NOTES TO CONDENSED CONSOLIDATED FINANCIAL
STATEMENTS
(UNAUDITED)
NOTE 1 – NATURE OF BUSINESS
PharmaCyte Biotech, Inc. (“Company”)
is a clinical stage 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 cancerous tumors involving the encapsulation of live cells placed in the body to enable the delivery 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 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 using its Cell-in-a-Box
®
technology. The Company is also 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 targeted chemotherapy. For pancreatic cancer, the Company
is planning on encapsulating genetically engineered live human cells that produce an enzyme designed to convert the cancer 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 tumor. The cancer prodrug ifosfamide will then be given intravenously at one-third the normal dose.
In this way, it is believed that a higher level of 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
will enable the production of optimal concentrations of the “cancer-killing” form of ifosfamide at the site of the
cancer. 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
The Company is developing a therapy for
pancreatic cancer to address a critical unmet medical need. This need exists for patients with advanced pancreatic cancer whose
tumors are locally advanced, non-metastatic and inoperable, but no longer respond to the current standard of care for advanced
pancreatic cancer. These patients have no effective treatment alternative once their tumors no longer respond to this combination
therapy.
Subject to the approval of the United States
Food and Drug Administration (“FDA”), the Company plans to commence a clinical trial in locally advanced, inoperable
non-metastatic pancreatic cancer (“LAPC”). The proposed clinical trial is designed to show that the Company’s
Cell-in-a-Box
®
plus low-dose ifosfamide therapy can serve as an effective and safe consolidation chemotherapy for
LAPC patients whose tumors no longer respond after four to six months of therapy using the current standard of care. The trial
will take place in the United States, 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 all abdominal tumors. Malignant ascites fluid
is secreted by abdominal tumors into the abdomen after the tumor reaches 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 surgically
removed on a periodic basis. This 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 at 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. Another preclinical study is planned. If successful, the Company plans
to conduct a clinical trial in the United States if it receives approval to do so from the FDA. Also, the Company plans to have
additional study sites in Europe if it receives 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. It is developing a therapy that involves encapsulation of human cells
that have been genetically engineered to produce, store insulin and release insulin on demand at levels in proportion to the levels
of blood sugar (glucose) in the human body. The encapsulation will be done using the Cell-in-a-Box
®
technology.
Cannabis Therapy
Cannabinoids
The Company plans to use Cannabinoids 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. The Company believes that targeted Cannabinoid-based
chemotherapy utilizing the Cell-in-a-Box
®
technology offers a “green” approach to treating solid-tumor
malignancies.
To further its
Cannabis
therapy
development plans, the Company entered a Research Agreement in May 2014 with the University of Northern Colorado. The goal of the
research is to develop methods for the identification, separation and quantification of Cannabinoids (some of which are prodrugs)
that may be used in combination with the Cell-in-a-Box
®
technology to treat cancer. Studies have been undertaken
using Cannabinoid-like model compounds 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 Cannabinoid 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 cancer and diabetes. On January 6, 2015,
the Company changed its name from Nuvilex, Inc. to PharmaCyte Biotech, Inc. to better reflect the nature of its business.
In 2011, the Company entered an Asset Purchase
Agreement (“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”),
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 common stock of the Company. 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 APA, the closing
date of the APA was extended twice by agreement between the parties.
In June 2013, the Company and SG Austria
entered a Third Addendum to the APA (“Third Addendum”). The Third Addendum changed materially the transaction contemplated
by the 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 that the Company held.
Effective as of the same date of the Third
Addendum, the parties entered 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
®
technology for the development of treatments for cancer and use of Austrianova’s Cell-in-a-Box
®
trademark
and associated technology.
Bio Blue Bird licensed certain types of
genetically modified human cells from Bavarian Nordic A/S (“Bavarian Nordic”) and GSF-Forschungszentrum für Umwelt
u. Gesundheit GmbH (collectively, “Bavarian Nordic/GSF”) pursuant to a License Agreement (“Bavarian Nordic/GSF
License Agreement”) to develop a therapy for cancer using a certain type of encapsulated cells (“Cells”). The
licensed rights to the Cells pertain to the countries in which Bavarian Nordic/GSF obtained patent protection. Hence, facilitated
by the acquisition of Bio Blue Bird, the Third Addendum provides the Company with an exclusive, worldwide license to use the Cell-in-a-Box
®
technology and trademark for the development of a therapy for all forms of cancer using these encapsulated Cells.
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”). The Company paid Austrianova
$2.0 million to secure this license.
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 cells (“Melligen Cells”) developed
by UTS to treat Type 1 diabetes and insulin-dependent Type 2 diabetes. The Company plans to develop an effective therapy for diabetes
by encapsulating the Melligen Cells using the Cell-in-a-Box
®
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”).
In July 2016, the Company entered into
a Binding Memorandum of Understanding with Austrianova (“Austrianova MOU”). Pursuant to the Austrianova MOU, Austrianova
agreed to actively work with the Company to seek an investment partner in territories not covered by the Bavarian Nordic/GSF License
Agreement. The plan is for the investment partner to 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 August 2017, the Company entered into
a Binding Term Sheet with SG Austria and Austrianova pursuant to which the parties reached an agreement to amend certain provisions
in the APA, the Diabetes Licensing Agreement and the Cannabis Licensing Agreement. See Note 10, Commitments and Contingencies,
for additional information.
NOTE 2 – LIQUIDITY
Liquidity
The Company's Condensed Consolidated Financial
Statements are prepared in accordance with United States generally accepted accounting principles (“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, 2017, the Company had an accumulated deficit of $92,638,015 and incurred a net loss for the six months ended
October 31, 2017 of $3,502,713.
During the six months ended October 31,
2017, funding was provided by investors to maintain and expand the Company. The remaining challenges, beyond the regulatory and
clinical aspects, include accessing funding for the Company to cover its future capital requirements. During the previous fiscal
year and through the six months ended October 31, 2017, the Company continued to acquire funds through sales of the Company’s
common stock pursuant to the Company’s Registration Statement on Form S-3 under which the Company’s placement agent
sold shares of the Company’s common stock “at-the-market” or pursuant to “block trades” in a program
structured to provide up to $50 million in funding to the Company less certain commissions.
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.
The Company believes its cash on hand at
October 31, 2017, 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, 2018.
The Company will continue to be dependent
on outside capital to fund its research and operating expenditures for the foreseeable future. If the Company fails to generate
positive cash flows or fails to obtain additional capital when required, the Company may need to modify, delay or abandon some
or all its business plans.
NOTE 3 – SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
General
The accompanying Condensed Consolidated
Financial Statements as of October 31, 2017 and for the three and six months ended October 31, 2017 and 2016 are unaudited. These
unaudited Condensed Consolidated Financial Statements have been prepared in accordance with U.S. GAAP for interim financial information
and are presented in accordance with the requirements of Regulation S-X of the United States 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, 2017 are not necessarily indicative of the results that may be expected for the fiscal
year ending April 30, 2018. The unaudited 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, 2017 and the Notes thereto included in the Annual
Report on Form 10-K the Company filed with the Commission.
The Condensed Consolidated Balance Sheet
as of April 30, 2017 contained herein has been derived from the audited Consolidated Financial Statements as of April 30, 2017,
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 Private Limited.; 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 Condensed Consolidated
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 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, 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, 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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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 adopted 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 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 United States and certain other
jurisdictions that 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, that 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.
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.
Under the Cannabis Licensing Agreement,
entered into in December 2014, the Company acquired from Austrianova an exclusive, world-wide license to use the Cell-in-a-Box
®
trademark and its associated technology with genetically modified non-stem cell lines which are designed to convert Cannabinoids
from cannabis to develop cancer therapies.
Under the Cannabis Licensing Agreement,
the Company was required to pay Austrianova an Upfront Payment (defined in Note 4) of $2.0 million in full by no later than June
30, 2016. The Company had paid Austrianova $2.0 million of the Upfront Payment. The cost of the license was
recorded as research and development costs.
Research and development costs for the
three and six months ended October 31, 2017 and 2016 were $515,458, $253,768, $943,128 and $428,772, 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.
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 $2,432,000 and
$1,302,000 at October 31, 2017 and 2016, 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.
Recent Accounting Pronouncements
In May 2014, the FASB issued Accounting
Standards Update (“ASU”) No. 2014-09 "
Revenue from Contracts with Customers
" (“Topic 606”).
Topic 606 supersedes the revenue recognition requirements in Topic 605,
“Revenue Recognition,”
including most
industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments
create a new Subtopic 340-40,
“Other Assets and Deferred Costs—Contracts with Customers.”
In summary,
the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
For a public entity, the amendments in this ASU are effective for annual reporting periods beginning after December 15, 2017, including
interim periods within that reporting period; early application is not permitted. The Company is not currently generating revenue;
therefore, it does not expect there will be an impact from this guidance on the Company’s consolidated financial position
and consolidated statement of operations.
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
U.S. 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 Company is still
evaluating the effect of this update.
The Company does not anticipate any material
impact on its consolidated financial statements upon the adoption of the following accounting pronouncements issued during 2016
and 2017: (i) ASU No. 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities
; (ii) ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments;
(iii) ASU No. 2017-07,
Compensation - Retirement Benefits (Topic 715): Improving
the
Presentation of Net Periodic Pension Cost and Net Periodic Postretirement Benefit Cost
;
and (iv) ASU No. 2017-09,
Compensation
-
Stock Compensation (Topic 718): Scope of
Modification Accounting
.
NOTE 4 – LICENSE AGREEMENT OBLIGATION
The Company entered a licensing agreement
for a license to use the Cell-in-a-Box
®
technology to develop therapies involving
Cannabis
for a total amount
of $2.0 million “Upfront Payment” for the license. As of June 30, 2016, the Company’s license agreement obligation
was paid in full.
NOTE 5 – 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:
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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;
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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;
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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
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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.
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NOTE 6 – 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, 2017 and 2016 are as follows:
The Company awarded 3,600,000 shares of
common stock to officers as part of their compensation agreements for 2016. These shares vest on a quarterly basis over a twelve-month
period and are subject to their continuing service under the agreements. During the three and six months ended October 31, 2016,
900,000 and 1,800,000 shares vested and the Company recorded a non-cash compensation expense in the amount of $53,910 and $107,820,
respectively. There were no unvested shares as of October 31, 2017.
The Company awarded 1,200,000 shares of
common stock to an employee as part of his compensation agreement for 2016. These shares vest on a quarterly basis over a twelve-month
period and are subject to the employee providing services under the agreement. During the three and six months ended October 31,
2016, 300,000 and 600,000 shares vested and the Company recorded a non-cash compensation expense in the amount of $17,970 and $35,940,
respectively. There were no unvested shares as of October 31, 2017.
During the six months ended October 31,
2016, the Company issued 600,000 shares of common stock to a consultant. These shares vest on a quarterly basis over a twelve-month
period and are subject to the consultant providing services under the agreement. During the three and six months ended October
31, 2016, 150,000 and 300,000 shares vested and the Company recorded a non-cash consulting expense in the amount of $8,550 and
$17,100, respectively.
During the six months ended October 31,
2016, the Company issued 500,000 shares of common stock to two consultants. The terms of the agreements are for twelve months each.
The shares vested upon issuance and the Company recorded a non-cash consulting expense in the amount of $21,400 for the three and
six months ended October 31, 2016.
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, 2017, the Company
recorded a non-cash compensation expense in the amount of $171,600 and $343,200, respectively. As of October 31, 2017, there were
1,100,000 unvested shares.
During the six months ended October 31,
2017, the Company issued 1,250,000 shares of common stock to three 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 $18,125 and $24,167 for the three and six months ended October 31, 2017, respectively.
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
$58,800 and $80,790 for the three and six months ended October 31, 2017, respectively. As of October 31, 2017, there were 3,000,000
unvested shares.
During the six months ended October 31,
2017, the Company awarded 500,000 shares of common stock to a new director of the Company’s Board pursuant to a Board compensation
agreement. The term of the agreement is for twelve months. The shares vest upon issuance, and the Company recorded a non-cash expense
$1,742 for the three and six months ended October 31, 2017.
All shares were issued without registration
under the Securities Act of 1933, as amended (“Securities Act”) in reliance upon the exemption afforded by Section
4(a)(2) of the Securities Act.
During the six months ended October 31,
2017 and 2016, the Company sold and issued approximately 62.4 and 66.8 million shares of common stock, respectively, at prices
ranging from $0.02 to $0.08 per share. Net of underwriting discounts, legal, accounting and other offering expenses, the Company
received proceeds of approximately $1.75 million and $1.33 million from the sale of these shares for the six months ended October
31, 2017 and 2016, respectively.
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, 2017
are as follows:
|
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
|
|
|
|
|
|
|
|
|
Non-vested, at April 30, 2017
|
|
|
|
4,400,000
|
|
|
$
|
0.10
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
|
5,950,000
|
|
|
|
0.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested
|
|
|
|
(6,250,000
|
)
|
|
|
0.08
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
|
–
|
|
|
|
–
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-vested, at October 31, 2017
|
|
|
|
4,100,000
|
|
|
$
|
0.08
|
|
NOTE 7 – STOCK OPTIONS AND WARRANTS
Stock Options
As of October 31, 2017, the Company had
86,250,000 outstanding stock options to its directors and officers (collectively, “Employee Options”) and consultants
(“Non-Employee Options”).
During the six months ended October 31,
2017 and 2016, the Company granted 2,950,000 and 0 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,
|
|
|
|
2017
|
|
|
2016
|
|
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,
2017 and 2016, the Company granted Non-Employee Options of 4,200,000 and 13,100,000, respectively. The Non-Employee Options granted
during the six months ended October 31, 2016 consisted of 600,000 guaranteed options and 12,500,000 non-guaranteed performance
based options. The 12,500,000 non-guaranteed performance based options expired on April 30, 2017.
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,
|
|
|
|
2017
|
|
|
2016
|
|
Risk-free interest rate
|
|
|
2.0%
|
|
|
|
1.8%
|
|
Expected volatility
|
|
|
107%
|
|
|
|
110%
|
|
Expected lives (years)
|
|
|
5.0
|
|
|
|
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, 2017 and 2016, 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 United States 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. At the end of each financial reporting period,
the value of these options, as calculated using the Black-Scholes-Merton option-pricing model, is determined, and compensation
expense recognized or recovered during the period is adjusted accordingly. As a result, the amount of the future compensation expense
is subject to adjustment until the Non-Employee Options are fully vested.
A summary of the Company’s stock
option activity and related information for the six months ended October 31, 2017 are shown below:
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Grant Date
Fair Value
per Share
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, April 30, 2017
|
|
|
79,100,000
|
|
|
$
|
0.13
|
|
|
$
|
0.09
|
|
Issued
|
|
|
7,150,000
|
|
|
|
0.07
|
|
|
|
0.04
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Exercised
|
|
|
–
|
|
|
|
–
|
|
|
|
–
|
|
Outstanding, October 31, 2017
|
|
|
86,250,000
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
Exercisable, October 31, 2017
|
|
|
80,750,000
|
|
|
$
|
0.12
|
|
|
$
|
–
|
|
Vested and expected to vest
|
|
|
85,750,000
|
|
|
$
|
0.12
|
|
|
$
|
–
|
|
A summary of the activity for unvested
stock options during the six months ended October 31, 2017 is as follows:
|
|
|
Options
|
|
|
Weighted
Average
Grant Date
Fair Value
per Share
|
|
|
|
|
|
|
|
|
|
|
Non-vested, April 30, 2017
|
|
|
|
6,800,000
|
|
|
$
|
0.10
|
|
|
Granted
|
|
|
|
7,150,000
|
|
|
|
0.07
|
|
|
Vested
|
|
|
|
(8,650,000
|
)
|
|
|
0.09
|
|
|
Forfeited
|
|
|
|
–
|
|
|
|
–
|
|
|
Non-vested, October 31, 2017
|
|
|
|
5,300,000
|
|
|
$
|
0.08
|
|
The Company recorded approximately $188,000
and $164,000 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, 2017 and 2016, respectively, and approximately $392,000 and $329,000 during
the six months ended October 31, 2017 and 2016, respectively. At October 31, 2017, there remained approximately $250,000 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 five months. The non-vested options vest at 850,000 shares per month and are expected
to be fully vested on July 31, 2018.
The Company recorded approximately $57,000
and $6,000 of stock based compensation related to the issuance of Non-Employee Options in exchange for services during the three
months ended October 31, 2017 and 2016, respectively, and approximately $98,000 and $12,000 during the six months ended October
31, 2017 and 2016, respectively. The non-vested Non-Employee Options vest at 400,000 shares per month and are expected to be fully
vested on December 31, 2018.
The following table summarizes ranges of
outstanding stock options by exercise price at October 31, 2017:
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
|
|
$
|
0.19
|
|
|
|
25,000,000
|
|
|
|
0.96
|
|
|
$
|
0.19
|
|
|
|
25,000,000
|
|
|
$
|
0.19
|
|
$
|
0.11
|
|
|
|
27,200,000
|
|
|
|
1.14
|
|
|
$
|
0.11
|
|
|
|
27,200,000
|
|
|
$
|
0.11
|
|
$
|
0.18
|
|
|
|
250,000
|
|
|
|
1.23
|
|
|
$
|
0.18
|
|
|
|
250,000
|
|
|
$
|
0.18
|
|
$
|
0.06
|
|
|
|
15,600,000
|
|
|
|
1.90
|
|
|
$
|
0.06
|
|
|
|
15,600,000
|
|
|
$
|
0.06
|
|
$
|
0.10
|
|
|
|
10,450,000
|
|
|
|
2.76
|
|
|
$
|
0.10
|
|
|
|
8,550,000
|
|
|
$
|
0.10
|
|
$
|
0.07
|
|
|
|
600,000
|
|
|
|
3.50
|
|
|
$
|
0.07
|
|
|
|
600,000
|
|
|
$
|
0.07
|
|
$
|
0.06
|
|
|
|
1,250,000
|
|
|
|
4.93
|
|
|
$
|
0.06
|
|
|
|
1,250,000
|
|
|
$
|
0.06
|
|
$
|
0.06
|
|
|
|
1,200,000
|
|
|
|
4.50
|
|
|
$
|
0.06
|
|
|
|
400,000
|
|
|
$
|
0.06
|
|
$
|
0.07
|
|
|
|
1,200,000
|
|
|
|
4.67
|
|
|
$
|
0.07
|
|
|
|
600,000
|
|
|
$
|
0.07
|
|
$
|
0.07
|
|
|
|
1,800,000
|
|
|
|
4.69
|
|
|
$
|
0.07
|
|
|
|
400,000
|
|
|
$
|
0.07
|
|
$
|
0.09
|
|
|
|
1,200,000
|
|
|
|
2.36
|
|
|
$
|
0.09
|
|
|
|
400,000
|
|
|
$
|
0.09
|
|
$
|
0.06
|
|
|
|
500,000
|
|
|
|
2.47
|
|
|
$
|
0.06
|
|
|
|
500,000
|
|
|
$
|
0.06
|
|
Total
|
|
|
|
86,250,000
|
|
|
|
1.69
|
|
|
$
|
0.12
|
|
|
|
80,750,000
|
|
|
$
|
0.12
|
|
As of October 31, 2017, 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, 2017 of approximately $0.05 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 505-50
and 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 May 19,
2017 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 June
28, 2017 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.
A summary of the Company’s warrant
activity and related information for the six months ended October 31, 2017 are shown below:
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Outstanding, April 30, 2017
|
|
|
|
67,853,504
|
|
|
$
|
0.13
|
|
|
Issued
|
|
|
|
2,833,333
|
|
|
|
0.03
|
|
|
Expired
|
|
|
|
(17,614,400
|
)
|
|
|
–
|
|
|
Outstanding, October 31, 2017
|
|
|
|
53,072,437
|
|
|
|
0.12
|
|
|
Exercisable, October 31, 2017
|
|
|
|
53,072,437
|
|
|
$
|
0.12
|
|
The following table summarizes additional
information concerning warrants outstanding and exercisable at October 31, 2017:
Exercise Prices
|
|
Number of
Warrant Shares
Exercisable at October 31, 2017
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise Price
|
|
$0.025, $0.03, $0.0575, $0.065, $0.11, $0.12 and $0.18
|
|
|
53,072,437
|
|
|
|
2.02
|
|
|
$
|
0.12
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Year Term – $0.12
|
|
|
27,468,308
|
|
|
|
2.16
|
|
|
|
|
|
Five Year Term – $0.18
|
|
|
11,132,000
|
|
|
|
0.34
|
|
|
|
|
|
Five Year Term – $0.11
|
|
|
10,000,000
|
|
|
|
2.39
|
|
|
|
|
|
Five Year Term – $0.065
|
|
|
769,231
|
|
|
|
4.14
|
|
|
|
|
|
Five Year Term – $0.0575
|
|
|
869,565
|
|
|
|
4.43
|
|
|
|
|
|
Five Year Term – $0.03
|
|
|
833,333
|
|
|
|
4.56
|
|
|
|
|
|
Five Year Term – $0.025
|
|
|
2,000,000
|
|
|
|
4.74
|
|
|
|
|
|
|
|
|
53,072,437
|
|
|
|
|
|
|
|
|
|
NOTE 8 – 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.
However, in the past the Company has been the subject of litigation, claims and assessments arising out of matters occurring in
its normal business operations. In the opinion of management, none of these had a material adverse effect on the Company’s
consolidated financial position, operations and cash flows.
NOTE 9 – RELATED PARTY TRANSACTIONS
The Company had the following related party
transactions during the three and six months ended October 31, 2017 and 2016, 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 from these subsidiaries in the approximate amounts of $426,000 and $95,000 in
the three months ended October 31, 2017 and 2016, respectively, and approximately $642,000 and $145,000 in the six months ended
October 31, 2017 and 2016, respectively.
In April 2014, the Company entered a 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, 2017 and 2016 were approximately $12,000 and $14,000 respectively, and approximately $27,000
and $42,000 for the six months ended October 31, 2017 and 2016, respectively. Also, during the six months ended October 31, 2017
and 2016, the Company awarded shares of restricted common stock to Dr. Salmons for services in the amount of 250,000 and 250,000,
respectively, and Dr. Günzburg earned 500,000 shares of the Company’s restricted common stock for the six months ended
October 31, 2017.
The Cannabis Licensing Agreement resulted
in the Company acquiring from Austrianova an exclusive, world-wide license to use the Cell-in-a-Box
®
trademark and
its associated technology with genetically modified non-stem cell lines which are designed to activate Cannabinoids to develop
therapies involving
Cannabis.
Under the Cannabis Licensing Agreement, the Company was required to pay Austrianova an Upfront
Payment of $2.0 million. As of June 30, 2016, the Company had paid Austrianova the entire $2.0 million of the Upfront Payment.
NOTE 10 – COMMITMENTS AND CONTINGENCIES
The Company acquires assets still in development
and enters research and development arrangements 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 formerly leased office space
at 12510 Prosperity Drive, Suite 310, Silver Spring, Maryland 20904. The term of the lease expired on July 31, 2016 and was extended
to August 31, 2016 at the same amount of monthly rent.
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 the lease is 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 these offices for the
three months ended October 31, 2017 and 2016 was $8,603 and $9,577, respectively, and $16,825 and $23,429 for the six months ended
October 31, 2017 and 2016, 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, 2017.
Periods Ending October 31,
|
|
|
Amount
|
|
|
2018
|
|
|
$
|
33,084
|
|
|
2019
|
|
|
|
27,570
|
|
|
|
|
|
$
|
60,654
|
|
License Agreements
Binding Term Sheet
On August 30, 2017, the Company entered
into a Binding Term Sheet (“Term Sheet”) with SG Austria and Austrianova pursuant to which the parties reached an agreement
to amend certain provisions in the APA, the Diabetes Licensing Agreement and the Cannabis Licensing Agreement.
The Term Sheet provides that the Company’s
obligation to make milestone payments to Austrianova will be eliminated in their entirety under (i) the Cannabis License Agreement,
(ii) the Diabetes License Agreement and (iii) the APA. The Term Sheet 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, the Term Sheet provides that
the Company will have a 5-year right of first refusal 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 technology, intellectual property,
trade secrets and know-how, which includes the right to purchase any manufacturing facility used for the Cell-in-a-Box
®
encapsulation
process and a non-exclusive license to use the special cellulose sulphate utilized with the Cell-in-a-Box
®
encapsulation
process (collectively, “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 following
the date of the Term Sheet, the Term sheet 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 Term Sheet further provides that (i)
the royalty payments on gross sales as specified in the Cannabis License Agreement, the Diabetes License Agreement and the APA
will be changed to 4% and (ii) the royalty payments on amounts received by the Company from sublicensees on sublicensees’
gross sales under the same agreements will be changed to 20% of the amount received by the Company from its sublicensees,
provided,
however,
that in the event the amounts received by the Company from sublicensees is 4% or less of sublicensees’
gross sales, Austrianova will receive 50% of what the Company receives (up to 2%) and then additionally 20% of any amount the Company
receives over 4%.
The Term Sheet provides 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.
The Term Sheet also provides that the Company will pay Austrianova Singapore $150,000 per month for a period of six months upon
the execution of the amendments to the Binding Term Sheet.
Finally, the Term Sheet provides that Prof.
Walter H. Günzburg, who currently serves as the Chief Scientific Officer of the Company, will not receive any cash compensation
from the Company for services rendered as the Company’s Chief Scientific Officer for a period of six months beginning September
1, 2017.
As of October 31, 2017, the amendments
to the APA, the Diabetes Licensing Agreement and the Cannabis Licensing Agreement to be entered into pursuant to the Binding Term
Sheet have not been finalized.
Melligen Cell License Agreement
The Melligen Cell License Agreement requires
that the Company pay royalty, milestone payments and patent costs to UTS as follows:
|
·
|
6% gross exploitation revenue on product sales by the Company;
|
|
·
|
25% of gross revenues if the product is sub-licensed by the Company;
|
|
·
|
Milestone payments of AU$ 50,000 at the successful conclusion of clinical studies, AU$ 100,000 at the successful conclusion of Phase 1 clinical trial, AU$ 450,000 at the successful conclusion of Phase 2 clinical trials and AU$ 3,000,000 upon conclusion of a Phase 3 clinical trial; and
|
|
·
|
Patent prosecution costs for the Melligen Cells plus a 15% patent administration fee to UTS related to the licensed intellectual property.
|
Consulting Agreement with Eurofins
On June 5, 2017, the Company and Eurofins
Lancaster Laboratories, Inc. (“Eurofins”) entered into an agreement for the preparation and characterization of a Master
Cell Bank (“MCB”) and a Working Cell Bank ((“WCB”) for use in the Company’s therapy for pancreatic
cancer. The agreement includes pre-bank testing, MCB preparation, MCB characterization, WCB preparation, WCB characterization,
end of production characterization and related analysis, as well as optional testing. The total cost to the Company, without optional
testing, is approximately $300,000.
Compensation Agreements
The Company entered executive compensation
agreements with its three executive officers in March 2015, each of which was amended in December 2015. Each agreement 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.
In May 2017, the Company appointed Mr.
Thomas C.K. Yuen to the Board to fill a vacancy created by the departure of certain members of the Board in October 2014. In connection
with Mr. Yuen’s appointment to the Board, the Company entered into a Board compensation agreement with Mr. Yuen pursuant
to which the Company agreed to pay Mr. Yuen $12,500 in cash for each calendar quarter of service on the Board and agreed to issue
annually: (i) 500,000 fully-paid, non-assessable shares of restricted common stock (“Yuen Shares”); and (ii) a five-year
option to purchase 500,000 Yuen Shares (“Yuen Option”) to Mr. Yuen at an exercise price equal to the fair market value
of the Company’s common stock on the date of grant. The Yuen Shares and the Yuen Option were fully vested on the date of
the grants. The Board approved the initial issuances of the Yuen Shares and the Yuen Option on May 1, 2017, and the Yuen Option
has an exercise price of $0.058 per share of common stock.
In July 2017, the Board appointed Dr. Michael
M. Abecassis to the Board to fill a vacancy created by the departure of certain members of the Board in October 2014. In connection
with the appointment of Dr. Abecassis to the Board, the Company entered into a Board compensation agreement with Dr. Abecassis
pursuant to which the Company agreed to pay Dr. Abecassis $12,500 in cash for each calendar quarter of service on the Board and
agreed to issue him annually: (i) 500,000 fully-paid, non-assessable shares of the Company’s restricted common stock (“Abecassis
Shares”); and (ii) a five-year Option to purchase 500,000 Abecassis Shares (“Abecassis Option”) at an exercise
price equal to the fair market value of the common stock on the date of the grant. The Abecassis Shares and the Abecassis Option
were fully vested on the date of the grants. The Board approved the initial issuances of the Abecassis Shares and the Abecassis
Option on July 3, 2017, and the Abecassis Option has an exercise price of $0.058 per share of common stock.
In July 2017, the Board appointed Dr. Linda
S. Sher to the position of the Company’s Chief Medical Officer (“CMO”). In connection with the appointment, the
Company entered into a Professional Services Agreement (“PSA”) with Dr. Sher pursuant to which the Company agreed to
pay Dr. Sher $10,000 in cash for each calendar month of service as the CMO. The Company also agreed to issue Dr. Sher: (i) 1,200,000
fully-paid, non-assessable shares of the Company’s restricted common stock (“Sher Shares”); and (ii) a five-year
Option to purchase 1,200,000 Sher Shares (“Sher Option”) at an exercise price equal to the fair market value of the
Company’s shares of commons stock on the date of the grant. The Sher Shares and the Sher Option each vest in the amount of
100,000 shares per month. The Board approved the issuances of the Sher Shares and the Sher Option on July 18, 2017, and the Sher
Option has an exercise price of $0.089 per share of common stock. Effective as of the effective date of the PSA, the agreement
was amended to provide that the Company will indemnify Dr. Sher for her work as the Company’s CMO.
In October 2017, the Board appointed Dr.
Raymond C.F. Tong to the Board to fill a vacancy created by the departure of certain members of the Board in October 2014. In connection
with Dr. Tong’s appointment to the Board, the Company entered into a Board compensation agreement with Dr. Tong pursuant
to which the Company agreed to pay Dr. Tong $12,500 in cash for each calendar quarter of service on the Board and agreed to issue
annually: (i) 500,000 fully-paid, non-assessable shares of restricted common stock (“Tong Shares”); and (ii) a five-year
option to purchase 500,000 Tong Shares (“Tong Option”) to Dr. Tong at an exercise price equal to the fair market value
of the Company’s common stock on the date of grant. The Tong Shares and the Tong Option were fully vested on the date of
the grants. The Board approved the initial issuances of the Tong Shares and the Tong Option on October 9, 2017, and the Tong Option
has an exercise price of $0.055 per share of common stock.
NOTE 11 - INCOME TAXES
The Company had no income tax expense for
the three and six months ended October 31, 2017 and 2016, respectively. During the six months ended October 31, 2017 and 2016,
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 $1,186,000 and $718,000 for the six months
ended October 31, 2017 and 2016, 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, 2017 and 2016.
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, 2017 will not be fully realizable. Accordingly, management has maintained a valuation
allowance against the net deferred tax assets at October 31, 2017.
There have been no changes to the Company’s
liability for unrecognized tax benefits during the six months ended October 31, 2017.
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, 2017 and 2016, the Company had accrued no interest or penalties related to uncertain tax positions.
See Note 12 of Notes to Consolidated Financial
Statements included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2017 for additional information
regarding income taxes.
NOTE 12 – 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, 2017 and 2016, 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,
|
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(3,502,713
|
)
|
|
$
|
(2,006,517
|
)
|
Basic weighted average number of shares outstanding
|
|
|
949,373,602
|
|
|
|
818,540,900
|
|
Diluted weighted average number of shares outstanding
|
|
|
949,373,602
|
|
|
|
818,540,900
|
|
Basic and diluted loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
The table below sets forth these potentially
dilutive securities:
|
|
Six Months Ended October 31,
|
|
|
|
2017
|
|
|
2016
|
|
Excluded options
|
|
|
86,250,000
|
|
|
|
81,150,000
|
|
Excluded warrants
|
|
|
53,072,437
|
|
|
|
84,969,908
|
|
Total excluded options and warrants
|
|
|
139,322,437
|
|
|
|
166,119,908
|
|
|
|
Three Months Ended October 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(1,814,298
|
)
|
|
$
|
(974,551
|
)
|
Basic weighted average number of shares outstanding
|
|
|
973,167,811
|
|
|
|
848,910,100
|
|
Diluted weighted average number of shares outstanding
|
|
|
973,167,811
|
|
|
|
848,910,100
|
|
Basic and diluted loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
The table below sets forth these potentially
dilutive securities:
|
|
Three Months Ended October 31,
|
|
|
|
2017
|
|
|
2016
|
|
Excluded options
|
|
|
86,250,000
|
|
|
|
81,150,000
|
|
Excluded warrants
|
|
|
53,072,437
|
|
|
|
84,969,908
|
|
Total excluded options and warrants
|
|
|
139,322,437
|
|
|
|
166,119,908
|
|