five (5) business days after the Closing Date; (2) a Closing of $250,000 ten (10) business days after the Closing Date; (3) a Closing of $250,000 thirty (30) business days after the Closing Date; and (4) a Closing $250,000 sixty (60) business days after the Closing Date. Each of the aforementioned being a Closing and the dates of each Closing being a Closing Date. The investor funded $250,000 on December 26, 2018 and the Company issued 208,333 common stock shares. The investor funded another $250,000 on December 31, 2018 and the Company issued another 208,333 common stock shares. The investor funded $250,000 on January 22, 2019 and another $250,000 on February 25, 2019 and the Company issued 208,333 common stock shares and 208,334 common stock shares, respectively. In addition, per the SPA, the investor had an option to purchase an additional 833,333 common stock shares of the Company at the Share Price of $1.20 for a period of 90 days subsequent to the last funds received from the multiple closings (“Option”). On May 21, 2019, the investor funded $250,000 and the Company issued 208,333 common stock shares at the Share Price relating to the investor’s Option.
On January 1, 2019, the Company issued 13,827 common stock shares at $2.26 per share for investor relations consulting services to be performed over a six-month period. The total value of this issuance was $31,249
On February 1, 2019, the Company amended two convertible promissory notes totaling $600,000 to extend the maturity dates to February 28, 2019. For extending the maturity date, the Company will issue a total of 30,000 common stock shares of the Company at $2.32 price per share. The total value of this issuance was $69,600. The Company considered if the amendment of the convertible promissory note was a debt modification or extinguishment based on the guidelines of ASC 470-50, and concluded that the amendments of the convertible promissory notes were debt modifications. The Company recorded the fair market value of the 30,000 common stock shares issued as a debt discount that has been fully amortized as of March 31, 2019.
On February 13, 2019, the Company entered into Debt Conversion Agreements (“Agreements”) with thirty convertible promissory note holders totaling $1,325,000 plus accrued interest and penalties of $213,859 that were converted into 832,365 common stock shares of the Company with a conversion price per share $1.85 which was based on a 20% discount to the average closing price of the Company’s common stock on the OTC Markets for five consecutive trading days. As a result of the lower conversion price compared to the fair market value of the common stock on the date of issuance, the Company recorded a loss on conversion of $812,241. In connection with the conversion of the convertible promissory notes, the Company will issue 657,655 warrants that were priced at $2.31 price per share.
On February 14, 2019, the Company entered into a Debt Conversion Agreement (“Agreement”), where $250,000 (Two Hundred Fifty Thousand Dollars) of $650,000 (Six Hundred Fifty Thousand Dollars) of the Outstanding Balance under the Senior Secured Promissory Note effective April 27, 2017 which was replaced with an Amended and Restated Senior Secured Promissory Note dated August 27, 2017 (the “Note”) shall be converted into 135,135 (One Hundred Thirty-Five Thousand, One Hundred Thirty-Five) shares of Common Stock of the Company (the “Conversion Shares”) at a conversion price of $1.85 per share (a discounted rate calculated as an approximation based on 20% discount on 5 days volume weighted average price of the market rate). As a result of the lower conversion price compared to the fair market value of the common stock on the date of issuance, the Company recorded a loss on conversion of $201,351.
On February 14, 2019, the Company entered into a First Amendment to Amended and Restated Senior Secured Promissory Note, that amends the Senior Secured Promissory Note effective April 27, 2017 which was replaced with an Amended and Restated Senior Secured Promissory Note effective August 27, 2017 (“Amended Agreement”) with the Note Holder (“Holder”). The Company and the Holder have agreed that the Maturity Date shall be extended to February 27, 2019 in exchange for 75,000 common stock shares of the Company at a price per share of $3.35. The total value of this issuance was $251,250. The Company considered if the amendment of the convertible promissory note was a debt modification or extinguishment based on the guidelines of ASC 470-50, and concluded that the amendments of the convertible promissory notes were debt modifications. The Company recorded the fair market value of the 75,000 common stock shares issued as a debt discount that has been fully amortized as of March 31, 2019.
On February 15, 2019, the Company entered into a Debt Conversion Agreement (“Agreement”) to convert $400,000 of convertible promissory notes plus accrued interest of $71,342 into 254,779 common stock shares of the Company with a conversion price per share $1.85 which was based on a 20% discount to the average closing price of the Company’s common stock on the OTC Markets for five consecutive trading days. As a result of the lower conversion price compared to the fair market value of the common stock on the date of issuance, the Company recorded a loss on conversion of $630,238.
On February 15, 2019, the Company entered into a Debt Conversion Agreement (“Agreement”) with a convertible promissory note holder totaling $1,000,000 plus accrued interest of $94,750 that were converted into 591,757 common stock shares of the Company with a conversion price per share $1.85 which was based on a 20% discount to the average closing price of the Company’s common stock on the OTC Markets for five consecutive trading days. As a result of the lower conversion price compared to the fair market value of the common stock on the date of issuance, the Company recorded a loss on conversion of $860,087. In connection with the conversion of the convertible promissory notes, the Company will issue 295,879 warrants that were priced at $2.31 price per share.
On February 15, 2019, the Company entered into a Debt Conversion Agreement (“Agreement”) with a convertible promissory note holder totaling $1,575,000 plus accrued interest of $18,406 that were converted into 861,301 common stock shares of the Company with a conversion price per share $1.85 which was based on a 20% discount to the average closing price of the Company’s common stock on the OTC Markets for five consecutive trading days. As a result of the lower conversion price compared to the fair market value of the common stock on the date of issuance, the Company recorded a loss on conversion of $745,929.
On February 19, 2019, the Company entered into a Debt Conversion Agreement (“Agreement”) with a convertible promissory note holder totaling $425,000 plus accrued interest of $425 that were converted into 168,819 common stock shares of the Company with a conversion price per share $2.52 which was based on a 20% discount to the average closing price of the Company’s common stock on the OTC Markets for five consecutive trading days.
On February 19, 2019, the Company entered into a Consulting Agreement (“Agreement”) with a Company. Per the terms of the Agreement, the Company is to issue 25,000 common stock shares of the Company for providing investor relations services, where 12,500 common stock shares of the Company are due immediately and the remaining 12,500 common stock shares of the Company is due June 19, 2019. On February 19, 2019, the Company issued 250,000 common stock shares of the Company at $3.39 per share. As of our filing of our Form 10-Q for the quarterly period ended June 30, 2019, the Company has not yet issued the 12,500 common stock shares due as of June 19, 2019 and has recorded a stock payable of $52,375.
On February 25, 2019, the Company issued 46,875 and 83,333 common stock shares of the Company at $0.74 and $1.81 per share, respectively, relating to restricted stock issued from the Company’s 2017 Equity Incentive Plan.
On April 16, 2019, the Company issued a total of 25,675 common stock shares at $2.31 per share from the cashless exercise of 88,769 warrants held by 5 warrant holders. The share price on the date of exercise was $3.25 per share.
On April 29, 2019, the Company issued 45,000 common stock shares at $1.52 per share in regards to a Consulting Agreement (“Agreement”), dated January 4, 2019, with an individual for providing financial and investor relations services.
On April 29, 2019 the Company issued 50,000 common stock shares at $1.84 per share in regard to an Advisory Consulting Agreement (“Agreement”), dated January 15, 2019, with an individual for providing financial advisory and business development services.
On April 29, 2019 the Company issued 60,000 common stock shares at $3.78 per share in regard to a Media Advertising Agreement (“Agreement”), dated February 26, 2019, with a company for providing investor relations and media coverage services.
On May 14, 2019, in connection with the Company’s acquisition of CHI (See Note 13), the Company issued 5,700,000 common stock shares as upfront consideration and estimated as of the Closing Date that approximately 8,410,875 common stock shares, of which 7,128,913 common stock shares are held in escrow, may be issued and released over a period of 5 months to 5 years related potential post-closing claims relating to, among other things, breaches of representations, warranties and covenants contained in the Merger Agreement and the future earn-out and achievement of a variety of milestones as defined in the Merger Agreement.
Stock Payable
On February 13, 2019, the Company entered into a Stock Purchase Agreement (“SPA”) with an individual (“Landlord”) for the cancellation of two months rent and overages for property tax and general liability insurance. In consideration for the Landlord’s cancellations, the Company shall grant 34,876 restricted common stock shares at $1.85 price per share. As the Company did not issue the 34,876 common stock shares before the six months period ended June 30, 2019, the Company recorded a stock payable of $64,521.
On February 15, 2019, the Company entered into a Debt Conversion Agreement (“Agreement”) with a convertible promissory note holder totaling $500,000 plus accrued interest of $28,588 that were converted into 285,723 common stock shares of the Company with a conversion price per share $1.85 which was based on a 20% discount to the average closing price of the Company’s common stock on the OTC Markets for five consecutive trading days. As of our filing of our Form 10-Q for the quarterly period ended June 30, 2019, the Company has not yet issued these common stock shares and has recorded a stock payable of $528,588. As a result of the lower conversion price compared to the fair market value of the common stock on the date of issuance, the Company recorded a loss on conversion of $409,672. In connection with the conversion of the convertible promissory notes, the Company will issue 312,500 warrants that were priced at $2.00 price per share.
During April 2019, the Company entered into a Securities Purchase Agreement (the “SPA”) with several accredited investors for the purchase of a total of 528,789 shares of common stock of the Company (the “Shares” or “Securities”) at $3.30 per share (the “Share Price”) for a total purchase price of $1,745,000. As of our filing of our Form 10-Q for the quarterly period ended June 30, 2019, the company has not yet issued these common stock shares and has recorded a stock payable of $1,745,000.
On May 15, 2019, the Company entered into a Consulting Agreement (“Agreement”) with an individual. Per the terms of the Agreement, the Company is to issue 35,309 common stock shares of the Company at $3.60 per share for providing investor relations, analyst coverage and media and news coverage services. As of our filing of our Form 10-Q for the quarterly period ended June 30, 2019, the Company has not yet issued these common stock shares and has recorded a stock payable of $127,112.
On June 20, 2019, the Company received a Notice of Exercise from a warrant holder to exercise 60,480 warrants to purchase 60,480 common stock shares of the Company at an exercise price of $1.00. As of our filing of our Form 10-Q for the quarterly period ended June 30, 2019, the Company has not yet issued these common stock shares and has recorded a stock payable of $60,480.
NOTE 15 - COMMITMENTS AND CONTINGENCIES
Litigation
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.
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.
Total rent expense for the three and six months periods ended June 30, 2019 was $63,646 and $126,674, respectively. Total rent expense for the three and six months periods ended June 30, 2018 was $67,792 and $141,670, respectively.