CTBO Cantabio Pharmaceuticals Inc (CE)

PART I - FINANCIAL INFORMATION

ITEM 1. CONDENSED CONSOLIDATED INTERIM FINANCIAL STATEMENTS (UNAUDITED)

CANTABIO PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

CANTABIO PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

CANTABIO PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

CANTABIO PHARMACEUTICALS, INC.

NOTE 2 - GOING CONCERN AND MANAGEMENT’S PLANS

As of December 31, 2018, 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 condensed consolidated financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.

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CANTABIO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 3 - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

Since the date of the Annual Report on Form 10-K for the year ended March 31, 2018, there have been no material changes to the Company’s significant accounting policies, except as disclosed in this note.

Reclassification

Certain amounts in prior periods have been reclassified to conform to the current period presentation. These reclassifications had no effect on previously reported net loss.

Subsequent Events

The Company evaluates events that have occurred after the balance sheet date but before the financial statements are issued. Based upon the evaluation, the Company did not identify any recognized or non-recognized subsequent events that would have required adjustment or disclosure in the consolidated financial statements, except as disclosed.

Earnings (Loss) Per Common Share

Basic earnings (loss) per share data for each period presented is computed using the weighted average number of shares of common stock outstanding during each such period. Diluted earnings (loss) per share data is computed using the weighted average number of common and dilutive common equivalent shares outstanding during each period.

The following securities were excluded from the calculation of diluted earnings per share because their inclusion would have been anti-dilutive:

Recent Accounting Standards

Fiscal 2019 Accounting Standards Adoptions

In August 2016, the Financial Accounting Standard Board (“FASB”) issued Accounting Standard Update (“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 became effective for the Company on April 1, 2018. The new standard does not have a material impact on the Company’s unaudited condensed consolidated financial statements and financial statement disclosures.

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CANTABIO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Recently Issued Accounting Standards

In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) (“ASU 2016-02”). 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 its unaudited condensed consolidated financial statements and financial statement disclosures.

In June 2018, the FASB issued ASU No. 2018-07, “Compensation - Stock Compensation (Topic 718)” (“ASU 2018-07”). ASU 2018-07 is intended to reduce cost and complexity and to improve financial reporting for nonemployee share-based payments.  Currently, the accounting requirements for nonemployee and employee share-based payment transactions are significantly different. This ASU expands the scope of Topic 718, Compensation-Stock Compensation (which currently only includes share-based payments to employees) to include share-based payments issued to nonemployees for goods or services. Consequently, the accounting for share-based payments to nonemployees and employees will be substantially aligned. This ASU supersedes Subtopic 505-50, Equity-Equity-Based Payments to Nonemployees. The amendments in this ASU are effective for public companies for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. For all other companies, the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning after December 15, 2020. Early adoption is permitted, but no earlier than a company's adoption date of Topic 606, Revenue from Contracts with Customers.  The Company is currently evaluating the impact of this new standard and does not expect it to have a material impact on its unaudited condensed consolidated financial statements and financial statement disclosures.

In March 2019, the FASB issued ASU 2019-01, “Leases (Topic 842): Codification Improvements” (“Topic 842”) (“ASU 2019-01”). These amendments align the guidance for fair value of the underlying asset by lessors that are not manufacturers or dealers in Topic 842 with that of existing guidance. As a result, the fair value of the underlying asset at lease commencement is its cost, reflecting any volume or trade discounts that may apply. However, if there has been a significant lapse of time between when the underlying asset is acquired and when the lease commences, the definition of fair value (in Topic 820, Fair Value Measurement) should be applied. (Issue 1). The ASU also requires lessors within the scope of Topic 942, Financial Services-Depository and Lending, to present all “principal payments received under leases” within investing activities. (Issue 2). Finally, the ASU exempts both lessees and lessors from having to provide certain interim disclosures in the fiscal year in which a company adopts the new leases standard. (Issue 3). The transition and effective date provisions apply to Issue 1 and Issue 2. They do not apply to Issue 3 because the amendments for that Issue are to the original transition requirements in Topic 842. The effective date of those amendments is for fiscal years beginning after December 15, 2019. The Company is currently evaluating ASU 2019-01 and its impact on its unaudited condensed consolidated financial statements.

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CANTABIO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

NOTE 4 - RELATED PARTY TRANSACTIONS

There have been no changes to the Company’s related party consulting arrangements as they have been disclosed in the Company’s most recently filed Form 10-K.

Costs incurred associated with related party transactions included in general and administrative in the unaudited condensed consolidated statements of operations are as follows:

Accounts payable and accrued expenses include amounts payable to related parties in the aggregate amount of $0.4 million and $0.6 million as of December 31, 2018 and March 31, 2018, respectively.

Additional related-party transactions are discussed in Note 6 - Convertible-Debt Related Party.

New issuance

On June 5, 2018, the Company entered into a securities purchase agreement (the “SPA”) with an accredited investor to place convertible debentures (as amended the “Debentures”) in the aggregate principal amount of up to $300,000 net of issuance costs of $35,000. The Debentures bear interest at the rate of 5% per annum with a maturity date of June 5, 2019, as may be extended at the option of the note holder.  In addition, the Company must pay to the holder an annual 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. The Debentures may be converted at any time on or prior to maturity at the lower of $0.05 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.

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CANTABIO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

Amendments

Concurrent with the issuance of the aforementioned convertible debentures, all outstanding debentures were amended to align with the new agreement. All the Debentures may be converted at any time on or prior to maturity at the lower of $0.05 (rather than $0.10 as previously) 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 Company accounted for the amendment as a debt modification which resulted in a $76,000 impact that was recorded in the change in fair value of embedded derivatives in the Company’s unaudited condensed statements of operations.

Conversions

During the nine months ended December 31, 2018, certain holders of secured convertible debentures of approximately $0.21 million in principal and accrued interest exercised their conversion option and converted into an aggregate of 10.5 million shares of common stock of the Company. The aggregate fair market value of the shares issued of $0.16 million was less than the net carrying value of the convertible notes by $0.05 million and a gain on extinguishment of debentures was recorded.

Secured Convertible Debenture Repayments

During the nine months ended December 31, 2018, the Company repaid secured convertible debentures in the aggregate amount of $0.93 million of principal and accrued interest. As a result of the repayments, the Company extinguished the associated bifurcated embedded derivatives and debt discount in the aggregate amount of $0.54 million and $0.08 million, respectively, and recorded a gain on extinguishment of debentures of $0.46 million. See below within Note 5 - Convertible Debentures as Amended - Embedded Derivatives for additional details regarding the embedded derivatives.

Monthly Payment Provision

During the nine months ended December 31, 2018, the Debentures had monthly payment provisions that were deemed to be contingent put options and were required to be separately measured at fair value, with subsequent changes in fair value recognized in the unaudited condensed consolidated statements of operations. The Company estimated the fair value of the monthly payment provisions at each reporting period commencing on the “Triggering Date”, as defined, through December 31, 2018, using a discount to the respective maximum redemption premium for any given payment, pursuant to the Debentures.

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CANTABIO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

In applying a probability analysis to the contingent put options, the Company used the following key inputs:

Embedded Conversion Features

The Company analyzes the Embedded Conversion Features (“ECFs”) of its convertible notes at issuance to determine whether the ECF should be bifurcated and accounted for as a derivative liability or if the ECF contains a beneficial conversion feature. During the nine month’s ended December 31, 2018, the Company determined that the ECFs of the Debentures were derivative liabilities and, as a result, were recorded as debt discount and are being amortized over the respective terms of the Debentures.

The analysis used in calculating the value of issued and outstanding ECFs during the three and nine months ended December 31, 2018 and 2017 was calculated using the following assumptions:

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CANTABIO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

New Issuances

During the nine months ended December 31, 2018, the Company issued one of our directors convertible debentures in the aggregate principal amount of $1.615 million. The Company received proceeds of $1.415 million during the nine months ended December 31, 2018, which bear interest at the rate of 24% per annum and provide for maturity dates between April 2019 and August 2019. The difference of $0.20 million was subsequently funded to the Company in January 2019. The proceeds of the financing shall be used for general corporate matters, repayment of certain outstanding debentures, research and development and for other expenses. In connection with the issuance of a certain convertible debenture, the Company granted the lender a board seat for at least one-year, effective October 2018. See Note 8 - Subsequent Events for details regarding a certain related party debenture in technical default.

The convertible debentures are convertible into shares of common stock of the Company at the option of the lender as follows: (i) at any time on or prior to maturity at 80% of the Company’s share price providing a $6 million or $9 million valuation, depending on the note, or (ii) at any time on or prior to maturity following an equity investment of over $1.5 million or $3.5 million, depending on the note, at a conversion price generally equal to 80% of the share price of such equity investment. The Company analyzes the ECFs of its convertible notes at issuance to determine whether the ECF should be bifurcated and accounted for as a derivative liability or if the ECF contains a beneficial conversion feature. See below within Note 6 - Convertible Debt - Related Party - Embedded Conversion Features for additional details regarding the embedded derivatives.

The notes have forced redemption provisions, whereby, the holder may demand redemption of the loan, either: (i) in cash at the then-outstanding principal and accrued interest balance or (ii) in common stock of the Company, pursuant to the conversion terms, provided the Company either receives an equity investment of over $1.5 million or  accumulated revenue in an amount equal to or greater than $3.5 million, depending on the note. The notes also provide for redemption provisions, whereby, the Company may elect to prepay the notes at any time, in cash, at a premium of up to 10% of the then outstanding principal and accrued interest, depending on the note.

Conversions

During the nine months ended December 31, 2018, a certain holder converted an aggregate of $0.22 million of principal and $0.05 million of the respective interest into approximately 25.3 million shares of common stock of the Company with an aggregate fair market value of $0.42 million. As a result of the conversion, the Company extinguished the associated bifurcated embedded derivatives and debt discount in the aggregate amount of $0.13 million and $0.03 million, respectively, and recorded a loss on extinguishment of related party debentures of $0.05 million. See below within Note 6 - Convertible Debt - Related Party - Embedded Conversion Features for additional details regarding the embedded derivatives.

Technical Default

A debenture held by one of our directors was due in April 2019 and is now in technical default. The obligation had not been called by such director.

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CANTABIO PHARMACEUTICALS, INC.

Notes to Condensed Consolidated Financial Statements

(Unaudited)

The Company analyzes the ECFs of its convertible related party notes at issuance to determine whether the ECF should be bifurcated and accounted for as a derivative liability or if the ECF contains a beneficial conversion feature. During the nine month’s ended December 31, 2018, the Company determined that the ECFs of convertible related party notes were derivative liabilities and, as a result, were recorded as debt discount and are being amortized over the respective terms of the Debentures.

The analysis used in calculating the value of issued and outstanding ECFs during the three and nine months ended December 31, 2018 and 2017 was calculated using the following assumptions:

NOTE 7 - CAPITAL STOCK

Issuance of shares for consulting services.

During the nine months ended December 31, 2018 the Company issued approximately 0.4 million shares of common stock of the Company with a fair value of approximately $10,000 as compensation for services performed and issued approximately 8.6 million shares of common stock of the Company to directors of the Company in lieu of $70,000 of unpaid fees.

See Note 5 - Secured Convertible Debentures and Note 6 - Convertible Debt - Related Party for details regarding the issuance of common stock of the Company in connection with conversions of certain debentures.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

ITEM 4. CONTROLS AND PROCEDURES