I
TEM 1. DESCRIPTION OF
BUSINESS
We are
a preclinical stage biotechnology company focusing on
commercializing novel therapies and the intellectual property
generated from our research and development activities for
Parkinson’s disease (PD) and Alzheimer’s disease (AD)
and any other related diseases. Our strategy involves
integrating therapeutic focus, target family biophysics, drug
discovery technology and expertise into an innovative drug
discovery approach, which identifies and develops small molecule
pharmacological chaperones for clinical trials. In addition, our
research efforts concentrate on the development of therapeutic
proteins that can pass through the blood-brain barrier and
supplement in vivo levels of proteins which display loss of
function during disease conditions. Our small molecule therapy
candidates program (CB101) and our protein therapy candidate
(CB201) initially targets Parkinson’s disease and thereafter
potentially a broad range of neurodegenerative diseases including
Alzheimer’s disease, amyotrophic lateral sclerosis (ALS),
Huntington’s disease and stroke. We also have 2 additional
small molecule pharmacological chaperone programs for the treatment
of Alzheimer’s Disease (and other related dementias); CB301,
targeting the Tau protein, a leading target for the development of
Alzheimer’s therapeutics, and CB401, targeting the Aß
peptide, again a well-established target in Alzheimer’s drug
research. We plan to advance a candidate from our CB101 program
into clinical trials in 2020.
Our Drug Discovery Approach
Our mission is to commercialize innovative drug candidates with
novel mechanisms of action as well as intellectual property
generated from our research activities for neurodegenerative
diseases such as Alzheimer’s and Parkinson’s
disease. Our research efforts focus on the discovery and
development of therapeutic small molecule pharmacological
chaperones targeting proteins that misfold and aggregate in
vivo.
Focusing on specific therapeutic targets we thoroughly investigate
target family biophysics, bringing together a combination of drug
discovery technologies, from initial screening through to specific
disease assays, and understanding of disease biology into our
innovative drug discovery approach, through which we identify and
develop small molecule pharmacological chaperones and protein based
therapies for clinical trials for neurodegenerative and other
diseases.
A pharmacological chaperone is a small molecule that can
enter cells and bind to either a folded or misfolded structure of a
protein to stabilize it or route it to the native folded functional
form.
Our therapeutic targets consist of proteins that misfold, aggregate
and lose their function or/and gain a toxic function in
vivo. Our small molecule pharmacological chaperones are
designed to stabilize the native functional form of specific
protein targets, thereby reducing their misfolding and aggregation
and enabling the target protein’s function or preventing
and/or eliminating the toxic function caused by these
changes.
The use of pharmacological chaperones is a unique therapeutic
approach that can directly target specific proteins to improve
native function and protect from toxic function and thereby treat
disease. We are applying a proprietary process to discover novel
small molecule pharmacological chaperone drug candidates by
applying biophysics based screening technologies in combination
with cell-based models of the targeted diseases, which provide
validation of the therapeutic effect of the identified
pharmacological chaperones. In many cases, we can apply
structure-based drug design for hit to lead and lead
optimization.
In addition, we are pursuing the application of protein delivery
technologies that enable the delivery of proteins into
patients’ brain, supplementing low functional levels of these
proteins in disease conditions. Our therapeutic targets
in this project are proteins, which display loss of function in
disease-affected cells. Our technologies involve the
development and application of novel protein constructs, fusing
specific proteins with unique cell permeable polypeptides, with the
capability to pass through the blood-brain barrier and enter the
central nervous system.
Research and Development Pipeline
Our research and development pipeline currently includes two lead
therapeutic small molecule programs, CB101 for Parkinson’s
and CB301 for Alzheimer’s, and one protein therapeutic
program CB201 that we are developing for the potential treatment of
Parkinson’s disease. In addition, we are developing one
therapeutic small molecule program, CB401, for the treatment of
Alzheimer’s Disease.
2
The following table summarizes the status and projected milestones
of our research and development programs:
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Therapeutic product candidate
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Description of product
candidate
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Targeted indication
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Preclinical
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PI
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PII
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PIII
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Upcoming Milestones
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Commercial rights
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CB101
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DJ-1 targeting small molecule pharmacological
chaperone
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Parkinson’s Disease
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x
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Selection of clinical
candidate in 2020
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Cantabio
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CB201
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CNS penetrant engineered DJ-1 protein
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Parkinson’s Disease
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x
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Selection of clinical
candidate in 2019
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Cantabio
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CB301
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Tau targeting small molecule pharmacological chaperone
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Alzheimer’s Disease
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x
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Selection of clinical
candidate in 2020
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Cantabio
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CB401
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Aß targeting small molecule pharmacological
chaperone
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Alzheimer’s Disease
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x
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Currently in proof of concept studies
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Cantabio
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Our Lead Programs
CB101 for Parkinson’s Disease
Parkinson’s Disease is a progressive, chronic, degenerative
neurological disorder that attacks the neurons in the brain,
resulting ultimately in death. Motor symptoms of PD are resting
tremor, slowness of movement, postural instability, rigidity and
cognitive impairment, ranging from mild memory difficulties to
dementia, and mood disorders, such as depression and
anxiety. At least 1 million people in the United States
and more than 7 million worldwide have PD. Currently
only symptomatic treatments are available for PD, which provide
only temporarily treatment.
Our CB101 program focuses on targeting DJ-1, a protein considered
to be one of the primary therapeutic targets for
PD. DJ-1 is genetically linked to familial and sporadic
PD and potentially to sporadic AD and other neurodegenerative
diseases. During high oxidative stress condition, which
is linked to the onset of neurodegenerative diseases, DJ-1 protein
is activated and initiates cellular mechanisms for the reduction
oxidative stress and protein misfolding. During aging
and in disease, the DJ-1 protein can be specifically oxidized
leading to its misfolding, inactivation, and ultimately to its loss
of function. The therapeutic targeting of DJ-1 could yield added
mechanistic benefits: protection from oxidative stress and protein
misfolding such as the aggregation of alpha-synuclein, a protein
whose aggregation is a pathological hallmark of PD.
Using our pharmaceutical chaperone drug discovery strategy, we
identified a number of novel small molecule scaffolds that potently
bind to the DJ-1 protein and from these selected molecules that
were shown to rescue a variety of cells and primary neurons from
oxidative stress. Within the CB101 and CB102 programs,
there are a number of small molecule pharmacological chaperone
therapeutic candidates that target the DJ-1 protein. Several of
these candidates have demonstrated survival benefits from oxidative
stress toxicity in an in vivo model, with one demonstrating
significant efficacy in a mammalian oxidative stress disease model
for Parkinson’s. All these compounds are in continuing
development as potential disease modifying therapeutics for
PD.
CB201 for Parkinson’s Disease
Our CB201 program focuses on supplementing low levels of active
DJ-1 in the brain during disease condition such as
PD. Delivering DJ-1 into the brain has been possible by
fusing native DJ-1 with a small cell penetrating peptide. Such DJ-1
protein system was shown to protect in vivo models of oxidative
stress in rodents. We are applying such protein delivery
technology, which enables the delivery of the DJ-1 protein into
patients’ brain to enhance DJ-1 activity to reduce oxidative
stress and protein misfolding that are linked to the onset and
progression of PD. CB201 is a novel protein therapeutic
candidate which consists of DJ-1 fused with a cell penetrating
peptide.
3
CB301 for Alzheimer’s Disease
Alzheimer’s Disease is progressive, chronic, degenerative
neurological disorders that attack the neurons in the brain
resulting ultimately in death. AD results in loss of memory,
thinking and language skills, and behavioral changes. AD
is among the 6th leading causes of death in the United States, and
approximately 5.4 and 36 million people have AD in the United
States and world-wide, respectively. Currently there are only
short-term temporary symptomatic treatments available for
AD.
Our CB301 program focuses on targeting the Tau protein for AD. The
aggregation of the Tau protein has been linked to the on-set and
progression of AD. CB301 is a small molecule pharmacological
chaperone of the Tau protein. Cantabio has developed novel
compounds that are believed to exert their functional effect by
binding to monomeric species of the Tau protein thereby reducing
their oligomer and amyloid formation in disease conditions.
The use of small molecules to reduce and inhibit this aggregation
process has high potential as a therapeutic approach through the
prevention of the formation of toxic oligomers.
Cantabio’s scientific team are progressing these into
cellular and animal model studies related to AD and towards
clinical trials.
CB401 for Alzheimer’s Disease
Our CB401 program focuses on targeting the Aß peptide for AD.
The aggregation of the Aß peptide has been linked to the
on-set and progression of AD. CB401 is a small molecule
pharmacological chaperone developed to bind to and stabilize the
Aß peptide. Cantabio’s novel compounds that are believed
to exert their functional effect by binding to monomeric species of
the Aß peptide thereby reducing their oligomer and amyloid
formation in disease conditions. The use of small molecules
to reduce and inhibit this aggregation process has high potential
as a therapeutic approach through the prevention of the formation
of toxic oligomers. Cantabio’s scientific team are
progressing these into cellular and animal model studies related to
AD and towards clinical trials.
Our Additional Discovery Programs Targeting AD
Our therapeutic research efforts also focus on other discovery
stage small molecule pharmacological chaperon programs for AD and
PD. We are also pursuing additional protein therapeutic candidates
for AD and PD using protein delivery technology. We expect that any
of these programs could advance to preclinical development in the
future.
Our Strategy
Our aim is to be the leading biotechnology company focused on
commercializing innovative pharmacological chaperone drug
candidates and blood-brain penetrant proteins with novel mechanism
of action, generated from our research and development activities
for neurodegenerative diseases such as Alzheimer’s and
Parkinson’s disease.
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Continue to discover pharmacological chaperones targeting novel
targets involved in protein misfolding diseases.
We will
continue to leverage our core scientific expertise and proprietary
technology to develop innovative pharmacological chaperone drug
candidates for the potential treatment of a range of
diseases.
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Continue to engineer blood-brain penetrant proteins to supplement
low levels of an active protein involved in protein misfolding
diseases.
We will
continue to leverage our core scientific expertise and proprietary
technology to develop engineered blood-brain penetrant proteins for
the potential treatment of a range of diseases.
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Translation of our research discoveries into clinical
development.
Once we
establish in vivo proof of concept for our pharmacological
chaperone and/or engineered blood-brain penetrant
proteins
drug
candidates, we use animal models to identify potential clinical
candidates to rapidly advance to manufacturing and preclinical
testing.
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Strategically collaborate or in- and out-license select
programs.
We
intend to seek to collaborate or in- and out-license certain
potentially therapeutic candidate products to biotechnology or
pharmaceutical companies for preclinical and clinical development
and commercialization.
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Highly leverage external talent and resources.
We plan
to maintain strong talent internally having expertise in our core
areas of focus and as needed to execute efficiently on our R&D
and business objectives. We operate by conducting in house R&D
on critical elements in our drug discovery pipeline, while forming
strategic alliances around novel technologies and outsourcing
generic research activities to established contract research
organizations. We plan to continue to rely on the extensive
experience of our management team to execute on our
objectives.
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Collaborate with scientific and clinical experts in disease areas
of interest.
We
collaborate with highly regarded scientists having expertise in our
disease areas of interest to test and characterize our
pharmacological chaperone and engineered protein therapeutic
candidates. We also collaborate with leading clinical experts in
our disease areas of interest for feedback and guidance on our
programs. In addition, we engage a number of consultants having
specific functional and/or disease area expertise to execute our
preclinical and clinical development programs.
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Evaluate commercialization strategies on a product-by-product basis
in order to maximize the value of our product candidates or future
potential products.
As we
move our drug candidates through development toward regulatory
approval, we will evaluate several options for each drug
candidate’s commercialization strategy. These options include
building our own internal sales force; entering into a joint
marketing partnership with another pharmaceutical or biotechnology
company, whereby we jointly sell and market the product; and
out-licensing our product, whereby another pharmaceutical or
biotechnology company sells and markets our product and pays us a
royalty on sales. Our decision will be made separately for each
product and will be based on a number of factors including capital
necessary to execute on each option, size of the market to be
addressed and terms of potential offers from other pharmaceutical
and biotechnology companies. It is too early for us to know which
of these options we will pursue for our drug candidates, assuming
their successful development.
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4
Patents and Intellectual Property Rights
Although we do not currently hold any patents or license patented
technology, we intend to protect our proprietary therapeutic
product candidate assets and associated technologies that are
important to our business by seeking and maintaining domestic and
international patents. These may cover our products and
compositions, their methods of use and processes for their
manufacture and any other inventions that may be commercially
important to the development of our business. We also rely on trade
secrets to protect aspects of our business. Our competitive
position depends on our ability to obtain patents on our
technologies and our potential products, to defend our patents, to
protect our trade secrets and to operate without infringing valid
and enforceable patents or trade secrets of others. We seek
licenses from others as appropriate to enhance or maintain our
competitive position.
In connection with our CB101 program, small molecule
pharmacological chaperone therapeutic candidates that target the
DJ-1 protein we hold a worldwide, perpetual, non-exclusive,
license, with the right to sublicense, all of the intellectual
property related to the composition of matter of CB101 and plan to
file U.S. and international patent applications in
2019. We have described the terms of this agreement in
the Section entitled “Material
Agreements”.
In connection with our program CB201, a protein therapeutic
candidate derived from DJ-1 fused with a cell penetrating peptide,
we hold all intellectual property and plan to file U.S. and
international patent application in 2019.
In connection with our CB301 program, small molecule
pharmacological chaperone we hold a worldwide, non-exclusive
license with the right to sub-license all of the intellectual
property related to composition of matter of CB301 and plan to file
US and international patents in 2018. We have described the terms
of this agreement in the Section entitled “Material
Agreements”.
In connection with our program CB401, small molecule
pharmacological chaperone therapeutic candidate that targets the Ab
peptide, we hold a worldwide, perpetual, non-exclusive
license, with the right to sublicense all of the intellectual
property related to the composition of matter of CB301 and plan to
file U.S. and international patent applications as soon as
2019. We have described the terms of this agreement in
the Section entitled “Material
Agreements”.
Reports to Security Holders
We are subject to the reporting and other requirements of the
Exchange Act, and we intend to furnish our shareholders’
annual reports containing financial statements audited by our
independent registered public accounting firm and to make available
quarterly reports containing unaudited financial statements for
each of the first three quarters of each year. We will
continue to file Quarterly Reports on Form 10-Q, Annual Reports on
Form 10-K and Current Reports on Form 8-K with the SEC in order to
meet our timely and continuous disclosure requirements. We may also
file additional documents with the SEC if they become necessary in
the course of the Company’s operations.
The public may read and copy any materials that we file with the
SEC at the SEC's Public Reference Room at 100 F Street, NE,
Washington, D.C. 20549. The public may obtain information on the
operation of the Public Reference Room by calling the SEC at
1-800-SEC-0330. The SEC maintains an Internet site that contains
reports, proxy and information statements, and other information
regarding issuers that file electronically with the SEC. The
address of that site is www.sec.gov.
Employees
As of July 9, 2018, we had 7 employees, all of whom are employed
through personal consultancy contracts. These staff members are
contracted to perform certain functions in the laboratory, and the
actual hours they work is governed by their proficiency in carrying
out these tasks.
The three members of our management are also
consultants. Their consultancy agreements are described
in the Section entitled “Material
Agreements”.
5
Material Agreements
In addition to other agreements described elsewhere in this current
report, we have entered into several agreements that we deem
material to our operations and/or our financial
situation. We set out below a summary of the terms of
those agreements, but encourage you to review each of those
agreements in their entirety as attached as exhibits to this
current report.
Agreement with NovAliX Deutschland GmbH
On March 23, 2016, we entered into a collaboration agreement with
NovAliX Deutschland GmbH, in which NovAliX granted us a worldwide,
perpetual, non-exclusive license, including the right to
sublicense, under (i) any and all patent rights owned or controlled
by NovAliX that claim or cover any chemical compound and (ii) any
and all technology generated by NovAliX in the performance of the
Agreement and related to selected series of compounds (the
“Hit Series Compounds”) from the NovAliX chemical
microarrays showing binding and Structure Activity Relation trends
to the Ab peptide. The terms of the agreement required an initial
payment of approximately $80,000, payable at some point within four
years, which would accrue interest at 20% per annum from the date
of signing until the balance is paid. A further payment of
approximately $80,000 is payable upon commercialization of the
technology. As at March 31, 2018 the total accrued interest was
approximately $35,000.
Purdue Research Foundation Licensing Agreement – DJ-1 Small
Molecule
On April 1, 2016, we entered into a trade secret license agreement
with
Purdue Research
Foundation (“PRF”). Pursuant to this agreement, we
received licenses to use certain
information generated at
Purdue University related to the DJ-1 compounds
. These licenses include a worldwide,
exclusive license to use that information to manufacture, use and
sell products to diagnose, prevent and treat diseases and a
worldwide, non-exclusive license under PRF’s rights in any
invention for research and development of DJ-1
compounds
.
The
license fee is $50,000, payable in five equal annual installments.
The first two installments came due in July 2016 and July 2017 and
both have been paid.
Cambridge Enterprise Licensing Agreement - Tau
On
September 7, 2016, we entered into a global licensing agreement
with Cambridge Enterprise to use technology generated in the Tau
small molecule project conducted at Cambridge University in
conjunction with the Max Planck Institute run by Dr. Gergely
Tóth at the University of Cambridge. The agreement defined an
initial payment of approximately $13,000 which has been paid by the
Company, followed by further payments upon reaching the following
milestones:
i.
Internal
Declaration of Candidate – approximately $13,000 for
technology based patents or approximately $25,000 for data based
patents;
ii.
First dose in man
or initiation of any Phase I Trial of each Licensed Product -
approximately $100,000 for technology based patents or
approximately $200,000 for data based patents;
iii.
Initiation of any
phase II trial of each Licensed Product - approximately $140,000
for technology based patents or approximately $280,000 for data
based patents;
iv.
Initiation of any
phase III trial of any Licensed Product – approximately
$140,000 for technology based patents or approximately $700,000 for
data based patents;
v.
First approval or
marketing authorisation of each Licensed Product in the United
States or European Union - approximately $140,000 for technology
based patents or approximately $700,000 for data based patents;
and
vi.
Reimbursement
approval in the U.S. - approximately $140,000 for technology based
patents or approximately $700,000 for data based
patents.
Work continues on projects under this agreement, although to date
none of these milestones have been reached.
Investment Agreement
On April 12, 2015, we entered into a memorandum of understanding
(“MOU”) with a group of investors, and subsequently on
October 21, 2015, we entered into an Investment Agreement with
these investors for $1,500,000 to be payable in several
tranches.
Upon payment of each tranche the Company was to issue shares to the
investors equal to the value of the tranche divided by the higher
of (i) $2.00 or (ii) the average of the closing sales price of the
Company’s common stock on each of the five days prior to the
date that payment for such tranche is due. The shares were to be
issued to escrow until all payments had been made.
Upon completion of the payments due under the agreements, the
investors will have a twelve-month option to invest up to an
additional $1,000,000 into the Company on the same
terms.
On June 7, 2016, we signed an Addendum (the “Addendum”)
to the Investment Agreement providing for an additional $60,000 of
investment on the same terms as the Investment Agreement. The
funding was paid to the Company within the terms of the Addendum on
June 8, 2016.
To date no shares have been issued to escrow due to
management’s uncertainty over the investors’ appetite
to complete the funding arrangement following a fall in share
price. To date the investors are due to receive 530,000 shares for
the $1,060,000 already invested. The final tranche of $500,000 was
due in October 2016, but to date that payment has not been
made.
6
Consulting Agreement with Gergely Toth
On July 1, 2016, the Company entered into a consulting agreement
with Toth and Associates, LTD for Dr. Toth to act as the
Company’s CEO. The agreement calls for a standard
monthly fee of approximately $12,000 plus any additional
uncontracted hours at the same rate, and bonuses as follows (A)
upon raising of capital on behalf of, or as part of the Company, an
amount equal to 1.5% of the capital raised, (B) increasing the
performance of the Company as measured by valuation in either an
agreed valuation in the context of an investment or, in the case of
a public company, market capitalization reaching $30.0 million, a
fixed bonus of $50,000, payable wholly or in mutually agreed
tranches over a 6 month period subsequent to the valuation event,
(C) on the issuance of new stock for the purposes of a capital
raise of an amount over $5.0 million, common stock equal to 1% of
the Company’s post-investment issued share capital and (D) in
the event of the Company, including any affiliated entities,
securing a licensing agreement with any 3rd party, an amount
equivalent to 1.5% of any payments to the Company under such
licensing agreement.
Consulting Agreement with Thomas Roger Sawyer
On July 1, 2016, the Company entered a consulting agreement with
Capro, LTD for Dr. Thomas Sawyer to act as the Company’s
COO. The agreement calls for a standard monthly fee of
approximately $10,000 plus any additional uncontracted hours at the
same rate, and bonuses as follows (A) upon raising of capital on
behalf of, or as part of the Company, an amount equal to 1.5% of
the capital raised, (B) increasing the performance of the Company
as measured by valuation in either an agreed valuation in the
context of an investment or, in the case of a public company,
market capitalization reaching $30.0 million, a fixed bonus of
$50,000, payable wholly or in mutually agreed tranches over a 6
month period subsequent to the valuation event and (C) on the
issuance of new stock for the purposes of a capital raise of an
amount over $5.0 million, common stock equal to 1% of the
Company’s post-investment issued share capital and (D) in the
event of the Company, including any affiliated entities, securing a
licensing agreement with any 3rd party, an amount equivalent to
1.5% of any payments to the Company under such licensing
agreement.
Consulting Agreement with Simon Peace
On July 1, 2016, the Company entered a consulting agreement with
Eden Professional LTD for Mr. Simon Peace to act as the
Company’s CFO. The agreement calls for a standard
monthly fee of approximately $6,000 plus any additional
uncontracted hours at the same rate, and bonuses as follows (A)
upon raising of capital on behalf of, or as part of the Company, an
amount equal to 1.5% of the capital raised, (B) increasing the
performance of the Company as measured by valuation in either an
agreed valuation in the context of an investment or, in the case of
a public company, market capitalization reaching $30.0 million, a
fixed bonus of $50,000, payable wholly or in mutually agreed
tranches over a 6 month period subsequent to the valuation event
and (C) on the issuance of new stock for the purposes of a capital
raise of an amount over $5.0 million, common stock equal to 1% of
the Company’s post-investment issued share capital and (D) in
the event of the Company, including any affiliated entities,
securing a licensing agreement with any 3rd party, an amount
equivalent to 1.5% of any payments to the Company under such
licensing agreement.
We are a smaller reporting company as defined by Rule 12b-2 of the
Exchange Act and are not required to provide the information
required under this item.
I
TEM 1B. UNRESOLVED STAFF
COMMENTS
None.
On March 31, 2018, we executed a new one-year lease for
approximately 750 square feet of space, comprising wet lab, protein
lab and office space, in Budapest, Hungary from
the MTA MTTK
for use as
our principal offices and
laboratory. We pay MTA MTTK approximately $3,000 a month for the
space and services.
On February 3, 2016, we entered into a lease on an office property
in Sunnyvale, CA. The monthly lease payments total approximately
$1,300, and there is a one month termination notice
period.
I
TEM 3. LEGAL
PROCEEDINGS
We are currently not aware of any pending legal proceedings to
which we are a party or of which any of our property is the
subject, nor are we aware of any such proceedings that are
contemplated by any third party including and governmental
authority.
I
TEM 4. MINE SAFETY
DISCLOSURES
None.
7
I
TEM 5. MARKET FOR
REGISTRANT’S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
AND ISSUER PURCHASES OF EQUITY SECURITIES
Market information
Our common stock is listed on the Over the Counter QB
(“OTCQB”) under the symbol “CTBO”. The
market for our common stock is limited, volatile and sporadic. The
following table sets forth, for the periods indicated, the high and
low bid prices of our common stock as reported on the OTCQB. The
following quotations reflect inter-dealer prices, without retail
mark-up, markdown, or commissions, and may not reflect actual
transactions.
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Quarter Ended
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Fiscal
Year 2018
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March
31, 2018
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$
0.13
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$
0.02
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December
31, 2017
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$
0.08
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$
0.01
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September 30,
2017
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$
0.15
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$
0.05
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June 30,
2017
|
$
0.19
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$
0.09
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Fiscal
Year 2017
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March
31, 2017
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$
0.30
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$
0.09
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December
31, 2016
|
$
0.60
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$
0.12
|
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September 30,
2016
|
$
3.27
|
$
0.51
|
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June 30,
2016
|
$
3.79
|
$
1.54
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The last reported sales price for our shares on the OTCQB as of
July 9, 2018, was $
0.03
per
share. As of July 9, 2018, we had
21
shareholders of record.
Holders
As of July 9, we had
53,863,584
shares of $0.001 par value common stock issued and
outstanding. Our Transfer Agent is
Island Stock
Transfer Co
.
Dividends
We have never declared or paid any cash dividends on our common
stock. For the foreseeable future, we intend to retain any
earnings to finance the development and expansion of our business
and do not anticipate paying any cash dividends on our common
stock. Any future determination to pay dividends will be at the
discretion of the Board of Directors and will be dependent upon
then existing conditions, including our financial condition and
results of operations, capital requirements, contractual
restrictions, business prospects and other factors that the board
of directors considers relevant.
Recent Sales of Unregistered Securities
On March 26, 2018, we issued our
directors
aggregate fees bonuses for services rendered since
December 31, 2015. In lieu of paying such fees and bonuses in cash,
we paid such fees and bonuses by issuing
an aggregate
of 7,200,000 shares of our common stock to our
directors.
On April 30, 2018, a holder of a convertible
debenture converted $58,733 of interest and principal on such
debenture into 1,636,013 shares of our common stock at $0.0359 per
share pursuant to the terms of such
debenture.
On May 12, 2018, we issued 370,370 shares of our
common stock to a supplier in satisfaction of invoices worth
$10,000.
The
securities discussed herein were issued in reliance on exemptions
from registration under Section 4(2) of the Securities Act of 1933,
as amended (the “Act”). These transactions
qualified for exemption from registration because among other
things, (i) the transactions did not involve a public offering,
(ii) the security holders were accredited investors, qualified
institutional buyers and/or directors or executive officers of our
company, (iii) the security holders had access to information about
our company and its investment, (iv) the investor took the
securities for investment and not resale and (v) where appropriate,
we took measures to restrict the transfer of the
securities.
I
TEM 6. SELECTED FINANCIAL
DATA
We are a smaller reporting company as defined by Rule 12b-2 of the
Exchange Act and are not required to provide the information
required under this item.
I
TEM 7. MANAGEMENT’S
DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
The following discussion and analysis of our financial condition
and results of operations should be read in conjunction with the
financial statements and related notes included elsewhere in this
report.
As of March 31, 2018, we had $109,426 cash in the bank. This amount
will not satisfy our cash requirements for the next twelve months
from the date of this filing or until such time that additional
proceeds are raised. We plan to satisfy our future cash
requirements by additional equity financing. This will likely be in
the form of private placements of common
stock. Additional equity financing may not be available
to us on acceptable terms or at all, and thus we could fail to
satisfy our future cash requirements.
8
If we are unsuccessful in raising the additional proceeds through a
private placement offering, we will then have to seek additional
funds through debt financing, which could be highly difficult for
us to secure. Therefore, we will depend upon the success of any
private placement offering and failure thereof would result in our
having to seek capital from other sources such as debt financing,
which may not even be available. However, if such financing were
available, we would likely have to pay additional costs associated
with high risk loans and be subject to an above market interest
rate. At such time these funds are required, management would
evaluate the terms of such debt financing and determine whether the
business could manage the debt load. If we cannot raise additional
proceeds via a private placement of our common stock or secure debt
financing, we would be required to cease as a business. As a
result, investors in our common stock would lose all of their
investment.
We did not generate any revenue during the years ended March 31,
2018 and 2017. We incurred operating expenses in the amount
of approximately $1.3 million in the year ended March 31, 2018.
These operating expenses were primarily comprised of general and
administrative expenses of approximately $1.0 million and research
and development expenses of approximately $0.4 million. We
generated Other Expenses in the year to March 31, 2018 of
approximately $0.6 million, largely due to transactions relating to
convertible debt. Based on the foregoing, management believes that
there is substantial doubt about our ability to continue as a going
concern.
As of the date of this report, the current funds available to us
will not be sufficient to continue operations.
Results of Operations for the year ended March 31, 2018, as
compared to the year ended March 31, 2017.
Our operating expenses increased to approximately $1.3 million for
the year ended March 31, 2018 from approximately $1.1 million in
the year ended March 31, 2017. This increase was
primarily due to increases in Research and Development, management
team costs, public company costs and legal and professional fees.
Management’s consulting fees rose to approximately $0.7
million in the year ended March 31, 2018 from approximately $0.3
million in the prior year, with most of that increase due to an
issuance of approximately $0.3 million in share compensation in the
current year, whereas there was no such award in the prior year.
Legal, professional and accountancy fees decreased to approximately
$0.2 million in the year ended March 31, 2018 from approximately
$0.2 million in the year ended March 31, 2017, the larger fees in
the prior year being driven by investor relations and legal fees
relating to fundraising. Research and development costs were
approximately $0.4 million in the year ended March 31, 2018 only
slightly higher than the approximately $0.4 in the year ended March
31, 2017 due to accelerating third party animal
studies.
We incurred Other Expenses of approximately $0.7 million in the
year ended March 31, 2018, compared to less than $0.1 million in
the year ended March 31, 2017. A growing proportion of our funding
is coming from convertible debt, which is driving larger interest
charges and changes in fair value of the underlying
derivatives.
Liquidity and Capital Resources
At March 31, 2018, we had negative working capital of approximately
$1.9 million and limited cash on hand.
Cash Flows from Financing Activities
During the year ended March 31, 2018, financing activities received
$0.7 million in funding, made up of $0.4 million through
convertible debenture facilities and $0.3 million through related
party convertible notes. These cash flows compare to the prior year
where financing activities raised $0.6 million in proceeds for the
future issuance of common stock, $0.4 million through a convertible
debenture facility.
The Company typically raises capital which it spends on maintaining
its research and corporate operations. At this early stage in the
life of the company, funding is often short term in nature. While
the Company has been proficient in raising funds in the past, the
short-term nature of these funding cycles raises substantial risk
around the Company's ability to continue as a going
concern.
Management is addressing going concern risk by seeking new sources
of capital and is continuing initiatives to raise capital through
private placements, related party loans and other institutional
sources to meet future working capital requirements. Furthermore,
strategic partnerships, most likely with larger pharmaceutical
industry companies, will be needed to continue to fund research and
development costs as our projects expand. These measures, if
successful, may contribute to reduce the risk of going concern
uncertainties for the Company beyond the next twelve
months.
Our financial statements indicate there is substantial doubt about
our ability to continue as a going concern as this would depend
upon our ability to obtain ongoing financing and ultimately to
generate sufficient cash flow to meet our obligations on a timely
basis. Our plans and efforts to achieve the above steps might not
be successful, which raises substantial doubt about the Company's
ability to continue as a going concern within one year from the
date of this filing.
As of the date of this report, the current funds available to us
will not be sufficient to continue operations. Management believes
that if we cannot raise sufficient revenues or maintain our
reporting status with the SEC we will have to cease all efforts
directed towards us. As such, any investment previously made
would be lost in its entirety.
9
OFF BALANCE SHEET ARRANGEMENTS
We do not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or
capital resources that are material to investors.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURE ABOUT MARKET
RISK
We are a smaller reporting company as defined by Rule 12b-2 of the
Exchange Act and are not required to provide the information
required under this item.
I
TEM 8. FINANCIAL STATEMENTS AND
SUPPLEMENTARY DATA
The following documents form part of the report on the Financial
Statements
|
|
PAGE
|
|
Report
of Independent Registered Public Accounting Firm
|
F-1
|
|
Balance
Sheets
|
F-2
|
|
Statements
of Operations
|
F-3
|
|
Statement
of Changes in Stockholders’ Equity (Deficit)
|
F-4
|
|
Statements
of Cash Flows
|
F-5
|
|
Notes
to Financial Statements
|
F-6
|
I
TEM 9. CHANGES IN AND DISAGREEMENTS WITH
ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
DISCLOSURES
We have not had any disagreements with our accountants or auditors
that would need to be disclosed pursuant to Item 304 of Regulation
S-K promulgated under the Securities Act of 1933.
I
TEM 9A. CONTROLS AND
PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and
Procedures
A set of disclosure controls and procedures designed to ensure that
information required to be disclosed by us in the reports filed
under the Securities Exchange Act, is recorded, processed,
summarized and reported within the time periods specified by the
SEC’s rules and forms is required to be maintained by
management. Disclosure controls should be designed with the
objective of ensuring that this information is accumulated and
communicated to our management, including our chief executive
officer and our chief financial officer, as appropriate, to allow
timely decisions regarding required disclosure. Management
has not designed and currently does not maintain a designed set of
disclosure controls and procedures.
We have not evaluated the effectiveness of our disclosure controls
and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under
the Securities Exchange Act of 1934, as amended) as of the end of
the period covered by this report. As a result, management has
concluded that our disclosure controls and procedures were not
effective for the year ended March 31, 2018, due to the
following:
1.
Failure
to design and maintain a set of disclosure and control
procedures
2.
Lack
of segregation of duties as a result of limited personnel.
3.
Lack
of Functioning Audit Committee: We do not have an Audit
Committee; our board of directors currently acts as our Audit
Committee. We do not have an independent
director.
Management’s Annual Report on Internal Control over Financial
Reporting
Our management is responsible for establishing and maintaining
adequate internal control over financial reporting. Internal
control over financial reporting is defined in Rule 13a-15(f) or
15d-15(f) promulgated under the Securities Exchange Act of 1934 as
a process designed by, or under the supervision of, our principal
executive officer and our principal financial officer and effected
by the our board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial
reporting and the preparation of financial statements for external
purposes in accordance with U.S. GAAP and includes those policies
and procedures that:
1.
Pertain
to the maintenance of records that in reasonable detail accurately
and fairly reflect the transactions and dispositions of our
assets;
2.
Provide
reasonable assurance that transactions are recorded as necessary to
permit preparation of financial statements in accordance with U.S.
GAAP and that our receipts and expenditures are being made only in
accordance with authorizations of our management and directors;
and
3.
Provide
reasonable assurance regarding prevention or timely detection of
unauthorized acquisition, use or disposition of our assets that
could have a material effect on the financial
statements.
10
Because of its inherent limitations, internal control over
financial reporting may not prevent or detect misstatements.
Projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate
because of changes in conditions, or that the degree of compliance
with the policies or procedures may deteriorate. All internal
control systems, no matter how well designed, have inherent
limitations. Therefore, even those systems determined to be
effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Because of
the inherent limitations of internal control, there is a risk that
material misstatements may not be prevented or detected on a timely
basis by internal control over financial reporting. However, these
inherent limitations are known features of the financial reporting
process. Therefore, it is possible to design into the process
safeguards to reduce, though not eliminate, this risk.
As of March 31, 2018, management has not completed a proper
evaluation, risk assessment and monitoring of the Company’s
internal controls over financial reporting based on the 2013
Committee of Sponsoring Organizations (COSO) framework. Management
concluded that, during the period covered by this report, that our
internal controls and procedures over financial reporting were not
effective. Management identified the following
material weaknesses set forth below in our internal control over
financial reporting.
|
1.
|
We lack
the necessary corporate accounting resources to maintain adequate
segregation of duties. Such a lack of segregation of duties is
typical in a company with limited resources.
|
|
2.
|
We do
not have a formal audit committee: our board of directors currently
acts as our Audit Committee. We do not have an
independent director.
|
|
3.
|
The
Company did not perform a proper evaluation, risk assessment or
monitor their internal controls over financial
reporting.
|
This annual report does not include an attestation report of our
registered public accounting firm regarding internal control over
financial reporting. Management's report was not subject to
attestation by our registered public accounting firm pursuant to
smaller reporting company rules of the SEC that permit us to
provide only the management's report in this annual report.
Implemented or Planned Remedial Actions in response to the Material
Weaknesses
Our management believes the lack of a functioning Audit Committee
has not had a material effect on our financial results. Our
present management will continue to address our need for additional
financial personnel and other independent members for our Board of
Directors and identify an “expert” for the Audit
Committee to advise other members with regard to accounting and
reporting procedures.
We will continue to strive to correct the above noted weakness in
internal control once we have adequate funds to do so. When funds
become available, we will be able to appoint a qualified
independent director. Appointing a financial expert to serve on our
Audit Committee will improve the overall performance of
Company’s controls over our financial reporting.
Changes in Internal Control over Financial Reporting
There were no changes in our internal control over financial
reporting that occurred during the quarter ended March 31, 2018,
that have materially affected, or are reasonably likely to
materially affect, our internal control over financial
reporting.
Our management, including the chief executive officer and principal
financial officer, do not expect that our disclosure controls or
internal controls will prevent all error and all fraud. A control
system, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of the
control system are met. In addition, the design of a control system
must reflect the fact that there are resource constraints, and the
benefits of controls must be considered relative to their costs.
Because of the inherent limitations in all control systems, no
evaluation of controls can provide absolute assurance that all
control issues and instances of fraud, if any, within a company
have been detected. These inherent limitations include the
realities that judgments in decision-making can be faulty, and that
breakdowns can occur because of simple error or
mistake.
I
TEM 9B. OTHER
INFORMATION
Not Applicable.
11
I
TEM 10. DIRECTORS, EXECUTIVE
OFFICERS AND CORPORATE GOVERNANCE
The following table provides information regarding our executive
officers and directors as of June 30, 2018.
|
Name
|
Age
|
Positions
|
Term
|
|
Gergely
Toth
|
45
|
President,
Chief Executive Officer, Director
|
May 22,
2015 - Present
|
|
Simon
Peace
|
45
|
Chief
Financial Officer, Director
|
June
29, 2015 - Present
|
|
Thomas
Roger Sawyer
|
48
|
Chief
Operations Officer, Director
|
May 22,
2015 - Present
|
Each of our directors will serve in that capacity until our next
annual shareholder meeting or until their successors are elected
and qualified. Officers hold their positions at the will of our
Board of Directors. There are no arrangements, agreements or
understandings between non-management security holders and
management under which non-management security holders may directly
or indirectly participate in or influence the management of our
affairs.
Dr. Gergely Toth
,
President, Chief Executive
Officer, Director
Dr. Tóth received his MSc in Chemistry at the University of
Szeged and later his PhD from the Department of Biomedical Sciences
at Creighton University in 2001. He was a post-doctoral fellow at
the Department of Molecular Biology at the University of California
at Berkeley between 2001 and 2002. Dr. Tóth is a graduate of
the Global BioExecutive program of the BioExecutive Institute
(University of California, Berkeley, Haas School of Business;
2005). Dr. Tóth also received an Executive MBA from the
University of Cambridge (UK) in 2012.
Dr. Tóth founded Gardedam in 2009. Dr. Tóth is also
affiliated with the University of Cambridge in the UK, (Department
of Clinical Neurosciences, Wolfson Brain Imaging Centre) since
2009, where he has been an Investigator in the NIHR Biomedical
Research Unit on Dementia and of the Neurodegenerative Disease
Initiative on AD funded by the Wellcome Trust and Medical Research
Council. In addition, Dr. Tóth heads the Neurodegenerative
Disease Drug Discovery research group since 2014 at the Academy of
Sciences of Hungary in Budapest. Dr. Tóth’s research
interests are the biophysical/structural biology aspects and
therapeutic targeting of proteins that misfold and lose their
native functions and/or gain toxic functions implicated in
neurodegenerative diseases. Dr. Tóth is also a visiting
lecturer in the Business of Biotechnology at the School of Pharmacy
at the University College London.
Previously, Dr. Tóth was at Protein Mechanics (California,
Mountain View) (later Locus Pharmaceuticals) where he was the
Director of Computer Aided Drug Discovery Group between
2002-2005. Here he was a key contributor to leading both
research and business development efforts and to selling Protein
Mechanics to Locus Pharmaceuticals in 2004. From 2005-2009, Dr.
Tóth was at Elan Pharmaceuticals (California, South San
Francisco) in various roles mostly in drug discovery research for
Parkinson’s and Alzheimer’s diseases. Dr.
Tóth has been a strategic scientific consultant at Elan
Pharmaceuticals between 2009-2013. Dr. Tóth published
over 35 peer reviewed articles and patents on the topics of life
sciences, drug discovery and the business of biotechnology, and he
actively presents in various international
conferences.
Dr. Thomas Roger Sawyer
,
Chief Operations Officer,
Director
Dr.
Sawyer completed his doctorate in biological sciences at the
University of Glasgow in 2000 and quickly moved into the corporate
world, starting the information technology companies Weather2
Limited and Advanced Weather Applications for which he served in
the role of Chief Technology Officer. While helping to build and
grow these companies, he also began consulting for clients in the
logistics industry, providing strategy, technical architecture and
business process consultancy for companies including Global Freight
Solutions and Nightline.
Dr.
Sawyer completed an Executive MBA at the University of Cambridge,
graduating in 2012, specializing in corporate finance and
management science and completed his thesis on the use of data for
predictive analytical tools in industry. It was from Cambridge that
he was recruited to work for private equity investors providing
advice on project due diligence, appraisal, corporate structuring
and economic valuation of minerals assets in southern and eastern
Africa. After completing the due diligence work on assets and
carrying out the initial corporate structuring he was appointed CEO
of East African Gold plc, a gold exploration company headquartered
in Mauritius and with extensive exploration licenses in the east
African country of Uganda, in late 2011, continuing in this role
until the end of 2014 when the company ceased operations. Under his
leadership, the company successfully raised capital in excess of
USD $4 million and carried out extensive exploration activities in
a large area in a remote region of the country, with up to 100
employees and wide-reaching operations capabilities.
In
2015, Dr. Sawyer began mentoring start-up companies at the
University of Cambridge and worked on various consulting projects
including a proposal to finance Gardedam Therapeutics, culminating
in the company’s rebranding, restructuring and a reverse
merger at the end of 2015, and his appointment to the board. In
2016, he was appointed a Director of Cognetivity Ltd, a UK based
company developing an artificial intelligence driven diagnostic
test for dementia.
Dr.
Sawyer has extensive experience starting and structuring companies,
raising capital, IPOs, mergers, setting up joint ventures and
corporate strategy. His background in research science allows him
to incorporate the technical aspects of the development of projects
with his experience in management and corporate finance, allowing
this to be built into the overall business strategy and direction.
He has lectured as a guest lecturer at the University of Cambridge,
teaching entrepreneurial finance to MBA students, at University
College London teaching finance of drug development to MSc students
at the School of Pharmacy and at Exeter University teaching
corporate finance and behavior to MSc students, and has been a
speaker at international conferences. Dr. Sawyer has board
experience in a number of industries; for Weather2 and Advanced
Weather Applications in the area of information technology and
business intelligence; Capro Ltd, an investment advisory and
consultancy company specializing in consultancy and direct
investment in growing businesses, in the extractive industry as
Director of each of the East African Gold group companies, and for
Cognetivity Ltd working on a SaaS solution for dementia
diagnosis. He brings to the Company his abilities in strategic
planning, corporate structuring, operations management, analytical
modeling and the ability to raise capital to fund
growth.
12
Simon
Peace
, Chief Financial Officer,
Director
Mr. Peace began his career in as an engineer at a small firm in
Bradford, UK, before shifting his career focus to accountancy and
entering a training post at SmithKline Beecham. He achieved
not only an excellent grounding in finance, but also a good
understanding of pharmaceutical pricing, marketing, transfer
pricing and regulation regimes in the UK. Upon completion of his
training Mr. Peace moved to a pricing role at Cable & Wireless,
building global B2B telecoms contracts.
In 2001, Mr. Peace became Financial Controller and Company
Secretary at Environmental Business Products Ltd, a high growth
green-tech business in London. The company doubled in size
each year of his two-year period of office, from approximately $9
million to approximately $35 million. Growth at that pace
created a number of financial and business challenges, all of which
were successfully tackled.
Pursuing a career in Mergers and Acquisitions, in 2003 Mr. Peace
joined GE Capital where he managed activities relating to credit
risk and then, in 2006, moved to GE Healthcare’s Business
Development team, where he spent seven years leading finance teams
in acquisitions, dispositions and setting up international joint
ventures, in Europe, U.S., Russia and the Middle East.
Mr. Peace’s experience in the field of M&A is extensive,
having worked on over 60 deals with purchase prices ranging from
tens to hundreds of millions of dollars. He was typically
present in a deal from the first approach to the target, though
initial modeling, due diligence, investment approval, contract
negotiation, deal close and post-merger integration and
monitoring.
In 2014, Mr. Peace left GE Healthcare to set up his own company,
Eden Professional Ltd, a finance and M&A consultancy working
for small technology companies typically in London, Oxford and
Cambridge.
Mr. Peace is qualified to the Chartered Institute of Management
Accountants and holds a BSc in Natural Sciences from the University
of Durham, majoring in chemistry and engineering, an MSc in
Manufacturing Management from the University of Bradford and an
Executive MBA from the University of Cambridge Judge Business
School.
Section 16(a) Beneficial Ownership Reporting
Compliance
Based solely upon a review of Forms 3, 4 and 5, we do not believe
that during our most recent fiscal year, all directors, officers or
beneficial owners of more than ten percent of our common stock
timely filed those
reports required by
section 16(a) of the Exchange Act.
I
TEM 11. EXECUTIVE
COMPENSATION
Our named executive officers for 2018, which consist of our Chief
Executive Officer and our two most highly compensated executive
officers other than our Chief Executive Officer, are:
|
●
|
|
Dr.
Gergely Toth, our President and Chief Executive
Officer;
|
|
●
|
|
Simon
Peace, our Chief Financial Officer; and
|
|
●
|
|
Dr.
Thomas Roger Sawyer, our Chief Operations Officer.
|
The following information sets out below outlines the approximate
compensation paid to our named executive officers for the fiscal
years ended March 31, 2018 and 2017.
|
Name
and Principal Position
|
Year
|
|
|
|
All
Other Compensation
($)
|
|
|
Dr. Gergely
Toth
|
2018
|
157,000
|
0
|
163,000
|
0
|
320,000
|
|
President
and Chief Executive Officer
|
2017
|
144,000
|
0
|
0
|
0
|
144,000
|
|
Simon
Peace
|
2018
|
82,000
|
0
|
65,000
|
0
|
147,000
|
|
Chief
Financial Officer
|
2017
|
75,000
|
0
|
0
|
0
|
75,000
|
|
Thomas Roger
Sawyer
|
2018
|
109,000
|
0
|
98,000
|
0
|
207,000
|
|
Chief
Operations Officer
|
2017
|
120,000
|
0
|
0
|
0
|
120,000
|
We have included a description of the consulting agreements with
members of our management under the Section entitled
“Material Agreements”.
13
Director Compensation
We currently do not pay any cash compensation to members of our
board of directors for their services as our directors although we
have paid compensation, as set out above, to our directors for
their services as our executive officers. We reimburse our
directors for all reasonable out-of-pocket expenses incurred in
connection with their attendance at meetings of the board of
directors. We may determine to grant to each new director,
at the time of such director's appointment, an option to purchase
our common shares.
Indemnification of Directors and Officers
Our amended and restated certificate of incorporation contains
provisions that limit the liability of our directors for monetary
damages to the fullest extent permitted by Delaware law.
Consequently, our directors will not be personally liable to us or
our stockholders for monetary damages for any breach of fiduciary
duties as directors, except liability for the
following:
|
●
|
|
any
breach of their duty of loyalty to our company or our
stockholders;
|
|
●
|
|
any act
or omission not in good faith or that involves intentional
misconduct or a knowing violation of law;
|
|
●
|
|
unlawful
payments of dividends or unlawful stock repurchases or redemptions
as provided in Section 174 of the Delaware General Corporation
Law; or
|
|
●
|
|
any
transaction from which they derived an improper personal
benefit.
|
Any amendment to, or repeal of, these provisions will not eliminate
or reduce the effect of these provisions in respect of any act,
omission, or claim that occurred or arose prior to that amendment
or repeal. If the Delaware General Corporation Law is amended to
provide for further limitations on the personal liability of
directors of corporations, then the personal liability of our
directors will be further limited to the greatest extent permitted
by the Delaware General Corporation Law.
In addition, our amended and restated bylaws provide that we will
indemnify, to the fullest extent permitted by law, any person who
is or was a party or is threatened to be made a party to any
action, suit, or proceeding by reason of the fact that he or she is
or was one of our directors or officers or is or was serving at our
request as a director or officer of another corporation,
partnership, joint venture, trust, or other enterprise. Our amended
and restated bylaws provide that we may indemnify to the fullest
extent permitted by law any person who is or was a party or is
threatened to be made a party to any action, suit, or proceeding by
reason of the fact that he or she is or was one of our employees or
agents or is or was serving at our request as an employee or agent
of another corporation, partnership, joint venture, trust, or other
enterprise. Our amended and restated bylaws also provide that we
must advance expenses incurred by or on behalf of a director or
officer in advance of the final disposition of any action or
proceeding, subject to limited exceptions.
Further, we may enter into indemnification agreements with each of
our directors and executive officers that may be broader than the
specific indemnification provisions contained in the Delaware
General Corporation Law. These indemnification agreements require
us, among other things, to indemnify our directors and executive
officers against liabilities that may arise by reason of their
status or service. These indemnification agreements also require us
to advance all expenses incurred by the directors and executive
officers in investigating or defending any such action, suit or
proceeding. We believe that these agreements are necessary to
attract and retain qualified individuals to serve as directors and
executive officers.
The limitation of liability and indemnification provisions that are
included in our amended and restated certificate of incorporation,
amended and restated bylaws, and indemnification agreements with
our directors and executive officers may discourage stockholders
from bringing a lawsuit against our directors and executive
officers for breach of their fiduciary duties. They may also reduce
the likelihood of derivative litigation against our directors and
executive officers, even though an action, if successful, might
benefit us and other stockholders. Further, a stockholder’s
investment may be adversely affected to the extent that we pay the
costs of settlement and damage awards against directors and
executive officers as required by these indemnification provisions.
At present, we are not aware of any pending litigation or
proceeding involving any person who is or was one of our directors,
officers, employees, or other agents or is or was serving at our
request as a director, officer, employee, or agent of another
corporation, partnership, joint venture, trust, or other
enterprise, for which indemnification is sought, and we are not
aware of any threatened litigation that may result in claims for
indemnification.
We intend to obtain insurance policies under which, subject to the
limitations of the policies, coverage will be provided to our
directors and executive officers against losses arising from claims
made by reason of breach of fiduciary duty or other wrongful acts
as a director or executive officer, including claims relating to
public securities matters, and to us with respect to payments that
may be made by us to these directors and executive officers
pursuant to our indemnification obligations or otherwise as a
matter of law.
Insofar as indemnification for liabilities arising under the
Securities Act may be permitted to directors, officers or persons
controlling our company pursuant to the foregoing provisions, we
have been informed that, in the opinion of the SEC, such
indemnification is against public policy as expressed in the
Securities Act and is therefore unenforceable.
14
I
TEM 12. SECURITY OWNERSHIP OF
CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER
MATTERS
Set forth below is information concerning the ownership as of July
9, 2018 of our common stock by our directors, our officers and each
sole person who, to our knowledge, beneficially owns more than five
(5%) percent of the outstanding shares of our common
stock. The beneficial owner has sole voting and investment
power with respect to such shares of common stock.
|
Name and Address of
Beneficial Owner
|
|
|
|
Dr. Gergely
Toth
1250 Oakmead
Pkwy
Sunnyvale,
California
|
16,079,147
|
29.9
%
|
|
Simon
Peace
1250 Oakmead
Pkwy
Sunnyvale,
California
|
4,877,703
|
9.1
%
|
|
Dr. Thomas Roger
Sawyer
1250 Oakmead
Pkwy
Sunnyvale,
California
|
5,597,703
|
10.4
%
|
|
Directors as
Group
|
26,554,553
|
49.7
%
|
|
|
|
|
|
Max
Zhu
Hong Kong,
China
|
8,415,652
|
15.6
%
|
|
|
|
|
(1)
Based on 53,863,584 shares of common stock issued
and outstanding on July 9, 2018 and, for each shareholder listed,
any shares that may be acquired by such holder within the next 60
days pursuant to any options, warrants, convertible notes or other
convertible securities held by such shareholder.
I
TEM 13. CERTAIN RELATIONSHIPS AND
RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Related-Party Transactions
Max Zhu
Max Zhu is an investor and consultant to the Company. During the
year ended March 31, 2018, Mr Zhu converted two loans, totaling
$134,993 in principal and interest into 5,959,664
shares.
Mr Zhu also advanced the company new notes totaling $100,000 and
$120,000. The notes have a term of six and twelve months
respectively. The first accrues interest at 23% up to the end of
the term, and 28% thereafter. The second note accrues interest at
5% and carries a 20% redemption penalty.
We have no other related party transactions.
Board Committees
We currently have not established any committees of the Board of
Directors. Our Board of Directors may designate from among
its members an executive committee and one or more other committees
in the future. We do not have a nominating committee or a
nominating committee charter. Further, we do not have a
policy with regard to the consideration of any director candidates
recommended by security holders. To date, other than as
described above, no security holders have made any such
recommendations. Nor do we have an audit committee or a
compensation committee. The entire Board of Directors
performs all functions that would otherwise be performed by
committees. Given the present size of our board, it is not
practical for us to have committees. If we are able to grow
our business and increase our operations, we intend to expand the
size of our board and allocate responsibilities
accordingly.
Audit Committee Financial Expert
We have no separate audit committee at this time. The entire
Board of Directors oversees our audits and auditing procedures.
The Board of Directors has at this time not determined
whether any director is an “audit committee financial
expert” within the meaning of Item 407(d)(5) for SEC
regulation S-K.
Code of Ethics
As we are a young company focusing our efforts on our operations,
we have not yet adopted a written code of ethics. As our
business grows, we intend to adopt a formal code of
ethics.
Family Relationships
There are no family relationships among our Directors or executive
officers.
We are not currently subject to listing requirements of any
national securities exchange or inter-dealer quotation system which
has requirements that a majority of the board of directors be
“independent” and, as a result, we are not at this time
required to have our Board of Directors comprised of a majority of
“independent directors.”
15
I
TEM 14. PRINCIPAL ACCOUNTING FEES
AND SERVICES
The following table sets forth fees billed to us by our independent
auditors for the years ended March 31, 2018 and 2017 for (i)
services rendered for the audit of our annual financial statements
and the review of our quarterly financial statements, (ii) services
rendered that are reasonably related to the performance of the
audit or review of our financial statements that are not reported
as Audit Fees, and (iii) services rendered in connection with tax
preparation, compliance, advice and assistance.
Marcum LLP
|
SERVICES
|
|
|
|
Audit
fees
|
$
85,000
|
$
86,000
|
|
Audit-related
fees
|
-
|
-
|
|
Tax
fees
|
-
|
-
|
|
All
other fees
|
-
|
-
|
|
Total fees
|
$
85,000
|
$
86,000
|
Audit fees and audit related fees represent amounts billed for
professional services rendered for the audit of our annual
financial statements and the review of our interim financial
statements. Before our independent accountants were engaged
to render these services, their engagement was approved by our
Directors.
Notes to Consolidated Financial Statements
NOTE 1 – ORGANIZATION AND DESCRIPTION OF THE
BUSINESS
Cantabio Pharmaceuticals Inc. (the “Company” or
“Cantabio”) is a preclinical stage biotechnology
company focusing on commercializing novel therapies and the
intellectual property generated from research and development
activities for Parkinson’s disease (PD) and Alzheimer’s
disease (AD). The Company’s strategy involves
integration of therapeutic focus, the targeting of family
biophysics, drug discovery technology and expertise into an
innovative drug discovery approach, which synergizes to identify
and develop small molecule pharmacological chaperones for clinical
trials. In addition, the Company’s research efforts
concentrate on the development of therapeutic proteins that
can pass through the blood-brain barrier and supplement in vivo
levels of proteins with display loss of function during disease
conditions.
NOTE 2 –GOING CONCERN
As of March 31, 2018 the Company had a working capital deficit of
$1.9 million and losses from operations.
The Company typically raises capital which it spends on maintaining
its research and corporate operations. At this early stage in the
life of the company funding is often short term in nature. While
the Company has been proficient in raising funds in the past, the
short-term nature of these funding cycles raises substantial doubt
about the Company's ability to continue as a going concern within
one year from the date of this filing.
Management is addressing going concern risk by seeking new sources
of capital and is continuing initiatives to raise capital through
private placements, related party loans and other institutional
sources to meet future working capital requirements. Furthermore,
strategic partnerships, most likely with larger pharmaceutical
industry companies, will be needed to continue to fund research and
development costs as our projects expand. These measures, if
successful, may contribute to reduce the risk of going concern
uncertainties for the Company beyond the next twelve
months.
The ability of the Company to continue as a going concern is
dependent upon its ability to raise additional capital and achieve
profitable operations. The accompanying financial statements do not
include any adjustments that might be necessary if the Company is
unable to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
These financial statements are presented in United States dollars
and have been prepared in accordance with accounting principles
generally accepted in the United States of America
(“GAAP”).
Principles of Consolidation
These financial statements include the accounts of the Company and
its wholly-owned subsidiary.
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of expenses during the year.
Management bases its estimates on historical experience and on
other assumptions considered to be reasonable under the
circumstances. However, actual results may differ from the
estimates.
Warrant Liability
The Company accounts for certain common stock warrants outstanding
as a liability at fair value and adjusts the instruments to fair
value at each reporting period. This liability is subject to
re-measurement at each balance sheet date until exercised, and any
change in fair value is recognized in the Company's statements of
operations. The fair value of the warrants issued by the Company
has been estimated using a valuation pricing model, at each
measurement date that incorporates various inputs including
remaining contractual term, stock volatility, risk free rate and
dividend yield.
Equity-linked Financial Instruments
Certain of the Company’s debt instruments include embedded
derivatives that require bifurcation from the host contract under
the provisions of ASC 815, Derivatives and Hedging. Under this
guidance, the Company recognizes the embedded derivatives at fair
value and records a gain or loss resulting from the change in fair
values at the end of each reporting period. In connection with
issuance of the Company’s Zhu convertible notes, beginning on
July 3, 2017, the Company became contingently obligated to issue
shares in excess of the 250 million authorized by shareholders.
Consequently, the ability to settle these obligations with shares
would be unavailable causing these and other share-settled
obligations to potentially be settled in cash.
The Company applies a sequencing policy regarding share settlement
wherein equity-linked financial instruments with the earliest
issuance date would be settled first. Thus, all equity-linked
financial instruments, which are convertible or exercisable into
common stock, issued concurrent or subsequent to the Zhu Notes are
classified as derivative liabilities, with the exception of
instruments related to employee share-based
compensation.
F-6
CANTABIO PHARMACEUTICALS INC.
Notes to Consolidated Financial Statements
Sequencing
As of July 3, 2017, the Company adopted a sequencing policy whereby
all future equity-linked instruments may be classified as a
derivative liability with the exception of instruments related to
share-based compensation issued to employees or
directors.
Income Taxes
The Company recognizes income taxes on an accrual basis based on
tax positions taken or expected to be taken in its tax returns. A
tax position is defined as a position in a previously filed tax
return or a position expected to be taken in a future tax filing
that is reflected in measuring current or deferred income tax
assets and liabilities. Tax positions are recognized only when it
is more likely than not (i.e., likelihood of greater than 50%),
based on technical merits, that the position would be sustained
upon examination by taxing authorities. Tax positions that meet the
more likely than not threshold are measured using a
probability-weighted approach as the largest amount of tax benefit
that is greater than 50% likely of being realized upon settlement.
Income taxes are accounted for using an asset and liability
approach that requires the recognition of deferred tax assets and
liabilities for the expected future tax consequences of events that
have been recognized in our financial statements or tax returns. A
valuation allowance is established to reduce deferred tax assets if
all, or some portion, of such assets will more than likely not be
realized. Should they occur, our policy is to classify interest and
penalties related to tax positions as income tax
expense.
Fair Value of Financial Instruments
The Company's financial instruments consist of cash, accounts
payable, convertible debentures and a loan payable to a related
party. The carrying amounts of these financial instruments
approximate fair value due either to length of maturity or interest
rates that approximate prevailing rates unless otherwise disclosed
in these financial statements.
Share Subscriptions
Under the terms of a subscription agreement, the Company has
received funds in advance of the issuance of stock. The stock is
issuable to the investors once the full subscription proceeds are
received, which, as of the date of this filing, has not yet
occurred. The Company recorded the advance in equity.
Earnings (Loss) per Share
The Company calculates earnings per share using basic net income
(loss) per common share be computed by dividing net income (loss)
for the period by the weighted average number of common shares
outstanding during the period. The Company does not
compute diluted earnings per share because to do so would be
anti-dilutive.
Potentially dilutive securities
|
|
|
|
|
|
|
|
|
Potentially dilutive securities
|
|
|
|
Secured convertible
debentures (Note 6)
|
12,406,000
|
3,420,000
|
|
Convertible debt
related party (Note 7)
|
3,914,000
|
-
|
|
Stock
subscription
|
530,000
|
530,000
|
Recently issued Accounting Standards
Fiscal 2018 Accounting Pronouncement Adoptions
In August 2016, the FASB issued ASU No.
2016-15,
Statement of Cash Flows (Topic
230): Classification of Certain Cash Receipts and Cash
Payments
. This new standard
clarifies certain aspects of the statement of cash flows, including
the classification of debt prepayment or debt extinguishment costs
or other debt instruments with coupon interest rates that are
insignificant in relation to the effective interest rate of the
borrowing, contingent consideration payments made after a business
combination, proceeds from the settlement of insurance claims,
proceeds from the settlement of corporate-owned life insurance
policies, distributions received from equity method investees and
beneficial interests in securitization transactions. This new
standard also clarifies that an entity should determine each
separately identifiable source of use within the cash receipts and
payments on the basis of the nature of the underlying cash flows.
In situations in which cash receipts and payments have aspects of
more than one class of cash flows and cannot be separated by source
or use, the appropriate classification should depend on the
activity that is likely to be the predominant source or use of cash
flows for the item. This new standard became effective for us on
April 1, 2018. The new standard does not have a material
impact on our financial statements.
In February 2016, the FASB issued ASU 2016-02, Leases (Topic 842).
ASU 2016-02 increases the transparency and comparability among
organizations by recognizing lease assets and lease liabilities on
the balance sheet and disclosing key information about leasing
arrangements. Certain qualitative and quantitative disclosures are
required, as well as a retrospective recognition and measurement of
impacted leases. The new ASU is effective for fiscal years and
interim periods within those years beginning after December 15,
2018, with early adoption permitted. The Company is currently
evaluating the impact of this new standard and does not expect it
to have a material impact on our financial statements.
In
June 2018, the FASB issued Accounting Standards Update (ASU)
2018-07 intended to reduce cost and complexity and to improve
financial reporting for nonemployee share-based payments.
Currently, the accounting requirements for nonemployee and employee
share-based payment transactions are significantly different. This
ASU expands the scope of Topic 718, Compensation-Stock Compensation
(which currently only includes share-based payments to employees)
to include share-based payments issued to nonemployees for goods or
services. Consequently, the accounting for share-based payments to
nonemployees and employees will be substantially aligned. This ASU
supersedes Subtopic 505-50, Equity-Equity-Based Payments to
Nonemployees. The amendments in this ASU are effective for
public companies for fiscal years beginning after December 15,
2018, including interim periods within that fiscal year. For all
other companies, the amendments are effective for fiscal years
beginning after December 15, 2019, and interim periods within
fiscal years beginning after December 15, 2020. Early adoption is
permitted, but no earlier than a company's adoption date of Topic
606, Revenue from Contracts with Customers. The Company is
currently evaluating the impact of this new standard and does not
expect it to have a material impact on our financial
statements.
F-7
CANTABIO PHARMACEUTICALS INC.
Notes to Consolidated Financial Statements
NOTE 4 – Material Agreements
The following material agreements are important to our research and
development activities:
Agreement with NovAliX Deutschland GmbH
On March 23, 2016, we entered into a collaboration agreement with
NovAliX Deutschland GmbH, in which NovAliX granted us a worldwide,
perpetual, non-exclusive license, including the right to
sublicense, under (i) any and all patent rights owned or controlled
by NovAliX that claim or cover any chemical compound and (ii) any
and all technology generated by NovAliX in the performance of the
Agreement and related to selected series of compounds (the
“Hit Series Compounds”) from the NovAliX chemical
microarrays showing binding and Structure Activity Relation trends
to the Ab peptide. The terms of the agreement required an initial
payment of approximately $80,000, payable at some point within four
years, which would accrue interest at 20% per annum from the date
of signing until the balance is paid. A further payment of
approximately $80,000 is payable upon commercialization of the
technology. As at March 31, 2018 the total of accrued interest was
approximately $35,000.
Purdue Research Foundation Licensing Agreement – DJ-1 Small
Molecule
On April 1, 2016, we entered into a trade secret license agreement
with
Purdue Research
Foundation (“PRF”). Pursuant to this agreement, we
received licenses to use certain
information generated at
Purdue University related to the DJ-1 compounds
. These licenses include a worldwide,
exclusive license to use that information to manufacture, use and
sell products to diagnose, prevent and treat diseases and a
worldwide, non-exclusive license under PRF’s rights in any
invention for research and development of DJ-1
compounds
.
The
license fee is $50,000, payable in five equal annual installments.
The first two installments came due in July 2016 and July 2017 and
both have been paid.
Cambridge Enterprise Licensing Agreement - Tau
On
September 7, 2016, we entered into a global licensing agreement
with Cambridge Enterprise to use technology generated in the Tau
small molecule project conducted at Cambridge University in
conjunction with the Max Planck Institute run by Dr. Gergely
Tóth at the University of Cambridge. The agreement defined an
initial payment of approximately $13,000 which has been paid by the
Company, followed by further payments upon reaching the following
milestones:
i.
Internal
Declaration of Candidate – approximately $13,000 for
technology based patents or approximately $25,000 for data based
patents;
ii.
First dose in man
or initiation of any Phase I Trial of each Licensed Product -
approximately $100,000 for technology based patents or
approximately $200,000 for data based patents;
iii.
Initiation of any
phase II trial of each Licensed Product - approximately $140,000
for technology based patents or approximately $280,000 for data
based patents;
iv.
Initiation of any
phase III trial of any Licensed Product – approximately
$140,000 for technology based patents or approximately $700,000 for
data based patents;
v.
First approval or
marketing authorisation of each Licensed Product in the United
States or European Union - approximately $140,000 for technology
based patents or approximately $700,000 for data based patents;
and
vi.
Reimbursement
approval in the U.S. - approximately $140,000 for technology based
patents or approximately $700,000 for data based
patents.
Work continues on projects under this agreement, although to date
none of these milestones have been reached.
NOTE 5 – RELATED PARTY TRANSACTIONS
Approximate costs incurred associated with related party
transactions included in general and administrative in the
statement of operations, including stock based compensation, are as
follows:
|
|
|
|
|
|
|
|
Operating
expenses:
|
|
|
|
Toth and Associates LTD
|
$
320,000
|
$
144,000
|
|
Capro LTD
|
207,000
|
120,000
|
|
Eden Professional LTD
|
147,000
|
75,000
|
|
Max Zhu Consulting
|
18,000
|
24,000
|
|
|
|
|
|
Total related party
transactions
|
$
692,000
|
$
363,000
|
|
|
|
|
Accounts payable and accrued expenses includes amounts payable to
related parties of $0.2 and $0.3 million for the fiscal years ended
March 31, 2018 and March 31, 2017, respectively.
F-8
CANTABIO PHARMACEUTICALS INC.
Notes to Consolidated Financial Statements
Toth and Associates LTD
On July 1, 2016, the Company entered into a consulting agreement
with Toth and Associates, LTD for Dr. Toth to act as the
Company’s CEO. The agreement calls for a standard
monthly fee of approximately $12,000 plus any additional
uncontracted hours at the same rate, and bonuses as follows (A)
upon raising of capital on behalf of, or as part of the Company, an
amount equal to 1.5% of the capital raised, (B) increasing the
performance of the Company as measured by valuation in either an
agreed valuation in the context of an investment or, in the case of
a public company, market capitalization reaching $30.0 million, a
fixed bonus of $50,000, payable wholly or in mutually agreed
tranches over a 6 month period subsequent to the valuation event,
(C) on the issuance of new stock for the purposes of a capital
raise of an amount over $5.0 million, common stock equal to 1% of
the Company’s post-investment issued share capital and (D) in
the event of the Company, including any affiliated entities,
securing a licensing agreement with any 3rd party, an amount
equivalent to 1.5% of any payments to the Company under such
licensing agreement.
Capro LTD
On July 1, 2016, the Company entered a consulting agreement with
Capro, LTD for Dr. Thomas Sawyer to act as the Company’s
COO. The agreement calls for a standard monthly fee of
approximately $10,000 plus any additional uncontracted hours at the
same rate, and bonuses as follows (A) upon raising of capital on
behalf of, or as part of the Company, an amount equal to 1.5% of
the capital raised, (B) increasing the performance of the Company
as measured by valuation in either an agreed valuation in the
context of an investment or, in the case of a public company,
market capitalization reaching $30.0 million, a fixed bonus of
$50,000, payable wholly or in mutually agreed tranches over a 6
month period subsequent to the valuation event and (C) on the
issuance of new stock for the purposes of a capital raise of an
amount over $5.0 million, common stock equal to 1% of the
Company’s post-investment issued share capital and (D) in the
event of the Company, including any affiliated entities, securing a
licensing agreement with any 3rd party, an amount equivalent to
1.5% of any payments to the Company under such licensing
agreement.
Eden Professional LTD
On July 1, 2016, the Company entered a consulting agreement with
Eden Professional LTD for Mr. Simon Peace to act as the
Company’s CFO. The agreement calls for a standard
monthly fee of approximately $6,000 plus any additional
uncontracted hours at the same rate, and bonuses as follows (A)
upon raising of capital on behalf of, or as part of the Company, an
amount equal to 1.5% of the capital raised, (B) increasing the
performance of the Company as measured by valuation in either an
agreed valuation in the context of an investment or, in the case of
a public company, market capitalization reaching $30.0 million, a
fixed bonus of $50,000, payable wholly or in mutually agreed
tranches over a 6 month period subsequent to the valuation event
and (C) on the issuance of new stock for the purposes of a capital
raise of an amount over $5.0 million, common stock equal to 1% of
the Company’s post-investment issued share capital and (D) in
the event of the Company, including any affiliated entities,
securing a licensing agreement with any 3rd party, an amount
equivalent to 1.5% of any payments to the Company under such
licensing agreement.
Max Zhu
Max Zhu, an investor and lender to the Company, also works as Head
of Computer Aided Drug Design for the Company under a consultancy
contract.
NOTE 6 – SECURED CONVERTIBLE DEBENTURES
Original issuances
The Company has entered into several securities purchase agreements
during 2017 and 2018 with an accredited investor to place
Convertible Debentures (as amended the “Debentures”) in
the aggregate principal amount of up to $900,000 (the
“Transaction”), provided that in case of an event of
default, the Debentures may become at the holder’s election
immediately due and payable. The Debentures bear interest at the
rate of 5% per annum. In addition, the Company must pay to the
holder an annual fee equal to 7% of the amount of the Debentures to
assist in their monitoring costs for the Debentures. The net
proceeds of the financing were used for general corporate matters
and for other expenses.
Conversion Feature
The Debentures may be converted at any time on or prior to maturity
at the lower of $0.10 or 93% of the average of the three lowest
daily volume weighted average price (“VWAP”) during the
10 consecutive trading days immediately preceding the conversion
date, provided that as long as we are not in default under the
Debenture and the conversion price is never lower than a stated
floor price. The Debentures have been amended several times,
including most recently in the third quarter with the addition that
the floor price being $0.01 and the due date November
2018.
Monthly Redemption Feature
Any time after the six-month anniversary of the issuance of a
Debenture that the daily VWAP is less than $0.01 for a period of
twenty consecutive trading days (the “Triggering Date”)
and only for so long as such conditions exist after a Triggering
Date, the Company shall make monthly payments beginning on the last
calendar day of the month when the Triggering Date occurred. Each
monthly payment shall be in an amount equal to the sum of (i) the
principal amount outstanding as of the Triggering Date divided by
the number of such monthly payments until maturity, (ii) a
redemption premium of 20% in respect of such principal amount and
(iii) accrued and unpaid interest hereunder as of each payment
date. The Company may, no more than twice, obtain a thirty-day
deferral of a monthly payment due as a result of a Triggering Date
through the payment of a deferral fee in the amount equal to 10% of
the total amount of such monthly payment. Each deferral payment may
be paid by the issuance of such number of shares as is equal to the
applicable deferral payment divided by a price per share equal to
93% of the average of the four lowest daily VWAPs during the 10
consecutive Trading Days immediately preceding the due date in
respect of such monthly payment begin deferred, provided that such
shares issued will be immediately freely tradable shares in the
hands of the holder.
In the third quarter a Triggering Date occurred and the Company
recorded a premium of $50,000 included in accounts payable and
accrued expense.
F-9
CANTABIO PHARMACEUTICALS INC.
Notes to Consolidated Financial Statements
Extinguishment of Notes
In the third quarter the Company, entered into an amended agreement
with the investor which included a change to the due date and an
adjustment to the floor price. The terms of the new debt instrument
was considered to be substantially different such that the changes
were sufficient to recognize the amendment as an extinguishment of
the debt. A loss on extinguishment of approximately $0.2 million
was recorded in other income (expense). Debt discount of
approximately $0.6 million was recorded as a result of the new
issuance due to the conversion features.
Beneficial Conversion Feature
At the time of each closing, the Debenture’s effective
conversion price was below the quoted market price of the
Company’s common stock. As such, the Company recognized a
beneficial conversion feature equal to the intrinsic value of the
conversion feature on each issuance date, resulting in a discount
to the Debenture with a corresponding credit to additional paid-in
capital.
Embedded Derivatives
The monthly payment provision within the Debentures is a
contingent put option that is required to be separately measured at
fair value, with subsequent changes in fair value recognized in the
Consolidated Statements of Operations. The Company estimated the
fair value of the monthly payment provision using probability
analysis of the occurrence of a Triggering Date applied to the
discounted maximum redemption premium for any given
payment.
The probability analysis utilized in calculating the embedded
derivative was calculated using the following key
inputs:
|
|
|
|
|
Stock
price
|
$
0.06
|
$
0.16-$0.23
|
|
Probability
of Triggering Date
|
100
%
|
23%-35
%
|
|
Volatility
|
300
%
|
207
%
|
|
Risk-free
rate
|
1
%
|
1
%
|
|
Discount
rate
|
0
%
|
40
%
|
Due to the Company’s sequencing policy the Company recorded
an embedded derivative associated with the debentures conversion
feature. The following are the inputs associated with the embedded
conversion feature.
|
|
|
|
|
Stock
price
|
$
0.06
|
$
0.16-$0.23
|
|
Exercise
price
|
$
0.06
|
$
0.15-$0.21
|
|
Volatility
|
300
%
|
207%
|
|
Contractual
term
|
1
year
|
|
|
Risk-free
rate
|
1
%
|
1
%
|
|
Discount
rate
|
0
%
|
40
%
|
The fair value estimate of the embedded derivatives is a Level 3
measurement. The roll-forward of the Level 3 fair value measurement
is as follows:
Balance
at
March
31, 2017
|
|
Net
unrealized (gain)/loss
|
Balance
at
March
31, 2018
|
|
24,000
|
$
685,000
|
$
27,000
|
$
736,000
|
The carrying value of the Debentures is comprised of the
following:
|
Secured
Convertible Debentures
|
|
|
|
|
|
|
|
Principal
|
$
750,000
|
$
450,000
|
|
Fair value of
embedded derivative
|
736,000
|
24,000
|
|
Accrued
interest
|
22,264
|
-
|
|
Debt
discount
|
(561,104
)
|
(151,744
)
|
|
Carrying
value of Secured Convertible Debentures
|
$
947,160
|
$
322,256
|
As of March 31, 2018, the estimated aggregate fair value of
outstanding convertible notes payable is approximately $0.9
million. The fair value estimate is based on the estimated option
value of the conversion terms. The estimated fair value represents
a Level 3 measurement.
Converted Debentures
During the year ended March 31, 2018, holders of approximately $0.2
million in principal amount and accrued interest with respect to
Secured Convertible Debentures exercised the conversion option and
converted into 4.2 million shares of common stock.
Events of Default or Financial covenants
The Company is in compliance with all terms associated with the
convertible note.
F-10
CANTABIO PHARMACEUTICALS INC.
Notes to Consolidated Financial Statements
NOTE 7 – CONVERTIBLE DEBT RELATED PARTIES
Convertible notes, 18%-28%
During the year ended March 31, 2018 the Company issued convertible
notes payable to Max Zhu for an aggregate principal balance of
$220,000, in exchange for cash of $175,000 and the exchange of a
note payable to Mr. Zhu with a principal balance of $45,000. The
extinguished note payable was fully matured. The convertible notes
had interest rates ranging from 18% to 28%. In January 2018 the
holder converted $120,000 of principal and $14,994 of interest into
approximately 6.0 million shares of common stock.
The remaining $100,000 convertible note payable from this tranche
had a six-month term, maturing in February 2018, incuring interest
at 23% through maturity and 28% thereafter. The Company has the
option to settle the principal and all accrued interest of each
note in cash or shares.
The note holder has the right to convert all or any portion of the
outstanding principal and accrued interest of the 28% note into
common shares of the Company at a conversion price of the lesser
of: (i) $0.08 per share, or (ii) a price equal to 80% of the lowest
VWAP during the five consecutive days before the notice of
conversion.
Convertible note, 5%
In January 2018 the Company issued a further convertible note to
Mr. Zhu in exchange for $120,000. The note has a twelve month term
and bears interest at the rate of 5% per annum. In addition, the
Company must pay to the holder an annual fee equal to 7% of the
amount of the note to assist in his monitoring costs.
The 5% note may be converted at any time at the lower of $0.10 or
93% of the average of the three lowest daily volume weighted
average price (“VWAP”) during the 10 consecutive
trading days immediately preceding the conversion date, provided
that we are not in default under the Debenture and the conversion
price is never lower than a stated floor price.
The analysis utilized in calculating the embedded derivative upon
issuance and at March 31, 2018 was calculated using the following
key inputs:
|
|
|
|
Stock
price
|
$
0.02- $0.07
|
|
Contractual
term
|
|
|
Volatility
|
275%-300
%
|
|
Risk-free
rate
|
1
%
|
The fair value estimate of the embedded derivative is a Level 3
measurement. The roll-forward of the Level 3 fair value
measurementis as follows:
|
|
Net
unrealized (gain)/loss
|
|
Balance
at
March
31, 2018
|
|
267,000
|
$
(53,000
)
|
$
(58,000
)
|
$
156,000
|
The carrying value of the Noteis comprised of the
following:
|
Convertible
Note at March 31, 2018:
|
|
|
Principal
|
$
220,000
|
|
Fair value of
embedded conversion option
|
156,000
|
|
Accrued
Interest
|
15,204
|
|
Debt
discount
|
(133,590
)
|
|
Carrying
value of Convertible Note
|
$
257,614
|
As of March 31, 2018, the estimated aggregate fair value of
outstanding convertible notes payable is approximately $0.3
million. The fair value estimate is based on the estimated option
value of the conversion terms. The estimated fair value represents
a Level 3 measurement.
Technical default
The notes which are due in January 2018 are in technical default,
although the obligation has not been called by the lender. The note
agreement provided for such circumstances with the effect that the
Company will record interest at the default interest rate of
28%.
F-11
CANTABIO PHARMACEUTICALS INC.
Notes to Consolidated Financial Statements
NOTE 8 – CAPITAL STOCK
Stock Subscriptions
On April 12, 2015, we entered into a memorandum of understanding
(“MOU”) with a group of investors, and subsequently on
October 21, 2015, we entered into an Investment Agreement with
these investors for $1,500,000 to be payable in several
tranches.
Upon payment of each tranche the Company was to issue shares to the
investors equal to the value of the tranche divided by the higher
of (i) $2.00 or (ii) the average of the closing sales price of the
Company’s common stock on each of the five days prior to the
date that payment for such tranche is due. The shares were to be
issued to escrow until all payments had been made.
Upon completion of the payments due under the agreements, the
investors will have a twelve-month option to invest up to an
additional $1,000,000 into the Company on the same
terms.
On June 7, 2016, we signed an Addendum (the “Addendum”)
to the Investment Agreement providing for an additional $60,000 of
investment on the same terms as the Investment Agreement. The
funding was paid to the Company within the terms of the Addendum on
June 8, 2016.
Final Placement
To date no shares have been issued to escrow due to
management’s uncertainty over the investors’ appetite
to complete the funding arrangement following a fall in share
price. To date the investors are due to receive 530,000 shares for
the $1,060,000 already invested. The final tranche of $500,000 was
due in October 2016, but to date that payment has not been
made.
Conversion of convertible debt instruments
During the year ended March 31, 2018, a holder of convertible
debentures converted approximately $0.2 million in principal amount
and accrued interest into approximately 4.2 million shares of
common stock and a holder of convertible debt converted
approximately $0.1 million in principal amount and accrued interest
converted into approximately 6.0 million shares of common stock.
Upon issuance of the stock the Company recognized a loss of
approximately $0.1 million.
Shares issued to satisfy accrued expenses
In April 2017 the Company issued 0.2 million shares to a supplier
in lieu of invoices worth approximately $24,000.
In February 2018 the three directors of the Company converted
approximately $0.2 million of unpaid fees and bonus into
approximately 7.2 million shares of common stock. Upon issuance of
the stock the Company recognized a loss of approximately $0.1
million.
Stock compensation
During the year ended March 31, 2018 the Company issued
approximately 7.5 million shares to employees and directors for
services. The Company recorded share based compensation of
approximately $0.4 million in the statement of
operations.
NOTE 9 – COMMITMENTS
Leases on Property
The Company has a $1,300 month to month lease on an office property
in Sunnyvale, CA.
In March 2018, the Company re-signed its annual lease on a
Laboratory in Budapest, Hungary. The monthly lease payments total
approximately $3,000, and the lease term was 1 year. The lessor may
terminate upon non-payment of rent, and the Company may terminate
if the laboratory is not operational for 15 days or
more.
Lease expense for the periods ended March 31, 2018 and 2017 was
approximately $52,000 and $49,000.
F-12
CANTABIO PHARMACEUTICALS INC.
Notes to Consolidated Financial Statements
NOTE 10 – INCOME TAXES
The Company files income tax returns in the U.S. federal
jurisdiction and the state of California.
The income tax provision (benefit) consists of the
following:
|
|
|
|
|
|
|
|
|
|
|
|
Federal:
|
|
|
|
Current
|
$
-
|
-
|
|
Deferred
|
(115,000
)
|
(368,000
)
|
|
|
|
|
|
State and
local:
|
|
|
|
Current
|
-
|
-
|
|
Deferred
|
(142,000
)
|
(65,000
)
|
|
|
(257,000
)
|
(433,000
)
|
|
Change in valuation
allowance
|
257,000
|
433,000
|
|
Income tax
provision (benefit)
|
$
-
|
-
|
The
difference between the statutory federal tax rate and the effective
tax rate is summarized below:
|
|
|
|
|
|
|
|
Deferred Tax
Assets:
|
|
|
|
Net
operating loss carryforwards
|
$
1,005,000
|
738,000
|
|
Accrued
compensation
|
50,000
|
60,000
|
|
Gross deferred tax
assets
|
1,055,000
|
798,000
|
|
Valuation
allowance
|
(1,055,000
)
|
(798,000
)
|
|
|
|
|
|
Deferred tax
assets, net of valuation allowance
|
-
|
-
|
|
|
|
|
|
Changes in
valuation allowance
|
$
(257,000
)
|
(433,000
)
|
The tax effects of temporary differences that give rise to the
Company’s deferred tax assets and liabilities are as
follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal tax at
statutory rate:
|
(31.0
)%
|
(34.0
)%
|
|
State taxes (net of
Federal benefit)
|
(6.0
)%
|
(5.8
)%
|
|
Permanent
differences
|
4.4
%
|
0.9
%
|
|
Other
|
(0.0
)%
|
0.0
%
|
|
Change in valuation
allowance
|
12.8
%
|
38.9
%
|
|
Change in federal
tax rate
|
19.8
%
|
0.0
%
|
|
Provision
for Income Taxes
|
0.0
%
|
0.0
%
|
As of March 31, 2018 and 2017, the Company provided a full
valuation allowance against its net deferred assets since
realization of these benefits is not more likely than not. As
of March 31, 2018, the Company had federal and state net
operating loss tax carryforwards of approximately $3.6
million. These net operating loss carryforwards expire in
various amounts starting in 2029. The utilization of the
federal and state net operating loss carryforwards will depend on
the Company’s ability to generate sufficient taxable income
prior to the expiration of the carryforwards. In addition, these
net operating loss carryforwards are subject to annual limitations
under Section 382 of the U.S. Internal Revenue Code when there is a
greater than 50% ownership change, as determined under the
regulations. Based on our analysis, there has been no such change
of control during the years ended March 31, 2018 and
2017.
As of March 31, 2018 and 2017, the Company had no unrecognized tax
benefits. To date, no tax returns have been filed by the Company.
Net operating losses cannot be used against future income until
returns are filed. Until those tax returns are filed by the
Company, all tax years will remain open to examination by federal
tax and state tax jurisdictions. No income tax returns are
currently under examination by taxing authorities.
The Tax Cuts and Jobs Act (the “Act”) was enacted in
December 2017 making significant changes to the Internal Revenue
Code. Changes include but are not limited to (a) the reduction of
the U.S. corporate income tax rate from 35% to 21% for tax years
beginning after December 31, 2017; (b) the transition of U.S.
international taxation from a worldwide tax system to a territorial
system; and (c) a one-time transition tax on the mandatory deemed
repatriation of foreign earnings. The latter two changes are not
expected to impact the Company. The change in tax law required the
Company to remeasure existing net deferred tax assets using the
lower rate expected to be in effect for the periods when the tax
benefit is expected to be realized, resulting in an income tax
expense of approximately $0.4 million which is fully offset by the
corresponding tax benefit of $0.4 million from the corresponding
reduction in the valuation allowance in the year ended March 31,
2018. There were no specific impacts of the Act that could not be
reasonably estimated which the Company accounted for under the
prior tax law. However, based on a continued analysis of the
estimates and further guidance on the application of the law, it is
possible that additional revisions may occur throughout the
allowable one-year measurement period, as outlined in Staff
Accounting Bulletin No. 118.
NOTE 11 - SUBSEQUENT EVENTS
On April 30, 2018 a holder of convertible debentures converted
approximately $0.1 million of principal and interest into
approximately 1.6 million shares of common stock.
On June 5, 2018, we entered into a securities purchase agreement
(the "SPA") with an accredited investor (the “Buyer”)
to issue Convertible Debentures (the “Debentures”) with
a maturity date of one year after the issuance thereof in the
aggregate principal amount of up to $0.3 million on similar terms
to those referred to in Note 6 above.
F-13
