The accompanying notes are an integral part of these unaudited
condensed consolidated financial statements
The accompanying notes are an integral part of these consolidated
financial statements.
NOTES TO UNAUDITED CONDENSED CONSOLIDATED
FINANCIAL STATEMENTS
JUNE 30, 2017
Introductory Comment
Unless otherwise indicated, any reference to
“our company”, “we”, “us”, or “our” refers to Creative Medical Technology Holdings,
Inc., and as applicable to its wholly owned subsidiary, Creative Medical Technologies, Inc., a Nevada corporation (“
CMT
”).
NOTE 1 – ORGANIZATION AND SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
Organization
– We
were incorporated on December 3, 1998, in the State of Nevada, and have one wholly-owned subsidiary, Creative Medical
Technologies, Inc., a Nevada corporation (“
CMT
”), which conducts all of our business operations. On
September 14, 2016, we formed a limited liability company, Amniostem LLC, in Nevada for the purpose of creating and/or
licensing intellectual property in the area of amniotic fluid derived stem cells for therapeutic applications. This entity is
a wholly owned subsidiary of CMT and has not commenced any business activities. On May 17, 2017, we formed a limited
liability company, StemSpine, LLC in Nevada for the purpose of creating and/or licensing intellectual property in the area of
using stem cells therapies to treat lower back pain. This entity is a wholly owned subsidiary of CMT and has not commenced
any business activities.
We had only limited operations during this
startup phase through June 30, 2008, at which time we ceased all business operations because of increased competition in the industry,
dwindling sales, and elevated costs associated with generating sales.
On May 18, 2016, we closed an Agreement and
Plan of Merger (the “
Merger Agreement
”) with CMT, Steven L. White, our principal shareholder and the sole
officer and director, and Jolley Acquisition Corp., a Nevada corporation and wholly owned subsidiary of our company (the “
Merger Sub
”). As a result of the closing of the Merger Agreement, the Merger Sub was merged with and into CMT with
CMT being the surviving corporation and CMT became our wholly-owned subsidiary. Effective May 18, 2016, we filed Articles of Merger
and Articles of Exchange with the Nevada Secretary of State evidencing the closing and the issuance of our shares to the shareholders
of CMT. Following closing, Mr. White, who was our majority shareholder prior to the closing, sold 15,100,000 shares of our common
stock to us for $5,000, after which the shares were cancelled and returned to our authorized but unissued shares of common stock.
In connection with the closing, CMT caused
Creative Medical Health, Inc., a Delaware corporation and parent of CMT (“
CMH
”), to advance $25,000 to us
for payment of certain obligations. Prior to the execution of the Merger Agreement, CMH advanced to us $8,256 for the payment of
certain accounts payable and $5,000 for repayment of certain notes payable. At closing, CMT caused CMH to advance $5,000 to us
for the purchase of Mr. White’s shares and the balance of the $25,000 for the payment of our remaining accounts payable.
The amounts advanced by the parent of CMT are evidenced by an 8% Promissory Note dated May 18, 2016.
At closing, each share of common stock of CMT
issued and outstanding immediately prior to the closing was converted into 6.4666666 shares of our common stock (97,000,000 shares),
which now constitutes approximately 91%, of our issued and outstanding common stock. The equity of the Company has been retroactively
restated to show the effect of the reverse merger on the common stock outstanding for the periods presented.
As a condition of closing, we delivered Cancellation
of Indebtedness Agreements evidencing the cancellation of all prior outstanding notes payable, except for promissory notes in the
aggregate amount of $20,000 which are payable upon obtaining DTC eligibility for our common stock.
At closing, Timothy Warbington, Donald Dickerson,
Thomas Ichim, PhD, and Amit Patel, MD were appointed as our directors and Mr. White resigned from all positions with our company.
Effective May 18, 2016, in connection with
the closing, we filed Articles of Merger with the Nevada Secretary of State evidencing the change of our name to “Creative
Medical Technology Holdings, Inc.” This merger was between our company and a newly formed Nevada corporation, Creative Medical
Technology Holdings, Inc., which was formed solely to effect our name change.
Our principal executive offices are located
at 2017 W Peoria Avenue, Phoenix, AZ 85029.
Use of Estimates
–
The preparation of the financial statements in conformity with accounting principles generally accepted in the United States of
America 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 balance sheet and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those estimates.
Basis of Presentation
– The accompanying unaudited condensed consolidated financial statements have been prepared without audit. In the
opinion of management, all adjustments (which include only normal recurring adjustments) necessary to present fairly the
financial position, results of operations and cash flows at June 30, 2017 and for the three and six month periods then ended
have been made. Certain information and footnote disclosures normally included in financial statements prepared in accordance
with accounting principles generally accepted in the United States of America have been condensed or omitted. The operations
for the three and six month period ended June 30, 2017, are not necessarily indicative of the operating results for the full
year.
Going Concern
– The
accompanying unaudited condensed consolidated financial statements have been prepared in conformity with accounting
principles generally accepted in the United States of America, which contemplate continuation of the Company as a going
concern. However, during the six month period ended June 30, 2017, the Company incurred a net loss of $1,129,707 had negative
cash flows from operating activities, had a working capital deficit of $1,209,524 and had no revenue-generating activities.
These factors raise substantial doubt about the ability of the Company to continue as a going concern. In this regard,
management is proposing to raise any necessary additional funds not provided by operations through loans or through
additional sales of common stock. There is no assurance that the Company will be successful in raising this additional
capital or in achieving profitable operations. The unaudited condensed consolidated financial statements do not include any
adjustments that might result from the outcome of these uncertainties.
Research and
Development
– Research and development will be the principal function of the Company. Research and development
costs will be expensed as incurred. Expenses in the accompanying unaudited condensed consolidated financial statements
include certain costs which are directly associated with the Company’s research and development:
|
1.
|
Erectile Dysfunction Technology based upon the use of stem cells. These costs, which consist primarily
of monies paid for clinical trial expenses, materials and supplies and compensation costs amounted to $17,109 and $64,872 for the
three and six month periods ended June 30, 2017, respectively.
|
|
2.
|
Stroke Treatment based upon implanting amniotic fluid-based stem cells. Monies paid for laboratory
expenses, materials and supplies amounted to $5,600 and $18,311 for the three and six month periods ended June 30, 2017, respectively.
|
Basic and Diluted
Loss Per Share –
The Company follows Financial Accounting Standards Board (“FASB”) ASC 260 Earnings
per Share to account for earnings per share. Basic earnings per share (“EPS”) calculations are determined by dividing
net loss by the weighted average number of shares of common stock outstanding during the year. Diluted earnings per share calculations
are determined by dividing net income by the weighted average number of common shares and dilutive common share equivalents outstanding.
During periods when common stock equivalents, if any, are anti-dilutive they are not considered in the computation. During the
three and six month periods ended June 30, 2017, the Company had 500,000 options and 800,000 warrants to purchase common stock
outstanding. In addition, the Company has various convertible notes payable for which at June 30, 2017 are convertible into approximately
1,949,206 shares of common stock. The effects of the dilutive securities were anti-dilutive due to net loss during the three and
six month periods ended June 30, 2017.
Recent
Accounting Pronouncements –
In July 2017, the FASB issued
ASU No. 2017-11, “Earnings Per Share (Topic 260) Distinguishing Liabilities from Equity (Topic 480) Derivatives and Hedging
(Topic 815),” which addresses the complexity of accounting for certain financial instruments with down round features. Down
round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced
on the basis of the pricing of future equity offerings. Current accounting guidance creates cost and complexity for entities that
issue financial instruments (such as warrants and convertible instruments) with down round features that require fair value measurement
of the entire instrument or conversion option. For public business entities, the amendments in Part I of this Update are effective
for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. For all other entities, the
amendments in Part I of this Update are effective for fiscal years beginning after December 15, 2019, and interim periods within
fiscal years beginning after December 15, 2020. The Company is currently evaluating the impact of adopting this guidance on its
consolidated financial statements. The Company has reviewed all
recently issued, but not yet adopted, accounting standards in order to determine their effects, if any, on its results of operation,
financial position or cash flows. Based on that review, the Company believes that none of these pronouncements will have
a significant effect on its financial statements other than disclosed above.
NOTE 2 – LICENSING AGREEMENTS
ED Patent
– The Company
acquired a patent from Creative Medical Health, Inc. (“CMH”), a related company, on February 2, 2016, in exchange for
64,666,667 shares of CMTH restricted common stock valued at $100,000. CMH holds a significant amount of the Public Company’s common
stock. The patent expires in 2025 and the Company has elected to amortize the patent over a ten year period on a straight line
basis. Amortization expense of $2,493 and $5,014 were recorded for the three and six month periods ended June 30, 2017, respectively.
Male Infertility
License Agreement
– The Company has acquired a royalty license from Los Angeles Biomedical Research Institute
at Harbor-UCLA Medical Center (“LABIOMED”) granting the exclusive license to the products and services of a
LABIOMED patent.
The license was acquired for a cash payment
of $5,000, issuance of 323,333 shares of restricted common stock of the Company (valued at $1,000, with a par value of $0.01 per
share), and an agreement to reimburse LABIOMED up to $1,800 for expenses incurred by LABIOMED in reviving and defending their patent.
The Company has expensed the cash paid, the value of the stock issued, and the expected reimbursement of $1,800 for a total intangible
royalty expense – license fees of $7,300.
The Company is subject to a 6% royalty payment
to LABIOMED on net sales of any products under this license and 25% on any non-royalty sublicense income. Commencing three years
after the date of the agreement, and each subsequent year thereafter, the Company is required to pay to LABIOMED annual maintenance
royalties of $20,000, unless during the prior one-year period the Company paid $50,000 or more in actual royalty payments. Finally,
the Company agreed to pay LABIOMED certain milestone payments upon achieving the milestones set forth in the agreement. As of June
30, 2017, no amounts are currently due to LABIOMED.
Multipotent Amniotic Fetal Stem Cells
License Agreement
– On August 25, 2016, CMT entered into a License Agreement dated August 25, 2016, with
a University. This license agreement grants to CMT the exclusive right to all products derived from a patent for use of multipotent
amniotic fetal stem cells composition of matter throughout the world during the period ending on the expiration date of the longest-lived
patent rights under the patent. The license agreement also permits CMT to grant sublicenses. Under the terms of the license agreement,
CMT is required to diligently develop, manufacture, and sell any products licensed under the agreement. CMT paid the University
an initial license fee within 30 days of entering into the agreement. CMT is also required to pay annual license maintenance fees
on each anniversary date of the agreement, which maintenance fees would be credited toward any earned royalties for any given period.
The License Agreement provides for payment of various milestone payments and earned royalties on the net sales of licensed products
by CMT or any sub licensee. CMT is also required to reimburse the University for any future costs associated with maintaining the
patent. CMT may terminate the license agreement for any reason upon 90 days’ written notice and the University may terminate
the agreement in the event CMT fails to meet its obligations set forth therein, unless the breach is cured within 30 days of the
notice from the University specifying the breach. CMT is also obligated to indemnify the University against claims arising due
to the exercise of the license by CMT or any sub licensee. As of June 30, 2017, no amounts are currently due to the University.
The Company estimates that the patent expires
in February 2026 and has elected to amortize the patent through the period of expiration on a straight line basis. Amortization
expense of $293 and $409 were recorded for the three and six month periods ended June 30, 2017, respectively.
Lower Back Patent
– The Company, through a newly created subsidiary of CMT, StemSpine, LLC, acquired a patent from CMII, a related
company, on May 17, 2017, for $100,000, payable in cash or stock. The patent expires on May 19, 2026 and the Company has
elected to amortize the patent over a ten-year period on a straight line basis. Amortization expense was insignificant for
the three-month period ended June 30, 2017.
For a period of five years from the
date of the first sale of any product derived from the patent, StemSpine is required to make royalty payments of 5% from
gross sales of products. StemSpine has also agreed to pay royalties of 50% of sale price or ongoing payments from third
parties for licenses granted under the patent to third parties. In addition, StemSpine has agreed to make progress payments
under the patent purchase agreement determined by whether the technology represented by the patent is tested by use of
autologous cells or allogenic cells. In the case of pursuit of the technology using autologous cells, StemSpine has agreed to
pay CMH $100,000 upon the signing of an agreement with a university for the initiation of an IRB clinical trial and $200,000
upon completion of the clinical trial. In the event StemSpine determines to pursue the technology using allogenic cells,
StemSpine has agreed to pay CMH $100,000 upon the filing for IND with the FDA; $200,000 upon the dosing of the first patient
in Phase 1-2 clinical trial; and $400,000 upon the dosing of the first patient in Phase 3 clinical trial. In each case
StemSpine has the option to make these payments in cash or in shares of the Company’s common stock at a discount to the
market price of the stock at the time of the transaction. The parties to the patent purchase agreement have agreed that in no
event will the aggregate royalty payments under the agreement exceed $2,500,000.
NOTE 3 – RELATED PARTY TRANSACTIONS
The Company has incurred a monetary obligation
to a related corporation to reimburse the cost of services provided to the Company (management and consulting) through June 30,
2017. Each of the Company’s executive officers is employed by the parent company, CMH, and will continue to receive his or
her salary or compensation from CMH. The Company has an agreement with CMH which obligates the Company to reimburse CMH $35,000
per month for such services beginning January 2016. The compensation paid by CMH will include an allocation of services performed
for CMH and for the Company. The amounts are presented as a “management fee payable - related party” on the accompanying
unaudited condensed consolidated balance sheets. The liability is non-interest bearing, unsecured, and will be due upon the Company
successfully raising at least $1,000,000 through the sale of equity. As of June 30, 2017, amounts due to CMH under the arrangement
were $193,000.
During 2016, the Company entered into three
note payable agreements with CMH in which the proceeds were used in operations. The notes payable were dated February 2, 2016,
May 1, 2016 and May 18, 2016 and resulted in borrowings of $50,000, $50,000 and $25,000, respectively. Notes payable of $50,000
mature on April 30, 2017, $50,000 on July 31, 2017 and $25,000 on May 18, 2018. On May 4, 2017, CMT and CMH entered into a Note
Extension and Limited Waiver Agreement whereby the parties extended the maturity date of the 8% Promissory Note dated February
2, 2016, in the principal amount of $50,000, from April 30, 2017, to April 30, 2018, and CMH waived the nonpayment of the Note
by CMT on the original maturity date. On extension, CMT paid to CMH accrued interest related to the extended note of $4,050. The
notes incur interest at 8% per annum on the outstanding balance of the notes. As of June 30, 2017, accrued interest was $7,386.
As of December 31, 2016, accrued interest was $6,398.
On August 12, 2016, CMH advanced the Company
$2,000 for operations. The amount is due on demand and does not incur interest.
See Note 2 for discussion of an additional
related party transaction with CMH.
NOTE 4 – DEBT
$100,000 Loan
On April 13, 2017, the Company received a loan
from an accredited investor in the amount of $100,000, for which $90,000 in proceeds were received. The loan is evidenced by a
promissory note dated April 13, 2017, which bears interest at 12% and which matures on October 13, 2017. In addition, at maturity
the Company must pay 125% of principal and interest at maturity. The promissory note is secured by 400,000 shares of common stock
held by the lender. The Company is amortizing the on issuance discount of $35,000 to interest expense using the straight-line method
over the term of the loan. During the three and six month periods ended June 30, 2017 the Company amortized $14,918 to interest
expense. As of June 30, 2017, a discount of $20,082 remained.
$400,000 Convertible Debenture
On May 2, 2017, the Company entered into a
convertible debenture agreement with a third party for an aggregate principal amount of up to $400,000, for which up to $360,000
in proceeds is to be received. On May 2, 2017, the Company received the first tranche of proceeds of $85,000 for which the Company
issued a convertible debenture in the face amount of $100,000. Under the terms of the agreement, the convertible debenture incurs
interest at 0% per annum with an effective interest rate at 5% per annum and has a maturity date of three years from the date of
funding, which represents May 2, 2020 for the first tranche of proceeds received. Additionally, the Company issued to the holder
50,000 shares of common stock. The convertible note was fully discounted upon issuance due to an on issuance discount of $10,000,
legal processing fees of $5,000 and the remaining discount of $85,000 due to the recording of a derivative liability as discussed
in Note 5. The Company is amortizing the total discount of $100,000 to interest expense using the straight-line method over the
term of the loan. During the three and six month periods ended June 30, 2017 the Company amortized $6,069 to interest expense.
As of June 30, 2017, a discount of $93,931 remained.
The debenture is convertible under the following
terms: 1) any time from issuance until 180 days at a fixed rate of $0.25 per share; 2) any time during the period beginning on
the date which is 180 days following the date of the issuance at the lower of $0.25 or a conversion price equal to 65% (adjusted
to 60% based upon the conversion rate of the $115,000 convertible note discussed below) of the second lowest closing trade price
of the Company’s common stock for the 15 trading days immediately preceding the conversion date. The Company is required at all
times to reserve shares of the Company’s common stock equal to 700% of the number of shares the convertible debenture is convertible
into.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible debenture. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, See Note 5. Derivative accounting applies as there are various terms in which the conversion
price is variable and does not have a floor as to the number of common shares in which could be converted. Thus, if the convertible
debenture is not repaid prior to the debenture being convertible, significant pressure may be put on the Company’s stock price
and additional dilution of current shareholders may take place.
In the event of default, the holder has the
right to require the Company to repay in cash all or a portion of the convertible debenture at a price equal to 110% of the aggregate
principal amount of the convertible debenture plus all accrued and unpaid interest on the principal amount. In addition, the default
interest rate would increase to the greater of 18% or the maximum amount allowable under the applicable law.
The Company has the option to redeem the
convertible debentures within 90 days from the date of issuance at 105% of the principal and interest; between 91 and to 120
days from the date of issuance at 115% of the principal and interest; between 121 days and 150 days from the date of issuance
at 120% of the principal and interest; between 151 days and to 180 days from the date of issuance at 130% of the principal
and interest; and after 180 days from the date of issuance at 140% of the principal and interest.
$115,000 Convertible Note
On April 10, 2017, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $115,000, for which $103,250 in proceeds were
received on May 5, 2017. Under the terms of the agreement, the convertible note incurs interest at 10% per annum and has a maturity
date of January 10, 2018. The convertible note is convertible upon issuance into shares of the Company’s common stock at a conversion
price equal to 60% of the two lowest trading prices of the Company’s common stock during the previous 25 trading days preceding
the conversion date. The Company is required at all times to reserve shares of the Company’s common stock equal to 10 times the
number of common shares the convertible note is convertible into. The Company is amortizing the on issuance discount of $10,000
and legal processing fees of $1,750 and the remaining discount of $103,250 due to the recording of a derivative liability as discussed
in Note 5. The Company is amortizing the total discount of $115,000 to interest expense using the straight-line method over the
term of the loan. During the three and six month periods ended June 30, 2017, the Company amortized $25,760 to interest expense.
As of June 30, 2017, a discount of $89,240 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not have
a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior to the
note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current shareholders
may take place.
In the event of default, the holder has the
right to require the Company to repay in cash all or a portion of the convertible note at a price equal to 150% of the aggregate
principal amount of the convertible note plus all accrued and unpaid interest on the principal amount. In addition, the default
interest rate would increase to the greater of 24% or the maximum amount allowable under the applicable law.
The Company has the option to redeem the convertible
notes within 90 days from the date of issuance at 125% of the principal and interest; between 91 and to 179 days from the date
of issuance at 140% of the principal and interest; and after 180 days the right of prepayment expires.
$55,000 Convertible Note
On April 24, 2017, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $55,000, for which $47,500 in proceeds were
received on May 8, 2017. Under the terms of the agreement, the convertible note incurs interest at 10% per annum and has a maturity
date of April 24, 2018. The convertible note is convertible upon issuance and convertible into shares of the Company’s stock at
a conversion price equal to 60% of the lowest trading price of the Company’s common stock during the previous 20 trading days preceding
the conversion date. The Company is required at all times to reserve shares of the Company’s common stock equal to three times
the number of common shares the convertible note is convertible into. In conjunction with the issuance of the note, the Company
issued 200,000 five-year warrants to purchase common stock at $0.25 per share to the note issuer. The Company is amortizing the
on issuance discount of $5,000 and legal processing fees of $2,500 and the remaining discount of $47,500 due to the recording of
a derivative liability as discussed in Note 5. The Company is amortizing the total discount of $55,000 to interest expense using
the straight-line method over the term of the loan. During the three and six month periods ended June 30, 2017 the Company amortized
$8,305 to interest expense. As of June 30, 2017, a discount of $46,695 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature and the warrants as derivative liabilities, see Note 5. Derivative accounting applies as the conversion price is variable
and does not have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid
prior to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current
shareholders may take place. The warrants were considered derivative liabilities as there are various reset provisions to the exercise
price based upon additional issuances of common stock and equivalents.
In the event of default, the holder has the
right to require the Company to repay in cash all or a portion of the convertible note at a price equal to 150% of the aggregate
principal amount of the convertible note plus all accrued and unpaid interest on the principal amount. In addition, the default
interest rate would increase to the greater of 22% or the maximum amount allowable under the applicable law.
The Company has the option to redeem the convertible
notes within 30 days from the date of issuance at 115% of the principal and interest; between 31 and to 60 days from the date of
issuance at 120% of the principal and interest; between 61 days and 90 days from the date of issuance at 125% of the principal
and interest; between 91days and to 120 days from the date of issuance at 130% of the principal and interest; between 121 days
and to 180 days from the date of issuance at 135% of the principal and interest; and after 180 days the right of prepayment expires.
$50,000 Secured Convertible Note
On June 26, 2017, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $50,000, for which $50,000 in proceeds were
received on June 26, 2017. Under the terms of the agreement, the convertible note incurs interest at 12% per annum and has a maturity
date of December 26, 2017. The convertible note is convertible upon issuance and convertible into shares of the Company’s stock
at a conversion price equal to or greater than $0.25 or a conversion price equal to 60% of the average closing trading price of
the Company’s common stock during the previous 20 trading days preceding the conversion date. The Company has pledged 200,000 shares
of common stock as security on the note. The Company recorded a discount of $40,681 due to the recording of a derivative liability
as discussed in Note 5. The Company is amortizing the total discount of $40,681 to interest expense using the straight-line method
over the term of the loan. During the three and six month periods ended June 30, 2017, the Company amortized $889 to interest expense.
As of June 30, 2017, a discount of $39,792 remained.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company accounted for the conversion
feature as a derivative liability, see Note 5. Derivative accounting applies as the conversion price is variable and does not have
a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid prior to the
note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current shareholders
may take place.
In the event of default, the holder has the
right to exercise the Stock Power granted and have the stock certificate representing the pledged stock transferred into the holder
or its broker’s name.
The Company has the option to redeem the convertible
notes within 10 days from the date of maturity at 120% of the principal and interest.
NOTE 5 – DERIVATIVE LIABILITIES
Derivative Liabilities
In connection with
convertible notes payable, the Company records derivative liabilities for the conversion feature. In addition, the Company has
warrants for which the exercise prices reset upon future events. These warrants are also considered to be derivative liabilities.
The derivative liabilities are valued on the date the convertible note payable become convertible and revalued at each reporting
period. The warrants are valued on the date of issuance and revalued at each reporting period. During the six months ended June
30, 2017, the Company recorded derivative liabilities of $389,750 based upon the following Black-Scholes option pricing model average
assumptions: an exercise price of $0.14 to $0.27 our stock price on the date of grant $0.45, expected dividend yield of 0%, expected
volatility of 50% to 90%, risk free interest rate of 0.86% and expected terms ranging from 0.5 to 3.0 years. Upon initial valuation,
the derivative liability exceeded the face value certain of the convertible note payables by approximately $113,319, which was
recorded as a day one loss on derivative liability.
On June 30, 2017,
the derivative liabilities were revalued at $681,055 resulting in a loss of $291,305 related to the change in fair market value
of the derivative liabilities. The derivative liabilities were revalued using the Black-Scholes option pricing model with the following
average assumptions: an exercise price of $0.13 to $0.25, our stock price on the date of valuation ($0.45), expected dividend yield
of 0%, expected volatility of 50% to 99%, risk-free interest rate of 0.86%, and an expected terms ranging from 0.5 to 2.8 years.
Future Potential
Dilution
Most of the Company’s
convertible notes payable contain adjustable conversion terms with significant discounts to market. As of June 30, 2017 the Company’s
convertible notes payable are potentially convertible into an aggregate of approximately 1.9 million shares of common stock. In
addition, due to the variable conversion prices on some of the Company’s convertible notes, the number of common shares issuable
is dependent upon the traded price of the Company’s common stock.
NOTE 6 – STOCK BASED COMPENSATION
In July and September 2016, the Company granted
10-year options to two parties for accepting appointment to the Company’s scientific advisory board. Each award consisted
of options to purchase up to 250,000 shares at $0.175 per share. The options vest at a rate of 50,000 on each anniversary date
of the respective grants.
On April 27, 2017, the Company issued 250,000
shares of common stock to a single party for consulting services. The Company determined the value of such shares to be $112,500.
The values were based upon the fair market value of the Company’s common stock on the date of performance, which in most
cases is the agreement date. Services performed in connection with this issuance relate to assignment to advisory services related
to capital markets.
The fair value of each option award is estimated
using the Black-Scholes valuation model. Assumptions used in calculating the fair value at June 30, 2017 were as follows:
|
|
Weighted
Average
Inputs Used
|
|
|
|
|
|
Annual dividend yield
|
|
$
|
-
|
|
Expected life (years)
|
|
|
6.55
|
|
Risk-free interest rate
|
|
|
1.42
|
%
|
Expected volatility
|
|
|
85.08
|
%
|
Common stock price
|
|
$
|
0.45
|
|
Since the expected life of the options was
greater than the Company’s historical stock information available, the Public Company determined the expected volatility based
on price fluctuations of comparable public companies.
Stock based compensation was $140,957 and $142,423
for the three and six month periods ended June 30, 2017, respectively. These costs are included with general and administrative
expenses on the accompanying unaudited condensed consolidated statement of operations. As of June 30, 2017, future estimated stock
based compensation to be recorded was $158,194 which will be recognized through 2021.
NOTE 7 – STOCKHOLDERS’ DEFICIT
In August 2016, the Company commenced a non-public
offering of up to 10,000,000 shares of common stock at $0.10 per share, and at no additional cost, one warrant to purchase another
share of common stock at $0.10 per share for each ten shares purchased in the offering. The securities offered have not been and
will not be registered under the Securities Act of 1933, as amended, and may not be offered or sold in the United States absent
registration or an applicable exemption from registration requirements. From August 6, 2016 to December 31, 2016, the Company sold
5,000,000 shares in this offering, resulting in proceeds of $500,000 and the issuance of warrants to purchase 500,000 shares of
common stock. Of this amount $30,000 was received from CMH, a related party.
In July and September 2016, the Company granted
10-year options to two parties for accepting appointment to the Company’s scientific advisory board. Each award consisted
of options to purchase up to 250,000 shares at $0.175 per share. The options vest at a rate of 50,000 on each anniversary date
of the respective grants.
On March 23, 2017, the Company sold an additional
1,000,000 shares and issued 100,000 warrants for gross proceeds of $100,000 under the same terms as the prior offering. The Company
determined that the fair value of these warrants was $5,546 was estimated using the Black-Scholes valuation model. The warrants
were classified as equity as they were issued in connection with a capital raise.
Assumptions used in calculating the fair value
of the warrants upon issuance were as follows:
|
|
Inputs Used
|
|
|
|
|
|
Annual dividend yield
|
|
$
|
-
|
|
Expected life (years)
|
|
|
4.82
|
|
Risk-free interest rate
|
|
|
0.86
|
%
|
Expected volatility
|
|
|
90.57
|
%
|
Common stock price
|
|
$
|
0.45
|
|
See Note 2 for discussion related to the issuance
of common stock in connection with licensing agreements. See Note 4 and 5 for discussion regarding warrants issued with a convertible
note payable.
NOTE
8 – SUBSEQUENT EVENTS
In accordance with ASC 855, management reviewed
all material events through August 14, 2017, for these financial statements and there are no material subsequent events to report,
except as follows:
$50,000 Convertible Note
On July 19, 2017, the Company entered into
a convertible note agreement with a third party for an aggregate principal amount of $50,000, for which $43,00 in proceeds were received. Under the terms of the agreement, the convertible note incurs interest at 5% per annum and has a maturity 12 months
from the effective date of payment. The convertible note is convertible upon issuance and convertible into shares of the Company’s
stock at a conversion price equal to 60% of the lowest trading price of the Company’s common stock during the previous 20 trading
days preceding the conversion date. The Company is required at all times to reserve shares of the Company’s common stock equal
to ten times the number of common shares the convertible note is convertible into.
The conversion price is subject to adjustment
in the case of stock splits, stock dividends, combinations of shares and similar recapitalization transactions and any issuances
of securities below the conversion price of the convertible note. On the date of issuance, the Company anticipates that it will
account for conversion feature as a derivative liability. Derivative accounting applies as the conversion price is variable and
does not have a floor as to the number of common shares in which could be converted. Thus, if the convertible note is not repaid
prior to the note being converted significant pressure maybe put on the Company’s stock price and additional dilution of current
shareholders may take place.
In the event of default, the holder has the
right to require the Company to repay in cash all or a portion of the convertible note at a price equal to 150% of the aggregate
principal amount of the convertible note plus all accrued and unpaid interest on the principal amount. In addition, the default
interest rate would increase to the lesser of 12% or the maximum amount allowable under the applicable law.
The Company has the option to redeem the convertible
notes within 60 days from the date of issuance at 120% of the principal and interest; between 61 and to 120 days from the date
of issuance at 135% of the principal and interest; between 121 days and 180 days from the date of issuance at 150% of the principal
and interest; and after 180 days the right of prepayment expires.