NOTE 2 – LIQUIDITY AND MANAGEMENT
PLANS
Liquidity
The Company's condensed consolidated financial
statements are prepared using accounting principles generally accepted in the United States (“U.S. GAAP”) applicable
to a going concern which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
As of January 31, 2017, the Company had an accumulated deficit of $87,980,280 and incurred a net loss for the nine months ended
January 31, 2017 of $3,288,663.
During the nine months ended January 31,
2017, approximately $3.1 million of funding was provided by investors to maintain and expand the Company’s operations. The
remaining challenges, beyond the regulatory and clinical aspects, include accessing funding for the Company to cover its future
cash flow needs. During the nine months ended January 31, 2017, the Company acquired funds through the Company’s S-3 Registration
Statement pursuant to which its exclusive placement agent, Chardan Capital Markets, LLC (“Chardan”), sold shares of
Common Stock “at-the-market” or in negotiated block trades in a program which is structured to provide up to $50 million
dollars to the Company less certain commissions. The Company may continue to sell securities under its current S-3 Registration
Statement for a period of three years from the original prospectus date, October 28, 2014. There is a grace period available of
an additional 180 days following the 3-year anniversary, making the expiration date April 30, 2018.
The Company requires substantial additional
capital to finance its planned business operations and expects to incur operating losses in future periods due to the expenses
related to the Company’s core businesses. The Company has not realized material revenue since it commenced doing business
in the biotechnology sector, and there can be no assurance that it will be successful in generating revenues in the future in
this sector. The Company believes that its cash as of January 31, 2017, the ability to use the Company’s S-3 Registration
Statement to raise capital through at-the-market sales and block trades, any sales of unregistered shares of Common Stock and
any public offerings of Common Stock the Company may engage in will provide sufficient capital to meet its capital requirements
and to fund its operations through January 31, 2018.
If the Company is not able to raise substantial
additional capital in a timely manner, the Company may not be able to commence or complete its planned clinical trials and preclinical
studies.
The Company will continue to be dependent on
outside capital to fund its research and operating expenditures for the foreseeable future. If the Company fails to generate positive
cash flows or fails to obtain additional capital when required, the Company may need to modify, delay or abandon some or all
its business plans.
Management Goal and Strategies to Implement
The Company’s goal is to become an industry-leading
biotechnology company using the Cell-in-a-Box
®
technology as a platform upon which therapies for cancer and diabetes
are developed and obtain marketing approval for these therapies from regulatory agencies in the U.S., the European Union, Australia
and Canada.
The Company’s strategies to achieve this
goal consist of the following:
|
·
|
The completion of clinical trials in locally advanced, inoperable non-metastatic pancreas cancer and its
associated pain;
|
|
·
|
The completion of preclinical studies and clinical trials that will demonstrate the effectiveness of the Company’s cancer therapy in reducing the production and accumulation of malignant ascites fluid in the abdomen that is characteristic of pancreas and other abdominal cancers;
|
|
·
|
The completion of preclinical studies and clinical trials that involve the encapsulation of the Melligen cells using the Cell-in-a-Box
®
technology to develop a treatment for Type 1 diabetes and insulin-dependent Type 2 diabetes;
|
|
·
|
The enhancement of the Company’s ability to expand into the biotechnology arena through further research and partnering agreements in cancer and diabetes;
|
|
·
|
The acquisition of contracts that generate revenue or provide research and development capital utilizing the Company’s sublicensing rights;
|
|
·
|
The further development of uses of the Cell-in-a-Box
®
technology platform through contracts, licensing agreements and joint ventures with other companies; and
|
|
|
|
|
·
|
The completion of testing, expansion and marketing of existing and newly derived product candidates.
|
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
General
The accompanying condensed consolidated
financial statements as of January 31, 2017 and for the three and nine months ended January 31, 2017 and 2016 are unaudited. These
unaudited condensed consolidated financial statements have been prepared in accordance with U.S. GAAP for interim financial information
and are presented in accordance with the requirements of Regulation S-X of the Securities and Exchange Commission (“Commission”)
and with the instructions to Form 10-Q. Accordingly, they do not include all the information and footnotes required by U.S. GAAP
for complete condensed consolidated financial statements.
In the opinion of management, all adjustments
(consisting of normal recurring accruals) considered necessary for a fair presentation have been included. Operating results for
the three and nine months ended January 31, 2017 are not necessarily indicative of the results that may be expected for the fiscal
year ending April 30, 2017. The unaudited condensed consolidated financial statements should be read in conjunction with the audited
consolidated financial statements as of and for the fiscal year ended April 30, 2016 and footnotes thereto included in the Annual
Report on Form 10-K the Company filed with the Commission.
The condensed consolidated balance sheet as
of April 30, 2016 contained herein has been derived from the audited consolidated financial statements as of April 30, 2016, but
does not include all disclosures required by U.S. GAAP.
Principles of Consolidation and Basis of
Presentation
The condensed consolidated financial statements
include the accounts of the Company and its wholly owned subsidiaries. The Company operates independently and through four wholly-owned
subsidiaries: (i) Bio Blue Bird; (ii) PharmaCyte Biotech Europe Limited; (iii) PharmaCyte Biotech Australia Pty. Ltd.; and (iv)
Viridis Biotech, Inc. and are prepared in accordance with U.S. GAAP and the rules and regulations of the Commission. Intercompany
balances and transactions are eliminated. The Company’s 14.5% investment in SG Austria is presented on the cost method of
accounting.
Use of Estimates
The preparation of financial statements in
accordance with U.S. GAAP requires the use of estimates and assumptions that affect the reported amounts of assets and liabilities,
disclosure of contingent assets and liabilities known to exist as of the date the financial statements are published and the reported
amounts of revenues and expenses during the reporting period. On an ongoing basis, the Company evaluates these estimates including
those related to fair values of financial instruments, intangible assets, fair value of stock-based awards, income taxes and contingent
liabilities, among others. Uncertainties with respect to such estimates and assumptions are inherent in the preparation of the
Company’s consolidated financial statements; accordingly, it is possible that the actual results could differ from these
estimates and assumptions, which could have a material effect on the reported amounts of the Company’s consolidated financial
position and results of operations.
Intangible Assets
The Financial Accounting Standards Board
("FASB") standard on goodwill and other intangible assets prescribes a two-step process for impairment testing of goodwill
and indefinite-lived intangibles, which is performed annually, as well as when an event triggering impairment may have occurred.
The first step tests for impairment, while the second step, if necessary, measures the impairment. The Company has elected to
perform its annual analysis at the end of its reporting year.
The Company’s intangible assets are licensing
agreements related to the Cell-in-a-Box
®
technology for $1,549,427 and diabetes license for $2,000,000 for an aggregate
total of $3,549,427.
These intangible assets have an indefinite
life; therefore, they are not amortizable.
The Company concluded that there was no impairment
of the carrying value of the intangibles for the nine months ended January 31, 2017.
Impairment of Long-Lived Assets
The Company evaluates long-lived assets for
impairment whenever events or changes in circumstances indicate that the carrying value of an asset may not be fully recoverable.
If the estimated future cash flows (undiscounted and without interest charges) from the use of an asset are less than carrying
value, a write-down would be recorded to reduce the related asset to its estimated fair value. No impairment was identified or
recorded during the nine months ended January 31, 2017.
Fair Value of Financial Instruments
For certain of the Company’s non-derivative
financial instruments, including cash, accounts payable and accrued expenses, the carrying amount approximates fair value due to
the short-term maturities of these instruments.
Accounting Standards Codification ("ASC")
Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments
held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation
hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying
amounts reported in the consolidated balance sheets for current liabilities qualify as financial instruments and are a reasonable
estimate of their fair values because of the short period of time between the origination of such instruments and their expected
realization and their current market rate of interest. The three levels of valuation hierarchy are defined as follows:
|
·
|
Level 1. Observable inputs such as quoted prices in active markets;
|
|
·
|
Level 2. Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
·
|
Level 3. Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
The Company adopted ASC subtopic 820-10, Fair
Value Measurements and Disclosures and Accounting Standards Codification subtopic 825-10, Financial Instruments, which permits
entities to choose to measure many financial instruments and certain other items at fair value. Neither of these statements had
an impact on the Company's financial position, results of operations or cash flows. The carrying value of cash, accounts payable
and accrued expenses, as reflected in the consolidated balance sheets, approximate fair value because of the short-term maturity
of these instruments.
Income Taxes
Deferred taxes are calculated using the liability
method whereby deferred tax assets are recognized for deductible temporary differences and operating loss and tax credit carry
forwards and deferred tax liabilities are recognized for taxable temporary differences. Temporary differences are the differences
between the reported amounts of assets and liabilities and their tax bases. Deferred tax assets are reduced by a valuation
allowance when, in the opinion of management, it is more likely than not that some portion or all of the deferred tax assets will
not be realized. Deferred tax assets and liabilities are adjusted for the effects of changes in tax laws and rates on the date
of enactment.
A valuation allowance is provided for deferred
income tax assets when, in management’s judgment, based upon currently available information and other factors, it is more
likely than not that all or a portion of such deferred income tax assets will not be realized. The determination of the need for
a valuation allowance is based on an on-going evaluation of current information including, among other things, historical operating
results, estimates of future earnings in different taxing jurisdictions and the expected timing of the reversals of temporary differences.
The Company believes the determination to record a valuation allowance to reduce a deferred income tax asset is a significant accounting
estimate because it is based, among other things, on an estimate of future taxable income in the U.S. and certain other jurisdictions,
which is susceptible to change and may or may not occur, and because the impact of adjusting a valuation allowance may be material.
In determining when to release the valuation allowance established against the Company’s net deferred income tax assets,
the Company considers all available evidence, both positive and negative. Consistent with the Company’s policy, and because
of the Company’s history of operating losses, the Company does not currently recognize the benefit of all its deferred
tax assets, including tax loss carry forwards, that may be used to offset future taxable income. The Company continually assesses
its ability to generate sufficient taxable income during future periods in which deferred tax assets may be realized. If and when
the Company believes it is more likely than not that it will recover its deferred tax assets, the Company will reverse the valuation
allowance as an income tax benefit in the statements of operations.
The Company accounts for its uncertain tax
positions in accordance with U.S. GAAP. The purpose of this method is to clarify accounting for uncertain tax positions recognized.
The U.S. GAAP method of accounting for uncertain tax positions utilizes a two-step approach to evaluate tax positions. Step one,
recognition, requires evaluation of the tax position to determine if based solely on technical merits it is more likely than not
to be sustained upon examination. Step two, measurement, is addressed only if a position is more likely than not to be sustained.
In step two, the tax benefit is measured as the largest amount of benefit, determined on a cumulative probability basis, which
is more likely than not to be realized upon ultimate settlement with tax authorities. If a position does not meet the more likely
than not threshold for recognition in step one, no benefit is recorded until the first subsequent period in which the more likely
than not standard is met, the issue is resolved with the taxing authority or the statute of limitations expires. Positions previously
recognized are derecognized when the Company subsequently determines the position no longer is more likely than not to be sustained.
Evaluation of tax positions, their technical merits and measurements using cumulative probability are highly subjective management
estimates. Actual results could differ materially from these estimates.
Research and Development
Research and development expenses consist of
costs incurred for direct and overhead-related research expenses and are expensed as incurred. Costs to acquire technologies, including
licenses, that are utilized in research and development and that have no alternative future use are expensed when incurred. Technology
developed for use in the Company’s product candidates is expensed as incurred until technological feasibility has been established.
Under the Cannabis Licensing Agreement, the
Company acquired from Austrianova an exclusive, world-wide license to use the Cell-in-a-Box
®
trademark and its associated
technology with genetically modified non-stem cell lines which are designed to activate cannabinoids to develop therapies involving
Cannabis.
Under the Cannabis Licensing Agreement, the
Company is required to pay Austrianova an Upfront Payment (defined in Note 4) of $2,000,000. The Company has the right to make
periodic monthly partial payments of the Upfront Payment in amounts to be agreed upon between the parties prior to each such payment
being made. Under the Cannabis Licensing Agreement, the Company was required to pay the Upfront Payment in full by no later than
June 30, 2016, and such obligation has been paid in full. As of January 31, 2017, the Company has paid Austrianova $2.0 million
of the Upfront Payment. The $2 million cost of the license has been recorded as research and development costs.
Research and development costs for the three
and nine months ended January 31, 2017 and 2016 were $579,717, $1,008,489, $573,978, and $1,169,367, respectively.
Stock-Based Compensation
The Company recognizes stock-based compensation
expense for only those awards ultimately expected to vest on a straight-line basis over the requisite service period of the award,
net of an estimated forfeiture rate. The Company estimates the fair value of stock options using a Black-Scholes-Merton valuation
model, which requires the input of highly subjective assumptions, including the option's expected term and stock price volatility.
In addition, judgment is also required in estimating the number of stock-based awards that are expected to be forfeited. Forfeitures
are estimated based on historical experience at the time of grant and revised, if necessary, in subsequent periods if actual forfeitures
differ from those estimates. The assumptions used in calculating the fair value of share-based payment awards represent management's
best estimates, but these estimates involve inherent uncertainties and the application of management's judgment. As a result, if
factors change and the Company uses different assumptions, its stock-based compensation expense could be materially different in
the future.
Concentration of Credit Risk
The Company has no significant
off-balance-sheet concentrations of credit risk such as foreign exchange contracts, options contracts or other foreign hedging
arrangements. The Company maintains most of its cash balance at a financial institution located in California. Accounts at this
institution are insured by the Federal Deposit Insurance Corporation up to $250,000. Uninsured balances aggregated approximately
$2,214,000 and $1,656,000 at January 31, 2017 and April 30, 2016, respectively. The Company has not experienced any losses in
such accounts. Management believes it is not exposed to any significant credit risk on cash.
Foreign Currency Translation
The Company translates the financial statements
of its foreign subsidiary from the local (functional) currencies to U.S. dollars in accordance with FASB ASC 830,
Foreign Currency
Matters
. All assets and liabilities of the Company’s foreign subsidiaries are translated at year-end exchange rates,
while revenue and expenses are translated at average exchange rates prevailing during the year. Adjustments for foreign currency
translation fluctuations are excluded from net loss and are included in other comprehensive income. Gains and losses on short-term
intercompany foreign currency transactions are recognized as incurred.
Recent Accounting Pronouncements
ASU No. 2014-15,
“Presentation of
Financial Statements – Going Concern”
, Subtopic 205-40,
“Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern.”
The amendments in this ASU apply to all entities and require management
to assess an entity’s ability to continue as a going concern by incorporating and expanding upon certain principles that
are currently in U.S. auditing standards. Specifically, the amendments: (i) provide a definition of the term “substantial
doubt”; (ii) require an evaluation every reporting period including interim periods; (iii) provide principles for considering
the mitigating effect of management’s plans; (iv) require certain disclosures when substantial doubt is alleviated as a result
of consideration of management’s plans; (v) require an express statement and other disclosures when substantial doubt
is not alleviated; and (vi) require an assessment for a period of one year after the date that the financial statements are issued
or available to be issued. The amendments in this update are effective for the annual period ending after December 15, 2016. The
adoption of this standard is not expected to have a material impact on the Company’s consolidated financial statements.
In May 2014, the FASB issued Accounting
Standards Update (“ASU”) No. 2014-09 "
Revenue from Contracts with Customers
" (“Topic 606”).
Topic 606 supersedes the revenue recognition requirements in Topic 605,
“Revenue Recognition,”
including most
industry-specific revenue recognition guidance throughout the Industry Topics of the Codification. In addition, the amendments
create a new Subtopic 340-40,
“Other Assets and Deferred Costs—Contracts with Customers.”
In summary,
the core principle of Topic 606 is that an entity recognizes revenue to depict the transfer of promised goods or services to customers
in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services.
For a public entity, the amendments in this Update are effective for annual reporting periods beginning after December 15, 2016,
including interim periods within that reporting period; early application is not permitted. The Company is currently evaluating
the impact this guidance will have on its consolidated financial position and consolidated statement of operations. In August
2015, the FASB issued ASU No. 2015-14,
Revenue with Customers – Deferral of the Effective Date
, as an amendment to
ASU No. 2014-09, which defers the effective date of ASU No. 2014-09 by one year.
ASU No. 2016-02,
Leases
, allows the
recognition of lease assets and lease liabilities by lessees for those leases classified as operating leases under previous US
GAAP. The classification criteria for distinguishing between finance leases and operating leases are substantially similar to the
classification criteria for distinguishing between capital leases and operating leases in the previous leases guidance. The Update
2016-02 is effective for annual reporting periods beginning after December 15, 2018 and early adoption is permitted. The Company
is still evaluating the effect of this update.
ASU No. 2016-09,
Compensation - Stock
Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
(“ASU 2016-09”), was issued in
March 2016. ASU 2016-09 eliminates additional paid in capital pools and requires excess tax benefits and tax deficiencies to be
recorded in the income statement when the awards vest or are settled. The accounting for an employee's use of shares to satisfy
the employer's statutory income tax withholding obligation and the accounting for forfeitures is also changing. ASU 2016-09 is
effective for annual reporting periods beginning after December 15, 2016. The Company is still evaluating the effect of this
update.
The Company does not anticipate any material
impact on its consolidated financial statements upon the adoption of the following accounting pronouncements issued during 2016
and 2017: (i) ASU No. 2016-01,
Financial Instruments - Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets
and Financial Liabilities
; (ii) ASU No. 2016-13,
Financial Instruments - Credit Losses (Topic 326): Measurement of Credit
Losses on Financial Instruments
; (iii) ASU No. 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain
Cash Receipts and Cash Payments
; (iv) ASU No. 2016-18,
Statement of Cash Flows (Topic 230): Restricted Cash;
and (v)
ASU No. 2017-04,
Intangibles - Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment.
NOTE 4 – LICENSE AGREEMENT OBLIGATION
The Company entered into a licensing agreement
for a license to use the Cell-in-a-Box
®
technology to develop therapies involving
Cannabis
for a total amount
of $2,000,000 “Upfront Payment” for the license (see Note 8). As of January 31, 2017, the Company’s license agreement
obligation was paid in full. As of April 30, 2016, the Company’s license obligation was $150,000.
NOTE 5 – COMMON STOCK TRANSACTIONS
The Company issued 3,600,000 shares of
Common Stock to officers as part of their compensation agreements in the year ended April 30, 2015. These shares vest on a quarterly
basis over a twelve-month period. During the three and nine months ended January 31, 2016, 900,000 and 2,700,000 shares vested
and the Company recorded a non-cash compensation expense of $41,400 and $231,930, respectively.
The Company issued 1,200,000 shares of
Common Stock to an employee as part of an employee agreement in the year ended April 30, 2015. These shares vest on a quarterly
basis over a twelve-month period. During the three and nine months ended January 31, 2016, 300,000 and 900,000 shares vested and
the Company recorded a non-cash expense of $13,800 and $77,310, respectively.
The Company awarded 3,600,000 shares of
Common Stock to officers as part of their compensation agreements for 2016. These shares vest on a quarterly basis over a twelve-month
period and are subject to their continuing service under the agreements. During the three and nine months ended January 31, 2017,
600,000 and 2,400,000 shares vested and the Company recorded a non-cash compensation expense in the amount of $35,940 and $143,760,
respectively.
The Company awarded 1,200,000 shares of
Common Stock to an employee as part of his compensation agreement for 2016. These shares vest on a quarterly basis over a twelve-month
period and are subject to the employee providing services under the agreement. During the three and nine months ended January 31,
2017, 200,000 and 800,000 shares vested and the Company recorded a non-cash compensation expense in the amount of $11,980 and $47,920,
respectively.
During the nine months ended January 31,
2017, the Company issued 600,000 shares of Common Stock to a consultant. These shares vest on a quarterly basis over a twelve-month
period and are subject to the consultant providing services under the agreement. During the three and nine months ended January
31, 2017, 150,000 and 450,000 shares vested and the Company recorded a non-cash expense in the amount of $8,550 and $25,650, respectively.
During the nine months ended January 31,
2017, the Company issued 500,000 shares of Common Stock to two consultants. The terms of the agreements are for twelve months each.
The shares vested upon issuance and the Company recorded a non-cash compensation expense in the amount of $21,400 for the nine
months ended January 31, 2017.
During the three and nine months ended
January 31, 2017, the Company issued 750,000 shares of Common Stock to two consultants. The terms of the agreements are for twelve
months each. The shares vested upon issuance and the Company recorded a non-cash compensation expense in the amount of $25,900
for the three and nine months ended January 31, 2017.
All shares were issued without registration
under the Securities Act of 1933, as amended (“Securities Act”), in reliance upon the exemption afforded by Section
4(a)(2) of the Securities Act.
The Company has filed a prospectus supplement
for an “at-the-market” offering with an investment bank as sales agent. During the nine months ended January 31, 2017
and 2016, the Company sold and issued approximately 89.2 and 21.6 million shares of common stock, respectively, at prices ranging
from $0.02 to $0.16 per share, pursuant to its Form S-3 Registration Statement. Net of underwriting discounts, legal, accounting,
commissions and other offering expenses, the Company received net proceeds of approximately $3.1 and $3.3 million from the sale
of these shares for the nine months ended January 31, 2017 and 2016, respectively.
A summary of the Company’s non-vested
restricted stock activity and related weighted average grant date fair value information for the nine months ended January 31,
2017 are as follows:
|
|
Shares
|
|
|
Weighted
Average
Grant Date
Fair Value
|
|
Non-vested, at April 30, 2016
|
|
|
3,600,000
|
|
|
$
|
0.06
|
|
Granted
|
|
|
1,850,000
|
|
|
|
0.04
|
|
Vested
|
|
|
(5,300,000
|
)
|
|
|
0.05
|
|
Forfeited
|
|
|
–
|
|
|
|
–
|
|
Non-vested, at January 31, 2017
|
|
|
150,000
|
|
|
$
|
0.06
|
|
NOTE 6 – STOCK OPTIONS AND WARRANTS
Stock Options
As of January 31, 2017, the Company had
outstanding stock options held by its directors, officers, an employee, (“Employee Options”) and a consultant, (“Non-employee
Options”) that were issued pursuant to compensation, director and consultant agreements.
During the nine months ended January 31,
2017 and 2016, the Company granted zero and 15,600,000 Employee Options, respectively.
The fair value of the Employee Options
was estimated using the Black-Scholes-Merton option-pricing model, based on the following weighted average assumptions:
|
|
Nine Months Ended January 31,
|
|
|
|
2017
|
|
|
2016
|
|
Risk-free interest rate
|
|
|
–
|
|
|
|
1.36%
|
|
Expected volatility
|
|
|
–
|
|
|
|
111%
|
|
Expected lives (years)
|
|
|
–
|
|
|
|
5.0
|
|
Expected dividend yield
|
|
|
–
|
|
|
|
0.00%
|
|
During the nine months ended January 31,
2017 and 2016, the Company granted 13,100,000 and zero Non-employee Options, respectively. The Non-employee Options granted during
the nine months ended January 31, 2017 consist of 600,000 guaranteed options and 12,500,000 non-guaranteed performance based options.
The fair value of the Non-employee Options
was estimated using the Black-Scholes-Merton option-pricing model, based on the following weighted average assumptions:
|
|
Nine Months Ended January 31,
|
|
|
|
2017
|
|
|
2016
|
|
Risk-free interest rate
|
|
|
1.90%
|
|
|
|
–
|
|
Expected volatility
|
|
|
110%
|
|
|
|
–
|
|
Expected lives (years)
|
|
|
5.0
|
|
|
|
–
|
|
Expected dividend yield
|
|
|
0.00%
|
|
|
|
–
|
|
The Company’s computation of expected
volatility is based on the historical daily volatility of its publicly traded stock. For stock option grants issued during the
three and nine months ended January 31, 2017 and 2016, the Company used a calculated volatility for each grant. For employee options,
the Company lacks adequate information about the exercise behavior at this time and has determined the expected term assumption
under the simplified method provided for under ASC 718, which averages the contractual term of the Company’s stock options
of five years with a typical vesting term of one year. For Non-employee Options, the Company used the contract term of five years
to estimate the expected term as guided under ASC 505. The dividend yield assumption of zero is based upon the fact the Company
has never paid cash dividends and presently has no intention of paying cash dividends. The risk-free interest rate used for each
grant is equal to the U.S. Treasury rates in effect at the time of the grant for instruments with a similar expected life.
Non-employee Option grants that do not
vest immediately upon grant are recorded as an expense over the vesting period. At the end of each financial reporting period,
the value of these options, as calculated using the Black-Scholes-Merton option-pricing model, is determined, and compensation
expense recognized or recovered during the period is adjusted accordingly. During the three and nine months ended January 31,
2017, the values to account for the measurement on these vesting dates were approximately $0.04 and $0.04, respectively. As a
result, the amount of the future compensation expense is subject to adjustment until the Common Stock options are fully vested.
A summary of the Company’s stock option
activity and related information for the nine months ended January 31, 2017 are shown below:
|
|
Options
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted Average Grant Date Fair Value per Share
|
|
Outstanding, April 30, 2016
|
|
|
68,050,000
|
|
|
$
|
0.13
|
|
|
$
|
0.09
|
|
Issued
|
|
|
13,100,000
|
|
|
|
0.07
|
|
|
|
0.04
|
|
Exercised
|
|
|
–
|
|
|
|
|
|
|
|
|
|
Total Outstanding, January 31, 2017
|
|
|
81,150,000
|
|
|
|
0.12
|
|
|
|
0.09
|
|
Total Exercisable, January 31, 2017
|
|
|
68,500,000
|
|
|
|
0.13
|
|
|
|
–
|
|
Total Vested and expected to vest as of January 31, 2017
|
|
|
68,650,000
|
|
|
$
|
0.13
|
|
|
$
|
–
|
|
The Company recorded $109,576 and $209,298
of stock-based compensation expense related to the issuance of employee options in exchange for services during the three months
ended January 31, 2017 and 2016, respectively, and $438,302 and $499,836 during the nine months ended January 31, 2017 and 2016,
respectively. As of January 31, 2017, and 2016, there remained zero and $801,169, respectively, of unrecognized compensation expense
related to unvested Employee Options granted, to be recognized as expense over a weighted-average period of approximately one year.
The non-vested Employee Options vested at 1,300,000 per month and were fully vested on December 31, 2016.
The Company recorded $6,190, $17,700,
zero and zero of stock-based compensation expense related to the issuance of Non-employee Options in exchange for services during
the three and nine months ended January 31, 2017 and 2016, respectively. The non-vested Non-employee Options that are guaranteed
vest at 50,000 per month and are expected to be fully vested on April 30, 2017.
The following table summarizes ranges of outstanding
stock options by exercise price at January 31, 2017:
|
|
Exercise Price
|
|
Exercise Price
|
|
$
|
0.19
|
|
|
$
|
0.11
|
|
|
$
|
0.18
|
|
|
$
|
0.063
|
|
|
$
|
0.069
|
|
Number of Options Outstanding
|
|
|
25,000,000
|
|
|
|
27,200,000
|
|
|
|
250,000
|
|
|
|
15,600,000
|
|
|
|
13,100,000
|
|
Weighted Average Remaining Contractual Life (years) of Outstanding Options
|
|
|
2.66
|
|
|
|
2.92
|
|
|
|
3.22
|
|
|
|
3.92
|
|
|
|
4.25
|
|
Weighted Average Exercise Price
|
|
$
|
0.19
|
|
|
$
|
0.11
|
|
|
$
|
0.18
|
|
|
$
|
0.063
|
|
|
$
|
0.069
|
|
Number of Options Exercisable
|
|
|
25,000,000
|
|
|
|
27,200,000
|
|
|
|
250,000
|
|
|
|
15,600,000
|
|
|
|
450,000
|
|
Weighted Average Exercise Price of Exercisable Options
|
|
$
|
0.19
|
|
|
$
|
0.11
|
|
|
$
|
0.18
|
|
|
$
|
0.063
|
|
|
$
|
0.069
|
|
The aggregate intrinsic value of outstanding
options as of January 31, 2017 was $946,500. This represents options whose exercise price was less than the closing fair market
value of the Common Stock on January 31, 2017 of $0.1145 per share.
Warrants
The warrants issued by the Company are classified
as equity. The fair value of the warrants was recorded as additional-paid-in-capital, and no further adjustments are made.
For stock warrants paid in consideration of
services rendered by non-employees, the Company recognizes consulting expense in accordance with the requirements of ASC 505-50
and ASC 505, as amended.
On December 31, 2016, Class D warrants
to purchase 18,755,200 shares of unregistered Common Stock expired. The terms of the warrant agreements stated the exercise price
of the warrants was $0.25 per share.
Effective January 1, 2017, the Company
issued a Common Stock purchase warrant to the placement agent of the Company’s at-the-market and block trade offerings.
The Company issued a warrant to purchase 769,231 shares based upon a block trade pursuant to the amended engagement agreement
dated December 15, 2016 with the Company’s placement agent. The Company classified these warrants as equity, and the warrants
have a term of five years with an exercise price of approximately $0.07 per share. Using the Black-Scholes-Merton warrant pricing
model, the Company determined the aggregate value of these warrants to be approximately $40,000. The warrants have a cashless
exercise feature.
A summary of the Company’s warrant activity
and related information for the three and nine months ended January 31, 2017 are shown below:
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
Outstanding, April 30, 2016
|
|
|
84,969,908
|
|
|
$
|
0.16
|
|
Issued
|
|
|
769,231
|
|
|
|
0.07
|
|
Expired
|
|
|
(18,755,200
|
)
|
|
|
0.25
|
|
Total Outstanding, January 31,2017
|
|
|
66,983,939
|
|
|
|
0.13
|
|
Total Exercisable, January 31, 2017
|
|
|
66,983,939
|
|
|
$
|
0.13
|
|
The following table summarizes additional information
concerning warrants outstanding and exercisable at January 31, 2017:
Range of Exercise Prices
|
|
Number of
Warrant Shares
Exercisable at
01/31/2017
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
$0.075, $0.11, $0.12, $0.18 and $0.25
|
|
|
66,983,939
|
|
|
|
2.06
|
|
|
$
|
0.13
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Five Year Term - $0.075
|
|
|
1,056,000
|
|
|
|
0.69
|
|
|
|
|
|
Five Year Term - $0.12
|
|
|
35,347,508
|
|
|
|
2.41
|
|
|
|
|
|
Five Year Term - $0.18
|
|
|
19,811,200
|
|
|
|
0.91
|
|
|
|
|
|
Five Year Term - $0.065
|
|
|
769,231
|
|
|
|
4.89
|
|
|
|
|
|
Five Year Term - $0.11
|
|
|
10,000,000
|
|
|
|
3.14
|
|
|
|
|
|
|
|
|
66,983,939
|
|
|
|
|
|
|
|
|
|
NOTE 7 – LEGAL PROCEEDINGS
The Company is not currently a party to
any pending legal proceedings, material or otherwise. There are no legal proceedings to which any property of the Company is subject.
However, in the past the Company has been the subject of litigation, claims and assessments arising out of matters occurring in
its normal business operations. In the opinion of management, none of these had a material adverse effect on the Company’s
unaudited condensed consolidated financial position, operations and cash flows presented in this Quarterly Report on Form 10-Q
(“Report”).
NOTE 8 – RELATED PARTY TRANSACTIONS
The Company had the following related party
transactions during the three and nine months ended January 31, 2017 and 2016, respectively.
The Company owns 14.5% of the equity in SG
Austria and is reported on the cost method of accounting. SG Austria has two subsidiaries: (i) Austrianova; and (ii) Austrianova
Thailand Ltd. The Company purchased products from these subsidiaries in the approximate amounts of $372,311 and $121,910 in the
three months ended January 31, 2017 and 2016, respectively, and $517,154 and $324,852 in the nine months ended January 31, 2017
and 2016, respectively.
In April 2014, the Company entered into
a consulting agreement with Vin-de-Bona Trading Company Pte. Ltd. (“Vin-de-Bona”) pursuant to which Vin-de-Bona agreed
to provide professional consulting services to the Company. Vin-de-Bona is owned by Prof. Walter H. Günzburg and Dr. Brian
Salmons, both of whom are involved in numerous aspects of the Company’s scientific endeavors relating to cancer and diabetes
therapies. The term of the agreement is for 12 months, automatically renewable for successive 12 month terms. After the initial
term, either party can terminate the agreement by giving the other party 30 days’ written notice before the effective date
of termination. The amounts paid for the three months ended January 31, 2017 and 2016 were $26,880 and $21,458, respectively,
and the amounts paid for the nine months ended January 31, 2017 and 2016 were $68,585 and $40,343, respectively.
Under the Cannabis Licensing Agreement, the
Company acquired from Austrianova an exclusive, world-wide license to use the Cell-in-a-Box
®
trademark and its associated
technology with genetically modified non-stem cell lines which are designed to activate cannabinoids to develop therapies involving
Cannabis.
Under the Cannabis Licensing Agreement,
the Company was required to pay Austrianova an Upfront Payment of $2,000,000. The Company has the right to make periodic monthly
partial payments of the Upfront Payment in amounts to be agreed upon between the parties prior to each such payment being made.
Under the Cannabis Licensing Agreement, as amended, the Upfront Payments must be paid in full by no later than June 30, 2016. As
of January 31, 2017, and 2016, the Company has paid Austrianova $2.0 million and $1.7 million of the Upfront Payment, respectively.
Except for Thomas Liquard, the Board of
Directors of the Company (“Board”) has determined that none of the Company’s directors satisfy the definition
of Independent Director as established in the NASDAQ Marketplace Rules. Mr. Liquard has been determined by the Board to be an
Independent Director.
NOTE 9 – COMMITMENTS AND CONTINGENCIES
The Company acquires assets still in development
and enters into research and development arrangements with third parties that often require milestone and royalty payments to
the third-party contingent upon the occurrence of certain future events linked to the success of the asset in development. Milestone
payments may be required, contingent upon the successful achievement of an important point in the development life-cycle of the
pharmaceutical product (e.g., approval of the product for marketing by a regulatory agency). If required by the license agreements,
the Company may have to make royalty payments based upon a percentage of the sales of the pharmaceutical products in the event
that regulatory approval for marketing is obtained.
Office Lease
The Company formerly leased office space at
12510 Prosperity Drive, Suite 310, Silver Spring, Maryland 20904. The term of the lease expired on July 31, 2016 and was extended
to August 31, 2016 at the same amount of monthly rent.
The Company entered into a new office lease
agreement effective on September 1, 2016. The term of the lease is twelve months. The leased premises are located at 23046 Avenida
de la Carlota, Suite 600, Laguna Hills, California 92653.
Rent expense for these offices for the three
months ended January 31, 2017 and 2016 was $13,702 and $13,852, respectively, and was $37,131 and $43,464 for the nine months ended
January 31, 2017 and 2016, respectively.
The following table summarizes the Company’s
aggregate future minimum lease payments required under the operating lease as of January 31, 2017.
Periods ending,
|
|
Amount
|
|
|
|
|
|
Three months ending April 30, 2017
|
|
$
|
10,109
|
|
Twelve months ending April 30, 2018
|
|
|
12,007
|
|
|
|
$
|
22,116
|
|
License Agreements
The Third Addendum
The Third Addendum requires the Company to
make future royalty and milestone payments as follows:
|
·
|
Two percent royalty on all gross sales received by the Company or its affiliates;
|
|
·
|
Ten percent royalty on gross revenues received by the Company or its affiliates from any sublicense or right to use the patents or the licenses granted by the Company or its affiliates;
|
|
·
|
Milestone payments of $100,000 due 30 days after enrollment of the first human patient in the first clinical trial for each product; $300,000 due 30 days after enrollment of the first human patient in the first Phase 3 clinical trial for each product; and $800,000 due 60 days after having a marketing application approved by the applicable regulatory authority for each product; and
|
|
·
|
Milestone payments of $50,000 due 30 days after enrollment of the first veterinary patient in the first trial for each product and $300,000 due 60 days after having a marketing application approved by the applicable regulatory authority for each veterinary product.
|
The parties to the Third Addendum also
entered into a Manufacturing Framework Agreement pursuant to which the Company is required to pay a fee for producing the final
encapsulated cell product of $647 per vial of 300 capsules after production with a minimum purchased batch size of 400 vials of
any Cell-in-a-Box® product. The fees under the Manufacturing Framework Agreement are subject to annual increases according
to the annual inflation rate in the country in which the encapsulated cell products are manufactured.
Diabetes Licensing Agreement
The Diabetes Licensing Agreement requires the
Company to pay a fee for producing the final encapsulated cell product of $633.14 per vial of 300 capsules after production with
a minimum purchased batch size of 400 vials of any Cell-in-a-Box
®
product, subject to adjustment for inflation in
accordance with the terms of the Diabetes Licensing Agreement.
The Diabetes Licensing Agreement requires the
Company to make future royalty and milestone payments as follows: (i) ten percent royalty of the gross sale of all products the
Company sells; (ii) twenty percent royalty of the amount actually received by the Company from sub-licensees on sub-licensees’
gross sales; (iii) milestone payments of $100,000 within 30 days of beginning the first pre-clinical experiments using the encapsulated
cells; (iv) $500,000 within 30 days after enrollment of the first human patient in the first clinical trial; (v) $800,000 within
30 days after enrollment of the first human patient in the first Phase 3 clinical trial; and (vi) $1,000,000 due 60 days after
having a marketing application approved by the applicable regulatory authority for each product.
Melligen Cell License Agreement
The Melligen Cell License Agreement, as amended,
does not require any “up-front” payment to UTS. The Company is required to pay the patent prosecution and maintenance
costs and to pay to UTS a patent administration fee amounting to 15% on all amounts paid by UTS to prosecute and maintain patents
related to the licensed property.
The Melligen Cell License Agreement requires
that the Company pay royalty payments to UTS of: (i) six percent gross exploitation revenue on product sales; and (ii) twenty-five
percent of gross revenues if the product is sub-licensed by the Company. In addition, the Company is required to pay milestone
payments of: (iii) AU$ 50,000 at the successful conclusion of pre-clinical studies; (iv) AU$ 100,000 at the successful conclusion
of Phase 1 clinical trials; (v) AU$ 450,000 at the successful conclusion of Phase 2 clinical trials; and (vi) AU$ 3,000,000 at
the conclusion of Phase 3 clinical trials.
Cannabis Licensing Agreement
Under the Cannabis Licensing Agreement, the
Company is required to pay Austrianova an Upfront Payment of $2,000,000. The Company has the right to make periodic monthly partial
payments of the Upfront Payment in amounts to be agreed upon between the parties prior to each such payment being made. Under the
Cannabis Licensing Agreement, as amended, the Upfront Payments must be paid in full by no later than June 30, 2016. As of January
31, 2017, the Company has paid Austrianova $2.0 million of the Upfront Payment (see Note 4).
The Cannabis Licensing Agreement requires
the Company to pay Austrianova, pursuant to a manufacturing agreement between the parties, a one-time manufacturing setup fee
in the amount of $800,000, of which 50% is required to be paid on the signing of a manufacturing agreement for a product and 50%
is required to be paid three months later. As of January 31, 2017, the manufacturing agreement remains unsigned. The Cannabis
Licensing Agreement also requires the Company to pay a fee for producing the final encapsulated cell product of $800 per vial
of 300 capsules after production with a minimum purchased batch size of 400 vials of any Cell-in-a-Box
®
product,
subject to adjustment for inflation in accordance with the terms of the Cannabis Licensing Agreement.
The Cannabis Licensing Agreement requires the
Company to make future royalty and milestone payments as follows: (i) ten percent royalty of the gross sale of all products sold
by the Company; (ii) twenty percent royalty of the amount actually received by the Company from sub-licensees on sub-licensees’
gross sales value; (iii) a milestone payment of $100,000 within 30 days of beginning the first pre-clinical experiments using the
encapsulated cells; (iv) a milestone payment of $500,000 within 30 days after enrollment of the first human patient in the first
clinical trial; (v) a milestone payment of $800,000 within 30 days after enrollment of the first human patient in the first Phase
3 clinical trial; and (vi) a milestone payment of $1,000,000 due 90 days after having a marketing application approved by the applicable
regulatory authority for each product.
Consulting Agreement with ViruSure
The Company has engaged ViruSure, a professional
cell growing and adventitious agent testing company that has had extensive experience with the CYP2B1-expressing cells that will
be needed for the Company’s pancreas cancer therapy. The Company did so to recover them from frozen stocks of similar cells
and regenerate new stocks for use by the Company in its preclinical studies and clinical trials. ViruSure is in the process of
cloning new cells from a selected clone. Those clones will be grown to populate a Master Cell Bank and a Working Cell Bank for
the Company’s future clinical trials. There are approximately $187,000 in future milestone payments relating to testing
to be completed.
Compensation Agreements
The Company entered into executive compensation
agreements with its two executive officers and an employment agreement with one of its employees in March 2015, each of which was
amended in December 2015. Each agreement has a term of two years. The Company also entered into a compensation agreement with a
Board member in April 2015 which continues in effect until the member is no longer on the Board.
NOTE 10 – INCOME TAXES
The Company had no income tax expense
for the three and nine months ended January 31, 2017 and 2016, respectively. During the nine months ended January 31, 2017 and
2016, the Company had a net operating loss (“NOL”) for each period which generated deferred tax assets for NOL carryforwards.
The Company provided valuation allowances against the net deferred tax assets including the deferred tax assets for NOL carryforwards.
Valuation allowances provided for the net deferred tax asset increased by approximately $1,190,000 and $903,000 for the nine months
ended January 31, 2017 and 2016, respectively.
There was no material difference between the
effective tax rate and the projected blended statutory tax rate for the nine months ended January 31, 2017 and 2016.
In assessing the realization of deferred tax
assets, management considered whether it is more likely than not that some portion or all the deferred asset will not be realized.
The ultimate realization of the deferred tax assets is dependent upon the generation of future taxable income during the periods
in which those temporary differences become deductible. Based on the available objective evidence, including the history of operating
losses and the uncertainty of generating future taxable income, management believes it is more likely than not that the net deferred
tax assets at January 31, 2017 will not be fully realizable. Accordingly, management has maintained a valuation allowance against
the net deferred tax assets at January 31, 2017.
During the current period ended January 31,
2017, the Company determined that the NOL carryforwards were overstated by approximately $5,000,000. The Company recalculated the
2009 and 2010 income tax losses using the appropriate tax methods, mostly relating to impairment of assets for book purposes that
were not fully deductible for income tax purposes. However, since the Company has recorded a valuation allowance against its net
deferred tax assets; there is no effect on the Company condensed consolidated balance sheets, statements of operations and cash
flows for the three and nine months ended January 31, 2017.
There have been no changes to the Company’s
liability for unrecognized tax benefits during the nine months ended January 31, 2017.
The Company’s policy is to recognize
any interest and penalties related to unrecognized tax benefits as a component of income tax expense. As of the nine months ended
January 31, 2017 and 2016, the Company had accrued no interest or penalties related to uncertain tax positions.
See Note 13 of Notes to Consolidated Financial
Statements included in the Company’s Annual Report on Form 10-K for the year ended April 30, 2016 for additional information
regarding income taxes.
NOTE 11 – EARNINGS PER SHARE
Basic earnings (loss) per share is computed
by dividing earnings available to common stockholders by the weighted average number of shares outstanding during the period.
Diluted earnings per share is computed by dividing net income by the weighted average number of shares and potentially dilutive
common shares outstanding during the period increased to include the number of additional shares of Common Stock that would be
outstanding if the potentially dilutive securities had been issued. Potential common shares outstanding principally include stock
options and warrants. During the three and nine months ended January 31, 2017 and 2016, the Company incurred losses. Accordingly,
the effect of any common stock equivalent would be anti-dilutive during those periods and are not included in the calculation
of diluted weighted average number of shares outstanding.
The table below sets forth the basic and diluted
loss per share calculations:
|
|
Nine Months Ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(3,288,663
|
)
|
|
$
|
(4,941,720
|
)
|
Basic weighted average number of shares outstanding
|
|
|
832,203,911
|
|
|
|
746,637,216
|
|
Diluted weighted average number of shares outstanding
|
|
|
832,203,911
|
|
|
|
746,637,216
|
|
Basic and diluted loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.01
|
)
|
The table below sets forth these potentially
dilutive securities:
|
|
Nine Months Ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
Excluded options
|
|
|
81,150,000
|
|
|
|
68,050,000
|
|
Excluded warrants
|
|
|
66,983,939
|
|
|
|
84,969,908
|
|
Total excluded options and warrants
|
|
|
148,133,939
|
|
|
|
153,019,908
|
|
The table below sets forth the basic and diluted
loss per share calculations:
|
|
Three Months Ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net loss
|
|
$
|
(1,282,146
|
)
|
|
$
|
(1,791,097
|
)
|
Basic weighted average number of shares outstanding
|
|
|
859,529,933
|
|
|
|
756,637,143
|
|
Diluted weighted average number of shares outstanding
|
|
|
859,529,933
|
|
|
|
756,637,143
|
|
Basic and diluted loss per share
|
|
$
|
(0.00
|
)
|
|
$
|
(0.00
|
)
|
The table below sets forth these potentially
dilutive securities:
|
|
Three Months Ended
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
Excluded options
|
|
|
81,150,000
|
|
|
|
68,050,000
|
|
Excluded warrants
|
|
|
66,983,939
|
|
|
|
84,969,908
|
|
Total excluded options and warrants
|
|
|
148,133,939
|
|
|
|
153,019,908
|
|
NOTE 12 – SUBSEQUENT EVENTS
The Company has performed an evaluation
of subsequent events in accordance with ASC Topic 855, noting no additional subsequent events other than those noted below.
On March 9, 2017, the Company appointed
Carlos A. Trujillo to become the Company’s Chief Financial Officer and appointed him to become a director to fill a vacancy
on the Board.
On March 10, 2017, effective as
of January 1, 2017, the Company amended the Executive Compensation Agreement with Kenneth L. Waggoner, the Chief
Executive Officer, President and General Counsel of the Company, pursuant to Amendment No. 2 to Executive Compensation
Agreement (“Waggoner Compensation Agreement”). The Waggoner Compensation Agreement is for a term of two years
with annual extensions thereof unless the Company or Mr. Waggoner provide 90-days written notice of termination. The
Waggoner Compensation Agreement provides that Mr. Waggoner will serve as a member of the Board and will be employed as
the Company’s Chief Executive Officer, President and General Counsel and as the Chief Executive Officer and General
Counsel of Viridis Biotech, Inc., the Company’s subsidiary. Mr. Waggoner will be paid a base salary of $375,000,
subject to annual increases at the discretion of the Compensation Committee of the Company (“Compensation
Committee”), an annual grant of 3,600,000 shares of restricted Common Stock, vesting at the rate of 300,000 shares per
month, and an annual stock option grant to purchase 4,500,000 shares of Common Stock exercisable over a five-year term at an
exercise price per share equal to the closing price of the Common Stock on the date of grant, vesting at the rate of 375,000
option shares per month.
On March 9, 2017, Mr. Waggoner was granted
3,600,000 shares of Common Stock, vesting at the rate of 300,000 shares per month. On March 9, 2017, Mr. Waggoner was also granted
a stock option to purchase 4,500,000 shares of Common Stock exercisable over a five-year term at an exercise price per share of
$0.1040, the closing price of the Common Stock on March 9, 2017, vesting at the rate of 375,000 option shares per month.
On March 10, 2017, effective as of
January 1, 2017, the Company amended the Executive Compensation Agreement with Gerald W. Crabtree (“Crabtree
Compensation Agreement”), the Company’s Chief Operating Officer. The Crabtree Compensation Agreement is for a
term of two years with annual extensions thereof unless the Company or Dr. Crabtree provide 90-days written notice of
termination. The Crabtree Compensation Agreement provides that Dr. Crabtree will serve as a member of the Board and will be
employed as the Company’s Chief Operating Officer and as the Chief Operating Officer of Viridis Biotech, Inc., the
Company’s subsidiary. Dr. Crabtree will be paid a base salary of $138,000, subject to annual increases at the
discretion of the Compensation Committee, an annual grant of 600,000 shares of restricted Common Stock, vesting at the rate
of 50,000 shares per month, and an annual stock option grant to purchase 1,500,000 shares of Common Stock on the date of
grant, vesting at the rate of 125,000 option shares per month.
On March 9, 2017, Dr. Crabtree was granted
600,000 shares of Common Stock, vesting at the rate of 50,000 shares per month. On March 9, 2017, Dr. Crabtree was also granted
a stock option to purchase 1,500,000 shares of Common Stock exercisable over a five-year term at an exercise price per share of
$0.1040, the closing price of the Common Stock on March 9, 2017, vesting at the rate of 125,000 option shares per month.
On March 10, 2017, effective as of
January 1, 2017, the Company amended the Employment Compensation Agreement with Carlos A. Trujillo (“Trujillo
Compensation Agreement”), the Company’s Chief Financial Officer. The Trujillo Compensation Agreement is for a
term of two years with annual extensions thereof unless the Company or Mr. Trujillo provide 90-days written notice of
termination. The Trujillo Compensation Agreement provides that Mr. Trujillo will serve as a member of the Board and will be
employed as the Company’s Chief Financial Officer and as Chief Financial Officer of Viridis Biotech, Inc., the
Company’s subsidiary. Mr. Trujillo will be paid a base salary of $275,000, subject to annual increases at the
discretion of the Compensation Committee, an annual grant of 2,400,000 shares of restricted Common Stock, vesting at
the rate of 200,000 shares per month, and an annual stock option grant to purchase 3,000,000 shares of Common Stock
exercisable over a five-year term at an exercise price per share equal to the closing price of the Common Stock on the date
of grant, vesting at the rate of 250,000 option shares per month.
On March 9, 2017, Mr. Trujillo was granted
2,400,000 shares of Common Stock, vesting at the rate of 200,000 shares per month. On March 9, 2017, Mr. Trujillo was also granted
a stock option to purchase 3,000,000 shares of Common Stock exercisable over a five-year term at an exercise price per share of
$0.1040, the closing price of the Common Stock on March 9, 2017, vesting at the rate of 250,000 option shares per month.
On March 10, 2017, the Company
amended its letter agreement with Board member Thomas Liquard (“Liquard Compensation Agreement”) pursuant to
which the Company amended the compensation Mr. Liquard receives to serve as a Board member. The Liquard Compensation
Agreement was immediately effective and continues in effect so long as Mr. Liquard remains a director of the Company.
Pursuant to the Liquard Compensation Agreement, Mr. Liquard will be paid $12,500 in cash for each calendar quarter of service
on the Board, and the Company will grant him annually 250,000 shares of restricted Common Stock and grant him a stock
option to purchase 250,000 shares of Common Stock exercisable over a five-year term at an exercise price per share equal to
the closing price of the Common Stock on the date of grant, both of which shall be fully vested at the time of
grant.
On March 9, 2017, Mr. Liquard was granted
250,000 shares of Common Stock and a stock option to purchase 250,000 shares of Common Stock exercisable over a five-year
term at an exercise price per share of $0.1040, the closing price of the Common Stock on March 9, 2017.
On March 9, 2017, a consultant was granted
a stock option to purchase 1,200,000 shares of Common Stock exercisable over a five-year term at an exercise price per share of
$0.1040, the closing price of the Common Stock on March 9, 2017, vesting at a rate of 100,000 option shares per month.
From February 1, 2017 to March 3, 2017,
the Company sold 2,566,589 shares of Common Stock pursuant to block trades under the S-3 Registration Statement. The issuance of
the shares resulted in gross proceeds to the Company of approximately $277,996.
Item 2. Management’s Discussion and
Analysis of Financial Conditions and Results of Operations.
Cautionary Note Regarding Forward-Looking
Statements
This Report includes “forward-looking
statements” within the meaning of the federal securities laws. All statements other than statements of historical fact are
“forward-looking statements” for purposes of this Report, including any projections of earnings, revenue or other
financial items, any statements regarding the plans and objectives of management for future operations, any statements concerning
proposed new products or services, any statements regarding future economic conditions or performance, any statements regarding
expected benefits from any transactions and any statements of assumptions underlying any of the foregoing. In some cases, forward-looking
statements can be identified by the use of terminology such as “may,” “will,” “should,” “believes,”
“intends,” “expects,” “plans,” “anticipates,” “estimates,” “goal,”
“aim,” “potential” or “continue,” or the negative thereof or other comparable terminology.
Although we believe that the expectations reflected in the forward-looking statements contained in this Report are reasonable,
there can be no assurance that such expectations or any of the forward-looking statements will prove to be correct, and actual
results could differ materially from those projected or assumed in the forward-looking statements. Thus, investors should refer
to and carefully review information in future documents we file with the Commission. Our future financial condition and results
of operations, as well as any forward-looking statements, are subject to inherent risk and uncertainties, including, but not limited
to, the risk factors set forth in “Part I, Item 1A – Risk Factors” set forth in our Form 10-K for the year ended
April 30, 2016 and for the reasons described elsewhere in this Report, among others, our estimates regarding expenses, future
revenues, capital requirements and needs for additional financing; whether the FDA approves our IND once submitted to the FDA
so that we can commence our clinical trial involving locally advanced, inoperable non-metastatic cancer; the success and timing
of our preclinical studies and clinical trials; the potential that results of preclinical studies and clinical trials may indicate
that any of our technologies and product candidates are unsafe or ineffective; our dependence on third parties in the conduct
of our preclinical studies and clinical trials; the difficulties and expenses associated with obtaining and maintaining regulatory
approval of our product candidates; and whether the FDA will approve our product candidates. All forward looking statements and
reasons why results may differ included in this Report are made as of the date hereof, and we do not intend to update any forward-looking
statements except as required by law or applicable regulations. Except where the context otherwise requires, in this Report, the
“Company,” “we,” “us” and “our” refer to PharmaCyte Biotech, Inc., a Nevada corporation,
and, where appropriate, its subsidiaries.
Overview
We are a clinical stage biotechnology
company focused on developing and preparing to commercialize treatments for cancer and diabetes based upon a proprietary cellulose-based
live cell encapsulation technology known as “Cell-in-a-Box
®
.” The Cell-in-a-Box
®
technology
is intended to be used as a platform upon which treatments for several types of cancer, including advanced, inoperable pancreas
cancer, and diabetes will be developed.
We are developing therapies for pancreas
and other solid cancerous tumors involving the encapsulation of live cells placed in the body to enable the delivery of cancer-killing
drugs at the source of the cancer. We are also developing a therapy for Type 1 diabetes and insulin-dependent Type 2 diabetes
based upon the encapsulation of a human cell line genetically engineered to produce, store and secrete insulin at levels in proportion
to the levels of blood sugar in the human body using our Cell-in-a-Box
®
technology. We are also examining ways
to exploit the benefits of the Cell-in-a-Box
®
technology to develop therapies for cancer based upon the constituents
of the
Cannabis
plant, known as “cannabinoids.”
Performance Indicators
Non-financial performance indicators used
by management to manage and assess how the business is progressing will include, but are not limited to, the ability to: (i) acquire
appropriate funding for all aspects of our operations; (ii) acquire and complete necessary contracts; (iii) complete activities
for producing cells and having them encapsulated for the planned preclinical studies and clinical trials; (iv) obtain FDA approval
of our IND once submitted to the FDA so that we can commence our clinical trial involving inoperable non-metastatic pancreas cancer;
(v) have regulatory work completed to enable studies and trials to be submitted to regulatory agencies; (vi) initiate all purity
and toxicology cellular assessments; and (vii) ensure completion of cGMP produced encapsulated cells to use in our clinical trials.
There are numerous factors required to
be completed successfully to ensure our final product candidates are ready for use in our clinical trials. Therefore, the effects
of material transactions with related parties and certain other parties to the extent necessary for such an undertaking may have
substantial effects on both the timeliness and success of our current and prospective financial position and operating results.
Nonetheless, we are actively working to ensure strong ties and interactions to minimize the inherent risks regarding success.
From our assessments to date, we do not believe there are factors which will cause materially different amounts to be reported
than those presented in this Report and aim to assess this regularly to provide the most accurate information to our shareholders.
Results of Operations
Three and nine months ended January 31, 2017 compared to three
and nine months ended January 31, 2016
Revenue
We had no revenues in the three and nine months ended January 31,
2017 and 2016.
Operating Expenses and Loss from Operations
The following tables summarize our Operating
Expenses and Loss from Operations for the three and nine months ended January 31, 2017 and 2016, respectively:
Three Months Ended January 31,
|
|
|
Nine Months Ended January 31,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
$
|
1,282,015
|
|
|
$
|
1,792,151
|
|
|
$
|
3,287,607
|
|
|
$
|
4,942,283
|
|
The total operating expenses for the three
months ended January 31, 2017 decreased by $510,136 from the three months ended January 31, 2016. The decrease is attributable
to a decrease in compensation expense of $68,335, a decrease in legal fees of $28,384 and a decrease in general and administrative
expenses of $419,156, which decrease was offset in part by an increase in research and development cost of $5,739. The decrease
in general and administrative expenses was mostly attributable to a decrease in consulting expenses.
The total operating expenses during the nine
months ended January 31, 2017 decreased by $1,654,676 from the nine months ended January 31, 2016. The decrease is attributable
to a decrease in general and administrative expenses of $1,498,183 (mainly attributable to the amortization of prepaid warrant
and common stock issued to consultants), a decrease in research and development cost of $160,878 and a decrease in director fees
of $9,000, which decrease was offset in part by an increase in legal and professional expense of $23,319 and an increase in compensation
expense of $9,934.
Other income (expense), net
The following tables summarize our other income (expense), net for
the three and nine months ended January 31, 2017 and 2016:
Three Months Ended January 31,
|
|
|
Nine Months Ended January 31,
|
|
2017
|
|
|
2016
|
|
|
2017
|
|
|
2016
|
|
$
|
(131
|
)
|
|
$
|
1,054
|
|
|
$
|
(1,056
|
)
|
|
$
|
563
|
|
Total other income (expense), net, for the
three months ended January 31, 2017 decreased by $1,185 from the three months ended January 31, 2016. The decrease is mainly attributable
to the decrease in foreign exchange income of $1,180.
Total other income (expense), net, for the
nine months ended January 31, 2017, was $(1,056), as compared to other income (expense), net, of $563 for the nine months ended
January 31, 2016. The decrease is mainly attributable to the reduction in foreign exchange income of $1,085.
Discussion of Operating, Investing and Financing Activities
The following table presents a summary of our sources and uses of
cash for the six months ended January 31, 2017 and 2016, respectively:
|
|
January 31,
|
|
|
|
2017
|
|
|
2016
|
|
Net cash used in operating activities:
|
|
$
|
(2,538,575
|
)
|
|
$
|
(3,127,704
|
)
|
Net cash used in investing activities:
|
|
$
|
–
|
|
|
$
|
–
|
|
Net cash provided by financing activities:
|
|
$
|
3,080,883
|
|
|
$
|
3,291,622
|
|
Effect of currency rate exchange
|
|
$
|
1,138
|
|
|
$
|
327
|
|
Increase in cash
|
|
$
|
543,446
|
|
|
$
|
164,245
|
|
Operating Activities
:
The cash used in operating activities for the
nine months ended January 31, 2017 is a result of our net losses: (i) offset by securities issued for services and compensation,
decreases to prepaid expenses, accrued expenses, and an increase in accounts payable; and (ii) decreased by the reduction in license
agreement liability. The cash used in operating activities for the nine months ended January 31, 2016 is a result of our net losses,
offset by an increase in stock issued, decrease to prepaid expenses, and increases in accounts payable and accrued expenses.
Investing Activities
:
There were no investing activities in the nine months ended January
31, 2017 and 2016.
Financing Activities
:
The cash provided from financing activities
is mainly attributable to the proceeds from the sale of our common stock.
Liquidity and Capital Resources
As of January 31, 2017, our cash totaled
approximately $2.5 million, compared to approximately $1.9 million at April 30, 2016. Working capital was approximately $1.9 million
at January 31, 2017 and approximately $1.4 million at April 30, 2016. The increase in cash is attributable to the net proceeds
from sale of Common Stock, offset in part by an increase in our operating expenses.
We believe that our cash as of January
31, 2017, our ability to use our S-3 Registration Statement, any sales of unregistered shares of Common Stock and any public offerings
of Common Stock will provide sufficient capital to meet our capital requirements and to fund our operations through January 31,
2018. We plan to pursue additional funding opportunities in connection with planning for and conducting our clinical trials.
Among others, we intend on continuing the sale of Common Stock to raise capital to fund these activities and for working capital
for corporate purposes, if necessary.
There can be no assurance that such financing
will be available as needed or if available, on terms favorable to us, and may result in higher costs of capital to us and higher
transaction expenses. Additionally, any such future financing may be dilutive to stockholders’ present ownership levels,
and such additional securities may have rights, preferences, or privileges that are senior to those of our existing common stock.
Off-Balance Sheet Arrangements
Except as described below, we have no off-balance
sheet arrangements that could have a material current effect or that are reasonably likely to have a material future effect on
our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures,
or capital resources.
As we reach certain “milestones”
in the progression of our live cell encapsulation technology towards the development of treatments for cancer and diabetes, we
will be required to make payments to SG Austria or Austrianova.
The future royalty and milestone payments for
cancer required by the Third Addendum to the Asset Purchase Agreement we entered into with SG Austria are as follows: (i) a 2%
royalty payment on all gross sales; (ii) a 10% royalty payment on all gross revenues from sublicensing; (iii) a milestone payment
of $100,000 after enrollment of the first human patient in the first clinical trial for each product; (iv) a milestone payment
of $300,000 after the enrollment of the first human patient in the first Phase 3 clinical trial; and (v) a milestone payment of
$800,000 after obtaining a marketing authorization from a regulatory agency. Additional milestone payments of $50,000 after the
enrollment of the first veterinary patient for each product and $300,000 after obtaining marketing authorization for each veterinary
product are also required to be paid to SG Austria.
The future royalty and milestone payments for
the treatment of diseases and their related symptoms using constituents of the
Cannabis
plant under our Licensing Agreement
with Austrianova are as follows: (i) a 10% royalty payment on all gross sales; (ii) a 20% royalty payment on gross revenues from
sublicensing; (iii) a milestone payment of $100,000 within 30 days of beginning the first pre-clinical experiments using the encapsulated
cells; (iv) a milestone payment of $500,000 within 30 days after enrollment of the first human patient in the first clinical trial;
(v) a milestone payment of $800,000 within 30 days after enrollment of a human patient in the first Phase 3 clinical trial; and
(vi) a milestone payment of $1,000,000 within 90 days after obtaining the first marketing authorization.
We are also required to pay a 4.5% royalty
payment on net sales for each product we develop that uses the genetically modified cells we license from Bavarian Nordic A/S and
GSF-Forschungszentrum fur Umwelt u. Gesundheit GmbH.
Contractual Obligations
On August 31, 2016, our existing office
lease expired. On September 1, 2016, we entered into a new office lease agreement with a term of 12 months. Payments owed in respect
of our new office lease are reflected in the following table, which presents certain payments due by us as of January 31, 2017
with respect to our known contractual obligations: