See accompanying notes to these unaudited condensed consolidated financial statements.
See accompanying notes to these unaudited condensed consolidated financial statements.
See accompanying notes to these unaudited condensed consolidated financial statements.
See accompanying notes to these unaudited condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Business Operations
CURE Pharmaceutical Holding Corp. (“CPHC”), its wholly-owned subsidiaries, CURE Pharmaceutical Corporation (“CURE Pharmaceutical”), Cure Chemistry Inc. and its subsidiaries (collectively referred to as “CHI”) and The Sera Labs, Inc. (“Sera Labs”) (CPHC, CURE Pharmaceutical, CHI and Sera Labs, collectively the “Company,” “we,” “our,” “us,” or “CURE”) is a biopharmaceutical company focusing on the development and manufacturing of drug formulation and drug 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 primary business model is to develop wellness and drug products using our proprietary technology, which development may include preclinical and clinical studies and regulatory approval, grant product rights to partners responsible for marketing, sales and distribution, while retaining exclusive manufacturing rights and market sell and distribute branded health, wellness, and beauty products through Sera Labs. We operate in a 25,000 square foot cGMP manufacturing plant in Oxnard, CA.
Our technology platform includes oral thin film (“OTF”), and encapsulation systems (“microCURE”) compatible with OTF, chews, oral solutions, topical and transdermal dose forms. We apply our technology to pharmaceutical drugs and dietary supplements and topical products for the wellness market. OTF 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, or GI, tract 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).
Our recently acquired wholly-owned subsidiary, Sera Labs, is a trusted leader in the health, wellness, and beauty sectors of innovative products with cutting edge technology and superior ingredients such as CBD. Sera Labs creates high quality products that use science-backed, proprietary formulations. More than 25 products are sold under the brand names Seratopical™, Seratopical Revolution™ SeraLabs™, and Nutri-Strips™. Sera Labs sells its products at affordable prices, making them easily accessible on a global scale. Strategically positioned in the growth market categories of beauty, health & wellness, and pet care, Sera Labs products are sold in major national drug, grocery chains, convenience stores and mass retailers. The company also sells products under private label to major retailers and multi-level marketers, as well as direct-to-consumer (DTC), via online website orders, including opt-in subscriptions.
Background
We were incorporated in the State of Nevada on May 15, 2014. On November 7, 2016, we changed our name from Makkanotti Group Corp. to CURE Pharmaceutical Holding Corp. On September 27, 2019, the Company reincorporated from the State of Nevada to the State of Delaware.
On October 2, 2020, the Company completed its acquisition of Sera Labs, a Delaware corporation pursuant to an Agreement and Plan of Merger and Reorganization, dated as of September 23, 2020 (the “Merger Agreement”), by and among the Company, Cure Labs, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”), Sera Labs and Nancy Duitch, in her capacity as the security holders representative. The Merger Agreement provides for the acquisition of Sera Labs by the Company through the merger of Merger Sub with and into Sera Labs, with Sera Labs surviving as a wholly owned subsidiary of the Company (the “Merger”).
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited 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.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP 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 GAAP 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 March 31, 2022, and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2022 and 2021, 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, 2021 filed with the SEC on April 1, 2022.
Principle of Consolidation
The condensed consolidated financial statements include the accounts of CPHC and its wholly-owned subsidiaries, CURE Pharmaceutical, CHI, and Sera Labs, collectively referred to as (“CURE”, “we”, “us”, “our” or the “Company”). All significant inter-company balances and transactions have been eliminated in consolidation. The development and production of the Company’s branded health, wellness, and beauty products in both the wellness and pharmaceutical industries represents the principal operations of the Company. Business acquisitions are included in the Company’s condensed consolidated financial statements from the date of the acquisition.
Going Concern and Management’s Liquidity Plans
In accordance with the Financial Accounting Standards Board’s (“FASB”) standard on going concern, Accounting Standard Update, or ASU No. 2014-15, The Company assesses going concern uncertainty in its consolidated financial statements to determine if it has sufficient cash, cash equivalents and working capital on hand, including marketable equity securities, and any available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued, which is referred to as the “look-forward period” as defined by ASU No. 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to The Company, it will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and its ability to delay or curtail expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, The Company makes certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent The Company deems probable those implementations can be achieved and it has the proper authority to execute them within the look-forward period in accordance with ASU No. 2014-15.
The accompanying condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. At March 31, 2022, we had an accumulated deficit of approximately $99.6 million and a working capital deficit of approximately $22.8 million. Our operating activities consume the majority of our cash resources. We anticipate that we will continue to incur operating losses and negative cash flows from operations, at least into the near future, as we execute our commercialization and development plans and strategic and business development initiatives.
As of March 31, 2022, the Company had approximately $0.5 million of cash on hand. We have previously funded, and intend to continue funding, our losses primarily through the issuance of common stock and/or promissory notes, combined with or without warrants, and cash generated from our product sales and research and development and license agreements. We are currently discussing various financing alternatives with potential investors, but there can be no assurance that these funds will be available on terms acceptable to us or will be enough to fully sustain operations. We believe the funds available through these potential financings will be sufficient to meet the Company’s working capital requirements during the coming year. If we are unable to raise sufficient additional funds, we will have to develop and implement a plan to extend payables, reduce expenditures, or scale back our business plan until sufficient additional capital is raised to support further operations.
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary if the Company is unable to continue as a going concern.
Reclassifications
Certain reclassifications have been made to prior year’s consolidated financial statements to enhance comparability with the current year’s consolidated financial statements. These reclassifications had no effect on the previously reported net loss.
Use of Estimates
The preparation of the accompanying consolidated 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 revenue and expenses during the reported period. Significant areas requiring the use of management estimates include, but are not limited to, the allowance for doubtful accounts, valuation of intangible assets and goodwill, depreciative and amortization useful lives, assumptions used to calculate the fair value of the contingent share consideration, stock based compensation, beneficial conversion features, warrant values, deferred taxes and the assumptions used to calculate derivative liabilities and fair values of the purchase price allocations and convertible promissory notes. Actual results could differ materially from such estimates under different assumptions or circumstances.
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. As of March 31, 2022 and December 31, 2021, the Company had no cash equivalents. The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation 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. At March 31, 2022 had $0.3 million in excess of the federal insurance limit. At December 31, 2021, the Company did not have in excess of the federal insurance limit.
Investment in Associates
The Company follows Accounting Standards Codification (“ASC”) 325-20, Cost Method Investments (“ASC 325-20”), to account for its ownership interest in noncontrolled entities. Under ASC 325-20, equity securities that do not have readily determinable fair values (i.e., non-marketable equity securities) and are not required to be accounted for under the equity method are typically carried at cost (i.e., cost method investments). Investments of this nature are initially recorded at cost. Income is recorded for dividends received that are distributed from net accumulated earnings of the noncontrolled entity subsequent to the date of investment. Dividends received in excess of earnings subsequent to the date of investment are considered a return of investment and are recorded as reductions in the cost of the investment. Investments are written down only when there is clear evidence that a decline in value that is other than temporary has occurred.
From November 1, 2019 to February 13, 2020, the Company purchased Convertible Loans (“Loans”) from Releaf Europe BV (“Releaf”) in the amount of $0.5 million. Releaf shall accrue interest on the Loans at 6% per annum and shall become due and payable to the Company at the earlier of the conversion date, the date when the Loans are repaid or at the maturity date of October 31, 2021 (“Maturity Date”). In the event of a request for conversion by the Company (“Request for Conversion”) or at the end of the Maturity Date, the outstanding amount of the Loans and any unpaid accrued interest shall be converted into shares of Releaf (“Shares”) based on a price per share on a post money valuation of $10.9 million. In the event Releaf completes a financing round totaling at least $2 million of debt and/or equity (“Qualified Financing”), the outstanding amount of the Loan Agreement and any unpaid accrued interest shall automatically convert at a price per share paid by the investors in connection with the Qualified Financing less a discount of 20% on the subscription price. In addition, both the Company and Releaf agree in the event the pre-money valuation of the Qualified Financing is higher than $15 million, the conversion shall be calculated with a cap of pre-money valuation of $14.5 million. As of December 31, 2021, the Company recorded an investment using the cost method of accounting in Releaf and recorded accrued interest relating to these Loans as well as a reserve on investment. As of the filing date of this report, the Company has not extended or received Shares as per the term of the agreement, but are in discussions with Releaf regarding the terms of conversion of the Loans.
Accounts Receivable
Accounts receivable are generally unsecured. The Company closely monitors accounts receivable balances and estimates the allowance for credit losses. These estimates are based on historical collection experience and other factors, including those related to current market conditions and events. The Company’s allowances for accounts receivable have not historically been material. At March 31, 2022 and December 31, 2021 management determined that an allowance of $0.08 million and $0.08 million, respectively, were necessary.
Inventory
Inventory is stated at the lower of cost or net realizable value (“NRV”). NRV is the amount by which the estimated selling price of the product exceeds the sum of any additional costs expected to be incurred on the sale of such product in the ordinary course of business. 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. In order to state the inventory at the lower of cost or NRV, we maintain reserves against individual stocking units. Inventory reserves, once established, are not reversed until the related inventories have been sold or scrapped. If future demand or market conditions are less favorable than our projections, a write-down of inventory may be required, and would be reflected in cost of product revenues sold in the period the revision is made.
Goodwill and intangible assets
In accordance with ASC 350, Intangibles – Goodwill and Other, in-process research and development (“IPR&D”) projects acquired in a business combination that are not complete as of the acquisition date are capitalized and accounted for as indefinite-lived intangible assets until completion or abandonment of the related research and development efforts. Upon successful completion of the project, the capitalized amount is amortized over its estimated useful life. If a project is abandoned, all remaining capitalized amounts are written off immediately. The Company considers various factors and risks for potential impairment of IPR&D assets, including the current legal and regulatory environment and the competitive landscape. Adverse clinical trial results, or significant delays, or the inability to bring a product to market and the introduction or advancement of competitors’ products could result in partial or full impairment of the related intangible assets. Consequently, the eventual realized value of the IPR&D project may vary from its fair value at the date of acquisition, and IPR&D impairment charges may occur in future periods. During the period between completion or abandonment, the IPR&D assets will not be amortized but will be tested for impairment on an annual basis and between annual tests if the Company becomes aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the IPR&D projects below their respective carrying amounts (see Note 8).
Goodwill represents the excess of the purchase price over the fair value of net identifiable assets and liabilities. Goodwill, similar to IPR&D, is not amortized but is tested for impairment at least annually, or if circumstances indicate its value may no longer be recoverable. Qualitative factors considered in this assessment include industry and market conditions, overall financial performance, and other relevant events and factors affecting the Company’s business. Based on the qualitative assessment, if it is determined that the fair value of goodwill is more likely than not to be less than its carrying amount, the fair value of a reporting unit will be calculated and compared with its carrying amount and an impairment charge will be recognized for the amount that the carrying value exceeds the fair value. The Company operates in two segments as result of the Sera Labs, Inc., acquisition in October 2020 and considered to be the two reporting units and, therefore, goodwill is tested for impairment at the segment level.
The Company does not have intangible assets with indefinite useful lives other than goodwill, Trademark, and the acquired IPR&D discussed in Note 19. As of March 31, 2022 the Company recorded a $2.7 million impairment of goodwill relating to the Cure Pharmaceutical reporting unit. Based on the continuing decline of our stock price and market capitalization as well as not meeting our revenue projections for the Cure Pharmaceutical reporting unit, we determined that the fair value of goodwill is more likely than not to be less than its carrying amount. The Company determined the amount of impairment to record was based on the income approach – discounted cash flow method. As of December 31, 2021, there has been no impairment of goodwill and intangible assets.
Business Combinations
The results of businesses acquired in a business combination are included in the Company’s condensed consolidated financial statements from the date of acquisition. Purchase accounting results in assets and liabilities of an acquired business being recorded at their estimated fair values on the acquisition date. Any excess consideration over the value of the assets acquired and liabilities assumed is recognized as goodwill.
Impairment of Long-Lived Assets
Long-lived assets include equipment and intangible assets other than those with indefinite lives. We assess the carrying value of our long-lived asset groups when indicators of impairment exist and recognize an impairment loss when the carrying amount of a long-lived asset is not recoverable when compared to undiscounted cash flows expected to result from the use and eventual disposition of the asset.
Indicators of impairment include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically a discounted cashflow analysis, and an impairment charge is recorded for the excess of carrying value over fair value. There was no impairment on our long-lived assets during the three months ended March 31, 2022 and 2021.
Contingent consideration liabilities
Certain of the Company’s asset and business acquisitions involve the potential for future payment of consideration to third-parties and former selling shareholders in amounts determined upon attainment of revenue milestones, from product sales, as applicable. The fair value of such liabilities is determined using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows and the risk-adjusted discount rate used to present value the cash flows. These obligations are referred to as contingent consideration.
ASC 805 requires that contingent consideration be estimated and recorded at fair value as of the acquisition date as part of the total consideration transferred. Contingent consideration is an obligation of the acquirer to transfer additional assets or equity interests to the selling shareholders in the future if certain future events occur or conditions are met, such as the attainment of product development milestones. Contingent consideration also includes additional future payments to selling shareholders based on achievement of components of earnings, such as “earn-out” provisions or percentage of future revenues, including royalties paid to the selling shareholders based on a percentage of revenues generated from the Sera Labs’ products.
The fair value of contingent consideration after the acquisition date is reassessed by the Company as changes in circumstances and conditions occur, with the subsequent change in fair value recorded in the consolidated statements of operations. Changes in key assumptions can materially affect the estimated fair value of contingent consideration liabilities and, accordingly, the resulting gain or loss that the Company records in its consolidated financial statements. See Note 19 for a full discussion of these liabilities.
Related Party
Parties are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, “Revenue Recognition”. 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 are evaluated using a five-step model.
To achieve the core principle of Topic 606, we perform the following steps:
| · | Identify the contract(s) with customer; |
| · | Identify the performance obligations in the contract; |
| · | Determine the transactions price; |
| · | Allocate the transactions price to the performance obligations in the contract; and |
| · | Recognize revenue when (or as) we satisfy a performance obligation. |
Under Topic 606, the Company recognizes revenue as, or when, we satisfy performance obligations under a contract. We account for a contract when the parties approved the contract and are committed to perform on it, the rights of each party and the payment terms are identified, the contract has commercial substance and it is probable that we will collect substantially all of the consideration. A performance obligation is a promise in a contract to transfer a distinct good or service, or a series of distinct goods or services, to a customer. The transaction price of a contract must be allocated to each performance obligation and recognized as the performance obligation is satisfied. In essence, we recognize revenue when or as control of the promised goods or services transfer to the customer.
Cure Pharmaceutical Revenue
Cure Pharmaceutical derives revenues from two primary sources: products and services. Product revenue includes the shipment of products according to agreements with the Cure Pharmaceutical’s customers. Services include research and development contracts for the development of OTF products utilizing the Cure Pharmaceutical’s CureFilm Technology or our other proprietary technologies. Cure Pharmaceutical’s contracts with customers rarely contain multiple performance obligations. For these contracts, Cure Pharmaceutical 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.
Cure Pharmaceutical’s formulation and product development income include services for the development of OTF products utilizing our CureFilm 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. Cure Pharmaceutical 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 we incur 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.
Cure Pharmaceutical has entered into a Collaboration and Joint Development Agreement (“Agreement”) with Medolife Rx (“Medolife”) on February 1, 2021 (“Effective Date”) for Medolife to produce Medolife Products (“Products”) in Cure Pharmaceutical’s cGMP facility. The term of this agreement is for five (5) years from the Effective Date (“Term”). Medolife is to pay $0.3 million to assist in completing the jointly developed production line at Cure Pharmaceutical’s cGMP facility. In addition, Cure Pharmaceutical will produce Products on behalf of Medolife and will grant access to Medolife for a joint production area within Cure Pharmaceutical’s production facility for the Term of this Agreement. The Company has determined that there are no distinct obligations for the $0.3 million and Cure Pharmaceutical does have further obligations as stated in the Agreement, thus the Company will recognize the revenue monthly over the Term, beginning February 1, 2021.
Sera Labs Revenue
Sera Labs recognizes revenue as, or when, we satisfy performance obligations under a contract. We account for a contract when the parties approved the contract and are committed to perform on it, the rights of each party and the payment terms are identified, the contract has commercial substance and it is probable that we will collect substantially all of the consideration. A performance obligation is a promise in a contract to transfer a distinct good or service, or a series of distinct goods or services, to a customer. The transaction price of a contract must be allocated to each performance obligation and recognized as the performance obligation is satisfied. In essence, we recognize revenue when or as control of the promised goods or services transfer to the customer.
Revenue from eCommerce sales, including direct-to-consumer sales, are recognized upon shipment of merchandise. We also elected to adopt the practical expedient related to shipping and handling fees which allows us to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations. Therefore, shipping and handling activities are considered part of the Company’s obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred. Shipping revenue are recorded upon delivery to the customer.
Practical Expedients and Exemptions
The Company has elected certain practical expedients and policy elections as permitted under ASC Topic 606 as follows:
| · | The Company adopted the practical expedient related to not adjusting the promised amount of consideration for the effects of a significant financing component if the period between transfer of product and customer payment is expected to be less than one year at the time of contract inception; |
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| · | The Company made the accounting policy election to exclude any sales and similar taxes from the transaction price; |
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| · | The Company adopted the practical expedient not to disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less |
Sales Tax
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised goods or services to a customer, excluding sales taxes. The net amount of sales tax payable to the taxation authority is included sales tax payable in the balance sheet.
Sales Returns, Discounts and Warranties
Sales returns, discount and warranties are considered variable consideration under ASC 606. The Company reduces revenue for estimated future returns, discounts and warranties which may occur with distributors and retailers. When evaluating the adequacy of sales returns, discounts and warranties, the Company analyzes the following: historical credit allowances, current sell-through of inventory of the Company’s products, current trends in retail industry, changes in customer demand, acceptance of products, and other related factors.
Cost to Obtain a Contract
The Company pays sales commission to its employees and outside sales representatives for contracts that they obtain relating to wholesale and personal protective equipment. The Company applies the optional practical expedient to immediately expense costs to obtain a contract if the amortization period of the asset that would have been recognized is one year or less. As such, sales commissions are immediately recognized as an expense and included as part of sales and marketing expenses.
Contract Liabilities
Advance payments and billings in excess of revenue recognized represent contract liabilities and are recorded as deferred revenues when customers remit contractual cash payments in advance before satisfying performance obligations under contractual arrangements. Contract liabilities are derecognized when revenue is recognized, and the performance obligation is satisfied. Advance payments and billings in excess of revenue recognized are included in deferred revenue, which is classified as current or noncurrent based on the timing of when the Company expects to recognize revenue. At March 31, 2022 and December 31, 2021, we had contract liabilities of $0.5 million and $0.5 million, respectively.
Contract liabilities is made up of the following as of March 31, 2022 and December 31, 2021 (in thousands):
| | 2022 | | | 2021 | |
Customer deposits for commercial products | | $ | 493 | | | $ | 508 | |
Total contract liabilities | | $ | 493 | | | $ | 508 | |
The following table summarizes the changes in contract liabilities during the three months ended March 31, 2022 and year ended December 31, 2021 (in thousands):
Balance at December 31, 2020 | | $ | 994 | |
Additions | | | 435 | |
Customer deposits returned | | | (713 | ) |
Transfers to Revenue | | | (208 | ) |
Balance at December 31, 2021 | | | 508 | |
Transfers to Revenue | | | (15 | ) |
Balance at March 31, 2022 | | $ | 493 | |
Cost of Revenues
Cost of revenues primarily consists of labor and manufacturing costs for our products.
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 $0.6 million and $0.6 million for the three months ended March 31, 2022 and 2021, 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 $0.3 million and $0.6 million for the three months ended March 31, 2022 and 2021, respectively.
Income Taxes
The Company utilizes Financial Accounting Standards Board (“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.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the outbreak of a novel strain of the coronavirus, COVID-19. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). Under the CARES Act, net operating losses (“NOLs”) arising in tax years beginning after December 31, 2017, and before January 1, 2021 may be carried back to each of the five tax years preceding the tax year of such loss. Moreover, under the 2017 Tax Act as modified by the CARES Act, federal NOLs of our corporate subsidiaries generated in tax years ending after December 31, 2017 may be carried forward indefinitely, but the deductibility of federal NOLs, particularly for tax years beginning on or after January 1, 2021, may be limited. The accounting for the material income tax impacts has been reflected in the year ended December 31, 2021 financial statements. It is uncertain if and to what extent various states will conform to the 2017 Tax Act or the CARES Act. The Company is currently assessing the impact the CARES Act will have on the Company’s condensed consolidated financial statements.
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 2018-07 (Topic 718) for share-based payments to employees, 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 grant 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 the closing stock price of the Company’s common stock reported on the OTC Bulletin Board. 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 Accounting Standards Update (“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 consolidated financial statements.
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 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. ASC 820 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
| · | Level 1 – Quoted prices in active markets for identical assets and liabilities. |
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| · | Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
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| · | Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
When a part of the purchase consideration consists of shares of the Company common stock, the Company calculates the purchase price attributable to those shares, a Level 1 security, by determining the fair value of those shares quoted on the OTC as of the acquisition date. The Company recognizes estimated fair values of the tangible assets and identifiable intangible assets acquired, including in-process research and development, and liabilities assumed, including any contingent consideration, as of the acquisition date. Goodwill is recognized as any amount of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in excess of the consideration transferred. ASC 805 precludes the recognition of an assembled workforce as an asset, effectively subsuming any assembled workforce value into goodwill.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and also considers counterparty credit risk in its assessment of fair value. At March 31, 2022 and December, 31, 2021, the Company had no financial assets or liabilities recorded at fair value on a recurring basis, except for cash and cash equivalents consisting of money market funds and the Series A and Series B Notes, which we elected the fair value option. These assets and liabilities are measured at fair value using either Black-Scholes model or Monte Carlo simulation model as a Level 3 input. The Company also has certain derivative liabilities and contingent consideration liabilities which are carried at fair value based on Level 3 inputs.
The carrying amounts of cash equivalents, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate fair values because of the short-term nature of these items.
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 March 31, 2021, the Company’s stock price, volatility percentage and the weighted average present value probability of each the various estimates of milestones, earn-out amounts and achievements being accomplished resulted in a decrease of the fair value of the contingent stock consideration. For the period from the December 31, 2021 to March 31, 2022, the Company’s stock price, volatility percentage and the weighted average present value probability of each the various estimates of milestones, earn-out amounts and achievements being accomplished resulted in a decrease of the fair value of the contingent stock consideration. In June 2020, the Company settled all of its outstanding contingent consideration liabilities outstanding with CHI. In October 2020, the Company acquired Sera Labs and had an outstanding contingent consideration liability of $3.2 million in relation to the Sera Labs Merger.
The Company has elected the fair value option to account for the Series A and B Notes that were issued on October 30, 2020 and records this at fair value with changes in fair value recorded in the Condensed Consolidated Statements of Operations. As a result of applying the fair value option, direct costs and fees related to the Series A and B Notes were recognized in earnings as incurred and not deferred.
The following table summarizes fair value measurements by level at March 31, 2022 for assets and liabilities measured at fair value on a recurring basis (in thousands):
| | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
Fair value of contingent stock consideration | | $ | 584 | | | $ | - | | | $ | - | | | $ | 584 | |
Fair value of Series A Note | | $ | 3,095 | | | $ | - | | | $ | - | | | $ | 3,095 | |
Fair value of Series B Note | | $ | 6,451 | | | $ | - | | | $ | - | | | $ | 6,451 | |
The following table summarizes fair value measurements by level at December 31, 2021 for assets and liabilities measured at fair value on a recurring basis (in thousands):
| | Total | | | Level 1 | | | Level 2 | | | Level 3 | |
Fair value of contingent stock consideration | | $ | 1,430 | | | $ | - | | | $ | - | | | $ | 1,430 | |
Fair value of Series A Note | | $ | 3,075 | | | $ | - | | | $ | - | | | $ | 3,075 | |
Fair value of Series B Note | | $ | 6,857 | | | $ | - | | | $ | - | | | $ | 6,857 | |
The following table summarizes the changes in Level 3 financial instruments during the three months ended March 31, 2022 (in thousands):
Fair value at December 31, 2021 | | $ | 9,932 | |
Change in fair value of Series A Note | | | 20 | |
Change in fair value of Series B Note | | | 260 | |
Conversion of Series B Note | | | (666 | ) |
Fair value of Series A and B Notes at March 31, 2022 | | $ | 9,546 | |
Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Series A and Series B Notes are measured at fair value using the Monte Carlo simulation valuation methodology. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s derivative liabilities that are categorized within Level 3 of the fair value hierarchy is as follows:
Date of valuation | | March 31, 2022 | | | December 31, 2021 | |
Stock price | | $ | 0.26 | | | $ | 0.36 | |
Conversion price | | $ | 1.32 | | | $ | 1.32 | |
Term (in years) – Series A Note | | | 0.58 | | | | 0.83 | |
Term (in years) – Series B Note | | | 0 | | | | 0.13 | |
Volatility – Series A Note | | | 75 | % | | | 85 | % |
Volatility – Series B Note | | | 75 | % | | | 65 | % |
Risk-free interest rate – Series A Note | | | 1.15 | % | | | 0.32 | % |
Risk-free interest rate – Series B Note | | | 1.15 | % | | | 0.06 | % |
Interest rate | | | 18 | % | | | 18 | % |
The Company recorded a loss of $0.3 million due to the change in fair value of Series A and B convertible notes for the three months ended March 31, 2022 and a gain of $1.0 million due to the change in fair value of Series A and B convertible notes for the three months ended March 31, 2021.
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.
Series A and Series B convertible notes:
As described further in Note 14 - the Company has elected the fair value option to record its Series A and Series B convertible debentures, which were issued in October 2020. The fair value of the Notes is classified within Level 3 of the fair value hierarchy because the fair values were estimated utilizing a Monte Carlo simulation model. Accordingly, the notes are marked-to-market at each reporting date with the change in fair value reported as a gain (loss) in the Condensed Consolidated Statement of Operations. All issuance costs related to the debentures were expensed as incurred in the Condensed Consolidated Statement of Operations.
Accounting for warrants
The Company determines the accounting classification of warrants it issues, as either liability or equity classified, by first assessing whether the warrants meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Under ASC 480, warrants are considered liability classified if the warrants are mandatorily redeemable, obligate the Company to settle the warrants or the underlying shares by paying cash or other assets, or warrants that must or may require settlement by issuing variable number of shares. If warrants do not meet liability classification under ASC 480-10, the Company assesses the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the warrants do not require liability classification under ASC 815-40, and in order to conclude equity classification, the Company also assesses whether the warrants are indexed to its common stock and whether the warrants are classified as equity under ASC 815-40 or other applicable GAAP. After all relevant assessments, the Company concludes whether the warrants are classified as liability or equity. Liability classified warrants require fair value accounting at issuance and subsequent to initial issuance with all changes in fair value after the issuance date recorded in the statements of operations. Equity classified warrants only require fair value accounting at issuance with no changes recognized subsequent to the issuance date. The Company does not have any liability classified warrants as of any period presented.
Derivative Liabilities
ASC 815-40, 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 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 March 31, 2022 and December 2021, the Company did not have any derivative liabilities to adjust to its fair value.
Contingencies
We are exposed to claims and litigation arising in the ordinary course of business and use various methods to resolve these matters in a manner that we believe serves the best interest of our shareholders and other constituents. When a loss is probable, we record an accrual based on the reasonably estimable loss or range of loss. When no point of loss is more likely than another, we record the lowest amount in the estimated range of loss and, if material, disclose the estimated range of loss. We do not record liabilities for reasonably possible loss contingencies, but do disclose a range of reasonably possible losses if they are material and we are able to estimate such a range. If we cannot provide a range of reasonably possible losses, we explain the factors that prevent us from determining such a range. Historically, adjustments to our estimates have not been material. We believe the recorded reserves in our condensed consolidated financial statements are adequate in light of the probable and estimable liabilities. We do not believe that any of these identified claims or litigation will be material to our results of operations, cash flows, or financial condition. Gain contingencies are recorded when the ultimate resolution of the contingency is resolved.
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 earnings per share is computed by dividing net earnings by the weighted average common shares outstanding during the period plus dilutive securities or other contracts to issue common stock as if these securities were exercised or converted to common stock.
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 table sets forth the computation of basic and diluted net income per share for the three months ended (in thousands, except per share data):
| | For the Three Months Ended | |
| | March 31, 2022 | | | March 31, 2021 | |
Net income (loss) attributable to the Company | | $ | (5,151 | ) | | $ | (3,171 | ) |
Weighted average outstanding shares of common stock | | | 50,829,729 | | | | 47,686,793 | |
Dilutive potential common stock shares from: | | | | | | | | |
Vested Stock options from the Company’s 2017 Equity Incentive Plan | | | - | | | | - | |
Warrants | | | - | | | | - | |
Conversion of convertible notes | | | - | | | | - | |
Issuance of contingent shares relating to CHI acquisition | | | - | | | | - | |
Common stock and common stock equivalents | | | 50,829,729 | | | | 47,686,793 | |
Income (loss) per share: | | | | | | | | |
Basic net income (loss) per share | | $ | (0.10 | ) | | $ | (0.07 | ) |
Diluted net income (loss) per share | | $ | (0.10 | ) | | $ | (0.07 | ) |
The following number of shares have been excluded from diluted net income (loss) since such inclusion would be anti-dilutive:
| | Three months ended March 31, | |
| | 2022 | | | 2021 | |
Vested stock options from the Company’s 2017 Equity Incentive Plan | | | 3,760,015 | | | | 3,002,525 | |
Warrants | | | 615,530 | | | | 2,479,849 | |
Shares to be issued upon conversion of convertible payable | | | 115,047 | | | | 115,047 | |
| | | | | | | | |
Total | | | 4,490,592 | | | | 5,597,421 | |
In connection with Sera Labs Merger, Sera Labs security holders are also entitled to receive up to 5,988,024 shares of the Company’s common stock (the “Clawback Shares”) based on the achievement of certain sales milestones. Due to the uncertainty of the number of Clawback Shares to be issued, these Clawback Shares were not included in the table above.
The Series A and B Notes (other than restricted amounts under a Series B Note) is convertible, at the option of the Investor, into shares of Common Stock at a conversion price of $1.32 per share. The conversion price is subject to full ratchet antidilution protection upon any transaction in which the Company is deemed to have granted, issued or sold, any shares of Common Stock. If the Company enters into any agreement to issue any variable rate securities, other than a bona fide at-the-market offering or equity line of credit, the Investor has the additional right to substitute such variable price (or formula) for the conversion price. If an Event of Default has occurred under the Convertible Notes, the Investor may elect to alternatively convert the Convertible Notes at the redemption premium described therein. Due to the uncertainty of the number of shares to be issued, the shares to be issued from the conversion of the Series A and B Notes were also not included in the table above.
Segment Reporting
The Company uses the “management approach” to identify its reportable segments. The management approach designates the internal organization used by management for making operating decisions and assessing performance as the basis for identifying the Company’s reportable segments. Using the management approach, the Company determined that it does have segment reporting relating to Cure Pharmaceutical and Sera Labs.
Risks and Uncertainties
COVID-19 Considerations
The COVID-19 pandemic has negatively impacted, and may continue to negatively impact, the macroeconomic environment in the United States and globally. Due to the evolving and uncertain nature of COVID-19, it is reasonably possible that it could materially impact our estimates, particularly those that require consideration of forecasted financial information, in the near to medium term. These estimates relate to certain accounts including, but not limited to, intangible assets, and other long-lived assets. The magnitude of the impact will depend on numerous evolving factors that we may not be able to accurately predict, including the duration and extent of the pandemic, the impact of federal, state, local and foreign governmental actions, consumer, supplier and hospital behavior in response to the pandemic and such governmental actions, and the economic and operating conditions that we may face in the aftermath of COVID-19.
Recent Accounting Pronouncements Not Yet Adopted
ASU 2022-02
In March 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings (“TDR”) and Vintage Disclosures” (“ASU 2022-02”). These amendments eliminate the TDR recognition and measurement guidance and enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU 2022-02 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of March 31, 2022, we do not expect ASU 2022-02 to have an impact to our condensed consolidated financial statements.
ASU 2022-01
In March 2022, the FASB issued ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method” (ASU 2022-01). The ASU expands the current single-layer method to allow multiple hedged layers of a single closed portfolio under the method. ASU 2022-01 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of March 31, 2022, we do not expect ASU 2022-01 to have an impact to our condensed consolidated financial statements.
Other accounting standard updates effective for interim and annual periods beginning after December 31, 2021 are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
There are various other updates recently issued, however, they are not expected to a have a material impact on the Company’s condense consolidated financial position, results of operations or cash flows.
NOTE 3 – ACCOUNTS RECEIVABLE
As of March 31, 2022 and December 31, 2021, accounts receivable consisted of the following (in thousands):
| | March 31, 2022 | | | December 31, 2021 | |
| | | | | | |
Customer billed | | $ | 549 | | | $ | 437 | |
Allowance for doubtful accounts | | | (80 | ) | | | (80 | ) |
Accounts receivable, net | | $ | 469 | | | $ | 357 | |
Customer billed accounts receivable represents amounts billed to clients that have yet to be collected.
Allowances for doubtful accounts have been determined through specific identification of amounts considered to be uncollectible and potential write-offs, plus a non-specific allowance for other amounts for which some potential loss has been determined to be probable based on current and past experience.
NOTE 4 - PREPAID EXPENSES AND OTHER ASSETS
As of March 31, 2022 and December 31, 2021, prepaid expenses and other assets consisted of the following (in thousands):
| | March 31, 2022 | | | December 31, 2021 | |
Prepaid insurance | | $ | 214 | | | $ | 302 | |
Prepaid equipment | | | 67 | | | | 67 | |
Prepaid inventory | | | 130 | | | | 95 | |
Prepaid expenses | | | 34 | | | | 31 | |
Other assets | | | 135 | | | | 132 | |
Total Prepaid expenses and other assets | | | 580 | | | | 627 | |
Current portion of prepaid expenses and other assets | | | (497 | ) | | | (544 | ) |
Prepaid expenses and other assets less current portion | | $ | 83 | | | $ | 83 | |
NOTE 5 - 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 Net Realized Value.
The carrying value of inventory consisted of the following (in thousands):
| | March 31, 2022 | | | December 31, 2021 | |
Raw materials | | $ | 74 | | | $ | 66 | |
Packaging components | | | 108 | | | | 117 | |
Work-in-process | | | 54 | | | | 40 | |
Finished goods | | | 650 | | | | 753 | |
| | | 886 | | | | 976 | |
Reserve for obsolescence | | | (100 | ) | | | (112 | ) |
Total inventory | | $ | 786 | | | $ | 864 | |
NOTE 6 - PROPERTY AND EQUIPMENT
As of March 31, 2022 and December 31, 2021, property and equipment consisted of the following (in thousands):
| | March 31, 2022 | | | December 31, 2021 | |
Equipment not yet placed in service | | $ | 1,413 | | | $ | 1,413 | |
Manufacturing equipment | | | 1,095 | | | | 1,095 | |
Computer and other equipment | | | 626 | | | | 626 | |
Less accumulated depreciation | | | (1,335 | ) | | | (1,293 | ) |
Property and Equipment, net | | $ | 1,799 | | | $ | 1,841 | |
For the three months ended March 31, 2022 and 2021, depreciation expense amounted to $0.04 million and $0.05 million, respectively.
NOTE 7 – NOTES RECEIVABLE
On May 26, 2021, the Company purchased a convertible loan (the “May 2021 Loan”) with Biopharmaceutical Research Company (“BRC”) for a total amount of $0.2 million, which is one of a series of notes “(Notes”) pursuant to the terms of the Note Purchase Agreement (“NPA”) offered by BRC. BRC shall accrue interest on the May 2021 Loan at 6% per annum and shall become due and payable to the Company at the earlier of the conversion date or the maturity date of May 26, 2023. In the event of a request for conversion by the Company, the outstanding amount of the May 2021 Loan and any unpaid accrued interest shall be converted into shares of BRC, rounded down to the nearest whole share, by dividing the May 2021 Loan by the price per share obtained by dividing $20 million by the number of outstanding shares of common stock of BRC immediately prior to such conversion (assuming conversion of all securities convertible into common stock and exercise of all outstanding options and warrants of BRC, but excluding (i) the shares of equity securities of BRC issued or issuable upon the conversion of the Notes and (ii) all shares of the common stock reserved and available for future grant under any equity incentive or similar plan of BRC. In the event the Company has not requested for conversion, the May 2021 Loan can automatically convert if BRC sells shares of preferred stock (the “Qualified Financing Securities”) to one or more investors in a single transaction or series of related transactions for aggregate proceeds to BRC (including cancellation of indebtedness under the Notes or any other convertible debt) of at least $4 million (a “Qualified Financing”). The May 2021 Loan shall automatically convert at the initial closing of and on the same terms and conditions of the Qualified Financing into a total number of Qualified Financing Securities, rounded down to the nearest whole share, obtained by dividing the May 2021 Loan by the lesser of (i) 80% of the price per share paid for the Qualified Financing Securities by investors in the Qualified Financing and (ii) $20 million by the number of outstanding shares of common stock of BRC immediately prior to such conversion (assuming conversion of all securities convertible into common stock and exercise of all outstanding options and warrants of BRC, but excluding (a) the shares of equity securities of BRC issued or issuable upon the conversion of the Notes, (b) all shares of the common stock reserved and available for future grant under any equity incentive or similar plan of BRC and (c) any equity incentive or similar plan to be created or increased in connection with the Qualified Financing).
Note receivable consists of the following (in thousands):
| | March 31, 2022 | | | December 31, 2021 | |
Biopharmaceutical Research Company | | $ | 200 | | | $ | 200 | |
Less: allowance for doubtful accounts | | | - | | | | - | |
Note receivable, net | | $ | 200 | | | $ | 200 | |
NOTE 8 – GOODWILL AND INTANGIBLE ASSETS
The Company incurred $0.001 million and $0.01 million of legal patent costs that were capitalized during the three months ended March 31, 2022 and 2021, respectively. During the year ended December 31, 2020, the Company acquired from Sera Labs customer relationships at a fair value of $7.1 million, $2.6 million in Tradename intangibles, $0.5 million in non-compete and $4.7 million in Goodwill from the acquisition of Sera Labs. During the year ended December 31, 2019, the Company acquired from the CHI acquisition patents at a fair value of $0.7 million, $14.5 million in Intellectual Property Research & Development and $9.2 million in Goodwill from the acquisition of CHI.
Intangible Asset Summary
As of March 31, 2022 and December 31, 2021, goodwill and intangible assets, net, consisted of the following (in thousands):
| | March 31, 2022 | | | December 31, 2021 | |
Goodwill (1) | | $ | 13,868 | | | $ | 13,868 | |
Accumulated impairment losses | | | (2,728 | ) | | | - | |
Goodwill, net | | $ | 11,140 | | | $ | 13,868 | |
| | | | | | | | |
Intangible assets not subject to amortization: | | | | | | | | |
Acquired IPR&D – Chemistry (2) | | $ | 502 | | | $ | 502 | |
Pending patents – Cure Pharmaceutical | | | 342 | | | | 341 | |
Total intangible assets not subject to amortization | | | 844 | | | | 843 | |
| | | | | | | | |
Intangible assets subject to amortization: | | | | | | | | |
Acquired IPR&D – Chemistry (2) | | | 13,958 | | | | 13,958 | |
Customer relationships (2) | | | 7,110 | | | | 7,110 | |
Tradename (2) | | | 2,610 | | | | 2,610 | |
Noncompete (2) | | | 462 | | | | 462 | |
Intellectual property | | | 972 | | | | 972 | |
Issued patents | | | 1,034 | | | | 1,034 | |
Total intangible assets subject to amortization | | | 26,146 | | | | 26,146 | |
Accumulated amortization | | | (5,653 | ) | | | (4,701 | ) |
Total intangible assets subject to amortization, net | | | 20,493 | | | | 21,445 | |
| | | | | | | | |
Intangible assets, net | | $ | 21,337 | | | $ | 22,288 | |
(1) | Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired from CHI and Sera Labs (see Note 19). |
| |
(2) | See Note 19 for information on the Mergers which were consummated in May 2019 and October 2020. During the year ended December 31, 2021, the Company completed two research and development projects that resulted in the company reclass approximately $13.9 million of IPR&D from intangibles not subject to amortization to intangibles subject to amortization. |
Amortization expense was $1.0 million and $0.6 million for the three months ended March 31, 2022 and 2021, respectively.
Impairment loss of goodwill was $2.7 million and $0 for the three months ended March 31, 2022 and 2021, respectively.
The estimated aggregate amortization expense over each of the next five years is as follows (in thousands):
2022 (remaining) | | $ | 2,809 | |
2023 | | | 3,592 | |
2024 | | | 3,429 | |
2025 | | | 2,583 | |
2026 | | | 1,516 | |
Thereafter | | | 6,564 | |
Total Amortization | | $ | 20,493 | |
NOTE 9 – INVESTMENT
In accordance with ASC 325-20, equity securities that do not have readily determinable fair values (i.e., non-marketable equity securities) and are not required to be accounted for under the equity method are typically carried at cost (i.e., cost method investments). Investments of this nature are initially recorded at cost.
As of March 31, 2022 and December 31, 2021, our investment, at cost, consisted of the following (in thousands):
| | March 31, 2022 | | | December 31, 2021 | |
Investment in Releaf Europe BV | | $ | 566 | | | $ | 566 | |
Valuation reserve | | | (350 | ) | | | (350 | ) |
Investment, net | | $ | 216 | | | $ | 216 | |
As of March 31, 2022 and December 31, 2021, the net investment is based on management’s best estimate of net realizable value, which resulted a valuation reserve amount of $0.4 million and $0.4 million, respectively.
NOTE 10 – ACCRUED EXPENSES
As of March 31, 2022 and December 31, 2021, accrued expenses consisted of the following (in thousands):
| | March 31, 2022 | | | December 31, 2021 | |
Accounts payable factoring | | $ | 819 | | | $ | 1,722 | |
Refunds and returns liability | | | 550 | | | | 445 | |
Accrued interest (see Note 11 for amount of related party interest included) | | | 546 | | | | 390 | |
Accrued payroll | | | 501 | | | | 330 | |
Accrued vacation leave | | | 178 | | | | 173 | |
Accrued expenses | | | 205 | | | | 359 | |
Sales tax payable | | | 325 | | | | 334 | |
Accrued Expenses | | $ | 3,124 | | | $ | 3,753 | |
NOTE 11 – RELATED PARTY TRANSACTIONS
Due to Related Party
The Company and other related entities have had a commonality of ownership and/or management control, and as a result, the reported operating results and /or financial position of the Company could significantly differ from what would have been obtained if such entities were autonomous.
On January 2, 2019, Sera Labs entered into an administrative service agreement (“Service Agreement”) with Visionworx, an affiliate of Sear Labs. Visionworx will process payments related to Sera Lab’s operations using Visionworx’s contractual relationship with JPMorgan Chase Bank, N.A. via its Chase Paymentech Select Merchant Payment Instrument Processing Agreement. In consideration for the services, Sera Labs will pay to Visionworx a management fee equal to all associated fees and expenses in connection with the Service Agreement. The Service Agreement was effective on January 2, 2019 and will be renewed automatically for additional one-year periods until terminated. The Service Agreement may be terminated by (a) either party for any reason at least thirty days’ prior written notice to the other party; or (b) immediately upon the mutual consent of the parties.
On August 6, 2020, the Company entered into an unsecured promissory note (the “August Note”) with John Bell (“Mr. Bell”), for a principal amount of $0.2 million. The August Note was due on August 6, 2021 and had an interest rate of 8% per annum, payable in quarterly payments. The principal and accrued interest under the August Note can convert into a convertible promissory note if the Company consummates a debt financing for the sale and issuance of promissory notes that are convertible into common stock of the Company on terms that are more favorable to new investors than the terms described in the term sheet included in the August Note. Upon notice by the Company of such debt financing, the holder of the August Note shall have the right, but not the obligation, to convert the August Note into a convertible promissory note, with the same principal amount and interest accruing from the date of issuance of the August Note, on the same terms as the convertible promissory notes issued to such new investors. Mr. Bell did not elect to convert their August Note into a convertible promissory note, and on August 6, 2021, both the Company and Mr. Bell agreed to roll the amount of principal and accrued interest as of August 6, 2021 into a new secured promissory note (“Secured August Note”) with a new principal amount of $0.2 million and an interest rate of 10% per annum, payable at maturity. The Secured August Note is due on June 30, 2022The Secured August Note is secured by all the Company’s personal property, now existing or later arising, including accounts, chattel paper, commercial tort claims, fixtures, intellectual property, investment property, letter-of-credit rights, inventory, equipment, general intangibles, deposit accounts, financial assets, documents, instruments, goods and money and all proceeds of all of the foregoing.
On October 2, 2020, the Company completed its acquisition of Sera Labs and pursuant to the Sera Labs Merger Agreement, the Company issued a promissory note in the principal amount of $1.1 million owed to the CEO of Sera Labs (“Duitch Note”), of which $1.0 million is the upfront payment in connection with the closing of the Sera Labs Merger, and $0.1 million is for certain liabilities of Sera Labs due to Mrs. Duitch. The Duitch Note was due on September 30, 2021 and had an interest rate of 8% per annum. On November 9, 2020, a payment of $0.3 million was made and applied to principal only. On June 30, 2021, both the Company and the CEO of Sera Labs agreed to roll the amount of principal and accrued interest as of June 30, 2021 as well as other amounts due to the CEO of Sera Labs into a new secured promissory note (“Secured Duitch Note”) with a new principal amount of $1.05 million and an interest rate of 10% per annum, payable at maturity. The Secured Duitch Note is secured by all the Company’s personal property, now existing or later arising, including accounts, chattel paper, commercial tort claims, fixtures, intellectual property, investment property, letter-of-credit rights, inventory, equipment, general intangibles, deposit accounts, financial assets, documents, instruments, goods and money and all proceeds of all of the foregoing. The Secured Duitch Note was due on April 15, 2022, and the Company and the CEO of Sera Labs are negotiating the terms to extend the Secured Duitch Note.
On November 16, 2021, the Company entered into a secured promissory note (the “Secured November Note”) with Mr. Bell for a principal amount of $0.05 million. The Secured November Note is due on June 30, 2022 and has an interest rate of 10% per annum, payable at maturity. The Secured November Note is secured by all the Company’s personal property, now existing or later arising, including accounts, chattel paper, commercial tort claims, fixtures, intellectual property, investment property, letter-of-credit rights, inventory, equipment, general intangibles, deposit accounts, financial assets, documents, instruments, goods and money and all proceeds of all of the foregoing.
From May 3, 2021 through December 28, 2021, the Company entered into several secured promissory notes (the “Secured Notes”) with several of Dov Szapiro’s affiliated investment companies (“Mr. Szaprio”) for a total principal amount of $0.7 million. The Secured Notes are due on June 30, 2022 and have an interest rate of 10% per annum, payable at maturity. The Secured Notes are secured by all the Company’s personal property, now existing or later arising, including accounts, chattel paper, commercial tort claims, fixtures, intellectual property, investment property, letter-of-credit rights, inventory, equipment, general intangibles, deposit accounts, financial assets, documents, instruments, goods and money and all proceeds of all of the foregoing.
On January 12, 2022, the Company entered into a secured promissory note (the “Secured January Note”) with the CEO of Sera Labs for a principal amount of $0.04 million (the “Second Duitch Note”) with an interest rate of 10% per annum, payable at maturity. The Second Duitch Note is secured by all the Company’s personal property, now existing or later arising, including accounts, chattel paper, commercial tort claims, fixtures, intellectual property, investment property, letter-of-credit rights, inventory, equipment, general intangibles, deposit accounts, financial assets, documents, instruments, goods and money and all proceeds of all of the foregoing. The Second Duitch Note was due on April 11, 2022 and the Company and the CEO of Sera Labs are negotiating the terms to extend the Second Duitch Note.
On January 10, 2022, the Company entered into several secured promissory notes (the “Secured January Notes”) with Mr. Szaprio for a total principal amount of $0.2 million. The Secured January Notes are due on June 30, 2022 and have an interest rate of 10% per annum, payable at maturity. The Secured January Notes are secured by all the Company’s personal property, now existing or later arising, including accounts, chattel paper, commercial tort claims, fixtures, intellectual property, investment property, letter-of-credit rights, inventory, equipment, general intangibles, deposit accounts, financial assets, documents, instruments, goods and money and all proceeds of all of the foregoing.
As of March 31, 2022 and December 31, 2021, the Company recorded $0.1 million and $0.08 million, respectively of accrued related party interest and is recorded in accrued expenses. Interest expense in regard to related party payables for the three months ended March 31, 2022 and 2021was $0.05 million and $0, respectively.
NOTE 12 – LOAN PAYABLE
Loan payable consists of the following at March 31, 2022 and December 31, 2021 (in thousands):
| | March 31, 2022 | | | December 31, 2021 | |
Note to a company due September 29, 2022, including interest at 4.32% per annum; unsecured; interest due monthly | | $ | 122 | | | $ | 195 | |
Note to a company due June 6, 2022, including interest at 4.42% per annum; unsecured; interest due monthly | | | 20 | | | | 40 | |
Current portion of loan payable | | | (142 | ) | | | (235 | ) |
Loan payable, less current portion | | $ | - | | | $ | - | |
Interest expense for the three months ended March 31, 2022 and 2021 was $0.05 million and $0.02 million, respectively.
NOTE 13 – NOTES PAYABLE
Notes payable consist of the following at March 31, 2022 and December 31, 2021 (in thousands):
| | March 31, 2022 | | | December 31, 2021 | |
Note to an individual, non-interest bearing, unsecured and due on demand | | $ | 50 | | | $ | 50 | |
Secured Promissory note to a company originally due June 30, 2022; interest at 10% per annum payable at maturity | | | 270 | | | | 270 | |
Secured Promissory note to a company originally due May 18, 2021 due June 30, 2022; interest at 10% per annum payable at maturity | | | 540 | | | | 540 | |
Secured Promissory note to a company originally due January 13, 2022 was due June 30, 2022; interest at 10% per annum payable at maturity | | | 500 | | | | 500 | |
Secured promissory notes to a company originally due April 8, 2022 and October 30, 2021 was rolled into a new secured promissory notes now due June 30, 2022; interest at 10% per annum payable at maturity | | | 502 | | | | 502 | |
Secured promissory note to a company due May 31, 2022; interest at 10% per annum payable at maturity | | | 300 | | | | 300 | |
Secured promissory note to a company due May 31, 2022; interest at 10% per annum payable at maturity | | | 100 | | | | 100 | |
Promissory notes to a company, , terms of the promissory notes are still being negotiated | | | 415 | | | | 415 | |
Secured promissory notes to a company due June 30, 2022; interest at 10% per annum payable at maturity | | | 200 | | | | 200 | |
Secured promissory notes to a company due June 30, 2022; interest at 10% per annum payable at maturity | | | 200 | | | | - | |
Promissory notes to a company, , terms of the promissory notes are still being negotiated | | | 2,052 | | | | - | |
Current portion of note payable | | $ | 5,129 | | | $ | 2,877 | |
On May 18, 2020 and August 12, 2020, the Company entered into unsecured promissory notes (“Notes”) with an investor for $0.3 million and $0.5 million, respectively. The Notes were due on May 18, 2021 and August 12, 2021, respectively, and have an interest rate of 8% per annum, payable in quarterly payments. The principal and accrued interest under the Notes can convert into convertible promissory notes if the Company consummates a debt financing for the sale and issuance of promissory notes that are convertible into common stock of the Company on terms that are more favorable to new investors than the terms described in the term sheet included in the Notes. Upon notice by the Company of such debt financing, the holder of the Notes shall have the right, but not the obligation, to convert the Notes into convertible promissory notes, with the same principal amount and interest accruing from the date of issuance of the Notes, on the same terms as the convertible promissory notes issued to such new investors. On October 30, 2021, both the Company and the investor agreed to roll the amount of principal and accrued interest as of October 30, 2021 into new secured promissory notes (“New August & May Notes”) with a new principal amount of $0.3 million and $0.5 million. The New August & May Notes are due on June 15, 2022 and has an interest rate of 10% per annum, payable at maturity. The New August & May Notes are secured by all the Company’s personal property, now existing or later arising, including accounts, chattel paper, commercial tort claims, fixtures, intellectual property, investment property, letter-of-credit rights, inventory, equipment, general intangibles, deposit accounts, financial assets, documents, instruments, goods and money and all proceeds of all of the foregoing.
On January 13, 2021 and February 25, 2021, the Company received a total of $0.5 million from an investment company in exchange for a promissory note. At the time the Company received the $0.5 million, terms of promissory note were not yet finalized. On October 30, 2021, both the Company and the investment company agreed to roll the amount of principal and accrued interest as of October 30, 2021 into a new secured promissory note (“New January 2021 Note”) with a principal amount of $0.5 million. The New January 2021 Note is due on June 15, 2022 and has an interest rate of 10% per annum, payable at maturity. The New January 2021 Note is secured by all the Company’s personal property, now existing or later arising, including accounts, chattel paper, commercial tort claims, fixtures, intellectual property, investment property, letter-of-credit rights, inventory, equipment, general intangibles, deposit accounts, financial assets, documents, instruments, goods and money and all proceeds of all of the foregoing.
On April 8, 2021 and September 24, 2021, the Company received $0.3 million and $0.3 million, respectively, from an investment company in exchange for two promissory notes. At the time the Company received the total amount of $0.5 million, terms of promissory notes were not yet finalized. On October 30, 2021, both the Company and the investment company agreed to roll the amount of principal and accrued interest as of October 30, 2021 into new secured promissory notes (“New April & September 2021 Notes”) with principal amounts of $0.3 million and $0.3 million. The New April & September 2021 Notes are due on June 15, 2022 and has an interest rate of 10% per annum, payable at maturity. The New April & September 2021 Notes are secured by all the Company’s personal property, now existing or later arising, including accounts, chattel paper, commercial tort claims, fixtures, intellectual property, investment property, letter-of-credit rights, inventory, equipment, general intangibles, deposit accounts, financial assets, documents, instruments, goods and money and all proceeds of all of the foregoing.
On October 27, 2021, the Company received $0.3 million from an investment company in exchange for a secured promissory note (“October 2021 Note”). The October 2021 Note is due on May 31, 2022 and has an interest rate of 10% per annum, payable at maturity. The October 2021 Note is secured by all the Company’s personal property, now existing or later arising, including accounts, chattel paper, commercial tort claims, fixtures, intellectual property, investment property, letter-of-credit rights, inventory, equipment, general intangibles, deposit accounts, financial assets, documents, instruments, goods and money and all proceeds of all of the foregoing. As of the filing date of this report, the Company and the investment company are negotiating the terms to extend the October 2021 Note.
On November 18, 2021, the Company received $0.1 million from an investment company in exchange for a secured promissory note (“November 2021 Note”). The November 2021 Note is due on May 31, 2022 and has an interest rate of 10% per annum, payable at maturity. The November 2021 Note is secured by all the Company’s personal property, now existing or later arising, including accounts, chattel paper, commercial tort claims, fixtures, intellectual property, investment property, letter-of-credit rights, inventory, equipment, general intangibles, deposit accounts, financial assets, documents, instruments, goods and money and all proceeds of all of the foregoing. As of the filing date of this report, the Company and the investment company are negotiating the terms to extend the November 2021 Note.
From October 15, 2021 to December 15, 2021, the Company received at total of $0.4 million from an investment company in exchange for promissory notes. Both the Company and the investment company agreed to negotiate the terms of the promissory notes and as of the filing date of this report, the Company and the investment company are still negotiating the terms of the promissory notes.
On December 16, 2021, the Company received at total of $0.2 million from an investment company in exchange for secured promissory note (“December 2021 Note”). The December 2021 Note is due on June 15, 2022 and has an interest rate of 10% per annum, payable at maturity. The December 2021 Note is secured by all the Company’s personal property, now existing or later arising, including accounts, chattel paper, commercial tort claims, fixtures, intellectual property, investment property, letter-of-credit rights, inventory, equipment, general intangibles, deposit accounts, financial assets, documents, instruments, goods and money and all proceeds of all of the foregoing.
On January 18, 2022, the Company received $0.2 million from an investment company in exchange for a secured promissory note (“January 2022 Note”). The January 2022 Note is due on June 30, 2022 and has an interest rate of 10% per annum, payable at maturity. The January 2022 Note is secured by all the Company’s personal property, now existing or later arising, including accounts, chattel paper, commercial tort claims, fixtures, intellectual property, investment property, letter-of-credit rights, inventory, equipment, general intangibles, deposit accounts, financial assets, documents, instruments, goods and money and all proceeds of all of the foregoing. As of the filing date of this report, the Company and the investment company are negotiating the terms to extend the January 2022 Note.
From January 31, 2022 to March 31, 2022, the Company received at total of $2.1 million from an investment company in exchange for promissory notes. Both the Company and the investment company agreed to negotiate the terms of the promissory notes and as of the filing date of this report, the Company and investment company are still negotiating the terms of the promissory notes.
Interest expense for the three months ended March 31, 2022 and 2021 was $0.1 million and $0.03 million, respectively.
NOTE 14 – CONVERTIBLE PROMISSORY NOTES AND FAIR VALUE OF CONVERTIBLE PROMISSORY NOTES
Convertible promissory notes consists of the following at March 31, 2022 and December 31, 2021 (in thousands):
| | March 31, 2022 | | | December 31, 2021 | |
Convertible promissory notes totaling $550,000 due January 31, 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 January 31, 2019 and currently in default. The Company has offered to either repay the convertible promissory notes or request to have them converted into common stock shares of the Company. The beneficial owners of the convertible promissory notes have not yet communicated their intent to either receive payment or convert. | | $ | 550 | | | $ | 550 | |
Current portion of convertible promissory notes | | $ | 550 | | | $ | 550 | |
Fair value of convertible promissory notes consists of the following at March 31, 2022 and December 31, 2021 (in thousands):
| | March 31, 2022 | | | December 31, 2021 | |
Series A subordinated convertible note at fair value | | $ | 3,095 | | | $ | 3,074 | |
Series B subordinated convertible note at fair value | | | 11,451 | | | | 11,858 | |
Total convertible promissory notes | | | 14,546 | | | | 14,932 | |
Less: Investor Note offset – Series B Note | | | (5,000 | ) | | | (5,000 | ) |
Carrying value of convertible promissory notes at fair value | | | 9,546 | | | | 9,932 | |
Less: current portion of convertible promissory notes at fair value | | | (9,546 | ) | | | (9,932 | ) |
Convertible promissory notes, less current portion | | $ | - | | | $ | - | |
On October 30, 2020, the Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with an institutional investor (the “Investor”) for the purchase of two new series of convertible notes with an aggregate principal amount of $11,500,000. Concurrently the Company consummated the sale to the Investor of a Series A subordinated convertible note (the “Series A Note”) with an initial principal amount of $4,600,000 and a Series B senior secured convertible note (the “Series B Note,” and together with the Series A Note, the “Convertible Notes” and, each a “Convertible Note”) with an initial principal amount of $6,900,000 in a private placement (the “Private Placement”).
The Series A Note was sold with an original issue discount of $600,000 and the Series B Note was sold with an original issue discount of $900,000. The Investor paid for the Series A Note to be issued to the Investor by delivering $4,000,000 in cash consideration and paid for the Series B Note to be issued to the Investor by delivering a secured promissory note (the “Investor Note”) with an initial principal amount of $6,000,000. The Company will receive cash in respect of a Series B Note only upon cash repayment of the corresponding Investor Note. In certain circumstances, the Investor Note may be automatically satisfied through netting against the Series B Note, as described more fully below, rather than through the payment of cash. Until an Investor Note is repaid, the original issue discount and the rest of the principal under the corresponding Series B Note is considered to be “restricted.” Upon any repayment of the Investor Note, the principal of the corresponding Series B Note becomes “unrestricted” on dollar-for-dollar basis, along with a proportional amount of the original issue discount. During the year ended December 31, 2020, the Company received $1.0 million from the Investor Note, leaving a remaining balance of $5.0 million of the Investor Note as of December 31, 2020, which is netted against the Series B Note and included in convertible promissory notes in the balance sheet.
The placement agent received a placement agent fee of $306,000 at the closing of the Private Placement, representing 8% of the gross cash proceeds at the closing. After deducting the placement agent fee, the Company’s estimated expenses associated with the Private Placement and the repayment of the September Note, the Company’s net cash proceeds at the closing were approximately $2,340,000. If the Investor Note is subsequently satisfied in full by payment in cash, the additional financial advisory fee on the cash proceeds received from the Investor Note will be another $480,000, and the aggregate net cash proceeds from the Private Placement as a whole will be approximately $8,850,000. In addition, the placement agent received a warrant (the “Warrant”) exercisable for two years for the purchase of an aggregate of up to 242,424 shares of the Company’s common stock, at an exercise price of $1.32 per share. The Warrant may also be exercised by means of a “cashless exercise” or “net exercise.” Upon the achievement of certain milestones, the placement agent is entitled to receive an additional warrant, on the same terms as the Warrant, exercisable for an aggregate of up to 363,636 shares of the Company’s common stock (collectively with the shares underlying the Warrant, the “Warrant Shares”). The Warrant Shares, when issued, will have the same rights, preferences and privileges (including the registration rights described under “Registration Rights Agreement” below) as the shares underlying the Convertible Notes.
The Convertible Notes mature on October 30, 2022 with respect to the Series A Note and October 30, 2021 with respect to the Series B Note (the “Maturity Date”), subject to extension in certain circumstances, including bankruptcy and outstanding events of default. On the Maturity Date, the Company shall pay to the Investor an amount in cash (other than restricted amounts under a Series B Note) presenting all outstanding principal, Make-Whole Amount (as defined in the Convertible Notes), if any, accrued and unpaid interest and accrued and unpaid Late Charges (as defined in the Convertible Notes) on such principal, except that any restricted amount under the Series B Note will be automatically satisfied on the Maturity Date (in lieu of a cash payment) by Maturity Netting (as defined in the Investor Note described below). The Company may not prepay any amounts due under the Convertible Notes. The Convertible Notes shall bear no interest unless there is an occurrence, and during the continuance, of an Event of Default at which point interest shall be 18%.
Each Convertible Note (other than restricted amounts under a Series B Note) is convertible, at the option of the Investor, into shares of Common Stock at a conversion price of $1.32 per share. The conversion price is subject to full ratchet antidilution protection upon any transaction in which the Company is deemed to have granted, issued or sold, any shares of Common Stock. If the Company enters into any agreement to issue any variable rate securities, other than a bona fide at-the-market offering or equity line of credit, the Investor has the additional right to substitute such variable price (or formula) for the conversion price. If an Event of Default has occurred under the Convertible Notes, the Investor may elect to alternatively convert the Convertible Notes at the redemption premium described therein.
Promptly after the consummation of the sale of the Convertible Notes, the Company repaid in full the outstanding principal balance and all accrued but unpaid interest expense on the Senior Promissory Note issued on September 25, 2020 to the Investor (the “September Note”). The cash payment to the Investor to satisfy the September Note was in the amount $1,100,000.
On January 5, 2022, the Company entered into a Forbearance Agreement (the “Forbearance Agreement”) with the Investor pursuant to which the Investor has agreed not to exercise, with certain exclusions, any of its judicial or administrative enforcement actions to obtain cash or other assets (excluding Common Stock or other assets issuable upon conversion or exchange of the Series B Note in accordance with the terms thereof) from the Company on account of any payment obligations of the Company under the Series B Note or the Event of Default Redemption Notice that exist as of the date of the Forbearance Agreement or that may arise from the date of this Agreement through February 15, 2022. See Note 21 for additional information as of the filing date of this report.
Payment of Amounts Due under the Convertible Notes
On the Maturity Date, the Company shall pay to the Investor an amount in cash (other than restricted amounts under a Series B Note) presenting all outstanding principal, Make-Whole Amount (as defined in the Convertible Notes), if any, accrued and unpaid interest and accrued and unpaid Late Charges (as defined in the Convertible Notes) on such principal, except that any restricted amount under the Series B Note will be automatically satisfied on the Maturity Date (in lieu of a cash payment) by Maturity Netting (as defined in the Investor Note described below). The Company may not prepay any amounts due under the Convertible Notes.
Interest
The Convertible Notes shall bear no interest unless there is an occurrence, and during the continuance, of an Event of Default (as defined in the Convertible Notes). During any such Event of Default, the Convertible Notes will accrue interest at the rate of 18% per annum. See “—Events of Default” below.
Conversion; Alternate Conversion upon Event of Default
Each Convertible Note (other than restricted amounts under a Series B Note) is convertible, at the option of the Investor, into shares of Common Stock at a conversion price of $1.32 per share. The conversion price is subject to full ratchet antidilution protection upon any transaction in which the Company is deemed to have granted, issued or sold, any shares of Common Stock. If the Company enters into any agreement to issue any variable rate securities, other than a bona fide at-the-market offering or equity line of credit, the Investor has the additional right to substitute such variable price (or formula) for the conversion price.
If an Event of Default has occurred under the Convertible Notes, the Investor may elect to alternatively convert the Convertible Notes at the redemption premium described therein.
Conversion Limitation
The Investor will not have the right to convert any portion of a Convertible Notes, to the extent that, after giving effect to such conversion, the Investor (and other certain related parties) would beneficially own in excess of 4.99% of the shares of Common Stock outstanding immediately after giving effect to such conversion. This limit may, from time to time, be increased, up to 9.99%, or decreased; provided that any such increase will not be effective until the 61st day after delivery of a notice to the Company of such increase.
Events of Default
The Convertible Notes include certain customary and other Events of Default. In connection with an Event of Default, the Investor may require the Company to redeem in cash any or all of the Convertible Notes. The redemption price will be at a premium to the amount due under the Convertible Notes as described therein.
Change of Control
In connection with a Change of Control (as defined in the Convertible Notes), the Investor may require the Company to redeem all or any portion of the Convertible Notes. The redemption price per share will be at a premium to the amount due under the Convertible Notes as described therein.
Covenants
The Company will be subject to certain customary affirmative and negative covenants including those regarding the payment of dividends, maintenance of its property, transactions with affiliates, and issue notes and certain securities.
Placement Agent Warrants
On October 2, 2020 and December 31, 2020, in connection with the Series A Note and Series B Note, respectively, a placement agent is to receive a warrant (the “Warrant”) exercisable for 2 years for the purchase of an aggregate of up to 242,424 and 60,606 shares, respectively, of the Company’s common stock, at an exercise price of $1.32 per share. The Warrant may also be exercised by means of a “cashless exercise” or “net exercise.” Upon the achievement of certain milestones, the placement agent is entitled to receive an additional warrant, on the same terms as the Warrant, exercisable for an aggregate of up to 363,636 shares of the Company’s common stock.
The Company used the Black-Scholes model to determine the fair value of the Warrants issued to the Placement Agent. The Company has elected the Fair Value Option for the Series A Note and Series B Note, accordingly the fair value of the Warrants issued to the placement agent were expensed.
The following table sets forth the assumptions used and calculated aggregated fair values of the warrants:
Significant assumptions (weighted-average): | | | |
Risk-free interest rate at grant date | | | 0.36 | % |
Expected stock price volatility | | | 81.14 | % |
Expected dividend payout | | | - | |
Expected warrant life (in years) | | | 2 | |
Expected forfeiture rate | | | 0 | % |
Fair Value Option for the Series A and Series B Notes
The Company elected the fair value option under ASC 825, Financial Instruments, for both the Series A and Series B Notes and accounted for the Notes as follows (1) the portion of the change in the liability’s fair value that is attributable to a change in instrument-specific credit risk in other comprehensive income (2) the remaining change in the liability’s fair value in net income (3) the excess of the fair value over the proceeds is recognized as an expense and (4) upfront costs and fees are recognized in earnings as incurred Gains and losses attributable to changes in credit risk are determined using observable credit default spreads for the issuer or comparable companies; these gains and losses were insignificant during all periods presented. The Company recognized a loss of $4.4 million and $5.1 million at the time of issuance of the Series A and Series B Notes, respectively, as a result of the make whole provision noted within the debt arrangements as the debt holders would be awarded a variable number of shares at the time of conversion which would always equate to an amount greater than the principal amount of the debt.
The Company recorded a loss of $0.02 million and $0.3 million relating to the Series A and Series B Notes, respectively, attributed to the change if fair value of the Series A and Series B Notes for the three months period ended March 31, 2022 and were recorded in the condensed consolidated statement of operations. The Company recorded a gain of $0.5 million and $0.5 million relating to the Series A and Series B Notes, respectively, attributed to the change if fair value of the Series A and Series B Notes for the three months period ended March 31, 2021 and were recorded in the condensed consolidated statement of operations.
NOTE 15 – WARRANT AGREEMENTS
During the three months ended March 31, 2022 and 2021, the Company did not issue any warrants.
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, 2020 | | | 2,479,849 | | | $ | 1.86 | | | | 1.23 | |
Granted | | | - | | | | - | | | | - | |
Exercised | | | (96,250 | ) | | | 1.00 | | | | - | |
Forfeited/Expired | | | (818,152 | ) | | | 1.58 | | | | - | |
Outstanding, December 31, 2021 | | | 1,565,447 | | | $ | 2.18 | | | | 0.66 | |
Granted | | | - | | | | - | | | | - | |
Exercised | | | - | | | | - | | | | - | |
Forfeited/Expired | | | (949,917 | ) | | | 2.31 | | | | - | |
Outstanding, March 31, 2022 | | | 615,530 | | | | 1.99 | | | | 1.25 | |
Exercisable at March 31, 2022 | | | 615,530 | | | $ | 1.99 | | | | 1.25 | |
Warrant summary as of March 31, 2022:
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 | |
$1.98–$2.00 | | | 615,530 | | | | 1.25 | | | $ | 1.99 | | | | 615,530 | | | $ | 1.99 | |
| | | 615,530 | | | | 1.25 | | | $ | 1.99 | | | | 615,530 | | | $ | 1.99 | |
Warrant summary as of December 31, 2021:
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 | |
$1.98–$2.31 | | | 1,565,447 | | | | 0.66 | | | $ | 2.18 | | | | 1,565,447 | | | $ | 2.18 | |
| | | 1,565,447 | | | | 0.66 | | | $ | 2.18 | | | | 1,565,447 | | | $ | 2.18 | |
The change in warrant value for the three months ended March 31, 2022and 2021 was $0 and $0, respectively.
The aggregate intrinsic value of warrants outstanding and exercisable at March 31, 2022 and December 31, 2021 was $0 and $0, respectively.
NOTE 16 – STOCK INCENTIVE PLANS
On December 29, 2017 (“Effective Date”), the Company adopted the CURE Pharmaceutical Holding Corp. 2017 Equity Incentive Plan (the “2017 Equity Plan”), pursuant to which an aggregate of 5,000,000 shares of the common stock of the Company are available for grant. On November 28, 2020, the Company registered an additional 5,000,000 shares of common stock of the Company that are available to be granted by filing a Form S-3 Registration Statement under the Securities Act of 1933.
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 did not issue any NSO’s, ISO’s, RSC’s or RSU’s during the three months ended March 31, 2022. The Company issued 650,801 Nonstatutory Stock Options (“NSO”) to employees of the Company and did not issue any Incentive Stock Options (“ISO”), Restricted Common Stock (“RCS”) and Restricted Stock Units (“RSU”) during the three months ended March 31, 2021. Vesting periods for awarded RCS, ISO’s and NSO’s range from immediate to quarterly over a 4 year period. Vesting period for RSU’s is the earlier of (i) the day prior to the next Annual Meeting of Shareholders following the date of grant, and (ii) one (1) year from the Date of Grant. For ISO’s and NSO’s awarded, the term to exercise their ISO or NSO is 10 years.
The Company issued 1,518,194 stock options to a consultant that contains performance-based vesting conditions where revenue milestones are to be met over a certain period. Such stock option awards would be valued using a Monte Carlo simulation based on the probability of the performance condition being met and the underlying expense would be recognized as the associated vesting conditions are met. No stock options that contain performance-based vesting conditions vested during the three months ended March 31, 2022 and the likelihood of meeting the performance-based condition is currently nil.
Stock Options
The Company’s stock option activity was as follows:
| | Options | | | Weighted Average Exercise Price | | | Weighted Average Contractual Remaining Life | |
Outstanding, December 31, 2020 | | | 6,285,792 | | | $ | 1.52 | | | | 8.86 | |
Granted | | | 1,555,526 | | | | 0.95 | | | | 9.25 | |
Exercised | | | - | | | | - | | | | - | |
Forfeited/Expired | | | (611,250 | ) | | | 0.97 | | | | - | |
Outstanding, December 31, 2021 | | | 7,230,068 | | | $ | 1.45 | | | | 8.27 | |
Granted | | | - | | | | - | | | | - | |
Exercised | | | - | | | | - | | | | - | |
Forfeited/Expired | | | (709,304 | ) | | | 1.17 | | | | - | |
Outstanding, March 31, 2022 | | | 6,520,763 | | | $ | 1.48 | | | | 7.94 | |
Exercisable at March 31, 2022 | | | 3,760,015 | | | $ | 1.56 | | | | 7.45 | |
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 | | | 6,520,763 | | | | 7.94 | | | $ | 1.48 | | | | 3,760,015 | | | $ | 1.56 | |
| | | 6,520,763 | | | | 7.94 | | | $ | 1.48 | | | | 3,760,015 | | | $ | 1.56 | |
The aggregate intrinsic value of options outstanding and exercisable at March 31, 2022 was $0.
The aggregate grant date fair value of options granted during the three months ended March 31, 2022 and 2021 and amounted to $0 and $0.5 million, respectively. Compensation expense related to stock options was $0.1 million and $0.7 million for the three months ended March 31, 2022 and 2021, respectively.
As of March 31, 2022, the total unrecognized fair value compensation cost related to unvested stock options was $1.6 million, which is to be recognized over a remaining weighted average period of approximately 1.4 years.
The weighted-average fair value of options granted during the three months ended March 31, 2022 and 2021, and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes option pricing model are as follows:
| | March 31, 2022 | | | March 31, 2021 | |
Significant assumptions (weighted-average): | | | | | | |
Risk-free interest rate at grant date | | | 0 | % | | | 0.92 | % |
Expected stock price volatility | | | 0 | % | | | 84.52 | % |
Expected dividend payout | | | - | | | | - | |
Expected option life (in years) | | | - | | | | 10 | |
Expected forfeiture rate | | | 0 | % | | | 0 | % |
Restricted Stock
Subject to the restrictions set with respect to the particular Award, a recipient of Restricted Stock generally shall have the rights and privileges of a shareholder, including the right to vote the Restricted Stock and the right to receive dividends; provided that, any cash dividends and stock dividends with respect to the Restricted Stock shall be withheld for the recipient’s account, and interest may be credited on the amount of the cash dividends withheld. The cash dividends or stock dividends so withheld and attributable to any particular share of Restricted Stock (and earnings thereon, if applicable) shall be distributed to the recipient in cash or, at the discretion of the Board or Committee, in shares of common stock having a fair market value equal to the amount of such dividends, if applicable, upon the release of restrictions on the Restricted Stock and, if the Restricted Stock is forfeited, the recipient shall have no right to the dividends.
The Company’s restricted stock activity was as follows:
| | Restricted Stock Shares | | | Weighted Average Grant Date Fair Value | |
Non-vested, December 31, 2020 | | | 50,000 | | | $ | 1.60 | |
Granted | | | 338,443 | | | | 1.20 | |
Vested | | | (388,443 | ) | | | 1.26 | |
Forfeited/Expired | | | - | | | | - | |
Non-vested, December 31, 2021 | | | - | | | | - | |
Granted | | | - | | | | - | |
Vested | | | - | | | | - | |
Forfeited/Expired | | | - | | | | - | |
Non-vested, March 31, 2022 | | | - | | | $ | - | |
Compensation expense related to restricted shares for the three months ended March 31, 2022 and 2021 was $0 and $0.2 million, respectively. At March 31, 2022 and December 31, 2021, the Company had $0 and $0, respectively, of total unrecognized compensation expense related to restricted stock awards. Compensation will be recognized over a weighted-average period of approximately 0 years and 0 years, respectively.
Restricted Stock Units
The terms and conditions of a grant of Restricted Stock Units shall be determined by the Board or Committee. No shares of common stock shall be issued at the time a Restricted Stock Unit is granted. A recipient of Restricted Stock Units shall have no voting rights with respect to the Restricted Stock Units. Upon the expiration of the restrictions applicable to a Restricted Stock Unit, The Company will either issue to the recipient, without charge, one share of common stock per Restricted Stock Unit or cash in an amount equal to the fair market value of one share of common stock.
The Company’s restricted stock unit activity was as follows:
| | Restricted Stock Units | | | Weighted Average Grant Date Fair Value | |
Outstanding, December 31, 2020 | | | 431,578 | | | $ | 1.33 | |
Granted | | | 629,338 | | | | 0.74 | |
Vested | | | (411,027 | ) | | | 1.33 | |
Forfeited/Expired | | | (61,654 | ) | | | 1.33 | |
Outstanding, December 31, 2021 | | | 588,235 | | | $ | 0.70 | |
Granted | | | - | | | | - | |
Vested | | | - | | | | - | |
Forfeited/Expired | | | - | | | | - | |
Outstanding, March 31, 2022 | | | 588,235 | | | $ | 0.70 | |
At March 31, 2022 and December 31, 2021, the Company had approximately $0.4 million and $0.4 million, respectively, of total unrecognized compensation expense related to restricted stock units. Compensation will be recognized over a weighted-average period of approximately 0.48 years and 0.85 years, respectively.
Compensation expense related to restricted stock units for the three months ended March 31, 2022 and 2021 was $0.4 million and $0.1 million, respectively. All compensation expense related to restricted stock units were included in selling, general and administrative expenses for the three months ended March 31, 2022 and 2021, respectively.
NOTE 17 – STOCKHOLDERS’ EQUITY
Authorized Stock
The Company has authorized to issue is 150,000,000 common shares with a par value of $0.001 per share.
As of March 31, 2022 and March 31, 2021, there were 69,866,900 and 59,926,409 shares of the Company’s common stock issued and outstanding, respectively.
Common Share Issuances
From January 1, 2021 to March 31, 2021, the Company issued 157,693 common stock shares, at prices per share ranging from $1.04 to $1.03 in connection to issuances from our 2017 Equity Plan. The total value of these issuances was $0.02 million.
From January 1, 2021 to March 31, 2021, the Company issued 265,512 common stock shares, at prices per share ranging from $1.04 to $1.03 in connection to several consulting agreements. The total value of these issuances was $0.5 million.
From January 1, 2021 to March 31, 2021, the Company issued 26,936 common stock shares, at a price of $1.30 per share, from a cash-less exercise of certain warrants. Total value of these issuances was $0.03 million.
From January 1, 2022 to March 31, 2022, the Company issued 1,192,369 common stock shares, at a price per share of $0.19, the Alternative Conversion Price, in connection to conversion of $0.2 million of the Series B Note plus 472,631 common stock shares at a price per share of $0.19, in connection to the make-whole-amounts totaling $0.2 million per the terms of the Series B Note.
Common Stock Issuable
In 2018, the Company entered into an amendment to extend the maturity date of a convertible promissory note. As compensation for extending the note, the Company is to issue 150,000 common stock shares of the Company at a price of $2.05 per share. As of the filing of this Current Report on Form 10-Q, the Company has not yet issued these common stock shares and has recorded a stock issuable of $0.3 million.
From January 1, 2021 to March 31, 2021, the Company entered into Consulting Agreements (“Agreements”) with individuals. Per the terms of the Agreements, the Company is to issue 102,104 common stock shares of the Company at prices ranging from $1.72 to $1.85 per share. These common stock shares were issued subsequent to the filing of the Current Report on Form 10-Q filed on May 17, 2021.
On October 1, 2021, the Company entered into a Consulting Agreement (“Agreement”) with individuals. Per the terms of the Agreement, the Company is to issue 115,000 common stock shares of the Company at prices ranging from $0.30 to $0.68 per share. As of our filing of our Form 10-Q for the three months ended March 31, 2022, the Company has not yet issued these common stock shares and has recorded a stock payable of $0.05 million.
NOTE 18 – SEGMENT REPORTING
Business Segments
The Company manages its operations through two business segments: Cure, which develops and manufactures pharmaceutical and wellness products, and Sera Labs, which sells wellness products through direct to consumer and wholesale channels.
The Company evaluates performance based on net operating profit. Administrative functions such as finance, treasury, and information systems are centralized. However, where applicable, portions of the administrative function expenses are allocated between the operating segments. The operating segments do share manufacturing or distribution facilities. In the event any materials and/or services are provided to one operating segment by the other, the transaction is valued according to the company’s transfer policy, which approximates market price. The costs of operating the manufacturing plant is captured discretely in the Cure segment. The Company’s property, plant and equipment, inventory, and accounts receivable are captured and reported discretely within each operating segment.
Summary financial information for the two reportable segments for March 31, 2022 is as follows (in thousands):
| | Cure | | | Sera Labs | | | Eliminations | | | Consolidated | |
Net Sales | | $ | 40 | | | $ | 1,076 | | | $ | (13 | ) | | $ | 1,103 | |
Operating Loss | | $ | (873 | ) | | $ | (1,158 | ) | | $ | - | | | $ | (2,031 | ) |
Assets | | $ | 44,450 | | | $ | 7,049 | | | $ | (14,175 | ) | | $ | 37,324 | |
Accounts receivable, net | | $ | - | | | $ | 469 | | | $ | - | | | $ | 469 | |
Inventory, net | | $ | 260 | | | $ | 526 | | | $ | - | | | $ | 786 | |
Interest expense | | $ | 173 | | | $ | 23 | | | $ | - | | | $ | 196 | |
Depreciation and amortization | | $ | 421 | | | $ | 578 | | | | | | | $ | 999 | |
Impairment of goodwill | | $ | 2,728 | | | $ | - | | | $ | - | | | $ | 2,728 | |
Summary financial information for the two reportable segments for March 31, 2021 is as follows (in thousands):
| | Cure | | | Sera Labs | | | Eliminations | | | Consolidated | |
Net Sales | | $ | 194 | | | $ | 1,260 | | | $ | (9 | ) | | $ | 1,445 | |
Operating Loss | | $ | (2,816 | ) | | $ | (1,674 | ) | | $ | - | | | $ | (4,499 | ) |
Assets | | $ | 45,767 | | | $ | 12,588 | | | $ | (14,175 | ) | | $ | 44,180 | |
Accounts receivable, net | | $ | 151 | | | $ | 117 | | | $ | - | | | $ | 268 | |
Inventory, net | | $ | 342 | | | $ | 461 | | | $ | - | | | $ | 803 | |
Interest expense | | $ | 64 | | | $ | 3 | | | $ | - | | | $ | 67 | |
Depreciation and amortization | | $ | 86 | | | $ | 577 | | | $ | - | | | $ | 663 | |
Impairment of goodwill | | $ | - | | | $ | - | | | $ | - | | | $ | - | |
Disaggregation of Revenues and Concentration Risk
The following table presents the percentage of consolidated revenues attributable to products or services classes that represent greater than ten percent of consolidated revenues for the three months March 31, 2022 and 2021:
| | Three Months Ended March 31, | |
| | 2022 | | | 2021 | |
CureFilm™ sales | | | 12 | % | | | 11 | % |
Cosemtic sales – Revolution Line | | | 14 | % | | | 0 | % |
Product sales - CBD | | | 73 | % | | | 85 | % |
Total | | | 99 | % | | | 96 | % |
The Company received revenue from one customer representing 14% of consolidated revenue for the three months ended March 31, 2022. Accounts receivable from this customer at March 31, 2022 and December 31, 2021 was $0.1 million and $0, respectively. The Company did not receive revenue from any one customer that individually represents greater than ten percent of consolidated revenues for the three months ended March 31, 2021.
NOTE 19 – BUSINESS COMBINATION AND DECONSOLIDATION OF SUBSIDIARY
Sera Labs Acquisition
On October 2, 2020, the Company acquired all of the issued and outstanding stock of Sera Labs. All issued and outstanding shares of the capital stock of Sera Labs were converted into the right to receive, subject to customary adjustments, an aggregate of approximately (i) $1.0 million in cash (the “Upfront Payment”) and (ii) up to 6,909,091 shares of the Company’s common stock. On October 1, 2020, the Parties entered into a Waiver of Closing Condition, pursuant to which the Company’s obligation to pay the Upfront Payment at the Effective Time was extended to October 13, 2020. Pursuant to the Sera Labs Merger Agreement, Sera Labs security holders are also entitled to receive up to 5,988,024 shares of the Company’s common stock (the “Clawback Shares”) based on the achievement of certain sales milestones up to an aggregate maximum amount of $20 million as set forth in the Sera Labs Merger Agreement. Subsequent to the Effective Time and for a period of two years, the Company agreed to make available to Sera Labs $4.0 million for working capital, less the outstanding amount of the Secured Promissory Note previously issued by the Company to Sera Labs.
Sera Labs is a trusted leader in the health, wellness, and beauty sectors of innovative products with cutting edge technology and superior ingredients such as CBD. Sera Labs creates high quality products that use science-backed, proprietary formulations. Its more than 20 products are sold under the brand names Seratopical™, SeraLabs™, and Revolution™. Sera Labs sells its products at affordable prices, making them easily accessible on a global scale. Strategically positioned in the growth market categories of beauty, health & wellness, and pet care, Sera Labs products are sold in major national drug, grocery chains and mass retailers. The company also sells products under private label to major retailers and multi-level marketers, as well as direct-to-consumer (DTC), via online website orders, including opt-in subscriptions.
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 12,897,115 total potential shares to be issued, 5,988,024 shares are considered contingent shares based on the achievement of certain sales milestones up to an aggregate maximum amount of $20 million as described in the Sera Labs 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 Shares of $3.1 million will be recorded as a liability as contingent share consideration as of October 2, 2020.
The following table presents the change in fair value of contingent consideration (in thousands):
(Dollars in thousands) | | Fair Value of the Contingent Share Consideration | |
Fair value at December 31, 2021 | | $ | 1,430 | |
Fair value at March 31, 2022 | | | 584 | |
Net change in fair value three months ended March 31, 2022 | | $ | (846 | ) |
The Company estimated the fair value of the preliminary purchase price for the acquisition of Sera Labs is approximately $14.2 million. The Company acquired Sera Labs through the issuance of shares of Common Stock of the Company with $1 million of cash consideration to be provided. The preliminary total purchase price was determined based on the following: i) $1 million of the Upfront Payment ii) Company’s closing price ($1.38) on October 2, 2020 for the closing merger consideration shares; and iii) the estimated fair value using the Monte-Carlo simulation of stock price correlation, and other variables over a 24 month performance period applied to the Clawback Shares.
(Dollars in thousands) | | Shares | | | Amount | |
Upfront Payment | | | - | | | $ | 1,000 | |
Closing Merger Consideration Shares | | | 6,909,091 | | | | 9,535 | |
Contingent Consideration Shares (Clawback Shares) | | | 5,988,024 | | | | 3,083 | |
Liabilities assumed | | | - | | | | 550 | |
Total purchase price | | | 12,897,115 | | | $ | 14,168 | |
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 Sera Labs acquisition, which is subject to change during measurement period:
(Dollars in thousands) | | | |
Net assets acquired: | | | |
Cash | | $ | 1,357 | |
Other assets | | | 1,440 | |
Property, plant and equipment | | | 6 | |
Other long term assets | | | 384 | |
Intangibles assets | | | 10,182 | |
Goodwill | | | 4,687 | |
Accounts payable and accrued expenses | | | (1,063 | ) |
Contract liabilities | | | (1,963 | ) |
Other current liabilities | | | (462 | ) |
Other long-term liabilities | | | (400 | ) |
Net assets acquired | | $ | 14,168 | |
Information regarding identifiable intangible assets acquired in the Sera Labs acquisition is presented below:
(Dollars in thousands) | | Weighted- average Estimated useful life | | Preliminary Estimated Asset Fair Value | |
Finite-lived intangible assets: | | | | | |
Customer relationships | | 5.0 years | | $ | 7,110 | |
Tradename | | 4.0 years | | $ | 2,610 | |
Non-compete | | 2.0 years | | $ | 462 | |
Total finite-lived intangible assets acquired | | 4.6 years | | $ | 10,182 | |
NOTE 20 - INTELLECTUAL PROPERTY AND COLLABORATIVE AGREEMENTS
On September 4, 2018, Cure Pharmaceutical Holding Corp., through its subsidiary, Cure Pharmaceutical Corp. (together, the “Company”) entered into its first multi-year licensing agreement (the “Licensing Agreement”) with Canopy Growth Corporation, a company that engages in the production and sale of medical cannabis (“Canopy”). Under the terms of the Licensing Agreement, Canopy will have an exclusive license to certain of the Company’s intellectual property rights, including the Company’s patented, multi-layer OTF, CUREfilm™ technology for use with cannabis extracts and biosynthetic cannabinoids (“Products”) and the Company’s trademarks in markets around the world where it is legal for Canopy to sell the Products, excluding Asia. The Company will retain the right to manufacture synthetic cannabinoids for pharmaceutical applications.
On November 7, 2019 (the “Effective Date”), the Company and Canopy entered into an Amendment Agreement (“Amendment”) to allow the Company to sell cannabinoid CUREfilm products (“Product”) to third parties internationally, excluding Canada, from the Effective Date until December 31, 2020. However, the Company shall not be allowed to sell any Product that are being specifically developed for Canopy, as identified per the Development Agreement between the Company and Canopy, which is dated on June 17, 2019.
On October 21, 2020, the Company filed a demand to commence arbitration with the American Arbitration Association against Canopy for Canopy’s failure to perform under the License Agreement. On April 28, 2021 the Company entered into an agreement resolving the dispute between the parties, pursuant to which neither party admitted liability, the parties released their respective claims and obligations, and Canopy agreed to pay a total of $3.9 million, of which $2.3 million was paid to the Company on May 6, 2021, and the balance of $1.6 million was paid to the Company’s attorneys. The Company recognized a settlement income of $2.4 million during 2021 as a result of this agreement.
During the three months ended March 31, 2022 and 2021, the Company did not recognize any revenue relating to work completed in regard to the transfer of technology fee as discussed in the License Agreement with Canopy.
NOTE 21 - 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.
On October 21, 2020, the Company filed a demand to commence arbitration with the American Arbitration Association against Canopy for Canopy’s failure to perform under the License Agreement. On April 28, 2021 the Company entered into an agreement resolving the dispute between the parties, pursuant to which neither party admitted liability, the parties released their respective claims and obligations, and Canopy agreed to pay a total of $3.9 million, of which $2.3 million was paid to the Company on May 6, 2021, and the balance of $1.6 million was paid to the Company’s attorneys.
On April 12, 2022, the Company filed a civil action in the California Super Court for the County of Ventura against the Investor referenced in Note 14, alleging that the Investor entered into the Purchase Agreement as an unregistered securities dealer and unlicensed finance lender in violation of California law. The Company’s complaint seeks rescission of the Purchase Agreement, damages, attorneys’ fees and other relief. As of the filing date of this report, the Investor has not responded to the complaint.
Tax Filings
The Company tax filings are subject to audit by taxing authorities in jurisdictions where it conducts business. These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or potentially through the courts. As of March 31, 2022, the Company is not subject to any such these audits.
Employment Contracts
The Company has entered into a severance benefit contract with an executive officer. Under the provisions of the contracts, the Company may be required to incur severance obligations for matters relating to changes in control, as defined, and certain terminations of executives. As of March 31, 2021, the Company had such severance obligations, in accordance with the severance benefit provisions of the respective employment and severance benefit agreement.
On November 3, 2021 the Company entered into a separation agreement (the “Berlent Separation Agreement”) with Jonathan Berlent whereby the parties have agreed to a mutual separation of Mr. Berlent’s employment as the Company’s Chief Business Officer, effective November 3, 2021.
Pursuant to the terms of the Berlent Separation Agreement, Mr. Berlent will be entitled to the following severance benefits: (i) a gross sum of $0.01 million relating to deferred payroll; (ii) separation pay of three weeks of Mr. Berlent’s gross pay, less standard payroll deductions and withholdings; and (iii) for a period of five months, an amount equal to the cost of his COBRA health benefits if he enrolls for COBRA coverage. The Berlent Separation Agreement contains a release and certain restrictive covenants that are binding upon Mr. Berlent.
Indemnification
In the normal course of business, The Company may provide indemnification of varying scope under The Company’s agreements with other companies or consultants, typically The Company’s clinical research organizations, suppliers and others. Pursuant to these agreements, The Company will generally agree to indemnify, hold harmless, and reimburse the indemnified parties for losses and expenses suffered or incurred by the indemnified parties arising from claims of third parties in connection with the use or testing of The Company’s products. Indemnification provisions could also cover third party infringement claims with respect to patent rights, copyrights, or other intellectual property pertaining to The Company’s products. The Company’s office and laboratory facility leases also will generally contain indemnification obligations, including obligations for indemnification of the lessor for environmental law matters and injuries to persons or property of others, arising from The Company’s use or occupancy of the leased property. The term of these indemnification agreements will generally continue in effect after the termination or expiration of the particular research, development, services, lease, or license agreement to which they relate. Historically, The Company has not been subject to any claims or demands for indemnification. The Company also maintains various liability insurance policies that limit The Company’s financial exposure. As a result, The Company management believes that the fair value of these indemnification agreements is minimal. Accordingly, The Company has not recorded any liabilities for these agreements as of March 31, 2022 and December 31, 2021.
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.
Sera Labs will pay base monthly rent in the amount of $0.01 million during the first 12 months of the Term. Base monthly rent will increase annually, over the base monthly rent then in effect, by 3%. If the Lease is terminated based on the occurrence of an “event of default,” The Company will be obligated to pay the abated rent to the lessor.
On May 1, 2019, Sera Labs entered into a lease agreement to lease a 3,822 square feet office space and was absorbed by the Company upon acquisition of Sera Labs on October 2, 2020. The agreement contains an option to extend the lease for an additional 36 months and the Company will reassess the lease term of the contract when it has determined it is reasonably certain to exercise the option. Sera Labs will pay base monthly rent in the amount of $0.01 million during the first 12 months of the Term. Base monthly rent will increase annually, over the base monthly rent then in effect, by 3%. If the Lease is terminated based on the occurrence of an “event of default,” The Company will be obligated to pay the abated rent to the lessor.
Total rent expense was $0.1 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively.
The Company classified the Sera Labs lease as an operating lease in accordance with ASC 842 and has recognized a right-of-use asset and a lease liability based on the present values of its lease payments over its respective lease term. The Company used the services of a valuation company to compute the IBR which is necessary to determine the present value of its lease payments since a borrowing rate is not explicitly available on the lease agreement. The concluded IBR is 11.30%. Operating lease payments and lease expense are recognized on a straight-line basis over the lease term.
As of March 31, 2022, the current portion and long-term portion of operating lease liability is $0.1 million and $0.1 million, respectively.
The future payments due under the operating lease as of March 31 are as follows:
Years | | | |
2022 (remaining) | | $ | 101 | |
2023 | | | 138 | |
2024 | | | 46 | |
2025 | | | - | |
2026 | | | - | |
Undiscounted cash flow | | | 285 | |
Effects of discounting | | | (32 | ) |
Lease liabilities recognized | | $ | 253 | |
Finance leases
During 2019 the Company entered into a 5-year equipment lease rental which requires the Company to pay monthly payments of $0.02 million. The Company determined the payments represented substantially all of the fair value of the asset and recorded a right of use asset for $0.06 million and a finance lease liability for $0.06 million during the year ended December 31, 2019 within other assets and liabilities. The company will make payment of $0.02 annually until October 2024. Interest associated with the lease is $0.01 million or less annually based on a discount rate of 9.0%. As of March 31, 2022, the current portion and long-term portion of finance capital lease liability was $0.01 million and $0.02 million, respectively. As of December 31, 2021, the Company the current and long-term portion of finance capital lease liability was $0.01 million and $0.03 million, respectively.
Future minimum lease payments under non-cancellable capital leases as of March 31, 2022 are as follows (in thousands):
2022 (remaining) | | | 11 | |
2023 | | | 14 | |
2024 | | | 12 | |
2025 | | | - | |
2026 | | | - | |
Thereafter | | | - | |
Finance lease liabilities recognized | | $ | 37 | |
Operating and Financing leases
The following table presents supplemental balance sheet information related to operating and financing leases as of March 31, 2022 and December 31, 2021 (in thousands, except lease term and discount rate):
| | March 31, 2022 | | | December 31, 2021 | |
Operating leases | | | | | | |
Right-of-use assets, net | | $ | 234 | | | | 257 | |
| | | | | | | | |
Right-of-use lease liabilities, current | | $ | 112 | | | | 104 | |
Right-of-use lease liabilities, noncurrent | | | 141 | | | | 174 | |
Total operating lease liabilities | | $ | 253 | | | | 278 | |
| | | | | | | | |
Financing Leases | | | | | | | | |
Finance lease right-to-use assets, net | | $ | 37 | | | | 40 | |
| | | | | | | | |
Current liabilities | | $ | 13 | | | | 13 | |
Noncurrent liabilities | | | 24 | | | | 27 | |
Total financing lease liabilities | | $ | 37 | | | | 40 | |
| | | | | | | | |
Weighted average remaining lease term | | | | | | | | |
Operating leases | | 2.04 years | | | 2.29 years | |
Financing leases | | 2.55 years | | | 2.80 years | |
| | | | | | | | |
Weighted average discount rate | | | | | | | | |
Operating leases | | | 11.3 | % | | | 11.3 | % |
Financing leases | | | 9.0 | % | | | 9.0 | % |
NOTE 22 – SUBSEQUENT EVENTS
Subsequent events were evaluated through the filing date of this Quarterly Report, May 16, 2022.
On April 12, 2022, the Company filed a civil action in the California Super Court for the County of Ventura against the Investor referenced in Note 14, alleging that the Investor entered into the Purchase Agreement as an unregistered securities dealer and unlicensed finance lender in violation of California law. The Company’s complaint seeks rescission of the Purchase Agreement, damages, attorneys’ fees and other relief. As of the filing date of this report, the Investor has not responded to the complaint.
On April 27, 2022, the Company received $0.5 million from an investment company in exchange for promissory notes. Both the Company and the investment company agreed to negotiate the terms of the promissory note and as of the filing date of this report, the Company and Investor are still negotiating the terms of the promissory note.