See accompanying notes to unaudited condensed consolidated financial statements
See accompanying notes to unaudited condensed consolidated financial statements
See accompanying notes to unaudited condensed consolidated financial statements
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
Description of Business
Cerebain Biotech Corp. (Formerly Discount Dental Materials, Inc.) (“Cerebain Biotech”), was incorporated on December 18, 2007 under the laws of Nevada. The Company is a smaller reporting biomedical company and through its wholly owned subsidiary, Cerebain Operating, Inc. (Formerly Cerebain Biotech Corp.), 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, 2017 has been derived from audited statements and (b) unaudited interim condensed financial statements as of December 31, 2017 and for the six-month and three-month periods ended December 31, 2017 and 2016 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, 2017 included on Form 10-K filed with the Securities and Exchange Commission on September 15, 2017.
NOTE 2 – BASIS OF PRESENTATION
The Company operates in one segment in accordance with accounting guidance Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) Topic 280,
Segment Reporting
. Our Principal Executive Officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
Going Concern
The accompanying unaudited condensed consolidated financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company had an accumulated deficit of approximately $31,375,000 and $27,531,000 at December 31, 2017 and June 30, 2017, respectively, and had a net loss of approximately $3,844,000 and $14,883,000 for the six-month periods ended December 31, 2017 and 2016, respectively, and net cash used in operating activities of approximately $362,000 and $385,000 for the six-month periods ended December 31, 2017 and 2016, respectively, with no revenue earned since inception, limited cash of approximately $4,400 and $11,000 at December 31, 2017 and June 30, 2017, respectively, and a lack of operational history. These matters raise substantial doubt about our ability to continue as a going concern.
While the Company is attempting to commence operations and generate revenues, the Company’s cash position may not be significant enough to support the Company’s daily operations. Management intends to raise additional funds by way of a public or private offering. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate revenues.
The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
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 and the valuation of warrants and options.
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 $6,000 and $8,000 for the six-month periods ended December 31, 2017 and 2016, respectively and approximately $3,000 and $5,000 for the three-month periods ended December 31, 2017 and 2016, respectively.
Research and Development
The Company expenses the cost of research and development as incurred. Research and development costs charged to operations were approximately $125,000 and $131,000 for the six-month periods ended December 31, 2017 and 2016, respectively, and approximately $82,000 and $62,000 for the three-month periods ended December 31, 2017 and 2016, 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.
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
Debt with warrants
In accordance with ASC Topic 470-20-25, when the Company issues debt with warrants, the Company treats the warrants as a debt discount, record as a contra-liability against the debt, and amortizes the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statements of operations. The offset to the contra-liability is recorded as additional paid in capital in our consolidated balance sheets 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 – 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 December 31, 2017 and June 30, 2017, 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.
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
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.).
|
|
|
|
|
·
|
Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
|
The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared.
Concentrations, Risks, and Uncertainties
The Company is 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:
|
·
|
Warrants,
|
|
|
|
|
·
|
Convertible notes,
|
|
|
|
|
·
|
Employee stock options, and
|
|
|
|
|
·
|
Other equity awards, which include long-term incentive awards.
|
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
The FASB ASC Topic 260, “
Earnings Per Share”
, requires the Company to include additional shares in the computation of earnings per share, assuming dilution. The additional shares included in diluted earnings per share represents the number of shares that would be issued if all of the Company’s outstanding dilutive instruments were converted into common stock.
Diluted earnings per share are based on the assumption that all dilutive options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options, warrants, and convertible notes are assumed to be exercised at the time of issuance, and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
Basic and diluted earnings (loss) per share are the same since the Company had net losses for all periods presented and including the additional potential common shares would have an anti-dilutive effect.
Recent Accounting Pronouncements
The Company has evaluated new accounting pronouncements that have been issued and are not yet effective for the Company and determined that there are no such pronouncements expected to have a significant impact on the Company’s future 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 $220,000, of which $65,000 has been incurred towards the Company’s monetary commitment.
To date, the results of the research suggest we have three options for implantable devices with a bias towards having them as non-invasive as possible. The options are comprised of two electro-stim types that have a multitude of variable test parameters that can be changed and modified externally as the testing facility conducts clinical trials on each patient. It is theorized that if a patient’s response to the Omentum stimulation is successful, the clinical facility should be able to perform various tests for the purpose of setting “markers” for the patient and then perform the standardized cognitive testing for Alzheimer’s patient with the intent of developing a testing matrix. It is our objective to test various methods and modalities with the aim of developing an enormous matrix of input to direct us to the best solution.
Consulting Agreements
Between December 2013 and December 2017, the Company entered into service and consulting agreements with various vendors to provide assistance to the Company in several areas including the marketing of its biomedical products upon the availability of the device, capital markets and marketing strategies, research and development, advertising services and assistance in the introduction of the Company to medical device testing organization and to facilitate access to doctors in numerous countries, including Poland, Uzbekistan and China. They were compensated an approximate aggregate 1,935,000 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 December 31, 2017, the Company has extended some of the contracts for additional periods. Any of the parties may terminate their respective agreement by providing thirty (30) days written notice of such termination. The Company has recognized $30,000 in accounts payable which is in arrears with one contractual obligation and is in discussions with the consultant to renegotiate the terms of the contract. As these contracts are for a period of up to twelve months to thirty-six months, the Company recorded the original approximate $2,670,000 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 six-month periods ended December 31, 2017 and 2016, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $102,000 and $280,000, respectively, and for the three-month periods ended December 31, 2017 and 2016 approximately $30,000 and $165,000, respectively. The unamortized prepaid expenses of these contracts are approximately $27,000 and included in prepaid expenses on the consolidated balance sheets at December 31, 2017 compared to $352,000 for the six-month period ended December 31, 2016.
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
In January 2016, the Company entered into a consulting agreement with an individual to provide business consulting services for a period of thirty-six months. Compensation was issuance of 75,000 shares of the Company’s stock and fully vested and non-forfeitable options to acquire up to 300,000 shares of our common stock, at an exercise price of $0.33 per share. Fair Market Value of these options totaled approximately $83,500 and is to be recognized ratably over the service period in selling, general and administrative expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 210%; risk-free interest rate of 1.07%; expected term of 3 years; and 0% dividend yield. For the six-month periods ended December 31, 2017 and 2016, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $14,000 and $14,000, respectively, and for the three-month periods ended December 31, 2017 and 2016, approximately $7,000 and $7,000, respectively. The unamortized prepaid expense of this contract is approximately $35,000 and included in prepaid expenses on the consolidated balance sheets at December 31, 2017.
In October 2016, the Company entered into a consulting agreement with an individual to provide business consulting services for a period of twelve months. Compensation was issuance of 300,000 shares of the Company’s stock (See Note 7) and fully vested and non-forfeitable warrants to acquire up to 300,000 shares of our common stock, at an exercise price of $0.40 per share. Fair Market Value of these warrants totaled approximately $171,000, and is to be recognized ratably over the service period in selling, general and administrative expense. The warrants were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 205%; risk-free interest rate of 0.63%; expected term of 1 year(s); and 0% dividend yield. For the six-month periods ended December 31, 2017 and 2016, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $43,000 and $43,000, respectively, and for the three-month periods ended December 31, 2017 and 2016, approximately $0 and $43,000, respectively. The prepaid expense of this contract has been fully amortized as of December 31, 2017.
As of December 31, 2017, future maturities of prepaid expenses on value of shares issued for consulting are as follows:
Fiscal year ended June 30,
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|
|
|
|
|
|
|
2018
|
|
$
|
36,198
|
|
2019
|
|
|
25,235
|
|
Total
|
|
$
|
61,433
|
|
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 no more than $120,000 in total and no less than $100,000 in total, the terms of such alternative payment options are as follows:
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
1)
|
The Company could pay Ms. Miller the total gross amount of one hundred twenty thousand dollars ($120,000) as follows:
|
|
a)
|
One payment of twenty thousand dollars ($20,000) within thirty (30) days after March 29, 2017; and
|
|
b)
|
Beginning within ninety (90) days after March 29, 2017, the Company would make monthly payments of fifteen thousand dollars ($15,000) to Ms. Miller’s representative until such time that Ms. Miller and her representative has received the gross amount of $120,000,
OR
|
2)
|
The Company could pay Ms. Miller the total gross amount of one hundred thousand dollars ($100,000) as follows:
|
|
a)
|
One payment of twenty thousand dollars ($20,000) within thirty (30) days after March 29, 2017.
|
|
b)
|
One payment of eighty thousand dollars ($80,000) within sixty (60) days after March 29, 2017,
OR
|
3)
|
The Company could pay Ms. Miller the total gross amount of one hundred ten thousand dollars ($110,000) as follows:
|
|
a)
|
One payment of twenty thousand dollars ($20,000) within thirty (30) days after March 29, 2017.
|
|
b)
|
One payment of fifteen thousand dollars ($15,000) within sixty (60) days after March 29, 2017.
|
|
c)
|
One payment of seventy-five thousand dollars ($75,000) within ninety (90) days after March 29, 2017.
|
The Company selected the 1
st
payment option. Upon all payments being made pursuant to the terms set forth in the agreement, Ms. Miller has agreed to knowingly and voluntarily release and discharge the Company of and from all claims, demands, liabilities, obligations, promises, controversies, compensation, wages, bonuses, commissions, damages, rights, actions and causes of action known and unknown, at law or in equity, which Ms. Miller has or may have against the Company as of the date of execution of the settlement agreement.
The Company 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 December 31, 2017. For the six-month and three-month periods ended December 31, 2017, the Company paid Ms. Miller $85,000 and $40,000, respectively, as agreed in the settlement agreement. As of December 31, 2017, the terms of the settlement agreement have been met and Ms. Miller has been paid in full.
NOTE
5
– PATENT RIGHTS
On June 10, 2010, the Company entered into a Patent License Agreement under which the Company acquired the exclusive rights to certain intellectual property related to using Omentum for treating dementia conditions. Under the agreement, the Company has paid rights fees of $50,000 to Dr. Saini, and the Company issued Dr. Saini 825,000 shares of our common stock, valued at $6,600 (based on the fair market value on the date of grant) restricted in accordance with Rule 144. In addition, Dr. Saini will have the option to participate in the sale of equity by the Company in the future, up to ten percent (10%) of the money raised, in exchange for the applicable number of his shares. To date, Dr. Saini has not participated in any sales of equity.
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.
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
The patent will have an estimated useful life of 20 years based on the term of the patent. Amortization of the patent will begin when the patent is issued by the United States Patent and Trademark Office and put in use.
Legal fees pertaining to the patent are recorded as general and administrative expenses when they are incurred. Legal fees charged to operations were approximately $1,560 and $3,775 for the six-month periods ended December 31, 2017 and 2016, respectively, and approximately $1,100 and $3,150 for the three-month periods ended December 31, 2017 and 2016, respectively.
The Company recognized a patent royalty expense of approximately $50,000 for the six-month period ended December 31, 2017 compared to $50,000 for the six-month period ended December 31, 2016 and approximately $25,000 for the three-month period ended December 31, 2017 compared to $25,000 for the three-month period ended December 31, 2016. The accrued payable of $300,000 pertaining to the patent royalty expense at December 31, 2017 is included in related party payables.
NOTE
6
– NOTES PAYABLE
Short Term Notes Payable to Stockholders
|
|
Short Term Notes Payable to Stockholders
|
|
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
Short term notes payable (A)
|
|
$
|
114,000
|
|
|
$
|
114,000
|
|
Short term notes payable (B)
|
|
|
250,000
|
|
|
|
175,000
|
|
Net total
|
|
$
|
364,000
|
|
|
$
|
289,000
|
|
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 December 31, 2017, 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.
|
|
|
(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 is scheduled to matured on December 31, 2017 and accrues no interest. In addition, the Company issued to the noteholder 200,000 shares of the Company’s common stock (see Note 7). 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.
|
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
Convertible Notes to Stockholders
|
|
Convertible Notes Payable
|
|
|
|
December 31,
2017
|
|
|
June 30,
2017
|
|
Convertible notes payable (A)
|
|
$
|
131,000
|
|
|
$
|
131,000
|
|
Convertible note payable (B)
|
|
|
260,000
|
|
|
|
260,000
|
|
Convertible notes payable (C)
|
|
|
2,560,112
|
|
|
|
2,460,112
|
|
Subtotal
|
|
|
2,951,112
|
|
|
|
2,851,112
|
|
Debt discount
|
|
|
(8,717
|
)
|
|
|
(12,053
|
)
|
Net total
|
|
$
|
2,942,395
|
|
|
$
|
2,839,059
|
|
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, netting a balance of approximately $131,000. 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 our common stock at rates that range from $0.20 and $5.00 per share, but only if such conversion would not cause the noteholders to own more than 9.9% of our outstanding common stock and contains piggyback registration rights. In addition, the Company granted to certain noteholders a cashless option to purchase one (1) share of the Company’s common stock, $.001 par value, at the exercise price of $0.50 to $1.25 per share, for each share the 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 December 31, 2017, the Company is in default approximately $62,500 on various notes. As a result, these notes are included in the current portion of convertible notes payable, 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 $3,300 and $9,600 for the six-month periods ended December 31, 2017 and 2016, respectively, and approximately $1,700 and $1,400 for the three-month periods ended December 31, 2017 and 2016, respectively. The accretion of debt discount expense to be recognized in future years is approximately $8,700.
Unsecured, Amended and Consolidated Convertible Note Payable (B)
December 2014 Convertible Note
In December 2014, the Company entered into an unsecured convertible promissory note with a non-affiliate stockholder for a principal amount of $200,000. The note payable accrued interest at 7.5% per annum, and was convertible into shares of our common stock at a conversion rates of $1.00 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of our outstanding common stock, and contained piggyback registration rights. The note payable was extinguished in December 2015.
In December 2014, the Company determined that the note had a beneficial conversion feature of approximately $90,000.
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
December 2015 Convertible Note
In December 2015, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of $260,000. In exchange, the Company extinguished a $10,000 short term note payable, the $200,000 convertible note payable issued in December 2014, and received cash of $50,000. The amended and consolidated note payable matures in October 2019, accrues interest at 7.5% per annum, and convertible into shares of our common stock at a conversion rates of $0.20 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of our outstanding common stock, and contains piggyback registration rights. In addition, the Company granted to the noteholder a cashless warrant to purchase one (1) share of the Company’s common stock, $.001 par value, at the exercise price of $0.50 per share, for each share the noteholder is entitled pursuant to the promissory note. The options are fully vested and shall expire three years from date of execution.
The Company determined the estimated relative fair value discount of the warrants was approximately $128,000 which was valued using the Black-Scholes option pricing model with the following inputs: volatility of 240%; risk-free interest rate of 1.05%; expected term of 3 years; and 0% dividend yield.
The Company determined that the note had a beneficial conversion feature of approximately $141,000.
Unsecured, Amended and Consolidated Convertible Notes Payable (C)
June 2015 Convertible Note
In June 2015, the Company entered into an unsecured convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $1,475,000. The note matured on June 9, 2017 and accrued interest at 7.5% per annum and is convertible into shares of our common stock at a conversion rate of $1.00 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of our outstanding common stock and contains piggyback registration rights. The note payable was modified in February 2016.
December 2015 Convertible Note
In December 2015, the Company entered into an unsecured $112,000 promissory note with a stockholder. The note matured on March 31, 2016 and accrued no interest. In addition, the Company issued to the noteholder 125,000 shares of the Company’s common stock. The note payable was modified in February 2016.
In connection with the issuance of the 125,000 shares of stock in December 2015, the Company recorded the approximate $39,000 value of the shares issued, included in loss on extinguishment. The Company used a recent sale of stock to determine the fair market value of the transaction.
February 2016 Convertible Note
In February 2016, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,080,112. In exchange, the Company modified the $1,475,000 convertible note payable issued in June 2015, modified the $112,000 note payable issued in December 2015, accounts payable related to accrued interest of approximately $293,000, and received cash of $200,000. The amended and consolidated note payable matured February 2018, accrued interest at 5% per annum, and was convertible into shares of our common stock at a conversion rate of $0.50 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of our outstanding common stock and contains piggyback registration rights. The note payable was modified in April 2016.
In connection with the $2,080,112 convertible note payable, the Company determined the embedded conversion feature did 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.
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
April 2016 Convertible Note
In April 2016, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,130,000. In exchange, the Company modified the $2,080,112 convertible promissory note payable issued in February 2016 and received cash of $55,000. The amended and consolidated convertible note payable matured in February 2018, accrued interest at 5% per annum, and was convertible into shares of our common stock at a conversion rate of $0.50 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of our outstanding common stock and contains piggyback registration rights. The note payable was extinguished in August 2016.
In connection with the $2,130,000 convertible note payable, the Company determined the embedded conversion feature did not meet the criteria in ASC 470-50-40-10 or 470-20-25, and the issuance of the convertible promissory note payable is considered a modification, and not an extinguishment that would require the recognition of a gain or loss.
August 2016 Convertible Note
In August 2016, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,285,000. In exchange, the Company extinguished the $2,135,112 convertible promissory note payable issued in April 2016 and received cash of $150,000. The amended and consolidated convertible note payable matured in August 2018, accrued interest at 5% per annum, and was convertible into shares of our common stock at a conversion rate of $0.40 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of our outstanding common stock and contains piggyback registration rights. The note payable was modified in October 2016.
In connection with the $2,285,000 convertible note, the Company determined the embedded conversion feature did meet the criteria in ASC 470-50-40-10 or 470-20-25, and the issuance of the convertible promissory note payable is considered an extinguishment that would require the recognition of a gain or loss. The Company recognized a loss from extinguishment of debt of approximately $3.7 million during the quarter ended September 30, 2016.
October 2016 Convertible Note
In October 2016, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,310,000. In exchange, the Company modified the $2,285,000 convertible promissory note payable issued in August 2016 and received cash of $25,000. The amended and consolidated convertible note payable matured in October 2018, accrued interest at 5% per annum and was convertible into shares of our common stock at a conversion rate of $0.40 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of our outstanding common stock, and contains piggyback registration rights. The note payable was extinguished in November 2016.
In connection with the $2,310,000 convertible note payable, the Company determined the embedded conversion feature did not meet the criteria in ASC 470-50-40-10 or 470-20-25, and the issuance of the convertible promissory note payable is considered a modification, and not an extinguishment that would require the recognition of a gain or loss.
November 2016 Convertible Note
In November 2016, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,410,000. In exchange, the Company extinguished the $2,310,112 convertible promissory note payable issued in October 2016 and received cash of $100,000. The amended and consolidated convertible note payable matured in November 2018, accrued interest at 5% per annum, and was convertible into shares of our common stock at a conversion rate of $0.15 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of our outstanding common stock and contains piggyback registration rights. The note payable was modified in January 2017.
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
In connection with the $2,410,000 convertible note, the Company determined the embedded conversion feature did meet the criteria in ASC 470-50-40-10 or 470-20-25, and the issuance of the convertible promissory note payable is considered an extinguishment that would require the recognition of a gain or loss. The Company recognized a loss from extinguishment of debt of approximately $10.1 million for the fiscal year ended June 30, 2017.
January 2017 Convertible Note
In January 2017, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,460,000. In exchange, the Company modified the $2,410,112 convertible promissory note payable issued in November 2016 and received cash of $50,000. The amended and consolidated convertible note payable matures in January 2019, accrues interest at 5% per annum, and is convertible into shares of our common stock at a conversion rate of $0.15 per share, but only if such conversion would not cause the noteholder to own more than 9.9% of our outstanding common stock, and contains piggyback registration rights. 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 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 our outstanding common stock, and contains piggyback registration rights.
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 three-month and six-month periods ended December 31, 2017.
The Company recognized interest expense on all notes payable to stockholders of approximately $82,000 and $76,000 for the six-month periods ended December 31, 2017 and 2016, respectively and approximately $41,000 and $39,000 for the three-month periods ended December 31, 2017 and 2016, respectively. Accrued interest on all notes payable to stockholders at December 31, 2017 and 2016 totaled approximately $340,000 and $179,000, respectively, and is included in accounts payable.
As of December 31, 2017, future maturities of all notes payable are as follows:
|
|
|
|
2018
|
|
$
|
724,000
|
|
2019
|
|
|
2,575,112
|
|
2020
|
|
|
16,000
|
|
Total outstanding notes
|
|
|
3,315,112
|
|
Debt Discount
|
|
|
(8,717
|
)
|
Net Notes Payable
|
|
$
|
3,306,395
|
|
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
NOTE
7
– STOCK TRANSACTIONS
For the six-month period ended December 31, 2017, the Company issued 144,000 shares of its common stock to a non-affiliate investor at $1.25 per share in exchange for $180,000. The investor has an existing stock purchase agreement with the Company that allows him to purchase up to $2,000,000 worth of the Company’s common stock at $1.25 per share. In addition to the 144,000 shares of the Company’s common stock, the Company will issue the investor a warrant to acquire 144,000 shares of the Company’s common stock at $2.50 per share. The warrant agreement will be issued after the full amount of the investment is determined after December 31, 2017.
For the six-month period ended December 31, 2017, the Company issued 375,000 fully vested, nonforfeitable shares of common stock to various individuals as payment for consulting services and financing fee per agreements dated between July 2017 and December 2017. The aggregate fair market value of these shares was approximately $65,000 as the fair market value of the stock was between $0.15 and $0.20 per share. The Company recognized the $35,000 as a prepaid expense and $30,000 as a loss from extinguishment of debt. The Company used recent sales of stock to determine the fair market value of these transactions.
On May 15, 2017, the Company issued a Private Placement Memorandum (“PPM”). The PPM authorizes the sale of up to 400 units, with each Unit consisting of one $10,000 Principal Amount Convertible Debenture and a warrant to purchase one share of our common stock, at a price of $1.25 per Unit. Each Unit includes a warrant to purchase 25,000 shares of the Company’s common stock, $.001 par value, at the exercise price of $0.80 per share. The Debentures will be convertible at Forty Cents ($0.40) per share. The Offering was to terminate on June 30, 2017, unless extended one or more times by us to a date not later than July 31, 2017. On August 18, 2017, by unanimous written consent of our directors, we extended the offering through December 31, 2017. As of December 31, 2017, the Company has received no subscriptions and the offering closed.
NOTE
8
– OPTIONS AND
WARRANTS
Options
For the six-month period ended December 31, 2017, the Company had 910,000 options outstanding at a weighted average exercise price of $1.45 and a weighted average contractual life of 7.69 years, with 682,000 options exercisable at a weighted average exercise price of $1.64 and a weighted average contractual life of 6.92 years. For the six-month periods ended December 31, 2017 and 2016, the Company recognized an expense of approximately $32,000 and $200,000, respectively, and for the three-month periods ended December 31, 2017 and 2016, the Company recognized an expense of approximately $16,000 and $85,000, respectively, which was recorded as compensation expense. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $136,000.
Warrants
For the six-month period ended December 31, 2017, the Company had approximately 1,700,000 warrants outstanding at an average exercise price of $0.49. For the six-month periods ended December 31, 2017 and 2016, the Company recognized an accretion of debt discount related to warrants expense of approximately $2,600 and $1,500, respectively, and for the three-month periods ended December 31, 2017 and 2016, the Company recognized an accretion of debt discount related to warrants expense of approximately $1,300 and $900, respectively. The approximate expense expected to be recognized in future years is $7,000.
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
NOTE
9
– RELATED PARTY TRANSACTIONS
Employment Agreements
Eric Clemons
On June 15, 2013, the Company entered into an employment agreement with Eric Clemons. Terms of the agreement included the following:
|
·
|
An annual salary of One Hundred Fifty-Six Thousand Dollars ($156,000).
|
|
|
|
|
·
|
Bonus of $40,000 upon the delivery to the Company of a prototype medical device from Sonos Models Inc., which has been paid in full.
|
|
|
|
|
·
|
Cash bonus should he be responsible for the Company consolidating with or merge into another corporation or convey all or substantially all of its assets to another corporation, will receive a cash bonus calculated using a Lehman formula of 5% for the first $1,000,000, 4% for the second $1,000,000, 3% for the third $1,000,000, 2% for the fourth $1,000,000, and 1% thereafter. To date, this incentive has not earned or been paid.
|
|
|
|
|
·
|
Option to acquire up to 100,000 shares of the Company’s common stock at an exercise price of $5.00 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $822,000 and is recognized ratably over the vesting period in selling, general and administrative expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 100%; risk-free interest rate of 1.04%; expected term of 5 years; and 0% dividend yield. As of December 31, 2017, 100,000 options to purchase the Company’s common stock have vested. The selling, general and administrative expense has been fully amortized.
|
On October 1, 2014, the Company entered into an addendum to the employment agreement. The addendum had no accounting impact on the prior agreement. Terms of the addendum include included the following:
|
·
|
Extension of employment until December 31, 2017. The Company has entered into a new employment agreement with Mr. Clemons (See Note 11).
|
|
|
|
|
·
|
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 December 31, 2017, 80,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $11,000 for the six-month periods ended December 31, 2017 and 2016, respectively and approximately $5,500 for the three-month periods ended December 31, 2017 and 2016, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $15,000.
|
On March 1, 2015, the Company entered into an addendum to the employment agreement. The addendum had no accounting impact on the prior agreements. Terms of the addendum included a cash placement bonus equal to an amount up to 10% of the aggregate purchase price paid by each purchaser of the Company’s Securities and Convertible Debt, where the purchaser of said Securities and Convertible Debt has been directly introduced to the Company by Mr. Clemons. For the six-month periods ended December 31, 2017 and 2016, a cash placement bonus was earned of approximately $0 and $27,000, respectively, and for the three-month periods ended December 31, 2017 and 2016, a cash placement bonus was earned of approximately $0 and $12,500, respectively, which was recognized as a reduction of the proceeds from the sale of shares of common stock and debt issuances and recorded as an expense.
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
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 December 31, 2017, 21,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $8,000 and $23,000 for the six-month periods ended December 31, 2017 and 2016, respectively, and approximately $4,000 for the three-month periods ended December 31, 2017 and 2016, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $39,000.
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 could be liable such payroll taxes and any related penalties and interest.
Wesley Tate
On June 15, 2013, the Company entered into an employment agreement with Wesley Tate. Terms of the agreement included the following:
|
·
|
Annual salary of One Hundred Five Thousand Dollars ($105,000).
|
|
|
|
|
·
|
Bonus of $20,000 upon the delivery to the Company of a prototype medical device form Sonos Models, Inc., which has been paid in full.
|
|
|
|
|
·
|
Option to acquire up to 50,000 shares of the Company’s common stock at an exercise price of $5.00 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $411,000 and is recognized ratably over the vesting period in selling, general and administrative expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 100%; risk-free interest rate of 1.04%; expected term of 5 years; and 0% dividend yield. As of December 31, 2017, 50,000 options to purchase the Company’s common stock have vested. The selling, general and administrative expense has been fully amortized.
|
On April 1, 2014, the Company entered into an addendum to this agreement. The addendum had no accounting impact on the prior agreement. Terms of the addendum included 25,000 of the Company’s common restricted shares representing a retention bonus as an incentive for him to remain in the employment of the Company for 12 months. The Company recognized a prepaid expense of approximately $37,500, which has been fully amortized to selling, general and administrative.
On October 1, 2014, the Company entered into an addendum to the employment agreement. The addendum had no accounting impact on the prior agreements. Terms of the agreement included the following:
|
·
|
Extension of employment until June 15, 2017. The Company entered into a new contract on October 1, 2015.
|
|
|
|
|
·
|
Annual salary of One Hundred Fifty-Six Thousand Dollars ($156,000).
|
|
|
|
|
·
|
Option to acquire up to 50,000 shares of the Company’s common stock under the Company’s 2014 Omnibus Stock Grant and Option Plan at an exercise price of $1.20 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $56,000 and is recognized ratably over the vesting period in selling, general and administrative expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 262%; risk-free interest rate of 1.69%; expected term of 5 years; and 0% dividend yield. As of December 31, 2017, 40,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $5,400 for the six-month periods ended December 31, 2017 and 2016, respectively and approximately $2,700 for the three-month periods ended December 31, 2017 and 2016, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $7,500.
|
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
On October 1, 2015, the Company entered into a new employment agreement. The new contract had no accounting impact on the prior agreements. Terms of the agreement included the following:
|
·
|
Extension of employment until October 2018. The Company has entered into a new employment agreement with Mr. Tate (See Note 11).
|
|
|
|
|
·
|
Annual salary of One Hundred Fifty-Six Thousand Dollars ($156,000).
|
|
|
|
|
·
|
Stock grant of 150,000 of the Company’s common restricted shares for services provided to the Company. The Company recognized selling, general and administrative expense of approximately $40,000 for the year ended June 2016.
|
On September 29, 2016, the Company issued Mr. Tate an option to acquire up to 105,000 shares of the Company’s common stock under the Company’s 2014 Omnibus Stock Grant and Option Plan at an exercise price of $0.75 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $78,000 and is recognized ratably over the vesting period in selling, general and administrative expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 206%; risk-free interest rate of 1.13%; expected term of 6 years; and 0% dividend yield. As of December 31, 2017, 21,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $8,000 and $23,000 for the six-month periods ended December 31, 2017 and 2016, respectively, and approximately $4,000 for the three-month periods ended December 31, 2017 and 2016, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $39,000.
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 could be 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.
The total number of potential additional dilutive options and warrants outstanding was approximately 3.1 million and 2.7 million for the six-month periods ended December 31, 2017 and 2016, 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 18 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:
|
|
For The Six Months
ended
December 31,
|
|
|
|
2017
|
|
|
2016
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to the common stockholders
|
|
$
|
(3,844,463
|
)
|
|
$
|
(14,882,781
|
)
|
|
|
|
|
|
|
|
|
|
Basic weighted average outstanding shares of common stock
|
|
|
8,174,265
|
|
|
|
7,330,564
|
|
Dilutive effect of options and warrants
|
|
|
-
|
|
|
|
-
|
|
Diluted weighted average common stock and common stock equivalents
|
|
|
8,174,265
|
|
|
|
7,330,564
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share:
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.47
|
)
|
|
$
|
(2.03
|
)
|
CEREBAIN BIOTECH CORP. AND SUBSIDIARY
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
FOR THE THREE AND SIX MONTH PERIODS ENDED DECEMBER 31, 2017 AND 2016
NOTE 11
–
SUBSEQUENT EVENTS
On February 1, 2018 the Company entered into a stock purchase agreement with a non-affiliate stockholder, under which the Company issued 120,000 shares of its common stock, in exchange for $60,000. The stock purchase agreement includes piggyback registration rights. In connection with the stock purchase agreement, the Company will also issue 120,000 warrants at $1.00 per share.
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. Shares shall vest per the table below:
|
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. Shares shall vest per the table below:
|
Stock Grant Vesting Schedule
|
Date of Vesting
|
|
Percent Vested
|
|
|
Number of Shares Vested
|
|
February 1, 2018
|
|
|
20
|
%
|
|
|
160,000
|
|
January 1, 2019
|
|
|
20
|
%
|
|
|
160,000
|
|
January 1, 2020
|
|
|
20
|
%
|
|
|
160,000
|
|
January 1, 2021
|
|
|
20
|
%
|
|
|
160,000
|
|
January 1, 2022
|
|
|
20
|
%
|
|
|
160,000
|
|
Total
|
|
|
|
|
|
|
800,000
|
|