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
Cell-in-a-Box® technology is intended to be used as a platform upon which therapies for several types of cancer,
including locally advanced, inoperable non-metastatic pancreatic cancer (“LAPC”), and Type 1 and insulin dependent
Type 2 diabetes will be developed.
The Company is developing therapies for
pancreatic and other solid cancerous tumors by using genetically engineered live human cells that are capable of converting a cancer
prodrug into its cancer-killing form, encapsulating those cells using the Cell-in-a-Box® technology and placing
those capsules in the blood supply as close as possible to the cancerous tumor. In this way, when the cancer prodrug is administered
to a patient with a particular type of cancer that may be affected by the prodrug, the killing of the patient’s tumor may
be optimized.
The Company is also examining ways to exploit
the benefits of the Cell-in-a-Box® encapsulation technology to develop therapies for cancer that involve prodrugs
based upon certain constituents of the Cannabis plant; these constituents are of the class of compounds known as “cannabinoids.”
In addition, the Company is involved in
preclinical studies to determine if its cancer therapy can slow the production and/or accumulation of malignant ascites fluid in
the abdomen that often accompanies the growth of several types of abdominal cancers.
Finally, the Company is developing a therapy
for Type 1 diabetes and insulin-dependent Type 2 diabetes based upon the encapsulation of a human liver 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
exploring the possibility of encapsulating human insulin-producing stem cells and islet cells and transplanting them into a diabetic
patient. All three types of cells will be encapsulated using the Cell-in-a-Box® encapsulation technology. Each method
is designed to function as a bio-artificial pancreas for purposes of insulin production.
The Cell-in-a-Box® capsules
are largely composed of cellulose (cotton) and are bio-inert. The Cell-in-a-Box encapsulation technology potentially enables genetically
engineered live human cells to be used as miniature factories. The technology results in the formation of pin-head sized cellulose-based
porous capsules in which genetically modified live human cells can be encapsulated and maintained. They are protected from environmental
challenges, such as the sheer forces associated with bioreactors, passage through catheters and needles, etc., enabling greater
growth and production of the end-product.
Cancer Therapy
Targeted Chemotherapy
The Company is seeking to utilize the
Cell-in-a-Box® encapsulation technology to develop a therapy for solid cancerous tumors through 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 to the pancreas as near as possible to the pancreas tumor. The cancer prodrug
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 in addition to the liver where it is normally converted. The Company believes
placement of the Cell-in-a-Box® capsules in close proximity to 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 side effects from the
chemotherapy.
Pancreatic Cancer Therapy
A critical unmet medical need exists for
patients with LAPC whose tumor in the pancreas no longer responds 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 for pancreatic
cancer). We believe these patients have no effective treatment alternative once their tumors no longer respond to these therapies.
Two of the most commonly 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 United States (“U.S.”).
The Company is developing a therapy comprised of Cell-in-a-Box® encapsulated live cells implanted as close as possible
to the cancerous tumor in a patient’s pancreas followed by low doses of the cancer prodrug ifosfamide being administered
intravenously. 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.
Subject to approval by the U.S. Food and
Drug Administration (“FDA”), the Company plans to commence a clinical trial involving patients with LAPC whose tumors
have ceased to respond to either Abraxane® plus gemcitabine or FOLFIRINOX after 4-6 months of treatment. The Company
had a Pre-Investigational New Drug Application meeting (“Pre-IND meeting”) with the Center for Biologics Evaluation
and Research of the FDA (“CBER”) in January 2017. At that Pre-IND meeting, the FDA communicated its agreement with
certain aspects of the Company’s clinical development plan, charged the Company with completing numerous tasks and provided
the Company with the guidance on the tasks the Company believes is needed to complete a successful IND, although no assurance
can be given whether the FDA will approve the Company’s IND once it is submitted to the FDA. Since the pre-IND meeting,
the Company has focused its efforts on completing Cell-in-a-Box® engineering runs and production runs along with
studies intended to provide data necessary for the Company’s IND. The trial would initially take place in the U.S. with
possible study sites in Europe at a later date.
Cannabinoid Therapy to Treat Cancer
The Company plans to use cannabinoids,
constituents of the Cannabis plant, to develop therapies for cancer, with the initial target of brain cancer. The Company
is focusing on developing specific therapies based on carefully chosen molecules rather than using complex Cannabis extracts.
To further its Cannabis therapy
development plans, the Company entered a Research Agreement with the University of Northern Colorado. The initial goal of the 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.
Further research has been conducted 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 the selected prodrugs 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.
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.
Once an abdominal tumor reaches a certain
stage of development, it produces malignant ascites in the abdominal cavity. Malignant ascites fluid must be removed by paracentesis
on a periodic basis. This procedure is painful and costly. There is no therapy that the Company is aware of 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”), an early stage CRO specializing in oncology,
to determine if the combination of Cell-in-a-Box® encapsulated cells plus ifosfamide therapy can delay the
production and accumulation of malignant ascites fluid. The data from the TD2 studies indicated that the treatment might play a
role in the rate of malignant ascites fluid production and accumulation, but the conclusions were difficult to interpret with certainty.
As a result, the Company plans to conduct another preclinical study in Germany to determine if its conclusions from the TD2 studies
are valid. If this study shows positive results, the Company plans to seek approval from the FDA to conduct a Phase 1 clinical
trial in the U.S.
Diabetes Therapy
Bio-Artificial Pancreas for Diabetes
The Company plans to develop a therapy
for Type 1 diabetes and insulin-dependent Type 2 diabetes. It is developing 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 using genetically modified stem cells
and natural, human insulin producing cells (beta islet cells) to treat Type 1 diabetes and insulin dependent Type 2 diabetes. All
three types of cells will be encapsulated using the Cell-in-a-Box® encapsulation technology. The goal for the three
approaches is to develop a bio-artificial pancreas for purposes of insulin production for diabetics who are insulin dependent.
After appropriate animal testing has been completed successfully, the Company plans to seek the FDA’s approval to transplant
encapsulated insulin-producing cells 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.
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 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 the biotechnology
sector.
In 2011, the Company entered into an Asset
Purchase Agreement (“SG Austria APA”) with SG Austria Private Limited (“SG Austria”) to purchase 100% of
the assets and liabilities of 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 of 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 into a 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®
encapsulation 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 develop, make or have made products to treat cancer, obtain marketing approval, sell and
offer for sale those products using the clinical data generated from the second pancreatic cancer clinical trial which contained
proprietary information from the 1st Interim Analysis of the trial that used the cells and capsules developed by Bavarian
Nordic/GSF (then known as “CapCells”). The licensed patent rights related to this information and technology pertained
to the countries in which patents had been granted to Bavarian Nordic/GSF.
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 for the existing patents; 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. The Company plans to develop a therapy for diabetes by encapsulating the Melligen
cells using the Cell-in-a-Box® encapsulation technology.
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”).
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 pursuant to which Austrianova will actively work to seek an investment partner
or partners who will finance clinical trials and further develop products for the therapies for cancer, in exchange for which the
Company, Austrianova and any future investment partner or partners will each receive a share of the net revenue from the sale of
products in designated territories.
Effective October 1, 2016, the Company
and Bavarian Nordic/GSF amended the Bavarian Nordic/GSF License Agreement to (i) 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; (ii) provide rights to Bio Blue Bird to the clinical data after expiration of the licensed patent rights; and (iii)
change the notice address and recipients of Bio Blue Bird.
In August 2017, the Company entered into
the Binding Term Sheet with SG Austria and Austrianova pursuant to which the parties reached an agreement to amend certain provisions
in the SG Austria APA, the Diabetes Licensing Agreement the Cannabis Licensing Agreement and the Vin-de-Bona Consulting Agreement
(defined below).
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 required by the Binding Term Sheet (“Binding Term Sheet Amendments”).
The Binding Term Sheet Amendments provide that the Company’s obligation to make milestone payments to Austrianova are eliminated
in their entirety under the Cannabis License Agreement and the Diabetes License Agreement, as amended. The Binding Term Sheet 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, is eliminated in its entirety. One of the Binding Term Sheet Amendments also provides that the scope of the Diabetes
License Agreement is 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 Binding Term Sheet
Amendments provides that the Company has 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 this 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®.
Also, for a period of one year from August 30, 2017 one of the Binding Term Sheet Amendments provides that Austrianova will not
solicit, negotiate or entertain any inquiry regarding the potential acquisition of the Cell-in-a-Box® encapsulation
technology and its Associated Technologies.
The Binding Term Sheet Amendments further
provide that 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%. They also provide that 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 Binding Term Sheet 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, 2019 and for the three and six months ended October 31, 2019 and 2018 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
(“Report”). Accordingly, they do not include all the information and Notes 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, 2019 are not necessarily indicative of the results that may be expected for the fiscal
year ending April 30, 2020. 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, 2019 and the Notes thereto included in the Company’s Annual
Report on Form 10-K for the period ended April 30, 2019 (“Form 10-K”) the Company filed with the Commission.
The Condensed Consolidated Balance Sheet
as of October 31, 2019 contained in this Report has been derived from the audited Consolidated Financial Statements as of April
30, 2019, 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. Therefore, 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 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, 2019 and 2018.
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, 2019 and 2018.
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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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. 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.
The Company maintains a full valuation
allowance on its U.S. net deferred tax assets. Deferred tax asset remeasurement (tax expense) was offset by a net decrease in valuation
allowance, that resulted in no impact on the Company's income tax expense.
Research and Development
Research and development (“R&D”)
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 R&D 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.
R&D expenses for the three and six
months ended October 31, 2019 were $17,940 and $90,270, respectively, and for the three and six months ended October 31, 2019 were
$115,101 and $382,895, 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.
The Company estimates the fair value of stock options using a Black-Scholes-Merton valuation model. This model 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, the stock-based compensation expense could be materially different in the future.
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 $0 and $127,000 at October
31, 2019 and April 30, 2019, 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 subsidiaries 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 quarter-end exchange
rates, while revenue and expenses are translated at average exchange rates prevailing during the period. 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 accompanying condensed consolidated
financial statements have been prepared assuming that the Company will continue as a going concern; however, the following conditions
raise substantial doubt about the Company's ability to do so. The condensed consolidated financial statements do not include any
adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts and classifications
of liabilities that may result should the Company be unable to continue as a going concern. As of October 31, 2019, the Company
had an accumulated deficit of $102,232,568 and incurred a net loss for six months ended October 31, 2019 of $2,201,197. 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.
For the six months ended October 31, 2019,
funding was provided by investors to maintain and expand the Company. Sales of the Company’s common stock were made under
the Registration Statement on Form S-3 filed on September 13, 2017 (“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
of the shares (“Block Trades”) of the Company’s common stock. During the six-month period ended October 31, 2019,
the Company continued to acquire funds through the Company’s S-3 pursuant to which the placement agent sells shares of common
stock from Block Trades in a program which is structured to provide up to $25 million to the Company less certain commissions pursuant
to the S-3.
As of August 13, 2019, the Company does
not meet the eligibility requirements to use the S-3 to raise capital, and the Company ceased to use the S-3 to raise capital after
that date.
From May 1, 2019 through August 12, 2019
the Company raised capital of approximately $950,000 in Block Trade transactions. Subsequent to October 31, 2019, the Company raised
additional capital in the amount of $300,000 through the sale of unregistered shares of its common stock in private placement transactions.
The Company plans to continue to sell unregistered
securities in private placements to raise capital to fund operations and R&D. The Company also has the ability to reduce consulting
expenses and R&D expenses should funding be delayed.
Recent Accounting Pronouncements
On May 1, 2019, the Company adopted Accounting
Standards Update (“ASU”) No. 2016-02, “Leases (Topic 842),” which requires the recognition of right-of-use
(“ROU”) assets and lease liabilities on the consolidated balance sheet. This ASU retains a distinction between finance
leases and operating leases, and the classification criteria for distinguishing between finance leases and operating leases are
substantially similar to the classification criteria for distinguishing between capital leases and operating leases in the current
accounting literature. Under the standard, disclosures are required to meet the objective of enabling users of financial statements
to assess the amount, timing, and uncertainty of cash flows arising from leases. The Company elected the available practical expedients
on adoption. Adoption of the new standard resulted in an immaterial amount of total lease liabilities and ROU assets of as of May
1, 2019.
The Company does not anticipate any material
impact on its condensed consolidated financial statements upon the adoption of the following accounting pronouncements issued during
2018 and 2019: (i) ASU 2018-19, ASC Topic 326: Codification Improvements to Financial Instruments, and (ii) ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments.
NOTE 3 – ACCRUED EXPENSES
Accrued expenses at October 31, 2019
and April 30, 2019 are summarized below:
|
|
October 31, 2019
|
|
|
April 30, 2019
|
|
Payroll related costs
|
|
$
|
402,383
|
|
|
$
|
358,616
|
|
Share issuance compensation
|
|
|
–
|
|
|
|
240,015
|
|
Related party payable (1)
|
|
|
70,000
|
|
|
|
–
|
|
Other
|
|
|
166,890
|
|
|
|
22,335
|
|
Total
|
|
$
|
639,273
|
|
|
$
|
620,966
|
|
______________
1 The related party
payable was non-interest bearing and due on demand. Subsequent to October 31, 2019, the related party payable was repaid in
full.
NOTE 4 – COMMON STOCK TRANSACTIONS
A summary of the Company’s restricted stock activity and related weighted average grant date fair value information for the six months ended October 31, 2019
and 2018 is as follows:
During the six months ended October 31,
2017, the Company issued 4,200,000 shares of common stock to three consultants pursuant to consulting agreements. 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 their respective agreements with the Company.
The Company recorded a non-cash consulting expense in the amount of $0 and $0 for the three and six months ended October 31, 2019,
respectively, and $16,800 and $62,600 for the three and six months ended October 31, 2018, respectively. There were zero and 200,000
unvested shares as of October 31, 2019 and 2018, respectively.
During the month of January 2018, 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, 2019, the Company recorded a non-cash compensation expense in the amount of $0 and $0, respectively, and $92,070 and
$184,140 for the three and six months ended October 31, 2018, respectively. There were zero and 1,100,000 unvested shares as of
October 31, 2019 and 2018, respectively.
During the six months ended October 31,
2018, the Company issued 1,950,000 shares of common stock to two consultants pursuant to consulting agreements. The terms of these
two consulting 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 with one of the consultants required 500,000 shares vested upon
issuance. The Company recorded a non-cash consulting expense in the amount of $0 and $12,816 for the three and six months ended
October 31, 2019, respectively and $42,854 and $42,854 for the three and six months ended October 31, 2018, respectively. There
were zero and 925,000 unvested shares as of October 31, 2019 and 2018, respectively.
During the month of April 2019, two consultants
were issued 2,500,000 shares of common stock pursuant to their consulting agreements. The term of the agreements is for twelve
months which covered prior and current periods. The shares vest monthly over a twelve-month period and are subject to the consultant
providing services under their respective consulting agreements. The Company recorded a non-cash consulting expense in the amount
of $4,701 and $11,910 for the three and six months ended October 31, 2019. There were zero unvested shares as of October 31, 2019.
During the six months ended October 31,
2019, the four independent directors of the Company’s Board pursuant to Board compensation agreements were issued 2,000,000
shares of common stock relating to their services for the prior year. The terms of the agreements are for twelve months. The shares
vest on the directors’ anniversary date of their agreements. The Company recorded a non-cash expense of $5,408 and $19,212
for the three and six months ended October 31, 2019, respectively.
During the six months ended October 31,
2019, a consultant was issued 500,000 shares of common stock pursuant to his consulting agreement with the Company. The term of
the consulting agreement is for twelve months which covered prior and current periods. The shares vest monthly over a twelve-month
period and are subject to the consultant providing services under his consulting agreement. The Company recorded a non-cash consulting
expense in the amount of $14,044 and $17,350 for the three and six months ended October 31, 2019, respectively.
During the month of April 2019, the Company
awarded 6,600,000 shares of common stock to officers as part of their executive compensation agreements for 2019. These shares
vest monthly over a twelve-month period and are subject to them continuing service under their respective executive compensation
agreements. During the three and six months ended October 31, 2019, the Company recorded a non-cash compensation expense in the
amount of $104,727 and $209,453, respectively. There were 1,100,000 unvested shares as of October 31, 2019.
During the six months ended October 31,
2019, four independent directors of the Company’s Board of Directors (“Board”) were issued 2,000,000 shares
of common stock pursuant to their respective Director Letter Agreement (“DLA”) with the Company. Each share issuance
under a DLA covers a twelve-month period. The shares vest upon the appointment of a director pursuant to a DLA and upon on the
anniversary date of the DLA. The Company recorded a non-cash expense of $15,793 and $27,435 for the three and six months ended
October 31, 2019, respectively.
During the six months ended October 31,
2019, a consultant was issued 2,000,000 shares of common stock pursuant to his services on the Company’s Medical and Scientific
Advisory Board over a four-year period. This share issuance covered prior and current periods. The shares vest monthly over the
four-year period and are subject to the consultant providing services to the Company. The Company recorded a non-cash consulting
expense in the amount of $4,701 and $11,851 for the three and six months ended October 31, 2019, respectively.
During the six months ended October 31,
2019, five consultants were issued 2,200,000 shares of common stock pursuant to their consulting agreements. The terms of the agreements
are for twelve months. The shares vest monthly over a twelve-month period and are subject to the consultant providing services
under their respective consulting agreements. The Company recorded a non-cash consulting expense in the amount of $20,803 and $20,803
for the three and six months ended October 31, 2019. There were 1,300,000 unvested shares as of October 31, 2019.
During the six months ended October 31,
2019, a consultant was issued 500,000 shares of common stock pursuant to his services as the Company’s Chairman of its Scientific
Advisory Board over a twelve period. The shares vest upon the anniversary date of the Board’s approval of the common stock
grant. The Company recorded a non-cash consulting expense in the amount of $1,533 and $1,533 for the three and six months ended
October 31, 2019, respectively.
All shares described above 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,
2019 and 2018, the Company sold and issued approximately 136.7 and 66.2 million shares of common stock, respectively, at prices
ranging from approximately $0.01 to $0.03 per share as Block Trades pursuant to the Company’s S-3. Net of underwriting discounts,
legal, accounting and other offering expenses, the Company received net proceeds of approximately $884,000 and $1.4 million from
the sale of these shares for the six months ended October 31, 2019 and 2018, respectively.
On October 31, 2019, the Company’s
Board of Directors passed a resolution recommending to shareholders that they approve the amendment of the Company’s articles
of incorporation to increase the number of authorized shares of the Company’s common stock by 1,000,000,000 from 1,490,000,000
to 2,490,000,000 shares. Subsequently, on October 31, 2019, by a written consent executed by holders of a majority of the
voting power of the Company’s outstanding stock, the Company’s stockholders approved such an amendment. October
31, 2019 such amendment was filed with the Secretary of State of the State of Nevada.
A summary of the Company’s unvested
restricted stock activity and related weighted average grant date fair value information for the six months ended October 31, 2019
are as follows:
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested, April 30, 2019
|
|
|
4,600,000
|
|
|
$
|
0.05
|
|
Granted
|
|
|
9,200,000
|
|
|
|
0.05
|
|
Vested
|
|
|
(11,400,000
|
)
|
|
|
0.05
|
|
Unvested, October 31, 2019
|
|
|
2,400,000
|
|
|
$
|
0.04
|
|
NOTE 5 – STOCK OPTIONS AND WARRANTS
Stock Options
As of October 31, 2019, the Company had
85,650,000 outstanding stock options to its directors and officers (collectively, “Employee Options”) and consultants
(collectively, “Non-Employee Options”).
During the six months ended October 31,
2019 and 2018, the Company granted 2,000,000 and zero Employee Options, respectively. During the six months ended October 31, 2019,
25,000,000 options expired.
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,
|
|
|
|
2019
|
|
|
2018
|
|
Risk-free interest rate
|
|
|
2.0%
|
|
|
|
–
|
|
Expected volatility
|
|
|
91%
|
|
|
|
–
|
|
Expected lives (years)
|
|
|
2.5
|
|
|
|
–
|
|
Expected dividend yield
|
|
|
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, 2019 and 2018, the Company used a calculated volatility for each grant. The Company lacks adequate
information about potential exercise behavior 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.
During the six months ended October 31,
2019 and 2018, the Company granted 1,200,000 and zero Non-Employee Options, respectively. During the three months ended October
31, 2019 and 2018, the Company granted 1,200,000 and zero Non-Employee Options, respectively.
Non-Employee Option grants that do not
vest immediately upon grant are recorded as an expense over the vesting period. The value of the 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, 2019 are shown below:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Grant Date
Fair Value
per Share
|
|
Outstanding, April 30, 2019
|
|
|
107,450,000
|
|
|
$
|
0.11
|
|
|
$
|
0.11
|
|
Issued
|
|
|
3,200,000
|
|
|
$
|
0.04
|
|
|
$
|
0.04
|
|
Forfeited
|
|
|
(25,000,000
|
)
|
|
$
|
0.19
|
|
|
$
|
0.19
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding, October 31, 2019
|
|
|
85,650,000
|
|
|
$
|
0.08
|
|
|
$
|
0.08
|
|
Exercisable, October 31, 2019
|
|
|
83,350,000
|
|
|
$
|
0.11
|
|
|
|
–
|
|
Vested and expected to vest
|
|
|
85,650,000
|
|
|
$
|
0.08
|
|
|
|
–
|
|
A summary of the activity for unvested
stock options during the six months ended October 31, 2019 is as follows:
|
|
Options
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Unvested, April 30, 2019
|
|
|
6,200,000
|
|
|
$
|
0.05
|
|
Granted
|
|
|
3,200,000
|
|
|
$
|
0.04
|
|
Vested
|
|
|
(7,100,000
|
)
|
|
$
|
0.05
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Unvested, October 31, 2019
|
|
|
2,300,000
|
|
|
$
|
0.05
|
|
The Company recorded $93,995 and $76,733
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, 2019 and 2018, respectively, and $210,909 and $153,466 during the six months ended October
31, 2019 and 2018, respectively. At October 31, 2019, there remained $56,319 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
two months in the calendar year. The unvested options vest at 750,000 shares per month and are expected to be fully vested on December
31, 2019.
The Company recorded $4,414 and $20,231
of stock-based compensation related to the issuance of Non-Employee Options in exchange for services during the three months ended
October 31, 2019 and 2018, respectively, and $13,825 and $56,723 during the six months ended October 31, 2019 and 2018, respectively.
At October 31, 2019, there remained approximately $28,000 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 unvested
Non-Employee Options vest at 100,000 shares per month and are expected to be fully vested on June 30, 2020.
The following table summarizes ranges of
outstanding stock options by exercise price at October 31, 2019:
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
|
|
$
|
0.110
|
|
|
|
27,200,000
|
|
|
|
0.22
|
|
|
$
|
0.110
|
|
|
|
27,200,000
|
|
|
$
|
0.110
|
|
$
|
0.184
|
|
|
|
250,000
|
|
|
|
0.23
|
|
|
$
|
0.184
|
|
|
|
250,000
|
|
|
$
|
0.184
|
|
$
|
0.063
|
|
|
|
15,600,000
|
|
|
|
0.70
|
|
|
$
|
0.063
|
|
|
|
15,600,000
|
|
|
$
|
0.063
|
|
$
|
0.104
|
|
|
|
10,450,000
|
|
|
|
1.52
|
|
|
$
|
0.104
|
|
|
|
10,450,000
|
|
|
$
|
0.104
|
|
$
|
0.0685
|
|
|
|
600,000
|
|
|
|
1.50
|
|
|
$
|
0.0685
|
|
|
|
600,000
|
|
|
$
|
0.0685
|
|
$
|
0.058
|
|
|
|
2,450,000
|
|
|
|
1.99
|
|
|
$
|
0.058
|
|
|
|
2,450,000
|
|
|
$
|
0.058
|
|
$
|
0.0734
|
|
|
|
1,200,000
|
|
|
|
2.50
|
|
|
$
|
0.0734
|
|
|
|
1,200,000
|
|
|
$
|
0.0734
|
|
$
|
0.0729
|
|
|
|
1,800,000
|
|
|
|
2.69
|
|
|
$
|
0.0729
|
|
|
|
1,800,000
|
|
|
$
|
0.0729
|
|
$
|
0.089
|
|
|
|
1,200,000
|
|
|
|
2.72
|
|
|
$
|
0.089
|
|
|
|
1,200,000
|
|
|
$
|
0.089
|
|
$
|
0.0553
|
|
|
|
500,000
|
|
|
|
1.47
|
|
|
$
|
0.0553
|
|
|
|
500,000
|
|
|
$
|
0.0553
|
|
$
|
0.0558
|
|
|
|
9,000,000
|
|
|
|
1.90
|
|
|
$
|
0.0558
|
|
|
|
9,000,000
|
|
|
$
|
0.0558
|
|
$
|
0.0534
|
|
|
|
1,200,000
|
|
|
|
3.85
|
|
|
$
|
0.0534
|
|
|
|
1,200,000
|
|
|
$
|
0.0534
|
|
$
|
0.0539
|
|
|
|
1,000,000
|
|
|
|
1.75
|
|
|
$
|
0.0539
|
|
|
|
1,000,000
|
|
|
$
|
0.0539
|
|
$
|
0.0683
|
|
|
|
500,000
|
|
|
|
1.83
|
|
|
$
|
0.0683
|
|
|
|
500,000
|
|
|
$
|
0.0683
|
|
$
|
0.0649
|
|
|
|
500,000
|
|
|
|
1.97
|
|
|
$
|
0.0649
|
|
|
|
500,000
|
|
|
$
|
0.0649
|
|
$
|
0.0404
|
|
|
|
1,000,000
|
|
|
|
2.25
|
|
|
$
|
0.0404
|
|
|
|
1,000,000
|
|
|
$
|
0.0404
|
|
$
|
0.0370
|
|
|
|
500,000
|
|
|
|
2.34
|
|
|
$
|
0.0370
|
|
|
|
500,000
|
|
|
$
|
0.0370
|
|
$
|
0.0495
|
|
|
|
9,000,000
|
|
|
|
2.63
|
|
|
$
|
0.0495
|
|
|
|
7,500,000
|
|
|
$
|
0.0495
|
|
$
|
0.0380
|
|
|
|
1,200,000
|
|
|
|
4.90
|
|
|
$
|
0.0380
|
|
|
|
400,000
|
|
|
$
|
0.0380
|
|
$
|
0.0340
|
|
|
|
500,000
|
|
|
|
2.47
|
|
|
$
|
0.0340
|
|
|
|
500,000
|
|
|
$
|
0.0340
|
|
|
Total
|
|
|
|
85,650,000
|
|
|
|
1.25
|
|
|
$
|
0.08
|
|
|
|
83,350,000
|
|
|
$
|
0.08
|
|
The aggregate intrinsic value of outstanding
options as of October 31, 2019 was $500. This represents options whose exercise price was less than the closing fair market value
of the Company’s common stock on October 31, 2019 of approximately $0.035 per share.
Warrants
The warrants issued by the Company are
equity-classified. 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.
The Company issued a Common Stock Purchase
Warrant (“May 2018 Warrant”) to Aeon Capital, Inc. (“Aeon”) dated May 30, 2018 for a Block Trade pursuant
to the Company’s engagement agreement with Aeon dated February 22, 2018 (“Engagement Agreement”). The May 2018
Warrant provides Aeon the right to purchase 1,388,889 shares of common stock based upon this Block Trade. The Company classified
the May 2018 Warrant as equity, and the May 2018 Warrant has a term of five years with an exercise price of approximately $0.02
per warrant share. Using the Black-Scholes-Merton option pricing model, the Company determined the aggregate value of the May 2018
Warrant to be approximately $19,000. The May 2018 Warrant has a cashless exercise feature.
The Company issued a warrant to Aeon dated
June 28, 2018 (“June 2018 Warrant”) for a Block Trade pursuant to the Engagement Agreement. The June 2018 Warrant provides
Aeon with the right to purchase 1,923,077 shares of common stock based upon a Block Trade. The Company classified the June 2018
Warrant as equity, and the June 2018 Warrant has a term of five years with an exercise price of approximately $0.03 per warrant
share. Using the Black-Scholes-Merton option pricing model, the Company determined the aggregate value of the June 2018 Warrant
to be approximately $38,000. The June 2018 Warrant has a cashless exercise feature.
The Company issued a Warrant to Aeon dated
June 13, 2019 (“June 2019 Warrant”) for a Block Trade pursuant to the Engagement Agreement. The June 2019 Warrant provides
Aeon with the right to purchase 1,388,889 shares of common stock based upon a Block Trade. The Company classified the June 2019
Warrant as equity, and the June 2019 Warrant has a term of five years with an exercise price of approximately $0.01 per warrant
share. Using the Black-Scholes-Merton option pricing model, the Company determined the aggregate value of the June 2019 Warrant
to be approximately $9,000. The June 2019 Warrant has a cashless exercise feature.
The Company issued a Warrant to Aeon dated
July 15, 2019 (“July 2019 Warrant”) for a Block Trade pursuant to the Engagement Agreement. The July 2019 Warrant provides
Aeon with a right to purchase 1,944,444 shares of common stock based upon a Block Trade. The Company classified the July 2019 Warrant
as equity, and the July 2019 Warrant has a term of five years with an exercise price of approximately $0.01 per warrant share.
Using the Black-Scholes-Merton option pricing model, the Company determined the aggregate value of the July 2019 Warrant to be
approximately $12,000. The July 2019 Warrant has a cashless exercise feature.
The Company issued two Warrants to Aeon
dated August 7, 2019 (“August 2019 Warrants”) for two Block Trades pursuant to the Engagement Agreement. The August
2019 Warrants provide Aeon with a right to purchase 3,500,000 shares of common stock based upon two Block Trades. The Company
classified the August 2019 Warrants as equity, and the August 2019 Warrants have a term of five years with an exercise price of
approximately $0.01 per warrant share. Using the Black-Scholes-Merton option pricing model, the Company determined the aggregate
value of the August 2019 Warrants to be approximately $12,000. The August 2019 Warrants have a cashless exercise feature.
A summary of the Company’s warrant
activity and related information for the six months ended October 31, 2019 are shown below:
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding, April 30, 2019
|
|
|
42,077,797
|
|
|
$
|
0.09
|
|
Issued
|
|
|
6,833,333
|
|
|
|
0.01
|
|
Expired
|
|
|
(854,308
|
)
|
|
|
0.12
|
|
Outstanding, October 31, 2019
|
|
|
48,056,822
|
|
|
|
–
|
|
Exercisable, October 31, 2019
|
|
|
48,056,822
|
|
|
$
|
0.07
|
|
The following table summarizes additional
information concerning warrants outstanding and exercisable at October 31, 2019:
Exercise Prices
|
|
Number of
Warrant Shares
Exercisable at
October 31, 2019
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
|
|
|
|
$0.12
|
|
|
17,000,000
|
|
|
|
1.19
|
|
|
|
–
|
|
$0.11
|
|
|
10,000,000
|
|
|
|
0.39
|
|
|
|
–
|
|
$0.065
|
|
|
769,231
|
|
|
|
2.14
|
|
|
|
–
|
|
$0.0575
|
|
|
869,565
|
|
|
|
2.43
|
|
|
|
–
|
|
$0.03
|
|
|
2,500,000
|
|
|
|
3.07
|
|
|
|
–
|
|
$0.026
|
|
|
1,923,077
|
|
|
|
3.66
|
|
|
|
–
|
|
$0.025
|
|
|
2,000,000
|
|
|
|
2.74
|
|
|
|
–
|
|
$0.018
|
|
|
1,388,889
|
|
|
|
3.58
|
|
|
|
–
|
|
$0.011
|
|
|
2,272,727
|
|
|
|
4.01
|
|
|
|
–
|
|
$0.01
|
|
|
2,500,000
|
|
|
|
4.41
|
|
|
|
–
|
|
$0.009
|
|
|
3,333,333
|
|
|
|
4.67
|
|
|
|
–
|
|
$0.005
|
|
|
3,500,000
|
|
|
|
4.77
|
|
|
|
–
|
|
|
|
|
48,056,822
|
|
|
|
1.69
|
|
|
$
|
0.07
|
|
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, 2019 and 2018, respectively.
The Company owns 14.5% of the equity in
SG Austria which 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 $0 and $2,400
in the three and six months ended October 31, 2019, respectively, and $68,000 and $119,000 for the three and six months ended October
31, 2018, respectively.
In April 2014, the Company entered into
a consulting agreement (“Vin-de-Bona Consulting Agreement”) with Vin-de-Bona Trading Co. Ltd (“Vin-de-Bona”)
pursuant to which it agreed to provide consulting services to the Company. Vin-de-Bona is owned by Prof. Walter H. Günzburg
(“Prof. Günzburg”) and Brian Salmons, PhD (“Dr. Salmons”), both of whom are involved in numerous
aspects of the Company’s scientific endeavors relating to cancer and diabetes. Prof. Günzburg is the Chairman of Austrianova,
and Dr. Salmons is the Chief Executive Officer and President of Austrianova. The term of the Vin-de-Bona Consulting Agreement
is for 12 months and automatically renews for successive 12-month terms. After the initial term, either party can terminate the
Vin-de-Bona Consulting Agreement by giving the other party 30 days’ written notice before the effective date of termination.
The amounts incurred for consulting services by Vin-de-Bona for the three and six months ended October 31, 2019 were approximately
$2,300 and $15,000, respectively, and $10,000 and $12,000 for the three and six months ended October 31, 2018, respectively. In
addition, during the six months ended October 31, 2019 the Company issued 250,000 common shares to Dr. Salmons for being a member
of the Company’s Medical and Scientific Advisory Board. The Company recorded a noncash expense of approximately $4,700 relating
to these shares for the six months ended October 31, 2019.
During the month of October 2019, the Company
received $70,000 from an officer of the Company as a short-term payable that was non-interest bearing and due on demand. Subsequent
to October 31, 2019, the related party was repaid in full.
During the three months ended October 31,
2019, the Company issued one share of Series A Preferred Stock to the chief executive officer of the Company for $1 pursuant to
a subscription agreement. The Series A Preferred Stock as detailed further in Note 11 – Preferred Stock, provided the officer
with voting rights equal to the number of votes then held by all other stockholders of the Company. Subsequent to October 31, 2019,
the Board of Directors adopted to exercise its right to redeem the one share of Series A Preferred Stock and it is no longer issued
and outstanding.
NOTE 8 – COMMITMENTS AND CONTINGENCIES
The Company acquires assets still in development
and enters license agreements with third parties that often require milestone and 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 of the product for marketing by a regulatory agency). 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
The Company determines whether an arrangement
is, or contains, a lease at inception. Prior to May 1, 2019, the Company generally accounted for operating lease payments by charging
them to expense as incurred. Beginning on May 1, 2019, operating leases that have commenced are included in other assets and accrued
expenses in the condensed consolidated balance sheet. Classification of operating lease liabilities as either current or noncurrent
is based on the expected timing of payments due under the Company’s obligations. The Company concluded that as of May 1,
2019, the lease liability and the ROU are immaterial to the condensed consolidated balance sheet; therefore, no amount was included
in the condensed consolidated balance sheet.
The Company leases office space related
to the administrative activities and at October 31, 2019, the remaining term of the lease is ten months.
The following table presents the minimum
lease payments as of October 31, 2019.
|
|
Amount
|
|
2020
|
|
$
|
14,220
|
|
2021
|
|
|
9,480
|
|
Total minimum lease payments
|
|
$
|
23,700
|
|
Material Agreements
The Company’s material agreements
are identified and 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. The amendments provided
that each executive compensation agreement has a term of two years with annual extensions thereafter unless the Company or the
officer provides written notification of termination at least ninety days prior to the end of the term or subsequent extensions.
The Company entered into a DLA with a new 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 with its three executive officers. 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 options each vest in the amount of 100,000 Shares, or options, as applicable,
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, 2019 and 2018, respectively. During the six months ended October 31, 2019 and 2018, 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 $449,000 and $549,000 for the six months ended October
31, 2019 and 2018, 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, 2019 and 2018.
Current tax laws limit the amount of loss
available to be offset against future taxable income when a substantial change in ownership occurs. Therefore, the amount available
to offset future taxable income may be limited. Based on the assessment of all available evidence including, but not limited to,
the Company’s limited operating history in its core business and lack of profitability, uncertainties of the commercial viability
of its technology, the impact of government regulations and healthcare reform initiatives and other risks normally associated with
biotechnology companies, the Company has concluded that is more likely than not that these operating loss carryforwards will not
be realized. Accordingly, 100% of the deferred tax valuation allowance has been recorded against these assets at October 31, 2019.
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, 2019 and 2018, the Company had accrued no interest or penalties related to uncertain tax positions.
See Note 9 of Notes to the Consolidated
Financial Statements included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2019 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 six months ended October 31, 2019 and 2018, 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,
|
|
|
|
2019
|
|
|
2018
|
|
Net loss
|
|
$
|
(2,201,197
|
)
|
|
$
|
(2,251,937
|
)
|
Basic weighted average number of shares outstanding
|
|
|
1,267,696,383
|
|
|
|
1,063,602,271
|
|
Diluted weighted average number of shares outstanding
|
|
|
1,267,696,383
|
|
|
|
1,063,602,271
|
|
Basic and diluted loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
The table below sets forth these potentially
dilutive securities:
|
|
Six Months Ended October 31,
|
|
|
|
2019
|
|
|
2018
|
|
Excluded options
|
|
|
85,650,000
|
|
|
|
96,450,000
|
|
Excluded warrants
|
|
|
48,056,822
|
|
|
|
37,305,070
|
|
Total excluded options and warrants
|
|
|
133,706,822
|
|
|
|
133,755,070
|
|
|
|
Three Months Ended October 31,
|
|
|
|
2019
|
|
|
2018
|
|
Net loss
|
|
$
|
(1,067,122
|
)
|
|
$
|
(1,036,574
|
)
|
Basic weighted average number of shares outstanding
|
|
|
1,325,086,933
|
|
|
|
1,080,708,112
|
|
Diluted weighted average number of shares outstanding
|
|
|
1,325,086,933
|
|
|
|
1,080,708,112
|
|
Basic and diluted loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
The table below sets forth these potentially
dilutive securities:
|
|
Three Months Ended October 31,
|
|
|
|
2019
|
|
|
2018
|
|
Excluded options
|
|
|
85,650,000
|
|
|
|
96,450,000
|
|
Excluded warrants
|
|
|
48,056,822
|
|
|
|
37,305,070
|
|
Total excluded options and warrants
|
|
|
133,706,822
|
|
|
|
133,755,070
|
|
NOTE 11 – PREFERRED STOCK
The Company has authorized 10,000,000 shares
of preferred stock, with a par value of $0.0001, of which one share has been designated as "Series A Preferred Stock."
There is one share of Series A Preferred Stock issued and outstanding as of October 31, 2019. The description of the Series A Preferred Stock below is qualified in its entirety by reference to the
Company’s Articles of Incorporation, as amended.
The Series A Preferred Stock has the following
features:
|
•
|
There is one share of preferred stock designated as
Series A Preferred Stock;
|
|
|
|
|
•
|
The Series A Preferred Stock has a number of votes at any time equal to the number of votes then held by all
other shareholders of the Company having a right to vote on any matter plus one. The Certificate of Designations that designated
the terms of the Series A Preferred Stock cannot be amended without the consent of the holder of the Series A Preferred Stock;
|
|
|
|
|
•
|
The Company may redeem the Series A Preferred
Stock at any time for a redemption price of $1.00 paid to the holder of the share of Series A Preferred Stock;
and
|
|
|
|
|
•
|
The Series A Preferred Stock has no rights of transfer, conversion,
dividends, preferences upon liquidation or participation in any distributions to shareholders.
|
NOTE 12 – SUBSEQUENT EVENTS
On November 11, 2019, the Company entered into two share subscription
agreements in a private placement for a total of 60,000,000 shares of restricted common stock for a total of $300,000. There were
no fees payable by the Company or warrant coverage relating to the share subscription agreements and the securities were offered
and sold without registration under the Securities Act of 1933 as amended, in reliance on Section 4(a)(2) thereof.
In December 2019, the Company redeemed from the chief executive
officer of the Company the one share of Series A Preferred Stock for $1.