# Propanc Biopharma, Inc.: Form 10-Q for the period ended Sep 30, 2018

- Company: [Propanc Biopharma, Inc.](/companies/ppcb.md) (CIK 1517681)
- Form: 10-Q
- Filed: 2018-11-13
- Accepted by EDGAR: Nov 9, 2018, 18:30 ET
- Period: 2018-09-30
- Accession: 0001493152-18-015599
- Inline XBRL: yes
- Main document: https://www.sec.gov/Archives/edgar/data/1517681/000149315218015599/form10-q.htm
- All documents and exhibits: https://www.sec.gov/Archives/edgar/data/1517681/000149315218015599/

## Figures reported in this filing

Standardized XBRL line items for the period ended 2018-09-30.

| Line item | Period | Value | XBRL concept |
| --- | --- | ---: | --- |
| Cost of revenue | 3 months, 2018-07-01 to 2018-09-30 | $8.1k | us-gaap:CostOfGoodsAndServicesSold |
| Research and development | 3 months, 2018-07-01 to 2018-09-30 | $56.2k | us-gaap:ResearchAndDevelopmentExpense |
| Operating income | 3 months, 2018-07-01 to 2018-09-30 | −$448.9k | us-gaap:OperatingIncomeLoss |
| Interest expense | 3 months, 2018-07-01 to 2018-09-30 | $624.5k | us-gaap:InterestExpense |
| Net income | 3 months, 2018-07-01 to 2018-09-30 | −$2.1m | us-gaap:NetIncomeLoss |
| Diluted EPS | 3 months, 2018-07-01 to 2018-09-30 | −$0.02 | us-gaap:EarningsPerShareBasicAndDiluted |
| Operating cash flow | 3 months, 2018-07-01 to 2018-09-30 | −$419.2k | us-gaap:NetCashProvidedByUsedInOperatingActivities |
| Cash and equivalents | at 2018-09-30 | $38.9k | us-gaap:Cash |
| Current assets | at 2018-09-30 | $73.0k | us-gaap:AssetsCurrent |
| Total assets | at 2018-09-30 | $82.8k | us-gaap:Assets |
| Current liabilities | at 2018-09-30 | $5.6m | us-gaap:LiabilitiesCurrent |
| Long-term debt | at 2018-09-30 | $3.8m | us-gaap:LongTermDebt |
| Shareholders' equity | at 2018-09-30 | −$5.6m | us-gaap:StockholdersEquity |

## Management's discussion and analysis

As filed, 39,140 characters.

*As used herein, “Propanc,” the “Company,” “our,” “we” or “us” and similar terms include Propanc Biopharma, Inc. and its wholly owned subsidiary Propanc PPY LTD, unless the context indicates otherwise. The following discussion and analysis of our business and results of operations for the three months ended September 30, 2018, and our financial conditions at that date, should be read in conjunction with the condensed consolidated financial statements and the notes thereto included elsewhere in this Quarterly Report on Form 10-Q (this “Quarterly Report”).US Dollars are denoted herein by “USD,” “$” and “dollars.”*

### Forward-Looking Statements

Certain statements contained in this Quarterly Report (or otherwise made by us or on our behalf from time to time in other reports, filings with the SEC, news releases, conferences, internet postings or otherwise) that are not statements of historical fact constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, notwithstanding that such statements are not specifically identified. These forward-looking statements relate to expectations or forecasts for future events, including without limitation our earnings, revenues, expenses or other future financial or business performance or strategies, or the impact of legal or regulatory matters on our business, results of operations or financial condition. These statements may be preceded by, followed by or include the words such as “may,” “will,” “expect,” “believe,” “anticipate,” “intent,” “could,” “would,” “should,” “estimate,” “might,” “plan,” “predict” or “continue” or the negative or other variations thereof or comparable terminology are intended to identify forward-looking statements. These forward-looking statements are not guarantees of future performance and are based on information available to us as of the date of this Quarterly Report and on our current expectations, forecasts and assumptions, and involve substantial risks and uncertainties. Actual results may vary materially from those expressed or implied by the forward-looking statements herein due to a variety of factors, including:

This Quarterly Report contains forward-looking statements, including statements regarding, among other things:

- our ability to continue as a going concern;
- our anticipated needs for working capital;
- our ability to successfully develop PRP, our lead product candidate;
- our ability to reach research and development milestones as planned and within proposed budgets;
- our current reliance on substantial debt financing;
- our ability to repay current debt in cash and obtain adequate new financing;
- our dependence on third parties for services;
- our dependence on key executives;
- our ability to control costs;
- our ability to successfully implement our expansion strategies;
- our ability to successfully develop and market our technologies;
- our ability to obtain and maintain patent protection;
- our ability to recruit employees with regulatory, accounting and finance expertise;
- the impact of government regulations, including United States Food and Drug Administration (the “FDA”) regulations;
- the impact of any future litigation;
- the availability of capital; and
- changes in economic, business and competitive conditions.

4

Actual events or results may differ materially from those discussed in forward-looking statements as a result of various factors, including, without limitation, the risks and uncertainties discussed in Item 1A. Risk Factors of this Quarterly Report, section captioned “Risk Factors” of our Registration Statement on Form S-1, filed with the U.S. Securities and Exchange Commission (the “SEC”) on October 17, 2018, and matters described in this Quarterly Report generally. In light of these risks and uncertainties, there can be no assurance that the forward-looking statements contained in this Quarterly Report will in fact occur. We caution you not to place undue reliance on these forward-looking statements. In addition to the information expressly required to be included in this Quarterly Report, we will provide such further material information, if any, as may be necessary to make the required statements, in light of the circumstances under which they are made, not misleading. All subsequent written and oral forward-looking statements attributable to our Company or to persons acting on our behalf are expressly qualified in their entirety by these cautionary statements. All forward-looking statements included in this Quarterly Report are made only as of the date of this report or as indicated. Except as required by law, we do not intend to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

### Our Business

We are a development-stage healthcare company that is currently focused on developing new cancer treatments for patients suffering from pancreatic, ovarian and colorectal cancer. Utilizing our scientific and oncology consultants, we have developed a rational, composite formulation of anti-cancer compounds, which together exert a number of effects designed to control or prevent tumors from recurring and spreading through the body. Our lead product candidate, PRP, is a variation upon our novel formulation and involves pro-enzymes, the inactive precursors of enzymes. As a result of positive early indications of the anti-cancer effects of our technology, over the last year we have conducted successful pre-clinical studies on PRP and subject to us receiving adequate financing, hope to submit a clinical trial application in the United Kingdom (the “UK”) in the first half of the 2019 calendar year. We intend to develop our PRP to treat early-stage cancer and pre-cancerous diseases and as a preventative measure for patients at risk of developing cancer based on genetic screening.

#### The Problem

In the early phases of tumor progression, cancer cells multiply near the site where their predecessors first began uncontrolled proliferation. The result, usually over a long period of time, is a primary tumor mass. Tumors often need to reach a large size before they make themselves apparent to the individual concerned, or the clinician screening for them.

Eventually, tumors of substantial size may begin to compromise the functioning of organs in which they have arisen and begin to evoke symptoms. In many cases, the effects on normal tissue function come from the physical pressure exerted by the expanding tumor masses. For example, large tumors in the colon may obstruct digestion products through the lumen, or in the lungs, airways may be compromised.

As dangerous and threatening as these primary tumors are, they are ultimately responsible for only about 10% of deaths. A far greater threat often arises for the patient, even after a primary tumor has been identified and removed. This threat involves cancerous growths that are discovered at sites far removed from the locations in their bodies where their primary tumors first appeared. These cancerous growths, called metastases, are responsible for approximately 90% of patient deaths from cancer. Metastases are formed by cancer cells that have left the primary tumor mass and traveled by the body’s blood and lymphatic vessels (a vein-like vessel carrying lymph, or white blood cells, from the tissues) to seek new sites and form new colonies. For example, breast cancers often spawn metastatic colonies in many tissues throughout the body including the brain, liver, bones, and lungs.

For primary tumors that have not yet metastasized, current treatments for cancer can be effective in initially reducing tumor burden. However, for many forms of cancer, current treatments lack sufficient efficacy to achieve a long lasting clinical response. Therefore, a vast majority of patients who succumb to cancer are killed by tumors that have metastasized. According to the National Cancer Institute’s SEER Cancer Statistics Review (2001 – 2007), of the patients diagnosed with late stage metastatic breast cancer, only 23% are expected to live longer than five years. This is compared to a 98% five-year survival rate for an early stage breast cancer patient when the cancer is confined to the primary site.

#### Our Solution

Our solution is to develop and commercialize a long-term therapy to prevent tumor recurrence and metastases, the main cause of patient death from cancer. We believe this problem can be addressed by developing a pro-enzyme formulation specifically targeting malignant carcinoma cells to create a long lasting clinical benefit to the patient.

Our lead product, PRP, is a novel, patented formulation consisting of two pro-enzymes, trypsinogen and chymotrypsinogen, combined at a ratio of one-to-six (1:6), to be administered intravenously. After establishing proof of concept *in vivo* as described in more detail below in the section captioned “Business”, supplemented by laboratory research at the Universities of Jaén and Granada on the mechanism of action of the pro-enzyme mixture, evidence suggests PRP may be effective against a range of solid tumors.

PRP recently completed preclinical development. A First-In-Human (FIH), Phase Ib study in patients with advanced solid tumors, evaluating the safety, pharmacokinetics and anti-tumor efficacy of PRP is planned to commence in 2018 in the UK subject to us receiving adequate financing, and is hoped to be completed within twelve months. The study will be an open-label, multicenter, non-comparative study of PRP administered at increasing dose levels, with once daily intravenous injections over a 28-day cycle, with at least 20 and up to 40 patients enrolled.

The Phase Ib study is planned to be followed by two open Phase IIa studies evaluating the safety, pharmacokinetics and anti-tumor efficacy of PRP administered intravenously to patients with locally advanced or metastatic pancreatic adenocarcinoma, or to patients with advanced epithelial ovarian cancer who have failed prior anti-cancer therapy regimen. These studies are envisioned to start in parallel, shortly after the FIH Phase IIa study, and are hoped to be finalized in 2021. Both studies will be open, multicenter phase II studies measuring overall survival of patients having received once daily intravenous administrations of PRP.

#### Our Development Strategy

Our goal is to undertake early stage clinical development of PRP through to a significant value inflection point, where the commercial attractiveness of a drug in development, together with a greater likelihood of achieving market authorization, may attract potential interest from licensees seeking to acquire new products. Such value inflection points in the context of cancer drugs are typically at the point where formal, controlled clinical trials have demonstrated either ‘efficacy’ or ‘proof of concept’ – typically meaning that there is controlled clinical trial evidence that the drug is effective in the proposed target patient population, has an acceptable safety profile, and is suitable for further development. From a ‘big picture’ perspective, it is our intention to progress the development of our technology through the completion of our planned Phase IIa clinical trials and then to seek a licensee for further development beyond that point.

As part of that commercial strategy, we will:

- continue research and development to build our existing intellectual property portfolio, and to seek new, patentable discoveries;
- seek to ensure all product development is undertaken in a manner that makes its products approvable in the major pharmaceutical markets, including the U.S., Europe, the UK and Japan;
- aggressively pursue the protection of our technology through all means possible, including patents in all major jurisdictions, and potentially trade secrets; and
- make strategic acquisitions to acquire new companies that have products or services that complement our future goals.

#### Our Development Plan and Milestones

We plan to progress PRP down a conventional early stage clinical development pathway in the UK for:

- regulatory approval to conduct a Phase Ib study, and submit it to the European Medicines Agency for approval; and
- Phase IIa multiple escalating dose studies to investigate the safety, tolerability, and pharmacokinetics of PRP administered intravenously to patients.

We anticipate reaching the Phase IIa proof of concept milestone in approximately three to four years, subject to regulatory approval in Europe, and the results from our research and development and licensing activities.

Our overhead and expenses are likely to increase from its current level as PRP progresses down the development pathway. This increase will be driven by the need to increase our internal resources in order to effectively manage our research and development activities.

Commencing in the third quarter of calendar year 2019, we intend to initiate a Phase Ib study in advanced cancer patients with solid tumors and the anticipated costs will be approximately $2,500,000. We intend to use the proceeds of the Equity Line to fund our planned Phase I, II and III clinical trials.

### Recent Developments

#### Business Activities

In September 2018, we presented at the 25th Annual NewsMakers in the Biotech Industry Conference held at the Millennium Broadway Hotel and Conference Center in New York, NY. This prestigious conference is sponsored by BioCentury, where only 45 companies are handpicked to present their stories to institutional investors in the biotech sector. At the conference, we discussed, among other things, recent scientific advancements of PRP and its ability to suppress the cancer stem cell population, which the Company plans to submit for publication to a peer reviewed scientific journal, and explained the current anticipated timelines for commencing its engineering run and full scale GMP manufacturing batch of PRP, emphasizing the Company management’s focus was to identify a suitable source of capital as we prepare for filling our drug product for clinical trials, as well as the goal of reducing our debt on the balance sheet by increasing equity investment.

In September 2018, we entered into a two-year collaboration agreement with the University of Jaen to provide certain research services to us. In consideration of such services, we agreed to pay the university approximately 52,000 Euros ($60,762 USD) in year one and a maximum of 40,000 Euros ($46,740 USD) in year two. Additionally, in exchange for full ownership of the intellectual property we agreed to pay royalties of 2% of net revenues to the University.

In July 2018, we entered national phase for two of our key patent applications from our intellectual property portfolio. The first patent application, which entered national phase in July 2018, describes a method to eradicate cancer stem cells, and a second patent application, covering proenzyme compositions for the treatment of solid tumors, recently completed national phase entry mid-July 2018. National phase is a process whereby applicants file a patent application in each individual jurisdiction or country, according to where intellectual property protection is sought.

#### Financing Activities

On October 5, 2018, we entered into the equity purchase agreement with L2 Capital, LLC (“L2 Capital”) pursuant to which L2 Capital committed to purchase up to $10,000,000 shares of our common stock (the “Equity Line”). In connection with the execution of the Equity Line, we issued 3,850,597 shares of our stock to L2 Capital as a commitment fee, which are subject to a lock-up/leak-out limitation. For more information about the Equity Line, please see our Current Report on Form 8-K, filed with the SEC on October 10, 2018.

On October 2, 2018, we entered into a securities purchase agreement with GS Capital Partners, LLC (“GS Capital”), pursuant to which GS Capital purchased two 8% unsecured convertible promissory notes from us, each in the principal amount of $106,000, convertible into shares of our common stock at the option of GS Capital (the “GS Capital Notes”).The maturity date of the GS Capital Notes is October 2, 2019.The first GS Capital note was funded with cash and is convertible at any time after the six-month anniversary of the issuance date. The purchase price of the second GS Capital Note was initially paid for by GS Capital issuing to us an offsetting $106,000 collateralized secured note. The second GS Capital Note is not convertible until it is funded in cash on or before June 2, 2019 and subject to certain conditions. For more information about the GS Capital Notes, please see our Current Report on Form 8-K, filed with the SEC on October 5, 2018.

On October 2, 2018, we entered into a securities purchase agreement with Eagle Equities, LLC (“Eagle Equities”), pursuant to which Eagle Equities purchased an 8% convertible promissory note (the “October 2018 Eagle Note”) from us in the principal amount of $210,000, convertible into shares of our common stock at the option of Eagle Equities at any time after the six-month anniversary of the issuance date. The maturity date of the October 2018 Eagle Note is October 2, 2019. For more information about the October 2018 Eagle Note, please see our Current Report on Form 8-K, filed with the SEC on October 5, 2018.

Effective August 29, 2018, we entered into a securities purchase agreement with Eagle Equities, pursuant to which Eagle Equities purchased an 8% convertible promissory note (the “August 29, 2018 Eagle Note”) from us in the principal amount of $105,000, convertible into shares of our common stock at the option of Eagle Equities at any time after the six-month anniversary of the August 29, 2018 Eagle Note. The maturity date of the August 29, 2018 Eagle Note is August 29, 2019. For more information about the August 29, 2018 Eagle Note, please see our Current Report on Form 8-K, filed with the SEC on September 4, 2018.

On August 28, 2018, we entered into a securities purchase agreement with Power Up Lending Group Ltd. (“Power Up”), pursuant to which Power Up purchased an 8% convertible promissory note (the “August 28, 2018 Power Up Note”) from us in the principal amount of $53,000, convertible into shares of our common stock at the option of Power Up at any time after the six-month anniversary of the issuance date. The maturity date of the August 28, 2018 Power Up Note is August 28, 2019. For more information about the August 28, 2018 Power Up Note, please see our Current Report on Form 8-K, filed with the SEC on September 4, 2018.

Effective July 13, 2018, we entered into a securities purchase agreement with Eagle Equities, pursuant to which Eagle Equities purchased an 8% convertible promissory note (the “July 2018 Eagle Note”) from us in the principal amount of $75,000, convertible into shares of our common stock at the option of Eagle Equities any time after the six month anniversary of the issuance date. The maturity date of the July 2018 Eagle Note is July 13, 2019. For more information about the July 2018 Eagle Note, please see our Current Report on Form 8-K, filed with the SEC on July 19, 2018.

### Critical Accounting Estimates

Below is a discussion of our more subjective accounting estimation processes for purposes of explaining (i) the methodology used in calculating the estimates, (ii) the inherent uncertainties pertaining to such estimates and (iii) the possible effects of a significant variance in actual experience, from that of the estimate, on our financial condition. Estimates involve numerous assumptions that, if incorrect, could create a material adverse impact on the Company’s results of operations and financial condition.

Reference is frequently made herein to the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”). This is the source of authoritative US GAAP recognized by the FASB to be applied to non-governmental entities. Each ASC reference in this filing is presented with a three-digit number, which represents its Topic. As necessary for explanation and as applicable, an ASC topic may be followed with a two-digit subtopic, a two-digit section or a two-or-three digit paragraph.

*Foreign Currency Translation and Comprehensive Income (Loss)*: Our functional currency is the AUD. For financial reporting purposes, the AUD has been translated into USD as the reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Equity transactions are translated at each historical transaction date spot rate. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity (deficit) as “accumulated other comprehensive income (loss).” Gains and losses resulting from foreign currency transactions are included in the statement of operations and comprehensive loss as other income (expense).

*Accounting for Income Taxes:* We are governed by Australian and United States income tax laws, which are administered by the Australian Taxation Office and the United States Internal Revenue Service, respectively. We follow ASC 740, “*Accounting for Income Taxes,”* which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for temporary differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities.

The Company adopted provisions of ASC 740, Sections 25 through 60, “*Accounting for Uncertainty in Income Taxes.”* These sections provide detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements. Tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized upon the adoption of ASC 740 and in subsequent periods.

*Accounting for Stock Based Compensation*: We record stock based compensation in accordance with ASC 718, “*Stock Compensation”* and Staff Accounting Bulletin No. 107 issued by the SEC in March 2005 regarding its interpretation of ASC 718. ASC 718 requires the fair value of all stock-based employee compensation awarded to employees to be recorded as an expense over the related requisite service period. The statement also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. We value any employee or non-employee stock based compensation at fair value using the Black-Scholes Option Pricing Model.

We account for non-employee share-based awards in accordance with the measurement and recognition criteria of ASC 505-50 “*Equity-Based Payments to Non-Employees.”*

*Derivative Instruments:* ASC 815, “*Derivatives and Hedging,”* establishes accounting and reporting standards for derivative instruments and for hedging activities by requiring that all derivatives be recognized in the balance sheet and measured at fair value. Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings. On the date of conversion, or payoff, of debt, we record the fair value of the conversion shares, remove the fair value of the related derivative liability, remove any discounts and record a net gain or loss on debt extinguishment.

*Convertible Notes with Variable Conversion Options*: We have entered into convertible notes, some of which contain variable conversion options, whereby the outstanding principal and accrued interest may be converted, by the holder, into common shares at a fixed discount to the price of the common stock at the time of conversion. We treat these convertible notes as stock settled debt under ASC 480 and measures the fair value of the notes at the time of issuance, which is the result of the share price discount at the time of conversion, and records the put premium as accretion to interest expense to the date of first conversion.

*Research and Development Tax Credits*: We may apply for Research and Development tax concessions with the Australian Taxation Office on an annual basis. Although the amount is possible to estimate at year end, the Australian Taxation Office may reject or materially alter the claim amount. Accordingly, we do not recognize the benefit of the claim amount until cash receipt since collectability is not certain until such time. The tax concession is a refundable credit. If we have net income then we can receive the credit which reduces its income tax liability. If we have net losses, then we may still receive a cash payment for the credit, however, our net operating loss carry forwards are reduced by the gross equivalent loss that would produce the credit amount when the income tax rate is applied to that gross amount. The concession is recognized as an income tax benefit, in operations, upon receipt.

### Recent Accounting Pronouncements

Please see section captioned “Recently Adopted Accounting Pronouncements” in Note 1 to our unaudited condensed consolidated financial statements included in this Quarterly Report for a discussion of recently issued and adopted accounting pronouncements.

### Results of Operations

### For the Three Months Ended September 30, 2018, as compared to the Three Months Ended September 30, 2017

#### Revenue

For the three months ended September 30, 2018 and 2017 we generated no revenue because we are currently undertaking research and development activities for market approval and no sales were generated in this period.

#### Administration Expense

Administration expense decreased by approximately $247,000 to $384,600 for the three months ended September 30, 2018, as compared to $631,406 for the three months ended September 30, 2017. This decrease is primarily attributable to a decrease in stock based expense of approximately $165,000 that was related to a grant of stock options to our directors in April 2016 along with a decrease of approximately $146,000 that is primarily related to a decrease in consulting fees for the three months ended September 30, 2018.

#### Occupancy Expense

Occupancy expense decreased by approximately $750 to $8,078 for the three months ended September 30, 2018, as compared to $8,830 for the three months ended September 30, 2017. The increase relates to the fluctuation in foreign currency exchange rates along with an approximately $100 decrease in occupancy expense in the three months ended September 30, 2018 related to a decrease in tax rates related to the property that occurred during the same period in the prior year.

#### Research and Development Expenses

Research and development expenses decreased by approximately $508,000 to $56,193 for the three months ended September 30, 2018, as compared to $563,739 for the three months ended September 30, 2017. The decrease in research and development expenditures is primarily attributable to completion of process development activities and preparation for commencement of the engineering run and subsequent GMP manufacture of PRP for clinical trials, which we hope to commence if we raise sufficient proceeds via the Equity Line. This includes raw material purification and stabilization process development, development of analytical quality assurance and control methods, reproduction runs for raw materials, and preparation of raw materials and finished product specifications for future full scale GMP manufacture of PRP.

#### Interest Expense/Income

Interest expense decreased by approximately $268,000 to $624,538 for the three months ended September 30, 2018, as compared to $892,432 for the three months ended September 30, 2017. Interest expense is primarily comprised of approximately $218,000 of debt discount amortization and approximately $344,000 accretion of debt premium. This decrease is primarily attributable to a decrease in the issuance of derivative debt resulting in lower amortization of debt discount offset by higher accretion amounts of convertible notes with discounted debt features during the quarter ended September 30, 2018.

#### Change in Fair Value of Derivative Liabilities

Change in fair value of derivative liabilities decreased by approximately $2,001,000 to a loss of $(1,971,116) for the three months ended September 30, 2018, as compared to a gain of $30,274 for the three months ended September 30, 2017. This decrease is primarily attributable to an increase in the volatility of the prices of our shares of common stock along with a decrease in stock price during the quarter ended September 30, 2018, which resulted in the recognition of such loss.

#### Gain on Debt Settlements, Net

Gain on settlement of debt increased by approximately $5,900 to a gain of $14,421 for the three months ended September 30, 2018, as compared with a gain of $8,570 for the three months ended September 30, 2017. The increase in gain on settlement of debt is primarily attributable to additional debt settlement agreements entered into in the three months ended September 30, 2018.

#### Foreign Currency Transaction Gain (Loss)

Foreign currency transaction decreased by approximately $414,000 to a loss of $(280,707) for the three months ended September 30, 2018, as compared with a gain of $133,792 for the three months ended September 30, 2017. The decrease in foreign currency transaction gain is primarily attributable to greater fluctuation in exchange rates in the three months ended September 30, 2018, as compared to the three months ended September 30, 2017.

#### Net loss

Net loss increased by approximately $201,000 to $(2,124,936) for the three months ended September 30, 2018, as compared to a net loss of $(1,923,743) for the three months ended September 30, 2017. The increase is primarily attributable to an increase in unrealized loss resulting in change in fair value of derivative liabilities of approximately $2,000,000 and foreign currency transaction loss of approximately $415,000, offset by a decrease in operating loss of approximately $755,000 and a decrease in interest expense of approximately $270,000.

### Liquidity and Capital Resources

#### Current Financial Condition

As of September 30, 2018, we had total assets of $82,775, comprised primarily of cash of $38,914, GST tax receivable of $1,699, prepaid expenses and other current assets of $32,418 and property and equipment, net, of $7,573. This compares with total assets of $71,387 as of June 30, 2018, comprised primarily of cash of $19,921, GST tax receivable of $6,257, prepaid expenses and other current assets of $34,712 and property and equipment, net, of $8,277.

As of September 30, 2018, we had current liabilities of $5,640,819, primarily comprised of net convertible debt of $3,758,891, accounts payable and accrued expenses of $1,494,730 and embedded conversion option liabilities of $157,377. This compares with current liabilities of $6,823,307, primarily comprised of net convertible debt of $4,699,299, accounts payable and accrued expenses of $1,521,773 and embedded conversion option liabilities of $371,532, as of June 30, 2018.

We have funded our operations primarily through the issuance of equity and/or convertible securities for cash. The cash was used primarily for payments for research and development, administration expenses, occupancy expenses, professional fees, consultants’ expenses and travel expenses.

During the quarter ended September 30, 2018 and as of the date of this Quarterly Report, we borrowed gross proceeds of $210,000 on October 3, 2018 from Eagle Equities via a convertible promissory note that matures on October 2, 2019, $106,000 from GS Capital on October 3, 2018 via a convertible promissory note that matures on October 2, 2019, $150,000 from GS Capital on September 12, 2018 via a back end convertible promissory note that matures on April 13, 2019, $100,000 from Coventry on September 7, 2018 via a back end convertible promissory note that matures on June 29, 2019, $105,000 on August 29, 2018 from Eagle Equities via a convertible promissory note that matures on August 29, 2019, $53,000 on August 28, 2018 from Power Up via a convertible promissory note that matures on August 28, 2019, $75,000 from Eagle Equities on July 13, 2018 via a convertible promissory note that matures on July 13, 2019, $100,000 from Coventry on July 2, 2018 via a convertible promissory note that matures on June 29, 2019. In addition, on November 7, 2018, we received gross proceeds of $79,398 from the put notice that we submitted to L2 Capital on October 30, 2018, to purchase 2,000,000 shares of our common stock, and on or about November 12, 2018, we expect to receive gross proceeds of approximately $72,000 from the put notice that we submitted to L2 Capital on November 6, 2018, to purchase 2,000,000 shares of our common stock.

We have substantial capital resource requirements and have incurred significant losses since inception. As of September 30, 2018, we had $38,914 in cash. We depend upon debt and/or equity financing to fund our ongoing operations and to execute our current business plan. Such capital requirements are in excess of what we have in available cash and for which we currently have commitments. Therefore, we presently do not have enough available cash to meet our obligations over the next 12 months. We intend to use the proceeds of the Equity Line to generate additional cash to fund our operations and business expenses, including research and development. If we are unable to access the Equity Line as described in the notes to our condensed consolidated financial statements included elsewhere in this Quarter Report, we believe our current available cash may be insufficient to meet our cash needs for the near future. We may also need to borrow additional amounts via the issuance of convertible notes on terms similar to the notes described above and/or obtain alternative or additional financing from financial institutions, investors or otherwise, in order to maintain and expand our existing operations. We cannot assure that the Equity Line or other financing will be available in amounts or terms acceptable to us, if at all. The failure by us to obtain such financing at reasonable terms would have a material adverse effect upon our business and plan of operations, financial condition and results of operations, and adversely affect our ability to complete ongoing activities in connection with our research and development programs.

#### Sources and Uses of Cash

|  | For the Three Months Ended September 30, 2018 | 2017 |
| --- | ---: | ---: |
| Net cash used in operating activities | $(419,196) | $(785,668) |
| Net cash used in investing activities | $- | $- |
| Net cash provided by financing activities | $480,419 | $894,000 |
| Effect of exchange rate changes on cash | $(42,230) | $(34,810) |

Net cash used in operating activities was $419,196 for the three months ended September 30, 2018, as compared to $785,668 for the three months ended September 30, 2017. This fluctuation is due to a decrease in stock option expense of approximately $165,000, a decrease in the issuance of convertible promissory notes for services of $310,000, offset by an increase in accounts payable and accrued expenses of approximately $147,000, along with fluctuations in changes in foreign currency transaction gains and losses, changes related to the valuation of new derivative liabilities and the revaluation of existing derivative liabilities in the three months ended September 30, 2018.

Cash flows provided by financing activities for the three months ended September 30, 2018 were $480,419, as compared to $894,000 for the three months ended September 30, 2017. During the three months ended September 30, 2018, we received proceeds from the sale of convertible promissory notes of $533,389. During the three months ended September 30, 2017, we received proceeds from convertible promissory notes of $894,000.

The effect of the exchange rate on cash resulted in a $42,230 negative adjustment to cash flows in the three months ended September 30, 2018, as compared to a negative adjustment of $34,810 to cash flows in the three months ended September 30, 2017. The reason for the fluctuation is due to the application of currency translation rates throughout the cash flow statement, the volume of transactions within each period and the daily fluctuation in exchange rates.

### Going Concern Qualification

We did not generate any revenue for the quarters ended September 30, 2018 and 2017 and have incurred significant losses and cash used in operations, and such losses and use of cash are expected to continue. Our independent registered public accounting firm has included a “Going Concern Qualification” in their audit report for each of the fiscal years ended June 30, 2018 and 2017. In addition, we have negative working capital and convertible debt that is past maturity that we are currently negotiating with lenders in order to amend the maturity dates. The foregoing raises substantial doubt about our ability to continue as a going concern. Our ability to continue as a going concern is dependent on our ability to execute our strategy and on our ability to raise additional funds. Management is currently seeking additional funds to operate our business, primarily through the issuance of equity and/or debt securities for cash, including continuing to utilize the Equity Line. No assurance can be given that the Equity Line or other financing will be available or, if available, that it will be in amounts or on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders, in case of equity and/or convertible debt financing. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The “Going Concern Qualification” might make it substantially more difficult to raise capital.

### Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.

## Market risk

As filed, 580 characters.

As of September 30, 2018, we were in default under certain convertible promissory notes issued to certain noteholders on December 12, 2016, January 27, 2017 and August 8, 2017 for failure to pay an aggregate of $610,773 of principal and accrued interest as of December 12, 2017, January 27, 2018 and August 8, 2018, the respective maturity dates of such notes. We are currently in discussions with such noteholders to extend such maturity dates. See Note 5 to our unaudited condensed consolidated financial statements in Part I of this Quarterly Report for additional information.

## Controls and procedures

As filed, 7,156 characters.

### Evaluation of Disclosure Controls and Procedures

Our management is responsible for establishing and maintaining disclosure controls and procedures (as such term is defined in Rule 13a-15(e) under the Exchange Act) that are designed to reasonably ensure that information required to be disclosed in our reports under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the rules and forms of the SEC, and that such information is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure based closely on the definition of “disclosure controls and procedures” in Rule 15d-15(e) under the Exchange Act. In designing and evaluating the disclosure controls and procedures, our management recognized that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives, and management necessarily was required to apply its judgment in evaluating the cost-benefit relationship of possible controls and procedures.

At the end of the period covered by this Quarterly Report, we conducted an evaluation(the “Evaluation”), under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer of the effectiveness of the design and operation of our disclosure controls and procedures. Based upon the foregoing, our Chief Executive Officer and Chief Financial Officer concluded that, as of September 30, 2018, the disclosure controls and procedures of our Company were not effective to ensure that the information required to be disclosed in our Exchange Act reports was recorded, processed, summarized and reported on a timely basis because of the material weaknesses in internal control over financial reporting described below.

### Material Weaknesses and Corrective Actions

In connection with the audits of our financial statements for the fiscal years ended June 30, 2018 and 2017, we identified certain deficiencies relating to our internal control over financial reporting that constitute a material weakness under standards established by the Public Company Accounting Oversight Board (the “PCAOB”). The PCAOB defines a material weakness as a deficiency, or a combination of deficiencies, in internal control over financial reporting such that there is a reasonable possibility that a material misstatement of the company’s annual or interim financial statements will not be prevented or detected on a timely basis. A deficiency in internal control exists when the design or operation of a control does not allow management or employees, in the normal course of performing their assigned functions, to prevent or detect misstatements on a timely basis.

The following material weaknesses in our internal control over financial reporting continued to exist at September 30, 2018:

- we do not have written documentation of our internal control policies and procedures. Written documentation of key internal controls over financial reporting is a requirement of Section 404 of the Sarbanes-Oxley Act of 2002 (the “Sarbanes-Oxley Act”);
- we do not have sufficient segregation of duties within accounting functions, which is a basic internal control. Due to our limited size and early stage nature of operations, segregation of all conflicting duties may not always be possible and may not be economically feasible; however, to the extent possible, the initiation of transactions, the custody of assets and the recording of transactions should be performed by separate individuals;
- lack of audit committee of our board of directors; and
- insufficient monitoring and review controls over the financial reporting closing process, including the lack of individuals with current knowledge of U.S. GAAP.

We outsource the functions that would normally be performed by a principal financial officer to assist us in implementing the necessary financial controls over the financial reporting and the utilization of internal management and staff to effectuate these controls.

We believe that these material weaknesses primarily relate, in part, to our lack of sufficient staff with appropriate training in U.S. GAAP and SEC rules and regulations with respect to financial reporting functions, and the lack of robust accounting systems, as well as the lack of sufficient resources to hire such staff and implement these accounting systems.

Subject to raising sufficient additional capital, we plan to take a number of actions in the future to correct these material weaknesses including, but not limited to, establishing an audit committee of our board of directors comprised of at least two independent directors, adding experienced accounting and financial personnel and retaining third-party consultants to review our internal controls and recommend improvements. If we receive sufficient capital, we hope to hire a part- or full-time chief financial officer as the first step in building out our accounting department. We will need to take additional measures to fully mitigate these issues, and the measures we have taken, and expect to take, to improve our internal controls may not be sufficient to (1) address the issues identified, (2) ensure that our internal controls are effective or (3) ensure that the identified material weakness or other material weaknesses will not result in a material misstatement of our annual or interim financial statements. In addition, other material weaknesses may be identified in the future. If we are unable to correct deficiencies in internal controls in a timely manner, our ability to record, process, summarize and report financial information accurately and within the time periods specified in the rules and forms of the SEC will be adversely affected. This failure could negatively affect the market price and trading liquidity of our common stock, cause investors to lose confidence in our reported financial information, subject us to civil and criminal investigations and penalties, and generally materially and adversely impact our business and financial condition.

### Changes in Internal Controls over Financial Reporting

There were no changes in our internal controls over financial reporting that occurred during the fourth quarter of the year ended September 30, 2018, that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

### CEO and CFO Certifications

Exhibit 31.1 to this Quarterly Report is the Certifications of our Chief Executive Officer and the Chief Financial Officer. These certifications are required in accordance with Section 302 of the Sarbanes-Oxley Act (the “Section 302 Certifications”). This Item 4. of this Quarterly Report, which you are currently reading, is the information concerning the Evaluation referred to above and in the Section 302 Certifications, and this information should be read in conjunction with the Section 302 Certifications for a more complete understanding of the topics presented.

## Risk factors

As filed, 567 characters.

In addition to the other information set forth in this Quarterly Report, you should carefully consider the factors discussed in the section captioned “Risk Factors” of our Registration Statement on Form S-1, filed with the SEC on October 17, 2018. These factors could materially adversely affect our business, financial condition, liquidity, results of operations and capital position, and could cause our actual results to differ materially from our historical results or the results contemplated by the forward-looking statements contained in this Quarterly Report.

Filed Nov 13, 2018.
Source: SEC EDGAR, the filing index for accession 0001493152-18-015599. Last ingested by Listed: Oct 29, 2026, 17:01 ET. No prices; not investment advice.