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Avenir Wellness Solutions, Inc. - Quarter Report: 2021 June (Form 10-Q)

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q 

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended June 30, 2021

 

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 333-204857

 

 

 

CURE PHARMACEUTICAL HOLDING CORP.

(Exact name of registrant as specified in its charter)

 

Delaware

 

2834

 

37-1765151

(State or other jurisdiction of

incorporation or organization)

 

(Primary Standard Industrial

Classification Number)

 

(IRS Employer

Identification Number)

 

1620 Beacon Place, Oxnard, California 93033

(Address of principal executive offices)

 

(805) 824-0410

(Issuer’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act: None.

 

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. Yes ☒     No ☐

 

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post such files). Yes ☒     No ☐

 

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

Non-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 ☐     No ☒

 

On August 12, 2021, we had 62,877,959 shares of common stock, par value $0.001 per share (the “Common Stock”) issued and outstanding.

 

 

 

 

TABLE OF CONTENTS

 

 

Page

PART I. FINANCIAL INFORMATION:

3

 

 

Item 1.

Unaudited Condensed Consolidated Financial Statements

 

3

 

 

Condensed Consolidated Balance Sheets as of June 30, 2021 (Unaudited) and December 31, 2020

 

3

 

 

Unaudited Condensed Consolidated Statements of Operations for the three and six month periods ended June 30, 2021 and 2021

 

4

 

 

Unaudited Condensed Consolidated Statements of Stockholders’ Equity for the three and six month periods ended June 30, 2021 and 2020

5

 

 

Unaudited Condensed Consolidated Statements of Cash Flows for the six month periods ended June 30, 2021 and 2020

 

6

 

 

Notes to the Unaudited Condensed Consolidated Financial Statements

 

7

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

51

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

 

63

 

 

Item 4.

Controls and Procedures

 

63

 

 

PART II. OTHER INFORMATION:

65

 

 

Item 1.

Legal Proceedings

 

65

 

 

Item 1A.

Risk Factors

 

65

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

 

66

 

 

Item 3.

Defaults Upon Senior Securities

 

66

 

 

Item 4.

Mine Safety Disclosure

 

66

 

 

Item 5.

Other Information

 

66

 

 

Item 6.

Exhibits

 

67

 

 

Signatures

 

68

 

 
2

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)

 

 

 

June 30, 2021

 

 

December 31, 2020

 

ASSETS

 

(unaudited)

 

 

 

Current assets:

 

 

 

 

 

 

Cash

 

$1,701

 

 

$1,725

 

Accounts receivable, net

 

 

242

 

 

 

224

 

Note receivable, net

 

 

-

 

 

 

-

 

Inventory, net

 

 

831

 

 

 

449

 

Prepaid expenses and other assets

 

 

516

 

 

 

1,452

 

Total current assets

 

 

3,290

 

 

 

3,850

 

 

 

 

 

 

 

 

 

 

Property and equipment, net

 

 

1,947

 

 

 

2,074

 

Finance lease right-of-use assets, net

 

 

46

 

 

 

52

 

Operating lease right-of-use assets, net

 

 

301

 

 

 

343

 

Note receivable

 

 

200

 

 

 

-

 

Investment

 

 

509

 

 

 

509

 

Goodwill

 

 

13,868

 

 

 

13,868

 

Intellectual property and patents, net

 

 

11,869

 

 

 

1,711

 

In-process research and development, net

 

 

3,867

 

 

 

14,288

 

Customer relationships, Tradename, and Non-compete, net

 

 

8,452

 

 

 

9,606

 

Other assets

 

 

83

 

 

 

58

 

 

 

 

 

 

 

 

 

 

Total assets

 

$44,432

 

 

$46,359

 

 

 

 

 

 

 

 

 

 

Liabilities and stockholders' equity

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$2,015

 

 

$2,135

 

Accrued expenses

 

 

3,708

 

 

 

1,299

 

Finance lease payable

 

 

12

 

 

 

12

 

Operating lease payable

 

 

100

 

 

 

93

 

Loan payable

 

 

46

 

 

 

265

 

Paycheck protection program loan

 

 

-

 

 

 

605

 

Related party payable

 

 

1,240

 

 

 

1,040

 

Notes payable

 

 

1,550

 

 

 

800

 

Convertible promissory notes

 

 

550

 

 

 

550

 

Fair value convertible promissory notes, net

 

 

7,221

 

 

 

6,674

 

Contract liabilities

 

 

597

 

 

 

994

 

Total current liabilities

 

 

17,039

 

 

 

14,467

 

 

 

 

 

 

 

 

 

 

License fees

 

 

-

 

 

 

80

 

Finance lease payable

 

 

34

 

 

 

40

 

Operating lease payable

 

 

227

 

 

 

278

 

Fair value convertible promissory notes, net

 

 

4,289

 

 

 

7,010

 

Contingent share considerations

 

 

1,650

 

 

 

3,205

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

23,239

 

 

 

25,080

 

 

 

 

 

 

 

 

 

 

Commitments and contingencies (see Note 21)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stockholders' equity:

 

 

 

 

 

 

 

 

Common stock: $0.001 par value; authorized 150,000,000 shares; 62,877,959 and 59,476,268 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively

 

 

63

 

 

 

60

 

Additional paid-in capital

 

 

106,272

 

 

 

101,807

 

Common stock issuable

 

 

603

 

 

 

665

 

Accumulated deficit

 

 

(85,745)

 

 

(81,253)

Total stockholders' equity

 

 

21,193

 

 

 

21,279

 

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' equity

 

$44,432

 

 

$46,359

 

 

See accompanying notes to these unaudited condensed consolidated financial statements.

 

 
3

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

 

 

For the Six Months Ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

Revenue:

 

 

 

 

 

 

 

 

 

 

 

 

Product sales, net of discounts and refunds

 

$2,066

 

 

$163

 

 

$3,447

 

 

$366

 

Consulting research & development income

 

 

25

 

 

 

100

 

 

 

52

 

 

 

169

 

Shipping and other sales

 

 

18

 

 

 

6

 

 

 

56

 

 

 

14

 

Total revenues

 

 

2,109

 

 

 

269

 

 

 

3,555

 

 

 

549

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cost of goods sold

 

 

797

 

 

 

100

 

 

 

1,214

 

 

 

201

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Gross profit

 

 

1,312

 

 

 

169

 

 

 

2,341

 

 

 

348

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating expenses:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Research and development expenses

 

 

699

 

 

 

735

 

 

 

1,343

 

 

 

1,540

 

Selling, general and administrative expenses

 

 

4,772

 

 

 

2,511

 

 

 

10,316

 

 

 

4,635

 

Change in fair value of contingent stock consideration

 

 

(894)

 

 

10,390

 

 

 

(1,555)

 

 

5,658

 

Total operating expenses

 

 

4,577

 

 

 

13,636

 

 

 

10,104

 

 

 

11,833

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net operating loss before other income (expense)

 

 

(3,265)

 

 

(13,467)

 

 

(7,763)

 

 

(11,485)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Other income (expense):

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

 

1

 

 

 

5

 

 

 

2

 

 

 

20

 

Gain from settlement

 

 

2,434

 

 

 

26

 

 

 

2,434

 

 

 

26

 

Gain on extinguishment of debt

 

 

335

 

 

 

-

 

 

 

734

 

 

 

-

 

Loss on sale of property, plant and equipment

 

 

-

 

 

 

-

 

 

 

(41)

 

 

-

 

Change in fair value of derivative liability

 

 

-

 

 

 

12

 

 

 

-

 

 

 

75

 

Change in fair value of convertible promissory notes

 

 

(692)

 

 

-

 

 

 

340

 

 

 

-

 

Interest expense

 

 

(134)

 

 

(15)

 

 

(199)

 

 

(28)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

 

1,944

 

 

 

28

 

 

 

3,270

 

 

 

93

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss before income taxes

 

 

(1,321)

 

 

(13,439)

 

 

(4,493)

 

 

(11,392)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Provision for income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss

 

$(1,321)

 

$(13,439)

 

$(4,493)

 

$(11,392)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss per share

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$(0.02)

 

$(0.32)

 

$(0.09)

 

$(0.29)

Diluted

 

$(0.02)

 

$(0.32)

 

$(0.09)

 

$(0.29)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Weighted average common shares outstanding

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

 

59,842,904

 

 

 

41,716,558

 

 

 

48,299,751

 

 

 

39,867,063

 

Diluted

 

 

59,842,904

 

 

 

41,716,558

 

 

 

48,299,751

 

 

 

39,867,063

 

 

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 Stockholders' Equity

For the Three and Six Months Ended June 30, 2021 and 2020

(in thousands, except share amounts)

 

 

 

Common Stock

 

 

Additional

Paid-in

 

 

Common Stock

 

 

Accumulated

 

 

 

 

 

Shares

 

 

Amount 

 

 

Capital

 

 

Issuable

 

 

Deficit

 

 

Total

 

Balance, December 31, 2020

 

 

59,476,268

 

 

$60

 

 

$101,807

 

 

$665

 

 

$(81,253)

 

$21,279

 

Issuance of common stock for professional services

 

 

265,512

 

 

 

-

 

 

 

363

 

 

 

145

 

 

 

 

 

 

 

508

 

Issuance of common stock from the equity incentive plan

 

 

157,693

 

 

 

-

 

 

 

190

 

 

 

(52)

 

 

 

 

 

 

138

 

Issuance of common stock for exercise of warrants

 

 

26,936

 

 

 

-

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

-

 

Fair value of stock options and restricted stock granted

 

 

 

 

 

 

 

 

 

 

961

 

 

 

 

 

 

 

 

 

 

 

961

 

Fair value of restricted stock units granted

 

 

 

 

 

 

 

 

 

 

144

 

 

 

 

 

 

 

 

 

 

 

144

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(3,171)

 

 

(3,171)

Balance, March 31, 2021

 

 

59,926,409

 

 

$60

 

 

$103,465

 

 

$758

 

 

$(84,424)

 

$19,859

 

Issuance of common stock for professional services

 

 

381,000

 

 

 

-

 

 

 

243

 

 

 

 

 

 

 

 

 

 

 

243

 

Issuance of common stock from the equity incentive plan

 

 

141,693

 

 

 

-

 

 

 

(2)

 

 

(155)

 

 

 

 

 

 

(157)

Issuance of common stock from conversion of convertible promissory notes

 

 

2,428,857

 

 

 

3

 

 

 

1,832

 

 

 

 

 

 

 

 

 

 

 

1,835

 

Fair value of stock options and restricted stock granted

 

 

 

 

 

 

 

 

 

 

591

 

 

 

 

 

 

 

 

 

 

 

591

 

Fair value of restricted stock units granted

 

 

 

 

 

 

 

 

 

 

143

 

 

 

 

 

 

 

 

 

 

 

143

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(1,321)

 

 

(1,321)

Balance, June 30, 2021

 

 

62,877,959

 

 

$63

 

 

$106,272

 

 

$603

 

 

$(85,745)

 

$21,193

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2019

 

 

38,001,543

 

 

$38

 

 

$63,035

 

 

$1,066

 

 

$(50,632)

 

$13,507

 

Issuance of common stock for professional services

 

 

31,250

 

 

 

-

 

 

 

68

 

 

 

163

 

 

 

 

 

 

 

231

 

Fair value of stock options and restricted stock granted

 

 

 

 

 

 

 

 

 

 

469

 

 

 

 

 

 

 

 

 

 

 

469

 

Fair value of restricted stock units granted

 

 

 

 

 

 

 

 

 

 

60

 

 

 

 

 

 

 

 

 

 

 

60

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2,046

 

 

 

2,046

 

Balance, March 31, 2020

 

 

38,032,793

 

 

$38

 

 

$63,632

 

 

$1,229

 

 

$(48,586)

 

$16,313

 

Issuance of common stock for professional services

 

 

218,750

 

 

 

-

 

 

 

600

 

 

 

(411)

 

 

 

 

 

 

189

 

Issuance of common stock from the equity incentive plan

 

 

8,003

 

 

 

-

 

 

 

-

 

 

 

 

 

 

 

 

 

 

 

-

 

Issuance of common stock from exercise of warrants

 

 

708,467

 

 

 

1

 

 

 

1,417

 

 

 

 

 

 

 

 

 

 

 

1,418

 

Issuance of common stock from settlement with Chemistry Holdings, Inc.

 

 

12,058,623

 

 

 

12

 

 

 

21,935

 

 

 

(246)

 

 

 

 

 

 

21,701

 

Fair value of stock options and restricted stock granted

 

 

 

 

 

 

 

 

 

 

479

 

 

 

 

 

 

 

 

 

 

 

479

 

Fair value of restricted stock units granted

 

 

 

 

 

 

 

 

 

 

60

 

 

 

 

 

 

 

 

 

 

 

60

 

Net loss

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

(13,439)

 

 

(13,439)

Balance, June 30, 2020

 

 

51,026,636

 

 

$51

 

 

$88,123

 

 

$572

 

 

$(62,025)

 

$26,721

 

 

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 Cash Flows

(in thousands)

 

 

 

For the Six Months Ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

 

 

 

 

 

 

Net loss

 

$(4,493)

 

$(11,392)

 

 

 

 

 

 

 

 

 

Adjustment to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Stock based compensation - services

 

 

752

 

 

 

420

 

Stock based compensation - prepaid

 

 

-

 

 

 

300

 

Stock issued from equity incentive plan

 

 

(19)

 

 

-

 

Gain from settlement of accounts payable

 

 

-

 

 

 

(26)

Gain from extinguishment of debt

 

 

(734)

 

 

-

 

Change in fair value of contingent share consideration

 

 

(1,555)

 

 

5,658

 

Change in fair value of convertible promissory notes

 

 

(340)

 

 

-

 

Depreciation and amortization

 

 

1,578

 

 

 

164

 

Amortization of right of use asset

 

 

48

 

 

 

6

 

Bad debt expenses

 

 

41

 

 

 

14

 

Recovery of bad debt expense

 

 

(221)

 

 

-

 

Loss on disposal of property, plant and equipment

 

 

41

 

 

 

-

 

Inventory reserve for obsolescence

 

 

(109)

 

 

(2)

Change of fair value in derivative liabilities

 

 

-

 

 

 

(75)

Fair value of vested stock options and restricted stock

 

 

1,839

 

 

 

1,069

 

 

 

 

 

 

 

 

 

 

Change in operating assets and liabilities:

 

 

 

 

 

 

 

 

Accounts receivable

 

 

(59)

 

 

85

 

Inventory

 

 

(273)

 

 

(52)

Prepaid expenses and other assets

 

 

957

 

 

 

(36)

Other assets

 

 

(25)

 

 

-

 

Accounts payable

 

 

(95)

 

 

139

 

Accrued expenses

 

 

2,538

 

 

 

113

 

Finance lease payable

 

 

(6)

 

 

(6)

Operating lease payable

 

 

(44)

 

 

-

 

Contract liabilities

 

 

(397)

 

 

(152)

License fees

 

 

(80)

 

 

(5)

 

 

 

 

 

 

 

 

 

Cash used in operating activities

 

 

(656)

 

 

(3,778)

 

 

 

 

 

 

 

 

 

Cash flows from investing activities

 

 

 

 

 

 

 

 

Investment in company

 

 

-

 

 

 

(250)

Purchase of intangible assets

 

 

(67)

 

 

(8)

Acquisition of property and equipment, net

 

 

(32)

 

 

(586)

Purchase of note receivable

 

 

(200)

 

 

0

 

Collection of note receivable

 

 

200

 

 

 

-

 

 

 

 

 

 

 

 

 

 

Cash used in investing activities

 

 

(99)

 

 

(844)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities

 

 

 

 

 

 

 

 

Proceeds from exercise of warrants

 

 

-

 

 

 

1,417

 

Proceeds from notes payable

 

 

750

 

 

 

649

 

Proceeds from related party payable

 

 

200

 

 

 

-

 

Repayment of loans payable

 

 

(219)

 

 

(111)

 

 

 

 

 

 

 

 

 

Cash provided by financing activities

 

 

731

 

 

 

1,955

 

 

 

 

 

 

 

 

 

 

Net decrease in cash and cash equivalents

 

 

(24)

 

 

(2,667)

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, beginning of year

 

 

1,725

 

 

 

4,096

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents, end of period

 

$1,701

 

 

$1,429

 

 

 

 

 

 

 

 

 

 

Supplemental cash flow information

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Cash paid for interest and income taxes:

 

 

 

 

 

 

 

 

Interest

 

$68

 

 

$3

 

Income taxes

 

$-

 

 

$-

 

 

 

 

 

 

 

 

 

 

Non-cash investing and financing activities:

 

 

 

 

 

 

 

 

Common stock issued for conversion of promissory notes and accrued interest

 

$1,834

 

 

$-

 

Common stock issued for settlement of earnout liabilities from the acquisition of Chemistry Holdings, Inc

 

$

 -

 

 

 21,701

 

 

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 subsidiary, CURE Pharmaceutical Corporation (“CURE Pharmaceutical”), Cure Chemistry Inc. and its recently acquired related subsidiaries (collectively referred to as “CHI”) and The Sera Labs, Inc. (“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. We operate in a 25,000 square foot cGMP manufacturing plant in Oxnard, CA.

 

Our technology platform includes oral dissolving 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).

 

Background

 

We were incorporated in the State of Nevada on May 15, 2014. On November 7, 2016, we changed our name from Makkanotti Group Corp to CURE Pharmaceutical Holding Corp. On September 27, 2019, the Company reincorporated from the State of Nevada to the State of Delaware.

 

On November 7, 2016, the board of directors and the majority stockholder of the then outstanding shares of registrant’s common stock executed a written consent to change registrant’s name from Makkanotti Group Corp. to CURE Pharmaceutical Holding Corp. The Certificate of Amendment to Articles of Incorporation was filed with the State of Nevada on November 30, 2016.

 

Further, on November 7, 2016, we, in a reverse take-over transaction, acquired a specialty pharmaceutical and bioscience company based in California that specializes in drug delivery technologies, by executing a Share Exchange Agreement and Conversion Agreement (“Exchange Agreement”) by and among us and a holder of a majority of our issued and outstanding capital stock prior to the closing (the “Majority Stockholder”), on the one hand, and CURE Pharmaceutical, all of the shareholders of CURE Pharmaceutical’s issued and outstanding share capital (the “CURE Pharm Shareholders”) and the holders of certain convertible promissory notes of CURE Pharmaceutical (“CURE Pharm Noteholders”), on the other hand. Hereinafter, this share exchange transaction is described as the “Share Exchange.”

 

As a result of the Share Exchange, CURE Pharmaceutical became a wholly owned subsidiary of CPHC, and the CURE Pharmaceutical Shareholders and CURE Pharmaceutical Noteholders became CPHC stockholders owning, at such time, approximately 65% of our issued and outstanding common stock.

 

On May 14, 2019 (the “Closing Date”), the Company, and CURE Chemistry Inc., a Delaware corporation and wholly owned subsidiary of the Company (“Merger Sub”), completed the transactions contemplated by the Agreement and Plan of Merger and Reorganization, dated March 31, 2019 (the “Merger Agreement”), with CHI., a Delaware corporation. As agreed in the Merger Agreement, the Company acquired CHI pursuant to a merger of the Merger Sub with and into CHI (the “Merger”). Pursuant to the Merger, CHI became a wholly-owned subsidiary of the Company and the stockholders of CHI received shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) in exchange for all of the issued and outstanding shares of CHI.

 

On October 2, 2020, the Company completed its acquisition of The Sera Labs, Inc. (“Sera Labs”) a Delaware corporation pursuant to an Agreement and Plan of Merger and Reorganization, dated as of September 23, 2020 (the “Sera Labs Merger Agreement”), by and among the Company, Cure Labs, Inc., a Delaware corporation and a wholly owned subsidiary of the Company (“Sera Labs Merger Sub”), Sera Labs and Nancy Duitch, in her capacity as the security holders representative (“Ms. Duitch” collectively with the Company, Sera Labs and Sera Labs Merger Sub, the “Parties”). The Sera Labs Merger Agreement provides for the acquisition of Sera Labs by the Company through the merger of Sera Labs Merger Sub with and into Sera Labs, with Sera Labs surviving as a wholly owned subsidiary of the Company (the “Sera Labs Merger”).

 

 
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The Coronavirus Disease 2019 (COVID-19) Pandemic

 

The COVID-19 pandemic was declared a global pandemic by the World Health Organization on March 11, 2020, has spread across the globe and is impacting worldwide economic activity. A pandemic, including COVID-19, or other public health epidemic poses the risk that the Company or its employees, suppliers, and other partners may be prevented from conducting business activities at full capacity for an indefinite period of time, including due to spread of the disease within these groups or due to shutdowns that may be requested or mandated by governmental authorities. While it is not possible at this time to estimate the future impact that COVID-19 could have on the Company’s business, the continued spread of COVID-19 and the measures taken by the governments of countries affected and in which the Company operates could continue to disrupt the operation of the Company’s business. The COVID-19 outbreak and mitigation measures have had an adverse impact on global economic conditions, and may continue to have such adverse impact, which could have an adverse effect on the Company’s business and financial condition, including on its potential to conduct financings on terms acceptable to the Company, if at all. In addition, the Company undertook temporary precautionary measures intended to help minimize the risk of the virus to its employees (with such measures still currently in effect), including temporarily requiring a majority of our employees to work remotely, and discouraging employee attendance at in-person work-related meetings, which could negatively affect the Company’s business. The extent to which the COVID-19 outbreak impacts the Company’s results will depend on future developments that are highly uncertain and cannot be predicted, including new information that may emerge concerning the severity of the virus and the actions to contain its impact. Due to the speed with which the COVID-19 situation is developing, the Company is not able at this time to estimate the impact of COVID-19 on its consolidated financial statements and related disclosures, but the impact could be material for the fiscal year 2021 in all business aspects and could be material during any future period affected either directly or indirectly by this pandemic.

 

While the extent and duration of the economic downturn from the COVID-19 pandemic remains unclear, the Company has considered, among other things, whether the global operational disruptions indicate a change in circumstances that may trigger asset impairments and whether it needs to revisit accounting estimates and projections or its expectations about collectability of receivables. Additionally, the Company has considered the potential impacts on its fair value disclosures and on its internal control over financial reporting. During the six months ended June 30, 2021 there was no significant direct impact on the Company’s operations as a result of the economic downturn. While significant uncertainty still exists concerning the magnitude of the impact and duration of the COVID-19 pandemic on the global economy, the Company has determined that there was no triggering event for an impairment with respect to any of its assets nor has there been an adverse change in the probability related to the collectability of its receivables. The Company continues to assess the potential impact of the global economic situation on its consolidated financial statements. Please see Item 1A. Risk Factors of this Quarterly Report on Form 10-Q.

 

NOTE 2 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Presentation

 

The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”). The summary of significant accounting policies presented below is designed to assist in understanding the Company’s financial statements. Such financial statements and accompanying notes are the representations of Company’s management, who is responsible for their integrity and objectivity.

 

The accompanying unaudited condensed consolidated financial statements have been prepared in accordance with GAAP for interim financial statements and with the instructions to Form 10-Q and Article 8 of Regulation S-X of the United States Securities and Exchange Commission (“SEC”). Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. In the opinion of the Company’s management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of June 30, 2021, and the results of operations and cash flows for the periods presented. The results of operations for the three and six months ended June 30, 2021 and 2020, 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, 2020 filed with the SEC on March 31, 2021.

 

 
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Principle of Consolidation

 

The condensed financial statements include the accounts of CURE Pharmaceutical Holding Corp (“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 Company’s film strip product represents the principal operations of the Company. Business acquisitions are included in the Company’s consolidated financial statements from the date of the acquisition. The Company’s purchase accounting resulted in all assets and liabilities of acquired businesses being recorded at their estimated fair values on the acquisition dates.

 

Going Concern and Management’s Liquidity Plans

 

                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 June 30, 2021, we had an accumulated deficit of approximately $85.8 million and a working capital deficit of approximately $13.7 million. Our operating activities consume the majority of our cash resources. We anticipate that we will continue to incur operating losses and negative cash flows from operations, at least into the near future, as we execute our commercialization and development plans and strategic and business development initiatives. As of the date of this report, the Company had approximately $0.7 million of cash on hand. As further described in Note 13, on October 30, 2020, the Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with an institutional investor (the “Investor”), pursuant to which it sold to the Investor a Series A subordinated convertible note, with an initial principal amount of $4.6 million (the “Series A Note”), and a Series B senior secured convertible note, with an initial principal amount of $6.9 million (the “Series B Note,” and together with the Series A Note, the “Convertible Notes” and, each a “Convertible Note”), for an aggregate principal amount of $11.5 million (the “Private Placement”). To date, the Company received gross proceeds from the Series A and Series B Notes of $5.0 million. To date, the Company paid legal and broker fees totaling $0.7 million and $1.1 million promissory note due to the Investor from the gross proceeds from the Series A and Series B Notes. The Series A Note was sold with an original issue discount of $0.6 million and the Series B Note was sold with an original issue discount of $0.9 million. The Investor paid for the Series A Note issued to the Investor by delivering $4.0 million in cash consideration and paid for the Series B Note issued to the Investor by delivering a secured promissory note (the “Investor Note”) with an initial principal amount of $6.0 million. The Investor will be required to prepay the Investor Note in certain amounts (each a “Mandatory Prepayment”) on the first date after the effectiveness of a resale registration statement (or the availability of Rule 144 promulgated under the Securities Act of 1933, as amended) if certain other conditions are satisfied as of such date.

 

 
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On May 6, 2021, the Company received $2.3 million of the settlement of the arbitration the Company filed against Canopy Growth Corporation (“Canopy”) with respect to the license agreement between the Company and Canopy.

 

While the Company believes the funds available through this financing and settlement with Canopy will be sufficient to meet the Company’s working capital requirements during the coming year, if the Company is unable to satisfy the conditions required to initiate the Mandatory Prepayment under the Investor Note, then it will need to obtain alternative financing. There can be no assurance that if such alternative financing is needed that it will be available on terms acceptable to the Company or will be enough to fully sustain the Company’s operations. If the Company is unable to raise sufficient additional funds it will have to develop and implement a plan to extend payables, reduce expenditures, or scale back our business plan until sufficient additional capital is raised to support further operations.

 

The ability of the Company to continue as a going concern is dependent upon its ability to successfully accomplish the plans described in the preceding paragraph and eventually secure other sources of financing and attain profitable operations. These factors raise substantial doubt about the Company’s ability to continue as a going concern for one year from the issuance of the unaudited condensed consolidated financial statements. The accompanying unaudited condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of assets and liabilities that might be necessary if the Company is unable to continue as a going concern.

    

Reclassifications

 

Certain reclassifications have been made to prior year’s consolidated financial statements to enhance comparability with the current year’s consolidated financial statements. These reclassifications had no effect on the previously reported net loss.

 

Use of Estimates

 

The preparation of the accompanying consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reported period. Significant areas requiring the use of management estimates include, but are not limited to, the allowance for doubtful accounts, valuation of intangible assets and goodwill, depreciative and amortization useful lives, assumptions used to calculate the fair value of the contingent share consideration, stock based compensation, beneficial conversion features, warrant values, deferred taxes and the assumptions used to calculate derivative liabilities and fair values of the purchase price allocations and convertible promissory notes. Actual results could differ materially from such estimates under different assumptions or circumstances.

  

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with maturities of three months or less at the time of purchase to be cash equivalents. As of June30, 2021 and December 31, 2020, the Company had no cash equivalents.

 

 
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Investment in Associates

 

An associate is an entity over which the Company has significant influence through a joint venture. Significant influence is the power to participate in the financial and operating policy decisions of the investee but not control or joint control over those policies.

 

The results of assets and liabilities of associates are incorporated in the condensed consolidated financial statements using the equity method of accounting. Under the equity method, investments in associates are carried in the consolidated balance sheet at cost as adjusted for post-acquisition changes in the Company’s share of the net assets of the associate, less any impairment in the value of the investment. Losses of an associate in excess of the Company’s interest in that associate are not recognized. Additional losses are provided for, and a liability is recognized, only to the extent that the Company has incurred legal or constructive obligations or made payments on behalf of the associate.

 

Any excess of the cost of acquisition over the Company’s share of the net fair value of the identifiable assets, liabilities and contingent liabilities of the associate recognized at the date of acquisition is recognized as goodwill. The goodwill is included within the carrying amount of the investment.

 

On November 1, 2019, the Company purchased a convertible loan (the “Releaf Loan”) with Releaf Europe BV (“Releaf”) in the amount of $0.2 million. Releaf shall accrue interest on the Releaf Loan at 6% per annum and shall become due and payable to the Company at the earlier of the conversion date, the date when the Releaf Loan is repaid or at the maturity date of October 31, 2021. In the event of a request for conversion by the Company or at the end of the maturity date, October 31, 2021, the outstanding amount of the Releaf Loan and any unpaid accrued interest shall be converted into shares of Releaf based on a price per share on a post money valuation of $10.9 million. In the event Releaf completes a financing round totaling at least $2.0 million of debt and/or equity (“Releaf Qualified Financing”), the outstanding amount of the Releaf Loan and any unpaid accrued interest shall automatically convert at a price per share paid by the investors in connection with the Releaf Qualified Financing less a discount of 20% on the subscription price. In addition, both the Company and Releaf agree in the event that the pre-money valuation of the Releaf Qualified Financing is higher than $15 million, the conversion shall be calculated with a cap of pre-money valuation of $14.5 million. As of June 30, 2021, the Company recorded an investment using the cost method of accounting in Releaf and did not record any accrued interest relating to the Releaf Loan.

 

On February 5, 2020 and February 13, 2020, the Company purchased two convertible loans (the “February 2020 Loans”) with Releaf for a total amount of $0.3 million. Releaf shall accrue interest on the February 2020 Loans at 6% per annum and they shall become due and payable to the Company at the earlier of the conversion date or the maturity date of October 31, 2021. In the event of a request for conversion by the Company or at the end of the maturity date, October 31, 2021, the outstanding amounts of the February 2020 Loans and any unpaid accrued interests shall be converted into shares of Releaf based on a price per share on a post money valuation of $10.9 million. In the event Releaf completes a financing round totaling at least $2.0 million of debt and/or equity (“Releaf February 2020 Qualified Financing”), the outstanding amount of the February 2020 Loans and any unpaid accrued interest shall automatically convert at a price per share paid by the investors in connection with the Releaf February 2020 Qualified Financing, less a discount of 20% on the subscription price. In addition, in the event that the pre-money valuation of the Releaf February 2020 Qualified Financing is higher than $15 million, the conversion shall be calculated with a cap of pre-money valuation of $14.5 million. As of June 30, 2021, the Company recorded an investment using the cost method of accounting in Releaf and did not record any accrued interest relating to the foregoing Releaf loans.

 

On May 26, 2021, the Company purchased a convertible loan (the “May 2021 Loan”) with Biopharmaceutical Research Company (“BRC”) for a total amount of $0.2 million, which is one of a series of notes “(Notes”) pursuant to the terms of the Note Purchase Agreement (“NPA”) offered by BRC. BRC shall accrue interest on the May 2021 Loan at 6% per annum and shall become due and payable to the Company at the earlier of the conversion date or the maturity date of May 26, 2023. In the event of a request for conversion by the Company, the outstanding amount of the May 2021 Loan and any unpaid accrued interest shall be converted into shares of BRC, rounded down to the nearest whole share, by dividing the May 2021 Loan by the price per share obtained by dividing $20 million by the number of outstanding shares of common stock of BRC immediately prior to such conversion (assuming conversion of all securities convertible into common stock and exercise of all outstanding options and warrants of BRC, but excluding (i) the shares of equity securities of BRC issued or issuable upon the conversion of the Notes and (ii) all shares of the common stock reserved and available for future grant under any equity incentive or similar plan of BRC. In the event the Company has not requested for conversion, the May 2021 Loan can automatically convert if BRC sells shares of preferred stock (the “Qualified Financing Securities”) to one or more investors in a single transaction or series of related transactions for aggregate proceeds to BRC (including cancellation of indebtedness under the Notes or any other convertible debt) of at least $4 million (a“Qualified Financing”). The May 2021 Loan shall automatically convert at the initial closing of and on the same terms and conditions of the Qualified Financing into a total number of Qualified Financing Securities, rounded down to the nearest whole share, obtained by dividing the May 2021 Loan by the lesser of (i) 80% of the price per share paid for the Qualified Financing Securities by investors in the Qualified Financing and (ii) $20 million by the number of outstanding shares of common stock of BRC immediately prior to such conversion (assuming conversion of all securities convertible into common stock and exercise of all outstanding options and warrants of BRC, but excluding (a) the shares of equity securities of BRC issued or issuable upon the conversion of the Notes, (b) all shares of the common stock reserved and available for future grant under any equity incentive or similar plan of BRC and (c) any equity incentive or similar plan to be created or increased in connection with the Qualified Financing).

 

 
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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. The Company has determined that there was no impairment of our investment in Releaf during the six months ended June 30, 2021.

 

Accounts Receivable

 

Accounts receivable are generally unsecured. The Company establishes an allowance for doubtful accounts receivable based on the age of outstanding invoices and management’s evaluation of collectability. Accounts are written off after all reasonable collection efforts have been exhausted and management concludes that likelihood of collection is remote. Any future recoveries are applied against the allowance for doubtful accounts. At June 30, 2021 management determined that an allowance of $0.08 million was necessary. At December 31, 2020 management determined that an allowance of $0.04 million was necessary.

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value (“NRV”). NRV is the amount by which the estimated selling price of the product exceeds the sum of any additional costs expected to be incurred on the sale of such product in the ordinary course of business. The Company determines the cost of its inventory, which includes amounts related to materials, direct labor, and manufacturing overhead, on a first-in, first-out basis. The Company performs an assessment of the recoverability of capitalized inventory during each reporting period. In order to state the inventory at the lower of cost or NRV, we maintain reserves against individual stocking units. Inventory reserves, once established, are not reversed until the related inventories have been sold or scrapped. If future demand or market conditions are less favorable than our projections, a write-down of inventory may be required, and would be reflected in cost of product revenues sold in the period the revision is made.

 

Goodwill and intangible assets

 

In accordance with ASC 350, Intangibles – Goodwill and Other, in-process research and development (“IPR&D”) projects acquired in a business combination that are not complete as of the acquisition date are capitalized and accounted for as indefinite-lived intangible assets until completion or abandonment of the related research and development efforts. Upon successful completion of the project, the capitalized amount is amortized over its estimated useful life. If a project is abandoned, all remaining capitalized amounts are written off immediately. The Company considers various factors and risks for potential impairment of IPR&D assets, including the current legal and regulatory environment and the competitive landscape. Adverse clinical trial results, or significant delays, or the inability to bring a product to market and the introduction or advancement of competitors’ products could result in partial or full impairment of the related intangible assets. Consequently, the eventual realized value of the IPR&D project may vary from its fair value at the date of acquisition, and IPR&D impairment charges may occur in future periods. During the period between completion or abandonment, the IPR&D assets will not be amortized but will be tested for impairment on an annual basis and between annual tests if the Company becomes aware of any events occurring or changes in circumstances that would indicate a reduction in the fair value of the IPR&D projects below their respective carrying amounts (see Note 7).

 

 
12

Table of Contents

  

Goodwill represents the excess of the purchase price over the fair value of net identifiable assets and liabilities. Goodwill, 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 and trademark discussed in Note 19. As of June 30, 2021 and December 31, 2020, there has been no impairment of goodwill and intangible assets.

 

Business Combinations

 

The results of businesses acquired in a business combination are included in the Company’s condensed consolidated financial statements from the date of acquisition. Purchase accounting results in assets and liabilities of an acquired business being recorded at their estimated fair values on the acquisition date. Any excess consideration over the value of the assets acquired and liabilities assumed is recognized as goodwill.

 

Impairment of Long-Lived Assets

 

Long-lived assets include equipment and intangible assets other than those with indefinite lives. We assess the carrying value of our long-lived asset groups when indicators of impairment exist and recognize an impairment loss when the carrying amount of a long-lived asset is not recoverable when compared to undiscounted cash flows expected to result from the use and eventual disposition of the asset.

 

Indicators of impairment include significant underperformance relative to historical or projected future operating results, significant changes in our use of the assets or in our business strategy, loss of or changes in customer relationships and significant negative industry or economic trends. When indications of impairment arise for a particular asset or group of assets, we assess the future recoverability of the carrying value of the asset (or asset group) based on an undiscounted cash flow analysis. If carrying value exceeds projected, net, undiscounted cash flows, an additional analysis is performed to determine the fair value of the asset (or asset group), typically a discounted cashflow analysis, and an impairment charge is recorded for the excess of carrying value over fair value. There was no impairment on our long-lived assets during the six months ended June 30, 2021 and 2020.

 

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.

 

 
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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.

 

Revenue Recognition

 

The Company recognizes revenue in accordance with ASC 606, “Revenue Recognition”. Revenues under Topic 606 are required to be recognized either at a “point in time” or “over time”, depending on the facts and circumstances of the arrangement, and are evaluated using a five-step model.

 

To achieve the core principle of Topic 606, we perform the following steps:

 

 

·

Identify the contract(s) with customer;

 

·

Identify the performance obligations in the contract;

 

·

Determine the transactions price;

 

·

Allocate the transactions price to the performance obligations in the contract; and

 

·

Recognize revenue when (or as) we satisfy a performance obligation.

 

Under Topic 606, the Company recognizes revenue as, or when, we satisfy performance obligations under a contract. We account for a contract when the parties approved the contract and are committed to perform on it, the rights of each party and the payment terms are identified, the contract has commercial substance and it is probable that we will collect substantially all of the consideration. A performance obligation is a promise in a contract to transfer a distinct good or service, or a series of distinct goods or services, to a customer. The transaction price of a contract must be allocated to each performance obligation and recognized as the performance obligation is satisfied. In essence, we recognize revenue when or as control of the promised goods or services transfer to the customer.

 

Cure Pharmaceutical Revenue

 

Cure Pharmaceutical derives revenues from two primary sources: products and services. Product revenue includes the shipment of products according to agreements with the Cure Pharmaceutical’s customers. Services include research and development contracts for the development of OTF products utilizing the Cure Pharmaceutical’s CureFilm Technology or our other proprietary technologies. Cure Pharmaceutical’s contracts with customers rarely contain multiple performance obligations. For these contracts, Cure Pharmaceutical accounts for individual performance obligations separately if they are distinct. The transaction price is allocated to the separate performance obligations on a relative standalone selling price basis. Standalone selling prices are typically estimated based on observable transactions when these services are sold on a standalone basis.

 

Cure Pharmaceutical’s formulation and product development income include services for the development of OTF products utilizing our CureFilm Technology. Our development contracts can 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.

 

 
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Cure Pharmaceutical has entered into a Collaboration and Joint Development Agreement (“Agreement”) with Medolife Rx (“Medolife”) on February 1, 2021 (“Effective Date”) for Medolife to produce Medolife Products (“Products”) in Cure Pharmaceutical’s cGMP facility. The term of this agreement is for five (5) years from the Effective Date (“Term”). Medolife is to pay $0.3 million to assist in completing the jointly developed production line at Cure Pharmaceutical’s cGMP facility. In addition, Cure Pharmaceutical will produce Products on behalf of Medolife and will grant access to Medolife for a joint production area within Cure Pharmaceutical’s production facility for the Term of this Agreement. The Company has determined that there are no distinct obligations for the $0.3 million and Cure Pharmaceutical does have further obligations as stated in the Agreement, thus the Company will recognize the revenue monthly over the Term, beginning February 1, 2021.

 

Sera Labs Revenue

 

Sera Labs recognizes revenue as, or when, we satisfy performance obligations under a contract. We account for a contract when the parties approved the contract and are committed to perform on it, the rights of each party and the payment terms are identified, the contract has commercial substance and it is probable that we will collect substantially all of the consideration. A performance obligation is a promise in a contract to transfer a distinct good or service, or a series of distinct goods or services, to a customer. The transaction price of a contract must be allocated to each performance obligation and recognized as the performance obligation is satisfied. In essence, we recognize revenue when or as control of the promised goods or services transfer to the customer.

 

Revenue from eCommerce sales, including direct-to-consumer sales, are recognized upon shipment of merchandise. We also elected to adopt the practical expedient related to shipping and handling fees which allows us to account for shipping and handling activities that occur after control of the related good transfers as fulfillment activities instead of assessing such activities as performance obligations. Therefore, shipping and handling activities are considered part of the Company’s obligation to transfer the products and therefore are recorded as direct selling expenses, as incurred. Shipping revenue are recorded upon delivery to the customer.

 

Practical Expedients and Exemptions

 

The Company has elected certain practical expedients and policy elections as permitted under ASC Topic 606 as follows:

 

 

·

The Company adopted the practical expedient related to not adjusting the promised amount of consideration for the effects of a significant financing component if the period between transfer of product and customer payment is expected to be less than one year at the time of contract inception;

 

 

 

 

·

The Company made the accounting policy election to exclude any sales and similar taxes from the transaction price;

 

 

 

 

·

The Company adopted the practical expedient not to disclose the value of unsatisfied performance obligations for contracts with an original expected length of one year or less

 

Sales Tax

 

The transaction price is the amount of consideration to which the Company expects to be entitled in exchange for transferring the promised goods or services to a customer, excluding sales taxes. The net amount of sales tax payable to the taxation authority is included sales tax payable in the balance sheet.

 

 
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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 June 30, 2021 and December 31, 2020, we had contract liabilities of $0.6 million and $1.0 million, respectively.

 

Contract liabilities is made up of the following as of June 30, 2021 and December 31, 2020 (in thousands):

   

 

 

2021

 

 

2020

 

Customer deposits for commercial products

 

$597

 

 

$281

 

Customer deposits for personal protective equipment

 

 

-

 

 

 

713

 

Total contract liabilities

 

$597

 

 

$994

 

  

The following table summarizes the changes in contract liabilities during the six months ended June 30, 2021 and year ended December 31, 2020 (in thousands):

 

Balance at December 31, 2019

 

$456

 

Additions

 

 

1,033

 

Transfers to Revenue

 

 

(495 )

Balance at December 31, 2020

 

 

994

 

Additions

 

 

591

 

Customer deposits returned

 

 

(713 )

Transfers to Revenue

 

 

(275 )

Balance at June 30, 2021

 

$597

 

 

Cost of Revenues

 

Cost of revenues primarily consists of labor and manufacturing costs for our products.

 

 
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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 $1.0 million and $1.6 million for the three and six month periods ended June 30, 2021, respectively. The Company did not record advertising costs for the three and six month periods ended June 30, 2020.

 

Research and Development

 

Costs incurred in connection with the development of new products and processes are charged to research and development expenses as incurred. The Company recorded research and development expenses of $0.7 million and $1.3 million for the three and six month periods ended June 30, 2021, respectively. The Company recorded research and development expenses of $0.7 million and $1.5 million for the three and six month periods ended June 30, 2020, respectively.

 

Income Taxes

 

The 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, 2020 financial statements. It is uncertain if and to what extent various states will conform to the 2017 Tax Act or the CARES Act. The Company is currently assessing the impact the CARES Act will have on the Company’s consolidated financial statements.

   

Stock-Based Compensation

 

Stock-based compensation is accounted for based on the requirements of the Share-Based Payment Topic of ASC 718 which requires recognition in the consolidated financial statements of the cost of employee and director services received in exchange for an award of equity instruments over the period the employee or director is required to perform the services in exchange for the award (presumptively, the vesting period). The ASC also requires measurement of the cost of employee and director services received in exchange for an award based on the grant-date fair value of the award.

 

Pursuant to ASC 2018-07 (“Topic 718”) for share-based payments to employees, consultants and other third-parties, compensation expense is determined at the “measurement date.” The expense is recognized over the vesting period of the award. Until the measurement date is reached, the total amount of compensation expense remains uncertain. The Company initially records compensation expense based on the fair value of the award at the grant date. The Company uses the Black-Scholes option valuation model for estimating fair value at the date of grant.

 

 
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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.

 

 

 

 

·

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.

 

 

 

 

·

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 June 30, 2021 and December, 31, 2020, 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 are measured at fair value using the period-end quoted market prices 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 (see Note 14).

 

 
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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 June 30, 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. In June 2020, the Company settled all of its outstanding contingent consideration liabilities outstanding with CHI. In October 2020, the Company acquired Sera Labs and had an outstanding contingent consideration liability of $3.2 million in relation to the Sera Labs Merger.

 

The Company has elected the fair value option to account for the Series A and B Notes that were issued on October 30, 2020 and records this at fair value with changes in fair value recorded in the Consolidated Statements of Operations. As a result of applying the fair value option, direct costs and fees related to the Series A and B Notes were recognized in earnings as incurred and not deferred.

 

The following table summarizes the changes in Level 3 financial instruments during the six months ended June 30, 2021 (in thousands):

 

Fair value at December 31, 2020

 

$18,684

 

Change in fair value of Series A Note

 

 

(886 )

Change in fair value of Series B Notes

 

 

546

 

Conversion of Series A Notes

 

 

(1,834)

Fair value of Series A and B Notes at June 30, 2021

 

$16,510

 

 

 
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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

 

June 30,

2021

 

 

December 31,

2020

 

Stock price

 

$0.51

 

 

$1.30

 

Conversion price

 

$1.32

 

 

$1.32

 

Term (in years) – Series A Note

 

 

1.33

 

 

 

1.83

 

Term (in years) – Series B Note

 

 

0.33

 

 

 

0.83

 

Volatility – Series A Note

 

 

85%

 

 

86%

Volatility – Series B Note

 

 

80%

 

 

80%

Risk-free interest rate – Series A Note

 

 

0.13%

 

 

0.12%

Risk-free interest rate – Series B Note

 

 

0.05%

 

 

0.09%

Interest rate

 

 

18%

 

 

1%

 

The Company recorded a loss of $0.7 million and a gain of $0.3 million due to the change in fair value of Series A and B convertible notes for the three and six months ended June 30, 2021 and $0 for the three and six months ended June 30, 2020.

 

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 13 - 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 Consolidated Statement of Operations. All issuance costs related to the debentures were expensed as incurred in the Consolidated Statement of Operations.

 

Accounting for warrants

 

The Company determines the accounting classification of warrants it issues, as either liability or equity classified, by first assessing whether the warrants meet liability classification in accordance with ASC 480-10, Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity, then in accordance with ASC 815-40, Accounting for Derivative Financial Instruments Indexed to, and Potentially Settled in, a Company’s Own Stock. Under ASC 480, warrants are considered liability classified if the warrants are mandatorily redeemable, obligate the Company to settle the warrants or the underlying shares by paying cash or other assets, or warrants that must or may require settlement by issuing variable number of shares. If warrants do not meet liability classification under ASC 480-10, the Company assesses the requirements under ASC 815-40, which states that contracts that require or may require the issuer to settle the contract for cash are liabilities recorded at fair value, irrespective of the likelihood of the transaction occurring that triggers the net cash settlement feature. If the warrants do not require liability classification under ASC 815-40, and in order to conclude equity classification, the Company also assesses whether the warrants are indexed to its common stock and whether the warrants are classified as equity under ASC 815-40 or other applicable GAAP. After all relevant assessments, the Company concludes whether the warrants are classified as liability or equity. Liability classified warrants require fair value accounting at issuance and subsequent to initial issuance with all changes in fair value after the issuance date recorded in the statements of operations. Equity classified warrants only require fair value accounting at issuance with no changes recognized subsequent to the issuance date. The Company does not have any liability classified warrants as of any period presented.

 

 
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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 June 30, 2021 and December 2020, the Company adjusted its derivative liability to its fair value, and reflected the change in fair value, in its consolidated statement of operations.

 

Contingencies

 

We are exposed to claims and litigation arising in the ordinary course of business and use various methods to resolve these matters in a manner that we believe serves the best interest of our shareholders and other constituents. When a loss is probable, we record an accrual based on the reasonably estimable loss or range of loss. When no point of loss is more likely than another, we record the lowest amount in the estimated range of loss and, if material, disclose the estimated range of loss. We do not record liabilities for reasonably possible loss contingencies, but do disclose a range of reasonably possible losses if they are material and we are able to estimate such a range. If we cannot provide a range of reasonably possible losses, we explain the factors that prevent us from determining such a range. Historically, adjustments to our estimates have not been material. We believe the recorded reserves in our consolidated financial statements are adequate in light of the probable and estimable liabilities. We do not believe that any of these identified claims or litigation will be material to our results of operations, cash flows, or financial condition.

 

Net Loss per Common Share

 

Basic net loss per common share is computed by dividing the net loss by the weighted average number of common shares outstanding during the period, excluding any unvested restricted stock awards. Diluted net 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):

 

 
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For the Three Months Ended

 

 

For the Six Months Ended

 

(Dollars in thousands)

 

June 30,

2021

 

 

June 30,

2020

 

 

June 30,

2021

 

 

June 30,

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss)

 

$(1,400)

 

$(13,439)

 

$(4,572)

 

$(11,392)

Weighted average outstanding shares of common stock

 

 

59,842,904

 

 

 

41,716,558

 

 

 

48,299,751

 

 

 

39,867,063

 

Dilutive potential common stock shares from:

 

 

-

 

 

 

 

 

 

 

 

 

 

 

 

 

Vested Stock options from the Company’s 2017 Equity Incentive Plan

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Conversion of convertible notes

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Common stock and common stock equivalents

 

 

59,842,904

 

 

 

41,716,558

 

 

 

48,299,751

 

 

 

39,867,063

 

Income per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic net income per share

 

 

(0.02)

 

 

(0.32)

 

 

(0.09 )

 

 

(0.29)

Diluted net income per share

 

 

(0.02)

 

 

(0.32)

 

 

(0.09)

 

 

(0.29 )

 

The following number of shares have been excluded from diluted net income (loss) since such inclusion would be anti-dilutive:

 

 

 

Three and six months ended June 30,

 

 

 

2021

 

 

2020

 

 

 

 

 

 

 

 

Vested stock options from the Company’s 2017 Equity Incentive Plan

 

 

3,471,304

 

 

 

3,460,767

 

Warrants

 

 

2,264,091

 

 

 

6,648,446

 

Shares to be issued upon conversion of convertible payable

 

 

115,047

 

 

 

115,047

 

 

 

 

 

 

 

 

 

 

Total

 

 

5,850,442

 

 

 

10,224,260

 

 

In connection with Sera Labs Merger, Sera Labs security holders are also entitled to receive up to 5,988,024 shares of the Company’s common stock (the “Clawback Shares”) based on the achievement of certain sales milestones. Due to the uncertainty of the number of Clawback Shares to be issued, these Clawback Shares were not included in the table above.

 

The Series A and B Notes (other than restricted amounts under a Series B Note) is convertible, at the option of the Investor, into shares of Common Stock at a conversion price of $1.32 per share. The conversion price is subject to full ratchet antidilution protection upon any transaction in which the Company is deemed to have granted, issued or sold, any shares of Common Stock. If the Company enters into any agreement to issue any variable rate securities, other than a bona fide at-the-market offering or equity line of credit, the Investor has the additional right to substitute such variable price (or formula) for the conversion price. If an Event of Default has occurred under the Convertible Notes, the Investor may elect to alternatively convert the Convertible Notes at the redemption premium described therein. Due to the uncertainty of the number of shares to be issued, the shares to be issued from the conversion of the Series A and B Notes were also not included in the table above.

 

 
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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.

   

Emerging Growth Company

 

We are an “emerging growth company” as defined in the Jumpstart our Business Startups Act of 2012 (“JOBS Act”). For as long as we are an “emerging growth company,” we are not required to: (i) comply with any new or revised financial accounting standards that have different effective dates for public and private companies until those standards would otherwise apply to private companies, (ii) provide an auditor’s attestation report on management’s assessment of the effectiveness of internal control over financial reporting pursuant to Section 404 of the Sarbanes-Oxley Act, (iii) comply with any new requirements adopted by the Public Company Accounting Oversight Board (“PCAOB”) requiring mandatory audit firm rotation or a supplement to the auditor’s report in which the auditor would be required to provide additional information about the audit and the financial statements of the issuer or (iv) comply with any new audit rules adopted by the PCAOB after April 5, 2012, unless the SEC determines otherwise. However, we have elected to “opt out” of the extended transition period discussed in (i), and will therefore comply with new or revised accounting standards on the applicable dates on which the adoption of such standards are required for non-emerging growth companies. Section 107 of the JOBS Act provides that our decision to opt out of such extended transition period for compliance with new or revised accounting standards is irrevocable.

 

Risks and Uncertainties

 

The COVID-19 pandemic has had, and may continue to have, an unfavorable impact on certain areas of the Company’s business. The broader implications of the COVID-19 pandemic on the Company’s financial condition and results of operations remain uncertain and will depend on certain developments, including the duration and severity of the COVID-19 pandemic, and the availability, distribution, and effectiveness of vaccines to address the COVID-19 virus. The impact on the Company’s customers and suppliers and the range of governmental and community reactions to the pandemic are uncertain. The Company may experience reduced customer demand or constrained supply that could materially adversely impact business, financial condition, results of operations, liquidity and cash flows in future periods.

 

Recent Accounting Pronouncements Adopted


ASU 2020-01

 

In January 2020, the FASB issued ASU 2020-01, Clarifying the Interactions Between Topic 321, Topic 323, and Topic 815. ASU 2020-01 addresses the accounting for the transition into and out of the equity method and measuring certain purchased options and forward contracts to acquire investments. Observable transactions that require a company to either apply or discontinue the equity method of accounting for the purposes of applying the measurement alternative in accordance with ASC 321, Investments – Equity Securities, should be considered immediately before applying or upon discontinuing the equity method. Certain non-derivative forward contracts or purchased call options to acquire equity securities generally will be measured using the fair value principles of ASC 321 before settlement or exercise and consideration shall not be given to how entities will account for the resulting investments on eventual settlement or exercise. ASU 2020-01 is effective for the Company beginning in the first quarter of 2021 and early adoption is permitted. ASU 2020-01 should be applied prospectively. The adoption of this ASU did not have any impact on the Company’s consolidated financial statements.

 

 
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Recent Accounting Pronouncements Not Yet Adopted

 

ASU 2019-12

 

In December 2019, the FASB issued ASU No. 2019-12, “Simplifying the Accounting for Income Taxes” under ASC 740, which simplifies the accounting for income taxes by removing certain exceptions to the general principles in Topic 740 and amends existing guidance to improve consistent application. This guidance is effective for fiscal years beginning after December 15, 2021, including interim periods within that fiscal year. Early adoption is permitted. The Company is in the process of evaluating the impacts of this guidance on its consolidated financial statements and related disclosures.

 

ASU 2020-06

 

In August 2020, the FASB issued ASU 2020-06, Debt - Debt with Conversion and Other Options and Derivative and Hedging - Contracts in Entity’s Own Equity, which simplifies the accounting for convertible instruments. This guidance eliminates certain models that require separate accounting for embedded conversion features, in certain cases. Additionally, among other changes, the guidance eliminates certain of the conditions for equity classification for contracts in an entity’s own equity. The guidance also requires entities to use the if-converted method for all convertible instruments in the diluted earnings per share calculation and include the effect of share settlement for instruments that may be settled in cash or shares, except for certain liability-classified share-based payment awards. This guidance is required to be adopted by us in the first quarter of 2023 and must be applied using either a modified or full retrospective approach. We are currently evaluating the impact this guidance will have on our 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 consolidated financial position, results of operations or cash flows.

 

NOTE 3 - PREPAID EXPENSES AND OTHER ASSETS

 

As of June 30, 2021 and December 31, 2020, prepaid expenses and other assets consisted of the following (in thousands):

 

 

 

June 30,

2021

 

 

December 31,

2020

 

 

 

 

 

 

 

 

Prepaid consulting services

 

$-

 

 

$14

 

Prepaid clinical study

 

 

-

 

 

 

32

 

Prepaid insurance

 

 

138

 

 

 

347

 

PPE deposits

 

 

-

 

 

 

700

 

Prepaid equipment

 

 

61

 

 

 

61

 

Prepaid deposit for inventory

 

 

175

 

 

 

211

 

Prepaid expenses

 

 

102

 

 

 

66

 

Other assets

 

 

123

 

 

 

79

 

Prepaid expenses and other assets

 

 

599

 

 

 

1,510

 

Current portion of prepaid expenses and other assets

 

 

(516 )

 

 

(1,452)

Prepaid expenses and other assets less current portion

 

$83

 

 

$58

 

 

 
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NOTE 4 - INVENTORY

 

Inventory consists of raw materials, packaging components, work-in-process and finished goods. The Company’s inventory is stated at the lower of cost (FIFO cost basis) or Net Realized Value.

 

The carrying value of inventory consisted of the following at June 30, 2021 and December 31, 2020 (in thousands):

 

 

 

June 30,

2021

 

 

December 31,

2020

 

Raw materials

 

$67

 

 

$64

 

Packaging components

 

 

133

 

 

 

54

 

Work-in-process

 

 

101

 

 

 

22

 

Finished goods

 

 

714

 

 

 

603

 

 

 

 

1,015

 

 

 

743

 

Reserve for obsolescence

 

 

(184 )

 

 

(294)

Total inventory

 

$831

 

 

$449

 

 

For the three months ended June 30, 2021 and 2020, inventory reserves amounted to $0.003 million and $0.001 million, respectively. For the six months ended June 30, 2021 and 2020, inventory reserves amounted to $0.003 million and $0.003 million, respectively.

 

NOTE 5 - PROPERTY AND EQUIPMENT

 

As of June 30, 2021 and December 31, 2020, property and equipment consisted of the following (in thousands):

 

 

 

June 30,

2021

 

 

December 31,

2020

 

 

 

 

 

 

 

 

Equipment not yet placed in service

 

$1,432

 

 

$1,465

 

Manufacturing equipment

 

 

1,074

 

 

 

1,047

 

Computer and other equipment

 

 

626

 

 

 

626

 

Less accumulated depreciation

 

 

(1,185)

 

 

(1,091)

Property and Equipment, net

 

$1,947

 

 

$2,074

 

 

 
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For the three and six month periods ended June 30, 2021, depreciation expense amounted to $0.04 million and $0.09 million, respectively. Depreciation expense for the three and six month periods ended June 30, 2020 was $0.05 million and $0.01 million, respectively.

 

NOTE 6 – NOTES RECEIVABLE

 

On November 12, 2019, the Company purchased a $0.2 million convertible promissory note (the “Coeptis Note”) issued by Coeptis Pharmaceuticals, Inc.(“Coeptis”), a privately held biopharmaceutical company engaged in the acquisition, development and commercialization of pharmaceutical products. The Coeptis Note is due June 15, 2020, pays interest at the rate of 9% per annum and gives us the right, at any time, to convert the Coeptis Note into shares of common stock of Coeptis, at a price per share equal to $2.60 or the share price set by the latest qualified financing, whichever is less.

 

On July 31,2020, the Company purchased a $0.5 million secured promissory note (the “Sera Labs Note”) issued by Sera Labs, in connection with the execution of the Memorandum of Understanding summarizing the terms and conditions of a proposed acquisition, pursuant to which Sera Labs will become a wholly-owned subsidiary of the Company. The Sera Labs Note bears an interest at the rate of 9% per annum and has a maturity date of December 31, 2020. On September 16, 2020, a Note Modification Agreement was signed, modifying the principal amount to $0.55 million with interest on $0.5 million of the principal amount accruing from and after July 31, 2020 and on $0.05 million of the principal amount from and after September 16, 2020. The note was settled as part of the Sera Labs acquisition, see Note 19.

 

On May 26, 2021, the Company purchased a convertible loan (the “May 2021 Loan”) with Biopharmaceutical Research Company (“BRC”) for a total amount of $0.2 million, which is one of a series of notes “(Notes”) pursuant to the terms of the Note Purchase Agreement (“NPA”) offered by BRC. BRC shall accrue interest on the May 2021 Loan at 6% per annum and shall become due and payable to the Company at the earlier of the conversion date or the maturity date of May 26, 2023. In the event of a request for conversion by the Company, the outstanding amount of the May 2021 Loan and any unpaid accrued interest shall be converted into shares of BRC, rounded down to the nearest whole share, by dividing the May 2021 Loan by the price per share obtained by dividing $20 million by the number of outstanding shares of common stock of BRC immediately prior to such conversion (assuming conversion of all securities convertible into common stock and exercise of all outstanding options and warrants of BRC, but excluding (i) the shares of equity securities of BRC issued or issuable upon the conversion of the Notes and (ii) all shares of the common stock reserved and available for future grant under any equity incentive or similar plan of BRC. In the event the Company has not requested for conversion, the May 2021 Loan can automatically convert if BRC sells shares of preferred stock (the “Qualified Financing Securities”) to one or more investors in a single transaction or series of related transactions for aggregate proceeds to BRC (including cancellation of indebtedness under the Notes or any other convertible debt) of at least $4 million(a “Qualified Financing”). The May 2021 Loan shall automatically convert at the initial closing of and on the same terms and conditions of the Qualified Financing into a total number of Qualified Financing Securities, rounded down to the nearest whole share, obtained by dividing the May 2021 Loan by the lesser of (i) 80% of the price per share paid for the Qualified Financing Securities by investors in the Qualified Financing and (ii) $20 million by the number of outstanding shares of common stock of BRC immediately prior to such conversion (assuming conversion of all securities convertible into common stock and exercise of all outstanding options and warrants of BRC, but excluding (a) the shares of equity securities of BRC issued or issuable upon the conversion of the Notes, (b) all shares of the common stock reserved and available for future grant under any equity incentive or similar plan of BRC and (c) any equity incentive or similar plan to be created or increased in connection with the Qualified Financing).

 

Note receivable consists of the following (in thousands):

 

 

 

June 30,

2021

 

 

December 31,

2020

 

Coeptis Pharmaceuticals, Inc.

 

$-

 

 

$200

 

Biopharmaceutical Research Company

 

 

200

 

 

 

-

 

Less: allowance for doubtful accounts

 

 

-

 

 

 

(200 )

Current portion of note receivable, net

 

 

-

 

 

 

-

 

Note receivable, net less current portion

 

$200

 

 

$-

 

 

 
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On January 20, 2021 and February 10, 2021, the Company collected a total of $0.2 million from Coeptis relating to a convertible promissory note issued from Coeptis on November 7, 2019. The total payment of $0.2 million was full satisfaction of the principal amount and accrued interest until February 10, 2021. The Coeptis Note had a maturity date of June 15, 2020, which was not paid by the maturity date and was considered in default as of December 31, 2020 and fully reserved for. The Company recorded the collection of the Coeptis Note as a recovery of bad debt during the three months ended March 31, 2021.

 

NOTE 7 – GOODWILL AND INTANGIBLE ASSETS

 

The Company incurred $0.07 and $0.01 million of legal patent costs that were capitalized during the six months ended June, 2021 and 2020, respectively. During the year ended December 31, 2020, the Company acquired from Sera Labs customer relationships at a fair value of $7.1 million, $2.6 million in Tradename intangibles, $0.5 million in non-compete and $4.7 million in Goodwill from the acquisition of Sera Labs. During the year ended December 31, 2019, the Company acquired from the CHI acquisition patents at a fair value of $0.7 million, $14.5 million in Intellectual Property Research & Development and $9.2 million in Goodwill from the acquisition of CHI.

 

Intangible Asset Summary

 

As of June 30, 2021 and December 31, 2020, goodwill and intangible assets, net, consisted of the following (in thousands):

 

 

 

June 30, 2021

 

 

December 31, 2020

 

Goodwill (1)

 

$13,868

 

 

$13,868

 

 

 

 

 

 

 

 

 

 

Intangible assets:

 

 

 

 

 

 

 

 

Acquired IPR&D – Chemistry (2)

 

$4,040

 

 

$14,460

 

Pending patents – Cure Pharmaceutical

 

 

327

 

 

 

259

 

Intangible assets subject to amortization:

 

 

 

 

 

 

 

 

Customer relationships (2)

 

 

7,110

 

 

 

7,110

 

Acquired IPR&D – Chemistry (2)

 

 

10,420

 

 

 

-

 

Tradename (2)

 

 

2,610

 

 

 

2,610

 

Noncompete (2)

 

 

462

 

 

 

462

 

Intellectual property

 

 

972

 

 

 

972

 

Issued patents

 

 

1,034

 

 

 

1,044

 

Total intangible assets

 

 

26,975

 

 

 

26,917

 

Accumulated amortization

 

 

(2,787)

 

 

(1,312)

Intangible assets, net

 

$24,188

 

 

$25,605

 

 

(1)

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in the Merger (see Note 19). In 2020, the Company recorded additional goodwill of $4.7 million as a result of the Sera Labs acquisition.

 

 

(2)

See Note 19 for information on the Mergers which were consummated in May 2019 and October 2020.

 

 
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During the three months ended June 30, 2021 the Company completed a portion of their IPR&D project and begin amortizing $10.4 million over its estimated useful life of 10 years on a straight-line basis.

 

Amortization expense was $0.09 million and $0.03 million for the three months ended June 30, 2021 and 2020, respectively. Amortization expense was $1.5 million and $0.06 million for the six months ended June 30, 2021 and 2020, respectively.

 

The estimated aggregate amortization expense over each of the next five years is as follows (in thousands):

 

2021 (remaining)

 

$1,734

 

2022

 

 

3,411

 

2023

 

 

3,238

 

2024

 

 

3,075

 

2025

 

 

2,230

 

Thereafter

 

 

6,134

 

Total Amortization

 

$19,822

 

 

NOTE 8 – ACCRUED EXPENSES

 

As of June 30, 2021 and December 31, 2020, accrued expenses consisted of the following (in thousands):

 

 

 

June 30,

2021

 

 

December 31,

2020

 

 

 

 

 

 

 

 

Accounts payable factoring

 

$1,851

 

 

$-

 

Refunds and returns liability

 

 

356

 

 

 

-

 

Accrued interest

 

 

325

 

 

 

194

 

Accrued payroll

 

 

272

 

 

 

308

 

Accrued vacation leave

 

 

248

 

 

 

180

 

Accrued expenses

 

 

310

 

 

 

306

 

Sales tax payable

 

 

346

 

 

 

311

 

Accrued Expenses

 

$3,708

 

 

$1,299

 

 

NOTE 9 – 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 Sera 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 is effective on January 2, 2019 and will continue for a period of two years. The term of the Service Agreement 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.

 

 
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On August 6, 2020, the Company entered into an unsecured promissory note (the “August Note”) with one of the Company’s board members (“Board Investor”), for a principal amount of $150,000. The August Note is due on August 6, 2021 and has 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. The Board Investor did not elect to convert their August Note into a convertible promissory note, with the same principal 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. As of the date of this report, both the Company and the Board Investor agreed to extend the August Note and are currently negotiating the terms of the amendment.

  

On October 2, 2020, the Company completed its acquisition of Sera Labs and pursuant to the Sera Labs Merger Agreement, the Company issued a promissory note in the principal amount of $1.1 million owed to the CEO of Sera Labs (“Duitch Note”), of which $1.0 million is the upfront payment in connection with the closing of the Sera Labs Merger, and $0.1 million is for certain liabilities of Sera Labs due to Mrs. Duitch. The Duitch Note is due June 30, 2021 and has an interest rate of 8% per annum. On November 9, 2020, a payment of $0.3 million was made and applied to principal only. As of June 30, 2021, total outstanding due to Mrs. Duitch was $0.9 million. As of the date of this report, both the Company and Mrs. Duitch agreed to extend the Duitch Note and are currently negotiating the terms of the amendment.

  

On May 3, 2021, the Company received $0.2 million from one of the Company’s board members (“Second Board Investor”) in exchange for a promissory note. Both the Company and Second Board Investor agreed to negotiate the terms of the promissory note and as of the filing date of this report, the Company and Second Board Investor are still negotiating the terms of the promissory note.

 

Interest expense in regard to related party payables for the three months ended June 30, 2021 and 2020 was $0.02 million and none, respectively. Interest expense in regard to related party payables for the six months ended June 30, 2021 and 2020 was $0.04 million and none, respectively.

 

NOTE 10 – LOAN PAYABLE

 

Loan payable consists of the following at June 30, 2021 and December 31, 2020 (in thousands):

 

 

 

June 30,

2021

 

 

December 31,

2020

 

 

 

 

 

 

 

 

Note to a company due September 29, 2021, including interest at 4.32% per annum; unsecured; interest due monthly

 

$46

 

 

$182

 

Note to a company due September 6, 2021, including interest at 6.55% per annum; unsecured; interest due monthly

 

 

-

 

 

 

83

 

Current portion of loan payable

 

 

(46)

 

 

(265 )

Loan payable, less current portion

 

$-

 

 

$-

 

 

Interest expense for the three and six month periods ended June 30, 2021 was $0.001 million and $0.003 million, respectively. Interest expense for the three and six month periods ended June 30, 2020 was $0.001 million and $0.002 million, respectively.

 

 
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NOTE 11 – NOTES PAYABLE AND PPP LOAN

 

Notes payable consist of the following at June 30, 2021 and December 31, 2020 (in thousands):

 

 

 

June 30,

2021

 

 

December 31,

2020

 

 

 

 

 

 

 

 

Note to an individual, non-interest bearing, unsecured and due on demand

 

$50

 

 

$50

 

Promissory note to a company due May 18, 2021; interest payable at 8% per annum; unsecured; principal and accrued interest automatically convert into a convertible promissory note

 

 

250

 

 

 

250

 

Promissory note to a company due August 12, 2021; interest payable at 8% per annum; unsecured; principal and accrued interest automatically convert into a convertible promissory note

 

 

500

 

 

 

500

 

Promissory note to a company due January 13, 2022; unsecured; principal and accrued interest automatically convert into a convertible promissory note

 

 

500

 

 

 

-

 

Promissory note to a company due April 8, 2022; unsecured; principal and accrued interest automatically convert into a convertible promissory note

 

 

250

 

 

 

-

 

Current portion of note payable

 

$1,550

 

 

$800

 

 

On May 18, 2020 and August 12, 2020, the Company entered into unsecured promissory notes (“Notes”) with an investor for $250,000 and $500,000, respectively. The Notes are due on May 18, 2021 and August 12, 2021, respectively, and have an interest rate of 8% per annum, payable in quarterly payments. The principal and accrued interest under the Notes can convert into convertible promissory notes if the Company consummates a debt financing for the sale and issuance of promissory notes that are convertible into common stock of the Company on terms that are more favorable to new investors than the terms described in the term sheet included in the Notes. Upon notice by the Company of such debt financing, the holder of the Notes shall have the right, but not the obligation, to convert the Notes into convertible promissory notes, with the same principal amount and interest accruing from the date of issuance of the Notes, on the same terms as the convertible promissory notes issued to such new investors. The investor did not elect to convert their Notes into a convertible promissory note, with the same principal and interest accruing from the date of issuance of the Notes, on the same terms as the convertible promissory notes issued to such new investors. As of the date of this report, both the Company and the investor agreed to extend the $250,000 unsecured promissory note and are currently negotiating the terms of the amendment.

  

On September 25, 2020 the Company issued a demand secured promissory note to Ionic Ventures, LLC (“Ionic”), dated September 25, 2020 (the “Promissory Note”), in the principal amount of $1.1 million with the Company receiving gross proceeds of $1.0 million and $0.1 million being an original issue discount. The Promissory Note is secured by certain assets of the Company as further set forth therein, bears no interest rate and is subject to payment on demand of Ionic after the earlier of either (a) the initial date after September 25, 2020 of any offering of securities by the Company with gross proceeds of at least $1.0 million or (b) October 31, 2020. The outstanding principal amount and any unpaid accrued Late Charges (as defined below) may be prepaid at any time, without notice, premium or penalty. Payments will be credited first to the accrued Late Charges then due and payable and the remainder applied to the outstanding principal. On October 30, 2020, the Company repaid in full the outstanding principal balance and all accrued but unpaid interest expense of $1.1 million from the proceeds of the Series A Note further described in Note 13.

 

 
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On January 13, 2021 and February 25, 2021, the Company received a total of $0.5 million from an investment company (“Investor”) in exchange for a promissory note. Both the Company and Investor agreed to negotiate the terms of the promissory note and as of the filing date of this report, the Company and Investor are still negotiating the terms of the promissory note.

 

On April 8, 2021, the Company received $0.3 million from an investment company (“Investor”) in exchange for a promissory note. Both the Company and Investor agreed to negotiate the terms of the promissory note and as of the filing date of this report, the Company and Investor are still negotiating the terms of the promissory note.

 

Paycheck protection program consist of the following at June 30, 2021 and December 31, 2020 (in thousands):

 

 

 

June 30,

2021

 

 

December 31,

2020

 

 

 

 

 

 

 

 

Payment Protection Program Loan due April 2022, including interest at 1% per annum; unsecured. On February 5, 2021, $0.4 million was forgiven as permitted under Section 1106 of the CARES Act.

 

$-

 

 

$399

 

Payment Protection Program Loan due April 2022, including interest at 1% per annum; unsecured. On June 9, 2021, $0.2 million was forgiven as permitted under Section 1106 of the CARES Act.

 

 

-

 

 

 

206

 

Payment protection program loan

 

$-

 

 

$605

 

 

In April 2020, the CURE Pharmaceutical and Sera Labs received loan proceeds in the amount of approximately $0.4 million and $0.2 million under the Paycheck Protection Program (“PPP”). The PPP, established as part of the CARES Act, provides for loans to qualifying businesses. A portion of the loans and accrued interest are forgivable as long as the borrower uses the loan proceeds for eligible purposes, including payroll, benefits, rent and utilities, and maintains its payroll levels. The amount of loan forgiveness will be reduced if the borrower terminates employees or reduces salaries. No collateral or guarantees were provided in connection with the PPP loans. On February 5, 2021, $0.4 million was forgiven as permitted under Section 1106 of the CARES Act and the Company recorded a gain on extinguishment of debt during the three months ended March 31, 2021. On June 9, 2021, $0.2 million was forgiven as permitted under Section 1106 of the CARES Act and the Company recorded a gain on extinguishment of debt during the three months ended June 30, 2021.

 

Interest expense for the three months ended June 30, 2021 and 2020 was $0.1 million and none, respectively. Interest expense for the six months ended June 30, 2021 and 2020 was $0.1 million and none, respectively.

 

NOTE 12 – CONVERTIBLE PROMISSORY NOTES

 

Convertible promissory notes consist of the following at June 30, 2021 and December 31, 2020 (in thousands):

 

 

 

June 30,

2021

 

 

December 31,

2020

 

 

 

 

 

 

 

 

Convertible promissory notes totaling $550,000 due January 31, 2019, interest payable at 8% per annum; unsecured; principal and accrued interest convertible into common stock at the lower of $7.00 per share or the price per share of the latest closing of a debt or equity offering by the Company greater than $3,000,000; accrued interest due January 31, 2019 and currently in default. The Company has offered to either repay the convertible promissory notes or request to have them converted into common stock shares of the Company. The beneficial owners of the convertible promissory notes have not yet communicated their intent to either receive payment or convert.

 

$550

 

 

$550

 

Current portion of convertible promissory notes

 

$550

 

 

$550

 

 

 
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NOTE 13 – FAIR VALUE CONVERTIBLE PROMISSORY NOTES

 

Fair value of convertible promissory notes consists of the following at June 30, 2021 and December 31, 2020 (in thousands):

 

 

 

June 30,

2021

 

 

December 31,

2020

 

 

 

 

 

 

 

 

Series A subordinated convertible note at fair value

 

$4,289

 

 

$7,010

 

Series B subordinated convertible note at fair value

 

 

12,221

 

 

 

11,674

 

Total convertible promissory notes

 

 

16,510

 

 

 

18,684

 

Less: Investor Note offset – Series B Note

 

 

(5,000)

 

 

(5,000)

Carrying value of convertible promissory notes at fair value

 

 

11,510

 

 

 

13,684

 

Less: current portion of convertible promissory notes at fair value

 

 

(7,221 )

 

 

(6,674)

Convertible promissory notes, less current portion

 

$4,289

 

 

$7,010

 

 

On October 30, 2020, the Company entered into a Securities Purchase Agreement (“Purchase Agreement”) with an institutional investor (the “Investor”) for the purchase of two new series of convertible notes with an aggregate principal amount of $11,500,000. Concurrently the Company consummated the sale to the Investor of a Series A subordinated convertible note (the “Series A Note”) with an initial principal amount of $4,600,000 and a Series B senior secured convertible note (the “Series B Note,” and together with the Series A Note, the “Convertible Notes” and, each a “Convertible Note”) with an initial principal amount of $6,900,000 in a private placement (the “Private Placement”).

 

The Series A Note was sold with an original issue discount of $600,000 and the Series B Note was sold with an original issue discount of $900,000. The Investor paid for the Series A Note to be issued to the Investor by delivering $4,000,000 in cash consideration and paid for the Series B Note to be issued to the Investor by delivering a secured promissory note (the “Investor Note”) with an initial principal amount of $6,000,000. The Company will receive cash in respect of a Series B Note only upon cash repayment of the corresponding Investor Note. In certain circumstances, the Investor Note may be automatically satisfied through netting against the Series B Note, as described more fully below, rather than through the payment of cash. Until an Investor Note is repaid, the original issue discount and the rest of the principal under the corresponding Series B Note is considered to be “restricted.” Upon any repayment of the Investor Note, the principal of the corresponding Series B Note becomes “unrestricted” on dollar-for-dollar basis, along with a proportional amount of the original issue discount. During the year ended December 31, 2020, the Company received $1.0 million from the Investor Note, leaving a remaining balance of $5.0 million of the Investor Note as of December 31, 2020, which is netted against the Series B Note and included in convertible promissory notes in the balance sheet.

 

The placement agent received a placement agent fee of $306,000 at the closing of the Private Placement, representing 8% of the gross cash proceeds at the closing. After deducting the placement agent fee, the Company’s estimated expenses associated with the Private Placement and the repayment of the September Note, the Company’s net cash proceeds at the closing were approximately $2,340,000. If the Investor Note is subsequently satisfied in full by payment in cash, the additional financial advisory fee on the cash proceeds received from the Investor Note will be another $480,000, and the aggregate net cash proceeds from the Private Placement as a whole will be approximately $8,850,000. In addition, the placement agent received a warrant (the “Warrant”) exercisable for two years for the purchase of an aggregate of up to 242,424 shares of the Company’s common stock, at an exercise price of $1.32 per share. The Warrant may also be exercised by means of a “cashless exercise” or “net exercise.” Upon the achievement of certain milestones, the placement agent is entitled to receive an additional warrant, on the same terms as the Warrant, exercisable for an aggregate of up to 363,636 shares of the Company’s common stock (collectively with the shares underlying the Warrant, the “Warrant Shares”). The Warrant Shares, when issued, will have the same rights, preferences and privileges (including the registration rights described under “Registration Rights Agreement” below) as the shares underlying the Convertible Notes.

 

 
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The Convertible Notes mature on October 30, 2022 with respect to the Series A Note and October 30, 2021 with respect to the Series B Note (the “Maturity Date”), subject to extension in certain circumstances, including bankruptcy and outstanding events of default. On the Maturity Date, the Company shall pay to the Investor an amount in cash (other than restricted amounts under a Series B Note) presenting all outstanding principal, Make-Whole Amount (as defined in the Convertible Notes), if any, accrued and unpaid interest and accrued and unpaid Late Charges (as defined in the Convertible Notes) on such principal, except that any restricted amount under the Series B Note will be automatically satisfied on the Maturity Date (in lieu of a cash payment) by Maturity Netting (as defined in the Investor Note described below). The Company may not prepay any amounts due under the Convertible Notes. The Convertible Notes shall bear no interest unless there is an occurrence, and during the continuance, of an Event of Default at which point interest shall be 18%.

 

Each Convertible Note (other than restricted amounts under a Series B Note) is convertible, at the option of the Investor, into shares of Common Stock at a conversion price of $1.32 per share. The conversion price is subject to full ratchet antidilution protection upon any transaction in which the Company is deemed to have granted, issued or sold, any shares of Common Stock. If the Company enters into any agreement to issue any variable rate securities, other than a bona fide at-the-market offering or equity line of credit, the Investor has the additional right to substitute such variable price (or formula) for the conversion price. If an Event of Default has occurred under the Convertible Notes, the Investor may elect to alternatively convert the Convertible Notes at the redemption premium described therein.

 

Promptly after the consummation of the sale of the Convertible Notes, the Company repaid in full the outstanding principal balance and all accrued but unpaid interest expense on the Senior Promissory Note issued on September 25, 2020 to the Investor (the “September Note”). The cash payment to the Investor to satisfy the September Note was in the amount $1,100,000.

 

Payment of Amounts Due under the Convertible Notes

 

On the Maturity Date, the Company shall pay to the Investor an amount in cash (other than restricted amounts under a Series B Note) presenting all outstanding principal, Make-Whole Amount (as defined in the Convertible Notes), if any, accrued and unpaid interest and accrued and unpaid Late Charges (as defined in the Convertible Notes) on such principal, except that any restricted amount under the Series B Note will be automatically satisfied on the Maturity Date (in lieu of a cash payment) by Maturity Netting (as defined in the Investor Note described below). The Company may not prepay any amounts due under the Convertible Notes.

 

Interest

 

The Convertible Notes shall bear no interest unless there is an occurrence, and during the continuance, of an Event of Default (as defined in the Convertible Notes). During any such Event of Default, the Convertible Notes will accrue interest at the rate of 18% per annum. See “—Events of Default” below.

 

Conversion; Alternate Conversion upon Event of Default

 

Each Convertible Note (other than restricted amounts under a Series B Note) is convertible, at the option of the Investor, into shares of Common Stock at a conversion price of $1.32 per share. The conversion price is subject to full ratchet antidilution protection upon any transaction in which the Company is deemed to have granted, issued or sold, any shares of Common Stock. If the Company enters into any agreement to issue any variable rate securities, other than a bona fide at-the-market offering or equity line of credit, the Investor has the additional right to substitute such variable price (or formula) for the conversion price.

 

 
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If an Event of Default has occurred under the Convertible Notes, the Investor may elect to alternatively convert the Convertible Notes at the redemption premium described therein.

 

Conversion Limitation

 

The Investor will not have the right to convert any portion of a Convertible Notes, to the extent that, after giving effect to such conversion, the Investor (and other certain related parties) would beneficially own in excess of 4.99% of the shares of Common Stock outstanding immediately after giving effect to such conversion. This limit may, from time to time, be increased, up to 9.99%, or decreased; provided that any such increase will not be effective until the 61st day after delivery of a notice to the Company of such increase.

 

Events of Default

 

The Convertible Notes include certain customary and other Events of Default. In connection with an Event of Default, the Investor may require the Company to redeem in cash any or all of the Convertible Notes. The redemption price will be at a premium to the amount due under the Convertible Notes as described therein.

 

Change of Control

 

In connection with a Change of Control (as defined in the Convertible Notes), the Investor may require the Company to redeem all or any portion of the Convertible Notes. The redemption price per share will be at a premium to the amount due under the Convertible Notes as described therein.

 

Covenants

 

The Company will be subject to certain customary affirmative and negative covenants including those regarding the payment of dividends, maintenance of its property, transactions with affiliates, and issue notes and certain securities.

 

Placement Agent Warrants

 

On October 2, 2020 and December 31, 2020, in connection with the Series A Note and Series B Note, respectively, a placement agent is to receive a warrant (the “Warrant”) exercisable for 2 years for the purchase of an aggregate of up to 242,424 and 60,606 shares, respectively, of the Company’s common stock, at an exercise price of $1.32 per share. The Warrant may also be exercised by means of a “cashless exercise” or “net exercise.” Upon the achievement of certain milestones, the placement agent is entitled to receive an additional warrant, on the same terms as the Warrant, exercisable for an aggregate of up to 363,636 shares of the Company’s common stock.

 

The Company used the Black-Scholes model to determine the fair value of the Warrants issued to the Placement Agent. The Company has elected the Fair Value Option for the Series A Note and Series B Note, accordingly the fair value of the Warrants issued to the placement agent were expensed.

 

The following table sets forth the assumptions used and calculated aggregated fair values of the warrants:

 

Significant assumptions (weighted-average):

 

 

 

Risk-free interest rate at grant date

 

 

0.36%

Expected stock price volatility

 

 

81.14%

Expected dividend payout

 

 

-

 

Expected warrant life (in years)

 

 

2

 

Expected forfeiture rate

 

 

0%

 

 
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Fair Value Option for the Series A and Series B Notes

 

The Company elected the fair value option under ASC 825, Financial Instruments, for both the Series A and Series B Notes and accounted for the Notes as follows (1) the portion of the change in the liability’s fair value that is attributable to a change in instrument-specific credit risk in other comprehensive income (2) the remaining change in the liability’s fair value in net income (3) the excess of the fair value over the proceeds is recognized as an expense and (4) upfront costs and fees are recognized in earnings as incurred Gains and losses attributable to changes in credit risk are determined using observable credit default spreads for the issuer or comparable companies; these gains and losses were insignificant during all periods presented. The Company recognized a loss of $4.4 million and $5.1 million at the time of issuance of the Series A and Series B Notes, respectively, as a result of the make whole provision noted within the debt arrangements as the debt holders would be awarded a variable number of shares at the time of conversion which would always equate to an amount greater than the principal amount of the debt.

 

The Company recorded a gain of $0.4 million and a loss of $1.1 million relating to the Series A and Series B Notes, respectively, attributed to the change if fair value of the Series A and Series B Notes for the three months period ended June 30, 2021 and were recorded in the consolidated statement of operations. The Company recorded a gain of $0.9 million and a loss of $0.5 million relating to the Series A and Series B Notes, respectively, attributed to the change if fair value of the Series A and Series B Notes for the six months period ended June 30, 2021 and were recorded in the consolidated statement of operations Based on discussions with our valuation expert and knowledge of the Company, there was no change in valuation caused by a change in the Company’s credit risk during the period from October 30, 2020 to December 31, 2020 and from January 1, 2021 to June 30, 2021.

 

The Company recorded a loss of $4.6 million and $4.7 million relating to the Series A and Series B Notes, respectively, attributed to the change if fair value of the Series A and Series B Notes for the year ended December 31, 2020 and were recorded in the consolidated statement of operations. The Company incurred debt issuance cost of $0.7 million and $0.1 million attributed to the Series A and Series B Notes, respectively, which were expensed as incurred.

 

NOTE 14 – DERIVATIVE LIABILITY

 

The Company evaluates its convertible instruments, options, warrants or other contracts, to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and Hedging.” The result of this accounting treatment is that the fair value of the derivative is marked-to-market each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income (expense). Upon conversion or exercise of a derivative instruments, the instrument is marked to fair value at the conversion date then that fair value is reclassified to equity. Equity instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815 are reclassified to liabilities at the fair value of the instrument on the reclassification date.

 

The following table presents a reconciliation of the derivative liability measured at fair value on a recurring basis from December 31, 2019 to June 30, 2021 (in thousands):

 

 

 

Fair value of

derivative

liabilities

 

Balance at December 31, 2019

 

$91

 

Loss on change in fair value included in earnings

 

 

(91)

Balance at December 31, 2020

 

 

-

 

Gain on change in fair value included in earnings

 

 

-

 

Balance at June 30, 2021

 

$-

 

 

 
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NOTE 15 – WARRANT AGREEMENTS

 

Warrants that vest at the end of a one-year period are amortized over the vesting period using the straight-line method.

 

In June 2020, as part of the Company’s settlement with CHI we amended the warrants to purchase up 8,018,071 common stock shares which vest based on various revenue achievement during year 3 and year 4 post the CHI acquisition Closing Date. As part of the settlement the Company reduced the number of warrants to708,467 common stock shares at an exercise price of $2.00 per share which was reduced from the original exercise price of $5.01 per share. In addition, the expiration date of the warrants was amended to expire on June 5, 2020. The warrants were exercisable on the date of issuance and were exercised by the warrant holders and the Company received $1.4 million. The Company determined based on Black-Scholes value calculated for pre and post modification, there was no incremental value to the warrant modification as the exercise price was more than the fair value of the stock.

 

On October 2, 2020 and December 31, 2020, in connection with the Series A Note and Series B Note, respectively, a placement agent is to receive a warrant (the “Warrant”) exercisable for 2 years for the purchase of an aggregate of up to 242,424 and 60,606 shares, respectively, of the Company’s common stock, at an exercise price of $1.32 per share. The Warrant may also be exercised by means of a “cashless exercise” or “net exercise.” Upon the achievement of certain milestones, the placement agent is entitled to receive an additional warrant, on the same terms as the Warrant, exercisable for an aggregate of up to 363,636 shares of the Company’s common stock.

 

On December 8, 2020, an individual exercised 62,851 warrants by means of a cashless exercise with an exercise price of $1.00 per share. As a result of the exercise, the Company is to issue 26,936 common stock shares of the Company.

 

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, 2019

 

 

14,666,518

 

 

$3.70

 

 

 

2.99

 

Granted

 

 

303,030

 

 

 

1.32

 

 

 

1.86

 

Exercised

 

 

(771,318)

 

 

1.92

 

 

 

-

 

Forfeited/Expired

 

 

(11,718,381)

 

 

5.01

 

 

 

-

 

Outstanding, December 31, 2020

 

 

2,479,849

 

 

$1.86

 

 

 

1.23

 

Granted

 

 

-

 

 

 

-

 

 

 

-

 

Exercised

 

 

(96,250)

 

 

1.00

 

 

 

-

 

Forfeited/Expired

 

 

(119,508)

 

 

5.01

 

 

 

-

 

Outstanding, June 30, 2021

 

 

2,264,091

 

 

 

1.82

 

 

 

0.83

 

Exercisable at June 30, 2021

 

 

2,264,091

 

 

$1.82

 

 

 

0.83

 

 

 
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Warrant summary as of June 30, 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

 

$ 1.00–$6.00

 

 

2,264,091

 

 

 

0.83

 

 

$1.82

 

 

 

2,264,091

 

 

$1.82

 

 

 

 

2,264,091

 

 

 

0.83

 

 

$1.82

 

 

 

2,264,091

 

 

$1.82

 

 

Warrant summary as of December 31, 2020:

 

Range of Exercise Price

 

Number of Warrants

 

 

Weighted Average Remaining Contractual Life (years)

 

 

Weighted Average

Exercise Price

 

 

Number of Warrants

Exercisable

 

 

Weighted Average

Exercise Price

 

$ 1.00–$6.00

 

 

2,479,849

 

 

 

1.23

 

 

$1.86

 

 

 

2,479,849

 

 

$1.86

 

 

 

 

2,479,849

 

 

 

1.23

 

 

$1.86

 

 

 

2,479,849

 

 

$1.86

 

 

The change in warrant value for the three months ended June 30, 2021 and 2020 was $0 and $0.1 million, respectively. The change in warrant value for the six months ended June 30, 2021 and 2020 was $0 and $0 million, respectively.

 

There were no warrants granted during the three and six months ended June 30, 2021. The weighted-average fair value of warrants granted to during the three and six months ended June 30, 2020, and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes option pricing model are as follows:

 

 

 

June 30,

2021

 

 

June 30,

2020

 

Significant assumptions (weighted-average):

 

 

 

 

 

 

Risk-free interest rate at grant date

 

-

%

 

 

0.29%

Expected stock price volatility

 

-

%

 

 

74.46%

Expected dividend payout

 

 

-

 

 

 

-

 

Expected option life (in years)

 

 

-

 

 

 

3

 

Expected forfeiture rate

 

-

%

 

 

0%

 

The aggregate intrinsic value of warrants outstanding and exercisable at June 30, 2021 was $0.

 

NOTE 16 – STOCK INCENTIVE PLANS

 

On December 29, 2017 (“Effective Date”), the Company adopted the CURE Pharmaceutical Holding Corp. 2017 Equity Incentive Plan (the “2017 Equity Plan”), pursuant to which an aggregate of 5,000,000 shares of the common stock of the Company are available for grant. On November 28, 2020, the Company registered an additional 5,000,000 shares of common stock of the Company that are available to be granted by filing a Form S-3 Registration Statement under the Securities Act of 1933.

 

The Board of Directors have determined that it is in the best interests of the Company and its stockholders to provide an additional incentive for certain employees, including executive officers, and non-employee members of the Board of Directors of the Company by granting to them awards with respect to the common stock of the Company pursuant to the Plan. The Plan seeks to achieve this purpose by providing for awards in the form of Options, Stock Appreciation Rights, Restricted Stock Awards, Restricted Stock Units, Performance Shares, Performance Units, Cash-Based Awards and Other Stock-Based Awards (“Awards”). The Plan will continue in effect until its termination by the Committee; provided, however, that all Awards must be granted, if at all, within ten (10) years from the Effective Date.

 

 
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The Company issued 1,395,801 Nonstatutory Stock Options (“NSO”) to employees of the Company and did not issue any Incentive Stock Options (“ISO”), Restricted Common Stock (“RCS”) and Restricted Stock Units (“RSU”) during the six months ended June 30, 2021. The Company did not issue any NSO’s, ISO’s, RSC’s or RSU’s during the six months ended June 20, 2020. Vesting periods for awarded RCS, ISO’s and NSO’s range from immediate to quarterly over a 4 year period. Vesting period for RSU’s is the earlier of (i) the day prior to the next Annual Meeting of Shareholders following the date of grant, and (ii) one (1) year from the Date of Grant. For ISO’s and NSO’s awarded, the term to exercise their ISO or NSO is 10 years.

 

The Company issued 1,518,194 stock options to a consultant that contains performance-based vesting conditions where revenue milestones are to be met over a certain period. Such stock option awards would be valued using a Monte Carlo simulation based on the probability of the performance condition being met and the underlying expense would be recognized as the associated vesting conditions are met. No stock options that contain performance-based vesting conditions vested during the six months ended June 30, 2021 and the likelihood of meeting the performance-based condition is currently nil.

 

 Stock Options

 

The Company’s stock option activity was as follows:

 

 

 

Options

 

 

Weighted Average Exercise Price

 

 

Weighted Average Contractual

Remaining Life

 

Outstanding, December 31, 2019

 

 

3,467,650

 

 

$1.84

 

 

 

8.74

 

Granted

 

 

3,600,364

 

 

 

1.26

 

 

 

9.19

 

Exercised

 

 

(30,000)

 

 

0.74

 

 

 

-

 

Forfeited/Expired

 

 

(752,222)

 

 

1.76

 

 

 

-

 

Outstanding, December 31, 2020

 

 

6,285,792

 

 

$1.52

 

 

 

8.86

 

Granted

 

 

1,395,801

 

 

 

0.98

 

 

 

9.68

 

Exercised

 

 

-

 

 

 

-

 

 

 

-

 

Forfeited/Expired

 

 

(371,250)

 

 

0.73

 

 

 

-

 

Outstanding, June 30, 2021

 

 

7,310,343

 

 

 

1.46

 

 

 

8.70

 

Exercisable at June 30, 2021

 

 

3,471,304

 

 

 

1.54

 

 

 

8.06

 

 

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

 

 

7,310,343

 

 

 

8.70

 

 

$1.46

 

 

 

3,471,304

 

 

$1.54

 

 

 

 

7,310,343

 

 

 

8.70

 

 

$1.46

 

 

 

3,471,304

 

 

$1.54

 

 

The aggregate intrinsic value of options outstanding and exercisable at June 30, 2021 was $0.02 million.

 

 
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The aggregate grant date fair value of options granted during the six months ended June 30, 2021 and year ended December 31, 2020 amounted to $1.1 and $4.3 million, respectively. Compensation expense related to stock options for the three and six month periods ended June 30, 2021 was $0.5 million and $1.2 million, respectively. Compensation expense related to stock options was $0.4 million and $0.4 million for the three and six month periods ended June 30, 2020, respectively.

 

As of June 30, 2021, the total unrecognized fair value compensation cost related to unvested stock options was $3.0 million, which is to be recognized over a remaining weighted average period of approximately 9.27 years.

 

The weighted-average fair value of options granted during the three months ended June 30, 2021 and 2020, and the weighted-average significant assumptions used to determine those fair values, using a Black-Scholes option pricing model are as follows:

 

 

 

June 30,

2021

 

 

June 30,

2020

 

Significant assumptions (weighted-average):

 

 

 

 

 

 

Risk-free interest rate at grant date

 

 

0.87%

 

 

0.29%

Expected stock price volatility

 

 

82.71%

 

 

74.46%

Expected dividend payout

 

 

-

 

 

 

-

 

Expected option life (in years)

 

 

10

 

 

 

10

 

Expected forfeiture rate

 

 

0%

 

 

0%

 

Restricted Stock

 

Subject to the restrictions set with respect to the particular Award, a recipient of Restricted Stock generally shall have the rights and privileges of a shareholder, including the right to vote the Restricted Stock and the right to receive dividends; provided that, any cash dividends and stock dividends with respect to the Restricted Stock shall be withheld for the recipient’s account, and interest may be credited on the amount of the cash dividends withheld. The cash dividends or stock dividends so withheld and attributable to any particular share of Restricted Stock (and earnings thereon, if applicable) shall be distributed to the recipient in cash or, at the discretion of the Board or Committee, in shares of common stock having a fair market value equal to the amount of such dividends, if applicable, upon the release of restrictions on the Restricted Stock and, if the Restricted Stock is forfeited, the recipient shall have no right to the dividends.

 

The Company’s restricted stock activity was as follows:

 

 

 

Restricted

Stock Shares

 

 

Weighted Average Grant Date

Fair Value

 

Non-vested, December 31, 2019

 

 

82,086

 

 

$2.69

 

Granted

 

 

150,000

 

 

 

1.60

 

Vested

 

 

(181,849)

 

 

2.08

 

Forfeited/Expired

 

 

(237)

 

 

-

 

Non-vested, December 31, 2020

 

 

50,000

 

 

$1.60

 

Granted

 

 

320,339

 

 

 

1.97

 

Vested

 

 

(254,954)

 

 

2.07

 

Forfeited/Expired

 

 

-

 

 

 

-

 

Non-vested, June 30, 2021

 

 

115,385

 

 

$1.30

 

 

 
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Compensation expense related to restricted shares for the three and six months ended June 30, 2021 was $0.1 million and $0.3 million, respectively. Compensation expense related to restricted shares for the three and six months ended June 30, 2020 was $0.1 million and $0.1 million, respectively. At June 30, 2021 and December 31, 2020, the Company had approximately $0.1 million and $0.1 million, respectively, of total unrecognized compensation expense related to restricted stock awards. Compensation will be recognized over a weighted-average period of approximately 0.29 years and 0.14 years, respectively.

 

Restricted Stock Units

 

The terms and conditions of a grant of Restricted Stock Units shall be determined by the Board or Committee. No shares of common stock shall be issued at the time a Restricted Stock Unit is granted. A recipient of Restricted Stock Units shall have no voting rights with respect to the Restricted Stock Units. Upon the expiration of the restrictions applicable to a Restricted Stock Unit, The Company will either issue to the recipient, without charge, one share of common stock per Restricted Stock Unit or cash in an amount equal to the fair market value of one share of common stock.

  

Restricted Stock Units

 

The Company’s restricted stock unit activity was as follows:

 

 

 

Restricted

Stock Units

 

 

Weighted Average Grant Date

Fair Value

 

Outstanding, December 31, 2019

 

 

60,759

 

 

 

3.66

 

Granted

 

 

431,578

 

 

 

1.33

 

Vested

 

 

(60,759)

 

 

3.66

 

Forfeited/Expired

 

 

-

 

 

 

-

 

Outstanding, December 31, 2020

 

 

431,578

 

 

$1.33

 

Granted

 

 

-

 

 

 

-

 

Vested

 

 

-

 

 

 

-

 

Forfeited/Expired

 

 

-

 

 

 

-

 

Outstanding, June 30, 2021

 

 

431,578

 

 

 

1.33

 

 

At June 30, 2021 and December 31, 2020, the Company had approximately $0.6 million and $0.6 million, respectively, of total unrecognized compensation expense related to restricted stock units. As of June 30, 2021 and December 31, 2020, compensation will be recognized over a weighted-average period of approximately 0.23 years and 0.64 years, respectively.

 

Compensation expense related to restricted stock units for the three and six month periods ended June 30, 2021 was $0 and $0, respectively. Compensation expense related to restricted stock units was $0.06 and $0.12 million for the three and six month periods ended June 30, 2020, respectively. All compensation expense related to restricted stock units were included in selling, general and administrative expenses.

 

NOTE 17 – STOCKHOLDERS’ EQUITY

 

Authorized Stock

 

The Company has authorized to issue is 150,000,000 common shares with a par value of $0.001 per share.

 

 
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As of June 30, 2021 and December 31, 2020, there were 62,877,959 shares of the Company’s common stock issued and outstanding, respectively.

   

Common Share Issuances

 

From January 1, 2020 to December 31, 2020, the Company issued 281,250 common stock shares, at prices per share ranging from $1.40 to $3.93 in consideration for certain consulting services. The total value of these issuances was $0.5 million.

 

From January 1, 2020 to December 31, 2020, the Company issued 194,016 common stock shares, at prices per share ranging from $1.60 to $3.15 in connection to issuances from our 2017 Equity Plan. The total value of these issuances was $0.02 million.

 

On June 5, 2020, the Company issued 12,058,623 shares of its common stock, at a price per share equal to$1.82, in connection with the Release, Waiver, and Amendment Agreement entered into with CHI. The total value of these issuances was $21.9 million. $0.2 million related to common stock issuable as of December 31, 2019 that was issued in during 2020.

 

On June 5, 2020, the Company issued 708,467 common stock shares, at a price of $2.00 per share, from the exercise of certain warrants. Total value of these issuances was $1.4 million.

 

On October 2, 2020, the Company issued 6,909,091 common stock shares at a price per share of $1.38, in connection with the Sera Labs Merger. The total value of this issuance was $9,534,546

 

On December 9, 2020, the Company issued 757,576 common stock shares, at a price per share of $1.32 in connection to conversion of $1,000,000 of the Series A Note plus 565,702 common stock shares at a price per share of $0.89 in connection to the make-whole-amount of $500,000 per the terms of the Series A Note.

 

From January 1, 2021 to June 30, 2021, the Company issued 299,386 common stock shares, at prices per share ranging from $1.04 to $1.85 in connection to issuances from our 2017 Equity Plan. The total value of these issuances was $0.2 million.

 

From January 1, 2021 to June 30, 2021, the Company issued 646,512 common stock shares, at prices per share ranging from $0.98 to $1.85 in connection to several consulting agreements. The total value of these issuances was $0.7 million.

 

From January 1, 2021 to June 30, 2021, the Company issued 26,936 common stock shares, at a price of $1.30 per share, from a cash-less exercise of certain warrants. Total value of these issuances was $0.03 million.

 

From January 1, 2021 to June 30, 2021, the Company issued 2,428,857 common stock shares, at a price per share of $1.32 in connection to conversion of $1,250,000 of the Series A Note plus 565,702 common stock shares at a price per share ranging from $0.54 to $0.64 in connection to the make-whole-amounts totaling $850,000 per the terms of the Series A Note.

 

Common Stock Issuable

 

In 2018, the Company entered into an amendment to extend the maturity date of a convertible promissory note. As compensation for extending the note, the Company is to issue 150,000 common stock shares of the Company at a price of $2.05 per share. As of the filing of this Current Report on Form 10-Q, the Company has not yet issued these common stock shares and has recorded a stock issuable of $0.3 million.

 

In 2018, convertible promissory notes and accrued interests totaling $0.3 million was converted into 297,288 shares of common stock of the Company at a price of $0.89 per share. As of the filing of this Current Report on Form 10-Q, the Company has not yet issued these common stock shares and has recorded a stock issuable of $0.3 million.

 

 
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From January 1, 2021 to June 30, 2021, the Company entered into Consulting Agreements (“Agreements”) with individuals. Per the terms of the Agreements, the Company is to issue 18,104 common stock shares of the Company at a price per share of $1.72. As of our filing of this Current Report on Form 10-Q, the Company has not yet issued these common stock shares and has recorded a stock payable of $0.03 million.

 

NOTE 18 – SEGMENT REPORTING

 

Business Segments

 

The Company manages its operations through two business segments: Cure, which develops and manufactures pharmaceutical and wellness products, and Sera Labs, which sells wellness products through direct to consumer and wholesale channels.

 

The Company evaluates performance based on net operating profit. Administrative functions such as finance, treasury, and information systems are centralized. However, where applicable, portions of the administrative function expenses are allocated between the operating segments. The operating segments do not share manufacturing or distribution facilities. In the event any materials and/or services are provided to one operating segment by the other, the transaction is valued according to the company’s transfer policy, which approximates market price. The costs of operating the manufacturing plant is captured discretely in the Cure segment. The Company’s property, plant and equipment, inventory, and accounts receivable are captured and reported discretely within each operating segment.

 

Summary financial information for the two reportable segments for the six months ending June 30, 2021 is as follows (in thousands):

 

 

 

 

Cure

 

 

Sera Labs

 

 

Eliminations

 

 

Consolidated

 

Net Sales

 

$279

 

 

$3,327

 

 

$(51)

 

$3,555

 

Operating Loss

 

$(4,116)

 

$(3,647)

 

$-

 

 

$(7,763)

Assets

 

$43,956

 

 

$14,651

 

 

$(14,175)

 

$44,432

 

Accounts receivable, net

 

$36

 

 

$206

 

 

$-

 

 

$242

 

Inventory, net

 

$336

 

 

$495

 

 

$-

 

 

$831

 

 

Summary financial information for the two reportable segments for the six months ending June 30, 2020 is as follows (in thousands):

 

 

 

Cure

 

 

Sera Labs

 

 

Eliminations

 

 

Consolidated

 

Net Sales

 

$549

 

 

$-

 

 

$-

 

 

$549

 

Operating Loss

 

$(11,485)

 

$-

 

 

$-

 

 

$(11,485)

Assets

 

$30,157

 

 

$-

 

 

$-

 

 

$30,157

 

Accounts receivable, net

 

$43

 

 

$-

 

 

$-

 

 

$43

 

Inventory, net

 

$210

 

 

$-

 

 

$-

 

 

$210

 

 

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 and six months June 30, 2020 and 2020:

 

 
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Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

2021

 

 

June 30,

2020

 

 

June 30,

2021

 

 

June 30,

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

CureFilm™ sales

 

 

4%

 

 

61%

 

 

7%

 

 

67%

Research & Development services

 

 

1

 

 

 

37

 

 

 

1

 

 

 

31

 

Product sales - CBD

 

 

78

 

 

 

-

 

 

 

82

 

 

 

-

 

Product sales - PPE

 

 

17

 

 

 

-

 

 

 

10

 

 

 

-

 

Total

 

 

100%

 

 

98%

 

 

100%

 

 

98%

 

The Company received revenue from one customer that individually represents 17% and 10% of consolidated revenues for the three and six months ended June 30, 2021. There were no accounts receivable for this customer at June 30, 2020 and December 31, 2020. The Company received revenue from four customers that individually represent greater than 10% of consolidated revenues, representing 98% of consolidated revenues for the three months ended June 30, 2020, and three customers that individually represent greater than 10% of consolidated revenues, representing 81% of consolidated revenues for the six months ended June 30, 2020. Accounts receivable from these customers was $0.04 million and $0.13 million at June 30, 2020 and December 31, 2019, respectively.

 

NOTE 19 – BUSINESS COMBINATION AND DECONSOLIDATION OF SUBSIDIARY

 

Sera Labs Acquisition

 

On October 2, 2020, the Company acquired all of the issued and outstanding stock of Sera Labs. All issued and outstanding shares of the capital stock of Sera Labs were converted into the right to receive, subject to customary adjustments, an aggregate of approximately (i) $1.0 million in cash (the “Upfront Payment”) and (ii) up to 6,909,091 shares of the Company’s common stock. On October 1, 2020, the Parties entered into a Waiver of Closing Condition, pursuant to which the Company’s obligation to pay the Upfront Payment at the Effective Time was extended to October 13, 2020. Pursuant to the Sera Labs Merger Agreement, Sera Labs security holders are also entitled to receive up to 5,988,024 shares of the Company’s common stock (the “Clawback Shares”) based on the achievement of certain sales milestones up to an aggregate maximum amount of $20 million as set forth in the Sera Labs Merger Agreement. Subsequent to the Effective Time and for a period of two years, the Company agreed to make available to Sera Labs $4.0 million for working capital, less the outstanding amount of the Secured Promissory Note previously issued by the Company to Sera Labs.

 

Sera Labs is a trusted leader in the health, wellness, and beauty sectors of innovative products with cutting edge technology and superior ingredients such as CBD. Sera Labs creates high quality products that use science-backed, proprietary formulations. Its more than 20 products are sold under the brand names Seratopical™, SeraLabs™, and Gordon’s Herbals™. Sera Labs sells its products at affordable prices, making them easily accessible on a global scale. Strategically positioned in the growth market categories of beauty, health & wellness, and pet care, Sera Labs products are sold in major national drug, grocery chains and mass retailers. The company also sells products under private label to major retailers and multi-level marketers, as well as direct-to-consumer (DTC), via online website orders, including opt-in subscriptions.

 

The acquisition was accounted for in accordance with ASC 805, Business Combinations. The equity consideration to be provided is subject to a variety of earn-out and milestone provisions thus of the 12,897,115 total potential shares to be issued, 5,988,024 shares are considered contingent shares based on the achievement of certain sales milestones up to an aggregate maximum amount of $20 million as described in the Sera Labs Merger Agreement. (“Contingent Shares”). Under ASC 480-10-25, based on the variable number of shares to be issued as part of the acquisition, the fair value of the Contingent Shares of $3.1 million will be recorded as a liability as contingent share consideration as of October 2, 2020.

 

 
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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, 2020

 

$3,205

 

Fair value at June 30, 2021

 

 

1,650

 

Net change in fair value for the six months ended June 30, 2021

 

$(1,555)

 

The Company estimated the fair value of the preliminary purchase price for the acquisition of Sera Labs is approximately $14.2 million. The Company acquired Sera Labs through the issuance of shares of Common Stock of the Company with $1 million of cash consideration to be provided. The preliminary total purchase price was determined based on the following: i) $1 million of the Upfront Payment ii) Company’s closing price ($1.38) on October 2, 2020 for the closing merger consideration shares; and iii) the estimated fair value using the Monte-Carlo simulation of stock price correlation, and other variables over a 24 month performance period applied to the Clawback Shares.

 

(Dollars in thousands)

 

Shares

 

 

Amount

 

Upfront Payment

 

 

-

 

 

$1,000

 

Closing Merger Consideration Shares

 

 

6,909,091

 

 

 

9,535

 

Contingent Consideration Shares (Clawback Shares)

 

 

5,988,024

 

 

 

3,083

 

Liabilities assumed

 

 

-

 

 

 

550

 

Total purchase price

 

 

12,897,115

 

 

$14,168

 

 

The Company allocated the acquisition consideration to tangible and identifiable intangible assets acquired and liabilities assumed based on their estimated fair values as of the acquisition date. The fair value of the acquired tangible and identifiable intangible assets were determined based on inputs that are unobservable and significant to the overall fair value measurement. It is also based on estimates and assumptions made by management at the time of the acquisition. As such, this was classified as Level 3 fair value hierarchy measurements and disclosures.

 

The excess of the purchase price over the estimated fair values is assigned to goodwill.

 

The following table summarizes the preliminary estimated fair values of the assets and liabilities assumed in the Sera Labs acquisition, which is subject to change during measurement period:

 

(Dollars in thousands)

 

 

 

Net assets acquired:

 

 

 

Cash

 

$1,357

 

Other assets

 

 

1,440

 

Property, plant and equipment

 

 

6

 

Other long term assets

 

 

384

 

Intangibles assets

 

 

10,182

 

Goodwill

 

 

4,687

 

Accounts payable and accrued expenses

 

 

(1,063)

Contract liabilities

 

 

(1,963)

Other current liabilities

 

 

(462 )

Other long-term liabilities

 

 

(400 )

Net assets acquired

 

$14,168

 

 

 
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Information regarding identifiable intangible assets acquired in the Sera Labs acquisition is presented below:

 

(Dollars in thousands)

 

Weighted-average Estimated

useful life

 

Preliminary

Estimated Asset

Fair Value

 

Finite-lived intangible assets:

 

 

 

 

 

Customer relationships

 

5.0 years

 

$7,110

 

Tradename

 

4.0 years

 

$2,610

 

Non-compete

 

2.0 years

 

$462

 

Total finite-lived intangible assets acquired

 

4.6 years

 

$10,182

 

 

CHI Acquisition

 

On May 14, 2019, the Company acquired all of the issued and outstanding stock of CHI for shares of the Company’s Common Stock. The maximum number of shares of Common Stock to be issued, including escrowed shares and shares issuable pursuant to a variety of earn-out provisions and warrants, is 32,072,283 shares. The shares are allocated as follows: (i) 5,700,000 shares of Common Stock as upfront consideration issued at the closing of the transaction (the “Closing Date”); (ii) 7,128,913 shares to be held in escrow, subject to indemnification and clawback rights that lapse upon the achievement of certain milestones; (iii) up to 3,207,228 shares that may be issued pursuant to an earn-out over five years upon the achievement of certain technological implementations; (iv) up to 8,018,071 shares that may be issued pursuant to an earn-out over two years upon the achievement of certain revenue goals; and (v) up to 8,018,071 shares issuable upon exercise of warrants (“Acquisition Warrant Shares”) that become exercisable upon achieving certain revenue goals between the second and fourth anniversary of the Closing Date at an exercise price of $5.01 per share, exercisable, to the extent vested, for five years from the Closing Date. In exchange for the assets and liabilities acquired, the Company received an investment of $2 million from Chemistry Holdings pursuant to a convertible note. Such convertible note, on the Closing Date, became an intercompany payable and was cancelled.

 

On June 5, 2020 (the “Release Effective Date”), the Company and CHI, entered into a Release, Waiver, and Amendment (the “Agreement”) and a related Warrant Amendment Agreement (“Warrant Amendment”), in order to make a full resolution of the shares issuable pursuant to the CHI Merger. The Agreement provided as follows: (a) all7,128,913 shares held in escrow were released to the Holders as of the Release Effective Date, of which 140,828shares were returned to the Company for cancellation in consideration for the Company committing to pay certain outstanding liabilities, (b) of the 11,225,299 total shares issuable pursuant to the earn-out provisions in the CHI Merger Agreement, 5,612,654 shares were issued to the Holders as of the Release Effective Date (310,821 of which were assigned back to the Company as of the Release Effective Date) and the obligation of the Company to issue any further earn-out shares was terminated, and (c) certain Holders exercised warrants issued in the CHI Merger to purchase 708,467 shares of Common Stock on the Release Effective Date at a price of $2.00 per share (which reflects a reduced exercise price as a result of the Warrant Amendment) for gross proceeds to the Company of approximately $1.4million and the remaining warrants to purchase 7,309,605 shares of Common Stock issued in the CHI Merger expired on the Release Effective Date as a result of an amendment of such warrants effected pursuant to the Warrant Amendment..

 

As previously disclosed, the Company undertook to issue warrants to purchase an additional 4,143,706 shares of common stock to certain affiliates of CHI in consideration for consulting and advisory services to be provided following the closing of the CHI Merger (the “Service Warrants”). Pursuant to the Agreement, the undertaking by the Company to issue the Service Warrants was terminated as of the Release Effective Date.

 

CHI has developed a novel chewable delivery system, nanoemulsions, microemulsions, microcapsules and taste masking solutions. These technologies complement and expand the CUREfilm™ platform to enable the delivery of a wider range of active ingredients at higher doses. The combined technologies create a versatile platform for both immediate and controlled-release drug delivery.

 

The acquisition was accounted for in accordance with ASC 805, Business Combinations. The equity consideration to be provided is subject to a variety of earn-out and milestone provisions thus of the 32,072,283 total potential shares to be issued, 26,372,283 shares are considered contingent shares to be released or issued over a period from 5 months to 5 years based on the various contingency as described in the Merger Agreement. (“Contingent Shares”). Under ASC 480-10-25, based on the variable number of shares to be issued as part of the acquisition, the fair value of the Contingent Shares and Acquisition Warrant Shares of $14.6 million will be recorded as a liability as contingent share consideration as of May 14, 2019. Below is the change of Contingent Share consideration for the year ended December 31, 2020:

 

 
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Dollars in thousands)

 

Fair Value of the Contingent Share Consideration

 

Fair Value at December 31, 2019

 

$16,043

 

Settlement of contingent consideration liability

 

 

(21,701)

Net change in fair value during the year ended December 31, 2020

 

 

5,658

 

Fair Value at December 31, 2020

 

$-

 

 

Supplemental Pro Forma Information

 

The following unaudited supplemental pro forma financial information is based on our historical consolidated financial statements and Sera Lab’s historical consolidated financial statements as adjusted to give effect to the October 2, 2020 acquisition of Sera Labs. The unaudited supplemental pro forma financial information for the periods presented gives effect to the acquisition for CHI as if it had occurred on January 1, 2020 for Sera Labs.

 

This unaudited pro forma financial information is presented for informational purposes only and is not necessarily indicative of the results of operations that actually would have resulted had the acquisition been in effect at the beginning of the periods presented. In addition, the unaudited pro forma results are not intended to be a projection of future results and do not reflect any operating efficiencies or cost savings that might be achievable.

 

The following table presents pro forma sales, net loss attributable to Cure Pharmaceutical Holding Corp, and net loss attributable to the Company per common share data assuming Sera Labs and CHI were acquired at the beginning of 2020 fiscal year.

 

For the three months ended June 30, 2020 (in thousands, except per share data):

 

 

 

Cure Pharmaceutical

 

 

Sera Labs

 

 

Pro forma

Adjustments

 

 

Consolidated
Pro Forma

 

Net product sales

 

$269

 

 

$3,327

 

 

$-

 

 

$3,596

 

Net income (loss)

 

$(13,349)

 

$4

 

 

$-

 

 

$(13,345)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net income (loss) attributable to Cure per common share:, basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$(0.32)

 

$0.00

 

 

 

 

 

 

$(0.25)

Diluted

 

$(0.32)

 

$0.00

 

 

 

 

 

 

$(0.25)

 

For the six months ended June 30, 2020 (in thousands, except per share data):

 

 

 

Cure Pharmaceutical

 

 

Sera Labs

 

 

Pro forma

Adjustments

 

 

Consolidated
Pro Forma

 

Net product sales

 

$549

 

 

$3,940

 

 

$-

 

 

$4,489

 

Net loss

 

$(11,392)

 

$(357 )

 

$-

 

 

$(11,749)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to Cure per common share:, basic and diluted

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic

 

$(0.29)

 

$(0.03)

 

 

 

 

 

$(0.23)

Diluted

 

$(0.29)

 

$(0.03)

 

 

 

 

 

$(0.23)

 

 
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NOTE 20 - INTELLECTUAL PROPERTY AND COLLABORATIVE AGREEMENTS

 

On September 4, 2018, Cure Pharmaceutical entered into its first multi-year licensing agreement (the “Licensing Agreement”) with Canopy Growth Corporation (“Canopy”), a company that engages in the production and sale of medical cannabis. Under the terms of the Licensing Agreement, Canopy will have an exclusive license to certain of Cure Pharmaceutical’s intellectual property rights, including Cure Pharmaceutical’s patented, multi-layer oral thin film (OTF), CUREfilm™ technology for use with cannabis extracts and biosynthetic cannabinoids and the Cure Pharmaceutical’s trademarks in markets around the world where it is legal for Canopy to sell such products, excluding Asia. Cure Pharmaceutical will retain the right to manufacture synthetic cannabinoids for pharmaceutical applications.

 

On November 7, 2019, the Company and Canopy entered into an Amendment Agreement (“Amendment”) to allow the Company to sell cannabinoid CUREfilm products to third parties internationally, excluding Canada, from the November 7, 2019 until December 31, 2020. However, Cure Pharmaceutical may not sell any cannabinoid CUREfilm products that are specifically developed for Canopy, as identified in the Development Agreement between the Company and Canopy, dated June 17, 2019.

 

Canopy will manufacture CUREfilms that deliver cannabis extracts, expanding the commercialization and monetization of the CUREfilm technology. The parties will collaborate on new products and uses for the products.

 

Canopy shall pay the Company approximately $0.3 million for costs associated with a feasibility study and technology transfer as well as certain milestone payments and royalties on product sales by Canopy with minimum royalties starting in 2020.

 

On October 21, 2020, the Company filed a demand to commence arbitration with the American Arbitration Association against Canopy for Canopy’s failure to perform under the License Agreement. On April 28, 2021 the Company entered into an agreement resolving the dispute between the parties, pursuant to which neither party admitted liability, the parties released their respective claims and obligations, and Canopy agreed to pay a total of $3.9 million, of which $2.3 million was paid to the Company on May 6, 2021, and the balance of $1.6 million will be paid to the Company’s attorneys within 45 calendar days.

 

During the three months ended June 30, 2021 and 2020, the Company recognized $0 and $0.05 million of revenue relating to work completed in regard to the transfer of technology fee as discussed in the License Agreement with Canopy, respectively. During the six months ended June 30, 2021 and 2020, the Company recognized $0 and $0.01 million of revenue relating to work completed in regard to the transfer of technology fee as discussed in the License Agreement with Canopy, respectively.

 

NOTE 21 - COMMITMENTS AND CONTINGENCIES

 

Litigation

 

From time to time, we may become involved in various lawsuits and legal proceedings that arise in the ordinary course of business. However, litigation is subject to inherent uncertainties, and an adverse result in these or other matters may arise from time to time that may harm our business.

 

On October 21, 2020, the Company filed a demand to commence arbitration with the American Arbitration Association against Canopy for Canopy’s failure to perform under the License Agreement. On April 28, 2021 the Company entered into an agreement resolving the dispute between the parties, pursuant to which neither party admitted liability, the parties released their respective claims and obligations, and Canopy agreed to pay a total of $3.9 million, of which $2.3 million was paid to the Company on May 6, 2021, and the balance of $1.6 million will be paid to the Company’s attorneys within 45 calendar days.

 

On March 26, 2021, a vendor that the Company utilized for consulting services relating to various quality, compliance and regulatory filed a complaint against the Company for breach of contract. On May 18, 2021, the Company responded to the compliant denying their claims and also filed a cross complaint against this vendor for breach of contract by failing to provide deliverables as required by the contract. The Company is currently unable to determine what additional expenses will be incurred in order to defend this matter. As such, the Company cannot determine whether there is a reasonable possibility that a loss will be incurred, nor can it estimate the range of any such potential loss. Accordingly, the Company has not accrued an amount for any potential loss associated with this action.

 

 
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Table of Contents

 

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 June 30, 2021, the Company is not subject to any such these audits.

 

Employment Contracts

 

The Company has entered into employment and severance benefit contracts with certain executive officers. 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 June 30, 2021, The Company had such severance obligations for certain executive officers, in accordance with the severance benefit provisions of their respective employment and severance benefit agreements.

 

On May 8, 2020 the Company entered into a separation agreement (the “Separation Agreement”) with Jessica Rousset whereby the parties have agreed to a mutual separation of Mrs. Rousset’s employment as the Company’s Chief Operating Officer, effective May 8, 2020.

 

Pursuant to the terms of the Separation Agreement, Mrs. Rousset will be entitled to the following severance benefits: (i) a gross sum of $93,461.54, paid in equal installments over a six-month period; (ii) for a period of six months, an amount equal to the cost of her COBRA health benefits if she enrolls for COBRA coverage; (iii) acceleration of vesting of each equity award held by her to the extent the award would have vested had she remained employed for six months following her resignation; and (iv) an extended exercise period for certain equity awards held by her such that she may exercise vested shares under such outstanding equity awards until May 8, 2021. The Separation Agreement contains a release and certain restrictive covenants that are binding upon Mrs. Rousset

 

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 June 30, 2021 and December 31, 2020.

 

Operating leases

 

The Company maintains its corporate offices and manufacturing facility at 1620 Beacon Place, Oxnard, CA 93033, which contains approximately 25,000 square feet. The Company is currently on a month-to-month lease.

 

Sera Labs will pay base monthly rent in the amount of $0.1 million during the first 12 months of the Term. Base monthly rent will increase annually, over the base monthly rent then in effect, by 3%. If the Lease is terminated based on the occurrence of an “event of default,” The Company will be obligated to pay the abated rent to the lessor.

 

 
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On May 1, 2019, Sera Labs entered into a lease agreement to lease a 3,822 square feet office space and was absorbed by the Company upon acquisition of Sera Labs on October 2, 2020. The agreement contains an option to extend the lease for an additional 36 months and the Company will reassess the lease term of the contract when it has determined it is reasonably certain to exercise the option. Sera Labs will pay base monthly rent in the amount of $0.01 million during the first 12 months of the Term. Base monthly rent will increase annually, over the base monthly rent then in effect, by 3%. If the Lease is terminated based on the occurrence of an “event of default,” The Company will be obligated to pay the abated rent to the lessor.

 

Total rent expense was $0.1 million and $0.07 million for the three months ended June 30, 2021 and 2020, respectively. Total rent expense was $0.2 million and $0.1 million for the six months ended June 30, 2021 and 2020, respectively.

 

The Company classified the Sera Labs lease as an operating lease in accordance with ASC 842 and has recognized a right-of-use asset and a lease liability based on the present values of its lease payments over its respective lease term. The Company used the services of a valuation company to compute the IBR which is necessary to determine the present value of its lease payments since a borrowing rate is not explicitly available on the lease agreement. The concluded IBR is 11.30%. Operating lease payments and lease expense are recognized on a straight-line basis over the lease term.

 

As of June 30, 2021, the current portion and long-term portion of operating lease liability is $0.1 million and $0.3 million, respectively.

 

The future payments due under the operating lease as of June 30, 2021 are as follows (in thousands):

 

Years

 

 

 

2021 (remaining)

 

$66

 

2022

 

 

134

 

2023

 

 

138

 

2024

 

 

46

 

2025

 

 

-

 

Undiscounted cash flow

 

 

384

 

Effects of discounting

 

 

(57)

Lease liabilities recognized

 

$327

 

 

Finance leases

 

During 2019 the Company entered into a 5-year equipment lease rental which requires the Company to pay monthly payments of $0.02 million. The Company determined the payments represented substantially all of the fair value of the asset and recorded a right of use asset for $0.06 million and a finance lease liability for $0.06 million during the year ended December 31, 2019 within other assets and liabilities. The company will make payment of $0.02 annually until October 2024. Interest associated with the lease is $0.1 million or less annually based on a discount rate of 9.0%. As of June 30, 2021, the current portion and long-term portion of finance capital lease liability was $0.01 million and $0.03 million, respectively. As of December 31, 2020, the Company the current and long-term portion of finance capital lease liability was $0.01 million and $0.04 million, respectively.

 

Future minimum lease payments under non-cancellable capital leases as of June 30, 2021 are as follows (in thousands):

 

2021 (remaining)

 

 

9

 

2022

 

 

14

 

2023

 

 

14

 

2024

 

 

9

 

2025

 

 

-

 

Thereafter

 

 

-

 

Finance lease liabilities recognized

 

$46

 

 

 
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Operating and Financing leases

 

The following table presents supplemental balance sheet information related to operating and financing leases as of June 30, 2021 and December 31, 2020 (in thousands, except lease term and discount rate):

 

 

 

June 30,

2021

 

 

December 31,

2020

 

Operating leases

 

 

 

 

 

 

Right-of-use assets, net

 

$301

 

 

 

343

 

 

 

 

 

 

 

 

 

 

Right-of-use lease liabilities, current

 

$100

 

 

 

93

 

Right-of-use lease liabilities, noncurrent

 

 

227

 

 

 

278

 

Total operating lease liabilities

 

$327

 

 

 

371

 

 

 

 

 

 

 

 

 

 

Financing Leases

 

 

 

 

 

 

 

 

Finance lease right-to-use assets, net

 

$46

 

 

 

52

 

 

 

 

 

 

 

 

 

 

Current liabilities

 

$12

 

 

 

12

 

Noncurrent liabilities

 

 

34

 

 

 

40

 

Total financing lease liabilities

 

$46

 

 

 

52

 

 

 

 

 

 

 

 

 

 

Weighted average remaining lease term

 

 

 

 

 

 

 

 

Operating leases

 

2.80 years

 

 

3.31 years

 

Financing leases

 

3.31 years

 

 

3.82 years

 

 

 

 

 

 

 

 

 

 

Weighted average discount rate

 

 

 

 

 

 

 

 

Operating leases

 

 

11.30%

 

 

11.3%

Financing leases

 

 

9.0%

 

 

9.0%

 

 
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with (i) our condensed consolidated financial statements and related notes appearing elsewhere in this Quarterly Report on Form 10-Q and (ii) our audited consolidated financial statements and the related notes and management’s discussion and analysis of financial condition and results of operations for the fiscal year ended December 31, 2020 included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission (“SEC”) on March 31, 2021. This Quarterly Report on Form 10-Q contains “forward-looking statements” within the meaning of Section 27A of the Securities Act and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”). These statements are often identified by the use of words such as “anticipate,” “believe,” “can,” “continue,” “could,” “estimate,” “expect,” “intend,” “may,” “plan,” “project,” “seek,” “should,” “target,” “will,” “would” or the negative or plural of these words or similar expressions or variations. Such forward-looking statements include, but are not limited to, statements with respect to our outlook; the impact of new accounting standards; our ability to service our debt; our business strategy, including with respect to potential acquisitions; plans and objectives of future operations; the length and severity of the COVID-19 outbreak and its impact on the global economy and our financial results; and our future financial and business performance. The events described in these forward-looking statements are subject to a number of risks, uncertainties, assumptions and other factors that could cause actual results and the timing of certain events to differ materially from future results expressed or implied by the forward-looking statements. Factors that could cause or contribute to such differences include, but are not limited to, those identified herein, and those discussed in the section titled “Risk Factors”, set forth in Part I, Item 1A of our Annual Report on Form 10-K for the year ended December 31, 2020, Part II, Item 1A of this Quarterly Report on Form 10-Q and in our other SEC filings. You should not rely upon forward-looking statements as predictions of future events. Furthermore, such forward-looking statements speak only as of the date of this report. Except as required by law, we undertake no obligation to update any forward-looking statements to reflect events or circumstances after the date of such statements.

 

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. 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 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 sell multiple commercial wellness products under our distribution partners’ brands. We also develop 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.

 

 
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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.

 

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”).

 

Impact of COVID-19

 

Our financial results and operations for the three months ended June 30, 2021 were not significantly impacted by the COVID-19 pandemic. The measures we have taken to ensure the availability and functioning of our critical infrastructure, and to promote the safety and security of our employees remain in place. In accordance with public and private sector policies and initiatives to reduce the transmission of COVID-19, we have imposed travel restrictions, adopted policies aimed at promoting social distancing, and implemented work-from-home arrangements for employees where practicable. These measures and our compliance with local and national guidelines aimed at containing the virus could impact our operations and disrupt our business. Currently, our single operating facility is operational, and no reduction in our work force has taken place.

 

CURE Pharmaceutical Corporation

 

Our wholly owned subsidiary and operating business, CURE Pharmaceutical Corporation, located in Oxnard, California was originally incorporated in July 2011 to develop novel drug formulation and delivery technologies.

 

The pharmaceutical industry is facing ever-growing R&D 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 R&D spend (13.4% average increase per year), low clinical trial success rate (10%) and sluggish NME drug approvals – with 48 NMEs approved in 2019, down from 55 in 2018. Faced with these challenges, drug developers are looking toward alternative dosage forms, for which R&D 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.

 

 
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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.

 

The FDA approves more reformulations than new chemical entities (NCEs) each year under Section 505(b)(2) of the Food, Drug, and Cosmetic Act (“505(b)(2)”). The number of 2018 NDA approvals that used the 505(b)(2) regulatory pathway rose dramatically from 45 approvals in 2016 to an all-time high of 75 in 2018 and 64 in 2019. Under Section (505)(b)(2), the FDA may grant market exclusivity for a term of up to three years of exclusivity following approval of a listed drug that contains previously approved active ingredients but is approved in a new dosage, dosage form, route of administration or indication for use. Taken together, the exclusivity period of a drug and the lower R&D cost for reformulating a drug, have led to some pharmaceutical companies investigating reformulating their drugs as part of their lifecycle management protocols.

 

Furthermore, patients are increasingly encouraged to take part in their own treatments, and a consumer market has been developing midway between the supermarket-based world of consumer goods companies and the scientific, pharmacy-based world of pharmaceutical firms. The front lines of this battle are wellness products that have been proven to help prevent or cure disease. Breakthroughs in functional medicine suggest a number of opportunities for pharmaceutical companies like CURE. Functional medicines focus on the imbalances underlying disease processes (rather than only symptomatic relief) and they rely on molecular nutrition for patient-specific solutions. These types of nutraceuticals can be synergistic with pharmaceutical treatments, particularly in the emerging endocannabinoid medical market.

 

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.

 

 
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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 20 products are sold under the brand names Seratopical™, SeraLabs™, and Gordon’s Herbals™. 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.

 

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

 

 

 

 

·

Protect molecules from degradation in the body (e.g. stomach acids); and

 

 

 

 

·

Increase a drug’s bioavailability and optimize its release kinetics through:

 

 

·

Increased solubility in water and therefore bodily fluids

 

 

 

 

·

Enhanced permeability and retention in target tissue

 

 
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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:

 

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 footprint, 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.

 

 
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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.

 

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;

 

 

 

 

·

edible films for administration of medicaments to animals;

 

 

 

 

·

methods for modulating dissolution, bioavailability, bioequivalence;

 

 

 

 

·

pharmaceutical composition and method of manufacturing;

 

 
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·

pharmaceutical composition with ionically crosslinked polymer encapsulation of active ingredient;

 

 

 

 

·

multi-layered high dosage dissolvable film for oral administration;

 

 

 

 

·

thin films with high load of active ingredient;

 

 

 

 

·

high dosage dissolvable films for oral administration;

 

 

 

 

·

methods and composition for improving sleep;

 

 

 

 

·

oral dissolvable film that includes plant extracts and controlled substances;

 

 

 

 

·

rapidly disintegrating film matrix for moisture sensitive compounds;

 

 

 

 

·

protein-polysaccharide macromolecular complexes encapsulating ethyl alcohol;

 

 

 

 

·

self-emulsifying oral thin film compositions; and

 

 

 

 

·

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.

 

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 39 full-time employees. None of our employees are covered by collective bargaining agreements. We consider our relations with our employees to be good.

 

 
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RESULTS OF OPERATIONS

 

Revenues for the Three Months and Six Ended June 30, 2021 and 2020

 

Revenues for the three and six months ended June 30, 2021 was $2.1 million and $3.6 million, respectively, as compared to $0.3 million and $0.5 million, respectively, for the three and six months ended June 30, 2020. The increase in revenue for the three and six months ended June 30, 2021 compared to the same period in 2020 was mainly due to $2.0 million and $3.3 million, respectively, of revenue attributed from Sera Labs. Revenue from Sera Labs was mainly from direct-to-consumer sales of our gummy products in both periods. The Company did not incur any revenues from Sera Labs during the three and six months ended June 30, 2020 as Sera Labs was acquired on October 2, 2020.

 

Cost of Goods Sold

 

Cost of goods sold was $0.8 million and $1.2 million, respectively, in the three and six months ended June 30, 2021 compared to $0.1 million and $0.2 million, respectively, in the three and six months ended June 30, 2020. Cost of goods sold increased by approximately $0.7 million and $1.0 million during the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020. The increase was primarily due to the Company generating substantially more revenue from Sera Labs sales during the three and six months ended June 30, 2021 as noted above compared to the same period in 2020. In addition, revenue from Sera Labs were from products that have a higher gross margin compared to products sold by Cure Pharmaceutical during the three and six months ended June 30, 2021 compared to the same period in 2020.

 

Research and Development Expenses

 

For the three and six months ended June 30, 2021, research and development expenses decreased to $0.7 million and $1.4 million, respectively, compared to the three and six months ended June 30, 2020 of $0.7 million and $1.5 million, respectively. The slight 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 and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020. However, the decrease in our third party contractor expenses was offset by the increase in expenses incurred in developing CUREfilm anti-Viral, CUREfilm CNS and various other OTF and other delivery forms during the three and six months ended June 30, 2021 compared to the three and six months ended June 30, 2020.

 

Selling, General and Administrative Expenses

 

Our expenses for the three and six months ended June 30, 2021 are summarized as follows in comparison to our expenses for the three and six months ended June 30, 2020 (in thousands).

 

 

 

Three Months Ended

 

 

Six Months Ended

 

 

 

June 30,

2021

 

 

June 30,

2020

 

 

June 30,

2021

 

 

June 30,

2020

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Consulting

 

$114

 

 

$378

 

 

$392

 

 

$602

 

Salaries and wages

 

 

696

 

 

 

264

 

 

 

1,365

 

 

 

524

 

Selling, general and administrative

 

 

3,001

 

 

 

833

 

 

 

5,255

 

 

 

1,406

 

Professional services and investor relations

 

 

353

 

 

 

496

 

 

 

1,797

 

 

 

1,034

 

Noncash compensation

 

 

608

 

 

 

540

 

 

 

1,507

 

 

 

1,069

 

Total selling, general and administrative expenses

 

$4,772

 

 

$2,511

 

 

$10,316

 

 

$4,635

 

 

 
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Consulting

 

Consulting expense decreased by $0.3 million and $0.2 million for the three and six months ended June 30, 2021, respectively, as compared to the three and six months ended June 30, 2020, respectively. This was due to the Company decreasing the number of consultants used during the three and six months ended June 30, 2021 compared to the same period in 2020. In addition, a majority of the expenses during the three and six months period ended June 30, 2020 related to noncash consulting services whereby the Company issued common stock shares in exchange for services performed over a period of time.

 

Salaries and wages

 

Salaries and wages expense increased by approximately $0.4 million and $0.9 million during the three and six months ended June 30, 2021, respectively, as compared to the three and six months ended June 30, 2020, respectively. This was due to an increase in twelve (12) new employees from the acquisition of Sera Labs in October 2020. These employees were not part of the Company during the three and six month periods ended June 30, 2020.

 

Selling, General and Administrative

 

Selling, general and administrative expense increased by approximately $2.2 million and $3.9 million for the three and six months ended June 30, 2021, respectively, as compared to the three and six months ended June 30, 2020, respectively. This was mainly due to marketing and advertising spends as well as selling expenses incurred by Sera Labs, which was not part of the Company during the three and six months ended June 30, 2020. In addition, the Company incurred amortization expense relating to the Sera Labs intangible assets acquired of $0.6 million and $ 1.2 million during the three and six months ended June 30, 2021 as well as the Company began amortizing completed IPR&D during the three months ended June 30, 2021 that were not incurred during the same periods in 2020.

 

Professional Services and Investor Relations

 

Professional Services and investor relations expenses decreased by approximately $0.1 million and increased by approximately $0.8 million for the three and six months ended June 30, 2021, respectively, as compared to the three and six months ended June 30, 2020, respectively. The decrease was a result of the Company reducing our investor relation efforts during the three months ended June 30, 2021 compared to the same period in 2020. The increase during the six months ended June 30, 2021 compared to the same period in 2020 was due to the Company recording the fair value of the common stock issued to investor relation firms which was not present during the six months ended June 30, 2020. The issuance of common stock to these investor relations firms was to help increase awareness of our Company with potential new investors as well as to update our existing shareholder base. In addition, the Company increased our legal and accounting professional services during the three and six months ended June 30, 2021 compared to the same period in 2020 as to assist the Company in strategic planning and advisory for potential business acquisitions, tax planning, patent and technology acquisitions and general and corporate compliance services.

 

Non-cash Compensation

 

Non-cash compensation expense increased by approximately $0.1 million and $0.4 million for the three and six months ended June 30, 2021, respectively, as compared to the three and six months ended June 30, 2020, respectively. 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 and six months ended June 30, 2021. As the Company issued stock options, restricted stock awards and restricted stock units during 2020, the Company incurred more vested awards from our 2017 Equity Plan during the three and six months period ended June 30, 2021 compared to the same period in 2020.

 

 
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Change in Fair Value Contingent Stock Consideration

 

The change in fair value contingent stock consideration decreased by approximately $11.2 million and $7.2 million for the three and six months ended June 30, 2021 as compared to the three and six months ended June 30, 2020. This was primarily due to the Company and CHI entering into a settlement arrangement on June 5, 2020 in order to settle the contingent shares in full which resulted in a significant decrease in the change in fair value of contingent stock consideration. No similar transaction incurred during the three and six months ended June 30, 2021..

 

Other Income/ (Expense)

 

 

 

For the three months ended

 

 

For the six months ended

 

 

 

June 30, 2021

 

 

June 30, 2020

 

 

June 30, 2021

 

 

June 30, 2020

 

(in thousands)

 

 

 

 

 

 

 

 

 

 

 

 

Interest income

 

$1

 

 

$5

 

 

$2

 

 

$20

 

Gain from settlement

 

 

2,434

 

 

 

26

 

 

 

2,434

 

 

 

26

 

Gain from extinguishment of debt

 

 

335

 

 

-

 

 

 

734

 

 

 

-

 

Loss on sale of property, plant and equipment

 

 

-

 

 

 

-

 

 

 

(41 )

 

 

-

 

Change in fair value of derivative liability

 

 

-

 

 

 

12

 

 

 

-

 

 

 

75

 

Change in fair value of convertible promissory notes

 

 

(692 )

 

 

-

 

 

 

340

 

 

 

-

 

Interest expense

 

 

(134 )

 

 

(15 )

 

 

(199 )

 

 

(28

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total other income (expense)

 

$1,944

 

 

$28

 

 

$3,270

 

 

$93

 

 

Other income/(expense) increased by approximately $2.0 million and $3.2 million during the three and six months ended June 30, 2021, respectively, as compared to the three and six months ended June 30, 2020, respectively. This was primarily due to (i) a decrease in the change in fair value of convertible promissory notes during the three months ended June 30, 2021 and increase in the change in fair value of convertible promissory notes during the six months ended June 30, 2021, (ii) a gain on extinguishment of the PPP loan that was forgiven during the three and six months ended June 30, 2021, (iii) a gain on settlement of approximately $2.4 million relating to the settlement reached between the Company and Canopy during the three months period ended June 30, 2021and (iv) an increase in interest expense relating to the increase in notes payable acquired during the three and six months ended June 30, 2021.

 

 
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LIQUIDITY AND CAPITAL RESOURCES

 

As of June 30, 2021 and December 31, 2020

 

Working Capital Deficit (in thousands)

 

 

 

June 30,

2021

 

 

December 31,

2020

 

Current assets

 

$3,290

 

 

$3,850

 

Current liabilities

 

 

(17,039 )

 

 

(14,467 )

Working capital (deficiency)

 

$(13,749 )

 

$(10,617 )

 

Working capital deficit as of June 30, 2021 was approximately $13.7 million, as compared to a working capital deficit of approximately $10.6 million as of December 31, 2020. As of June 30, 2021, current assets were approximately $3.3 million, comprised primarily of (i) cash of approximately $1.7 million, (ii) accounts receivable, net of approximately $0.2 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, 2020, current assets were approximately $3.9 million, comprised primarily of (i) cash of approximately $1.7 million, (ii) accounts receivable, net of approximately $0.2 million, (iii) inventory, net of approximately $0.5 million and (iv) prepaid expenses and other assets of approximately $1.5 million.

 

As of June 30, 2021, current liabilities were approximately $17.0 million, comprised primarily of (i) approximately $9.3 million in notes payable, convertible notes payable and fair value of convertible promissory notes (ii) $1.2 million in related party payable, (iii) approximately $2.0 million in accounts payable; (iv) approximately $3.7 million in accrued expenses (v) approximately $0.6 million in contract liabilities and (vi) approximately $0.1 million of finance and operating lease payables. Comparatively, as of December 31, 2020, current liabilities were approximately $14.5 million, comprised primarily of (i) approximately $8.9 million in loans, notes payable, paycheck protection program loans convertible notes payable and fair value convertible promissory notes, (ii) approximately $2.1 million in accounts payable; (ii) approximately $1 million in contract liabilities and (iii) approximately $1.3 million in accrued expenses, (iv) approximately $0.1 million of finance and operating lease payables and (v) approximately $1.0 million in related party payable.

 

Net Cash (in thousands)

 

 

 

For the Six Months Ended

 

 

 

June 30,

2021

 

 

June 30,

2020

 

Net cash used in operating activities

 

$(656 )

 

$(3.778 )

Net cash used in investing activities

 

 

(99 )

 

 

(844 )

Net cash provided by financing activities

 

 

731

 

 

 

1,955

 

Decrease in cash

 

$(24 )

 

$(2.667 )

 

Net cash used in Operating Activities

 

Net cash used in operating activities was approximately $0.7 million during the six months ended June 30, 2021. This was primarily due to the net loss of approximately $4.6 million, as well as (i) gain from extinguishment of debt of approximately $0.7 million, (ii) the change in fair value of contingent share consideration of $1.6 million, and (iii) change in fair value of convertible promissory notes of approximately $0.3 million and was partially offset by (i) stock based compensation for services of approximately $0.9 million, (ii) depreciation and amortization of approximately $1.6 million and (iii) fair value of vested stock options and restricted stock of approximately $1.8 million .

 

 
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Comparatively, net cash used in operating activities was approximately $3.8 million during the six months ended June 30, 2020. This was primarily due to the net loss of approximately $11.4 million, partially offset by (i) the change in fair value of contingent share consideration of $5.7 million and (ii) the change in fair value of derivative liabilities of $0.08 million which was increased by (iii) stock based compensation of approximately $0.7 million, (iv) depreciation and amortization of approximately $0.2 million and (v) the fair value of vested stock options and restricted stock of approximately $1.1 million.

 

Net cash used in Investing Activities

 

Net cash used in investing activities of approximately $0.1 million during the six months ended June 30, 2021 was due to (i) the purchase of an intangible asset for approximately $0.07 million, (ii) the purchase of property and equipment for approximately $0.03 million (iii) purchase of a note receivable of approximately $0.2 million and (iv) collection of notes receivable of approximately $0.2 million. Comparatively, net cash used in investing activities of approximately $0.8 million during the six months ended June 30, 2020 was due to (i) the investment in Relief Europe of $0.3 million (ii) the purchase of an intangible asset for approximately $0.01 million and (iii) the purchase of property and equipment for approximately $0.6 million.

 

Net cash provided by Financing Activities

 

Net cash provided by financing activities of approximately $0.7 million during the six months ended June 30, 2021 was due to (i) proceeds from notes payable of approximately of $0.8 million, (ii) proceeds from related party payable and (iii) repayment of loan payable of approximately $0.2 million. Correspondingly, net cash provided by financing activities of approximately $2 million during the six months ended June30, 2020 was due to (i) proceeds from the exercise of warrants of approximately $1.4 million, (ii) proceeds from notes payable of approximately of $0.6 million and (iii) repayment of loan payable of approximately $0.1 million.

 

We may need to raise additional operating capital in calendar year 2021 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 2020 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 2021. 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.

 

 
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RECENTLY ISSUED ACCOUNTING PRONOUNCEMENTS

 

See Note 2 to our unaudited condensed consolidated financial statements included elsewhere in this Quarterly Report on Form 10-Q for a summary of recently issued and adopted accounting pronouncements.

 

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(e) and 15d-15(e)) 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 June 30, 2021. 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, or 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.

 

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 June 30, 2021. 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:

 

 
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·

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, 2020 and into the six months ended June 30, 2021, we continued to execute upon our planned remediation actions which are all intended to strengthen our overall control environment. During the second quarter of fiscal year 2019 management hired a Chief Financial Officer. Our Chief Financial Officer is an experienced C-Level executive. During the third quarter of fiscal year 2019 we hired a new Controller with expertise in functional areas of finance and accounting. During the first quarter of fiscal year 2021, we hired a senior accountant with over 15 years various accounting positions. We believe the above additions have improved our segregation of duties as well as added to the overall

 

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 2020 which include derivative and warrants

 

 

 

·

Review of the purchase accounting entries made in connection with acquisitions completed in 2019 and 2020

 

 

 

 

·

Forms 10-Q and 10-K review 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 2013

 

 

 

 

·

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, we were not able to mitigate the material weakness for the three months period ended June 30, 2021. 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 disclosure controls and procedures (as defined in Exchange Act Rules 13a15(e) and 15d15(e)) as of June 30, 2021, 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 June 30, 2021, the Company’s disclosure controls are 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 June 30, 2021 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 2020 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. For a detailed discussion of the risks that affect our business, please refer to Part I—Item 1A, “Risk Factors,” in our Annual Report on Form 10-K for the year ended December 31, 2020, which was filed with the SEC on March 31, 2021. There have been no material changes to the risk factors as previously disclosed in our Annual Report on Form 10-K, except as follows:

 

Global economic conditions, including those resulting from the widespread outbreak of COVID-19, may negatively impact the Company’s financial condition and results of operations.

 

A general weakening or decline in the global economy or a reduction in industrial outputs, business or consumer spending or confidence could delay or significantly decrease purchases of the Company’s products by its customers and end users. Consumer purchases of discretionary items, which could include the Company’s maintenance products and homecare and cleaning products, may decline during periods where disposable income is reduced or there is economic uncertainty, and this may negatively impact the Company’s financial condition and results of operations.

 

In addition, the Company’s sales and operating results may be affected by uncertain or changing economic and market conditions, including inflation, deflation, prolonged weak consumer demand, political instability, public health crises or other changes that may affect the principal markets, trade channels, and industrial segments in which the Company conducts its business. Public health crises, including epidemics or pandemics, may affect the principal markets, trade channels, and industrial segments in which the Company conducts its business. For example, the Company is monitoring the impact of the recent global outbreak of COVID-19, which was first detected in China in 2019 and subsequently declared a global pandemic by the World Health Organization in March 2020. COVID-19 has already caused a significant disruption to global financial markets and supply chains. The significance of the operational and financial impact to the Company will depend on how long and widespread this disruption proves to be. The extent to which COVID-19 impacts the Company’s results will depend on future developments, which are highly uncertain and cannot be predicted, including new information which may emerge concerning the severity of the outbreak and the international actions that are being taken to contain and treat it. While the Company currently expects this business disruption to be temporary, there is uncertainty around its duration and its broader impact, and therefore the effects it will have on the Company’s financial results and operations. If economic or market conditions in key global markets continue to deteriorate, the Company may experience material adverse effects on its business, financial condition and results of operations.

 

 
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Adverse economic and market conditions could also harm the Company’s business by negatively affecting the parties with whom it does business, including its customers and third-party contract manufacturers and suppliers. These conditions could impair the ability of the Company’s customers to pay for products they have purchased from the Company. As a result, allowances for doubtful accounts and write-offs of accounts receivable from the Company’s customers may increase. In addition, the Company’s third-party contract manufacturers and their suppliers may experience financial difficulties or business disruptions that could negatively affect their operations and their ability to supply the Company with finished goods and the raw materials, packaging, and components required for the Company’s products.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

From January 1, 2021 to June 30, 2021, the Company issued 646,512 common stock shares, at prices per share ranging from $0.98 to $1.85 in connection to several consulting agreements. The total value of these issuances was $0.7 million.

 

From January 1, 2021 to June 30, 2021, the Company issued 26,936 common stock shares, at a price of $1.30 per share, from the exercise of certain warrants. Total value of these issuances was $0.03 million.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

As of June 30, 2021, 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 June 30, 2021, the note holders of the Defaulted Notes have not yet communicated their intent to either receive payment or convert.

 

ITEM 4. MINE SAFETY DISCLOSURE

 

None.

 

ITEM 5. OTHER INFORMATION

 

None.

 

 
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ITEM 6. EXHIBITS

 

31.1

 

Certification of Chief Executive Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

31.2

 

Certification of Chief Financial Officer pursuant to Rule 13a-14(a) or Rule 15d-14(a) of the Securities Exchange Act of 1934, as amended.

32.1#

 

Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

32.2#

 

Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

101.INS**

 

XBRL Instance Document

101.SCH**

 

XBRL Taxonomy Extension Schema Document

101.CAL**

 

XBRL Taxonomy Extension Calculation Linkbase Document

101.DEF**

 

XBRL Taxonomy Extension Definition Linkbase Document

101.LAB**

 

XBRL Taxonomy Extension Label Linkbase Document

101.PRE**

 

XBRL Taxonomy Extension Presentation Linkbase Document

_____________

# 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: August 16, 2021

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

 

August 16, 2021

 

/s/ Michael Redard

 

Michael Redard

 

Chief Financial Officer

 

August 16, 2021

 

 
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