UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from __________ to __________
Commission file number
(Exact name of registrant as specified in its charter) |
| 2834 |
| ||
(State or other jurisdiction of incorporation or organization) |
| (Primary Standard Industrial Classification Number) |
| (IRS Employer Identification Number) |
(Address of principal executive offices)
(
(Issuer’s telephone number)
Securities registered pursuant to Section 12(b) of the Act: None.
Securities registered pursuant to Section 12(g) of the Act:
Title of each class: |
|
Trading symbol(s) |
| Name of exchange on which registered |
Common stock, par value $0.001 |
| CURR |
| OTCQB Markets |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15 (d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer”, “smaller reporting company” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer | ☐ | Accelerated filer | ☐ |
☒ | Smaller reporting company | ||
| Emerging growth company |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ☐
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes
On May 13, 2022, we had
TABLE OF CONTENTS
| 2 |
| Table of Contents |
Special Note Regarding Forward-Looking Statements
This Quarterly Report on Form 10-Q contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve risks and uncertainties, including statements based on our current expectations, assumptions, estimates and projections about future events, our business, financial condition, results of operations and prospects, our industry and the regulatory environment in which we operate. Any statements contained herein that are not statements of historical facts may be deemed to be forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipate,” “believe,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “should,” “will,” “would” or the negative of those terms, or other comparable terms intended to identify statements about the future. Forward-looking statements include, but are not limited to, statements about:
| · | the length and severity of the recent COVID-19 outbreak and its impact on the global economy and our financial results; |
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| · | our ability to obtain additional and substantial funding for our company on an immediate basis, whether pursuant to a capital raising transaction arising from the sale of our securities, a strategic transaction or otherwise; |
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| · | our ability to attract and/or maintain research, development, commercialization and manufacturing partners; |
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| · | the ability of our company and/or a partner to successfully complete product research and development, including pre-clinical and clinical studies and commercialization; |
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| · | the ability of our company and/or a partner to obtain required governmental approvals, including product patent approvals; |
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| · | the ability of our company and/or a partner to develop and commercialize products that can compete favorably with those of our competitors; |
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| · | the timing of costs and expenses related to the research and development programs of our company and/or our partners; |
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| · | the timing and recognition of revenue from milestone payments and other sources not related to product sales; |
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| · | our ability to obtain suitable facilities in which to conduct our planned business operations on acceptable terms and on a timely basis; |
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| · | our ability to satisfy our disclosure obligations under the Exchange Act, and to maintain the registration of our common stock thereunder; |
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| · | our ability to attract and retain qualified officers, employees and consultants as necessary; and |
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| · | costs associated with any product liability claims, patent prosecution, patent infringement lawsuits and other lawsuits. |
The forward-looking statements included herein are based on current expectations of our management based on available information and involve a number of risks and uncertainties, all of which are difficult or impossible to predict accurately and many of which are beyond our control. As such, our actual results may differ significantly from those expressed in any forward-looking statements. Factors that may cause or contribute to such differences include, but are not limited to, those discussed in more detail in Item 2 “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of Part I and Item 1A “Risk Factors” of Part II of this Quarterly Report on Form 10-Q. Readers should carefully review these risks, as well as the additional risks described in other documents we file from time to time with the Securities and Exchange Commission (“SEC”). In light of the significant risks and uncertainties inherent in the forward-looking statements included herein, the inclusion of such information should not be regarded as a representation by us or any other person that such results will be achieved, and readers are cautioned not to place undue reliance on such forward-looking statements. Except as required by law, we undertake no obligation to revise the forward-looking statements contained herein to reflect events or circumstances after the date hereof or to reflect the occurrence of unanticipated events. You should read this Quarterly Report on Form 10-Q and the documents we file with the SEC, with the understanding that our actual future results, levels of activity, performance and achievements may be materially different from what we expect. We qualify all of our forward-looking statements by these cautionary statements.
Unless otherwise indicated or the context requires otherwise, as used in this Quarterly Report on Form 10-Q, the words “we,” “us,” “our,” the “Company” “our Company” or “CURE” refer to CURE Pharmaceutical Holding Corp., a Delaware corporation, and our subsidiaries taken as a whole, unless otherwise noted.
This Quarterly Report on Form 10-Q includes our trademarks and trade names, including, without limitation, CureFilm™ Technology, which is our property and is protected under applicable intellectual property laws. This Quarterly Report on Form 10-Q also includes trademarks and trade names that are the property of other organizations. Solely for convenience, trademarks and trade names referred to in this Quarterly Report on Form 10-Q may appear without the ® and ™ symbols, but those references are not intended to indicate that we will not assert, to the fullest extent under applicable law, our rights, or that the applicable owner will not assert its rights, to these trademarks and trade names. We do not intend our use or display of other companies’ trade names or trademarks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.
| 3 |
| Table of Contents |
PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS.
CURE PHARMACEUTICAL HOLDING CORP AND SUBSIDIARIES
Condensed Consolidated Balance Sheets
(in thousands, except share amounts)
|
| March 31, 2022 |
|
| December 31, 2021 |
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ASSETS |
| (unaudited) |
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Current assets: |
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Cash |
| $ |
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| $ |
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Accounts receivable, net |
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Note receivable, net |
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Inventory, net |
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Prepaid expenses and other assets |
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Total current assets |
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Property and equipment, net |
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Finance lease right-of-use assets, net |
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Operating lease right-of-use assets, net |
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Note receivable |
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Investment |
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Goodwill, net |
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Intellectual property and patents, net |
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In-process research and development, net |
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Customer relationships, Tradename, and Non-compete, net |
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Other assets |
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Total assets |
| $ |
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| $ |
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Liabilities and stockholders' equity |
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Current liabilities: |
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Accounts payable |
| $ |
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| $ |
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Accrued expenses |
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Finance lease payable |
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Operating lease payable |
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Loan payable |
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Related party payable |
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Notes payable |
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Convertible promissory notes |
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Fair value convertible promissory notes, net |
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Contract liabilities |
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Contingent share considerations |
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Total current liabilities |
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Finance lease payable |
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Operating lease payable |
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Total liabilities |
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Commitments and contingencies (see Note 21) |
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Stockholders' equity: |
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Common stock: $ |
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Additional paid-in capital |
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Common stock issuable |
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Accumulated deficit |
|
| ( | ) |
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| ( | ) |
Total stockholders' equity |
|
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Total liabilities and stockholders' equity |
| $ |
|
| $ |
| ||
See accompanying notes to these unaudited condensed consolidated financial statements.
| 4 |
| Table of Contents |
CURE PHARMACEUTICAL HOLDING CORP AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Operations
(in thousands, except share amounts)
|
| For the Three Months Ended |
| |||||
|
| March 31, 2022 |
|
| March 31, 2021 |
| ||
Revenue: |
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Product sales, net of discounts and refunds |
| $ |
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| $ |
| ||
Consulting research development income |
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Shipping and other sales |
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Total revenues |
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Cost of goods sold: |
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Cost of goods sold |
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Gross profit |
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Operating expenses: |
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Research and development expenses |
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Selling, general and administrative expenses |
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Change in fair value of contingent stock consideration |
|
| ( | ) |
|
| ( | ) |
Impairment of goodwill |
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Total operating expenses |
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Net operating loss before other income (expense) |
|
| ( | ) |
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| ( | ) |
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Other income (expense): |
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Interest income |
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Settlement income |
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Gain on extinguishment of debt |
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Loss on sale of property, plant and equipment |
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| ( | ) | |
Change in fair value of convertible promissory notes |
|
| ( | ) |
|
|
| |
Interest expense |
|
| ( | ) |
|
| ( | ) |
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Total other income (expense) |
|
| ( | ) |
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| |
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Net loss before income taxes |
|
| ( | ) |
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| ( | ) |
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Provision for income taxes |
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Net loss |
| $ | ( | ) |
| $ | ( | ) |
|
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Net loss per share |
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Basic |
| $ | ( | ) |
| $ | ( | ) |
Diluted |
| $ | ( | ) |
| $ | ( | ) |
|
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Weighted average common shares outstanding |
|
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Basic |
|
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Diluted |
|
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See accompanying notes to these unaudited condensed consolidated financial statements.
| 5 |
| Table of Contents |
CURE PHARMACEUTICAL HOLDING CORP AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Stockholders’ Equity
(in thousands, except share amounts)
|
|
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| Additional |
|
| Common |
|
|
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|
|
|
| ||||||
|
| Common Stock |
|
| Paid-in |
|
| Stock |
|
| Accumulated |
|
|
|
| |||||||||
|
| Shares |
|
| Par |
|
| Capital |
|
| Issuable |
|
| Deficit |
|
| Total |
| ||||||
Balance, December 31, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||||
Issuance of common stock for professional services |
|
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Issuance of common stock from conversion of convertible promissory notes |
|
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Fair value of stock options and restricted stock granted |
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Fair value of restricted stock units granted |
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Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) |
Balance, March 31, 2022 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||||
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Balance, December 31, 2020 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||||
Issuance of common stock for professional services |
|
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Issuance of common stock from the equity incentive plan |
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| ( | ) |
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Issuance of common stock for exercise of warrants |
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Fair value of stock options and restricted stock granted |
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Fair value of restricted stock units granted |
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Net loss |
|
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|
|
|
|
|
|
|
|
|
|
|
|
| ( | ) |
|
| ( | ) |
Balance, March 31, 2021 |
|
|
|
| $ |
|
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||||
See accompanying notes to these unaudited condensed consolidated financial statements.
| 6 |
| Table of Contents |
CURE PHARMACEUTICAL HOLDING CORP AND SUBSIDIARIES
Unaudited Condensed Consolidated Statements of Cash Flows
(in thousands)
|
| For the Three Months Ended |
| |||||
|
| March 31, 2022 |
|
| March 31, 2021 |
| ||
|
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Net loss |
| $ | ( | ) |
| $ | ( | ) |
|
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Adjustment to reconcile net loss to net cash used in operating activities: |
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Stock based compensation - services |
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Stock based compensation - prepaid |
|
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Stock issued from equity incentive plan |
|
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Gain from settlement of accounts payable |
|
| ( | ) |
|
|
| |
Gain from extinguishment of debt |
|
|
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|
| ( | ) | |
Change in fair value of contingent share consideration |
|
| ( | ) |
|
| ( | ) |
Change in fair value of convertible promissory notes |
|
|
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|
| ( | ) | |
Impairment of goodwill |
|
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Depreciation and amortization |
|
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Amortization of right of use asset |
|
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Bad debt expenses |
|
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Recovery of bad debt expense |
|
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| ( | ) | |
Loss on disposal of property, plant and equipment |
|
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Inventory reserve for obsolescence |
|
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| ( | ) | |
Change of fair value in derivative liabilities |
|
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Fair value of vested stock options and restricted stock |
|
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Warrant granted for broker fee expense |
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|
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Change in operating assets and liabilities: |
|
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|
Accounts receivable |
|
| ( | ) |
|
| ( | ) |
Inventory |
|
|
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|
| ( | ) | |
Prepaid expenses and other assets |
|
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| ||
Other assets |
|
|
|
|
| ( | ) | |
Accounts payable |
|
|
|
|
|
| ||
Accrued expenses |
|
| ( | ) |
|
|
| |
Finance lease payable |
|
| ( | ) |
|
| ( | ) |
Operating lease payable |
|
|
|
|
| ( | ) | |
Contract liabilities |
|
| ( | ) |
|
| ( | ) |
License fees |
|
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|
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Cash used in operating activities |
|
| ( | ) |
|
| ( | ) |
|
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Cash flows from investing activities |
|
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Investment in company |
|
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Purchase of intangible assets |
|
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| ( | ) | |
Net cash acquired from acquisition of Sera Labs, Inc. |
|
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Acquisition of property and equipment, net |
|
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| ( | ) | |
Purchase of note receivable |
|
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Collection of note receivable |
|
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Cash provided by (used in) investing activities |
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Cash flows from financing activities |
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Proceeds from convertible notes payable |
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Proceeds from loans payable |
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Proceeds from exercise of warrants |
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Proceeds from notes payable |
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Proceeds from related party payable |
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Proceeds from paryoll protection program loan |
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Repayment of notes payable |
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Repayment of related party payable |
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Repayment of loans payable |
|
| ( | ) |
|
| ( | ) |
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Cash provided by financing activities |
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Net increase (decrease) in cash and cash equivalents |
|
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| ( | ) | |
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Cash and cash equivalents, beginning of year |
|
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Cash and cash equivalents, end of year |
| $ |
|
| $ |
| ||
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Supplemental cash flow information |
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Cash paid for interest and income taxes: |
|
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|
|
|
|
Interest |
| $ |
|
| $ |
| ||
Income taxes |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Non-cash investing and financing activities: |
|
|
|
|
|
|
|
|
Common stock issued for conversion of promissory notes and accrued interest |
| $ |
|
| $ |
| ||
See accompanying notes to these unaudited condensed consolidated financial statements.
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CURE PHARMACEUTICAL HOLDING CORP AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
NOTE 1 - ORGANIZATION AND DESCRIPTION OF BUSINESS
Business Operations
CURE Pharmaceutical Holding Corp. (“CPHC”), its wholly-owned subsidiaries, CURE Pharmaceutical Corporation (“CURE Pharmaceutical”), Cure Chemistry Inc. and its subsidiaries (collectively referred to as “CHI”) and The Sera Labs, Inc. (“Sera Labs”) (CPHC, CURE Pharmaceutical, CHI and Sera Labs, collectively the “Company,” “we,” “our,” “us,” or “CURE”) is a biopharmaceutical company focusing on the development and manufacturing of drug formulation and drug delivery technologies in novel dosage forms to improve drug safety, efficacy and patient adherence. Our mission is to improve lives by redefining how medications are delivered and experienced. Our primary business model is to develop wellness and drug products using our proprietary technology, which development may include preclinical and clinical studies and regulatory approval, grant product rights to partners responsible for marketing, sales and distribution, while retaining exclusive manufacturing rights and market sell and distribute branded health, wellness, and beauty products through Sera Labs. We operate in a 25,000 square foot cGMP manufacturing plant in Oxnard, CA.
Our technology platform includes oral thin film (“OTF”), and encapsulation systems (“microCURE”) compatible with OTF, chews, oral solutions, topical and transdermal dose forms. We apply our technology to pharmaceutical drugs and dietary supplements and topical products for the wellness market. OTF products are about the size of a postage stamp and composed of excipients such as polymers, stabilizers, lipids and surfactants, which are all generally recognized as safe. They can be designed to deliver active ingredients to the gastrointestinal, or GI, tract when placed on the tongue and swallowed, or directly to the blood stream when placed under the tongue (sublingual) or on the inner lining of the cheek and lip (buccal).
Our recently acquired wholly-owned subsidiary, Sera Labs, is a trusted leader in the health, wellness, and beauty sectors of innovative products with cutting edge technology and superior ingredients such as CBD. Sera Labs creates high quality products that use science-backed, proprietary formulations. More than 25 products are sold under the brand names Seratopical™, Seratopical Revolution™ SeraLabs™, and Nutri-Strips™. Sera Labs sells its products at affordable prices, making them easily accessible on a global scale. Strategically positioned in the growth market categories of beauty, health wellness, and pet care, Sera Labs products are sold in major national drug, grocery chains, convenience stores and mass retailers. The company also sells products under private label to major retailers and multi-level marketers, as well as direct-to-consumer (DTC), via online website orders, including opt-in subscriptions.
Background
We were incorporated in the State of Nevada on May 15, 2014. On November 7, 2016, we changed our name from Makkanotti Group Corp. to CURE Pharmaceutical Holding Corp. On September 27, 2019, the Company reincorporated from the State of Nevada to the State of Delaware.
On October 2, 2020, the Company completed its acquisition of Sera Labs, a Delaware corporation pursuant to an Agreement and Plan of Merger and Reorganization, dated as of September 23, 2020 (the “Merger Agreement”), by and among the Company, Cure Labs, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”), Sera Labs and Nancy Duitch, in her capacity as the security holders representative. The Merger Agreement provides for the acquisition of Sera Labs by the Company through the merger of Merger Sub with and into Sera Labs, with Sera Labs surviving as a wholly owned subsidiary of the Company (the “Merger”).
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NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial statements. Such financial statements and accompanying notes are the representations of Company’s management, who is responsible for their integrity and objectivity.
The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of March 31, 2022, and the results of operations and cash flows for the periods presented. The results of operations for the three months ended March 31, 2022 and 2021, are not necessarily indicative of the operating results for the full fiscal year or any future period. These unaudited condensed consolidated financial statements should be read in conjunction with the financial statements and related notes thereto included in Form 10-K for the fiscal period ended December 31, 2021 filed with the SEC on April 1, 2022.
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Principle of Consolidation
The condensed consolidated financial statements include the accounts of CPHC and its wholly-owned subsidiaries, CURE Pharmaceutical, CHI, and Sera Labs, collectively referred to as (“CURE”, “we”, “us”, “our” or the “Company”). All significant inter-company balances and transactions have been eliminated in consolidation. The development and production of the Company’s branded health, wellness, and beauty products in both the wellness and pharmaceutical industries represents the principal operations of the Company. Business acquisitions are included in the Company’s condensed consolidated financial statements from the date of the acquisition.
Going Concern and Management’s Liquidity Plans
In accordance with the Financial Accounting Standards Board’s (“FASB”) standard on going concern, Accounting Standard Update, or ASU No. 2014-15, The Company assesses going concern uncertainty in its consolidated financial statements to determine if it has sufficient cash, cash equivalents and working capital on hand, including marketable equity securities, and any available borrowings on loans, to operate for a period of at least one year from the date the consolidated financial statements are issued, which is referred to as the “look-forward period” as defined by ASU No. 2014-15. As part of this assessment, based on conditions that are known and reasonably knowable to The Company, it will consider various scenarios, forecasts, projections, estimates and will make certain key assumptions, including the timing and nature of projected cash expenditures or programs, and its ability to delay or curtail expenditures or programs, if necessary, among other factors. Based on this assessment, as necessary or applicable, The Company makes certain assumptions around implementing curtailments or delays in the nature and timing of programs and expenditures to the extent The Company deems probable those implementations can be achieved and it has the proper authority to execute them within the look-forward period in accordance with ASU No. 2014-15.
The accompanying condensed consolidated financial statements have been prepared on the basis that we will continue as a going concern, which contemplates realization of assets and the satisfaction of liabilities in the normal course of business. At March 31, 2022, we had an accumulated deficit of approximately $
As of March 31, 2022, the Company had approximately $
The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the consolidated financial statements. The accompanying consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary if the Company is unable to continue as a going concern.
Reclassifications
Certain reclassifications have been made to prior year’s consolidated financial statements to enhance comparability with the current year’s consolidated financial statements. These reclassifications had no effect on the previously reported net loss.
Use of Estimates
The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Significant areas requiring the use of management estimates include, but are not limited to, the allowance for doubtful accounts, valuation of intangible assets and goodwill, depreciative and amortization useful lives, assumptions used to calculate the fair value of the contingent share consideration, stock based compensation, beneficial conversion features, warrant values, deferred taxes and the assumptions used to calculate derivative liabilities and fair values of the purchase price allocations and convertible promissory notes. Actual results could differ materially from such estimates under different assumptions or circumstances.
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Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. As of March 31, 2022 and December 31, 2021, the Company had no cash equivalents. The Company maintains its cash and cash equivalents in banks insured by the Federal Deposit Insurance Corporation in accounts that at times may be in excess of the federally insured limit of $
Investment in Associates
The Company follows Accounting Standards Codification (“ASC”) 325-20, Cost Method Investments (“ASC 325-20”), to account for its ownership interest in noncontrolled entities. Under ASC 325-20, equity securities that do not have readily determinable fair values (i.e., non-marketable equity securities) and are not required to be accounted for under the equity method are typically carried at cost (i.e., cost method investments). Investments of this nature are initially recorded at cost. Income is recorded for dividends received that are distributed from net accumulated earnings of the noncontrolled entity subsequent to the date of investment. Dividends received in excess of earnings subsequent to the date of investment are considered a return of investment and are recorded as reductions in the cost of the investment. Investments are written down only when there is clear evidence that a decline in value that is other than temporary has occurred.
From November 1, 2019 to February 13, 2020, the Company purchased Convertible Loans (“Loans”) from Releaf Europe BV (“Releaf”) in the amount of $
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Accounts Receivable
Accounts receivable are generally unsecured. The Company closely monitors accounts receivable balances and estimates the allowance for credit losses. These estimates are based on historical collection experience and other factors, including those related to current market conditions and events. The Company’s allowances for accounts receivable have not historically been material. At March 31, 2022 and December 31, 2021 management determined that an allowance of $
Inventory
Inventory is stated at the lower of cost or net realizable value (“NRV”). NRV is the amount by which the estimated selling price of the product exceeds the sum of any additional costs expected to be incurred on the sale of such product in the ordinary course of business. The Company determines the cost of its inventory, which includes amounts related to materials, direct labor, and manufacturing overhead, on a first-in, first-out basis. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period. In order to state the inventory at the lower of cost or NRV, we maintain reserves against individual stocking units. Inventory reserves, once established, are not reversed until the related inventories have been sold or scrapped. If future demand or market conditions are less favorable than our projections, a write-down of inventory may be required, and would be reflected in cost of product revenues sold in the period the revision is made.
Goodwill and intangible assets
In accordance with ASC 350, Intangibles – Goodwill and Other, in-process research and development (“IPRD”) projects acquired in a business combination that are not complete as of the acquisition date are capitalized and accounted for as indefinite-lived intangible assets until completion or abandonment of the related research and development efforts. Upon successful completion of the project, the capitalized amount is amortized over its estimated useful life. If a project is abandoned, all remaining capitalized amounts are written off immediately. The Company considers various factors and risks for potential impairment of IPRD assets, including the current legal and regulatory environment and the competitive landscape. Adverse clinical trial results, or significant delays, or the inability to bring a product to market and the introduction or advancement of competitors’ products could result in partial or full impairment of the related intangible assets. Consequently, the eventual realized value of the IPRD project may vary from its fair value at the date of acquisition, and IPRD impairment charges may occur in future periods. During the period between completion or abandonment, the IPRD assets will not be amortized but will be tested for impairment on an annual basis and between annual tests if the Company becomes aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the IPRD projects below their respective carrying amounts (see Note 8).
Goodwill represents the excess of the purchase price over the fair value of net identifiable assets and liabilities. Goodwill, similar to IPRD, is not amortized but is tested for impairment at least annually, or if circumstances indicate its value may no longer be recoverable. Qualitative factors considered in this assessment include industry and market conditions, overall financial performance, and other relevant events and factors affecting the Company’s business. Based on the qualitative assessment, if it is determined that the fair value of goodwill is more likely than not to be less than its carrying amount, the fair value of a reporting unit will be calculated and compared with its carrying amount and an impairment charge will be recognized for the amount that the carrying value exceeds the fair value. The Company operates in two segments as result of the Sera Labs, Inc., acquisition in October 2020 and considered to be the two reporting units and, therefore, goodwill is tested for impairment at the segment level.
The Company does not have intangible assets with indefinite useful lives other than goodwill, Trademark, and the acquired IPRD discussed in Note 19. As of March 31, 2022 the Company recorded a $
Business Combinations
The results of businesses acquired in a business combination are included in the Company’s condensed consolidated financial statements from the date of acquisition. Purchase accounting results in assets and liabilities of an acquired business being recorded at their estimated fair values on the acquisition date. Any excess consideration over the value of the assets acquired and liabilities assumed is recognized as goodwill.
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Impairment of Long-Lived Assets
Long-lived assets include equipment and intangible assets other than those with indefinite lives. We assess the carrying value of our long-lived asset groups when indicators of impairment exist and recognize an impairment loss when the carrying amount of a long-lived asset is not recoverable when compared to undiscounted cash flows expected to result from the use and eventual disposition of the asset.
Indicators of impairment include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically a discounted cashflow analysis, and an impairment charge is recorded for the excess of carrying value over fair value. There was no impairment on our long-lived assets during the three months ended March 31, 2022 and 2021.
Contingent consideration liabilities
Certain of the Company’s asset and business acquisitions involve the potential for future payment of consideration to third-parties and former selling shareholders in amounts determined upon attainment of revenue milestones, from product sales, as applicable. The fair value of such liabilities is determined using unobservable inputs. These inputs include the estimated amount and timing of projected cash flows and the risk-adjusted discount rate used to present value the cash flows. These obligations are referred to as contingent consideration.
ASC 805 requires that contingent consideration be estimated and recorded at fair value as of the acquisition date as part of the total consideration transferred. Contingent consideration is an obligation of the acquirer to transfer additional assets or equity interests to the selling shareholders in the future if certain future events occur or conditions are met, such as the attainment of product development milestones. Contingent consideration also includes additional future payments to selling shareholders based on achievement of components of earnings, such as “earn-out” provisions or percentage of future revenues, including royalties paid to the selling shareholders based on a percentage of revenues generated from the Sera Labs’ products.
The fair value of contingent consideration after the acquisition date is reassessed by the Company as changes in circumstances and conditions occur, with the subsequent change in fair value recorded in the consolidated statements of operations. Changes in key assumptions can materially affect the estimated fair value of contingent consideration liabilities and, accordingly, the resulting gain or loss that the Company records in its consolidated financial statements. See Note 19 for a full discussion of these liabilities.
Related Party
Parties are considered to be related to the Company if the parties that, directly or indirectly, through one or more intermediaries, control, are controlled by, or are under common control with the Company. Related parties also include principal owners of the Company, its management, members of the immediate families of principal owners of the Company and its management and other parties with which the Company may deal if one party controls or can significantly influence the management or operating policies of the other to an extent that one of the transacting parties might be prevented from fully pursuing its own separate interests.
Revenue Recognition
The Company recognizes revenue in accordance with ASC 606, “Revenue Recognition”. Revenues under Topic 606 are required to be recognized either at a “point in time” or “over time”, depending on the facts and circumstances of the arrangement, and are evaluated using a five-step model.
To achieve the core principle of Topic 606, we perform the following steps:
| · | Identify the contract(s) with customer; |
| · | Identify the performance obligations in the contract; |
| · | Determine the transactions price; |
| · | Allocate the transactions price to the performance obligations in the contract; and |
| · | Recognize revenue when (or as) we satisfy a performance obligation. |
Under Topic 606, the Company recognizes revenue as, or when, we satisfy performance obligations under a contract. We account for a contract when the parties approved the contract and are committed to perform on it, the rights of each party and the payment terms are identified, the contract has commercial substance and it is probable that we will collect substantially all of the consideration. A performance obligation is a promise in a contract to transfer a distinct good or service, or a series of distinct goods or services, to a customer. The transaction price of a contract must be allocated to each performance obligation and recognized as the performance obligation is satisfied. In essence, we recognize revenue when or as control of the promised goods or services transfer to the customer.
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Cure Pharmaceutical Revenue
Cure Pharmaceutical derives revenues from two primary sources: products and services. Product revenue includes the shipment of products according to agreements with the Cure Pharmaceutical’s customers. Services include research and development contracts for the development of OTF products utilizing the Cure Pharmaceutical’s CureFilm Technology or our other proprietary technologies. Cure Pharmaceutical’s contracts with customers rarely contain multiple performance obligations. For these contracts, Cure Pharmaceutical accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices are typically estimated based on observable transactions when these services are sold on a standalone basis.
Cure Pharmaceutical’s formulation and product development income include services for the development of OTF products utilizing our CureFilm Technology. Our development contracts have up to four phases. Revenue is recognized based on progress toward completion of the performance obligation in each phase. The method to measure progress toward completion requires judgment and is based on the nature of the products or services to be provided. Cure Pharmaceutical generally uses the input method to measure progress for its contracts because it best depicts the transfer of assets to the customer, which occurs as we incur costs for the contracts. Under the cost-to-cost measure of progress, the progress toward completion is measured based on the ratio of costs incurred to date to the total estimated costs at completion of the performance obligation. Revenue is recorded proportionally as costs are incurred. Costs to fulfill these obligations mainly include materials, labor, supplies and consultants.
Cure Pharmaceutical has entered into a Collaboration and Joint Development Agreement (“Agreement”) with Medolife Rx (“Medolife”) on February 1, 2021 (“Effective Date”) for Medolife to produce Medolife Products (“Products”) in Cure Pharmaceutical’s cGMP facility. The term of this agreement is for five (
Sera Labs Revenue
Sera Labs recognizes revenue as, or when, we satisfy performance obligations under a contract. We account for a contract when the parties approved the contract and are committed to perform on it, the rights of each party and the payment terms are identified, the contract has commercial substance and it is probable that we will collect substantially all of the consideration. A performance obligation is a promise in a contract to transfer a distinct good or service, or a series of distinct goods or services, to a customer. The transaction price of a contract must be allocated to each performance obligation and recognized as the performance obligation is satisfied. In essence, we recognize revenue when or as control of the promised goods or services transfer to the customer.
Revenue from eCommerce sales, including direct-to-consumer sales, are recognized upon shipment of merchandise. We also elected to adopt the practical expedient related to shipping and handling fees which allows us to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations. Therefore, shipping and handling activities are considered part of the Company’s obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred. Shipping revenue are recorded upon delivery to the customer.
Practical Expedients and Exemptions
The Company has elected certain practical expedients and policy elections as permitted under ASC Topic 606 as follows:
| · | The Company adopted the practical expedient related to not adjusting the promised amount of consideration for the effects of a significant financing component if the period between transfer of product and customer payment is expected to be less than one year at the time of contract inception; |
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|
|
| · | The Company made the accounting policy election to exclude any sales and similar taxes from the transaction price; |
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|
| · | The Company adopted the practical expedient not to disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less |
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Sales Tax
The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised goods or services to a customer, excluding sales taxes. The net amount of sales tax payable to the taxation authority is included sales tax payable in the balance sheet.
Sales Returns, Discounts and Warranties
Sales returns, discount and warranties are considered variable consideration under ASC 606. The Company reduces revenue for estimated future returns, discounts and warranties which may occur with distributors and retailers. When evaluating the adequacy of sales returns, discounts and warranties, the Company analyzes the following: historical credit allowances, current sell-through of inventory of the Company’s products, current trends in retail industry, changes in customer demand, acceptance of products, and other related factors.
Cost to Obtain a Contract
The Company pays sales commission to its employees and outside sales representatives for contracts that they obtain relating to wholesale and personal protective equipment. The Company applies the optional practical expedient to immediately expense costs to obtain a contract if the amortization period of the asset that would have been recognized is one year or less. As such, sales commissions are immediately recognized as an expense and included as part of sales and marketing expenses.
Contract Liabilities
Advance payments and billings in excess of revenue recognized represent contract liabilities and are recorded as deferred revenues when customers remit contractual cash payments in advance before satisfying performance obligations under contractual arrangements. Contract liabilities are derecognized when revenue is recognized, and the performance obligation is satisfied. Advance payments and billings in excess of revenue recognized are included in deferred revenue, which is classified as current or noncurrent based on the timing of when the Company expects to recognize revenue. At March 31, 2022 and December 31, 2021, we had contract liabilities of $
Contract liabilities is made up of the following as of March 31, 2022 and December 31, 2021 (in thousands):
|
| 2022 |
|
| 2021 |
| ||
Customer deposits for commercial products |
| $ |
|
| $ |
| ||
Total contract liabilities |
| $ |
|
| $ |
| ||
The following table summarizes the changes in contract liabilities during the three months ended March 31, 2022 and year ended December 31, 2021 (in thousands):
Balance at December 31, 2020 |
| $ |
| |
Additions |
|
|
| |
Customer deposits returned |
|
| ( | ) |
Transfers to Revenue |
|
| ( | ) |
Balance at December 31, 2021 |
|
|
| |
Transfers to Revenue |
|
| ( | ) |
Balance at March 31, 2022 |
| $ |
|
15 |
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Cost of Revenues
Cost of revenues primarily consists of labor and manufacturing costs for our products.
Advertising Expense
The Company expenses marketing, promotions and advertising costs as incurred. Such costs are included in general and administrative expense in the accompanying statements of operations. The Company recorded advertising costs of $
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 $
Income Taxes
The Company utilizes Financial Accounting Standards Board (“FASB”) ASC 740, “Income Taxes,” which requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been included in the financial statements or tax returns. Under this method, deferred tax assets and liabilities are determined based on the difference between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. A valuation allowance is recorded when it is “more likely-than-not” that a deferred tax asset will not be realized.
The Company generated a deferred tax asset through net operating loss carry-forward. However, a valuation allowance of 100% has been established due to the uncertainty of the Company’s realization of the net operating loss carry forward prior to its expiration.
On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security Act (the “CARES Act”) was enacted in response to the outbreak of a novel strain of the coronavirus, COVID-19. The CARES Act lifts certain deduction limitations originally imposed by the Tax Cuts and Jobs Act of 2017 (the “2017 Tax Act”). Under the CARES Act, net operating losses (“NOLs”) arising in tax years beginning after December 31, 2017, and before January 1, 2021 may be carried back to each of the five tax years preceding the tax year of such loss. Moreover, under the 2017 Tax Act as modified by the CARES Act, federal NOLs of our corporate subsidiaries generated in tax years ending after December 31, 2017 may be carried forward indefinitely, but the deductibility of federal NOLs, particularly for tax years beginning on or after January 1, 2021, may be limited. The accounting for the material income tax impacts has been reflected in the year ended December 31, 2021 financial statements. It is uncertain if and to what extent various states will conform to the 2017 Tax Act or the CARES Act. The Company is currently assessing the impact the CARES Act will have on the Company’s condensed consolidated financial statements.
Stock-Based Compensation
Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.
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Pursuant to ASC 2018-07 (Topic 718) for share-based payments to employees, consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the grant date. The Company uses the Black-Scholes option valuation model for estimating fair value at the date of grant.
The Company accounts for restricted stock awards and stock options issued at fair value, based the closing stock price of the Company’s common stock reported on the OTC Bulletin Board. Compensation expense is recognized for the portion of the award that is ultimately expected to vest over the period during which the recipient renders the required services to the Company generally using the straight-line single option method.
In the case of award modifications, the Company accounts for the modification in accordance with Accounting Standards Update (“ASU”) No. 2017-09, Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting, whereby the Company recognizes the effect of the modification in the period the award is modified.
As of January 1, 2019, the Company adopted ASU No. 2018-07, Compensation-Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which aligns the accounting of share-based payment awards issued to employees and nonemployees. The adoption did not materially impact our consolidated financial statements.
Fair value measurements
The Company follows FASB ASC 820, “Fair Value Measurements and Disclosures” (“ASC 820”), for assets and liabilities measured at fair value on a recurring basis. ASC 820 establishes a common definition for fair value to be applied to existing generally accepted accounting principles that require the use of fair value measurements and establishes a framework for measuring fair value and expands disclosure about such fair value measurements. ASC 820 establishes a single authoritative definition of fair value, sets out a framework for measuring fair value and expands on required disclosures about fair value measurement. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible. ASC 820 describes a fair value hierarchy based on three levels of inputs, of which the first two are considered observable and the last unobservable, that may be used to measure fair value, which are the following:
| · | Level 1 – Quoted prices in active markets for identical assets and liabilities. |
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| · | Level 2 – Inputs other than Level 1 that are observable, either directly or indirectly, such as quoted market prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities. |
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| · | Level 3 – Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. |
When a part of the purchase consideration consists of shares of the Company common stock, the Company calculates the purchase price attributable to those shares, a Level 1 security, by determining the fair value of those shares quoted on the OTC as of the acquisition date. The Company recognizes estimated fair values of the tangible assets and identifiable intangible assets acquired, including in-process research and development, and liabilities assumed, including any contingent consideration, as of the acquisition date. Goodwill is recognized as any amount of the fair value of the tangible and identifiable intangible assets acquired and liabilities assumed in excess of the consideration transferred. ASC 805 precludes the recognition of an assembled workforce as an asset, effectively subsuming any assembled workforce value into goodwill.
In determining fair value, the Company utilizes valuation techniques that maximize the use of observable inputs and minimize the use of unobservable inputs to the extent possible, and also considers counterparty credit risk in its assessment of fair value. At March 31, 2022 and December, 31, 2021, the Company had no financial assets or liabilities recorded at fair value on a recurring basis, except for cash and cash equivalents consisting of money market funds and the Series A and Series B Notes, which we elected the fair value option. These assets and liabilities are measured at fair value using either Black-Scholes model or Monte Carlo simulation model as a Level 3 input. The Company also has certain derivative liabilities and contingent consideration liabilities which are carried at fair value based on Level 3 inputs.
The carrying amounts of cash equivalents, prepaid expenses and other current assets, accounts payable, accrued expenses and other current liabilities approximate fair values because of the short-term nature of these items.
The fair value of contingent stock consideration is evaluated each reporting period using projected financial information, discount rates, and key inputs. Projected contingent payment amounts are discounted back to the current period using a discount rate. Financial information is based on the Company’s most recent internal forecasts. Changes in projected financial information, the Company’s stock price, discount rate and time for settlement of milestones and earnouts may result in higher or lower fair value measurements. Increases (decreases) in any of those inputs in isolation may result in a significantly lower (higher) fair value measurement. For the period from the date of acquisition to March 31, 2021, the Company’s stock price, volatility percentage and the weighted average present value probability of each the various estimates of milestones, earn-out amounts and achievements being accomplished resulted in a decrease of the fair value of the contingent stock consideration. For the period from the December 31, 2021 to March 31, 2022, the Company’s stock price, volatility percentage and the weighted average present value probability of each the various estimates of milestones, earn-out amounts and achievements being accomplished resulted in a decrease of the fair value of the contingent stock consideration. In June 2020, the Company settled all of its outstanding contingent consideration liabilities outstanding with CHI. In October 2020, the Company acquired Sera Labs and had an outstanding contingent consideration liability of $
The Company has elected the fair value option to account for the Series A and B Notes that were issued on October 30, 2020 and records this at fair value with changes in fair value recorded in the Condensed Consolidated Statements of Operations. As a result of applying the fair value option, direct costs and fees related to the Series A and B Notes were recognized in earnings as incurred and not deferred.
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The following table summarizes fair value measurements by level at March 31, 2022 for assets and liabilities measured at fair value on a recurring basis (in thousands):
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| Total |
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| Level 1 |
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| Level 2 |
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| Level 3 |
| ||||
Fair value of contingent stock consideration |
| $ |
|
| $ | - |
|
| $ | - |
|
| $ |
| ||
Fair value of Series A Note |
| $ |
|
| $ | - |
|
| $ | - |
|
| $ |
| ||
Fair value of Series B Note |
| $ |
|
| $ | - |
|
| $ | - |
|
| $ |
| ||
The following table summarizes fair value measurements by level at December 31, 2021 for assets and liabilities measured at fair value on a recurring basis (in thousands):
|
| Total |
|
| Level 1 |
|
| Level 2 |
|
| Level 3 |
| ||||
Fair value of contingent stock consideration |
| $ |
|
| $ | - |
|
| $ | - |
|
| $ |
| ||
Fair value of Series A Note |
| $ |
|
| $ | - |
|
| $ | - |
|
| $ |
| ||
Fair value of Series B Note |
| $ |
|
| $ | - |
|
| $ | - |
|
| $ |
| ||
| 17 |
| Table of Contents |
The following table summarizes the changes in Level 3 financial instruments during the three months ended March 31, 2022 (in thousands):
Fair value at December 31, 2021 |
| $ |
| |
Change in fair value of Series A Note |
|
|
| |
Change in fair value of Series B Note |
|
|
| |
Conversion of Series B Note |
|
| ( | ) |
Fair value of Series A and B Notes at March 31, 2022 |
| $ |
|
Financial instruments measured at fair value are classified in their entirety based on the lowest level of input that is significant to the fair value measurement. The Series A and Series B Notes are measured at fair value using the Monte Carlo simulation valuation methodology. A summary of the weighted average (in aggregate) significant unobservable inputs (Level 3 inputs) used in measuring the Company’s derivative liabilities that are categorized within Level 3 of the fair value hierarchy is as follows:
Date of valuation |
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Stock price |
| $ |
|
| $ |
| ||
Conversion price |
| $ |
|
| $ |
| ||
Term (in years) – Series A Note |
|
|
|
|
|
| ||
Term (in years) – Series B Note |
|
|
|
|
|
| ||
Volatility – Series A Note |
|
| % |
|
| % | ||
Volatility – Series B Note |
|
| % |
|
| % | ||
Risk-free interest rate – Series A Note |
|
| % |
|
| % | ||
Risk-free interest rate – Series B Note |
|
| % |
|
| % | ||
Interest rate |
|
| % |
|
| % | ||
The Company recorded a loss of $
Beneficial Conversion Feature
If the conversion features of conventional convertible debt provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount pursuant to ASC Topic 470-20 “Debt with Conversion and Other Options.” In those circumstances, the convertible debt is recorded net of the discount related to the BCF and the Company amortizes the discount to interest expense over the life of the debt using the effective interest method.
Series A and Series B convertible notes:
As described further in Note 14 - the Company has elected the fair value option to record its Series A and Series B convertible debentures, which were issued in October 2020. The fair value of the Notes is classified within Level 3 of the fair value hierarchy because the fair values were estimated utilizing a Monte Carlo simulation model. Accordingly, the notes are marked-to-market at each reporting date with the change in fair value reported as a gain (loss) in the Condensed Consolidated Statement of Operations. All issuance costs related to the debentures were expensed as incurred in the Condensed Consolidated Statement of Operations.
| 18 |
| Table of Contents |
Accounting for warrants
The Company determines the accounting classification of warrants it issues, as either liability or equity classified, by first assessing whether the warrants meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Under ASC 480, warrants are considered liability classified if the warrants are mandatorily redeemable, obligate the Company to settle the warrants or the underlying shares by paying cash or other assets, or warrants that must or may require settlement by issuing variable number of shares. If warrants do not meet liability classification under ASC 480-10, the Company assesses the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the warrants do not require liability classification under ASC 815-40, and in order to conclude equity classification, the Company also assesses whether the warrants are indexed to its common stock and whether the warrants are classified as equity under ASC 815-40 or other applicable GAAP. After all relevant assessments, the Company concludes whether the warrants are classified as liability or equity. Liability classified warrants require fair value accounting at issuance and subsequent to initial issuance with all changes in fair value after the issuance date recorded in the statements of operations. Equity classified warrants only require fair value accounting at issuance with no changes recognized subsequent to the issuance date. The Company does not have any liability classified warrants as of any period presented.
Derivative Liabilities
ASC 815-40, requires that embedded derivative instruments be bifurcated and assessed, along with free-standing derivative instruments such as warrants, on their issuance date and in accordance with ASC 815-40-15 to determine whether they should be considered a derivative liability and measured at their fair value for accounting purposes. In determining the appropriate fair value, the Company uses the Black-Scholes option pricing formula and present value pricing. At March 31, 2022 and December 2021, the Company did not have any derivative liabilities to adjust to its fair value.
Contingencies
We are exposed to claims and litigation arising in the ordinary course of business and use various methods to resolve these matters in a manner that we believe serves the best interest of our shareholders and other constituents. When a loss is probable, we record an accrual based on the reasonably estimable loss or range of loss. When no point of loss is more likely than another, we record the lowest amount in the estimated range of loss and, if material, disclose the estimated range of loss. We do not record liabilities for reasonably possible loss contingencies, but do disclose a range of reasonably possible losses if they are material and we are able to estimate such a range. If we cannot provide a range of reasonably possible losses, we explain the factors that prevent us from determining such a range. Historically, adjustments to our estimates have not been material. We believe the recorded reserves in our condensed consolidated financial statements are adequate in light of the probable and estimable liabilities. We do not believe that any of these identified claims or litigation will be material to our results of operations, cash flows, or financial condition. Gain contingencies are recorded when the ultimate resolution of the contingency is resolved.
| 19 |
| Table of Contents |
Net Loss per Common Share
Basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period, excluding any unvested restricted stock awards. Diluted net earnings per share is computed by dividing net earnings by the weighted average common shares outstanding during the period plus dilutive securities or other contracts to issue common stock as if these securities were exercised or converted to common stock.
Diluted net loss per share includes the effect of common stock equivalents (stock options, unvested restricted stock, and warrants) when, under either the treasury or if-converted method, such inclusion in the computation would be dilutive. Net loss is adjusted for the dilutive effect of the change in fair value liability for price adjustable warrants, if applicable.
The following table sets forth the computation of basic and diluted net income per share for the three months ended (in thousands, except per share data):
|
| For the Three Months Ended |
| |||||
|
| March 31, 2022 |
|
| March 31, 2021 |
| ||
Net income (loss) attributable to the Company |
| $ | ( | ) |
| $ | ( | ) |
Weighted average outstanding shares of common stock |
|
|
|
|
|
| ||
Dilutive potential common stock shares from: |
|
|
|
|
|
|
|
|
Vested Stock options from the Company’s 2017 Equity Incentive Plan |
|
| - |
|
|
| - |
|
Warrants |
|
| - |
|
|
| - |
|
Conversion of convertible notes |
|
| - |
|
|
| - |
|
Issuance of contingent shares relating to CHI acquisition |
|
| - |
|
|
| - |
|
Common stock and common stock equivalents |
|
|
|
|
|
| ||
Income (loss) per share: |
|
|
|
|
|
|
|
|
Basic net income (loss) per share |
| $ | ( | ) |
| $ | ( | ) |
Diluted net income (loss) per share |
| $ | ( | ) |
| $ | ( | ) |
The following number of shares have been excluded from diluted net income (loss) since such inclusion would be anti-dilutive:
|
| Three months ended March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
Vested stock options from the Company’s 2017 Equity Incentive Plan |
|
|
|
|
|
| ||
Warrants |
|
|
|
|
|
| ||
Shares to be issued upon conversion of convertible payable |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Total |
|
|
|
|
|
| ||
In connection with Sera Labs Merger, Sera Labs security holders are also entitled to receive up to
The Series A and B Notes (other than restricted amounts under a Series B Note) is convertible, at the option of the Investor, into shares of Common Stock at a conversion price of $
| 20 |
| Table of Contents |
Segment Reporting
The Company uses the “management approach” to identify its reportable segments. The management approach designates the internal organization used by management for making operating decisions and assessing performance as the basis for identifying the Company’s reportable segments. Using the management approach, the Company determined that it does have segment reporting relating to Cure Pharmaceutical and Sera Labs.
Risks and Uncertainties
COVID-19 Considerations
The COVID-19 pandemic has negatively impacted, and may continue to negatively impact, the macroeconomic environment in the United States and globally. Due to the evolving and uncertain nature of COVID-19, it is reasonably possible that it could materially impact our estimates, particularly those that require consideration of forecasted financial information, in the near to medium term. These estimates relate to certain accounts including, but not limited to, intangible assets, and other long-lived assets. The magnitude of the impact will depend on numerous evolving factors that we may not be able to accurately predict, including the duration and extent of the pandemic, the impact of federal, state, local and foreign governmental actions, consumer, supplier and hospital behavior in response to the pandemic and such governmental actions, and the economic and operating conditions that we may face in the aftermath of COVID-19.
| 21 |
| Table of Contents |
Recent Accounting Pronouncements Not Yet Adopted
ASU 2022-02
In March 2022, the Financial Accounting Standards Board (“FASB”) issued ASU 2022-02, “Financial Instruments-Credit Losses (Topic 326): Troubled Debt Restructurings (“TDR”) and Vintage Disclosures” (“ASU 2022-02”). These amendments eliminate the TDR recognition and measurement guidance and enhance existing disclosure requirements and introduce new requirements related to certain modifications of receivables made to borrowers experiencing financial difficulty. ASU 2022-02 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of March 31, 2022, we do not expect ASU 2022-02 to have an impact to our condensed consolidated financial statements.
ASU 2022-01
In March 2022, the FASB issued ASU 2022-01, “Derivatives and Hedging (Topic 815): Fair Value Hedging-Portfolio Layer Method” (ASU 2022-01). The ASU expands the current single-layer method to allow multiple hedged layers of a single closed portfolio under the method. ASU 2022-01 will become effective for us in the first quarter of fiscal 2023 and early adoption is permitted. As of March 31, 2022, we do not expect ASU 2022-01 to have an impact to our condensed consolidated financial statements.
Other accounting standard updates effective for interim and annual periods beginning after December 31, 2021 are not expected to have a material impact on the Company’s financial position, results of operations or cash flows.
There are various other updates recently issued, however, they are not expected to a have a material impact on the Company’s condense consolidated financial position, results of operations or cash flows.
| 22 |
| Table of Contents |
NOTE 3 – ACCOUNTS RECEIVABLE
As of March 31, 2022 and December 31, 2021, accounts receivable consisted of the following (in thousands):
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
|
|
|
|
|
|
| ||
Customer billed |
| $ |
|
| $ |
| ||
Allowance for doubtful accounts |
|
| ( | ) |
|
| ( | ) |
Accounts receivable, net |
| $ |
|
| $ |
| ||
Customer billed accounts receivable represents amounts billed to clients that have yet to be collected.
Allowances for doubtful accounts have been determined through specific identification of amounts considered to be uncollectible and potential write-offs, plus a non-specific allowance for other amounts for which some potential loss has been determined to be probable based on current and past experience.
NOTE 4 - PREPAID EXPENSES AND OTHER ASSETS
As of March 31, 2022 and December 31, 2021, prepaid expenses and other assets consisted of the following (in thousands):
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Prepaid insurance |
| $ |
|
| $ |
| ||
Prepaid equipment |
|
|
|
|
|
| ||
Prepaid inventory |
|
|
|
|
|
| ||
Prepaid expenses |
|
|
|
|
|
| ||
Other assets |
|
|
|
|
|
| ||
Total Prepaid expenses and other assets |
|
|
|
|
|
| ||
Current portion of prepaid expenses and other assets |
|
| ( | ) |
|
| ( | ) |
Prepaid expenses and other assets less current portion |
| $ |
|
| $ |
| ||
NOTE 5 - INVENTORY
Inventory consists of raw materials, packaging components, work-in-process and finished goods. The Company’s inventory is stated at the lower of cost (FIFO cost basis) or Net Realized Value.
The carrying value of inventory consisted of the following (in thousands):
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Raw materials |
| $ |
|
| $ |
| ||
Packaging components |
|
|
|
|
|
| ||
Work-in-process |
|
|
|
|
|
| ||
Finished goods |
|
|
|
|
|
| ||
|
|
|
|
|
|
| ||
Reserve for obsolescence |
|
| ( | ) |
|
| ( | ) |
Total inventory |
| $ |
|
| $ |
| ||
NOTE 6 - PROPERTY AND EQUIPMENT
As of March 31, 2022 and December 31, 2021, property and equipment consisted of the following (in thousands):
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Equipment not yet placed in service |
| $ |
|
| $ |
| ||
Manufacturing equipment |
|
|
|
|
|
| ||
Computer and other equipment |
|
|
|
|
|
| ||
Less accumulated depreciation |
|
| ( | ) |
|
| ( | ) |
Property and Equipment, net |
| $ |
|
| $ |
| ||
For the three months ended March 31, 2022 and 2021, depreciation expense amounted to $0.04 million and $0.05 million, respectively.
| 23 |
| Table of Contents |
NOTE 7 – NOTES RECEIVABLE
On May 26, 2021, the Company purchased a convertible loan (the “May 2021 Loan”) with Biopharmaceutical Research Company (“BRC”) for a total amount of $
Note receivable consists of the following (in thousands):
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Biopharmaceutical Research Company |
| $ |
|
| $ |
| ||
Less: allowance for doubtful accounts |
|
| - |
|
|
| - |
|
Note receivable, net |
| $ |
|
| $ |
| ||
NOTE 8 – GOODWILL AND INTANGIBLE ASSETS
The Company incurred $
| 24 |
| Table of Contents |
Intangible Asset Summary
As of March 31, 2022 and December 31, 2021, goodwill and intangible assets, net, consisted of the following (in thousands):
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Goodwill (1) |
| $ |
|
| $ |
| ||
Accumulated impairment losses |
|
| ( | ) |
|
|
| |
Goodwill, net |
| $ |
|
| $ |
| ||
|
|
|
|
|
|
|
|
|
Intangible assets not subject to amortization: |
|
|
|
|
|
|
|
|
Acquired IPRD – Chemistry (2) |
| $ |
|
| $ |
| ||
Pending patents – Cure Pharmaceutical |
|
|
|
|
|
| ||
Total intangible assets not subject to amortization |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Intangible assets subject to amortization: |
|
|
|
|
|
|
|
|
Acquired IPRD – Chemistry (2) |
|
|
|
|
|
| ||
Customer relationships (2) |
|
|
|
|
|
| ||
Tradename (2) |
|
|
|
|
|
| ||
Noncompete (2) |
|
|
|
|
|
| ||
Intellectual property |
|
|
|
|
|
| ||
Issued patents |
|
|
|
|
|
| ||
Total intangible assets subject to amortization |
|
|
|
|
|
| ||
Accumulated amortization |
|
| ( | ) |
|
| ( | ) |
Total intangible assets subject to amortization, net |
|
|
|
|
|
| ||
|
|
|
|
|
|
|
|
|
Intangible assets, net |
| $ |
|
| $ |
| ||
(1) | Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired from CHI and Sera Labs (see Note 19). |
|
|
(2) | See Note 19 for information on the Mergers which were consummated in May 2019 and October 2020. During the year ended December 31, 2021, the Company completed two research and development projects that resulted in the company reclass approximately $ |
Amortization expense was $
Impairment loss of goodwill was $
The estimated aggregate amortization expense over each of the next five years is as follows (in thousands):
2022 (remaining) |
| $ |
| |
2023 |
|
|
| |
2024 |
|
|
| |
2025 |
|
|
| |
2026 |
|
|
| |
Thereafter |
|
|
| |
Total Amortization |
| $ |
|
| 25 |
| Table of Contents |
NOTE 9 – INVESTMENT
In accordance with ASC 325-20, equity securities that do not have readily determinable fair values (i.e., non-marketable equity securities) and are not required to be accounted for under the equity method are typically carried at cost (i.e., cost method investments). Investments of this nature are initially recorded at cost.
As of March 31, 2022 and December 31, 2021, our investment, at cost, consisted of the following (in thousands):
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Investment in Releaf Europe BV |
| $ |
|
| $ |
| ||
Valuation reserve |
|
| ( | ) |
|
| ( | ) |
Investment, net |
| $ |
|
| $ |
| ||
As of March 31, 2022 and December 31, 2021, the net investment is based on management’s best estimate of net realizable value, which resulted a valuation reserve amount of $
NOTE 10 – ACCRUED EXPENSES
As of March 31, 2022 and December 31, 2021, accrued expenses consisted of the following (in thousands):
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Accounts payable factoring |
| $ |
|
| $ |
| ||
Refunds and returns liability |
|
|
|
|
|
| ||
Accrued interest (see Note 11 for amount of related party interest included) |
|
|
|
|
|
| ||
Accrued payroll |
|
|
|
|
|
| ||
Accrued vacation leave |
|
|
|
|
|
| ||
Accrued expenses |
|
|
|
|
|
| ||
Sales tax payable |
|
|
|
|
|
| ||
Accrued Expenses |
| $ |
|
| $ |
| ||
NOTE 11 – RELATED PARTY TRANSACTIONS
Due to Related Party
The Company and other related entities have had a commonality of ownership and/or management control, and as a result, the reported operating results and /or financial position of the Company could significantly differ from what would have been obtained if such entities were autonomous.
On January 2, 2019, Sera Labs entered into an administrative service agreement (“Service Agreement”) with Visionworx, an affiliate of Sear Labs. Visionworx will process payments related to Sera Lab’s operations using Visionworx’s contractual relationship with JPMorgan Chase Bank, N.A. via its Chase Paymentech Select Merchant Payment Instrument Processing Agreement. In consideration for the services, Sera Labs will pay to Visionworx a management fee equal to all associated fees and expenses in connection with the Service Agreement. The Service Agreement was effective on January 2, 2019 and will be renewed automatically for additional one-year periods until terminated. The Service Agreement may be terminated by (a) either party for any reason at least thirty days’ prior written notice to the other party; or (b) immediately upon the mutual consent of the parties.
On August 6, 2020, the Company entered into an unsecured promissory note (the “August Note”) with John Bell (“Mr. Bell”), for a principal amount of $0.2 million. The August Note was due on August 6, 2021 and had an interest rate of 8% per annum, payable in quarterly payments. The principal and accrued interest under the August Note can convert into a convertible promissory note if the Company consummates a debt financing for the sale and issuance of promissory notes that are convertible into common stock of the Company on terms that are more favorable to new investors than the terms described in the term sheet included in the August Note. Upon notice by the Company of such debt financing, the holder of the August Note shall have the right, but not the obligation, to convert the August Note into a convertible promissory note, with the same principal amount and interest accruing from the date of issuance of the August Note, on the same terms as the convertible promissory notes issued to such new investors. Mr. Bell did not elect to convert their August Note into a convertible promissory note, and on August 6, 2021, both the Company and Mr. Bell agreed to roll the amount of principal and accrued interest as of
On October 2, 2020, the Company completed its acquisition of Sera Labs and pursuant to the Sera Labs Merger Agreement, the Company issued a promissory note in the principal amount of $
On November 16, 2021, the Company entered into a secured promissory note (the “Secured November Note”) with Mr. Bell for a principal amount of $
From May 3, 2021 through December 28, 2021, the Company entered into several secured promissory notes (the “Secured Notes”) with several of Dov Szapiro’s affiliated investment companies (“Mr. Szaprio”) for a total principal amount of $
On January 12, 2022, the Company entered into a secured promissory note (the “Secured January Note”) with the CEO of Sera Labs for a principal amount of $
On January 10, 2022, the Company entered into several secured promissory notes (the “Secured January Notes”) with Mr. Szaprio for a total principal amount of $
As of March 31, 2022 and December 31, 2021, the Company recorded $
NOTE 12 – LOAN PAYABLE
Loan payable consists of the following at March 31, 2022 and December 31, 2021 (in thousands):
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Note to a company due September 29, 2022, including interest at 4.32% per annum; unsecured; interest due monthly |
| $ |
|
| $ |
| ||
Note to a company due June 6, 2022, including interest at 4.42% per annum; unsecured; interest due monthly |
|
|
|
|
|
| ||
Current portion of loan payable |
|
| ( | ) |
|
| ( | ) |
Loan payable, less current portion |
| $ |
|
| $ |
| ||
Interest expense for the three months ended March 31, 2022 and 2021 was $
| 26 |
| Table of Contents |
NOTE 13 – NOTES PAYABLE
Notes payable consist of the following at March 31, 2022 and December 31, 2021 (in thousands):
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Note to an individual, non-interest bearing, unsecured and due on demand |
| $ |
|
| $ |
| ||
Secured Promissory note to a company originally due June 30, 2022; interest at 10% per annum payable at maturity |
|
|
|
|
|
| ||
Secured Promissory note to a company originally due May 18, 2021 due June 30, 2022; interest at 10% per annum payable at maturity |
|
|
|
|
|
| ||
Secured Promissory note to a company originally due January 13, 2022 was due June 30, 2022; interest at 10% per annum payable at maturity |
|
|
|
|
|
| ||
Secured promissory notes to a company originally due April 8, 2022 and October 30, 2021 was rolled into a new secured promissory notes now due June 30, 2022; interest at 10% per annum payable at maturity |
|
|
|
|
|
| ||
Secured promissory note to a company due May 31, 2022; interest at 10% per annum payable at maturity |
|
|
|
|
|
| ||
Secured promissory note to a company due May 31, 2022; interest at 10% per annum payable at maturity |
|
|
|
|
|
| ||
Promissory notes to a company, , terms of the promissory notes are still being negotiated |
|
|
|
|
|
| ||
Secured promissory notes to a company due June 30, 2022; interest at 10% per annum payable at maturity |
|
|
|
|
|
| ||
Secured promissory notes to a company due June 30, 2022; interest at 10% per annum payable at maturity |
|
|
|
|
|
| ||
Promissory notes to a company, , terms of the promissory notes are still being negotiated |
|
|
|
|
|
| ||
Current portion of note payable |
| $ |
|
| $ |
| ||
On May 18, 2020 and August 12, 2020, the Company entered into unsecured promissory notes (“Notes”) with an investor for $
On January 13, 2021 and February 25, 2021, the Company received a total of $0.5 million from an investment company in exchange for a promissory note. At the time the Company received the $0.5 million, terms of promissory note were not yet finalized. On October 30, 2021, both the Company and the investment company agreed to roll the amount of principal and accrued interest as of October 30, 2021 into a new secured promissory note (“New January 2021 Note”) with a principal amount of $
On April 8, 2021 and September 24, 2021, the Company received $
On October 27, 2021, the Company received $
On November 18, 2021, the Company received $
From October 15, 2021 to December 15, 2021, the Company received at total of $
On December 16, 2021, the Company received at total of $
On January 18, 2022, the Company received $
From January 31, 2022 to March 31, 2022, the Company received at total of $2.1 million from an investment company in exchange for promissory notes. Both the Company and the investment company agreed to negotiate the terms of the promissory notes and as of the filing date of this report, the Company and investment company are still negotiating the terms of the promissory notes.
Interest expense for the three months ended March 31, 2022 and 2021 was $
NOTE 14 – CONVERTIBLE PROMISSORY NOTES AND FAIR VALUE OF CONVERTIBLE PROMISSORY NOTES
Convertible promissory notes consists of the following at March 31, 2022 and December 31, 2021 (in thousands):
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Convertible promissory notes totaling $550,000 due January 31, 2019, interest payable at 8% per annum; unsecured; principal and accrued interest convertible into common stock at the lower of $7.00 per share or the price per share of the latest closing of a debt or equity offering by the Company greater than $3,000,000; accrued interest due January 31, 2019 and currently in default. The Company has offered to either repay the convertible promissory notes or request to have them converted into common stock shares of the Company. The beneficial owners of the convertible promissory notes have not yet communicated their intent to either receive payment or convert. |
| $ |
|
| $ |
| ||
Current portion of convertible promissory notes |
| $ |
|
| $ |
| ||
| 27 |
| Table of Contents |
Fair value of convertible promissory notes consists of the following at March 31, 2022 and December 31, 2021 (in thousands):
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Series A subordinated convertible note at fair value |
| $ |
|
| $ |
| ||
Series B subordinated convertible note at fair value |
|
|
|
|
|
| ||
Total convertible promissory notes |
|
|
|
|
|
| ||
Less: Investor Note offset – Series B Note |
|
| ( | ) |
|
| ( | ) |
Carrying value of convertible promissory notes at fair value |
|
|
|
|
|
| ||
Less: current portion of convertible promissory notes at fair value |
|
| ( | ) |
|
| ( | ) |
Convertible promissory notes, less current portion |
| $ |
|
| $ |
| ||
On October 30, 2020, the Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with an institutional investor (the “Investor”) for the purchase of two new series of convertible notes with an aggregate principal amount of $
The Series A Note was sold with an original issue discount of $
The placement agent received a placement agent fee of $
The Convertible Notes mature on October 30, 2022 with respect to the Series A Note and October 30, 2021 with respect to the Series B Note (the “Maturity Date”), subject to extension in certain circumstances, including bankruptcy and outstanding events of default. On the Maturity Date, the Company shall pay to the Investor an amount in cash (other than restricted amounts under a Series B Note) presenting all outstanding principal, Make-Whole Amount (as defined in the Convertible Notes), if any, accrued and unpaid interest and accrued and unpaid Late Charges (as defined in the Convertible Notes) on such principal, except that any restricted amount under the Series B Note will be automatically satisfied on the Maturity Date (in lieu of a cash payment) by Maturity Netting (as defined in the Investor Note described below). The Company may not prepay any amounts due under the Convertible Notes. The Convertible Notes shall bear no interest unless there is an occurrence, and during the continuance, of an Event of Default at which point interest shall be
| 28 |
| Table of Contents |
Each Convertible Note (other than restricted amounts under a Series B Note) is convertible, at the option of the Investor, into shares of Common Stock at a conversion price of $
Promptly after the consummation of the sale of the Convertible Notes, the Company repaid in full the outstanding principal balance and all accrued but unpaid interest expense on the Senior Promissory Note issued on September 25, 2020 to the Investor (the “September Note”). The cash payment to the Investor to satisfy the September Note was in the amount $
On January 5, 2022, the Company entered into a Forbearance Agreement (the “Forbearance Agreement”) with the Investor pursuant to which the Investor has agreed not to exercise, with certain exclusions, any of its judicial or administrative enforcement actions to obtain cash or other assets (excluding Common Stock or other assets issuable upon conversion or exchange of the Series B Note in accordance with the terms thereof) from the Company on account of any payment obligations of the Company under the Series B Note or the Event of Default Redemption Notice that exist as of the date of the Forbearance Agreement or that may arise from the date of this Agreement through February 15, 2022. See Note 21 for additional information as of the filing date of this report.
Payment of Amounts Due under the Convertible Notes
On the Maturity Date, the Company shall pay to the Investor an amount in cash (other than restricted amounts under a Series B Note) presenting all outstanding principal, Make-Whole Amount (as defined in the Convertible Notes), if any, accrued and unpaid interest and accrued and unpaid Late Charges (as defined in the Convertible Notes) on such principal, except that any restricted amount under the Series B Note will be automatically satisfied on the Maturity Date (in lieu of a cash payment) by Maturity Netting (as defined in the Investor Note described below). The Company may not prepay any amounts due under the Convertible Notes.
Interest
The Convertible Notes shall bear no interest unless there is an occurrence, and during the continuance, of an Event of Default (as defined in the Convertible Notes). During any such Event of Default, the Convertible Notes will accrue interest at the rate of
Conversion; Alternate Conversion upon Event of Default
Each Convertible Note (other than restricted amounts under a Series B Note) is convertible, at the option of the Investor, into shares of Common Stock at a conversion price of $1.32 per share. The conversion price is subject to full ratchet antidilution protection upon any transaction in which the Company is deemed to have granted, issued or sold, any shares of Common Stock. If the Company enters into any agreement to issue any variable rate securities, other than a bona fide at-the-market offering or equity line of credit, the Investor has the additional right to substitute such variable price (or formula) for the conversion price.
If an Event of Default has occurred under the Convertible Notes, the Investor may elect to alternatively convert the Convertible Notes at the redemption premium described therein.
Conversion Limitation
| 29 |
| Table of Contents |
Events of Default
The Convertible Notes include certain customary and other Events of Default. In connection with an Event of Default, the Investor may require the Company to redeem in cash any or all of the Convertible Notes. The redemption price will be at a premium to the amount due under the Convertible Notes as described therein.
Change of Control
In connection with a Change of Control (as defined in the Convertible Notes), the Investor may require the Company to redeem all or any portion of the Convertible Notes. The redemption price per share will be at a premium to the amount due under the Convertible Notes as described therein.
Covenants
The Company will be subject to certain customary affirmative and negative covenants including those regarding the payment of dividends, maintenance of its property, transactions with affiliates, and issue notes and certain securities.
Placement Agent Warrants
On October 2, 2020 and December 31, 2020, in connection with the
The Company used the Black-Scholes model to determine the fair value of the Warrants issued to the Placement Agent. The Company has elected the Fair Value Option for the Series A Note and Series B Note, accordingly the fair value of the Warrants issued to the placement agent were expensed.
The following table sets forth the assumptions used and calculated aggregated fair values of the warrants:
Significant assumptions (weighted-average): |
|
|
| |
Risk-free interest rate at grant date |
|
| % | |
Expected stock price volatility |
|
| % | |
Expected dividend payout |
|
|
| |
Expected warrant life (in years) |
|
|
| |
Expected forfeiture rate |
|
| % | |
Fair Value Option for the Series A and Series B Notes
The Company elected the fair value option under ASC 825, Financial Instruments, for both the Series A and Series B Notes and accounted for the Notes as follows (1) the portion of the change in the liability’s fair value that is attributable to a change in instrument-specific credit risk in other comprehensive income (2) the remaining change in the liability’s fair value in net income (3) the excess of the fair value over the proceeds is recognized as an expense and (4) upfront costs and fees are recognized in earnings as incurred Gains and losses attributable to changes in credit risk are determined using observable credit default spreads for the issuer or comparable companies; these gains and losses were insignificant during all periods presented. The Company recognized a loss of $
The Company recorded a loss of $
32 |
Table of Contents |
NOTE 15 – WARRANT AGREEMENTS
During the three months ended March 31, 2022 and 2021, the Company did not issue any warrants.
Warrants that vest at the end of a one-year period are amortized over the vesting period using the straight-line method.
The Company’s warrant activity was as follows:
|
| Warrants |
|
| Weighted Average Exercise Price |
|
| Weighted Average Contractual Remaining Life |
| |||
Outstanding, December 31, 2020 |
|
|
|
| $ |
|
|
|
| |||
Granted |
|
| - |
|
|
|
|
|
| - |
| |
Exercised |
|
| ( | ) |
|
|
|
|
| - |
| |
Forfeited/Expired |
|
| ( | ) |
|
|
|
|
| - |
| |
Outstanding, December 31, 2021 |
|
|
|
| $ |
|
|
|
| |||
Granted |
|
| - |
|
|
|
|
|
| - |
| |
Exercised |
|
| - |
|
|
|
|
|
| - |
| |
Forfeited/Expired |
|
| ( | ) |
|
|
|
|
| - |
| |
Outstanding, March 31, 2022 |
|
|
|
|
|
|
|
|
| |||
Exercisable at March 31, 2022 |
|
|
|
| $ |
|
|
|
| |||
| 30 |
| Table of Contents |
Warrant summary as of March 31, 2022:
Range of Exercise Price |
| Number of Warrants |
|
| Weighted Average Remaining Contractual Life (years) |
|
| Weighted Average Exercise Price |
|
| Number of Warrants Exercisable |
|
| Weighted Average Exercise Price |
| |||||
$1.98–$2.00 |
|
|
|
|
|
|
| $ |
|
|
|
|
| $ |
| |||||
|
|
|
|
|
|
|
| $ |
|
|
|
|
| $ |
| |||||
Warrant summary as of December 31, 2021:
Range of Exercise Price |
| Number of Warrants |
|
| Weighted Average Remaining Contractual Life (years) |
|
| Weighted Average Exercise Price |
|
| Number of Warrants Exercisable |
|
| Weighted Average Exercise Price |
| |||||
$1.98–$2.31 |
|
|
|
|
|
|
| $ |
|
|
|
|
| $ |
| |||||
|
|
|
|
|
| 0.66 |
|
| $ |
|
|
|
|
| $ |
| ||||
The change in warrant value for the three months ended March 31, 2022and 2021 was $
The aggregate intrinsic value of warrants outstanding and exercisable at March 31, 2022 and December 31, 2021 was $
NOTE 16 – STOCK INCENTIVE PLANS
On December 29, 2017 (“Effective Date”), the Company adopted the CURE Pharmaceutical Holding Corp. 2017 Equity Incentive Plan (the “2017 Equity Plan”), pursuant to which an aggregate of
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 Company did not issue any NSO’s, ISO’s, RSC’s or RSU’s during the three months ended March 31, 2022. The Company issued
The Company issued
| 31 |
| Table of Contents |
Stock Options
The Company’s stock option activity was as follows:
|
| Options |
|
| Weighted Average Exercise Price |
|
| Weighted Average Contractual Remaining Life |
| |||
Outstanding, December 31, 2020 |
|
|
|
| $ |
|
|
|
| |||
Granted |
|
|
|
|
|
|
|
|
| |||
Exercised |
|
| - |
|
|
|
|
|
| - |
| |
Forfeited/Expired |
|
| ( | ) |
|
|
|
|
| - |
| |
Outstanding, December 31, 2021 |
|
|
|
| $ |
|
|
|
| |||
Granted |
|
| - |
|
|
|
|
|
| - |
| |
Exercised |
|
| - |
|
|
|
|
|
| - |
| |
Forfeited/Expired |
|
| ( | ) |
|
|
|
|
| - |
| |
Outstanding, March 31, 2022 |
|
|
|
| $ |
|
|
|
| |||
Exercisable at March 31, 2022 |
|
|
|
| $ |
|
|
|
| |||
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 |
|
|
|
|
|
|
| $ |
|
|
| 3,760,015 |
|
| $ |
| ||||
|
|
|
|
|
|
|
| $ |
|
|
| 3,760,015 |
|
| $ |
| ||||
The aggregate intrinsic value of options outstanding and exercisable at March 31, 2022 was $
The aggregate grant date fair value of options granted during the three months ended March 31, 2022 and 2021 and amounted to $
As of March 31, 2022, the total unrecognized fair value compensation cost related to unvested stock options was $
| 32 |
| Table of Contents |
The weighted-average fair value of options granted during the three months ended March 31, 2022 and 2021, and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes option pricing model are as follows:
|
| March 31, 2022 |
|
| March 31, 2021 |
| ||
Significant assumptions (weighted-average): |
|
|
|
|
|
| ||
Risk-free interest rate at grant date |
|
| % |
|
| % | ||
Expected stock price volatility |
|
| % |
|
| 84.52 | % | |
Expected dividend payout |
|
|
|
|
|
| ||
Expected option life (in years) |
|
| - |
|
|
|
| |
Expected forfeiture rate |
|
| % |
|
| % | ||
Restricted Stock
Subject to the restrictions set with respect to the particular Award, a recipient of Restricted Stock generally shall have the rights and privileges of a shareholder, including the right to vote the Restricted Stock and the right to receive dividends; provided that, any cash dividends and stock dividends with respect to the Restricted Stock shall be withheld for the recipient’s account, and interest may be credited on the amount of the cash dividends withheld. The cash dividends or stock dividends so withheld and attributable to any particular share of Restricted Stock (and earnings thereon, if applicable) shall be distributed to the recipient in cash or, at the discretion of the Board or Committee, in shares of common stock having a fair market value equal to the amount of such dividends, if applicable, upon the release of restrictions on the Restricted Stock and, if the Restricted Stock is forfeited, the recipient shall have no right to the dividends.
The Company’s restricted stock activity was as follows:
|
| Restricted Stock Shares |
|
| Weighted Average Grant Date Fair Value |
| ||
Non-vested, December 31, 2020 |
|
|
|
| $ |
| ||
Granted |
|
|
|
|
|
| ||
Vested |
|
| ( | ) |
|
| 1.26 |
|
Forfeited/Expired |
|
| - |
|
|
|
| |
Non-vested, December 31, 2021 |
|
| - |
|
|
| - |
|
Granted |
|
| - |
|
|
|
| |
Vested |
|
| - |
|
|
|
| |
Forfeited/Expired |
|
| - |
|
|
|
| |
Non-vested, March 31, 2022 |
|
|
|
| $ | - |
| |
Compensation expense related to restricted shares for the three months ended March 31, 2022 and 2021 was $
Restricted Stock Units
The terms and conditions of a grant of Restricted Stock Units shall be determined by the Board or Committee. No shares of common stock shall be issued at the time a Restricted Stock Unit is granted. A recipient of Restricted Stock Units shall have no voting rights with respect to the Restricted Stock Units. Upon the expiration of the restrictions applicable to a Restricted Stock Unit, The Company will either issue to the recipient, without charge, one share of common stock per Restricted Stock Unit or cash in an amount equal to the fair market value of one share of common stock.
| 33 |
| Table of Contents |
The Company’s restricted stock unit activity was as follows:
|
| Restricted Stock Units |
|
| Weighted Average Grant Date Fair Value |
| ||
Outstanding, December 31, 2020 |
|
|
|
| $ |
| ||
Granted |
|
|
|
|
|
| ||
Vested |
|
| ( | ) |
|
|
| |
Forfeited/Expired |
|
| ( | ) |
|
|
| |
Outstanding, December 31, 2021 |
|
|
|
| $ |
| ||
Granted |
|
| - |
|
|
|
| |
Vested |
|
| - |
|
|
|
| |
Forfeited/Expired |
|
| - |
|
|
|
| |
Outstanding, March 31, 2022 |
|
|
|
| $ |
| ||
At March 31, 2022 and December 31, 2021, the Company had approximately $
Compensation expense related to restricted stock units for the three months ended March 31, 2022 and 2021 was $
NOTE 17 – STOCKHOLDERS’ EQUITY
Authorized Stock
The Company has authorized to issue is
As of March 31, 2022 and March 31, 2021, there were
Common Share Issuances
From January 1, 2021 to March 31, 2021, the Company issued
From January 1, 2021 to March 31, 2021, the Company issued
From January 1, 2021 to March 31, 2021, the Company issued
From January 1, 2022 to March 31, 2022, the Company issued
Common Stock Issuable
In 2018, the Company entered into an amendment to extend the maturity date of a convertible promissory note. As compensation for extending the note, the Company is to issue
From January 1, 2021 to March 31, 2021, the Company entered into Consulting Agreements (“Agreements”) with individuals. Per the terms of the Agreements, the Company is to issue
On October 1, 2021, the Company entered into a Consulting Agreement (“Agreement”) with individuals. Per the terms of the Agreement, the Company is to issue
NOTE 18 – SEGMENT REPORTING
Business Segments
The Company manages its operations through two business segments: Cure, which develops and manufactures pharmaceutical and wellness products, and Sera Labs, which sells wellness products through direct to consumer and wholesale channels.
The Company evaluates performance based on net operating profit. Administrative functions such as finance, treasury, and information systems are centralized. However, where applicable, portions of the administrative function expenses are allocated between the operating segments. The operating segments do share manufacturing or distribution facilities. In the event any materials and/or services are provided to one operating segment by the other, the transaction is valued according to the company’s transfer policy, which approximates market price. The costs of operating the manufacturing plant is captured discretely in the Cure segment. The Company’s property, plant and equipment, inventory, and accounts receivable are captured and reported discretely within each operating segment.
| 34 |
| Table of Contents |
Summary financial information for the two reportable segments for March 31, 2022 is as follows (in thousands):
|
| Cure |
|
| Sera Labs |
|
| Eliminations |
|
| Consolidated |
| ||||
Net Sales |
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||
Operating Loss |
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
| $ | ( | ) | |
Assets |
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||
Accounts receivable, net |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Inventory, net |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Interest expense |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Depreciation and amortization |
| $ |
|
| $ |
|
|
|
|
|
| $ |
| |||
Impairment of goodwill |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Summary financial information for the two reportable segments for March 31, 2021 is as follows (in thousands):
|
| Cure |
|
| Sera Labs |
|
| Eliminations |
|
| Consolidated |
| ||||
Net Sales |
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||
Operating Loss |
| $ | ( | ) |
| $ | ( | ) |
| $ |
|
| $ | ( | ) | |
Assets |
| $ |
|
| $ |
|
| $ | ( | ) |
| $ |
| |||
Accounts receivable, net |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Inventory, net |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Interest expense |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Depreciation and amortization |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Impairment of goodwill |
| $ |
|
| $ |
|
| $ |
|
| $ |
| ||||
Disaggregation of Revenues and Concentration Risk
The following table presents the percentage of consolidated revenues attributable to products or services classes that represent greater than ten percent of consolidated revenues for the three months March 31, 2022 and 2021:
|
| Three Months Ended March 31, |
| |||||
|
| 2022 |
|
| 2021 |
| ||
CureFilm™ sales |
|
| % |
|
| 11 | % | |
Cosemtic sales – Revolution Line |
|
| % |
|
| % | ||
Product sales - CBD |
|
| % |
|
| 85 | % | |
Total |
|
| % |
|
| % | ||
The Company received revenue from one customer representing
NOTE 19 – BUSINESS COMBINATION AND DECONSOLIDATION OF SUBSIDIARY
Sera Labs Acquisition
On October 2, 2020, the Company acquired all of the issued and outstanding stock of Sera Labs. All issued and outstanding shares of the capital stock of Sera Labs were converted into the right to receive, subject to customary adjustments, an aggregate of approximately (i) $
| 35 |
| Table of Contents |
Sera Labs is a trusted leader in the health, wellness, and beauty sectors of innovative products with cutting edge technology and superior ingredients such as CBD. Sera Labs creates high quality products that use science-backed, proprietary formulations. Its more than 20 products are sold under the brand names Seratopical™, SeraLabs™, and Revolution™. Sera Labs sells its products at affordable prices, making them easily accessible on a global scale. Strategically positioned in the growth market categories of beauty, health wellness, and pet care, Sera Labs products are sold in major national drug, grocery chains and mass retailers. The company also sells products under private label to major retailers and multi-level marketers, as well as direct-to-consumer (DTC), via online website orders, including opt-in subscriptions.
The acquisition was accounted for in accordance with ASC 805, Business Combinations. The equity consideration to be provided is subject to a variety of earn-out and milestone provisions thus of the
The following table presents the change in fair value of contingent consideration (in thousands):
(Dollars in thousands) |
| Fair Value of the Contingent Share Consideration |
| |
Fair value at December 31, 2021 |
| $ |
| |
Fair value at March 31, 2022 |
|
|
| |
Net change in fair value three months ended March 31, 2022 |
| $ | ( | ) |
The Company estimated the fair value of the preliminary purchase price for the acquisition of Sera Labs is approximately $
(Dollars in thousands) |
| Shares |
|
| Amount |
| ||
Upfront Payment |
|
| - |
|
| $ |
| |
Closing Merger Consideration Shares |
|
|
|
|
|
| ||
Contingent Consideration Shares (Clawback Shares) |
|
|
|
|
|
| ||
Liabilities assumed |
|
| - |
|
|
|
| |
Total purchase price |
|
|
|
| $ |
| ||
The Company allocated the acquisition consideration to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The fair value of the acquired tangible and identifiable intangible assets were determined based on inputs that are unobservable and significant to the overall fair value measurement. It is also based on estimates and assumptions made by management at the time of the acquisition. As such, this was classified as Level 3 fair value hierarchy measurements and disclosures.
The excess of the purchase price over the estimated fair values is assigned to goodwill.
| 36 |
| Table of Contents |
The following table summarizes the preliminary estimated fair values of the assets and liabilities assumed in the Sera Labs acquisition, which is subject to change during measurement period:
(Dollars in thousands) |
|
|
| |
Net assets acquired: |
|
|
| |
Cash |
| $ |
| |
Other assets |
|
|
| |
Property, plant and equipment |
|
|
| |
Other long term assets |
|
|
| |
Intangibles assets |
|
|
| |
Goodwill |
|
|
| |
Accounts payable and accrued expenses |
|
| ( | ) |
Contract liabilities |
|
| ( | ) |
Other current liabilities |
|
| ( | ) |
Other long-term liabilities |
|
| ( | ) |
Net assets acquired |
| $ |
| |
Information regarding identifiable intangible assets acquired in the Sera Labs acquisition is presented below:
(Dollars in thousands) |
| Weighted- average Estimated useful life |
| Preliminary Estimated Asset Fair Value |
| |
Finite-lived intangible assets: |
|
|
|
|
| |
Customer relationships |
|
| $ |
| ||
Tradename |
|
| $ |
| ||
Non-compete |
|
| $ |
| ||
Total finite-lived intangible assets acquired |
|
| $ |
| ||
NOTE 20 - INTELLECTUAL PROPERTY AND COLLABORATIVE AGREEMENTS
On September 4, 2018, Cure Pharmaceutical Holding Corp., through its subsidiary, Cure Pharmaceutical Corp. (together, the “Company”) entered into its first multi-year licensing agreement (the “Licensing Agreement”) with Canopy Growth Corporation, a company that engages in the production and sale of medical cannabis (“Canopy”). Under the terms of the Licensing Agreement, Canopy will have an exclusive license to certain of the Company’s intellectual property rights, including the Company’s patented, multi-layer OTF, CUREfilm™ technology for use with cannabis extracts and biosynthetic cannabinoids (“Products”) and the Company’s trademarks in markets around the world where it is legal for Canopy to sell the Products, excluding Asia. The Company will retain the right to manufacture synthetic cannabinoids for pharmaceutical applications.
On November 7, 2019 (the “Effective Date”), the Company and Canopy entered into an Amendment Agreement (“Amendment”) to allow the Company to sell cannabinoid CUREfilm products (“Product”) to third parties internationally, excluding Canada, from the Effective Date until December 31, 2020. However, the Company shall not be allowed to sell any Product that are being specifically developed for Canopy, as identified per the Development Agreement between the Company and Canopy, which is dated on June 17, 2019.
On October 21, 2020, the Company filed a demand to commence arbitration with the American Arbitration Association against Canopy for Canopy’s failure to perform under the License Agreement. On April 28, 2021 the Company entered into an agreement resolving the dispute between the parties, pursuant to which neither party admitted liability, the parties released their respective claims and obligations, and Canopy agreed to pay a total of $
During the three months ended March 31, 2022 and 2021, the Company did not recognize any revenue relating to work completed in regard to the transfer of technology fee as discussed in the License Agreement with Canopy.
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NOTE 21 - COMMITMENTS AND CONTINGENCIES
Litigation
From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.
On October 21, 2020, the Company filed a demand to commence arbitration with the American Arbitration Association against Canopy for Canopy’s failure to perform under the License Agreement. On April 28, 2021 the Company entered into an agreement resolving the dispute between the parties, pursuant to which neither party admitted liability, the parties released their respective claims and obligations, and Canopy agreed to pay a total of $
On April 12, 2022, the Company filed a civil action in the California Super Court for the County of Ventura against the Investor referenced in Note 14, alleging that the Investor entered into the Purchase Agreement as an unregistered securities dealer and unlicensed finance lender in violation of California law. The Company’s complaint seeks rescission of the Purchase Agreement, damages, attorneys’ fees and other relief. As of the filing date of this report, the Investor has not responded to the complaint.
Tax Filings
The Company tax filings are subject to audit by taxing authorities in jurisdictions where it conducts business. These audits may result in assessments of additional taxes that are subsequently resolved with the authorities or potentially through the courts. As of March 31, 2022, the Company is not subject to any such these audits.
Employment Contracts
The Company has entered into a severance benefit contract with an executive officer. Under the provisions of the contracts, the Company may be required to incur severance obligations for matters relating to changes in control, as defined, and certain terminations of executives. As of March 31, 2021, the Company had such severance obligations, in accordance with the severance benefit provisions of the respective employment and severance benefit agreement.
On November 3, 2021 the Company entered into a separation agreement (the “Berlent Separation Agreement”) with Jonathan Berlent whereby the parties have agreed to a mutual separation of Mr. Berlent’s employment as the Company’s Chief Business Officer, effective November 3, 2021.
Pursuant to the terms of the Berlent Separation Agreement, Mr. Berlent will be entitled to the following severance benefits: (i) a gross sum of $0.01 million relating to deferred payroll; (ii) separation pay of three weeks of Mr. Berlent’s gross pay, less standard payroll deductions and withholdings; and (iii) for a period of five months, an amount equal to the cost of his COBRA health benefits if he enrolls for COBRA coverage. The Berlent Separation Agreement contains a release and certain restrictive covenants that are binding upon Mr. Berlent.
Indemnification
In the normal course of business, The Company may provide indemnification of varying scope under The Company’s agreements with other companies or consultants, typically The Company’s clinical research organizations, suppliers and others. Pursuant to these agreements, The Company will generally agree to indemnify, hold harmless, and reimburse the indemnified parties for losses and expenses suffered or incurred by the indemnified parties arising from claims of third parties in connection with the use or testing of The Company’s products. Indemnification provisions could also cover third party infringement claims with respect to patent rights, copyrights, or other intellectual property pertaining to The Company’s products. The Company’s office and laboratory facility leases also will generally contain indemnification obligations, including obligations for indemnification of the lessor for environmental law matters and injuries to persons or property of others, arising from The Company’s use or occupancy of the leased property. The term of these indemnification agreements will generally continue in effect after the termination or expiration of the particular research, development, services, lease, or license agreement to which they relate. Historically, The Company has not been subject to any claims or demands for indemnification. The Company also maintains various liability insurance policies that limit The Company’s financial exposure. As a result, The Company management believes that the fair value of these indemnification agreements is minimal. Accordingly, The Company has not recorded any liabilities for these agreements as of March 31, 2022 and December 31, 2021.
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Operating leases
The Company maintains its corporate offices and manufacturing facility at 1620 Beacon Place, Oxnard, CA 93033, which contains approximately 25,000 square feet. The Company is currently on a month-to-month lease.
Sera Labs will pay base monthly rent in the amount of $
On May 1, 2019, Sera Labs entered into a lease agreement to lease a
Total rent expense was $0.1 million and $0.1 million for the three months ended March 31, 2022 and 2021, respectively.
The Company classified the Sera Labs lease as an operating lease in accordance with ASC 842 and has recognized a right-of-use asset and a lease liability based on the present values of its lease payments over its respective lease term. The Company used the services of a valuation company to compute the IBR which is necessary to determine the present value of its lease payments since a borrowing rate is not explicitly available on the lease agreement. The concluded IBR is
As of March 31, 2022, the current portion and long-term portion of operating lease liability is $
The future payments due under the operating lease as of March 31 are as follows:
Years |
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2022 (remaining) |
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2023 |
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2024 |
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2025 |
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2026 |
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Undiscounted cash flow |
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Effects of discounting |
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| ( | ) |
Lease liabilities recognized |
| $ |
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Finance leases
During 2019 the Company entered into a
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Future minimum lease payments under non-cancellable capital leases as of March 31, 2022 are as follows (in thousands):
2022 (remaining) |
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2023 |
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2024 |
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2025 |
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2026 |
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Thereafter |
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Finance lease liabilities recognized |
| $ |
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Operating and Financing leases
The following table presents supplemental balance sheet information related to operating and financing leases as of March 31, 2022 and December 31, 2021 (in thousands, except lease term and discount rate):
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| March 31, 2022 |
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| December 31, 2021 |
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Operating leases |
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Right-of-use assets, net |
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Right-of-use lease liabilities, current |
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Right-of-use lease liabilities, noncurrent |
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Total operating lease liabilities |
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Financing Leases |
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Weighted average remaining lease term |
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Financing leases |
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Weighted average discount rate |
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Operating leases |
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Financing leases |
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NOTE 22 – SUBSEQUENT EVENTS
Subsequent events were evaluated through the filing date of this Quarterly Report, May 16, 2022.
On April 12, 2022, the Company filed a civil action in the California Super Court for the County of Ventura against the Investor referenced in Note 14, alleging that the Investor entered into the Purchase Agreement as an unregistered securities dealer and unlicensed finance lender in violation of California law. The Company’s complaint seeks rescission of the Purchase Agreement, damages, attorneys’ fees and other relief. As of the filing date of this report, the Investor has not responded to the complaint.
On April 27, 2022, the Company received $
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion and analysis should be read in conjunction with our condensed consolidated financial statements and notes thereto included in Part I, Item 1 of this Quarterly Report on Form 10-Q, as well as the audited consolidated financial statements and the related notes thereto, and the discussion under “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Business” included in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as filed with the SEC on April 1, 2022.
Overview
CURE Pharmaceutical Holding Corp. (“CPHC”), its wholly-owned subsidiaries, CURE Pharmaceutical Corporation (“CURE Pharmaceutical”), Cure Chemistry Inc. and its subsidiaries (collectively referred to as “CHI”) and The Sera Labs, Inc. (“Sera Labs”) (CPHC, CURE Pharmaceutical, CHI and Sera Labs, collectively the “Company,” “we,” “our,” “us,” or “CURE”) is a biopharmaceutical company focusing on the development and manufacturing of drug formulation and drug delivery technologies in novel dosage forms to improve drug safety, efficacy and patient adherence. Our mission is to improve lives by redefining how medications are delivered and experienced. Our primary business model is to develop wellness and drug products using our proprietary technology, which development may include preclinical and clinical studies and regulatory approval, and grant product rights to partners responsible for marketing, sales and distribution, while retaining exclusive manufacturing rights and market, sell and distribute branded health, wellness, and beauty products through Sera Labs. We operate in a 25,000 square foot cGMP manufacturing plant in Oxnard, CA.
On October 2, 2020, we completed our acquisition of Sera Labs, a Delaware corporation pursuant to an Agreement and Plan of Merger and Reorganization, dated as of September 23, 2020 (the “Merger Agreement”), by and among the Company, Cure Labs, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“Merger Sub”), Sera Labs and Nancy Duitch, in her capacity as the security holders representative. The Merger Agreement provides for the acquisition of Sera Labs by the Company through the merger of Merger Sub with and into Sera Labs, with Sera Labs surviving as a wholly owned subsidiary of the Company (the “Merger”).
Our technology platform includes oral thin film (“OTF”), and encapsulation systems (“microCURE”) compatible with OTF, chews, oral solutions, topical and transdermal dose forms. We apply our technology to pharmaceutical drugs and dietary supplements for the wellness market. OTF products are about the size of a postage stamp and composed of excipients such as polymers, stabilizers, lipids and surfactants which are all generally recognized as safe. They can be designed to deliver active ingredients to the gastrointestinal, or GI, tract when placed on the tongue and swallowed, or directly to the blood stream when placed under the tongue (sublingual) or on the inner lining of the cheek and lip (buccal).
We mainly sell multiple commercial wellness products through Sera Labs where the Company generates the majority of revenue from. We also sell commercial wellness products under our distribution partners’ brands.
We have also developed a 50,000IU and Vitamin D3 OTF for oral administration to be distributed by Meroven Pharmaceuticals in the United States and the MENA region. Our pharmaceutical drug program includes:
CUREfilm Blue
A 25mg and 50mg sildenafil OTF for the treatment of erectile dysfunction. We have completed our pre-IND meeting with the U.S. Food and Drug Administration (the “FDA”), confirming a 505(b)(2) regulatory path.
CUREfilm Canna
We are developing several cannabinoid products with optimized pharmacokinetic profiles using microCURE and CUREfilm technology.
CUREfilm Anti-Viral
We are developing an orally bio-available anti-viral of an existing therapeutic leveraging existing pre-clinical/clinical safety and toxicity data.
CUREfilm Central Nervous System (CNS)
In the area of CNS indications, we are developing a novel dosage form of a difficult to treat disease states utilizing our proprietary CUREfilm dosage form. These could include but are not limited to mental health disorders such as depression, PTSD, addiction disorders, obsessive compulsive disorder, and anxiety.
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The pharmaceutical industry is facing ever-growing RD expenditures and fewer new drug approvals as a result of increasing regulation, a failure to predict safety problems or a lack of efficacy early in a drug’s development, and high investment in new technologies to improve the speed and accuracy of drug development. Researching and developing new molecular entities (NMEs) is risky as measured by an ever-increasing RD spend (13.4% average increase per year), low clinical trial success rate (10%) and sluggish NME drug approvals – with 50 NMEs approved in 2021, down from 53 in 2020. Faced with these challenges, drug developers are looking toward alternative dosage forms, for which RD investments dwarves those of NMEs. Alternative dosage forms can address safety and efficacy limitations observed during clinical development of an NME using conventional formulations, by improving its pharmacokinetic profile.
In addition to these challenges, many marketed drugs are coming off-patent, creating a need to fill revenue gaps. Novel dosage forms can offer strategies for surviving patent cliffs by extending market exclusivity when they address a bona fide unmet need.
The pharmaceutical industry is also challenged by the many patients who do not adhere to a regime of prescription drugs because of side effects, difficulty in administration or the taste of a drug. According to HealthPrize and Capgemini, the loss of global revenues by drug makers due to non-adherence to medicines is $630 billion every year and according to a recent paper published in The Annals of Pharmacotherapy titled “Cost of Prescription Drug-Related Morbidity and Mortality” the estimated annual cost of prescription drug-related morbidity and mortality resulting from nonoptimized medication therapy was $528.4 billion in 2016 US dollars and about 275,689 deaths per year. Medication adherence and the patient experience can be improved with strategies such as replacing an injectable drug with a sublingual drug, simplifying the dosing schedule with a sustained release dosage form and reducing toxicities by avoiding the GI tract (e.g. through transdermal or transmucosal delivery).
Improved formulations can address these many challenges by cutting down development costs, reducing the time to market, extending product patent protection, improving patient compliance and increasing drug efficacy. For example, reformulation can enable drug repositioning, the process of finding new uses for failed drugs, such as those abandoned for lack of efficacy or excessive toxicity after Phase II trials, or marketed drugs for which new uses will extend patent life and, therefore, profitability.
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Our Strategy
Our commercial strategy is designed to mitigate risk by pursuing a diversified model in the following categories:
Pharmaceuticals
We partner with companies that are responsible for marketing and distribution of the products we develop and manufacture. On a case-by-case basis, we may be responsible for clinical development and regulatory approval with the FDA and/or other regulatory bodies. Deal terms may include upfront licensing fees, development costs, milestone payments, royalties and exclusive manufacturing rights. Within this category, we are pursuing products with 505(b)(2) approval pathways such as our Sildenafil OTF – CUREfilm Blue. While we currently manufacture nutraceutical products in our state-of-the-art cGMP oral dissolving film manufacturing facility, we are undertaking steps to manufacture pharmaceutical products for commercial use.
Cannabinoids and Other Schedule 1 Drugs
We are specifically investing in pharmaceutical-grade cannabinoid products, such as tetrahydrocannabinol (THC) and cannabidiol (CBD). The oral bioavailability of cannabinoids is very low due to extensive “first-pass” metabolism. Consequently, potency and release times are unpredictable and inconsistent. Moreover, cannabinoids do not readily dissolve in water which adds to dosing difficulties and discrepancies. In addition to improving bioavailability, CUREfilm enables the loading of combinations of cannabinoids and botanical extracts which may provide maximum therapeutic benefit.
We are sponsoring preclinical cannabinoid research at the Technion – Israel Institute of Technology, where the laboratory of Dr. Dedi Meiri is identifying specific combinations of cannabinoids with anti-tumor effects. We are registered with the Drug Enforcement Administration (“DEA”) to manufacture Schedule 1 controlled substances at the Oxnard facility.
Wellness
We focus on evidence-based wellness products that are differentiated by using proprietary and/or proven active ingredients that we formulate for greater stability, overall quality and increased bioavailability. Wellness products can be cosmetics, OTC or dietary supplements which do not require FDA approval but do require following all GMPs. Thus, they are less costly and faster to launch in the marketplace. We sell white labeled and private labeled wellness products which we produce in our state-of-the-art cGMP manufacturing facility. While manufacturing fees for such products have lower margins than prescription drugs, they provide us with short term revenue opportunities.
Our recently acquired wholly-owned subsidiary, Sera Labs, is a trusted leader in the health, wellness, and beauty sectors of innovative products with cutting edge technology and superior ingredients such as CBD. Sera Labs creates high quality products that use science-backed, proprietary formulations. Its more than 25 products are sold under the brand names Seratopical™, Seratopical® Revolution, SeraLabs™, and Nutri-Strips™. Sera Labs sells its products at affordable prices, making them easily accessible on a global scale. Strategically positioned in the growth market categories of beauty, health wellness, and pet care, Sera Labs products are sold in major national drug, grocery chains and mass retailers. The company also sells products under private label to major retailers and multi-level marketers, as well as direct-to-consumer (DTC), via online website orders, including opt-in subscriptions.
In December 2020, Nicole Kidman became the Global Brand Ambassador and Strategic Partner for Seratopical Skincare. In addition to being the face of the brand, Nicole Kidman will play an integral role in the strategic direction of product development and messaging. This partnership will allow for women of all skin tones and types to look and feel their best by using Sera Labs’ industry best ingredients.
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Our Technology
As a drug delivery company, we seek to grow our technological capabilities through internal innovation and acquisitions. On May 13, 2019, we acquired Chemistry Holdings, Inc., a formulation technology company that is developing innovative delivery systems for wellness and pharmaceutical products. This acquisition allows us to address the increased demand for solid, chewable, liquid and dermal products for immediate and controlled-release, particularly for poorly soluble molecules such as cannabinoids.
Our expanded formulation and delivery platform, CUREformTM combines the right formulation with the right dosage form. In addition to novel chewable dosage forms, the acquisition gives us advanced encapsulation capabilities (microCURE) that serve to:
| · | Protect molecules from degradation during the manufacturing process and throughout shelf life |
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| · | Protect molecules from degradation in the body (e.g. stomach acids); and |
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| · | Increase a drug’s bioavailability and optimize its release kinetics through: |
| · | Increased solubility in water and therefore bodily fluids |
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| · | Enhanced permeability and retention in target tissue |
CUREfilmTM Technology
The founders of CURE Pharmaceutical are pioneers in drug delivery and OTF, having launched the first therapeutic OTF product, Chloraseptic® relief strips in 2003. OTF products are about the size of a postage stamp and can deliver medicines through the mucosal tissue in the mouth, sublingually or buccally – on the cheek or more traditionally via the GI tract. Oral transmucosal drug delivery is a non-invasive route for drug delivery that allows for absorption directly into the vascularized tissue in the mouth, bypassing the hepatic first pass effect. This leads to reduced drug exposure and can offer a rapid onset of action. As an oral OTF, active ingredients can be either pre-solubilized within the matrix or encapsulated, or both for more effective GI absorption and/or sustained release. The quick dissolution nature of OTF means that no water is required for administration, improving patient compliance - especially among the elderly, children, and in conditions where patients have difficulty in swallowing.
OTFs have significant advantages compared to other dosage forms (e.g., tablets and capsules), including:
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Safety and Efficacy
| · | Potential for rapid onset of action which can be especially useful for indications such as motion sickness, erectile dysfunction, seizures, allergic attack or coughing, bronchitis or asthma. |
| · | Potential to extend a drug’s half-life and consequently extending dosage intervals. |
| · | Transmucosal delivery can improve a drug’s safety profile of therapy such as reduced gastric irritation. |
| · | Transmucosal delivery can improve a drug’s efficacy in patients with GI absorption issues. |
| · | Accuracy in the administered dose can be better assured for each film. |
Patient Experience and Medication Adherence
| · | Difficulty swallowing tablets and capsules can be a problem for many individuals and can lead to a variety of adverse events and patient noncompliance with treatment regimens. It is estimated that over 16 million people in the United States have some difficulty swallowing, also known as dysphagia. Studies in adults evaluating the effect of tablet and capsule size on ease of swallowing suggest that increases in size are associated with increases in patient complaints related to swallowing difficulties at tablet sizes greater than approximately 8 mm in diameter. OTFs can readily be taken without the need to swallow or use of water or other beverages. |
| · | Upon administration, there is a relatively low risk of the patient choking which can be most beneficial for patients suffering from motion sickness, dysphagia and repeated emesis. |
| · | Easily administered to bedridden and non-cooperative patients (e.g., geriatric, pediatric, and psychiatric). They are hard to spit out. |
| · | Configured with physical dimensions such that it is relatively easy and convenient to store and carry. Patients can conveniently carry multiple dissolvable films in his or her pocket or wallet. A single dose of strip can be carried individually without requiring the secondary container. |
| · | OTFs are flexible with a pleasant mouth feel unlike oral dissolvable tablets which are brittle. |
Manufacturing and logistics
| · | The pouches or sachets offer larger printable 2D areas which traditional drug product formats do not. This allows the manufacturer to adapt to rapidly evolving labeling and regulatory requirements for information and anti-counterfeiting, such as product serialization. |
| · | The manufacturing process has a low carbon foot print, with lower use of water for component preparation and sterilization as compared with other dosage forms. |
| · | Even though not necessarily sterile, each dose unit is packed individually avoiding contact with other units. |
| · | Tensile strength and plasticity of OTF allow for handling single, individual dose units without damage to the dosage form. |
| · | Multiple SKUs can be produced by simply modifying the length of the OTF. |
| · | Enables anti-counterfeit management and dose management. |
| · | Adaptable for use with dispensing devices for pharmacy preparation or self-administration. |
| · | Can be easily and conveniently handled, stored, and transported at room temperature. |
The CUREfilm platform is a scalable and versatile formulation and drug delivery system for both oral (OTF) and transdermal (skin) delivery. We believe that CUREfilm formulations can improve or match the pharmacokinetics of drugs in accordance with the desired outcome. The platform is compatible with a broad spectrum of molecules, for the formulation of both investigational and marketed prescription drugs and nutraceutical products.
The specific advantages below are present with multiple CUREfilm products and platform technologies. The advantages listed below are expressly described in CURE’s patent documents. Other advantages are present in specific products and platform technologies but not outlined in the patent documents and kept as trade secrets and proprietary equipment designs. Additional advantages are described in pending and unpublished patent documents, including, but not limited to the following:
| · | loading of multiple active ingredients on one dose unit; |
| · | ability to accommodate high drug load per dose unit (e.g. 200 mg); |
| · | quickly dissolving/disintegrating (e.g. 2 minutes); |
| · | potential for low moisture level (e.g. 10 wt.% water); |
| · | ability to achieve desired performance characteristics while maintaining pleasant feeling in the mouth (e.g. soft, plush feeling with pliable film); |
| · | ability to achieve desired performance characteristics while formulating active ingredients susceptible to degradation from low pH environments, light, heat, moisture, and oxygen; and |
| · | multiple and unique ways to mask the bitter, metallic or salty taste of an active ingredient. |
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Intellectual Property
The competitive advantages of the CUREformTM platform and products are protected by issued and ending patents, as well as trade secrets such as proprietary equipment design and manufacturing processes which allow us to produce CUREform products at commercial scale in a cGMP environment. We will be able to protect our technology and products from unauthorized use by third parties only to the extent it is covered by valid and enforceable claims of our patents or is effectively maintained as trade secrets. Patents and other proprietary rights are thus an essential element of our business.
Our success will depend in part on our ability to obtain and maintain proprietary protection for our product candidates, technology, and know-how, to operate without infringing on the proprietary rights of others, and to prevent others from infringing it proprietary rights. Our policy is to seek to protect our proprietary position by, among other methods, filing U.S. and foreign patent applications related to our proprietary technology, inventions, and improvements that are important to the development of our business. We also rely on trade secrets, know-how, continuing technological innovation, and in-licensing opportunities to develop and maintain our proprietary position.
We own or have exclusive rights to fourteen (14) issued U.S. patents, two (2) allowed U.S. patents, twenty three (23) pending applications in the United States, one (1) issued patent in China and one (1) international Patent Cooperation Treaty (“PCT”) patent application. These patents and applications relate, among others, to:
| · | a method and apparatus for minimizing heat, moisture, and shear damage to medicant incorporated into an edible film; |
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| · | edible films for administration of medicaments to animals; |
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| · | methods for modulating dissolution, bioavailability, bioequivalence; |
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| · | pharmaceutical composition and method of manufacturing; |
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| · | pharmaceutical composition with ionically crosslinked polymer encapsulation of active ingredient; |
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| · | multi-layered high dosage dissolvable film for oral administration; |
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| · | thin films with high load of active ingredient; |
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| · | high dosage dissolvable films for oral administration; |
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| · | methods and composition for improving sleep; |
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| · | oral dissolvable film that includes plant extracts and controlled substances; |
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| · | rapidly disintegrating film matrix for moisture sensitive compounds; |
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| · | protein-polysaccharide macromolecular complexes encapsulating ethyl alcohol; |
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| · | self-emulsifying oral thin film compositions; and |
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| · | topical preparation. |
Granted U.S. patents will expire between 2023 and 2035, excluding any patent term extensions that might be available following the grant of marketing authorizations. If issued, pending applications would expire in 2040, excluding any patent term adjustment that might be available following the grant of the patent and any patent term extensions that might be available following the grant of marketing authorizations.
We have five (5) registered trade and logomarks, and one pending trademark registration for which the opposition periods have expired without any opposition being filed.
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Competition
We face competition from pharmaceutical companies, generic drug companies, wellness and nutraceutical companies, as well as organizations developing advanced drug delivery platforms such as Lonza, Aquestive Therapeutics, BioDelivery Sciences International, IntelGenx, ARx Pharma and LTS Lohmann which have substantially greater financial, technical and human resources than we have. Furthermore, we face competition from these entities as well as universities, governmental agencies and other public and private research organizations for collaborative arrangements with pharmaceutical and biotechnology companies, in recruiting and retaining highly qualified scientific and management personnel and for licenses to additional technologies. Our success will be based in part on our ability to develop and manufacture products that address unmet medical needs and create value to patients at competitive price points. In addition, continuing to build our intellectual property portfolio and designing innovative approaches that surpass our competitors’ patents will be critical to success.
Environmental Compliance
Our research and development activities involve the controlled use of hazardous materials and chemicals. We are subject to federal, state and local laws and regulations governing the use, storage, handling and disposal of these materials and specific waste products. We are also subject to numerous environmental, health and workplace safety laws and regulations, including those governing laboratory procedures, exposure to blood-borne pathogens and the handling of bio-hazardous materials. The cost of compliance with these laws and regulations could be significant and may adversely affect capital expenditures to the extent we are required to procure expensive capital equipment to meet regulatory requirements. At this time, we believe that we are in compliance with environmental regulations applicable to our research and development and manufacturing facility located in Oxnard, California.
Employees
As of the date of this filing, we have 24 full-time employees. None of our employees are covered by collective bargaining agreements. We consider our relations with our employees to be good.
RESULTS OF OPERATIONS
Revenues for the Three Months Ended March 31, 2022 and 2021
Revenues for the three months ended March 31, 2022 was $1.1 million as compared to $1.4 million for the three months ended March 31, 2021. The decrease in revenue was mainly due to decrease in our DTC revenue attributed from Sera Labs when compared to the previous period. However, this decrease was offset by an increase in our wholesale revenue from sales of our Seratopical Revolution products in one of the largest retail stores in the United States.
Cost of Goods Sold
Cost of goods sold was $0.35 million in the three months ended March 31, 2022 compared to $0.41 million in the three months ended March 31, 2021. Cost of goods sold decreased by approximately $0.06 million during the three months ended March 31, 2022 compared to the three months ended March 31, 2022. The decrease was primarily due to the decrease in DTC revenue during the three months ended March 31, 2022 compared to the same period 2021.
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Research and Development Expenses
For the three months ended March 31, 2022, research and development expenses decreased to $0.3 million compared to the three months ended March 31, 2021 of $0.6 million. The decrease in research and development expenses is mainly due to the Company not incurring the same third party contractor expenses for our CUREfilm Blue product during the three months ended March 31, 2022 compared to the three months ended March 31, 2021. In addition, the Company did incur any clinical expenses during the 2022 period compared to the 2021.
Selling, General and Administrative Expenses
Our expenses for the three months ended March 31, 2022 are summarized as follows in comparison to our expenses for the three months ended March 31, 2021 (in thousands).
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| Three Months Ended |
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| March 31, 2022 |
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| March 31, 2021 |
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Consulting |
| $ | 54 |
|
| $ | 219 |
|
Salaries and wages |
|
| 504 |
|
|
| 523 |
|
Selling, general and administrative |
|
| 2,047 |
|
|
| 2,395 |
|
Professional and investor relations |
|
| 304 |
|
|
| 806 |
|
Noncash compensation |
|
| 455 |
|
|
| 1,602 |
|
Total operating expenses |
| $ | 3,364 |
|
| $ | 5,545 |
|
Consulting
Consulting expense decreased for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. The Company has reduced the number of consultants used during the three months period ended March 31, 2022 compared to the same period in 2021, resulting in a decrease in consulting expenses.
Salaries and wages
Salaries and wages expense has slightly decreased by approximately $0.02 million during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. This was due to an decrease in employees from during the 2022 period when compared to the same period in 2022.
Selling, General and Administrative
Selling, general and administrative expense increased by approximately $0.4 million for the three months ended March 31, 2022, as compared to the three months ended March 31, 2021. This was mainly due to a decrease in our marketing spend and selling expenses incurred by Sera Labs during the 2022 period when compared to the same period in 2021 as well as a decrease in other general administrative expenses in the 2022 period compared to the 2021 period. However, this decrease in selling, general and administrative expense is offset by an increase in amortization expense mainly related to the IPRD that was placed in service during the year ended 2021 and thus the Company did not incur any amortization expense relating to our IPRD during the three months ended March 31, 2021.
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Professional and Investor Relations
Professional and investor relations expenses decreased by approximately $0.5 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. This was primarily due to the Company looking to a new investor relations firm to help increase awareness of our Company with potential new investors base. As a result, we did not utilize the same investor relations firm during the 2022 period as we did in the 2021 period.
Non-cash Compensation
Non-cash compensation expense decreased by approximately $1.1 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. This was primarily due to the Company recording the fair value of vested stock options, restricted stock awards and restricted stock units issued from our 2017 Equity Plan during the three months ended March 31, 2021 and issue nearly as many stock options and restricted stock during the same period in 2022.
Change in Fair Value Contingent Stock Consideration
The change in fair value contingent stock consideration increased by approximately $0.2 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. The change in fair value contingent stock consideration during the three months ended March 31, 2022 was based on a change in probability percentages of achieving the milestones which was significantly different compared to the probability percentages estimated during the same period in 2021. In addition, the decrease in the stock price resulted in a decrease in the fair value of the contingent stock consideration.
Impairment of Goodwill
Impairment of goodwill increased by approximately $2.7 million for the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. The impairment of goodwill during the three months ended March 31, 2022 was determined based on the qualitative factors that the fair value of goodwill is more likely than not to be less than its carrying amount and thus the fair value of a reporting unit, Cure Pharmaceutical, to be calculated and compared with its carrying amount and an impairment charge was recognized of approximately $2.7 million.
Other Income/ (Expense)
|
| For the Three Months Ended |
| |||||
(in thousands) |
| March 31, 2022 |
|
| March 31, 2021 |
| ||
Interest expense |
| $ | (196 | ) |
| $ | (64 | ) |
Change in fair value of convertible promissory notes |
|
| (280 | ) |
|
| 1,032 |
|
Loss on sale of property, plant and equipment |
|
| - |
|
|
| (41 | ) |
Settlement income |
|
| 82 |
|
|
| - |
|
Interest income |
|
| 2 |
|
|
| 2 |
|
Gain on extinguishment of debt |
|
| - |
|
|
| 399 |
|
Total other income (expense), net |
| $ | (392 | ) |
| $ | 1,328 |
|
Other income/(expense) decreased by approximately $1.7 million during the three months ended March 31, 2022 as compared to the three months ended March 31, 2021. This was primarily due to (i) an increase in interest expense of $0.1 million, (ii) aa decrease in the change in fair value of convertible promissory notes of $1.3 million, (iii) recording of settlement income of $0.08 million during the three months ended March 31, 2022 and (iv) a decrease in the gain on extinguishment of debt of the PPP loan that was forgiven during the three months ended March 31, 2021.
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LIQUIDITY AND CAPITAL RESOURCES
As of March 31, 2022 and December 31, 2021
Working Capital Deficit (in thousands)
|
| March 31, 2022 |
|
| December 31, 2021 |
| ||
Current assets |
| $ | 2,283 |
|
| $ | 1,781 |
|
Current liabilities |
|
| (25,060 | ) |
|
| (24,261 | ) |
Working capital (deficiency) |
| $ | (22,777 | ) |
| $ | (22,480 | ) |
Working capital deficit as of March 31, 2022 was approximately $22.7 million, as compared to a working capital deficit of approximately $22.5 million as of December 31, 2021. As of March 31, 2022, current assets were approximately $2.3 million, comprised primarily of (i) cash of approximately $0.5 million, (ii) accounts receivable, net of approximately $0.5 million, (iii) inventory, net of approximately $0.8 million and (iv) prepaid expenses and other assets of approximately $0.5 million. As of December 31, 2021, current assets were approximately $1.8 million, comprised primarily of (i) cash of approximately $0.02 million, (ii) accounts receivable, net of approximately $0.4 million, (iii) inventory, net of approximately $0.9 million and (iv) prepaid expenses and other assets of approximately $0.5 million.
As of March 31, 2022, current liabilities were approximately $24.8 million, comprised primarily of (i) approximately $15.4 million in notes payable, convertible notes payable and fair value of convertible promissory notes (ii) $2.2 million in related party payable, (iii) approximately $3.1 million in accounts payable; (iv) approximately $3.1 million in accrued expenses, (v) approximately $0.1 million of finance and operating lease payables and (vi) contingent share considerations of approximately $0.6 million. Comparatively, as of December 31, 2021, current liabilities were approximately $24.3 million, comprised primarily of (i) approximately $13.6 million in loans, notes, related party payables, convertible notes payable and fair value of convertible promissory notes, (ii) approximately $2.8 million in accounts payable; (iii) approximately $0.5 million in contract liabilities, (iv) approximately $3.8 million in accrued expenses, (v) approximately $0.1 million of finance and operating lease payables and (vi) contingent share considerations of approximately $1.4 million.
Net Cash (in thousands)
|
| For the Three Months Ended |
| |||||
|
| March 31, 2022 |
|
| March 31, 2021 |
| ||
(in thousands) |
|
|
|
|
|
| ||
Net cash used in operating activities |
| $ | (1,834 | ) |
| $ | (1,775 | ) |
Net cash provided by (used in) investing activities |
|
| - |
|
|
| 139 |
|
Net cash provided by financing activities |
|
| 2,349 |
|
|
| 391 |
|
Net increase (decrease) in cash |
| $ | 515 |
|
| $ | (1,245 | ) |
Net cash used in Operating Activities
Net cash used in operating activities was approximately $1.8 million during the three months ended March 31, 2021. This was primarily due to the net loss of approximately $5.2 million, offset by (i) the fair value of vested stock options and restricted stock of approximately $0.5 million, (ii) impairment of goodwill of approximately $2.7 million, (iii) change in fair value of convertible promissory notes of approximately $0.3 million and (iv) depreciation and amortization of approximately $1.0 million which was increased by (v) the change in fair value of contingent share consideration approximately of $0.8 million, and (vi) increase in the change in accrued expenses of approximately $0.6 million.
Comparatively, net cash used in operating activities was approximately $1.8 million during the three months ended March 31, 2021. This was primarily due to the net loss of approximately $3.2 million, offset by (i) stock based compensation of approximately $0.5 million, (ii) the fair value of vested stock options and restricted stock of approximately $1.1 million, and (iii) depreciation and amortization of approximately $0.7 million which was increased by (iv) the change in fair value of contingent share consideration and change in fair value of convertible promissory notes of $1.7 million, and (v) gain from extinguishment of debt of $0.4 million.
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Net cash used in Investing Activities
Net cash provided by investing activities of approximately $0.001 million during the three months ended March 31, 2022 was due to the purchase of an intangible asset for approximately $0.05 million. Comparatively, net cash provided by investing activities of approximately $0.1 million during the three months ended March 31, 2021 was due to (i) collection of a note receivable of approximately $0.2 million and (ii) the purchase of an intangible asset for approximately $0.05 million.
Net cash provided by Financing Activities
Net cash used by financing activities of approximately $0.4 million during the three months ended March 31, 2022 was primarily due to (i) proceeds from notes payable of $2.3 million (ii) proceeds from related party payables of $0.2 million and (iii) the repayment of debt in the amount of $0.1 million. Correspondingly, Net cash used by financing activities of approximately $0.4 million during the three months ended March 31, 2021 was primarily due to (i) proceeds from notes payable of $0.5 million and (ii) the repayment of debt in the amount of $0.1 million.
We may need to raise additional operating capital in calendar year 2022 in order to maintain our operations and to realize our business plan. Without additional sources of cash and/or the deferral, reduction, or elimination of significant planned expenditures, we may not have the cash resources to continue as a going concern thereafter.
CRITICAL ACCOUNTING POLICIES
The preparation of financial statements in conformity with GAAP requires estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses, and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations, and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. We also have other key accounting policies, which involve the use of estimates, judgments, and assumptions that are significant to understanding our results. Although we believe that our estimates, assumptions, and judgments are reasonable, they are based upon information presently available. Actual results may differ significantly from these estimates under different assumptions, judgments, or condition.
Our 2021 Annual Report, contains additional information regarding the critical accounting policies that affect our more significant estimates and judgments used in the preparation of our Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q. There have been no material changes to these policies in 2022. Please refer to “Note 2 – Summary of Significant Accounting Policies” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q for information regarding recently adopted accounting standards.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this Quarterly Report on Form 10-Q, we do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.
Information for this Item is not required as we are a “smaller reporting company” as defined in Rule 12b-2 of the Exchange Act.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Disclosure controls and procedures (as defined in Rules 13a-15(f) and 15d-15(f)) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), are designed to ensure that: (1) information required to be disclosed in reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in SEC rules and forms; and (2) such information is accumulated and communicated to management, including the principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosures. There are inherent limitations to the effectiveness of any system of disclosure controls and procedures, including the possibility of human error and the circumvention or overriding of controls and procedures. Accordingly, even effective disclosure controls and procedures can only provide reasonable assurance of achieving their control objectives.
Our management assessed the effectiveness of our internal control over financial reporting as of March 31, 2022. Based on this assessment, management concluded that the Company did not maintain effective internal controls over financial reporting as a result of the identified material weakness in our internal control over financial reporting described below. In making this assessment, management used the framework set forth in the report entitled Internal Control--Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). The COSO framework summarizes each of the components of a company’s internal control system, including (i) the control environment, (ii) risk assessment, (iii) control activities, (iv) information and communication and (v) monitoring.
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Identified Material Weakness
A material weakness in our internal control over financial reporting is a control deficiency, or combination of control deficiencies, that results in more than a remote likelihood that a material misstatement or the financial statements will not be prevented or detected. Management identified the segregation of duties as a material weakness during its assessment of internal controls over financial reporting as of March 31, 2022. Management has been implementing and continues to implement measures designed to ensure that control deficiencies contributing to the material weaknesses are remediated, such that these controls are designed, implemented, and operating effectively. The remediation actions planned include:
| · | re-design of our accounting processes and control procedures; and |
|
|
|
| · | identify gaps in our skills base and the expertise of our staff required to meet the financial reporting requirements of a public company. |
During the fiscal year ended December 31, 2021, we continued to execute upon our planned remediation actions which are all intended to strengthen our overall control environment.
Additionally, Management has engaged a professional services firm with expertise in internal controls. In order to remediate the material weaknesses described above, management has initiated compensating controls in the near term and are enhancing and revising the design of existing controls and procedures to properly account for significant and unusual transactions.
The following are the primary remediation efforts made by the Company:
| · | Prepare accounting memos over the debt issuances made by the Company in fiscal 2021 and 2020 which include derivative and warrants |
| · | Review fair value of convertible promissory notes in relation to the Series A and B Notes |
| · | Review of impairment of long-lived assets including goodwill and intangibles |
| · | Review forms 10-Q and 10-K to ensure the appropriate disclosures are made within the SEC filed documents |
In addition, the Company engaged external SOX consultants to further enhance the Company’s internal control environment. After several meetings with the key accounting personnel the following were put in place:
| · | Adoption of COSO |
| · | SOX risk assessment memo |
| · | Entity level COSO mapping |
| · | SOX control narratives for financial reporting as well as other processes |
While we believe these additions have addressed our lack of segregation of duties, due to the timing of the events, they were not able to mitigate the material weakness for the three months period ended March 31, 2022. We are committed to maintaining a strong internal control environment and believe that these remediation efforts will represent significant improvements in our control environment. Our management will continue to monitor and evaluate the relevance of our risk-based approach and the effectiveness of our internal controls and procedures over financial reporting on an ongoing basis and is committed to taking further action and implementing additional enhancements or improvements, as necessary and as funds allow.
Management, with the participation of the Company’s Principal Executive Officer and Principal Financial Officer, carried out an evaluation of the effectiveness of our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) as of March 31, 2022, the end of the period covered by this Quarterly Report on Form 10-Q. Based upon that evaluation, the Company’s Principal Executive Officer and Principal Financial Officer have concluded that as of March 31, 2022, the Company’s internal control over financial reporting is not effective as a result of the identified material weakness described herein.
Changes in Internal Control Over Financial Reporting
There were no changes in our internal controls over financial reporting during the fiscal quarter ended March 31, 2022 that materially affected, or is reasonably likely to have a material effect, on our internal control over financial reporting.
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PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
From time to time, we may be involved in litigation relating to claims arising out of our operations in the normal course of business. We currently are not a party to any legal proceedings, the adverse outcome of which, in management’s opinion, individually or in the aggregate, would have a material adverse effect on our results of operations, financial position or cash flows. Regardless of the outcome, any litigation could have an adverse impact on us due to defense and settlement costs, diversion of management resources and other factors.
The information contained in “Note 21 – Commitments and Contingencies” of the Notes to Condensed Consolidated Financial Statements included in Part I, Item 1 of this Quarterly Report on Form 10-Q is incorporated by reference into this Item 1. Except as set forth therein, there have been no new material legal proceedings and no material developments in the legal proceedings reported in our 2021 Annual Report.
ITEM 1A. RISK FACTORS
We operate in a rapidly changing environment that involves a number of risks that could materially affect our business, financial condition or future results, some of which are beyond our control. The occurrence of any of these risks could harm our business, financial condition, results of operations and/or growth prospects or cause our actual results to differ materially from those contained in forward-looking statements we have made in this report and those we may make from time to time. In evaluating the Company and its business, you should carefully consider the information included in this Quarterly Report on Form 10-Q and the factors discussed under Part I, Item 1A “Risk Factors” in our Annual Report on Form 10-K for the fiscal year ended December 31, 2021, as well as in other documents we file with the SEC.
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ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
As of March 31, 2022, there were two convertible promissory notes (the “Defaulted Notes”) totaling $550,000 that were in default as the maturity dates of these Notes have expired and have not yet been repaid or converted into common stock shares of the Company. The Company has offered to either repay the Defaulted Notes or request to have them converted into common stock shares of the Company. As of our filing of our Form 10-Q for the quarterly period ended March 31, 2022, the note holders of the Defaulted Notes have not yet communicated their intent to either receive payment or convert.
ITEM 4. MINE SAFETY DISCLOSURE
Not applicable.
ITEM 5. OTHER INFORMATION
None.
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| Table of Contents |
ITEM 6. EXHIBITS
10.1 |
| Forbearance Agreement. |
| ||
| ||
| ||
| ||
101.INS** |
| Inline XBRL Instance Document (the instance document does not appear in the Interactive Data File because its XBRL tags are embedded within the Inline XBRL document). |
101.SCH** |
| Inline XBRL Taxonomy Extension Schema Document. |
101.CAL** |
| Inline XBRL Taxonomy Extension Calculation Linkbase Document. |
101.DEF** |
| Inline XBRL Taxonomy Extension Definition Linkbase Document. |
101.LAB** |
| Inline XBRL Taxonomy Extension Labels Linkbase Document. |
101.PRE** |
| Inline XBRL Taxonomy Extension Presentation Linkbase Document. |
104 |
| Cover Page Interactive Data File (formatted as inline XBRL and contained in Exhibit 101). |
_____________
# The information in Exhibits 32.1 and 32.2 shall not be deemed “filed” for purposes of Section 18 of the Exchange Act, or otherwise subject to the liabilities of that section, nor shall it be deemed incorporated by reference in any filing under the Securities Act or the Exchange Act (including this Quarterly Report on Form 10-Q), unless the Registrant specifically incorporates the foregoing information into those documents by reference.
** In accordance with Rule 402 of Regulation S-T, this interactive data file is deemed not filed or part of this Quarterly Report on Form 10-Q for purposes of Sections 11 or 12 of the Securities Act or Section 18 of the Exchange Act and otherwise is not subject to liability under these sections.
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SIGNATURES
In accordance with the requirements of the Exchange Act, the Registrant caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
| CURE PHARMACEUTICAL HOLDING CORP. | ||
|
| ||
Dated: May 16, 2022 | By: | /s/ Robert Davidson | |
| Robert Davidson | ||
| Chief Executive Officer | ||
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated:
/s/ Robert Davidson |
|
Robert Davidson |
|
Chief Executive Officer |
|
May 16, 2022 |
/s/ Michael Redard |
|
Michael Redard |
|
Chief Financial Officer |
|
May 16, 2022 |
| 57 |