Special Note Regarding Forward-Looking Information
The following discussion and analysis of the results of operations and financial
condition of Propanc Biopharma, Inc., and its wholly-owned Australian
subsidiary, Propanc PTY LTD ("Propanc" or the "Company") as of March 31, 2021
for the nine months ended March 31, 2021 and 2020 should be read in conjunction
with our unaudited financial statements and the notes to those unaudited
financial statements that are included elsewhere in this Quarterly Report on
Form 10-Q. References in this Management's Discussion and Analysis of Financial
Condition and Results of Operations to "us", "we", "our" and similar terms refer
to Propanc. This Quarterly Report contains forward-looking statements as that
term is defined in the federal securities laws. The events described in
forward-looking statements contained in this Quarterly Report may not occur.
Generally, these statements relate to business plans or strategies, projected or
anticipated benefits or other consequences of our plans or strategies, projected
or anticipated benefits from acquisitions to be made by us, or projections
involving anticipated revenues, earnings or other aspects of our operating
results. The words "may," "will," "expect," "believe," "anticipate," "project,"
"plan," "intend," "estimate," and "continue," and their opposites and similar
expressions, are intended to identify forward-looking statements. We caution you
that these statements are not guarantees of future performance or events and are
subject to a number of uncertainties, risks and other influences, many of which
are beyond our control, which may influence the accuracy of the statements and
the projections upon which the statements are based. Factors that may affect our
results include, but are not limited to, the risks and uncertainties set forth
under Item 1A. Risk Factors in the Company's section captioned "Risk Factors" of
our Registration Statement on Form S-1, filed with the United States Securities
and Exchange Commission ("SEC") on November 3, 2020, and matters described in
this Quarterly Report generally.
Our actual results, performance and achievements could differ materially from
those expressed or implied in these forward-looking statements. Except as
required by federal securities laws, we undertake no obligation to publicly
update or revise any forward-looking statements, whether from new information,
future events or otherwise.
COVID-19
At Propanc, our highest priority remains the safety, health and well-being of
our employees, their families and our communities. The COVID-19 pandemic is a
highly fluid situation and it is not currently possible for us to reasonably
estimate the impact it may have on our financial and operating results. We will
continue to evaluate the impact of the COVID-19 pandemic on our business as we
learn more and the impact of COVID-19 on our industry becomes clearer. We are
complying health guidelines regarding safety procedures, including, but are not
limited to, social distancing, remote working, and teleconferencing. The extent
of the future impact of the COVID-19 pandemic on our business is uncertain and
difficult to predict. Adverse global economic and market conditions as a result
of COVID-19 could also adversely affect our business. If the pandemic continues
to cause significant negative impacts to economic conditions, our results of
operations, financial condition and liquidity could be adversely impacted. (See
Part II, Item 1A - "Risk Factors").
Overview
We were incorporated in the state of Delaware as Propanc Health Group
Corporation on November 23, 2010. In January 2011, to reorganize our Company, we
acquired all of the outstanding shares of Propanc PTY LTD, an Australian
corporation, on a one-for-one basis and Propanc PTY LTD became our wholly-owned
subsidiary. Effective April 20, 2017, we changed our name to "Propanc Biopharma,
Inc." to better reflect our current stage of operations and development.
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 24 months we have conducted successful pre-clinical
studies on PRP. Subject to us receiving sufficient financing, we plan to begin
our Investigational Medicinal Product Dossier, study proposal and Investigator's
Brochure in the 2021 calendar year. Our plan is to then commence our study
preparation process with the contract research organization, analytical lab and
trial site(s) selection and to begin our clinical trial application for PRP
("CTA") compilation in the second calendar quarter of 2021 and complete the CTA
compilation and submit the CTA in the fourth calendar quarter of 2021. In the
fourth quarter of 2021, we plan to begin the preparation of logistics and trial
site initiation visits. Subject to raising additional sufficient capital, we
subsequently plan to commence a First-In-Human (FIH), Phase Ib study in patients
with advanced solid tumors, evaluating the safety, pharmacokinetics and
anti-tumor efficacy of PRP in the first calendar quarter of 2022, which study we
hope to complete within twelve months thereafter. 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.
3
The Company hopes to capture and protect additional patentable subject matter
based on the Company's field of technology relating to pharmaceutical
compositions of proenzymes for treating cancer by filing additional patent
applications as it advances its lead product candidate, PRP, through various
stages of development.
To date, we have generated no revenue, have no cancer treatment products
available to market and have no products which have reached the clinical trial
stage. We require substantial additional financing to continue to test and
commercialize PRP.
Products and Products in Development
Lead Product Candidate - PRP
PRP is a pharmaceutical composition consisting of two pancreatic proenzymes
trypsinogen and chymotrypsinogen for treating cancer. PRP is a novel approach to
prevent recurrence and metastasis of solid tumors by using pancreatic proenzymes
that target and eradicate cancer stem cells in patients suffering from
pancreatic, ovarian and colorectal cancers. PRP is a novel therapy based on the
science that enzymes stimulate biological reactions in the body, especially
enzymes secreted by the pancreas and could represent the body's primary defense
against cancer.
To date, preclinical development has been completed for PRP, including
pharmacology and safety toxicology studies, process development activities and
bioanalytical method development. The full-scale GMP (Good Manufacturing
Practice) finished product manufacture of PRP will be completed in preparation
for the FIH Phase Ib study. Validation of the bioanalytical method will also be
completed prior to lodging our first clinical trial application (CTA) which we
plan to undertake at the Peter Mac Cancer Center in Melbourne, Victoria,
Australia's biggest cancer hospital. Propanc Biopharma is currently
collaborating with contract research organizations, manufacturing partners and
its consultants to complete the activities prior to preparing the CTA for the
Phase Ib study.
Recently, the Company received expressions of interest to evaluate proenzyme
therapy as a method to prevent recurrence and metastasis of solid tumors in
pancreatic and ovarian cancers. The letters of interest were confirmed by Drs.
Natalia Luque Caro and Fernando Gálvez Montosa, medical oncologists specializing
in pancreatic and ovarian cancers, respectively, from the University Hospital of
Jaén, in Granada, Spain. The evaluation will most likely be conducted as
separate Phase IIa proof of concept (POC), multi-trial center studies for each
target indication. The expressions of interest were confirmed after their
evaluation of Propanc's scientific literature supporting the use of proenzymes
in pancreatic and ovarian cancers. The Phase IIa POC studies will be conducted
after the Phase Ib dose escalation study investigating the tolerability and
activity of proenzyme therapy in patients with advanced solid tumors is
completed at the Peter Mac Cancer Center.
Joint Research and Drug Discovery Program - POP1
The POP1 joint research and drug discovery program is designed to produce a
backup clinical compound to the lead product candidate, PRP. With the aim of
producing large quantities of trypsinogen and chymotrypsinogen for commercial
use, exhibiting minimal variation between lots and without sourcing the
proenzymes from animals, Propanc Biopharma is undertaking a challenging research
project in collaboration with the Universities of Jaén and Granada, led by
research scientist Mr. Aitor González, M.Sc. and Ms. Belen Toledo M.Sc.,
supported by Prof. Macarena Perán, Ph.D. Prof. Juan Marchal M.D. and Dr. Julian
Kenyon, M.D. as joint supervisors, representing the Universities and Propanc,
respectively.
Propanc Biopharma entered into a second two-year joint research and
collaboration agreement with the University of Jaén who are undertaking the
research activities for the POP1 program.
One specific objective of the project will be to synthesize by an in vivo system
both proenzymes to produce crystalized proteins that could be maintained for
long periods without suffering degradation, even in absence of refrigeration.
This will be particularly useful for a longer shelf life as well as global
distribution of the drug product, particularly in warmer climates and developing
regions where refrigeration may not be available.
The POP1 joint research and drug discovery program has produced synthetic
recombinant versions of the two proenzymes, trypsinogen and chymotrypsinogen.
Propanc Biopharma's joint scientific researchers developed a novel expression
system and are in the process of optimizing conditions to achieve high titers of
recombinant trypsinogen and chymotrypsinogen. Further, the anticancer effects of
the synthetic versions will be tested against the naturally derived proenzymes
from bovine origin.
To date, both proenzymes were synthesized and purified in the laboratory. Once
purified, the proenzymes were lyophilized (freeze dried) and each formed a
stable, dry white powder. The sequence of proteins of each proenzyme were then
determined by mass spectrometry. Larger quantities of the proenzymes were
produced with the objective of establishing their combined anti-cancer effects
against pancreatic and colorectal cancers. In addition, research activities were
transferred to the MEDINA Foundation Research Center to scale up production.
MEDINA is a Non-Profit Research Organization established in 2008 through a
public-private alliance between the Regional Government of Andalusia, Spain, the
pharmaceutical company Merck Sharp & Dohme de España S.A. (MSD), and the
University of Granada. Medina's scientific platforms support the development of
multidisciplinary research programs in Microbiology, Natural Product Chemistry
and Screening & Target Validation.
4
Recently, Ms. Belen Toledo MSc., a biotechnologist specializing in cell
regenerative medicine was appointed to evaluate the impact of proenzyme therapy
on the tumor microenvironment. Ms. Toledo's work will be part of the joint
research and drug discovery program. Ms. Toledo, will elucidate the molecular
pathways involved in the proenzymes anti-tumor efficacy and study how proenzymes
interact with the pre-metastatic tumor niche, focusing on the interaction and
suppression of tumor associated cells, like cancer-associated fibroblasts and
macrophages. A pre-metastatic tumor niche is an environment in a secondary organ
conducive to the metastasis (spreading) of a primary tumor. Such a niche
provides favorable conditions for growth, and eventually metastasis, in an
otherwise foreign and hostile environment for the primary tumor cells.
Metastasis remains the main cause of patient death from solid tumors for cancer
sufferers.
To achieve this, Ms. Toledo will use integrated tumor models in a microfluidics
chip by obtaining 3-dimensional bio-impression samples from patients with
advanced solid tumors, developed at the Centre for Biomedical Research,
University of Granada, Granada, Spain, led by Prof. Juan Marchal M.D. As well as
explaining the mechanism of action by which proenzymes exert their anti-cancer
effects, it also confirms whether proenzymes penetrate into the tumor
microenvironment and exert their effects. At the same time, it confirms the
selectivity of the drug on solid tumors, by targeting cancer cells and leaving
healthy cells alone.
Intellectual Property Portfolio
Propanc Biopharma's intellectual property portfolio consists of four patent
families and sixty-five patents either in force or pending. The portfolio covers
important discoveries regarding the use of proenzymes and their anti-cancer
effects against solid tumors. Another two patent applications are in preparation
covering composition of matter and method of use claims.
The portfolio covers pharmaceutical compositions for treating cancer comprising
trypsinogen and/or chymotrypsinogen and a cancer treatment method for
eradicating cancer stem cells. In 2018, three patent families entered national
phase in key global jurisdictions, which means the application is under control
of the national or regional patent offices for examination as the final step
towards receiving a granted patent in that jurisdiction.
In July 2020, a world first patent was granted in Australia for the cancer
treatment method patent family. Presently, there are 29 granted patents and 33
patents under examination in key global jurisdictions relating to the use of
proenzymes against solid tumors, covering the lead product candidate PRP.
The Company hopes to capture and protect additional patentable subject matter
based on the Company's field of technology relating to pharmaceutical
compositions of proenzymes for treating cancer by filing additional patent
applications as it advances its lead product candidate, PRP, through various
stages of development.
Recent Developments
On October 1, 2020, the Company entered into a two-year collaboration agreement
with the University of Jaén (the "University") to provide certain research
services to the Company. In consideration of such services, the Company agreed
to pay the University approximately 30,000 Euros ($35,145 USD) which shall be
paid in four installment payments of 5,000 Euros in November 2020, 5,000 Euros
($5,858) in March 2021, 10,000 Euros ($11,715) in December 2021 and 10,000 Euros
($11,715) in September 2022. Additionally, the University shall hire and train a
doctoral student for this project and as such the Company shall pay the
University 25,837 Euros ($30,268 USD). In exchange for full ownership of the
intellectual property, the Company agreed to pay royalties of 2% of net revenues
to the University.
On November 17, 2020, the Company effected a one-for-one thousand (1:1,000)
reverse stock split of the Company's issued and outstanding shares of common
stock (the "Reverse Stock Split"). Proportional adjustments for the Reverse
Stock Split were made to the Company's outstanding stock options, warrants and
equity incentive plans. All share and per-share data and amounts have been
retroactively adjusted as of the earliest period presented in the unaudited
condensed consolidated financial statements to reflect the Reverse Stock Split.
Results of Operations
The following discussion should be read in conjunction with the Company's
unaudited consolidated financial statements and notes thereto included elsewhere
in this Report. The results discussed below are of the Company and its
wholly-owned Australian subsidiary, Propanc PTY LTD.
Three and Nine Months Ended March 31, 2021, as compared to the Three and Nine
Months Ended March 31, 2020
Revenue
For the three and nine months ended March 31, 2021 and 2020, we generated no
revenue because we are currently undertaking research and development activities
for market approval and no sales were generated in this period.
5
Administration Expense
Administration expense decreased to $373,834 for the three months ended March
31, 2021 as compared to $542,093 for the three months ended March 31, 2020. This
decrease of approximately $168,000 is primarily attributable to a decrease of
approximately $90,000 in marketing and market research expense and decrease in
general consulting, legal and investor relation fees of approximately $76,000,
decrease in accounting fees of approximately $29,000, and decrease in other
general and administrative expenses of approximately $8,000 offset by increase
of approximately $35,000 in employee remuneration expense.
Administration expense decreased to $913,124 for the nine months ended March 31,
2021 as compared to $2,751,478 for the nine months ended March 31, 2020. This
decrease of approximately $1,838,000 is primarily attributable to a decrease of
approximately $1,141,000 in stock-based expenses for services, decrease of
approximately $128,000 in capital raising costs, decrease in general consulting,
legal, and investor relation fees of approximately $326,000, decrease in
accounting fees of approximately $26,000, decrease in insurance expense of
approximately $75,000, decrease of approximately $148,000 in marketing and
market research expense, decrease in travel expenses of approximately $30,000,
decrease of approximately $19,000 of other general and administrative expenses
and, offset by increase of approximately $55,000 in employee remuneration
expense.
Occupancy Expense
Occupancy expense increased by approximately $1,640 to $9,231 for the three
months ended March 31, 2021.
Occupancy expense increased by approximately $370 to $26,185 for the nine months
ended March 31, 2021. The increase primarily relates to exchange rate movements
over the period when compared to the same period in 2020.
Research and Development Expenses
Research and development expenses were $44,887 for the three months ended March
31, 2021, as compared to $57,484 for the three months ended March 31, 2020.
Research and development expenses were $145,898 for the nine months ended March
31, 2021, as compared to $122,893 for the nine months ended March 31, 2020. The
decrease in research and development expenses for the three-month period is
primarily attributable to completion of process development activities and
preparation for commencement of the engineering run and subsequent full scale
GMP manufacture of PRP for clinical trials, with the process, preparation and
small-scale manufacture having been completed in the period ended December 31,
2017, which the clinical trials we hope to commence in 2021 calendar year, if we
raise sufficient proceeds by raising additional capital. Completed activities
include 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. The increase in
research and development expenses for the nine-month period is primarily
attributable to the increase in research and development expenses incurred in
relation to the two-year collaboration agreement we entered with University of
Jaén in October 2020.
Interest Expense/Income
Interest expense decreased to $102,901 for the three months ended March 31,
2021, as compared to $384,804 for the three months ended March 31, 2020.
Interest expense decreased to $420,017 for the nine months ended March 31, 2021,
as compared to $1,506,111 for the nine months ended March 31, 2020. Interest
expense is primarily comprised of approximately $75,000 and $331,000 of debt
discount amortization and accretion of put premium for the three and nine months
ended March 31, 2021, respectively, and interest expense from conversion fees,
prepayment penalty fees and accrual of interest expense for a total of
approximately $28,000 and $89,000 for the three and nine months ended March 31,
2021, respectively.
This decrease is primarily attributable to a decrease in the issuance of
convertible notes and was further reduced due to the conversion and repayment of
convertible notes during the nine months ended March 31, 2021 which resulted to
a decrease in accretion of put premium of approximately $67,000 and $636,000
during the three and nine months ended March 31, 2021, respectively, and the
decrease in amortization of debt discount of approximately $227,000 and $407,000
during the three and nine months ended March 31, 2021. Additionally, interest
expense from prepayment penalty fees decreased by approximately $0 and $99,000
offset by increase in conversion fees and accrual of interest expense for a
total of $12,000 and $56,000 during the three and nine months ended March 31,
2021, respectively.
Change in Fair Value of Derivative Liabilities
Change in fair value of derivative liabilities changed by $509,600, to a loss of
$55,158 for the three months ended March 31, 2021, as compared to a gain of
$454,442 for the three months ended March 31, 2020. Change in fair value of
derivative liabilities changed by $305,530, to a loss of $7,156 for the nine
months ended March 31, 2021, as compared to a gain of $298,374 for the nine
months ended March 31, 2020. This change is primarily attributable to an
increase in the principal amount of convertible notes with bifurcated embedded
conversion option derivatives during the nine months ended March 31, 2021.
Gain from Settlement of Debt, net
During the three and nine months ended March 31, 2021, the Company recorded gain
from settlement of debt, net of $48,390 relating to two transactions. On March
22, 2021, the Company entered into a settlement agreement with our former
counsel, Foley Shechter, whereby both parties agreed to settle all claims for
professional fees owed for a total of $51,032. The Company paid the settlement
amount of $51,032 on March 22, 2021. Prior to the settlement agreement, the
Company recorded total accounts payable and accrued expenses $142,660.
Accordingly, the Company recognized gain from settlement of debt of $91,628
during the nine months ended March 31, 2021.
6
Additionally, on March 15, 2021, the Company entered into a Settlement and
Mutual Release Agreement with Regal whereby both parties agreed to settle all
claims and liabilities under the August 10, 2017 Convertible note for a total of
$100,000. All other terms of the August 10, 2017 Convertible Note shall remain
in full force and effect. Both parties agree that all future penalties under
this note are waived unless the Company fails to authorize to distribute the
requested shares upon conversion. The Company has the right to pay off the
balance of any remaining amounts dues under this note in cash at any time more
than 60 days after March 15, 2021. Prior to the Settlement Agreement, the
Company recorded total liabilities $56,762 consisting of remaining principal
amount of $8,500, accrued interest of $23,262 and accrued expenses of $25,000.
Accordingly, the Company recognized loss from settlement of debt of $43,238
during the nine months ended March 31, 2021.
Gain (loss) on Extinguishment of Debt, net
During the three months ended March 31, 2021, notes were converted with
principal amounts totaling $20,000 which contained bifurcated embedded
conversion option derivatives. Accordingly, the fair market value of the shares
issued was $44,213 resulting in a loss on extinguishment at the time of
conversion of $24,213 and $24,835 of derivative fair value was recorded as a
gain on extinguishment at the time of conversion.
During the nine months ended March 31, 2021, notes were converted with principal
amounts totaling $95,000 contained bifurcated embedded conversion option
derivatives. Accordingly, the fair market value of the shares issued was
$178,368 resulting in a loss on extinguishment at the time of conversion of
$80,368 and $130,975 of derivative fair value was recorded as a gain on
extinguishment at the time of conversion.
Foreign Currency Transaction Gain (Loss)
Foreign currency transaction decreased to a gain of $6,984 for the three months
ended March 31, 2021 as compared with a loss of $2,135,421 for the three months
ended March 31, 2020. Foreign currency transaction decreased to a gain of
$54,179 for the nine months ended March 31, 2021 as compared with a loss of
$2,053,010 for the nine months ended March 31, 2020.
The foreign currency transaction decreased to a gain is partially attributable
to the increase in exchange rates during the three and nine months ended March
31, 2021, as compared to during the three and nine months ended March 31, 2020.
Additionally, effective fiscal year 2021, the parent company determined that
intercompany loans will not be repaid in the foreseeable future and thus, per
ASC 830-20-35-3, gains and losses from measuring the intercompany balances are
recorded within cumulative translation adjustment, a component of other
comprehensive income.
Benefit (provision) for taxes
During the three months ended March 31, 2021 and 2020, the Company had provision
for tax in the amount of $112,277 and $26,317, respectively. During the nine
months ended March 31, 2021 and 2020, the Company applied for and received from
the Australian Taxation Office a research and development tax credit in the
amount of $112,277 and $135,068, respectively.
Net loss
Net loss decreased to $417,738 for the three months ended March 31, 2021 as
compared to a net loss of $2,585,662 for the three months ended March 31, 2020.
The change relates to the factors discussed above. Net loss decreased to
$1,246,926 for the nine months ended March 31, 2021 as compared to a net loss of
$5,944,711 for the nine months ended March 31, 2020. The change relates to the
factors discussed above.
Liquidity and Capital Resources
Current Financial Condition
As of March 31, 2021, we had total assets of $28,043, comprised primarily of
cash of $14,439, GST tax receivable of $4,079, property and equipment, net, of
$4,843 and operating lease right of use asset, net, $2,397. As compared to June
30, 2020, we had total assets of $98,518, comprised primarily of cash of
$67,007, GST tax receivable of $2,015, property and equipment, net, of $5,747
and operating lease right of use asset, net, $21,682.
We had current liabilities of $3,031,721, primarily comprised of net convertible
debt of $950,180, accounts payable and accrued expenses of $1,506,185 and
embedded conversion option liabilities of $53,189 as of March 31, 2021. As
compared to June 30, 2020, we had current liabilities of $3,739,943, primarily
comprised of net convertible debt of $1,557,734, accounts payable and accrued
expenses of $1,544,387 and embedded conversion option liabilities of $354,109.
7
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 and travel.
During the nine months ended March 31, 2021 we received proceeds from exercise
of warrants of $526,044 and proceeds from issuance of convertible notes of
$325,000.
We have substantial capital resource requirements and have incurred significant
losses since inception. As of March 31, 2021, we had $14,439 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. If continued funding and capital resources are unavailable at
reasonable terms, we may curtail our plan of operations. We will be required to
obtain alternative or additional financing from financial institutions,
investors or otherwise, in order to maintain and expand our existing operations.
The failure by us to obtain such financing would have a material adverse effect
upon our business, financial condition and results of operations, and adversely
affecting our ability to complete ongoing activities in connection with our
research and development programs.
Sources and Uses of Cash
For the Nine months ended
March 31,
2021 2020
Net cash used in operating activities $ (908,977 ) $ (1,349,931 )
Net cash used in investing activities $
- $ -
Net cash provided by financing activities $ 808,044 $ 1,465,250
Effect of exchange rate changes on cash $ 48,365 $ (90,756 )
Net Cash Flow from Operating Activities
Net cash used in operating activities was $908,977 for the nine months ended
March 31, 2021, due to our net loss of $1,246,926 offset primarily by non-cash
charges of amortization of debt discount of $130,418, stock-based compensation
of $129,665 non-cash interest expense of $12,750, accretion of put premium of
$200,410, change in fair value of derivatives of $7,156 addback foreign currency
transaction gain of $54,179, gain from settlement of debt of $48,390 and $50,607
gain on extinguishment of debt. Net changes in operating assets and liabilities
totaled $9,259, which is primarily attributable to increase in accounts payable
of $110,877, employee benefit liability of $32,685, accrued interest of $61,022
offset by decrease in accrued expenses of $195,158.
Net cash used in operating activities was $1,349,931 nine months ended March 31,
2020, due to our net loss of $5,944,711 offset primarily by non-cash charges of
amortization of debt discount of $537,868, stock-based compensation of
$1,270,922, accretion of put premium of $836,724, foreign currency transaction
loss of $2,053,010 addback gain on extinguishment of debt of $81,011 and
$298,374 of change in fair value of derivatives. Net changes in operating assets
and liabilities totaled $270,782, which is primarily attributable to decrease in
prepaid expenses and other assets of $82,211, increases in accounts payable of
$207,071, increase in employee benefit liability of $23,205, and accrued
interest of $122,798 and offset by decrease in accrued expenses of $167,074.
Net Cash Flow from Financing Activities
Cash flows provided by financing activities for the nine months ended March 31,
2021 were $808,044 as compared to $1,465,250 for the nine months ended March 31,
2020. During the nine months ended March 31, 2021 we received proceeds from the
exercise of warrants of $526,044 and proceeds from issuance of convertible notes
of $325,000 offset by repayments of convertible notes of $43,000. During the
nine months ended March 31, 2020, we received proceeds from the sale of
convertible promissory notes of $1,591,250, net of $126,000 in issue costs.
Effect of Exchange Rate
The effect of the exchange rate on cash resulted in a $48,365 positive
adjustment to cash flows in the nine months ended March 31, 2021 as compared to
a negative adjustment of $90,756 to cash flows in the nine months ended March
31, 2020. 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.
8
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): The Company's
wholly owned subsidiary's functional currency is the AUD. For financial
reporting purposes, the Australian Dollar ("AUD") has been translated into USD
as the Company's 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). Effective fiscal
year 2021, the parent company determined that intercompany loans will not be
repaid in the foreseeable future and thus, per ASC 830-20-35-3, gains and losses
from measuring the intercompany balances are recorded within cumulative
translation adjustment, a component of other comprehensive income.
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 718.
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 or around 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 measure 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 record the put premium as accretion to interest expense.
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.
Leases: In February 2016, the Financial Accounting Standards Board ("FASB")
issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to
recognize lease assets and lease liabilities for most operating leases. In
addition, the updated guidance requires that lessors separate lease and
non-lease components in a contract in accordance with the new revenue guidance
in ASC 606. This guidance is effective for interim and annual reporting periods
beginning after December 15, 2018. The Company adopted this guidance effective
July 1, 2019.
9
On July 1, 2019, the Company adopted ASU No. 2016-02, applying the package of
practical expedients to leases that commenced before the effective date whereby
the Company elected to not reassess the following: (i) whether any expired or
existing contracts contain leases and; (ii) initial direct costs for any
existing leases. For contracts entered into on or after the effective date, at
the inception of a contract the Company assessed whether the contract is, or
contains, a lease. The Company's assessment is based on: (1) whether the
contract involves the use of a distinct identified asset, (2) whether we obtain
the right to substantially all the economic benefit from the use of the asset
throughout the period, and (3) whether it has the right to direct the use of the
asset. The Company will allocate the consideration in the contract to each lease
component based on its relative stand-alone price to determine the lease
payments.
Operating lease ROU assets represents the right to use the leased asset for the
lease term and operating lease liabilities are recognized based on the present
value of future minimum lease payments over the lease term at commencement date.
As most leases do not provide an implicit rate, the Company use an incremental
borrowing rate based on the information available at the adoption date in
determining the present value of future payments. Lease expense for minimum
lease payments is amortized on a straight-line basis over the lease term and is
included in general and administrative expenses in the condensed consolidated
statements of operations.
Recent Accounting Pronouncements
Please see section captioned "Recent 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.
Going Concern Qualification
The accompanying unaudited condensed consolidated financial statements have been
prepared in conformity with US GAAP, which contemplate continuation of the
Company as a going concern. For the nine months ended March 31, 2021, the
Company had no revenues, had a net loss of $1,246,926, and had net cash used in
operations of $908,977. Additionally, as of March 31, 2021, the Company had a
working capital deficit, stockholders' deficit and accumulated deficit of
$3,013,203, $3,003,678 and $57,028,696, respectively.
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,
2020 and 2019. 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 for a period of 12 months from the
issue date of this report. 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 and/or to consummate a public offering. Management is currently
seeking additional funds, primarily through the issuance of equity and/or debt
securities for cash to operate our business. No assurance can be given that any
future financing will be available or, if available, that it will be 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 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.
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