UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended September 30, 2018
¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
CEREBAIN BIOTECH CORP. |
(Exact name of registrant as specified in its charter) |
Nevada |
| 000-54381 |
| 26-1974399 |
(State or other jurisdiction of incorporation or organization) |
| (Commission File Number) |
| (I.R.S. Employer Identification No.) |
600 Anton Blvd., Suite 1100 Costa Mesa, CA 92626 | ||
(Address of principal executive offices) | ||
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714-371-4109 | ||
(Registrant’s telephone number, including area code) | ||
___________________________________ | ||
(Former address, if changed since last report) | ||
_______________________________________ | ||
(Former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer | ¨ |
| Accelerated filer | ¨ |
Non-accelerated filer | ¨ | (Do not check if a smaller reporting company) | Smaller reporting company | x |
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| Emerging growth company | ¨ |
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 ¨ No x
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes ¨ No ¨
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the latest practicable date.
Class of Securities |
| Shares Outstanding at November 14, 2018 |
Common Stock, $0.001 par value |
| 16,413,097 |
CEREBAIN BIOTECH CORP.
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| NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
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MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
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- 2 - |
Table of Contents |
PART 1 - FINANCIAL INFORMATION
The unaudited condensed consolidated financial statements of registrant for the three-month periods ended September 30, 2018 and 2017 follow. The unaudited condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. All such adjustments are of a normal and recurring nature.
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
CONDENSED CONSOLIDATED BALANCE SHEETS
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| September 30, |
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| June 30, |
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| 2018 |
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| 2018 |
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| (unaudited) |
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ASSETS | ||||||||
Current assets: |
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Cash and cash equivalents |
| $ | 38,633 |
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| $ | 64,583 |
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Prepaid expenses |
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| 20,684 |
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| 27,018 |
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Total current assets |
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| 59,317 |
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| 91,601 |
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Total assets |
| $ | 59,317 |
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| $ | 91,601 |
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LIABILITIES AND STOCKHOLDERS’ DEFICIT | ||||||||
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Current liabilities: |
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Accounts payable |
| $ | 920,658 |
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| $ | 1,142,636 |
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Related party payables |
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| 375,000 |
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| 350,000 |
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Accrued payroll |
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| 255,082 |
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| 215,973 |
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Payroll taxes payable |
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| 112,102 |
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| 94,124 |
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Convertible notes to stockholders, current portion |
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| 360,000 |
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| 360,000 |
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Short term notes payable to stockholders |
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| 464,000 |
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| 464,000 |
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Short term convertible notes payable, net of debt discount of approximately $90,874 and $177,094, respectively |
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| 178,036 |
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| 107,906 |
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Derivative liabilities |
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| 425,000 |
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| 285,000 |
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Warrant liabilities |
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| 89,828 |
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| 85,058 |
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Total current liabilities |
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| 3,179,706 |
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| 3,104,697 |
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Long term liabilities: |
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Convertible notes to stockholders, net of current portion and net of debt discount of approximately $3,884 and $5,381, respectively |
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| 2,949,229 |
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| 2,570,731 |
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Total long-term liabilities |
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| 2,949,229 |
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| 2,570,731 |
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Total liabilities |
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| 6,128,935 |
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| 5,675,428 |
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Commitments and contingencies (Note 4) |
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Stockholders’ deficit |
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Preferred stock ($0.001 par value: 1,000,000 shares authorized; none issued and outstanding) |
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| - |
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| - |
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Common stock ($0.001 par value: 249,000,000 shares authorized; 10,109,347 and 9,039,347 shares issued and outstanding at September 30, 2018 and June 30, 2018, respectively) |
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| 10,120 |
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| 9,039 |
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Additional paid in capital |
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| 26,907,073 |
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| 26,856,647 |
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Accumulated deficit |
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| (32,986,811 | ) |
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| (32,449,513 | ) |
Total stockholders’ deficit |
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| (6,069,618 | ) |
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| (5,583,827 | ) |
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Total liabilities and stockholders’ deficit |
| $ | 59,317 |
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| $ | 91,601 |
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See accompanying notes to unaudited condensed consolidated financial statements
- 3 - |
Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
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| For the Three Months Ended |
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| September 30, |
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| 2018 |
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| 2017 |
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Operating Expenses |
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Selling, general and administrative expenses |
| $ | 194,229 |
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| $ | 288,918 |
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Research and development costs |
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| 32,000 |
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| 42,314 |
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Patent Royalty Expense |
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| 25,000 |
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| 25,000 |
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Marketing expenses |
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| - |
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| 3,148 |
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Total operating expenses |
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| 251,229 |
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| 359,380 |
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Other (income) expense |
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Accretion of debt discount |
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| 87,717 |
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| 1,668 |
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Loss from extinguishment of debt |
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| 30,000 |
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Interest expense |
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| 53,583 |
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| 40,435 |
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Change in fair value of derivative liabilities |
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| 140,000 |
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| - |
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Change in fair value of warrant liabilities |
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| 4,770 |
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| - |
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Total other expense, net |
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| 286,070 |
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| 72,103 |
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Net loss |
| $ | (537,299 | ) |
| $ | (431,483 | ) |
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Loss per share: |
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Basic and diluted loss per share |
| $ | (0.06 | ) |
| $ | (0.05 | ) |
Basic and diluted weighted average shares outstanding |
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| 9,143,951 |
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| 8,003,532 |
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See accompanying notes to unaudited condensed consolidated financial statements
- 4 - |
Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
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| For the Three Months Ended |
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| September 30, |
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| 2018 |
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| 2017 |
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Cash flows from operating activities: |
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Net loss |
| $ | (537,299 | ) |
| $ | (431,483 | ) |
Adjustments to reconcile net loss to net cash used in operating activities: |
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Accretion of debt discount |
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| 87,717 |
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| 1,668 |
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Change in derivative liabilities |
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| 140,000 |
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| - |
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Change in warrant liabilities |
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| 4,770 |
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| - |
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Loss from extinguishment of debt |
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| - |
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| 30,000 |
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Stock based compensation |
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| 29,200 |
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| 15,925 |
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Amortization of stock based prepaid consulting compensation |
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| 8,835 |
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| 122,433 |
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Conversion of short-term convertible notes payable fees |
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| 3,500 |
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| - |
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Changes in operating assets and liabilities: |
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Prepaid expenses |
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| (2,501 | ) |
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| - |
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Accounts payable |
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| 82,741 |
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| 30,838 |
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Related party payables |
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| 25,000 |
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| 14,432 |
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Accrued payroll and taxes |
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| 57,087 |
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| 50,952 |
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Net cash used in operating activities |
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| (100,950 | ) |
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| (165,235 | ) |
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Cash flows from financing activities: |
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Proceeds from issuance of common stock |
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| 80,000 |
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Proceeds from short term notes to stockholders |
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| 75,000 |
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Proceeds from convertible notes |
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| 75,000 |
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| - |
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Net cash flows provided by financing activities: |
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| 75,000 |
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| 155,000 |
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Net change in cash and cash equivalents |
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| (25,950 | ) |
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| (10,235 | ) |
Cash and cash equivalents- beginning of period |
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| 64,583 |
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| 11,345 |
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Cash and cash equivalents- end of period |
| $ | 38,633 |
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| $ | 1,110 |
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Supplemental disclosure of non-cash activities: |
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Cash paid during the period for: |
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Interest |
| $ | - |
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| $ | - |
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Income tax |
| $ | - |
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| $ | - |
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Supplemental disclosure on non-cash investing and financing activities: |
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Refinancing of accrued interest |
| $ | 302,001 |
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| $ | - |
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Conversion of short-term convertible notes payable |
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| 16,090 |
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| - |
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Conversion of short-term convertible notes payable interest |
| $ | 2,718 |
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| $ | - |
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Stock issued for prepaid services |
| $ | - |
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| $ | 35,000 |
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See accompanying notes to unaudited condensed consolidated financial statements
- 5 - |
Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
Description of Business
Cerebain Biotech Corp. (“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., the Company’s business revolves around the discovery of products for the treatment of Alzheimer’s disease utilizing Omentum. The Company plans to produce products that will include both a medical device solution as well as a synthetic drug solution.
Cerebain Operating, Inc. was incorporated on February 22, 2010, in the State of Nevada.
The accompanying (a) condensed balance sheet at June 30, 2018 has been derived from audited statements and (b) unaudited interim condensed financial statements as of September 30, 2018 and for the three-month period ended September 30, 2018 and 2017 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended June 30, 2018 included on Form 10-K filed with the Securities and Exchange Commission on September 26, 2018.
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. The Company’s Principal Executive Officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company had an accumulated deficit of approximately $33,000,000 and $32,450,000 at September 30, 2018 and June 30, 2018, respectively, and had a net loss of approximately $537,000 and $431,000 for the three-month periods ended September 30, 2018 and 2017, respectively, and net cash used in operating activities of approximately $101,000 and $165,000 for the three-month periods ended September 30, 2018 and 2017, respectively, with no revenue earned since inception, limited cash of approximately $39,000 and $65,000 at September 30, 2018 and June 30, 2018, respectively, and a lack of operational history. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
While the Company is attempting to commence operations and generate revenues, the Company’s cash position may not be significant enough to support the Company’s daily operations. Management intends to raise additional funds by way of a public or private offering. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate revenues.
The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
- 6 - |
Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
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 condensed consolidated financial statements. The condensed 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 accounting principles generally accepted in the United States and have been consistently applied in the preparation of the condensed consolidated financial statements.
Use of Estimates
The preparation of these condensed 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 condensed 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 condensed consolidated financial statements. The more significant estimates and assumptions by management include among others: useful lives and residual values of long-lived assets, the valuation of equity instruments, the valuation of warrants and options, the valuation of derivative liabilities, and the valuation of warrant liabilities.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Cerebain Biotech Corp. and its wholly-owned subsidiary, Cerebain Operating, Inc. (collectively referred to as the “Company”). There are no material intercompany transactions.
Advertising Costs
Advertising costs are recorded as general and administrative expenses when they are incurred. Advertising costs charged to operations were approximately $0 and $3,000 for the three-month periods ended September 30, 2018 and 2017, respectively.
Research and Development
The Company expenses the cost of research and development as incurred. Research and development costs charged to operations were approximately $32,000 and $42,000 for the three-month periods ended September 30, 2018 and 2017, respectively, and are included in research and development costs in the accompanying condensed consolidated statements of operations (See Note 4).
Debt
The Company issues debt that may have separate warrants, conversion features, or no equity-linked attributes.
- 7 - |
Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
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, recorded 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 the Company’s consolidated balance sheets if the warrants are not treated as a derivative. 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, we must first assess whether the conversion feature meets the requirements to be treated as a derivative, as follows: a) one or more underlyings, typically the price of our common stock; b) one or more notional amounts or payment provisions or both, generally the number of shares upon conversion; c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provisions, which in the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. An embedded equity-linked component that meets the definition of a derivative does not have to be separated from the host instrument if the component qualifies for the scope exception for certain contracts involving an issuer’s own equity. The scope exception applies if the contract is both a) indexed to its own stock; and b) classified in shareholders’ equity in its statement of financial position.
If the conversion feature within convertible debt meets the requirements to be treated as a derivative, we estimate the fair value of the convertible debt derivative using the Monte Carlo Method 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 statement of operations. The debt discount is amortized through interest expense over the life of the debt.
Convertible debt – beneficial conversion feature
If the conversion feature is not treated as a derivative, the Company assesses whether it is a beneficial conversion feature (“BCF”). A BCF exists if the conversion price of the convertible debt instrument is less than the stock price on the commitment date. This typically occurs when the conversion price is less than the fair value of the stock on the date the instrument was issued. The value of a BCF is equal to the intrinsic value of the feature, the difference between the conversion price and the common stock into which it is convertible and is recorded as additional paid in capital and as a debt discount in the consolidated balance 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.
- 8 - |
Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
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 September 30, 2018 and June 30, 2018, 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.
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. |
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| · | Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.). |
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| · | 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. The warrant and derivative liabilities are recognized at fair value on a recurring basis at September 30, 2018 and are Level 3 measurements. There have been no transfers between levels.
Concentrations, Risks, and Uncertainties
The Company is a startup company subject to the substantial business risks and uncertainties inherent to such an entity, including the potential risk of business failure.
- 9 - |
Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
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, |
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| · | Convertible notes, |
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| · | Employee stock options, and |
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| · | Other equity awards, which include long-term incentive awards. |
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
FASB ASU 2018-07 “Compensation – Stock Compensation (Topic 718) - In June 2018, the FASB issued ASU 2018-07. This update is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers, etc.). The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. The standard will be applied in a retrospective approach for each period presented. The Company currently does not plan to early adopt this guidance and is evaluating the potential impact of this guidance on the consolidated financial statements as well as transition methods.
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CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
NOTE 4 – COMMITMENTS AND CONTINGENCIES
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 $320,000, of which $165,000 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.
Consulting Agreements
Between December 2016 and September 2018, 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 1,935,000 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 September 30, 2018, 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 $2,670,000 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 three-month periods ended September 30, 2018 and 2017, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $1,800 and $72,000, respectively. The unamortized prepaid expenses of these contracts are approximately $2,500 and included in prepaid expenses on the consolidated balance sheets at September 30, 2018.
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 the issuance of 75,000 shares (included in the preceding paragraph) of the Company’s stock and fully vested and non-forfeitable options to acquire up to 300,000 shares of the Company’s common stock, at an exercise price of $0.33 per share. Fair Market Value of these options totaled approximately $83,500 and is being 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 three-month periods ended September 30, 2018 and 2017, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $7,000, respectively. The unamortized prepaid expense of this contract is approximately $13,900 and included in prepaid expenses on the consolidated balance sheets at September 30, 2018.
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CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 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 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 three-month periods ended September 30, 2018 and 2017, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $0 and $43,000, respectively. The prepaid expense of this contract has been fully amortized as of September 30, 2018.
As of September 30, 2018, future maturities of prepaid expenses on value of shares and options issued for consulting are as follows:
Fiscal year ended June 30, |
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2019 |
| $ | 16,400 |
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Total |
| $ | 16,400 |
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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 alleged: (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 claimed causes of action for breach of contract, violation of the Pennsylvania wage payment and collection law, and unjust enrichment, and sought 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 as follows:
The Company paid 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 made 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. |
Upon all payments being made pursuant to the terms set forth in the agreement, Ms. Miller 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 had 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 September 30, 2018. For the fiscal year ended June 30, 2018, the Company paid Ms. Miller $85,000 as agreed in the settlement agreement. As of September 30, 2018, the terms of the settlement agreement have been met and Ms. Miller has been paid in full.
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CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
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 (patent pending) 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 shares issued under the pertinent section of the agreement. To date, Dr. Saini has not participated in any sales of equity.
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.
Legal fees pertaining to the patent are recorded as general and administrative expenses when they are incurred. Legal fees charged to operations were approximately $3,200 and $450 for the three-month periods ended September 30, 2018 and 2017, respectively.
The Company recognized a patent royalty expense of approximately $25,000 for the three-month period ended September 30, 2018 compared to $25,000 for the three-month period ended September 30, 2017. The accrued payable of $375,000 pertaining to the patent royalty expense at September 30, 2018 is included in related party payables.
NOTE 6 – NOTES PAYABLE
Short Term Notes Payable to Stockholders
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| Short Term Notes Payable to Stockholders |
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| September 30, 2018 |
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| June 30, 2018 |
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Short term notes payable (A) |
| $ | 114,000 |
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| $ | 114,000 |
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Short term notes payable (B) |
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| 250,000 |
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| 250,000 |
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Short term notes payable (C) |
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| 100,000 |
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| 100,000 |
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Net total |
| $ | 464,000 |
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| $ | 464,000 |
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Short Term Notes Payable to Stockholders
(A) | In 2012, the Company issued a short term note payable to a non-affiliate stockholder. 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 September 30, 2018, the outstanding balance was $114,000. The Company is currently in default and is in discussions with the noteholder to restructure the terms of the note. |
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CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
(B) | In 2017, the Company issued short term notes payable to a non-affiliate stockholder. 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. 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 an independent third party for cash 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 was 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. In connection with the issuance of the 200,000 shares of stock, the Company recorded the approximate $30,000 value of the shares issued as loss on extinguishment of debt. The Company is currently in default and is in discussions with the noteholder to restructure the terms of the note. |
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(C) | In June 2018, the Company issued a short term note payable to a non-affiliate stockholder. The note matured on August 14, 2018 and accrues no interest. On August 14, 2018, the Company issued an addendum to the short term note payable. The addendum extended the maturity date of the note to December 31, 2018. |
Short Term Convertible Notes Payable
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| Short Term Convertible Notes Payable |
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| September 30, 2018 |
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| June 30, 2018 |
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Crown Bridge Partners |
| $ | 58,397 |
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| $ | 65,000 |
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Auctus Fund |
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| 110,000 |
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| 110,000 |
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EMA Financial |
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| 100,513 |
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| 110,000 |
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Subtotal |
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| 268,910 |
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| 285,000 |
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Debt discount |
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| (90,874 | ) |
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| (177,094 | ) |
Net total |
| $ | 178,036 |
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| $ | 107,906 |
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Crown Bridge Partners
On March 2, 2018, the Company held an initial closing under a Securities Purchase Agreement (the “Crown SPA”) and corresponding Convertible Promissory Note (the “Crown Note”) with Crown Bridge Partners, LLC (“Crown”), dated February 14, 2018. Under the Crown SPA and the Crown Note, Crown agreed to loan the Company up to One Hundred Thirty Thousand Dollars ($130,000) in tranches. The Crown Note has an original issuance discount of $13,000, meaning the maximum amount the Company can borrow under the Crown Note is $117,000. The initial tranche on March 2, 2018 was $65,000, with the Company receiving $58,500 and the remaining $6,500 being retained by Crown as the portion of the prorated original issuance discount. The Crown Note bears interest at Ten Percent (10%) per annum and matures twelve (12) months from the date of each tranche, with the initial tranche of $65,000 maturing on March 2, 2019. Under the terms of the Crown Note, Crown has the right, at any time to convert all or part of the amounts due to it under the Crown Note into shares of the Company’s common stock. The conversion price is 55% of the lesser of (a) the lowest traded price or (b) the lowest closing bid price, of the Company’s common stock on the twenty-five trading days prior to the conversion date. However, Crown may not convert the amounts due under the Note into shares of the Company’s common stock if such conversion would cause it to own more than 4.99% of the Company’s then-outstanding common stock, which limitation may be waived by Crown upon 61 days-notice. In the event the Company defaults under the terms of the Crown Note, the Company owes 150% of the principal amount then due under the Note, plus any unpaid interest, immediately. The Company may prepay the amounts loaned to the Company under the Crown Note as follows: (i) during the initial 60-day period after each tranche, at 125% multiplied by the amount the Company is prepaying, (ii) during the 61st through 120 days after each tranche, at 135% multiplied by the amount the Company is prepaying, and (iii) during the 121st through 180th day after each tranche, at 150% multiplied by the amount the Company is prepaying. Any prepayments are subject to Crown’s written acceptance of such prepayment. After 180 days from each tranche the Company cannot prepay that tranche in cash.
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CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
While this Note is outstanding, if the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has the right to convert monies owed to that 3rd party (or receive shares pursuant to a settlement or otherwise) at a discount to market greater than the Variable Conversion Price in effect at that time (prior to all other applicable adjustments in the Note), then the Variable Conversion Price shall be automatically adjusted to such greater discount percentage (prior to all applicable adjustments in this Note) until this Note is no longer outstanding. Each time, while this Note is outstanding, the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has a look back period greater than the look back period in effect under the Note at that time, then the Holder’s look back period shall automatically be adjusted to such greater number of days until this Note is no longer outstanding.
In addition to issuing the Crown Note, the Company agreed to issue Crown a warrant with each funding tranche. Each warrant will be for the purchase of shares of the Company’s common stock equal to 75% of the face value of the tranche divided by $0.50. For example, the first tranche of funding is for $65,000, the Company issued a warrant to purchase 97,500 shares of the Company’s common stock at an exercise price of $0.50 per share. The warrant contains a cashless exercise provision. Each warrant expires five years after the date of issuance.
In connection with the warrants, if the Company, at any time from and after the Issuance Date, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of, sell or issue (or announce any offer, sale, grant or any option to purchase or other disposition of) any Common Stock or Common Stock Equivalents entitling any person, firm, association or entity to acquire shares of Common Stock at an effective price per share less than the then-current Exercise Price (including but not limited to under the Note), as adjusted hereunder (any such issuance being referred to as a “Dilutive Issuance,” subject, however, to the provision contained in the further definition of the term “Dilutive Issuance” contained in the agreement, then (a) the Exercise Price shall be adjusted to match the lowest price per share at which such Common Stock was issued or may be acquired pursuant to such Common Stock Equivalents in the Dilutive Issuance, and (b) the number of Warrant Shares issuable upon the exercise of this Warrant shall be increased to an amount equal to the number of Warrant Shares Holder could purchase hereunder for the aggregate Exercise Price, as reduced pursuant to the agreement, equal to the aggregate Exercise Price payable immediately prior to such reduction in Exercise Price. Additionally, following the occurrence of a Dilutive Issuance, all references in this Warrant to “Warrant Shares” shall be a reference to the Warrant Shares as increased pursuant to the agreement, and all references in this Warrant to “Exercise Price” shall be a reference to the Exercise Price as reduced pursuant to the agreement, as the same may occur from time to time hereunder. Subject to the anti-dilution provision, the Company adjusted Crown’s warrant to purchase 243,750 shares of our common stock at an exercise price of $0.20 per share as a result of the warrant issued to Auctus Fund on March 8, 2018.
On September 7, 2018, Crown Bridge Partners, LLC elected to convert $5,049, consisting of $4,549 of principal and $500 of fees, into 90,000 shares of the Company’s Common Stock at an exercise price of $0.0561 pursuant to the convertible note dated February 14, 2018.
On September 28, 2018, Crown Bridge Partners, LLC elected to convert $2,534, consisting of $2,054 of principal and $500 of fees, into 480,000 shares of the Company’s Common Stock at an exercise price of $0.00532 pursuant to the convertible note dated February 14, 2018.
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CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
Auctus Fund
On March 8, 2018, the Company closed a Securities Purchase Agreement (the “Auctus SPA”) and corresponding Convertible Promissory Note (the “Auctus Note”) with Auctus Fund, LLC (“Auctus”), dated February 15, 2018. Under the Auctus SPA and the Auctus Note, Auctus agreed to loan the Company One Hundred Ten Thousand Dollars ($110,000). The Auctus Note bears interest at Ten Percent (10%) per annum and matures on November 15, 2018. Under the terms of the Auctus Note, Auctus has the right, at any time to convert all or part of the amounts due to it under the Auctus Note into shares of the Company’s common stock. The conversion price is 55% multiplied by the lowest Trading Price during the twenty-five trading days prior to the conversion date. However, Auctus may not convert the amounts due under the Note into shares of the Company’s common stock if such conversion would cause it to own more than 4.99% of the Company’s then-outstanding common stock, which limitation may be waived by Auctus upon 61 days-notice. In the event the Company defaults under the terms of the Auctus Note, the Company owes 150% of the principal amount then due under the Note, plus any unpaid interest, immediately. The Company may prepay the amounts loaned to the Company under the Auctus Note as follows: (i) during the initial 90-day period after the issue date, at 135% multiplied by the amount the Company is prepaying, and (ii) from the 91st through the 180th day after the issue date, at 150% multiplied by the amount the Company is prepaying. Any prepayments are subject to Auctus’ written acceptance of such prepayment. After 180 days from the issue date the Company cannot prepay the Auctus Note.
While this Note is outstanding, if the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has the right to convert monies owed to that 3rd party (or receive shares pursuant to a settlement or otherwise) at a discount to market greater than the Variable Conversion Price in effect at that time (prior to all other applicable adjustments in the Note), then the Variable Conversion Price shall be automatically adjusted to such greater discount percentage (prior to all applicable adjustments in this Note) until this Note is no longer outstanding. Each time, while this Note is outstanding, the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has a look back period greater than the look back period in effect under the Note at that time, then the Holder’s look back period shall automatically be adjusted to such greater number of days until this Note is no longer outstanding.
In addition to issuing the Auctus Note, the Company agreed to issue Auctus a warrant to acquire 275,000 shares of the Company’s common stock at an exercise price of $0.20 per share. The warrant contains a cashless exercise provision and expires on the fifth anniversary of the warrant.
In connection with the warrants, if the Company, at any time from and after the Issuance Date, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of, sell or issue (or announce any offer, sale, grant or any option to purchase or other disposition of) any Common Stock or Common Stock Equivalents entitling any person, firm, association or entity to acquire shares of Common Stock at an effective price per share less than the then-current Exercise Price (including but not limited to under the Note), as adjusted hereunder (any such issuance being referred to as a “Dilutive Issuance,” subject, however, to the proviso contained in the further definition of the term “Dilutive Issuance” contained in the agreement, then (a) the Exercise Price shall be adjusted to match the lowest price per share at which such Common Stock was issued or may be acquired pursuant to such Common Stock Equivalents in the Dilutive Issuance, and (b) the number of Warrant Shares issuable upon the exercise of this Warrant shall be increased to an amount equal to the number of Warrant Shares Holder could purchase hereunder for the aggregate Exercise Price, as reduced pursuant to the agreement, equal to the aggregate Exercise Price payable immediately prior to such reduction in Exercise Price. Additionally, following the occurrence of a Dilutive Issuance, all references in this Warrant to “Warrant Shares” shall be a reference to the Warrant Shares as increased pursuant to the agreement, and all references in this Warrant to “Exercise Price” shall be a reference to the Exercise Price as reduced pursuant to the agreement, as the same may occur from time to time hereunder.
On September 12, 2018, Auctus Fund, LLC elected to convert $3,025, consisting of $2,525 of accrued and unpaid interest and $500 of fees, into 50,000 shares of the Company’s Common Stock at an exercise price of $0.06050 pursuant to the convertible note dated February 15, 2018.
On September 25, 2018, Auctus Fund, LLC elected to convert $693, consisting of $193 of accrued and unpaid interest and $500 of fees, into 60,000 shares of the Company’s Common Stock at an exercise price of $0.01155 pursuant to the convertible note dated February 15, 2018.
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CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
EMA Financial
On March 8, 2018, the Company closed a Securities Purchase Agreement (the “EMA SPA”) and corresponding Convertible Promissory Note (the “EMA Note”) with EMA Financial, LLC (“EMA”), dated February 12, 2018. Under the EMA SPA and the EMA Note, EMA agreed to loan the Company One Hundred Ten Thousand Dollars ($110,000). The EMA Note has an original issuance discount of $6,600, meaning the amount the Company received at funding was $103,400. The EMA Note bears interest at Ten Percent (10%) per annum and matures on February 12, 2019. Under the terms of the EMA Note, EMA has the right, at any time to convert all or part of the amounts due to it under the EMA Note into shares of the Company’s common stock. The conversion price is 55% multiplied by the lowest Trading Price during the twenty trading days prior to the conversion date. However, EMA may not convert the amounts due under the Note into shares of the Company’s common stock if such conversion would cause it to own more than 4.99% of the Company’s then-outstanding common stock, which limitation may be waived by EMA upon 61 days-notice. In the event the Company defaults under the terms of the EMA Note, the Company owes 150% of the principal amount then due under the Note, plus any unpaid interest, immediately. The Company may prepay the amounts loaned to the Company under the EMA Note as follows: (i) during the initial 90-day period after the issue date, at 135% multiplied by the amount the Company is prepaying, and (ii) from the 91st through the 180th day after the issue date, at 150% multiplied by the amount the Company is prepaying. Any prepayments are subject to EMA’s written acceptance of such prepayment. After 180 days from the issue date the Company cannot prepay the EMA Note.
While this Note is outstanding, if the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has the right to convert monies owed to that 3rd party (or receive shares pursuant to a settlement or otherwise) at a discount to market greater than the Variable Conversion Price in effect at that time (prior to all other applicable adjustments in the Note), then the Variable Conversion Price shall be automatically adjusted to such greater discount percentage (prior to all applicable adjustments in this Note) until this Note is no longer outstanding. Each time, while this Note is outstanding, the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has a look back period greater than the look back period in effect under the Note at that time, then the Holder’s look back period shall automatically be adjusted to such greater number of days until this Note is no longer outstanding.
In addition to issuing the EMA Note, the Company agreed to issue EMA a warrant to acquire 137,500 shares of the Company’s common stock at an exercise price of $0.40 per share. The warrant contains a cashless exercise provision and expires on the fifth anniversary of the warrant.
In connection with the warrants, if the Company, at any time from and after the Issuance Date, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of, sell or issue (or announce any offer, sale, grant or any option to purchase or other disposition of) any Common Stock or Common Stock Equivalents entitling any person, firm, association or entity to acquire shares of Common Stock at an effective price per share less than the then-current Exercise Price (including but not limited to under the Note), as adjusted hereunder (any such issuance being referred to as a “Dilutive Issuance,” subject, however, to the proviso contained in the further definition of the term “Dilutive Issuance” contained in the agreement, then (a) the Exercise Price shall be adjusted to match the lowest price per share at which such Common Stock was issued or may be acquired pursuant to such Common Stock Equivalents in the Dilutive Issuance, and (b) the number of Warrant Shares issuable upon the exercise of this Warrant shall be increased to an amount equal to the number of Warrant Shares Holder could purchase hereunder for the aggregate Exercise Price, as reduced pursuant to the agreement, equal to the aggregate Exercise Price payable immediately prior to such reduction in Exercise Price. Additionally, following the occurrence of a Dilutive Issuance, all references in this Warrant to “Warrant Shares” shall be a reference to the Warrant Shares as increased pursuant to the agreement, and all references in this Warrant to “Exercise Price” shall be a reference to the Exercise Price as reduced pursuant to the agreement, as the same may occur from time to time hereunder. Subject to the anti-dilution provision and as a result of the warrant issued to Auctus detailed above, the Company issued EMA an amended and restated warrant to purchase 275,000 shares of our common stock at an exercise price of $0.20 per share, which replaced the original warrant issued to EMA.
On September 11, 2018, EMA Financial, LLC elected to convert $6,187.50, consisting of $5,437.50 of principal and $750 of fees, into 90,000 shares of the Company’s Common Stock at an exercise price of $0.06875 pursuant to the convertible note dated February 12, 2018.
On September 9, 2018, EMA Financial, LLC elected to convert $4,800, consisting of $4,050 of principal and $750 of fees, into 300,000 shares of the Company’s Common Stock at an exercise price of $0.016 pursuant to the convertible note dated February 12, 2018.
- 17 - |
Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
Short Term Convertible Notes Conversion
The Company evaluated the notes under the requirements of ASC 480 “Distinguishing Liabilities From Equity” (ASC 480) and concluded that the notes do not fall within the scope of ASC 480. The Company next evaluated the notes under the requirements of ASC 815 “Derivatives and Hedging”. Due to the existence of the anti-dilution provisions which reduces the purchaser’s conversion price in the event of subsequent dilutive issuances by the Company below the purchaser’s conversion price as described above, the conversion features do not meet the definition of “indexed to” the Company’s stock, and the scope exception to ASC 815’s derivative accounting provisions does not apply. The Company also evaluated the embedded derivative criteria in ASC 815, and concluded that the conversion features meet all the embedded derivative criteria in ASC 815, and therefore, the conversion features meet the definition of an embedded derivative that should be separated from the notes and accounted for as a derivative liability.
The embedded derivatives were recorded as a derivative liability on the consolidated Balance Sheet at their fair value of $330,000 at the date of issuance. At each subsequent reporting date, the fair value of the embedded derivative liabilities will be remeasured and changes in the fair value will be recorded in the consolidated Statements of Operations. At September 30, 2018, the embedded derivatives were re-measured at fair value that was determined to be $425,000. During the three months ended September 30, 2018 and 2017, the Company recorded a loss on embedded derivative re-valuation of $140,000 and $0, respectively.
The fair value of the embedded derivative liabilities is measured in accordance with ASC 820 “Fair Value Measurement”, using the “Monte Carlo Method” modeling incorporating the following inputs:
| September 30, |
|
| June 30, |
| |||
Crown Bridge Partners |
| 2018 |
|
| 2018 |
| ||
|
|
|
|
|
|
| ||
Expected dividend yield |
|
| 0.00 | % |
|
| 0.00 | % |
Expected stock-price volatility |
|
| 185.0 | % |
|
| 260.0 | % |
Risk-free interest rate |
|
| 2.36 | % |
|
| 2.22 | % |
Stock price |
| $ | 0.06 |
|
| $ | 0.14 |
|
Conversion price |
| $ | 0.02 |
|
| $ | 0.07 |
|
| September 30, |
|
| June 30, |
| |||
Auctus Fund |
| 2018 |
|
| 2018 |
| ||
|
|
|
|
|
|
| ||
Expected dividend yield |
|
| 0.00 | % |
|
| 0.00 | % |
Expected stock-price volatility |
|
| 300.0 | % |
|
| 100.0 | % |
Risk-free interest rate |
|
| 2.16 | % |
|
| 2.02 | % |
Stock price |
| $ | 0.06 |
|
| $ | 0.14 |
|
Conversion price |
| $ | 0.02 |
|
| $ | 0.07 |
|
- 18 - |
Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
| September 30, |
|
| June 30, |
| |||
EMA Financial |
| 2018 |
|
| 2018 |
| ||
|
|
|
|
|
|
| ||
Expected dividend yield |
|
| 0.00 | % |
|
| 0.00 | % |
Expected stock-price volatility |
|
| 185.0 | % |
|
| 210.0 | % |
Risk-free interest rate |
|
| 2.48 | % |
|
| 2.22 | % |
Stock price |
| $ | 0.06 |
|
| $ | 0.14 |
|
Conversion price |
| $ | 0.02 |
|
| $ | 0.07 |
|
Short Term Convertible Notes Warrants
The Company evaluated the Warrants under ASC 480 “Distinguishing Liabilities From Equity” and ASC 815 “Derivatives and Hedging”. Due to the existence of the antidilution provision, which reduces the Exercise Price and Conversion Price in the event of subsequent issuances, the Warrants are not indexed to our common stock, and the Company has determined that the Warrants meet the definition of a derivative under ASC 815. Accordingly, the Warrants were recorded as derivative liabilities in the consolidated Balance Sheet at their fair value of $96,289 at the date of issuance. At each subsequent reporting date, the fair value of the Warrants will be remeasured and changes in the fair value will be reported in the consolidated Statements of Operations. At September 30, 2018, the warrant liability was re-measured at fair value that was determined to be $89,828. During the three months ended September 30, 2018 and 2017, the Company recorded a loss on warrant re-valuation of $4,770 and $0, respectively.
The fair value of the Warrants is measured in accordance with ASC 820 “Fair Value Measurement”, using “Monte Carlo simulation” modeling, incorporating the following inputs:
Crown Bridge Partners |
| September 30, 2018 |
|
| June 30, 2018 |
| ||
|
|
|
|
|
|
| ||
Expected dividend yield |
|
| 0.00 | % |
|
| 0.00 | % |
Expected stock-price volatility |
|
| 215.0 | % |
|
| 215.0 | % |
Risk-free interest rate |
|
| 2.91 | % |
|
| 2.74 | % |
Stock price |
| $ | 0.06 |
|
| $ | 0.14 |
|
Exercise price |
| $ | 0.20 |
|
| $ | 0.20 |
|
Auctus Fund |
| September 30, 2018 |
|
| June 30, 2018 |
| ||
|
|
|
|
|
|
| ||
Expected dividend yield |
|
| 0.00 | % |
|
| 0.00 | % |
Expected stock-price volatility |
|
| 215.0 | % |
|
| 215.0 | % |
Risk-free interest rate |
|
| 2.91 | % |
|
| 2.74 | % |
Stock price |
| $ | 0.06 |
|
| $ | 0.14 |
|
Exercise price |
| $ | 0.20 |
|
| $ | 0.20 |
|
EMA Financial |
| September 30, 2018 |
|
| June 30, 2018 |
| ||
|
|
|
|
|
|
| ||
Expected dividend yield |
|
| 0.00 | % |
|
| 0.00 | % |
Expected stock-price volatility |
|
| 215.0 | % |
|
| 215.0 | % |
Risk-free interest rate |
|
| 2.91 | % |
|
| 2.73 | % |
Stock price |
| $ | 0.06 |
|
| $ | 0.14 |
|
Exercise price |
| $ | 0.20 |
|
| $ | 0.20 |
|
- 19 - |
Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
Debt Discount
The Company issued the notes with warrants that require liability treatment under ASC 815. As such, the proceeds of the notes were allocated, based on fair values, as follows: original issue discount of approximately $32,000, approximately $96,000 to the warrants granted, and approximately $330,000 to the embedded derivative, resulting in a debt discount to such notes of approximately $285,000 with the remaining amount of approximately $173,000 expensed at inception of the note. The debt discount is accreted to interest expense over the term of the note.
The Company recorded debt discount accretion of approximately $86,000 and $0 to interest expense for the three months ended September 30, 2018 and 2017, respectively. The accretion of debt discount expense to be recognized in future years is approximately $91,000.
Changes in the derivative and warrant liabilities were as follows:
Derivative liabilities: |
|
|
| |
June 30, 2018 |
| $ | 285,000 |
|
Increase (decrease) in fair value |
|
| 140,000 |
|
September 30, 2018 |
| $ | 425,000 |
|
|
|
|
|
|
Warrant liabilities: |
|
|
|
|
June 30, 2018 |
| $ | 85,058 |
|
Increase (decrease) in fair value |
|
| 4,770 |
|
September 30, 2018 |
| $ | 89,828 |
|
Convertible Notes to Stockholders
|
| Convertible Notes Payable |
| |||||
|
| September 30, 2018 |
|
| June 30, 2018 |
| ||
Convertible notes payable (A) |
| $ | 116,000 |
|
| $ | 116,000 |
|
Convertible note payable (B) |
|
| 260,000 |
|
|
| 260,000 |
|
Convertible notes payable (C) |
|
| 2,937,113 |
|
|
| 2,560,112 |
|
Subtotal |
|
| 3,313,113 |
|
|
| 2,936,112 |
|
Debt discount |
|
| (3,884 | ) |
|
| (5,381 | ) |
Net total |
| $ | 3,309,229 |
|
| $ | 2,930,731 |
|
Convertible Notes Payable (A)
Between September 2013 and December 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 and the repayment of one note totaling $15,000, netting a balance of approximately $116,000. Under the terms of these notes, maturity dates range from June 2015 and July 2019, interest rates range from 7.5% to 8.0% per annum, and are convertible into shares of the Company’s common stock at rates that range from $0.20 and $5.00 per share, but only if such conversion would not cause the noteholders to own more than 9.9% of the Company’s 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 period ended September 30, 2018, the Company is in default approximately $77,500 on various notes. As a result, these notes are included in the current portion of convertible notes payable, and the Company is in discussions with the noteholders to restructure the terms of the notes.
- 20 - |
Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
The Company determined that some of the notes had a beneficial conversion feature of approximately $38,000.
The Company recognized an accretion of debt discount expense of approximately $1,500 and $1,700 for the three-month periods ended September 30, 2018 and 2017, respectively. The accretion of debt discount expense to be recognized in future years is approximately $4,000.
Unsecured, Amended and Consolidated Convertible Note Payable (B)
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 the Company’s 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 the Company’s 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.
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.
Unsecured, Amended and Consolidated Convertible Notes Payable (C)
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 the Company’s 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 the Company’s outstanding common stock, and contains piggyback registration rights. The note payable was extinguished in October 2017.
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.
October 2017 Convertible Note
In October 2017, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,560,000. In exchange, the Company modified the $2,460,112 convertible promissory note payable issued in January 2017 and received cash of $100,000. The amended and consolidated convertible promissory note matures in October 2019, accrues interest at 5% per annum and is convertible into shares of the Company’s common stock at a conversion rate of $0.10 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of the Company’s outstanding common stock, and contains piggyback registration rights. The note payable was modified in September 2018.
- 21 - |
Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
In connection with the $2,560,000 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 $3.1 million for the year ended June 30, 2018.
September 2018 Convertible Note
In September 2018, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of $2,937,113. In exchange, the Company modified the $2,560,112 convertible promissory note payable issued in October 2017, accounts payable related to accrued interest of approximately $302,000 and received cash of $75,000. The amended and consolidated convertible promissory note matures in October 2019, accrues interest at 5% per annum and is convertible into shares of the Company’s common stock at a conversion rate of $0.10 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of the Company’s outstanding common stock, and contains piggyback registration rights.
In connection with the $2,937,113 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 $50,000 and $40,000 for the three-month periods ended September 30, 2018 and 2017, respectively. Accrued interest on all notes payable to stockholders at September 30, 2018 and 2017 totaled approximately $176,000 and $300,000, respectively, and is included in accounts payable.
As of September 30, 2018, future maturities of all note payables are as follows:
2019 |
|
| 1,092,910 |
|
2020 |
|
| 2,953,113 |
|
Total outstanding notes |
|
| 4,046,023 |
|
Debt Discount |
|
| (94,758 | ) |
Net Notes Payable |
| $ | 3,951,265 |
|
NOTE 7 – STOCK TRANSACTIONS
On September 7, 2018, Crown Bridge Partners, LLC elected to convert $5,049, consisting of $4,549 of principal and $500 of fees, into 90,000 shares of the Company’s Common Stock at an exercise price of $0.0561 pursuant to the convertible note dated February 14, 2018.
On September 11, 2018, EMA Financial, LLC elected to convert $6,187.50, consisting of $5,437.50 of principal and $750 of fees, into 90,000 shares of the Company’s Common Stock at an exercise price of $0.06875 pursuant to the convertible note dated February 12, 2018.
On September 12, 2018, Auctus Fund, LLC elected to convert $3,025, consisting of $2,525 of accrued and unpaid interest and $500 of fees, into 50,000 shares of the Company’s Common Stock at an exercise price of $0.06050 pursuant to the convertible note dated February 15, 2018.
- 22 - |
Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
On September 9, 2018, EMA Financial, LLC elected to convert $4,800, consisting of $4,050 of principal and $750 of fees, into 300,000 shares of the Company’s Common Stock at an exercise price of $0.016 pursuant to the convertible note dated February 12, 2018.
On September 25, 2018, Auctus Fund, LLC elected to convert $693, consisting of $193 of accrued and unpaid interest and $500 of fees, into 60,000 shares of the Company’s Common Stock at an exercise price of $0.01155 pursuant to the convertible note dated February 15, 2018.
On September 28, 2018, Crown Bridge Partners, LLC elected to convert $2,534, consisting of $2,054 of principal and $500 of fees, into 480,000 shares of the Company’s Common Stock at an exercise price of $0.00532 pursuant to the convertible note dated February 14, 2018.
NOTE 8 – OPTIONS AND WARRANTS
Options
For the three-month period ended September 30, 2018, the Company had 910,000 options outstanding at a weighted average exercise price of $1.45 and a weighted average contractual life of 6.26 years, with 826,000 options exercisable at a weighted average exercise price of $1.52 and a weighted average contractual life of 5.88 years. For the three-month period ended September 30, 2018 and 2017, the Company recognized an expense of approximately $14,500 and $16,000, respectively, and was recorded as compensation expense. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $54,500.
Warrants
For the three-month period ended September 30, 2018, the Company had approximately 3,200,000 warrants outstanding at an average exercise price of $0.78. For the three-month period ended September 30, 2018 and 2017, the Company recognized an accretion of debt discount related to warrants expense of approximately $1,200 and $1,300, respectively. The approximate expense expected to be recognized in future years is $4,000.
NOTE 9 – RELATED PARTY TRANSACTIONS
Employment Agreements
Eric Clemons
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 December 31, 2017. The Company has entered into a new employment agreement with Mr. Clemons. |
|
|
|
| · | 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 September 30, 2018, 100,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $4,500 and $5,500 for the three-month periods ended September 30, 2018 and 2017, respectively. The selling, general and administrative expense has been fully amortized. |
- 23 - |
Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
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 three-month periods ended September 30, 2018 and 2017, no cash placement bonus was earned, respectively.
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 September 30, 2018, 63,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $4,000 for the three-month periods ended September 30, 2018 and 2017, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $27,000.
On February 1, 2018, the Company entered into a new employment agreement with Eric Clemons, an officer of the company. The new contract had no accounting impact on the prior agreements. Terms of the agreement include the following:
| · | Term of contract thirty-six months. |
|
|
|
| · | Annual salary of Two Hundred Fourteen Thousand Five Hundred Dollars ($214,500). |
|
|
|
| · | Stock grant of 800,000 of the Company’s common restricted shares for services provided to the Company. Stock grant is subject to a vesting schedule, of which 160,000 shares of stock were issued on February 1, 2018. The aggregate fair market value of these shares was approximately $144,000 as the fair market value of the stock was $0.18 per share. The Company used recent sales of stock to determine the fair market value of this transaction. As of September 30, 2018, 160,000 shares have been issued. The Company recognized selling, general and administrative expense of approximately $7,300 and $0 for the three-month periods ended September 30, 2018 and 2017, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $95,500. |
To date, employee and employer payroll taxes have been accrued but have not been remitted to taxing authorities by the Company for cash compensation paid. As a result, the Company is liable such payroll taxes and any related penalties and interest.
Wesley Tate
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 has entered into a new employment agreement with Mr. Tate. |
|
|
|
| · | 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 September 30, 2018, 50,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $2,200 and $2,700 for the three-month periods ended September 30, 2018 and 2017, respectively. The selling, general and administrative expense has been fully amortized. |
- 24 - |
Table of Contents |
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
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 September 30, 2018, 63,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $4,000 for the three-month periods ended September 30, 2018 and 2017, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $27,000.
On February 1, 2018, the Company entered into a new employment agreement with Wesley Tate, an officer of the company. The new contract had no accounting impact on the prior agreements. Terms of the agreement include the following:
| · | Term of contract thirty-six months. |
|
|
|
| · | Annual salary of One Hundred Eighty-Seven Thousand Two Hundred Dollars ($187,200). |
|
|
|
| · | Stock grant of 800,000 of the Company’s common restricted shares for services provided to the Company. Stock grant is subject to a vesting schedule of which 160,000 shares of stock were issued on February 1, 2018. The aggregate fair market value of these shares was approximately $144,000 as the fair market value of the stock was $0.18 per share. The Company used recent sales of stock to determine the fair market value of this transaction. As of September 30, 2018, 160,000 shares have been issued. The Company recognized selling, general and administrative expense of approximately $7,300 and $0 for the three-month periods ended September 30, 2018 and 2017, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $95,500. |
To date, employee and employer payroll taxes have been accrued but have not been remitted to taxing authorities by the Company for cash compensation paid. As a result, the Company is liable such payroll taxes and any related penalties and interest.
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 approximately 4.0 million and 2.6 million for the three-month periods ended September 30, 2018 and 2017, respectively. In addition, the convertible notes convert at an exercise price of between $0.10 and $5.00 per share of common stock representing approximately 30 million shares. The options, warrants and shares underlying the convertible note were considered for the dilutive calculation but in periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
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CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
The following table sets forth the computation of basic and diluted net income per share:
|
| For the Three Months ended September 30, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
|
|
|
|
|
|
| ||
Net loss attributable to the common stockholders |
| $ | (537,299 | ) |
| $ | (431,483 | ) |
|
|
|
|
|
|
|
|
|
Basic weighted average outstanding shares of common stock |
|
| 9,143,951 |
|
|
| 8,003,532 |
|
Dilutive effect of options and warrants |
|
| - |
|
|
| - |
|
Diluted weighted average common stock and common stock equivalents |
|
| 9,143,951 |
|
|
| 8,003,532 |
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
Basic and diluted |
| $ | (0.06 | ) |
| $ | (0.05 | ) |
NOTE 11 – SUBSEQUENT EVENTS
On October 1, 2018, Auctus Fund, LLC elected to convert $2,333, consisting of $1,833 of accrued and unpaid interest and $500 of fees, into 360,000 shares of the Company’s Common Stock at an exercise price of $0.00648 pursuant to the convertible note dated February 15, 2018.
On October 4, 2018, EMA Financial, LLC elected to convert $4,120, consisting of $3,370 of principal and $750 of fees, into 515,000 shares of the Company’s Common Stock at an exercise price of $0.008 pursuant to the convertible note dated February 12, 2018.
On October 10, 2018, Crown Bridge Partners, LLC elected to convert $2,896, consisting of $2,396 of principal and $500 of fees, into 548,000 shares of the Company’s Common Stock at an exercise price of $0.005285 pursuant to the convertible note dated February 14, 2018.
On October 10, 2018, Auctus Fund, LLC elected to convert $2,884, consisting of $1,960 of accrued and unpaid interest, $424 of principal and $500 of fees, into 477,500 shares of the Company’s Common Stock at an exercise price of $0.00440 pursuant to the convertible note dated February 15, 2018.
On October 18, 2018, EMA Financial, LLC elected to convert $3,618, consisting of $2,368 of principal and $750 of fees, into 599,000 shares of the Company’s Common Stock at an exercise price of $0.00604 pursuant to the convertible note dated February 12, 2018.
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CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 2018 AND 2017
On October 29, 2018, Auctus Fund, LLC elected to convert $1,760, consisting of $570 of accrued and unpaid interest, $690 of principal and $500 of fees, into 400,000 shares of the Company’s Common Stock at an exercise price of $0.00440 pursuant to the convertible note dated February 15, 2018.
On October 29, 2018, EMA Financial, LLC elected to convert $2,472, consisting of $1,722 of principal and $750 of fees, into 561,750 shares of the Company’s Common Stock at an exercise price of $0.0044 pursuant to the convertible note dated February 12, 2018.
On November 6, 2018, Crown Bridge Partners, LLC elected to convert $1,706, consisting of $1,206 of principal and $500 of fees, into 677,000 shares of the Company’s Common Stock at an exercise price of $0.00252 pursuant to the convertible note dated February 14, 2018.
On November 7, 2018, EMA Financial, LLC elected to convert $2,085, consisting of $1,335 of principal and $750 of fees, into 677,000 shares of the Company’s Common Stock at an exercise price of $0.00308 pursuant to the convertible note dated February 12, 2018.
On November 9, 2018, Crown Bridge Partners, LLC elected to convert $1,875, consisting of $1,375 of principal and $500 of fees, into 744,000 shares of the Company’s Common Stock at an exercise price of $0.00252 pursuant to the convertible note dated February 14, 2018.
On November 9, 2018, EMA Financial, LLC elected to convert $2,293, consisting of $1,543 of principal and $750 of fees, into 744,500 shares of the Company’s Common Stock at an exercise price of $0.00308 pursuant to the convertible note dated February 12, 2018.
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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DISCLAIMER REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q, which are not statements of historical fact, are what are known as "forward-looking statements," which are basically statements about the future. For that reason, these statements involve risk and uncertainty since no one can accurately predict the future. Words such as "plans," "intends," "hopes," "seeks," "anticipates," "expects," and the like, often identify such forward looking statements, but are not the only indication that a statement is a forward-looking statement. Such forward-looking statements include statements concerning our plans and objectives with respect to our present and future operations, and statements which express or imply that such present and future operations will or may produce revenues, income or profits. These and other factors may cause our actual results to differ materially from any forward-looking statement. We caution you not to place undue reliance on these forward-looking statements. Although we base these forward-looking statements on our expectations, assumptions, and projections about future events, actual events and results may differ materially, and our expectations, assumptions, and projections may prove to be inaccurate. The forward-looking statements speak only as of the date hereof, and we expressly disclaim any obligation to publicly release the results of any revisions to these forward-looking statements to reflect events or circumstances after the date of this filing.
Business Overview
We were incorporated on December 18, 2007, in the State of Nevada. We are a smaller reporting biomedical company and through our wholly owned subsidiary, Cerebain Operating, Inc. (“Cerebain”), our business involves the discovery of products for the treatment of Alzheimer’s disease utilizing Omentum. Under our current plan, our products will include both a medical device solution as well as a synthetic drug solution.
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.
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 (patent pending) 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.
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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 $375,000 in accounts payable at September 30, 2018 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.
Legal fees pertaining to the patent are recorded as general and administrative expenses when they are incurred. Legal fees charged to operations were approximately $3,200 and $450 for the three-month periods ended September 30, 2018 and 2017, respectively.
We recognized a patent royalty expense of approximately $25,000 for the three-month period ended September 30, 2018 compared to $25,000 for the three-month period ended September 30, 2017. The accrued payable of $375,000 pertaining to the patent royalty expense at September 30, 2018 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.
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.
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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.
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, 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.
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Limited Operating History; Need for Additional Capital
There is very limited historical financial information about us on which to base an evaluation of our performance. We are a smaller reporting biomedical company and have not generated revenues from operations. We cannot guarantee we will be successful in our business operations. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources, and possible cost overruns due to increases in the cost of services. To become profitable and competitive, we must receive additional capital. We have no assurance that future financing will materialize. If that financing is not available, we may be unable to continue operations.
Overview
The following management’s discussion and analysis of financial condition and results of operations (“MD&A”) of Cerebain includes the following sections:
| · | Results of Operations |
| · | Liquidity and Capital Resources |
| · | Capital Expenditures |
| · | Fiscal Year End |
| · | Going Concern |
| · | Critical Accounting Policies |
| · | Recent Accounting Pronouncements |
| · | Off-Balance Sheet Arrangements |
| · | Inflation |
Results of Operations
Three Months Ended September 30, 2018 Compared to Three Months Ended September 30, 2017
Revenue
For the three-month periods ended September 30, 2018 and 2017, we did not generate any revenues.
Operating expenses
Operating expenses decreased by approximately $108,000, or 30.09%, to approximately $251,000 in the three-month period ended September 30, 2018 from approximately $359,000 in the three-month period ended September 30, 2017 primarily due to the following: decrease in research and development costs; decrease in marketing costs; decrease in consultant costs, including costs related to fair value of stock and warrants issued for services as some of these costs have been fully amortized; and decrease in travel and entertainment expenses due to decrease in required travel; offset by an increase in compensation and employee expenses; and increase in professional fees due to an increase in legal fees and audit fees.
Operating expenses for the three-month period ended September 30, 2018 were primarily comprised of (amounts approximate) research and development costs of $32,000 related to consulting services, patent royalty expense of $25,000, consulting services costs primarily paid through the issuance of our common stock of $15,000, compensation expense of $30,000, employee expense of $108,000; professional fees of $28,000, travel and entertainment costs of $10,000, and other operating expenses of $3,000.
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Operating expenses for the three-month period ended September 30, 2017 were comprised of (amounts approximate) marketing costs of $3,100, research and development costs of $42,000, patent royalty expense of $25,000, consulting services costs primarily paid through the issuance of our common stock of $140,000, compensation expense of $16,000, employee expense of $95,000; professional fees of $22,500, travel and entertainment costs of $11,000, and other operating expenses of $5,400.
Other income (expenses)
Other expense increased by approximately $214,000, or 296.75%, to approximately $286,000 in the three-month period ended September 30, 2018 from approximately $72,000 in the three-month period ended September 30, 2017 primarily due to an increase in accretion of recorded debt discounts related to notes payable; and the recognition in the change of fair value of warrant liability and the change of fair value of derivative liability.
Net loss before income taxes
Net loss before income taxes for the three-month period ended September 30, 2018 totaled approximately $537,000 compared to $431,000 for the three-month period ended September 30, 2017. The increase in net loss before income taxes was primarily due to the following: increase in compensation and employee expenses; increase in professional fees due to an increase in legal fees and audit fees; increase in accretion of recorded debt discounts related to notes payable; and the recognition in the change of fair value of warrant liability and the change of fair value of derivative liability, offset by a decrease in research and development costs; decrease in marketing costs; decrease in consultant costs, including costs related to fair value of stock and warrants issued for services as some of these costs have been fully amortized; and decrease in travel and entertainment expenses due to decrease in required travel.
Assets and Liabilities
Assets were approximately $59,000 as of September 30, 2018. Assets consisted of cash of approximately $39,000 and prepaid expense of approximately $20,000. Liabilities were approximately $6,129,000 as of September 30, 2018. Liabilities primarily consisted of (amounts approximate) accounts payable of $921,000, related party payables of $375,000, accrued payroll of $255,000, payroll taxes payable of $112,000, short term related party notes payable of $464,000, current portion of convertible notes of $360,000, short term convertible notes payable, net of debt discount, of $178,000, derivative liabilities of $425,000, warrant liabilities of $90,000 and convertible notes to stockholders, net of debt discount, of $2,949,000.
Stockholders’ Deficit
Stockholders’ deficit was approximately $6,070,000 as of September 30, 2018. Stockholder’s deficit consisted primarily of deficit accumulated of approximately $33,000,000 at September 30, 2018, offset by shares issued to founders and recorded as compensation in the amount of $13,900, shares issued for fundraising totaling $1,781,000, net of issuance costs, beneficial conversion feature associated with convertible note of $18,361,000, shares issued in conversion of liabilities of $780,000, shares associated with warrants, options and issuances for services of $5,974,000 and shares issued for patent rights totaling $6,600.
Liquidity and Capital Resources
General – We had cash (amounts approximate) of $39,000 and $65,000 as of September 30, 2018 and June 30, 2018, respectively, representing a decrease in cash flows of approximately $26,000 in the three-month period ended September 30, 2018 resulting from cash used in operating activities of approximately $101,000, offset partially by cash provided by financing activities of approximately $75,000.
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The following is a summary of our cash flows provided by (used in) operating and financing activities during the periods indicated:
|
| Three Months Ended September 30, |
| |||||
|
| 2018 |
|
| 2017 |
| ||
|
|
|
|
|
|
| ||
Cash at beginning of period |
| $ | 64,583 |
|
| $ | 11,345 |
|
Net cash used in operating activities |
|
| (100,950 | ) |
|
| (165,235 | ) |
Net cash provided by financing activities |
|
| 75,000 |
|
|
| 155,000 |
|
Cash at end of period |
| $ | 38,633 |
|
| $ | 1,110 |
|
Cash Flows from Operating Activities – For the three-month period ended September 30, 2018, net cash used in operations was approximately $101,000 compared to net cash used in operations of approximately $165,000 for the three-month period ended September 30, 2017. Net cash used in operations for the three-month period ended September 30, 2018 was primarily due to (amounts approximate) a net loss of $537,000, accretion of debt discount of $88,000, increase in the change in derivative liabilities of $140,000, increase in the change in warrant liabilities of $5,000, stock-based compensation of $29,000, amortization of prepaid consulting compensation of $9,000, conversion of short-term convertible notes payable fees of $3,500, and the changes in operating assets and liabilities of approximately $162,000.
Cash Flows from Financing Activities – Net cash flows provided by financing activities in the three-month period ended September 30, 2018 was approximately $75,000, compared to net cash provided of approximately $155,000 in the same period in 2017. The cash provided by financing activities for the three-month period ended September 30, 2018 was due to proceeds from convertible promissory notes payable to stockholder of approximately $75,000.
Financing – We expect that our current working capital position, together with our expected future cash flows from operations will be insufficient to fund our operations in the ordinary course of business, anticipated capital expenditures, debt payment requirements and other contractual obligations for at least the next twelve months. However, this belief is based upon many assumptions and is subject to numerous risks, and we will require additional funding in the future.
We have no present agreements or commitments with respect to any material acquisitions of other businesses, products, product rights or technologies or any other material capital expenditures. However, we will continue to evaluate acquisitions of and/or investments in products, technologies, capital equipment or improvements or companies that complement our business and may make such acquisitions and/or investments in the future. Accordingly, we may need to obtain additional sources of capital in the future to finance any such acquisitions and/or investments. We may not be able to obtain such financing on commercially reasonable terms, if at all. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing, or cause substantial dilution for our stockholders, in the case of equity financing.
Capital Expenditures
Other Capital Expenditures
If we have the funds available, we expect to purchase approximately $30,000 of equipment in connection with the expansion of the business, primarily related to office equipment and supplies.
Fiscal Year End
Cerebain and Cerebain Biotech each has a June 30 fiscal year end.
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Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared assuming we will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. We had an accumulated deficit of approximately $33,000,000 and $32,450,000 at September 30, 2018 and June 30, 2018, respectively, and had a net loss of approximately $537,000 and $431,000 for the three-month periods ended September 30, 2018 and 2017, respectively, and net cash used in operating activities of approximately $101,000 and $165,000 for the three-month periods ended September 30, 2018 and 2017, respectively, with no revenue earned since inception, limited cash of approximately $39,000 and $65,000 at September 30, 2018 and June 30, 2018, respectively, and a lack of operational history. These matters raise substantial doubt about our ability to continue as a going concern.
While we are attempting to commence operations and generate revenues, our cash position will not be significant enough to support our daily operations. Management intends to raise additional funds by way of a public or private offering. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for us to continue as a going concern. While we believe in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to further implement our business plan, generate revenues, and successfully borrow money or sell our securities for cash.
The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Critical Accounting Policies
The Commission has defined a company’s critical accounting policies as the ones that are most important to the portrayal of our financial condition and results of operations and which require us to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies that are significant to understanding our results. For additional information, see Note 3 - Summary of Significant Accounting Policies on page 9.
The following are deemed to be the most significant accounting policies affecting us.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Measurement, estimates and assumptions are used for, but not limited to, useful lives and residual value of long-lived assets, and the valuation of equity instruments. We make these estimates using the best information available at the time the estimates are made; however actual results when ultimately realized could differ from those estimates. The more significant estimates and assumptions by management include among others: useful lives and residual values of long-lived assets, the valuation of equity instruments, the valuation of warrants and options, the valuation of derivative liabilities, and the valuation of warrant liabilities.
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.
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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.
Convertible debt – derivative treatment
When we issue debt with a conversion feature, we must first assess whether the conversion feature meets the requirements to be treated as a derivative, as follows: a) one or more underlyings, typically the price of our common stock; b) one or more notional amounts or payment provisions or both, generally the number of shares upon conversion; c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provisions, which in the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. An embedded equity-linked component that meets the definition of a derivative does not have to be separated from the host instrument if the component qualifies for the scope exception for certain contracts involving an issuer’s own equity. The scope exception applies if the contract is both a) indexed to its own stock; and b) classified in shareholders’ equity in its statement of financial position.
If the conversion feature within convertible debt meets the requirements to be treated as a derivative, we estimate the fair value of the convertible debt derivative using the Monte Carlo Method 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 statement of operations. The debt discount is amortized through interest expense over the life of the debt.
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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
FASB ASU 2018-07 “Compensation – Stock Compensation (Topic 718) - In June 2018, the FASB issued ASU 2018-07. This update is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers, etc.). The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. The standard will be applied in a retrospective approach for each period presented. We currently do not plan to early adopt this guidance and are evaluating the potential impact of this guidance on the consolidated financial statements as well as transition methods.
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 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting Company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-l5(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2018. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2018 our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended.
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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 September 30, 2018. 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”). Management believes that, as of September 30, 2018, 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 formal written risk assessment and mapped our processes to control objectives. |
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| · | We have not implemented comprehensive entity-level internal controls. |
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| · | We have not implemented adequate system and manual controls. |
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| · | We do not have sufficient segregation of duties. |
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| · | We lack sufficient personnel with appropriate training and expertise in accounting principles generally 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.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the period ended September 30, 2018, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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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 alleged: (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 claimed causes of action for breach of contract, violation of the Pennsylvania wage payment and collection law, and unjust enrichment, and sought 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 as follows:
We paid 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 made 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. |
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 had 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 September 30, 2018. For the fiscal year ended June 30, 2018, we paid Ms. Miller $85,000 as agreed in the settlement agreement. As of September 30, 2018, the terms of the settlement agreement have been met and Ms. Miller has been paid in full.
The following table summarizes the dates and payments made to Ms. Miller:
Date of Payment |
| Amount |
| |
April 27, 2017 |
| $ | 20,000 |
|
June 29, 2017 |
|
| 15,000 |
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July 25, 2017 |
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| 15,000 |
|
September 5, 2017 |
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| 15,000 |
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September 28, 2017 |
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| 15,000 |
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October 27, 2017 |
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| 15,000 |
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November 27, 2017 |
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| 15,000 |
|
December 28, 2017 |
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| 10,000 |
|
Total |
| $ | 120,000 |
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There have been no changes to our Risk Factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 26, 2018.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
In September 2018, we entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of $2,937,113. In exchange, we modified the $2,560,112 convertible promissory note payable issued in October 2017, accounts payable related to accrued interest of approximately $293,001, and received cash of $75,000. The amended and consolidated convertible promissory note matures in October 2019, accrues interest at 5% per annum and is convertible into shares of our common stock at a conversion rate of $0.10 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of the Company’s outstanding common stock, and contains piggyback registration rights. The issuance was made in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended. To make this determination we relied on the representations of the purchaser contained in the convertible promissory note signed by the purchaser, which indicated the purchaser was knowledgeable about our management and our operations, was a sophisticated investor, and understood the purchase was part of a private placement.
On September 7, 2018, Crown Bridge Partners, LLC elected to convert $5,049, consisting of $4,549 of principal and $500 of fees, into 90,000 shares of our Common Stock at an exercise price of $0.0561 pursuant to the convertible note dated February 14, 2018. The issuance was made in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended. To make this determination we relied on the representations of the purchaser contained in the convertible promissory note signed by the purchaser, which indicated the purchaser was knowledgeable about our management and our operations, was a sophisticated investor, and understood the purchase was part of a private placement.
On September 11, 2018, EMA Financial, LLC elected to convert $6,187.50, consisting of $5,437.50 of principal and $750 of fees, into 90,000 shares of our Common Stock at an exercise price of $0.06875 pursuant to the convertible note dated February 12, 2018. The issuance was made in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended. To make this determination we relied on the representations of the purchaser contained in the convertible promissory note signed by the purchaser, which indicated the purchaser was knowledgeable about our management and our operations, was a sophisticated investor, and understood the purchase was part of a private placement.
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On September 12, 2018, Auctus Fund, LLC elected to convert $3,025, consisting of $2,525 of accrued and unpaid interest and $500 of fees, into 50,000 shares of our Common Stock at an exercise price of $0.06050 pursuant to the convertible note dated February 15, 2018. The issuance was made in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended. To make this determination we relied on the representations of the purchaser contained in the convertible promissory note signed by the purchaser, which indicated the purchaser was knowledgeable about our management and our operations, was a sophisticated investor, and understood the purchase was part of a private placement.
On September 9, 2018, EMA Financial, LLC elected to convert $4,800, consisting of $4,050 of principal and $750 of fees, into 300,000 shares of our Common Stock at an exercise price of $0.016 pursuant to the convertible note dated February 12, 2018. The issuance was made in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended. To make this determination we relied on the representations of the purchaser contained in the convertible promissory note signed by the purchaser, which indicated the purchaser was knowledgeable about our management and our operations, was a sophisticated investor, and understood the purchase was part of a private placement.
On September 25, 2018, Auctus Fund, LLC elected to convert $693, consisting of $193 of accrued and unpaid interest and $500 of fees, into 60,000 shares of our Common Stock at an exercise price of $0.01155 pursuant to the convertible note dated February 15, 2018. The issuance was made in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended. To make this determination we relied on the representations of the purchaser contained in the convertible promissory note signed by the purchaser, which indicated the purchaser was knowledgeable about our management and our operations, was a sophisticated investor, and understood the purchase was part of a private placement.
On September 28, 2018, Crown Bridge Partners, LLC elected to convert $2,534, consisting of $2,054 of principal and $500 of fees, into 480,000 shares of our Common Stock at an exercise price of $0.00532 pursuant to the convertible note dated February 14, 2018. The issuance was made in reliance on Section 4(a)(2) of the Securities Act of 1933, as amended. To make this determination we relied on the representations of the purchaser contained in the convertible promissory note signed by the purchaser, which indicated the purchaser was knowledgeable about our management and our operations, was a sophisticated investor, and understood the purchase was part of a private placement.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There have been no events which are required to be reported under this Item.
ITEM 4. MINING SAFETY DISCLOSURES
There have been no events which are required to be reported under this Item.
There have been no events which are required to be reported under this Item.
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| Employment Agreement with Wesley Tate dated February 1, 2018 | |
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| Amended and Restated Warrant Agreement with EMA Financial dated February 15, 2018 | |
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| Cerebain Biotech Corps. Domestic and International Subsidiaries | |
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101** |
| Interactive Data File (Form 10-Q for the three-month period ended September 30, 2018 furnished in XBRL). |
101.INS |
| Interactive Data File (Form 10-Q for the three-month period ended September 30, 2018 furnished in XBRL). |
101.SCH |
| XBRL Taxonomy Extension Schema Document |
101.CAL |
| XBRL Taxonomy Extension Calculation Linkbase Document |
101.DEF |
| XBRL Taxonomy Extension Definition Linkbase Document |
101.LAB |
| XBRL Taxonomy Extension Label Linkbase Document |
101.PRE |
| XBRL Taxonomy Extension Presentation Linkbase Document |
* filed herewith
** Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections
(1) | Incorporated by reference from our Registration Statement on Form S-1 filed with the Commission on January 27, 2009. |
(2) | Incorporated by reference from our Form 8-K filed with the Commission on February 10, 2012. |
(3) | Incorporated by reference from our Form 8-K filed with the Commission on September 28, 2012. |
(4) | Incorporated by reference from our Form 10-Q filed with the Commission on November 14, 2012. |
(5) | Incorporated by reference from our Form 8-K filed with the Commission on January 24, 2013. |
(6) | Incorporated by reference from our Form 10-Q filed with the Commission on February 12, 2013. |
(7) | Incorporated by reference from our Form 10-Q filed with the Commission on May 3, 2013. |
(8) | Incorporated by reference from our Form 10-K/A filed with the Commission on October 4, 2013. |
(9) | Incorporated by reference from our Form 8-K filed with the Commission on January 6, 2014. |
(10) | Incorporated by reference from our Form 10-Q filed with the Commission on February 10, 2014. |
(11) | Incorporated by reference from our Form 10-Q filed with the Commission on May 14, 2014. |
(12) | Incorporated by reference from our Form DEF 14A filed with the Commission on March 14, 2014. |
(13) | Incorporated by reference from our Form 10-K filed with the Commission on August 11, 2014. |
(14) | Incorporated by reference from our Form 10-Q filed with the Commission on November 16, 2015. |
(15) | Incorporated by reference from our Form 10-Q filed with the Commission on November 14, 2016. |
(16) | Incorporated by reference from our Form 10-Q filed with the Commission on February 10, 2017. |
(17) | Incorporated by reference from our Form 10-Q filed with the Commission on May 11, 2017. |
(18) | Incorporated by reference from our Form 10-Q filed with the Commission on February 6, 2018. |
(19) | Incorporated by reference from our Form 8-K filed with the Commission on March 13, 2018. |
(20) | Incorporated by reference from our Form 10-Q filed with the Commission on May 15, 2018 |
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Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
Cerebain Biotech Corp. A Nevada corporation | |||
Date: November 14, 2018 | By: | /s/ ERIC CLEMONS | |
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| Eric Clemons | |
President (Principal Executive Officer) | |||
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| By: | /s/ WESLEY TATE |
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| Wesley Tate |
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| Chief Financial Officer (Principal Financial and Accounting Officer) |
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EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Eric Clemons, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Cerebain Biotech Corp. for the period ended September 30, 2018. |
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2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this interim report is being prepared; |
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| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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| c) | evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
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| d) | disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. |
Dated: November 14, 2018 | By: | /s/ ERIC CLEMONS | |
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| Eric Clemons | |
President (Principal Executive Officer) |
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Wesley Tate, certify that:
1. | I have reviewed this Quarterly Report on Form 10-Q of Cerebain Biotech Corp. for the period ended September 30, 2018. |
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2. | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; |
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3. | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; |
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4. | The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: |
| a) | designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this interim report is being prepared; |
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| b) | designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
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| c) | evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; |
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| d) | disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; |
5. | The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function): |
| a) | all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and |
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| b) | any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting. |
Dated: November 14, 2018 | By: | /s/ WESLEY TATE | |
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| Wesley Tate | |
Chief Financial Officer (Principal Financial and Accounting Officer) |
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cerebain Biotech Corp. (the "Company") on Form 10-Q for the period ended September 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Eric Clemons, President of the Company, certify, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: November 14, 2018 | By: | /s/ ERIC CLEMONS | |
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| Eric Clemons | |
President (Principal Executive Officer) |
A signed original of this written statement required by Section 906 has been provided to Cerebain Biotech Corp. and will be retained by Cerebain Biotech Corp. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.2
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Cerebain Biotech Corp. (the "Company") on Form 10-Q for the period ended September 30, 2018 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Wesley Tate, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
| (1) | The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and |
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| (2) | The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. |
Dated: November 14, 2018 | By: | /s/ WESLEY TATE | |
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| Wesley Tate | |
Chief Financial Officer (Principal Financial and Accounting Officer) |
A signed original of this written statement required by Section 906 has been provided to Cerebain Biotech Corp. and will be retained by Cerebain Biotech Corp. and furnished to the Securities and Exchange Commission or its staff upon request.
Document and Entity Information - shares |
3 Months Ended | |
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Sep. 30, 2018 |
Nov. 14, 2018 |
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Document And Entity Information | ||
Entity Registrant Name | CEREBAIN BIOTECH CORP. | |
Entity Central Index Key | 0001453099 | |
Document Type | 10-Q | |
Document Period End Date | Sep. 30, 2018 | |
Amendment Flag | false | |
Current Fiscal Year End Date | --06-30 | |
Is Entity's Reporting Status Current? | Yes | |
Entity Filer Category | Non-accelerated Filer | |
Entity Common Stock, Shares Outstanding | 16,413,097 | |
Document Fiscal Period Focus | Q1 | |
Document Fiscal Year Focus | 2019 | |
Entity Emerging Growth Company | false | |
Entity Small Business | true | |
Entity Ex Transition Period | false |
CONDENSED CONSOLIDATED BALANCE SHEETS (Parenthetical) - USD ($) |
Sep. 30, 2018 |
Jun. 30, 2018 |
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Current liabilities: | ||
Convertible notes payable, net of debt discount | $ 90,874 | $ 177,094 |
Long term liabilities: | ||
Convertible notes payable net of debt discount Non current | $ 3,884 | $ 5,381 |
Stockholders' deficit | ||
Preferred stock, par value | $ 0.001 | $ 0.001 |
Preferred stock, authorized shares | 1,000,000 | 1,000,000 |
Preferred stock, issued shares | 0 | 0 |
Preferred stock, outstanding shares | 0 | 0 |
Common stock, par value | $ 0.001 | $ 0.001 |
Common stock, Authorized shares | 249,000,000 | 249,000,000 |
Common stock, Issued shares | 10,109,347 | 9,039,347 |
Common stock, outstanding shares | 10,109,347 | 9,039,347 |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS - USD ($) |
3 Months Ended | |
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Sep. 30, 2018 |
Sep. 30, 2017 |
|
Operating Expenses | ||
Selling, general and administrative expenses | $ 194,229 | $ 288,918 |
Research and development costs | 32,000 | 42,314 |
Patent Royalty Expense | 25,000 | 25,000 |
Marketing expenses | 3,148 | |
Total operating expenses | 251,229 | 359,380 |
Other (income) expense | ||
Accretion of debt discount | 87,717 | 1,668 |
Loss from extinguishment of debt | 30,000 | |
Interest expense | 53,583 | 40,435 |
Change in fair value of derivative liabilities | 140,000 | |
Change in fair value of warrant liabilities | 4,770 | |
Total other expense, net | 286,070 | 72,103 |
Net loss | $ (537,299) | $ (431,483) |
Loss per share: | ||
Basic and diluted loss per share | $ (0.06) | $ (0.05) |
Basic and diluted weighted average shares outstanding | 9,143,951 | 8,003,532 |
ORGANIZATION AND PRINCIPAL ACTIVITIES |
3 Months Ended |
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Sep. 30, 2018 | |
Notes to Financial Statements | |
NOTE 1 - ORGANIZATION AND PRINCIPAL ACTIVITIES |
Description of Business
Cerebain Biotech Corp. (“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., the Company’s business revolves around the discovery of products for the treatment of Alzheimer’s disease utilizing Omentum. The Company plans to produce products that will include both a medical device solution as well as a synthetic drug solution.
Cerebain Operating, Inc. was incorporated on February 22, 2010, in the State of Nevada.
The accompanying (a) condensed balance sheet at June 30, 2018 has been derived from audited statements and (b) unaudited interim condensed financial statements as of September 30, 2018 and for the three-month period ended September 30, 2018 and 2017 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company's audited consolidated financial statements and notes thereto for the year ended June 30, 2018 included on Form 10-K filed with the Securities and Exchange Commission on September 26, 2018. |
BASIS OF PRESENTATION |
3 Months Ended |
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Sep. 30, 2018 | |
Notes to Financial Statements | |
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. The Company’s Principal Executive Officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company had an accumulated deficit of approximately $33,000,000 and $32,450,000 at September 30, 2018 and June 30, 2018, respectively, and had a net loss of approximately $537,000 and $431,000 for the three-month periods ended September 30, 2018 and 2017, respectively, and net cash used in operating activities of approximately $101,000 and $165,000 for the three-month periods ended September 30, 2018 and 2017, respectively, with no revenue earned since inception, limited cash of approximately $39,000 and $65,000 at September 30, 2018 and June 30, 2018, respectively, and a lack of operational history. These matters raise substantial doubt about the Company’s ability to continue as a going concern.
While the Company is attempting to commence operations and generate revenues, the Company’s cash position may not be significant enough to support the Company’s daily operations. Management intends to raise additional funds by way of a public or private offering. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate revenues.
The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
3 Months Ended | ||||||||||||||||||||||||||||||||||||
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Sep. 30, 2018 | |||||||||||||||||||||||||||||||||||||
Notes to Financial Statements | |||||||||||||||||||||||||||||||||||||
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 condensed consolidated financial statements. The condensed 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 accounting principles generally accepted in the United States and have been consistently applied in the preparation of the condensed consolidated financial statements.
Use of Estimates
The preparation of these condensed 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 condensed 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 condensed consolidated financial statements. The more significant estimates and assumptions by management include among others: useful lives and residual values of long-lived assets, the valuation of equity instruments, the valuation of warrants and options, the valuation of derivative liabilities, and the valuation of warrant liabilities.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Cerebain Biotech Corp. and its wholly-owned subsidiary, Cerebain Operating, Inc. (collectively referred to as the “Company”). There are no material intercompany transactions.
Advertising Costs
Advertising costs are recorded as general and administrative expenses when they are incurred. Advertising costs charged to operations were approximately $0 and $3,000 for the three-month periods ended September 30, 2018 and 2017, respectively.
Research and Development
The Company expenses the cost of research and development as incurred. Research and development costs charged to operations were approximately $32,000 and $42,000 for the three-month periods ended September 30, 2018 and 2017, respectively, and are included in research and development costs in the accompanying condensed consolidated statements of operations (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, recorded 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 the Company’s consolidated balance sheets if the warrants are not treated as a derivative. 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, we must first assess whether the conversion feature meets the requirements to be treated as a derivative, as follows: a) one or more underlyings, typically the price of our common stock; b) one or more notional amounts or payment provisions or both, generally the number of shares upon conversion; c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provisions, which in the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. An embedded equity-linked component that meets the definition of a derivative does not have to be separated from the host instrument if the component qualifies for the scope exception for certain contracts involving an issuer’s own equity. The scope exception applies if the contract is both a) indexed to its own stock; and b) classified in shareholders’ equity in its statement of financial position.
If the conversion feature within convertible debt meets the requirements to be treated as a derivative, we estimate the fair value of the convertible debt derivative using the Monte Carlo Method 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 statement of operations. The debt discount is amortized through interest expense over the life of the debt.
Convertible debt – beneficial conversion feature
If the conversion feature is not treated as a derivative, the Company assesses whether it is a beneficial conversion feature (“BCF”). A BCF exists if the conversion price of the convertible debt instrument is less than the stock price on the commitment date. This typically occurs when the conversion price is less than the fair value of the stock on the date the instrument was issued. The value of a BCF is equal to the intrinsic value of the feature, the difference between the conversion price and the common stock into which it is convertible and is recorded as additional paid in capital and as a debt discount in the consolidated balance 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 September 30, 2018 and June 30, 2018, 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.
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.
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. The warrant and derivative liabilities are recognized at fair value on a recurring basis at September 30, 2018 and are Level 3 measurements. There have been no transfers between levels.
Concentrations, Risks, and Uncertainties
The Company is a startup company subject to the substantial business risks and uncertainties inherent to such an entity, including the potential risk of business failure.
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:
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
FASB ASU 2018-07 “Compensation – Stock Compensation (Topic 718) - In June 2018, the FASB issued ASU 2018-07. This update is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers, etc.). The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. The standard will be applied in a retrospective approach for each period presented. The Company currently does not plan to early adopt this guidance and is evaluating the potential impact of this guidance on the consolidated financial statements as well as transition methods. |
COMMITMENTS AND CONTINGENCIES |
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Sep. 30, 2018 | ||||||||||||||||||||||||||||||
Notes to Financial Statements | ||||||||||||||||||||||||||||||
NOTE 4 - COMMITMENTS AND CONTINGENCIES |
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 $320,000, of which $165,000 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.
Consulting Agreements
Between December 2016 and September 2018, 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 1,935,000 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 September 30, 2018, 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 $2,670,000 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 three-month periods ended September 30, 2018 and 2017, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $1,800 and $72,000, respectively. The unamortized prepaid expenses of these contracts are approximately $2,500 and included in prepaid expenses on the consolidated balance sheets at September 30, 2018.
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 the issuance of 75,000 shares (included in the preceding paragraph) of the Company’s stock and fully vested and non-forfeitable options to acquire up to 300,000 shares of the Company’s common stock, at an exercise price of $0.33 per share. Fair Market Value of these options totaled approximately $83,500 and is being 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 three-month periods ended September 30, 2018 and 2017, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $7,000, respectively. The unamortized prepaid expense of this contract is approximately $13,900 and included in prepaid expenses on the consolidated balance sheets at September 30, 2018.
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 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 three-month periods ended September 30, 2018 and 2017, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $0 and $43,000, respectively. The prepaid expense of this contract has been fully amortized as of September 30, 2018.
As of September 30, 2018, future maturities of prepaid expenses on value of shares and options issued for consulting are as follows:
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 alleged: (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 claimed causes of action for breach of contract, violation of the Pennsylvania wage payment and collection law, and unjust enrichment, and sought 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 as follows:
The Company paid Ms. Miller the total gross amount of one hundred twenty thousand dollars ($120,000) as follows:
Upon all payments being made pursuant to the terms set forth in the agreement, Ms. Miller 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 had 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 September 30, 2018. For the fiscal year ended June 30, 2018, the Company paid Ms. Miller $85,000 as agreed in the settlement agreement. As of September 30, 2018, the terms of the settlement agreement have been met and Ms. Miller has been paid in full. |
PATENT RIGHTS |
3 Months Ended |
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Sep. 30, 2018 | |
Notes to Financial Statements | |
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 (patent pending) 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 shares issued under the pertinent section of the agreement. To date, Dr. Saini has not participated in any sales of equity.
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.
Legal fees pertaining to the patent are recorded as general and administrative expenses when they are incurred. Legal fees charged to operations were approximately $3,200 and $450 for the three-month periods ended September 30, 2018 and 2017, respectively.
The Company recognized a patent royalty expense of approximately $25,000 for the three-month period ended September 30, 2018 compared to $25,000 for the three-month period ended September 30, 2017. The accrued payable of $375,000 pertaining to the patent royalty expense at September 30, 2018 is included in related party payables. |
NOTES PAYABLE |
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Notes to Financial Statements | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NOTE 6 - NOTES PAYABLE |
Short Term Notes Payable to Stockholders
Short Term Notes Payable to Stockholders
Short Term Convertible Notes Payable
Crown Bridge Partners
On March 2, 2018, the Company held an initial closing under a Securities Purchase Agreement (the “Crown SPA”) and corresponding Convertible Promissory Note (the “Crown Note”) with Crown Bridge Partners, LLC (“Crown”), dated February 14, 2018. Under the Crown SPA and the Crown Note, Crown agreed to loan the Company up to One Hundred Thirty Thousand Dollars ($130,000) in tranches. The Crown Note has an original issuance discount of $13,000, meaning the maximum amount the Company can borrow under the Crown Note is $117,000. The initial tranche on March 2, 2018 was $65,000, with the Company receiving $58,500 and the remaining $6,500 being retained by Crown as the portion of the prorated original issuance discount. The Crown Note bears interest at Ten Percent (10%) per annum and matures twelve (12) months from the date of each tranche, with the initial tranche of $65,000 maturing on March 2, 2019. Under the terms of the Crown Note, Crown has the right, at any time to convert all or part of the amounts due to it under the Crown Note into shares of the Company’s common stock. The conversion price is 55% of the lesser of (a) the lowest traded price or (b) the lowest closing bid price, of the Company’s common stock on the twenty-five trading days prior to the conversion date. However, Crown may not convert the amounts due under the Note into shares of the Company’s common stock if such conversion would cause it to own more than 4.99% of the Company’s then-outstanding common stock, which limitation may be waived by Crown upon 61 days-notice. In the event the Company defaults under the terms of the Crown Note, the Company owes 150% of the principal amount then due under the Note, plus any unpaid interest, immediately. The Company may prepay the amounts loaned to the Company under the Crown Note as follows: (i) during the initial 60-day period after each tranche, at 125% multiplied by the amount the Company is prepaying, (ii) during the 61st through 120 days after each tranche, at 135% multiplied by the amount the Company is prepaying, and (iii) during the 121st through 180th day after each tranche, at 150% multiplied by the amount the Company is prepaying. Any prepayments are subject to Crown’s written acceptance of such prepayment. After 180 days from each tranche the Company cannot prepay that tranche in cash.
While this Note is outstanding, if the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has the right to convert monies owed to that 3rd party (or receive shares pursuant to a settlement or otherwise) at a discount to market greater than the Variable Conversion Price in effect at that time (prior to all other applicable adjustments in the Note), then the Variable Conversion Price shall be automatically adjusted to such greater discount percentage (prior to all applicable adjustments in this Note) until this Note is no longer outstanding. Each time, while this Note is outstanding, the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has a look back period greater than the look back period in effect under the Note at that time, then the Holder’s look back period shall automatically be adjusted to such greater number of days until this Note is no longer outstanding.
In addition to issuing the Crown Note, the Company agreed to issue Crown a warrant with each funding tranche. Each warrant will be for the purchase of shares of the Company’s common stock equal to 75% of the face value of the tranche divided by $0.50. For example, the first tranche of funding is for $65,000, the Company issued a warrant to purchase 97,500 shares of the Company’s common stock at an exercise price of $0.50 per share. The warrant contains a cashless exercise provision. Each warrant expires five years after the date of issuance.
In connection with the warrants, if the Company, at any time from and after the Issuance Date, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of, sell or issue (or announce any offer, sale, grant or any option to purchase or other disposition of) any Common Stock or Common Stock Equivalents entitling any person, firm, association or entity to acquire shares of Common Stock at an effective price per share less than the then-current Exercise Price (including but not limited to under the Note), as adjusted hereunder (any such issuance being referred to as a “Dilutive Issuance,” subject, however, to the provision contained in the further definition of the term “Dilutive Issuance” contained in the agreement, then (a) the Exercise Price shall be adjusted to match the lowest price per share at which such Common Stock was issued or may be acquired pursuant to such Common Stock Equivalents in the Dilutive Issuance, and (b) the number of Warrant Shares issuable upon the exercise of this Warrant shall be increased to an amount equal to the number of Warrant Shares Holder could purchase hereunder for the aggregate Exercise Price, as reduced pursuant to the agreement, equal to the aggregate Exercise Price payable immediately prior to such reduction in Exercise Price. Additionally, following the occurrence of a Dilutive Issuance, all references in this Warrant to “Warrant Shares” shall be a reference to the Warrant Shares as increased pursuant to the agreement, and all references in this Warrant to “Exercise Price” shall be a reference to the Exercise Price as reduced pursuant to the agreement, as the same may occur from time to time hereunder. Subject to the anti-dilution provision, the Company adjusted Crown’s warrant to purchase 243,750 shares of our common stock at an exercise price of $0.20 per share as a result of the warrant issued to Auctus Fund on March 8, 2018.
On September 7, 2018, Crown Bridge Partners, LLC elected to convert $5,049, consisting of $4,549 of principal and $500 of fees, into 90,000 shares of the Company’s Common Stock at an exercise price of $0.0561 pursuant to the convertible note dated February 14, 2018.
On September 28, 2018, Crown Bridge Partners, LLC elected to convert $2,534, consisting of $2,054 of principal and $500 of fees, into 480,000 shares of the Company’s Common Stock at an exercise price of $0.00532 pursuant to the convertible note dated February 14, 2018.
Auctus Fund
On March 8, 2018, the Company closed a Securities Purchase Agreement (the “Auctus SPA”) and corresponding Convertible Promissory Note (the “Auctus Note”) with Auctus Fund, LLC (“Auctus”), dated February 15, 2018. Under the Auctus SPA and the Auctus Note, Auctus agreed to loan the Company One Hundred Ten Thousand Dollars ($110,000). The Auctus Note bears interest at Ten Percent (10%) per annum and matures on November 15, 2018. Under the terms of the Auctus Note, Auctus has the right, at any time to convert all or part of the amounts due to it under the Auctus Note into shares of the Company’s common stock. The conversion price is 55% multiplied by the lowest Trading Price during the twenty-five trading days prior to the conversion date. However, Auctus may not convert the amounts due under the Note into shares of the Company’s common stock if such conversion would cause it to own more than 4.99% of the Company’s then-outstanding common stock, which limitation may be waived by Auctus upon 61 days-notice. In the event the Company defaults under the terms of the Auctus Note, the Company owes 150% of the principal amount then due under the Note, plus any unpaid interest, immediately. The Company may prepay the amounts loaned to the Company under the Auctus Note as follows: (i) during the initial 90-day period after the issue date, at 135% multiplied by the amount the Company is prepaying, and (ii) from the 91st through the 180th day after the issue date, at 150% multiplied by the amount the Company is prepaying. Any prepayments are subject to Auctus’ written acceptance of such prepayment. After 180 days from the issue date the Company cannot prepay the Auctus Note.
While this Note is outstanding, if the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has the right to convert monies owed to that 3rd party (or receive shares pursuant to a settlement or otherwise) at a discount to market greater than the Variable Conversion Price in effect at that time (prior to all other applicable adjustments in the Note), then the Variable Conversion Price shall be automatically adjusted to such greater discount percentage (prior to all applicable adjustments in this Note) until this Note is no longer outstanding. Each time, while this Note is outstanding, the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has a look back period greater than the look back period in effect under the Note at that time, then the Holder’s look back period shall automatically be adjusted to such greater number of days until this Note is no longer outstanding.
In addition to issuing the Auctus Note, the Company agreed to issue Auctus a warrant to acquire 275,000 shares of the Company’s common stock at an exercise price of $0.20 per share. The warrant contains a cashless exercise provision and expires on the fifth anniversary of the warrant.
In connection with the warrants, if the Company, at any time from and after the Issuance Date, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of, sell or issue (or announce any offer, sale, grant or any option to purchase or other disposition of) any Common Stock or Common Stock Equivalents entitling any person, firm, association or entity to acquire shares of Common Stock at an effective price per share less than the then-current Exercise Price (including but not limited to under the Note), as adjusted hereunder (any such issuance being referred to as a “Dilutive Issuance,” subject, however, to the proviso contained in the further definition of the term “Dilutive Issuance” contained in the agreement, then (a) the Exercise Price shall be adjusted to match the lowest price per share at which such Common Stock was issued or may be acquired pursuant to such Common Stock Equivalents in the Dilutive Issuance, and (b) the number of Warrant Shares issuable upon the exercise of this Warrant shall be increased to an amount equal to the number of Warrant Shares Holder could purchase hereunder for the aggregate Exercise Price, as reduced pursuant to the agreement, equal to the aggregate Exercise Price payable immediately prior to such reduction in Exercise Price. Additionally, following the occurrence of a Dilutive Issuance, all references in this Warrant to “Warrant Shares” shall be a reference to the Warrant Shares as increased pursuant to the agreement, and all references in this Warrant to “Exercise Price” shall be a reference to the Exercise Price as reduced pursuant to the agreement, as the same may occur from time to time hereunder.
On September 12, 2018, Auctus Fund, LLC elected to convert $3,025, consisting of $2,525 of accrued and unpaid interest and $500 of fees, into 50,000 shares of the Company’s Common Stock at an exercise price of $0.06050 pursuant to the convertible note dated February 15, 2018.
On September 25, 2018, Auctus Fund, LLC elected to convert $693, consisting of $193 of accrued and unpaid interest and $500 of fees, into 60,000 shares of the Company’s Common Stock at an exercise price of $0.01155 pursuant to the convertible note dated February 15, 2018.
EMA Financial
On March 8, 2018, the Company closed a Securities Purchase Agreement (the “EMA SPA”) and corresponding Convertible Promissory Note (the “EMA Note”) with EMA Financial, LLC (“EMA”), dated February 12, 2018. Under the EMA SPA and the EMA Note, EMA agreed to loan the Company One Hundred Ten Thousand Dollars ($110,000). The EMA Note has an original issuance discount of $6,600, meaning the amount the Company received at funding was $103,400. The EMA Note bears interest at Ten Percent (10%) per annum and matures on February 12, 2019. Under the terms of the EMA Note, EMA has the right, at any time to convert all or part of the amounts due to it under the EMA Note into shares of the Company’s common stock. The conversion price is 55% multiplied by the lowest Trading Price during the twenty trading days prior to the conversion date. However, EMA may not convert the amounts due under the Note into shares of the Company’s common stock if such conversion would cause it to own more than 4.99% of the Company’s then-outstanding common stock, which limitation may be waived by EMA upon 61 days-notice. In the event the Company defaults under the terms of the EMA Note, the Company owes 150% of the principal amount then due under the Note, plus any unpaid interest, immediately. The Company may prepay the amounts loaned to the Company under the EMA Note as follows: (i) during the initial 90-day period after the issue date, at 135% multiplied by the amount the Company is prepaying, and (ii) from the 91st through the 180th day after the issue date, at 150% multiplied by the amount the Company is prepaying. Any prepayments are subject to EMA’s written acceptance of such prepayment. After 180 days from the issue date the Company cannot prepay the EMA Note.
While this Note is outstanding, if the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has the right to convert monies owed to that 3rd party (or receive shares pursuant to a settlement or otherwise) at a discount to market greater than the Variable Conversion Price in effect at that time (prior to all other applicable adjustments in the Note), then the Variable Conversion Price shall be automatically adjusted to such greater discount percentage (prior to all applicable adjustments in this Note) until this Note is no longer outstanding. Each time, while this Note is outstanding, the Company enters into a Section 3(a)(9) transaction, as defined by the Securities Act, (including but not limited to the issuance of new promissory notes or of a replacement promissory note), or Section 3(a)(10) transaction, as defined by the Securities Act, in which any 3rd party has a look back period greater than the look back period in effect under the Note at that time, then the Holder’s look back period shall automatically be adjusted to such greater number of days until this Note is no longer outstanding.
In addition to issuing the EMA Note, the Company agreed to issue EMA a warrant to acquire 137,500 shares of the Company’s common stock at an exercise price of $0.40 per share. The warrant contains a cashless exercise provision and expires on the fifth anniversary of the warrant.
In connection with the warrants, if the Company, at any time from and after the Issuance Date, shall sell or grant any option to purchase, or sell or grant any right to reprice, or otherwise dispose of, sell or issue (or announce any offer, sale, grant or any option to purchase or other disposition of) any Common Stock or Common Stock Equivalents entitling any person, firm, association or entity to acquire shares of Common Stock at an effective price per share less than the then-current Exercise Price (including but not limited to under the Note), as adjusted hereunder (any such issuance being referred to as a “Dilutive Issuance,” subject, however, to the proviso contained in the further definition of the term “Dilutive Issuance” contained in the agreement, then (a) the Exercise Price shall be adjusted to match the lowest price per share at which such Common Stock was issued or may be acquired pursuant to such Common Stock Equivalents in the Dilutive Issuance, and (b) the number of Warrant Shares issuable upon the exercise of this Warrant shall be increased to an amount equal to the number of Warrant Shares Holder could purchase hereunder for the aggregate Exercise Price, as reduced pursuant to the agreement, equal to the aggregate Exercise Price payable immediately prior to such reduction in Exercise Price. Additionally, following the occurrence of a Dilutive Issuance, all references in this Warrant to “Warrant Shares” shall be a reference to the Warrant Shares as increased pursuant to the agreement, and all references in this Warrant to “Exercise Price” shall be a reference to the Exercise Price as reduced pursuant to the agreement, as the same may occur from time to time hereunder. Subject to the anti-dilution provision and as a result of the warrant issued to Auctus detailed above, the Company issued EMA an amended and restated warrant to purchase 275,000 shares of our common stock at an exercise price of $0.20 per share, which replaced the original warrant issued to EMA.
On September 11, 2018, EMA Financial, LLC elected to convert $6,187.50, consisting of $5,437.50 of principal and $750 of fees, into 90,000 shares of the Company’s Common Stock at an exercise price of $0.06875 pursuant to the convertible note dated February 12, 2018.
On September 9, 2018, EMA Financial, LLC elected to convert $4,800, consisting of $4,050 of principal and $750 of fees, into 300,000 shares of the Company’s Common Stock at an exercise price of $0.016 pursuant to the convertible note dated February 12, 2018.
Short Term Convertible Notes Conversion
The Company evaluated the notes under the requirements of ASC 480 “Distinguishing Liabilities From Equity” (ASC 480) and concluded that the notes do not fall within the scope of ASC 480. The Company next evaluated the notes under the requirements of ASC 815 “Derivatives and Hedging”. Due to the existence of the anti-dilution provisions which reduces the purchaser’s conversion price in the event of subsequent dilutive issuances by the Company below the purchaser’s conversion price as described above, the conversion features do not meet the definition of “indexed to” the Company’s stock, and the scope exception to ASC 815’s derivative accounting provisions does not apply. The Company also evaluated the embedded derivative criteria in ASC 815, and concluded that the conversion features meet all the embedded derivative criteria in ASC 815, and therefore, the conversion features meet the definition of an embedded derivative that should be separated from the notes and accounted for as a derivative liability.
The embedded derivatives were recorded as a derivative liability on the consolidated Balance Sheet at their fair value of $330,000 at the date of issuance. At each subsequent reporting date, the fair value of the embedded derivative liabilities will be remeasured and changes in the fair value will be recorded in the consolidated Statements of Operations. At September 30, 2018, the embedded derivatives were re-measured at fair value that was determined to be $425,000. During the three months ended September 30, 2018 and 2017, the Company recorded a loss on embedded derivative re-valuation of $140,000 and $0, respectively.
The fair value of the embedded derivative liabilities is measured in accordance with ASC 820 “Fair Value Measurement”, using the “Monte Carlo Method” modeling incorporating the following inputs:
Short Term Convertible Notes Warrants
The Company evaluated the Warrants under ASC 480 “Distinguishing Liabilities From Equity” and ASC 815 “Derivatives and Hedging”. Due to the existence of the antidilution provision, which reduces the Exercise Price and Conversion Price in the event of subsequent issuances, the Warrants are not indexed to our common stock, and the Company has determined that the Warrants meet the definition of a derivative under ASC 815. Accordingly, the Warrants were recorded as derivative liabilities in the consolidated Balance Sheet at their fair value of $96,289 at the date of issuance. At each subsequent reporting date, the fair value of the Warrants will be remeasured and changes in the fair value will be reported in the consolidated Statements of Operations. At September 30, 2018, the warrant liability was re-measured at fair value that was determined to be $89,828. During the three months ended September 30, 2018 and 2017, the Company recorded a loss on warrant re-valuation of $4,770 and $0, respectively.
The fair value of the Warrants is measured in accordance with ASC 820 “Fair Value Measurement”, using “Monte Carlo simulation” modeling, incorporating the following inputs:
Debt Discount
The Company issued the notes with warrants that require liability treatment under ASC 815. As such, the proceeds of the notes were allocated, based on fair values, as follows: original issue discount of approximately $32,000, approximately $96,000 to the warrants granted, and approximately $330,000 to the embedded derivative, resulting in a debt discount to such notes of approximately $285,000 with the remaining amount of approximately $173,000 expensed at inception of the note. The debt discount is accreted to interest expense over the term of the note.
The Company recorded debt discount accretion of approximately $86,000 and $0 to interest expense for the three months ended September 30, 2018 and 2017, respectively. The accretion of debt discount expense to be recognized in future years is approximately $91,000.
Changes in the derivative and warrant liabilities were as follows:
Convertible Notes to Stockholders
Convertible Notes Payable (A)
Between September 2013 and December 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 and the repayment of one note totaling $15,000, netting a balance of approximately $116,000. Under the terms of these notes, maturity dates range from June 2015 and July 2019, interest rates range from 7.5% to 8.0% per annum, and are convertible into shares of the Company’s common stock at rates that range from $0.20 and $5.00 per share, but only if such conversion would not cause the noteholders to own more than 9.9% of the Company’s 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 period ended September 30, 2018, the Company is in default approximately $77,500 on various notes. As a result, these notes are included in the current portion of convertible notes payable, and the Company is in discussions with the noteholders to restructure the terms of the notes.
The Company determined that some of the notes had a beneficial conversion feature of approximately $38,000.
The Company recognized an accretion of debt discount expense of approximately $1,500 and $1,700 for the three-month periods ended September 30, 2018 and 2017, respectively. The accretion of debt discount expense to be recognized in future years is approximately $4,000.
Unsecured, Amended and Consolidated Convertible Note Payable (B)
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 the Company’s 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 the Company’s 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.
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.
Unsecured, Amended and Consolidated Convertible Notes Payable (C)
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 the Company’s 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 the Company’s outstanding common stock, and contains piggyback registration rights. The note payable was extinguished in October 2017.
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.
October 2017 Convertible Note
In October 2017, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,560,000. In exchange, the Company modified the $2,460,112 convertible promissory note payable issued in January 2017 and received cash of $100,000. The amended and consolidated convertible promissory note matures in October 2019, accrues interest at 5% per annum and is convertible into shares of the Company’s common stock at a conversion rate of $0.10 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of the Company’s outstanding common stock, and contains piggyback registration rights. The note payable was modified in September 2018.
In connection with the $2,560,000 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 $3.1 million for the year ended June 30, 2018.
September 2018 Convertible Note
In September 2018, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of $2,937,113. In exchange, the Company modified the $2,560,112 convertible promissory note payable issued in October 2017, accounts payable related to accrued interest of approximately $302,000 and received cash of $75,000. The amended and consolidated convertible promissory note matures in October 2019, accrues interest at 5% per annum and is convertible into shares of the Company’s common stock at a conversion rate of $0.10 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of the Company’s outstanding common stock, and contains piggyback registration rights.
In connection with the $2,937,113 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 $50,000 and $40,000 for the three-month periods ended September 30, 2018 and 2017, respectively. Accrued interest on all notes payable to stockholders at September 30, 2018 and 2017 totaled approximately $176,000 and $300,000, respectively, and is included in accounts payable.
As of September 30, 2018, future maturities of all note payables are as follows:
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STOCK TRANSACTIONS |
3 Months Ended |
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Sep. 30, 2018 | |
Notes to Financial Statements | |
NOTE 7 - STOCK TRANSACTIONS |
On September 7, 2018, Crown Bridge Partners, LLC elected to convert $5,049, consisting of $4,549 of principal and $500 of fees, into 90,000 shares of the Company’s Common Stock at an exercise price of $0.0561 pursuant to the convertible note dated February 14, 2018.
On September 11, 2018, EMA Financial, LLC elected to convert $6,187.50, consisting of $5,437.50 of principal and $750 of fees, into 90,000 shares of the Company’s Common Stock at an exercise price of $0.06875 pursuant to the convertible note dated February 12, 2018.
On September 12, 2018, Auctus Fund, LLC elected to convert $3,025, consisting of $2,525 of accrued and unpaid interest and $500 of fees, into 50,000 shares of the Company’s Common Stock at an exercise price of $0.06050 pursuant to the convertible note dated February 15, 2018.
On September 9, 2018, EMA Financial, LLC elected to convert $4,800, consisting of $4,050 of principal and $750 of fees, into 300,000 shares of the Company’s Common Stock at an exercise price of $0.016 pursuant to the convertible note dated February 12, 2018.
On September 25, 2018, Auctus Fund, LLC elected to convert $693, consisting of $193 of accrued and unpaid interest and $500 of fees, into 60,000 shares of the Company’s Common Stock at an exercise price of $0.01155 pursuant to the convertible note dated February 15, 2018.
On September 28, 2018, Crown Bridge Partners, LLC elected to convert $2,534, consisting of $2,054 of principal and $500 of fees, into 480,000 shares of the Company’s Common Stock at an exercise price of $0.00532 pursuant to the convertible note dated February 14, 2018. |
OPTIONS AND WARRANTS |
3 Months Ended |
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Sep. 30, 2018 | |
Notes to Financial Statements | |
NOTE 8 - OPTIONS AND WARRANTS |
Options
For the three-month period ended September 30, 2018, the Company had 910,000 options outstanding at a weighted average exercise price of $1.45 and a weighted average contractual life of 6.26 years, with 826,000 options exercisable at a weighted average exercise price of $1.52 and a weighted average contractual life of 5.88 years. For the three-month period ended September 30, 2018 and 2017, the Company recognized an expense of approximately $14,500 and $16,000, respectively, and was recorded as compensation expense. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $54,500.
Warrants
For the three-month period ended September 30, 2018, the Company had approximately 3,200,000 warrants outstanding at an average exercise price of $0.78. For the three-month period ended September 30, 2018 and 2017, the Company recognized an accretion of debt discount related to warrants expense of approximately $1,200 and $1,300, respectively. The approximate expense expected to be recognized in future years is $4,000. |
RELATED PARTY TRANSACTIONS |
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Notes to Financial Statements | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
NOTE 9 - RELATED PARTY TRANSACTIONS |
Employment Agreements
Eric Clemons
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:
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 three-month periods ended September 30, 2018 and 2017, no cash placement bonus was earned, respectively.
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 September 30, 2018, 63,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $4,000 for the three-month periods ended September 30, 2018 and 2017, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $27,000.
On February 1, 2018, the Company entered into a new employment agreement with Eric Clemons, an officer of the company. The new contract had no accounting impact on the prior agreements. Terms of the agreement include the following:
To date, employee and employer payroll taxes have been accrued but have not been remitted to taxing authorities by the Company for cash compensation paid. As a result, the Company is liable such payroll taxes and any related penalties and interest.
Wesley Tate
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:
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 September 30, 2018, 63,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $4,000 for the three-month periods ended September 30, 2018 and 2017, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $27,000.
On February 1, 2018, the Company entered into a new employment agreement with Wesley Tate, an officer of the company. The new contract had no accounting impact on the prior agreements. Terms of the agreement include the following:
To date, employee and employer payroll taxes have been accrued but have not been remitted to taxing authorities by the Company for cash compensation paid. As a result, the Company is liable such payroll taxes and any related penalties and interest. |
EARNINGS PER SHARE |
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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 approximately 4.0 million and 2.6 million for the three-month periods ended September 30, 2018 and 2017, respectively. In addition, the convertible notes convert at an exercise price of between $0.10 and $5.00 per share of common stock representing approximately 30 million shares. The options, warrants and shares underlying the convertible note were considered for the dilutive calculation but in periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
The following table sets forth the computation of basic and diluted net income per share:
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SUBSEQUENT EVENTS |
3 Months Ended |
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Sep. 30, 2018 | |
Notes to Financial Statements | |
NOTE 11 - SUBSEQUENT EVENTS |
On October 1, 2018, Auctus Fund, LLC elected to convert $2,333, consisting of $1,833 of accrued and unpaid interest and $500 of fees, into 360,000 shares of the Company’s Common Stock at an exercise price of $0.00648 pursuant to the convertible note dated February 15, 2018.
On October 4, 2018, EMA Financial, LLC elected to convert $4,120, consisting of $3,370 of principal and $750 of fees, into 515,000 shares of the Company’s Common Stock at an exercise price of $0.008 pursuant to the convertible note dated February 12, 2018.
On October 10, 2018, Crown Bridge Partners, LLC elected to convert $2,896, consisting of $2,396 of principal and $500 of fees, into 548,000 shares of the Company’s Common Stock at an exercise price of $0.005285 pursuant to the convertible note dated February 14, 2018.
On October 10, 2018, Auctus Fund, LLC elected to convert $2,884, consisting of $1,960 of accrued and unpaid interest, $424 of principal and $500 of fees, into 477,500 shares of the Company’s Common Stock at an exercise price of $0.00440 pursuant to the convertible note dated February 15, 2018.
On October 18, 2018, EMA Financial, LLC elected to convert $3,618, consisting of $2,368 of principal and $750 of fees, into 599,000 shares of the Company’s Common Stock at an exercise price of $0.00604 pursuant to the convertible note dated February 12, 2018.
On October 29, 2018, Auctus Fund, LLC elected to convert $1,760, consisting of $570 of accrued and unpaid interest, $690 of principal and $500 of fees, into 400,000 shares of the Company’s Common Stock at an exercise price of $0.00440 pursuant to the convertible note dated February 15, 2018.
On October 29, 2018, EMA Financial, LLC elected to convert $2,472, consisting of $1,722 of principal and $750 of fees, into 561,750 shares of the Company’s Common Stock at an exercise price of $0.0044 pursuant to the convertible note dated February 12, 2018.
On November 6, 2018, Crown Bridge Partners, LLC elected to convert $1,706, consisting of $1,206 of principal and $500 of fees, into 677,000 shares of the Company’s Common Stock at an exercise price of $0.00252 pursuant to the convertible note dated February 14, 2018.
On November 7, 2018, EMA Financial, LLC elected to convert $2,085, consisting of $1,335 of principal and $750 of fees, into 677,000 shares of the Company’s Common Stock at an exercise price of $0.00308 pursuant to the convertible note dated February 12, 2018.
On November 9, 2018, Crown Bridge Partners, LLC elected to convert $1,875, consisting of $1,375 of principal and $500 of fees, into 744,000 shares of the Company’s Common Stock at an exercise price of $0.00252 pursuant to the convertible note dated February 14, 2018.
On November 9, 2018, EMA Financial, LLC elected to convert $2,293, consisting of $1,543 of principal and $750 of fees, into 744,500 shares of the Company’s Common Stock at an exercise price of $0.00308 pursuant to the convertible note dated February 12, 2018. |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Policies) |
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Summary Of Significant Accounting Policies | ||||||||||||||||||||||
Use of Estimates | The preparation of these condensed 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 condensed 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 condensed consolidated financial statements. The more significant estimates and assumptions by management include among others: useful lives and residual values of long-lived assets, the valuation of equity instruments, the valuation of warrants and options, the valuation of derivative liabilities, and the valuation of warrant liabilities. |
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Principles of Consolidation | The accompanying condensed consolidated financial statements include the accounts of Cerebain Biotech Corp. and its wholly-owned subsidiary, Cerebain Operating, Inc. (collectively referred to as the “Company”). There are no material intercompany transactions. |
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Advertising Costs | Advertising costs are recorded as general and administrative expenses when they are incurred. Advertising costs charged to operations were approximately $0 and $3,000 for the three-month periods ended September 30, 2018 and 2017, respectively. |
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Research and Development | The Company expenses the cost of research and development as incurred. Research and development costs charged to operations were approximately $32,000 and $42,000 for the three-month periods ended September 30, 2018 and 2017, respectively, and are included in research and development costs in the accompanying condensed consolidated statements of operations (See Note 4). |
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Debt | The Company issues debt that may have separate warrants, conversion features, or no equity-linked attributes. |
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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, recorded 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 the Company’s consolidated balance sheets if the warrants are not treated as a derivative. 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. |
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Convertible debt derivative treatment | When the Company issues debt with a conversion feature, we must first assess whether the conversion feature meets the requirements to be treated as a derivative, as follows: a) one or more underlyings, typically the price of our common stock; b) one or more notional amounts or payment provisions or both, generally the number of shares upon conversion; c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provisions, which in the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. An embedded equity-linked component that meets the definition of a derivative does not have to be separated from the host instrument if the component qualifies for the scope exception for certain contracts involving an issuer’s own equity. The scope exception applies if the contract is both a) indexed to its own stock; and b) classified in shareholders’ equity in its statement of financial position.
If the conversion feature within convertible debt meets the requirements to be treated as a derivative, we estimate the fair value of the convertible debt derivative using the Monte Carlo Method 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 statement of operations. The debt discount is amortized through interest expense over the life of the debt. |
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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. |
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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. |
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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 September 30, 2018 and June 30, 2018, 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. |
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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.
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. The warrant and derivative liabilities are recognized at fair value on a recurring basis at September 30, 2018 and are Level 3 measurements. There have been no transfers between levels. |
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Concentrations, Risks, and Uncertainties | The Company is a startup company subject to the substantial business risks and uncertainties inherent to such an entity, including the potential risk of business failure. |
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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:
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. |
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Recent Accounting Pronouncements | FASB ASU 2018-07 “Compensation – Stock Compensation (Topic 718) - In June 2018, the FASB issued ASU 2018-07. This update is intended to reduce cost and complexity and to improve financial reporting for share-based payments issued to non-employees (for example, service providers, external legal counsel, suppliers, etc.). The ASU expands the scope of Topic 718, Compensation—Stock Compensation, which currently only includes share-based payments issued to employees, to also include share-based payments issued to non-employees for goods and services. Consequently, the accounting for share-based payments to non-employees and employees will be substantially aligned. This standard will be effective for financial statements issued by public companies for the annual and interim periods beginning after December 15, 2018. Early adoption of the standard is permitted. The standard will be applied in a retrospective approach for each period presented. The Company currently does not plan to early adopt this guidance and is evaluating the potential impact of this guidance on the consolidated financial statements as well as transition methods. |
COMMITMENTS AND CONTINGENCIES (Tables) |
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Commitments And Contingencies | |||||||||||||||||||||
Schedule of Future Maturity of Prepaid Expense |
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NOTES PAYABLE (Tables) |
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Future maturities of convertible notes payable |
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Schedule changes in the derivative and warrant liabilities |
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Short Term Notes Payable [Member] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of note payable |
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Convertible Notes Payable [Member] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of note payable |
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Short Term Convertible Notes Payable [Member] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Summary of note payable |
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Short Term Convertible Warrants Conversion [Member] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of fair value of the embedded derivative liabilities |
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Short Term Convertible Notes Conversion [Member] | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Schedule of fair value of the embedded derivative liabilities |
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EARNINGS PER SHARE (Tables) |
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Earnings Per Share | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
Computation of basic and diluted net income per share |
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ORGANIZATION AND PRINCIPAL ACTIVITIES (Details Narrative) |
3 Months Ended |
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Sep. 30, 2018 | |
Organization And Principal Activities | |
State of incorporation | Nevada |
Date of incorporation | Dec. 18, 2007 |
BASIS OF PRESENTATION (Details Narrative) - USD ($) |
3 Months Ended | |||
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Sep. 30, 2018 |
Sep. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
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Basis Of Presentation | ||||
Accumulated deficit | $ (32,986,811) | $ (32,449,513) | ||
Net loss | (537,299) | $ (431,483) | ||
Net cash used in operating activities | (100,950) | (165,235) | ||
Cash and cash equivalents | $ 38,633 | $ 1,110 | $ 64,583 | $ 11,345 |
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (Details Narrative) - USD ($) |
3 Months Ended | |
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Sep. 30, 2018 |
Sep. 30, 2017 |
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Summary Of Significant Accounting Policies Details Narrative Abstract | ||
Advertising costs | $ 0 | $ 3,000 |
Research and development costs | $ 32,000 | $ 42,314 |
COMMITMENTS AND CONTINGENCIES (Details) |
Sep. 30, 2018
USD ($)
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Commitments And Contingencies Details Abstract | |
2019 | $ 16,400 |
Total | $ 16,400 |
PATENT RIGHTS (Details Narrative) - USD ($) |
3 Months Ended | ||
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Sep. 30, 2018 |
Sep. 30, 2017 |
Jun. 10, 2010 |
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Legal fees | $ 3,200 | $ 450 | |
Patent royalty expense | 25,000 | $ 25,000 | |
Accrued payable | 375,000 | ||
2014 | 50,000 | ||
2015 | 50,000 | ||
2016 | 50,000 | ||
Thereafter | $ 100,000 | ||
Estimated useful life of patent | 20 years | ||
Royalty payment percentage | 6.00% | ||
Dr. Saini [Member] | |||
Patent license agreement fees | $ 50,000 | ||
Stock issued | 825,000 | ||
Shares issued, value | $ 6,600 | ||
Equity participation percentage | 10.00% |
NOTES PAYABLE (Details) - USD ($) |
Sep. 30, 2018 |
Jun. 30, 2018 |
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Short term notes payable to stockholders | $ 464,000 | $ 464,000 |
Short term notes payable (A) [Member] | ||
Short term notes payable to stockholders | 114,000 | 114,000 |
Short term notes payable (B) [Member] | ||
Short term notes payable to stockholders | 250,000 | 250,000 |
Short term notes payable (C) [Member] | ||
Short term notes payable to stockholders | $ 100,000 | $ 100,000 |
NOTES PAYABLE (Details 1) - USD ($) |
Sep. 30, 2018 |
Jun. 30, 2018 |
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Subtotal | $ 268,910 | $ 285,000 |
Debt discount | (90,874) | (177,094) |
Short term convertible notes payable, net of debt discount of approximately $261,250 and $0, respectively | 178,036 | 107,906 |
Short Term Convertible Notes Payable [Member] | Crown Bridge Partners [Member] | ||
Subtotal | 58,397 | 65,000 |
Short Term Convertible Notes Payable [Member] | Auctus Fund [Member] | ||
Subtotal | 110,000 | 110,000 |
Short Term Convertible Notes Payable [Member] | EMA Financial [Member] | ||
Subtotal | $ 100,513 | $ 110,000 |
NOTES PAYABLE (Details 2) - Derivative Liabilities [Member] - $ / shares |
3 Months Ended | 12 Months Ended |
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Sep. 30, 2018 |
Jun. 30, 2018 |
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Crown Bridge Partners [Member] | ||
Expected dividend yield | 0.00% | 0.00% |
Expected stock-price volatility | 185.00% | 260.00% |
Risk-free interest rate | 2.36% | 2.22% |
Stock price | $ 0.06 | $ 0.14 |
Conversion price | $ 0.02 | $ 0.07 |
Auctus Fund [Member] | ||
Expected dividend yield | 0.00% | 0.00% |
Expected stock-price volatility | 300.00% | 100.00% |
Risk-free interest rate | 216.50% | 2.02% |
Stock price | $ 0.06 | $ 0.14 |
Conversion price | $ 0.02 | $ 0.07 |
EMA Financial [Member] | ||
Expected dividend yield | 0.00% | 0.00% |
Expected stock-price volatility | 185.00% | 210.00% |
Risk-free interest rate | 2.48% | 2.22% |
Stock price | $ 0.06 | $ 0.14 |
Conversion price | $ 0.02 | $ 0.07 |
NOTES PAYABLE (Details 3) - Warrants [Member] - $ / shares |
3 Months Ended | 12 Months Ended |
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Sep. 30, 2018 |
Jun. 30, 2018 |
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Crown Bridge Partners [Member] | ||
Expected dividend yield | 0.00% | 0.00% |
Expected stock-price volatility | 215.00% | 215.00% |
Risk-free interest rate | 2.91% | 2.74% |
Stock price | $ 0.06 | $ 0.14 |
Conversion price | $ 0.20 | $ 0.20 |
Auctus Fund [Member] | ||
Expected dividend yield | 0.00% | 0.00% |
Expected stock-price volatility | 215.00% | 215.00% |
Risk-free interest rate | 2.91% | 2.74% |
Stock price | $ 0.06 | $ 0.14 |
Conversion price | $ 0.20 | $ 0.20 |
EMA Financial [Member] | ||
Expected dividend yield | 0.00% | 0.00% |
Expected stock-price volatility | 215.00% | 215.00% |
Risk-free interest rate | 2.91% | 2.74% |
Stock price | $ 0.06 | $ 0.14 |
Conversion price | $ 0.20 | $ 0.20 |
NOTES PAYABLE (Details 4) - USD ($) |
3 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Derivative liabilities: | ||
Derivative liabilities, Beginning balance | $ 285,000 | |
Increase (decrease) in fair value | 140,000 | |
Derivative liabilities, Outstanding balance | 425,000 | |
Warrant liabilities: | ||
Warrant liabilities, Beginning balance | 85,058 | |
Increase in fair value | 4,770 | |
Warrant liabilities, Outstanding balance | 89,828 | |
Warrants [Member] | ||
Warrant liabilities: | ||
Warrant liabilities, Beginning balance | 85,058 | |
Increase in fair value | 4,770 | |
Warrant liabilities, Outstanding balance | 89,828 | |
Derivative Liabilities [Member] | ||
Derivative liabilities: | ||
Derivative liabilities, Beginning balance | 285,000 | |
Increase (decrease) in fair value | 140,000 | |
Derivative liabilities, Outstanding balance | $ 425,000 |
NOTES PAYABLE (Details 5) - USD ($) |
Sep. 30, 2018 |
Jun. 30, 2018 |
---|---|---|
Convertible Notes Payable | $ 3,313,113 | $ 2,936,112 |
Debt discount | (3,884) | (5,381) |
Convertible Notes to Stockholders | 3,309,229 | 2,930,731 |
Convertible Notes Payable (A) [Member] | ||
Convertible Notes Payable | 116,000 | 116,000 |
Convertible Notes Payable (B) [Member] | ||
Convertible Notes Payable | 260,000 | 260,000 |
Convertible Note Payable (C) [Member] | ||
Convertible Notes Payable | $ 2,937,113 | $ 2,560,112 |
NOTES PAYABLE (Details 6) |
Sep. 30, 2018
USD ($)
|
---|---|
Notes Payable | |
2019 | $ 1,092,910 |
2020 | 2,953,113 |
Total outstanding notes | 4,046,023 |
Debt Discount | (94,758) |
Net Notes Payable | $ 3,951,265 |
NOTES PAYABLE (Details Narrative) - USD ($) |
1 Months Ended | 3 Months Ended | 12 Months Ended | 52 Months Ended | |||||||||||
---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|---|
Sep. 12, 2018 |
Sep. 11, 2018 |
Sep. 09, 2018 |
Sep. 07, 2018 |
Mar. 08, 2018 |
Mar. 02, 2018 |
Sep. 28, 2018 |
Sep. 25, 2018 |
Aug. 29, 2017 |
Sep. 30, 2018 |
Sep. 30, 2017 |
Jun. 30, 2018 |
Jun. 30, 2017 |
Dec. 31, 2017 |
Feb. 28, 2016 |
|
Proceeds from related party debt | $ 75,000 | ||||||||||||||
Derivative liabilities | $ 330,000 | 425,000 | $ 285,000 | ||||||||||||
Change in fair value of derivative liabilities | 140,000 | ||||||||||||||
Warrant liabilities | $ 96,289 | 89,828 | 85,058 | ||||||||||||
Debt discount | 94,758 | ||||||||||||||
Amortization of debt discount | 87,717 | 1,668 | |||||||||||||
Convertible Notes Payable | $ 3,313,113 | $ 2,936,112 | |||||||||||||
Common stock, par value | $ 0.001 | $ 0.001 | |||||||||||||
Loss from extinguishment of debt | (30,000) | ||||||||||||||
Interest expense on notes payable | 53,583 | 40,435 | |||||||||||||
Accounts payable | 920,658 | $ 1,142,636 | |||||||||||||
Revaluation of Liabilities [Member] | |||||||||||||||
Change in fair value of derivative liabilities | 140,000 | 0 | |||||||||||||
Loss on re-valuation of warrant liability | 4,770 | 0 | |||||||||||||
Convertible Notes Payable (A) [Member] | |||||||||||||||
Accretion of debt discount | 1,500 | 1,700 | |||||||||||||
Convertible Notes Payable | $ 157,000 | ||||||||||||||
Converted amount | 26,000 | ||||||||||||||
Repayment of debt | 15,000 | ||||||||||||||
Balance amount | $ 116,000 | ||||||||||||||
Note holder acquire percentage | 9.90% | ||||||||||||||
Common stock granted in cashless option | 1 | ||||||||||||||
Common stock, par value | $ 0.001 | ||||||||||||||
Beneficial conversion amount | 38,000 | ||||||||||||||
Accretion of debt discount expense in future | 4,000 | ||||||||||||||
Debt default | 77,500 | ||||||||||||||
Convertible Promissory Notes [Member] | |||||||||||||||
Original issue discount | 32,000 | ||||||||||||||
Debt discount | 285,000 | ||||||||||||||
Amortization of debt discount | 173,000 | ||||||||||||||
Accretion of debt discount | 86,000 | 0 | |||||||||||||
Accretion of debt discount to be recognized in future | 91,000 | ||||||||||||||
Convertible Promissory Notes [Member] | Warrant [Member] | |||||||||||||||
Original issue discount | 96,000 | ||||||||||||||
Convertible Promissory Notes [Member] | Derivative Liabilities [Member] | |||||||||||||||
Original issue discount | $ 330,000 | ||||||||||||||
September 2018 Convertible Note [Member] | |||||||||||||||
Accrued interest percentage | 5.00% | ||||||||||||||
Unsecured promissory note | $ 2,937,113 | ||||||||||||||
Convertible Notes Payable | $ 2,560,112 | ||||||||||||||
Maturity date | Oct. 31, 2019 | ||||||||||||||
Common stock rate, per share | $ 0.10 | ||||||||||||||
Note holder acquire percentage | 9.90% | ||||||||||||||
Cash received from notes payable | $ 75,000 | ||||||||||||||
Accounts payable related to accrued interest | 302,000 | ||||||||||||||
Interest expense on notes payable | 50,000 | 40,000 | |||||||||||||
Accounts payable | $ 176,000 | $ 300,000 | |||||||||||||
October 2017 Convertible Note [Member] | |||||||||||||||
Accrued interest percentage | 5.00% | ||||||||||||||
Unsecured promissory note | $ 2,560,000 | ||||||||||||||
Convertible Notes Payable | $ 2,460,112 | ||||||||||||||
Maturity date | Oct. 31, 2019 | ||||||||||||||
Common stock rate, per share | $ 0.10 | ||||||||||||||
Note holder acquire percentage | 9.90% | ||||||||||||||
Cash received from notes payable | $ 100,000 | ||||||||||||||
Loss from extinguishment of debt | $ 3,100,000 | ||||||||||||||
January 2017 Convertible Note [Member] | |||||||||||||||
Accrued interest percentage | 5.00% | ||||||||||||||
Unsecured promissory note | $ 2,460,000 | ||||||||||||||
Convertible Notes Payable | $ 2,410,112 | ||||||||||||||
Maturity date | Jan. 31, 2019 | ||||||||||||||
Common stock rate, per share | $ 0.15 | ||||||||||||||
Note holder acquire percentage | 9.90% | ||||||||||||||
Cash received from notes payable | $ 50,000 | ||||||||||||||
December 2015 Convertible Note [Member] | |||||||||||||||
Accrued interest percentage | 7.50% | ||||||||||||||
Related party short term notes payable | $ 10,000 | ||||||||||||||
Unsecured promissory note | 260,000 | ||||||||||||||
Convertible Notes Payable | $ 200,000 | ||||||||||||||
Maturity date | Oct. 31, 2019 | ||||||||||||||
Common stock rate, per share | $ 0.20 | ||||||||||||||
Note holder acquire percentage | 9.90% | ||||||||||||||
Common stock granted in cashless option | 1 | ||||||||||||||
Common stock, par value | $ 0.001 | ||||||||||||||
Exercise price | $ 0.50 | ||||||||||||||
Cash received from notes payable | $ 50,000 | ||||||||||||||
Estimated relative fair value discount | $ 128,000 | ||||||||||||||
Volatility rate | 240.00% | ||||||||||||||
Risk-free interest rate | 1.05% | ||||||||||||||
Expected term | 3 years | ||||||||||||||
Dividend yield | 0.00% | ||||||||||||||
Minimum [Member] | Convertible Notes Payable (A) [Member] | |||||||||||||||
Maturity date | Jun. 30, 2015 | ||||||||||||||
Fully vested options expire period | 1 year | ||||||||||||||
Maximum [Member] | Convertible Notes Payable (A) [Member] | |||||||||||||||
Maturity date | Jul. 31, 2019 | ||||||||||||||
Fully vested options expire period | 3 years | ||||||||||||||
Short Term Notes Payable to Stockholders [Member] | |||||||||||||||
Maturity date description | <p style="margin: 0; text-align: justify"><font style="font: 10pt Times New Roman, Times, Serif">The note matured on August 14, 2018 and accrues no interest. On August 14, 2018, the Company issued an addendum to the short term note payable. The addendum extended the maturity date of the note to December 31, 2018</font></p> | ||||||||||||||
Notes payable additional amount | $ 1,000 | ||||||||||||||
Related party short term notes payable | $ 114,000 | ||||||||||||||
Short Term Notes Payable to Stockholders [Member] | In 2012 [Member] | |||||||||||||||
Maturity date | Dec. 31, 2013 | ||||||||||||||
Short Term Notes Payable to Stockholders [Member] | In 2012 [Member] | Minimum [Member] | |||||||||||||||
Interest rate | 7.00% | ||||||||||||||
Short Term Notes Payable to Stockholders [Member] | In 2012 [Member] | Maximum [Member] | |||||||||||||||
Interest rate | 7.50% | ||||||||||||||
EMA Financial, LLC [Member] | |||||||||||||||
Maturity date | Feb. 12, 2018 | Feb. 12, 2018 | |||||||||||||
Exercise price | $ 0.06875 | $ 0.016 | |||||||||||||
Debt conversion amount converted or elected to be converted | $ 6,188 | $ 4,800 | |||||||||||||
Debt conversion amount converted or elected to be converted, principal | $ 5,438 | $ 4,050 | |||||||||||||
Common stock shares issued upon conversion of debt | 90,000 | 300,000 | |||||||||||||
Debt conversion amount converted or elected to be converted, fees | $ 750 | $ 750 | |||||||||||||
EMA Financial, LLC [Member] | Warrant [Member] | Securities Purchase Agreement [Member] | |||||||||||||||
Common stock shares issuable upon exercise of warrants or rights | 137,500 | 275,000 | |||||||||||||
Exercise price | $ 0.40 | $ 0.20 | |||||||||||||
EMA Financial, LLC [Member] | Convertible Promissory Note [Member] | Securities Purchase Agreement [Member] | |||||||||||||||
Credit facility maximum borrowing capacity | $ 110,000 | ||||||||||||||
Original issue discount | 6,600 | ||||||||||||||
Credit facility maximum borrowing capacity net of debt discount | $ 103,400 | ||||||||||||||
Interest rate | 10.00% | ||||||||||||||
Maturity date description | The EMA Note bears interest at Ten Percent (10%) per annum and matures on February 12, 2019 | ||||||||||||||
Terms of conversion feature | The conversion price is 55% multiplied by the lowest Trading Price during the twenty trading days prior to the conversion date. However, EMA may not convert the amounts due under the Note into shares of the Company’s common stock if such conversion would cause it to own more than 4.99% of the Company’s then-outstanding common stock, which limitation may be waived by EMA upon 61 days-notice | ||||||||||||||
Description for event of default | In the event the Company defaults under the terms of the EMA Note, the Company owes 150% of the principal amount then due under the Note, plus any unpaid interest, immediately | ||||||||||||||
Description of prepayment of debt | The Company may prepay the amounts loaned to the Company under the EMA Note as follows: (i) during the initial 90-day period after the issue date, at 135% multiplied by the amount the Company is prepaying, and (ii) from the 91st through the 180th day after the issue date, at 150% multiplied by the amount the Company is prepaying. Any prepayments are subject to EMA’s written acceptance of such prepayment. After 180 days from the issue date the Company cannot prepay the EMA Note | ||||||||||||||
Auctus Fund, LLC [Member] | |||||||||||||||
Maturity date | Feb. 15, 2018 | Feb. 15, 2018 | |||||||||||||
Exercise price | $ 0.06050 | $ 0.01155 | |||||||||||||
Debt conversion amount converted or elected to be converted | $ 3,025 | $ 693 | |||||||||||||
Debt conversion amount converted or elected to be converted, accrued and unpaid interest | $ 2,525 | $ 193 | |||||||||||||
Common stock shares issued upon conversion of debt | 50,000 | 60,000 | |||||||||||||
Debt conversion amount converted or elected to be converted, fees | $ 500 | $ 500 | |||||||||||||
Auctus Fund, LLC [Member] | Warrant [Member] | Securities Purchase Agreement [Member] | |||||||||||||||
Common stock shares issuable upon exercise of warrants or rights | 275,000 | ||||||||||||||
Exercise price | $ 0.20 | ||||||||||||||
Auctus Fund, LLC [Member] | Convertible Promissory Note [Member] | Securities Purchase Agreement [Member] | |||||||||||||||
Credit facility maximum borrowing capacity | $ 110,000 | ||||||||||||||
Interest rate | 10.00% | ||||||||||||||
Maturity date description | The Auctus Note bears interest at Ten Percent (10%) per annum and matures on November 15, 2018 | ||||||||||||||
Terms of conversion feature | The conversion price is 55% multiplied by the lowest Trading Price during the twenty-five trading days prior to the conversion date. However, Auctus may not convert the amounts due under the Note into shares of the Companys common stock if such conversion would cause it to own more than 4.99% of the Companys then-outstanding common stock, which limitation may be waived by Auctus upon 61 days-notice | ||||||||||||||
Description for event of default | In the event the Company defaults under the terms of the Auctus Note, the Company owes 150% of the principal amount then due under the Note, plus any unpaid interest, immediately | ||||||||||||||
Description of prepayment of debt | The Company may prepay the amounts loaned to the Company under the Auctus Note as follows: (i) during the initial 90-day period after the issue date, at 135% multiplied by the amount the Company is prepaying, and (ii) from the 91st through the 180th day after the issue date, at 150% multiplied by the amount the Company is prepaying. Any prepayments are subject to Auctus written acceptance of such prepayment. After 180 days from the issue date the Company cannot prepay the Auctus Note | ||||||||||||||
Crown Bridge Partners [Member] | |||||||||||||||
Maturity date | Feb. 14, 2018 | Feb. 14, 2018 | |||||||||||||
Exercise price | $ 0.0561 | $ 0.00532 | |||||||||||||
Debt conversion amount converted or elected to be converted | $ 5,049 | $ 2,534 | |||||||||||||
Debt conversion amount converted or elected to be converted, principal | $ 4,549 | $ 2,054 | |||||||||||||
Common stock shares issued upon conversion of debt | 90,000 | 480,000 | |||||||||||||
Debt conversion amount converted or elected to be converted, fees | $ 500 | $ 500 | |||||||||||||
Crown Bridge Partners [Member] | Securities Purchase Agreement [Member] | |||||||||||||||
Description of warrants issuable under agreement | the Company agreed to issue Crown a warrant with each funding tranche. Each warrant will be for the purchase of shares of the Company’s common stock equal to 75% of the face value of the tranche divided by $0.50. For example, the first tranche of funding is for $65,000, the Company issued a warrant to purchase 97,500 shares of the Company’s common stock at an exercise price of $0.50 per share. The warrant contains a cashless exercise provision. Each warrant expires five years after the date of issuance | ||||||||||||||
Crown Bridge Partners [Member] | Warrant [Member] | Securities Purchase Agreement [Member] | |||||||||||||||
Common stock shares issuable upon exercise of warrants or rights | 243,750 | ||||||||||||||
Exercise price | $ 0.20 | ||||||||||||||
Crown Bridge Partners [Member] | Convertible Promissory Note [Member] | Securities Purchase Agreement [Member] | |||||||||||||||
Credit facility maximum borrowing capacity | $ 130,000 | ||||||||||||||
Original issue discount | 13,000 | ||||||||||||||
Credit facility maximum borrowing capacity net of debt discount | $ 117,000 | ||||||||||||||
Interest rate | 10.00% | ||||||||||||||
Maturity date description | The Crown Note bears interest at Ten Percent (10%) per annum and matures twelve (12) months from the date of each tranche, with the initial tranche of $65,000 maturing on March 2, 2019 | ||||||||||||||
Terms of conversion feature | Under the terms of the Crown Note, Crown has the right, at any time to convert all or part of the amounts due to it under the Crown Note into shares of the Companys common stock. The conversion price is 55% of the lesser of (a) the lowest traded price or (b) the lowest closing bid price, of the Companys common stock on the twenty-five trading days prior to the conversion date. However, Crown may not convert the amounts due under the Note into shares of the Companys common stock if such conversion would cause it to own more than 4.99% of the Companys then-outstanding common stock, which limitation may be waived by Crown upon 61 days-notice | ||||||||||||||
Description for event of default | In the event the Company defaults under the terms of the Crown Note, the Company owes 150% of the principal amount then due under the Note, plus any unpaid interest, immediately | ||||||||||||||
Description of prepayment of debt | The Company may prepay the amounts loaned to the Company under the Crown Note as follows: (i) during the initial 60-day period after each tranche, at 125% multiplied by the amount the Company is prepaying, (ii) during the 61st through 120 days after each tranche, at 135% multiplied by the amount the Company is prepaying, and (iii) during the 121st through 180th day after each tranche, at 150% multiplied by the amount the Company is prepaying. Any prepayments are subject to Crowns written acceptance of such prepayment. After 180 days from each tranche the Company cannot prepay that tranche in cash | ||||||||||||||
Crown Bridge Partners [Member] | Convertible Promissory Note [Member] | Securities Purchase Agreement [Member] | Tranche 1 [Member] | |||||||||||||||
Original issue discount | $ 6,500 | ||||||||||||||
Proceeds from related party debt including portion attributable to debt discount | 65,000 | ||||||||||||||
Proceeds from related party debt | $ 58,500 | ||||||||||||||
Convertible Notes Payable [Member] | Minimum [Member] | |||||||||||||||
Interest rate | 7.50% | ||||||||||||||
Unsecured promissory note | $ 7,500 | ||||||||||||||
Common stock rate, per share | $ 0.20 | ||||||||||||||
Exercise price | $ 0.50 | ||||||||||||||
Convertible Notes Payable [Member] | Maximum [Member] | |||||||||||||||
Interest rate | 8.00% | ||||||||||||||
Unsecured promissory note | $ 30,000 | ||||||||||||||
Common stock rate, per share | $ 5.00 | ||||||||||||||
Exercise price | $ 1.25 | ||||||||||||||
Short Term Notes Payable to Stockholders One [Member] | |||||||||||||||
Notes payable additional amount | $ 75,000 | ||||||||||||||
Related party short term notes payable | $ 250,000 | ||||||||||||||
Common stock, issued shares | 200,000 | ||||||||||||||
Maturity date | Dec. 31, 2017 | ||||||||||||||
Common stock issued to Convertible notes | 200,000 | ||||||||||||||
Notes payable included in consolidation | $ 175,000 | ||||||||||||||
Loss from extinguishment of debt | $ 30,000 | ||||||||||||||
Short Term Notes Payable to Stockholders One [Member] | In 2017 [Member] | |||||||||||||||
Related party short term notes payable | $ 175,000 | ||||||||||||||
Common stock, issued shares | 50,000 | ||||||||||||||
Maturity date | Jun. 30, 2017 | ||||||||||||||
Debt discount cost | $ 26,000 |
EARNINGS PER SHARE (Details) - USD ($) |
3 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Earnings Per Share Details Abstract | ||
Net loss attributable to the common stockholders | $ (537,299) | $ (431,483) |
Basic weighted average outstanding shares of common stock | 9,143,951 | 8,003,532 |
Dilutive effect of options and warrants | ||
Diluted weighted average common stock and common stock equivalents | 9,143,951 | 8,003,532 |
Earnings (loss) per share: | ||
Basic and diluted | $ (0.06) | $ (0.05) |
EARNINGS PER SHARE (Details Narrative) - $ / shares |
3 Months Ended | |
---|---|---|
Sep. 30, 2018 |
Sep. 30, 2017 |
|
Total dilutive warrants | 4,000,000 | 2,600,000 |
Common stock shares issuable upon conversion of convertible notes | 30,000,000 | |
Minimum [Member] | ||
Exercise price of convertible notes | $ 0.10 | |
Maximum [Member] | ||
Exercise price of convertible notes | $ 5.00 |
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