UNITED STATES 

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-K

 

x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the fiscal year ended June 30, 2015

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from __________ to _________

 

CEREBAIN BIOTECH CORP.

(Exact name of registrant as specified in its charter)

 

Nevada		000-54381		26-1974399
(State or other jurisdiction of incorporation or organization)		(Commission File Number)		(I.R.S. Employer Identification No.)

 

13727 Noel Road, Tower II, Suite 200 Dallas, TX 75240
(Address of principal executive offices)

949-415-7478
(Registrant’s telephone number, including area code)

_________________________________________________________
(Former name, address, if changed since last report)

_________________________________________________________
(Former fiscal year, if changed since last report)

 

Securities registered pursuant to Section 12(b) of the Act:

None

 

Securities registered pursuant to Section 12(g) of the Act:

Common Stock, $0.001 par value

 

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x

 

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x

 

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 x 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 x No ¨

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. ¨ 

 

   

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer	¨	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	x
(Do not check if a smaller reporting company)

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes ¨ No x

 

State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.

 

The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 31, 2014 is approximately $3,330,000.

 

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS

DURING THE PRECEDING FIVE YEARS

 

Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨

 

APPLICABLE ONLY TO CORPORATE ISSUERS

 

Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the latest practicable date.

 

Class of Securities	Shares Outstanding at September 17, 2015
Common Stock, $0.001 par value	4,835,347

 

DOCUMENTS INCORPORATED BY REFERENCE: NONE

 

 

 

CEREBAIN BIOTECH CORP. 

(FORMERLY DISCOUNT DENTAL MATERIALS, INC.) 

2015 ANNUAL REPORT ON FORM 10-K

 

TABLE OF CONTENTS

 

PART I
Item 1.		Business			4
Item 1A.		Risk Factors			11
Item 1B.		Unresolved Staff Comments			20
Item 2.		Properties			20
Item 3.		Legal Proceedings			20
Item 4.		Mine Safety Disclosures			20
PART II
Item 5.		Market for the Registrant’s Common Stock, Related Stockholder Matters and Issuer Repurchases of Equity Securities			21
Item 6.		Selected Financial Data			22
Item 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations			22
Item 7A.		Quantitative and Qualitative Disclosures About Market Risk			28
Item 8.		Financial Statements and Supplementary Data			28
Item 9.		Changes in and Disagreements with Accountants on Accounting and Financial Disclosure			28
Item 9A		Controls and Procedures			29
Item 9B		Other Information			29
PART III
Item 10.		Directors, Executive Officers and Corporate Governance			30
Item 11.		Executive Compensation			33
Item 12.		Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			35
Item 13.		Certain Relationships and Related Transactions, and Director Independence			37
Item 14.		Principal Accountant Fees and Services			37
PART IV
Item 15.		Exhibits, Financial Statement Schedules			38

 

2

 

SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS

 

This report contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Description of Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “seeks,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” below. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Such statements may include, but are not limited to, information related to: anticipated operating results; licensing arrangements; relationships with our customers; consumer demand; financial resources and condition; changes in revenues; changes in profitability; changes in accounting treatment; cost of sales; selling, general and administrative expenses; interest expense; the ability to secure materials and subcontractors; the ability to produce the liquidity or enter into agreements to acquire the capital necessary to continue our operations and take advantage of opportunities; legal proceedings and claims.

 

Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. You should read this report and the documents that we reference and filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.

 

USE OF CERTAIN DEFINED TERMS

 

Except as otherwise indicated by the context, references in this report to “we,” “us,” “our,” “our Company,” or “the Company” are to the combined business of Cerebain Biotech Corp. (formerly Discount Dental Materials, Inc.) and its wholly-owned subsidiary, Cerebain Operating, Inc. (formerly Cerebain Biotech Corp.).

 

As noted below, the financial disclosure in this Annual Report Form 10-K relates to the operations of Cerebain Operating, Inc., a company that is now our wholly-owned subsidiary as a result of the transactions described herein.

 

In addition, unless the context otherwise requires and for the purposes of this report only:

 

	·	“Cerebain Biotech” or “CBBT” refers to Cerebain Biotech Corp., a Nevada corporation (formerly Discount Dental Materials, Inc.);
	·	“Commission” refers to the Securities and Exchange Commission;
	·	“Exchange Act” refers to the Securities Exchange Act of 1934, as amended;
	·	“Cerebain” refers to Cerebain Operating, Inc., a Nevada corporation (formerly Cerebain Biotech Corp.); and
	·	“Securities Act” refers to the Securities Act of 1933, as amended.

 

3

 

PART I

 

Item 1. Business

 

Background

 

Business Overview

 

We were incorporated on December 18, 2007, in the State of Nevada. We are a smaller reporting biomedical company and through our wholly owned subsidiary, Cerebain Operating, Inc. (“Cerebain”), our business involves the discovery of products for the treatment of Alzheimer’s disease utilizing Omentum. Under our current plan, our products will include both a medical device solution as well as a synthetic drug solution.

 

On January 17, 2012, the holders of a majority of our common stock entered into a Stock Purchase Agreement with Cerebain Operating, Inc., a Nevada corporation, under which Cerebain Operating, Inc. agreed to purchase an aggregate of 380,000 shares of our common stock from those shareholders in exchange for $296,000. These shares represented approximately 90% of our outstanding common stock at the time of the transaction (after taking into account the cancellation of 600,000 shares of our common stock by R. Douglas Barton under the Spinoff Agreement as discussed herein). The transaction closed February 9, 2012. Concurrently with the close of the transaction, we closed a transaction with the shareholders of Cerebain whereby we issued 455,680 shares of our common stock in exchange for 22,784,000 shares of Cerebain’s common stock, which represented 100% of Cerebain’s outstanding common stock. In addition, concurrent with these two transactions, we closed a transaction with our primary shareholder, Mr. R. Douglas Barton, whereby we sold all of our then-existing assets to Mr. Barton in exchange for Mr. Barton assuming all of our then-existing liabilities, as well as the return of 600,000 shares of our common stock. The shares were returned by Mr. Barton and were cancelled on our books on February 9, 2012.

 

As a result of these transactions: (i) Cerebain Operating, Inc. became our wholly-owned subsidiary, (ii) all of our officers and one of our directors resigned immediately, and we appointed one new director and retained new executive officers; and (iii) we changed our business focus from one selling disposable dental supply products at discount prices over the Internet to one focusing on researching, developing, and testing medicinal treatments utilizing Omentum under a patent Cerebain licenses from Dr. Surinder Singh Saini, MD.

 

On April 15, 2014, we completed the solicitation of votes of stockholders. A majority of our shareholders voted to amend our Articles of Incorporation to change our name to Cerebain Biotech Corp. As a result of this action, we changed the name of our wholly-owned subsidiary to Cerebain Operating Inc. In addition, a majority of our shareholders voted to amend our Articles of Incorporation to effectuate a reverse split of our common stock at a ratio of 1-for-10 and approved the 2014 Cerebain Biotech Corp. Omnibus Stock Grant and Option Plan. All share and per share information was retroactively adjusted at that time to reflect the reverse split of our common stock.

 

Our only operations are conducted through our wholly-owned subsidiary, Cerebain Operating, Inc. The term “we” as used throughout this document refers to Cerebain Biotech Corp. and our wholly-owned subsidiary, Cerebain Operating, Inc

 

In accordance with our current business plan the testing, research and development of both a medical device solution as well as a synthetic drug solution are underway, and we have contracted with certain third party companies to research, develop, and test certain products that could be used to treat dementia utilizing Omentum. We have also contracted with various individuals to facilitate the introduction of the company to medical device testing organizations in overseas locations including Poland, China and Uzbekistan for the purpose of testing our medicinal treatments utilizing Omentum. Our management anticipates that we may form subsidiaries and affiliates to develop different drugs based on the intellectual property. Although we have contracted with a firm to research, develop and test products that could be used to treat dementia utilizing Omentum, in order to fully execute on that agreement, as well as hire one or more firms to research, develop and test medicinal treatments utilizing Omentum, we will need to raise additional funds. There can be no assurance that further research and development will validate and support the results of our preliminary research and studies. Further, there can be no assurance that the necessary regulatory approvals will be obtained or that we will be able to develop commercially viable products on the basis of our technologies.

 

4

 

General

 

Description of Patent License Agreement

 

On June 10, 2010, we entered into a Patent License Agreement with Dr. Surinder Singh Saini, MD, under which we acquired the exclusive rights to certain intellectual property related to using Omentum for treating dementia conditions. Under the agreement we paid rights fees of $50,000 to Dr. Saini, and we issued Dr. Saini 825,000 shares of our common stock, valued at $6,600 (based on the fair market value on the date of grant) restricted in accordance with Rule 144. As a result Dr. Saini became our largest shareholder. In addition, Dr. Saini has the option to participate in the sale of equity by us in the future, up to ten percent (10%) of the money raised, in exchange for the applicable number of his shares.

 

In addition, the Patent License agreement provides for a royalty payment of six (6) percent of the value of the net sales, as defined, generated from the sale of licensed products. The agreement also provides for yearly minimum royalty payments of $50,000 for each of the fourth, fifth, and sixth anniversary of the date of the agreement, and a yearly minimum royalty payment of $100,000 for each year thereafter during the term of the agreement. The Company has recognized costs associated with the patent rights for $50,000 in accounts payable for the patent rights and is currently in arrears and in discussions to renegotiate the terms of the agreement. The term of the agreement shall continue until the patent in the intellectual property expires, unless terminated sooner under the provisions of the agreement, as defined.

 

The patent will have an estimated useful life of 20 years based on the term of the patent. Amortization of the patent will begin when the patent is issued by the United States Patent and Trademark Office and put in use.

 

Rights fees of $50,000 were incurred during the years ended June 30, 2015 and 2014, respectively, and legal fees totaling approximately $14,000 and $6,000 was incurred during each of the years ended June 30, 2015 and 2014, respectively.

 

The accrued payable of $100,000 pertaining to the rights fees at June 30, 2015 and 2014 is included in related party payables.

 

Overview of Dementia and Alzheimer’s Disease

 

Dementia (taken from Latin, originally meaning "madness") is generally referred to as a serious loss and/or decline of human brain function. The areas of brain function affected by dementia include memory, attention, language, problem solving and emotion. Dementia is generally considered as a progressive and non-reversible condition. Alzheimer’s disease is the most common form of dementia. Alzheimer’s disease is an age-related, non-reversible brain disorder that develops over a period of years. Initially, people experience memory loss and confusion, which may be mistaken for the kinds of memory changes that are sometimes associated with normal aging. However, the symptoms of Alzheimer’s disease gradually lead to behavior and personality changes, a decline in cognitive abilities such as decision making and language skills, and problems recognizing family and friends. Alzheimer’s disease ultimately leads to a severe loss of mental functions. These losses are related to the worsening breakdown of the connections between certain neurons in the brain responsible for memory and learning. Neurons can’t survive when they lose their connections to other neurons. As neurons die throughout the brain, the affected regions begin to atrophy, or shrink. By the final stage of Alzheimer’s disease, damage is widespread and brain tissue has shrunk significantly.

 

5

 

Causes

 

Many scientists generally accept that one or more of the following mechanisms are responsible for dementia:

 

	1)	accumulation of toxic materials in brain cells, which leads to death of the cells;
	2)	reduction of certain biological factors (e.g. Acetylcholine or ACh) in a brain; and
	3)	loss or reduction of blood flow in the brain.

 

Neurodegenerative diseases, such as Alzheimer's disease and Parkinson's disease, are the most common causes of dementia. Dementia can also be due to a stroke. In most circumstances, the changes in the brain that are causing dementia cannot be controlled or reversed.

 

Statistics

 

§ Affected population worldwide

 

According to the Alzheimer’s Association 2015 Alzheimer’s Disease Facts and Figures, an estimated 5.3 million Americans have Alzheimer's disease in 2015, including approximately 200,000 individuals younger than age 65 who have younger-onset Alzheimer's. Almost two-thirds, 3.2 million, of American seniors living with Alzheimer's are women. Within the next 10 years, 19 states will see a 40 percent or greater growth in the number of people with Alzheimer’s. Someone in the United States develops Alzheimer’s every 67 seconds. In 2050, someone in the United States will develop the disease every 33 seconds.

 

In addition, the Alzheimer’s Association stated Alzheimer’s disease is the 6^th leading cause of death in the United States and the 5^th leading cause of death for those aged 65 and older. In 2013, over 84,000 Americans officially died from Alzheimer’s; in 2015, an estimated 700,000 people will die with Alzheimer’s, meaning they will die after having developed the disease. Deaths from Alzheimer have increased 71 percent from 2000 to 2013, while deaths from other major diseases (including heart disease, stroke, breast and prostate cancer, and HIVAIDS) decreased. Alzheimer’s is the only cause of death among the top 10 in America that cannot be prevented, cured, or even slowed.

 

According to the 2015 World Alzheimer Report, in 2015 about 46.8 million people had dementia worldwide. The report stated that this figure is likely to nearly double every 20 years, to nearly 74.7 million in 2030 and 131.5 million in 2050. For 2015, they estimate over 9.9 million new cases of dementia each year worldwide, implying one new case every 3.2 seconds. The regional distribution of new dementia cases is 4.9 million (49% of the total) in Asia, 2.5 million (25%) in Europe, 1.7 million (18%) in the Americas, and 0.8 million (8%) in Africa.

 

§ Cost

 

According to the Alzheimer’s Association 2015 Alzheimer’s Disease Facts and Figures, unpaid caregivers are primarily immediate family members, but they may be other relatives and friends. In 2014, 15.7 million family and friends provided an estimated 17.9 billion hours of unpaid care, a contribution to the nation valued at over $217.7 billion. Nearly 60 percent of Alzheimer’s and dementia caregivers rate the emotional stress of caregiving as high or very high; about 40 percent suffer from depression. Due to the physical and emotional toll of caregiving, Alzheimer’s and dementia caregivers had $9.7 billion in additional health care costs of their own in 2014.

 

6

 

According to the 2015 World Alzheimer Report, the global cost of care for dementia will likely exceed $818 billion in 2015, or 1.09 percent of the world's gross domestic product (GDP). These costs include those attributed to informal care from family member or others, direct social care from professional care givers, and direct medical bills. About 70% of these costs occur in Western Europe and North America. Such costs will continue to increase dramatically as the affected population of dementia increases.

 

§ Cost to Nation

 

According to the Alzheimer’s Association 2015 Alzheimer’s Disease Facts and Figures, Alzheimer’s disease is the most expensive condition in the nation. In 2015, the direct costs to American society of caring for those with Alzheimer's will total an estimated $226 billion, with half of the costs borne by Medicare. Nearly one in every five Medicare dollars is spent on people with Alzheimer’s and other dementias. In 2050, it will be one in every three dollars. The average per-person Medicare spending for those with Alzheimer's and other dementias is three times higher than for those without these conditions. The average per-person Medicaid spending for seniors with Alzheimer's and other dementias is 19 times higher than average per-person Medicaid spending for all other seniors. Unless something is done, in 2050, Alzheimer’s will cost over $1.1 trillion (in 2015 dollars). Costs to Medicare will increase over 400 percent to $589 billion.

 

Current Approaches to Treating Dementia

 

Currently, there is no cure for dementia. Certain drugs relieve some of the disease mechanisms (primarily the causes listed as #1 and #2, above) and are often used early in the course of the disease; however, their effects in long-term progression of the disease condition are still unclear. A majority of management of dementia generally focuses on providing emotional and physical support to a patient during the progression of the disease from caregivers or in facilities. While such support is important and necessary to a patient, it is irrelevant to treatment of the disease. Accordingly, an effective method of treatment which may be able to delay the progression of the disease and/or recover damaged brain cells does not presently exist and remains a great need.

 

Omentum and its Use in Treating Dementia

 

Omentum Overview

 

The Omentum is a layer of tissue lying over internal organs (e.g. the intestines) like a blanket. Omentum has the ability to generate biological agents that nourish nerves and help them grow. When such agents identified from the Omentum were tested, they were shown to provoke the growth of new brain cells in areas of the brain affected by Alzheimer's disease. The Omentum tissue can also increase the level of Acetylcholine (ACh) whose reduction is considered as a main cause of brain cell death. Some scientists believe that the ability of the Omentum to provide this important factor (ACh) may be a key to successfully treating dementia. Additionally, the Omentum has been shown to be angiogenic (i.e. to promote new blood vessel growth) in areas of the body lacking blood flow.

 

Use of Omentum in Treating Dementia

 

Historically, doctors have utilized Omentum to treat dementia using a procedure called omental transposition. This approach involves a surgical procedure in which the Omentum is surgically lengthened into the brain through the chest, neck and behind the ear. The Omentum is then laid directly on the underlying brain. According to studies conducted by a team in the University of Nevada, School of Medicine, omental transposition not only arrested Alzheimer's disease, but also reversed it, resulting in the patient’s neurologic function being improved. Despite the promising results, this surgical procedure has not been popular because it is very invasive and therefore often causes unwanted complications to a patient, especially in the elderly. Accordingly, a less invasive procedure or a pharmaceutical approach in treatment of dementia remains a significant need.

 

7

 

Principal Products and Services

 

Our Products

 

Dr. Saini is the inventor of U.S. Patent Application No. 13/849,014, derived from Patent Applications No. 12/361,808 and No. 13/309,468, and its foreign counterparts in Europe and Japan. He is one of our founders and a medical advisor to the company. As a practicing physician he is a gastrointestinal specialist, and often needs to apply a gastrostomy tube to an abdominal area of a patient for surgical procedures. In some cases when a patient having dementia underwent such surgery, Dr. Saini observed that some of symptoms of dementia became noticeably improved for at least 24 hours or longer after the surgery. These observations led Dr. Saini to a hypothesis that stimulation of Omentum can improve conditions related to dementia and such improvement may occur because the stimulation of Omentum induces production and/or secretion of some biological agent(s) that can improve such conditions.

 

Based on these observations, Dr. Saini conducted intensive studies that led to the discovery of a potential breakthrough in the treatment of Alzheimer’s Disease. These breakthroughs are described in Dr. Saini’s pending patent applications, which we have licensed from Dr. Saini under the patent license agreement. More particularly, the pending patent applications describe in detail a variety of methods of isolating several biological agents from the Omentum and testing the agents for their activity in treating dementia conditions. The isolation and identification of active biological agents can be done with the Omentum tissue obtained from a patient or grown in a petri-dish. Accordingly, methods of producing the Omentum tissue, possibly on a large scale, are included in the applications.

 

Once the active biological agent(s) are identified, a composition (e.g. various forms of medicaments) having such agents can be produced for treatment of a patient. Alternatively, the Omentum tissue/extract containing the active agents can be used to produce the composition.

 

With respect to treatment methods, there is a method of administering the composition having the isolated active biological agents to a patient. The composition can be manufactured in different forms (e.g. oral medication or injection) and can be administered to a patient accordingly. The ability to treat dementia using Omentum through oral medication or injection would provide a breakthrough in the treatment of dementia using Omentum, which has historically been applied only through a surgical procedure. In addition, methods of monitoring improvement of the disease conditions after the treatment are provided in the applications.

 

Dr. Saini’s patent application also discloses a method for producing the Omentum tissue in a petri-dish. The growth of such material outside of the human body will permit the large scale production of material that can be used as raw materials for treatment and/or further research.

 

Currently, Dr. Saini has been conducting a series of scientific experiments with other experts in the research area to prove the efficacy and applicability of the above-listed treatment methods.

 

Up until now, it has been notoriously difficult to identify effective treatments for Alzheimer’s disease and other forms of dementia. All of the efforts heretofore, have been directed to palliative treatments or addressing the three mechanisms of action discussed above. Many once-promising therapies have been shown to address one or more of the underlying mechanisms of action; however, many such therapies fail in clinical trials because no clear improvement in mental function can be shown. In contrast, Dr. Saini’s invention was developed based on the observation that a clear improvement in mental function was observed in patients whose Omentum had been stimulated. Thus, Dr. Saini’s invention was based on the premise that clinical improvement could be obtained rather than on a hope that affecting one of the underlying mechanisms of action would also affect mental functioning.

 

Another advantage of Dr. Saini’s technology is that patents were written in a manner that permitted all stages of the development of the technology to be covered. Thus, the technology includes the direct stimulation of Omentum tissue, which leads to release of the factors that can promote mental functioning. Once it can be proven that such factors exist and are effective, the technology also provides methods for identifying what such relevant factors are and then isolating or producing such factors. To the extent that the Omentum itself is necessary to produce such factors, the invention provides that the Omentum can be grown in tissue culture, and used directly or factors isolated from it. The ability to grow the tissue in culture obviates the need to obtain Omentum tissue directly from patients or animals.

 

8

 

Agreement with Sonos

 

In an effort to develop a less invasive procedure in the treatment of dementia, on May 16, 2012, we signed an agreement with medical device product development company Sonos Models, Inc. (“Sonos”) to assess our options for a medical device solution (“Initial Feasibility Study”).

 

We completed the Initial Feasibility Study and, as a result of the findings, entered into an agreement with Sonos on September 24, 2012 to build up to three medical device prototypes to be used for testing. The agreement calls for a total cash payment of up to $400,000 and the issuance of warrants to purchase up to 65,000 shares of our common stock, with the cash payments and warrants to be issued in stages once certain developmental thresholds are achieved. Any warrants issued under this agreement will be exercisable, will be eligible for cashless exercise at the option of the holder and will have a term of three years from the date of the issuance and an exercise price based on the fair market value of the stock on the date of completion of the phase.

 

On April 1, 2014, we entered into an addendum to the agreement with Sonos. The addendum stipulated Sonos shall receive 325,000 restricted shares of our common stock for services to be provided to the company. We recognized a prepaid expense of approximately $488,000, of which approximately $366,000 and $122,000 was expensed to research and development in the years ended 2015 and 2014, respectively. Specific services to be provided shall be those services originally identified in the Sonos Agreement as Phase 5 – Testing of the device, Phase 6 – Refinements, changes and CAD modeling updates of the design, and Phase 7- Production of or make changes to the device as necessary. The warrants that were to be issued for Phase 4 will not be issued and are hereby null and void. In addition, we committed to pay Sonos up to One Million Dollars ($1,000,000) for research and development costs. Costs will be recognized when incurred. To date, Sonos has been issued 325,000 restricted shares of the company’s stock, 25,000 warrants to purchase the company’s stock and paid approximately $154,000.

 

To date, the results of the research suggest we have three options for implantable devices with a bias towards having them as non-invasive as possible. The options are comprised of two electro-stim types that have a multitude of variable test parameters that can be changed and modified externally as the testing facility conducts clinical trials on each patient. It is theorized that if a patient’s response to the Omentum stimulation is successful, the clinical facility should be able to perform various tests for the purpose of setting “markers” for the patient and then perform the standardized cognitive testing for Alzheimer’s patient with the intent of developing a testing matrix. It is our objective to test various methods and modalities with the aim of developing an enormous matrix of input to direct us to the best solution. Our goal is to be less invasive, as small as possible and as simple as possible to reach the broadest patient base. We intend to “Shape and Innovate History” as we visualize and create a solution for this debilitating disease.

 

Industry Overview

 

As noted above, according to the 2015 World Alzheimer Report, in 2015 approximately 46.8 million people have dementia worldwide. With regard to Alzheimer's disease which is the main cause of dementia, there are about 5.3 million Americans who have already been diagnosed with Alzheimer's disease and someone in the United States develops Alzheimer’s every 67 seconds. The global cost of care for dementia exceeded $818 billion in 2015, or 1.09 percent of the world's gross domestic product (GDP) according to the 2015 World Alzheimer Report. These costs include those attributed to informal care from family member or others, direct social care from professional care givers, and direct medical bills. About 70% of these costs occur in Western Europe and North America. Such costs will continue to increase drastically as the affected population of dementia increases.

 

Marketing

 

We plan to launch a marketing campaign using a number of different channels. We plan to work with already established affiliates and partnerships to promote our products to healthcare providers and Alzheimer patients. We also plan to market directly to consumers through direct-to-consumer advertising that communicates the uses, benefits and risks of our products. In addition, we plan to sponsor general advertising to educate the public on Alzheimer’s disease awareness, prevention and wellness, and public health issues.

 

9

 

Customers

 

If we are successful in bringing a product to market, our customers will be consumers suffering through the various stages of Alzheimer’s disease.

 

Distribution

 

If we are successful in bringing a product to market we plan to distribute our products principally through wholesalers, but we will also try to sell directly to retailers, hospitals, clinics, government agencies and pharmacies.

 

Competition

 

Due to the number of people suffering from dementia, and the projected future numbers, there are several players in the dementia medication market. Four of the five Alzheimer’s disease-inhibiting drugs approved to treat Alzheimer’s in the United States – donepezil (Aricept), galantamine (Razadyne), rivastigmine (Exelon), and tacrine (Cognex) – belong to the same class and essentially work the same way. They reduce the breakdown in the brain of a chemical called acetylcholine, which is a chemical messenger that transmits information from nerve cell to nerve cell. This effectively increases levels of acetylcholine in the brain, and may preserve brain function. These drugs are generally capable, at best, of boosting memory for up to 18 months. After that, patients continue to decline as the disease progresses.

 

The fifth and most recently approved drug, memantine (Namenda), works differently. It blocks the actions of the neurotransmitter glutamate. Glutamate is needed for memory but too much of it is toxic to nerve cells and it appears that in people with Alzheimer’s, there is too much of it (for unknown reasons).

 

Of these five drugs currently approved to treat Alzheimer’s in the United States, none of them “cure" Alzheimer’s disease. They are all disease-inhibiting drugs. Studies have found these drugs only treat symptoms of the disease and can slow a person’s mental decline and ease symptoms (especially forgetfulness and confusion), but they do not stop the disease.

 

All the studies indicate that when people taking any of the Alzheimer’s medicines are compared to those taking a placebo, only 10% to 20% more people taking the drug get a significant, noticeable or sustained response. And it is the rare person who has a strong response, with marked improvement or a significant delay in the worsening of symptoms. By another measure, one team of researchers calculated that for every three to seven people taking an Alzheimer’s drug, only one benefits at all. Unfortunately, there is no way as yet to predict who will respond and who will have little or no benefit.

 

Disease-arresting drugs, however, would be a game changer. These drugs would target what researchers believe is the root cause of Alzheimer’s: a buildup of protein called beta-amyloid or a-beta (often referred to as plaque) that is poisonous to brain cells. If they work, doctors could administer the drugs during the earlier stages of the disease, when brain damage caused by disease is still manageable. The drugs could then be used to keep the disease in check, giving patients the prospect of going on to live relatively normal lives.

 

Research and Development

 

Historically, efforts in the development and acquisition of innovative new products or technology have been minimal.

 

Liability and Insurance

 

We currently do not maintain a general liability insurance policy. However, we plan to obtain general liability insurance policy in advance of releasing products. We believe that our anticipated insurance coverage will be adequate for the types of products and services that may be marketed in the near future. There can be no assurance, however, that such insurance will be sufficient to cover potential claims or that the present level of coverage, or increased coverage, will be available in the future at a reasonable cost.

 

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Government Regulation

 

Our research, development and testing of potential products, including clinical trials, will be subject to extensive regulation by numerous governmental authorities in the United States, both federal and state. The sanctions for failure to comply with such laws, regulations, or rules could include denial of the right to conduct business, significant fines, and criminal and civil penalties. An increase in the complexity or substantive requirements of such laws, regulations, or rules could have a material adverse effect on our business. Any change in the current regulatory requirements or related interpretations of regulatory requirement could adversely affect our operations.

 

Intellectual Property

 

Currently, our only intellectual property is the patent we are licensing from Dr. Saini. Other than that and our trade secrets and proprietary know-how, we do not have any other intellectual property.

 

Employees and Contractors

 

As of the date of this filing, we have 2 employees and 15 independent contractors. Both of our employees have agreed to defer their annual salaries and accept a consulting fee in the same amount.

 

Facilities

 

Our principal executive and administrative offices, and those of Cerebain, are currently located at 13727 Noel Road, Tower II, Suite 200, Dallas, TX 75240. Our office space is located at an executive suites location and is leased on a month to month basis. Our monthly lease payment is $149 per month. Due to the nature of our business, the majority of our operations and research & development are outsourced, thereby reducing the need for a sizeable facility.

 

Available Information

 

We file various reports with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, which are available through the SEC's electronic data gathering, analysis and retrieval system (“EDGAR”) by accessing the SEC's home page (http://www.sec.gov). The documents are also available to be read or copied at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, D.C., 20549. Information on the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.

 

Item 1A. Risk Factors

 

Risks Related to Business Operations

 

We have a limited operating history and historical financial information upon which you may evaluate our performance.

 

You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages of development. We may not successfully address these risks and uncertainties or successfully implement our existing and new products and services. If we fail to do so, it could materially harm our business and impair the value of our common stock. Even if we accomplish these objectives, we may not generate the positive cash flows or profits we anticipate in the future. We were incorporated in Nevada on December 18, 2007. All of our operations are conducted through Cerebain, our wholly-owned subsidiary, which also has a limited operating history. However, as a result of the agreement with Sonos described herein, and the continuing scientific experiments being conducted by Dr. Surinder Singh Saini, MD to research, develop and test medicinal treatments for dementia utilizing omentum, we have started operations.. Our only significant asset is our rights under that certain Patent License Agreement with Dr. Surinder Singh Saini, MD, dated June 10, 2010. Unanticipated problems, expenses and delays are frequently encountered in establishing a new business and developing new products and services. These include, but are not limited to, inadequate funding, lack of consumer acceptance, competition, product development, and inadequate sales and marketing. The failure by us to meet any of these conditions would have a materially adverse effect upon us and may force us to reduce or curtail operations. No assurance can be given that we can or will ever operate profitably.

 

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We may not be able to meet our future capital needs.

 

To date, we have not generated any revenue and we have very little cash liquidity and capital resources. Our future capital requirements will depend on many factors, including our ability to develop our intellectual property, cash flow from operations, and competing market developments. We will need additional capital in the near future. Any equity financings will result in dilution to our then-existing stockholders. Sources of debt financing may result in high interest expense. Any financing, if available, may be on unfavorable terms. If adequate funds are not obtained, we will be required to reduce or curtail operations.

 

If we cannot obtain additional funding, our product development and commercialization efforts may be reduced or discontinued and we may not be able to continue operations.

 

We have historically experienced negative cash flows from operations since our inception and we expect the negative cash flows from operations to continue for the foreseeable future. Unless and until we are able to generate revenues, we expect such losses to continue for the foreseeable future. As discussed in our financial statements, there exists substantial doubt regarding our ability to continue as a going concern.

 

Product development efforts are highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to support our future operations through one or more methods, including but not limited to, issuing additional equity or debt.

 

In addition, we may also raise additional capital through additional equity offerings, and licensing our future products in development. While we will continue to explore these potential opportunities, there can be no assurances that we will be successful in raising sufficient capital on terms acceptable to us, or at all, or that we will be successful in licensing our future products. Based on our current projections, we believe we have insufficient cash on hand to meet our obligations as they become due based on current assumptions. The uncertainties surrounding our future cash inflows have raised substantial doubt regarding our ability to continue as a going concern.

 

If we are unable to meet our future capital needs, we may be required to reduce or curtail operations.

 

To date, we have relied on funding from our founders and private investment to fund operations. We have extremely limited cash liquidity and capital resources. Our future capital requirements will depend on many factors, including our ability to successfully test, develop, and bring to market products based on the intellectual property we are licensing under the Patent License Agreement with Dr. Surinder Singh Saini, MD, dated June 10, 2010 (“License Agreement”), manage our cash flow from operations, and competing market developments. Our business plan requires additional funding. Consequently, we intend to raise additional funds through private placements or other financings. Any equity financings would result in dilution to our then-existing stockholders. Sources of debt financing may result in higher interest expense. Any financing, if available, may be on unfavorable terms. If adequate funds are not obtained, we may be required to reduce or curtail operations. Additionally, we have substantial financial obligations under the License Agreement, which will require additional funds to be raised by us in the future. If we are not able to raise these funds it may put us in breach under the License Agreement and/or not enable us to properly prosecute the patent application that is the subject of the License Agreement.

 

Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.

 

Our financial statements as of June 30, 2015 have been prepared under the assumption that we will continue as a going concern for the next twelve months. Our independent registered public accounting firm has issued a report that included an explanatory paragraph referring to our need to obtain additional financing and expressing substantial doubt in our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity financing or other capital, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate revenue. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. We are continually evaluating opportunities to raise additional funds through public or private equity financings, as well as evaluating prospective business partners, and will continue to do so. However, if adequate funds are not available to us when we need it, and we are unable to enter into some form of strategic relationship that will give us access to additional cash resources, we will be required to even further curtail our operations which would, in turn, further raise substantial doubt about our ability to continue as a going concern.

 

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Because we face intense competition, we may not be able to operate profitably in our markets.

 

The market for Alzheimer’s and dementia medications is highly competitive and is becoming more so, which could hinder our ability to successfully market our products. We may not have the resources, expertise or other competitive factors to compete successfully in the future. We expect to face additional competition from existing competitors and new market entrants in the future. Many of our competitors have greater name recognition and more established relationships in the industry than we do. As a result, these competitors may be able to:

 

	·	develop and expand their product offerings more rapidly;
	·	adapt to new or emerging changes in customer requirements more quickly;
	·	take advantage of acquisition and other opportunities more readily; and
	·	devote greater resources to the marketing and sale of their products and adopt more aggressive pricing policies than we can.

 

We may not be able to compete with our competitors in the biotechnology industry because many of them have greater resources than we do and they are further along in their development efforts.

 

The pharmaceutical and biotechnology industry is intensely competitive and subject to rapid and significant technological change. Many of the drugs that we are attempting to discover or develop will be competing with existing therapies. Some or all of these companies may have greater financial resources, larger technical staffs, and larger research budgets than we have, as well as greater experience in developing products and running clinical trials. We expect to continue to experience significant and increasing levels of competition in the future. In addition, there may be other companies which are currently developing competitive technologies and products or which may in the future develop technologies and products that are comparable or superior to our technologies and products.

 

Our business depends substantially on the continuing efforts of our senior management and other key personnel, including Dr. Saini, and our business may be severely disrupted if we lost their services.

 

Our future success heavily depends on the continued service of our senior management and other key personnel, including Dr. Saini. In particular, we rely on the expertise and experience of Eric Clemons our President and Wesley Tate our Chief Financial Officer regarding their experience as officers of a publicly-traded over-the-market company, and of Dr. Saini, our Principal Scientist, regarding his knowledge of omentum and the medical community. If Mr. Clemons, Mr. Tate or Dr. Saini are unable or unwilling to continue to work for us in their present positions, we may have to spend a considerable amount of time and resources searching, recruiting, and integrating the replacements into our operations, which would substantially divert management’s attention from our business and severely disrupt our business. This may also adversely affect our ability to execute our business strategy. Moreover, if any of our senior executives joins a competitor or forms a competing company, we may lose customers, suppliers, know-how, and key employees.

 

We may be unable to adequately protect our proprietary rights.

 

Our ability to compete partly depends on the superiority, uniqueness and value of our intellectual property and technology. To protect our proprietary rights, we will rely on a combination of patent, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions. Despite these efforts, any of the following occurrences may reduce the value of our intellectual property:

 

	·	Our applications for patents relating to our business may not be granted and, if granted, may be challenged or invalidated;
	·	Issued patents may not provide us with any competitive advantages;
	·	Our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology;
	·	Our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we develop; or
	·	Another party may obtain a blocking patent and we would need to either obtain a license or design around the patent in order to continue to offer the contested feature or service in our products.

 

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We may be forced to litigate to defend our intellectual property rights, or to defend against claims by third parties against us relating to intellectual property rights.

 

We may be forced to litigate to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of other parties’ proprietary rights. Any such litigation could be very costly and could distract our management from focusing on operating our business. The existence and/or outcome of any such litigation could harm our business.

 

We may become involved in lawsuits to protect or enforce our patents that would be expensive and time consuming.

 

In order to protect or enforce our patent rights, we may initiate patent litigation against third parties. In addition, we may become subject to interference or opposition proceedings conducted in patent and trademark offices to determine the priority and patentability of inventions. The defense of intellectual property rights, including patent rights through lawsuits, interference or opposition proceedings, and other legal and administrative proceedings, would be costly and divert our technical and management personnel from their normal responsibilities. An adverse determination of any litigation or defense proceedings could put our pending patent applications at risk of not being issued.

 

Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. For example, during the course of this kind of litigation, confidential information may be inadvertently disclosed in the form of documents or testimony in connection with discovery requests, depositions or trial testimony. This disclosure could have a material adverse effect on our business and our financial results.

 

If we fail to obtain or maintain applicable regulatory clearances or approvals for our products, or if such clearances or approvals are delayed, we will be unable to distribute our products in a timely manner, or at all, which could significantly disrupt our business and materially and adversely affect our sales and profitability.

 

The sale and marketing of our products are subject to regulation in the countries where we intend to conduct business. For a significant portion of our products, we need to obtain and renew licenses and registrations with the FDA, and its equivalent in other markets. The processes for obtaining regulatory clearances or approvals can be lengthy and expensive, and the results are unpredictable. If we are unable to obtain clearances or approvals needed to market existing or new products, or obtain such clearances or approvals in a timely fashion, our business would be significantly disrupted, and our sales and profitability could be materially and adversely affected.

 

In particular, as we enter foreign markets, we lack the experience and familiarity with both the regulators and the regulatory systems, which could make the process more difficult, more costly, more time consuming and less likely to succeed.

 

If we fail to comply with regulatory requirements, regulatory agencies may take action against us, which could significantly harm our business.

 

Marketed products, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for these products, are subject to continual requirements and review by the FDA and other regulatory bodies. In addition, regulatory authorities subject a marketed product, its manufacturer and the manufacturing facilities to ongoing review and periodic inspections. We will be subject to ongoing FDA requirements, including required submissions of safety and other post-market information and reports, registration requirements, current Good Manufacturing Practices (“cGMP”) regulations, requirements regarding the distribution of samples to physicians and recordkeeping requirements.

 

The cGMP regulations also include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. Regulatory agencies may change existing requirements or adopt new requirements or policies. We may be slow to adapt or may not be able to adapt to these changes or new requirements.

 

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We expect to rely entirely on third parties for international registration, sales and marketing efforts.

 

In the event that we attempt to enter into international markets, we expect to rely on collaborative partners to obtain regulatory approvals and to market and sell our product(s) in those markets. We have not yet entered into any collaborative arrangement. We may be unable to enter into any other arrangements on terms favorable to us, or at all, and even if we are able to enter into sales and marketing arrangements with collaborative partners, we cannot assure you that their sales and marketing efforts will be successful. If we are unable to enter into favorable collaborative arrangements in international markets, or if our collaborators’ efforts are unsuccessful, our ability to generate revenues from international product sales will suffer.

 

We may become subject to litigation for infringing the intellectual property rights of others.

 

Others may initiate claims against us for infringing on their intellectual property rights. We may be subject to costly litigation relating to such infringement claims and we may be required to pay compensatory and punitive damages or license fees if we settle or are found culpable in such litigation, we may be required to pay damages, including punitive damages. In addition, we may be precluded from offering products that rely on intellectual property that is found to have been infringed by us. We also may be required to cease offering the affected products while a determination as to infringement is considered. These developments could cause a decrease in our operating income and reduce our available cash flow, which could harm our business and cause our stock price to decline.

 

We do not maintain any insurance, and if we were found liable for a claim, we may be forced to expend significant capital to resolve the claim.

 

We currently do not have any insurance. As a result, if we were found to be liable for a claim any monetary damages awarded to a third party against us would have to be paid by us and we do not currently have sufficient funds to pay for a claim against us. Additionally, if we decide to obtain insurance coverage in the future, it is possible that: (1) we may not be able to get enough insurance to meet our needs; (2) we may have to pay very high premiums for the additional coverage; (3) we may not be able to acquire any insurance for certain types of business risk; or (4) we may have gaps in coverage for certain risks. This could leave us exposed to potential uninsured claims for which we could have to expend significant amounts of capital resources. Consequently, if we were found liable for a significant uninsured claim in the future, we may be forced to expend a significant amount of our operating capital to resolve the uninsured claim.

 

Our future research and development projects may not be successful.

 

The successful development of pharmaceutical products can be affected by many factors. Products that appear to be promising at their early phases of research and development may fail to be commercialized for various reasons, including the failure to obtain the necessary regulatory approvals. In addition, the research and development cycle for new products for which we may obtain an approval certificate is long.

 

There is no assurance that all of our future research and development projects will be successful or completed within the anticipated time frame or budget or that we will receive the necessary approvals from relevant authorities for the production of these newly developed products, or that these newly developed products will achieve commercial success. Even if such products can be successfully commercialized, they may not achieve the level of market acceptance that we expect.

 

We do not currently have any products and the development of products, including clinical trials, are expensive, time-consuming and difficult to design and implement.

 

We do not currently have any products and the development of products, including clinical trials, are expensive, time-consuming and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. The research, testing and development process for new drugs is time-consuming and expensive. The clinical trial process is also expensive, time consuming, failure can occur at any stage of the trials, and we could encounter problems that cause us to abandon or repeat clinical trials. The commencement and completion of clinical trials may be delayed by several factors, including:

 

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	·	unforeseen safety issues;
	·	determination of dosing issues;
	·	lack of effectiveness during clinical trials;
	·	slower than expected rates of patient recruitment;
	·	inability to monitor patients adequately during or after treatment; and
	·	inability or unwillingness of medical investigators to follow our clinical protocols

 

In addition, we (or the FDA), may suspend our clinical trials at any time if it appears that we are exposing participants to unacceptable health risks or if the regulatory bodies find serious deficiencies in our investigational new drug, submissions or the conduct of these trials. Therefore, we cannot predict with any certainty the schedule for future clinical trials.

 

We do not have experience as a company conducting Early-Stage or Large-Scale clinical trials, or in other areas required for the successful commercialization and marketing of our product candidates.

 

Negative or limited results from any current or future clinical trial could delay or prevent further development of our product candidates which would adversely affect our business.

 

We have no experience as a company in conducting early-stage, large-scale, late-stage clinical trials. In part because of this limited experience, we cannot be certain that planned clinical trials will begin or be completed on time, if at all. Large-scale trials would require either additional financial and management resources, or reliance on third-party clinical investigators, clinical research organizations (“CROs”) or consultants. Relying on third-party clinical investigators or CROs may force us to encounter delays that are outside of our control. Any such delays could have a material adverse effect on our business.

 

We also do not currently have marketing and distribution capabilities for our product candidates. Developing an internal sales and distribution capability would be an expensive and time-consuming process. We may enter into agreements with third parties that would be responsible for marketing and distribution. However, these third parties may not be capable of successfully selling any of our product candidates. The inability to commercialize and market our product candidates could materially affect our business.

 

The results of our clinical trials may not support our product candidate claims.

 

Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product candidate claims. Success in pre-clinical testing and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the results of later clinical trials will replicate the results of prior clinical trials and pre-clinical testing. The clinical trial process may fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. This failure would cause us to abandon a product candidate and may delay development of other product candidates.

 

Any products we develop may not achieve or maintain widespread market acceptance.

 

The success of any products we develop based on the intellectual property will be highly dependent on market acceptance. We believe that market acceptance of any products will depend on many factors, including, but not limited to:

 

	·	the perceived advantages of our products over competing products and the availability and success of competing products;
	·	the effectiveness of our sales and marketing efforts;
	·	our product pricing and cost effectiveness;
	·	the safety and efficacy of our products and the prevalence and severity of adverse side effects, if any; and
	·	publicity concerning our products, product candidates or competing products.

 

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If our products fail to achieve or maintain market acceptance, or if new products are introduced by others that are more favorably received than our products, are more cost effective or otherwise render our products obsolete, we may experience a decline in demand for our products. If we are unable to market and sell any products we develop successfully, our business, financial condition, results of operations and future growth would be adversely affected.

 

Developments by competitors may render our products or technologies obsolete or non-competitive.

 

The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological changes. A large number of companies are pursuing the development of pharmaceuticals that target the same diseases and conditions that we are targeting. We face competition from pharmaceutical and biotechnology companies in the United States and other countries. In addition, companies pursuing different but related fields represent substantial competition. Many of these organizations competing with us have substantially greater capital resources, larger research and development staffs and facilities, longer drug development history in obtaining regulatory approvals and greater manufacturing and marketing capabilities than we do. These organizations also compete with us to attract qualified personnel and parties for acquisitions, joint ventures or other collaborations.

 

We may have significant product liability exposure because we do not maintain product liability insurance.

 

We face an inherent business risk of exposure to product liability claims in the event that the administration of one of our drugs during a clinical trial adversely affects or causes the death of a patient. Product liability insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms, if at all. Our inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims in excess of our insurance coverage, if any, or a product recall, could negatively impact our financial position and results of operations.

 

Risks Related to Ownership of Our Common Stock

 

Our Articles of Incorporation authorize our board of directors to issue new series of preferred stock that may have the effect of delaying or preventing a change of control, which could adversely affect the value of your shares.

 

Our articles of incorporation provide that our board of directors will be authorized to issue from time to time, without further stockholder approval, up to 1,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each series, including the dividend rights, dividend rates, conversion rights, voting rights, rights of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of any series. Such shares of preferred stock could have preferences over our common stock with respect to dividends and liquidation rights. We may issue additional preferred stock in ways which may delay, defer or prevent a change of control of our company without further action by our stockholders. Such shares of preferred stock may be issued with voting rights that may adversely affect the voting power of the holders of our common stock by increasing the number of outstanding shares having voting rights, and by the creation of class or series voting rights.

 

Our Articles of Incorporation limits the liability of members of the Board of Directors.

 

Our Articles of Incorporation limits the personal liability of our directors for monetary damages for breach of fiduciary duty as a director, subject to certain exceptions, to the fullest extent allowed. We are organized under Nevada law. Accordingly, except in limited circumstances, our directors will not be liable to our stockholders for breach of their fiduciary duties.

 

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Provisions of our Articles of Incorporation, bylaws and Nevada corporate law have anti-takeover effects.

 

Some provisions in our Articles of Incorporation and bylaws could delay or prevent a change in control of us, even if that change might be beneficial to our stockholders. Our Articles of Incorporation and bylaws contain provisions that might make acquiring control of us difficult, including provisions limiting rights to call special meetings of stockholders and regulating the ability of our stockholders to nominate directors for election at annual meetings of our stockholders. In addition, our board of directors has the authority, without further approval of our stockholders, to issue common stock having such rights, preferences and privileges as the board of directors may determine. Any such issuance of common stock could, under some circumstances, have the effect of delaying or preventing a change in control of us and might adversely affect the rights of holders of common stock.

 

In addition, we are subject to Nevada statutes regulating business combinations, takeovers and control share acquisitions, which might also hinder or delay a change in control of us. Anti-takeover provisions in our certificate of incorporation and bylaws, anti-takeover provisions that could be included in the common stock when issued and the Nevada statutes regulating business combinations, takeovers and control share acquisitions can depress the market price of our securities and can limit the stockholders’ ability to receive a premium on their shares by discouraging takeover and tender offer bids, even if such events could be viewed by our shareholders or others as beneficial transactions.

 

The issuance of additional common stock and/or the resale of our issued and outstanding common stock could cause substantial dilution to investors.

 

Our Articles of Incorporation authorize the issuance of up to 249,000,000 shares of common stock and 1,000,000 shares of preferred stock. Our Board of Directors has the authority to issue additional shares of common stock and to issue options and warrants to purchase shares of our common stock without shareholder approval. Future issuances of common stock could represent further substantial dilution to investors. In addition, the Board of Directors could issue large blocks of voting stock to fend off unwanted tender offers or hostile takeovers without further shareholder approval.

 

Our common stock has a limited trading market, which could affect your ability to sell shares of our common stock and the price you may receive for our common stock.

 

Our common stock is currently traded in the over-the-counter market and “bid” and “asked” quotations regularly appear on the OTC Bulletin Board under the symbol “CBBT” There is only limited trading activity in our securities. We have a relatively small public float compared to the number of our shares outstanding. Accordingly, we cannot predict the extent to which investors’ interest in our common stock will provide an active and liquid trading market. Due to our limited public float, we may be vulnerable to investors taking a “short position” in our common stock, which would likely have a depressing effect on the price of our common stock and add increased volatility to our trading market. The volatility of the market for our common stock could have a materially adverse effect on our business, results of operations and financial condition. There cannot be any guarantee that an active trading market for our securities will develop or, if such a market does develop, will be sustained. Accordingly, investors must be able to bear the financial risk of losing their entire investment in our common stock.

 

Our common stock is quoted only on The OTC Bulletin Board, which may have an unfavorable impact on our stock price and liquidity.

 

Our common stock is quoted on The OTC Bulletin Board. The OTC Bulletin Board is a significantly more limited market than the New York Stock Exchange or The NASDAQ Stock Market. The quotation of our shares on The OTC Bulletin Board may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock, and could have a long-term adverse impact on our ability to raise capital in the future.

 

The sale of securities by us in any equity or debt financing could result in dilution to our existing stockholders and have a material adverse effect on our earnings.

 

Any sale of common stock by us in a future private placement offering could result in dilution to the existing stockholders as a direct result of our issuance of additional shares of our capital stock. In addition, our business strategy may include expansion through internal growth, by acquiring complementary businesses, by acquiring or licensing additional brands, or by establishing strategic relationships with targeted customers and suppliers. In order to do so, or to finance the cost of our other activities, we may issue additional equity securities that could dilute our stockholders’ stock ownership. We may also assume additional debt and incur impairment losses related to goodwill and other tangible assets if we acquire another company and this could negatively impact our earnings and results of operations.

 

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Future sales of our common stock in the public market could lower the price of our common stock and impair our ability to raise funds in future securities offerings.

 

Future sales of a substantial number of shares of our common stock in the public market, or the perception that such sales may occur, could adversely affect the then prevailing market price of our common stock and could make it more difficult for us to raise funds in the future through a public offering of its securities.

 

The market price of our common stock may be volatile and may be affected by market conditions beyond our control.

 

The market price of our common stock is subject to significant fluctuations in response to, among other factors:

 

	·	variations in our operating results and market conditions specific to Biomedical Industry companies;
	·	changes in financial estimates or recommendations by securities analysts;
	·	announcements of innovations or new products or services by us or our competitors;
	·	the emergence of new competitors;
	·	operating and market price performance of other companies that investors deem comparable;
	·	changes in our board or management;
	·	sales or purchases of our common stock by insiders;
	·	commencement of, or involvement in, litigation;
	·	changes in governmental regulations; and
	·	general economic conditions and slow or negative growth of related markets.

 

In addition, if the market for stocks in our industry, or the stock market in general, experience a loss of investor confidence, the market price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause the price of our common stock to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to the board of directors and management.

 

We may be subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.

 

The Commission has adopted regulations which generally define so-called “penny stocks” as an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. If our shares of common stock become a “penny stock”, we may become subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.

 

For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the Commission relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.

 

There can be no assurance that our shares of common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock was exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the Commission the authority to restrict any person from participating in a distribution of penny stock if the Commission finds that such a restriction would be in the public interest.

 

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Our internal financial reporting procedures are still being developed. We will need to allocate significant resources to meet applicable internal financial reporting standards.

 

We have adopted disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we submit under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are accumulated and communicated to management, including principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. We are taking steps to develop and adopt appropriate disclosure controls and procedures.

 

These efforts require significant time and resources. If we are unable to establish appropriate internal financial reporting controls and procedures, our reported financial information may be inaccurate and we will encounter difficulties in the audit or review of our financial statements by our independent auditors, which in turn may have material adverse effects on our ability to prepare financial statements in accordance with generally accepted accounting principles in the United States of America and to comply with SEC reporting obligations.

 

The forward looking statements contained in this Annual Report may prove incorrect.

 

This Annual Report contains certain forward-looking statements, including among others: (i) anticipated trends in our financial condition and results of operations; (ii) our business strategy for developing products based on our intellectual property; and (iii) our ability to distinguish ourselves from our current and future competitors. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. In addition to the other risks described elsewhere in this “Risk Factors” discussion, important factors to consider in evaluating such forward-looking statements include: (i) changes to external competitive market factors or in our internal budgeting process which might impact trends in our results of operations; (ii) anticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the wound care industry; and (iv) various competitive factors that may prevent us from competing successfully in the marketplace. In light of these risks and uncertainties, many of which are described in greater detail elsewhere in this “Risk Factors” discussion, there can be no assurance that the events predicted in forward-looking statements contained in this Annual Report will, in fact, transpire.

 

Item 1B. Unresolved Staff Comments

 

Not applicable.

 

Item 2. Properties

 

Our principal executive and administrative offices, and those of Cerebain, are currently located at 13727 Noel Road, Tower II, Suite 200, Dallas, TX 75240. Our monthly rent for this location is $149.

 

Due to anticipated growth, we are in the process of looking in various locations for new space for our headquarters and customer service operations. We believe that we will be able to locate such space on reasonable rates and terms.

 

Item 3. Legal Proceedings

 

We are not involved in any legal matters arising in the normal course of business. While incapable of estimation, in the opinion of the management, the individual regulatory and legal matters in which it might involve in the future are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

 

Item 4. Mine Safety Disclosures

 

There is no information required to be disclosed by us under this Item.

 

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PART II

 

Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

 

(a) Market Information

 

Our stock is quoted on the OTC Bulletin Board under the symbol “CBBT.” We were listed on September 19, 2011. There are 4,835,347 shares outstanding. The below table provides the high and low bid prices of our common stock for each quarterly period during the last two years.

 

	Fiscal Year ended June 30, 2015
		High				Low
First Quarter		$	1.97			$	1.20
Second Quarter		$	1.50			$	1.00
Third Quarter		$	1.43			$	0.95
Fourth Quarter		$	1.09			$	0.75
		Fiscal Year ended June 30, 2014
		High				Low
First Quarter		$	12.90			$	5.00
Second Quarter		$	6.50			$	1.60
Third Quarter		$	3.20			$	1.60
Fourth Quarter		$	1.30			$	3.25

 

(b) Stockholders of Record

 

The number of beneficial holders of record of our common stock as of the close of business on June 30, 2015 was 111. Many of the shares of our common stock are held in "street name" and consequently may reflect numerous additional beneficial owners.

 

(c) Dividends

 

We do not expect to pay cash dividends in the next term. We intend to retain future earnings, if any, to provide funds for operation of our business. We currently have no restrictions affecting our ability to pay cash dividends.

 

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(d) Equity Compensation Plans

 

On April 15, 2014, shareholders of the company approved the 2014 Cerebain Biotech Corp. Omnibus Stock Grant and Option Plan.

 

In December 2014, we entered into consulting agreements with two individuals. The agreements called for an issuance of options to purchase up to a total of 100,000 shares of our common stock at an exercise price of $1.30 per share. Fair Market Value of these options totaled approximately $83,000. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 100%; risk-free interest rate of 0.49%; expected term of 2 years; and 0% dividend yield. The options were fully vested on date of issuance.

 

In October 2014, we entered into employee agreements addendums with two individuals, namely Eric Clemons and Wesley Tate, our executive officers. The agreements called for an issuance of options to purchase up to a total of 150,000 shares of our common stock, under the Company’s 2014 Omnibus Stock Grant and Option Plan, at an exercise price of $1.20 per share, subject to a vesting schedule. Fair Market Value of these options totaled approximately $134,000. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 100%; risk-free interest rate of 1.69%; expected term of 5 years; and 0% dividend yield. As of June 30, 2015, 30,000 of the options to purchase our common stock have vested.

 

In June 2013, we entered into employee agreements with two individuals, namely Eric Clemons and Wesley Tate, our executive officers. The agreements called for an issuance of options to purchase up to a total of 150,000 shares of our common stock at an exercise price of $5.00 per share, subject to a vesting schedule. Fair Market Value of these options totaled approximately $1.2 million. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 100%; risk-free interest rate of 1.04%; expected term of 5 years; and 0% dividend yield. As of June 30, 2015, 90,000 of the options to purchase our common stock have vested.

 

Recent Sales of Unregistered Securities

For the three month period ended June 30, 2015, we issued 13,500 shares of common stock to individuals as payment for consulting services per contracts dated between May 2015 and June 2015. The aggregate Fair Market Value of these shares was approximately $9,000 as the fair market value of the stock was between $0.67 and $0.70 per share. We used recent sales of stock to determine the fair market value of these transactions. These issuances were completed in accordance with Section 4(a)(2) of the Securities Act in an offering without any public offering or distribution. These shares are restricted securities and include an appropriate restrictive legend.

 

Item 6. Selected Financial Data

 

Because we are a smaller reporting company, this Item 6 is not applicable.

 

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

 

Certain statements in this report, which are not statements of historical fact, are what are known as “forward-looking statements,” which are basically statements about the future. For that reason, these statements involve risk and uncertainty since no one can accurately predict the future. Words such as “plans,” “intends,” “hopes,” “seeks,” “anticipates,” “expects, “and the like, often identify such forward looking statements, but are not the only indication that a statement is a forward-looking statement. Such forward-looking statements include statements concerning our plans and objectives with respect to our present and future operations, and statements, which express or imply that such present and future operations will or may produce revenues, income or profits. In evaluating these forward-looking statements, you should consider various factors, including those described in this report under the heading “Risk Factors” in Part I, Item 1A. These and other factors may cause our actual results to differ materially from any forward- looking statement. We caution you not to place undue reliance on these forward-looking statements. Although we base these forward-looking statements on our expectations, assumptions, and projections about future events, actual events and results may differ materially, and our expectations, assumptions, and projections may prove to be inaccurate. The forward-looking statements speak only as of the date hereof, and we expressly disclaim any obligation to publicly release the results of any revisions to these forward-looking statements to reflect events or circumstances after the date of this filing.

 

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Limited Operating History; Need for Additional Capital

 

There is very limited historical financial information about us on which to base an evaluation of our performance. We are a smaller reporting company and have not generated any revenues from operations. We cannot guarantee we will be successful in our business operations. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources, and possible cost overruns due to increases in the cost of services. To become profitable and competitive, we must receive additional capital. We have no assurance that future financing will materialize. If that financing is not available we may be unable to continue operations.

 

Overview

 

The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) includes the following sections:

 

	·	Results of Operations
	·	Liquidity and Capital Resources
	·	Capital Expenditures
	·	Fiscal Year End
	·	Going Concern
	·	Critical Accounting Policies · Recent Accounting Pronouncements
	·	Off-Balance Sheet Arrangements · Inflation

 

Results of Operations

 

Fiscal Year Ended June 30, 2015 Compared to Fiscal Year Ended June 30, 2014

 

Revenue

 

For the fiscal years ended June 30, 2015 and June 30, 2014, we did not generate any revenues.

 

Operating expenses

 

Operating expenses decreased by $736,383, or 25.7%, to $2,126,845 in the fiscal year ended June 30, 2015 from $2,863,228 in the fiscal year ended June 30, 2014 primarily due to decreases in consultant costs, including costs related to fair value of stock and warrants issued for services and amortization of compensation costs related to stock options and professional fees offset by increases in research and development and travel costs.

 

Operating expenses for the fiscal year ended June 30, 2015 were approximately comprised of marketing costs of $172,000, $1,022,000 in consulting services costs primarily paid through the issuance of our common stock, research and development costs of $379,000, compensation expense of $321,000, professional fees of $84,000, travel costs of $124,000, and other operating expenses.

 

Operating expenses for the fiscal year ended June 30, 2014 were comprised of marketing costs of $172,000, $1,847,000 in consulting services costs primarily paid through the issuance of our common stock, research and development costs of $349,000, compensation expense of $256,000, professional fees of $147,000, travel costs of $84,000, and other operating expenses.

 

23

 

Other income (expenses)

 

Other expense increased by $307,401, or 60.8%, to $812,872 in the fiscal year ended June 30, 2015 from $505,471 in the fiscal year ended June 30, 2014 primarily related to the accretion of recorded debt discounts related to notes payable issued throughout the year ended June 30, 2015 and in the previous fiscal years ending June 2014 and 2013.

 

Net loss before income taxes

 

Net loss before income taxes for the fiscal year ended June 30, 2015 totaled $2,939,717 primarily due marketing, consulting services costs, legal, accounting and other professional fees, loan interest and amortized costs expense, research and development costs, compensation expense, employee expense and travel costs compared to $3,368,699 for the fiscal year ended June 30, 2014 primarily due to marketing, consulting services costs, legal, accounting and other professional fees, loan interest and amortized costs expense, research and development costs, compensation expense, employee expense and travel costs.

 

Assets and Liabilities

 

Assets were $369,613 as of June 30, 2015. Assets consisted of cash of $486, prepaid expense of $185,227, and patent rights of $183,900. Liabilities were $2,746,476 as of June 30, 2015. Liabilities consisted primarily of accounts payable of $929,945, short term notes payable of $131,000, and convertible notes to stockholders, net of debt discount, of $1,685,531.

 

Stockholders’ Deficit

 

Stockholders’ deficit was $2,376,863 as of June 30, 2015. Stockholder’s deficit consisted primarily of shares issued to founders and recorded as compensation in the amount of $13,900, shares issued for fundraising totaling $1,238,236, net of issuance costs, beneficial conversion feature associated with convertible note of $1,184,813, shares issued in conversion of liabilities of $386,750, shares associated with warrants, options and issuances for services of $3,887,283 and shares issued for patent rights totaling $6,600, offset primarily by the deficit accumulated of $9,094,445 at June 30, 2015.

 

Liquidity and Capital Resources

 

General – Overall, we had a decrease in cash flows of $1,202 in the fiscal year ending June 30, 2015 resulting from cash provided by financing activities of $709,550, offset partially by cash used in operating activities of $710,752.

 

The following is a summary of our cash flows provided by (used in) operating, investing, and financing activities during the periods indicated:

 

		Fiscal Year Ended June 30,
		2015				2014
Cash at beginning of period		$	1,688			$	8
Net cash used in operating activities			(710,752	)			(874,352	)
Net cash used in investing activities			-				-
Net cash provided by financing activities			709,550				876,032
Cash at end of period		$	486			$	1,688

 

24

 

Cash Flows from Operating Activities – For the fiscal year ending June 30, 2015, net cash used in operations was $710,752 compared to net cash used in operations of $874,352 for the fiscal year ending June 30, 2014. Net cash used in operations was primarily due to a net loss of $2,939,717 for fiscal year ending June 30, 2015, accretion of debt discount of $612,158, stock issued for services of $847,190 and issuance of options for $293,400.

 

Cash Flows from Investing Activities – Net cash flows used in investing activities was $0 in the fiscal year ending June 30, 2015, compared to net cash used in investing activities of $0 in the same period in 2014.

 

Cash Flows from Financing Activities – Net cash flows provided by financing activities in the fiscal year ending June 30, 2015 was $709,550, compared to net cash provided of $876,032 in the same period in 2014. The increase in net cash provided by financing activities was primarily due to an increase in proceeds from issuance of common stock, net of offering costs, and proceeds from notes payable to shareholders.

 

Financing – We expect that our current working capital position, together with our expected future cash flows from operations will be insufficient to fund our operations in the ordinary course of business, anticipated capital expenditures, debt payment requirements and other contractual obligations for at least the next twelve months. However, this belief is based upon many assumptions and is subject to numerous risks (see “Risk Factors”), and we will require additional funding in the future.

 

We have no present agreements or commitments with respect to any material acquisitions of other businesses, products, product rights or technologies or any other material capital expenditures. However, we will continue to evaluate acquisitions of and/or investments in products, technologies, capital equipment or improvements or companies that complement our business and may make such acquisitions and/or investments in the future. Accordingly, we may need to obtain additional sources of capital in the future to finance any such acquisitions and/or investments. We may not be able to obtain such financing on commercially reasonable terms, if at all. Due to the ongoing global economic crisis, we believe it may be difficult to obtain additional financing if needed. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.

 

Capital Expenditures

 

Other Capital Expenditures

 

If we have the funds available, we expect to purchase approximately $30,000 of equipment in connection with the expansion of the business.

 

Fiscal Year End

 

Cerebain and Cerebain Biotech each has a June 30 fiscal year end.

 

Going Concern

 

Our independent auditors have added an explanatory paragraph to their audit opinion issued in connection with our financial statements for our fiscal year ended June 30, 2015. We had a deficit accumulated of $9,094,445 and $6,154,728 at June 30, 2015 and 2014, respectively, and had a net loss of $2,939,717 for the fiscal year ending June 30, 2015 and $3,368,699 for the fiscal year ended June 30, 2014, and net cash used in operating activities of $710,752 for the fiscal year ending June 30, 2015 and $874,352 for the fiscal year ended June 30, 2014, with no revenue earned since inception.

 

25

 

While we are commencing operations and attempting to generate revenues, our cash position will not be significant enough to support our daily operations. Management intends to raise additional funds by way of a public or private offering. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for us to continue as a going concern. While we believe in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to further implement our business plan, generate revenues, and successfully borrow money or sell our securities for cash.

 

The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.

 

Critical Accounting Policies

 

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. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies that are significant to understanding our results. For additional information, see Note 3 - Summary of Significant Accounting Policies on page F-9.

 

The following are deemed to be the most significant accounting policies affecting the Company.

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States 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 reporting periods. Measurement, estimates and assumptions are used for, but not limited to, useful lives and residual value of long-lived assets and the valuation of warrants and options. Management makes these estimates using the best information available at the time the estimates are made; however actual results when ultimately realized could differ from those estimates. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumption.

 

Revenue Recognition and Accounts Receivable

 

The Company will recognize revenues in accordance with the guidelines of the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104 “Revenue Recognition”.

 

Under SAB 104, four conditions must be met before revenue can be recognized: (i) there is persuasive evidence that an arrangement exists, (ii) delivery has occurred or service has been rendered, (iii) the price is fixed or determinable, and (iv) collection is reasonably assured. The Company provides for an allowance for doubtful account based history and experience considering economic and industry trends. The Company does not have any off-Balance Sheet exposure related to its customers.

 

26

 

Income Taxes

 

We account for income taxes under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 740, Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.

 

Stock Compensation

 

The Company accounts for employee and non-employee stock awards under ASC 718, Compensation – Stock Compensation, whereby equity instruments issued to employees for services are recorded based on the fair value of the instrument issued and those issued to nonemployees are recorded based on the fair value of the consideration received or the fair value of the equity instrument, whichever is more reliably measurable.

 

Accounting for Derivative Financial Instruments

 

The Company evaluates stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity (“ASC 815-40”). The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at 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 or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

 

The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants are recognized currently in earnings until such time as the warrants are exercised, expire or the related rights have been waived. These common stock purchase warrants do not trade in an active securities market. The Company estimates the fair value of these warrants using the binomial method.

 

If a conversion feature of conventional convertible debt is not accounted for as a derivative instrument and 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. The convertible debt is recorded net of the discount related to the BCF. The Company amortizes the discount to interest expense over the life of the debt using the straight-line method, which approximates the effective interest rate method.

 

Fair Value of Financial Instruments

 

The Company follows the provisions of ASC 820. This Topic defines fair value, establishes a measurement framework and expands disclosures about fair value measurements.

 

The Company uses fair value measurements for determining the valuation of derivative financial instruments payable in shares of its common stock. This primarily involves option pricing models that incorporate certain assumptions and projections to determine fair value. These require management judgment.

 

27

 

Recent Accounting Pronouncements

 

The Company has evaluated new accounting pronouncements that have been issued and are not yet effective for the Company and determined that there are no such pronouncements expected to have an impact on the Company’s future financial statements.

 

Off-Balance Sheet Arrangements

 

As of June 30, 2015, we have not entered into any transaction, agreement or other contractual arrangement with an entity unconsolidated under which it has:

 

	·	a retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit;
	·	liquidity or market risk support to such entity for such assets;
	·	an obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument; or
	·	an obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by, and material to us, where such entity provides financing, liquidity, market risk or credit risk support to or engages in leasing, hedging, or research and development services with us.

 

The following table sets forth our current contractual obligations as of June 30, 2015:

 

		Payments due by period
Contractual Obligations		Total				Less than 1 year				1-3 years				3-5 years				More than 5 years
Long Term Debt		$	1,752,500			$	277,500			$	1,475,000				-				-
Operating Leases		$	3,892			$	1,652			$	2,240				-				-
Total		$	1,756,392			$	279,152			$	1,477,240				-				-

 

Inflation

 

Management believes that inflation has not had a material effect on our results of operations.

 

Item 7A. Quantitative and Qualitative Disclosure About Market Risk

 

We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.

 

Item 8. Financial Statements and Supplementary Data

 

The consolidated financial statements and supplementary financial information which are required to be filed under this item are presented under Item 13. Exhibits, Financial Statement Schedules and Reports on Form 10-K in this document, and are incorporated herein by reference.

 

Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

 

There have been no events required to be reported under this Item.

 

28

 

Item 9A. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

We maintain disclosure controls and procedures (as defined in Rule 13a-l5(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.

 

As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2015. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2015, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended.

 

Management’s Report on Internal Controls over Financial Reporting

 

The Company’s management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rule 13a-l5(f) of the Securities Exchange Act). Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2015. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that assessment, management believes that, as of June 30, 2015, the Company’s internal control over financial reporting was ineffective based on the COSO criteria, due to the following material weaknesses listed below.

 

Insufficient segregation of duties in our finance and accounting functions due to limited personnel. During the fiscal year ended June 30, 2015, we internally performed all aspects of our financial reporting process, including, but not limited to, access to the underlying accounting records and systems, the ability to post and record journal entries and responsibility for the preparation of the financial statements. Due to the fact these duties were performed by the same person, a lack of review was created over the financial reporting process that might result in a failure to detect errors in spreadsheets, calculations, or assumptions used to compile the financial statements and related disclosures as filed with the SEC.

 

Insufficient corporate governance policies. Our corporate governance activities and processes are not always formally documented nor are they reviewed and approved by anyone other than the CFO.

 

These control deficiencies could result in a material misstatement to our interim or annual financial statements that would not be prevented or detected.

 

We intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies and we intend to consider the results of our remediation efforts and related testing as part of our next assessment of the effectiveness of our internal control over financial reporting.

 

This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the SEC that permit us to provide only management’s report in this annual report.

 

Changes in Internal Control over Financial Reporting

 

There have been no changes in our internal control over financial reporting during the fiscal year ending June 30, 2015 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

 

Item 9B. Other Information

 

There have been no events required to be reported under this Item.

 

29

PART III

 

Item 10. Directors, Executive Officers and Corporate Governance

 

The following table sets forth the names, ages, and biographical information of each of our current directors and executive officers and the positions with the Company held by each person. Our executive officers are elected annually by the Board of Directors. The directors serve one-year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. Unless described below, there are no family relationships among any of the directors and officers.

 

Name		Age		Position(s)
Eric Clemons		44		President and a Director
Wesley Tate		52		Chief Financial Officer, Secretary and a Director

 

Eric Clemons

 

Prior to joining Cerebain Biotech Corp., from 1997 until 2010, Mr. Clemons served as President and Chief Operating Officer for GTC Telecom Corp, a publicly-traded Nevada Corporation that operated in Costa Mesa, California. The company provided telecommunication services, including long distance telephone services, calling card services and various Internet related services including Internet Service Provider access and Web Page Hosting. In addition, the company developed an international subsidiary offering call center and IT support services in India. While serving in this capacity, Mr. Clemons was instrumental in growing the company’s annual revenues from $500,000 per year to over $17 million per year. In a span of 9 years, GTC Telecom generated total revenues of over $75 million dollars. Since 2010, Mr. Clemons has been providing management and financial consulting services to small-to-mid sized public companies.

 

Wesley Tate

 

Prior to joining Cerebain Biotech Corp., Mr. Tate was the owner of Strategic Business Associates, a Tennessee company providing consulting services to start-up and small companies, assisting with the inception of an idea through growing a successful business. Prior to starting his own company, Mr. Tate served as the Chief Financial Officer for HST Global, Inc., a Bio-Technology Development Stage Company located in Hampton, VA. Mr. Tate also served as the Director of Operations for The Health Network, Inc., a Health and Wellness company located in Hampton, VA. Other positions include Executive Vice President and Chief Operating Officer for InnerLight Inc. located in Provo, Utah, Director of Finance for Beverly Sassoon and Co. in Boca Raton, Florida and Finance Director for Strategic Telecom Systems in Knoxville Tennessee. Wes has spent over 15 years overseeing all financial and operational responsibilities for companies in a variety of industries including bio-technology, pharmaceutical, health care, construction and telecommunications. Mr. Tate received his Bachelor of Science degree from the University of Tennessee, Knoxville, with majors in Finance and Psychology, and earned his Masters of Business Administration from the University of Tennessee, Knoxville, with concentrations in finance and management. Wes served his country in the United States Army.

 

Compliance with Section 16(a) of the Securities Exchange Act of 1934

 

Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who own more than ten percent of a registered class of our equity securities to file with the SEC initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater than ten percent shareholders are required by SEC regulations to furnish us with copies of all Section 16(a) forms they file.

 

30

 

During the most recent fiscal year, to the best of our knowledge, the following delinquencies occurred:

 

Name		No. of Late Reports				No. of Transactions Reported Late				No. of Failures to File
Eric Clemons			1				1				0
Wesley Tate			1				1				0

 

Family Relationships

 

There are no family relationships between or among the above directors, executive officers or persons nominated or charged by us to become directors or executive officers.

 

Conflicts of Interest

 

Certain potential conflicts of interest are inherent in the relationships between our officers and directors and us.

 

From time to time, one or more of our affiliates may form or hold an ownership interest in and/or manage other businesses both related and unrelated to the type of business that we own and operate. These persons expect to continue to form, hold an ownership interest in and/or manage additional other businesses which may compete with our business with respect to operations, including financing and marketing, management time and services and potential customers. These activities may give rise to conflicts between or among the interests of us and other businesses with which our affiliates are associated. Our affiliates are in no way prohibited from undertaking such activities, and neither us nor our shareholders will have any right to require participation in such other activities.

 

Further, because we intend to transact business with some of our officers, directors and affiliates, as well as with firms in which some of our officers, directors or affiliates have a material interest, potential conflicts may arise between the respective interests of us and these related persons or entities. We believe that such transactions will be effected on terms at least as favorable to us as those available from unrelated third parties.

 

With respect to transactions involving real or apparent conflicts of interest, we have adopted policies and procedures which require that: (i) the fact of the relationship or interest giving rise to the potential conflict be disclosed or known to the directors who authorize or approve the transaction prior to such authorization or approval, (ii) the transaction be approved by a majority of our disinterested outside directors, and (iii) the transaction be fair and reasonable to us at the time it is authorized or approved by our directors.

 

Our policies and procedures regarding transactions involving potential conflicts of interest are not in writing. We understand that it will be difficult to enforce our policies and procedures and will rely and trust our officers and directors to follow our policies and procedures. We will implement our policies and procedures by requiring the officer or director who is not in compliance with our policies and procedures to remove himself and the other officers and directors will decide how to implement the policies and procedures, accordingly.

 

Involvement in Legal Proceedings

 

We are not involved in any legal matters arising in the normal course of business.

 

31

 

Board Committees

 

We do not currently have a separately designated audit, nominating or compensation committee. However, we do intend to comply with the independent director and committee composition requirements in the future.

 

We maintain a Scientific Advisory Board to assist the Board of Directors by reviewing and evaluating our research and development programs. Dr. Husain serves as the Principal Scientist of our Scientific Advisory Board.

 

Director Independence

 

We do not have any independent directors. Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship which, in the opinion of the company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:

 

	·	the director is, or at any time during the past three years was, an employee of the company;
	·	the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service);
	·	a family member of the director is, or at any time during the past three years was, an executive officer of the company;
	·	the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions);
	·	the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or
	·	the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit.

 

We do not currently have a separately designated audit, nominating or compensation committee.

 

Indemnification of Directors and Officers

 

Articles IX of our Articles of Incorporation provides the following:

 

The personal liability of the directors of the corporation is hereby eliminated to the fullest extent permitted by paragraph 1 of Section 78.037 of the General Corporation Law of the State of Nevada, as the same may be amended and supplemented.

 

Articles X of our Articles of Incorporation provides the following:

 

The corporation shall, to the fullest extent permitted by Section 78.751 of the General Corporation Law of the State of Nevada, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all expenses, liabilities, or other matters referred to in or covered by said section.

 

32

 

Item 11. Executive Compensation

 

The following sets forth information with respect to the compensation awarded or paid to Eric Clemons, our President, Wesley Tate, our Chief Financial Officer and Secretary, and Gerald DeCiccio, our former President and Chief Executive Officer, Chief Financial Officer and Secretary, for all services rendered in all capacities to us in fiscal years ended June 30, 2015, 2014 and 2013.

 

Summary Compensation Table

 

The following table sets forth information regarding each element of compensation that we paid or awarded to our named executive officers for the fiscal years ended June 30, 2015, 2014 and 2013.

 

Name and Principal Position		Fiscal Year		Salary($)				Bonus($)				All Other Compensation ($)				Total($)
Eric Clemons		2015		$	129,492			$	0			$	45,500			$	174,992
President		2014		$	156,574			$	0			$	59,000			$	215,574
		2013		$	12,265			$	10,000			$	0			$	22,265
Wesley Tate		2015		$	76,250			$	0			$	3,750			$	80,000
CFO and Secretary		2014		$	93,625			$	0			$	0			$	93,625
		2013		$	18,034			$	0			$	0			$	18,034
Gerald DeCiccio (1) (2)		2015		$	0			$	0			$	0			$	0
Former President and		2014		$	0			$	0			$	0			$	0
Chief Executive Officer		2013		$	21,080			$	0			$	0			$	21,080

________________ 

(1)	On February 9, 2012, we acquired Cerebain in a reverse acquisition transaction and, in connection with that transaction, Mr. DeCiccio was appointed as our President, Chief Executive Officer, Chief Financial Officer and Secretary. Mr. DeCiccio resigned from these officer positions in January 2013.
(2)	Includes $21,080 paid to Mr. DeCiccio by Cerebain for the fiscal year ended June 30, 2013.

 

Outstanding Equity Awards at Fiscal Year-End Table

 

The following table sets forth certain information concerning outstanding stock awards held by the Named Executive Officers for our fiscal year ended June 30, 2015:

 

		Option Awards																		Stock Awards
Name		Number of Securities Underlying Unexercised Options (#) Exercisable				Number of Securities Underlying Unexercised Options (#) Unexercisable				Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#)				Option Exercise Price ($)				Option Expiration Date		Number of Shares or Units of Stock That Have Not Vested (#)				Market Value of Shares or Units of Stock That Have Not Vested ($)				Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#)				Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($)
Eric Clemons			60,000				40,000				-0-				5.00			2023			-0-				-0-				-0-				-0-
Wesley Tate			30,000				20,000				-0-				5.00			2023			-0-				-0-				-0-				-0-
Eric Clemons			20,000				80,000				-0-				1.20			2024			-0-				-0-				-0-				-0-
Wesley Tate			10,000				40,000				-0-				1.20			2024			-0-				-0-				-0-				-0-

 

33

 

Employment Agreements

 

On June 15, 2013, we entered into an employment agreement with Eric Clemons. Under the terms of the agreement, Mr. Clemons shall be paid an annual salary of One Hundred Fifty-Six Thousand Dollars ($156,000), shall be entitled to a bonus of $40,000 upon delivery to the company of a prototype medical device from Sonos Models Inc., and should he be responsible for the Company consolidating with or merge into another corporation or convey all or substantially all of its assets to another corporation, will receive a cash bonus calculated using a Lehman formula of 5% for the first $1,000,000, 4% for the second $1,000,000, 3% for the third $1,000,000, 2% for the fourth $1,000,000, and 1% thereafter. In addition, we also issued Mr. Clemons an option to acquire up to 100,000 Shares of our Common Stock, fully paid and non-assessable at an exercise price of $5.00 per share subject to a vesting schedule. On August 30, 2013, we entered into an addendum to this agreement in which Mr. Clemons will be entitled to a stock award of 25,000 shares of our common restricted stock if, within 24 months, there is a reorganization of the company. On October 1, 2014, the Company entered into an addendum to the employment agreement with Eric Clemons. Under the terms of the addendum, the agreement has been extended one year until June 15, 2017. Mr. Clemons shall be paid an annual salary of One Hundred Ninety Five Thousand Dollars ($195,000) and the Company issued Mr. Clemons an option to acquire up to 100,000 Shares of our Common Stock under the Company’s 2014 Omnibus Stock Grant and Option Plan, fully paid and non-assessable at an exercise price of $1.20 per share subject to a vesting schedule. Mr. Clemons has agreed to defer the aforementioned annual salary and accept a consulting fee for the same amount. On March 1, 2015, the Company entered into an addendum to the employment agreement with Eric Clemons. Under the terms of the addendum, Mr. Clemons shall be paid a cash placement bonus equal to an amount up to 10% of the aggregate purchase price paid by each purchaser of the Company’s Securities, where the purchaser of said Securities has been directly introduced to the Company by Mr. Clemons. According to the terms of this agreement, Mr. Clemons was compensated $31,250 for the year ended June 30, 2015.

 

On June 15, 2013, we entered into an employment agreement with Wesley Tate. Under the terms of the agreement, Mr. Tate shall be paid an annual salary of One Hundred Five Thousand Dollars ($105,000) and shall be entitled to a bonus of $20,000 upon delivery to the company of a prototype medical device form Sonos Models, Inc. In addition, we also will issue Mr. Tate an option to acquire up to 50,000 Shares of our Common Stock under the Company’s 2014 Omnibus Stock Grant and Option Plan, fully paid and non-assessable at an exercise price of $5.00 per share subject to a vesting schedule. On August 30, 2013, we entered into an addendum to this agreement in which Mr. Tate will be entitled to a stock award of 25,000 shares of our common restricted stock if, within 24 months, there is a reorganization of the company. On April 1, 2014, we entered into an addendum to this agreement in which Mr. Tate was issued stock in the amount of 25,000 of the company’s common restricted shares representing a retention bonus as an incentive for him to remain in the employment of the Company. The company recognized a prepaid expense of approximately $37,500, of which $28,000 and $9,000 was expensed in the years ended 2015 and 2014, respectively. On October 1, 2014, the Company entered into an addendum to the employment agreement with Wesley Tate. Under the terms of the addendum, the agreement has been extended one year until June 15, 2017. Mr. Tate shall be paid an annual salary of One Hundred Fifty Six Thousand Dollars ($156,000) and the Company issued Mr. Tate an option to acquire up to 50,000 Shares of our Common Stock, fully paid and non-assessable at an exercise price of $1.20 per share subject to a vesting schedule. Mr. Tate has agreed to defer the aforementioned annual salary and accept a consulting fee for the same amount.

 

Compensation of Directors

 

On June 1, 2013, we entered into a consulting agreement with Gerald DeCiccio. Under the terms of the agreement, Mr. DeCiccio was paid a cash retainer of $5,000 per quarter, payable at the beginning of a quarter; $1,000 per major committee meeting as contemplated in the respective committee charter, payable at the beginning of the subsequent quarter; $2,500 per quarter, payable at the beginning of a quarter, for Chairman of the Audit Committee; and $1,000 per quarter, payable at the beginning of a quarter, for Chairman of any other board committee. In addition, he was also issued 10,000 CBBT common restricted shares annually. The first issuance of 10,000 shares was on the Effective Date of his Agreement and each year on January 1 thereafter. These shares were fully vested on the date issued. On August 30, 2013, we entered into an addendum to this agreement in which Mr. DeCiccio was entitled to a stock award of 25,000 shares of our common restricted stock if, within 24 months, there is a reorganization of the company. Mr. DeCiccio resigned as a director of the company, effective June 10, 2014.

 

34

 

The following represents a summary of the Equity Compensation grants and options awards outstanding at June 30, 2015 and changes during the years then ended:

 

		Options				Options Average Exercise Price				Aggregate Intrinsic Value
Outstanding July 1, 2013			150,000			$	5.00			$	-
Granted			-				-
Exercised			-				-
Expired/Forfeited			-				-
Outstanding, June 30, 2014			150,000			$	5.00			$	-
Granted			150,000				1.20			$	-
Exercised			-				-
Expired/Forfeited			-				-
Outstanding, June 30, 2015			300,000			$	3.10			$	-
Exercisable at June 30, 2015			120,000			$	3.10			$	-
Expected to be vested			300,000			$	3.10			$	-
Compensation to be recognized		$	580,100
Forfeiture Rate			-				-

 

Item 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

 

The following table sets forth information relating to the beneficial ownership our common stock as of June 30, 2015 by (i) each person known to be the beneficial owner of more than 5% of the outstanding shares of common stock and (ii) each of our directors and executive officers. Unless otherwise noted below, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. For purposes hereof, a person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date hereof upon the exercise of warrants or options or the conversion of convertible securities. Each beneficial owner’s percentage ownership is determined by assuming that any warrants, options or convertible securities that are held by such person (but not those held by any other person) and which are exercisable within 60 days from the date hereof, have been exercised.

 

Name and Address (2)		Amount of Beneficial Ownership				Percent of Class (1)
Eric Clemons (3) (5)			755,122				15.36	%
Wesley Tate (3) (6)			112,203				2.30	%
Dr. Surinder Singh Saini, MD			825,000				17.06	%
Sonos Models, Inc.(7)			350,000				7.20	%
Brad Vroom			497,938	(4)			9.89	%
All Officers and Directors as a Group (2 Persons)			867,325				17.50	%

 

35

___________________ 

(1)	Based on 4,835,347 shares of common stock issued and outstanding. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person.
(2)	Unless otherwise noted, the address of each beneficial owner is c/o Cerebain Operating, Inc., 13727 Noel Road, Tower II, Suite 200, Dallas, TX 75240.
(3)	Indicates an officer and/or director of the Company.
(4)	Includes 197,938 shares of our common stock that Mr. Vroom could acquire under a convertible note he has with the company, which include a 9.9% limiter on them that prohibit conversion if such conversion would cause Mr. Vroom to own more than 9.9% of our common stock.
(5)	Includes options to purchase 60,000 shares of common stock, at an exercise price of $5.00 per share and 20,000 shares of common stock, at an exercise price of $1.20 per share.
(6)	Includes options to purchase 30,000 shares of common stock, at an exercise price of $5.00 per share and 10,000 shares of common stock, at an exercise price of $1.20 per share.
(7)	Includes warrants to purchase 25,000 shares of our common stock at $2.00 per share.

 

We are not aware of any person who owns of record, or is known to own beneficially, five percent or more of our outstanding securities of any class, other than as set forth above. We do not have an investment advisor. There are no current arrangements which will result in a change in control.

 

Equity Compensation Plans

 

On April 15, 2014, shareholders of the company approved the 2014 Cerebain Biotech Corp. Omnibus Stock Grant and Option Plan.

 

In December 2014, we entered into consulting agreements with two individuals. The agreements called for an issuance of options to purchase up to a total of 100,000 shares of our common stock at an exercise price of $1.30 per share. Fair Market Value of these options totaled approximately $83,000. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 100%; risk-free interest rate of 0.49%; expected term of 2 years; and 0% dividend yield. The options were fully vested on date of issuance.

 

In October 2014, we entered into employee agreements addendums with two individuals, namely Eric Clemons and Wesley Tate, our executive officers. The agreements called for an issuance of options, under the terms of the 2014 Omnibus stock Grant and Option Plan, to purchase up to a total of 150,000 shares of our common stock at an exercise price of $1.20 per share, subject to a vesting schedule. Fair Market Value of these options totaled approximately $134,000. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 100%; risk-free interest rate of 1.69%; expected term of 5 years; and 0% dividend yield. As of June 30, 2015, 30,000 of the options to purchase our common stock have vested.

 

In June 2013, we entered into employee agreements with two individuals, namely Eric Clemons and Wesley Tate, our executive officers. The agreements called for an issuance of options to purchase up to a total of 150,000 shares of our common stock at an exercise price of $5.00 per share, subject to a vesting schedule. Fair Market Value of these options totaled approximately $1.2 million. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 100%; risk-free interest rate of 1.04%; expected term of 5 years; and 0% dividend yield. As of June 30, 2015, 90,000 of the options to purchase our common stock have vested.

 

36

 

The following represents a summary of the Equity Compensation grants and options awards outstanding at June 30, 2015 and changes during the years then ended:

 

2015
Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a))
		(a)				(b)				(c)
Equity compensation plans approved by security holders			150,000			$	1.20				3,605,000
Equity compensation plans not approved by security holders			250,000			$	1.24				-
Total			400,000			$	2.65				3,605,000

 

Item 13. Certain Relationships and Related Transactions, and Director Independence

 

In October 2014, we entered into employee agreements addendums with two individuals, namely Eric Clemons and Wesley Tate, our executive officers. The agreements called for an issuance of options, under the terms of the 2014 Omnibus stock Grant and Option Plan, to purchase up to a total of 150,000 shares of our common stock at an exercise price of $1.20 per share, subject to a vesting schedule. Fair Market Value of these options totaled approximately $134,000. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 100%; risk-free interest rate of 1.69%; expected term of 5 years; and 0% dividend yield. As of June 30, 2015, 30,000 of the options to purchase our common stock have vested.

 

In June 2013, we entered into employee agreements with two individuals, namely Eric Clemons and Wesley Tate, our executive officers. The agreements called for an issuance of options to purchase up to a total of 150,000 shares of our common stock at an exercise price of $5.00 per share, subject to a vesting schedule. Fair Market Value of these options totaled approximately $1.2 million. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 100%; risk-free interest rate of 1.04%; expected term of 5 years; and 0% dividend yield. As of June 30, 2015, 90,000 of the options to purchase our common stock have vested.

 

Item 14. Principal Accounting Fees and Services

 

Audit-Related Fees

 

The aggregate fees billed in 2015 by Hartley Moore Accountancy Corporation for the review of the Company’s statements included in our quarterly reports on Form 10-Q for March 31, 2015, December 31, 2014 and September 30, 2014 were $7,500.

 

The aggregate fees billed by Hartley Moore Accountancy Corporation for the audit of our financial statements in 2015 were $7,500.

 

37

 

Tax Fees

 

We did not incur any fees for tax services for fiscal year ended 2015.

 

All Other Fees

 

None

Item 15. Exhibits, Financial Statement Schedules.

 

(a)  The Exhibits listed below are filed as part of this Annual Report.

 

Item No.		Description
3.1 (1)		Articles of Incorporation of Cerebain Biotech Corp., a Nevada corporation, filed with the Secretary of State for the State of Nevada on December 18, 2007
3.2 (1)		Bylaws of Cerebain Biotech Corp., a Nevada corporation
10.1 (1)		Agreement by and between Cerebain Biotech Corp. and R. Douglas Barton dated January 2, 2009
10.2 (1)		Agreement by and between Cerebain Biotech Corp. and R. Douglas Barton dated January 2, 2009
10.3 (2)		Share Exchange Agreement by and between Cerebain Biotech Corp. and the shareholders of Cerebain Operating, Inc. dated January 17, 2012
10.4 (2)		Spinoff Agreement by and between Cerebain Biotech Corp. and R. Douglas Barton dated January 17, 2012
10.5 (2)		Stock Purchase Agreement by and between Cerebain Operating, Inc. and certain shareholders of Cerebain Biotech Corp. dated January 17, 2012
10.6 (2)		Patent License Agreement by and between Cerebain Operating, Inc. and Dr. Surinder Singh Saini dated June 10, 2010
10.7 (3)		Letter Agreement with Sonos Models, Inc. dated September 24, 2012
10.8 (4)		$240,000 Principal Amount Convertible Promissory Note dated June 18, 2012
10.9 (6)		$235,000 Amended and Consolidated Promissory Note dated November 1, 2012
10.10 (5)		Termination Agreement and General Release with Gerald A. DeCiccio dated January 18, 2013

 

38

 

10.11 (5)		Termination Agreement and General Release with Eric Clemons dated January 18, 2013
10.12 (5)		Termination Agreement and General Release with Paul Sandhu dated January 18, 2013
10.13 (5)		Promissory Note Issued to Gerald A. DeCiccio dated January 18, 2013
10.14 (5)		Promissory Note Issued to Eric Clemons dated January 18, 2013
10.15 (5)		Promissory Note Issued to Paul Sandhu dated January 18, 2013
10.16 (7)		$600,000 Amended and Consolidated Promissory Note dated March 14, 2013
10.17 (8)		Employment Agreement with Eric Clemons dated June 15, 2013
10.18 (8)		Employment Agreement with Wesley Tate dated June 15, 2013
10.19 (8)		Consulting Agreement with Gerald DeCiccio dated June 15, 2013
10.20 (8)		Consulting Agreement with IDC Consulting & Investors LLC dated April 15, 2013
10.21 (10)		Consulting Agreement with Superior Inc. dated October 15, 2013
10.22 (10)		$970,000 Amended and Consolidated Promissory Note dated October 15, 2013
10.23 (9)		Stock Purchase Agreement with Eric Clemons from Conversion of Debt dated December 30, 2013
10.24 (9)		Stock Purchase Agreement with Gerald DeCiccio from Conversion of Debt dated December 30, 2013
10.25 (11)		$1,245,000 Amended and Consolidated Promissory Note dated February 25, 2014
10.26 (12)		Resignation of Gerald DeCiccio from Board of Directors dated June 10, 2014
10.27 (14)		$1,345,000 Amended and Consolidated Promissory Note dated May 29, 2014

 

39

 

10.28 (14)		Stock Purchase Agreement with Wesley Tate from Conversion of Debt dated June 16, 2014
10.29 (13)		2014 Cerebain Biotech Corp. Omnibus Stock Grant and Option Plan
14 (1)		Code of Ethics of Cerebain Biotech Corp.
21 (14)		Cerebain Biotech Corps. Domestic and International Subsidiaries
31.1		Certification of the Chief Executive Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003. *
31.2		Certification of the Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003. *
32.1		Certification of the Chief Executive Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003. *
32.2		Certification of the Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003. *
101**		Interactive Data File (Form 10-K for the fiscal year ended June 30, 2015 furnished in XBRL).
101.INS		Interactive Data File (Form 10-K for the fiscal year ended June 30, 2015 furnished in XBRL).
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

_______________ 

*	filed herewith
**	Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections
(1)	Incorporated by reference from our Registration Statement on Form S-1 filed with the Commission on January 27, 2009.
(2)	Incorporated by reference from our Form 8-K filed with the Commission on February 10, 2012.
(3)	Incorporated by reference from our Form 8-K filed with the Commission on September 28, 2012.
(4)	Incorporated by reference from our Form 10-Q filed with the Commission on November 14, 2012.
(5)	Incorporated by reference from our Form 8-K filed with the Commission on January 24, 2013.
(6)	Incorporated by reference from our Form 10-Q filed with the Commission on February 12, 2013.
(7)	Incorporated by reference from our Form 10-Q filed with the Commission on May 3, 2013.
(8)	Incorporated by reference from our Form 10-K/A filed with the Commission on October 4, 2013.
(9)	Incorporated by reference from our Form 8-K filed with the Commission on January 6, 2014.
(10)	Incorporated by reference from our Form 10-Q filed with the Commission on February 10, 2014.
(11)	Incorporated by reference from our Form 10-Q filed with the Commission on May 14, 2014.
(12)	Incorporated by reference from our Form 8-K filed with the Commission on May 11, 2014.
(13)	Incorporated by reference from our Form DEF 14A filed with the Commission on March 14, 2014.
(14)	Incorporated by reference from our Form 10-K filed with the Commission on August 11, 2014.

 

40

 

SIGNATURES

 

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.

 

	Cerebain Biotech Corp. a Nevada corporation
Dated: September 22, 2015	By:	/s/ Eric Clemons
		Eric Clemons
		President

 

 

41

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARIES 

(FORMERLY DISCOUNT DENTAL MATERIALS, INC.)

 

Index to Consolidated Financial Statements

CONTENTS

 

		Page
Report of Independent Registered Public Accounting Firm		F-2
Consolidated Balance Sheets		F-3
Consolidated Statements of Operations		F-4
Consolidated Statements of Changes in Stockholders’ Deficit		F-5
Consolidated Statements of Cash Flows		F-6
Notes to Consolidated Financial Statements		F-7

 

F-1

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

 

To the Board of Directors and Stockholders 

of Cerebain Biotech Corp. (formerly Discount Dental Materials, Inc.):

 

We have audited the consolidated balance sheet of Cerebain Biotech Corp. (formerly Discount Dental Materials, Inc.) as of June 30, 2015 and 2014, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for each of the years then ended. These financial statements are the responsibility of the entity’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with auditing standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

 

In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Cerebain Biotech Corp. (formerly Discount Dental Materials, Inc.) as of June 30, 2015 and 2014, and the results of its operations and its cash flows for each of the years then ended, in conformity with accounting principles generally accepted in the United States of America.

 

The accompanying financial statements have been prepared assuming that the entity will continue as a going concern. The entity has no revenues, has suffered recurring losses from operations and has limited cash. The Company may not have adequate readily available resources to fund operations through fiscal 2016. This raises substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

/s/ Hartley Moore Accountancy Corporation 

Irvine, California 

September 22, 2015

 

F-2

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

(FORMERLY DISCOUNT DENTAL MATERIALS, INC.)

CONSOLIDATED BALANCE SHEETS

 

		June 30,
		2015				2014
ASSETS
Current assets:
Cash and cash equivalents		$	486			$	1,688
Prepaid expenses			185,227				694,292
Total current assets			185,713				695,980
Long-term assets:
Patent rights			183,900				133,900
Total long-term assets			183,900				133,900
Total assets		$	369,613			$	829,880
LIABILITIES AND STOCKHOLDERS’ DEFICIT
Current liabilities:
Accounts payable		$	399,486			$	133,200
Related party payables			530,459				288,009
Convertible note to stockholders, current portion, net of debt discount of $66,969 and $0, respectively			210,531				-
Notes payable to stockholders			18,000				-
Related party notes payable			113,000				144,153
Total current liabilities			1,271,476				565,362
Long term liabilities:
Convertible note to stockholders, net of debt discount of $0 and $444,127, respectively			1,475,000				1,058,373
Total Long term liabilities			1,475,000				1,058,373
Total liabilities			2,746,476				1,623,735
Commitments and contingencies (Note 4)
Stockholders’ deficit
Preferred stock ($0.001 par value: 1,000,000 shares authorized; none issued and outstanding)			-				-
Common stock ($0.001 par value: 249,000,000 shares authorized;
4,835,347 and 4,176,323 shares issued and outstanding at June 30, 2015 and 2014, respectively			4,835				4,176
Additional paid in capital			6,712,747				5,356,697
Accumulated deficit			(9,094,445	)			(6,154,728	)
Total stockholders’ deficit			(2,376,863	)			(793,855	)
Total liabilities and stockholders’ deficit		$	369,613			$	829,880

See accompanying notes to the consolidated financial statements

F-3

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

(FORMERLY DISCOUNT DENTAL MATERIALS, INC.)

CONSOLIDATED STATEMENTS OF OPERATIONS

 

		For The Fiscal Year Ended June 30,
		2015				2014
Operating Expenses
Selling, general and administrative expenses		$	1,575,681			$	2,342,555
Research and development costs			379,125				349,035
Marketing expenses			172,039				171,638
Depreciation			-				-
Total operating expenses			2,126,845				2,863,228
Other (income) expense
Accretion of debt discount			612,158				363,755
Interest Expense			200,714				141,716
Total other (income) expense			812,872				505,471
Net operating loss			(2,939,717	)			(3,368,699	)
Loss before income taxes			(2,939,717	)			(3,368,699	)
Income taxes			-				-
Net loss		$	(2,939,717	)		$	(3,368,699	)
Loss per share:
Basic and diluted loss per share		$	(0.65	)		$	(0.93	)
Basic and diluted weighted average shares outstanding			4,507,047				3,615,160

 

See accompanying notes to the consolidated financial statements

 

F-4

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

(FORMERLY DISCOUNT DENTAL MATERIALS, INC.)

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT

 

		Common Stock # of Shares				Common Stock Amount				Additional Paid in Capital				Accumulated Deficit				Total Stockholders’ Deficit
Balance, June 30, 2013			3,158,000			$	3,158			$	1,924,039			$	(2,786,029	)		$	(858,832	)
Shares issued for cash			20,000				20				29,980								30,000
Shares issued for services			998,323				998				2,588,518								2,589,516
Warrants issued											65,660								65,660
Options issued											246,500								246,500
Beneficial conversion feature associated with convertible note											502,000								502,000
Net loss for the year															(3,368,699	)			(3,368,699	)
Balance, June 30, 2014			4,176,323			$	4,176			$	5,356,697			$	(6,154,728	)		$	(793,855	)
Shares issued for cash			340,198				340				416,210								416,550
Shares issued for services			257,500				258				229,617								229,875
Shares issued for conversion of related parties payable			48,435				48				72,605								72,653
Shares issued for conversion of convertible notes payable			12,891				13				25,768								25,781
Options issued											376,850								376,850
Beneficial conversion feature associated with convertible note											235,000								235,000
Net loss for the year															(2,939,717	)			(2,939,717	)
Balance, June 30, 2015			4,835,347			$	4,835			$	6,712,747			$	(9,094,445	)		$	(2,376,863	)

 

 See accompanying notes to the consolidated financial statements

 

F-5

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY 

(FORMERLY DISCOUNT DENTAL MATERIALS, INC.)

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		For the Fiscal Year Ended
		June 30,
		2015				2014
Cash flows from operating activities:
Net loss		$	(2,939,717	)		$	(3,368,699	)
Adjustments to reconcile net loss to net cash used in operating activities:
Accretion of debt discount			612,158				363,755
Warrants issued for research and development			-				65,660
Stock compensation related to stock options			293,400				246,500
Amortization of prepaid consulting compensation			837,190				1,581,408
Changes in operating assets and liabilities:
Prepaid Expenses			(14,800	)			(2,967	)
Accounts payable			266,286				52,046
Related party payables			234,731				200,825
Accrued Payroll and Taxes			-				(12,880	)
Net cash used in operating activities			(710,752	)			(874,352	)
Cash flows from investing activities:
			-				-
Net cash used in investing activities			-				-
Cash flows from financing activities:
Proceeds from issuance of common stock and warrants, net of offering costs			416,550				30,000
Notes Payable to related parties			-				1,600
Repayment of notes payable to related parties			-				(31,068	)
Repayment of notes payable to stockholders			-				(5,720	)
Notes payable to stockholders			293,000				881,220
Net cash flows provided by financing activities:			709,550				876,032
Net change in cash and cash equivalents			(1,202	)			1,680
Cash and cash equivalents- beginning of period			1,688				8
Cash and cash equivalents- end of period		$	486			$	1,688
Supplemental disclosure of non cash activities:
Cash paid during the period for:
Interest		$	6,500			$	1,803
Income tax		$	-			$	-

 

Supplemental disclosure on non-cash investing and financing activities: 

Issuance of common stock issuable		$	-			$	30,000
Beneficial conversion feature on convertible note		$	235,000			$	502,000
Stock issued for prepaid asset		$	229,875			$	2,271,200
Conversion of convertible notes payable and interest to stock		$	25,781			$	-
Stock issued for satisfaction of related party payables		$	-			$	37,822
Options issued for prepaid services		$	83,450			$	-
Conversion of related party payable, notes payable and interest into stock		$	72,653			$	288,316
Related party payable for capitalized patent cost		$	50,000			$	50,000

 

See accompanying notes to the consolidated financial statements

 

F-6

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

FOR THE YEARS ENDED JUNE 30, 2015 AND 2014

 

NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES

 

Description of Business

 

Cerebain Biotech Corp. (Formerly Discount Dental Materials, Inc.) (“Cerebain Biotech”), was incorporated on December 18, 2007 under the laws of Nevada. The Company is a smaller reporting biomedical company and through its wholly owned subsidiary, Cerebain Operating, Inc. (Formerly Cerebain Biotech Corp.), the Company’s business revolves around the discovery of products for the treatment of Alzheimer’s disease utilizing Omentum. The Company plans to produce products that will include both a medical device solution as well as a synthetic drug solution.

 

Cerebain Operating, Inc. was incorporated on February 22, 2010, in the State of Nevada.

 

NOTE 2 – BASIS OF PRESENTATION

 

The Company operates in one segment in accordance with accounting guidance Financial Accounting Standards Board (“FASB”) ASC Topic 280, Segment Reporting. Our Chief Executive Officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.

 

Reverse Stock Split

 

On April 15, 2014, the Company filed a Certificate of Amendment to our Certificate of Incorporation to implement a one-for-ten reverse split of our common stock (the “Reverse Stock Split”). The ratio for the Reverse Stock Split was determined by our Board of Directors pursuant to the approval of the stockholders at the Company’s special meeting of stockholders held on April 15, 2014, authorizing the Board to effectuate a reverse stock split of the Company’s common stock. The Company’s common stock began trading on a post-split basis on June 19, 2014.

 

As a result of the Reverse Stock Split, each ten shares of the Company’s issued and outstanding common stock were automatically combined and converted into one issued and outstanding share of common stock. The Reverse Stock Split affected all issued and outstanding shares of the Company’s common stock, as well as common stock underlying stock options, stock appreciation rights, restricted stock, restricted stock units, warrants and convertible debentures outstanding immediately prior to the effectiveness of the Reverse Stock Split. The Reverse Stock Split reduced the number of shares of the Company’s common stock outstanding from approximately 41 million to 4.1 million at the time of the Reverse Stock Split. The Reverse Stock Split did not alter the par value of common stock, which remained $0.001 per share, or modify any voting rights or other terms of the Company’s common stock. Unless otherwise indicated, all information set forth herein gives effect to such Reverse Stock Split.

 

F-7

 

Going Concern

 

The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company had a deficit accumulated during the development stage of $9,094,445 and $6,154,728 at June 30, 2015 and 2014, respectively, had a net loss of $2,939,717 and $3,368,699 for the fiscal years ended June 30, 2015 and 2014, respectively, and net cash used in operating activities of $710,752 and $874,352 for the fiscal years ended June 30, 2015 and 2014, respectively, with no revenue earned since inception, and a lack of operational history. These matters, among others, raise substantial doubt about our ability to continue as a going concern.

 

While the Company is attempting to commence operations and generate revenues, the Company’s cash position may not be significant enough to support the Company’s daily operations. Management intends to raise additional funds by way of a public or private offering. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate revenues.

 

The 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

 

This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of the financial statements.

 

Use of Estimates

 

The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reported periods. Actual results may differ from those estimates and such differences may be material to the financial statements. The more significant estimates and assumptions by management include among others: useful lives and residual values of long-lived assets and valuation of warrants and options. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.

 

Principles of Consolidation

 

The accompanying consolidated financial statements include the accounts of Cerebain Biotech Corp. and its wholly-owned subsidiary, Cerebain Operating, Inc. (collectively referred to as the “Company”). There are no material intercompany transactions.

 

Revenue Recognition

 

The Company expects to recognize revenues in accordance with the guidelines of the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104 “Revenue Recognition”.

 

Under SAB 104, four conditions must be met before revenue can be recognized: (i) there is persuasive evidence that an arrangement exists, (ii) delivery has occurred or service has been rendered, (iii) the price is fixed or determinable, and (iv) collection is reasonably assured.

 

F-8

 

Cash and Cash Equivalents

 

For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of six months or less to be cash equivalents. Accounts held at U.S. financial institutions are insured by the FDIC up to $250,000. Cash balances could exceed insured amounts at any given time, however, the Company has not experienced any such losses.

 

Income Taxes

 

The Company is subject to income taxes in the U.S. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. In accordance with FASB ASC Topic 740, “Income Taxes,” the Company provides for the recognition of deferred tax assets if realization of such assets is more likely than not.

 

The Company accounts for income tax under the provisions of FASB ASC Topic 740, “Income Taxes”, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns. Deferred income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities. Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.

 

Advertising Costs

 

Advertising expenses are recorded as general and administrative expenses when they are incurred. Advertising expense charged to operations was approximately $172,000 for each of the years ended June 30, 2015 and 2014.

 

Research and Development

 

The Company expenses the cost of research and development as incurred. Research and development costs charged to operations for the years ended June 30, 2015 and 2014 were approximately $379,000 and $349,000, respectively.

 

Long-lived Assets

 

The Company’s long-lived assets and other assets (consisting of equipment and purchased intangible assets with finite useful lives) are reviewed for impairment in accordance with the guidance of the FASB Topic ASC 360, “Property, Plant, and Equipment”, and FASB ASC Topic 205 “Presentation of Financial Statements”. The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management’s estimates on asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Through June 30, 2014, the Company had not experienced impairment losses on its long-lived assets. However, there can be no assurances that demand for the Company’s products or services will continue, which could result in an impairment of long-lived assets in the future.

 

F-9

 

Convertible Debt

 

In accordance with ASC Topic 470-20, “Debt with Conversion and Other Options”, conventional convertible debt is a financial instrument in which the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash. Conventional convertible debt with a non-detachable conversion feature that does not contain a cash settlement option, and is not accounted for as a derivative, is recorded as a debt instrument in its entirety.

 

Non-Cash Equity Transactions

 

Shares of equity instruments issued for noncash consideration are recorded at the estimated fair market value of the consideration granted based on the estimated fair market value of the equity instrument, or at the estimated fair market value of the goods or services received whichever is more readily determinable.

 

Accounting for Derivative Financial Instruments

 

The Company evaluates stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity (“ASC 815-40”). The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at 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 or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

 

The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants are recognized currently in earnings until such time as the warrants are exercised, expire or the related rights have been waived. These common stock purchase warrants do not trade in an active securities market. The Company estimates the fair value of these warrants using the binomial method.

 

If a conversion feature of conventional convertible debt is not accounted for as a derivative instrument and 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. The convertible debt is recorded net of the discount related to the BCF. The Company amortizes the discount to interest expense over the life of the debt using the straight-line method, which approximates the effective interest rate method. The Company has recorded a BCF to the notes issued (see Note 6).

 

Fair Value of Financial Instruments

 

The Company applies the provisions of accounting guidance, FASB Topic ASC 825 that requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of June 30, 2015 and 2014, the fair value of cash, accounts payable, related party payables, and notes payable to stockholders approximated carrying value due to the short maturity of the instruments, quoted market prices or interest rates which fluctuate with market rates.

 

F-10

 

Fair Value Measurements

 

FASB ASC Topic 825 “Financial Instruments,” requires disclosure about fair value of financial instruments.

 

The FASB ASC Topic 820, Fair Value Measurement, clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.

 

The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.

 

· Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.

 

· Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.).

 

· Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).

 

The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared.

 

Concentrations, Risks, and Uncertainties

 

The Company is in its early stages of its life cycle and subject to the substantial business risks and uncertainties inherent to such an entity, including the potential risk of business failure.

 

Basic and Diluted Earnings Per Share

 

Basic earnings (loss) per common share is computed by dividing net earnings applicable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method, consisting of shares that might be issued upon exercise of common stock warrants and conversion of convertible notes. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common shares equivalents, because their inclusion would be anti-dilutive.

 

Basic earnings per share are based on the weighted-average number of shares of common stock outstanding. Diluted earnings per share is based on the weighted-average number of shares of common stock outstanding adjusted for the effects of common stock that may be issued as a result of the following types of potentially dilutive instruments:

 

	·	Warrants,
	·	Convertible notes,
	·	Employee stock options, and
	·	Other equity awards, which include long-term incentive awards.

 

F-11

 

The FASB ASC Topic 260, “Earnings Per Share”, requires the Company to include additional shares in the computation of earnings per share, assuming dilution. The additional shares included in diluted earnings per share represents the number of shares that would be issued if all of the Company’s outstanding dilutive instruments were converted into common stock.

 

Diluted earnings per share are based on the assumption that all dilutive options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options, warrants, and convertible notes are assumed to be exercised at the time of issuance, and as if funds obtained thereby were used to purchase common stock at the average market price during the period.

 

Basic and diluted earnings (loss) per share are the same since the Company had net losses for all periods presented and including the additional potential common shares would have an anti-dilutive effect.

 

Recent Accounting Pronouncements

 

The Company has evaluated new accounting pronouncements that have been issued and are not yet effective for the Company and determined that there are no such pronouncements expected to have an impact on the Company’s future financial statements.

 

Reclassifications

 

Certain reclassifications have been made to prior period amounts to conform to current period presentation.

 

NOTE 4 – COMMITMENTS AND CONTINGENCIES

 

Employment Agreements

 

On June 15, 2013, the Company entered into an employment agreement with Eric Clemons. Under the terms of the agreement, Mr. Clemons shall be paid an annual salary of One Hundred Fifty-Six Thousand Dollars ($156,000), shall be entitled to a bonus of $40,000 upon delivery to the company of a prototype medical device from Sonos Models Inc., and should he be responsible for the Company consolidating with or merge into another corporation or convey all or substantially all of its assets to another corporation, will receive a cash bonus calculated using a Lehman formula of 5% for the first $1,000,000, 4% for the second $1,000,000, 3% for the third $1,000,000, 2% for the fourth $1,000,000, and 1% thereafter. In addition, the Company also will issue Mr. Clemons an option to acquire up to 100,000 Shares of our Common Stock, fully paid and non-assessable at an exercise price of $5.00 per share subject to a vesting schedule. On August 30, 2013, the Company entered into an addendum to this agreement in which Mr. Clemons will be entitled to a stock award of 25,000 shares of our common restricted stock if, within 24 months, there is a reorganization of the company. On October 1, 2014, the Company entered into an addendum to the employment agreement with Eric Clemons. Under the terms of the addendum, the agreement has been extended one year until June 15, 2017. Mr. Clemons shall be paid an annual salary of One Hundred Ninety Five Thousand Dollars ($195,000) and the Company issued Mr. Clemons an option to acquire up to 100,000 Shares of our Common Stock under the Company’s 2014 Omnibus Stock Grant and Option Plan, fully paid and non-assessable at an exercise price of $1.20 per share subject to a vesting schedule. Mr. Clemons has agreed to defer the aforementioned annual salary and accept a consulting fee for the same amount. On March 1, 2015, the Company entered into an addendum to the employment agreement with Eric Clemons. Under the terms of the addendum, Mr. Clemons shall be paid a cash placement bonus equal to an amount up to 10% of the aggregate purchase price paid by each purchaser of the Company’s Securities, where the purchaser of said Securities has been directly introduced to the Company by Mr. Clemons. According to the terms of this agreement, Mr. Clemons was compensated $31,250 for the year ended June 30, 2015.

 

F-12

 

On June 15, 2013, the Company entered into an employment agreement with Wesley Tate. Under the terms of the agreement, Mr. Tate shall be paid an annual salary of One Hundred Five Thousand Dollars ($105,000) and shall be entitled to a bonus of $20,000 upon delivery to the company of a prototype medical device form Sonos Models, Inc. In addition, the Company also will issue Mr. Tate an option to acquire up to 50,000 Shares of our Common Stock, fully paid and non-assessable at an exercise price of $5.00 per share subject to a vesting schedule. On August 30, 2013, the Company entered into an addendum to this agreement in which Mr. Tate will be entitled to a stock award of 25,000 shares of our common restricted stock if, within 24 months, there is a reorganization of the company. On April 1, 2014, the Company entered into an addendum to this agreement in which Mr. Tate was issued stock in the amount of 25,000 of the company’s common restricted shares representing a retention bonus as an incentive for him to remain in the employment of the Company. The company recognized a prepaid expense of approximately $37,500, of which $28,000 and $9,000 was expensed in the years ended 2015 and 2014, respectively. On October 1, 2014, the Company entered into an addendum to the employment agreement with Wesley Tate. Under the terms of the addendum, the agreement has been extended one year until June 15, 2017. Mr. Tate shall be paid an annual salary of One Hundred Fifty Six Thousand Dollars ($156,000) and the Company issued Mr. Tate an option to acquire up to 50,000 Shares of our Common Stock under the Company’s 2014 Omnibus Stock Grant and Option Plan, fully paid and non-assessable at an exercise price of $1.20 per share subject to a vesting schedule. Mr. Tate has agreed to defer the aforementioned annual salary and accept a consulting fee for the same amount.

 

Contracts

 

On September 24, 2012, the Company entered into an agreement with Sonos Models, Inc. (“Sonos”) to build up to three medical device prototypes to be used for testing. The agreement calls for a total cash payment of up to $400,000 and the issuance of warrants to purchase up to 65,000 shares of the Company’s common stock, with the cash payments and warrants to be issued in stages once certain developmental thresholds are achieved. Any warrants issued under this agreement will be immediately exercisable, will be eligible for cashless exercise at the option of the holder and will have a term of three years from the date of the issuance and an exercise price based on the fair market value of the stock on the date of completion of the phase (See Note 8). On April 1, 2014, the Company entered into an addendum to the agreement with Sonos. The modifications made to the agreement state that Sonos shall receive 325,000 restricted shares of the Company’s common stock for Services provided to the Company. The warrants that were to be issued for Phase 4 will not be issued and will not be due. In addition, the Company committed to pay Sonos up to One Million Dollars ($1,000,000) for Research and Development costs. The Company recorded the $488,000 value of the shares issued as a prepaid expense and is amortizing the expense associated with these issuances over a twelve-month period. For the nine and three month periods ended March 31, 2015, the Company has recognized an expense of approximately $366,000 and $122,000, respectively, associated with this agreement. The contract is fully amortized.

 

Consulting Agreements

 

The Company has service and consulting agreements with various individuals to provide assistance to the Company in several areas including the marketing of its biomedical products upon the availability of the device, capital markets and marketing strategies, advertising services and assistance in the introduction of the Company to medical device testing organization and to facilitate access to doctors in numerous countries, including Poland, Uzbekistan and China. They were compensated an aggregate 678,500 shares of the Company’s common stock and cash payments of $198,000 and $185,000 for the fiscal years ended 2015 and 2014, respectively. These contracts are for twelve months to 24 months beginning between December 2013 and June 2015 and may be renewed or extended for any period as may be agreed by the parties. As of June 30, 2015 the Company has extended some of the contracts for additional periods. Any of the parties may terminate their respective agreement by providing thirty (30) days written notice of such termination. The Company has recognized $30,000 in accounts payable which is in arrears with one contractual obligation and is in discussions with the consultant to renegotiate the terms of the contract. As these contracts are for a period of up to twelve months to twenty four months, the Company recorded approximately $1,976,000 as the value of the shares issued to prepaid expense and is amortizing the expense associated with these issuances over a twelve to twenty four month period. For the fiscal year ended June 30, 2015 and 2014, the Company recognized an expense of approximately $395,000 and $1,450,000, respectively. The unamortized portions of these contracts are approximately $130,000 and included in prepaid expenses on the balance sheet at June 30, 2015.

 

The Company has entered into consulting agreements with two individuals to provide business consulting services. For compensation of these services, they were issued options to acquire up to 100,000 shares of our common stock, fully paid and non-assessable at an exercise price of $1.30 per share. These agreements are for twelve months beginning December 2014 (See Note 8) and the company recorded approximately $83,000 as a prepaid expense to be amortized over the twelve month period. For the fiscal year ended June 30, 2015 and 2014, the Company recognized an expense of approximately $49,000 and $0, respectively. The unamortized portions of these contracts are approximately $35,000 and included in prepaid expenses on the balance sheet at June 30, 2015.

 

F-13

 

The Company has entered into a consulting agreement with an individual to provide marketing and social media strategy services. For compensation of these services, they were paid an engagement fee of $30,000 and a monthly consulting fee of $3,500. This agreement is for twelve months beginning March 2015 and the company recorded approximately $30,000 of the engagement fee as a prepaid expense to be amortized over the twelve month period. For the fiscal year ended June 30, 2015 and 2014, the Company recognized an expense of approximately $10,000 and $0, respectively. The unamortized portion of this contract is approximately $20,000 and included in prepaid expenses on the balance sheet at June 30, 2015.

 

As of June 30, 2015, future maturities of prepaid expenses on value of shares issued for consulting are as follows:

 

Fiscal year ending June 30,
2016		$	185,000
2017		$	-
Total		$	185,000

 

Legal

 

The Company is not involved in any legal matters arising in the normal course of business. While incapable of estimation, in the opinion of the management, the individual regulatory and legal matters in which it might involve in the future are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows.

 

NOTE 5 – PATENT RIGHTS

 

On June 10, 2010, the Company entered into a Patent License Agreement under which the Company acquired the exclusive rights to certain intellectual property related to using Omentum for treating dementia conditions. Under the agreement the Company has paid rights fees of $50,000 to Dr. Saini, and the Company issued Dr. Saini 825,000 shares of our common stock, valued at $6,600 (based on the fair market value on the date of grant) restricted in accordance with Rule 144. In addition, Dr. Saini will have the option to participate in the sale of equity by the Company in the future, up to ten percent (10%) of the money raised, in exchange for the applicable number of his shares.

 

In addition, the Patent License agreement provides for a royalty payment of six (6) percent of the value of the net sales, as defined, generated from the sale of licensed products. The agreement also provides for yearly minimum royalty payments of $50,000 for each of the fourth, fifth, and sixth anniversary of the date of the agreement, and a yearly minimum royalty payment of $100,000 for each year thereafter during the term of the agreement. The Company has recognized costs associated with the patent rights for $50,000 in accounts payable for the patent rights and is currently in arrears and in discussions to renegotiate the terms of the agreement. The term of the agreement shall continue until the patent in the intellectual property expires, unless terminated sooner under the provisions of the agreement, as defined.

 

The patent will have an estimated useful life of 20 years based on the term of the patent. Amortization of the patent will begin when the patent is issued by the United States Patent and Trademark Office and put in use.

 

F-14

 

Rights fees of $50,000 were incurred during the years ended June 30, 2015 and 2014, respectively, and legal fees totaling approximately $14,000 and $6,000 was incurred during each of the years ended June 30, 2015 and 2014, respectively.

 

The accrued payable of $100,000 pertaining to the rights fees at June 30, 2015 and 2014 is included in related party payables.

 

NOTE 6 – NOTES PAYABLE TO STOCKHOLDERS

 

Short Term Note Payable

 

On June 30, 2013, the Company converted $84,915 of related party payables owed under consulting agreements, into related party notes payable. The notes matured on December 31, 2013 and accrued interest at two (2.0) percent per annum at maturity. On June 16, 2014, the company converted $30,694 of related party notes payable to common stock. On September 30, 2014, the company converted $31,153 of related party notes payable as well as $41,500 of other related party payables to the same note holder, to common stock (See Note 7). As of June 30, 2015, the outstanding balance of the related party payables is $0.

 

On January 18, 2013, the Company converted $356,700 of related party payables owed under consulting agreements, into related party notes payable. The notes were scheduled to mature on December 31, 2013 and accrued interest at seven and one-half (7.5) percent per annum at maturity. However, on December 30, 2013, the Company converted $219,700 of related party notes payable to common stock. As of June 30, 2015, the outstanding balance of the related party notes payable is $113,000. The Company is currently in default and is in discussions with the noteholder to restructure the terms of the note.

 

On May 1, 2015, the Company entered into an unsecured $10,000 promissory note with a stockholder. The note matures on June 1, 2015 and accrues interest at seven and one-half (7.5) percent per annum at maturity. As of June 30, 2015, the outstanding balance of the related party payables is $10,000. The Company is currently in default and is in discussions with the noteholder to restructure the terms of the note.

 

On May 8 and June 6, 2015, the Company entered into an unsecured promissory note totaling $8,000 with a stockholder. The terms of the note have not been negotiated.

 

Long Term Note Payable

 

Convertible Note Payable

 

The Company has entered into various unsecured convertible promissory notes with non-affiliate stockholders totaling $1,752,500. Of this amount, $1,502,500 of notes was outstanding at June 30, 2014, and the remainder was issued during the fiscal year ended June 30, 2015. The principal amounts of these notes are between $15,000 and $1,475,000. Under the terms of these notes, they mature between June 2015 and June 2017, accrue interest at between 7.5% and 8.0% per annum, and are convertible into shares of our common stock at a conversion rates of between $1.00 and $5.00 per share, but only if such conversion would not cause the Noteholders to own more than 9.9% of our outstanding common stock, and contains piggyback registration rights. The Company used a recent sale of stock to determine the fair market value of these transactions. The issuances were exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investors were sophisticated and familiar with our operations at the time of the issuance of the shares. In December 2014, the company converted $25,000 of convertible notes payable and accrued interest of $781 and issued 12,891 shares of restricted stock (See Note 7). In addition, the Company issued to a holder 50,000 shares of the company’s common stock. The Company recorded the $135,000 value of the shares issued as a prepaid expense and will amortize the expense associated with this issuance over a twenty-four month period. The Company used a recent sale of stock to determine the fair market value of the transaction. For the fiscal years ended June 30, 2015 and 2014, the company recognized an expense of approximately $68,000 and $39,000, respectively, associated with is issuance.

 

F-15

 

To properly account for certain Convertible Promissory Notes, the Company performed a detailed analysis to obtain a thorough understanding of the transactions, including understanding the terms of each instrument issued, and any related derivatives entered into. The Company first reviewed ASC Topic 815, to identify whether any equity-linked features in the Notes are freestanding or embedded. The Company determined that there were no free standing features. The Notes were then analyzed in accordance with Topic 815 to determine if the Note should be accounted for at fair value and remeasured at fair value in income. The Company determined that the Notes did not meet the requirements of Topic 815 and therefore accounted for the Notes as conventional debt. The Company then reviewed ASC Topic 470-20, and determined that some of Notes met the criteria of a conventional convertible note and that the Note had a beneficial conversion feature, which was recorded as a debt discount against the face amount of the Note, indicated above. The Convertible Promissory Notes had an aggregate beneficial conversion feature valued at approximately $679,000, which was recorded as a debt discount against the face amount of the Notes, which is being accreted to interest expense over the 24 month term of the Notes. The Company recognized an expense of approximately $612,000 and $364,000 for the fiscal years ended 2015 and 2014, respectively. The interest expense expected to be recognized in future years is approximately $67,000.

 

Accrued interest on all notes payable to stockholders and other related parties at June 30, 2015 totaled $264,267 and is included in related party payables.

 

As of June 30, 2015, future maturities of notes payable are as follows:

 

Fiscal year ending June 30,
2016		$	277,500
2017		$	1,475,000
Total		$	1,752,500

 

NOTE 7 – STOCK TRANSACTIONS

 

For the fiscal year ended June 30, 2015, the Company entered into various stock purchase agreements with third parties between July of 2014 and March of 2015, under which we issued 340,199 shares of our common stock, restricted in accordance with Rule 144, in exchange for $416,550, net of related costs of $31,250. The stock purchase agreements include piggyback registration rights. The issuance was exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investor was sophisticated and familiar with our operations at the time of the issuance of the shares.

 

For the fiscal year ended June 30, 2015, the Company issued 257,500 shares of common stock to various individuals as payment for consulting services per contracts dated between July 2014 and June 2015 (See Note 4). The aggregate Fair Market Value of these shares was approximately $230,000 as the fair market value of the stock was between $0.67 and $1.09 per share. The Company used recent sales of stock to determine the fair market value of these transactions. These issuances were completed in accordance with Section 4(a)(2) of the Securities Act in an offering without any public offering or distribution. These shares are restricted securities and include an appropriate restrictive legend.

 

For the fiscal year ended June 30, 2015, the Company issued 61,326 shares of our common stock to individuals for conversions of a convertible note payable, related note payable and interest payable (See Note 6). The aggregate Fair Market Value of these shares was approximately $98,000 as the conversion price was between $1.50 and $2.00 per share. This issuance was completed in accordance with Section 4(a)(2) of the Securities Act in an offering without any public offering or distribution. These shares are restricted securities and include an appropriate restrictive legend.

 

On November 26, 2014, the Company issued a Private Placement Memorandum (“PPM”). The PPM authorized the sale of up to 4,000,000 units, with each Unit consisting of one share of our common stock and a Warrant to purchase one share of our common stock, at a price of $1.25 per Unit. Each Unit included a non-cashless Warrant to purchase one (1) share of the Company’s common stock, $.001 par value, at the exercise price of $2.50 per share. The Offering terminated on March 26, 2015. The Company received no subscriptions.

 

F-16

 

NOTE 8 – OPTIONS AND WARRANTS

 

Stock Award Plans

 

On April 15, 2014, shareholders of the company approved the 2014 Cerebain Biotech Corp. Omnibus Stock Grant and Option Plan (“The Plan”). The purpose of the plan is to offer selected employees, directors and consultants an opportunity to acquire a proprietary interest in the success of the Company, or to increase such interest, to encourage such selected persons to remain in the employ of the Company, and to attract new employees with outstanding qualifications. The Plan seeks to achieve this purpose by providing for Awards in the form of Restricted Shares and Options (which may constitute Incentive Stock Options or Nonstatutory Stock Options) as well as the direct award or sale of Shares of the Company’s Common Stock. The aggregate number of shares which may be issued or transferred as common stock pursuant to an award under the Plan shall not exceed ten percent (10%) of the Company’s outstanding common stock on the date the Plan is approved.

 

Options granted under the Plan expire no later than ten years from the date of grant. The exercise price of each incentive stock option shall not be less than 100% of the fair value of the stock on the date of grant. An option shall become exercisable no less rapidly than the rate of twenty percent (20%) per year for each of the first five (5) years from the date of grant, subject to the discretion of the Compensation Committee.

 

Awards granted under this Plan expire thirty (30) days after the grant if not exercised by the Offeree. The exercise price of each award shall not be less than 85% of the fair value of the stock on the date of grant (100% for officers, directors and 10% shareholders). An award shall become exercisable no less rapidly than the rate of twenty percent (20%) per year for each of the first five (5) years from the date of grant, subject to the discretion of the Compensation Committee.

 

The following represents a summary of the Equity Compensation grants and options awards outstanding at June 30, 2015 and changes during the years then ended:

 

2015
Plan category		Number of securities to be issued upon exercise of outstanding options, warrants and rights				Weighted-average exercise price of outstanding options, warrants and rights				Number of securities remaining available for future issuance under equity compensation plan (excluding securities reflected in column (a))
		(a)				(b)				(c)
Equity compensation plans approved by security holders			150,000			$	1.20				3,605,000
Equity compensation plans not approved by security holders			250,000			$	1.24				-
Total			400,000			$	2.65				3,605,000

 

Options

 

In December 2014, the Company entered into consulting agreements with two individuals (See Note 4). The agreements call for an issuance of options to purchase up to a total of 100,000 shares of the Company’s common stock at an exercise price of $1.30 per share. Fair Market Value of these options totaled approximately $83,000. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 100%; risk-free interest rate of 0.49%; expected term of 2 years; and 0% dividend yield. The options were fully vested on date of issuance.. For the fiscal year ended June 30, 2015 and 2014, the Company recognized an expense of approximately $49,000 and $0, respectively. The expense expected to be recognized is approximately $35,000.

 

F-17

 

In October 2014, the Company entered into employee agreements addendums with two individuals (See Note 4). The agreements call for an issuance of options to purchase up to a total of 150,000 shares of the Company’s common stock at an exercise price of $1.20 per share, subject to a vesting schedule. Fair Market Value of these options totaled approximately $134,000. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 100%; risk-free interest rate of 1.69%; expected term of 5 years; and 0% dividend yield. As of June 30, 2015, 30,000 options to purchase the Company’s common stock have vested. For the fiscal year ended June 30, 2015 and 2014, the Company recognized an expense of approximately $47,000 and $0, respectively. The compensation expected to be recognized in future years is approximately $87,000.

 

In June 2013, the Company entered into employee agreements with two individuals (See Note 4). The agreements call for an issuance of options to purchase up to a total of 150,000 shares of the Company’s common stock at an exercise price of $5.00 per share, subject to a vesting schedule. Fair Market Value of these options totaled approximately $1.2 million. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 100%; risk-free interest rate of 1.04%; expected term of 5 years; and 0% dividend yield. As of June 30, 2015, 90,000 options to purchase the Company’s common stock have vested. For each of the fiscal years ended June 30, 2015 and 2014, the Company recognized an expense of approximately $247,000. The compensation expected to be recognized in future years is approximately $493,000.

 

The following represents a summary of the Options outstanding at June 30, 2015 and changes during the periods then ended:

 

		Options				Options Average Exercise Price				Aggregate Intrinsic Value
Outstanding July 1, 2013			150,000			$	5.00			$	-
Granted			-				-
Exercised			-				-
Expired/Forfeited			-				-
Outstanding, June 30, 2014			150,000			$	5.00			$	-
Granted			250,000				1.24			$	-
Exercised			-				-
Expired/Forfeited			-				-
Outstanding, June 30, 2015			400,000			$	2.65			$	-
Exercisable at June 30, 2015			220,000			$	2.65			$	-
Expected to be vested			400,000			$	2.65			$	-
Compensation to be recognized		$	614,500
Forfeiture Rate			-				-

 

F-18

 

Warrants

 

On December 11, 2013, the Company issued Sonos warrants to purchase 20,000 shares of the Company’s common stock, valued at $65,660 (based on the fair market value of the date of grant). The Company recognized an expense of $49,200 as research and development during the three months ended September 30, 2013 related to 10,000 of these warrants to be issued for completion of phases 1b and 2 during that period. The fair value was determined using Black-Scholes option pricing model with a volatility of 100%, a risk free interest rate of 1.04% and 0% dividend yield. The Company has recognized no research and development costs related to issued warrants during the year ended June 30, 2015. The warrants are exercisable, cashless at the option of the holder, and have a term of three years and an exercise price of $2.00 per share.

 

On January 27, 2015, the Company entered into a stock purchase agreement with a third party, under which the Company issued him 10,000 restricted common shares along with warrants to purchase an additional 10,000 shares. The warrants have an exercise price of $2.50 and are exercisable for a term of three years.

 

The following represents a summary of the Warrants outstanding at June 30, 2015 and changes during the periods then ended:

 

		Warrants				Weighted Average Exercise Price
Outstanding, June 30, 2013			6,250				3.20
Granted			20,000				2.00
Exercised			-				-
Expired/Forfeited			(1,250	)			8.00
Outstanding, June 30, 2014			25,000			$	2.00
Granted			10,000				2.50
Exercised			-				-
Expired/Forfeited			-				-
Outstanding, June 30, 2015			35,000				2.14
Exercisable at June 30, 2015			35,000			$	2.14

 

NOTE 9 – Related Party Transactions

 

Other than as set forth below, and as disclosed in Notes 4, 6, 7, and 8, the Company has not entered into or been a participant in any transaction in which a related person had or will have a direct or indirect material interest.

 

F-19

 

NOTE 10 – EARNINGS PER SHARE

 

FASB ASC Topic 260, Earnings Per Share, requires a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share (EPS) computations.

 

Basic earnings (loss) per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.

 

The total number of potential additional dilutive options and warrants outstanding was 435,000 and 175,000 for the fiscal year ended June 30, 2015 and 2014, respectively. In addition, the convertible notes convert at an exercise price of between $1.00 and $5.00 per share of common stock. The options, warrants and shares underlying the convertible note were considered for the dilutive calculation but in periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.

 

The following table sets forth the computation of basic and diluted net income per share:

 

		For The Fiscal Years Ended June 30,
		2015				2014
Net loss attributable to the common stockholders		$	(2,939,717	)		$	(3,368,699	)
Basic weighted average outstanding shares of common stock			4,507,047				3,615,160
Dilutive effect of options and warrants			-				-
Diluted weighted average common stock and common stock equivalents			4,507,047				3,615,160
Earnings (loss) per share:
Basic and diluted		$	(0.65	)		$	(0.93	)

 

NOTE 11 – INCOME TAXES

 

The provision (benefit) for income taxes for the period ended June 30, 2015 and 2014, assumes a 34% effective tax rate for federal income taxes. The Company has no state income taxes liability:

 

		June 30, 2015				June 30, 2014
Current tax provision:
Federal		$	--			$	--
Taxable income - federal		$	--			$	--
State		$	--			$	--
Taxable income - state		$	--			$	--
Total current tax provision		$	--			$	--
Deferred tax provision:
Federal and State
Total deferred tax provision		$	--			$	--

 

F-20

 

The Company had deferred income tax assets as of June 30, 2015 and 2014 are as follows:

 

		June 30, 2015				June 30, 2014
Loss carryforwards		$	2,906,000			$	2,062,000
Less – valuation allowance			(2,906,000	)			(2,062,000	)
Total net deferred tax assets		$	--			$	--

 

The Company provided a valuation allowance equal to the deferred income tax assets for the fiscal years ended June 30, 2015 and 2014, respectively, because it is not presently known whether future taxable income will be sufficient to utilize the loss carryforwards.

 

At June 30, 2015, the Company had approximately $8,637,000 in Federal and State tax loss carryforwards that can be utilized in future periods to reduce taxable income, and begin to expire in 2030. Pursuant to Internal Revenue Code Section 382, the future utilization of our net operating loss carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future.

 

The Company did not identify any material uncertain tax positions on tax returns that will be filed.

 

The Company has not filed any of its income tax returns. The fiscal years ended June 30, 2015, 2014, 2013, 2012, 2011 and 2010 are open for examination.

 

NOTE 12 – SUBSEQUENT EVENTS

 

The company evaluated events occurring between the end of our most recent fiscal year and the date the financial statements were issued and noted the following subsequent events:

 

In September 2015, the Company amended a Stock Purchase Agreement, dated May 18, 2015. Under the terms of the amendment, the Purchaser has agreed to purchase up to One Million Six Hundred Thousand (1,600,000) shares of the Company’s common stock at a per-share price of One Dollar and Twenty Five Cents ($1.25) per share, for a total purchase price of up to Two Million Dollars ($2,000,000). To date, the Purchaser has acquired Two Hundred Forty Thousand (240,000) shares of the Company’s common stock providing Three Hundred Thousand Dollars ($300,000) to the Company, at a price of $1.25 per share, with the remainder to be acquired by December 31, 2015.

  

In September 2015, the Company issued 500,000 shares of the Company’s common stock to two individuals for conversion of accounts payable. The aggregate Fair Market Value of these shares was approximately $155,000 as the conversion price was $0.31 per share. This issuance was completed in accordance with Section 4(a)(2) of the Securities Act in an offering without any public offering or distribution. These shares are restricted securities and include an appropriate restrictive legend.

 

In August 2015, the Company entered into an unsecured $75,000 promissory note with a stockholder. The note matures on September 17, 2015, accrues no interest and the Company reduced the conversion price of the stockholder’s Consolidated Convertible Promissory Note, dated June 9, 2015, to a conversion rate of $0.75. As of September 23, 2015, the outstanding balance of the related party payable is $75,000. The Company is currently in default and is in discussions with the noteholder to restructure the terms of the note.

 

 

F-21

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