$CTCO Files Form 10-K

SPECIAL NOTE OF CAUTION REGARDING FORWARD-LOOKING STATEMENTS

The following discussion should be read in conjunction with our audited consolidated financial statements and the accompanying notes included elsewhere in this Annual Report. The following discussion contains forward-looking statements that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of various factors, including those discussed elsewhere in this Annual Report.

Overview

We were incorporated as Surf A Movie Solutions, Inc. in Nevada on December 18, 2007, to engage in the business of the development, sales and marketing of online video stores. We were not successful in our efforts and have ceased this line of business.

On October 10, 2013, we entered into a Joint Venture Agreement with Produced Water Solutions, Inc., a Colorado corporation, in the business of providing economically and environmentally sound solutions for the treatment and recycling of wastewater resulting principally from oil and gas exploration and production activities. As a result of our research of the business opportunities, on December 31, 2013 we determined not to move forward with this line of business.

In early March 2014 we determined to enter into the business of developing, manufacturing and marketing pharmaceutical level products containing phytocannabinnoids, an abundant and pharmaceutically active component of industrial hemp, for the prevention and alleviation of various conditions and diseases. In connection therewith, on March 17, 2014 we changed our name to Cannabis Therapy Corporation and on March 24, 2014 changed our trading symbol on OTC Markets to “CTCO”. On December 23, 2014, we changed our name to Peak Pharmaceuticals, Inc. Our common stock will temporarily remain listed for quotation on OTC Markets under the current symbol “CTCO” until a new symbol is assigned by Financial Industry Regulatory Authority, Inc. (FINRA). The Company will publicly announce the new trading symbol when assigned by FINRA and the effective date of the symbol change. All of our business operations are carried on through our wholly-owned subsidiary, Peak BioPharma Corp., a Colorado corporation.

On July 29, 2014, through our wholly-owned subsidiary, Peak BioPharma Corp., we entered into a License Agreement (the “License Agreement”) with Canna-Pet, LLC, (“Licensor”) a Washington limited liability corporation, which owns the brand name “Canna-Pet” and certain related intellectual property including, but not limited to, trademarks and copyrights, formulations, recipes, production processes and systems, websites, domain names, customer lists, supplier lists, trade secrets and know-how, and other related intellectual property (collectively, the “Licensed Intellectual Property”), used by Licensor in the conduct of its business related to the production and sale of medical products made from industrial hemp which are

intended exclusively for consumption by pets. Pursuant to the License Agreement, Licensor granted to us a perpetual, exclusive, world-wide license to use the Licensed Intellectual Property in conjunction with our business and the production and sale of medical products made from industrial hemp as well as the right to sublicense the Licensed Intellectual Property to third parties. The License Agreement gives us the right to produce and sell existing products utilizing the Licensed Intellectual Property and to develop new products, jointly with Licensor or otherwise, based upon the Licensed Intellectual Property. The License Agreement provides us with an immediate revenue source and access to Licensor’s customer base. During the term of the license, all intellectual property rights in and to the Licensed Intellectual Property remain the exclusive property of Licensor.

In consideration of the grant of the license, we have agreed to pay Licensor license fees in the form of royalty payments calculated on the basis of gross proceeds received by us from sales of products manufactured, marketed or sold by us utilizing the Licensed Intellectual Property or any subsequently developed intellectual property which is jointly owned by us and Licensor.

The royalty will be calculated and paid by us on a quarterly basis using calendar quarters ending March 31, June 30, September 30, and December 31 each year and will be equal to fifteen percent (15%) of the first $1,000,000 of gross proceeds received by us during the quarter and ten percent (10%) on gross proceeds in excess of $1,000,000 received by us during the quarter. On or before the date, which is 45 days following the end of each calendar quarter, we will calculate the amount of the royalty due to Licensor for that quarter and will make payment in full of such amount to Licensor. For purposes of calculating the amount of royalty due for each quarter, “gross proceeds” will not include amounts received by us as payments for any and all taxes, duties, governmental charges, sales expenses, freight or shipping charges, and the like.

Commencing in 2015, we have agreed to pay Licensor guaranteed minimum royalty amounts based upon the gross proceeds received by us from the sale of products (the “License Based Products”) utilizing the Licensed Intellectual Property or subsequently developed jointly owned intellectual property. The guaranteed minimum royalty payments are as follows:

                                                                   Minimum Annual
Time Period                                                          License Fee
January 1, 2015 through December 31, 2015                                    (1)
January 1, 2016 through December 31, 2016                                    (2)
January 1, 2017 through December 31, 2017                                    (2)
January 1, 2018 through December 31, 2018                                    (2)
January 1, 2019 through December 31, 2019                                    (2)
January 1, 2020 through December 31, 2020, and all succeeding
years                                                                        (3)

(2) Calculated based on gross proceeds equal to 115% of the amount of gross proceeds used to calculate the minimum royalty for the prior calendar year ended December 31.

(3) The minimum annual royalty payment for the calendar year beginning January 1, 2020 and for all subsequent calendar years will be equal to the minimum annual royalty payment calculated for the calendar year ended December 31, 2019.

All royalty payments made by us during any calendar year will be credited against the minimum annual royalty amounts due and payable by us for such year. In the event that the aggregate amount of royalties payable by us for any calendar year are not sufficient to satisfy our minimum annual royalty payment obligation for that year, we will be obligated to pay the unpaid balance of the minimum royalty amount to Licensor on or before February 28 of the following year.

Licensor has agreed to defend, at its own expense, any action against Licensor or us based on a claim that the Licensed Intellectual Property infringes a US or foreign patent, a US or foreign copyright or involves misappropriation of a trade secret.

Subsequent to September 30, 2014 we began selling Canna-Pet products.

Critical Accounting Policies and Estimates

Our financial statements and accompanying notes have been prepared in accordance with United States generally accepted accounting principles applied on a consistent basis. The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods.

We regularly evaluate the accounting policies and estimates that we use to prepare our financial statements. A complete summary of these policies is included in the notes to our financial statements. In general, management’s estimates are based on historical experience, on information from third party professionals, and on various other assumptions that are believed to be reasonable under the facts and circumstances. Actual results could differ from those estimates made by management.

Recent Pronouncements

From time to time, new accounting pronouncements are issued that we adopt as of the specified effective date. We believe that the impact of recently issued standards that are not yet effective may have an impact on our results of operations and financial position. ASU Update 2014-15 Presentation of Financial Statements-Going Concern (Sub Topic 205-40) issued August 27, 2014 by FASB defines management’s responsibility to evaluate whether there is substantial doubt about an organization’s ability to continue as a going concern. The additional disclosure requirement is effective after December 15, 2016 and will be evaluated as to impact and implemented accordingly.

Results of Operations

We generated no revenue during the years ended September 30, 2014 and 2013. For the year ended September 30, 2014 we incurred $412,114 for those costs associated with exploring the business opportunities of providing economically and environmentally sound solutions for the treatment and recycling of wastewater resulting principally from oil and gas exploration and production activities. The cost included project acquisition costs, travel costs, conferences, business studies, legal fees and web development. We never operated in this business and accordingly we did not treat this as a discontinued operation.

As stated above in March 2014 we entered into the business of developing, manufacturing and marketing pharmaceutical level products containing phytocannabinnoids, an abundant and pharmaceutically active

component of industrial hemp, for the prevention and alleviation of various conditions and diseases. In connection with that business and general and administrative expenses not directly related to the cost associated with our previous business, we incurred general and administrative expenses of $2,674,723. The following is a breakdown of those costs:

Stock based compensation                 $ 2,010,116
Investor and public relations                211,966
Legal and professional fees                  177,648
Personnel cost                                99,706
Research and development                      30,000
Amortization                                   4,861
Other general and administrative costs       140,426
                                         $ 2,674,723

Investor and public relations costs were paid primarily to three firms in order for the public and industry to be aware of our business direction. We do not anticipate that these cost will be as high in future periods.

Legal and professional fees were incurred in connection with the changes in our business and the costs of being a public company. We anticipate that legal and professional fees will remain at or near the current levels.

Personnel costs relate to 3 full time employees during the year. We currently have 2 full time employees and anticipate hiring at least 2 more employees in the near future.

We have incurred $30,000 in research and development expenses to cultivate and harvest a hemp crop, and expect to incur further R&D expenses in 2015, as our laboratory becomes fully operational and starts developing proprietary extraction processes using the hemp crop.

Other general and administrative costs include costs such as rent, travel, communications, and office expenses.

We had a loss from operations of $3,086,837 for the year ended September 30, 2014 as compared to $12,341 for the year ended Sept3ember 30, 2013.

For the year ended September 30, 2014 other income and expense included a $24,650 gain on extinguishment of debt. Interest expense for the year ended September 30, 2014 included debt discount of $649,780 and accrued interest of $46,848

For the year ended September 30, 2014 we had a net loss of $3,758,815 as compared to $12,341 for the year ended September 30, 2013.

Liquidity and Capital Resources

Our independent auditor has expressed doubt about our ability to continue as a going concern and believes that our ability is dependent on our ability to implement our business plan, raise capital and generate revenues.

We expect that we will need to raise funds in order to effectuate our business plan. We may seek additional investors to purchase our stock to provide us with working capital to fund our operations. There can be no assurance that additional capital will be available to us at all or on acceptable terms. We may seek to raise the required capital by other means. We may have to issue debt or equity or enter into a strategic arrangement with a third party. We currently have no agreements, arrangements or understandings with any person to obtain funds through bank loans, lines of credit or any other sources. Since we have no such arrangements or plans currently in effect, our inability to raise funds will have a severe negative impact on our ability to remain a viable company.

At September 30, 2014, cash was $451,431

.

Net cash used in operating activities was $933,475 for the year ended September 30, 2014, as compared to net cash used of $15,567 for the year ended September 30, 2013. The increase in net cash used in operations was primarily due to our change in operating plans and costs incurred operations in exploring the possible business of treatment and recycling of wastewater resulting principally from oil and gas exploration and production activities and the cost of entering a new business segment.

During the year ended September 30, 2014 we used $35,000 for the development of a website. There were no cash investing activities during the year ended September 30, 2013.

During the year ended September 30, 2014 we received $1,040,000 in proceeds from sales of our common stock and repurchased $125,000 of stock back from investors.
We had $500,000 in proceeds from sales of our convertible notes. During the year ended September 30, 2013 we received $15,510 in proceeds representing advances from a related party.

We believe that with the proceeds from the sale of common stock and the debt, we will have sufficient capital to begin the business of manufacturing and marketing pharmaceutical level products containing phytocannabinoids, an abundant and pharmaceutically active component of cannabis, for the treatment of various conditions and diseases, however we will need additional capital to bring the business to profitability.

There is no assurance that we will be able to obtain any financing or enter into any form of credit arrangement. Although we may be offered such financing, the terms may not be acceptable to us. If we are not able to secure financing or it is offered on unacceptable terms, then our business plan may have to be modified or curtailed or certain aspects terminated. There is no assurance that even with financing we will be able to achieve our goals.

Off Balance Sheet Arrangements

None.

Contractual Obligations

None.

ITEM 7A.