Notes to Consolidated
Financial Statements
NOTE 1 – ORGANIZATION AND DESCRIPTION OF BUSINESS
Organization and Business Activity
Panther Biotechnology, Inc. (the “Company”)
was incorporated in the State of Nevada on July 11, 2011. The Company was originally incorporated as New Era Filing Services
Inc., changed its name to NEF Enterprises, Inc. on October 4, 2011 and then changed its name to Panther Biotechnology, Inc. on
May 29, 2014. The Company incorporated a wholly-owned subsidiary, PubCo Reporting Services, Inc., formerly known as New Era
Filing Services, Inc., in Florida on November 20, 2012.
The Company is an early stage bio-medical technology
company that pursues and is continuing to pursue in-licensing of certain technologies so that they may be able to develop those
technologies for treatments of patients with cancer. Panther’s current purpose is to better serve the unmet medical
needs of patients with the most difficult to treat cancers. Panther’s mission is to identify, license and acquire unique
molecules that are designed to heal without causing harm and are either optimized derivatives of existing products, repurposed
approved products or new classes of drugs. Panther is also seeking other diversified business opportunities.
The Company’s prior operations, through
its wholly-owned subsidiary, PubCo Reporting Services, Inc. (“PubCo”), which is in the Securities Exchange Commission
compliance filing services, was sold as of June 1, 2015 and is reflected as discontinued operations in these consolidated financial
statements.
NOTE 2 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Consolidation
The accompanying consolidated financial statements
include the accounts of the Company and its wholly owned subsidiary, PubCo Reporting Services, Inc. All significant intercompany
balances and transactions have been eliminated in these consolidated financial statements.
Basis of Presentation
The accounting and reporting policies of the
Company conform to accounting principles generally accepted in the United States of America (“GAAP”). These consolidated
financial statements include all adjustments that, in the opinion of management, are necessary in order to make the financial statements
not misleading.
Discontinued Operations
In accordance with Accounting Standards Codification
(ASC) 205-20, Presentation of Financial Statements - Discontinued Operations, the Company reported the results of our PubCo subsidiary
operations as discontinued operations. On June 1, 2105, the Company sold its PubCo subsidiary.
Use of estimates
The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities
and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amount of revenues
and expenses during the reporting period. Actual results could differ from those estimates. The Company’s periodic
filings with the Securities and Exchange Commission include, where applicable, disclosures of estimates, assumptions, uncertainties
and markets that could affect the financial statements and future operations of the Company.
Cash and Cash Equivalents
The Company considers all highly liquid investments
with original maturities of less than three months, which are readily convertible to known amounts of cash and which, in the opinion
of management, are subject to an insignificant risk of loss in value, to be cash equivalents.
Intangible Assets
Intangible assets are amortized using the straight-line
method over their estimated period of benefit. We evaluate the recoverability of intangible assets periodically and take into account
events or circumstances that warrant revised estimates of useful lives or that indicate that impairment exists. All of our intangible
assets are subject to amortization. Intangible assets having a capitalized cost of $390,487 were impaired during the year ended
May 31, 2016. No impairment of intangible assets was identified for the year ended May 31, 2015.
Impairment of Long-Lived Assets
The Company reviews the carrying value of its
long-lived assets annually or whenever events or changes in circumstances indicate that the historical cost-carrying value of an
asset may no longer be appropriate. The Company assesses recoverability of the carrying value of the asset by estimating the future
net undiscounted cash flows expected to result from the asset, including eventual disposition. If the future net undiscounted cash
flows are less than the carrying value of the asset, an impairment loss is recorded equal to the difference between the asset’s
carrying value and estimated fair value.
Revenue Recognition
The Company recognizes revenue from the sale
of services in accordance with ASC 605,
“Revenue Recognition”
. Revenue from discontinued operations consists
of SEC compliance services; focusing on corporate and individual reporting requirements for our Discontinued Operations. Sales
income is recognized only when all of the following criteria have been met:
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i)
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Persuasive evidence for an agreement exists;
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ii)
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Service has been provided;
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iii)
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The fee is fixed or determinable; and
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iv)
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Collection is reasonably assured.
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Share-based Expenses
ASC 718 "
Compensation – Stock
Compensation
" prescribes accounting and reporting standards for all share-based payment transactions in which employee
services are acquired. Transactions include incurring liabilities, or issuing or offering to issue shares, options, and other equity
instruments such as employee stock ownership plans and stock appreciation rights. Share-based payments to employees, including
grants of employee stock options, are recognized as compensation expense in the financial statements based on their fair values.
That expense is recognized over the period during which an employee is required to provide services in exchange for the award,
known as the requisite service period (usually the vesting period).
The Company accounts for stock-based compensation
issued to non-employees and consultants in accordance with the provisions of ASC 505-50, "
Equity – Based Payments
to Non-Employees"
Measurement of share-based payment transactions with non-employees is based on the fair value of whichever
is more reliably measurable: (a) the goods or services received; or (b) the equity instruments issued. The fair value of the share-based
payment transaction is determined at the earlier of performance commitment date or performance completion date.
Fair Value of Financial Instruments
The Company adopted the framework for measuring
fair value that establishes a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value.
The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level
1 measurements) and lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy
are described below:
Basis of Fair Value Measurement
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·
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Level 1 - Observable inputs that reflect quoted prices (unadjusted) for identical assets or liabilities in active markets.
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·
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Level 2 - Inputs reflect quoted prices for identical assets or liabilities in markets that are not active; quoted prices for similar assets or liabilities in active markets; inputs other than quoted prices that are observable for the asset or the liability; or inputs that are derived principally from or corroborated by observable market data by correlation or other means.
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·
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Level 3 - Unobservable inputs reflect the Company’s own assumptions incorporated in valuation techniques used to determine fair value. These assumptions are required to be consistent with market participant assumptions that are reasonably available.
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The Company believes that the fair value of
its financial instruments comprising cash, accounts payable, and convertible notes approximate their carrying amounts. As of May
31, 2016 and 2015, the Company had no Level 1 or Level 2 financial assets or liabilities, and Level 3 financial liabilities consisted
of the Company’s derivative liability.
The following table presents the fair value measurement information
for the Company as of May 31, 2016:
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Carrying Amount
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Level 1
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Level 2
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Level 3
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Derivative liability
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$
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295,883
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$
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–
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$
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–
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$
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295,883
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The following table presents the fair value measurement information
for the Company as of May 31, 2015:
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Carrying Amount
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Level 1
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Level 2
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Level 3
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Derivative liability
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$
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–
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$
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–
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$
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–
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$
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–
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Income Taxes
Deferred tax assets and liabilities are recorded
based on the differences between the financial statement and tax basis of assets and liabilities and the tax rates in effect when
these differences are expected to reverse. Deferred tax assets are reduced by a valuation allowance if, based on the weight
of available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Loss per Share
Basic loss per common share equals net loss
divided by weighted average common shares outstanding during the period. Diluted loss per share includes the impact on dilution
from all contingently issuable shares, including options, warrants and convertible securities. The common stock equivalents from
contingent shares are determined by the treasury stock method. The Company incurred net losses for the years ended May 31, 2016
and 2015, and therefore, basic and diluted loss per share for those periods are the same as all potential common equivalent shares
would be antidilutive. For the year ended May 31, 2016 the Company had 33,000 common stock warrants outstanding that were excluded
from the calculation of diluted net loss per share because to do so would be anti-dilutive. The Company had no potentially dilutive
securities, such as options or warrants, currently issued and outstanding as of May 31, 2015.
Recent Accounting Pronouncements
In April 2015, the FASB issued ASU No. 2015-03,
Simplifying the Presentation of Debt Issuance Costs, and in August 2015 issued ASU No. 2015-15, Presentation and Subsequent Measurement
of Debt Issuance Costs Associated with Line-of-Credit Arrangements. Under ASU 2015-03, debt issuance costs reported on the consolidated
balance sheet would be reflected as a direct deduction from the related debt liability rather than as an asset. While ASU 2015-03
addresses costs related to term debt, ASU No. 2015-15 provides clarification regarding costs to secure revolving lines of credit,
which are, at the outset, not associated with an outstanding borrowing. ASU No. 2015-15 provides commentary that the SEC staff
would not object to an entity deferring and presenting costs associated with line-of-credit arrangements as an asset and subsequently
amortizing them ratably over the term of the revolving debt arrangement. The Company has elected to implement ASU No. 2015-03 effective
August 20, 2015 and the financial statements as of May 31, 2016 reflect the early adoption.
The Company does not expect the adoption of
any recently issued accounting pronouncements to have a significant impact on its financial position, results of operations or
cash flows.
Reclassifications
Certain reclassifications may have been
made to the prior year financial statements to conform to the current year presentation.
Subsequent Events
The Company has evaluated all transactions
through the date the consolidated financial statements were issued for subsequent event disclosure consideration.
NOTE 3 – GOING CONCERN AND LIQUIDITY
CONSIDERATIONS
The accompanying consolidated financial
statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of
liabilities in the normal course of business. The Company has a cumulative net loss since inception of $11,183,996, negative
working capital of $857,121 and is currently in default on its convertible debt and has required additional capital raises
and advances from shareholders’ to support its operations. These factors raise substantial doubt about the
ability of the Company to continue as a going concern for a reasonable period of time. The Company’s
continuation as a going concern is dependent upon its ability to generate revenues and its ability to continue receiving
capital from shareholders and other related parties and obtain financing from third parties. No assurance can be
given that the Company will be successful in these efforts.
The consolidated financial statements do not
include any adjustments relating to the recoverability and classification of recorded asset amounts or the amounts and classification
of liabilities that might be necessary should the Company be unable to continue as a going concern.
NOTE 4 – COMMITMENTS AND CONTINGENCIES
License Agreement with Northwestern University
On January 26, 2015, the Company entered into
a license agreement with Northwestern University (“Northwestern”). Northwestern is the owner of certain patents and
grants for cancer treatments of which the Company has obtained an exclusive license under a Patent Rights agreement and a non-exclusive
license under a Know-How agreement (together the “Licensed Product”).
According to the agreement, the Company must
reach the following milestones to maintain the licenses:
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a)
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Raise funds of at least $3 million by January 26, 2016. (The Company plans to request an extension from Northwestern but there is no guarantee that such extension will be granted);
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b)
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Initiate good laboratory practices in preclinical studies with a Licensed Product within 18 months of the closing date;
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c)
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File an Investigational new drug application within 4 years of the closing date;
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d)
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First dosing of a patient in a phase I clinical trial for a Licensed Product within 5 years of the closing date;
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e)
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First dosing of a patient in a phase II clinical trial for a Licensed Product within 6 years of the closing date;
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f)
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First dosing of a patient in a phase III clinical trial for a Licensed Product within eight years of the closing date;
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g)
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Submit a new drug application for a Licensed Product within 10 years of the closing date;
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h)
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Complete and submit to Northwestern a business plan for commercialization of a Licensed Product within 1 year of submission of a new drug application (“NDA”) for such Licensed Product.
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In consideration of the license granted by
Northwestern, the Company shall pay to Northwestern the following:
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a)
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A non-creditable, non-refundable licensing fee of $24,000 within 30 days of the closing date. The license fee was paid during the year ended May 31, 2014 and recorded as a license deposit. On January 26, 2015, the license deposit was capitalized as part of the intangible license purchase upon closing of the transaction.
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b)
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In partial consideration of the grant of the exclusive rights and license to the assigned patent rights and non-exclusive license to the know-how of Northwestern, the Company agreed to issue Northwestern a number of shares of its common stock that will represent 2% of the total outstanding shares of the Company and, in consideration of Dr. Sui Huang’s role as co-founder and in anticipation of entering into a research agreement with Northwestern to support research in Dr. Sui Huang’s laboratory, the Company will issue to Dr. Sui Huang a number of shares of common stock that will represent 2% of the total outstanding shares of the Company; The fair value of the 186,282 common shares, based on the January 26, 2015 closing stock price of $2.01, was $374,427. The Company recorded an intangible license asset in the amount of $187,214 for the shares owed to Northwestern and recorded share-based compensation of $187,213 for the shares owed to Dr. Sui Huang. As of May 31, 2015, none of these shares had been issued and a stock payable in the amount of $374,427 was recorded. On September 12, 2015, one of the Company’s shareholders, and former Chairman of the Board, transferred 186,282 common shares of his own on behalf of the Company for the 4% of outstanding shares to be issued above.
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c)
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The Company shall pay to Northwestern a non-creditable, non-refundable annual maintenance fee on each anniversary of the closing date according to the following schedule until the Company receives regulatory approval from the Federal Drug Administration (or foreign equivalent) (“Regulatory Approval”) of the first Licensed Product(s):
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Time Periods
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Amount
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1st anniversary
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0
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2nd-4th anniversaries
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$7,000
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5th and 6th anniversaries
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$25,000
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7th anniversary and each year thereafter
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$50,000
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In the first full calendar year following
Regulatory Approval, Northwestern shall credit 1/12 of the annual maintenance fee paid by the Company against the minimal royalty
payments (see item (e) below) due for each full month remaining between January 1 of that year and the anniversary of the closing
date.
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d)
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The following non-creditable and non-refundable milestone payments upon the achievement of particular milestones in the development of Licensed Products (none of which have occurred as of May 31, 2015 and through the date of this filing):
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(1)
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$25,000 upon filing of Investigational new drug application for a Licensed Product
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(2)
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$50,000 upon dosing first patient in Phase I trial (or foreign equivalent) for a Licensed Product
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(3)
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$100,000 upon dosing first patient in Phase II trial (or foreign equivalent) for a Licensed Product
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(4)
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$250,000 upon dosing first patient in Phase III trial (or foreign equivalent) for a Licensed Product
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(5)
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$1,500,000 upon Regulatory Approval of a Licensed Product
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e)
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Beginning the first full calendar year after Regulatory Approval of a Licensed Product in the United States, Canada, Japan, France, Germany, United Kingdom, Australia, or Italy, or the year 2025, whichever comes first, the Company shall pay to Northwestern minimum royalty payments of $200,000 per year, on a quarterly basis.
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f)
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The Company will reimburse Northwestern's out of pocket patent expenses totaling approximately $25,000 as of November 18, 2014. All future patent costs for the preparation, filing, prosecution, and maintenance of the Patent rights, shall be borne by the Company. Payment of out of pocket patent expenses will be deferred until the earlier of a) the date the Company closes on its first round of financing after the closing date or b) one year from the closing date. None of these events have occurred as of May 31, 2015 and through the date of this filing and the $25,000 reimbursement remains in deferral.
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g)
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A running royalty of (a) 5% of net sales of Licensed Products if such Licensed Product is covered by patent rights in the country where such Licensed Product is manufactured or sold and (b) 2% of net sales of Licensed Products in all other countries. In the event that Licensee enters into other license agreements) with third parties with respect to intellectual property which in the Company's opinion is legally required for the manufacture, use or sale of Licensed Product(s), the Company may offset amounts paid to such third parties against earned royalties due Northwestern hereunder, by reducing Licensee's obligation to Northwestern by 0.25% for each 1% of royalty rate payable to third parties; provided, however, that in no event will the royalty rate otherwise due to Northwestern be less than 2.5%;
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h)
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In addition to the running royalties described above, 15% of any payments, including, but not limited to, sublicense issue fees or milestones received from sub licensees as consideration for Patent Rights or Licensed Products prior to filing of an NDA; 5% after filing an NDA;
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i)
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In the event of a corporate partnership for the development and/or commercialization of a Licensed Product, 10% of any payments received from such corporate partner as consideration for patent rights or Licensed Products. Payments received by the Company for equity and payments allocated solely for research are excluded;
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j)
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The Company subject to certain payments if the Company issues sublicenses, permit assignments on the agreement, or in the event of a corporate partnership for the development and /or commercialization of a licensed product;
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k)
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In the event of a permitted assignment of the agreement, 10% of any payments received from such assignee as consideration for patent rights or Licensed Products.
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The agreement will continue in effect, on a
country-by country basis, until the expiration of the last to expire of patent rights.
The Northwestern License required that the
Company raise $3,000,000 dollars prior to the one year anniversary of the agreement on January 26, 2016. The Company did not raise
the requisite amount of capital and is in default on the license agreement. Although the Company has not received a notice of default
from Northwestern regarding the default, in the first months of fiscal year 2016, the Company recognized an impairment charge of
$198,820 related to the Northwestern License, which represents the net book value of the intangible asset. However, we maintain
a close relationship with Northwestern, as they are a significant shareholder in the Company, and the Inventor of the Licensed
Products sits on our Board of Directors as well as a Professor of Hematology at the Feinberg Medical School (Northwestern’s
medical school).
Blue Print Partners Group
On April 7, 2015, the Company entered into
a twelve-month consulting agreement with Blue Print Partners and its principal, Tim Boyd, to assist in, among other items, the
daily merger and acquisition activities of the Company, raising capital, and the possible acquisition of pre-identified biotech
assets. Mr. Boyd was to be paid a signing fee of 6,250 shares of the Company’s common stock with a fair value of $50,000
on closing and a retainer of $12,500 per month plus out-of-pocket costs. Mr. Boyd would also have been entitled to various
success fees ranging from seven percent (7%) to ten percent (10%), based on the type of transaction, of the total value of any
transaction, and would be payable in shares of the Company’s common stock. Mr. Boyd would have earned a success fee of $100,000
plus 10% of the transaction value in the Company’s stock in the event of a closing of a transaction of an acquisition of
an agreed upon target company, a success fee upon the closing of a financing of 5% cash or 10% in Company stock (7% cash or 12%
stock for Mezzanine or Equity financing) if Boyd had introduced us to the investor or lender, or a success fee of $100,000 on
the sale of any of the Company assets through Mr. Boyd. None of these potential targets had been met by Mr. Boyd prior to the
termination of this Agreement. Due to Mr. Boyd’s improper and unauthorized activities in a number of transactions, the Company
terminated this agreement on August 18, 2015, and informed Mr. Boyd he would not be receiving any shares and the Company demanded
the return of $10,000 delivered to Mr. Boyd for the purposes of legal fees for a possible transaction. The Company has instituted
legal proceedings against Mr. Boyd due to a pattern of conduct by Mr. Boyd after the consulting agreement was signed that the
Company believes was wholly improper and is seeking significant damages from Mr. Boyd for damages caused due to his actions. The
Company recorded a stock payable of $50,000 for the 6,250 signing fee shares and accrued $25,000 for the April and May retainer
amounts due under the agreement as of May 31, 2015. During the nine months ended February 29, 2016, the Company accrued an additional
$50,000 for monthly retainers, pending resolution of this matter. On July 6, 2015, the Company issued 6,250 common shares for
the $50,000 stock payable recorded as of May 31, 2015. The Company filed a 30-day notice of termination on August 31, 2015, and
per the terms of the agreement, the contract was terminated on September 30, 2015. Accordingly, the Company reversed the stock
payable and accrued compensation as of May 31, 2016.
License Agreement with University of Rochester
On April 16, 2015, the Company entered into
an exclusive patent license agreement with University of Rochester (“Rochester”). Rochester grants to the Company a
worldwide exclusive, royalty-bearing license, with the right to sublicense, for patents and technology related to the treatment
of diabetes (the “Patent Products”). According to the agreement, the Company will reimburse Rochester for all mutually
agreed fees and costs relating to the filing, prosecution, and maintenance of patent applications, including without limitation,
interferences, oppositions, and reexaminations, and the maintenance and defense of patents in patent rights, including fees and
cost incurred on, and after the closing date of the agreement.
As partial consideration for the rights conveyed
by Rochester under this agreement, the Company agreed to issue 25,437 shares of the Company’s common stock to Rochester as
a one-time, non-refundable, non-creditable license issue fee valued at $200,000 based upon the average price per share during the
week preceding the closing date, which was $7.86. Rochester may not transfer the shares before August 30, 2016. The Company
capitalized the $200,000 as an intangible license asset on the consolidated balance sheet.
In addition to the above license fee, for the
term of the agreement on an annual basis measured from the closing date of the agreement, the Company will pay at the beginning
of the following year a non-refundable minimum annual maintenance fee of $15,000 in cash or Company stock each year prior to the
onset of clinical trials. Rochester will waive the pre-clinical trial annual maintenance fee if the Company spends at least $200,000
annually on the drug development that would impinge the patent rights conveyed. After onset of clinical trials, the Company
will pay a non-refundable minimum annual maintenance fee of $25,000 in cash or Company stock each year or part of year until the
first product is commercialized and sales royalty payments begin. Annual maintenance fees paid in cash will be credited against
the costs of maintaining the Patent Rights for that year.
During the term of this Agreement, the Company
agreed to pay to Rochester an earned royalty of 5% of the first $10,000,000, 4% of the second $10,000,000, 3% of the third $10,000,000,
2% of the fourth $10,000,000 in net sales revenue produced from Patent Products, and l % of all remaining net sales revenue produced
from Patent Products. Earned royalty payments are due and payable within 30 days of the end of each calendar quarter.
The Company agreed to pay to Rochester 50%
of all cash and non-cash consideration derived from sublicenses granted by the Company in Patent Products, excluding earned royalties,
loans, equity investments, and research and development support.
The Company agreed to pay Rochester the milestone
payments per product as set forth below:
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a)
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If the Company sponsors Phase I, II and III clinical trials, the Company will pay $500,000 within 30 days of approval of any Patent Product;
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b)
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If the Company sells a controlling interest in or sublicenses substantially all of the Patent Products before the initiation of Phase II clinical trial, the Company will pay:
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1)
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$200,000 within 30 days of initiation of Phase II clinical trial;
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2)
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$200,000 within 30 days of initiation of Phase III clinical trial; and
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3)
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$300,000 within 30 days of approval of a Patent Product
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As of May 31, 2016, and through the date of
this filing, none of the milestones noted above for Rochester have been met.
The term of this Agreement will commence on
the closing date and will end upon the latest of (i) expiration of the last-to-expire valid claim of the Patent Products; or (ii)
the 10 year anniversary of commercial launch of any Patent Product.
The University of Rochester License required
that the Company spend $200,000 annually on drug development or pay an annual maintenance fee of $15,000 in cash or an equivalent
number of the Company’s common stock. The Company has defaulted on these requirements. Although the Company has not received
a notice of default from Rochester regarding the default, the Company recognized an impairment charge of $191,667 related to the
Rochester License, which represents the net book value of the intangible license, during the year ended May 31, 2016.
Alchemia Oncology / Blueprint Partners
Dispute
On June 27, 2015, the Company entered into
a binding term sheet to acquire Alchemia Oncology Pty LTD (“Alchemia”), a subsidiary of Alchemia LTD listed on the
Australian Stock Exchange (the “Alchemia Term Sheet”). The transaction was brought to the Company by Tim Boyd of Blueprint
Partners, whom the Company engaged to seek potential acquisitions of Australian biotechnology candidates on a success fee basis,
see Note 4. Mr. Boyd identified and negotiated directly with Alchemia and agreed on the transaction terms. Mr. Boyd subsequently
presented those terms to the Company. Mr. Boyd guaranteed the due diligence and a financing of $10,000,000 should the Company engage
in the transaction, with a short term guarantee of $500,000 simply to execute the term sheet. The agreement that Mr. Boyd negotiated
required a final mutually agreed upon asset purchase agreement containing certain milestone achievements in the short term, including
but not limited to, a filing of an S-1 registration statement and applying for a listing on the NASDAQ. The acquisition consideration
was $15,000,000 worth of the Company’s common shares. The guaranteed price of the first tranche of the Blueprint Partners
financing was $5 per share. The Company believed the transaction to be of minimal risk. However, the initial failure of Blueprint
to deliver the financing, of which an initial $500,000 was guaranteed with five days from the date of the signing of the term sheet,
resulted in the failure to achieve certain milestones per the term sheet which then subjected the Company to a breakup fee of $500,000.
The Company takes the position that it is not liable if such fee were ever pursued due to the failure of Blueprint to deliver the
financing. The Company was unable to agree upon the terms of the asset purchase agreement as well as unable to achieve the milestones
on a timely basis due to both Alchemia withholding critical data and Mr. Boyd improperly misrepresenting his ability to deliver
the requisite financing concurrent with the execution of the term sheet. In addition, the Company discovered questionable board
relationships and practices amongst Alchemia and Mr. Boyd. Also, certain statements and actions from Alchemia appeared contradictory
to the expectations of the relationship. The Company made every attempt to resolve the situation, however, the Company suspects
that possible collusion amongst the parties made the transaction absolutely impossible to consummate. Currently there is no negotiation
or agreement in place. The Company believes it is entitled to damages and has initiated litigation against Tim Boyd and Blueprint
Partners and is evaluating whether other parties should be part of the litigation in any capacity. This is not expected to have
a material impact on the Company.
In December 2015, the Company received a demand
letter for payment under the Alchemia Term Sheet demanding $500,000 for the breakup fee and an additional $75,000 for operational
expenses. The Company has delivered a demand letter to Alchemia asserting its rights to void the agreement in light of irregularities
that have been brought to the Company’s attention. Neither Alchemia nor the Company have initiated legal action regarding
the Alchemia Term Sheet. The Company intends to mount a vigorous defense in the event that suit is brought by Alchemia and will
pursue counterclaims against Alchemia in the event a lawsuit is filed against the Company by Alchemia.
Faulk Pharmaceuticals
On July 14, 2015, the Company closed on an
asset acquisition agreement with Faulk Pharmaceuticals, Inc. (“Faulk”). The assets include 23 granted patents owned
by Faulk, related to the treatment of cancer, virus infections, and treatment of parasitic infections.
.
The Company issued 50,000 shares of restricted
common stock, with a fair market value of $274,000 based on our stock closing price of $5.48. The shares may be sold by Faulk,
assigned or transferred in accordance with securities laws and vests monthly over the following schedule:
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1)
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33% of the shares beginning 6 months after the closing date
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2)
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an additional 33% of the shares beginning 9 months after the closing date
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3)
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the remaining 34% of the shares beginning 12 months after the closing date
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For each calendar year continuing until the
date that is 10 years after the expiration of the last of the patents conveyed to the Company, a royalty on net revenue received
by the Company in that year from the sales or licenses of any products commercialized by the Company, its successors or assignees
as a direct result of the assets acquired or the technology or processes related to the assets acquired, in the following amount:
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1)
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5% of the first $10,000,000 in such net revenue;
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2)
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4% of the second $10,000,000 in such net revenue
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3)
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3% of the third $10,000,000 in such net revenue
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4)
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2% of the forth $10,000,000 in such net revenue and
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5)
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1% of such net revenue in excess of $40,000,000
|
Excelsior Global Advisors
On September 1, 2015, the Company entered into
a Master Services Agreement with Excelsior Global Advisors LLC (“Excelsior”). Excelsior will provide investor
relations services in consideration for:
|
(a)
|
$35,000 cash payment due on signing and the 1st day of each month, subject to (c) below.
|
|
(b)
|
15,000 shares of the Company’s common stock that will be eligible for Rule 144 as promulgated under the Securities Act of 1933, as amended, earned on the first day of the month and deliverable by the 20th day of each month during the term of this agreement.
|
|
(c)
|
Excelsior acknowledges that the Company will defer the cash payment due each month until the Company raises a minimum of $3 million. This deferral will continue until a minimum of $3 million has been raised.
|
|
(d)
|
The Company will reimburse Consultant for any pre-approved, in writing, travel or other expenses and the Consultant shall submit such expenses to the Company monthly for reimbursement.
|
The parties have reached an oral understanding
that the cash compensation will be deferred until such time as the Company is current in its SEC filings and able to enter into
a search for financing transactions. The initial term of the Master Services Agreement is six months with an additional six-month
continuation unless terminated by either party in writing. This agreement is no longer in effect.
Stock Purchase Agreement
On August 28, 2015, the Company entered
into a Stock Purchase Agreement with a private non-affiliated investor to sell 33,000 shares of the Company’s common
stock, at a price of $5.00 per share. The closing occurred on August 28, 2015. The investor also received a common
stock purchase warrant for the right to purchase 33,000 shares at a purchase price of $6.00 per share. The warrant
expires on August 27, 2020. The investor also received 22,000 shares of the Company’s common stock, with a fair
market value of $112,200 based on our stock closing price of $5.10 that vested over six months, as consideration for a one
year consulting agreement to the Company. The investor has agreed to assist the Company in the capacity of investor
relations, introductions to potential public market investors in the Chicago area, business development and facilitating with
potential synergistic corporate alliances, and potential alliances with medical practices, etc. in the Chicago area.
Officer Compensation
In November 2015, the Compensation Committee
authorized compensation for Mr. Levine, the Chief Executive Officer of the Company and Mr. Ruben, the former Chief Financial Officer
and former General Counsel of the Company, as follows:
|
·
|
A $25,000 lump sum payment to be payable in November or December 2015 (both payments were made on November 22, 2015)
|
|
·
|
2016 salary established at $15,000 per month commencing January 15, 2016
|
|
·
|
Healthcare reimbursement of $1,000 per month
|
|
·
|
2016 bonus, if warranted, will be determined at the discretion of the compensation committee of the Board of Directors and paid in a lump sum in November or December 2016.
|
In March 2016, Mr. Ruben resigned from his
position as Chief Financial Officer and General Counsel of the Company. In April 2016, the Company retained Steven M. Plumb, CPA
as Chief Financial Officer, through a contract with his consulting firm, Clear Financial Solutions, Inc. (“Clear Financial”).
Clear Financial is paid $6,000 per month for Mr. Plumb’s services. In addition, Mr. Plumb was awarded a stock grant for 180,000
shares of the Company’s commons stock, vesting equally over 36 months. The Company has recognized $9,710 in stock based compensation
related to Mr. Plumb’s stock grant during the year ended May 31, 2016.
Clear Financial Solutions Agreement
On March 21, 2016, the Company, entered into
an engagement letter with Clear Financial Solutions, Inc. Under the Engagement Letter, Clear Financial will provide certain financial
consulting services to the Company and Mr. Steven M. Plumb, founder and President of Clear Financial, will serve as the Chief Financial
Officer of the Company. Clear Financial will, among other things, prepare and review the Company’s financial statements,
oversee internal accounting controls and provide advice on generally accepted accounting principles. In addition, Mr. Plumb will
execute the certifications required by Form 10-K and Form 10-Q pursuant to the requirements of the Securities Exchange Act of 1934
and Section 302 of the Sarbanes-Oxley Act of 2002. As compensation for the services provided, the Company will pay Clear Financial
a fee of $6,000 per month and has agreed to issue up to 180,000 shares of the Company’s common stock, par value $0.001 per
share (the “Common Stock”), to Mr. Plumb. The Engagement Letter has an initial term of one year and will automatically
renew for successive one-year periods until terminated by either party upon 60 days’ written notice prior to the end of the
then current term.
Loan Default
On March 30, 2016, the Company received a
notice of default, as of August 29, 2015, from our convertible note holder. The default occurred when we failed to file our Form
10-K and 10-Q’s on a timely basis. As a result of the default, the interest rate of the debt was increased to 22% and the
Company incurred additional penalty interest in the amount of $260,732 during the nine months ended February 29, 2016. The total
amount due to the lender for principal and accrued interest, as a result of the default, is $514,460 as of May 31, 2016.
NOTE 5 – INTANGIBLE ASSETS
Intangible assets consisted of the following as of May 31, 2016
and 2015:
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
Intangible license (Northwestern transaction, see Note 4)
|
|
$
|
214,121
|
|
|
$
|
211,214
|
|
Intangible license - Rochester University (see Note 4)
|
|
|
200,000
|
|
|
|
200,000
|
|
Patents - Faulk Pharmaceuticals (see Note 4)
|
|
|
274,000
|
|
|
|
–
|
|
Accumulated amortization and impairment
|
|
|
(438,096
|
)
|
|
|
(10,374
|
)
|
Intangible assets, net
|
|
$
|
250,025
|
|
|
$
|
400,840
|
|
The Company is amortizing the intangible licenses
over the 10 year term of the license agreements with Northwestern and Rochester, see Note 4. The Company recorded amortization
of $34,328 and $10,374, respectively, for the years ended May 31, 2016 and 2015.
The Northwestern License required that the
Company raise $3,000,000 prior to the one-year anniversary of the agreement on January 26, 2016. The Company did not raise the
requisite amount of capital and is in default on the license agreement. Although the Company has not received a notice of default
from Northwestern regarding the default, the Company recognized an impairment charge of $198,820 related to the Northwestern License,
which represents the net book value of the intangible license. The Company is reevaluating the license.
The University of Rochester License required
that the Company spend $200,000 annually on drug development or pay an annual maintenance fee of $15,000 in cash or an equivalent
number of the Company’s common stock. The Company has defaulted on these requirements. Although the Company has not received
a notice of default from Rochester regarding the default, the Company recognized an impairment charge of $191,667 related to the
Rochester License, which represents the net book value of the intangible license. The Company is reevaluating the license.
NOTE 6 – RELATED PARTY TRANSACTIONS
As of May 31, 2016 and 2015, total advances
from certain officers, directors and shareholders of the Company were $87,500, which was used for payment of general operating
expenses. The related parties advances have no conversion provisions into equity, have no paperwork associated with them
and do not incur interest.
During the year ended May 31, 2015, the
Company recorded invoices for legal fees from the law firm of our former chief financial officer totaling $24,071,
respectively, and included them in related party payables. In March 2016, the former chief financial officer resigned his
position with the Company and agreed to refund $40,000 in legal fees paid to his law firm and returned 195,000 shares of the
Company’s common stock previously issued to him.
During the year ended May 31, 2016, the Company has recorded
as $93,000 in compensation expense related to the employment agreement with the chief executive officer and $20,000 in compensation
expense related to the contract with the chief financial officer.
During the year ended May 31, 2016, the Company recognized
$1,901,600 and $9,710 in share based compensation related to the stock grants made to the chief executive officer and the chief
financial officer, respectively.
Accounts payable – related party reflects
amounts due to our CEO and CFO of $20,003 as of May 31, 2016 and $24,071 due to the law firm of our former chief financial officer
as of May 31, 2015.
Stock payable – related party reflects
stock compensation earned for which the shares had not been issued to officers and directors of $60,287 and $3,661,702 at May
31, 2016 and 2015, respectively.
NOTE 7 – STOCK PAYABLE
On January 26, 2015, the Company entered
a license agreement with Northwestern University, see Note 4. As part of the agreement, the Company agreed to issue 186,282 shares,
for which it recorded as an intangible license asset in the amount of $187,214 for the shares owed to Northwestern and recorded
share-based compensation of $187,213 for shares owed to Dr. Sui Huang. As of May 31, 2015, none of these shares had been
issued and a stock payable in the amount of $374,427 was recorded. On September 12, 2015, one of the Company’s shareholders,
and former Chairman of the Board, transferred 186,282 common shares of his own on behalf of the Company for the 4% of outstanding
shares to be issued above.
On February 4, 2015, the Board of Directors
approved the issuance of 1,320,000 shares of restricted common stock, with a fair market value of $3,432,000 based on our stock
closing price of $2.60, to the directors and the Chairman of the board for their services. The shares will vest monthly and be
amortized over the following periods:
|
1)
|
33% of the restriction will be removed on February 4, 2016,
|
|
2)
|
an additional 33% of the restriction will be removed on February 4, 2017,
|
|
3)
|
and the final 34% of the restriction will be removed on February 4, 2018.
|
On February 12, 2015, the Board of Directors
approved the issuance of 280,000 shares of restricted common stock, with a fair market value of $1,069,600 based on our stock closing
price of $3.82, to the CEO for services. The shares will vest monthly and be amortized over the following periods:
|
1)
|
33% of the restriction will be removed on February 12, 2016,
|
|
2)
|
an additional 33% of the restriction will be removed on February 12, 2017,
|
|
3)
|
and the final 34% of the restriction will be removed on February 12, 2018.
|
On April 2, 2015, the Board of Directors
approved the issuance of 260,000 shares of restricted common stock, with a fair market value of $1,807,000 based on our stock closing
price of $6.95, to a consultant and the CFO of the Company for services. The shares will vest monthly and be amortized over the
following periods:
|
1)
|
33% of the restriction will be removed on April 2, 2016,
|
|
2)
|
an additional 33% of the restriction will be removed on April 2, 2017,
|
|
3)
|
and the final 34% of the restriction will be removed on April 2, 2018.
|
On December 11, 2015, all unvested
stock grants that were outstanding on May 31, 2015 were modified such that all grants became fully vested.
As of May 31, 2015, a stock payable in the amount of $1,047,167
was recorded for the vested shares related to the transactions above on February 4th, February 12th, and April 2nd, for
which none of the shares had been issued as of May 31, 2015. Unamortized share-based compensation of $5,009,720 remained
as of May 31, 2015 for unvested common shares.
On April 16, 2015, the Company agreed to
issue 25,437 shares of the Company’s common stock to Rochester as a one-time, non-refundable, non-creditable license issue
fee valued at $200,000 based upon the average price per share during the week preceding the closing date, which was $7.86, see
Note 4. The Company capitalized the $200,000 as an intangible license asset on the consolidated balance sheet.
During the year ended May 31, 2015, the
Company granted 488,340 common shares to various individuals for services with a fair value of $2,856,789. The shares had
not been unissued as of May 31, 2015 and a stock payable was recorded.
During the year ended May 31, 2016, the
Company issued 320,511 common shares for the settlement of $1,236,880 of stock payable that was recorded as of May 31, 2015. The
Company recorded an additional payable of $223,643 during the year ended May 31, 2016 for 88,000 common shares which it is obligated
to issue to various consultants.
On September 12, 2015, a shareholder of
the Company issued 674,622 common shares (488,340 of the shares were related to services and 186,282 were related to the Company’s
license purchase from Northwestern University) of his own on the Company’s behalf for the settlement of $3,231,217 of stock
payable recorded as of May 31, 2015. The settlement of this stock payable by the shareholder was recorded as contributed capital.
NOTE 8 – CONVERTIBLE NOTE PAYABLE
|
|
May 31,
|
|
|
May 31,
|
|
Description
|
|
2016
|
|
|
2015
|
|
On August 20, 2015, the Company executed a convertible note payable in the original principal amount of $247,000 for net proceeds of $220,000, payable on March 31, 2018 bearing interest at 10% per annum. This note is convertible into the Company’s common stock at $7.50 per share unless the market capitalization of the Company falls below $15,000,000, at which point the conversion price will equal the market price of the Company’s common stock on the date of conversion. On October 29, 2015, the market capitalization of the Company fell below $15,000,000 and the variable conversion feature became permanent. The note is unsecured.
Convertible note payable
|
|
$
|
207,750
|
|
|
$
|
–
|
|
Less: Original issue discount
|
|
|
(22,000
|
)
|
|
|
–
|
|
Less: Debt discount from derivative liability
|
|
|
(220,000
|
)
|
|
|
–
|
|
Less: Deferred financing cost
|
|
|
(5,000
|
)
|
|
|
–
|
|
Add: Amortization of debt discount and deferred financing cost
|
|
|
104,548
|
|
|
|
–
|
|
Total convertible notes payable, net
|
|
$
|
65,298
|
|
|
$
|
–
|
|
On March 30, 2016, the Company received a notice
of default, as of August 29, 2015, from our convertible note holder. The default occurred when we failed to file our Form 10-K
and 10-Q’s on a timely basis. As a result of the default, the interest rate of the debt was increased to 22% on August 29,
2015 and the Company incurred additional penalty interest in the amount of $260,732 during the nine months ended February 29, 2016.
The total amount due to the lender for principal and accrued interest, as a result of the default, is $514,460 as of May 31, 2016.
NOTE 9 – DERIVATIVE LIABILITIES
On August 20, 2015, the Company issued a convertible
note agreement with a variable conversion feature that gave rise to an embedded derivative instrument. The derivative feature has
been valued using a binomial lattice-based option valuation model using holding period assumptions developed from the Company's
business plan and management assumptions, and expected volatility from comparable companies including OTC Pink® and small-cap
companies. Increases or decreases in the Company's share price, the volatility of the share price, changes in interest rates in
general, and the passage of time will all impact the value of the derivative instrument. The Company re-values the derivative instrument
at the end of each reporting period and any changes are reflected as changes in derivative liabilities in the consolidated statements
of operations. The assumptions used are as follows:
|
August 20,
2015
|
|
May 31,
2016
|
Market value of common stock on measurement date (1)
|
$5.20
|
|
$0.56
|
Adjusted conversion price (2)
|
$3.5108
|
|
$0.2304
|
Risk free interest rate (3)
|
0.74%
|
|
0.68%
|
Life of the note in years
|
2.477 years
|
|
1.726 years
|
Expected volatility (4)
|
259.60%
|
|
360.57%
|
Expected dividend yield (5)
|
–
|
|
–
|
|
(1)
|
The market value of common stock is based on closing market
price as of initial valuation date.
|
|
(2)
|
The adjusted conversion price is calculated based on conversion
terms described in the note agreement.
|
|
(3)
|
The risk-free interest rate was determined by management
using the 2 year Treasury Bill as of the respective Offering or measurement date.
|
|
(4)
|
The volatility factor was estimated by management using
the historical volatilities of the Company’s stock.
|
|
(5)
|
Management determined the dividend yield to be 0% based
upon its expectation that it will not pay dividends for the foreseeable future.
|
The initial valuation of the derivative liability
was $380,995 on August 20, 2015, the date of the initial valuation, and $295,883 on May 31, 2016. The decrease of $21,595 in the
derivative liability was recorded on the consolidated statements of operations.
NOTE 10 – DISCONTINUED OPERATIONS
On June 1, 2015, the Company sold its interest
in its PubCo subsidiary for $10 to the management of Pubco. The Company recorded a loss of $80,194 on the sale of PubCo. The Company
had reclassified the results of Pubco to discontinued operations.
The summarized operating results for discontinued
operations for PubCo are as follows:
|
|
Year Ended May 31,
|
|
|
|
2016
|
|
|
2015
|
|
Revenue
|
|
$
|
–
|
|
|
$
|
387,909
|
|
Cost of revenue
|
|
|
–
|
|
|
|
86,792
|
|
Gross profit
|
|
|
–
|
|
|
|
301,117
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses
|
|
|
|
|
|
|
|
|
Selling, general and administrative
|
|
|
–
|
|
|
|
271,047
|
|
Total operating expenses
|
|
|
–
|
|
|
|
271,047
|
|
Net income (loss)
|
|
$
|
–
|
|
|
$
|
30,070
|
|
Summary of
assets and liabilities of discontinued operations is as follows:
Balance Sheet Data:
|
|
As of
May
31, 2016
|
|
|
As of
May 31, 2015
|
|
Cash
|
|
$
|
–
|
|
|
$
|
59,987
|
|
Receivables
|
|
$
|
–
|
|
|
$
|
46,295
|
|
Prepaid expenses
|
|
$
|
–
|
|
|
$
|
5,914
|
|
Total assets
|
|
$
|
–
|
|
|
$
|
112,196
|
|
Total liabilities
|
|
$
|
–
|
|
|
$
|
40,512
|
|
NOTE 11 – STOCKHOLDERS' EQUITY
On July 6, 2015, the Company issued 50,000
shares of its common stock to Faulk Pharmaceuticals, Inc. in accordance with a license agreement, see Note 4. The fair market value
of the stock on the date of grant was $274,000.
On July 6, 2015, the Company issued 25,437
shares of its common stock to the University of Rochester in accordance with a license agreement, see Note 4. The fair market
value of the stock, $200,000, on the date of grant, was accrued in stock payable on May 31, 2015.
On September
3, 2015, the Company closed on a Stock Purchase Agreement with a private non-affiliated investor to sell 33,000 shares of the
Company’s common stock, at a price of $5.00 per share. The investor paid $125,000 of the purchase price at closing,
giving rise to a stock subscription receivable of $40,000. During the year ended May 31, 2016, the subscription receivable was
collected. The investor also received a common stock purchase warrant for the right to purchase 33,000 shares at a purchase price
of $6.00 per share. The fair market value of the warrant was $171,600 on the date of grant. The warrant expires on August
27, 2020.
On September 12, 2015, a shareholder of the
Company issued 674,622 shares of his own on the Company’s behalf for the settlement of $3,231,217 of stock payable recorded
as of May 31, 2015. Of these shares, 488,340 were related to services and 186,282 were for the Company’s license purchase
from Northwestern University.
In May 2016, the Company sold 833,333 shares
of its common stock at $0.15 per share for gross proceeds of $125,000.
In May 2016, the convertible note holder submitted
a notice of conversion of $29,250 in principal. The Company issued 250,000 shares of its common stock to the note holder in conjunction
with the conversion notice.
During the year ended May 31, 2016, the Company
issued:
|
·
|
320,511 common shares for the settlement
of $1,186,881 of stock payable recorded as of May 31, 2015 for share-based compensation and purchase of intangibles.
|
|
·
|
34,873 common shares to related parties
for services. The fair value of the stock on grant date was $184,734, and was recorded as share-based compensation.
|
|
·
|
1,644,873 common shares for
services. The fair value of the stock on grant date was $6,537,913 and was recorded as share-based compensation. This includes share based compensation of $986,880 which was accrued as a stock payable as of May 31,
2015.
|
NOTE 12 – INCOME TAXES
We recognize the financial statement effects
of tax positions when it is more likely than not, based on the technical merits, that the position will be sustained upon examination
by a taxing authority. Recognized tax positions are initially and subsequently measured as the largest amount of tax benefit that
is more likely than not of being realized upon ultimate settlement with a taxing authority. We have not taken a tax position that,
if challenged, would have a material effect on the consolidated financial statements or the effective tax rate for the years ending
May 31, 2016 and 2015.
Each of the three tax years the Company has
been in operation are subject to examination by the Internal Revenue Service. The Company has net operating losses of approximately
$200,000 that begin to expire on May 31, 2031. The change in the Company’s valuation allowance for the years ended
May 31, 2016 and 2015 was $126,450 and $32,210, respectively.
The provision for income taxes differs from
the amounts which would be provided by applying the statutory federal income tax rate of 34% to the net income/(loss) before provision
for income taxes for the following reasons:
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
Income tax benefit at statutory rate
|
|
$
|
(2,369,163
|
)
|
|
$
|
(1,428,679
|
)
|
Meals and entertainment
|
|
|
(2,266
|
)
|
|
|
(1,417
|
)
|
Temporary differences
|
|
|
2,344,336
|
|
|
|
1,397,886
|
|
Change in valuation allowance
|
|
|
27,093
|
|
|
|
32,210
|
|
Income tax expense
|
|
$
|
–
|
|
|
$
|
–
|
|
Net deferred tax assets at statutory rates
consisted of the following components as of:
|
|
May 31, 2016
|
|
|
May 31, 2015
|
|
NOL carryover
|
|
$
|
69,642
|
|
|
$
|
42,549
|
|
Valuation allowance
|
|
|
(69,642
|
)
|
|
|
(42,549
|
)
|
Net deferred tax asset
|
|
$
|
–
|
|
|
$
|
–
|
|
NOTE 13 – SUBSEQUENT EVENTS
In June and July 2016, the Company sold 450,000
shares of common stock for gross proceeds of $67,500.
On July 8, 2016, the Company entered into an
agreement with a consultant to develop an IND for TRF-DOX in use as a treatment for ovarian cancer and to prepare for a pre-IND
meeting with the FDA related to TRF-DOX. The agreement calls for the Company to pay $487,500 for these services, as follows:
|
·
|
$90,000 is due upon completion of the work necessary to conduct a
pre-IND meeting with the FDA;
|
|
·
|
$322,500 is due upon IND submission;
|
|
·
|
$37,500 is due upon design of nonclinical toxicology study; and
|
|
·
|
$37,500 is due upon the identification of a manufacturing
site
|
All payments are to be made in a form consisting
of 1/3 cash and 2/3 in the common stock of the Company. In addition, the Company agreed to pay the consultant a signing bonus of
20,000 shares of its common stock upon execution of the agreement.