Notes
to Unaudited Financial Statements
September
30, 2017 (Unaudited)
NOTE
1: NATURE OF OPERATIONS AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
A.
Nature of operations
Techcare
Corp. (“
Techcare
”, the “
Registrant
” or the “
Company
”), formally known
as BreedIT Corp. (“
BreedIt
”), was incorporated under the laws of the State of Delaware on May 26, 2010. The
Company’s common stock is traded in the United States on the OTCQB Market under the ticker symbol “TECR”.
On
February 8, 2016, the Company signed a Merger Agreement with Novomic Ltd. (“
Novomic
”), a private company incorporated
under the laws of the State of Israel. The closing of the merger took place on August 9, 2016 pursuant to which Novomic became
a wholly-owned subsidiary of the Company. The merger was structured as a reverse merger.
On
August 23, 2017, the Company entered into a binding memorandum of understanding (the “
MOU
”) with Naturalicious
Holdings B.V., a Dutch corporation (including its subsidiaries, “
Natur
”), pursuant to which the Company will
acquire certain assets, operations and activities of Natur, in consideration for which the Company will issue a number of shares
of common stock, par value $0.0001 per share representing fifty percent (50%) of the Company’s issued and outstanding
common stock, on a fully diluted basis. The parties have agreed to use commercially reasonable efforts to negotiate and execute
a definitive agreement within thirty (30) days of the execution of the MOU and subsequent closing of the aforesaid transactions
(the “
Closing
”). In connection with the transaction, the parties shall enter into a separate stockholders’
agreement pursuant to which the board of directors of the Company (the “
Board
”), following the closing, will
be comprised of six (6) directors, three (3) of whom shall be nominated for election by the controlling stockholders of Natur
and three (3) of whom shall be nominated for election by the Company’s current controlling stockholders. The MOU may be
terminated by either party in the event definitive agreements are not executed by the parties within eighty (80) days of the execution
of the MOU.
Also,
on August 23, 2017, the Company announced the appointment of Mr. Shlomi Arbel as the Company’s Chief Executive Officer,
effective as of that date. Mr. Arbel, a member of the management team of the Company and Novomic, succedes Mr. Zvi Yemini who
remained the chairman of the Board.
Going
Concern
During
the nine months period ended September 30, 2017, the Company had a comprehensive loss of approximately $3.5 million (out of which
$2.2 million is related to stock-based compensation). As of September 30, 2017, the Company had accumulated losses of approximately
$7.2 million (out of which $2.9 million is related to stock-based compensation). Based on the projected cash flows and Company’s
cash balances as of September 30, 2017, Company’s management is of the opinion that without further fund raising it will
not have sufficient resources to enable it to continue advancing its activities including the development, manufacturing and marketing
of its products for a period of at least 12 months from the date of issuance of these financial statements. As a result, there
is substantial doubt about the Company’s ability to continue as a going concern.
Management’s
plans include the continued commercialization of the products, continue taking cost reduction steps and securing sufficient financing
through the sale of additional equity securities, debt or capital inflows from strategic partnerships. There are no assurances
however, that the Company will be successful in obtaining the level of financing needed for its operations. If the Company is
unsuccessful in commercializing its products and securing sufficient financing, it may need to reduce activities, curtail or cease
operations. These financial statements do not include any adjustments relating to the recoverability and classification of recorded
assets and the amounts and classification of liabilities that might be necessary should the Company be unable to continue as a
going concern.
B.
Summary of significant accounting policies
The
accounting policies adopted are consistent with those of the previous financial year.
Basis
of Presentation
The
accompanying unaudited condensed consolidated financial statements and condensed footnotes have been prepared in accordance with
the applicable rules and regulations of the Securities and Exchange Commission (the “
SEC
”) regarding interim
financial reporting. Accordingly, they do not include all of the information and footnotes required by U.S. generally accepted
accounting principles (“
GAAP
”), for complete financial statements. In the opinion of management, all adjustments
(consisting of normal recurring items) considered necessary for fair statement of results for the interim periods presented have
been included. The results of operations for the nine and the three months ended September 30, 2017 are not necessarily indicative
of the results to be expected for the year or for other interim periods or for future years. The consolidated balance sheet as
of December 31, 2016 is derived from audited financial statements as of that date; however, it does not include all of the information
and footnotes required by GAAP for complete financial statements. These consolidated financial statements should be read in conjunction
with the audited consolidated financial statements and related notes included in the Company’s Annual Report on Form 10-K
for the year ended December 31, 2016, which was filed with the SEC on May 10, 2017.
Principles
of Consolidation
The
accompanying consolidated financial statements include the accounts of TechCare, and its subsidiary, Novomic. All intercompany
accounts and transactions have been eliminated in consolidation.
NOTE
2: RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS
In
March 2016, the FASB issued an ASU No. 2016-09, which simplifies certain aspects of the accounting for share-based payments, including
accounting for income taxes, classification of awards as either equity or liabilities, classification on the statement of cash
flows as well as allowing an entity-wide accounting policy election to either estimate the number of awards that are expected
to vest or account for forfeitures as they occur. The ASU is effective for annual reporting periods (including interim periods
within those annual reporting periods) beginning after December 15, 2016 and all amendments of the ASU that apply must be adopted
in the same period. The adoption by the Company of ASU No. 2016-09 on January 1, 2017, did not have any effect on the Company’s
consolidated financial statements.
NOTE
3: RESTATEMENT
The
Company restated its September 30, 2016 statement of operations, comprehensive loss and cash flows in order to correct the following
errors:
1) Reclassification of certain
property, plant and equipment items that was previously expensed.
2) Measurement of stock-based compensation modification for the Company’s 2015 stock grants.
3) The accounting treatment of the
reverse merger
(including the effect on earnings per share).
Statement
of operations and comprehensive loss for the nine months period ended September 30, 2016:
|
|
As
previously reported
|
|
Adjustments
|
|
As
presented in these financial statements
|
|
|
|
U.S. Dollar
|
|
Research
and development expenses
|
|
|
211,222
|
|
|
|
571,009
|
|
|
|
782,231
|
|
General
and administrative expenses
|
|
|
946,169
|
|
|
|
(309,258
|
)
|
|
|
636,911
|
|
Financial
expenses (income), net
|
|
|
(129,675
|
)
|
|
|
172,739
|
|
|
|
43,064
|
|
Net
loss for the period
|
|
|
1,027,716
|
|
|
|
434,490
|
|
|
|
1,462,206
|
|
Total
comprehensive loss
|
|
|
979,361
|
|
|
|
633,057
|
|
|
|
1,612,418
|
|
Loss
per share – Basic and diluted
|
|
|
(0.15
|
)
|
|
|
0.05
|
|
|
|
(0.10
|
)
|
Weighted
average number of common stock outstanding – Basic and diluted
|
|
|
6,853,206
|
|
|
|
8,213,772
|
|
|
|
15,066,978
|
|
Statement
of operations and comprehensive loss for the three months period ended September 30, 2016:
|
|
As
previously reported
|
|
Adjustments
|
|
As
presented in these financial statements
|
|
|
|
U.S.
Dollar
|
|
Research
and development expenses
|
|
|
64,020
|
|
|
|
239,577
|
|
|
|
303,597
|
|
General
and administrative expenses
|
|
|
287,462
|
|
|
|
257,285
|
|
|
|
544,747
|
|
Financial
expenses (income), net
|
|
|
(131,302
|
)
|
|
|
173,637
|
|
|
|
42,335
|
|
Net
loss for the period
|
|
|
220,180
|
|
|
|
670,499
|
|
|
|
890,679
|
|
Total
comprehensive loss
|
|
|
203,749
|
|
|
|
835,667
|
|
|
|
1,039,416
|
|
Loss
per share – Basic and diluted
|
|
|
(0.02
|
)
|
|
|
(0.03
|
)
|
|
|
(0.05
|
)
|
Weighted
average number of common stock outstanding – Basic and diluted
|
|
|
10,570,821
|
|
|
|
6,956,199
|
|
|
|
17,527,020
|
|
Statements
of cash flows for the nine months ended September 30, 2016:
|
|
As
previously reported
|
|
|
Adjustments
|
|
|
As
presented in these financial statements
|
|
|
|
|
U.S.
Dollar
|
|
Net cash
used in operating activities
|
|
|
(806,128
|
)
|
|
|
(81,567
|
)
|
|
|
(887,695
|
)
|
Net cash provided by
(used in) investing activities
|
|
|
1,121,540
|
|
|
|
(1,181,620
|
)
|
|
|
(60,080
|
)
|
Net cash provided by
financing activities
|
|
|
165,000
|
|
|
|
1,146,462
|
|
|
|
1,311,462
|
|
NOTE
4: STOCKHOLDERS’ EQUITY
Share
capital
During
the nine months ended September 30, 2017 the Company entered into several agreements, under which the Company raised an aggregate
amount of $878,250. In October 2017, the Company entered into an Advance Investment Agreement for a bridge investment in the aggregate
amount of US$250,000 – See note 10.
|
a.
|
In the first quarter of 2017, the Company entered into an agreement
with Zvi Yemini, the Company’s Chief Chairman of the Board through his controlled entity, Y.M.Y Industry Ltd.
(“
YMY
”), pursuant to which the Company issued YMY 207,039 shares of common stock of the Company at a purchase
price of $0.483 per share for a total consideration of $100,000.
|
|
|
|
|
b.
|
In the first quarter of 2017, the Company entered into several agreements, pursuant to which the Company issued to certain investors 1,242,236 shares of common stock of the Company at a purchase price of $0.483 per share for a total consideration of $600,000.
|
|
|
|
|
c.
|
In the first quarter of 2017, the Company entered into an agreement, pursuant to which the Company issued 103,520 shares of common stock of the Company and warrants exercisable for a period of 6 months to purchase an additional 15,528 shares at a purchase price of $0.483 per unit for a total consideration of $50,000.The warrants expired during the third quarter of 2017.
|
|
|
|
|
d.
|
In the second quarter of 2017, the Company signed an agreement to issue 103,520 shares of common stock of the Company at a purchase price of $0.483 per share for a total consideration of $50,000. The stock were issued during the third quarter of 2017.
|
|
|
|
|
e.
|
In the second quarter of 2017, the Company signed agreements to issue 162,008 shares of common stock of the Company at a purchase price of $0.483 per share for a total consideration of $78,250. The stock were issued and the funds were received during the third quarter of 2017.
|
|
|
During
the nine months ended September 30, 2017, the Company issued the following shares of common stock and warrants in relation
to services:
|
|
|
|
|
f.
|
In
the first quarter of 2017, the Company signed an agreement to issue 300,000 restricted shares of the Company to a service
provider for his consulting services for a term of 18 months. As part of the consulting agreement, the Company also granted
the service provider warrants exercisable to purchase 100,000 of the Company’s common stock at an exercise price of
$1.50 per warrant share exercisable for a period of 24 months commencing the date of the agreement. The total value of the
agreement at the date of the grant was $146,031.
|
|
|
|
|
g.
|
In
the second quarter of 2017, the Company signed a service agreement with a service provider, pursuant to which the Company
will pay a monthly fee and also granted the service provider 70,000 shares of common stock which were issued in April
2017.
|
|
|
|
|
h.
|
In
the second quarter of 2017, the Company signed a consulting agreement with a service provider pursuant to which the Company
will pay a monthly fee and will grant the service provider up to 500,000 shares of common stock of the Company that
will be issued as follows: (1) 50,000 common stock on the execution of the agreement, (2) the remaining 450,000 common
stock shall be contingent upon the successful achievement of certain milestones, as described in the agreement. As of September
30, 2017, the Company had not yet issued the 50,000 common stock and, therefore, recorded a stock payable in the amount
of $30,000 in the consolidated financial statements. Also, as of September 30, 2017 the milestones have not been achieved
and no additional common stock were issued.
|
|
|
|
|
i.
|
In
the third quarter of 2017, the Board approved the issuance of 40,782 restricted shares for professional corporate services.
As of September 30, 2017, the Company had not yet issued the common stock and, therefore, recorded a stock payable
in the amount of $18,964 in the consolidated financial statements.
|
Stock-Based
Compensation
Stock
based awards are accounted for using the fair value method in accordance with ASC 718, Shared Based Payment. The Company’s
primary type of stock based compensation consists of stock options to directors, employees, officers, consultants, and advisors.
The Company uses the Black-Scholes option pricing model in valuing options.
During
March 2017, the Company granted to certain employees options to purchase 723,027 of the Company’s common stock and to non-employees
options to purchase 2,000,952 of the Company’s common stock for an exercise price of $0.0001. Out of all the option grants,
1,298,737 options were granted to related parties.
During September 2017, the Company granted to its CEO options to purchase 266,369 of the Company’s common stock for an exercise
price of $0.0001 per share.
A
summary of the stock option activity for the nine-month period ended September 30, 2017:
|
|
Number
of Options
|
|
|
Weighted
Average Exercise Price
|
|
|
|
|
|
|
|
|
U.S
Dollar
|
|
Options outstanding at January
1, 2017
|
|
|
1,666,617
|
|
|
|
0.0001
|
|
Granted
|
|
|
2,723,979
|
|
|
|
0.0001
|
|
Options outstanding at June 30, 2017
|
|
|
4,390,596
|
|
|
|
0.0001
|
|
Granted
|
|
|
266,369
|
|
|
|
0.0001
|
|
Options outstanding at September 30, 2017
|
|
|
4,656,965
|
|
|
|
0.0001
|
|
The
options granted during the nine months period ended in September 30, 2017 were fully vested on the grant date and exercisable
for 2.5-5 years. The following assumptions were applied in determining the options’ fair value on their grant date:
Risk-free
interest rate
|
|
|
1.54
|
%
|
Expected shares price volatility
|
|
|
70
|
%
|
Expected option term
(years)
|
|
|
2.5-5
|
|
Dividend yield
|
|
|
-
|
|
The
Company based the risk-free interest rate on the U.S. Treasury yield curve. The expected term in years represents the period of
time that the awards granted are expected to be outstanding. The assumption for dividend yield is zero because the Company has
not historically paid dividends nor does it expect to do so in the foreseeable future. The volatility was based on the historical
stock volatility of several peer companies, as the Company has limited trading history to use the volatility of its own common
stock. Stock-based compensation expense included in the Company’s statements of operations were allocated as follows:
|
|
Nine
months ended September 30, 2017
|
|
|
Nine
months ended September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
Research
and development expenses
|
|
$
|
364,674
|
|
|
$
|
142,506
|
|
General and administrative
expenses
|
|
|
1,802,147
|
|
|
|
299,097
|
|
|
|
$
|
2,166,821
|
|
|
$
|
441,603
|
|
|
|
Three
months ended
September 30, 2017
|
|
|
Three
months ended
September 30, 2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restated
|
|
Research
and development expenses
|
|
$
|
-
|
|
|
$
|
142,506
|
|
General and administrative
expenses
|
|
|
123,681
|
|
|
|
299,097
|
|
|
|
$
|
123,681
|
|
|
$
|
441,603
|
|
NOTE
5: OEM DISTRIBUTION AGREEMENT
On
June 23, 2017, the Company entered into an OEM agreement (the “
OEM Agreement
”) with a medical device and
wellness applications company based in the United States (the “
OEM Distributor”),
according to which the
OEM Distributor will manufacture, distribute and sell the Company’s Novokid head lice treatment products in the United
States, Canada, Brazil, Argentina, Costa Rica and Colombia, all on an exclusive basis, pursuant to and in accordance with the
terms and conditions set forth in the OEM Agreement, including minimum royalties commitments. The OEM Distributor will
be solely responsible for obtaining and maintain the approval from the US Food and Drug Administration (the
“
FDA
”) and shall bear all costs related to such approval.
As
part of the OEM Agreement, the OEM Distributor paid a royalty advance of $10,000 and also an amount of $140,000 which is held
in an escrow account, until the Company completes certain milestones, as described in the OEM Agreement.
NOTE
5: OEM DISTRIBUTION AGREEMENT
(continued)
Also,
as part of the OEM Agreement, the Company granted the OEM Distributor an option to purchase up to 9.09% of the Company’s
common stock for a total consideration of up to $900,000, exercisable until January 15, 2018. The fair value of the option as
of September 30, 2017 amounted to $182,720. The key assumptions used in the options’ valuation was as follows:
Risk-free
interest rate
|
|
|
1.14
|
%
|
Expected shares price volatility
|
|
|
70
|
%
|
Expected option term
(years)
|
|
|
0.29
|
|
Dividend yield
|
|
|
-
|
|
NOTE
6: INCOME TAXES
a.
Basis of taxation
The
Company and its subsidiary are taxed under the domestic tax laws of the jurisdiction of incorporation of each entity, United States
and Israel, respectively.
b.
Carryforward Tax Losses
As
of September 30, 2017 and December 31, 2016, the subsidiary had net operating carry forward tax losses of approximately $1.7 million
and $0.9 million, respectively. A full valuation allowance was created against these carry forward tax losses since the realization
of any future benefit from these net operating losses cannot be sufficiently assured at September 30, 2017 and December 31, 2016.
c.
Corporate tax rates
The
corporate tax rate in Israel was 26.5% in 2015 and 25% in 2016. The regular corporate tax rate starting January 1, 2017 is 24%
and starting January 1, 2018 will be 23%. The corporate tax rate in the U.S is approximately 35%.
NOTE
7: LOSS PER SHARE
Loss
per share is based on the loss that is attributed to the stockholders holding common stock, divided by the weighted average number
of common stock in issue during the period.
For
purposes of the calculation of the diluted loss per share, the Company adjusts the weighted average number of common stock
using the treasury stock method assuming conversion of all of the dilutive potential stock. The potential stock are taken
into account only if their effect is dilutive (increases loss per share).
NOTE
8: FAIR VALUE OF FINANCIAL INSTRUMENTS
The
carrying amount of the Company’s financial instruments, including cash equivalents, current assets, accounts payable and
accrued liabilities and notes payables approximate their fair value, due to their short term in nature and their carrying amounts
approximates the amounts expected to be received or paid.
A
hierarchy has been established for inputs used in measuring fair value that maximizes the use of observable inputs and minimizes
the use of unobservable inputs by requiring that the most observable inputs be used when available. The Company accounts for option
liability as Level 3 since its inputs are unobservable inputs for the liability.
The
following table is a reconciliation of the change for the financial liability where fair value measurement is estimated utilizing
Level 3 inputs:
|
|
2017
|
|
|
|
|
US
dollar
|
|
Fair value as of January 1,
|
|
$
|
-
|
|
Change
in fair value recognized in statement of operations
|
|
|
276,150
|
|
Fair value as of June 30,
|
|
|
276,150
|
|
Change in fair value
recognized in statement of operations
|
|
|
(93,430
|
)
|
Fair value as of September 30,
|
|
$
|
182,720
|
|
NOTE
9: RELATED PARTY TRANSACTIONS
For
the issuance of shares of common stock to the Company’s Chairman of the Board’s affiliated entity, other related parties
and option grants to the Company’s directors, refer to note 4.
On
February 22, 2017, the Company signed an amendment to the original service agreement with Zvi Yemini, the Company’s chairman
of the Board, through his affiliated entity, YMY. According to the amendment, Mr.Yemini’s monthly payment was increased
to 45,000 NIS (approximately $12 thousand) starting February 2017.
On
October 17, 2017, the Company entered into an Advance Investment Agreement with YMY and with Traistman Radziejewski Fundacja Ltd.,
a company affiliated to Oren Traistman, a member of the Board. For further details, please refer to note 10 below.
NOTE
10: SUBSEQUENT EVENTS
On
October 17, 2017, the Company entered into an Advance Investment Agreement (the “
Advance Investment Agreement
”)
with YMY and Traistman Radziejewski Fundacja Ltd. Pursuant to the Advance Investment Agreement, YMY and Traistman Radziejewski
Fundacja Ltd. provided the Company with a bridge investment in the aggregate amount of US$250,000 (the “
Investment Amount
”).
The Investment Amount will be immediately payable upon the consummation of an Asset Purchase Agreement with Natur (the “
Asset
Purchase Agreement
”, see note 1 above), provided the consummation of which occurs prior to or on December 31, 2017 (the
“
Trigger Date
”) or upon other insolvency events of the Company, as described in the agreement. In the event
that the Company has not consummated the Asset Purchase Agreement prior to or on the Trigger Date, then the entire then outstanding
Investment Amount will be automatically converted into shares of common stock of the Company, par value $0.0001 per share (the
“
Shares
”) on the first business day following the Trigger Date, at a price per share equal to 70% of the volume
weighted average price (as defined in the Advance Investment Agreement) of the Shares as of such date (the “
PPS
”).
The Investment amount will also be converted into Shares at the PPS upon a Deemed Liquidation Event (as defined in the Advance
Investment Agreement).