Notes to Condensed Consolidated Financial Statements
(Unaudited)
NOTE 1 – ORGANIZATION AND DESCRIPTION OF THE
BUSINESS
Cantabio Pharmaceuticals Inc. (the “Company” or
“Cantabio”) is a preclinical stage biotechnology
company focusing on commercializing novel therapies and the
intellectual property generated from research and development
activities for Parkinson’s disease (PD) and Alzheimer’s
disease (AD). The Company’s strategy involves integration of
therapeutic focus, the targeting of family biophysics, drug
discovery technology and expertise into an innovative drug
discovery approach, which synergizes to identify and develop small
molecule pharmacological chaperones for clinical trials. In
addition, the Company’s research efforts concentrate on the
development of therapeutic proteins that can pass through the
blood-brain barrier and supplement in vivo levels of proteins with
display loss of function during disease conditions.
NOTE 2 – LIQUIDITY AND GOING CONCERN
As of December 31, 2017, the Company had a working capital deficit
and continues to have losses from operations due to its research
and development activities.
The Company typically raises capital which it spends on maintaining
its research and corporate operations. At this early stage in the
life of the Company funding is often short term in nature. While
the Company has been proficient in raising funds in the past the
short-term nature of these funding cycles raises substantial doubt
about the Company's ability to continue as a going concern within
one year from the date of this filing.
Management is addressing going concern risk by seeking new sources
of capital and is continuing initiatives to raise capital through
private placements, related party loans and other institutional
sources to meet future working capital requirements. Furthermore,
strategic partnerships, most likely with larger pharmaceutical
industry companies, will be needed to continue to fund research and
development costs as our projects expand. These measures, if
successful, may contribute to reduce the risk of going concern
uncertainties for the Company for at least twelve months from
issuance of these condensed consolidated financial
statements.
The ability of the Company to continue as a going concern is
dependent upon its ability to raise additional capital and achieve
profitable operations. The accompanying financial statements do not
include any adjustments that might be necessary if the Company is
unable to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
The Company has developed the additional accounting policies below.
Aside from these additions to the Company’s accounting
policies there have been no material changes in the Company’s
significant accounting policies to those previously disclosed in
the Company’s annual report on Form 10-K, which was filed
with the SEC on June 30, 2017.
Warrant Liability
The Company accounts for certain common stock warrants outstanding
as a liability at fair value and adjusts the instruments to fair
value at each reporting period. This liability is subject to
re-measurement at each balance sheet date until exercised, and any
change in fair value is recognized in the Company's statements of
operations. The fair value of the warrants issued by the Company
has been estimated using a valuation pricing model, at each
measurement date that incorporates various inputs including
remaining contractual term, stock volatility, risk free rate and
dividend yield.
5
Equity-linked Financial Instruments
Certain of the Company’s debt instruments include embedded
derivatives that require bifurcation from the host contract under
the provisions of ASC 815, Derivatives and Hedging. Under this
guidance, the Company recognizes the embedded derivatives at fair
value and records a gain or loss resulting from the change in fair
values at the end of each reporting period. In connection with
issuance of the Company’s Zhu Notes, beginning on July 3,
2017, the Company became contingently obligated to issue shares in
excess of the 250 million authorized by shareholders. Consequently,
the ability to settle these obligations with shares would be
unavailable causing these and other share-settled obligations to
potentially be settled in cash.
The Company applies a sequencing policy regarding share settlement
wherein equity-linked financial instruments with the earliest
issuance date would be settled first. Thus, all equity-linked
financial instruments, which are convertible or exercisable into
common stock, issued concurrent or subsequent to the Zhu Notes are
classified as derivative liabilities, with the exception of
instruments related to employee share-based
compensation.
Sequencing
As of July 3, 2017, the Company adopted a sequencing policy whereby
all future equity-linked instruments may be classified as a
derivative liability with the exception of instruments related to
share-based compensation issued to employees or
directors.
Income Taxes
The Company recognizes deferred tax liabilities and assets for the
expected future tax consequences of events that have been included
in the financial statements or tax returns. Deferred tax assets and
liabilities are determined based on the difference between the
financial statement and tax basis of assets and liabilities using
enacted tax rates in effect for the year in which the differences
are expected to reverse. The Company estimates the degree to which
tax assets and credit carry forwards will result in a benefit based
on expected profitability by tax jurisdiction.
In its interim financial statements, the Company follows the
guidance in ASC 270, “Interim Reporting” and ASC 740
“Income Taxes”, whereby the Company utilizes the
expected annual effective tax rate in determining its income tax
provisions for the interim periods. That rate differs from U.S.
statutory rates primarily as a result of valuation allowance
related to the Company’s net operating loss carryforward as a
result of the historical losses of the Company.
On December 22, 2017, the U.S. government enacted comprehensive tax
legislation commonly referred to as the Tax Cuts and Jobs Act (the
“Tax Act”). The Tax Act makes broad and complex changes
to the U.S. tax code that will affect the Company’s fiscal
year ending March 31, 2018, including, but not limited to, reducing
the U.S. federal corporate tax rate. The Tax Act reduces the
federal corporate tax rate to 21 percent in the fiscal year ending
March 31, 2018. Section 15 of the Internal Revenue Code stipulates
that our fiscal year ending March 31, 2018, will have a blended
corporate tax rate of approximately 21 percent, which is based on
the applicable tax rates before and after the Tax Act and the
number of days in the year. The reduction of the corporate tax rate
will cause the Company to reduce its deferred tax asset to the
lower federal base rate of 21% and adjust the allowance against the
deferred tax asset by the same amount. The Company has not yet
determined the impact the rate reduction will have on its gross
deferred tax asset and liabilities and offsetting valuation
allowance. The Company has a full allowance against the deferred
tax asset and as a result there was no impact to income tax expense
for the quarter ended December 31, 2017.
The changes included in the Tax Act are broad and complex. The
final transition impacts of the Tax Act may differ from the above
estimate, possibly materially, due to, among other things, changes
in interpretations of the Tax Act, any legislative action to
address questions that arise because of the Tax Act, any changes in
accounting standards for income taxes or related interpretations in
response to the Tax Act, or any updates or changes to estimates the
company has utilized to calculate the transition impact. The
Securities Exchange Commission has issued rules that would allow
for a measurement period of up to one year after the enactment date
of the Tax Act to finalize the recording of the related tax
impacts. We currently anticipate finalizing and recording any
resulting adjustments by the end of our current fiscal year ending
March 31, 2018.
Recent Accounting Standards
Fiscal 2019 Accounting Pronouncement Adoptions
In August 2016, the FASB issued ASU No.
2016-15,
Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash
Payments
. This new standard
clarifies certain aspects of the statement of cash flows, including
the classification of debt prepayment or debt extinguishment costs
or other debt instruments with coupon interest rates that are
insignificant in relation to the effective interest rate of the
borrowing, contingent consideration payments made after a business
combination, proceeds from the settlement of insurance claims,
proceeds from the settlement of corporate-owned life insurance
policies, distributions received from equity method investees and
beneficial interests in securitization transactions. This new
standard also clarifies that an entity should determine each
separately identifiable source of use within the cash receipts and
payments on the basis of the nature of the underlying cash flows.
In situations in which cash receipts and payments have aspects of
more than one class of cash flows and cannot be separated by source
or use, the appropriate classification should depend on the
activity that is likely to be the predominant source or use of cash
flows for the item. This new standard will be effective for us on
April 1, 2018. The Company is currently evaluating the impact
of this new standard and does not expect it to have a material
impact on our financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).
ASU 2016-02 increases the transparency and comparability among
organizations by recognizing lease assets and lease liabilities on
the balance sheet and disclosing key information about leasing
arrangements. Certain qualitative and quantitative disclosures are
required, as well as a retrospective recognition and measurement of
impacted leases. The new ASU is effective for fiscal years and
interim periods within those years beginning after December 15,
2018, with early adoption permitted. The Company is currently
evaluating the impact of this new standard and does not expect it
to have a material impact on our financial statements.
6
NOTE 4 – RELATED PARTY TRANSACTIONS
Toth and Associates LTD
On July 1, 2016, the Company entered into a consulting agreement
with Toth and Associates LTD for Dr. Toth to act as the
Company’s CEO. The standard monthly fee is approximately
$13,000 plus any additional uncontracted hours at the same rate,
and bonuses as follows (A) upon raising of capital on behalf of, or
as part of the Company, an amount equal to 1.5% of the capital
raised, (B) increasing the performance of the Company as measured
by valuation in either an agreed valuation in the context of an
investment or, in the case of a public company, market
capitalization reaching $30.0 million, a fixed bonus of $50,000,
payable wholly or in mutually agreed tranches over a 6 month period
subsequent to the valuation event, (C) on the issuance of new stock
for the purposes of a capital raise of an amount over $5.0 million,
common stock equal to 1% of the Company’s post-investment
issued share capital and (D) in the event of the Company, including
any affiliated entities, securing a licensing agreement with any
third party, an amount equivalent to 1.5% of any payments to the
Company under such licensing agreement.
Capro LTD
On July 1, 2016, the Company entered a consulting agreement with
Capro, LTD for Dr. Thomas Sawyer to act as the Company’s
COO. The standard monthly fee is approximately $11,000
plus any additional uncontracted hours at the same rate, and
bonuses as follows (A) upon raising of capital on behalf of, or as
part of the Company, an amount equal to 1.5% of the capital raised,
(B) increasing the performance of the Company as measured by
valuation in either an agreed valuation in the context of an
investment or, in the case of a public company, market
capitalization reaching $30.0 million, a fixed bonus of $50,000,
payable wholly or in mutually agreed tranches over a 6 month period
subsequent to the valuation event and (C) on the issuance of new
stock for the purposes of a capital raise of an amount over $5.0
million, common stock equal to 1% of the Company’s
post-investment issued share capital and (D) in the event of the
Company, including any affiliated entities, securing a licensing
agreement with any third party, an amount equivalent to 1.5% of any
payments to the Company under such licensing
agreement.
Eden Professional LTD
On July 1, 2016, the Company entered a consulting agreement with
Eden Professional LTD for Mr. Simon Peace to act as the
Company’s CFO. The standard monthly fee is
approximately $7,000 plus any additional uncontracted hours at the
same rate, and bonuses as follows (A) upon raising of capital on
behalf of, or as part of the Company, an amount equal to 1.5% of
the capital raised, (B) increasing the performance of the Company
as measured by valuation in either an agreed valuation in the
context of an investment or, in the case of a public company,
market capitalization reaching $30.0 million, a fixed bonus of
$50,000, payable wholly or in mutually agreed tranches over a 6
month period subsequent to the valuation event and (C) on the
issuance of new stock for the purposes of a capital raise of an
amount over $5.0 million, common stock equal to 1% of the
Company’s post-investment issued share capital and (D) in the
event of the Company, including any affiliated entities, securing a
licensing agreement with any third party, an amount equivalent to
1.5% of any payments to the Company under such licensing
agreement.
7
Costs incurred associated with related party transactions noted
above included in general and administrative in the statement of
operations are as follows:
|
|
For
the three months ended December 31,
|
For
the nine months ended December 31,
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
|
|
Toth and Associates LTD
|
$
40,000
|
$
36,000
|
$
120,000
|
$
108,000
|
|
Capro LTD
|
18,000
|
30,000
|
84,000
|
90,000
|
|
Eden Professional LTD
|
21,000
|
19,000
|
63,000
|
57,000
|
|
Max Zhu Consulting
(1)
|
3,000
|
6,000
|
12,000
|
18,000
|
|
|
|
|
|
|
|
Total related party
transactions
|
$
82,000
|
$
91,000
|
$
279,000
|
$
273,000
|
|
|
|
|
|
|
(1)
Max
Zhu, an investor in and lender to the Company, also works as Head
of Computer Aided Drug Design for the Company under a consultancy
contract.
Accounts payable and accrued expenses includes amounts payable to
related parties of $0.5 and $0.3 million for the period ended
December 31, 2017 and March 31, 2017, respectively.
NOTE 5 – CONVERTIBLE DEBENTURES AS AMENDED
Original
issuance
The Company entered into several securities purchase agreements
with an accredited investor to place Convertible Debentures (as
amended the “Debentures”) in the aggregate principal
amount of up to $750,000 (the “Transaction”), provided
that in case of an event of default, the Debentures may become at
the holder’s election immediately due and payable. The
Debentures bear interest at the rate of 5% per annum. In addition,
the Company must pay to the holder a fee equal to 7% of the amount
of the Debentures to assist in their monitoring costs for the
Debentures. The net proceeds of the financing were used for general
corporate matters and for other expenses.
Conversion Feature
The Debentures may be converted at any time on or prior to maturity
at the lower of $0.10 or 93% of the average of the three lowest
daily volume weighted average price (“VWAP”) during the
10 consecutive trading days immediately preceding the conversion
date, provided that as long as we are not in default under the
Debenture and the conversion price is never lower than a stated
floor price. The Debentures have been amended several times,
including most recently in the third quarter with the floor price
being $0.01 and the due date November 2018.
Monthly Redemption Feature
Any time after the six-month anniversary of the issuance of a
Debenture that the daily VWAP is less than $0.01 for a period of
twenty consecutive trading days (the “Triggering Date”)
and only for so long as such conditions exist after a Triggering
Date, the Company shall make monthly payments beginning on the last
calendar day of the month when the Triggering Date occurred. Each
monthly payment shall be in an amount equal to the sum of (i) the
principal amount outstanding as of the Triggering Date divided by
the number of such monthly payments until maturity, (ii) a
redemption premium of 20% in respect of such principal amount and
(iii) accrued and unpaid interest hereunder as of each payment
date. The Company may, no more than twice, obtain a thirty-day
deferral of a monthly payment due as a result of a Triggering Date
through the payment of a deferral fee in the amount equal to 10% of
the total amount of such monthly payment. Each deferral payment may
be paid by the issuance of such number of shares as is equal to the
applicable deferral payment divided by a price per share equal to
93% of the average of the four lowest daily VWAPs during the 10
consecutive Trading Days immediately preceding the due date in
respect of such monthly payment begin deferred, provided that such
shares issued will be immediately freely tradable shares in the
hands of the holder.
In the third quarter a Triggering Date occurred and the Company
recorded a premium of $50,000 included in accounts payable and
accrued expense.
8
In the third quarter the Company, entered into an amended agreement
with the investor which included a change to the due date and an
adjustment to the floor price. The terms of the new debt instrument
was considered to be substantially different such that the changes
were sufficient to recognize the amendment as an extinguishment of
the debt. A loss on extinguishment of approximately $0.2 million
was recorded in other income (expense). Debt discount of
approximately $0.6 million was recorded as a result of the new
issuance due to the conversion features.
Beneficial Conversion
Feature
At the time of each closing, the Debenture’s effective
conversion price was below the quoted market price of the
Company’s common stock. As such, the Company recognized a
beneficial conversion feature equal to the intrinsic value of the
conversion feature on each issuance date, resulting in a discount
to the Debenture with a corresponding credit to additional paid-in
capital.
Embedded
Derivatives
The monthly payment provision within the Debentures is a
contingent put option that is required to be separately measured at
fair value, with subsequent changes in fair value recognized in the
Condensed Consolidated Statements of Operations. The Company
estimated the fair value of the monthly payment provision, as of
the issuance date and December 31, 2017 using probability analysis
of the occurrence of a Triggering Date applied to the
discounted maximum redemption premium for any given payment. The
probability analysis utilized in calculating the embedded
derivative upon issuance and at December 31, 2017 was calculated
using the following key inputs:
|
|
|
|
Stock
price
|
$
0.03
|
|
Probability
of Triggering Date
|
100
%
|
|
Volatility
|
282
%
|
|
Risk-free
rate
|
1
%
|
|
Discount
rate
|
0
%
|
Due to the extinguishment of the notes and the Company’s
sequencing policy the amended notes the Company recorded an
embedded derivative associated with the conversion feature. The
following are the inputs associated with the conversion
feature.
|
|
|
|
Stock
price
|
$
0.03
|
|
Exercise
price
|
$
0.03
|
|
Volatility
|
282
%
|
|
Contractual
term
|
|
|
Risk-free
rate
|
1
%
|
|
Discount
rate
|
0
%
|
The fair value estimate of the embedded derivatives is a Level 3
measurement. The roll-forward of the Level 3 fair value
measurement, for the nine months ended December 31, 2017, is as
follows:
Balance
at
March
31, 2017
|
|
Net
unrealized (gain)/loss
|
Balance
at
December
31, 2017
|
|
24,000
|
$
555,000
|
$
131,000
|
$
710,000
|
The carrying value of the Debentures, as of December 31, 2017, is
comprised of the following:
|
Secured
Convertible Debenture at December 31, 2017:
|
|
|
Principal value of
5%, convertible
|
$
633,000
|
|
Fair value of
embedded derivative
|
710,000
|
|
Accrued
interest
|
14,000
|
|
Debt
discount
|
(634,000
)
|
|
Carrying
value of Secured Convertible Debenture Note
|
$
723,000
|
As of December 31, 2017, the estimated aggregate fair value of
outstanding convertible notes payable is approximately $0.8
million. The fair value estimate is based on the estimated option
value of the conversion terms. The estimated fair value represents
a Level 3 measurement.
During the current financial year, holders of approximately $0.1
million in principal amount and accrued interest with respect to
Secured Convertible Debentures exercised the conversion option and
converted into 3.3 million shares of common stock.
Events of Default or Financial covenants
The Company is in compliance with all terms associated with the
convertible note.
9
NOTE 6 – CONVERTIBLE DEBT RELATED PARTY
In the second quarter of fiscal 2018 the Company issued convertible
notes payable to Max Zhu for an aggregate principal balance of
$220,000, in exchange for cash of $175,000 and the exchange of a
note payable to Mr. Zhu with a principal balance of $45,000. The
extinguished notes payable was fully matured.
The convertible notes payable have a six-month term and incurs
interest at rates ranging from 18% to 23% through maturity. If the
notes are not repaid within the six-month term, the interest rate
increases on each note to rates ranging from 23% to 28%. The
Company has the option to settle the principal and all accrued
interest of each note in cash or shares.
The note holder has the right to convert all or any portion of the
outstanding principal and accrued interest of each note into common
shares of the Company at a conversion price of the lesser of: (i)
$0.08 per share, or (ii) a price equal to 80% of the lowest VWAP
during the five consecutive days before the notice of
conversion.
Upon issuance of the convertible notes, the Company recognized an
aggregate debt discount of approximately $0.2 million relating to
the bifurcated embedded conversion option.
The analysis utilized in calculating the embedded derivative upon
issuance and at December 31, 2017 was calculated using the
following key inputs:
|
|
|
|
Stock
price
|
$0.01- $0.03
|
|
Contractual
term
|
|
|
Volatility
|
125%-159%
|
|
Risk-free
rate
|
1%
|
The fair value estimate of the embedded derivative is a Level 3
measurement. The roll-forward of the Level 3 fair value
measurement, for the nine months ended December 31, 2017, is as
follows:
|
|
Net
unrealized (gain)/loss
|
Balance
at
December
31, 2017
|
|
159,000
|
$
(90,000
)
|
$
69,000
|
The carrying value of the Notes, as of December 31, 2017, is
comprised of the following:
|
Secured
Convertible Debenture at December 31, 2017:
|
|
|
Principal value of
5%, convertible
|
$
220,000
|
|
Fair value of
embedded conversion option
|
69,000
|
|
Accrued
Interest
|
16,740
|
|
Debt
discount
|
(37,818
)
|
|
Carrying
value of Secured Convertible Debenture Note
|
$
267,922
|
As
of December 31, 2017, the estimated aggregate fair value of
outstanding convertible notes payable is approximately $0.3
million. The fair value estimate is based on the estimated option
value of the conversion terms. The estimated fair value represents
a Level 3 measurement.
Technical default
The notes which are due in January 2018 are in technical default,
although the obligation has not been called by the lender. The note
agreement provided for such circumstances with the effect that the
Company will record interest at the default interest rate of
23%.
10
NOTE 7 – CAPITAL STOCK
Issuance of shares for consulting services.
Through December 31, 2017 the Company issued approximately 0.3
million shares with a fair value of approximately $40,000 as
compensation for services performed.
Potentially dilutive securities
|
|
|
December 31,
|
|
|
March 31,
|
|
|
|
|
2017
|
|
|
2017
|
|
|
Potentially dilutive securities
|
|
|
|
|
|
|
|
Convertible
debentures (Note 6)
|
|
|
26,375,000
|
|
|
|
3,420,000
|
|
|
Convertible
debt related party (Note 7)
|
|
|
10,577,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8 – SUBSEQUENT EVENTS
On Jan 8, 2018 the Board agreed a convertible debt deal with Max
Zhu for $120,000 on terms similar to those for prior deals, except
for the addition of the floor price of $0.01. The note is due July
2018.
On Jan 12, 2018 the Company issued approximately 6 million shares
to Max Zhu following conversion of two earlier loans totalling
$120,000 principle plus approximately $15,000
interest.
On
February 15, 2018, the Company received $150,000 less fees and
costs representing the second tranche of funding under the
securities purchasing agreement dated November 20,
2017.
11
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