NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 1 – NATURE OF BUSINESS
PharmaCyte Biotech, Inc. (“Company”)
is a biotechnology company focused on developing and preparing to commercialize cellular therapies for cancer and
diabetes based upon a proprietary cellulose-based live cell encapsulation technology known as “Cell-in-a-Box
®
.”
The Company intends to use the Cell-in-a-Box
®
technology as a platform upon which treatments for several types of
cancer and diabetes will be developed.
The Company is developing therapies for
solid tumor cancers involving the encapsulation of live cells placed in the body to enable the activation of cancer-killing drugs
at the source of the cancer. The Company is also developing a therapy for Type 1 diabetes and insulin-dependent Type 2 diabetes
based upon the encapsulation, using the Cell-in-a-Box
®
technology, of a human cell line genetically engineered to
produce, store and secrete insulin at levels in proportion to the levels of blood sugar in the human body. The Company is also
working on an alternative route to bring a biological treatment for diabetes into the clinic. The Company is exploring the possibility
of encapsulating human insulin-producing islet cells or stem cells and transplanting them into a diabetic patient. In addition,
the Company is examining ways to exploit the benefits of the Cell-in-a-Box
®
technology to develop therapies for
cancer based upon the constituents of the
Cannabis
plant, known as “Cannabinoids.”
Cancer Therapy
Targeted Chemotherapy
The Company is using the Cell-in-a-Box
®
technology to develop a therapy for solid cancerous tumors through a form of targeted chemotherapy. For pancreatic cancer,
the Company is encapsulating genetically engineered live human cells that produce an enzyme designed to convert the prodrug ifosfamide
into its cancer-killing form. The capsules containing these cells will be implanted in a patient in the blood supply as near as
possible to the pancreas tumor; these encapsulated cells will form the target for the cancer prodrug ifosfamide. The ifosfamide
will then be given intravenously at one-third the normal dose. In this way, it is believed that the ifosfamide will be converted
at the site of the tumor instead of in the liver where it is normally converted. The Company believes placement of the Cell-in-a-Box
®
capsules near the tumor enables the production of optimal concentrations of the “cancer-killing” form of ifosfamide
at the site of the tumor. The cancer-killing metabolite of ifosfamide has a short half-life, which the Company believes will result
in little to no collateral damage to other organs in the body.
Pancreatic Cancer Therapy
A critical unmet medical need exists for
patients with locally advanced, inoperable non-metastatic pancreatic cancer (“LAPC”) whose pancreas tumors no longer
respond after 4-6 months of treatment with either Abraxane
®
plus gemcitabine or the 4-drug combination known as
FOLFIRINOX (both combinations are the current standards of care). These patients have no effective treatment alternative once their
tumors no longer respond to these therapies. Two of the previously used treatments for such patients are 5-fluorouiracil (“5-FU”)
or capecitabine (a prodrug of 5-FU) plus radiation (chemoradiation therapy). Both treatments are only marginally effective in treating
the tumor and result in serious side effects. More recently, radiation treatment alone is being used at some cancer centers in
the U.S. The Company is developing a therapy comprised of Cell-in-a-Box
®
encapsulated live cells implanted near
the pancreas tumor followed treatment with low doses of the cancer prodrug ifosfamide. The Company believes that its treatment
can serve as a “consolidation therapy” with the current standards of care for patients with LAPC and thus address this
critical unmet medical need.
The Company is currently working on an
Investigational New Drug Application (“IND”) to submit to the FDA to commence a clinical trial with patients with
LAPC. Subject to FDA acceptance of the IND when filed, the Company plans to commence a clinical trial involving patients with
LAPC to test this hypothesis. The trial would take place in the United States (“U.S.”) with possible study sites in
Europe.
Malignant Ascites Fluid Therapy
The Company is also developing a therapy
to delay the production and accumulation of malignant ascites fluid that results from many types of abdominal tumors. Malignant
ascites fluid is secreted by abdominal tumors into the abdomen after the tumors have reached a certain stage of growth. This fluid
contains cancer cells that can seed and form new tumors throughout the abdomen. This fluid accumulates in the abdominal cavity,
causing swelling of the abdomen, severe breathing difficulties and extreme pain.
Malignant ascites fluid must be removed
by paracentesis on a periodic basis. This procedure is painful and costly. There is no therapy that prevents or delays the production
and accumulation of malignant ascites fluid. The Company has been involved in a series of preclinical studies conducted by Translational
Drug Development (“TD2”) to determine if the combination of Cell-in-a-Box
®
encapsulated cells
plus ifosfamide can delay the production and accumulation of malignant ascites fluid. The Company plans to conduct another preclinical
study in Germany to determine if its conclusions from the TD2 studies are valid. If the preclinical studies are deemed successful
and the Company receives approval to do so from the FDA, the Company plans to conduct a clinical trial in the U.S. It also plans
to have additional study sites in Europe if the Company receive approval to do so from the European Medicines Agency.
Diabetes Therapy
Bio-Artificial Pancreas for Diabetes
The Company plans to develop a therapy
for Type 1 diabetes and insulin-dependent Type 2 diabetes. The Company is attempting to develop a therapy that involves encapsulation
of human liver cells that have been genetically engineered to produce, store and release insulin on demand at levels in proportion
to the levels of blood sugar (glucose) in the human body. The Company is also exploring the possibility of encapsulating human-insulin
producing cells (beta islet cells) and/or insulin-producing stem cells. All three types of cells will be encapsulated using the
Cell-in-a-Box
®
encapsulation technology. After appropriate animal testing has been successfully completed, encapsulated
insulin-producing cells will then be transplanted into diabetic patients. The goal for these approaches is to develop a bio-artificial
pancreas for purposes of insulin production for diabetics who are insulin dependent.
Cannabis Therapy
Cannabinoids
The Company plans to use Cannabinoids
(chemical constituents of the
Cannabis
plant) to develop therapies for cancer, with the initial target being brain cancer.
The Company is focusing on developing specific therapies based on carefully chosen molecules rather than using complex
Cannabis
extracts. Targeted cannabinoid-based chemotherapy utilizing the Cell-in-a-Box
®
technology offers a “green”
approach to treating solid-tumor malignancies. Here, the methodology of placing a target in proximity to the tumor so that a cancer
prodrug can be activated there mimics the Company’s efforts with LAPC except that in this case the cancer prodrug will be
Cannabinoid-derived.
To further its
Cannabis
therapy
development plans, the Company entered into a Research Agreement with the University of Northern Colorado. The initial goal of
the ongoing research was to develop methods for the identification, separation and quantification of constituents of
Cannabis
(some of which are prodrugs) that may be used in combination with the Cell-in-a-Box
®
technology to treat cancer;
this has been accomplished. Subsequent studies have been undertaken to identify the appropriate cell type that can convert the
selected Cannabinoid prodrugs into metabolites with anticancer activity. Once identified, the genetically modified cells that will
produce the appropriate enzyme to convert that prodrug will be encapsulated using the Company’s Cell-in-a-Box
®
technology. The encapsulated cells and Cannabinoid prodrugs identified by these studies will then be combined and used for future
studies to evaluate their anticancer effectiveness.
Company Background and Material Agreements
The Company is a Nevada corporation incorporated
in 1996. In 2013, the Company restructured its operations to focus on biotechnology. The restructuring resulted in the Company
focusing all its efforts upon the development of a novel, effective and safe way to treat various types of cancer and diabetes.
On January 6, 2015, the Company changed its name from Nuvilex, Inc. to PharmaCyte Biotech, Inc. to reflect the nature of its business.
In 2011, the Company entered an Asset Purchase
Agreement with SG Austria Private Limited (“SG Austria APA”) to purchase 100% of the assets and liabilities of SG Austria
Private Limited (“SG Austria”). Austrianova Singapore Pte. Ltd. (“Austrianova”) and Bio Blue Bird AG (“Bio
Blue Bird”), then wholly-owned subsidiaries of SG Austria, were to become wholly-owned subsidiaries of the Company on the
condition that the Company pay SG Austria $2.5 million and 100,000,000 shares of the common stock of the Company’s common
stock. The Company was to receive 100,000 shares of common stock of Austrianova and nine bearer shares of Bio Blue Bird representing
100% of the ownership of Bio Blue Bird.
Through two addenda to the SG Austria APA,
the closing date of the SG Austria APA was extended twice by agreement between the parties.
In June 2013, the Company and SG Austria
entered a Third Addendum to the SG Austria APA (“Third Addendum”). The Third Addendum changed materially the transaction
contemplated by the SG Austria APA. Under the Third Addendum, the Company acquired 100% of the equity interests in Bio Blue Bird
and received a 14.5% equity interest in SG Austria. In addition, the Company received nine bearer shares of Bio Blue Bird to reflect
its 100% ownership of Bio Blue Bird. The Company paid: (i) $500,000 to retire all outstanding debt of Bio Blue Bird; and (ii) $1.0
million to SG Austria. The Company also paid SG Austria $1,572,193 in exchange for the 14.5% equity interest in SG Austria. The
Third Addendum required SG Austria to return the 100,000,000 shares of common stock held by SG Austria and for the Company to return
the 100,000 shares of common stock of Austrianova the Company held.
Effective as of the same date of the Third
Addendum, the parties entered the Clarification Agreement to the Third Addendum (“Clarification Agreement”) to clarify
and include certain language that was inadvertently left out of the Third Addendum. Among other things, the Clarification Agreement
confirmed that the Third Addendum granted the Company an exclusive, worldwide license to use, with a right to sublicense, the Cell-in-a-Box
®
technology for the development of treatments for cancer and use of Austrianova’s Cell-in-a-Box
®
trademark
and its associated technology.
With respect to Bio Blue Bird, Bavarian
Nordic A/S (“Bavarian Nordic”) and GSF-Forschungszentrum für Umwelt u. Gesundheit GmbH (collectively, “Bavarian
Nordic/GSF”) and Bio Blue Bird entered into the Bavarian Nordic/GSF License Agreement in July 2005 whereby Bio Blue Bird
was granted a non-exclusive license to further develop, make, have made (including services under contract for Bio Blue Bird or
a sub-licensee), by Contract Manufacturing Organizations, Contract Research Organizations, Consultants, Logistics Companies or
others, obtain marketing approval, sell and offer for sale the clinical data generated from the second pancreatic cancer clinical
trial which contained proprietary information from the 1
st
Interim Analysis of the trial that used the cells and capsules
developed by Bavarian Nordic/GSF (then known as “CapCells”) or otherwise use the licensed patent rights related thereto
in the countries in which patents had been granted.
Bavarian Nordic/GSF and Bio Blue Bird amended
the Bavarian Nordic License Agreement in December 2006 to reflect: (i) the license granted was exclusive; (ii) the royalty rate
increased from 3% to 4.5%; (iii) Bio Blue Bird assumed the patent prosecution expenses; and (iv) it was made clear that the license
will survive as a license granted by one of the licensors if the other licensor rejects performance under the Bavarian Nordic License
Agreement due to any actions or declarations of insolvency.
In June 2013, the Company acquired from
Austrianova an exclusive, worldwide license to use the Cell-in-a-Box
®
technology and trademark for the development
of a therapy for Type 1 and insulin-dependent Type 2 diabetes (“Diabetes Licensing Agreement”).
In October 2014, the Company entered into
an exclusive, worldwide license agreement (“Melligen Cell License Agreement”) with the University of Technology, Sydney
(“UTS”) in Australia to use insulin-producing genetically engineered human liver cells developed by UTS to treat Type
1 diabetes and insulin-dependent Type 2 diabetes. These cells, named “Melligen,” were tested by UTS in mice and shown
to produce insulin in direct proportion to the amount of glucose in their surroundings. In those studies, when Melligen cells were
transplanted into immunosuppressed diabetic mice, the blood glucose levels of the mice became normal.
In December 2014, the Company acquired
from Austrianova an exclusive, worldwide license to use the Cell-in-a-Box
®
technology in combination with genetically
modified non-stem cell lines which are designed to activate Cannabinoid prodrug molecules for development of therapies for diseases
and their related symptoms using of the Cell-in-a-Box
®
technology and trademark (“Cannabis Licensing Agreement”).
This allows the Company to develop a therapy to treat some solid cancers through encapsulation of genetically modified cells designed
to convert Cannabinoids to their cancer killing form using the Cell-in-a-Box
®
technology. The Company paid Austrianova
$2.0 million to secure this license.
In July 2016, the Company entered into
a Binding Memorandum of Understanding with Austrianova (“Austrianova MOU”). Pursuant to the Austrianova MOU, Austrianova
will actively work with the Company to seek an investment partner or partners who will finance clinical trials and further develop
products for the Company’s therapy for cancer, in exchange for which the Company, Austrianova and any future investment partner
will each receive a portion of the net revenue of cancer products.
In October 2016, the parties amended the
Bavarian Nordic/GSF License Agreement to include the right to import, reflect ownership and notification of improvements, clarify
which provisions survive expiration or termination of the Bavarian Nordic/GSF License Agreement, to provide rights to Bio Blue
Bird to the clinical data after expiration of the licensed patent rights and to change the notice address and recipients of Bio
Blue Bird.
In May 2018, the Company entered into
agreements with SG Austria and Austrianova to amend certain provisions of the SG Austria APA, the Diabetes Licensing Agreement,
the Cannabis Licensing Agreement and the Vin-de-Bona Consulting Agreement (“Amendments”). The Amendments provide that
the Company’s obligation to make milestone payments to Austrianova will be eliminated in their entirety under the: (i) Cannabis
License Agreement; and (ii) the Diabetes License Agreement, as amended. The Amendments also provide that the Company’s obligation
to make milestone payments to SG Austria pursuant to the SG Austria APA, as amended and clarified, will be eliminated in their
entirety. One of the Amendments also provides that the scope of the Diabetes License Agreement will be expanded to include all
cell types and cell lines of any kind or description now or later identified, including, but not limited to, primary cells, mortal
cells, immortal cells and stem cells at all stages of differentiation and from any source specifically designed to produce insulin
for the treatment of diabetes.
In addition, one of the Amendments provides
that the Company will have a 5-year right of first refusal from August 30, 2017 in the event that Austrianova chooses to sell,
transfer or assign at any time during such period the Cell-in-a-Box
®
tradename and its Associated Technologies;
provided, however, that the Associated Technologies subject to the right of first refusal do not include Bac-in-a-Box
®
.
Additionally, for a period of one year from August 30, 2017 one of the Amendments provides that Austrianova will not solicit, negotiate
or entertain any inquiry regarding the potential acquisition of the Cell-in-a-Box
®
and its Associated Technologies.
The Amendments further provide that: (i)
the royalty payments on gross sales as specified in the SG Austria APA, the Cannabis License Agreement and the Diabetes License
Agreement will be changed to 4%; and (ii) the royalty payments on amounts received by the Company from sublicensees’ gross
sales under the same agreements will be changed to 20% of the amount received by the Company’s sublicensees, provided, however
,
that in the event the amounts received by the Company from sublicensees is 4% or less of sublicensees’ gross sales, Austrianova
or SG Austria (as the case may be) will receive 50% of what the Company receives up to 2%. In addition, Austrianova or SG Austria
(as the case may be) will receive 20% of any amount the Company receives over a 4% royalty payment from sublicensees.
The Amendments also provide that Austrianova
will receive 50% of any other financial and non-financial consideration received from the Company’s sublicensees of the Cell-in-a-Box
®
technology.
NOTE 2 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
General
The accompanying Condensed Consolidated
Financial Statements as of October 31, 2018 and for the three and six months ended October 31, 2018 and 2017 are unaudited. These
unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. generally accepted accounting
principles (“U.S. GAAP”) for interim financial information and are presented in accordance with the requirements of
Regulation S-X of the U.S. Securities and Exchange Commission (“Commission”) and with the instructions to Form 10-Q.
Accordingly, they do not include all the information and footnotes required by U.S. GAAP for complete Condensed Consolidated Financial
Statements.
In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for
the three and six months ended October 31, 2018 are not necessarily indicative of the results that may be expected for the fiscal
year ending April 30, 2019. The Condensed Consolidated Financial Statements should be read in conjunction with the audited Consolidated
Financial Statements as of and for the fiscal year ended April 30, 2018 and the Notes thereto included in the Company’s Annual
Report on Form 10-K for the period ended April 30, 2018 (“Form 10-K”) the Company filed with the Commission.
The Condensed Consolidated Balance Sheet
as of April 30, 2018 contained herein has been derived from the audited Consolidated Financial Statements as of April 30, 2018
but does not include all disclosures required by U.S. GAAP.
Principles of Consolidation and Basis
of Presentation
The Condensed Consolidated Financial Statements
include the accounts of the Company and its wholly owned subsidiaries. The Company operates independently and through four wholly-owned
subsidiaries: (i) Bio Blue Bird; (ii) PharmaCyte Biotech Europe Limited; (iii) PharmaCyte Biotech Australia Pty. Ltd.; and (iv)
Viridis Biotech, Inc. and are prepared in accordance with U.S. GAAP and the rules and regulations of the Commission. Intercompany
balances and transactions are eliminated. The Company’s 14.5% investment in SG Austria is presented on the cost method of
accounting.
Use of Estimates
The preparation of financial statements
in accordance with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published and the reported
amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates these estimates including
those related to fair values of financial instruments, intangible assets, fair value of stock-based awards, income taxes and contingent
liabilities, among others. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the
Company’s condensed consolidated financial statements; accordingly, it is possible that the actual results could differ from
these estimates and assumptions, which could have a material effect on the reported amounts of the Company’s condensed consolidated
financial position and results of operations.
Intangible Assets
The Financial Accounting Standards Board
("FASB") standard on goodwill and other intangible assets prescribes a two-step process for impairment testing of goodwill
and indefinite-lived intangibles, which is performed annually, as well as when an event triggering impairment may have occurred.
The first step tests for impairment, while the second step, if necessary, measures the impairment. The Company has elected to perform
its annual analysis at the end of its reporting year.
The Company’s intangible assets are
licensing agreements related to the Cell-in-a-Box
®
technology for $1,549,427 and diabetes license for $2,000,000
for an aggregate total of $3,549,427.
These intangible assets have an indefinite
life; therefore, they are not amortizable.
The Company concluded that there was no
impairment of the carrying value of the intangibles for the six months ended October 31, 2018 and 2017.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets
for impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be fully recoverable.
If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than carrying
value, a write-down would be recorded to reduce the related asset to its estimated fair value. No impairment was identified or
recorded during the six months ended October 31, 2018 and 2017.
Fair Value of Financial Instruments
For certain of the Company’s non-derivative
financial instruments, including cash, accounts payable and accrued expenses, the carrying amount approximates fair value due to
the short-term maturities of these instruments.
Accounting Standards Codification ("ASC")
Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments
held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying
amounts reported in the condensed consolidated balance sheets for current liabilities qualify as financial instruments and are
a reasonable estimate of their fair values because of the short period between the origination of such instruments and their expected
realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
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Level 1. Observable inputs such as quoted prices in active markets;
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·
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Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
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Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
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The Company follows ASC subtopic 820-10,
Fair Value Measurements and Disclosures and ASC subtopic 825-10, Financial Instruments, which permit entities to choose to measure
many financial instruments and certain other items at fair value. Neither of these statements had an impact on the Company's financial
position, results of operations or cash flows. The carrying value of cash, accounts payable and accrued expenses, as reflected
in the condensed consolidated balance sheets, approximate fair value because of the short-term maturity of these instruments.
Income Taxes
Deferred taxes are calculated using the
liability method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit
carry forwards, and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation allowance
when, in the opinion of management, it is more likely than not that some portion or all the deferred tax assets will not be realized.
Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date of enactment.
A valuation allowance is provided for deferred
income tax assets when, in management’s judgment, based upon currently available information and other factors, it is more
likely than not that all or a portion of such deferred income tax assets will not be realized. The determination of the need for
a valuation allowance is based on an on-going evaluation of current information including, among other things, historical operating
results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary differences.
The Company believes the determination to record a valuation allowance to reduce a deferred income tax asset is a significant accounting
estimate because it is based on, among other things, an estimate of future taxable income in the U.S. and certain other jurisdictions,
which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation allowance may be material.
In determining when to release the valuation allowance established against the Company’s net deferred income tax assets,
the Company considers all available evidence, both positive and negative. Consistent with the Company’s policy, and because
of the Company’s history of operating losses, the Company does not currently recognize the benefit of all its deferred tax
assets, including tax loss carry forwards, which may be used to offset future taxable income. The Company continually assesses
its ability to generate sufficient taxable income during future periods in which deferred tax assets may be realized. When the
Company believes it is more likely than not that it will recover its deferred tax assets, the Company will reverse the valuation
allowance as an income tax benefit in the statements of operations.
The U.S. GAAP method of accounting for
uncertain tax positions utilizes a two-step approach to evaluate tax positions. Step one, recognition, requires evaluation of the
tax position to determine if based solely on technical merits it is more likely than not to be sustained upon examination. Step
two, measurement, is addressed only if a position is more likely than not to be sustained. In step two, the tax benefit is measured
as the largest amount of benefit, determined on a cumulative probability basis, which is more likely than not to be realized upon
ultimate settlement with tax authorities. If a position does not meet the more likely than not threshold for recognition in step
one, no benefit is recorded until the first subsequent period in which the more likely than not standard is met, the issue is resolved
with the taxing authority or the statute of limitations expires. Positions previously recognized are derecognized when the Company
subsequently determines the position no longer is more likely than not to be sustained. Evaluation of tax positions, their technical
merits and measurements using cumulative probability are highly subjective management estimates. Actual results could differ materially
from these estimates.
On December 22, 2017, the U.S. enacted
the “Tax Cuts and Jobs Act” (“Tax Act”), which made significant changes to U.S. federal income tax law
affecting the Company. Set forth below is a discussion of certain provisions of the Tax Act and the Company's assessment of the
impact of such provisions on its financials.
Effective January 1, 2018, the
Company's U.S. income will be taxed at a 21% (subject to IRC Section 15 blended rate provisions) down from the 35 percent
federal corporate rate. ASC 740-10-25-47 requires the Company to recognize the effect of this rate change on its deferred tax
assets and liabilities in the period the tax rate change is enacted. As a result, the Company has concluded this will
cause the Company's net deferred taxes to be remeasured at the new lower tax rate. The Company maintains a full
valuation allowance on its U.S. net deferred tax assets. Deferred tax asset remeasurement (tax expense) will be offset by a
net decrease in valuation allowance, resulting in no impact on the Company's income tax expense.
Research and Development
Research and development expenses consist
of costs incurred for direct and overhead-related research expenses and are expensed as incurred. Costs to acquire technologies,
including licenses, that are utilized in research and development and that have no alternative future use are expensed when incurred.
Technology developed for use in the Company’s product candidates is expensed as incurred until technological feasibility
has been established.
Research and development costs for the
three and six months ended October 31, 2018 were approximately $115,000, and $383,000, respectively, and for the three and six
months ended October 31, 2017 $515,000 and $943,000, respectively.
Stock-Based Compensation
The Company recognizes stock-based compensation
expense for only those awards ultimately expected to vest on a straight-line basis over the requisite service period of the award,
net of an estimated forfeiture rate. The Company estimates the fair value of stock options using a Black-Scholes-Merton valuation
model, which requires the input of highly subjective assumptions, including the option's expected term and stock price volatility.
In addition, judgment is also required in estimating the number of stock-based awards that are expected to be forfeited. Forfeitures
are estimated based on historical experience at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. The assumptions used in calculating the fair value of share-based payment awards represent management's
best estimates, but these estimates involve inherent uncertainties and the application of management's judgment. Thus, if factors
change and the Company uses different assumptions, its stock-based compensation expense could be materially different in the future.
Effective August 1, 2018, the Company
early adopted ASU 2018-07
Compensation - Stock Compensation (Topic 718): - Improvements to Nonemployee Share-Based Payment
Accounting,
which simplified the guidance under which the accounting for nonemployee share-based payment transactions for
acquiring goods and services from nonemployees.
Concentration of Credit Risk
The Company has no significant off-balance-sheet
concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging arrangements. The
Company maintains most of its cash balance at a financial institution located in California. Accounts at this institution are insured
by the Federal Deposit Insurance Corporation up to $250,000. Uninsured balances aggregated approximately $518,000 and $772,000
at October 31, 2018 and April 30, 2018, respectively. The Company has not experienced any losses in such accounts. Management believes
it is not exposed to any significant credit risk on cash.
Foreign Currency Translation
The Company translates the financial statements
of its foreign subsidiary from the local (functional) currencies to U.S. dollars in accordance with FASB ASC 830,
Foreign Currency
Matters
. All assets and liabilities of the Company’s foreign subsidiaries are translated at year-end exchange rates,
while revenue and expenses are translated at average exchange rates prevailing during the year. Adjustments for foreign currency
translation fluctuations are excluded from net loss and are included in other comprehensive income. Gains and losses on short-term
intercompany foreign currency transactions are recognized as incurred.
Going Concern
The Company's condensed consolidated financial
statements are prepared using U.S. GAAP applicable to a going concern which contemplates the realization of assets and liquidation
of liabilities in the normal course of business. As of October 31, 2018, the Company has an accumulated deficit of $98,216,080
and incurred a net loss for the six months ended October 31, 2018 of $2,251,937. The Company requires substantial additional capital
to finance its planned business operations and expects to incur operating losses in future periods due to the expenses related
to the Company’s core businesses. The Company has not realized any revenue since it commenced doing business in the biotechnology
sector, and there can be no assurance that it will be successful in generating revenues in the future in this sector. These conditions
raise substantial doubt about the Company’s ability to continue as a going concern.
Over the past year, funding was
provided by investors to maintain and expand the Company’s operations. Sales of the Company’s common stock were
made under the initial Registration Statement on Form S-3 filed on October 17, 2014 (“First S-3”) allowing for
offerings up to $50 million dollars and the second Registration Statement on Form S-3 filed on September 13, 2017 (“Second
S-3”) allowing for offerings of up to $50 million dollars in transactions that are deemed to be “at the market
offerings” as defined in Rule 415 under the Securities Act of 1933, as amended (“Securities Act”) or
transactions structured as a public offering of a distinct block or blocks (“Block Trades”) of the shares of the
Company’s common stock. Over the past year, the Company continued to acquire funds through the Company’s First
S-3 and Second S-3 pursuant to which the placement agent sells shares of common stock “at-the-market” in a
program which is structured to provide up to $50 million dollars to the Company less certain commissions pursuant to the
First S-3 and up to $25 million dollars to the Company less certain commissions pursuant to the Second S-3. From May 1, 2017
through October 31, 2018 the Company raised capital of approximately $1.4 million in “at-the-market” and Block
Trade transactions. The Company plans to continue selling securities under the Second S-3. Additionally, the Company has the
ability to reduce the research and development expenses significantly should the funding be delayed.
Management determined that these
plans alleviate substantial doubt about the Company’s ability to continue as a going concern. The Company believes the
cash on hand at October 31, 2018, the ability to use the Second S-3 to raise capital through at-the-market sales and Block
Trades, sales of registered and unregistered shares of its common stock and any public offerings of common stock in which the
Company may engage in will provide sufficient capital to meet the Company’s capital requirements and to fund the
Company’s operations through December 31, 2019. On November 1, 2018, the Company received $500,000 as a result of a
Block Trade sale of common stock using the Second S-3.
Recent Accounting Pronouncements
ASU No. 2016-02,
Leases
, allows
the recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous
US GAAP. The classification criteria for distinguishing between finance leases and operating leases are similar to the classification
criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The Update 2016-02 is
effective for annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The adoption of
this standard is not expected to have a material impact on the Company’s condensed consolidated financial statements.
The Company does not anticipate any material
impact on its condensed consolidated financial statements upon the adoption of the following accounting pronouncements issued during
2016 and 2017: (i) ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial
Instruments
; (ii) ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash
Payments.
NOTE 3 – PREFERRED STOCK
The Company has authorized 10,000,000 shares
of preferred stock, with a par value of $0.0001, of which 13,500 shares have been designated as “Series E Convertible Preferred
Stock.” There are no outstanding shares of preferred stock or Series E Convertible Preferred Stock. The Series E Convertible
Preferred Stock has the following features:
|
·
|
The holders of Series E Convertible Preferred Stock are entitled to receive cash out of the assets of the Company before any amount is paid to the holders of any capital stock of the Company of any class junior in rank to the shares of Series E Convertible Preferred Stock;
|
|
·
|
Each share of Series E Convertible Preferred Stock is convertible, at the holder’s option, into shares of common stock at the average closing bid price of the common stock for five trading days prior to the conversion date;
|
|
·
|
The Company has the right, in its sole discretion, at any time 110 days after issuance of shares of Series E Convertible Preferred Stock, to redeem all the shares of Series E Convertible Preferred Stock upon thirty days advance written notice at a redemption price equal to the par value of the shares of the Series E Convertible Preferred Stock; and
|
|
·
|
At every meeting of stockholders every holder of shares of Series E Convertible Preferred Stock is entitled to 50,000 votes for each share of Series E Convertible Preferred Stock with the same and identical voting rights as a holder of a share of common stock.
|
NOTE 4 – COMMON STOCK TRANSACTIONS
A summary of the Company’s non-vested
restricted stock activity and related weighted average grant date fair value information for the three and six months ended October
31, 2018 and 2017 are as follows:
The Company awarded 6,600,000 shares of
common stock to officers as part of their compensation agreements for 2017. These shares vest monthly over a twelve-month period
and are subject to them continuing service under the agreements. During the three and six months ended October 31, 2018, the Company
recorded a non-cash compensation expense in the amount of $0 and $0, respectively, and during the three and six months ended October
31, 2017, the Company recorded non-cash compensation of $171,600 and $343,200, respectively. As of October 31, 2018, there were
no unvested shares.
During the six months ended October 31,
2017, the Company issued 1,250,000 shares of common stock to four directors of the Company’s Board of Directors (“Board”)
pursuant to Board compensation agreements. The terms of the agreements are for twelve months. The shares vested upon issuance and
the Company recorded a non-cash expense of $0 and $0 for the three and six months ended October 31, 2018, respectively, and $18,125
and $24,167 for the three and six months ended October 31, 2017, respectively. As of October 31, 2018, there were no unvested shares.
During the six months ended October 31,
2017, the Company issued 4,200,000 shares of common stock to three consultants. The terms of two of the agreements are for twelve
months and one agreement is for eighteen months. The shares vest monthly over a twelve-month to eighteen-month period and are subject
to the consultants providing services under the agreements. The Company recorded a non-cash consulting expense in the amount of
$16,800 and $62,600 for the three and six months ended October 31, 2018, respectively, and $58,800 and $80,790 for the three and
six months ended October 31, 2017, respectively. As of October 31, 2018, there were 200,000 unvested shares.
The Company awarded 6,600,000 shares of
common stock to officers as part of their compensation agreements for 2018. These shares vest monthly over a twelve-month period
and are subject to them continuing service under the agreements. During the three and six months ended October 31, 2018, the Company
recorded a non-cash compensation expense in the amount of $92,070 and $184,140, respectively. As of October 31, 2018, there were
1,100,000 unvested shares.
During the six months ended October 31,
2018, the Company issued 1,950,000 shares of common stock to two consultants. The terms of two of the agreements are for twelve
months. The shares vest monthly over a twelve-month period and are subject to the consultants providing services under the agreements.
An additional agreement required 500,000 shares vested upon issuance. The Company recorded a non-cash consulting expense in the
amount of $42,854 and $42,854 for the three and six months ended October 31, 2018, respectively. As of October 31, 2018, there
were 925,000 unvested shares.
All shares were issued without registration
under the Securities Act in reliance upon the exemption afforded by Section 4(a)(2) of the Securities Act.
During the six months ended October 31,
2018 and 2017, the Company sold and issued approximately 66.2 million and 62.4 million shares of common stock, respectively, at
prices ranging from $0.02 to $0.08 per share pursuant to the Company’s First S-3 and Second S-3. Net of underwriting discounts,
legal, accounting and other offering expenses, the Company received proceeds of approximately $1.4 million and $1.8 million from
the sale of these shares for the six months ended October 31, 2018 and 2017, respectively. There were no such sales and issuances
during the three months ended October 31, 2018.
A summary of the Company’s non-vested
restricted stock activity and related weighted average grant date fair value information for the six months ended October 31,
2018 are as follows:
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested,
April 30, 2018
|
|
|
|
5,600,000
|
|
|
$
|
0.06
|
|
Granted
|
|
|
|
1,950,000
|
|
|
|
0.05
|
|
Vested
|
|
|
|
(5,325,000
|
)
|
|
|
0.06
|
|
Forfeited
|
|
|
|
–
|
|
|
|
–
|
|
Non-vested, October 31, 2018
|
|
|
|
2,225,000
|
|
|
$
|
0.06
|
|
NOTE 5 – STOCK OPTIONS AND WARRANTS
Stock Options
As of October 31, 2018, the Company had
96,450,000 outstanding stock options to its directors and officers (collectively, “Employee Options”) and consultants
(“Non-Employee Options”).
During the six months ended October 31,
2018 and 2017, the Company granted 0 and 2,950,000 Employee Options, respectively.
The fair value of the Employee Options
at the date of grant was estimated using the Black-Scholes-Merton option-pricing model, based on the following weighted average
assumptions:
|
|
Six Months Ended October 31,
|
|
|
|
2018
|
|
|
2017
|
|
Risk-free interest rate
|
|
|
–
|
|
|
|
2.0
|
%
|
Expected volatility
|
|
|
–
|
|
|
|
107
|
%
|
Expected lives (years)
|
|
|
–
|
|
|
|
2.5
|
|
Expected dividend yield
|
|
|
–
|
|
|
|
0.00
|
%
|
During the six months ended October 31,
2018 and 2017, the Company granted Non-Employee Options of 1,200,000 and 4,200,000, respectively.
The fair value of the Non-Employee Options was estimated using
the Black-Scholes-Merton option-pricing model, based on the following weighted average assumptions:
|
|
Six Months Ended October 31,
|
|
|
|
2018
|
|
|
2017
|
|
Risk-free interest rate
|
|
|
2.8
|
%
|
|
|
1.8
|
%
|
Expected volatility
|
|
|
97
|
%
|
|
|
108
|
%
|
Expected lives (years)
|
|
|
4.85
|
|
|
|
5.0
|
|
Expected dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
The Company’s computation of expected
volatility is based on the historical daily volatility of its publicly traded stock. For stock option grants issued during the
six months ended October 31, 2018 and 2017, the Company used a calculated volatility for each grant. The Company lacks adequate
information about the exercise behavior now and has determined the expected term assumption under the simplified method provided
for under ASC 718, which averages the contractual term of the Company’s stock options of five years with the average vesting
term of two and one-half years for an average of three years. The dividend yield assumption of zero is based upon the fact the
Company has never paid cash dividends and presently has no intention of paying cash dividends. The risk-free interest rate used
for each grant is equal to the U.S. Treasury rates in effect at the time of the grant for instruments with a similar expected life.
Non-Employee Option grants
that do not vest immediately upon grant are recorded as an expense over the vesting period. Effective August 1, 2018 the Company
early adopted ASU 2018-07 using a modified retrospective transition approach. The Company determined that there was no transition
adjustment upon adoption of ASU 2018-07. The Company issued 1,200,000 stock options to a non-employee during the three months
ended October 31, 2018. The value of these options was determined as of the grant date using the Black-Scholes-Merton option-pricing
model, and compensation expense is being recognized over the service period.
A summary of the Company’s stock
option activity and related information for the six months ended October 31, 2018 are shown below:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Grant Date
Fair Value
per Share
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, April 30, 2018
|
|
|
95,250,000
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
Issued
|
|
|
1,200,000
|
|
|
|
0.05
|
|
|
|
0.05
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding, October 31, 2018
|
|
|
96,450,000
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
Exercisable, October 31, 2018
|
|
|
93,950,000
|
|
|
$
|
0.12
|
|
|
$
|
–
|
|
Vested and expected to vest
|
|
|
96,450,000
|
|
|
$
|
0.11
|
|
|
$
|
–
|
|
A summary of the activity for unvested
stock options during the six months ended October 31, 2018 is as follows:
|
|
|
Options
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested, April 30, 2018
|
|
|
|
7,200,000
|
|
|
$
|
0.06
|
|
Granted
|
|
|
|
1,200,000
|
|
|
|
0.05
|
|
Vested
|
|
|
|
(5,900,000
|
)
|
|
|
0.06
|
|
Forfeited
|
|
|
|
–
|
|
|
|
–
|
|
Non-vested, October 31, 2018
|
|
|
|
2,500,000
|
|
|
$
|
0.06
|
|
The Company recorded approximately $77,000
and $188,000 of stock-based compensation related to the issuance of Employee Options to certain officers and directors in exchange
for services during the three months ended October 31, 2018 and 2017, respectively and approximately $153,000 and $392,000 during
the six months ended October 31, 2018 and 2017, respectively. At October 31, 2018, there remained approximately $51,000 of unrecognized
compensation expense related to unvested Employee Options granted to officers and directors, to be recognized as expense over a
weighted-average period of the remaining 2 months. The non-vested options vest at 750,000 shares per month and are expected to
be fully vested on December 31, 2018.
The Company recorded approximately $20,000
and $57,000 of stock-based compensation related to the issuance of Non-Employee Options in exchange for services during the three
months ended October 31, 2018 and 2017, respectively, and approximately $57,000 and $98,000 during the six months ended October
31, 2018 and 2017, respectively. At October 31, 2018, there remained approximately $45,000 of unrecognized compensation expense
related to unvested Non-Employee Options granted to consultants, to be recognized as expense over a weighted-average period of
the remaining eight months. The non-vested Non-Employee Options vest at 200,000 shares per month through December 31, 2018 and
100,000 shares per month thereafter and are expected to be fully vested on June 30, 2019.
The following table summarizes ranges of
outstanding stock options by exercise price at October 31, 2018:
Exercise Price
|
|
|
Number of Options Outstanding
|
|
|
Weighted Average Remaining Contractual Life (years) of Outstanding Options
|
|
|
Weighted Average Exercisable Price
|
|
|
Number of Options Exercisable
|
|
|
Weighted Average Exercise Price of Exercisable Options
|
|
$
|
0.190
|
|
|
|
25,000,000
|
|
|
|
0.46
|
|
|
$
|
0.190
|
|
|
|
25,000,000
|
|
|
$
|
0.190
|
|
$
|
0.110
|
|
|
|
27,200,000
|
|
|
|
0.61
|
|
|
$
|
0.110
|
|
|
|
27,200,000
|
|
|
$
|
0.110
|
|
$
|
0.184
|
|
|
|
250,000
|
|
|
|
0.73
|
|
|
$
|
0.184
|
|
|
|
250,000
|
|
|
$
|
0.184
|
|
$
|
0.063
|
|
|
|
15,600,000
|
|
|
|
1.30
|
|
|
$
|
0.063
|
|
|
|
15,600,000
|
|
|
$
|
0.063
|
|
$
|
0.104
|
|
|
|
10,450,000
|
|
|
|
2.16
|
|
|
$
|
0.104
|
|
|
|
10,450,000
|
|
|
$
|
0.104
|
|
$
|
0.0685
|
|
|
|
600,000
|
|
|
|
2.50
|
|
|
$
|
0.068
5
|
|
|
|
600,000
|
|
|
$
|
0.068
5
|
|
$
|
0.058
|
|
|
|
2,450,000
|
|
|
|
2.74
|
|
|
$
|
0.058
|
|
|
|
2,450,000
|
|
|
$
|
0.058
|
|
$
|
0.0734
|
|
|
|
1,200,000
|
|
|
|
3.50
|
|
|
$
|
0.073
4
|
|
|
|
1,200,000
|
|
|
$
|
0.073
4
|
|
$
|
0.072
9
|
|
|
|
1,800,000
|
|
|
|
3.69
|
|
|
$
|
0.072
9
|
|
|
|
1,600,000
|
|
|
$
|
0.072
9
|
|
$
|
0.089
|
|
|
|
1,200,000
|
|
|
|
1.86
|
|
|
$
|
0.089
|
|
|
|
1,200,000
|
|
|
$
|
0.089
|
|
$
|
0.0553
|
|
|
|
500,000
|
|
|
|
1.97
|
|
|
$
|
0.055
3
|
|
|
|
500,000
|
|
|
$
|
0.055
3
|
|
$
|
0.0534
|
|
|
|
1,200,000
|
|
|
|
4.85
|
|
|
$
|
0.053
4
|
|
|
|
400,000
|
|
|
$
|
0.053
4
|
|
$
|
0.0558
|
|
|
|
9,000,000
|
|
|
|
2.50
|
|
|
$
|
0.055
8
|
|
|
|
7,500,000
|
|
|
$
|
0.055
8
|
|
|
Total
|
|
|
|
96,450,000
|
|
|
|
1.28
|
|
|
$
|
0.12
|
|
|
|
93,950,000
|
|
|
$
|
0.12
|
|
As of October 31, 2018, the aggregate
intrinsic value of outstanding options was $0. This represents options whose exercise price was less than the closing fair market
value of the Company’s common stock on October 31, 2018 of approximately $0.052 per share.
Warrants
The warrants issued by the Company are
classified as equity. The fair value of the warrants was recorded as additional-paid-in-capital, and no further adjustments are
made.
For stock warrants paid in consideration
of services rendered by non-employees, the Company recognizes consulting expense in accordance with the requirements of ASC 505.
Effective May 24, 2017, the Company issued
a common stock purchase warrant to the placement agent of the Company’s at-the-market and Block Trade offerings. The Company
issued a warrant to purchase 833,333 shares based upon a Block Trade pursuant to the amended engagement agreement dated December
15, 2016 with the Company’s placement agent. The Company classified these warrants as equity, and the warrants have a term
of five years with an exercise price of approximately $0.03 per share. Using the Black-Scholes-Merton warrant pricing model, the
Company determined the aggregate value of these warrants to be approximately $20,000. The warrants have a cashless exercise feature.
Effective July 26, 2017, the Company issued
a common stock purchase warrant to the placement agent of the Company’s at-the-market and Block Trade sales. The Company
issued a warrant to purchase 2,000,000 shares based upon a Block Trade pursuant to the amended engagement agreement dated December
15, 2016 with the Company’s placement agent. The Company classified these warrants as equity, and the warrants have a term
of five years with an exercise price of approximately $0.03 per share. Using the Black-Scholes-Merton warrant pricing model, the
Company determined the aggregate value of these warrants to be approximately $23,000. The warrants have a cashless exercise feature.
Effective May 30, 2018, the Company issued
a common stock purchase warrant to the placement agent of the Company’s at-the-market and Block Trade sales. The Company
issued a warrant to purchase 1,388,889 shares based upon a Block Trade pursuant to the engagement agreement dated February 22,
2018 with the Company’s placement agent. The Company classified these warrants as equity, and the warrants have a term of
five years with an exercise price of approximately $0.02 per share. Using the Black-Scholes-Merton warrant pricing model, the Company
determined the aggregate value of these warrants to be approximately $19,000. The warrants have a cashless exercise feature.
Effective June 28, 2018, the Company issued
a common stock purchase warrant to the placement agent of the Company’s at-the-market and Block Trade sales. The Company
issued a warrant to purchase 1,923,077 shares based upon a Block Trade pursuant to the engagement agreement dated February 22,
2018 with the Company’s placement agent. The Company classified these warrants as equity, and the warrants have a term of
five years with an exercise price of approximately $0.03 per share. Using the Black-Scholes-Merton warrant pricing model, the
Company determined the aggregate value of these warrants to be approximately $38,000. The warrants have a cashless exercise feature.
A summary of the Company’s warrant
activity and related information for the six months ended October 31, 2018 are shown below:
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding, April 30, 2018
|
|
|
|
33,993,104
|
|
|
$
|
0.10
|
|
Issued
|
|
|
|
3,311,966
|
|
|
|
0.02
|
|
Expired
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding, October 31, 2018
|
|
|
|
37,305,070
|
|
|
|
0.09
|
|
Exercisable, October 31, 2018
|
|
|
|
37,305,070
|
|
|
$
|
0.09
|
|
The following table summarizes additional
information concerning warrants outstanding and exercisable at October 31, 2018:
Exercise Prices
|
|
Number of
Warrant Shares
Exercisable at
October 31, 2018
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise Price
|
|
$0.018, $0.025, $0.026, $0.03, $0.0575, $0.065, $0.11 and $0.12
|
|
|
37,305,070
|
|
|
|
2.42
|
|
|
$
|
0.09
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Year Term – $0.12
|
|
|
17,854,308
|
|
|
|
2.12
|
|
|
|
|
|
Five Year Term – $0.11
|
|
|
10,000,000
|
|
|
|
1.39
|
|
|
|
|
|
Five Year Term – $0.065
|
|
|
769,231
|
|
|
|
3.14
|
|
|
|
|
|
Five Year Term – $0.0575
|
|
|
869,565
|
|
|
|
3.43
|
|
|
|
|
|
Five Year Term – $0.03
|
|
|
2,500,000
|
|
|
|
4.07
|
|
|
|
|
|
Five Year Term – $0.026
|
|
|
1,923,077
|
|
|
|
4.66
|
|
|
|
|
|
Five Year Term – $0.025
|
|
|
2,000,000
|
|
|
|
3.74
|
|
|
|
|
|
Five Year Term – $0.018
|
|
|
1,388,889
|
|
|
|
4.58
|
|
|
|
|
|
|
|
|
37,305,070
|
|
|
|
|
|
|
|
|
|
NOTE 6 – LEGAL PROCEEDINGS
The Company is not currently a party to
any pending legal proceedings, material or otherwise. There are no legal proceedings to which any property of the Company is subject.
NOTE 7 – RELATED PARTY TRANSACTIONS
The Company had the following related party
transactions during the three and six months ended October 31, 2018 and 2017, respectively.
The Company owns 14.5% of the equity in
SG Austria and is reported on the cost method of accounting. SG Austria has two subsidiaries: (i) Austrianova; and (ii) Austrianova
Thailand Co., Ltd. The Company purchased products and services from these subsidiaries in the approximate amounts of $68,000 and
$119,000 for the three and six months ended October 31, 2018, respectively, and $426,000 and $642,000 in the three and six months
ended October 31, 2017, respectively.
In April 2014, the Company entered a consulting
agreement (“Vin-de-Bona Consulting Agreement”) with Vin-de-Bona Trading Private Limited (“Vin-de-Bona”)
pursuant to which it agreed to provide professional consulting services to the Company. Vin-de-Bona is owned by Prof. Walter H.
Günzburg and Dr. Brian Salmons, both of whom are involved in numerous aspects of the Company’s scientific endeavors
relating to cancer and diabetes. The term of the agreement is for 12 months, automatically renewable for successive 12-month terms.
After the initial term, either party can terminate the agreement by giving the other party 30 days’ written notice before
the effective date of termination. The amounts paid for the three months ended October 31, 2018 and 2017 were approximately $10,000
and $12,000, respectively, and approximately $12,000 and $27,000 for the six months ended October 31, 2018 and 2017, respectively.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
The Company acquires assets still in development
and enters research and development arrangements with third parties that often require milestone and/or royalty payments to the
third-party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone
payments may be required, contingent upon the successful achievement of an important point in the development life-cycle of the
pharmaceutical product (e.g., approval by a regulatory agency of the product for marketing). If required by the license agreements,
the Company may have to make royalty payments based upon a percentage of the sales of the pharmaceutical products if regulatory
approval for marketing is obtained.
Office Lease
Effective September 1, 2016, the Company
entered into a new lease for office space at 23046 Avenida de la Carlota, Suite 600, Laguna Hills, California 92653 (“Leased
Premises”). The term of that lease was for 12 months. In May 2017, the Company entered into an additional two-year lease
for the Leased Premises, commencing upon the expiration of the term of the first lease. The term of the new lease expires on August
31, 2019.
Rent expense for this office for the three
months ended October 31, 2018 and 2017 was approximately $9,000 and $9,000, respectively and $17,000 and $17,000 for the six months
ended October 31, 2018 and 2017, respectively.
The following table summarizes the Company’s
aggregate future minimum lease payments required under the office lease for the Leased Premises as of October 31, 2018.
Periods Ending October 31,
|
|
|
Amount
|
|
|
2019
|
|
|
$
|
27,570
|
|
Material Agreements
Amendments to Agreements with SG
Austria and Austrianova
In May 2018, the Company entered into the
Amendments contemplated by the Term Sheet. The terms and conditions of the Amendments are summarized in Note 1 – Nature of
Business, Company Background and Material Agreements.
Compensation Agreements
The Company entered into executive compensation
agreements with its three executive officers in March 2015, each of which was amended in December 2015. Each amendment has a term
of two years. The Company also entered a compensation agreement with a Board member in April 2015 which continues in effect until
the member is no longer on the Board.
In March 2017, the Company amended the
executive compensation agreements. The term for each agreement is two years from an effective date of January 1, 2017. At the same
time, the Company amended the compensation agreement with the Board member referenced above. It continues in effect until the member
is no longer on the Board.
The Company has four independent directors.
Each director receives the same compensation: (i) $12,500 in cash for each calendar quarter of service on the Board; (ii) 500,000
fully-paid, non-assessable shares of the Company’s restricted common stock (“Shares”) annually; and (iii) a five-year
option to purchase 500,000 Shares annually at an exercise price equal to the fair market value of the Shares on the date of grant.
The Shares and the Options fully vest on the date of the grants.
The Company’s Chief Medical Officer
(“CMO”) receives: (i) $10,000 in cash for each calendar month of service as the Company’s CMO; (ii) 1,200,000
Shares annually; and (iii) a five-year Option to purchase 1,200,000 Shares at an exercise price equal to the fair market value
of the Shares on the date of the grant. The Shares and the Option Shares each vest in the amount of 100,000 Shares per month. The
Company will indemnify the CMO for her work as the Company’s CMO.
NOTE 9 – INCOME
TAXES
The Company had no income tax expense for
the six months ended October 31, 2018 and 2017, respectively. During the six months ended October 31, 2018 and 2017, the Company
had a net operating loss (“NOL”) for each period which generated deferred tax assets for NOL carryforwards. The Company
provided valuation allowances against the net deferred tax assets including the deferred tax assets for NOL carryforwards. Valuation
allowances provided for the net deferred tax asset increased by approximately $549,000 and $1,186,000 for the six months ended
October 31, 2018 and 2017, respectively.
There was no material difference between
the effective tax rate and the projected blended statutory tax rate for the six months ended October 31, 2018 and 2017.
In assessing the realization of deferred
tax assets, management considered whether it is more likely than not that some portion or all of the deferred asset will not be
realized. The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during
the periods in which those temporary differences become deductible. Based on the available objective evidence, including the history
of operating losses and the uncertainty of generating future taxable income, management believes it is more likely than not that
the net deferred tax assets at October 31, 2018 will not be fully realizable. Accordingly, management has maintained a valuation
allowance against the net deferred tax assets at October 31, 2018.
The Tax Act was enacted on December 22,
2017. The Tax Act reduces the U.S. federal corporate income tax rate from 35% to 21%, requires companies to pay a one-time transition
tax on earnings of certain foreign subsidiaries that were previously tax deferred and creates new taxes on certain foreign sourced
earnings. The Company is applying the guidance in SAB 118 when accounting for the enactment-date effects of the Tax Act. The Company’s
accounting for the Tax Act is incomplete, as noted at year-end. However, the Company is able to reasonably estimate certain effects
and, therefore, recorded provisional adjustments at April 30, 2018 associated with the reduction of the U.S. federal corporate
tax rate. During the quarter ended October 31, 2018, the Company recognized no adjustments to the provisional amounts recorded
at April 30, 2018 and has not completed the Company’s accounting for all of the tax effects of the Tax Act. The Company
is awaiting further guidance from U.S. federal and state regulatory bodies with regards to the final accounting and reporting
of these items in the several jurisdictions where the Company files tax returns. In all cases the Company will continue to make
and refine its calculations as additional analysis is completed. The Company’s estimates may also be affected as it gains
a more thorough understanding of the tax law.
The Company’s policy is to recognize
any interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of the six months ended
October 31, 2018 and 2017, the Company had accrued no interest or penalties related to uncertain tax positions.
See Note 9 of Notes to Consolidated Financial
Statements included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2018 for additional information
regarding income taxes.
NOTE 10 – EARNINGS PER SHARE
Basic earnings (loss) per share is computed
by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the period. Diluted
earnings per share is computed by dividing net income by the weighted average number of shares and potentially dilutive common
shares outstanding during the period increased to include the number of additional shares of common stock that would be outstanding
if the potentially dilutive securities had been issued. Potential common shares outstanding principally include stock options and
warrants. During the three and six months ended October 31, 2018 and 2017, the Company incurred losses. Accordingly, the effect
of any common stock equivalent would be anti-dilutive during those periods and are not included in the calculation of diluted weighted
average number of shares outstanding.
The table below sets forth the basic loss
per share calculations:
|
|
Six Months Ended October 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net loss
|
|
$
|
(2,251,937
|
)
|
|
$
|
(3,502,713
|
)
|
Basic weighted average number of shares outstanding
|
|
|
1,063,602,271
|
|
|
|
949,373,602
|
|
Diluted weighted average number of shares outstanding
|
|
|
1,063,602,271
|
|
|
|
949,373,602
|
|
Basic and diluted loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
The table below sets forth these potentially
dilutive securities:
|
|
Six Months Ended October 31,
|
|
|
|
2018
|
|
|
2017
|
|
Excluded options
|
|
|
96,450,000
|
|
|
|
86,250,000
|
|
Excluded warrants
|
|
|
37,305,070
|
|
|
|
53,072,437
|
|
Total excluded options and warrants
|
|
|
133,755,070
|
|
|
|
139,322,437
|
|
|
|
Three Months Ended October 31,
|
|
|
|
2018
|
|
|
2017
|
|
Net loss
|
|
$
|
(1,036,574
|
)
|
|
$
|
(1,814,298
|
)
|
Basic weighted average number of shares outstanding
|
|
|
1,080,708,112
|
|
|
|
973,167,811
|
|
Diluted weighted average number of shares outstanding
|
|
|
1,080,708,112
|
|
|
|
973,167,811
|
|
Basic and diluted loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
The table below sets forth these potentially
dilutive securities:
|
|
Three Months Ended October 31,
|
|
|
|
2018
|
|
|
2017
|
|
Excluded options
|
|
|
96,450,000
|
|
|
|
86,250,000
|
|
Excluded warrants
|
|
|
37,305,070
|
|
|
|
53,072,437
|
|
Total excluded options and warrants
|
|
|
133,755,070
|
|
|
|
139,322,437
|
|
NOTE 11 – SUBSEQUENT EVENTS
From November 1, 2018 through December
14, 2018, the Company sold 45,454,545 shares of common stock using the Second S-3 structured as a Block Trade. The issuance of
these shares resulted in gross proceeds to the Company of approximately $500,000. Pursuant to the financial advisory, offering
and at the market offering letter agreement with Aeon Capital, Inc. (“Aeon”), the Company is required to pay Aeon a
fee of 7%, which equals $35,000 and provide warrant coverage of 5% of the number of shares of common stock sold in the Block Trade
with a five-year term of approximately 2.3 million warrant shares.