Attached files

file filename
EX-32.2 - CERTIFICATION - CEREBAIN BIOTECH CORP.cbbt_ex322.htm
EX-31.1 - CERTIFICATION - CEREBAIN BIOTECH CORP.cbbt_ex311.htm
EX-31.2 - CERTIFICATION - CEREBAIN BIOTECH CORP.cbbt_ex312.htm
EX-32.1 - CERTIFICATION - CEREBAIN BIOTECH CORP.cbbt_ex321.htm

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

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

 

For the quarterly period ended March 31, 2016

 

¨ 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.)

600 Anton Blvd., Suite 1100

Costa Mesa, CA 92626

(Address of principal executive offices)

714-371-4109

(Registrant's telephone number, including area code)

13727 Noel Road, Tower II, Suite 200

Dallas, TX 75240

(Former address, if changed since last report)

_____________________________________

(Former fiscal year, if changed since last report)

 

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 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

 

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 May 12, 2016

Common Stock, $0.001 par value

6,585,347

 

 


CEREBAIN BIOTECH CORP.

 

TABLE OF CONTENTS

 

 

 

PAGE

 

PART I – FINANCIAL INFORMATION

 

 

 

 

ITEM 1.

FINANCIAL STATEMENTS

 

 

3

 

 

 

 

 

 

UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

4

 

 

 

 

 

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

5

 

 

 

 

 

 

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

6

 

 

 

 

 

 

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

 

7

 

 

 

 

 

 

ITEM 2.

MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

 

26

 

 

 

 

 

 

ITEM 3.

QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

 

 

38

 

 

 

 

 

 

ITEM 4.

CONTROLS AND PROCEDURES

 

 

38

 

 

 

 

 

 

PART II. OTHER INFORMATION

 

 

 

 

 

 

ITEM 1.

LEGAL PROCEEDINGS

 

 

40

 

 

 

 

 

 

ITEM 1A.

RISK FACTORS

 

 

40

 

 

 

 

 

 

ITEM 2.

UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

 

40

 

 

 

 

 

 

ITEM 3.

DEFAULTS UPON SENIOR SECURITIES

 

 

40

 

 

 

 

 

 

ITEM 4.

MINING SAFETY DISCLOSURES

 

 

40

 

 

 

 

 

 

ITEM 5.

OTHER INFORMATION

 

 

40

 

 

 

 

 

 

ITEM 6.

EXHIBITS

 

 

41

 

SIGNATURES

 

 

44

 

 

 
- 2 -
 

 
PART I FINANCIAL INFORMATION

 

ITEM 1. FINANCIAL STATEMENTS

 

The unaudited condensed consolidated financial statements of registrant for the three and nine months ended March 31, 2016 and 2015 follow. The unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. All such adjustments are of a normal and recurring nature.

 

 
- 3 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

March 31,

 

 

June 30,

 

 

 

2016

 

 

2015

 

 

 

(unaudited)

 

 

 

 

ASSETS

Current assets:

 

 

 

 

 

 

Cash and cash equivalents

 

$2,773

 

 

$486

 

Prepaid expenses

 

 

177,019

 

 

 

157,102

 

Deferred financing costs

 

 

-

 

 

 

28,125

 

Total current assets

 

 

179,792

 

 

 

185,713

 

 

 

 

 

 

 

 

 

 

Long-term assets:

 

 

 

 

 

 

 

 

Patent rights

 

 

83,900

 

 

 

183,900

 

 

 

 

 

 

 

 

 

 

Total assets

 

$263,692

 

 

$369,613

 

 

 

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS' DEFICIT

 

 

 

 

 

 

 

 

 

Current liabilities:

 

 

 

 

 

 

 

 

Accounts payable

 

$538,705

 

 

$399,486

 

Related party payables

 

 

241,464

 

 

 

530,459

 

Convertible note, current portion, net of debt discount of $0 and $66,969, respectively

 

 

77,500

 

 

 

210,531

 

Notes payable

 

 

-

 

 

 

131,000

 

Total current liabilities

 

 

971,669

 

 

 

1,271,476

 

 

 

 

 

 

 

 

 

 

Long term liabilities:

 

 

 

 

 

 

 

 

Convertible note to, net of debt discount of approximately $172,495 and $0, respectively

 

 

2,208,517

 

 

 

1,475,000

 

 

 

 

 

 

 

 

 

 

Total liabilities

 

 

3,180,186

 

 

 

2,746,476

 

 

 

 

 

 

 

 

 

 

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; 6,585,347 and 4,835,347 shares issued and outstanding at March 31, 2016 and June 30, 2015, respectively)

 

 

6,585

 

 

 

4,835

 

Additional paid in capital

 

 

7,740,082

 

 

 

6,712,747

 

Accumulated deficit

 

 

(10,663,161)

 

 

(9,094,445)

Total stockholders' deficit

 

 

(2,916,494)

 

 

(2,376,863)

 

 

 

 

 

 

 

 

 

Total liabilities and stockholders' deficit

 

$263,692

 

 

$369,613

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 
- 4 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

 

For the Nine Months Ended

 

 

For the Three Months Ended

 

 

 

March 31,

 

 

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Operating Expenses

 

 

 

 

 

 

 

 

 

 

 

 

Selling, general and administrative expenses

 

$1,123,910

 

 

$1,178,118

 

 

$397,465

 

 

$405,475

 

Research and development costs

 

 

-

 

 

 

379,125

 

 

 

-

 

 

 

135,375

 

Patent Royalty Expense

 

 

137,500

 

 

 

-

 

 

 

12,500

 

 

 

-

 

Marketing expenses

 

 

50,880

 

 

 

136,140

 

 

 

14,840

 

 

 

35,903

 

Total operating expenses

 

 

1,312,290

 

 

 

1,693,383

 

 

 

424,805

 

 

 

576,753

 

Other (income) expense

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Accretion of debt discount

 

 

81,834

 

 

 

128,376

 

 

 

43,982

 

 

 

32,190

 

Loss from extinguishment of debt

 

 

48,750

 

 

 

-

 

 

 

-

 

 

 

-

 

Financing costs

 

 

28,125

 

 

 

50,625

 

 

 

-

 

 

 

16,875

 

Interest expense

 

 

97,717

 

 

 

97,926

 

 

 

26,697

 

 

 

34,541

 

Total other (income) expense

 

 

256,426

 

 

 

276,927

 

 

 

70,679

 

 

 

83,606

 

Net operating loss

 

 

(1,568,716)

 

 

(1,970,310)

 

 

(495,484)

 

 

(660,359)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss before income taxes

 

 

(1,568,716)

 

 

(1,970,310)

 

 

(495,484)

 

 

(660,359)

Income taxes

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Net loss

 

$(1,568,716)

 

$(1,970,310)

 

$(495,484)

 

$(660,359)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Loss per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted loss per share

 

$(0.28)

 

$(0.45)

 

$(0.08)

 

$(0.14)

Basic and diluted weighted average shares outstanding

 

 

5,614,438

 

 

 

4,400,955

 

 

 

6,378,479

 

 

 

4,585,236

 

 

See accompanying notes to unaudited condensed consolidated financial statements 

 

 
- 5 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

 

For the Nine Months Ended

 

 

 

March 31,

 

 

 

2016

 

 

2015

 

Cash flows from operating activities:

 

 

 

 

 

 

Net loss

 

$(1,568,716)

 

$(1,970,310)

Adjustments to reconcile net loss to net cash used in operating activities:

 

 

 

 

 

 

 

 

Accretion of debt discount

 

 

81,834

 

 

 

128,376

 

Loss from extinguishment of debt

 

 

48,750

 

 

 

-

 

Stock based compensation

 

 

245,475

 

 

 

225,074

 

Amortization of stock based prepaid consulting compensation

 

 

162,583

 

 

 

692,196

 

Amortization of deferred financing costs

 

 

28,125

 

 

 

50,625

 

Correction of an error

 

 

100,000

 

 

 

-

 

Changes in operating assets and liabilities:

 

 

 

 

 

 

 

 

Prepaid expenses

 

 

20,000

 

 

 

(34,992)

Accounts payable

 

 

532,331

 

 

 

147,960

 

Related party payables

 

 

(43,995)

 

 

117,665

 

Net cash used in operating activities

 

 

(393,613)

 

 

(643,406)

 

 

 

 

 

 

 

 

 

Cash flows from financing activities:

 

 

 

 

 

 

 

 

Proceeds from issuance of common stock and warrants, net of offering costs

 

 

-

 

 

 

416,550

 

Proceeds from related party notes

 

 

1,000

 

 

 

 

 

Proceeds from convertible notes

 

 

402,900

 

 

 

250,000

 

Repayment of notes payable to shareholders

 

 

(8,000)

 

 

 

 

Net cash flows provided by financing activities:

 

 

395,900

 

 

 

666,550

 

 

 

 

 

 

 

 

 

 

Net change in cash and cash equivalents

 

 

2,287

 

 

 

23,144

 

Cash and cash equivalents- beginning of period

 

 

486

 

 

 

1,688

 

Cash and cash equivalents- end of period

 

$2,773

 

 

$24,832

 

 

 

 

 

 

 

 

 

 

Supplemental disclosure of non-cash activities:

 

 

 

 

 

 

 

 

Cash paid during the period for:

 

 

 

 

 

 

 

 

Interest

 

$-

 

 

$-

 

Income tax

 

$-

 

 

$-

 

 

Supplemental disclosure on non-cash investing and financing activities:

Beneficial conversion feature on convertible note

 

$197,360

 

 

$119,928

 

Stock issued for prepaid services

 

$148,500

 

 

$220,800

 

Stock issued for Financing Fee

 

$38,750

 

 

$-

 

Options issued for prepaid services

 

$54,000

 

 

$83,450

 

Stock issued for satisfaction of accounts payable

 

$100,000

 

 

$-

 

Stock issued for satisfaction of related party payables

 

$245,000

 

 

$40,000

 

Conversion convertible notes payable and interest into stock

 

$-

 

 

$25,781

 

Conversion of related party notes payable and interest into stock

 

$-

 

 

$32,653

 

Conversion of accounts payable to convertible note payable

 

 

293,112

 

 

 

-

 

Reclassification of debt from shareholders to convertible debt

 

$10,000

 

 

$-

 

 

See accompanying notes to unaudited condensed consolidated financial statements

 

 
- 6 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 

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.

 

The accompanying (a) condensed balance sheet at June 30, 2015 has been derived from audited statements and (b) unaudited interim condensed financial statement as of March 31, 2016 and for the three and nine months ended March 31, 2016 and 2015 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended June 30, 2015 included on Form 10-K filed with the Securities and Exchange Commission on September 22, 2015.

 

NOTE 2 – BASIS OF PRESENTATION

 

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

 

Going Concern

 

The accompanying unaudited condensed 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 an accumulated deficit of approximately $10,700,000 and $9,100,000 at March 31, 2016 and June 30, 2015, respectively, and had a net loss of approximately $1,600,000 and $2,000,000 for the nine months ended March 31, 2016 and 2015, respectively, and net cash used in operating activities of approximately $400,000 and $650,000 for the nine months ended March 31, 2016 and 2015, respectively, with no revenue earned since inception. These matters raise substantial doubt about our ability to continue as a going concern.

 

 
- 7 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 

While the Company is in the process of developing its medical device solution and its synthetic drug solution for the treatment of dementia, 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 accounting principles generally accepted in the United States 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, the valuation of equity instruments and the 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.

 

Reclassifications

 

Certain reclassifications have been made to prior fiscal year amounts or balances to conform to the presentation adopted in the current fiscal year, which did not have any impact to consolidated net income or stockholder's equity amounts previously reported.

 

 
- 8 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 

Advertising Costs

 

Advertising costs are recorded as general and administrative expenses when they are incurred. Advertising costs charged to operations were approximately $51,000 and $136,000 for the nine months ended March 31, 2016 and 2015, respectively, and approximately $15,000 and $36,000 for the three months ended March 31, 2016 and 2015, respectively, and are included in marketing costs in the accompanying consolidated statements of operations.

 

Research and Development

 

The Company expenses the cost of research and development as incurred. Research and development costs charged to operations were approximately $0 and $379,000 for the nine months ended March 31, 2016 and 2015, respectively, and approximately $0 and $135,000 for the three months ended March 31, 2016 and 2015, respectively, and are included in research and development costs in the accompanying consolidated statements of operations.
 

Deferred Financing Costs

 

Deferred financing costs represent costs incurred in connection with obtaining the debt financing. These costs are amortized ratably and charged to interest expense over the term of the related debt.

 

In connection with two of the debt issuances as discussed in Note 6, the Company issued 175,000 shares of the Company's common stock. The Company recorded the approximate $174,000 value of the shares issued as a deferred financing cost and amortized the expense associated with these issuances over the life of each note. The deferred financing cost has been fully amortized.

 

Debt

 

The Company issues debt that may have separate warrants, conversion features, or no equity-linked attributes.

 

Debt with warrants

 

In accordance with ASC Topic 470-20-25, when the Company issues debt with warrants, the Company treats the warrants as a debt discount, record as a contra-liability against the debt, and amortizes the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statements of operations. The offset to the contra-liability is recorded as additional paid in capital in our consolidated balance sheet. The Company determines the value of the warrants using the Black-Scholes Option Pricing Model ("Black-Scholes") using the stock price on the date of issuance, the risk free interest rate associated with the life of the debt, and the volatility of the stock. If the debt is retired early, the associated debt discount is then recognized immediately as amortization of debt discount expense in the consolidated statement of operations. The debt is treated as conventional debt.

 

 
- 9 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 

Convertible debtderivative treatment

 

When the Company issues debt with a conversion feature, the Company must first assess whether the conversion feature meets the requirements to be treated as a derivative, as follows: a) one or more underlyings, typically the price of our common stock; b) one or more notional amounts or payment provisions or both, generally the number of shares upon conversion; c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provisions, which in the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. An embedded equity-linked component that meets the definition of a derivative does not have to be separated from the host instrument if the component qualifies for the scope exception for certain contracts involving an issuer's own equity. The scope exception applies if the contract is both a) indexed to its own stock; and b) classified in stockholders' equity in its statement of financial position.

 

If the conversion feature within convertible debt meets the requirements to be treated as a derivative, the Company estimates the fair value of the convertible debt derivative using Black-Scholes upon the date of issuance. If the fair value of the convertible debt derivative is higher than the face value of the convertible debt, the excess is immediately recognized as interest expense. Otherwise, the fair value of the convertible debt derivative is recorded as a liability with an offsetting amount recorded as a debt discount, which offsets the carrying amount of the debt. The convertible debt derivative is revalued at the end of each reporting period and any change in fair value is recorded as a gain or loss in the consolidated statement of operations. The debt discount is amortized through interest expense over the life of the debt.

  

Convertible debt – beneficial conversion feature

 

If the conversion feature is not treated as a derivative, the Company assesses whether it is a beneficial conversion feature ("BCF'). A BCF exists if the conversion price of the convertible debt instrument is less than the stock price on the commitment date. This typically occurs when the conversion price is less than the fair value of the stock on the date the instrument was issued. The value of a BCF is equal to the intrinsic value of the feature, the difference between the conversion price and the common stock into which it is convertible, and is recorded as additional paid in capital and as a debt discount in the consolidated balance sheet. The Company amortizes the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statement of operations. If the debt is retired early, the associated debt discount is then recognized immediately as amortization of debt discount expense in the consolidated statement of operations.

 

If the conversion feature does not qualify for either the derivative treatment or as a BCF, the convertible debt is treated as traditional debt.

 

Debt Modifications and Extinguishments

 

When the Company modifies or extinguishes debt, it does so in accordance with ASC Topic 470-50-40, which requires modification to debt instruments to be evaluated to assess whether the modifications are considered "substantial modifications". A substantial modification of terms shall be accounted for like an extinguishment. Based on the guidance relied upon and the analysis performed, if the Company believes the embedded conversion feature has no fair value on the date of issuance (measurement date) and the embedded conversion feature has no beneficial conversion feature, the embedded conversion feature does not meet the criteria in ASC 470-50-40-10 or 470-20-25 and the issuance of the convertible note payable is considered a modification, and not an extinguishment that would require the recognition of a gain or loss. If the Company determines the change in terms meet the criteria for substantial modification under ASC 470 it will treat the modification as extinguishment and recognize a loss from debt extinguishment.

 

 
- 10 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 

Concentrations, Risks, and Uncertainties

 

The Company is a startup company subject to the substantial business risks and uncertainties inherent to such an entity, including the potential risk of business failure.

 

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.

 

NOTE 4 COMMITMENTS AND CONTINGENCIES

 

Employment Agreements

 

Eric Clemons

 

On June 15, 2013, the Company entered into an employment agreement with Eric Clemons. Terms of the agreement included the following:

 

 

·

An annual salary of One Hundred Fifty-Six Thousand Dollars ($156,000), which has been paid or settled in stock in full.

 

·

Bonus of $40,000 upon the delivery to the Company of a prototype medical device from Sonos Models Inc., which has been paid in full.

 

·

Cash bonus 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. To date, this incentive has not earned or been paid.

 

·

Option to acquire up to 100,000 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 $822,000, and is recognized ratably over the vesting period in selling, general and administrative expense. 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 March 31, 2016, 60,000 options to purchase the Company's common stock have vested. The Company recognized selling, general and administrative expense of approximately $124,000 for nine months ended March 31, 2016 and 2015, and approximately $42,000 for three months ended March 31, 2016 and 2015. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $206,000.

 

 
- 11 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 

On October 1, 2014, the Company entered into an addendum to the employment agreement. The addendum had no accounting impact on the prior agreement. Terms of the addendum include included the following:

 

 

·

Extension of employment until June 15, 2017.

 

·

Annual salary of One Hundred Ninety Five Thousand Dollars ($195,000).

 

·

Option to acquire up to 100,000 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 $90,000, and is recognized ratably over the vesting period in selling, general and administrative expense. 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 March 31, 2016, 40,000 options to purchase the Company's common stock have vested. The Company recognized selling, general and administrative expense of approximately $14,000 and $27,000 for the nine months ended March 31, 2016 and 2015, respectively, and approximately $5,000 for the three months ended March 31, 2016 and 2015. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $45,000.

 

On March 1, 2015, the Company entered into an addendum to the employment agreement. The addendum had no accounting impact on the prior agreements. Terms of the addendum included 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. From January through March 2015, $31,250 was earned and paid, which was recognized as a reduction of the proceeds from the sale of shares of common stock. No cash placement bonus has been earned or paid in 2016.

  

To date, no employee or employer payroll taxes have been withheld, remitted to taxing authorities, or recognized by the Company for cash compensation paid. As a result, the Company could be liable such payroll taxes and any related penalties and interest.

 

Wesley Tate

 

On June 15, 2013, the Company entered into an employment agreement with Wesley Tate. Terms of the agreement included the following:

 

 

·

Annual salary of One Hundred Five Thousand Dollars ($105,000), which has been paid or settled in stock in full.

 

·

Bonus of $20,000 upon the delivery to the Company of a prototype medical device form Sonos Models, Inc., which has been paid in full.

 

·

Option to acquire up to 50,000 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 $411,000, and is recognized ratably over the vesting period in selling, general and administrative expense. 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 March 31, 2016, 30,000 options to purchase the Company's common stock have vested. The Company recognized selling, general and administrative expense of approximately $62,000 for the nine months ended March 31, 2016 and 2015, and approximately $21,000 for the three months ended March 31, 2016 and 2015. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $103,000.

 

 
- 12 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 

On April 1, 2014, the Company entered into an addendum to this agreement. The addendum had no accounting impact on the prior agreement. Terms of the addendum included 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 for 12 months. The Company recognized a prepaid expense of approximately $37,500, which has been fully amortized to selling, general and administrative. The Company recognized selling, general and administrative expense of approximately $0 and $28,000 for the nine months ended March 31, 2016 and 2015, respectively, and $0 and $9,500 for the three months ended March 31, 2016 and 2015, respectively.

 

On October 1, 2014, the Company entered into an addendum to the employment agreement. The addendum had no accounting impact on the prior agreements. Terms of the agreement included the following:

 

 

·

Extension of employment until June 15, 2017.

 

·

Annual salary of One Hundred Fifty Six Thousand Dollars ($156,000)

 

·

Option to acquire up to 50,000 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 $45,000, and is recognized ratably over the vesting period in selling, general and administrative expense. 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 March 31, 2016, 20,000 options to purchase the Company's common stock have vested. The Company recognized selling, general and administrative expense of approximately $7,000 and $14,000 for the nine months ended March 31, 2016 and 2015, respectively, and approximately $2,300 for the three months ended March 31, 2016 and 2015. The compensation expected to be recognized in future years is approximately $22,000.

 

On October 1, 2015, the Company entered into a new employment agreement. The new contract had no accounting impact on the prior agreements. Terms of the agreement included the following:

 

 

·

Extension of employment until October 2018.

 

·

Annual salary of One Hundred Fifty Six Thousand Dollars ($156,000)

 

·

Stock grant of 150,000 of the Company's common restricted shares for services provided to the Company. The Company recognized selling, general and administrative expense of approximately $40,000 and $0 for the nine and three months ended March 31, 2016.

 

To date, no employee or employer payroll taxes have been withheld, remitted to taxing authorities, or recognized by the Company for cash compensation paid. As a result, the Company could be liable such payroll taxes and any related penalties and interest.

 

 
- 13 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015


Commitments

 

In September 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. In April 2014, the Company entered into an addendum to the agreement with Sonos, which included a commitment by the Company to pay Sonos up to One Million Dollars ($1,000,000) cash, excluding stock based compensation, for research and development costs. These costs will be recognized in research and development expense as costs are incurred. To date, Sonos has been issued 325,000 restricted shares of the Company's stock, 20,000 warrants to purchase the Company's stock and the Company has paid approximately $180,000, of which $25,000 has been incurred towards the Company's monetary commitment.

 

Consulting Agreements

 

Between December 2013 and March 2016, the Company entered into service and consulting agreements with various vendors 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 approximate aggregate 1,000,000 shares of the Company's fully vested and non-forfeitable common stock. These contracts are for twelve to twenty four months and may be renewed or extended for any period as may be agreed by the parties. As of March 31, 2016 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 originally approximately $2,000,000 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 nine months ended March 31, 2016 and 2015, the Company amortized from prepaid expenses to General and Administrative expenses approximately $128,000 and $263,000, respectively, and approximately $34,000 and $64,000 for the three months ended March 31, 2016 and 2015, respectively. The unamortized prepaid expenses of these contracts are approximately $123,000 and included in prepaid expenses on the balance sheet at March 31, 2016.

 

In December 2014, the Company entered into consulting agreements with two individuals to provide business consulting services for a period of twelve months. Compensation was fully vested and non-forfeitable options to acquire up to 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, and is to be recognized ratably over the service period in selling, general and administrative expense. 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. For the nine months ended March 31, 2016 and 2015, the Company amortized from prepaid expenses to General and Administrative expenses approximately $35,000 and $28,000, respectively, and approximately $0 and $21,000 for the three months ended March 31, 2016 and 2015, respectively. These contracts are fully amortized.

 

In March 2015, the Company entered into a consulting agreement with an individual to provide marketing and social media strategy services for a period of twelve months. Compensation was an engagement fee of $30,000 and monthly consulting fee of $3,500. The Company recognized the $30,000 as a prepaid expense to be amortized to marketing expense over the service period. For the nine months ended March 31, 2016 and 2015, the Company amortized from prepaid expenses to General and Administrative expenses approximately $20,000 and $3,000, respectively, and approximately $5,000 and $3,000 for the three months ended March 31, 2016 and 2015, respectively. This contract is fully amortized.

 

 
- 14 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 

In January 2016, the Company entered into a consulting agreement with an individual to provide business consulting services for a period of thirty six months. Compensation was issuance of 75,000 shares of the Company's stock (See note 7) and fully vested and non-forfeitable options to acquire up to 300,000 shares of our common stock, at an exercise price of $0.33 per share. Fair Market Value of these options totaled approximately $54,000, and is to be recognized ratably over the service period in selling, general and administrative expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 100%; risk-free interest rate of 0.47%; expected term of 3 years; and 0% dividend yield. The amortization from prepaid expense for the nine and three months periods ended March 31, 2016 related to this agreement was de minimis. The unamortized prepaid expense of this contract is approximately $54,000 and included in prepaid expenses on the balance sheet at March 31, 2016.

 

As of March 31, 2016, future maturities of prepaid expenses on value of shares issued for consulting are as follows:

 

Fiscal year ending June 30,

 

 

 

 

 

 

 

2016

 

$43,026

 

2017

 

 

102,493

 

2018

 

 

18,000

 

2019

 

 

13,500

 

Total

 

$177,019

 

 

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. To date, Dr. Saini has not participated in any sales of equity.

 

 
- 15 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 
 

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 the fourth (June 2014), fifth (June 2015), and sixth (June 2016) 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 accrued the minimum patent royalty expense associated with the patent rights in accounts payable 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.

 

Legal fees pertaining to the patent are recorded as general and administrative expenses when they are incurred. Legal fees charged to operations were approximately $1,900 and $11,000 for the nine months ended March 31, 2016 and 2015, respectively and approximately $1,700 and $0 for the three months ended March 31, 2016 and 2015, respectively.

 

The Company recognized a patent royalty expense of approximately $38,000 and an additional $100,000 for the correction of error for the nine months ended March 31, 2016 compared to $0 for the nine months ended March 31, 2015 and patent royalty expense of approximately $12,500 and $0 for the three months ended March 31, 2016 and 2015, respectively. The accrued payable of $137,500 pertaining to the patent royalty expense at March 31, 2016 is included in related party payables.

 

In connection with the Patent Licensing Agreement, the Company incurred $50,000 royalty fees in fiscal year 2014 and 2015, which were capitalized to patent rights on the balance sheet. After further analysis, the Company determined that the royalty fees should have been expensed to selling, general and administrative expenses. The effect of the correction of the error can be seen in Note 12.

 

NOTE 6 – NOTES PAYABLE

 

Short Term Note Payable

 

 

 

Short Term Notes Payable

 

 

 

March 31,

2015

 

 

June 30,

2015

 

Short term note payable (A)

 

$114,000

 

 

$113,000

 

Short term note payable (B)

 

 

-

 

 

 

10,000

 

Short term note payable (C)

 

 

-

 

 

 

8,000

 

Net total

 

$114,000

 

 

$131,000

 

 

 
- 16 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 

Related Party Notes Payable

 

(A)

In 2012, the Company issued a note payable to a related party. The note was scheduled to mature on December 31, 2013 and accrued interest at seven and one-half (7.5) percent per annum. In February 2016, the noteholder provided the Company with an additional $1,000. As of March 31, 2016, the outstanding balance was $114,000. The Company is currently in default and is in discussions with the noteholder to restructure the terms of the note.

 

Notes Payable

 

(B)

In May 2015, the Company entered into an unsecured $10,000 promissory note with a stockholder. The note matured on June 1, 2015 and accrued interest at seven and one-half (7.5) percent per annum. In December 2015, the Company extinguished this debt in exchange of an unsecured amended and consolidated convertible promissory note for a principal amount of $260,000 (See Convertible Note Payable (B) below).

(C)

In May and June, 2015, the Company entered into an unsecured $8,000 promissory note with a stockholder. As of March 31, 2016 the promissory note has been fully paid.

 

Long Term Note Payable

 

 

 

Convertible Notes Payable

 

 

 

March 31,

2015

 

 

June 30,

2015

 

Convertible note payable (A)

 

$118,400

 

 

$77,500

 

Convertible note payable (B)

 

 

260,000

 

 

 

200,000

 

Convertible note payable (C)

 

 

2,080,112

 

 

 

1,475,000

 

Subtotal

 

 

2,458,512

 

 

 

1,752,500

 

Debt discount

 

 

(172,495)

 

 

(66,969)

Net total

 

$2,286,017

 

 

$1,685,531

 

 

 
- 17 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 

Convertible Note Payable (A)

 

Between September 2013 and March 2016, the Company entered into various unsecured convertible promissory notes with non-affiliate stockholders for principal amounts of approximately $7,500 to $25,000, totaling approximately $118,000. Under the terms of these notes, maturity dates range from June 2015 and March 2019, interest rates range from 7.5% to 8.0% per annum, and are convertible into shares of our common stock at rates that range from $0.20 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. In addition, the Company granted to certain noteholders a cashless option to purchase one (1) share of the Company's common stock, $.001 par value, at the exercise price of $0.50 to $1.25 per share, for each share the holders are entitled to pursuant to the promissory note. The options are fully vested and shall expire one year from date of execution. To date, none of the convertible notes have been converted and none of the options have been exercised. For the period ended March 31, 2016, the Company is in default approximately $48,000 on some of the notes. As a result, these notes are included in the current portion of convertible notes payable, and the Company is in discussions with the noteholders to restructure the terms of the notes.

 

The Company recognized an accretion of debt discount expense of approximately $3,000 and $8,500 for the nine months ended March 31, 2016 and 2015, respectively and approximately $0 and $3,000 for the three months ended March 31, 2016 and 2015, respectively. The accretion of debt discount expense expected to be recognized in future years is approximately $18,000.

 

Unsecured, Amended and Consolidated Convertible Note Payable (B)

 

December 2014 Convertible Note

 

In December 2014, the Company entered into an unsecured convertible promissory note with a non-affiliate stockholder for a principal amount of $200,000. The note payable matured in December 2016, accrued interest at 7.5% per annum, and convertible into shares of our common stock at a conversion rates of $1.00 per share, but only if such conversion would not cause the Noteholder to own more than 9.9% of our outstanding common stock, and contains piggyback registration rights.

 

The Company determined that the note had a beneficial conversion feature of approximately $90,000.

 

The Company recognized an accretion of debt discount expense of $15,000 for the nine months ended March 31, 2016 and 2015, and approximately $0 and $11,000 for the three months ended March 31, 2016 and 2015, respectively. The accretion of debt discount has been fully amortized.

 

 
- 18 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 

December 2015 Convertible Note

 

In December 2015, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of $260,000. In exchange, the Company extinguished a $10,000 short term note payable, the $200,000 convertible note payable issued in December 2014, and received cash of $50,000. The amended and consolidated note payable matures in March 2019, accrues interest at 7.5% per annum, and convertible into shares of our common stock at a conversion rates of $0.20 per share, but only if such conversion would not cause the Noteholder to own more than 9.9% of our outstanding common stock, and contains piggyback registration rights. In addition, the Company granted to the noteholder a cashless warrant to purchase one (1) share of the Company's common stock, $.001 par value, at the exercise price of $0.50 per share, for each share the holders are entitled to pursuant to the promissory note. The options are fully vested and shall expire three years from date of execution.

  

The value of the warrants was approximately $121,000 which was valued using the Black-Scholes option pricing model with the following inputs: volatility of 100%; risk-free interest rate of 0.75%; expected term of 2 years; and 0% dividend yield. The Company determined the relative fair value discount of the warrants was approximately $83,000.

 

The Company determined that the note had a beneficial conversion feature of approximately $96,000.

 

In connection with the $260,000 convertible note, the Company recognized an accretion of debt discount expense of approximately $25,000 for the nine month period ended March 31, 2016 and approximately $15,000 for the three month period ended March 31, 2016. The accretion of debt discount expense expected to be recognized in future years is approximately $154,000.

  

For the nine month period ended March 31, 2016, the Company recognized a loss of approximately $50,000 related to the modification of the $200,000 convertible note payable issued in December 2014.

 

Unsecured, Amended and Consolidated Convertible Note Payable (C)

 

June 2015 Convertible Note

 

In June 2015, the Company entered into an unsecured convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $1,475,000. The note payable accrued interest at 7.5% per annum and is convertible into shares of our common stock at a conversion rate of $1.00 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.

 

In connection with the extinguished $1,475,000 convertible notes payable, the Company recognized an accretion of debt discount expense of approximately $0 and $105,000 for the nine months ended March 31, 2016 and 2015, respectively, and approximately $0 and $18,000 for the three months ended March 31, 2016 and 2015, respectively. The accretion of debt discount has been fully amortized.

 

 
- 19 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 

December 2015 Convertible Note

 

In December 2015, the Company entered into an unsecured $112,000 promissory note with a stockholder. The note matured on September 17, 2015 and accrued no interest. In addition, the Company issued to the noteholder 125,000 shares of the Company's common stock.

 

In connection with the issuance of the 125,000 shares of stock in December 2015, the Company recorded the approximate $39,000 value of the shares issued as a debt discount and amortized the expense associated with this issuance over a four month period. The Company used a recent sale of stock to determine the fair market value of the transaction. For the nine months ended March 31, 2016, the Company recognized an accretion of debt discount expense of approximately $39,000 and for the three months ended March 31, 2016, the Company recognized approximately $30,000.

 

February 2016 Convertible Note

 

In February 2016, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,100,000. In exchange, the Company extinguished the $1,475,000 convertible note payable issued in June 2015, the $112,000 note payable issued in December 2015, accounts payable related to accrued interest of approximately $293,000, and received cash of $200,000. The amended and consolidated note payable matures February 2018, accrues interest at 5% per annum, and is convertible into shares of our common stock at a conversion rate of $0.50 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 determined the embedded conversion feature does not meet the criteria in ASC 470-50-40-10 or 470-20-25, and the issuance of the convertible note payable is considered a modification, and not an extinguishment that would require the recognition of a gain or loss.

 

The Company recognized interest expense on all notes of approximately $98,000 for the nine months ended March 31, 2016 and 2015, and approximately $27,000 and $35,000 for the three months ended March 31, 2016 and 2015, respectively. Accrued interest on all notes payable to stockholders and other related parties at March 31, 2016 totaled approximately $69,000 and is included in accounts payables.

 

As of March 31, 2016, future maturities of notes payable are as follows:

 

Fiscal year ending June 30,

 

 

 

 

 

 

 

2016

 

$77,500

 

2017

 

 

7,500

 

2018

 

 

2,355,112

 

2019

 

 

18,400

 

Total outstanding notes

 

 

2,458,512

 

Debt Discount

 

 

(172,495)

Net Notes Payable

 

$2,286,017

 

 

 
- 20 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

  

NOTE 7 – STOCK TRANSACTIONS

 

On May 18, 2015, the Company entered a Stock Purchase Agreement for the purchase of 1,600,000 shares for total gross proceeds of $2,000,000 by June 30, 2015. In March 2016, a total of 240,000 shares were purchased for a total of $300,000 and subsequent to that date, no shares have been purchased. In December 2015, the Stock Purchase Agreement was extended to acquire the remainder of the shares by March 31, 2016. The Company is currently in discussions with the purchaser to restructure the terms of the agreement.

 

In September 2015, the Company issued Eric Clemons, a related party, 250,000 shares of common stock at $0.31 per share for payment of $77,500 of related party payables, related to previously recognized compensation expense, and Wesley Tate, a related party, 250,000 shares of common stock at $0.31 per share for payment of $77,500 of related party payables, related to previously recognized compensation expense, for an aggregate of 500,000 shares of the Company's common stock for payment of $155,000 of related party payables. The Company used recent sales of stock to determine the fair market value of the shares and recorded the issuances at $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 January 2016, the Company issued Eric Clemons, a related party, 150,000 shares of common stock at $0.30 per share for payment of $45,000 of related party payables, related to previously recognized compensation expense, and Wesley Tate, a related party, 150,000 shares of common stock at $0.30 per share for payment of $45,000 of related party payables, related to previously recognized compensation expense, for an aggregate of 300,000 shares of the Company's common stock for payment of $90,000 of related party payables. The Company used recent sales of stock to determine the fair market value of the shares and recorded the issuances at $0.30 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.

  

For the nine month period ended March 31, 2016, the Company issued 375,000 shares of common stock to various individuals as payment for consulting services per contracts dated between October 2015 and March 2016 (See Note 4 and Note 6). The Company recorded the approximate $148,500 value of the shares issued at the Fair Market Value of the shares into prepaid expenses. The Company used recent sales of stock to determine the fair market value of the shares and recorded the issuances at $0.21 to $0.45 per share. 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 nine month period ended March 31, 2016, the Company issued 300,000 shares of our common stock to individuals for conversions of accounts payable. The aggregate Fair Market Value of these shares was approximately $100,000 as the conversion price was between $0.27 and $0.35 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.

 

For the nine month period ended March 31, 2016, the Company issued 125,000 shares of common stock to an individual as payment for consulting services per contract dated December 2015 (See Note 6). The Company recorded the approximate $39,000 value of the shares issued at the Fair Market Value of the shares into prepaid expenses. The Company used recent sales of stock to determine the fair market value of the shares and recorded the issuances at $0.31 per share. 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 nine month period ended March 31, 2016, the Company issued 150,000 shares of common stock to a related party as payment for consulting services per agreement dated October 2015 (See Note 4). The Company recorded the approximate $40,500 value of the shares issued at the Fair Market Value of the shares, which was expensed upon issuance. The Company used recent sales of stock to determine the fair market value of the shares and recorded the issuances at $0.27 per share. 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.

 

 
- 21 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 

NOTE 8 – OPTIONS AND WARRANTS

 

Options

 

In January 2016, the Company issued fully vested and non-forfeitable options to acquire up to 300,000 shares, which are included in the 700,000 options outstanding at March 31, 2016, of our common stock, at an exercise price of $0.33 per share to an individual as compensation for consulting services. Fair Market Value of these options, valued using the Black-Scholes option pricing model, totaled approximately $54,000, and is to be recognized ratably over the service period in selling, general and administrative expense. The options were valued using the Black-Scholes option pricing model with the following inputs: volatility of 100%; risk-free interest rate of 0.47%; expected term of 3 years; and 0% dividend yield (See Note 4).

 

For the nine month period ended March 31, 2016, the Company had 700,000 options outstanding at an average exercise price of $1.66, with 550,000 options exercisable and an expected compensation to be recognized of $429,000. For the nine months ended March 31, 2016 and 2015, the Company recognized an expense of approximately $207,000 and $253,000, respectively, and $70,000 and $75,000 for the three month period ended March 31, 2016 and 2015, respectively. The compensation expected to be recognizedin selling, general and administrative expense in future years is approximately $430,000.

 

Warrants

 

For the nine month period ended March 31, 2016, the Company had approximately 1,500,000 warrants outstanding at an average exercise price of $0.57, with approximately 1,500,000 warrants exercisable and 5,000 warrants forfeited compared to 35,000 warrants outstanding and exercisable for the period ended June 30, 2015. For the three and nine months ended March 31, 2016 and 2015, the Company recognized an expense of $0. The expense expected to be recognized is $0.

 

Between October 2015 and March 2016, the Company entered into unsecured convertible promissory notes with non-affiliate stockholders for principal amounts of approximately $2,500 to $260,000. In association with these notes, the Company granted to noteholders a cashless warrant to purchase one (1) share of the Company's common stock, $.001 par value, at the exercise price of between $0.50 and $1.25 per share, for each share the holders are entitled to pursuant to the promissory note. For the nine months ended March 31, 2016, the Company has recognized the issuance of approximately 1,470,000 warrants, which in included in the approximate 1,500,000 warrants outstanding (See note 6).

 

NOTE 9 – RELATED PARTY TRANSACTIONS

  

In September 2015, the Company issued Eric Clemons, a related party, 250,000 shares of common stock at $0.31 per share for payment of $77,500 of related party payables, related to previously recognized compensation expense, and Wesley Tate, a related party, 250,000 shares of common stock at $0.31 per share for payment of $77,500 of related party payables, related to previously recognized compensation expense, for an aggregate of 500,000 shares of our common stock for payment of $155,000 of related party payables. The Company used recent sales of stock to determine the fair market value of the shares and recorded the issuances at $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.

 

 
- 22 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 

In January 2016, the Company issued Eric Clemons, a related party, 150,000 shares of common stock at $0.30 per share for payment of $45,000 of related party payables, related to previously recognized compensation expense, and Wesley Tate, a related party, 150,000 shares of common stock at $0.30 per share for payment of $45,000 of related party payables, related to previously recognized compensation expense, for an aggregate of 300,000 shares of the Company's common stock for payment of $90,000 of related party payables. The Company used recent sales of stock to determine the fair market value of the shares and recorded the issuances at $0.30 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 connection to the related party payables pertaining to Mr. Clemons and Mr. Tate, the payables are only related to previously recognized compensation expense. Compensation expense payable that has been recognized for Mr. Clemons and Mr. Tate as of March 31, 2016 and June 30, 2015 was approximately $40,000 and $165,000, respectively, and included in related party payables.

 

The Company recognized a patent royalty expense of approximately $38,000 and an additional $100,000 for the correction of error for the nine months ended March 31, 2016 compared to $0 for the nine months ended March 31, 2015 and patent royalty expense of approximately $12,500 and $0 for the three months ended March 31, 2016 and 2015, respectively. The accrued payable of $137,500 pertaining to the patent royalty expense at March 31, 2016 is included in related party payables.

 

The Company issued 150,000 shares of common stock to a related party as payment for consulting services per agreement dated October 2015 (See Note 4). The Company recorded the approximate $40,000 value of the shares issued at the Fair Market Value of the shares, which was expensed upon issuance. The Company used recent sales of stock to determine the fair market value of the shares and recorded the issuances at $0.27 per share. 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.

  

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.

 

The total number of potential additional dilutive options and warrants outstanding was approximately 2,200,000 and 435,000 for the nine months ended March 31, 2016 and 2015, respectively. In addition, the convertible notes convert at an exercise price of between $0.20 and $5.00 per share of common stock representing approximately 5.7 million shares. 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.

 

 
- 23 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

 

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

 

 

 

For The Nine Months ended

March 31,

 

 

For The Three Months ended

March 31,

 

 

 

2016

 

 

2015

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Net loss attributable to the common stockholders

 

$(1,568,716)

 

$(1,970,310)

 

 

(495,484)

 

$(660,359)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic weighted average outstanding shares of common stock

 

 

5,614,438

 

 

 

4,400,955

 

 

 

5,567,141

 

 

 

4,585,236

 

Dilutive effect of options and warrants

 

 

-

 

 

 

-

 

 

 

-

 

 

 

-

 

Diluted weighted average common stock and common stock equivalents

 

 

5,614,438

 

 

 

4,400,955

 

 

 

6,378,479

 

 

 

4,585,236

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Earnings (loss) per share:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Basic and diluted

 

$(0.28)

 

$(0.45)

 

 

(0.08)

 

$(0.14)

 

NOTE 11 – INCOME TAXES

 

The Company accounts 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.

 


The provision (benefit) for income taxes for the period ended March 31, 2016 and June 30, 2015, assumes a 34% effective tax rate for federal income taxes. The Company has no state income taxes liability. The Company had deferred income tax assets as of March 31, 2016 and June 30, 2015 are as follows:

 

 

 

March 31,

2016

 

 

June 30,

2015

 

 

 

 

 

 

 

 

Loss carryforwards

 

$3,650,000

 

 

$2,900,000

 

Less – valuation allowance

 

 

(3,650,000)

 

 

(2,900,000)

Total net deferred tax assets

 

$-

 

 

$-

 

 

 
- 24 -
 

 

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE AND NINE MONTH PERIODS ENDED MARCH 31, 2016 AND 2015

  

The Company provided a valuation allowance equal to the deferred income tax assets for the periods ended March 31, 2016 and June 30, 2015, respectively, because it is not presently known whether future taxable income will be sufficient to utilize the loss carryforwards.

 

At March 31, 2016, the Company had approximately $10,700,000 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 CORRECTION OF AN ERROR

 

In connection with the Patent Licensing Agreement (See Note 5), the Company incurred $50,000 royalty fees in fiscal year 2014 and 2015, which were improperly capitalized to patent rights on the prior year balance sheet. After further analysis, the Company determined that the royalty fees should have been expensed to selling, general and administrative expenses. To properly account for the correction of the error, the Company considered ASC Topic 205. Based on an analysis of the results of the correction, the Company determined that the correction was immaterial to the prior years issued financial statements and recorded the corrections in the current year ending 2016. The conclusion was based on the fact that the Company is in the early stages of its life cycle, has not begun primary operations, to date the Company has been focused on capital raising efforts necessary to fund development of a prototype. As a result, available cash has been limited and account balances directly related to cash have relatively small account balances. Therefore, cash flow and the availability of funds is what the Company believes investors and potential investors are focused on, not non-cash corrections of errors. The Company further believes investors are focused on the viability of the technology, eventual FDA approval, and licensing or sale of the technology.

 

NOTE 13 SUBSEQUENT EVENTS

 

In December 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) (See Note 7). In May 2016, the Purchaser acquired Sixty Four Thousand (64,000) shares of the Company's common stock providing Eighty Thousand Dollars ($80,000) to the Company, at a price of $1.25 per share. To date, a total of 304,000 shares have been purchased for a total of $380,000.

 

 
- 25 -
 

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

 

DISCLAIMER REGARDING FORWARD LOOKING STATEMENTS

 

Certain statements in this Form 10-Q, 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. 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.

 

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.

 

 
- 26 -
 

 

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.

 

Description of Patent License Agreement

 

On June 10, 2010, our subsidiary, Cerebain Operating, Inc., entered into a Patent License Agreement under which it 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 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 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 the fourth (June 2014), fifth (June 2015), and sixth (June 2016) 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. We have recognized costs associated with the patent rights for $137,500 in accounts payable for the patent rights and are 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.

 

Legal fees pertaining to the patent are recorded as general and administrative expenses when they are incurred. Legal fees charged to operations were approximately $1,900 and $11,000 for the nine months ended March 31, 2016 and 2015, respectively and approximately $1,700 and $0 for the three months ended March 31, 2016 and 2015, respectively.

 

We recognized a patent royalty expense of approximately $38,000 and an additional $100,000 for the correction of error for the nine months ended March 31, 2016 compared to $0 for the nine months ended March 31, 2015 and patent royalty expense of approximately $12,500 and $0 for the three months ended March 31, 2016 and 2015, respectively. The accrued payable of $137,500 pertaining to the patent royalty expense at March 31, 2016 is included in related party payables.

 

 
- 27 -
 

 

In connection with the Patent Licensing Agreement, we incurred $50,000 royalty fees in fiscal year 2014 and 2015, which were improperly capitalized to patent rights on the prior year balance sheet. After further analysis, we determined that the royalty fees should have been expensed to selling, general and administrative expenses. To properly account for the correction of the error, we considered ASC Topic 205. Based on an analysis of the results of the correction, we determined that the correction was immaterial. The conclusion was based on the fact that we are in the early stages of our life cycle, has not begun primary operations, to date we have been focused on capital raising efforts necessary to fund development of a prototype. As a result, available cash has been limited and account balances directly related to cash have relatively small account balances. Therefore, cash flow and the availability of funds is what we believe investors and potential investors are focused on, not non-cash corrections of errors. We further believe investors are focused on the viability of the technology, eventual FDA approval, and licensing or sale of the technology.

 

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.

 

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.

 

 
- 28 -
 

 

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 6th leading cause of death in the United States and the 5th 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.

 

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.

 

 
- 29 -
 

 

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.

 

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 in September 2012 to build up to three medical device prototypes to be used for testing. In April 2014, we entered into an addendum to the agreement with Sonos, which included a commitment by us to pay Sonos up to One Million Dollars ($1,000,000) cash, excluding stock based compensation, for research and development costs. These costs will be recognized in research and development expense as costs are incurred. To date, Sonos has been issued 325,000 restricted shares of our stock, 20,000 warrants to purchase our stock and paid approximately $180,000, of which $25,000 has been incurred towards our monetary commitment.

 

 
- 30 -
 

 

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.

 

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 biomedical company and have not generated 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") of Cerebain includes the following sections:

 

·

Results of Operations

 

·

Liquidity and Capital Resources

 

·

Capital Expenditures

 

·

Fiscal Year End

 

·

Going Concern

 

·

Critical Accounting Policies

·

Recent Accounting Pronouncements

 

 
- 31 -
 

 

·

Off-Balance Sheet Arrangements

·

Inflation

 

Results of Operations

 

Three Months Ended March 31, 2016 Compared to Three Months Ended March 31, 2015

 

Revenue

 

For the three months ended March 31, 2016 and March 31, 2015, we did not generate any revenues.

 

Operating expenses

 

Operating expenses decreased by approximately $152,000, or 26.3%, to approximately $425,000 in the three months ended March 31, 2016 from approximately $577,000 in the three months ended March 31, 2015 primarily due to the following: decrease in research and development cost as no costs were incurred; decrease in marketing expense; travel expenses decreased due to less travel being required during the period; offset by an increase in professional fees; and the recognition of patent royalty expense.

 

Approximate operating expenses for the three months ended March 31, 2016 were comprised of marketing costs of $15,000; patent royalty costs of $13,000; $267,000 in consulting services costs; compensation expense of $68,000; professional fees of $29,000; travel & entertainment costs of $30,000; and $3,000 in other operating expenses.

 

Approximate operating expenses for the three months ended March 31, 2015 were comprised of marketing costs of $36,000; consulting services costs of $281,000; research and development costs of $135,000; compensation expense of $78,000; professional fees of $7,000; travel costs of $31,000; office supplies costs of $4,000; investor relations costs of $2,000; and $3,000 in other operating expenses.

 

Other income (expenses)

 

Other expense decreased by approximately $13,000, or 15.5%, to approximately $71,000 in the three months ended March 31, 2016 from approximately $84,000 in the three months ended March 31, 2015 primarily due to the following: interest expenses decreased due to the restructuring of certain loans and the accretion of recorded debt discounts related to notes payable have decreased as we have restructured certain loans that no longer contain beneficial elements offset by an increase in financing fees.

 

 
- 32 -
 

 

Net loss before income taxes

 

Net loss before income taxes for the three months ended March 31, 2016 totaled approximately $495,000 primarily due to consulting services costs, patent royalty expense, costs related to fair value of stock and warrants issued for services and amortization of compensation costs related to stock options, and professional fees compared to approximately $660,000 for the three months ended March 31, 2015 primarily due to marketing costs, consulting services costs, research and development costs, costs related to fair value of stock and warrants issued for services and amortization of compensation costs related to stock options, and professional fees.

 

Nine Months Ended March 31, 2016 Compared to Nine Months Ended March 31, 2015

 

Revenue

 

For the nine months ended March 31, 2016 and March 31, 2015, we did not generate any revenues.

 

Operating expenses

 

Operating expenses decreased by approximately $381,000, or 22.5%, to approximately $1,310,000 in the nine months ended March 31, 2016 from approximately $1,690,000 in the nine months ended March 31, 2015 primarily due to the following: decrease in research and development cost as no costs were incurred; decrease in marketing expense; increase in professional fees; travel expenses decreased due to less travel being required during the period; offset by an increase 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 as we have added new consultants and a scientific advisory board member; and the recognition of patent royalty expense.

 

Approximate operating expenses for the nine months ended March 31, 2016 were comprised of marketing expense of $51,000; patent royalty costs of $138,000; consulting services costs of $764,000; compensation expense of $246,000; professional fees of $50,000; travel costs of $50,000; phone expense of $3,000; office supply costs of $1,000; rent expense of $1,500; and $5,500 in other operating expenses.

 

Approximate operating expenses for the nine months ended March 31, 2015 were comprised of marketing costs of $136,000; consulting services costs of $750,000; research and development costs of $380,000; compensation expense of $253,000; professional fees of $70,000; travel costs of $85,000; phone expense of $3,500; office supply costs of $6,500; rent expense of $1,600; and $4,400 in other operating expenses.

 

Other income (expenses)

 

Other expense decreased by approximately $21,000, or 7.4%, to approximately $257,000 in the nine months ended March 31, 2016 from approximately $277,000 in the nine months ended March 31, 2015 primarily due to the following: interest expenses decreased due to the restructuring of certain loans and the accretion of recorded debt discounts related to notes payable have decreased as we have restructured certain loans that no longer contain beneficial elements offset by an increase in financing fees.

 

 
- 33 -
 

 
 

Net loss before income taxes

 

Net loss before income taxes for the nine months ended March 31, 2016 totaled approximately $1,600,000 primarily due to consulting services costs, patent royalty expense, costs related to fair value of stock and warrants issued for services and amortization of compensation costs related to stock options, and professional fees compared to approximately $2,000,000 for the nine months ended March 31, 2015 primarily due to marketing costs, consulting services costs, research and development costs, costs related to fair value of stock and warrants issued for services and amortization of compensation costs related to stock options, and professional fees.

 

Assets and Liabilities

 

Assets were approximately $264,000 as of March 31, 2016. Assets consisted of cash of approximately $2,800, prepaid expenses of approximately $177,000, and patent rights of approximately $84,000. Liabilities were approximately $3,200,000 as of March 31, 2016. Liabilities consisted of accounts payable of approximately $539,000, related party payable of approximately $242,000, notes payable to related parties of approximately $114,000 and convertible notes to stockholders, net of debt discount, of approximately $2,300,000.

 

Stockholders' Deficit

 

Stockholders' deficit was approximately $3,000,000 as of March 31, 2016. Stockholder's deficit consisted primarily of shares issued to founders and recorded as compensation in the amount of approximately $14,000, shares issued for fundraising totaling approximately $1,300,000, net of issuance costs, beneficial conversion feature associated with convertible note of approximately $1,400,000, shares issued in conversion of liabilities of approximately $730,000, shares associated with warrants, options and issuances for services of approximately $4,400,000 and shares issued for patent rights totaling approximately $7,000, offset primarily by the deficit accumulated of approximately $10,700,000 at March 31, 2016.

 

Liquidity and Capital Resources

 

General – Overall, we had an increase in cash flows of approximately $2,500 in the nine months ending March 31, 2016 resulting from cash used in operating activities of approximately $394,000, offset partially by cash provided by financing activities of approximately $396,000.

 

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

 

 

 

Nine Months Ended March 31,

 

 

 

2016

 

 

2015

 

 

 

 

 

 

 

 

Cash at beginning of period

 

$486

 

 

$1,688

 

Net cash used in operating activities

 

 

(393,613)

 

 

(643,406)

Net cash provided by financing activities

 

 

395,900

 

 

 

666,550

 

Cash at end of period

 

$2,773

 

 

$24,832

 

 

 
- 34 -
 

 

Cash Flows from Operating Activities – For the nine months ended March 31, 2016, net cash used in operations was approximately $394,000 compared to net cash used in operations of approximately $644,000 for the nine months ended March 31, 2015. Net cash used in operations was primarily due to a net loss of approximately $1,600,000 for the nine months ended March 31, 2016, amortization of prepaid consulting compensation of approximately $170,000, accretion of debt discount of approximately $82,000, loss from extinguishment of debt of approximately $49,000, stock based compensation related to stock options for approximately $250,000, amortization of deferred financing of $28,000, correction of an error of $100,000, and the changes in operating assets and liabilities of approximately $509,000.

  

Cash Flows from Financing Activities – Net cash flows provided by financing activities in the nine months ending March 31, 2016 was approximately $396,000, compared to net cash provided of approximately $667,000 in the same period in 2015. The cash provided by financing activities was due to proceeds from notes payable to stockholders of approximately $403,000 offset my repayment of third party note of $8,000.

 

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, 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 previous 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

 

The accompanying unaudited condensed consolidated financial statements have been prepared assuming we 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. We had a accumulated deficit of approximately $10,700,000 and $9,100,000 at March 31, 2016 and June 30, 2015, respectively, and had a net loss of approximately $1,600,000 and $2,000,000 for the nine months ended March 31, 2016 and 2015, respectively, and net cash used in operating activities of approximately $400,000 and $650,000 for the nine months ended March 31, 2016 and 2015, respectively, with no revenue earned since inception. These matters raise substantial doubt about our ability to continue as a going concern.

  

 
- 35 -
 

 

While we are in the process of developing our medical device solution and our synthetic drug solution for the treatment of dementia, our cash position may not be significant enough to support our daily operations. We intend to raise additional funds by way of a public or private offering. We believe that the actions presently being taken to further implement our business plan and generate revenues provide the opportunity for us to continue as a going concern. While we believe in the viability of our strategy to generate revenues and in our 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 and generate revenues.

 

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 our financial condition and results of operations and which require us 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 9.

 

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

 

Use of Estimates

 

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires us 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 equity instruments. We make 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.

 

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

 

We account 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.

 

 
- 36 -
 

 

Accounting for Derivative Financial Instruments

 

We evaluate 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. We estimate 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

 

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

 

We use 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 our judgment.

 

Recent Accounting Pronouncements

 

We have evaluated new accounting pronouncements that have been issued and are not yet effective for us and determined that there are no such pronouncements expected to have an impact on our future financial statements.

 

Off-Balance Sheet Arrangements

 

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.

 

 
- 37 -
 

 

Inflation

 

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

 

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES 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 4. 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 (our Principal Executive Officer) and Chief Financial Officer (our Principal Financial Officer), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2016. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2016, 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

 

Our 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). We assessed the effectiveness of our internal control over financial reporting as of March 31, 2016. In making this assessment, we used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission ("COSO"). Based on that assessment, we believe that, as of March 31, 2016, our internal control over financial reporting was ineffective based on the COSO criteria, due to the following material weaknesses listed below.

 

 
- 38 -
 

 

Insufficient segregation of duties in our finance and accounting functions due to limited personnel. During the three and nine months ended March 31, 2016, 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 Chief Financial Officer.

 

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

 

In connection with the Patent Licensing Agreement error in which we capitalized patent royalty fees to patent rights on the balance sheet and determined that the royalty fees should have been expensed to selling, general and administrative expenses, we considered ASC Topic 205. Based on an analysis of the results of the correction, we determined that the correction was immaterial. The conclusion was based on the fact that we are in the early stages of our life cycle, have not begun primary operations, to date we have been focused on capital raising efforts necessary to fund development of a prototype. As a result, available cash has been limited and account balances directly related to cash have relatively small account balances. Therefore, cash flow and the availability of funds is what we believe investors and potential investors are focused on, not non-cash corrections of errors. We further believe investors are focused on the viability of the technology, eventual FDA approval, and licensing or sale of the technology.

 

When we are financially able, 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.

 

Changes in Internal Control over Financial Reporting

 

There was no change in our internal control over financial reporting during the period ending March 31, 2016, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.

 

 
- 39 -
 

 

PART II  OTHER INFORMATION

 

ITEM 1. 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 our financial position, results of operations, or cash flows.

 

ITEM 1A. RISK FACTORS

 

There have been no changes to our Risk Factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 22, 2015.

 

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

 

In January 2016, we issued Eric Clemons, a related party, 150,000 shares of common stock at $0.30 per share for payment of $45,000 of related party payables, related to previously recognized compensation expense, and Wesley Tate, a related party, 150,000 shares of common stock at $0.30 per share for payment of $45,000 of related party payables, related to previously recognized compensation expense, for an aggregate of 300,000 shares of our common stock for payment of $90,000 of related party payables. The Company used recent sales of stock to determine the fair market value of the shares and recorded the issuances at $0.30 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.

 

For the three month period ended March 31, 2016, we issued 225,000 shares of common stock to various individuals as payment for consulting services per contracts dated between January and March 2016. The aggregate Fair Market Value of these shares was approximately $105,000 as the fair market value of the stock was between $0.30 and $0.55 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.

 

For the three month period ended March 31, 2016, we issued 100,000 shares of our common stock to an individual for conversion of accounts payable. The aggregate Fair Market Value of these shares was approximately $30,000 as the conversion price was $0.30 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.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

 

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

 

ITEM 4. MINING SAFETY DISCLOSURES

 

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

 

ITEM 5. OTHER INFORMATION

 

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

 

 
- 40 -
 

 

ITEM 6. EXHIBITS

 

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

 

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

 

 
- 41 -
 

 

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

 

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

 

 
- 42 -
 

 

10.30 (15)

Employment Agreement with Wesley Tate dated October 1, 2015

 

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-Q for the three months ended March 31, 2016 furnished in XBRL).

101.INS

Interactive Data File (Form 10-Q for the three months ended March 31, 2016 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.

(15)

Incorporated by reference from our Form 10-Q filed with the Commission on November 16, 2015.

 

 
- 43 -
 

 
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 thereunto duly authorized.

 

 

 

Cerebain Biotech Corp.

 

A Nevada corporation

    
Dated: May 13, 2016By:/s/ Eric Clemons

 

 

 

Eric Clemons

 

 

 

President

 

(Principal Executive Officer)

 

 

 

 

By:/s/ Wesley Tate
Wesley Tate
Chief Financial Officer
(Principal Financial and Accounting Officer)

 

 

- 44 -