1250 Oakmead Pkwy

---

This Annual Report on Form 10-K contains forward-looking statements. To the extent that any statements made in this report contain information that is not historical, these statements are essentially forward-looking. Forward-looking statements can be identified by the use of words such as “expects”, “plans”, “may”, “anticipates”, “believes”, “should”, “intends”, “estimates”, and other words of similar meaning. These statements are subject to risks and uncertainties that cannot be predicted or quantified and, consequently, actual results may differ materially from those expressed or implied by such forward-looking statements. Such risks and uncertainties include, without limitation, our ability to raise additional capital to finance our activities; our ability to conduct clinical trials and Phase I, Phase II and Phase III studies; the results of any such trials and studies; the effectiveness, profitability and marketability of our products, if any are ever produced; legal and regulatory risks associated with the share exchange; the future trading of our common stock; our ability to operate as a public company; our ability to protect our proprietary information; general economic and business conditions; the volatility of our operating results and financial condition; our ability to attract or retain qualified senior management personnel and research and development staff; and other risks detailed from time to time in our filings with the Securities and Exchange Commission (the “SEC”), or otherwise.

Information regarding market and industry statistics contained in this report is included based on information available to us that we believe is accurate. It is generally based on industry and other publications that are not produced for purposes of securities offerings or economic analysis. Forecasts and other forward-looking information obtained from these sources are subject to the same qualifications and the additional uncertainties accompanying any estimates of future market size, revenue and market acceptance of products and services. We do not undertake any obligation to publicly update any forward-looking statements. As a result, investors should not place undue reliance on these forward-looking statements.

We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission. You may read and copy documents referred to in this Annual Report on Form 10-K that have been filed with the SEC at the SEC’s Public Reference Room, 450 Fifth Street, N.W., Washington, D.C. You may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. You can also obtain copies of our SEC filings by going to the SEC’s website at http://www.sec.gov.

 

 

As used in this annual report: (i) the terms “we”, “us”, “our”, “Cantabio” and the “Company” mean Cantabio Pharmaceuticals Inc.; (ii) “SEC” refers to the Securities and Exchange Commission; (iii) “Securities Act” refers to the United States Securities Act of 1933, as amended; (iv) “Exchange Act” refers to the United States Securities Exchange Act of 1934, as amended; and (v) all dollar amounts refer to United States dollars unless otherwise indicated.

---

---

Overview

We are a preclinical stage biotechnology company focusing on commercializing novel therapies and the intellectual property generated from our research and development activities for Parkinson’s disease (PD) and Alzheimer’s disease (AD) and any other related diseases. Our strategy involves integrating therapeutic focus, target family biophysics, drug discovery technology and expertise into an innovative drug discovery approach, which identifies and develops small molecule pharmacological chaperones for clinical trials. In addition, our research efforts concentrate on the development of therapeutic proteins that can pass through the blood-brain barrier and supplement in vivo levels of proteins which display loss of function during disease conditions. Our small molecule therapy candidates program (CB101) and our protein therapy candidate (CB201) initially targets Parkinson’s disease and thereafter potentially a broad range of neurodegenerative diseases including Alzheimer’s disease, amyotrophic lateral sclerosis (ALS), Huntington’s disease and stroke. We also have 2 additional small molecule pharmacological chaperone programs for the treatment of Alzheimer’s Disease (and other related dementia); CB301, targeting the Tau protein, a leading target for the development of Alzheimer’s therapeutics, and CB401, targeting the Aß peptide, again a well-established target in Alzheimer’s drug research. We plan to advance a candidate from our CB101 program into clinical trials in 2020.

Our Drug Discovery Approach

Our mission is to commercialize innovative drug candidates with novel mechanisms of action as well as intellectual property generated from our research activities for neurodegenerative diseases such as Alzheimer’s and Parkinson’s disease.  Our research efforts focus on the discovery and development of therapeutic small molecule pharmacological chaperones targeting proteins that misfold and aggregate in vivo.

Our strategy involves integration of therapeutic focus, target family biophysics, drug discovery technology and expertise into our innovative drug discovery approach, which brings together these elements to identify and develop small molecule pharmacological chaperones and protein based therapies for clinical trials for neurodegenerative and other diseases.

A pharmacological chaperone is a small molecule that can enter cells and bind to either a folded or misfolded structure of a protein to stabilize it or route it to the native folded functional form.

Our therapeutic targets consist of proteins that misfold, aggregate and lose their function or/and gain a toxic function in vivo.  Our small molecule pharmacological chaperones are designed to stabilize the native functional form of specific protein targets, thereby reducing their misfolding and aggregation and enabling the target protein’s function or preventing and/or eliminating the toxic function caused by these changes.

The use of pharmacological chaperones is a unique therapeutic approach that can directly target specific proteins to improve native function and protect from toxic function and thereby treat disease. We are applying a proprietary process to discover novel small molecule pharmacological chaperone drug candidates by applying biophysics based screening technologies in combination with cell-based models of the targeted diseases, which provide validation of the therapeutic effect of the identified pharmacological chaperones. In many cases, we can apply structure-based drug design for hit to lead and lead optimization.

In addition, we are pursuing the application of protein delivery technologies that enable the delivery of proteins into patients’ brain, supplementing low functional levels of these proteins in disease conditions.  Our therapeutic targets in this project are proteins, which display loss of function in disease-affected cells.  Our technologies involve the development and application of novel protein constructs, fusing specific proteins with unique cell permeable polypeptides, with the capability to pass through the blood-brain barrier and enter the central nervous system.

---

Research and Development Pipeline

Our research and development pipeline currently includes two lead therapeutic small molecule programs, CB101 for Parkinson’s and CB301 for Alzheimer’s, and one protein therapeutic program CB201 that we are developing for the potential treatment of Parkinson’s disease.  In addition, we are developing one therapeutic small molecule program, CB401, for the treatment of Alzheimer’s Disease.

The following table summarizes the status and projected milestones of our research and development programs:

Our Lead Programs

CB101 for Parkinson’s Disease

Parkinson’s Disease is a progressive, chronic, degenerative neurological disorder that attacks the neurons in the brain, resulting ultimately in death. Motor symptoms of PD are resting tremor, slowness of movement, postural instability, rigidity and cognitive impairment, ranging from mild memory difficulties to dementia, and mood disorders, such as depression and anxiety.  At least 1 million people in the United States and more than 7 million worldwide have PD.  Currently only symptomatic treatments are available for PD, which provide only temporarily treatment.

Our CB101 program focuses on targeting DJ-1, a protein considered to be one of the primary therapeutic targets for PD.  DJ-1 is genetically linked to familial and sporadic PD and potentially to sporadic AD and other neurodegenerative diseases.  During high oxidative stress condition, which is linked to the onset of neurodegenerative diseases, DJ-1 protein is activated and initiates cellular mechanisms for the reduction oxidative stress and protein misfolding.  During aging and in disease, the DJ-1 protein can be specifically oxidized leading to its misfolding, inactivation, and ultimately to its loss of function. The therapeutic targeting of DJ-1 could yield added mechanistic benefits: protection from oxidative stress and protein misfolding such as the aggregation of alpha-synuclein, a protein whose aggregation is a pathological hallmark of PD.

---

Using our pharmaceutical chaperone drug discovery strategy, we identified a number of novel small molecule scaffolds that potently bind to the DJ-1 protein and from these selected molecules that were shown to rescue a variety of cells and primary neurons from oxidative stress.  Within the CB101 and CB102 programs, there are a number of small molecule pharmacological chaperone therapeutic candidates that target the DJ-1 protein. Several of these candidates have demonstrated survival benefits from oxidative stress toxicity in an in vivo model and are in development as potential disease modifying therapeutics for PD.

CB201 for Parkinson’s Disease

Our CB201 program focuses on supplementing low levels of active DJ-1 in the brain during disease condition such as PD.  Delivering DJ-1 into the brain has been possible by fusing native DJ-1 with a small cell penetrating peptide. Such DJ-1 protein system was shown to protect in vivo models of oxidative stress in rodents. We are applying such protein delivery technology, which enables the delivery of the DJ-1 protein into patients’ brain to enhance DJ-1 activity to reduce oxidative stress and protein misfolding that are linked to the onset and progression of PD.  CB201 is a novel protein therapeutic candidate which consists of DJ-1 fused with a cell penetrating peptide.

CB301 for Alzheimer’s Disease

Alzheimer’s Disease is progressive, chronic, degenerative neurological disorders that attack the neurons in the brain resulting ultimately in death. AD results in loss of memory, thinking and language skills, and behavioral changes.  AD is among the 6th leading causes of death in the United States, and approximately 5.4 and 36 million people have AD in the United States and world-wide, respectively.  Currently there are only short-term temporary symptomatic treatments available for AD.

Our CB301 program focuses on targeting the Tau protein for AD. The aggregation of the Tau protein has been linked to the on-set and progression of AD.  CB301 is a small molecule pharmacological chaperone of the Tau protein. Cantabio has developed novel compounds that are believed to exert their functional effect by binding to monomeric species of the Tau protein thereby reducing their oligomer and amyloid formation in disease conditions.  The use of small molecules to reduce and inhibit this aggregation process has high potential as a therapeutic approach through the prevention of the formation of toxic oligomers.  Cantabio’s scientific team are progressing these into cellular and animal model studies related to AD and towards clinical trials.

CB401 for Alzheimer’s Disease

Our CB401 program focuses on targeting the Aß peptide for AD. The aggregation of the Aß peptide has been linked to the on-set and progression of AD. CB401 is a small molecule pharmacological chaperone developed to bind to and stabilize the Aß peptide. Cantabio’s novel compounds that are believed to exert their functional effect by binding to monomeric species of the Aß peptide thereby reducing their oligomer and amyloid formation in disease conditions.  The use of small molecules to reduce and inhibit this aggregation process has high potential as a therapeutic approach through the prevention of the formation of toxic oligomers. Cantabio’s scientific team are progressing these into cellular and animal model studies related to AD and towards clinical trials.

Our Additional Discovery Programs Targeting AD

Our therapeutic research efforts also focus on other discovery stage small molecule pharmacological chaperon programs for AD and PD. We are also pursuing additional protein therapeutic candidates for AD and PD using protein delivery technology. We expect that any of these programs could advance to preclinical development in the future.

---

Our Strategy

Our aim is to be the leading biotechnology company focused on commercializing innovative pharmacological chaperone drug candidates and blood-brain penetrant proteins with novel mechanism of action, generated from our research and development activities for neurodegenerative diseases such as Alzheimer’s and Parkinson’s disease.

 

---

Patents and Intellectual Property Rights

Although we do not currently hold any patents or license patented technology, we intend to protect our proprietary therapeutic product candidate assets and associated technologies that are important to our business by seeking and maintaining domestic and international patents. These may cover our products and compositions, their methods of use and processes for their manufacture and any other inventions that may be commercially important to the development of our business. We also rely on trade secrets to protect aspects of our business. Our competitive position depends on our ability to obtain patents on our technologies and our potential products, to defend our patents, to protect our trade secrets and to operate without infringing valid and enforceable patents or trade secrets of others. We seek licenses from others as appropriate to enhance or maintain our competitive position.

In connection with our CB101 program, small molecule pharmacological chaperone therapeutic candidates that target the DJ-1 protein we hold a worldwide, perpetual, non-exclusive, license, with the right to sublicense, all of the intellectual property related to the composition of matter of CB101 and plan to file U.S. and international patent applications as soon as Q3 2017.  We have described the terms of this agreement in the Section entitled “Material Agreements”.

In connection with our program CB201, a protein therapeutic candidate derived from DJ-1 fused with a cell penetrating peptide, we hold all intellectual property and plan to file U.S. and international patent application in 2018.

In connection with our CB301 program, small molecule pharmacological chaperone we hold a worldwide , non-exclusive license with the right to sub-license all of the intellectual property related to composition of matter of CB301 and plan to file US and international patents as soon as 2018. We have described the terms of this agreement in the Section entitled “Material Agreements”.

In connection with our program CB401, small molecule pharmacological chaperone therapeutic candidate that targets the Aβ peptide, we hold a worldwide, perpetual, non-exclusive, license, with the right to sublicense, all of the intellectual property related to the composition of matter of CB301 and plan to file U.S. and international patent applications as soon as 2018.  We have described the terms of this agreement in the Section entitled “Material Agreements”.

Reports to Security Holders

We are subject to the reporting and other requirements of the Exchange Act, and we intend to furnish our shareholders’ annual reports containing financial statements audited by our independent registered public accounting firm and to make available quarterly reports containing unaudited financial statements for each of the first three quarters of each year.  We will continue to file Quarterly Reports on Form 10-Q, Annual Reports on Form 10-K and Current Reports on Form 8-K with the SEC in order to meet our timely and continuous disclosure requirements. We may also file additional documents with the SEC if they become necessary in the course of the Company’s operations.

The public may read and copy any materials that we file with the SEC at the SEC's Public Reference Room at 100 F Street, NE, Washington, D.C. 20549. The public may obtain information on the operation of the Public Reference Room by calling the SEC at 1-800-SEC-0330. The SEC maintains an Internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC. The address of that site is www.sec.gov.

Employees

As of June 27, 2017, we had 8 employees, all of whom are employed through personal consultancy contracts. These staff are contracted to perform certain functions in the laboratory, and the actual hours they work is governed by their proficiency in carrying out these tasks.  

The three members of our management are also consultants.  Their consultancy agreements are described in the Section entitled “Material Agreements”.

---

We lease our principal laboratories and offices in Budapest, Hungary on a month-to-month basis for approximately $2,700 per month from the Hungarian Academy of Sciences, Research Centre for Natural Sciences (MTA MTTK). Our rent allows us to use certain MTA MTTK laboratory facilities in the same building for an additional fee.

In addition to other agreements described elsewhere in this current report, we have entered into several agreements that we deem material to our operations and/or our financial situation.  We set out below a summary of the terms of those agreements, but encourage you to review each of those agreements in their entirety as attached as exhibits to this current report.

Agreements with NovAliX Deutschland GmbH

On November 12, 2015, Gardedam entered into an agreement with NovAliX Deutschland GmbH that replaced in its entirety a prior agreement, dated December 23, 2009, between Gardedam and NovAlix’s predecessor.  Under the Agreement, NovAliX granted us a worldwide, perpetual, non-exclusive license, including the right to sublicense, under (i) any and all patent rights owned or controlled by NovAliX that claim or cover any chemical compound and (ii) any and all technology generated by NovAliX in the performance of the Agreement and related to selected series of compounds (the “Hit Series Compounds”) from the NovAliX chemical microarrays showing binding and Structure Activity Relation trends to the DJ-1 protein to use:

 

 

In exchange for the license, we agreed to pay a total of approximately $120,000, of which $32,000 was paid on December 12, 2015, another $40,000 was due by May 12, 2016 and another $48,000 was due by November 12, 2016.  All payments have been made under these agreements and the completion of the payments has been acknowledged by NovAliX.

On March 23, 2016, we entered into a collaboration agreement with NovAliX Deutschland GmbH, in which NovAliX granted us a worldwide, perpetual, non-exclusive license, including the right to sublicense, under (i) any and all patent rights owned or controlled by NovAliX that claim or cover any chemical compound and (ii) any and all technology generated by NovAliX in the performance of the Agreement and related to selected series of compounds (the “Hit Series Compounds”) from the NovAliX chemical microarrays showing binding and Structure Activity Relation trends to the Aβ peptide. The terms of the agreement required an initial payment of approximately $80,000, payable at some point within four years, which would accrue interest at 20% per annum from the date of signing until the balance is paid.  A further payment of approximately $80,000 is payable upon commercialization of the technology.

---

Purdue Research Foundation Licensing Agreement - DJ-1 Small Molecule

On April 1, 2016, we entered into a trade secret license agreement with Purdue Research Foundation (“PRF”).  Pursuant to this agreement, we received licenses to use certain information generated at Purdue University related to the DJ-1 compounds. These licenses include a worldwide, exclusive license to use that information to manufacture, use and sell products to diagnose, prevent and treat diseases and a worldwide, non-exclusive license under PRF’s rights in any invention for research and development of DJ-1 compounds. The license fee is $50,000, payable in five equal annual installments. The first installment came due in July 2016 and was paid.

Cambridge Enterprise Licensing Agreement - Tau

On September 7, 2016, we entered into a global licensing agreement with Cambridge Enterprise to use technology generated in the Tau small molecule project conducted at Cambridge University in conjunction with the Max Planck Institute run by Dr. Gergely Tóth at the University of Cambridge. The agreement defined an initial payment of $12,564 which has been paid by the Company, followed by further payments upon reaching the following milestones:

 

---

Consulting Agreement with Gergely Toth

 

On July 1, 2016, the Company entered into a consulting agreement with Toth and Associates, LTD for Dr. Toth to act as the Company’s CEO.  The agreement calls for a standard monthly fee of approximately $12,000 plus any additional uncontracted hours at the same rate, and bonuses as follows (A) upon raising of capital on behalf of, or as part of the Company, an amount equal to 1.5% of the capital raised, (B) increasing the performance of the Company as measured by valuation in either an agreed valuation in the context of an investment or, in the case of a public company, market capitalization reaching $30.0 million, a fixed bonus of $50,000, payable wholly or in mutually agreed tranches over a 6 month period subsequent to the valuation event, (C) on the issuance of new stock for the purposes of a capital raise of an amount over $5.0 million, common stock equal to 1% of the Company’s post-investment issued share capital and (D) in the event of the Company, including any affiliated entities, securing a licensing agreement with any 3rd party, an amount equivalent to 1.5% of any payments to the Company under such licensing agreement.

 

Consulting Agreement with Thomas Roger Sawyer

 

Consulting Agreement with Simon Peace

 

On March 31, 2017, we resigned a one-year lease for approximately 750 square feet of space, comprising wet lab, protein lab and office space, in Budapest, Hungary from the MTA MTTK for use as our principal offices and laboratory.  We pay MTA MTTK approximately $2,700 a month for the space and services.  

---

We are currently not aware of any pending legal proceedings to which we are a party or of which any of our property is the subject, nor are we aware of any such proceedings that are contemplated by any third party including and governmental authority.

None of our directors or executive officers has been involved in any of the following events during the past ten years:

 

---

Recent Sales of Unregistered Securities

---

The following discussion and analysis of our financial condition and results of operations should be read in conjunction with the financial statements and related notes included elsewhere in this report.

As of March 31, 2017, we had $32,275 cash in the bank. This amount will not satisfy our cash requirements for the next twelve months or until such time that additional proceeds are raised. We plan to satisfy our future cash requirements by additional equity financing. This will likely be in the form of private placements of common stock.  Additional equity financing may not be available to us on acceptable terms or at all, and thus we could fail to satisfy our future cash requirements.

 

If we are unsuccessful in raising the additional proceeds through a private placement offering, we will then have to seek additional funds through debt financing, which could be highly difficult for us to secure. Therefore, we will depend upon the success of any private placement offering and failure thereof would result in our having to seek capital from other sources such as debt financing, which may not even be available. However, if such financing were available, we would likely have to pay additional costs associated with high risk loans and be subject to an above market interest rate. At such time these funds are required, management would evaluate the terms of such debt financing and determine whether the business could manage the debt load. If we cannot raise additional proceeds via a private placement of our common stock or secure debt financing, we would be required to cease as a business. As a result, investors in our common stock would lose all of their investment.

We did not generate any revenue during the years ended March 31, 2017 and 2016.   We incurred operating expenses in the amount of $1,069,269 in the year ended March 31, 2017. These operating expenses were primarily comprised of general and administrative expenses of $718,959 and research and development expenses of $350,310, partially increased by other expenses of $3,000 due to revaluation of an embedded derivative and $39,869 of interest expense. Based on the foregoing, management believes that there is substantial doubt about our ability to continue as a going concern.

As of the date of this report, the current funds available to us will not be sufficient to continue operations.

Results of Operations for the year ended March 31, 2017, as compared to the year ended March 31, 2016.

Our operating expenses increased to $1,069,268 for the year ended March 31, 2017 from $840,937 in the year ended March 31, 2016.  This increase was primarily due to increases in Research and Development, management team costs, public company costs and legal and professional fees.  Management’s consulting fees fell to $337,953 in the year to March 31, 2017 from $503,692 in the prior year, since performance bonuses for management of $150,000 were accrued in the prior year, whereas no bonus was awarded in the current year.  Legal, professional and accountancy fees increased to $272,903 in the year to March 31, 2017 from $97,888 in the year to March 31, 2016 largely driven by a full year of public company compliance costs, investor relations and fees relating to fundraising.  Travel costs also increased from $33,296 in the year to March 31, 2016 to $45,259 in the year to March 31, 2017 due to increased attendance at research and fundraising conferences.  Research and development costs increased to $350,310 in the year to March 31, 2017 from $149,159 in the year to March 31, 2016 largely due to accelerating research both in terms of numbers of staff and commencement of some third party studies in animal models.

---

We incurred Other Expenses of $42,869 in the year to March 31, 2017, mostly due to $39,869 interest coupled with $3,000 due to revaluation of an embedded derivative. We generated Other Income in the year ended March 31, 2016 of $89,609, which was mostly comprised of $107,884 due to reduction of a liability following renegotiation with NovAliX Deutschland GmbH, the remainder being losses on foreign exchange.  

Liquidity and Capital Resources

 

At March 31, 2017, we had negative working capital of $853,922 and limited cash on hand.

 

During the year ended March 31, 2017, financing activities received $0.56 million in proceeds for the future issuance of common stock.  We raised $0.36 million through a convertible debenture facility and an additional net $0.03 million through debt, net of repayments.  These cash flows compare to the prior year where $0.6 million was raised in proceeds for the future issuance of common stock and $0.02 million in net debt.

The Company typically raises capital which it spends on maintaining its research and corporate operations.  At this early stage in the life of the company funding is often short term in nature. While the Company has been proficient in raising funds in the past, the short term nature of these funding cycles raises substantial risk around the Company's ability to continue as a going concern.

Management is addressing going concern risk by seeking new sources of capital and is continuing initiatives to raise capital through private placements, related party loans and other institutional sources to meet future working capital requirements.  Furthermore, strategic partnerships, most likely with larger pharmaceutical industry companies, will be needed to continue to fund research and development costs as our projects expand. These measures, if successful, may contribute to reduce the risk of going concern uncertainties for the Company beyond the next twelve months.

Our financial statements indicate there is substantial doubt about our ability to continue as a going concern as this would depend upon our ability to obtain ongoing financing and ultimately to generate sufficient cash flow to meet our obligations on a timely basis. Our plans and efforts to achieve the above steps might not be successful, which raises substantial doubt about the Company's ability to continue as a going concern within one year from the date of this filing.

 

OFF BALANCE SHEET ARRANGEMENTS

 

As of the date of this report, the current funds available to us will not be sufficient to continue operations. Management believes that if we cannot raise sufficient revenues or maintain our reporting status with the SEC we will have to cease all efforts directed towards us.  As such, any investment previously made would be lost in its entirety.    

 

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources that are material to investors.

---

---

---

The following table provides information regarding our executive officers and directors as of June 30, 2017.

Each of our directors will serve in that capacity until our next annual shareholder meeting or until their successors are elected and qualified. Officers hold their positions at the will of our Board of Directors. There are no arrangements, agreements or understandings between non-management security holders and management under which non-management security holders may directly or indirectly participate in or influence the management of our affairs.

Dr. Gergely Toth, President, Chief Executive Officer, Director

Dr. Tóth received his MSc in Chemistry at the University of Szeged and later his PhD from the Department of Biomedical Sciences at Creighton University in 2001. He was a post-doctoral fellow at the Department of Molecular Biology at the University of California at Berkeley between 2001 and 2002. Dr. Tóth is a graduate of the Global BioExecutive program of the BioExecutive Institute (University of California, Berkeley, Haas School of Business; 2005). Dr. Tóth also received an Executive MBA from the University of Cambridge (UK) in 2012.

Dr. Tóth founded Gardedam in 2009. Dr. Tóth is also affiliated with the University of Cambridge in the UK, (Department of Clinical Neurosciences, Wolfson Brain Imaging Centre) since 2009, where he has been an Investigator in the NIHR Biomedical Research Unit on Dementia and of the Neurodegenerative Disease Initiative on AD funded by the Wellcome Trust and Medical Research Council. In addition, Dr. Tóth heads the Neurodegenerative Disease Drug Discovery research group since 2014 at the Academy of Sciences of Hungary in Budapest. Dr. Tóth’s research interests are the biophysical/structural biology aspects and therapeutic targeting of proteins that misfold and lose their native functions and/or gain toxic functions implicated in neurodegenerative diseases. Dr. Tóth is also a visiting lecturer in the Business of Biotechnology at the School of Pharmacy at the University College London.

---

Previously, Dr. Tóth was at Protein Mechanics (California, Mountain View) (later Locus Pharmaceuticals) where he was the Director of Computer Aided Drug Discovery Group between 2002-2005. Here he was a key contributor to leading both research and business development efforts and to selling Protein Mechanics to Locus Pharmaceuticals in 2004. From 2005-2009, Dr. Tóth was at Elan Pharmaceuticals (California, South San Francisco) in various roles mostly in drug discovery research for Parkinson’s and Alzheimer’s diseases. Dr. Tóth has been a strategic scientific consultant at Elan Pharmaceuticals between 2009-2013. Dr. Tóth published over 35 peer reviewed articles and patents on the topics of life sciences, drug discovery and the business of biotechnology, and he actively presents in various international conferences.

Dr. Thomas Roger Sawyer, Chief Operations Officer, Director

Dr. Sawyer completed his doctorate in biological sciences at the University of Glasgow in 2000 and quickly moved into the corporate world, starting the information technology companies Weather2 Limited and Advanced Weather Applications for which he served in the role of Chief Technology Officer. While helping to build and grow these companies, he also began consulting for clients in the logistics industry, providing strategy, technical architecture and business process consultancy for companies including Global Freight Solutions and Nightline.

Dr. Sawyer completed an Executive MBA at the University of Cambridge, graduating in 2012, specializing in corporate finance and management science and completed his thesis on the use of data for predictive analytical tools in industry. It was from Cambridge that he was recruited to work for private equity investors providing advice on project due diligence, appraisal, corporate structuring and economic valuation of minerals assets in southern and eastern Africa. After completing the due diligence work on assets and carrying out the initial corporate structuring he was appointed CEO of East African Gold plc, a gold exploration company headquartered in Mauritius and with extensive exploration licenses in the east African country of Uganda, in late 2011, continuing in this role until the end of 2014 when the company ceased operations. Under his leadership, the company successfully raised capital in excess of USD $4 million and carried out extensive exploration activities in a large area in a remote region of the country, with up to 100 employees and wide-reaching operations capabilities.

In 2015, Dr. Sawyer began mentoring start-up companies at the University of Cambridge and worked on various consulting projects including a proposal to finance Gardedam Therapeutics, culminating in the company’s rebranding, restructuring and a reverse merger at the end of 2015, and his appointment to the board. In 2016, he was appointed a Director of Cognetivity Ltd, a UK based company developing an artificial intelligence driven diagnostic test for dementia.

Dr. Sawyer has extensive experience starting and structuring companies, raising capital, IPOs, mergers, setting up joint ventures and corporate strategy. His background in research science allows him to incorporate the technical aspects of the development of projects with his experience in management and corporate finance, allowing this to be built into the overall business strategy and direction. He has lectured as a guest lecturer at the University of Cambridge, teaching entrepreneurial finance to MBA students, at University College London teaching finance of drug development to MSc students at the School of Pharmacy and at Exeter University teaching corporate finance and behavior to MSc students, and has been a speaker at international conferences. Dr. Sawyer has board experience in a number of industries; for Weather2 and Advanced Weather Applications in the area of information technology and business intelligence; Capro Ltd, an investment advisory and consultancy company specializing in consultancy and direct investment in growing businesses, in the extractive industry as Director of each of the East African Gold group companies, and for Cognetivity Ltd working on a SaaS solution for dementia diagnosis. He brings to the Company his abilities in strategic planning, corporate structuring, operations management, analytical modeling and the ability to raise capital to fund growth.

---

Simon Peace, Chief Financial Officer, Director

Mr. Peace began his career in as an engineer at a small firm in Bradford, UK, before shifting his career focus to accountancy and entering a training post at SmithKline Beecham.  He achieved not only an excellent grounding in finance, but also a good understanding of pharmaceutical pricing, marketing, transfer pricing and regulation regimes in the UK. Upon completion of his training Mr. Peace moved to a pricing role at Cable & Wireless, building global B2B telecoms contracts. 

In 2001 Mr. Peace became Financial Controller and Company Secretary at Environmental Business Products Ltd, a high growth green-tech business in London.  The company doubled in size each year of his two-year period of office, from approximately $9 million to approximately $35 million.  Growth at that pace created a number of financial and business challenges, all of which were successfully tackled. 

Pursuing a career in Mergers and Acquisitions, in 2003 Mr. Peace joined GE Capital where he managed activities relating to credit risk and then, in 2006, moved to GE Healthcare’s Business Development team, where he spent seven years leading finance teams in acquisitions, dispositions and setting up international joint ventures, in Europe, U.S., Russia and the Middle East.

Mr. Peace’s experience in the field of M&A is extensive, having worked on over 60 deals with purchase prices ranging from tens to hundreds of millions of dollars.  He was typically present in a deal from the first approach to the target, though initial modeling, due diligence, investment approval, contract negotiation, deal close and post-merger integration and monitoring.

In 2014, Mr. Peace left GE Healthcare to set up his own company, Eden Professional Ltd, a finance and M&A consultancy working for small technology companies typically in London, Oxford and Cambridge.

Mr. Peace is a member of the Finance and Tax Advisory Committee of the UK BioIndustry Association.

Mr. Peace is qualified to the Chartered Institute of Management Accountants and holds a BSc in Natural Sciences from the University of Durham, majoring in chemistry and engineering, an MSc in Manufacturing Management from the University of Bradford and an Executive MBA from the University of Cambridge Judge Business School.

The following information sets out below outlines the compensation paid to our named executive officers for the fiscal years ended March 31, 2017 and 2016.

We have included a description of the consulting agreements with members of our management under the Section entitled “Material Agreements”.

---

Director Compensation

We currently do not pay any cash compensation to members of our board of directors for their services as our directors although we have paid compensation, as set out above, to our directors for their services as our executive officers.  We reimburse our directors for all reasonable out-of-pocket expenses incurred in connection with their attendance at meetings of the board of directors.   We may determine to grant to each new director, at the time of such director's appointment, an option to purchase our common shares.

Indemnification of Directors and Officers

Our amended and restated certificate of incorporation contains provisions that limit the liability of our directors for monetary damages to the fullest extent permitted by Delaware law. Consequently, our directors will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors, except liability for the following:

 

Any amendment to, or repeal of, these provisions will not eliminate or reduce the effect of these provisions in respect of any act, omission, or claim that occurred or arose prior to that amendment or repeal. If the Delaware General Corporation Law is amended to provide for further limitations on the personal liability of directors of corporations, then the personal liability of our directors will be further limited to the greatest extent permitted by the Delaware General Corporation Law.

In addition, our amended and restated bylaws provide that we will indemnify, to the fullest extent permitted by law, any person who is or was a party or is threatened to be made a party to any action, suit, or proceeding by reason of the fact that he or she is or was one of our directors or officers or is or was serving at our request as a director or officer of another corporation, partnership, joint venture, trust, or other enterprise. Our amended and restated bylaws provide that we may indemnify to the fullest extent permitted by law any person who is or was a party or is threatened to be made a party to any action, suit, or proceeding by reason of the fact that he or she is or was one of our employees or agents or is or was serving at our request as an employee or agent of another corporation, partnership, joint venture, trust, or other enterprise. Our amended and restated bylaws also provide that we must advance expenses incurred by or on behalf of a director or officer in advance of the final disposition of any action or proceeding, subject to limited exceptions.

Further, we may enter into indemnification agreements with each of our directors and executive officers that may be broader than the specific indemnification provisions contained in the Delaware General Corporation Law. These indemnification agreements require us, among other things, to indemnify our directors and executive officers against liabilities that may arise by reason of their status or service. These indemnification agreements also require us to advance all expenses incurred by the directors and executive officers in investigating or defending any such action, suit or proceeding. We believe that these agreements are necessary to attract and retain qualified individuals to serve as directors and executive officers.

---

The limitation of liability and indemnification provisions that are included in our amended and restated certificate of incorporation, amended and restated bylaws, and indemnification agreements with our directors and executive officers may discourage stockholders from bringing a lawsuit against our directors and executive officers for breach of their fiduciary duties. They may also reduce the likelihood of derivative litigation against our directors and executive officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholder’s investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and executive officers as required by these indemnification provisions. At present, we are not aware of any pending litigation or proceeding involving any person who is or was one of our directors, officers, employees, or other agents or is or was serving at our request as a director, officer, employee, or agent of another corporation, partnership, joint venture, trust, or other enterprise, for which indemnification is sought, and we are not aware of any threatened litigation that may result in claims for indemnification.

We intend to obtain insurance policies under which, subject to the limitations of the policies, coverage will be provided to our directors and executive officers against losses arising from claims made by reason of breach of fiduciary duty or other wrongful acts as a director or executive officer, including claims relating to public securities matters, and to us with respect to payments that may be made by us to these directors and executive officers pursuant to our indemnification obligations or otherwise as a matter of law.

Insofar as indemnification for liabilities arising under the Securities Act may be permitted to directors, officers or persons controlling our company pursuant to the foregoing provisions, we have been informed that, in the opinion of the SEC, such indemnification is against public policy as expressed in the Securities Act and is therefore unenforceable.

---

Related-Party Transactions

Gergely Toth

On September 13, 2016, Gergely Toth, the Company CEO, advanced the Company approximately $10,000 under a note.  The note bore no interest and was payable on demand.  That note was repaid on October 18, 2016.

On January 3, 2017, Gergely Toth, the Company CEO, advanced the Company approximately $4,000 under a note.  The note bore no interest and was payable on demand.  That note was repaid on February 1, 2017.

On July 22, 2016, the Company repaid approximately $15,000 to satisfy a loan note from Eden Professional Ltd, the service company of the Company CFO.

We have no other related party transactions.

Board Committees

Audit Committee Financial Expert

We have no separate audit committee at this time.  The entire Board of Directors oversees our audits and auditing procedures.  The Board of Directors has at this time not determined whether any director is an “audit committee financial expert” within the meaning of Item 407(d)(5) for SEC regulation S-K.

Code of Ethics

As we are a young company focusing our efforts on our operations, we have not yet adopted a written code of ethics.  As our business grows, we intend to adopt a formal code of ethics.

---

Family Relationships

 

There are no family relationships among our Directors or executive officers.

We are not currently subject to listing requirements of any national securities exchange or inter-dealer quotation system which has requirements that a majority of the board of directors be “independent” and, as a result, we are not at this time required to have our Board of Directors comprised of a majority of “independent directors.”   

---

 

In accordance with Section 13 or 15(d) of the Securities Exchange Act, the Registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

 

Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on behalf of the registrant in the capacities and on the dates indicated.

 

 

---

 

REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

---

CANTABIO PHARMACEUTICALS INC.

CONSOLIDATED BALANCE SHEETS

 

The accompanying notes are an integral part of these consolidated financial statements.

---

CANTABIO PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF OPERATIONS

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

---

CANTABIO PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

 

The accompanying notes are an integral part of these consolidated financial statements.

 

 

---

CANTABIO PHARMACEUTICALS INC.

CONSOLIDATED STATEMENTS OF CASH FLOWS

 

 

The accompanying notes are an integral part of these consolidated financial statements.

F-5

CANTABIO PHARMACEUTICALS INC.

Notes to Consolidated Financial Statements

NOTE 1 – ORGANIZATION AND DESCRIPTION OF THE BUSINESS

 

Cantabio Pharmaceuticals Inc. (the “Company” or “Cantabio”) is a preclinical stage biotechnology company focusing on commercializing novel therapies and the intellectual property generated from research and development activities for Parkinson’s disease (PD) and Alzheimer’s disease (AD).  The Company’s strategy involves integration of therapeutic focus, the targeting of family biophysics, drug discovery technology and expertise into an innovative drug discovery approach, which synergizes to identify and develop small molecule pharmacological chaperones for clinical trials. In addition, the Company’s research efforts concentrate on the development of therapeutic proteins that can pass through the blood-brain barrier and supplement in vivo levels of proteins with display loss of function during disease conditions.

NOTE 2 – LIQUIDITY AND GOING CONCERN

As of March 31, 2017, the Company had a working capital deficit of $0.85 million and losses from operations.

The Company typically raises capital which it spends on maintaining its research and corporate operations.  At this early stage in the life of the company funding is often short term in nature. While the Company has been proficient in raising funds in the past the short term nature of these funding cycles raises substantial doubt about the Company's ability to continue as a going concern within one year from the date of this filing.

Management is addressing going concern risk by seeking new sources of capital and is continuing initiatives to raise capital through private placements, related party loans and other institutional sources to meet future working capital requirements.  Furthermore, strategic partnerships, most likely with larger pharmaceutical industry companies, will be needed to continue to fund research and development costs as our projects expand. These measures, if successful, may contribute to reduce the risk of going concern uncertainties for the Company beyond the next twelve months.

 

The ability of the Company to continue as a going concern is dependent upon its ability to raise additional capital and achieve profitable operations. The accompanying 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

 

Basis of Presentation

These financial statements are presented in United States dollars and have been prepared in accordance with accounting principles generally accepted in the United States of America (“GAAP”).

 

Principles of Consolidation

These financial statements include the accounts of the Company and its wholly-owned subsidiary.

Use of Estimates

The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the year. Management bases its estimates on historical experience and on other assumptions considered to be reasonable under the circumstances. However, actual results may differ from the estimates.

---

Income Taxes

The Company recognizes income taxes on an accrual basis based on tax positions taken or expected to be taken in its tax returns. A tax position is defined as a position in a previously filed tax return or a position expected to be taken in a future tax filing that is reflected in measuring current or deferred income tax assets and liabilities. Tax positions are recognized only when it is more likely than not (i.e., likelihood of greater than 50%), based on technical merits, that the position would be sustained upon examination by taxing authorities. Tax positions that meet the more likely than not threshold are measured using a probability-weighted approach as the largest amount of tax benefit that is greater than 50% likely of being realized upon settlement. Income taxes are accounted for using an asset and liability approach that requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of events that have been recognized in our financial statements or tax returns. A valuation allowance is established to reduce deferred tax assets if all, or some portion, of such assets will more than likely not be realized. Should they occur, our policy is to classify interest and penalties related to tax positions as income tax expense.

 

Fair Value of Financial Instruments

The Company's financial instruments consist of cash, accounts payable, convertible debentures and a loan payable to a related party. The carrying amounts of these financial instruments approximate fair value due either to length of maturity or interest rates that approximate prevailing rates unless otherwise disclosed in these financial statements.

Share Subscriptions

Under the terms of a subscription agreement the Company has received funds in advance of the issuance of stock.  The stock is issuable to the investors once the full subscription proceeds are received, which, as of the date of this filing, has not yet occurred.  The Company recorded the advance in equity.

Earnings (Loss) per Share

The Company calculates earnings per share using basic net income (loss) per common share be computed by dividing net income (loss) for the period by the weighted average number of common shares outstanding during the period.   The Company does not compute diluted earnings per share because to do so would be anti-dilutive. Dilutive securities that were not considered in the computation for diluted net loss per share includes the convertible debentures that convert into 3,420,000 common shares, and 530,000 common shares which have not yet been issued under the stock subscriptions described in Note 7.

 

Recent Accounting Standards

---

 

In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842). ASU 2016-02 increases the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Certain qualitative and quantitative disclosures are required, as well as a retrospective recognition and measurement of impacted leases. The new ASU is effective for fiscal years and interim periods within those years beginning after March 15, 2019, with early adoption permitted. The Company is currently evaluating the impact of this new standard and does not expect it to have a material impact on our financial statements.
 

NOTE 4 – Material Agreements

We maintain various agreements that that are important to our research and development activities.  Material agreements are laid out below.

NovAliX Collaboration Agreement – DJ-1

On November 12, 2015, Gardedam entered into an agreement with NovAliX Deutschland GmbH that replaced in its entirety a prior agreement, dated December 23, 2009, between Gardedam and NovAlix’s predecessor. Under the Agreement, NovAliX granted the Company a worldwide, perpetual, non-exclusive right to sublicense to use certain compounds, synthesized compounds and other information provided by NovAlix to use against the DJ-1 protein.

The new agreement modified the remaining amount owed of approximately $215,000 as of March 31, 2016 to approximately $120,000 on November 12, 2015. The new agreement resulted in a reduction in the Company’s accounts payable of approximately $107,000, which was recorded in other income and recorded in the fiscal year ended March 31, 2016.

Of the $120,000 due under the agreement, $32,000 fell due in November 2015, $40,000 was due by May 12, 2016 and $48,000 was due by November 12, 2016.  All these payments have been made and no amounts are due under the contract as of March 31, 2017.

NovAliX Collaboration Agreement – ABeta

On March 23, 2016, the Company entered into a collaboration agreement with NovAliX Deutschland GmbH to use technology related to the protein ABeta.  The terms of the agreement required an initial payment of approximately $80,000, payable within 4 years, whichis recognized in the balance sheet as an accrued technology access fee. As of March 31, 2017 and 2016, approximately $90,000 and $80,000 was accrued and outstanding under this agreement.

A milestone payment of approximately $80,000 is payable upon commercialization of the technology.

Purdue Research Foundation Licensing Agreement - DJ-1 Small Molecule

---

Cambridge Enterprise Licensing Agreement - Tau

On September 7, 2016, we entered into a global licensing agreement with Cambridge Enterprise to use certain technology connected to the Tau small molecule project conducted at Cambridge University in conjunction with the Max Planck Institute. The agreement defined an initial payment of $12,564 which has been paid by the Company, followed by further payments upon reaching the following milestones:

NOTE 5 – RELATED PARTY TRANSACTIONS

Toth and Associates LTD

On July 1, 2016, the Company entered into a consulting agreement with Toth and Associates, LTD for Dr. Toth to act as the Company’s CEO.  The agreement calls for a standard monthly fee of approximately $12,000 plus any additional uncontracted hours at the same rate, and bonuses as follows (A) upon raising of capital on behalf of, or as part of the Company, an amount equal to 1.5% of the capital raised, (B) increasing the performance of the Company as measured by valuation in either an agreed valuation in the context of an investment or, in the case of a public company, market capitalization reaching $30.0 million, a fixed bonus of $50,000, payable wholly or in mutually agreed tranches over a 6 month period subsequent to the valuation event, (C) on the issuance of new stock for the purposes of a capital raise of an amount over $5.0 million, common stock equal to 1% of the Company’s post-investment issued share capital and (D) in the event of the Company, including any affiliated entities, securing a licensing agreement with any 3rd party, an amount equivalent to 1.5% of any payments to the Company under such licensing agreement.

The Company incurred consulting fees of approximately $144,000 for the year ended March 31, 2017. As of March 31, 2017, Toth and Associates LTD was owed approximately $86,000, comprising $36,000 unpaid fees from fiscal year 2017 and $50,000 bonus carried over from fiscal year 2016.  The $86,000 is included in Accounts payable.

In the year ended March 31, 2016, the Company incurred consulting fees and bonuses of approximately $200,000. As of March 31, 2016, Toth and Associates LTD was owed approximately $62,000, comprising $12,000 fees and $50,000 bonus.

---

Capro LTD

On July 1, 2016, the Company entered a consulting agreement with Capro, LTD for Dr. Thomas Sawyer to act as the Company’s COO.  The agreement calls for a standard monthly fee of approximately $10,000 plus any additional uncontracted hours at the same rate, and bonuses as follows (A) upon raising of capital on behalf of, or as part of the Company, an amount equal to 1.5% of the capital raised, (B) increasing the performance of the Company as measured by valuation in either an agreed valuation in the context of an investment or, in the case of a public company, market capitalization reaching $30.0 million, a fixed bonus of $50,000, payable wholly or in mutually agreed tranches over a 6 month period subsequent to the valuation event and (C) on the issuance of new stock for the purposes of a capital raise of an amount over $5.0 million, common stock equal to 1% of the Company’s post-investment issued share capital and (D) in the event of the Company, including any affiliated entities, securing a licensing agreement with any 3rd party, an amount equivalent to 1.5% of any payments to the Company under such licensing agreement.

The Company incurred consulting fees and bonuses of approximately $120,000 for the year ended March 31, 2017. As of March 31, 2017, Capro LTD was owed approximately $73,000, comprising $23,000 unpaid fees from fiscal year 2017 and $50,000 bonus carried over from fiscal year 2016.  The $73,000 is included in Accounts payable.

In the year ended March 31, 2016, the Company incurred consulting fees and bonuses of approximately $170,000. As of March 31, 2016, Capro LTD was owed approximately $60,000, comprising $10,000 fees and $50,000 bonus.

Eden Professional LTD

On July 1, 2016, the Company entered a consulting agreement with Eden Professional LTD for Mr. Simon Peace to act as the Company’s CFO.  The agreement calls for a standard monthly fee of approximately $6,000 plus any additional uncontracted hours at the same rate, and bonuses as follows (A) upon raising of capital on behalf of, or as part of the Company, an amount equal to 1.5% of the capital raised, (B) increasing the performance of the Company as measured by valuation in either an agreed valuation in the context of an investment or, in the case of a public company, market capitalization reaching $30.0 million, a fixed bonus of $50,000, payable wholly or in mutually agreed tranches over a 6 month period subsequent to the valuation event and (C) on the issuance of new stock for the purposes of a capital raise of an amount over $5.0 million, common stock equal to 1% of the Company’s post-investment issued share capital and (D) in the event of the Company, including any affiliated entities, securing a licensing agreement with any 3rd party, an amount equivalent to 1.5% of any payments to the Company under such licensing agreement.

The Company incurred consulting fees and bonuses of approximately $75,000 for the year ended March 31, 2017. As of March 31, 2017, Eden Professional LTD was owed approximately $69,000, comprising $19,000 unpaid fees from fiscal year 2017 and $50,000 bonus carried over from fiscal year 2016.  The $69,000 is included in Accounts payable.

In the year ended March 31, 2016, the Company incurred consulting fees and bonuses of approximately $130,000. In addition to the amounts under the note payable referred to in Note 6 below, as of March 31, 2016, Eden Professional LTD was owed approximately $56,000, comprising $6,000 fees and $50,000 bonus.

Max Zhu

Max Zhu, and investor in and lender to the Company, also works as Head of Computer Aided Drug Design for the Company under a consultancy contract.  In the year ended March 31, 2017, the Company paid fees to Mr. Zhu under this contract totaling $24,000. In the year ended March 31, 2016, the Company paid fees to Mr. Zhu totaling $18,000.

NOTE 6 – NOTES PAYABLE RELATED PARTIES

 

Gergely Toth

On September 13, 2016, Gergely Toth, the Company’s CEO, advanced the Company approximately $10,000 under a note.  The note bore no interest and was payable on demand.  That note was repaid on October 18, 2016.

On January 3, 2017, Gergely Toth advanced the Company approximately $4,000 under a note.  The note bore no interest and was payable on demand.  That note was repaid on February 1, 2017.

---

On July 22, 2016, the Company repaid approximately $15,000 to satisfy a loan note from Eden Professional Ltd, the service company of the Company’s CFO.  The note bore no interest.

In the year ended March 31, 2016, the officers of the Company loaned funds totaling $34,000 to the company to fund operating expenses. The loans were unsecured, non-interest bearing, and had no specific terms of repayment. As of March 31, 2016, the balance outstanding was $16,562.

NOTE 7 – CAPITAL STOCK

 

Stock Subscriptions

Prior Year Capital Stock Issuances

Approximately 11.8 million shares were issued in connection with a reverse merger that was consummated.

Approximately 0.7 million shares were issued associated with a capital raise for proceeds of $0.1 million.

NOTE 8 – COMMITMENTS

Leases on Property

The Company has a $1,300 month to month lease on an office property in Sunnyvale, CA.

On March 2, 2017, the Company resigned its annual lease on a Laboratory in Budapest, Hungary.  The monthly lease payments total approximately $2,700, and the lease term was 1 year.  The lessor may terminate upon non-payment of rent, and the Company may terminate if the laboratory is not operational for 15 days or more.

NOTE 9 – INCOME TAXES

 

The Company had no income tax expense due to operating losses incurred for the years ended March 31, 2017 and 2016.

The difference between the statutory federal tax rate of 34% and the effective tax rate is summarized below:

---

At March 31, 2016 and 2017, the Company has provided a full valuation allowance against its net deferred assets since realization of these benefits is not more likely than not.  At March 31, 2017, the Company had federal and state net operating loss tax carryforwards of approximately $1.9m.  These net operating loss carryforwards expire in various amounts starting in 2029.  The utilization of the federal and state net operating loss carryforwards will depend on the Company’s ability to generate sufficient taxable income prior to the expiration of the carryforwards. In addition, the maximum annual use of net operating loss is limited in certain situations where changes occur in stock ownership.

 

As of March 31, 2016 and 2017, the Company had no unrecognized tax benefits. To date, no tax returns have been filed by the Company. Net operating losses cannot be used against future income until returns are filed. Until those tax returns are filed by the Company, all tax years will remain open to examination by federal tax and state tax jurisdictions. No income tax returns are currently under examination by taxing authorities.

NOTE 10 – CONVERTIBLE DEBENTURES

Background

On January 25, 2017, the Company entered into a securities purchase agreement with an accredited investor to place Convertible Debentures (as amended the “Debentures”) with a maturity date of January 25, 2018 in the aggregate principal amount of up to $600,000 (the “Transaction”), provided that in case of an event of default, the Debentures may become at the holder’s election immediately due and payable. The initial closing of the Transaction occurred on January 25, 2017 when the Company issued a Debenture for $300,000.  A second closing for $150,000 occurred on March 2, 2017 and a third closing for $150,000 occurred on May 3, 2017. The Debentures bear interest at the rate of 5% per annum.  In addition, the Company must pay to the holder a fee equal to 7% of the amount of the Debentures to assist in their monitoring costs for the Debentures. The net proceeds of the financing will be used for general corporate matters and for other expenses.

Conversion Features

The Debentures may be converted at any time on or prior to maturity at the lower of $0.3107 or 93% of the average of the three lowest daily volume weighted average price (VWAP) during the 10 consecutive trading days immediately preceding the conversion date, provided that as long as we are not in default under the Debenture, the conversion price may never be less than $0.05.

Any time after the six-month anniversary of the issuance of a Debenture that the daily VWAP is less than $0.05 for a period of twenty consecutive trading days (the “Triggering Date”) and only for so long as such conditions exist after a Triggering Date, the Company shall make monthly payments beginning on the last calendar day of the month when the Triggering Date occurred.  Each monthly payment shall be in an amount equal to the sum of (i) the principal amount outstanding as of the Triggering Date divided by the number of such monthly payments until maturity, (ii) a redemption premium of 20% in respect of such principal amount and (iii) accrued and unpaid interest hereunder as of each payment date.  The Company may, no more than twice, obtain a thirty-day deferral of a monthly payment due as a result of a Triggering Date through the payment of a deferral fee in the amount equal to 10% of the total amount of such monthly payment.  Each deferral payment may be paid by the issuance of such number of shares as is equal to the applicable deferral payment divided by a price per share equal to 93% of the average of the four lowest daily VWAPs during the 10 consecutive Trading Days immediately preceding the due date in respect of such monthly payment begin deferred, provided that such shares issued will be immediately freely tradable shares in the hands of the holder.

---

Debt discount, embedded redemption feature and beneficial conversion feature

Upon issuance of the Debentures in the first and second closings, the Company recognized an aggregate debt discount of approximately $175,000 to the aggregate $450,000 principal value of Debentures, comprised the following:

The debt discount is presented net of the related Debenture balance in the Consolidated Balance Sheets and is amortized to interest expense over the Debenture’s term using the effective interest method.

Beneficial Conversion Feature

At the time of each closing, the Debenture’s effective conversion price was below the quoted market price of the Company’s common stock. As such, the Company recognized a beneficial conversion feature equal to the intrinsic value of the conversion feature on each issuance date, resulting in a discount to the Debenture with a corresponding credit to additional paid-in capital.

Embedded Derivative

The monthly payment provision within the Debentures is a contingent put option that is required to be separately measured at fair value, with subsequent changes in fair value recognized in the Consolidated Statement of Operations. The Company estimated the fair value of the monthly payment provision, as of the issuance date and March 31, 2017 using probability analysis of the occurrence of a Triggering Date applied to the discounted maximum redemption premium for any given payment. The probability analysis utilized in calculating the embedded derivative upon issuance and at March 31, 2017 was calculated using the following key inputs:

The maximum redemption was discounted at 39.6%, the calculated effective rate of the Debenture before measurement of the contingent put option. The fair value estimate of the embedded derivative is a Level 3 measurement.  The roll-forward of the Level 3 fair value measurement, for the three months ended March 31, 2017, is as follows:

The carrying value of the Debentures, as of March 31, 2017, is comprised of the following:

 

Events of Default or Financial covenants

---

NOTE 11 - SUBSEQUENT EVENTS

Receipt of further investment funds

On May 3, 2017, the Company received further investment totaling $150,000 under the January 25, 2017 convertible debentures agreement referred to in Note 10.

At the time of this third closing, for no additional consideration, the Company and the Buyer agreed that the Original Debentures (first and second closings) shall be exchanged for New Convertible Debentures. All interest that has accrued on an Original Debenture shall be deemed to have accrued on the New Convertible Debenture for which it is exchanged. The date of issuance of each such New Convertible Debenture shall be deemed to be the issuance date of the Original Debenture for which it is exchanged.

Issuance of shares

On May 17, 2017, the Company issued 129,149 shares to research staff working for the Company, and on May 22, 2017, the Company issued 200,000 shares as part payment for investor relations services supplied to the Company.