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 subsidiary, CURE Pharmaceutical Corporation (“CURE Pharmaceutical”) and Chemistry Holdings Inc. and its recently acquired subsidiaries (collectively referred to as “CHI”) (CPHC, CURE Pharmaceutical, and CHI, 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, and grant product rights to partners responsible for marketing, sales and distribution, while retaining exclusive manufacturing rights. We operate in a 25,000 square foot cGMP manufacturing plant in Oxnard, CA.
Our technology platform includes oral dissolving film (“ODF”), and encapsulation systems (“microCURE”) compatible with ODF, chews, oral solutions, topical and transdermal dose forms. We apply our technology to pharmaceutical drugs and dietary supplements for the wellness market. ODF products are about the size of a postage stamp and composed of excipients such as polymers, stabilizers, lipids and surfactants which are all generally recognized as safe. They can be designed to deliver active ingredients to the gastrointestinal, 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).
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 November 7, 2016, we, in a reverse take-over transaction, acquired a specialty pharmaceutical and bioscience company based in California that specializes in drug delivery technologies, by executing a Share Exchange Agreement and Conversion Agreement, by and among us and a holder of a majority of our issued and outstanding capital stock prior to the closing, on the one hand, and CURE Pharmaceutical, all of the holders of CURE Pharmaceutical’s issued and outstanding shares of capital stock (the “CURE Pharmaceutical Shareholders”) and the holders of certain convertible promissory notes of CURE Pharmaceutical (“CURE Pharmaceutical Noteholders”), on the other hand (the “Share Exchange”).
As a result of the Share Exchange, CURE Pharmaceutical became a wholly owned subsidiary of CPHC, and the CURE Pharmaceutical Shareholders and CURE Pharmaceutical Noteholders became CPHC stockholders owning, at such time, approximately 65% of our issued and outstanding common stock.
On November 10, 2017, we entered into an exclusive license agreement with Oak Therapeutics, Inc. (“Oak”), whereby we granted Oak an exclusive license to our patent rights in the developing world (the “Territory”) to develop products in the Territory along with a royalty-free non-exclusive license to any improvements made by Oak. In consideration for such licenses, we received 269,000 shares of Oak. Due to the lack of performance by Oak under the license agreement, on April 15, 2019, we terminated all contractual relationships with Oak, including the license and surrendered our Oak shares to Oak. The parties terminated all contractual relationships between them, whether written or verbal, express or implied. All license or other rights previously granted by Oak to us or us to Oak were terminated, including all licenses or rights of any kind granted by us.
On May 14, 2019, CPHC, CURE Chemistry Inc., a Delaware corporation and wholly-owned subsidiary of CPHC (“Merger Sub”) and CHI, completed the transactions contemplated by the Agreement and Plan of Merger and Reorganization, dated March 31, 2019 (the “Merger Agreement”). As agreed in the Merger Agreement, the Company acquired CHI pursuant to a merger of the Merger Sub with and into CHI (the “Merger”). Pursuant to the Merger, CHI became a wholly-owned subsidiary of CPHC and the stockholders of CHI received shares of CPHC’s Common Stock in exchange for all of the issued and outstanding shares of CHI.
The Coronavirus Disease 2019 (COVID-19) Pandemic
The COVID-19 pandemic was declared a global pandemic by the World Health Organization on March 11, 2020, has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19, or other public health epidemic poses the risk that the Company or its employees, suppliers, and other partners may be prevented from conducting business activities at full capacity for an indefinite period of time, including due to spread of the disease within these groups or due to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the impact that COVID-19 could have on the Company’s business, the continued spread of COVID-19 and the measures taken by the governments of countries affected and in which the Company operates could disrupt the operation of the Company’s business. The COVID-19 outbreak and mitigation measures may also have an adverse impact on global economic conditions, which could have an adverse effect on the Company’s business and financial condition, including on its potential to conduct financings on terms acceptable to the Company, if at all. In addition, the Company undertook temporary precautionary measures intended to help minimize the risk of the virus to its employees, including temporarily requiring a majority of our employees to work remotely, and discouraging employee attendance at in-person work-related meetings, which could negatively affect the Company’s business. The extent to which the COVID-19 outbreak impacts the Company’s results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact. Due to the speed with which the COVID-19 situation is developing, the Company is not able at this time to estimate the impact of COVID-19 on its consolidated financial statements and related disclosures, but the impact could be material for the remainder of fiscal year 2020 in all business aspects and could be material during any future period affected either directly or indirectly by this pandemic.
While the extent and duration of the economic downturn from the COVID-19 pandemic remains unclear, the Company has considered, among other things, whether the global operational disruptions indicate a change in circumstances that may trigger asset impairments and whether it needs to revisit accounting estimates and projections or its expectations about collectability of receivables. Additionally, the Company has considered the potential impacts on its fair value disclosures and on its internal control over financial reporting. During the quarter, the Company's facilities, research laboratory, manufacturing and storage facilities have been operating at close to full capacity, and staff have remote working capabilities, and there was no significant direct impact on the Company's operations as a result of the economic downturn. While significant uncertainty still exists concerning the magnitude of the impact and duration of the COVID-19 pandemic on the global economy, the Company has determined that there was no triggering event for an impairment with respect to any of its assets nor has there been an adverse change in the probability related to the collectability of its receivables. The Company continues to assess the potential impact of the global economic situation on its consolidated financial statements. Please see Item 1A. Risk Factors of this Quarterly Report on Form 10-Q.
NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial statements. Such financial statements and accompanying notes are the representations of Company’s management, who is responsible for their integrity and objectivity.
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 June 30, 2020, and the results of operations and cash flows for the periods presented. The results of operations for the three and six month periods ended June 30, 2020 and 2019, 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, 2019 filed with the SEC on March 30, 2020.
Principle of Consolidation
The condensed financial statements include the accounts of CPHC and its wholly-owned subsidiaries, CURE Pharmaceutical, CHI and its 63% majority owned subsidiary Oak, through April 15, 2019 when the Company entered into a Termination and Release Agreement with Oak whereby the Company surrender all of its shares of Oak and terminated any rights the Company may have had to acquire additional shares or interest in Oak. All significant inter-company balances and transactions have been eliminated in consolidation. The Company’s film strip product represents the principal operations of the Company. Business acquisitions are included in the Company’s consolidated financial statements from the date of the acquisition. The Company’s purchase accounting resulted in all assets and liabilities of acquired businesses being recorded at their estimated fair values on the acquisition dates.
Going Concern and Management’s Liquidity Plans
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 June 30, 2020, we had an accumulated deficit of approximately $62 million and a working capital deficit of approximately $1.0 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 June 30, 2020 we had approximately $1.4 million of cash on hand, which is expected to provide operating cash needs for up to four months. We have previously funded, and intend to continue funding, our losses primarily through the issuance of common stock and/or convertible 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. 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. There can be no assurance that such a plan will be successful.
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 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.
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, 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. 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 June 30, 2020 and December 31, 2019, 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 June 30, 2020 and December 31, 2019, the Company had $1.2 million and $3.8 million in excess of the federal insurance limit, respectively.
Investment in Associates
An associate is an entity over which the Company has significant influence through a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but not control or joint control over those policies.
The results of assets and liabilities of associates are incorporated in the condensed consolidated financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Company’s share of the net assets of the associate, less any impairment in the value of the investment. Losses of an associate in excess of the Company’s interest in that associate are not recognized. Additional losses are provided for, and a liability is recognized, only to the extent that the Company has incurred legal or constructive obligations or made payments on behalf of the associate.
Any excess of the cost of acquisition over the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognized at the date of acquisition is recognized as goodwill.
On November 1, 2019, the Company purchased a convertible loan (the “Releaf Loan”) with Releaf Europe BV (“Releaf”) in the amount of $0.2 million. Releaf shall accrue interest on the Releaf Loan at 6% per annum and shall become due and payable to the Company at the earlier of the conversion date, the date when the Releaf Loan is repaid or at the maturity date of October 31, 2021. In the event of a request for conversion by the Company or at the end of the maturity date, October 31, 2021, the outstanding amount of the Releaf Loan and any unpaid accrued interest shall be converted into shares of Releaf 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 (“Releaf Qualified Financing”), the outstanding amount of the Releaf Loan and any unpaid accrued interest shall automatically convert at a price per share paid by the investors in connection with the Releaf Qualified Financing less a discount of 20% on the subscription price. In addition, both the Company and Releaf agree in the event that the pre-money valuation of the Releaf 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 June 30, 2020, the Company recorded an investment using the cost method of accounting in Releaf and did not record any accrued interest relating to the Releaf Loan.
On February 5, 2020 and February 13, 2020, the Company purchased two convertible loans (the “February 2020 Loans”) with Releaf for a total amount of $0.3 million. Releaf shall accrue interest on the February 2020 Loans at 6% per annum and they shall become due and payable to the Company at the earlier of the conversion date or the maturity date of October 31, 2021. In the event of a request for conversion by the Company or at the end of the maturity date, October 31, 2021, the outstanding amounts of the February 2020 Loans and any unpaid accrued interests shall be converted into shares of Releaf 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 (“Releaf February 2020 Qualified Financing”), the outstanding amount of the February 2020 Loans and any unpaid accrued interest shall automatically convert at a price per share paid by the investors in connection with the Releaf February 2020 Qualified Financing, less a discount of 20% on the subscription price. In addition, in the event that the pre-money valuation of the Releaf February 2020 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 June 30, 2020, the Company recorded an investment using the cost method of accounting in Releaf and did not record any accrued interest relating to the foregoing Releaf loans.
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.
Accounts Receivable
Accounts receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied against the allowance for doubtful accounts. At June 30, 2020 management determined that an allowance of $0.1 million was necessary. At December 31, 2019, management determined that no allowance was necessary.
Revenue Recognition
We recognize 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:
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·
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Identify the contract(s) with customer;
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·
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Identify the performance obligations in the contract;
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·
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Determine the transactions price;
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·
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Allocate the transactions price to the performance obligations in the contract; and
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·
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Recognize revenue when (or as) we satisfy a performance obligation.
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We derive revenues from two primary sources: products and services. Product revenue includes the shipment of product according to the agreement with our customers. Services include research and development contracts for the development of OTF products utilizing our CureFilm™ Technology or our other proprietary technologies. Rarely our contracts with customers contain multiple performance obligations. For these contracts, the Company accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices are typically estimated based on observable transactions when these services are sold on a standalone basis.
The Company’s 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. The Company generally uses the input method to measure progress for its contracts because it best depicts the transfer of assets to the customer, which occurs as the Company incurs costs for the contracts. Under the cost-to-cost measure of progress, the progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenue is recorded proportionally as costs are incurred. Costs to fulfill these obligations mainly include materials, labor, supplies and consultants.
Contract liabilities is shown separately in the consolidated balance sheets. At June 30, 2020 and December 31, 2019, we had contract liabilities of $0.3 million and $0.4 million, respectively.
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 did not record advertising costs for the three and six month periods ended June 30, 2020. The Company recorded advertising costs of $0.1 million and $0.2 million for the three and six month periods ended June 30, 2019, 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 $0.7 million and $1.5 million for the three and six month periods ended June 30, 2020, respectively. The Company recorded research and development expenses of $0.7 million and $1.1 million for the three and six month periods ended June 30, 2019, 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 will be reflected in the 2020 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 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 on an exercise price per share equal to the volume-weighted average of the high and low selling prices of the Company’s common stock reported on the OTC Bulletin Board for the five (5) trading days in the Company’s common stock beginning with the third (3rd) such trading following the Filing Date and ending with the seventh (7th) such trading day following the Filing Date. Compensation expense is recognized for the portion of the award that is ultimately expected to vest over the period during which the recipient renders the required services to the Company generally using the straight-line single option method.
In the case of award modifications, the Company accounts for the modification in accordance with 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.
Derivative Liabilities
ASC 815-40 (formerly SFAS No. 133 “Accounting for Derivative Instruments and Hedging Activities”), requires that embedded derivative instruments be bifurcated and assessed, along with free-standing derivative instruments such as warrants, on their issuance date and in accordance with ASC 815-40-15 (formerly EITF 00-19 “Accounting for derivative financial instruments indexed to, and potentially settled in, a company’s own stock”) to determine whether they should be considered a derivative liability and measured at their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option pricing formula and present value pricing. At June 30, 2020 and December 31, 2019, the Company adjusted its derivative liability to its fair value, and reflected the change in fair value, in its consolidated statement of operations and comprehensive loss.
Fair Value Measurements
The Company follows FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements and establishes a framework for measuring fair value and expands disclosure about such fair value measurements.
ASC 820 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Additionally, ASC 820 requires the use of valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs. These inputs are prioritized below:
Level 1:
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Observable inputs such as quoted prices (unadjusted) in active markets for identical assets or liabilities.
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Level 2:
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Inputs other than quoted prices that are observable for the asset or liability, either directly or indirectly. These include quoted prices for similar assets or liabilities in active markets and quoted prices for identical or similar assets or liabilities in markets that are not active.
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Level 3:
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Unobservable inputs in which little or no market data exists, therefore developed using estimates and assumptions developed by us, which reflect those that a market participant would use.
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The carrying amounts reported in the balance sheet for cash, accounts receivable, accounts payable, accrued expenses and notes and loans payable approximate their estimated fair market value based on the short-term maturity of these instruments. The carrying amount of the notes and convertible promissory notes approximates the estimated fair value for these instruments as management believes that such notes constitute substantially all of the Company’s debt and the interest payable on the notes approximates the Company’s incremental borrowing rate. We measured the liability for price adjustable warrants and embedded derivative features in the convertible notes, using the probability adjusted Black-Scholes option pricing model, which management has determined approximates values using more complex methods, using Level 3 inputs (See Note 13).
We measured the contingent stock consideration based on the following: (i) Company’s closing price at the end of each quarter; (ii) the estimated fair value using the Monte-Carlo simulation of stock price correlation, and other variables over a 61 month performance period applied to the total number of contingent shares, as determined based on the weighted average present value probability of each the various estimates of milestones, earn-out amounts and achievements being accomplished; and (iii) the fair value of the acquisition warrant shares based on using the Black-Scholes valuation.
The following table summarizes fair value measurements by level at June 30, 2020 for assets and liabilities measured at fair value on a recurring basis (in thousands):
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Total
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|
|
Level 1
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|
|
Level 2
|
|
|
Level 3
|
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Fair value of contingent stock consideration
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$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Fair value of derivative liability
|
|
$
|
16
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16
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|
The following table summarizes fair value measurements by level at December 31, 2019 for assets and liabilities measured at fair value on a recurring basis (in thousands):
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Total
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|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Fair value of contingent stock consideration
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|
$
|
16,043
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16,043
|
|
Fair value of derivative liability
|
|
$
|
91
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
91
|
|
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 December 31, 2019 to June 30, 2020, 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, we settled all of our outstanding contingent consideration liabilities outstanding with Chemistry Holdings Inc,
Non-controlling Interests in Consolidated Financial Statements
The Company follows ASC 810-10-65, “Non-controlling Interests in Consolidated Financial Statements.” This statement clarifies that a non-controlling (minority) interest in a subsidiary is an ownership interest in the entity that should be reported as equity in the consolidated financial statements. It also requires consolidated net income to include the amounts attributable to both the parent and non-controlling interest, with disclosure on the face of the consolidated income statement of the amounts attributed to the parent and to the non-controlling interest. In accordance with ASC 810-10-45-21, the losses attributable to the parent and the non-controlling interest in subsidiary may exceed their interests in the subsidiary’s equity. The excess and any further losses attributable to the parent and the non-controlling interest shall be attributed to those interests even if that attribution results in a deficit non-controlling interest balance. As of June 30, 2020, and December 31, 2019, the Company reflected a non-controlling interest of $0 and $0 respectively, in connection with our majority-owned subsidiary, Oak as reflected in the accompanying consolidated balance sheets.
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 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.
Net Loss per Common Share
Basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period, excluding any unvested restricted stock awards. Diluted net loss per share includes the effect of common stock equivalents (stock options, unvested restricted stock, and warrants) when, under either the treasury or if-converted method, such inclusion in the computation would be dilutive. Net loss is adjusted for the dilutive effect of the change in fair value liability for price adjustable warrants, if applicable.
Diluted net loss per share includes the effect of common stock equivalents (stock options, unvested restricted stock, and warrants) when, under either the treasury or if-converted method, such inclusion in the computation would be dilutive. Net loss is adjusted for the dilutive effect of the change in fair value liability for price adjustable warrants, if applicable.
The following number of shares have been excluded from diluted net income (loss) since such inclusion would be anti-dilutive:
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For the Three and Six
Months Ended
June 30,
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|
|
|
2020
|
|
|
2019
|
|
|
|
|
|
|
|
|
Restricted stock and stock options outstanding
|
|
|
3,460,767
|
|
|
|
1,743,673
|
|
Warrants
|
|
|
6,648,446
|
|
|
|
5,638,770
|
|
Shares to be issued upon conversion of convertible payable
|
|
|
115,047
|
|
|
|
115,047
|
|
|
|
|
|
|
|
|
|
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Total
|
|
|
10,224,260
|
|
|
|
7,497,490,
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|
Emerging Growth Company
We are an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012 (“JOBS Act”). For as long as we are an “emerging growth company,” we are not required to: (i) comply with any new or revised financial accounting standards that have different effective dates for public and private companies until those standards would otherwise apply to private companies, (ii) provide an auditor’s attestation report on management’s assessment of the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (iii) comply with any new requirements adopted by the Public Company Accounting Oversight Board (“PCAOB”) requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer or (iv) comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise. However, we have elected to “opt out” of the extended transition period discussed in (i), and will therefore comply with new or revised accounting standards on the applicable dates on which the adoption of such standards are required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of such extended transition period for compliance with new or revised accounting standards is irrevocable.
Recent Accounting Pronouncements Adopted
ASU 2016-13
In June 2016, the FASB issued ASU 2016-13 (as amended through November 2019), Financial Instruments—Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments. ASU 2016-13 introduces a new forward-looking approach, based on expected losses, to estimate credit losses on certain types of financial instruments, including trade receivables and held-to-maturity debt securities, which will require entities to incorporate considerations of historical information, current information and reasonable and supportable forecasts. This ASU also expands disclosure requirements. ASU 2016-13 is effective for the Company beginning in the first quarter of 2020. The guidance will be applied using the modified-retrospective approach. The adoption of this ASU did not have a material impact on the Company’s consolidated financial statements.
ASU 2018-13
In August 2018, the FASB issued ASU 2018-13, Disclosure Framework - Changes to the Disclosure Requirements for Fair Value Measurements, which eliminates, adds and modifies certain disclosure requirements for fair value measurements as part of the FASB’s disclosure framework project. ASU 2018-13 is effective for the Company beginning in the first quarter of 2020. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements.
ASU 2017 - 04
In January 2017, the FASB issued ASU 2017-04, Intangibles-Goodwill and Other, which simplifies the test for goodwill impairment. This update eliminates Step 2 from the goodwill impairment test. In computing the implied fair value of goodwill under Step 2, an entity had to perform procedures to determine the fair value at the impairment testing date of its assets and liabilities (including unrecognized assets and liabilities) following the procedure that would be required in determining the fair value of the assets acquired and liabilities assumed in a business combination. Instead an entity should perform its annual, or interim, goodwill impairment test by comparing the fair value of a reporting unit with its carrying amount. An entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting unit's fair value, however the loss recognized should not exceed the total amount of goodwill allocated to the reporting unit. The amendments in this update are effective for the Company for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements.
Recent Accounting Pronouncements Not Yet Adopted
ASU 2019-12
In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes” under ASC 740, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. This guidance is effective for fiscal years beginning after December 15, 2021, including interim periods within that fiscal year. Early adoption is permitted. The Company is in the process of evaluating the impacts of this guidance on its consolidated financial statements and related disclosures.
ASU 2020-01
In January 2020, the FASB issued ASU 2020-01, Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815. ASU 2020-01 addresses the accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. Observable transactions that require a company to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with ASC 321, Investments – Equity Securities, should be considered immediately before applying or upon discontinuing the equity method. Certain non-derivative forward contracts or purchased call options to acquire equity securities generally will be measured using the fair value principles of ASC 321 before settlement or exercise and consideration shall not be given to how entities will account for the resulting investments on eventual settlement or exercise. ASU 2020-01 is effective for the Company beginning in the first quarter of 2021 and early adoption is permitted. ASU 2020-01 should be applied prospectively. The Company is currently assessing the impact this standard will have on the Company’s consolidated financial statements.
There are various other updates recently issued, however, they are not expected to a have a material impact on the Company’s consolidated financial position, results of operations or cash flows.
NOTE 3 - PREPAID EXPENSES AND OTHER ASSETS
As of June 30, 2020 and December 31, 2019, prepaid expenses and other assets consisted of the following (in thousands):
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Prepaid consulting services
|
|
$
|
74
|
|
|
$
|
285
|
|
Prepaid clinical study
|
|
|
175
|
|
|
|
175
|
|
Prepaid insurance
|
|
|
66
|
|
|
|
146
|
|
Other receivables
|
|
|
2
|
|
|
|
-
|
|
Prepaid equipment
|
|
|
277
|
|
|
|
1,135
|
|
Prepaid inventory
|
|
|
34
|
|
|
|
5
|
|
Prepaid expenses
|
|
|
29
|
|
|
|
48
|
|
Other assets
|
|
|
35
|
|
|
|
35
|
|
Prepaid expenses and other assets
|
|
|
692
|
|
|
|
1,829
|
|
Current portion of prepaid expenses and other assets
|
|
|
(657
|
)
|
|
|
(1,794
|
)
|
Prepaid expenses and other assets less current portion
|
|
$
|
35
|
|
|
$
|
35
|
|
NOTE 4 - INVENTORY
Inventory consists of raw materials, packaging components, work-in-process and finished goods. The Company’s inventory is stated at the lower of cost (FIFO cost basis) or market. The carrying value of inventory consisted of the following at June 30, 2020 and December 31, 2019 (in thousands):
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Raw materials
|
|
$
|
95
|
|
|
$
|
78
|
|
Packaging components
|
|
|
68
|
|
|
|
50
|
|
Work-in-process
|
|
|
47
|
|
|
|
18
|
|
Finished goods
|
|
|
2
|
|
|
|
15
|
|
|
|
|
212
|
|
|
|
161
|
|
Reserve for obsolescence
|
|
|
(2
|
)
|
|
|
(5
|
)
|
Total inventory
|
|
$
|
210
|
|
|
$
|
156
|
|
NOTE 5 - PROPERTY AND EQUIPMENT
As of June 30, 2020 and December 31, 2019, property and equipment consisted of the following (in thousands):
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Equipment deposits
|
|
$
|
-
|
|
|
$
|
20
|
|
Manufacturing equipment
|
|
|
2,349
|
|
|
|
882
|
|
Computer and other equipment
|
|
|
620
|
|
|
|
616
|
|
Less accumulated depreciation
|
|
|
(974
|
)
|
|
|
(877
|
)
|
Property and Equipment, net
|
|
$
|
1,995
|
|
|
$
|
641
|
|
For the three and six month periods ended June 30, 2020, depreciation expense amounted to $0.05 million and $0.1 million, respectively. Depreciation expense for the three and six month periods ended June 30, 2019 was $0.03 million and $0.05 million, respectively.
NOTE 6 – NOTES RECEIVABLE
On November 12, 2019, the Company purchased a $0.2 million convertible promissory note (the “Coeptis Note”) issued by Coeptis Pharmaceuticals, Inc.(“Coeptis”), a privately held biopharmaceutical company engaged in the acquisition, development and commercialization of pharmaceutical products. The Coeptis Note is due June 15, 2020, pays interest at the rate of 9% per annum and gives us the right, at any time, to convert the Coeptis Note into shares of common stock of Coeptis, at a price per share equal to $2.60 or the share price set by the latest qualified financing, whichever is less.
Note receivable consists of the following (in thousands):
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Coeptis Pharmaceuticals, Inc.
|
|
$
|
200
|
|
|
$
|
200
|
|
Less: allowance for doubtful accounts
|
|
|
(200
|
)
|
|
|
(200
|
)
|
Note receivable, net
|
|
$
|
-
|
|
|
$
|
-
|
|
The Company has allowed in full this note receivable due to the uncertainty of repayment as of the date of this report. Even though we are allowing for the full amount of this note receivable, we will exhaust all efforts to collect on this note receivable.
NOTE 7 - INTANGIBLE ASSETS
The Company incurred $0.01 and $0.03 million of legal patent costs that were capitalized during the six months ended June 30, 2020 and 2019, respectively. The Company acquired from the CHI acquisition patents at a fair value of $0.7 million during the year ended December 31, 2019. The Company also acquired $14.5 million in Intellectual Property Research and Development and $9.2 million in goodwill from the acquisition of CHI during the year ended December 31, 2019.
Intangible Asset Summary
The following table summarizes the estimated fair values as of June 30, 2020 of the identifiable intangible assets acquired, their useful life, and method of amortization (in thousands):
|
|
Estimated Fair Value
|
|
|
Remaining
Estimated
Useful Life
(Years)
|
|
|
Annual
Amortization
Expense
|
|
Intellectual Property
|
|
$
|
972
|
|
|
|
10.83
|
|
|
$
|
20
|
|
Patents
|
|
|
1,286
|
|
|
|
12.24
|
|
|
|
40
|
|
In-Process research and development technology
|
|
|
14,460
|
|
|
|
13.58
|
|
|
|
-
|
|
Total
|
|
$
|
16,718
|
|
|
|
|
|
|
$
|
60
|
|
Less: accumulated amortization
|
|
|
(675
|
)
|
|
|
|
|
|
|
|
|
Net intangibles
|
|
$
|
16,043
|
|
|
|
|
|
|
|
|
|
Less: Pending patents not amortized
|
|
|
(14,542
|
)
|
|
|
|
|
|
|
|
|
Net intangible assets subject to amortization
|
|
$
|
1,501
|
|
|
|
|
|
|
|
|
|
Amortization expense was $0.03 million and $0.06 million for the three and six month periods ended June 30, 2020, respectively. Amortization expense was $0.02 million and $0.04 million for the three and six month periods ended June 30, 2019, respectively.
The estimated aggregate amortization expense over each of the next five years is as follows (in thousands):
2020 (remaining)
|
|
$
|
61
|
|
2021
|
|
|
121
|
|
2022
|
|
|
121
|
|
2023
|
|
|
121
|
|
2024
|
|
|
121
|
|
Thereafter
|
|
|
956
|
|
Total Amortization
|
|
$
|
1,501
|
|
NOTE 8 – LOAN PAYABLE
Loan payable consists of the following at June 30, 2020 and December 31, 2019 (in thousands):
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
Notes to a company due September 29, 2020, including interest at 4.95% per annum; unsecured; interest due monthly
|
|
$
|
16
|
|
|
$
|
127
|
|
Current portion of loan payable
|
|
|
(16
|
)
|
|
|
(127
|
)
|
Loan payable, less current portion
|
|
$
|
-
|
|
|
$
|
-
|
|
Interest expense for the three and six month periods ended June 30, 2020 was $0.001 million and $0.002 million, respectively. Interest expense for the three and six month periods ended June 30, 2019 was $0.001 million and $0.002 million, respectively.
NOTE 9 – NOTES PAYABLE
Notes payable consist of the following at June 30, 2020 and December 31, 2019 (in thousands):
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Note to an individual, non-interest bearing, unsecured and due on demand
|
|
$
|
50
|
|
|
$
|
50
|
|
Promissory Note (“Note”) to a company (“Holder”) due May 18, 2021; interest payable at 8% per annum; unsecured; principal and accrued interest automatically convert into a Convertible Promissory Note (“Convertible Note”) if the Company raises financing through the sale and issuance of promissory notes that are convertible into common stock of the Company on terms that are no less favorable to new investors than the terms described in the term sheet included in the Note, then the Company shall notify the Holder thereof and upon the first closing of such sale, the Holder shall have the right, but not the obligation, to convert into a Convertible Note with the same principal amount and interest accruing from the Note Date, but otherwise on the same terms as the Convertible Note(s) sold for cash to new investors in that financing
|
|
|
250
|
|
|
|
-
|
|
Payment Protection Program Loan due April 2022, including interest at 1% per annum; unsecured
|
|
|
399
|
|
|
|
-
|
|
Unamortized discount
|
|
|
-
|
|
|
|
-
|
|
Current portion of loan payable
|
|
$
|
699
|
|
|
$
|
50
|
|
In April 2020, the Company received loan proceeds in the aggregate amount of approximately $0.4 million under the Paycheck Protection Program (“PPP”). The PPP, established as part of the CARES Act, provides for loans to qualifying businesses. A portion of the loans and accrued interest are forgivable as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries. No collateral or guarantees were provided in connection with the PPP loans.
The unforgiven portion of the PPP loans is payable over two years at an interest rate of 1%, with a deferral of payments for the first six months. The Company intends to use the proceeds for purposes consistent with the PPP. While the Company currently believes that its use of the loan proceeds will meet the conditions for forgiveness of the loans, we cannot assure you that we will not take actions that could cause the Company to be ineligible for forgiveness of the loans, in whole or in part.
Interest expense for the three and six month periods ended June 30, 2020 was $0.002 million and $0.002 million, respectively. Interest expense for the three and six month periods ended June 30, 2019 was $0.006 million and $0.03 million, respectively.
NOTE 10 – CONVERTIBLE PROMISSORY NOTES
Convertible promissory notes consist of the following at June 30, 2020 and December 31, 2019 (in thousands):
|
|
June 30,
2020
|
|
|
December 31,
2019
|
|
|
|
|
|
|
|
|
Convertible promissory notes totaling $1,400,000 due between December 31, 2018 and February 28, 2019, interest payable at 8% per annum; unsecured; principal and accrued interest convertible into common stock at the lower of $7.00 per share or the price per share of the latest closing of a debt or equity offering by the Company greater than $3,000,000; accrued interest due between December 31, 2018 and February 28, 2019. A total of $250,000 convertible promissory notes was repaid in 2018 and $450,000 convertible promissory notes were repaid in 2019. A total $400,000 of convertible promissory notes plus accrued interest of $71,342 have been converted in to 254,779 common stock shares of the Company in 2019. Remaining $550,000 of convertible promissory notes are currently in default.
|
|
$
|
550
|
|
|
$
|
550
|
|
|
|
|
|
|
|
|
|
|
Unamortized discount
|
|
|
-
|
|
|
|
-
|
|
Current portion of convertible promissory notes
|
|
$
|
550
|
|
|
$
|
550
|
|
During the three and six month periods ended June 30, 2020, the Company incurred $0 and $0 million, respectively, amortization of discount. During the three and six month periods ended June 30, 2019, the Company incurred $0 and $1.1 million, respectively, amortization of discount. Interest expense for the three and six month periods ended June 30, 2020 was $0.01 million and $0.02 million, respectively. Interest expense for the three and six month periods ended June 30, 2019 was $0.01 and $0.09, respectively.
NOTE 11 – DERIVATIVE LIABILITY
The Company evaluates its convertible instruments, options, warrants or other contracts, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense). Upon conversion or exercise of a derivative instruments, the instrument is marked to fair value at the conversion date then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.
The following table summarizes fair value measurements by level at June 30, 2020 for assets and liabilities measured at fair value on a recurring basis (in thousands):
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Fair value of Derivative Liability
|
|
$
|
16
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
16
|
|
The following table summarizes fair value measurements by level at December 31, 2019 for assets and liabilities measured at fair value on a recurring basis (in thousands):
|
|
Total
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
Fair value of Derivative Liability
|
|
$
|
91
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
91
|
|
The Company has issued convertible promissory notes during 2018 and 2017. The convertible notes require us to record the value of the conversion feature as a liability, at fair value, pursuant to ASC 815, including provisions in the notes that protect the holders from declines in the Company’s stock price, which is considered outside the control of the Company. The derivative liabilities are marked-to-market each reporting period and changes in fair value are recorded as a non-operating gain or loss in our statement of operations, until they are completely settled. The fair value of the conversion feature is determined each reporting period using the Black-Scholes option pricing model and is affected by changes in inputs to that model including our stock price, expected stock price volatility, dividends, interest rates and expected term. The assumptions used in valuing the derivative liability during 2020 were as follows:
Significant assumptions:
|
|
|
|
Risk-free interest rate at grant date
|
|
|
0.29
|
%
|
Expected stock price volatility
|
|
|
74.46
|
%
|
Expected dividend payout
|
|
|
-
|
|
Expected option life (in years)
|
|
|
1
|
|
Expected forfeiture rate
|
|
|
0
|
|
The following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis from December 31, 2018 to June 30, 2020 (in thousands):
|
|
Fair
value of derivative liabilities
|
|
Balance at December 31, 2018
|
|
$
|
618
|
|
Loss on change in fair value included in earnings
|
|
|
(527
|
)
|
Balance at December 31, 2019
|
|
|
91
|
|
Gain on change in fair value included in earnings
|
|
|
(75
|
)
|
Balance at June 30, 2020
|
|
$
|
16
|
|
NOTE 12 – WARRANT AGREEMENTS
Warrants that vest at the end of a one-year period are amortized over the vesting period using the straight-line method.
In June 2020, as part of the Company’s settlement with CHI we amended the warrants to purchase up 8,018,071 common stock shares which vest based on various revenue achievement during year 3 and year 4 post the CHI acquisition Closing Date. As part of the settlement the Company reduced the number of warrants to 708,467 common stock shares at an exercise price of $2.00 per share which was reduced from the original exercise price of $5.01 per share. In addition, the expiration date of the warrants was amended to expire on June 5, 2020. The warrants were exercisable on the date of issuance and were exercised by the warrant holders and the Company received $1.4 million. The Company determined there was no incremental value to the warrant modification as the exercise price was more than the fair value of the stock.
The Company’s warrant activity was as follows:
|
|
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average Contractual Remaining
Life
|
|
Outstanding, December 31, 2019
|
|
|
14,666,518
|
|
|
|
3.70
|
|
|
|
2.99
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(708,467
|
)
|
|
|
2.00
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
(7,309,605
|
)
|
|
|
5.01
|
|
|
|
-
|
|
Outstanding, June 30, 2020
|
|
|
6,648,446
|
|
|
|
2.66
|
|
|
|
0.82
|
|
Exercisable at June 30, 2020
|
|
|
6,648,446
|
|
|
|
2.07
|
|
|
|
0.82
|
|
Warrant summary for the period ended June 30, 2020:
Range of
Exercise Price
|
|
Number of
Warrants
|
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Warrants
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$
|
1.00–$7.00
|
|
|
6,648,446
|
|
|
|
0.82
|
|
|
$
|
2.66
|
|
|
|
6,648,446
|
|
|
$
|
2.07
|
|
|
|
|
|
6,648,446
|
|
|
|
0.82
|
|
|
$
|
2.66
|
|
|
|
6,648,446
|
|
|
$
|
2.07
|
|
Warrant summary for the year ended December 31, 2019:
Range of
Exercise Price
|
|
Number of
Warrants
|
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Warrants
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$
|
1.00–$7.00
|
|
|
14,666,518
|
|
|
|
2.74
|
|
|
$
|
3.70
|
|
|
|
6,648,446
|
|
|
$
|
1.07
|
|
|
|
|
|
14,666,518
|
|
|
|
2.74
|
|
|
$
|
3.70
|
|
|
|
6,648,446
|
|
|
$
|
1.07
|
|
The weighted-average fair value of warrants granted to during the three months ended June 30, 2020 and 2019, and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes option pricing model are as follows:
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
Significant assumptions (weighted-average):
|
|
|
|
|
|
|
Risk-free interest rate at grant date
|
|
|
0.29
|
%
|
|
|
1.76
|
%
|
Expected stock price volatility
|
|
|
74.46
|
%
|
|
|
129.01
|
%
|
Expected dividend payout
|
|
|
-
|
|
|
|
-
|
|
Expected option life (in years)
|
|
|
3
|
|
|
|
3
|
|
Expected forfeiture rate
|
|
|
0
|
%
|
|
|
0
|
%
|
NOTE 13 – 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. The Board of Directors have determined that it is in the best interests of the Company and its stockholders to provide an additional incentive for certain employees, including executive officers, and non-employee members of the Board of Directors of the Company by granting to them awards with respect to the common stock of the Company pursuant to the Plan. The Plan seeks to achieve this purpose by providing for awards in the form of Options, Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Units, Performance Shares, Performance Units, Cash-Based Awards and Other Stock-Based Awards (“Awards”). The Plan will continue in effect until its termination by the Committee; provided, however, that all Awards must be granted, if at all, within ten (10) years from the Effective Date.
The Company issued 90,000 Incentive Stock Options to an officer of the Company during the six months period ended June 30, 2020. The Company did not issue any ISO’s during the six months period ended June 30, 2019. In addition, the Company did not issue any Nonstatutory Stock Options (“NSO”), Restricted Common Stock (“RCS”) or Restricted Common Stock (“RCS”) to employees, including executive officers, and non-employee members of the Board of Directors of the Company during the six months ended June 30, 2020 and 2019. 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.
Stock Options
The Company’s stock option activity was as follows:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average Contractual Remaining
Life
|
|
Outstanding, December 31, 2019
|
|
|
3,467,650
|
|
|
|
1.84
|
|
|
|
8.74
|
|
Granted
|
|
|
90,000
|
|
|
|
2.38
|
|
|
|
9.86
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
(122,500
|
)
|
|
|
2.04
|
|
|
|
-
|
|
Outstanding, June 30, 2020
|
|
|
3,435,150
|
|
|
|
1.85
|
|
|
|
8.28
|
|
Exercisable at June 30, 2020
|
|
|
2,067,125
|
|
|
|
1.46
|
|
|
|
8.09
|
|
Range of
Exercise Price
|
|
Number of
Awards
|
|
|
Weighted
Average
Remaining
Contractual
Life (years)
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Awards
Exercisable
|
|
|
Weighted
Average
Exercise
Price
|
|
$
|
0.61 - $4.01
|
|
|
3,435,150
|
|
|
|
8.28
|
|
|
$
|
1.85
|
|
|
|
2,067,125
|
|
|
$
|
1.46
|
|
|
|
|
|
3,435,150
|
|
|
|
8.28
|
|
|
$
|
1.85
|
|
|
|
2,067,125
|
|
|
$
|
1.46
|
|
The aggregate intrinsic value of options outstanding and exercisable at June 30, 2020 was $0.02 million.
The aggregate grant date fair value of options granted during the six months ended June 30, 2020 and year ended December 31, 2019 amounted to $0.2 and $4.3 million, respectively. Compensation expense related to stock options was $0.4 million and $0.4 million for the three and six month periods ended June 30, 2020, respectively. Compensation expense related to stock options for the three and six month periods ended June 30, 2019 was $0.4 million and $0.5 million, respectively.
As of June 30, 2020, the total unrecognized fair value compensation cost related to unvested stock options was $3 million, which is to be recognized over a remaining weighted average period of approximately 8.56 years.
The weighted-average fair value of options granted during the six months ended June 30, 2020 and 2019, and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes option pricing model are as follows:
|
|
June 30,
2020
|
|
|
June 30,
2019
|
|
Significant assumptions (weighted-average):
|
|
|
|
|
|
|
Risk-free interest rate at grant date
|
|
|
0.29
|
%
|
|
|
1.76
|
%
|
Expected stock price volatility
|
|
|
74.46
|
%
|
|
|
129.01
|
%
|
Expected dividend payout
|
|
|
-
|
|
|
|
-
|
|
Expected option life (in years)
|
|
|
10
|
|
|
|
10
|
|
Expected forfeiture rate
|
|
|
0
|
%
|
|
|
0
|
%
|
Restricted Stock
The Company’s restricted stock activity was as follows:
|
|
Restricted
Stock
Shares
|
|
|
Weighted Average
Grant
Date Fair
Value
|
|
Non-vested, December 31, 2019
|
|
|
82,086
|
|
|
|
2.69
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
(56,469
|
)
|
|
|
2.48
|
|
Forfeited/Expired
|
|
|
-
|
|
|
|
-
|
|
Non-vested, June 30, 2020
|
|
|
25,617
|
|
|
|
3.15
|
|
Compensation expense related to restricted stock was $0.07 million and $0.1 million for the three and six month periods ended June 30, 2020, respectively. Compensation expense related to restricted shares for the three and six month periods ended June 30, 2019 was $0.1 million and $0.3 million, respectively.
Restricted Stock Units
The Company’s restricted stock unit activity was as follows:
|
|
Restricted
Stock
Units
|
|
|
Weighted Average
Grant
Date Fair
Value
|
|
Outstanding, December 31, 2019
|
|
|
60,759
|
|
|
|
3.66
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
Vested
|
|
|
-
|
|
|
|
-
|
|
Forfeited/Expired
|
|
|
-
|
|
|
|
-
|
|
Outstanding, June 30, 2020
|
|
|
60,759
|
|
|
|
3.66
|
|
Compensation expense related to restricted stock units was $0.06 and $0.12 million for the three and six month periods ended June 30, 2020, respectively. Compensation expense related to restricted stock units for the three and six month periods ended June 30, 2019 was $0 and $0 million, respectively.
NOTE 14 – 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 June 30, 2020 and December 31, 2019, there were 51,026,636 and 38,001,543 shares of the Company’s common stock issued and outstanding, respectively.
Common Share Issuances
From January 1, 2020 to June 30, 2020, the Company issued 258,003 common stock shares at prices per share ranging from $1.50 to $3.93 regarding consulting services. Total value of these issuances was $0.7 million.
On June 5, 2020, the Company issued 12,058,623 common stock shares at a price of $1.82 relating to the Release, Waiver, and Amendment Agreement with CHI. Total value of these issuances was $21.9 million.
On June 5, 2020, the Company issued 708,467 common stock shares at a price of $2.00 from the exercise of warrants. Total value of these issuances was $1.4 million.
Common Stock Issuable
During 2018, a convertible promissory notes and accrued interests totaling $0.3 million was converted into 297,288 shares of common stock of the Company at a price of $0.89 per share. As of our 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.
NOTE 15 – BUSINESS COMBINATION
CHI Acquisition
On May 14, 2019, the Company acquired all of the issued and outstanding stock of CHI for shares of the Company’s Common Stock. The maximum number of shares of Common Stock to be issued, including escrowed shares and shares issuable pursuant to a variety of earn-out provisions and warrants, is 32,072,283 shares. The shares are allocated as follows: (i) 5,700,000 shares of Common Stock as upfront consideration issued at the closing of the transaction (the “Closing Date”); (ii) 7,128,913 shares to be held in escrow, subject to indemnification and clawback rights that lapse upon the achievement of certain milestones; (iii) up to 3,207,228 shares that may be issued pursuant to an earn-out over five years upon the achievement of certain technological implementations; (iv) up to 8,018,071 shares that may be issued pursuant to an earn-out over two years upon the achievement of certain revenue goals; and (v) up to 8,018,071 shares issuable upon exercise of warrants (“Acquisition Warrant Shares”) that become exercisable upon achieving certain revenue goals between the second and fourth anniversary of the Closing Date at an exercise price of $5.01 per share, exercisable, to the extent vested, for five years from the Closing Date. In exchange for the assets and liabilities acquired, the Company received an investment of $2 million from Chemistry Holdings pursuant to a convertible note. Such convertible note, on the Closing Date, became an intercompany payable and was cancelled.
As previously disclosed, the maximum number of shares of Common Stock that could be issued to the Holders in connection with the Merger, including escrowed shares and shares issuable pursuant to earn-out provisions and warrants, was 32,072,283 shares allocated as follows: (i) 5,700,000 shares of Common Stock that were issued as upfront consideration at the closing of the Merger; (ii) 7,128,913 shares held in escrow, subject to indemnification and clawback rights that were subject to lapse upon the achievement of certain milestones; (iii) 3,207,228 shares that could be issued pursuant to an earn-out over five years upon the achievement of certain technological implementations; (iv) 8,018,071 shares that could be issued pursuant to an earn-out over two years upon the achievement of certain revenue goals; and (v) 8,018,071 shares issuable upon exercise of warrants that were to become exercisable upon achieving certain revenue goals between the second and fourth anniversary of the closing of the Merger at an exercise price of $5.01 per share, exercisable, to the extent vested, for five years from the closing of the Merger.
On June 5, 2020 (the “Release Effective Date”), the Company and CHI, entered into a Release, Waiver, and Amendment (the “Agreement”) and a related Warrant Amendment Agreement (“Warrant Amendment”), in order to make a full resolution of the shares issuable pursuant to the Merger. The Agreement provided as follows: (a) all 7,128,913 shares held in escrow were released to the Holders as of the Release Effective Date, of which 140,828 shares were returned to the Company for cancellation in consideration for the Company committing to pay certain outstanding liabilities, (b) of the 11,225,299 total shares issuable pursuant to the earn-out provisions in the Merger Agreement, 5,612,654 shares were issued to the Holders as of the Release Effective Date (310,821 of which were assigned back to the Company as of the Release Effective Date) and the obligation of the Company to issue any further earn-out shares was terminated, and (c) certain Holders exercised warrants issued in the Merger to purchase 708,467 shares of Common Stock on the Release Effective Date at a price of $2.00 per share (which reflects a reduced exercise price as a result of the Warrant Amendment) for gross proceeds to the Company of approximately $1.4 million and the remaining warrants to purchase 7,309,605 shares of Common Stock issued in the Merger expired on the Release Effective Date as a result of an amendment of such warrants effected pursuant to the Warrant Amendment.
As previously disclosed, the Company undertook to issue warrants to purchase an additional 4,143,706 shares of Common Stock to certain affiliates of CHI in consideration for consulting and advisory services to be provided following the closing of the Merger (the “Service Warrants”). Pursuant to the Agreement, the undertaking by the Company to issue the Service Warrants was terminated as of the Release Effective Date.
CHI has developed a novel chewable delivery system, nanoemulsions, microemulsions, microcapsules and taste masking solutions. These technologies complement and expand the CUREfilm™ platform to enable the delivery of a wider range of active ingredients at higher doses. The combined technologies create a versatile platform for both immediate and controlled-release drug delivery.
The acquisition was accounted for in accordance with ASC 805, Business Combinations. The equity consideration to be provided is subject to a variety of earn-out and milestone provisions thus of the 32,072,283 total potential shares to be issued, 26,372,283 shares are considered contingent shares to be released or issued over a period from 5 months to 5 years based on the various contingency as described in the Merger Agreement. (“Contingent Shares”). Under ASC 480-10-25, based on the variable number of shares to be issued as part of the acquisition, the fair value of the Contingent Shares and Acquisition Warrant Shares of $14.6 million will be recorded as a liability as contingent share consideration as of May 14, 2019. On June 5, 2020 the company entered into a settlement with CHI in order to settle the total amount of shares to be issued upon in relation to the contingent consideration. As part of the settlement the Company agreed to issue 12,058,623 common stock shares in order to settle the contingent consideration in full. Below is the change of Contingent Share consideration for the three months ended June 30, 2020:
(Dollars in thousands)
|
|
Fair Value
of the
Contingent
Share Consideration
|
|
Fair value at December 31, 2019
|
|
$
|
16,043
|
|
Net change in fair value during the six months ended June 30, 2020
|
|
|
(16,043
|
)
|
Fair Value at June 30, 2020
|
|
$
|
-
|
|
Supplemental Pro Forma Information
The following unaudited supplemental pro forma financial information is based on our historical consolidated financial statements and CHI’s historical consolidated financial statements as adjusted to give effect to the May 14, 2019 acquisition of CHI’s. The unaudited supplemental pro forma financial information for the periods presented gives effect to the acquisition as if it had occurred on January 1, 2018.
This unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have resulted had the acquisition been in effect at the beginning of the periods presented. In addition, the unaudited pro forma results are not intended to be a projection of future results and do not reflect any operating efficiencies or cost savings that might be achievable.
The following table presents pro forma sales, net income attributable to Cure Pharmaceuticals Holding, Inc., and net income attributable to CURE per common share data assuming CHI was acquired at the beginning of the 2018 fiscal year (in thousands, except per share data):
|
|
Three months
ended
June 30,
2019
|
|
|
Six months
ended
June 30,
2019
|
|
Net revenues
|
|
$
|
108
|
|
|
|
182
|
|
Net loss
|
|
|
(14,591
|
)
|
|
|
(24,739
|
)
|
|
|
|
|
|
|
|
|
|
Net loss attributable to Cure per common share, basic
|
|
$
|
(0.36
|
)
|
|
|
(0.67
|
)
|
Net loss attributable to Cure per common share, diluted
|
|
$
|
(0.36
|
)
|
|
|
(0.67
|
)
|
NOTE 16 - INTELLECTUAL PROPERTY AND COLLABORATIVE AGREEMENTS
On September 4, 2018, Cure Pharmaceutical entered into its first multi-year licensing agreement (the “Licensing Agreement”) with Canopy Growth Corporation (“Canopy”), a company that engages in the production and sale of medical cannabis. Under the terms of the Licensing Agreement, Canopy will have an exclusive license to certain of Cure Pharmaceutical’s intellectual property rights, including Cure Pharmaceutical’s patented, multi-layer oral thin film (OTF), CUREfilm™ technology for use with cannabis extracts and biosynthetic cannabinoids and the Cure Pharmaceutical’s trademarks in markets around the world where it is legal for Canopy to sell such products, excluding Asia. Cure Pharmaceutical will retain the right to manufacture synthetic cannabinoids for pharmaceutical applications.
On November 7, 2019, the Company and Canopy entered into an Amendment Agreement (“Amendment”) to allow the Company to sell cannabinoid CUREfilm products to third parties internationally, excluding Canada, from the November 7. 2019 until December 31, 2020. However, Cure Pharmaceutical may not sell any cannabinoid CUREfilm products that are specifically developed for Canopy, as identified in the Development Agreement between the Company and Canopy, dated June 17, 2019.
Canopy will manufacture CUREfilms that deliver cannabis extracts, expanding the commercialization and monetization of the CUREfilm technology. The parties will collaborate on new products and uses for the products.
During the three and six months ended June 30, 2020, the Company recognized $0 and $0.5 million, respectively, of revenue relating to work completed in regard to the transfer of technology fee as discussed in the License Agreement with Canopy.
NOTE 17 - 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.
Operating leases
The Company maintains its corporate offices and manufacturing facility at 1620 Beacon Place, Oxnard, CA 93033, which contains approximately 25,000 square feet. The Company is currently on a month-to-month lease.
Total rent expense for the three and six month periods ended June 30, 2020 was $0.07 and $0.1 million, respectively. Total rent expense for the three and six month periods ended June 30, 2019 was $0.06 million and $0.1 million, respectively.
Finance leases
During 2019 the Company entered into a 5-year equipment lease rental which requires the Company to pay annual 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 as of 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 June 30, 2020, the current portion and long-term portion of finance capital lease liability is $0.01 million and $0.05 million, respectively. For the year ended December 31, 2019 the current portion and long-term portion of finance capital lease liability is $0.01 million and $0.05 million, respectively.
Future minimum lease payments under non-cancellable capital leases as of June 30, 2020 are as follows (in thousands):
2020 (remaining)
|
|
$
|
5
|
|
2021
|
|
|
14
|
|
2022
|
|
|
14
|
|
2023
|
|
|
14
|
|
2024
|
|
|
9
|
|
Thereafter
|
|
|
-
|
|
Total
|
|
$
|
56
|
|
NOTE 18 – SUBSEQUENT EVENTS
On July 27, 2020, the Company entered into a non-binding memorandum of understanding (the “Memorandum of Understanding”) with The Sera Labs, Inc., a Delaware corporation (“Sera Labs”), which summarizes the terms and conditions of a proposed acquisition, pursuant to which Sera Labs will become a wholly-owned subsidiary of the Company (the “Proposed Acquisition”).
In connection with the execution of the Memorandum of Understanding, the Company will loan to Sera Labs $500,000 in exchange for the issuance of a secured promissory note (the “Promissory Note”), with the right to take a future advance of an additional $1,000,000 if the Proposed Acquisition does not close by September 1, 2020. The Promissory Note is secured by certain assets of Sera Labs as further set forth therein. The Promissory Note bears an interest rate of 9% per annum and has a maturity date of December 31, 2020. The outstanding principal amount and any unpaid accrued interest may be prepaid at any time, provided that Sera Labs gives written notice to the Company at least 15 days in advance of the prepayment.
The Promissory Note provides that, upon the occurrence of any Event of Default (as defined therein), the Company may accelerate the Promissory Note by written notice to Sera Labs, with the principal amount plus all accrued but unpaid interest (the “Outstanding Balance”) becoming immediately due and payable in cash, except that, upon the occurrence of a Bankruptcy Event (as defined therein), no notice shall be required and the Outstanding Balance shall become immediately and automatically due and payable. The Promissory Note further provides that if a merger transaction is effected between the Company and Sera Labs pursuant to the terms of a definitive merger agreement, the outstanding principal amount shall be credited to marketing and growth funds, as to be described in such definitive merger agreement.
On August 6, 2020 (“Note Date”), the Company entered into a unsecured promissory note (“Note”) with one of the Company’s board members (“Holder”) for $150,000. The Note is due on August 6, 2021 and has an interest rate of 8% per annum payable in quarterly payments. Principal and accrued interest automatically convert into a Convertible Promissory Note (“Convertible Note”) if the Company raises financing through the sale and issuance of promissory notes that are convertible into common stock of the Company on terms that are no less favorable to new investors than the terms described in the term sheet included in the Note, then the Company shall notify the Holder thereof and upon the first closing of such sale, the Holder shall have the right, but not the obligation, to convert into a Convertible Note with the same principal amount and interest accruing from the Note Date, but otherwise on the same terms as the Convertible Note(s) sold for cash to new investors in that financing.
On August 12, 2020 (“Note Date”), the Company entered into a unsecured promissory note (“Note”) with a company (“Holder”) for $500,000. The Note is due on August 12, 2021 and has an interest rate of 8% per annum payable in quarterly payments. Principal and accrued interest automatically convert into a Convertible Promissory Note (“Convertible Note”) if the Company raises financing through the sale and issuance of promissory notes that are convertible into common stock of the Company on terms that are no less favorable to new investors than the terms described in the term sheet included in the Note, then the Company shall notify the Holder thereof and upon the first closing of such sale, the Holder shall have the right, but not the obligation, to convert into a Convertible Note with the same principal amount and interest accruing from the Note Date, but otherwise on the same terms as the Convertible Note(s) sold for cash to new investors in that financing.