Attached files
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| EX-32.2 - CERTIFICATION - CEREBAIN BIOTECH CORP. | cbbt_ex322.htm |
| EX-32.1 - CERTIFICATION - CEREBAIN BIOTECH CORP. | cbbt_ex321.htm |
| EX-31.2 - CERTIFICATION - CEREBAIN BIOTECH CORP. | cbbt_ex312.htm |
| EX-31.1 - CERTIFICATION - CEREBAIN BIOTECH CORP. | cbbt_ex311.htm |
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended June 30, 2017
¨ 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 |
| (Commission |
| (I.R.S. Employer |
| 600 Anton Blvd., Suite 1100 Costa Mesa, CA 92626 | ||
| (Address of principal executive offices) | ||
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| 714-371-4109 | ||
| (Registrant’s telephone number, including area code) | ||
| _______________________________________ | ||
| (Former name, address, if changed since last report) | ||
| ____________________________________ | ||
| (Former fiscal year, if changed since last report) |
Securities registered pursuant to Section 12(b) of the Act:
None
Securities registered pursuant to Section 12(g) of the Act:
Common Stock, $0.001 par value
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o
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 | o | Accelerated filer | o |
| Non-accelerated filer | o | Smaller reporting company | x |
| (Do not check if a smaller reporting company) | Emerging growth company | o | |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ________
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o No x
State the aggregate market value of the voting and non-voting common equity held by non-affiliates computed by reference to the price at which the common equity was last sold, or the average bid and asked price of such common equity, as of the last business day of the registrant’s most recently completed second fiscal quarter.
The aggregate market value of the voting stock held by non-affiliates of the registrant as of December 31, 2016 was approximately $2,800,000.
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the latest practicable date.
| Class of Securities |
| Shares Outstanding at September 15, 2017 |
| Common Stock, $0.001 par value |
| 8,120,347 |
DOCUMENTS INCORPORATED BY REFERENCE: NONE
CEREBAIN BIOTECH CORP.
2016 ANNUAL REPORT ON FORM 10-K
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SPECIAL NOTE REGARDING FORWARD LOOKING STATEMENTS
This report contains forward-looking statements. The forward-looking statements are contained principally in the sections entitled “Description of Business,” “Risk Factors,” and “Management’s Discussion and Analysis of Financial Condition and Results of Operations.” These statements involve known and unknown risks, uncertainties and other factors which may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements. In some cases, you can identify forward-looking statements by terms such as “anticipates,” “believes,” “seeks,” “could,” “estimates,” “expects,” “intends,” “may,” “plans,” “potential,” “predicts,” “projects,” “should,” “would” and similar expressions intended to identify forward-looking statements. Forward-looking statements reflect our current views with respect to future events and are based on assumptions and subject to risks and uncertainties. These risks and uncertainties include, but are not limited to, the factors described in the section captioned “Risk Factors” below. Given these uncertainties, you should not place undue reliance on these forward-looking statements. Such statements may include, but are not limited to, information related to: anticipated operating results; licensing arrangements; relationships with our customers; consumer demand; financial resources and condition; changes in revenues; changes in profitability; changes in accounting treatment; cost of sales; selling, general and administrative expenses; interest expense; the ability to secure materials and subcontractors; the ability to produce the liquidity or enter into agreements to acquire the capital necessary to continue our operations and take advantage of opportunities; legal proceedings and claims.
Also, forward-looking statements represent our estimates and assumptions only as of the date of this report. You should read this report and the documents that we reference and filed as exhibits to this report completely and with the understanding that our actual future results may be materially different from what we expect. Except as required by law, we assume no obligation to update any forward-looking statements publicly, or to update the reasons actual results could differ materially from those anticipated in any forward-looking statements, even if new information becomes available in the future.
USE OF CERTAIN DEFINED TERMS
Except as otherwise indicated by the context, references in this report to “we,” “us,” “our,” “our Company,” or “the Company” are to the combined business of Cerebain Biotech Corp. and its wholly-owned subsidiary, Cerebain Operating, Inc.
As noted below, the financial disclosure in this Annual Report Form 10-K relates to the operations of Cerebain Operating, Inc., a company that is our wholly-owned subsidiary as a result of the transactions described herein.
In addition, unless the context otherwise requires and for the purposes of this report only:
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| · | “Cerebain Biotech” or “CBBT” refers to Cerebain Biotech Corp., a Nevada corporation; |
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| · | “Commission” refers to the Securities and Exchange Commission; |
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| · | “Exchange Act” refers to the Securities Exchange Act of 1934, as amended; |
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| · | “Cerebain” refers to Cerebain Operating, Inc., a Nevada corporation; and |
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| · | “Securities Act” refers to the Securities Act of 1933, as amended. |
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Background
Business Overview
We were incorporated on December 18, 2007, in the State of Nevada. We are a smaller reporting biomedical company and through our wholly owned subsidiary, Cerebain Operating, Inc. (“Cerebain”), our business involves the discovery of products for the treatment of Alzheimer’s disease utilizing Omentum. Under our current plan, our products will include both a medical device solution as well as a synthetic drug solution.
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 joint ventures 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 we will be successful in raising the necessary funds. There can also be no assurance that further research and development will validate and support the results of our preliminary research and studies, or 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.
General
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.
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 $250,000 in accounts payable at June 30, 2017 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.
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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. For the fiscal years ended June 30, 2017 and 2016, the Company recognized an impairment on capitalized patent cost of approximately $0 and $84,000, respectively.
Legal fees, pertaining to the patent, are recorded as general and administrative expenses when they are incurred. Legal fees charged to operations were approximately $7,500 and $2,500 for the fiscal years ended June 30, 2017 and 2016, respectively.
We recognized a patent royalty expense of approximately $100,000 for the fiscal year ended June 30, 2017 compared to $150,000 for the fiscal year ended June 30, 2016. The accrued payable of $250,000 pertaining to the patent royalty expense at June 30, 2017 is included in related party payables.
Overview of Dementia and Alzheimer’s Disease
Dementia (taken from Latin, originally meaning "madness") is generally referred to as a serious loss and/or decline of human brain function. The areas of brain function affected by dementia include memory, attention, language, problem solving and emotion. Dementia is generally considered as a progressive and non-reversible condition. Alzheimer’s disease is the most common form of dementia. Alzheimer’s disease is an age-related, non-reversible brain disorder that develops over a period of years. Initially, people experience memory loss and confusion, which may be mistaken for the kinds of memory changes that are sometimes associated with normal aging. However, the symptoms of Alzheimer’s disease gradually lead to behavior and personality changes, a decline in cognitive abilities such as decision making and language skills, and problems recognizing family and friends. Alzheimer’s disease ultimately leads to a severe loss of mental functions. These losses are related to the worsening breakdown of the connections between certain neurons in the brain responsible for memory and learning. Neurons can’t survive when they lose their connections to other neurons. As neurons die throughout the brain, the affected regions begin to atrophy, or shrink. By the final stage of Alzheimer’s disease, damage is widespread and brain tissue has shrunk significantly.
Causes
Many scientists generally accept that one or more of the following mechanisms are responsible for dementia:
1) accumulation of toxic materials in brain cells, which leads to death of the cells;
2) reduction of certain biological factors (e.g. Acetylcholine or ACh) in a brain; and
3) loss or reduction of blood flow in the brain.
Neurodegenerative diseases, such as Alzheimer's disease and Parkinson's disease, are the most common causes of dementia. Dementia can also be due to a stroke. In most circumstances, the changes in the brain that are causing dementia cannot be controlled or reversed.
Statistics
| · | Affected population worldwide |
According to the Alzheimer’s Association 2017 Alzheimer’s Disease Facts and Figures, an estimated 5.5 million Americans have Alzheimer's disease, including approximately 200,000 individuals younger than age 65 who have younger-onset Alzheimer's. By 2050, it is estimated that up to 16 million Americans will have the disease. Almost two-thirds, 3.3 million, of American seniors living with Alzheimer's are women. By 2025, it is estimated that 20 states will see a 35 percent or greater growth in the number of people with Alzheimer’s. Someone in the United States develops Alzheimer’s every 66 seconds. In 2050, it is predicted that someone in the United States will develop the disease every 33 seconds.
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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 2016, an estimated 700,000 people will die with Alzheimer’s, meaning they will die after having developed the disease. Deaths from Alzheimer 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 2017 Alzheimer’s Disease Facts and Figures, unpaid caregivers are primarily immediate family members, but they may be other relatives and friends. In 2015, 15.9 million family and friends provided an estimated 18.1 billion hours of unpaid care, a contribution to the nation valued at over $221.3 billion. Nearly half of care contributors cut back on their own expenses (including food, transportation and medical care) to pay for dementia-related care of a family member or friend. Care contributors are 28 percent more likely than other adults to eat less or go hungry because they cannot afford to pay for food. One in five care contributors cut back on their own doctor visits because of their care responsibilities. And, among caregivers, 74 percent report they are “somewhat” to “very” concerned about maintaining their own health since becoming a caregiver. On average care contributors lose over $15,000 in annual income as a result of reducing or quitting work to meet the demand of caregiving.
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 2017 Alzheimer’s Disease Facts and Figures, Alzheimer’s disease is the most expensive condition in the nation. In 2017, the direct costs to American society of caring for those with Alzheimer's will total an estimated $236 billion, with just under 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 is estimated 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 2016 dollars). Costs to Medicare will increase over 365 percent to $589 billion.
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Current Approaches to Treating Dementia
Currently, there is no cure for dementia. There are a number of prescription drugs that target those with Alzheimer’s and dementia, however those drugs primarily relieve some of the disease mechanisms 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.
Principal Products and Services
Our Products
Dr. Saini is the inventor of U.S. Patent Application No. 15/493,535, derived from Patent Applications No. 15/260,699, No. 15/006,939, No. 13/849,014, No. 13/309,468 and No. 12/361,808, and its foreign counterparts in Europe and Japan. He is one of our founders and a medical advisor to the Company. As a practicing physician, he is a gastrointestinal specialist, and often needs to apply a gastrostomy tube to an abdominal area of a patient for surgical procedures. In some cases, when a patient having dementia underwent such surgery, Dr. Saini observed that some of symptoms of dementia became noticeably improved for at least 24 hours or longer after the surgery. These observations led Dr. Saini to a hypothesis that stimulation of Omentum can improve conditions related to dementia and such improvement may occur because the stimulation of Omentum induces production and/or secretion of some biological agent(s) that can improve such conditions.
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Based on these observations, Dr. Saini conducted intensive studies that led to the discovery of a potential breakthrough in the treatment of Alzheimer’s Disease. These breakthroughs are described in Dr. Saini’s pending patent applications, which we have licensed from Dr. Saini under the patent license agreement. More particularly, the pending patent applications describe in detail a variety of methods of isolating several biological agents from the Omentum and testing the agents for their activity in treating dementia conditions. The isolation and identification of active biological agents can be done with the Omentum tissue obtained from a patient or grown in a petri-dish. Accordingly, methods of producing the Omentum tissue, possibly on a large scale, are included in the applications.
Once the active biological agent(s) are identified, a composition (e.g. various forms of medicaments) having such agents can be produced for treatment of a patient. Alternatively, the Omentum tissue/extract containing the active agents can be used to produce the composition.
With respect to treatment methods, there is a method of administering the composition having the isolated active biological agents to a patient. The composition can be manufactured in different forms (e.g. oral medication or injection) and can be administered to a patient accordingly. The ability to treat dementia using Omentum through oral medication or injection would provide a breakthrough in the treatment of dementia using Omentum, which has historically been applied only through a surgical procedure. In addition, methods of monitoring improvement of the disease conditions after the treatment are provided in the applications.
Dr. Saini’s patent application also discloses a method for producing the Omentum tissue in a petri-dish. The growth of such material outside of the human body will permit the large-scale production of material that can be used as raw materials for treatment and/or further research.
Currently, Dr. Saini has been conducting a series of scientific experiments with other experts in the research area to prove the efficacy and applicability of the above-listed treatment methods.
Up until now, it has been notoriously difficult to identify effective treatments for Alzheimer’s disease and other forms of dementia. All of the efforts heretofore, have been directed to palliative treatments or addressing the three mechanisms of action discussed above. Many once-promising therapies have been shown to address one or more of the underlying mechanisms of action; however, many such therapies fail in clinical trials because no clear improvement in mental function can be shown. In contrast, Dr. Saini’s invention was developed based on the observation that a clear improvement in mental function was observed in patients whose Omentum had been stimulated. Thus, Dr. Saini’s invention was based on the premise that clinical improvement could be obtained rather than on a hope that affecting one of the underlying mechanisms of action would also affect mental functioning.
Another advantage of Dr. Saini’s technology is that patents were written in a manner that permitted all stages of the development of the technology to be covered. Thus, the technology includes the direct stimulation of Omentum tissue, which leads to release of the factors that can promote mental functioning. Once it can be proven that such factors exist and are effective, the technology also provides methods for identifying what such relevant factors are and then isolating or producing such factors. To the extent that the Omentum itself is necessary to produce such factors, the invention provides that the Omentum can be grown in tissue culture, and used directly or factors isolated from it. The ability to grow the tissue in culture obviates the need to obtain Omentum tissue directly from patients or animals.
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Industry Overview
As noted above, according to the Alzheimer’s Association 2017 Alzheimer’s Disease Facts and Figures, an estimated 5.5 million Americans have Alzheimer's disease, including approximately 200,000 individuals younger than age 65 who have younger-onset Alzheimer's. By 2050, it is estimated up to 16 million will have the disease. Almost two-thirds, 3.3 million, of American seniors living with Alzheimer's are women. By 2025, it is estimated 20 states will see a 35 percent or greater growth in the number of people with Alzheimer’s. Someone in the United States develops Alzheimer’s every 66 seconds. In 2050, it is estimated someone in the United States will develop the disease every 33 seconds. The global cost of care for dementia exceeded $818 billion in 2015, or 1.09 percent of the world's gross domestic product (GDP) according to the 2015 World Alzheimer Report. These costs include those attributed to informal care from family member or others, direct social care from professional care givers, and direct medical bills. About 70% of these costs occur in Western Europe and North America. Such costs will continue to increase drastically as the affected population of dementia increases.
Marketing
We plan to launch a marketing campaign using a number of different channels. We plan to work with already established affiliates and partnerships to promote our products to healthcare providers and Alzheimer patients. We also plan to market directly to consumers through direct-to-consumer advertising that communicates the uses, benefits and risks of our products. In addition, we plan to sponsor general advertising to educate the public on Alzheimer’s disease awareness, prevention and wellness, and public health issues. However, we will need to raise additional funds by way of a public or private offering, which we currently have no commitments for.
Customers
If we are successful in bringing a product to market, our customers will be consumers suffering through the various stages of Alzheimer’s disease.
Distribution
If we are successful in bringing a product to market we plan to distribute our products principally through wholesalers, but we will also try to sell directly to retailers, hospitals, clinics, government agencies and pharmacies.
Competition
Due to the number of people suffering from dementia, and the projected future numbers, there are several players in the dementia medication market. Four of the five Alzheimer’s disease-inhibiting drugs approved to treat Alzheimer’s in the United States – donepezil (Aricept), galantamine (Razadyne), rivastigmine (Exelon), and tacrine (Cognex) – belong to the same class and essentially work the same way. They reduce the breakdown in the brain of a chemical called acetylcholine, which is a chemical messenger that transmits information from nerve cell to nerve cell. This effectively increases levels of acetylcholine in the brain, and may preserve brain function. These drugs are generally capable, at best, of boosting memory for up to 18 months. After that, patients continue to decline as the disease progresses.
The fifth and most recently approved drug, memantine (Namenda), works differently. It blocks the actions of the neurotransmitter glutamate. Glutamate is needed for memory but too much of it is toxic to nerve cells and it appears that in people with Alzheimer’s, there is too much of it (for unknown reasons).
Of these five drugs currently approved to treat Alzheimer’s in the United States, none of them “cure" Alzheimer’s disease. They are all disease-inhibiting drugs. Studies have found these drugs only treat symptoms of the disease and can slow a person’s mental decline and ease symptoms (especially forgetfulness and confusion), but they do not stop the disease.
All the studies indicate that when people taking any of the Alzheimer’s medicines are compared to those taking a placebo, only 10% to 20% more people taking the drug get a significant, noticeable or sustained response. And it is the rare person who has a strong response, with marked improvement or a significant delay in the worsening of symptoms. By another measure, one team of researchers calculated that for every three to seven people taking an Alzheimer’s drug, only one benefits at all. Unfortunately, there is no way as yet to predict who will respond and who will have little or no benefit.
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Disease-arresting drugs, however, would be a game changer. These drugs would target what researchers believe is the root cause of Alzheimer’s: a buildup of protein called beta-amyloid or a-beta (often referred to as plaque) that is poisonous to brain cells. If they work, doctors could administer the drugs during the earlier stages of the disease, when brain damage caused by disease is still manageable. The drugs could then be used to keep the disease in check, giving patients the prospect of going on to live relatively normal lives.
Research and Development
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 and paid approximately $220,000, of which $65,000 has been incurred towards our monetary commitment.
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.
Liability and Insurance
We currently do not maintain a general liability insurance policy. However, we plan to obtain general liability insurance policy in advance of releasing products. We believe that our anticipated insurance coverage will be adequate for the types of products and services that may be marketed in the near future. There can be no assurance, however, that such insurance will be sufficient to cover potential claims or that the present level of coverage, or increased coverage, will be available in the future at a reasonable cost.
Government Regulation
Our research, development and testing of potential products, including clinical trials, will be subject to extensive regulation by numerous governmental authorities in the United States, both federal and state. The sanctions for failure to comply with such laws, regulations, or rules could include denial of the right to conduct business, significant fines, and criminal and civil penalties. An increase in the complexity or substantive requirements of such laws, regulations, or rules could have a material adverse effect on our business. Any change in the current regulatory requirements or related interpretations of regulatory requirement could adversely affect our operations. Moreover, as noted above, we intend to commence clinical trials in Poland and other foreign countries. We will be subject to regulations by each respective country’s governmental authority.
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Intellectual Property
Currently, our only intellectual property is the patent we are licensing from Dr. Saini. Other than that, our trade secrets and proprietary know-how, we do not have any other intellectual property. As noted above, we 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 we have paid rights fees of $50,000 to Dr. Saini, and the Company issued Dr. Saini 825,000 shares of our common stock. We have recognized costs associated with the patent rights for $250,000 in accounts payable at June 30, 2017 for the patent rights and are currently in arrears and in discussions to renegotiate the terms of the agreement.
Employees and Contractors
As of the date of this filing, we have 2 employees and 18 independent contractors.
Facilities
Our principal executive and administrative offices, and those of Cerebain, are currently located at 600 Anton Blvd., Suite 1100, Costa Mesa, CA 92626. Our office space is located at an executive suites location and is leased on a month to month basis. Our monthly lease payment is $349 per month. Due to the nature of our business, the majority of our operations and research & development are outsourced, thereby reducing the need for a sizeable facility.
Available Information
We file various reports with the SEC, including Annual Reports on Form 10-K, Quarterly Reports on Form 10-Q and Current Reports on Form 8-K, which are available through the SEC's electronic data gathering, analysis and retrieval system (“EDGAR”) by accessing the SEC's home page (http://www.sec.gov). The documents are also available to be read or copied at the SEC’s Public Reference Room located at 100 F Street, NE, Washington, D.C., 20549. Information on the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
Risks Related to Business Operations
We have a limited operating history and historical financial information upon which you may evaluate our performance.
You should consider, among other factors, our prospects for success in light of the risks and uncertainties encountered by companies that, like us, are in their early stages of development. We may not successfully address these risks and uncertainties or successfully implement our existing and new products and services. If we fail to do so, it could materially harm our business and impair the value of our common stock. Even if we accomplish these objectives, we may not generate the positive cash flows or profits we anticipate in the future. We were incorporated in Nevada on December 18, 2007. All of our operations are conducted through Cerebain, our wholly-owned subsidiary, which also has a limited operating history. However, as a result of the agreement with Sonos described herein, and the continuing scientific experiments being conducted by Dr. Surinder Singh Saini, MD to research, develop and test medicinal treatments for dementia utilizing Omentum, we have started operations. Our only significant asset is our rights under that certain Patent License Agreement with Dr. Surinder Singh Saini, MD, dated June 10, 2010. Unanticipated problems, expenses and delays are frequently encountered in establishing a new business and developing new products and services. These include, but are not limited to, inadequate funding, lack of consumer acceptance, competition, product development, and inadequate sales and marketing. The failure by us to meet any of these conditions would have a materially adverse effect upon us and may force us to reduce or curtail operations. No assurance can be given that we can or will ever operate profitably.
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We may not be able to meet our future capital needs.
To date, we have not generated any revenue and we have very little cash liquidity and capital resources. Our future capital requirements will depend on many factors, including our ability to develop our intellectual property, cash flow from operations, and competing market developments. We will need additional capital in the near future. Any equity financings will result in dilution to our then-existing stockholders. Sources of debt financing may result in high interest expense. Any financing, if available, may be on unfavorable terms. If adequate funds are not obtained, we will be required to reduce or curtail operations.
If we cannot obtain additional funding, our product development and commercialization efforts may be reduced or discontinued and we may not be able to continue operations.
We have historically experienced negative cash flows from operations since our inception and we expect the negative cash flows from operations to continue for the foreseeable future. Unless and until we are able to generate revenues, we expect such losses to continue for the foreseeable future. As discussed in our financial statements, there exists substantial doubt regarding our ability to continue as a going concern.
Product development efforts are highly dependent on the amount of cash and cash equivalents on hand combined with our ability to raise additional capital to support our future operations through one or more methods, including but not limited to, issuing additional equity or debt.
In addition, we may also raise additional capital through additional equity offerings, and licensing our future products in development. While we will continue to explore these potential opportunities, there can be no assurances that we will be successful in raising sufficient capital on terms acceptable to us, or at all, or that we will be successful in licensing our future products. Based on our current projections, we believe we have insufficient cash on hand to meet our obligations as they become due based on current assumptions. The uncertainties surrounding our future cash inflows have raised substantial doubt regarding our ability to continue as a going concern.
If we are unable to meet our future capital needs, we may be required to reduce or curtail operations.
To date, we have relied on funding from our founders and private investment to fund operations. We have extremely limited cash liquidity and capital resources. Our future capital requirements will depend on many factors, including our ability to successfully test, develop, and bring to market products based on the intellectual property we are licensing under the Patent License Agreement with Dr. Surinder Singh Saini, MD, dated June 10, 2010 (“License Agreement”), manage our cash flow from operations, and competing market developments. Our business plan requires additional funding. Consequently, we intend to raise additional funds through private placements or other financings. Any equity financings would result in dilution to our then-existing stockholders. Sources of debt financing may result in higher interest expense. Any financing, if available, may be on unfavorable terms. If adequate funds are not obtained, we may be required to reduce or curtail operations. Additionally, we have substantial financial obligations under the License Agreement, which will require additional funds to be raised by us in the future. If we are not able to raise these funds it may put us in breach under the License Agreement and/or not enable us to properly prosecute the patent application that is the subject of the License Agreement.
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Our independent registered public accounting firm has expressed doubt about our ability to continue as a going concern, which may hinder our ability to obtain future financing.
Our financial statements as of June 30, 2017 have been prepared under the assumption that we will continue as a going concern for the next twelve months. Our independent registered public accounting firm has issued a report that included an explanatory paragraph referring to our need to obtain additional financing and expressing substantial doubt in our ability to continue as a going concern. Our ability to continue as a going concern is dependent upon our ability to obtain additional equity financing or other capital, attain further operating efficiencies, reduce expenditures, and, ultimately, to generate revenue. The financial statements do not include any adjustments that might result from the outcome of this uncertainty. We are continually evaluating opportunities to raise additional funds through public or private equity financings, as well as evaluating prospective business partners, and will continue to do so. However, if adequate funds are not available to us when we need it, and we are unable to enter into some form of strategic relationship that will give us access to additional cash resources, we will be required to even further curtail our operations which would, in turn, further raise substantial doubt about our ability to continue as a going concern.
Because we face intense competition, we may not be able to operate profitably in our markets.
The market for Alzheimer’s and dementia medications is highly competitive and is becoming more so, which could hinder our ability to successfully market our products. We may not have the resources, expertise or other competitive factors to compete successfully in the future. We expect to face additional competition from existing competitors and new market entrants in the future. Many of our competitors have greater name recognition and more established relationships in the industry than we do. As a result, these competitors may be able to:
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| · | adapt to new or emerging changes in customer requirements more quickly; |
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| · | take advantage of acquisition and other opportunities more readily; and |
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| · | devote greater resources to the marketing and sale of their products and adopt more aggressive pricing policies than we can. |
We may not be able to compete with our competitors in the biotechnology industry because many of them have greater resources than we do and they are further along in their development efforts.
The pharmaceutical and biotechnology industry is intensely competitive and subject to rapid and significant technological change. Many of the drugs that we are attempting to discover or develop will be competing with existing therapies. Some or all of these companies may have greater financial resources, larger technical staffs, and larger research budgets than we have, as well as greater experience in developing products and running clinical trials. We expect to continue to experience significant and increasing levels of competition in the future. In addition, there may be other companies which are currently developing competitive technologies and products or which may in the future develop technologies and products that are comparable or superior to our technologies and products.
Our business depends substantially on the continuing efforts of our senior management and other key personnel, including Dr. Saini, and our business may be severely disrupted if we lost their services.
Our future success heavily depends on the continued service of our senior management and other key personnel, including Dr. Saini. In particular, we rely on the expertise and experience of Eric Clemons our President and Wesley Tate our Chief Financial Officer regarding their experience as officers of a publicly-traded over-the-market company, and of Dr. Saini, our Principal Scientist, regarding his knowledge of Omentum and the medical community. If Mr. Clemons, Mr. Tate or Dr. Saini are unable or unwilling to continue to work for us in their present positions, we may have to spend a considerable amount of time and resources searching, recruiting, and integrating the replacements into our operations, which would substantially divert management’s attention from our business and severely disrupt our business. This may also adversely affect our ability to execute our business strategy. Moreover, if any of our senior executives joins a competitor or forms a competing company, we may lose customers, suppliers, know-how, and key employees. In addition, we have accrued the minimum patent royalty expense associated with the patent rights in accounts payable and are currently in arrears and in discussions to renegotiate the terms of the agreement.
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We may be unable to adequately protect our proprietary rights.
Our ability to compete partly depends on the superiority, uniqueness and value of our intellectual property and technology. To protect our proprietary rights, we will rely on a combination of patent, copyright and trade secret laws, confidentiality agreements with our employees and third parties, and protective contractual provisions. Despite these efforts, any of the following occurrences may reduce the value of our intellectual property:
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| · | Our applications for patents relating to our business may not be granted and, if granted, may be challenged or invalidated; |
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| · | Issued patents may not provide us with any competitive advantages; |
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| · | Our efforts to protect our intellectual property rights may not be effective in preventing misappropriation of our technology; |
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| · | Our efforts may not prevent the development and design by others of products or technologies similar to or competitive with, or superior to those we develop; or |
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| · | Another party may obtain a blocking patent and we would need to either obtain a license or design around the patent in order to continue to offer the contested feature or service in our products. |
We may be forced to litigate to defend our intellectual property rights, or to defend against claims by third parties against us relating to intellectual property rights.
We may be forced to litigate to enforce or defend our intellectual property rights, to protect our trade secrets or to determine the validity and scope of other parties’ proprietary rights. Any such litigation could be very costly and could distract our management from focusing on operating our business. The existence and/or outcome of any such litigation could harm our business.
We may become involved in lawsuits to protect or enforce our patent rights that would be expensive and time consuming.
In order to protect or enforce our patent rights, we may initiate patent litigation against third parties. In addition, we may become subject to interference or opposition proceedings conducted in patent and trademark offices to determine the priority and patentability of inventions. The defense of intellectual property rights, including patent rights through lawsuits, interference or opposition proceedings, and other legal and administrative proceedings, would be costly and divert our technical and management personnel from their normal responsibilities. An adverse determination of any litigation or defense proceedings could put our pending patent applications at risk of not being issued.
Furthermore, because of the substantial amount of discovery required in connection with intellectual property litigation, there is a risk that some of our confidential information could be compromised by disclosure during this type of litigation. For example, during the course of this kind of litigation, confidential information may be inadvertently disclosed in the form of documents or testimony in connection with discovery requests, depositions or trial testimony. This disclosure could have a material adverse effect on our business and our financial results.
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If we fail to obtain or maintain applicable regulatory clearances or approvals for our products, or if such clearances or approvals are delayed, we will be unable to distribute our products in a timely manner, or at all, which could significantly disrupt our business and materially and adversely affect our sales and profitability.
The sale and marketing of our products are subject to regulation in the countries where we intend to conduct business. For a significant portion of our products, we need to obtain and renew licenses and registrations with the FDA, and its equivalent in other markets. The processes for obtaining regulatory clearances or approvals can be lengthy and expensive, and the results are unpredictable. If we are unable to obtain clearances or approvals needed to market existing or new products, or obtain such clearances or approvals in a timely fashion, our business would be significantly disrupted, and our sales and profitability could be materially and adversely affected.
In particular, as we enter foreign markets, we lack the experience and familiarity with both the regulators and the regulatory systems, which could make the process more difficult, costlier, more time consuming and less likely to succeed.
If we fail to comply with regulatory requirements, regulatory agencies may take action against us, which could significantly harm our business.
Marketed products, along with the manufacturing processes, post-approval clinical data, labeling, advertising and promotional activities for these products, are subject to continual requirements and review by the FDA and other regulatory bodies. In addition, regulatory authorities subject a marketed product, its manufacturer and the manufacturing facilities to ongoing review and periodic inspections. We will be subject to ongoing FDA requirements, including required submissions of safety and other post-market information and reports, registration requirements, current Good Manufacturing Practices (“cGMP”) regulations, requirements regarding the distribution of samples to physicians and recordkeeping requirements.
The cGMP regulations also include requirements relating to quality control and quality assurance, as well as the corresponding maintenance of records and documentation. Regulatory agencies may change existing requirements or adopt new requirements or policies. We may be slow to adapt or may not be able to adapt to these changes or new requirements.
We expect to rely entirely on third parties for international registration, sales and marketing efforts.
In the event that we attempt to enter into international markets, we expect to rely on collaborative partners to obtain regulatory approvals and to market and sell our product(s) in those markets. We have not yet entered into any collaborative arrangement. We may be unable to enter into any other arrangements on terms favorable to us, or at all, and even if we are able to enter into sales and marketing arrangements with collaborative partners, we cannot assure you that their sales and marketing efforts will be successful. If we are unable to enter into favorable collaborative arrangements in international markets, or if our collaborators’ efforts are unsuccessful, our ability to generate revenues from international product sales will suffer.
We may become subject to litigation for infringing the intellectual property rights of others.
Others may initiate claims against us for infringing on their intellectual property rights. We may be subject to costly litigation relating to such infringement claims and we may be required to pay compensatory and punitive damages or license fees if we settle or are found culpable in such litigation, we may be required to pay damages, including punitive damages. In addition, we may be precluded from offering products that rely on intellectual property that is found to have been infringed by us. We also may be required to cease offering the affected products while a determination as to infringement is considered. These developments could cause a decrease in our operating income and reduce our available cash flow, which could harm our business and cause our stock price to decline.
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We do not maintain any insurance, and if we were found liable for a claim, we may be forced to expend significant capital to resolve the claim.
We currently do not have any insurance. As a result, if we were found to be liable for a claim any monetary damages awarded to a third party against us would have to be paid by us and we do not currently have sufficient funds to pay for a claim against us. Additionally, if we decide to obtain insurance coverage in the future, it is possible that: (1) we may not be able to get enough insurance to meet our needs; (2) we may have to pay very high premiums for the additional coverage; (3) we may not be able to acquire any insurance for certain types of business risk; or (4) we may have gaps in coverage for certain risks. This could leave us exposed to potential uninsured claims for which we could have to expend significant amounts of capital resources. Consequently, if we were found liable for a significant uninsured claim in the future, we may be forced to expend a significant amount of our operating capital to resolve the uninsured claim.
Our future research and development projects may not be successful.
The successful development of pharmaceutical products can be affected by many factors. Products that appear to be promising at their early phases of research and development may fail to be commercialized for various reasons, including the failure to obtain the necessary regulatory approvals. In addition, the research and development cycle for new products for which we may obtain an approval certificate is long.
There is no assurance that all of our future research and development projects will be successful or completed within the anticipated time frame or budget or that we will receive the necessary approvals from relevant authorities for the production of these newly developed products, or that these newly developed products will achieve commercial success. Even if such products can be successfully commercialized, they may not achieve the level of market acceptance that we expect.
We do not currently have any products and the development of products, including clinical trials, are expensive, time-consuming and difficult to design and implement.
We do not currently have any products and the development of products, including clinical trials, are expensive, time-consuming and difficult to design and implement, in part because they are subject to rigorous regulatory requirements. The research, testing and development process for new drugs is time-consuming and expensive. The clinical trial process is also expensive, time consuming, failure can occur at any stage of the trials, and we could encounter problems that cause us to abandon or repeat clinical trials. The commencement and completion of clinical trials may be delayed by several factors, including:
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| · | inability or unwillingness of medical investigators to follow our clinical protocols |
In addition, we (or the FDA), may suspend our clinical trials at any time if it appears that we are exposing participants to unacceptable health risks or if the regulatory bodies find serious deficiencies in our investigational new drug, submissions or the conduct of these trials. Therefore, we cannot predict with any certainty the schedule for future clinical trials.
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We do not have experience as a company conducting Early-Stage or Large-Scale clinical trials, or in other areas required for the successful commercialization and marketing of our product candidates.
Negative or limited results from any current or future clinical trial could delay or prevent further development of our product candidates which would adversely affect our business.
We have no experience as a company in conducting early-stage, large-scale, late-stage clinical trials. In part because of this limited experience, we cannot be certain that planned clinical trials will begin or be completed on time, if at all. Large-scale trials would require either additional financial and management resources, or reliance on third-party clinical investigators, clinical research organizations (“CROs”) or consultants. Relying on third-party clinical investigators or CROs may force us to encounter delays that are outside of our control. Any such delays could have a material adverse effect on our business.
We also do not currently have marketing and distribution capabilities for our product candidates. Developing an internal sales and distribution capability would be an expensive and time-consuming process. We may enter into agreements with third parties that would be responsible for marketing and distribution. However, these third parties may not be capable of successfully selling any of our product candidates. The inability to commercialize and market our product candidates could materially affect our business.
The results of our clinical trials may not support our product candidate claims.
Even if our clinical trials are completed as planned, we cannot be certain that their results will support our product candidate claims. Success in pre-clinical testing and early clinical trials does not ensure that later clinical trials will be successful, and we cannot be sure that the results of later clinical trials will replicate the results of prior clinical trials and pre-clinical testing. The clinical trial process may fail to demonstrate that our product candidates are safe for humans and effective for indicated uses. This failure would cause us to abandon a product candidate and may delay development of other product candidates.
Any products we develop may not achieve or maintain widespread market acceptance.
The success of any products we develop based on the intellectual property will be highly dependent on market acceptance. We believe that market acceptance of any products will depend on many factors, including, but not limited to:
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| · | the safety and efficacy of our products and the prevalence and severity of adverse side effects, if any; and |
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| · | publicity concerning our products, product candidates or competing products. |
If our products fail to achieve or maintain market acceptance, or if new products are introduced by others that are more favorably received than our products, are more cost effective or otherwise render our products obsolete, we may experience a decline in demand for our products. If we are unable to market and sell any products we develop successfully, our business, financial condition, results of operations and future growth would be adversely affected.
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Developments by competitors may render our products or technologies obsolete or non-competitive.
The biotechnology and pharmaceutical industries are intensely competitive and subject to rapid and significant technological changes. A large number of companies are pursuing the development of pharmaceuticals that target the same diseases and conditions that we are targeting. We face competition from pharmaceutical and biotechnology companies in the United States and other countries. In addition, companies pursuing different but related fields represent substantial competition. Many of these organizations competing with us have substantially greater capital resources, larger research and development staffs and facilities, longer drug development history in obtaining regulatory approvals and greater manufacturing and marketing capabilities than we do. These organizations also compete with us to attract qualified personnel and parties for acquisitions, joint ventures or other collaborations.
We may have significant product liability exposure because we do not maintain product liability insurance.
We face an inherent business risk of exposure to product liability claims in the event that the administration of one of our drugs during a clinical trial adversely affects or causes the death of a patient. Product liability insurance is expensive, difficult to obtain and may not be available in the future on acceptable terms, if at all. Our inability to obtain sufficient insurance coverage on reasonable terms or to otherwise protect against potential product liability claims in excess of our insurance coverage, if any, or a product recall, could negatively impact our financial position and results of operations.
Risks Related to Ownership of Our Common Stock
Our Articles of Incorporation authorize our board of directors to create and issue new series of preferred stock that may have the effect of delaying or preventing a change of control, which could adversely affect the value of your shares.
Our articles of incorporation provide that our board of directors will be authorized to create and issue from time to time, without further stockholder approval, up to 1,000,000 shares of preferred stock in one or more series and to fix or alter the designations, preferences, rights and any qualifications, limitations or restrictions of the shares of each series, including the dividend rights, dividend rates, conversion rights, voting rights, rights of redemption, including sinking fund provisions, redemption price or prices, liquidation preferences and the number of shares constituting any series or designations of any series. Such shares of preferred stock could have preferences over our common stock with respect to dividends and liquidation rights. We may issue additional preferred stock in ways which may delay, defer or prevent a change of control of our company without further action by our stockholders. Such shares of preferred stock may be issued with voting rights that may adversely affect the voting power of the holders of our common stock by increasing the number of outstanding shares having voting rights, and by the creation of class or series voting rights.
Our Articles of Incorporation limits the liability of members of the Board of Directors.
Our Articles of Incorporation limits the personal liability of our directors for monetary damages for breach of fiduciary duty as a director, subject to certain exceptions, to the fullest extent allowed. We are organized under Nevada law. Accordingly, except in limited circumstances, our directors will not be liable to our stockholders for breach of their fiduciary duties.
Provisions of our Articles of Incorporation, bylaws and Nevada corporate law have anti-takeover effects.
Some provisions in our Articles of Incorporation and bylaws could delay or prevent a change in control of us, even if that change might be beneficial to our stockholders. Our Articles of Incorporation and bylaws contain provisions that might make acquiring control of us difficult, including provisions limiting rights to call special meetings of stockholders and regulating the ability of our stockholders to nominate directors for election at annual meetings of our stockholders. In addition, our board of directors has the authority, without further approval of our stockholders, to issue common stock having such rights, preferences and privileges as the board of directors may determine. Any such issuance of common stock could, under some circumstances, have the effect of delaying or preventing a change in control of us and might adversely affect the rights of holders of common stock.
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In addition, we are subject to Nevada statutes regulating business combinations, takeovers and control share acquisitions, which might also hinder or delay a change in control of us. Anti-takeover provisions in our certificate of incorporation and bylaws, anti-takeover provisions that could be included in the common stock when issued and the Nevada statutes regulating business combinations, takeovers and control share acquisitions can depress the market price of our securities and can limit the stockholders’ ability to receive a premium on their shares by discouraging takeover and tender offer bids, even if such events could be viewed by our stockholders or others as beneficial transactions.
The issuance of additional common stock and/or the resale of our issued and outstanding common stock could cause substantial dilution to investors.
Our Articles of Incorporation authorize the issuance of up to 249,000,000 shares of common stock and 1,000,000 shares of preferred stock. Our Board of Directors has the authority to issue additional shares of common stock and to issue options and warrants to purchase shares of our common stock without shareholder approval. Future issuances of common stock could represent further substantial dilution to investors. In addition, the Board of Directors could issue large blocks of voting stock to fend off unwanted tender offers or hostile takeovers without further stockholder approval.
Our common stock has a limited trading market, which could affect your ability to sell shares of our common stock and the price you may receive for our common stock.
Our common stock is currently traded in the over-the-counter market and “bid” and “asked” quotations regularly appear on OTC Markets under the symbol “CBBT” There is only limited trading activity in our securities. We have a relatively small public float compared to the number of our shares outstanding. Accordingly, we cannot predict the extent to which investors’ interest in our common stock will provide an active and liquid trading market. Due to our limited public float, we may be vulnerable to investors taking a “short position” in our common stock, which would likely have a depressing effect on the price of our common stock and add increased volatility to our trading market. The volatility of the market for our common stock could have a materially adverse effect on our business, results of operations and financial condition. There cannot be any guarantee that an active trading market for our securities will develop or, if such a market does develop, will be sustained. Accordingly, investors must be able to bear the financial risk of losing their entire investment in our common stock.
Our common stock is quoted on the OTCQB-tier of OTC Markets, which may have an unfavorable impact on our stock price and liquidity.
Our common stock is quoted on OTCQB-tier of OTC Markets. OTC Markets is a significantly more limited market than the New York Stock Exchange or The NASDAQ Stock Market. The quotation of our shares on OTC Markets may result in a less liquid market available for existing and potential stockholders to trade shares of our common stock, could depress the trading price of our common stock, and could have a long-term adverse impact on our ability to raise capital in the future.
The sale of securities by us in any equity or debt financing could result in dilution to our existing stockholders and have a material adverse effect on our earnings.
Any sale of common stock by us in a future private placement offering could result in dilution to the existing stockholders as a direct result of our issuance of additional shares of our capital stock. In addition, our business strategy may include expansion through internal growth, by acquiring complementary businesses, by acquiring or licensing additional brands, or by establishing strategic relationships with targeted customers and suppliers. In order to do so, or to finance the cost of our other activities, we may issue additional equity securities that could dilute our stockholders’ stock ownership. We may also assume additional debt and incur impairment losses related to goodwill and other tangible assets if we acquire another company and this could negatively impact our earnings and results of operations.
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Future sales of our common stock in the public market could lower the price of our common stock and impair our ability to raise funds in future securities offerings.
Future sales of a substantial number of shares of our common stock in the public market, or the perception that such sales may occur, could adversely affect the then prevailing market price of our common stock and could make it more difficult for us to raise funds in the future through a public offering of its securities.
The market price of our common stock may be volatile and may be affected by market conditions beyond our control.
The market price of our common stock is subject to significant fluctuations in response to, among other factors:
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In addition, if the market for stocks in our industry, or the stock market in general, experience a loss of investor confidence, the market price of our common stock could decline for reasons unrelated to our business, financial condition or results of operations. If any of the foregoing occurs, it could cause the price of our common stock to fall and may expose us to lawsuits that, even if unsuccessful, could be costly to defend and a distraction to the board of directors and management.
We may be subject to penny stock regulations and restrictions and you may have difficulty selling shares of our common stock.
The Commission has adopted regulations which generally define so-called “penny stocks” as an equity security that has a market price of less than $5.00 per share or an exercise price of less than $5.00 per share, subject to certain exemptions. If our shares of common stock become a “penny stock”, we may become subject to Rule 15g-9 under the Exchange Act, or the Penny Stock Rule. This rule imposes additional sales practice requirements on broker-dealers that sell such securities to persons other than established customers and “accredited investors” (generally, individuals with a net worth in excess of $1,000,000 or annual income exceeding $200,000, or $300,000 together with their spouses). For transactions covered by Rule 15g-9, a broker-dealer must make a special suitability determination for the purchaser and receive the purchaser’s written consent to the transaction prior to sale. As a result, this rule may affect the ability of broker-dealers to sell our securities and may affect the ability of purchasers to sell any of our securities in the secondary market.
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For any transaction involving a penny stock, unless exempt, the rules require delivery, prior to any transaction in a penny stock, of a disclosure schedule prepared by the Commission relating to the penny stock market. Disclosure is also required to be made about sales commissions payable to both the broker-dealer and the registered representative and current quotations for the securities. Finally, monthly statements are required to be sent disclosing recent price information for the penny stock held in the account and information on the limited market in penny stock.
There can be no assurance that our shares of common stock will qualify for exemption from the Penny Stock Rule. In any event, even if our common stock was exempt from the Penny Stock Rule, we would remain subject to Section 15(b)(6) of the Exchange Act, which gives the Commission the authority to restrict any person from participating in a distribution of penny stock if the Commission finds that such a restriction would be in the public interest.
Our internal financial reporting procedures are still being developed. We will need to allocate significant resources to meet applicable internal financial reporting standards.
We have adopted disclosure controls and procedures that are designed to ensure that information required to be disclosed by us in the reports that we submit under the Securities Exchange Act of 1934, as amended, are recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include, without limitation, controls and procedures designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Exchange Act are accumulated and communicated to management, including principal executive and principal financial officers, as appropriate to allow timely decisions regarding required disclosure. We are taking steps to develop and adopt appropriate disclosure controls and procedures.
These efforts require significant time and resources. If we are unable to establish appropriate internal financial reporting controls and procedures, our reported financial information may be inaccurate and we will encounter difficulties in the audit or review of our financial statements by our independent auditors, which in turn may have material adverse effects on our ability to prepare financial statements in accordance with generally accepted accounting principles in the United States of America and to comply with SEC reporting obligations.
The forward-looking statements contained in this Annual Report may prove incorrect.
This Annual Report contains certain forward-looking statements, including among others: (i) anticipated trends in our financial condition and results of operations; (ii) our business strategy for developing products based on our intellectual property; and (iii) our ability to distinguish ourselves from our current and future competitors. These forward-looking statements are based largely on our current expectations and are subject to a number of risks and uncertainties. Actual results could differ materially from these forward-looking statements. In addition to the other risks described elsewhere in this “Risk Factors” discussion, important factors to consider in evaluating such forward-looking statements include: (i) changes to external competitive market factors or in our internal budgeting process which might impact trends in our results of operations; (ii) anticipated working capital or other cash requirements; (iii) changes in our business strategy or an inability to execute our strategy due to unanticipated changes in the wound care industry; and (iv) various competitive factors that may prevent us from competing successfully in the marketplace. In light of these risks and uncertainties, many of which are described in greater detail elsewhere in this “Risk Factors” discussion, there can be no assurance that the events predicted in forward-looking statements contained in this Annual Report will, in fact, transpire.
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Item 1B. Unresolved Staff Comments
Not applicable.
Our principal executive and administrative offices, and those of Cerebain, are currently located at 600 Anton Blvd., Suite 1100, Costa Mesa, CA 92626. Our monthly rent for this location is $349.
On July 21, 2016, we were sued in the United States District Court for the Eastern District of Pennsylvania (Miriam Weber Miller v. Cerebain Biotech Corp. and Eric Clemons, Civil Action No. 16-3943) by Miriam Weber Miller, with Mr. Clemons named as an individual defendant. According to the Complaint, the Plaintiff alleges: (i) she was hired by us to perform public relations, investor relations, corporate growth strategies, and was to be an advisor to our Chief Executive Officer, (ii) she performed services, and (iii) that she was not fully compensated for those services. The Complaint claims causes of action for breach of contract, violation of the Pennsylvania wage payment and collection law, and unjust enrichment, and seeks damages of approximately $400,000. On April 3, 2017, without admitting fault or liability, and still denying the same, we made a business decision to resolve the lawsuit and it is now settled, effectively ending the litigation. In consideration for signing the agreement, we agreed to pay Ms. Miller no more than $120,000 in total and no less than $100,000 in total, the terms of such alternative payment options are as follows:
| 1) | We could pay Ms. Miller the total gross amount of one hundred twenty thousand dollars ($120,000) as follows: |
|
| a) | One payment of twenty thousand dollars ($20,000) within thirty (30) days after March 29, 2017; and |
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| b) | Beginning within ninety (90) days after March 29, 2017, we would make monthly payments of fifteen thousand dollars ($15,000) to Ms. Miller’s representative until such time that Ms. Miller and her representative has received the gross amount of $120,000, OR |
| 2) | We could pay Ms. Miller the total gross amount of one hundred thousand dollars ($100,000) as follows: |
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| a) | One payment of twenty thousand dollars ($20,000) within thirty (30) days after March 29, 2017. |
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| b) | One payment of eighty thousand dollars ($80,000) within sixty (60) days after March 29, 2017, OR |
| 3) | We could pay Ms. Miller the total gross amount of one hundred ten thousand dollars ($110,000) as follows: |
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| a) | One payment of twenty thousand dollars ($20,000) within thirty (30) days after March 29, 2017. |
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| b) | One payment of fifteen thousand dollars ($15,000) within sixty (60) days after March 29, 2017. |
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| c) | One payment of seventy-five thousand dollars ($75,000) within ninety (90) days after March 29, 2017. |
Upon all payments being made pursuant to the terms set forth in the agreement, Ms. Miller has agreed to knowingly and voluntarily release and discharge us of and from all claims, demands, liabilities, obligations, promises, controversies, compensation, wages, bonuses, commissions, damages, rights, actions and causes of action known and unknown, at law or in equity, which Ms. Miller has or may have against us as of the date of execution of the settlement agreement.
We have recognized an accrual in Accounts Payable for payment of the agreed upon settlement, but no accrual has been made for additional legal contingencies in the consolidated financial statements as of June 30, 2017. For the year ended June 30, 2017, we paid Ms. Miller thirty-five thousand dollars ($35,000) as agreed in the settlement agreement.
Item 4. Mine Safety Disclosures
There is no information required to be disclosed by us under this Item.
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(a) Market Information
Our stock is quoted on the OTBQB-tier of OTC Markets under the symbol “CBBT.” We were initially quoted on September 19, 2011. For the fiscal year ended June 30, 2017, there were 7,880,347 shares outstanding. The below table provides the high and low bid prices of our common stock for each quarterly period during the last two years.
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|
| Fiscal Year ended June 30, 2017 |
| |||||
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| High |
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| Low |
| ||
| First Quarter |
| $ | 1.09 |
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| $ | 0.75 |
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| Second Quarter |
| $ | 0.83 |
|
| $ | 0.56 |
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| Third Quarter |
| $ | 0.80 |
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| $ | 0.22 |
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| Fourth Quarter |
| $ | 0.55 |
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| $ | 0.21 |
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| |
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| Fiscal Year ended June 30, 2016 | ||||||
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|
| High |
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| Low |
| ||
| First Quarter |
| $ | 1.00 |
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| $ | 0.23 |
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| Second Quarter |
| $ | 0.54 |
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| $ | 0.18 |
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| Third Quarter |
| $ | 0.65 |
|
| $ | 0.22 |
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| Fourth Quarter |
| $ | 1.75 |
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| $ | 0.23 |
|
(b) Stockholders of Record
The number of beneficial holders of record of our common stock as of the close of business on June 30, 2017 was 116. Many of the shares of our common stock are held in "street name" and consequently may reflect numerous additional beneficial owners.
(c) Dividends
We do not expect to pay cash dividends in the next term. We intend to retain future earnings, if any, to provide funds for operation of our business. We currently have no restrictions affecting our ability to pay cash dividends.
Recent Sales of Unregistered Securities
For the three-month period ended June 30, 2017, we issued 110,000 shares of common stock to individuals as payment for consulting services and financing fee per contracts dated between April and June 2017. The aggregate Fair Market Value of these shares was approximately $55,000 as the fair market value of the stock was between $0.48 and $0.52 per share. We used recent public market sale 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.
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For the three-month period ended June 30, 2017, we issued 10,000 shares of our common stock to an individual for conversion of notes payable. The aggregate value of these shares was approximately $2,000 as the conversion price was $0.20 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 June 30, 2017, we entered into various stock purchase agreements with third parties between April and June of 2016, under which we recognized 40,000 shares and issued 10,000 shares of our common stock, restricted in accordance with Rule 144, in exchange for $55,000. The stock purchase agreements include piggyback registration rights. The issuances were exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investors were sophisticated and familiar with our operations at the time of the issuance of the shares.
Item 6. Selected Financial Data
Because we are a smaller reporting company, Item 6 is not applicable.
Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations
Certain statements in this report, which are not statements of historical fact, are what are known as “forward-looking statements,” which are basically statements about the future. For that reason, these statements involve risk and uncertainty since no one can accurately predict the future. Words such as “plans,” “intends,” “hopes,” “seeks,” “anticipates,” “expects, “and the like, often identify such forward looking statements, but are not the only indication that a statement is a forward-looking statement. Such forward-looking statements include statements concerning our plans and objectives with respect to our present and future operations, and statements, which express or imply that such present and future operations will or may produce revenues, income or profits. In evaluating these forward-looking statements, you should consider various factors, including those described in this report under the heading “Risk Factors” in Part I, Item 1A. These and other factors may cause our actual results to differ materially from any forward- looking statement. We caution you not to place undue reliance on these forward-looking statements. Although we base these forward-looking statements on our expectations, assumptions, and projections about future events, actual events and results may differ materially, and our expectations, assumptions, and projections may prove to be inaccurate. The forward-looking statements speak only as of the date hereof, and we expressly disclaim any obligation to publicly release the results of any revisions to these forward-looking statements to reflect events or circumstances after the date of this filing.
Limited Operating History; Need for Additional Capital
There is very limited historical financial information about us on which to base an evaluation of our performance. We are a smaller reporting company and have not generated any revenues from operations. We cannot guarantee we will be successful in our business operations. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources, and possible cost overruns due to increases in the cost of services. To become profitable and competitive, we must receive additional capital. We have no assurance that future financing will materialize. If that financing is not available, we may be unable to continue operations.
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Overview
The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) includes the following sections:
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| · | Results of Operations |
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| · | Liquidity and Capital Resources |
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| · | Capital Expenditures |
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| · | Fiscal Year End |
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| · | Going Concern |
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| · | Critical Accounting Policies | |
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| · | Recent Accounting Pronouncements | |
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| · | Off-Balance Sheet Arrangements | |
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| · | Inflation | |
Results of Operations
Fiscal Year Ended June 30, 2017 Compared to Fiscal Year Ended June 30, 2016
Revenue
For the fiscal years ended June 30, 2017 and June 30, 2016, we did not generate any revenues.
Operating expenses
Operating expenses increased by approximately $173,000, or 9.3%, to approximately $2,000,000 in the fiscal year ended June 30, 2017 from approximately $1,860,000 in the fiscal year ended June 30, 2016 primarily due to the following: increase in research and development cost; 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 due to the inclusion of additional consultants; increase in employee expense due to the recognition of salary expense; and increase in professional fees due to the increase in legal costs associated with Miller settlement agreement; offset by decrease in marketing expense; decrease in patent royalty expense; decrease in impairment of an asset; decrease in compensation expense; decrease in investor relations and decrease in travel and entertainment costs due to reduced travel requirements.
Operating expenses for the fiscal year ended June 30, 2017 were approximately comprised of marketing costs of $10,000, research and development costs of $241,000, patent royalty expense of $100,000, consulting services costs primarily paid through the issuance of our common stock of $915,000, compensation expense of $341,000, employee expense of $190,000, professional fees of $163,000, investor relations expense of $10,000, travel and entertainment costs of $50,000, and other operating expenses of $14,000.
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Operating expenses for the fiscal year ended June 30, 2016 were approximately comprised of marketing costs of $71,000, research and development costs of $178,000, patent royalty expense of $150,000, impairment on intangible asset of $84,000, consulting services costs primarily paid through the issuance of our common stock of $860,000, compensation expense of $350,000, professional fees of $70,000, investor relations expense of $33,000, travel and entertainment costs of $52,000, and other operating expenses of $15,000.
Other income (expenses)
Other expense increased by approximately $13,400,000, or 2,382.15%, to approximately $13,980,000 in the fiscal year ended June 30, 2017 from approximately $563,000 in the fiscal year ended June 30, 2016 primarily due to the increase in accretion of recorded debt discounts related to notes payable, increase in loan interest expense and the recognition of loss from extinguishment of debt. Other expenses were approximately comprised of accretion of recorded debt discounts related to notes payable of $43,000, loan interest expense of $157,000 and recognition of loss from extinguishment of debt of $13,800,000.
In connection with the loss from extinguishment of debt, we determined an embedded conversion feature associated with convertible promissory notes payable meet the criteria in ASC 470-50-40-10 or 470-20-25, and the issuance of the convertible promissory notes payable are considered an extinguishment that would require the recognition of a gain or loss. We recognized a loss from extinguishment of debt of approximately $13.8 million for the fiscal year ended June 30, 2017 compared to $375,000 for the fiscal year ended June 30, 2016.
Net loss before income taxes
Net loss before income taxes for the fiscal year ended June 30, 2017 totaled approximately $16,000,000 primarily due to the following: increase in research and development cost; 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; increase in employee expense; and increase in professional fees; increase in loss from extinguishment of debt; offset by decrease in marketing expense; decrease in patent royalty expense; decrease in impairment of an asset; decrease in compensation expense; decrease in investor relations and decrease in travel and entertainment costs compared to $2,400,000 for the fiscal year ended June 30, 2016 primarily due to the following: decrease in research and development cost; decrease in marketing expense; decrease in professional fees; travel and entertainment expenses decreased due to less travel being required during the year; 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; an increase in investor relations expense; and the recognition of patent royalty expense.
Assets and Liabilities
Assets were approximately $237,000 as of June 30, 2017. Assets approximately consisted of cash of $11,000 and prepaid expense of $226,000. Liabilities were approximately $4,490,000 as of June 30, 2017. Liabilities approximately consisted of accounts payable of $985,000, related party payables of $377,000, short term notes payable of $289,000, current portion of convertible notes of $63,000 and convertible notes to stockholders, net of debt discount, of $2,777,000.
Stockholders’ Deficit
Stockholders’ deficit was approximately $4,250,000 as of June 30, 2017. Stockholder’s deficit consisted primarily of deficit accumulated of approximately $27,500,000 at June 30, 2017, offset by shares issued to founders and recorded as compensation in the amount of $13,900, shares issued for fundraising totaling $1,490,000, net of issuance costs, beneficial conversion feature associated with convertible note of $15,300,000, shares issued in conversion of liabilities of $758,000, shares associated with warrants, options and issuances for services of $5,720,000 and shares issued for patent rights totaling $6,600.
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Non-GAAP Financial Measures
For the non-GAAP Adjusted EBITDA (Earnings (loss) Before Interest, Taxes, Depreciation and Amortization) per share-basic and diluted measures presented, we have provided (1) the most directly comparable GAAP measure; (2) a reconciliation of the differences between the non-GAAP measure and the most directly comparable GAAP measure; (3) an explanation of why our management believes this non-GAAP measure provides useful information to investors; and (4) additional purposes for which we use this non-GAAP measure.
We believe that the disclosure of Adjusted EBITDA per share-basic and diluted provides investors with a better comparison of our period-to-period operating results. We exclude the effects of certain items from net loss per share-basic and diluted when we evaluate key measures of our performance internally, and in assessing the impact of known trends and uncertainties on our business. We also believe that excluding the effects of these items provides a more balanced view of the underlying dynamics of our business. Adjusted EBITDA per share-diluted excludes the impacts of interest expense, tax expense, depreciation and amortization, loss on extinguishment of debt, impairment of intangible asset, and share-based compensation. Weighted average number of common shares outstanding - basic and diluted (adjusted) excludes the impact of shares issued in connection with share-based compensation.
Tabular reconciliations of this supplemental non-GAAP financial information to our most comparable GAAP information are contained in this Report. We present such non-GAAP supplemental financial information, as we believe such information provides additional meaningful methods of evaluating certain aspects of our operating performance from period-to-period on a basis that may not be otherwise apparent on a non-GAAP basis. This supplemental financial information should be considered in addition to, not in lieu of, our Consolidated Financial Statements.
|
|
| Year ended June 30, |
| |||||
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| 2017 |
|
| 2016 |
| ||
| Net loss |
| $ | (16,012,615 | ) |
| $ | (2,423,661 | ) |
| Adjustments: |
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| Stock based compensation |
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| 341,342 |
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| 347,800 |
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| Amortization of stock based prepaid consulting compensation |
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| 778,190 |
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| 271,353 |
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| Impairment on intangible asset |
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| - |
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| 83,900 |
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| Accretion of debt discount |
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| 43,481 |
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|
| 27,045 |
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| Interest expense |
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| 156,911 |
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| 133,613 |
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| Loss on extinguishment of debt |
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| 13,778,649 |
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| 374,400 |
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| Total adjustments |
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| 15,098,573 |
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|
| 1,238,111 |
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| Adjusted EBITDA |
| $ | (914,042 | ) |
| $ | (1,185,550 | ) |
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| Per share – basic and diluted: |
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| Net loss |
| $ | (2.13 | ) |
| $ | (0.41 | ) |
| Adjusted EBITDA |
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| (0.13 | ) |
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| (0.22 | ) |
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| Weighted-average shares outstanding: |
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| Net loss |
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| 7,514,226 |
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| 5,909,427 |
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| Adjusted EBITDA |
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| 7,222,966 |
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| 5,510,843 |
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Liquidity and Capital Resources
General – Overall, we had a decrease in cash flows of approximately $9,000 in the fiscal year ended June 30, 2017 resulting from cash provided by financing activities of approximately $656,000, offset partially by cash used in operating activities of approximately $665,000.
The following is a summary of our cash flows provided by (used in) operating, and financing activities during the periods indicated:
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| Fiscal Year Ended June 30, |
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| 2017 |
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| 2016 |
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| Cash at beginning of period |
| $ | 20,245 |
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| $ | 486 |
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| Net cash used in operating activities |
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| (664,900 | ) |
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| (564,953 | ) |
| Net cash provided by financing activities |
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| 656,000 |
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| 584,712 |
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| Cash at end of period |
| $ | 11,345 |
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| $ | 20,245 |
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Cash Flows from Operating Activities – For the fiscal year ended June 30, 2017, net cash used in operations was approximately $665,000 compared to net cash used in operations of approximately $565,000 for the fiscal year ended June 30, 2016. Net cash used in operations was primarily due to a net loss of approximately $16,000,000 for the year ended June 30, 2017, amortization of prepaid consulting compensation of approximately $778,000, accretion of debt discount of approximately $43,000, loss from extinguishment of debt of approximately $13,780,000, stock based compensation of approximately $341,000, and the changes in operating assets and liabilities of approximately $406,000.
Cash Flows from Financing Activities – Net cash flows provided by financing activities in the fiscal year ended June 30, 2017 was approximately $656,000, compared to net cash provided of approximately $585,000 in the same period in 2016. The increase in net cash provided by financing activities was primarily due to an increase in proceeds from issuance of common stock, proceeds from exercise of warrants and proceeds from related party notes.
Financing – We expect that our current working capital position, together with our expected future cash flows from operations will be insufficient to fund our operations in the ordinary course of business, anticipated capital expenditures, debt payment requirements and other contractual obligations for at least the next twelve months. However, this belief is based upon many assumptions and is subject to numerous risks (see “Risk Factors”), and we will require additional funding in the future.
We have no present agreements or commitments with respect to any material acquisitions of other businesses, products, product rights or technologies or any other material capital expenditures. However, we will continue to evaluate acquisitions of and/or investments in products, technologies, capital equipment or improvements or companies that complement our business and may make such acquisitions and/or investments in the future. Accordingly, we may need to obtain additional sources of capital in the future to finance any such acquisitions and/or investments. We may not be able to obtain such financing on commercially reasonable terms, if at all. Due to the ongoing global economic crisis, we believe it may be difficult to obtain additional financing if needed. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.
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Capital Expenditures
Other Capital Expenditures
If we have the funds available, we expect to purchase approximately $50,000 of equipment in connection with the expansion of the business.
Fiscal Year End
Cerebain and Cerebain Biotech each has a June 30 fiscal year end.
Going Concern
Our independent registered public accounting firm has added an explanatory paragraph to their audit opinion issued in connection with our financial statements for our fiscal year ended June 30, 2017. We had an accumulated deficit of approximately $27,500,000 and $11,500,000 at June 30, 2017 and 2016, respectively, had a net loss of approximately $16,000,000 and $2,500,000 for the fiscal years ended June 30, 2017 and 2016, respectively, and net cash used in operating activities of approximately $665,000 and $570,000 for the fiscal years ended June 30, 2017 and 2016, respectively, with no revenue earned since inception, and limited cash of $11,000 and $20,000 at June 30 2017 and 2016, respectively. These matters raise substantial doubt about our ability to continue as a going concern.
While we are commencing operations, and attempting to generate revenues, our cash position will not be significant enough to support our daily operations. Management intends to raise additional funds by way of a public or private offering. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for us to continue as a going concern. While we believe in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to further implement our business plan, generate revenues, and successfully borrow money or sell our securities for cash.
The consolidated 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 Commission has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the company’s financial condition and results of operations and which require the company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies that are significant to understanding our results. For additional information, see Note 3 - Summary of Significant Accounting Policies on page F-8.
The following are deemed to be the most significant accounting policies affecting the Company.
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Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Measurement, estimates and assumptions are used for, but not limited to, useful lives and residual value of long-lived assets and the valuation of warrants and options. Management makes these estimates using the best information available at the time the estimates are made; however actual results when ultimately realized could differ from those estimates. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumption.
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.
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 Black and Scholes Option Pricing Model.
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.
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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 consolidated 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.
Inflation
Management believes that inflation has not had a material effect on our results of operations.
Item 7A. Quantitative and Qualitative Disclosure About Market Risk
We are a smaller reporting company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
Item 8. Financial Statements and Supplementary Data
The consolidated financial statements and supplementary financial information which are required to be filed under this item are presented under Item 13. Exhibits, Financial Statement Schedules and Reports on Form 10-K in this document, and are incorporated herein by reference.
Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
There have been no events required to be reported under this Item.
Item 9A. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-l5(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
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As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of June 30, 2017. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of June 30, 2017, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended.
Management’s Report on Internal Controls over Financial Reporting
The Company’s management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rule 13a-l5(f) of the Securities Exchange Act). Management assessed the effectiveness of the Company’s internal control over financial reporting as of June 30, 2017. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 Internal Control – Integrated Framework (“COSO”). Based on that assessment, management believes that, as of June 30, 2017, the Company’s internal control over financial reporting was ineffective based on the COSO criteria, due to the following material weaknesses listed below.
The specific material weaknesses identified by the company’s management as of end of the period covered by this report include the following:
|
| · | We have not performed a risk assessment and mapped our processes to control objectives. |
|
|
|
|
|
| · | We have not implemented comprehensive entity-level internal controls. |
|
|
|
|
|
| · | We have not implemented adequate system and manual controls. |
|
|
|
|
|
| · | We do not have sufficient segregation of duties. |
|
|
|
|
|
| · | We lack sufficient personnel with appropriate training and expertise in accounting principles general accepted in the United States. |
Despite the material weaknesses reported above, our management believes that our financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented and that this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.
This Annual Report does not include an attestation report of our registered public accounting firm regarding internal control over financial reporting. Management’s report was not subject to attestation by our registered public accounting firm pursuant to rules of the Commission that permit us to provide only management’s report in this report.
Changes in Internal Control over Financial Reporting
There have been no changes in our internal control over financial reporting during the fiscal year ended June 30, 2017 that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
There have been no events required to be reported under this Item.
| 32 |
| Table of Contents |
Item 10. Directors, Executive Officers and Corporate Governance
The following table sets forth the names, ages, and biographical information of each of our current directors and executive officers and the positions with the Company held by each person. Our executive officers are elected annually by the Board of Directors. The directors serve one-year terms until their successors are elected. The executive officers serve terms of one year or until their death, resignation or removal by the Board of Directors. Unless described below, there are no family relationships among any of the directors and officers.
| Name |
| Age |
| Position(s) |
|
|
|
|
|
|
| Eric Clemons |
| 46 |
| President and a Director |
| Wesley Tate |
| 54 |
| Chief Financial Officer, Secretary and a Director |
Eric Clemons
Mr. Clemons has been our President since March 2013. Prior to joining Cerebain Biotech Corp., from 1997 until 2010, Mr. Clemons served as President and Chief Operating Officer for GTC Telecom Corp, a publicly-traded Nevada Corporation that operated in Costa Mesa, California. The company provided telecommunication services, including long distance telephone services, calling card services and various Internet related services including Internet Service Provider access and Web Page Hosting. In addition, the company developed an international subsidiary offering call center and IT support services in India. While serving in this capacity, Mr. Clemons was instrumental in growing the company’s annual revenues from $500,000 per year to over $17 million per year. In a span of 9 years, GTC Telecom generated total revenues of over $75 million dollars. Since 2010, Mr. Clemons has been providing management and financial consulting services to small-to-mid sized public companies.
Wesley Tate
Mr. Tate has been our Chief Financial Officer since January 2013. Prior to joining Cerebain Biotech Corp., Mr. Tate was the owner of Strategic Business Associates, a Tennessee company providing consulting services to start-up and small companies, assisting with the inception of an idea through growing a successful business. Prior to starting his own company, Mr. Tate served as the Chief Financial Officer for HST Global, Inc., a Bio-Technology Development Stage Company located in Hampton, VA. Mr. Tate also served as the Director of Operations for The Health Network, Inc., a Health and Wellness company located in Hampton, VA. Other positions include Executive Vice President and Chief Operating Officer for InnerLight Inc. located in Provo, Utah, Director of Finance for Beverly Sassoon and Co. in Boca Raton, Florida and Finance Director for Strategic Telecom Systems in Knoxville Tennessee. Wes has spent over 15 years overseeing all financial and operational responsibilities for companies in a variety of industries including bio-technology, pharmaceutical, health care, construction and telecommunications. Mr. Tate received his Bachelor of Science degree from the University of Tennessee, Knoxville, with majors in Finance and Psychology, and earned his Masters of Business Administration from the University of Tennessee, Knoxville, with concentrations in finance and management. Wes served his country in the United States Army.
Compliance with Section 16(a) of the Securities Exchange Act of 1934
Section 16(a) of the Securities Exchange Act of 1934 requires our directors and executive officers and persons who own more than ten percent of a registered class of our equity securities to file with the Commission initial reports of ownership and reports of changes in ownership of our common stock and other equity securities. Officers, directors and greater than ten percent shareholders are required by Commission regulations to furnish us with copies of all Section 16(a) forms they file.
| 33 |
| Table of Contents |
During the most recent fiscal year, to the best of our knowledge, the following delinquencies occurred:
| Name |
| No. of Late Reports |
|
| No. of Transactions Reported Late |
|
| No. of Failures to File |
| |||
| Eric Clemons |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
| Wesley Tate |
|
| 0 |
|
|
| 0 |
|
|
| 0 |
|
Family Relationships
There are no family relationships between or among the above directors, executive officers or persons nominated or charged by us to become directors or executive officers.
Conflicts of Interest
Certain potential conflicts of interest are inherent in the relationships between our officers and directors and us.
From time to time, one or more of our affiliates may form or hold an ownership interest in and/or manage other businesses both related and unrelated to the type of business that we own and operate. These persons expect to continue to form, hold an ownership interest in and/or manage additional other businesses which may compete with our business with respect to operations, including financing and marketing, management time and services and potential customers. These activities may give rise to conflicts between or among the interests of us and other businesses with which our affiliates are associated. Our affiliates are in no way prohibited from undertaking such activities, and neither us nor our stockholders will have any right to require participation in such other activities.
Further, because we intend to transact business with some of our officers, directors and affiliates, as well as with firms in which some of our officers, directors or affiliates have a material interest, potential conflicts may arise between the respective interests of us and these related persons or entities. We believe that such transactions will be effected on terms at least as favorable to us as those available from unrelated third parties.
With respect to transactions involving real or apparent conflicts of interest, we have adopted policies and procedures which require that: (i) the fact of the relationship or interest giving rise to the potential conflict be disclosed or known to the directors who authorize or approve the transaction prior to such authorization or approval, (ii) the transaction be approved by a majority of our disinterested outside directors, and (iii) the transaction be fair and reasonable to us at the time it is authorized or approved by our directors.
Our policies and procedures regarding transactions involving potential conflicts of interest are not in writing. We understand that it will be difficult to enforce our policies and procedures and will rely and trust our officers and directors to follow our policies and procedures. We will implement our policies and procedures by requiring the officer or director who is not in compliance with our policies and procedures to remove himself and the other officers and directors will decide how to implement the policies and procedures, accordingly.
| 34 |
| Table of Contents |
Involvement in Legal Proceedings
On July 21, 2016, we were sued in the United States District Court for the Eastern District of Pennsylvania (Miriam Weber Miller v. Cerebain Biotech Corp. and Eric Clemons, Civil Action No. 16-3943) by Miriam Weber Miller, with Mr. Clemons named as an individual defendant. According to the Complaint, the Plaintiff alleges: (i) she was hired by us to perform public relations, investor relations, corporate growth strategies, and was to be an advisor to our Chief Executive Officer, (ii) she performed services, and (iii) that she was not fully compensated for those services. The Complaint claims causes of action for breach of contract, violation of the Pennsylvania wage payment and collection law, and unjust enrichment, and seeks damages of approximately $400,000. On April 3, 2017, without admitting fault or liability, and still denying the same, we made a business decision to resolve the lawsuit and it is now settled, effectively ending the litigation. In consideration for signing the agreement, we agreed to pay Ms. Miller no more than $120,000 in total and no less than $100,000 in total, the terms of such alternative payment options are as follows:
| 1) | We could pay Ms. Miller the total gross amount of one hundred twenty thousand dollars ($120,000) as follows: |
|
| a) | One payment of twenty thousand dollars ($20,000) within thirty (30) days after March 29, 2017; and |
|
|
|
|
|
| b) | Beginning within ninety (90) days after March 29, 2017, we would make monthly payments of fifteen thousand dollars ($15,000) to Ms. Miller’s representative until such time that Ms. Miller and her representative has received the gross amount of $120,000, OR |
| 2) | We could pay Ms. Miller the total gross amount of one hundred thousand dollars ($100,000) as follows: |
|
| a) | One payment of twenty thousand dollars ($20,000) within thirty (30) days after March 29, 2017. |
|
|
|
|
|
| b) | One payment of eighty thousand dollars ($80,000) within sixty (60) days after March 29, 2017, OR |
| 3) | We could pay Ms. Miller the total gross amount of one hundred ten thousand dollars ($110,000) as follows: |
|
| a) | One payment of twenty thousand dollars ($20,000) within thirty (30) days after March 29, 2017. |
|
|
|
|
|
| b) | One payment of fifteen thousand dollars ($15,000) within sixty (60) days after March 29, 2017. |
|
|
|
|
|
| c) | One payment of seventy-five thousand dollars ($75,000) within ninety (90) days after March 29, 2017. |
Upon all payments being made pursuant to the terms set forth in the agreement, Ms. Miller has agreed to knowingly and voluntarily release and discharge us of and from all claims, demands, liabilities, obligations, promises, controversies, compensation, wages, bonuses, commissions, damages, rights, actions and causes of action known and unknown, at law or in equity, which Ms. Miller has or may have against us as of the date of execution of the settlement agreement.
We have recognized an accrual in Accounts Payable for payment of the agreed upon settlement, but no accrual has been made for additional legal contingencies in the consolidated financial statements as of June 30, 2017. For the year ended June 30, 2017, we paid Ms. Miller thirty-five thousand dollars ($35,000) as agreed in the settlement agreement.
Board Committees
We do not currently have a separately designated audit, nominating or compensation committee. However, we do intend to comply with the independent director and committee composition requirements in the future.
We maintain a Scientific Advisory Board to assist the Board of Directors by reviewing and evaluating our research and development programs. Dr. Husain serves as the Principal Scientist of our Scientific Advisory Board.
| 35 |
| Table of Contents |
Director Independence
We do not have any independent directors. Because our common stock is not currently listed on a national securities exchange, we have used the definition of “independence” of The NASDAQ Stock Market to make this determination. NASDAQ Listing Rule 5605(a)(2) provides that an “independent director” is a person other than an officer or employee of the company or any other individual having a relationship which, in the opinion of the company’s Board of Directors, would interfere with the exercise of independent judgment in carrying out the responsibilities of a director. The NASDAQ listing rules provide that a director cannot be considered independent if:
|
| · | the director is, or at any time during the past three years was, an employee of the company; |
|
|
|
|
|
| · | the director or a family member of the director accepted any compensation from the company in excess of $120,000 during any period of 12 consecutive months within the three years preceding the independence determination (subject to certain exclusions, including, among other things, compensation for board or board committee service); |
|
|
|
|
|
| · | a family member of the director is, or at any time during the past three years was, an executive officer of the company; |
|
|
|
|
|
| · | the director or a family member of the director is a partner in, controlling stockholder of, or an executive officer of an entity to which the company made, or from which the company received, payments in the current or any of the past three fiscal years that exceed 5% of the recipient’s consolidated gross revenue for that year or $200,000, whichever is greater (subject to certain exclusions); |
|
|
|
|
|
| · | the director or a family member of the director is employed as an executive officer of an entity where, at any time during the past three years, any of the executive officers of the company served on the compensation committee of such other entity; or |
|
| · | the director or a family member of the director is a current partner of the company’s outside auditor, or at any time during the past three years was a partner or employee of the company’s outside auditor, and who worked on the company’s audit. |
We do not currently have a separately designated audit, nominating or compensation committee.
Indemnification of Directors and Officers
Articles IX of our Articles of Incorporation provides the following:
The personal liability of the directors of the corporation is hereby eliminated to the fullest extent permitted by paragraph 1 of Section 78.037 of the General Corporation Law of the State of Nevada, as the same may be amended and supplemented.
Articles X of our Articles of Incorporation provides the following:
The corporation shall, to the fullest extent permitted by Section 78.751 of the General Corporation Law of the State of Nevada, as the same may be amended and supplemented, indemnify any and all persons whom it shall have power to indemnify under said section from and against any and all expenses, liabilities, or other matters referred to in or covered by said section.
| 36 |
| Table of Contents |
Item 11. Executive Compensation
The following sets forth information with respect to the compensation awarded or paid to Eric Clemons, our President, and Wesley Tate, our Chief Financial Officer and Secretary, for all services rendered in all capacities to us in fiscal years ended June 30, 2017, 2016 and 2015.
Summary Compensation Table
The following table sets forth information regarding each element of compensation that we paid or awarded to our named executive officers for the fiscal years ended June 30, 2017, 2016 and 2015.
| Name and Principal Position |
| Fiscal Year |
| Salary ($) |
|
| Bonus ($) |
|
| All Other Compensation ($) |
|
| Total ($) |
| ||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Eric Clemons |
| 2017 |
| $ | 129,000 |
|
| $ | - |
|
| $ | 27,500 |
|
| $ | 156,500 |
|
| President |
| 2016 |
| $ | 97,787 |
|
| $ | - |
|
| $ | 33,500 |
|
| $ | 131,287 |
|
|
|
| 2015 |
| $ | 129,492 |
|
| $ | - |
|
| $ | 45,500 |
|
| $ | 174,992 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| |
| Wesley Tate |
| 2017 |
| $ | 125,222 |
|
| $ | - |
|
| $ | - |
|
| $ | 125,222 |
|
| CFO and Secretary |
| 2016 |
| $ | 83,750 |
|
| $ | - |
|
| $ | - |
|
| $ | 83,750 |
|
|
|
| 2015 |
| $ | 76,250 |
|
| $ | - |
|
| $ | 3,750 |
|
| $ | 80,000 |
|
Outstanding Equity Awards at Fiscal Year-End Table
The following table sets forth certain information concerning outstanding stock awards held by the Named Executive Officers for our fiscal year ended June 30, 2017:
|
|
| Option Awards |
| Stock Awards |
| |||||||||||||||||||||||||||||
| Name |
| Number of Securities Underlying Unexercised Options (#) Exercisable |
|
| Number of Securities Underlying Unexercised Options (#) Unexercisable |
|
| Equity Incentive Plan Awards: Number of Securities Underlying Unexercised Unearned Options (#) |
|
| Option Exercise Price ($) |
|
| Option Expiration Date |
| Number of Shares or Units of Stock That Have Not Vested (#) |
|
| Market Value of Shares or Units of Stock That Have Not Vested ($) |
|
| Equity Incentive Plan Awards: Number of Unearned Shares, Units or Other Rights That Have Not Vested (#) |
|
| Equity Incentive Plan Awards: Market or Payout Value of Unearned Shares, Units or Other Rights That Have Not Vested ($) |
| ||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||
| Eric Clemons |
|
| 100,000 |
|
|
| -0- |
|
|
| -0- |
|
|
| 5.00 |
|
| 2023 |
|
| -0- |
|
|
| -0- |
|
|
| -0- |
|
|
| -0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Wesley Tate |
|
| 50,000 |
|
|
| -0- |
|
|
| -0- |
|
|
| 5.00 |
|
| 2023 |
|
| -0- |
|
|
| -0- |
|
|
| -0- |
|
|
| -0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Eric Clemons |
|
| 60,000 |
|
|
| 40,000 |
|
|
| -0- |
|
|
| 1.20 |
|
| 2024 |
|
| -0- |
|
|
| -0- |
|
|
| -0- |
|
|
| -0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Wesley Tate |
|
| 30,000 |
|
|
| 20,000 |
|
|
| -0- |
|
|
| 1.20 |
|
| 2024 |
|
| -0- |
|
|
| -0- |
|
|
| -0- |
|
|
| -0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Eric Clemons |
|
| 21,000 |
|
|
| 84,000 |
|
|
| -0- |
|
|
| 0.75 |
|
| 2026 |
|
| -0- |
|
|
| -0- |
|
|
| -0- |
|
|
| -0- |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Wesley Tate |
|
| 21,000 |
|
|
| 84,000 |
|
|
| -0- |
|
|
| 0.75 |
|
| 2026 |
|
| -0- |
|
|
| -0- |
|
|
| -0- |
|
|
| -0- |
|
| 37 |
| Table of Contents |
Employment Agreements
Eric Clemons
On June 15, 2013, we 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). |
|
|
|
|
|
| · | Bonus of $40,000 upon the delivery to us of a prototype medical device from Sonos Models Inc., which has been paid in full. |
|
|
|
|
|
| · | Cash bonus should he be responsible for us 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 June 30, 2017, 100,000 options to purchase our common stock have vested. We recognized selling, general and administrative expense of approximately $164,000 for the fiscal years ended June 30, 2017 and 2016, respectively. The selling, general and administrative expense has been fully amortized. |
On October 1, 2014, we 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. The Company is currently in the process of negotiating a new employee agreement. |
|
|
|
|
|
| · | Annual salary of One Hundred Ninety-Five Thousand Dollars ($195,000). |
|
|
|
|
|
| · | Option to acquire up to 100,000 shares of our common stock under our 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 $112,000, 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 262%; risk-free interest rate of 1.69%; expected term of 5 years; and 0% dividend yield. As of June 30, 2017, 80,000 options to purchase our common stock have vested. We recognized selling, general and administrative expense of approximately $22,000 and $41,000 for the fiscal years ended June 30, 2017 and 2016, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $26,000. |
On March 1, 2015, we 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 our Securities and Convertible Debt, where the purchaser of said Securities and Convertible Debt has been directly introduced to us by Mr. Clemons. For the fiscal years ended June 30, 2017 and 2016, a cash placement bonus was earned of approximately $27,500 and $33,500, respectively, which was recognized as a reduction of the proceeds from the sale of shares of common stock and debt issuances and recorded as an expense.
| 38 |
| Table of Contents |
On September 29, 2016, we issued Mr. Clemons an option to acquire up to 105,000 shares of our common stock under our 2014 Omnibus Stock Grant and Option Plan at an exercise price of $0.75 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $78,000, 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 206%; risk-free interest rate of 1.13%; expected term of 6 years; and 0% dividend yield. As of June 30, 2017, 21,000 options to purchase our common stock have vested. We recognized selling, general and administrative expense of approximately $31,000 and $0 for the fiscal years ended June 30, 2017 and 2016, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $47,000.
Wesley Tate
On June 15, 2013, we 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). |
|
|
|
|
|
| · | Bonus of $20,000 upon the delivery to us 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 June 30, 2017, 50,000 options to purchase our common stock have vested. We recognized selling, general and administrative expense of approximately $82,000 for the fiscal years ended June 30, 2017 and 2016, respectively. The selling, general and administrative expense has been fully amortized. |
On April 1, 2014, we 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 our common restricted shares representing a retention bonus as an incentive for him to remain in the employment of us for 12 months. We recognized a prepaid expense of approximately $37,500, which has been fully amortized to selling, general and administrative.
On October 1, 2014, we 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. We entered into a new contract on October 1, 2015. |
|
|
|
|
|
| · | 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 $56,000, 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 262%; risk-free interest rate of 1.69%; expected term of 5 years; and 0% dividend yield. As of June 30, 2017, 40,000 options to purchase our common stock have vested. We recognized selling, general and administrative expense of approximately $11,000 and $20,000 for the fiscal years ended June 30, 2017 and 2016, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $13,000. |
On October 1, 2015, we 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 our common restricted shares for services provided to us. We recognized selling, general and administrative expense of approximately $40,000 for the year ended June 2016. |
| 39 |
| Table of Contents |
On September 29, 2016, we issued Mr. Tate an option to acquire up to 105,000 shares of our common stock under the Company’s 2014 Omnibus Stock Grant and Option Plan at an exercise price of $0.75 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $78,000, 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 206%; risk-free interest rate of 1.13%; expected term of 6 years; and 0% dividend yield. As of June 30, 2017, 21,000 options to purchase our common stock have vested. We recognized selling, general and administrative expense of approximately $31,000 and $0 for the fiscal years ended June 30, 2017 and 2016, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $47,000.
Compensation of Directors
Our directors received the following compensation during the year ended June 30, 2017.
| Name |
| Stock Awards ($) |
|
| Option Awards ($) |
|
| Total ($) |
| |||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| Eric Clemons |
| $ | - |
|
| $ | - |
|
| $ | - |
|
| Wesley Tate |
|
| - |
|
|
| - |
|
|
| - |
|
The following table sets forth information relating to the beneficial ownership our common stock as of June 30, 2017 by (i) each person known to be the beneficial owner of more than 5% of the outstanding shares of common stock and (ii) each of our directors and executive officers. Unless otherwise noted below, we believe that all persons named in the table have sole voting and investment power with respect to all shares of common stock beneficially owned by them. For purposes hereof, a person is deemed to be the beneficial owner of securities that can be acquired by such person within 60 days from the date hereof upon the exercise of warrants or options or the conversion of convertible securities. Each beneficial owner’s percentage ownership is determined by assuming that any warrants, options or convertible securities that are held by such person (but not those held by any other person) and which are exercisable within 60 days from the date hereof, have been exercised.
| Name and Address (2) |
| Amount of Beneficial Ownership |
|
| Percent of Class (1) |
| ||
|
|
|
|
|
|
|
| ||
| Eric Clemons (3) (5) |
|
| 1,238,122 |
|
|
| 15.36 | % |
|
|
|
|
|
|
|
|
|
|
| Wesley Tate (3) (6) |
|
| 723,203 |
|
|
| 9.06 | % |
|
|
|
|
|
|
|
|
|
|
| Dr. Surinder Singh Saini, MD |
|
| 825,000 |
|
|
| 10.47 | % |
|
|
|
|
|
|
|
|
|
|
| Brad Vroom |
|
| 813,529 | (4) |
|
| 9.90 | % |
|
|
|
|
|
|
|
|
|
|
| Jerrold Hinton |
|
| 833,180 | (7) |
|
| 9.90 | % |
|
|
|
|
|
|
|
|
|
|
| All Officers and Directors as a Group (2 Persons) |
|
| 1,961,325 |
|
|
| 24.42 | % |
_______
| (1) | Based on 7,880,347 shares of common stock issued and outstanding. Shares of common stock subject to options or warrants currently exercisable, or exercisable within 60 days, are deemed outstanding for purposes of computing the percentage of the person holding such options or warrants, but are not deemed outstanding for purposes of computing the percentage of any other person. |
| 40 |
| Table of Contents |
| (2) | Unless otherwise noted, the address of each beneficial owner is c/o Cerebain Operating, Inc., 600 Anton Blvd., Suite 1100, Costa Mesa, CA 92626. |
|
|
|
| (3) | Indicates an officer and/or director of the Company. |
|
|
|
| (4) | Includes 338,592 shares of our common stock that Mr. Vroom could acquire under a convertible note he has with the company, which include a 9.9% limiter on them that prohibit conversion if such conversion would cause Mr. Vroom to own more than 9.9% of our common stock. |
|
|
|
| (5) | Includes options to purchase 100,000 shares of common stock, at an exercise price of $5.00 per share, 60,000 shares of common stock, at an exercise price of $1.20 per share and 21,000 shares of common stock, at an exercise price of $0.75 per share. |
|
|
|
| (6) | Includes options to purchase 50,000 shares of common stock, at an exercise price of $5.00 per share, 30,000 shares of common stock, at an exercise price of $1.20 per share and 21,000 shares of common stock, at an exercise price of $0.75 per share. |
|
|
|
| (7) | Includes 538,680 shares of our common stock that Mr. Hinton could acquire under a convertible note he has with the company, which include a 9.9% limiter on them that prohibit conversion if such conversion would cause Mr. Hinton to own more than 9.9% of our common stock. |
We are not aware of any person who owns of record, or is known to own beneficially, five percent or more of our outstanding securities of any class, other than as set forth above. We do not have an investment advisor. There are no current arrangements which will result in a change in control.
Item 13. Certain Relationships and Related Transactions, and Director Independence
On September 29, 2016, we issued Eric Clemons and Wesley Tate options to acquire up to a total of 210,000 shares of our common stock under the Company’s 2014 Omnibus Stock Grant and Option Plan at an exercise price of $0.75 per share subject to a vesting schedule. Fair value of these options totaled approximately $156,000, 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 206%; risk-free interest rate of 1.13%; expected term of 6 years; and 0% dividend yield. As of June 30, 2017, 42,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $63,000 and $0 for the fiscal years ended June 30, 2017 and 2016, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $93,000.
Item 14. Principal Accounting Fees and Services
Audit-Related Fees
The aggregate billed and to be billed fees in 2016 by Hall and Company for the review of the Company’s consolidated financial statements included in our quarterly reports on Form 10-Q for March 31, 2017, December 31, 2016 and September 30, 2016 were $13,500.
The aggregate billed and to be billed fees by Hall and Company for the audit of our consolidated financial statements in 2017 were $12,000.
Tax Fees
We did not incur any fees for tax services for fiscal year ended 2017.
All Other Fees
None
| 41 |
| Table of Contents |
Item 15. Exhibits, Financial Statement Schedules.
(a) The Exhibits listed below are filed as part of this Annual Report.
| 42 |
| Table of Contents |
| 43 |
| Table of Contents |
|
| ||
|
|
|
|
|
| Cerebain Biotech Corps. Domestic and International Subsidiaries | |
|
|
|
|
|
| ||
|
| ||
|
| ||
|
| ||
|
|
|
|
| 101** |
| Interactive Data File (Form 10-K for the fiscal year ended June 30, 2017 furnished in XBRL). |
| 101.INS |
| Interactive Data File (Form 10-K for the fiscal year ended June 30, 2017 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 10Q 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 10K/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 10K filed with the Commission on August 11, 2014. |
| (15) | Incorporated by reference from our Form 10Q filed with the Commission on November 16, 2015. |
| (16) | Incorporated by reference from our Form 10Q filed with the Commission on November 14, 2016. |
| (17) | Incorporated by reference from our Form 10Q filed with the Commission on February 10, 2017. |
| (18) | Incorporated by reference from our Form 10Q filed with the Commission on May 11, 2017. |
| 44 |
| Table of Contents |
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned hereunto duly authorized.
|
| Cerebain Biotech Corp. a Nevada corporation |
| |
|
| |||
| Dated: September 15, 2017 | By: | /s/ Eric Clemons |
|
|
| Eric Clemons |
| |
|
| President |
| |
| 45 |
CEREBAIN BIOTECH CORP. AND SUBSIDIARIES
(FORMERLY DISCOUNT DENTAL MATERIALS, INC.)
Index to Consolidated Financial Statements
|
|
| Page |
|
|
| F-2 |
| |
|
|
|
|
|
|
| F-3 |
| |
|
|
|
|
|
|
| F-4 |
| |
|
|
|
|
|
|
| F-5 |
| |
|
|
|
|
|
|
| F-6 |
| |
|
|
|
|
|
|
| F-7 |
|
| F-1 |
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders
of Cerebain Biotech Corp.:
We have audited the accompanying consolidated balance sheets of Cerebain Biotech Corp. (formerly Discount Dental Materials, Inc.) (the “Company”) as of June 30, 2017 and 2016, and the related consolidated statements of operations, changes in stockholders’ deficit, and cash flows for the years then ended. These consolidated financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company has determined that it is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the consolidated financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall consolidated financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the consolidated financial position of Cerebain Biotech Corp. (formerly Discount Dental Materials, Inc.) as of June 30, 2017 and 2016, and the consolidated results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the consolidated financial statements, the Company has no revenues, a history of incurring net losses and net operating cash flow deficits and has limited cash. These conditions raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding these matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
/s/ HALL & COMPANY
Irvine, California
September 15, 2017
| F-2 |
| Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
CONSOLIDATED BALANCE SHEETS
|
|
| June 30, |
| |||||
|
|
| 2017 |
|
| 2016 |
| ||
|
|
|
|
|
|
|
| ||
| ASSETS | ||||||||
| Current assets: |
|
|
|
|
|
| ||
| Cash and cash equivalents |
| $ | 11,345 |
|
| $ | 20,245 |
|
| Prepaid expenses |
|
| 225,517 |
|
|
| 475,699 |
|
| Total current assets |
|
| 236,862 |
|
|
| 495,944 |
|
|
|
|
|
|
|
|
|
|
|
| Total assets |
| $ | 236,862 |
|
| $ | 495,944 |
|
|
|
|
|
|
|
|
|
|
|
| LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
| Current liabilities: |
|
|
|
|
|
|
|
|
| Accounts payable |
| $ | 926,131 |
|
| $ | 685,045 |
|
| Related party payables |
|
| 260,608 |
|
|
| 230,685 |
|
| Accrued payroll |
|
| 115,810 |
|
|
| - |
|
| Payroll taxes payable |
|
| 59,234 |
|
|
| - |
|
| Convertible notes to stockholders, current portion |
|
| 100,000 |
|
|
| 62,500 |
|
| Related party notes payable |
|
| 289,000 |
|
|
| 114,000 |
|
| Total current liabilities |
|
| 1,750,783 |
|
|
| 1,092,230 |
|
|
|
|
|
|
|
|
|
|
|
| Long term liabilities: |
|
|
|
|
|
|
|
|
| Convertible notes to stockholders, net of current portion and net of debt discount of approximately $12,053 and $9,534, respectively |
|
| 2,739,059 |
|
|
| 2,448,478 |
|
| Total long-term liabilities |
|
| 2,739,059 |
|
|
| 2,448,478 |
|
|
|
|
|
|
|
|
|
|
|
| Total liabilities |
|
| 4,489,842 |
|
|
| 3,540,708 |
|
|
|
|
|
|
|
|
|
|
|
| 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; 7,880,347 and 7,116,347 shares issued and outstanding at June 30, 2017 and 2016, respectively) |
|
| 7,880 |
|
|
| 7,116 |
|
| Additional paid-in capital |
|
| 23,269,861 |
|
|
| 8,466,226 |
|
| Accumulated deficit |
|
| (27,530,721 | ) |
|
| (11,518,106 | ) |
| Total stockholders’ deficit |
|
| (4,252,980 | ) |
|
| (3,044,764 | ) |
|
|
|
|
|
|
|
|
|
|
| Total liabilities and stockholders’ deficit |
| $ | 236,862 |
|
| $ | 495,944 |
|
See accompanying notes to the consolidated financial statements
| F-3 |
| Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
| For The Fiscal Year Ended June 30, |
| |||||
|
|
| 2017 |
|
| 2016 |
| ||
|
|
|
|
|
|
|
| ||
| Operating Expenses |
|
|
|
|
|
| ||
| Selling, general and administrative expenses |
| $ | 1,682,805 |
|
| $ | 1,461,745 |
|
| Research and development costs |
|
| 240,923 |
|
|
| 177,518 |
|
| Patent Royalty Expense |
|
| 100,000 |
|
|
| 150,000 |
|
| Marketing expenses |
|
| 9,846 |
|
|
| 71,215 |
|
| Total operating expenses |
|
| 2,033,574 |
|
|
| 1,860,478 |
|
| Net operating loss |
|
|
|
|
|
|
|
|
| Other expense |
|
|
|
|
|
|
|
|
| Accretion of debt discount |
|
| 43,481 |
|
|
| 27,045 |
|
| Loss on extinguishment of debt |
|
| 13,778,649 |
|
|
| 374,400 |
|
| Financing costs |
|
| - |
|
|
| 28,125 |
|
| Interest expense |
|
| 156,911 |
|
|
| 133,613 |
|
| Total other expense |
|
| 13,979,041 |
|
|
| 563,183 |
|
| Operating loss |
|
| (16,012,615 | ) |
|
| (2,423,661 | ) |
|
|
|
|
|
|
|
|
|
|
| Loss before income taxes |
|
| (16,012,615 | ) |
|
| (2,423,661 | ) |
| Income taxes |
|
| - |
|
|
| - |
|
| Net loss |
| $ | (16,012,615 | ) |
| $ | (2,423,661 | ) |
|
|
|
|
|
|
|
|
|
|
| Loss per share: |
|
|
|
|
|
|
|
|
| Basic and diluted loss per share |
| $ | (2.13 | ) |
| $ | (0.41 | ) |
| Basic and diluted weighted average shares outstanding |
|
| 7,514,226 |
|
|
| 5,909,427 |
|
See accompanying notes to the consolidated financial statements
| F-4 |
| Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ DEFICIT
|
|
| Common Stock # of Shares |
|
| Common Stock Amount |
|
| Additional Paid in Capital |
|
| Accumulated Deficit |
|
| Total Stockholders’ Deficit |
| |||||
| Balance, June 30, 2015 |
|
| 4,835,347 |
|
| $ | 4,835 |
|
| $ | 6,712,747 |
|
| $ | (9,094,445 | ) |
| $ | (2,376,863 | ) |
| Proceeds from issuance of common stock, net of offering costs |
|
| 84,000 |
|
|
| 84 |
|
|
| 86,916 |
|
|
|
|
|
|
| 87,000 |
|
| Proceeds from exercise of warrants |
|
| 60,000 |
|
|
| 60 |
|
|
| 29,940 |
|
|
|
|
|
|
| 30,000 |
|
| Shares issued for services |
|
| 702,000 |
|
|
| 702 |
|
|
| 505,748 |
|
|
|
|
|
|
| 506,450 |
|
| Shares issued with convertible note payable |
|
| 125,000 |
|
|
| 125 |
|
|
| 38,625 |
|
|
|
|
|
|
| 38,750 |
|
| Shares issued for conversion of related parties payable |
|
| 800,000 |
|
|
| 800 |
|
|
| 244,200 |
|
|
|
|
|
|
| 245,000 |
|
| Shares issued for conversion of accounts payable |
|
| 300,000 |
|
|
| 300 |
|
|
| 99,700 |
|
|
|
|
|
|
| 100,000 |
|
| Shares issued for conversion of convertible notes payable |
|
| 60,000 |
|
|
| 60 |
|
|
| 11,940 |
|
|
|
|
|
|
| 12,000 |
|
| Stock based compensation |
|
| 150,000 |
|
|
| 150 |
|
|
| 347,650 |
|
|
|
|
|
|
| 347,800 |
|
| Options issued for services |
|
|
|
|
|
|
|
|
|
| 83,500 |
|
|
|
|
|
|
| 83,500 |
|
| Debt discount associated with convertible notes payable – beneficial conversion feature |
|
|
|
|
|
|
|
|
|
| 177,110 |
|
|
|
|
|
|
| 177,110 |
|
| Debt discount associated with convertible notes payable – warrant feature |
|
|
|
|
|
|
|
|
|
| 128,150 |
|
|
|
|
|
|
| 128,150 |
|
| Net loss for the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (2,423,661 | ) |
|
| (2,423,661 | ) |
| Balance, June 30, 2016 |
|
| 7,116,347 |
|
| $ | 7,116 |
|
| $ | 8,466,226 |
|
| $ | (11,518,106 | ) |
| $ | (3,044,764 | ) |
| Proceeds from issuance of common stock, net of offering costs |
|
| 80,000 |
|
|
| 80 |
|
|
| 99,920 |
|
|
|
|
|
|
| 100,000 |
|
| Proceeds from exercise of warrants |
|
| 72,000 |
|
|
| 72 |
|
|
| 35,928 |
|
|
|
|
|
|
| 36,000 |
|
| Shares issued for services |
|
| 540,000 |
|
|
| 540 |
|
|
| 342,660 |
|
|
|
|
|
|
| 343,200 |
|
| Shares issued with convertible note payable |
|
| 72,000 |
|
|
| 72 |
|
|
| 14,328 |
|
|
|
|
|
|
| 14,400 |
|
| Stock based compensation |
|
|
|
|
|
|
|
|
|
| 341,342 |
|
|
|
|
|
|
| 341,342 |
|
| Warrants issued for services |
|
|
|
|
|
|
|
|
|
| 170,808 |
|
|
|
|
|
|
| 170,808 |
|
| Debt discount associated with convertible notes payable – beneficial conversion feature |
|
|
|
|
|
|
|
|
|
| 4,000 |
|
|
|
|
|
|
| 4,000 |
|
| Debt discount associated with convertible notes payable – warrant feature |
|
|
|
|
|
|
|
|
|
| 16,000 |
|
|
|
|
|
|
| 16,000 |
|
| Loss from extinguishment associated with debt discounts and finance costs |
|
|
|
|
|
|
|
|
|
| 13,778,649 |
|
|
|
|
|
|
| 13,778,649 |
|
| Net loss for the year |
|
|
|
|
|
|
|
|
|
|
|
|
|
| (16,012,615 | ) |
|
| (16,012,615 | ) |
| Balance, June 30, 2017 |
|
| 7,880,347 |
|
| $ | 7,880 |
|
| $ | 23,269,861 |
|
| $ | (27,530,721 | ) |
| $ | (4,252,980 | ) |
See accompanying notes to the consolidated financial statements
| F-5 |
| Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
| For the Fiscal Year Ended |
| |||||
|
|
| June 30, |
| |||||
|
|
| 2017 |
|
| 2016 |
| ||
| Cash flows from operating activities: |
|
|
|
|
|
| ||
| Net loss |
| $ | (16,012,615 | ) |
| $ | (2,423,661 | ) |
| Adjustments to reconcile net loss to net cash used in operating activities: |
|
|
|
|
|
|
|
|
| Accretion of debt discount |
|
| 43,481 |
|
|
| 27,045 |
|
| Loss from extinguishment of debt |
|
| 13,778,649 |
|
|
| 374,400 |
|
| Stock based compensation |
|
| 341,342 |
|
|
| 347,800 |
|
| Amortization of stock based prepaid consulting compensation |
|
| 778,190 |
|
|
| 271,353 |
|
| Amortization of deferred financing costs |
|
| - |
|
|
| 28,125 |
|
| Recognition of impairment on intangible asset |
|
| - |
|
|
| 83,900 |
|
| Correction of an error |
|
| - |
|
|
| 100,000 |
|
| Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
| Prepaid Expenses |
|
| (40,000 | ) |
|
| - |
|
| Accounts payable |
|
| 241,085 |
|
|
| 680,859 |
|
| Related party payables |
|
| 29,924 |
|
|
| (54,774 | ) |
| Accrued payroll and taxes |
|
| 175,044 |
|
|
| - |
|
| Net cash used in operating activities |
|
| (664,900 | ) |
|
| (564,953 | ) |
|
|
|
|
|
|
|
|
|
|
| Cash flows from financing activities: |
|
|
|
|
|
|
|
|
| Proceeds from issuance of common stock |
|
| 100,000 |
|
|
| 87,000 |
|
| Proceeds from exercise of warrants |
|
| 36,000 |
|
|
| 30,000 |
|
| Proceeds from related party notes |
|
| 175,000 |
|
|
| 2,000 |
|
| Repayment of related party notes |
|
|
|
|
|
| (1,000 | ) |
| Proceeds from convertible notes |
|
| 345,000 |
|
|
| 474,712 |
|
| Repayment of notes payable to stockholders |
|
|
|
|
|
| (8,000 | ) |
| Net cash flows provided by financing activities: |
|
| 656,000 |
|
|
| 584,712 |
|
|
|
|
|
|
|
|
|
|
|
| Net change in cash and cash equivalents |
|
| (8,900 | ) |
|
| 19,759 |
|
| Cash and cash equivalents- beginning of period |
|
| 20,245 |
|
|
| 486 |
|
| Cash and cash equivalents- end of period |
| $ | 11,345 |
|
| $ | 20,245 |
|
|
|
|
|
|
|
|
|
|
|
| Supplemental disclosure of non-cash activities: |
|
|
|
|
|
|
|
|
| Cash paid during the period for: |
|
|
|
|
|
|
|
|
| Interest |
| $ | - |
|
| $ | - |
|
| Income tax |
| $ | - |
|
| $ | - |
|
Supplemental disclosure on non-cash investing and financing activities:
| Debt discount associated with convertible notes payable – beneficial conversion feature |
| $ | 4,000 |
|
| $ | 177,110 |
|
| Debt discount associated with convertible notes payable – warrant feature |
| $ | 16,000 |
|
| $ | 128,150 |
|
| Stock issued for prepaid services |
| $ | 317,200 |
|
| $ | 506,450 |
|
| Stock issued with convertible notes payable |
| $ | - |
|
| $ | 38,750 |
|
| Options issued for prepaid services |
| $ | - |
|
| $ | 83,500 |
|
| Warrants issued for prepaid services |
| $ | 170,808 |
|
| $ | - |
|
| Stock issued for satisfaction of accounts payable |
| $ | - |
|
| $ | 100,000 |
|
| Stock issued for satisfaction of related party payables |
| $ | - |
|
| $ | 245,000 |
|
| Conversion of convertible notes payable and interest to stock |
| $ | 14,400 |
|
| $ | 12,000 |
|
| Reclassification of accrued interest to convertible note payable |
| $ | - |
|
| $ | 295,300 |
|
| Reclassification of debt from stockholders to convertible debt |
| $ |
|
| $ | 10,000 |
| |
| Debt discount associated with related party notes payable – stock issued |
| $ | 26,000 |
|
| $ | - |
|
See accompanying notes to the consolidated financial statements
| F-6 |
| Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FOR THE YEARS ENDED JUNE 30, 2017 AND 2016
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.) (collectively referred to as the “Company”), the Company’s business revolves around the discovery of products for the treatment of Alzheimer’s disease utilizing Omentum. The Company plans to produce products that will include both a medical device solution as well as a synthetic drug solution.
Cerebain Operating, Inc. was incorporated on February 22, 2010, in the State of Nevada.
NOTE 2 – BASIS OF PRESENTATION
The Company operates in one segment in accordance with accounting guidance Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280, Segment Reporting. Our Chief Executive Officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
Going Concern
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company had an accumulated deficit of approximately $27,500,000 and $11,500,000 at June 30, 2017 and 2016, respectively, had a net loss of approximately $16,000,000 and $2,500,000 for the fiscal years ended June 30, 2017 and 2016, respectively, and net cash used in operating activities of approximately $665,000 and $570,000 for the fiscal years ended June 30, 2017 and 2016, respectively, with no revenue earned since inception, limited cash of $11,000 and $20,000 at June 30, 2017 and 2016, respectively, and a lack of operational history. These matters raise substantial doubt about our ability to continue as a going concern.
While the Company is attempting to commence operations and generate revenues, the Company’s cash position may not be significant enough to support the Company’s daily operations. Management intends to raise additional funds by way of a public or private offering. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate revenues.
The consolidated 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 consolidated financial statements. The consolidated financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to GAAP and have been consistently applied in the preparation of the consolidated financial statements.
| F-7 |
| Table of Contents |
Use of Estimates
The preparation of these consolidated 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 consolidated 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 consolidated financial statements. The more significant estimates and assumptions by management include among others: useful lives and residual values of long-lived assets and valuation of warrants and options.
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of Cerebain Biotech Corp. and its wholly-owned subsidiary, Cerebain Operating, Inc. There are no material intercompany transactions.
Advertising Costs
Advertising expenses are recorded as general and administrative expenses when they are incurred. Advertising expense charged to operations was approximately $10,000 and $71,000 for the years ended June 30, 2017 and 2016, respectively.
Research and Development
The Company expenses the cost of research and development as incurred. Research and development costs charged to operations for the years ended June 30, 2017 and 2016 were approximately $241,000 and $178,000, respectively, (See Note 4).
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 sheets. 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 statements of operations. The debt is treated as conventional debt.
Convertible debt – derivative 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 underlying’s, 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.
| F-8 |
| Table of Contents |
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 the Black-Scholes Option Pricing Model 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 statements 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 sheets. The Company amortizes the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statements 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 statements 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.
Fair Value of Financial Instruments
The Company applies the provisions of accounting guidance, FASB Topic ASC 825 that requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of June 30, 2017 and 2016, the fair value of cash, accounts payable, related party payables, and notes payable to stockholders approximated carrying value due to the short maturity of the instruments, quoted market prices or interest rates which fluctuate with market rates.
| F-9 |
| Table of Contents |
Fair Value Measurements
FASB ASC Topic 825 “Financial Instruments,” requires disclosure about fair value of financial instruments.
The FASB ASC Topic 820, Fair Value Measurement, clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.
The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.
· Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets. · Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.). · Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared.
Concentrations, Risks, and Uncertainties
The Company is in its early stages of its life cycle and subject to the substantial business risks and uncertainties inherent to such an entity, including the potential risk of business failure.
Basic and Diluted Earnings Per Share
Basic earnings (loss) per common share is computed by dividing net earnings applicable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per common share is determined using the weighted-average number of common shares outstanding during the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method, consisting of shares that might be issued upon exercise of common stock warrants and conversion of convertible notes. In periods where losses are reported, the weighted-average number of common stock outstanding excludes common shares equivalents, because their inclusion would be anti-dilutive.
Basic earnings per share are based on the weighted-average number of shares of common stock outstanding. Diluted earnings per share is based on the weighted-average number of shares of common stock outstanding adjusted for the effects of common stock that may be issued as a result of the following types of potentially dilutive instruments:
|
| · | Warrants, |
|
|
|
|
|
| · | Convertible notes, |
|
|
|
|
|
| · | Employee stock options, and |
|
|
|
|
|
| · | Other equity awards, which include long-term incentive awards. |
F-10 Table of Contents
The FASB ASC Topic 260, “Earnings Per Share”, requires the Company to include additional shares in the computation of earnings per share, assuming dilution. The additional shares included in diluted earnings per share represents the number of shares that would be issued if all of the Company’s outstanding dilutive instruments were converted into common stock.
Diluted earnings per share are based on the assumption that all dilutive options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options, warrants, and convertible notes are assumed to be exercised at the time of issuance, and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
Basic and diluted earnings (loss) per share are the same since the Company had net losses for all periods presented and including the additional potential common shares would have an anti-dilutive effect.
Recent Accounting Pronouncements
The Company has evaluated new accounting pronouncements that have been issued and are not yet effective for the Company and determined that there are no such pronouncements expected to have an impact on the Company’s future consolidated 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). · 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 the Company’s common stock at an exercise price of $5.00 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $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 June 30, 2017, 100,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $164,000 for the fiscal years ended June 30, 2017 and 2016, respectively. The selling, general and administrative expense has been fully amortized.
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 the Company’s 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 $112,000, 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 262%; risk-free interest rate of 1.69%; expected term of 5 years; and 0% dividend yield. As of June 30, 2017, 80,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $22,000 and $41,000 for the fiscal years ended June 30, 2017 and 2016, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $26,000.
| F-11 |
| Table of Contents |
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 and Convertible Debt, where the purchaser of said Securities and Convertible Debt has been directly introduced to the Company by Mr. Clemons. For the fiscal years ended June 30, 2017 and 2016, a cash placement bonus was earned of approximately $27,500 and $33,500, respectively, which was recognized as a reduction of the proceeds from the sale of shares of common stock and debt issuances and recorded as an expense.
On September 29, 2016, the Company issued Mr. Clemons an option to acquire up to 105,000 shares of the Company’s common stock under the Company’s 2014 Omnibus Stock Grant and Option Plan at an exercise price of $0.75 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $78,000, 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 206%; risk-free interest rate of 1.13%; expected term of 6 years; and 0% dividend yield. As of June 30, 2017, 21,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $31,000 and $0 for the fiscal years ended June 30, 2017 and 2016, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $47,000.
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). · 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 the Company’s common stock at an exercise price of $5.00 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $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 June 30, 2017, 50,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $82,000 for the fiscal years ended June 30, 2017 and 2016, respectively. The selling, general and administrative expense has been fully amortized.
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.
| F-12 |
| Table of Contents |
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. The Company entered into a new contract on October 1, 2015. · Annual salary of One Hundred Fifty-Six Thousand Dollars ($156,000). · Option to acquire up to 50,000 shares of the Company’s 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 $56,000, 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 262%; risk-free interest rate of 1.69%; expected term of 5 years; and 0% dividend yield. As of June 30, 2017, 40,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $11,000 and $20,000 for the fiscal years ended June 30, 2017 and 2016, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $13,000.
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 for the year ended June 2016.
On September 29, 2016, the Company issued Mr. Tate an option to acquire up to 105,000 shares of the Company’s common stock under the Company’s 2014 Omnibus Stock Grant and Option Plan at an exercise price of $0.75 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $78,000, 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 206%; risk-free interest rate of 1.13%; expected term of 6 years; and 0% dividend yield. As of June 30, 2017, 21,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $31,000 and $0 for the fiscal years ended June 30, 2017 and 2016, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $47,000.
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 and the Company has paid approximately $220,000, of which $65,000 has been incurred towards the Company’s monetary commitment.
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.
| F-13 |
| Table of Contents |
Consulting Agreements
Between December 2013 and June 2017, 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, research and development, 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 1,760,000 shares of the Company’s fully vested and non-forfeitable common stock. These contracts are for twelve to thirty-six months and may be renewed or extended for any period as may be agreed by the parties. As of June 30, 2017, 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 thirty-six months, the Company recorded the original approximate $2,650,000 as the value of the shares issued to prepaid expense and is amortizing the expense associated with these issuances over a twelve to thirty-six-month period. For the years ended June 30, 2017 and 2016, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $593,000 and $210,000, respectively. The unamortized prepaid expenses of these contracts are approximately $94,000 and included in prepaid expenses on the consolidated balance sheets at June 30, 2017 compared to $400,000 for the fiscal year ended June 20, 2016.
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 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 $83,500, 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 210%; risk-free interest rate of 1.07%; expected term of 3 years; and 0% dividend yield. For the years ended June 30, 2017 and 2016, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $28,000 and $7,000, respectively. The unamortized prepaid expense of this contract is approximately $49,000 and included in prepaid expenses on the consolidated balance sheets at June 30, 2017.
In October 2016, the Company entered into a consulting agreement with an individual to provide business consulting services for a period of twelve months. Compensation was issuance of 300,000 shares of the Company’s stock (See Note 7) and fully vested and non-forfeitable warrants to acquire up to 300,000 shares of our common stock, at an exercise price of $0.40 per share. Fair Market Value of these warrants totaled approximately $171,000, and is to be recognized ratably over the service period in selling, general and administrative expense. The warrants were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 205%; risk-free interest rate of 0.63%; expected term of 1 year(s); and 0% dividend yield. For the years ended June 30, 2017 and 2016, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $128,000 and $0, respectively. The unamortized prepaid expense of this contract is approximately $43,000 and included in prepaid expenses on the consolidated balance sheets at June 30, 2017.
As of June 30, 2017, future maturities of prepaid consulting expenses on value of shares issued are as follows:
| Fiscal year ended June 30, |
|
|
| |
|
|
|
|
| |
| 2018 |
|
| 160,282 |
|
| 2019 |
|
| 25,235 |
|
| Total |
| $ | 185,517 |
|
| F-14 |
| Table of Contents |
Legal
On July 21, 2016, the Company was sued in the United States District Court for the Eastern District of Pennsylvania (Miriam Weber Miller v. Cerebain Biotech Corp. and Eric Clemons, Civil Action No. 16-3943) by Miriam Weber Miller, with Mr. Clemons named as an individual defendant. According to the Complaint, the Plaintiff alleges: (i) she was hired by the Company to perform public relations, investor relations, corporate growth strategies, and was to be an advisor to the Company’s Chief Executive Officer, (ii) she performed services, and (iii) that she was not fully compensated for those services. The Complaint claims causes of action for breach of contract, violation of the Pennsylvania wage payment and collection law, and unjust enrichment, and seeks damages of approximately $400,000. On April 3, 2017, without admitting fault or liability, and still denying the same, the Company made a business decision to resolve the lawsuit and it is now settled, effectively ending the litigation. In consideration for signing the agreement, the Company agreed to pay Ms. Miller no more than $120,000 in total and no less than $100,000 in total, the terms of such alternative payment options are as follows:
| 1) | The Company could pay Ms. Miller the total gross amount of one hundred twenty thousand dollars ($120,000) as follows: |
|
| a) | One payment of twenty thousand dollars ($20,000) within thirty (30) days after March 29, 2017; and |
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|
|
|
|
| b) | Beginning within ninety (90) days after March 29, 2017, the Company would make monthly payments of fifteen thousand dollars ($15,000) to Ms. Miller’s representative until such time that Ms. Miller and her representative has received the gross amount of $120,000, OR |
| 2) | The Company could pay Ms. Miller the total gross amount of one hundred thousand dollars ($100,000) as follows: |
|
| a) | One payment of twenty thousand dollars ($20,000) within thirty (30) days after March 29, 2017. |
|
|
|
|
|
| b) | One payment of eighty thousand dollars ($80,000) within sixty (60) days after March 29, 2017, OR |
| 3) | The Company could pay Ms. Miller the total gross amount of one hundred ten thousand dollars ($110,000) as follows: |
|
| a) | One payment of twenty thousand dollars ($20,000) within thirty (30) days after March 29, 2017. |
|
|
|
|
|
| b) | One payment of fifteen thousand dollars ($15,000) within sixty (60) days after March 29, 2017. |
|
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|
|
| c) | One payment of seventy-five thousand dollars ($75,000) within ninety (90) days after March 29, 2017. |
Upon all payments being made pursuant to the terms set forth in the agreement, Ms. Miller has agreed to knowingly and voluntarily release and discharge the Company of and from all claims, demands, liabilities, obligations, promises, controversies, compensation, wages, bonuses, commissions, damages, rights, actions and causes of action known and unknown, at law or in equity, which Ms. Miller has or may have against the Company as of the date of execution of the settlement agreement.
The Company has recognized an accrual in Accounts Payable for payment of the agreed upon settlement, but no accrual has been made for additional legal contingencies in the consolidated financial statements as of June 30, 2017. For the fiscal year ended June 30, 2017, the Company paid Ms. Miller thirty-five thousand dollars ($35,000) as agreed in the settlement agreement.
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.
| F-15 |
| Table of Contents |
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 $7,500 and $2,500 for the fiscal years ended June 30, 2017 and 2016, respectively.
The Company recognized a patent royalty expense of approximately $100,000 for the fiscal year ended June 30, 2017 compared to $150,000 for the fiscal year ended June 30, 2016. The accrued payable of $250,000 pertaining to the patent royalty expense at June 30, 2017 is included in related party payables.
NOTE 6 – NOTES PAYABLE TO STOCKHOLDERS
Related Party Notes Payable
|
|
| Short Term Notes Payable |
| |||||
|
|
| June 30, 2017 |
|
| June 30, 2016 |
| ||
| Short term notes payable (A) |
| $ | 114,000 |
|
| $ | 114,000 |
|
| Short term notes payable (B) |
|
| 175,000 |
|
|
| - |
|
| Net total |
| $ | 289,000 |
|
| $ | 114,000 |
|
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 June 30, 2017, the outstanding principal balance was $114,000. The Company is currently in default and is in discussions with the noteholder to restructure the terms of the note. |
|
|
|
| (B) | In 2017, the Company issued notes payable to a related party. The notes were scheduled to mature on June 30, 2017 and accrued no interest. In addition, the Company issued to the noteholder 50,000 shares of the Company’s common stock (See Note 7). In connection with the issuance of the 50,000 shares of stock, the Company recorded the approximate $26,000 value of the shares issued as debt discount cost. The expense has been fully amortized at June 30, 2017. The Company used a recent sale of stock to determine the fair market value of the transaction. As of June 30, 2017, the outstanding principal balance was $175,000. On August 29, 2017, the Company issued a $250,000 amended and consolidated note payable. The amended and consolidated note payable is a consolidation of the $175,000 notes payable and an additional $75,000. The amended and consolidated promissory note is scheduled to mature on December 31, 2017 and accrues no interest. In addition, the Company issued to the noteholder 200,000 shares of the Company’s common stock (See Note 12). |
Convertible Notes to Stockholders
|
|
| Convertible Notes Payable |
| |||||
|
|
| June 30, 2017 |
|
| June 30, 2016 |
| ||
| Convertible notes payable (A) |
| $ | 131,000 |
|
| $ | 125,400 |
|
| Convertible note payable (B) |
|
| 260,000 |
|
|
| 260,000 |
|
| Convertible notes payable (C) |
|
| 2,460,112 |
|
|
| 2,135,112 |
|
| Subtotal |
|
| 2,851,112 |
|
|
| 2,520,512 |
|
| Debt discount |
|
| (12,053 | ) |
|
| (9,534 | ) |
| Net total |
| $ | 2,839,059 |
|
| $ | 2,510,978 |
|
| F-16 |
| Table of Contents |
Convertible Notes Payable (A)
Between September 2013 and June 2017, the Company entered into various unsecured convertible promissory notes with non-affiliate stockholders for principal amounts of approximately $7,500 to $30,000, totaling approximately $157,000, offset by the conversion of convertible notes payable to shares of the Company’s common stock of approximately $26,000, netting a balance of approximately $131,000. Under the terms of these notes, maturity dates range from June 2015 and November 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 to $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 noteholders are entitled pursuant to the promissory notes. The options are fully vested and shall expire from one to three years from date of execution. For the fiscal year ended June 30, 2017, the Company is in default approximately $62,500 on various notes. As a result, these notes are included in the current portion of convertible notes payable along with $37,500 in notes that will mature during fiscal year ending June 30, 2018, and the Company is in discussions with the noteholders to restructure the terms of the notes.
The Company determined that some of the notes had a beneficial conversion feature totaling approximately $38,000.
The Company recognized an accretion of debt discount expense of approximately $17,500 and $27,000 for the fiscal years ended June 30, 2017 and 2016, respectively. The accretion of debt discount expense to be recognized in future years is approximately $12,000.
During the fiscal year ended June 30, 2017, convertible notes of approximately $14,400 have been converted to 72,000 shares of the Company’s common stock. During the fiscal year ended June 30, 2017, the Company issued 72,000 shares of our common stock, pursuant to warrant agreements that were exercised, in exchange for $36,000, (See Note 8).
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.
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 October 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 noteholder is entitled pursuant to the promissory note. The options are fully vested and shall expire three years from date of execution.
| F-17 |
| Table of Contents |
The Company determined the estimated relative fair value discount of the warrants was approximately $128,000 which was valued using the Black-Scholes option pricing model with the following inputs: volatility of 240%; risk-free interest rate of 1.05%; expected term of 3 years; and 0% dividend yield.
The Company determined that the note had a beneficial conversion feature of approximately $141,000.
In connection with the $260,000 convertible note, the Company recognized a loss from extinguishment of debt of approximately $269,000 for the year ended June 30, 2016.
In connection with the $200,000 convertible note, the Company recognized a loss from extinguishment of debt of approximately $50,000 for the year ended June 30, 2016.
Unsecured, Amended and Consolidated Convertible Notes 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 matured on June 9, 2017 and 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 noteholder to own more than 9.9% of our outstanding common stock, and contains piggyback registration rights.
December 2015 Convertible Note
In December 2015, the Company entered into an unsecured $112,000 promissory note with a stockholder. The note matured on March 31, 2016 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, included in loss on extinguishment. The Company used a recent sale of stock to determine the fair market value of the transaction.
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 modified 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 noteholder to own more than 9.9% of our outstanding common stock, and contains piggyback registration rights.
In connection with the $2,100,000 convertible note payable, 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 promissory note payable is considered a modification, and not an extinguishment that would require the recognition of a gain or loss.
| F-18 |
| Table of Contents |
April 2016 Convertible Note
In April 2016, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,130,000. In exchange, the Company modified the $2,080,112 convertible promissory note payable issued in February 2016 and received cash of $55,000. The amended and consolidated convertible note payable matures in 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 noteholder to own more than 9.9% of our outstanding common stock, and contains piggyback registration rights.
In connection with the $2,130,000 convertible note payable, 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 promissory note payable is considered a modification, and not an extinguishment that would require the recognition of a gain or loss.
August 2016 Convertible Note
In August 2016, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,285,000. In exchange, the Company extinguished the $2,135,112 convertible promissory note payable issued in April 2016 and received cash of $150,000. The amended and consolidated convertible note payable matures in August 2018, accrues interest at 5% per annum, and is convertible into shares of our common stock at a conversion rate of $0.40 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 connection with the $2,285,000 convertible note, the Company determined the embedded conversion feature does meet the criteria in ASC 470-50-40-10 or 470-20-25, and the issuance of the convertible promissory note payable is considered an extinguishment that would require the recognition of a gain or loss. The Company recognized a loss from extinguishment of debt of approximately $3.7 million for the fiscal year ended June 30, 2017 compared to $0 for the fiscal year ended June 30, 2016.
October 2016 Convertible Note
In October 2016, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,310,000. In exchange, the Company modified the $2,285,000 convertible promissory note payable issued in August 2016 and received cash of $25,000. The amended and consolidated convertible note payable matures in October 2018, accrues interest at 5% per annum, and is convertible into shares of our common stock at a conversion rate of $0.40 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 connection with the $2,310,000 convertible note payable, 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 promissory note payable is considered a modification, and not an extinguishment that would require the recognition of a gain or loss.
November 2016 Convertible Note
In November 2016, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,410,000. In exchange, the Company extinguished the $2,310,112 convertible promissory note payable issued in October 2016 and received cash of $100,000. The amended and consolidated convertible note payable matures in November 2018, accrues interest at 5% per annum, and is convertible into shares of our common stock at a conversion rate of $0.15 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.
| F-19 |
| Table of Contents |
In connection with the $2,410,000 convertible note, the Company determined the embedded conversion feature does meet the criteria in ASC 470-50-40-10 or 470-20-25, and the issuance of the convertible promissory note payable is considered an extinguishment that would require the recognition of a gain or loss. The Company recognized a loss from extinguishment of debt of approximately $10.1 million for the fiscal year ended June 30, 2017 compared to $0 for the fiscal year ended June 30, 2016.
January 2017 Convertible Note
In January 2017, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,460,000. In exchange, the Company modified the $2,410,112 convertible promissory note payable issued in November 2016 and received cash of $50,000. The amended and consolidated convertible note payable matures in January 2019, accrues interest at 5% per annum, and is convertible into shares of our common stock at a conversion rate of $0.15 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 connection with the $2,460,000 convertible note payable, 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 promissory 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 payable to stockholders of approximately $157,000 and $134,000 for the fiscal years ended June 30, 2017 and 2016, respectively. Accrued interest on all notes payable to stockholders at June 30, 2017 and 2016 totaled approximately $260,000 and $103,000, respectively, and is included in accounts payables.
As of June 30, 2017, future maturities of convertible notes payable are as follows:
| Fiscal years ending June 30, |
|
|
| |
|
|
|
|
| |
| 2018 |
|
| 389,000 |
|
| 2019 |
|
| 2,735,112 |
|
| 2020 |
|
| 16,000 |
|
| Total outstanding notes |
|
| 3,140,112 |
|
| Debt Discount |
|
| (12,053 | ) |
| Net Convertible Notes Payable |
| $ | 3,128,059 |
|
NOTE 7 – STOCK TRANSACTIONS
For the fiscal year ended June 30, 2017, the Company entered into various stock purchase agreements with third parties between July 2016 and June of 2017, under which the Company issued 152,000 shares of its common stock, in exchange for $136,000. The aggregate value of these shares was $136,000 as the price was between $0.50 and $1.25 per share. The stock purchase agreements include piggyback registration rights. In connection with one of the stock purchase agreements, the Company will also issue 80,000 warrants at $2.50 per share. The warrant agreement will be issued after the full amount of the investment is determined after December 31, 2017.
For the fiscal year ended June 30, 2017, the Company issued 72,000 shares of its common stock to an individual for conversion of notes payable. The aggregate value of these shares was approximately $14,400 as the conversion price was $0.20 per share.
| F-20 |
| Table of Contents |
For the fiscal year ended June 30, 2017, the Company issued 540,000 fully vested, nonforfeitable shares of common stock to various individuals as payment for consulting services and financing fee per agreements dated between April 2016 and June 2017 (See Note 4). The aggregate Fair Market Value of these shares was approximately $343,000 as the fair market value of the stock was between $0.48 and $0.75 per share. The Company used recent sales of stock to determine the fair market value of these transactions.
On May 15, 2017, the Company issued a Private Placement Memorandum (“PPM”). The PPM authorizes the sale of up to 400 units, with each Unit consisting of one $10,000 Principal Amount Convertible Debenture and a Warrant to purchase one share of our common stock, at a price of $1.25 per Unit. Each Unit includes a non-cashless Warrant to purchase one 25,000 shares of the Company’s common stock, $.001 par value, at the exercise price of $0.80 per share. The Debentures will be convertible at Forty Cents ($0.40) per share. The Offering was to terminate on June 30, 2017, unless extended one or more times by us to a date not later than July 31, 2017. On August 18, 2017, by unanimous written consent of our directors, we extended the offering through December 31, 2017. As of June 30, 2017, the Company has received no subscriptions.
NOTE 8 – OPTIONS AND WARRANTS
Options
For the year ended June 30, 2017, the Company had 910,000 options outstanding at an average exercise price of $1.45, with 682,000 options exercisable and an expected compensation to be recognized of approximately $181,000. For the years ended June 30, 2017 and 2016, the Company recognized an expense of approximately $341,000 and $348,000, respectively.
On September 29, 2016, the Company issued Eric Clemons and Wesley Tate options to acquire up to a total of 210,000 shares of our common stock under the Company’s 2014 Omnibus Stock Grant and Option Plan at an exercise price of $0.75 per share subject to a vesting schedule. Fair value of these options totaled approximately $156,000, 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 206%; risk-free interest rate of 1.13%; expected term of 6 years; and 0% dividend yield. As of June 30, 2017, 42,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $62,000 and $0 for the fiscal years ended June 30, 2017 and 2016, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $94,000.
The following represents a summary of the Options outstanding at June 30, 2017 and changes during the periods then ended:
|
|
| Options |
|
| Options Average Exercise Price |
|
| Weighted Average Contractual Life |
|
| Aggregate Intrinsic Value |
| ||||
| Outstanding July 1, 2015 |
|
| 400,000 |
|
| $ | 2.65 |
|
|
| 10.00 |
|
| $ | - |
|
| Granted |
|
| 300,000 |
|
|
| 0.33 |
|
|
| 3.00 |
|
|
| - |
|
| Exercised |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| Expired/Forfeited |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| Outstanding, June 30, 2016 |
|
| 700,000 |
|
| $ | 1.65 |
|
|
| 7.00 |
|
| $ | - |
|
| Granted |
|
| 210,000 |
|
|
| 0.75 |
|
|
| 10.00 |
|
|
| - |
|
| Exercised |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| Expired/Forfeited |
|
| - |
|
|
| - |
|
|
| - |
|
|
| - |
|
| Outstanding, June 30, 2017 |
|
| 910,000 |
|
| $ | 1.45 |
|
|
| 7.69 |
|
| $ | - |
|
| Exercisable at June 30, 2017 |
|
| 682,000 |
|
| $ | 1.64 |
|
|
| 6.92 |
|
| $ | - |
|
| Expected to be vested |
|
| 910,000 |
|
| $ | 1.45 |
|
|
| 7.69 |
|
| $ | - |
|
| Compensation to be recognized |
| $ | 181,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
| Forfeiture Rate |
|
| - |
|
|
| - |
|
|
|
|
|
|
|
|
|
| F-21 |
| Table of Contents |
Warrants
For the year ended June 30, 2017, the Company had approximately 1,700,000 warrants outstanding at an average exercise price of $0.50. The Company recognized the issuance of approximately 400,000 warrants, offset by the exercise of 72,000 warrants and the expiration of 115,000 warrants which is included in the approximate 1,700,000 warrants outstanding for the fiscal year ended June 30, 2017. For the fiscal years ended June 30, 2017 and 2016, the Company recognized an accretion of debt discount related to warrants expense of approximately $6,300 and $0, respectively. The approximate expense expected to be recognized in future years is $10,000.
In July 2016, the Company entered into a $10,000 unsecured convertible promissory note with a non-affiliate stockholder. In association with this note, the Company granted 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 holder is entitled pursuant to the promissory note, totaling 50,000 shares. Relative fair value of the warrants totaled approximately $8,000, and is to be recognized ratably over the note period in interest expense. They were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 211%; risk-free interest rate of 0.81%; expected term of 3 years; and 0% dividend yield.
In November 2016, the Company entered into a $10,000 unsecured convertible promissory note with a non-affiliate stockholder. In association with this note, the Company granted the noteholder a cashless warrant to purchase one (1) share of the Company’s common stock, $0.001 par value, at the exercise price of $0.50 per share, for each share the holder is entitled pursuant to the promissory note, totaling 50,000 shares. Relative fair value of the warrants totaled approximately $7,500, and is to be recognized ratably over the note period in interest expense. They were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 199.7%; risk-free interest rate of 1.28%; expected term of 3 years; and 0% dividend yield.
In October 2016, the Company entered into a consulting agreement with an individual to provide business consulting services for a period of twelve months. Compensation was the issuance of 300,000 shares of the Company’s common stock (See note 4 and 7) and fully vested and non-forfeitable warrants to acquire up to 300,000 shares of our common stock, at an exercise price of $0.40 per share. Fair value of these warrants totaled approximately $172,000, and is to be recognized ratably over the service period in selling, general and administrative expense. The warrants were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 205%; risk-free interest rate of 0.63%; expected term of 1 year(s); and 0% dividend yield. For the fiscal years ended June 30, 2017 and 2016, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $128,000 and $0, respectively. The unamortized prepaid expense of this contract is approximately $43,000 and included in prepaid expenses on the consolidated balance sheets at June 30, 2017.
The following represents a summary of the Warrants outstanding at June 30, 2017 and changes during the periods then ended:
|
|
| Warrants |
|
| Weighted Average Exercise Price |
| ||
| Outstanding, June 30, 2015 |
|
| 35,000 |
|
| $ | 2.14 |
|
| Granted |
|
| 1,507,000 |
|
|
| 0.56 |
|
| Exercised |
|
| (60,000 | ) |
|
| 0.50 |
|
| Expired/Forfeited |
|
| (5,000 | ) |
|
| 2.00 |
|
| Outstanding, June 30, 2016 |
|
| 1,477,000 |
|
| $ | 0.59 |
|
| Granted |
|
| 400,000 |
|
|
| 0.43 |
|
| Exercised |
|
| (72,000 | ) |
|
| 0.50 |
|
| Expired/Forfeited |
|
| (115,000 | ) |
|
| 1.51 |
|
| Outstanding, June 30, 2017 |
|
| 1,690,000 |
|
|
| 0.50 |
|
| Exercisable at June 30, 2017 |
|
| 1,690,000 |
|
| $ | 0.50 |
|
| F-22 |
| Table of Contents |
NOTE 9 – RELATED PARTY TRANSACTIONS
On September 29, 2016, the Company issued Eric Clemons and Wesley Tate options to acquire up to a total of 210,000 shares of our common stock under the Company’s 2014 Omnibus Stock Grant and Option Plan at an exercise price of $0.75 per share subject to a vesting schedule. Fair value of these options totaled approximately $156,000, 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 206%; risk-free interest rate of 1.13%; expected term of 6 years; and 0% dividend yield. As of June 30, 2017, 42,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $62,000 and $0 for the fiscal years ended June 30, 2017 and 2016, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $94,000.
NOTE 10 – EARNINGS PER SHARE
FASB ASC Topic 260, Earnings Per Share, requires a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share (EPS) computations.
Basic earnings (loss) per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
The total number of potential additional dilutive options and warrants outstanding was 2.6 million and 2.2 million for the fiscal years ended June 30, 2017 and 2016, respectively. In addition, the convertible promissory notes convert at an exercise price of between $0.20 and $5.00 per share of common stock representing approximately 18 million shares. The options, warrants and shares underlying the convertible promissory notes were considered for the dilutive calculation but in periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
The following table sets forth the computation of basic and diluted net income per share:
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|
| For The Fiscal Years Ended June 30, |
| |||||
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| 2017 |
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| 2016 |
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|
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|
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| Net loss attributable to the common stockholders |
| $ | (16,012,615 | ) |
| $ | (2,423,661 | ) |
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|
|
|
|
|
| Basic weighted average outstanding shares of common stock |
|
| 7,514,226 |
|
|
| 5,909,427 |
|
| Dilutive effect of options and warrants |
|
| - |
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|
| - |
|
| Diluted weighted average common stock and common stock equivalents |
|
| 7,514,226 |
|
|
| 5,909,427 |
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| Earnings (loss) per share: |
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|
|
|
|
|
|
| Basic and diluted |
| $ | (2.13 | ) |
| $ | (0.41 | ) |
| F-23 |
| Table of Contents |
NOTE 11 – INCOME TAXES
The provision (benefit) for income taxes for the period ended June 30, 2017 and 2016, assumes a 34% effective tax rate for federal income taxes and 1.5% state income taxes liability:
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| June 30, 2017 |
|
| June 30, 2016 |
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|
|
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|
| ||
| Current tax provision: |
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|
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|
| ||
| Federal |
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|
|
|
|
| ||
| Taxable income - federal |
| $ | 34.0 | % |
| $ | 34.0 | % |
|
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|
|
|
|
|
|
|
| State |
|
|
|
|
|
|
|
|
| Taxable income - state |
| $ | 1.5 | % |
| $ | 1.5 | % |
| Total current tax provision |
| $ | 35.5 | % |
| $ | 35.5 | % |
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|
| Deferred tax provision: |
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|
|
|
|
|
|
| Federal and State |
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|
|
|
|
|
|
|
| Total deferred tax provision |
| $ | -- |
|
| $ | -- |
|
The Company had deferred income tax assets as of June 30, 2017 and 2016 are as follows:
|
|
| June 30, 2017 |
|
| June 30, 2016 |
| ||
|
|
|
|
|
|
|
| ||
| Loss carryforwards |
| $ | 27,500,000 |
|
| $ | 11,500,000 |
|
| Less – valuation allowance |
|
| (27,500,000 | ) |
|
| (11,500,000 | ) |
| Total net deferred tax assets |
| $ | -- |
|
| $ | -- |
|
The Company provided a valuation allowance equal to the deferred income tax assets for the fiscal years ended June 30, 2017 and 2016, respectively, because it is not presently known whether future taxable income will be sufficient to utilize the loss carryforwards.
At June 30, 2017, the Company had approximately $27,500,000 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, 2010 thru 2017 are open for examination.
NOTE 12 – SUBSEQUENT EVENTS
On July 24, 2017, the Company entered into a stock purchase agreement with a third party, under which the Company issued 40,000 shares of its common stock, in exchange for $50,000. The aggregate value of these shares was $50,000 as the price was $1.25 per share. The stock purchase agreements include piggyback registration rights. The Company will also issue 40,000 warrants at $2.50 per share. The warrant agreement will be issued after the full amount of the investment is determined after December 31, 2017.
On August 29, 2017, the Company issued a $250,000 amended and consolidated note payable to a related party. The amended and consolidated note payable is a consolidation of the $175,000 notes payable (See Note 6) and an additional $75,000. The amended and consolidated promissory note is scheduled to mature on December 31, 2017 and accrues no interest. In addition, the Company issued to the noteholder 200,000 shares of the Company’s common stock.
| F-24 |