The following discussion and analysis should be read in conjunction with our
unaudited condensed consolidated financial statements and notes thereto included
in this Quarterly Report, as well as the audited consolidated financial
statements and the notes thereto, and the discussion under "Management's
Discussion and Analysis of Financial Condition and Results of Operations" and
"Business" included in our Annual Report on Form 10-K for the fiscal year ended
December 31, 2021, as filed with the SEC on April 1, 2022 (our "2021 Annual
Report").
Overview
CURE Pharmaceutical Holding Corp. ("CURE"), its wholly-owned subsidiaries
including The Sera Labs, Inc. ("Sera Labs") (collectively the "Company," "we,"
"our," "us," or "CURE") is a broad platform technology company focusing on the
development and manufacturing of nutraceutical formulation and delivery
technologies in novel dosage forms to improve safety, efficacy and enhance
wellness. Our mission is to improve lives by redefining how active ingredients
are delivered and experienced. Our primary business model is to develop wellness
products using our proprietary technology and may grant product rights to third
parties responsible for marketing, sales and distribution, while retaining
exclusive rights to produce and market, sell and distribute branded health,
wellness, and beauty products through Sera Labs.
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 and beauty
products can be cosmetics, over-the-counter or dietary supplements which do not
require FDA approval but do require following all good manufacturing practices
(GMPs). Thus, they are less costly and faster to launch in the marketplace than
pharmaceutical products.
Recent Developments
On July 22, 2022, we completed the sale of certain assets comprising our
pharmaceutical business segment of the Company pursuant to that certain Asset
Purchase Agreement (the "APA") with TF Tech Ventures, Inc. (the "Buyer"), under
which the Buyer purchased certain of our assets (the "Asset Sale"), including
certain pharmaceutical patents, trademarks and related machinery and equipment.
We retained 15 other patents not included in the Asset Sale, which we expect to
monetize through product development, licensing arrangements and/or the sale of
such patents. In connection with the Asset Sale, the Buyer assumed the Oxnard,
CA facility lease and hired the related employees based at the facility.
Key Factors Affecting our Performance
As a result of a number of factors, our historical results of operations may not
be comparable to our results of operations in future periods, and our results of
operations may not be directly comparable from period to period. Set forth below
is a brief discussion of the key factors impacting our results of operations.
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Known Trends and Uncertainties
Inflation
The U.S. economy is experiencing the highest rates of inflation since the 1980s.
Historically, we have not experienced significant inflation risk in our
business. However, our ability to raise our product prices depends on market
conditions and there may be periods during which we are unable to fully recover
increases in our costs. In addition, the global economy suffers from slowing
growth and rising interest rates, and many economists believe that a global
recession may begin in the near future. If the global economy slows, our
business would likely be adversely affected.
Geopolitical Conditions
Recently, Russia initiated significant military action against Ukraine. In
response, the U.S. and certain other countries imposed significant sanctions and
export controls against Russia, Belarus and certain individuals and entities
connected to Russian or Belarusian political, business, and financial
organizations, and the U.S. and certain other countries could impose further
sanctions, trade restrictions, and other retaliatory actions should the conflict
continue or worsen. It is not possible to predict the broader consequences of
the conflict, including related geopolitical tensions, and the measures and
retaliatory actions taken by the U.S. and other countries in respect thereof as
well as any counter measures or retaliatory actions by Russia or Belarus in
response, including, for example, potential cyberattacks, is likely to cause
regional instability, geopolitical shifts, and could materially adversely affect
global trade, currency exchange rates, regional economies and the global
economy. The situation remains uncertain, and while it is difficult to predict
the impact of any of the foregoing, the conflict and actions taken in response
to the conflict could increase our costs, reduce our sales and earnings, impair
our ability to raise additional capital when needed on acceptable terms, if at
all, or otherwise adversely affect our business, financial condition, and
results of operations.
Effects of the COVID-19 Pandemic
The current outbreak of COVID-19 has globally resulted in the loss of life,
business closures, restrictions on travel, and widespread cancellation of social
gatherings. There continues to be considerable uncertainty around the duration
of the pandemic and its resultant economic effects. The extent to which the
COVID-19 pandemic impacts our business will depend on future developments, which
are highly uncertain and cannot be predicted at this time, including:
· new information which may emerge concerning the severity of the disease;
· the duration and spread of the outbreak;
· the severity of travel restrictions imposed by geographic areas in which
we operate, mandatory or voluntary business closures;
· regulatory actions taken in response to the pandemic, which may impact
merchant operations, consumer and merchant pricing, and our product
offerings;
· other business disruptions that affect our workforce;
· the impact on capital and financial markets; and
· actions taken throughout the world, including in markets in which we
operate, to contain the COVID-19 outbreak or treat its impact.
In addition, the current outbreak of COVID-19 has resulted in a widespread
global health crisis and adversely affected global economies and financial
markets, and similar public health threats could do so in the future.
Any potential impact to our results will depend on to a large extent, future
developments and new information that may emerge regarding the duration and
severity of the COVID-19 pandemic and the actions taken by government
authorities and other entities to contain the COVID-19 pandemic or treat its
impact, almost all of which are beyond our control. If the disruptions posed by
the COVID-19 pandemic or other matters of global concern continue for an
extensive period of time, the operations of our business may be materially
adversely affected.
To the extent the COVID-19 pandemic or a similar public health threat has an
impact on our business, it is likely to also have the effect of heightening many
of the other risks described in the "Risk Factors" section in Part I, Item 1A of
our Annual Report on Form 10-K for the fiscal year ended December 31, 2021 filed
with the SEC on April 1, 2022.
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Supply Chain
Global business interruptions may adversely impact our third-party relationships
whom we rely upon in our business as well as manufacturers, suppliers, and
makers of raw materials. If any such parties are adversely impacted by supply
chain restrictions, or if they cannot obtain the necessary supplies, or if such
third parties need to prioritize other products or customers over us, we may
experience delays or disruptions in our supply chain, which could have a
material and adverse impact on our business. Third party manufacturers may also
need to implement measures and changes, or deviate from typical requirements
because of the COVID-19 pandemic that may otherwise adversely impact our supply
chain or the quality of the resulting products or supplies.
Seasonality
Our business could be affected by seasonal variations. However, taken as a
whole, seasonality does not have a material impact on our financial results.
RESULTS OF OPERATIONS
The following discussion for our results of operations does not include the loss
from our discontinued operations which was $0.7 million and $7.0 million for the
three and nine months ended September 30, 2022, respectively. The significant
component of the losses from discontinued operations was the impairment of
goodwill amounting to $2.7 million for the three months ended March 31, 2022 and
$2.0 million for the three months ended June 30, 2022 for a total impairment
loss of $4.7 million for the nine months ended September 30, 2022.
Revenue for the Three and Nine Months Ended September 30, 2022 and 2021
Revenue for the three and nine months ended September 30, 2022 was $1.8 million
and $4.0 million, respectively, as compared to $1.4 million and $4.7 million,
respectively, for the three and nine months ended September 30, 2021. The
decrease in revenue was mainly due to financial constraints to market and
promote Sera Labs products resulting in a decrease in unit sales in our DTC
channel of distribution when compared to the previous period and the
discontinuation of the sale of personal protective equipment (PPE) in the second
quarter of 2021 ($0.4 million). However, this decrease was offset in part by an
increase in unit sales in our wholesale channel of distribution related to sales
of our Seratopical Revolution™ products in one of the largest retail stores in
the United States.
Cost of Goods Sold
Cost of goods sold was $0.4 million and $0.8 million, respectively, in the three
and nine months ended September 30, 2022 compared to $0.4 million and $1.5
million, respectively, in the three and nine months ended September 30, 2021.
Cost of goods sold decreased by approximately $0.1 million and $0.6 million
during the three and nine months ended September 30, 2022 compared to the three
and nine months ended September 30, 2021. The decrease was primarily due to the
decrease in DTC and PPE sales offset in part by higher gross margin due to lower
product costs during the three and nine months ended September 30, 2022 compared
to the same periods in 2021.
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Research and Development Expenses
For the three and nine months ended September 30, 2022 and 2021, research and
development expenses were included in the loss from disposal group.
Selling, General and Administrative Expenses
Our expenses for the three and nine months ended September 30, 2022 are
summarized as follows in comparison to our expenses for the three and nine
months ended September 30, 2021 (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30, September 30, September 30,
2022 2021 2022 2021
Consulting $ 123 $ 220 $ 366 $ 496
Salaries and
wages 384 494 1,044 1,442
Selling,
general and
administrative 2,399 2,719 5,718 9,487
Professional
services and
investor
relations 200 130 1,001 643
Non-cash
compensation 506 653 1,352 2,114
Total selling,
general and
administrative
expenses $ 3,612 $ 4,216 $ 9,481 $ 14,182
Consulting
Consulting expense decreased by $0.10 million and decreased by $0.13 million for
the three and nine months ended September 30, 2022, respectively, as compared to
the three and nine months ended September 30, 2021, respectively. The Company
has reduced the number of consultants used during the nine months period ended
September 30, 2022 compared to the same period in 2021, resulting in a decrease
in consulting expenses.
Salaries and Wages
Salaries and wages expense decreased by approximately $0.1 million and $0.4
million during the three and nine months ended September 30, 2022, respectively,
as compared to the three and nine months ended September 30, 2021, respectively.
This was due to the decrease in the number of employees during the 2022 period
when compared to the same period in 2021.
Selling, General and Administrative
Selling, general and administrative expense decreased by approximately $0.3
million and $3.8 million for the three and nine months ended September 30, 2022,
respectively, as compared to the three and nine months ended September 30, 2021,
respectively. Sera Labs marketing expenses and other selling expenses for the
nine months ended September 30, 2022 decreased by approximately $2.4 million, as
compared to the same period for 2021, due lack of available cash flow. Also, the
selling, general and administrative expense for the Cure operation decreased by
approximately $1.4 million due to cost elimination after the sale of the
pharmaceutical operations the Company during the 2022 periods when compared to
the same periods in 2021 as well as a decrease in other general administrative
expenses in the 2022 periods compared to the 2021 periods.
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Professional Services and Investor Relations
Professional services and investor relations expenses increased by approximately
$0.07 million and increased by approximately $0.4 million for the three and nine
months ended September 30, 2022, respectively, as compared to the three and nine
months ended September 30, 2021, respectively. This was primarily due to the
Company looking to a new investor relations firm to help increase awareness of
our Company with potential new investor base. As a result, we did not utilize
the same investor relations firm during the 2022 period as we did in the 2021
period.
Non-cash Compensation
Non-cash compensation expense decreased by approximately $0.1 million and $0.8
million for the three and nine months ended September 30, 2022, respectively, as
compared to the three and nine months ended September 30, 2021, respectively.
This was primarily due to the Company recording the fair value of an increased
number of vested stock options, restricted stock awards and restricted stock
units issued from our 2017 Equity Plan during the three and nine months ended
September 30, 2021 and did not issue nearly as many stock options and restricted
stock during the same periods in 2022.
Change in Fair Value Contingent Stock Consideration
The change in fair value contingent stock consideration decreased by
approximately $0.3 million and decreased by approximately $0.4 million for the
three and nine months ended September 30, 2022, respectively, as compared the
three and nine months ended September 30, 2021. The change in fair value of
contingent stock consideration during the three and nine months ended September
30, 2022 was based on the extension of the Sera Labs earnout period and a change
in the probability percentages of achieving the milestones which was different
compared to the probability percentages estimates used in the same period in
2021. In addition, the decrease in the stock price resulted in a decrease in the
fair value of the contingent stock consideration.
Impairment of Intangibles
Impairment losses amounted to $0 and $4.6 million for the three and nine months
ended September 30, 2022, respectively, as compared to no impairment losses in
the three and nine months ended September 30, 2021. The Company's management
determined that the customer relationships have no future value and were written
down to $0 as of June 30, 2022.
Other Income/ (Expense)
For the Three Months Ended For the Nine months Ended
September 30, September 30, September 30, September 30,
2022 2021 2022 2021
(in thousands)
Interest
income $ 14 $ 2 $ 17 $ 4
Gain from
settlement - - 82 2,434
Gain on
extinguishment
of debt - 7 40 741
Loss on sale
of property,
plant and
equipment - - - (41 )
Change in fair
value of
convertible
promissory
notes (411 ) 772 (718 ) 1,112
Interest
expense (6 ) (178 ) (393 ) (377 )
Other income - - 26 -
Total other
income
(expense), net $ (403 ) $ 603 $ (946 ) $ 3,873Other income/(expense) decreased by approximately $1.0 million and $4.8 million
during the three and nine months ended September 30, 2022, respectively, as
compared to the three and nine months ended September 30, 2021, respectively.
This was primarily due to (i) a decrease in the change in fair value of
convertible promissory notes of $1.8 million during the nine months ended
September 30, 2022, (ii) recording of settlement income of $0.08 million during
the nine months ended September 30, 2022 compared to $2.4 million during the
nine months ended September 30, 2021 and (iii) a decrease in the gain on
extinguishment of debt of the PPP loan that was forgiven during the nine months
ended September 30, 2021.
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LIQUIDITY AND CAPITAL RESOURCES
We had net cash used by operating activities for the period ended September 30,
2022 of $8.5 million and the cash balance was $4.4 million as of September 30,
2022 and stockholders' deficit of $0.2 million. We believe our current cash
balances coupled with anticipated cash flow from operating activities will not
be not sufficient to meet our working capital requirements for at least the next
twelve months. We cannot give assurance that we can increase our cash balances
or limit our cash consumption and thus maintain sufficient cash balances for our
planned operations or future acquisitions. Future business demands may lead to
cash utilization at levels greater than recently experienced. We may need to
raise additional capital in the future. However, we cannot assure that we will
be able to raise additional capital on acceptable terms, or at all. To date, we
have funded our operations through cash generated from our product sales,
issuance of common stock and promissory notes.
As of September 30, 2022 and December 31, 2021
Working Capital Deficit (in thousands)
September 30, December 31,
2022 2021
Current assets $ 8,251 $ 1,781
Current liabilities (15,056 ) (24,261 )
Working capital (deficiency) $ (6,805 ) $ (22,480 )
Working capital deficit as of September 30, 2022 was approximately $6.8 million,
as compared to a working capital deficit of approximately $22.5 million as of
December 31, 2021. As of September 30, 2022, current assets were approximately
$8.3 million, comprised primarily of (i) cash of approximately $4.4 million,
(ii) accounts receivable, net of approximately $0.5 million, (iii) inventory,
net of approximately $0.6 million, (iv) prepaid expenses and other assets of
approximately $0.5 million and (v) current notes receivable of $2.2 million. As
of December 31, 2021, current assets were approximately $1.8 million, comprised
primarily of (i) cash of approximately $0.02 million, (ii) accounts receivable,
net of approximately $0.4 million, (iii) inventory, net of approximately $0.6
million, (iv) prepaid expenses and other assets of approximately $0.4 million
and (v) current assets held for sale of approximately $0.3 million.
As of September 30, 2022, current liabilities were approximately $15.1 million,
comprised primarily of (i) approximately $10.5 million in notes payable,
convertible notes payable and fair value of convertible promissory notes (ii) $0
in related party payable, (iii) approximately $1.6 million in accounts payable;
(iv) approximately $1.4 million in accrued expenses, (v) approximately $0.1
million of operating lease payables, (vi) contingent stock consideration of
approximately $0.9 million and (vii) contract liabilities of approximately $0.4
million. Comparatively, as of December 31, 2021, current liabilities were
approximately $24.3 million, comprised primarily of (i) approximately $15.6
million in loans, notes, related party payables, convertible notes payable and
fair value of convertible promissory notes, (ii) approximately $2.8 million in
accounts payable; (iii) approximately $0.3 million in contract liabilities, (iv)
approximately $3.5 million in accrued expenses, (v) approximately $0.1 million
of operating lease payables, (vi) contingent share considerations of
approximately $1.4 million and (vii) current liabilities held for sale of
approximately $0.5 million.
Net Cash (in thousands)
For the Nine months Ended
September 30, September 30,
2022 2021
Net cash used in operating activities $ (8,487 ) $ (2,657 )
Net cash provided by (used in) investing
activities 13,891 (99 )
Net cash provided by (used in) financing
activities (977 ) 1,195
Net increase (decrease) in cash $ 4,427 $ (1,561 )
Net cash used in Operating Activities
Net cash used in operating activities was approximately $8.5 million during the
nine months ended September 30, 2022. This was primarily due to the net loss
from continuing operations of approximately $11.4 million, the change in fair
value of contingent stock consideration approximately of $0.5 million and the
net loss from disposal group of approximately $7.0 million, offset in part by
(i) the fair value of vested stock options and restricted stock of approximately
$1.4 million, (ii) the change in fair value of convertible promissory notes of
approximately $0.7 million, (iii) depreciation and amortization of approximately
$1.4 million, (iv)the increase in accrued assets and liabilities held for sale
of approximately $4.3 million, and (v) the impairment of intangibles other than
goodwill of $4.6 million .
Comparatively, net cash used in operating activities was approximately $2.7
million during the nine months ended September 30, 2021. This was primarily due
to the net loss from continuing operations of approximately $6.2 million and the
loss from disposal group of approximately $2.7 million, which included the
change in fair value of convertible promissory notes of $1.1 million and the
gain from extinguishment of debt of $0.7 million, offset in part by (i)
stock-based compensation of approximately $0.7 million, (ii) the fair value of
vested stock options and restricted stock of approximately $2.5 million, (iii)
depreciation and amortization of approximately $1.7 million, and (iv) the change
in fair value of contingent stock consideration.
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Net cash provided by (used in) Investing Activities
Net cash provided by investing activities of approximately $13.9 million during
the nine months ended September 30, 2022 was due to proceeds received from the
sale of certain pharmaceutical assets. Comparatively, net cash used in investing
activities of approximately $0.1 million during the nine months ended September
30, 2021 was due to the collection of a note receivable of approximately $0.2
million offset by (i) the purchase of a note receivable of approximately $0.2
million and (ii) the purchase of property and equipment for approximately $0.1
million.
Net cash provided by (used in) Financing Activities
Net cash used in financing activities of approximately $1.0 million during the
nine months ended September 30, 2022 was primarily due to repayment of notes
payable of $3.1 million and $2.2 million for related party payable offset in
part by the proceeds of debt in the amount of $4.6 million. Correspondingly, net
cash provided by financing activities of approximately $1.2 million during the
nine months ended September 30, 2021 was primarily due to (i) proceeds from
notes payable of $1.0 million and (ii) proceeds from related party payables in
the amount of $0.4 million offset in part by the repayment of loans payable of
$0.2 million.
The total consideration received in connection with the Asset Sale was $20.0
million, which consisted of (i) the cancellation of indebtedness owed by the
Company to the Buyer in the amount of $4.15 million, (ii) a $2.0 million payable
in the form of a secured promissory note due July 22, 2023 which bears interest
at 2.63% per annum, and (iii) the remainder of $13.85 million in cash reduced by
approximately $41,000 for certain liabilities that the Buyer assumed at the
closing. A portion of the net proceeds from the sale was used to pay down debt
and related accrued interest ($5.6 million) and the balance is available for
working capital and other general corporate purposes including the development
and procurement of product and for marketing and promoting our products and
brands in furtherance of our strategic plan. The Company retained 15 patents not
included in the Asset Sale, which the Company expects to monetize through
product development, licensing arrangements and/or the sale of such patents. In
connection with the Asset Sale, the Buyer assumed the Oxnard, CA facility lease
and hired the related employees based at the facility reducing the Company's
overhead and operating expenses as of the closing.
In the event that such working capital is insufficient, we may need to raise
additional operating capital in the fourth quarter of 2022 and the calendar year
2023 in order to maintain our operations and to realize our strategic 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, revenue and expenses, and related disclosures of contingent assets
and liabilities in the financial statements and accompanying notes. The SEC has
defined a company's critical accounting policies as the ones that are most
important to the portrayal of the company's financial condition and results of
operations, and which require the company to make its most difficult and
subjective judgments, often as a result of the need to make estimates of matters
that are inherently uncertain. We also have other key accounting policies, which
involve the use of estimates, judgments, and assumptions that are significant to
understanding our results. Although we believe that our estimates, assumptions,
and judgments are reasonable, they are based upon information presently
available. Actual results may differ significantly from these estimates under
different assumptions, judgments, or condition.
Our 2021 Annual Report contains additional information regarding the critical
accounting policies that affect our more significant estimates and judgments
used in the preparation of our condensed consolidated financial statements
included in this Quarterly Report. There have been no material changes to these
policies reported in our 2021 Annual Report. Please refer to "Note 2 - Summary
of Significant Accounting Policies" of the notes to condensed consolidated
financial statements included in this Quarterly Report for information regarding
recently adopted accounting standards.
OFF-BALANCE SHEET ARRANGEMENTS
As of the date of this Quarterly Report, 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, revenue or
expenses, results of operations, liquidity, capital expenditures or capital
resources that are material to investors.
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