UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2013
£ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from ____ to ____
DISCOUNT DENTAL MATERIALS, INC.
(Exact name of registrant as specified in its charter)
Nevada | 000-54381 | 26-1974399 |
(State or other jurisdiction of incorporation or organization) | (Commission File Number) | (I.R.S. Employer Identification No.) |
13455 Noel Road, Suite 1000 Dallas, TX 75240 | ||
(Address of principal executive offices) | ||
949-415-7478 | ||
(Registrant’s telephone number, including area code) | ||
(Former address, if changed since last report) | ||
(Former fiscal year, if changed since last report) |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes /X/ No / /
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes [X] No [ ]
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of "large accelerated filer," "accelerated filer" and "smaller reporting company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer [ ] Accelerated filer [ ]
Non-accelerated filer [ ] (Do not check if a smaller reporting company) Smaller reporting company [X]
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS
DURING THE PRECEDING FIVE YEARS
Indicate by check mark whether the registrant filed all documents and reports required to be filed by Section 12, 13 or 15(d) of the Exchange Act after the distribution of securities under a plan confirmed by a court. Yes / / No / /
APPLICABLE ONLY TO CORPORATE ISSUERS
Indicate the number of shares outstanding of each of the issuer's classes of stock, as of the latest practicable date.
Class of Securities | Shares Outstanding at May 2, 2013 |
Common Stock, $0.001 par value | 31,180,001 |
DISCOUNT DENTAL MATERIALS, INC.
TABLE OF CONTENTS
PART I – FINANCIAL INFORMATION | PAGE |
ITEM 1. FINANCIAL STATEMENTS | 4 |
UNAUDITED CONDENSED CONSOLIDATED BALANCE SHEETS | 5 |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS | 6 |
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS | 7 |
NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS | 8 |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS | 21 |
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK | 34 |
ITEM 4. CONTROLS AND PROCEDURES | 34 |
PART II. OTHER INFORMATION | 36 |
ITEM 1. LEGAL PROCEEDINGS | 36 |
ITEM 1A. RISK FACTORS | 36 |
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS | 36 |
ITEM 3. DEFAULTS UPON SENIOR SECURITIES | 36 |
ITEM 4. MINING SAFETY DISCLOSURES | 36 |
ITEM 5. OTHER INFORMATION | 36 |
ITEM 6. EXHIBITS | 36 |
SIGNATURES |
39 |
PART 1 - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
The unaudited condensed consolidated financial statements of registrant for the three and nine months ended March 31, 2013 and 2012 follow. The condensed consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary to a fair statement of the results for the interim periods presented. All such adjustments are of a normal and recurring nature.
DISCOUNT DENTAL MATERIALS, INC. AND SUBSIDIARY
(a development stage company)
CONDENSED CONSOLIDATED BALANCE SHEETS
March 31, | June 30, | ||||
2013 | 2012 | ||||
(unaudited) | |||||
ASSETS | |||||
Current assets: | |||||
Cash and cash equivalents | $ | 28,709 | $ | 4,185 | |
Prepaid Expenses | 5,126 | - | |||
Total current assets | 33,835 | 4,185 | |||
Long-term assets: | |||||
Computer equipment, net | - | 357 | |||
Patent rights | 83,900 | 83,900 | |||
Total long-term assets | 83,900 | 84,257 | |||
Total assets | $ | 117,735 | $ | 88,442 | |
LIABILITIES AND STOCKHOLDERS’ DEFICIT | |||||
Current liabilities: | |||||
Accounts payable | $ | 87,502 | $ | 42,767 | |
Related party payables | 45,545 | 369,283 | |||
Notes payable to stockholders | - | 75,000 | |||
Accrued Payroll and Taxes | 41,341 | - | |||
Related party notes payable | 338,700 | - | |||
Total current liabilities | 513,088 | 487,050 | |||
Long term liabilities: | |||||
Convertible note to stockholder, net of debt discount | 223,529 | 107,813 | |||
Total Long term liabilities | 223,529 | 107,813 | |||
Total liabilities | 736,617 | 594,863 | |||
Commitments and contingencies (Note 4) | |||||
Stockholders’ deficit | |||||
Preferred stock ($0.001 par value: 1,000,000 shares authorized; none issued and outstanding) |
- | - | |||
Common stock ($0.001 par value: 249,000,000 shares authorized; | |||||
31,180,001 shares issued and outstanding at March 31, 2013 and June 30, 2012) |
31,180 | 31,180 | |||
Additional paid in capital | 1,326,017 | 916,204 | |||
Deficit accumulated during the development stage | (1,976,079) | (1,453,805) | |||
Total stockholders’ deficit | (618,882) | (506,421) | |||
Total liabilities and stockholders’ deficit | $ | 117,735 | $ | 88,442 |
DISCOUNT DENTAL MATERIALS, INC. AND SUBSIDIARY
(a development stage company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
February 22, 2010 (date of inception) through March 31, 2013 | ||||||||||||||||
For the Nine Months Ended March 31, | For the Three Months Ended March 31, | |||||||||||||||
2013 | 2012 | 2013 | 2012 | |||||||||||||
Operating Expenses | ||||||||||||||||
Selling, general and administrative expenses | $ | 313,946 | $ | 394,963 | $ | 118,095 | $ | 135,636 | $ | 1,351,456 | ||||||
Research and development costs | 108,500 | — | — | — | 112,578 | |||||||||||
Accretion of debt discount | 68,529 | — | 34,779 | — | 71,342 | |||||||||||
Interest expense | 30,602 | 5,950 | 15,752 | 3,200 | 40,152 | |||||||||||
Depreciation | 357 | 641 | — | 213 | 1,711 | |||||||||||
Purchase of shell | — | 397,000 | — | — | 397,000 | |||||||||||
Marketing expenses | 340 | — | 340 | — | 1,840 | |||||||||||
Total operating expenses | 522,274 | 798,554 | 168,966 | 139,049 | 1,976,079 | |||||||||||
Net operating loss | (522,274 | ) | (798,554 | ) | (168,966 | ) | (139,049 | ) | (1,976,079 | ) | ||||||
Loss before income taxes | (522,274 | ) | (798,554 | ) | (168,966 | ) | (139,049 | ) | (1,976,079 | ) | ||||||
Income taxes | — | (800 | ) | — | (400 | ) | — | |||||||||
Net loss | (522,274 | ) | $ | (799,354 | ) | $ | (168,966 | ) | $ | (139,449 | ) | $ | (1,976,079 | ) | ||
Loss per share: | ||||||||||||||||
Basic and diluted loss per share | $ | (0.02 | ) | $ | (0.03 | ) | $ | (0.01 | ) | $ | (0.00 | ) | ||||
Basic and diluted weighted average shares outstanding | 31,180,001 | 30,123,051 | 31,180,001 | 30,979,176 |
DISCOUNT DENTAL MATERIALS, INC. AND SUBSIDIARY
(a development stage company)
UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
For the Nine Months Ended |
February 22, 2010 (date of inception) through March 31, 2013 | ||||||||
March 31, | |||||||||
2013 | 2012 | ||||||||
Cash flows from operating activities: | |||||||||
Net loss | $ | (522,274) | $ | (799,354) | $ | (1,976,079) | |||
Adjustments to reconcile net loss to net cash used in operating activities: | |||||||||
Depreciation | 357 | 641 | 1,711 | ||||||
Accretion of debt discount | 68,529 | - | 71,342 | ||||||
Warrants issued for research and development | 108,500 | - | 108,500 | ||||||
Supplies contributed for founder’s shares | - | - | 10,650 | ||||||
Changes in operating assets and liabilities: | |||||||||
Accounts payable | 44,735 | 82,887 | 87,502 | ||||||
Related party payables | 32,962 | (56,786) | 352,245 | ||||||
Prepaid Expenses | (5,126) | (5,126) | |||||||
Accrued Payroll and Taxes | 41,341 | 41,341 | |||||||
Income Taxes Payable | 800 | ||||||||
Net cash used in operating activities | (230,976) | (771,812) | (1,307,914) | ||||||
Cash flows from investing activities: | |||||||||
Capitalized patent costs | - | (8,000) | (27,300) | ||||||
Purchases of computer equipment | - | - | (1,711) | ||||||
Net cash used in investing activities | - | (8,000) | (29,011) | ||||||
Cash flows from financing activities: | |||||||||
Founders capital contribution | - | - | 3,250 | ||||||
Proceeds from issuance of common stock and warrants, net of offering costs | - | 544,884 | 791,884 | ||||||
Repayment of notes payable to related parties | (18,000) | (18,000) | |||||||
Repayment of notes payable to stockholders | - | (5,490) | (19,490) | ||||||
Proceeds from notes payable to stockholders, net of costs | 273,500 | 240,000 | 607,990 | ||||||
Net cash flows provided by financing activities: | 255,500 | 779,394 | 1,365,634 | ||||||
Net change in cash and cash equivalents | 24,524 | (418) | 28,709 | ||||||
Cash and cash equivalents- beginning of period | 4,185 | 746 | - | ||||||
Cash and cash equivalents- end of period | $ | 28,709 | $ | 328 | $ | 28,709 | |||
Supplemental disclosure of non cash activities: | |||||||||
Cash paid during the period for: | |||||||||
Interest | $ | - | $ | - | $ | - | |||
Income tax | $ | - | $ | - | $ | - |
Supplemental disclosure on non-cash investing and financing activities:
Acquisition of patent rights for related party payable and common stock | $ | - | $ | - | $ | 56,600 | ||
Beneficial conversion feature on convertible note | $ | 400,000 | $ | - | $ | 535,000 | ||
Conversion of related party payables into related party notes payable | $ | 356,700 | $ | $ | 596,700 |
Overview
Discount Dental Materials, Inc., a development stage company (“Discount Dental” or “Company”), was incorporated on December 18, 2007 under the laws of Nevada. The Company is a developmental stage biomedical company and through its wholly-owned subsidiary, Cerebain Biotech Corp., the Company’s business involves the discovery of products for the treatment of Alzheimer’s disease utilizing Omentum. Under the current plan, the Company’s products will include both a medical device solution as well as a synthetic drug solution.
NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES
The financial statements as of March 31, 2013 and for the three and nine months ended March 31, 2013 and 2012 have been prepared in accordance with accounting principles generally accepted in the United States for interim financial information on the same basis as the annual financial statements and in the opinion of management, reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company's financial position, results of operations and cash flows for the periods shown. The results of operations for such periods are not necessarily indicative of the results expected for a full year or for any future period. They do not include all of the information and footnotes required by generally accepted accounting principles for complete financial statements. Therefore, these financial statements should be read in conjunction with the Company's audited financial statements and notes thereto for the year ended June 30, 2012 included on Form 10-K filed with the Securities and Exchange Commission on September 28, 2012.
NOTE 2 – BASIS OF PRESENTATION
The Company operates in one segment in accordance with accounting guidance Financial Accounting Standards Board (“FASB”) ASC Topic 280, Segment Reporting. Our Principal Executive Officer has been identified as the chief operating decision maker as defined by FASB ASC Topic 280.
The Accounting Standards Codification ("Codification" or "ASC") is the source of authoritative accounting principles recognized by the FASB to be applied by nongovernmental entities in the preparation of financial statements in accordance with generally accepted accounting principles in the United States ("GAAP"). Rules and interpretive releases of the Securities and Exchange Commission ("SEC") issued under authority of federal securities laws are also sources of GAAP for SEC registrants.
Description of Business
Development Stage Company
The Company is a development stage company as defined by ASC section 915-10-20. Although the Company’s planned principal operations have commenced it is still devoting substantially all of its efforts on establishing the business. All losses accumulated since inception has been considered as part of the Company's development stage activities.
Fiscal year end
The Company’s fiscal year end is June 30.
Going Concern
The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company had a deficit accumulated during the development stage of $1,976,079
and $1,453,805 at March 31, 2013 and June 30, 2012, respectively, and had a net loss of $522,274 and $799,354 for the nine months ended March 31, 2013 and 2012, respectively, and net cash used in operating activities of $230,976 and $771,812 for the nine months ended March 31, 2013 and 2012, respectively, with no revenue earned since inception, and a lack of operational history. These matters, among others, raise substantial doubt about our ability to continue as a going concern.
Since the Company only recently commenced operations and has not generated revenues, the Company’s cash position may not be significant enough to support the Company’s daily operations. Management intends to raise additional funds by way of a public or private offering. Management believes that the actions presently being taken to further implement its business plan and generate revenues provide the opportunity for the Company to continue as a going concern. While the Company believes in the viability of its strategy to generate revenues and in its ability to raise additional funds, there can be no assurances to that effect. The ability of the Company to continue as a going concern is dependent upon the Company’s ability to further implement its business plan and generate revenues.
The financial statements do not include any adjustments that might be necessary if the Company is unable to continue as a going concern.
NOTE 3 – SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States and have been consistently applied in the preparation of the financial statements.
Use of Estimates
The preparation of these financial statements in accordance with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosures of contingent assets and liabilities at the dates of the financial statements and the reported amounts of net sales and expenses during the reported periods. Actual results may differ from those estimates and such differences may be material to the financial statements. The more significant estimates and assumptions by management include among others: useful lives and residual values of long-lived assets, and the valuation of equity instruments. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumptions.
Principles of Consolidation
The accompanying condensed consolidated financial statements include the accounts of Discount Dental Materials, Inc. and its wholly-owned subsidiary, Cerebain Biotech Corp. (collectively hereinafter referred to as the “Company”). There are no material intercompany transactions.
Revenue Recognition
The Company expects to recognize revenues in accordance with the guidelines of the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104 “Revenue Recognition”.
Under SAB 104, four conditions must be met before revenue can be recognized: (i) there is persuasive evidence that an arrangement exists, (ii) delivery has occurred or service has been rendered, (iii) the price is fixed or determinable, and (iv) collection is reasonably assured.
Cash and Cash Equivalents
For purposes of the statements of cash flows, the Company considers all highly liquid debt instruments purchased with a maturity of six months or less to be cash equivalents. Accounts held at U.S. financial institutions are insured by the FDIC up to $250,000. Cash balances could exceed insured amounts at any given time; however, the Company has not experienced any such losses.
Income Taxes
The Company is subject to income taxes in the U.S. Significant judgment is required in evaluating our uncertain tax positions and determining our provision for income taxes. In accordance with FASB ASC Topic 740, “Income Taxes,” the Company provides for the recognition of deferred tax assets if realization of such assets is more likely than not.
The Company accounts for income tax under the provisions of FASB ASC Topic 740, “Income Taxes”, which requires recognition of deferred tax assets and liabilities for the expected future tax consequences of the events that have been included in the financial statements or tax returns. Deferred income taxes are recognized for all significant temporary differences between tax and financial statements bases of assets and liabilities. Valuation allowances are established against net deferred tax assets when it is more likely than not that some portion or all of the deferred tax asset will not be realized.
Research and Development
The Company expenses the cost of research and development as incurred. Research and development costs charged to operations for the nine months ended March 31, 2013 and 2012 were $108,500 and none, respectively, and are included in research and development costs in the accompanying consolidated statements of operations. There were no such costs charged to operations for the three months ended March 31, 2013 and 2012.
Computer Equipment
Computer equipment is stated at cost. Depreciation is computed using the straight-line method for financial statement purposes. Maintenance and repairs are expensed as incurred and the costs of additions and betterments that increase the useful lives of the assets are capitalized. When property or equipment is disposed, the cost and related accumulated depreciation and amortization are removed from the accounts and any gain or loss is included in other income or expenses.
The estimated useful lives of property and equipment are as follows:
Laptop computers | 2 years | |
Computers and computer software | 3 years |
Long-lived Assets
The Company’s long-lived assets and other assets (consisting of property and equipment and purchased intangible assets with finite useful lives) are reviewed for impairment in accordance with the guidance of the FASB Topic ASC 360, “Property, Plant, and Equipment”, and FASB ASC Topic 205 “Presentation of Financial Statements”. The Company tests for impairment losses on long-lived assets used in operations whenever events or changes in circumstances indicate that the carrying amount of the asset may not be recoverable. Recoverability of an asset to be held and used is measured by a comparison of the carrying amount of an asset to the future undiscounted cash flows expected to be generated by the asset. If such asset is considered to be impaired, the impairment to be recognized is measured by the amount by which the carrying amount of the asset exceeds its fair value. Impairment evaluations involve management’s estimates on asset useful lives and future cash flows. Actual useful lives and cash flows could be different from those estimated by management which could have a material effect on our reporting results and financial positions. Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party independent appraisals, as considered necessary. Through March 31, 2013, the Company had not experienced impairment losses on its long-lived assets. However, there can be no assurances that demand for the Company’s products or services will continue, which could result in an impairment of long-lived assets in the future.
Convertible Debt
In accordance with ASC Topic 470-20, “Debt with Conversion and Other Options”, conventional convertible debt is a financial instrument in which the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash. Conventional convertible debt with a non-detachable conversion feature that does not contain a cash settlement option, and is not accounted for as a derivative, is recorded as a debt instrument in its entirety.
Non-Cash Equity Transactions
Shares of equity instruments issued for non-cash consideration are recorded at the fair value of the consideration received based on the market value of services to be rendered, or at the value of the stock given, considered in reference to contemporaneous cash sale of stock.
Accounting for Derivative Financial Instruments
The Company evaluates stock options, stock warrants or other contracts to determine if those contracts or embedded components of those contracts qualify as derivatives to be separately accounted for under the relevant sections of ASC Topic 815-40, “Derivative Instruments and Hedging: Contracts in Entity’s Own Equity” (“ASC Topic 815-40”). The result of this accounting treatment could be that the fair value of a financial instrument is classified as a derivative instrument and is marked-to-market at each balance sheet date and recorded as a liability. In the event that the fair value is recorded as a liability, the change in fair value is recorded in the statement of operations as other income or other expense. Upon conversion or exercise of a derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified to equity. Financial instruments that are initially classified as equity that become subject to reclassification under ASC Topic 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.
Fair Value of Financial Instruments
The Company applies the provisions of accounting guidance, FASB Topic ASC 825 that requires all entities to disclose the fair value of financial instruments, both assets and liabilities recognized and not recognized on the balance sheet, for which it is practicable to estimate fair value, and defines fair value of a financial instrument as the amount at which the instrument could be exchanged in a current transaction between willing parties. As of March 31, 2013 and June 30, 2012, the fair value of cash, accounts payable, related party payables, and notes payable to stockholders approximated carrying value due to the short maturity of the instruments, quoted market prices or interest rates which fluctuate with market rates.
Fair Value Measurements
FASB ASC Topic 825 “Financial Instruments,” requires disclosure about fair value of financial instruments.
The FASB ASC Topic 820, Fair Value Measurements and Disclosures, clarifies the definition of fair value for financial reporting, establishes a framework for measuring fair value and requires additional disclosures about the use of fair value measurements.
The inputs or methodologies used for valuing securities are not necessarily an indication of the risk associated with investing in these securities. These inputs are summarized in the three broad levels listed below.
· Level 1 – observable market inputs that are unadjusted quoted prices for identical assets or liabilities in active markets.
· Level 2 – other significant observable inputs (including quoted prices for similar securities, interest rates, credit risk, etc.).
· Level 3 – significant unobservable inputs (including the Company’s own assumptions in determining the fair value of investments).
The carrying value of financial assets and liabilities recorded at fair value is measured on a recurring or nonrecurring basis. Financial assets and liabilities measured on a non-recurring basis are those that are adjusted to fair value when a significant event occurs. The Company had no financial assets or liabilities carried and measured on a nonrecurring basis during the reporting periods. Financial assets and liabilities measured on a recurring basis are those that are adjusted to fair value each time a financial statement is prepared.
Concentrations, Risks, and Uncertainties
The Company has only recently started operations and is, therefore, subject to the substantial business risks and uncertainties inherent to such an entity, including the potential risk of business failure.
Basic and Diluted Earnings Per Share
Basic earnings (loss) per share is computed by dividing net earnings applicable to common stockholders by the weighted-average number of shares of common stock outstanding during the period. Diluted earnings (loss) per share is determined using the weighted-average number of shares of common stock outstanding during the period, adjusted for the dilutive effect of common stock equivalents, using the treasury stock method, consisting of shares that might be issued upon exercise of common stock warrants and conversion of convertible notes. In periods where losses are reported, the weighted-average number of shares outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
The FASB ASC Topic 260, Earnings Per Share, requires the Company to include additional shares in the computation of earnings per share, assuming dilution. The additional shares included in diluted earnings per share represents the number of shares that would be issued if all of the Company’s outstanding dilutive instruments were converted into common stock.
Diluted earnings per share are based on the assumption that all dilutive options were converted or exercised. Dilution is computed by applying the treasury stock method. Under this method, options, warrants, and convertible notes are assumed to be exercised at the time of issuance, and as if funds obtained thereby were used to purchase common stock at the average market price during the period.
Basic and diluted loss per share are the same since the Company had net losses for all periods presented and inclusion of the additional potential common shares would have an anti-dilutive effect.
Subsequent Events
The Company follows the guidance in ASC Topic 855, Subsequent Events (“ASC 855”), which provides guidance to establish general standards of accounting for and disclosures of events that occur after the balance sheet date but before financial statements are issued or are available to be issued. ASC 855 sets forth (i) the period after the balance sheet date during which management of a reporting entity evaluate events or transactions that may occur for potential recognition or disclosure in the financial statements, (ii) the circumstances under which an entity should recognize events or transactions occurring after the balance sheet date in its financial statements, and (iii) the disclosures that an entity should make about events or transactions that occurred after the balance sheet date.
Recent Accounting Pronouncements
The Company has evaluated new accounting pronouncements that have been issued and are not yet effective for the Company and determined that there are no such pronouncements expected to have an impact on the Company’s future financial statements.
4. COMMITMENTS AND CONTINGENCIES
Contracts
On September 24, 2012, the Company entered into an agreement with medical device product development company Sonos Models, Inc. (“Sonos”) to build up to three medical device prototypes to be used for testing. The agreement calls for a total cash payment of up to $400,000 and the issuance of warrants to purchase up to 650,000 shares of the Company’s common stock, with the cash payments and warrants to be issued in stages once certain developmental thresholds are achieved. Any warrants issued under this agreement will be immediately exercisable, will be eligible for cashless exercise at the option of the holder, and will have a term of three years from the date of issuance and an exercise price based on the fair market value of the Company’s common stock on the date of the completion of the respective project phase. Pursuant to the agreement, the Company agreed to the following schedule:
i) Upon signing the agreement the Company issued Sonos warrants to purchase 50,000 shares of the Company’s common stock. The warrants have an exercise price of $0.20 per share.
ii) Phase 1 - Sonos will conduct a search of literature, patents, and sources for information to guide the definition of the device requirements, including, but not limited to, reviewing Dr. Saini’s patent, review other patents related to omentum, fluid extraction, and collection, stimulation, search medical literature for omentum texts, articles, research clinical studies related to the use of omentum in the treatment of omentum. In exchange for the services, the Company will pay Sonos a cash payment of approximately $20,000 and 50,000 warrants upon completion of the phase.
iii) Phase 2 - Sonos will define the design objective in terms of materials, fabrication, technology, and performance. In exchange for the services, the Company will pay Sonos a cash payment of approximately $19,000 and 50,000 warrants upon completion of the phase.
iv) Phase 3 - Sonos will develop a minimum of three design concepts that meet the design objectives outlined in Phase II, and document the designs in sketches, drawings, and draft specifications and estimate schedule, capital, and production costs for each approach. In exchange for these services, the Company will pay Sonos a cash payment of $12,500 and 100,000 warrants upon completion of the phase.
v) Phase 4 - Sonos will review concepts from Phase 3 and choose two or more of the design concepts for the development of prototypes for testing in Phase 5 (which will be pursuant to a subsequent agreement between the parties). In exchange for these services, the Company will pay Sonos a cash payment of up to $350,000 and 100,000 warrants for each of the three prototypes for a total of 300,000 warrants. In addition, should Sonos complete the first Omentum producing prototype by March 31, 2013, Sonos will receive an additional 100,000 warrants.
As of March 31, 2013, Sonos had only delivered the product development report with the overview of the development plan from the feasibility study and had not performed any substantive services related to any of the phases.
Consulting Agreements
The Company had a consulting agreement with its officer, director, and stockholder under which he was compensated $5,000 per month, plus medical benefits. This contract, as amended on January 1, 2012, was for twenty-four (24) months beginning January 2012 (“Initial Term”), automatically renewable for two (2) successive twelve (12) month terms after the Initial Term (“Renewal Term”), and terminable with six month notice during the Renewal Term. On January 18, 2013, the contract was terminated by both parties, notwithstanding the aforementioned termination provisions, with no additional costs owed subsequent to December 31, 2012. The amount of $116,700 owed under the contract as of December 31, 2012 was converted into a note payable (see Note 7).
The Company has a consulting agreement with a stockholder to provide accounting and administrative support, under which she is compensated $1,500 per month. This contract was for twelve (12) months beginning September 2010 (“Initial Term”), automatically renewable for one (1) successive twelve (12) month term after the Initial Term (“Renewal Term”), and terminable with six month notice during the Renewal Term. This contract is currently on a month to month basis and can be terminated given 30 days written notice.
In addition, the Company had consulting agreements with two (2) of its stockholders, under which the Company compensated each of these stockholders $10,000 per month plus medical benefits. These contracts, as amended on January 1, 2012, were for twenty-four (24) months beginning January 2012 (“Initial Term”), automatically renewable for two (2) successive twelve (12) month terms after the Initial Term (“Renewal Term”), and terminable with six month notice during the Renewal Term. On January 18, 2013, these contracts were terminated by both parties, notwithstanding the aforementioned terminable conditions, with no additional costs owed subsequent to December 31, 2012. The amounts totaling $240,000 owed under these contracts as of December 31, 2012 were converted into a note payable (see Note 7).
Patent License Agreement
The Patent License Agreement (see Note 6) provides for a one-time payment of $50,000 due within ninety (90) days of the date of signing of June 10, 2010 (as of the date of this filing, the one-time payment is fully paid), and a royalty payment of six (6) percent of the value of the net sales, as defined, generated from the sale of licensed products. The agreement also provides for yearly minimum royalty payments of $50,000 for each of the fourth, fifth, and sixth anniversary of the date of the agreement, and a yearly minimum royalty payment of $100,000 for each year thereafter during the term of the agreement. The term of the agreement shall continue until the patent in the intellectual property expires, unless terminated sooner under the provisions of the agreement, as defined.
Legal
The Company is not a party to or otherwise involved in any legal proceedings.
In the ordinary course of business, the Company is from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of the Company’s management, other than as set forth herein, matters currently pending or threatened against the Company are not expected to have a material adverse effect on its financial position or results of operations.
5. COMPUTER EQUIPMENT
Computer equipment consisted of the following:
March 31, 2013 | June 30, 2012 | ||||
Computer equipment | $ | 1,711 | $ | 1,711 | |
Less: accumulated depreciation | (1,711) | (1,354) | |||
Total | $ | - | $ | 357 |
6. PATENT RIGHTS
On June 10, 2010, the Company entered into a Patent License Agreement under which the Company acquired the exclusive rights to certain intellectual property related to using omentum for treating dementia conditions. Under the agreement the Company paid rights fees of $50,000 to Dr. Saini, and the Company issued Dr. Saini 8,250,000 shares of our common stock, valued at $6,600 (based on the fair market value on the date of grant) restricted in accordance with Rule 144. As a result, Dr. Saini became our largest shareholder. In addition, Dr. Saini will have the option to participate in the sale of equity by the Company in the future, up to ten percent (10%) of the money raised, in exchange for the applicable number of his shares.
The patent will have an estimated useful life of 20 years based on the term of the patent. Amortization of the patent will begin when the patent is issued by the United States Patent and Trademark Office and put in use.
The Company has paid legal fees totaling $27,300 related to the patent.
7. NOTES PAYABLE TO STOCKHOLDERS
Short Term Note Payable
On January 18, 2013, the Company converted $356,700 of related party payables owed under consulting agreements, into related party notes payable. The notes mature on December 31, 2013 and accrue interest at seven and one-half (7.5) percent per annum at maturity. As of March 31, 2013, the outstanding balance of the related party payables is $338,700.
Old Notes
On June 12, 2012, the Company entered into an unsecured $75,000 principal amount promissory note with a stockholder. This note, as amended, matured on September 30, 2012 and accrued interest beginning on the maturity date at 7.5% per annum. The Company determined that imputed interest on the note for the period from the issuance date to maturity is immaterial to the financial statements. On July 25, 2012, the Company entered into an unsecured $100,000 promissory note with the same stockholder. This note matured on September 30, 2012 and accrued interest at seven and one-half (7.5) percent per annum at maturity. On August 30, 2012, the Company entered into an unsecured $60,000 promissory note with the same stockholder. The terms of the note had not been negotiated. On November 1, 2012 we restructured the terms of these notes with the noteholder as described below.
On November 1, 2012, the Company entered into an unsecured $235,000 principal amount consolidation promissory note (“Consolidation Promissory Note”) with a non-affiliate stockholder (“Noteholder”). The Consolidation Promissory Note is a consolidation of the foregoing promissory notes totaling $235,000 with the same Noteholder. Such notes were voided as a result, however, the accrued interest on such notes is still owed and included with the accrued interest of the Consolidation Promissory Note until paid. The Company did not receive additional funds under the Consolidation Promissory Note, as it was a consolidation of prior notes owed to Noteholder. Under the terms of the Consolidation Promissory Note, it matures January 31, 2013, and accrues interest at 7.5% per annum beginning November 1, 2012. On March 14, 2013 we restructured the terms of the note with the noteholder as described below.
On December 27, 2012, the Company entered into an unsecured $10,000 promissory note with a stockholder. The terms of the note have not been negotiated. On March 14, 2013 we restructured the terms of the note with the noteholder as described below.
Long Term Note Payable
Old Notes
On July 31, 2011, the Company entered into an unsecured $60,000 promissory note with a stockholder. This note matured on April 13, 2012 and accrued interest at six (6) percent per annum at maturity. On October 13, 2011, the Company entered into a $100,000 convertible note (“Convertible Note”) with the same stockholder. The Convertible Note matured on April 13, 2012, accrued interest at six (6) percent per annum, the holder was entitled to convert at $0.32 per share into the Company’s common stock, and provided for potential adjustments, as defined. To properly account for this transaction, the Company performed a detailed analysis to obtain a thorough understanding of the transaction, including understanding the terms of each instrument issued. This agreement meets the definition of conventional convertible debt and there was no beneficial conversion feature since the conversion price was not lower than the estimated fair market value of the Company’s common stock on the date of transaction. On February 1, 2012, Cerebain entered into an unsecured $80,000 promissory note with the same stockholder. This note matured on April 13, 2012 and accrued interest at six (6) percent per annum. On June 18, 2012 we restructured the terms of the note with the noteholder as described below.
On June 18, 2012, the Company entered into an unsecured $240,000 principal amount convertible promissory note (“Consolidation Note”) with a non-affiliate stockholder (“Noteholder”). The Consolidation Note is a consolidation of the foregoing Promissory and Convertible Notes totaling $240,000 with the same Noteholder. Such notes were voided as a result, however, the accrued interest on such notes is still owed and included with the accrued interest of the Consolidation Note until paid. The Company did not receive additional funds under the Consolidation Note, as it was a consolidation of prior notes owed to Noteholder, but Noteholder has loaned us an additional $235,000 under the terms of separate promissory notes (non-convertible), as described above. Under the terms of the Consolidation Note, it matures June 30, 2014, accrues interest at 6% per annum beginning July 1, 2012, is convertible into shares of our common stock at $0.32 per share, but only if such conversion would not cause the Noteholder to own more than 9.9% of our outstanding common stock, and contains piggyback registration rights. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was sophisticated and familiar with our operations at the time of the issuance of the shares.
To properly account for this transaction, the Company performed a detailed analysis to obtain a thorough understanding of the transaction, including understanding the terms of each instrument issued, and any related derivatives entered into. The Company first reviewed ASC Topic 815, “Broad Transactions – Derivatives and Hedging” (“Topic 815”) to identify whether any equity-linked features in the Consolidation Note are freestanding or embedded. The Company determined that there were no free standing features. The Consolidation Note was then analyzed in accordance with Topic 815 to determine if the Consolidation Note should be accounted for at fair value and remeasured at fair value in income. The Company determined that the Consolidation Note did not meet the requirements of Topic 815 and therefore accounted the Consolidation Note as conventional convertible debt. The Company then reviewed ASC Topic 470-20, “Debt with Conversion and Other Options”, and determined that the Consolidation Note met the criteria of a conventional convertible note and that the Consolidation Note had a beneficial conversion feature valued at $135,000, which was recorded as a debt discount against the face amount of the Consolidation Note, which is being accreted to interest expense over the 24 month term of the Consolidation Note. The Company used a recent sale of restricted stock to determine the fair value of the stock for purposes of calculating the beneficial conversion feature. On March 14, 2013 we restructured the terms of the note with the noteholder as described below.
New Note
On March 14, 2013, the Company entered into an unsecured $600,000 principal amount convertible promissory note (“Consolidation Note”) with a non-affiliate stockholder (“Noteholder”). The Consolidation Note is a consolidation of the foregoing Promissory and Convertible Notes totaling $485,000 with the same Noteholder. Such notes were voided as a result, however, the accrued interest on such notes is still owed and included with the accrued interest of the Consolidation Note until paid. The Company did receive additional funds totaling $115,000 under the Consolidation Note. Under the terms of the Consolidation Note, it matures July 15, 2014, accrues interest at 7.5% per annum beginning March 1, 2013, is convertible into shares of our common stock at $0.30 per share, but only if such conversion would not cause the Noteholder to own more than 9.9% of our outstanding common stock, and contains piggyback registration rights. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was sophisticated and familiar with our operations at the time of the issuance of the shares.
To properly account for this transaction, the Company performed a detailed analysis to obtain a thorough understanding of the transaction, including understanding the terms of each instrument issued, and any related derivatives entered into. The Company first reviewed ASC Topic 815, “Broad Transactions – Derivatives and Hedging” (“Topic 815”) to identify whether any equity-linked features in the Consolidation Note are freestanding or embedded. The Company determined that there were no free standing features. The Consolidation Note was then analyzed in accordance with Topic 815 to determine if the Consolidation Note should be accounted for at fair value and remeasured at fair value in income. The Company determined that the Consolidation Note did not meet the requirements of Topic 815 and therefore accounted the Consolidation Note as conventional convertible debt. The Company then reviewed ASC Topic 470-20, “Debt with Conversion and Other Options”, and determined that the Consolidation Note met the criteria of a conventional convertible note and that the Consolidation Note had a beneficial conversion feature valued at $400,000, which was recorded net of $87,187 related to the unamortized discount of the voided notes, as a debt discount against the face amount of the Consolidation Note, which is being accreted to interest expense over the 17 month term of the Consolidation Note. The Company used a recent sale of restricted stock to determine the fair value of the stock for purposes of calculating the beneficial conversion feature.
Accrued interest on all notes payable to stockholders at March 31, 2013 totaled $40,152 and is included in related party payables.
8. WARRANTS
Accounting for the Warrants
On September 24, 2012, the Company entered into an agreement with medical device product development company Sonos Models, Inc. (“Sonos”) to build up to three medical device prototypes to be used for testing. The agreement calls for a total cash payment of up to $400,000 and the issuance of warrants to purchase up to 650,000 shares of the Company’s common stock, with the cash payments and warrants to be issued in stages once certain developmental thresholds are achieved.
Upon signing the agreement the Company issued Sonos warrants to purchase 50,000 shares of the Company’s common stock, valued at $108,500 (based on the fair market value on the date of grant). The warrants are immediately exercisable, cashless at the option of the holder, and have a term of three years and an exercise price of $0.20 per share.
The Company analyzed the warrants issued (“Warrants”) in accordance with ASC Topic 815 to determine whether the Warrants meet the definition of a derivative under ASC Topic 815 and, if so, whether the Warrants meet the scope exception of ASC Topic 815, which is that contracts issued or held by the reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders’ equity shall not be considered to be derivative instruments for purposes of ASC Topic 815. The provisions of ASC Topic 815 subtopic 40 “Determining Whether an Instrument (or Embedded Feature) Is Indexed to an Entity’s Own Stock” (“ASC Topic 815 subtopic 40”) apply to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by ASC Topic 815 and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. The Company concluded these warrants should be treated as equity since they contain no provisions which would require the Company to account for the warrants as a derivative liability.
The following represents a summary of the Warrants outstanding at March 31, 2013 and changes during the period then ended:
Warrants |
Weighted Average Exercise Price | |||
Outstanding at June 30, 2012 | 37,500 | $ | 0.80 | |
Granted | 50,000 | 0.20 | ||
Exercised | - | - | ||
Expired/Forfeited | - | - | ||
Outstanding at March 31, 2013 | 87,500 | $ | 0.46 | |
Exercisable at March 31, 2013 | 87,500 | $ | 0.46 |
Fair Value of the Warrants
Fair value is generally based on independent sources such as quoted market prices or dealer price quotations. To the extent certain financial instruments trade infrequently or are non-marketable securities, they may not have readily determinable fair values. The Company estimated the fair value of the Warrants using a Black Scholes option pricing model and available information that management deems most relevant. Among the factors considered in determining the fair value of financial instruments: The stock price is the closing price of the Company’s stock on the valuation date; the risk free interest rate is based on the U.S. Government Securities average rate for 1.5 year maturities on the date of issuance; the volatility is a statistical measure (standard deviation) of the tendency of the Company’s stock price to change over time; the exercise price is the price at which the warrant can be purchased by exercising prior to its expiration; the dividend yield is not applicable due to the Company not intending to declare dividends; the contractual life is based on the average exercise period of the warrant; and the fair market value is value of the warrants based on the Black Scholes model on the valuation date.
The following table provides the valuation inputs used to value the Warrants issued in connection with the Sonos agreement.
Sonos Agreement Warrants - Valuation Inputs | ||||||||
Attribute |
September 24, 2012 | |||||||
Stock Price | $ | 2.25 | ||||||
Risk Free Interest Rate | 0.27 | % | ||||||
Volatility | 235.5 | % | ||||||
Exercise Price | $ | 0.20 | ||||||
Dividend Yield | 0 | % | ||||||
Expected Exercise Term (Years) | 1.5 | |||||||
Fair Market Value | $ | 108,500 |
9. Related Party Transactions
Other than as set forth below, and as disclosed in Notes 4, 6, and 7, the Company has not entered into or been a participant in any transaction in which a related person had or will have a direct or indirect material interest.
The Company had consulting agreements with four stockholders, one of which is an officer and director of the Company (see Note 4) and expensed consulting fees totaling $24,066 and $88,500 for the three months ended December 31, 2012 and 2011, respectively, and $112,566 and $177,000 for the six months ending December 31, 2012 and 2011, respectively. On January 18, 2013, the Company converted $356,700 of related party payables owed under consulting agreements, into related party notes payable. The notes mature on December 31, 2013 and accrue interest at seven and one-half (7.5) percent per annum at maturity
Included in related party payables at March 31, 2013 is $40,152 of accrued interest on notes payable to a stockholder.
10. EARNINGS PER SHARE
FASB ASC Topic 260, Earnings Per Share, requires a reconciliation of the numerator and denominator of the basic and diluted earnings (loss) per share (EPS) computations.
Basic earnings (loss) per share are computed by dividing income available to common shareholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per share is computed similar to basic earnings per share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive.
The total number of potential additional dilutive warrants outstanding for the three months ended March 31, 2013 and 2012 was 87,500 and 37,500, respectively, and for the nine month periods ended March 31, 2013 and 2012 was 87,500 and 37,500, respectively. In addition, the convertible note converts at an exercise price of $0.30 of common stock. The warrants and shares underlying the convertible note were considered for the dilutive calculation but in periods where losses are reported, the weighted-average number of common stock outstanding excludes common stock equivalents, because their inclusion would be anti-dilutive.
The following table sets forth the computation of basic and diluted net income per share:
For The Nine Months ended March 31, |
For The Three Months ended March 31, | |||||||
2013 | 2012 | 2013 | 2012 | |||||
Net loss attributable to the common stockholders | $ | (522,274) | $ | (799,354) | $ | (168,966) | $ | (139,449) |
Basic weighted average outstanding shares of common stock | 31,180,001 | 30,123,051 | 31,180,001 | 30,979,176 | ||||
Dilutive effect of options and warrants | - | - | - | - | ||||
Diluted weighted average common stock and common stock equivalents | 31,180,001 | 30,123,051 | 31,180,001 | 30,979,176 | ||||
Earnings (loss) per share: | ||||||||
Basic and diluted | $ | (0.02) | $ | (0.03) | $ | (0.01) | $ | (0.00) |
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
DISCLAIMER REGARDING FORWARD LOOKING STATEMENTS
Certain statements in this Form 10-Q, which are not statements of historical fact, are what are known as "forward-looking statements," which are basically statements about the future. For that reason, these statements involve risk and uncertainty since no one can accurately predict the future. Words such as "plans," "intends," "hopes," "seeks," "anticipates," "expects," and the like, often identify such forward looking statements, but are not the only indication that a statement is a forward-looking statement. Such forward-looking statements include statements concerning our plans and objectives with respect to our present and future operations, and statements which express or imply that such present and future operations will or may produce revenues, income or profits. These and other factors may cause our actual results to differ materially from any forward-looking statement. We caution you not to place undue reliance on these forward-looking statements. Although we base these forward-looking statements on our expectations, assumptions, and projections about future events, actual events and results may differ materially, and our expectations, assumptions, and projections may prove to be inaccurate. The forward-looking statements speak only as of the date hereof, and we expressly disclaim any obligation to publicly release the results of any revisions to these forward-looking statements to reflect events or circumstances after the date of this filing.
Overview
Discount Dental Materials, Inc., a development stage company (“DDOO” or “Discount Dental”), was incorporated on December 18, 2007 under the laws of Nevada. We are a developmental stage biomedical company and through our wholly owned subsidiary, Cerebain Biotech Corp. (“Cerebain”), our business involves the discovery of products for the treatment of Alzheimer’s disease utilizing Omentum. Under our current plan, our products will include both a medical device solution as well as a synthetic drug solution.
Under our current business plan we intend to research, develop, and test medicinal treatments utilizing omentum under a patent we license from Dr. Surinder Singh Saini, MD. Our management anticipates that we may form subsidiaries and affiliates to operate different drugs based on the intellectual property.
On September 24, 2012, we entered into an agreement with medical device product development company Sonos Models, Inc. (“Sonos”) to research, develop, and test certain products that could be used to treat dementia utilizing omentum. Under the agreement, Sonos will develop and build up to three medical device prototypes to be used for testing potential dementia treatments. The agreement calls for a total cash payment of up to $400,000 and the issuance of warrants to purchase up to 650,000 shares of our common stock, with the cash payments and warrants to be issued in stages once certain developmental thresholds are achieved. Additional information and terms regarding the agreement are detailed below. As a result of the agreement with Sonos and the continuing scientific experiments being conducted by Dr. Surinder Singh Saini, MD to research, develop and test medicinal treatments for dementia utilizing omentum, we have operations sufficient to cease being a shell company, as defined in Rule 12b-2.
Agreement with Dr. Saini
On June 10, 2010, we entered into a Patent License Agreement with Dr. Surinder Singh Saini, MD, under which we acquired the exclusive rights to certain intellectual property related to using omentum for treating dementia conditions. Under the agreement we paid rights fees of $50,000 to Dr. Saini, and we issued Dr. Saini 8,250,000 shares of our common stock, valued at $6,600 (based on the fair market value on the date of grant) restricted in accordance with Rule 144. As a result Dr. Saini became our largest shareholder. In addition, Dr. Saini has the option to participate in the sale of equity by us in the future, up to ten percent (10%) of the money raised, in exchange for the applicable number of his shares.
Subsequently, we paid legal fees totaling $27,300 related to the patent.
Overview of Dementia and Alzheimer’s Disease
Dementia (taken from Latin, originally meaning "madness") is generally referred to as a serious loss and/or decline of brain function in an animal including a human. The areas of brain function affected by dementia include memory, attention, language, problem solving and emotion. Dementia is generally considered as a progressive and non-reversible condition. Alzheimer’s disease is the most common form of dementia. Alzheimer’s disease is an age-related, non-reversible brain disorder that develops over a period of years. Initially, people experience memory loss and confusion, which may be mistaken for the kinds of memory changes that are sometimes associated with normal aging. However, the symptoms of Alzheimer’s disease gradually lead to behavior and personality changes, a decline in cognitive abilities such as decision making and language skills, and problems recognizing family and friends. Alzheimer’s disease ultimately leads to a severe loss of mental functions. These losses are related to the worsening breakdown of the connections between certain neurons in the brain responsible for memory and learning. Neurons can’t survive when they lose their connections to other neurons. As neurons die throughout the brain, the affected regions begin to atrophy, or shrink. By the final stage of Alzheimer’s disease, damage is widespread and brain tissue has shrunk significantly.
Causes
Many scientists generally accept that one or more of the following mechanisms are responsible for dementia:
1) accumulation of toxic materials in brain cells, which leads to death of the cells;
2) reduction of certain biological factors (e.g. Acetylcholine or ACh) in a brain; and
3) loss or reduction of blood flow in the brain.
Neurodegenerative diseases, such as Alzheimer's disease and Parkinson's disease, are the most common causes of dementia. Dementia can also be due to a stroke. In most circumstances, the changes in the brain that are causing dementia cannot be stopped or turned back.
Statistics
§ Affected population worldwide
According to the 2010 World Alzheimer Report this year, about 35 million people have dementia worldwide. The report stated that this figure is likely to nearly double every 20 years, to nearly 66 million in 2030 and 115 million in 2050.
With regard to Alzheimer's disease which is the main cause of dementia, there are about 4.5 million Americans who have already been diagnosed with Alzheimer's disease and about 1,000 new cases of the disease are diagnosed daily in the United States. After age 65, the chances of developing Alzheimer's disease double every five years. At age 85, people have about a 50 percent chance of developing Alzheimer's.
§ Cost
The global cost of care for dementia will likely exceed $604 billion this year, or 1 percent of the world's gross domestic product (GDP) according to the 2010 World Alzheimer Report. These costs include those attributed to informal care from family member or others, direct social care from professional care givers, and direct medical bills. About 70% of these costs occur in Western Europe and North America. Such costs will continue to increase drastically as the affected population of dementia increases.
Current Approaches to Treating Dementia
Currently, there is no cure for dementia. Certain drugs relieve some of the disease mechanisms (primarily the causes listed as #1 and #2, above) and are often used early in the course of the disease; however, their effects in long-term progression of the disease condition are still unclear. A majority of management of dementia generally focuses on providing emotional and physical support to a patient during the progression of the disease from caregivers or in facilities. While such support is important and necessary to a patient, it is irrelevant to treatment of the disease. Accordingly, an effective method of treatment which may be able to delay the progression of the disease and/or recover damaged brain cells does not exist and remains a great need.
Omentum and its Use in Treating Dementia
Omentum Overview
The omentum is a layer of tissue lying over internal organs (e.g. the intestines) like a blanket. Omentum has the ability to generate biological agents that nourish nerves and help them grow. When such agents identified from the omentum were tested, they were shown to provoke the growth of new brain cells in areas of the brain affected by Alzheimer's disease. The omentum tissue can also increase the level of Acetylcholine (ACh) whose reduction is considered as a main cause of brain cell death. Some scientists believe that the ability of the omentum to provide this important factor (ACh) may be a key to successfully treating dementia. Additionally, the omentum has been shown to be angiogenic (i.e. to promote new blood vessel growth) in areas of the body lacking blood flow.
Use of Omentum in Treating Dementia
Historically, doctors have utilized omentum to treat dementia using a procedure called omental transposition. This approach involves a surgical procedure in which the omentum is surgically lengthened into the brain through the chest, neck and behind the ear. The omentum is then laid directly on the underlying brain. According to studies conducted by a team in the University of Nevada, School of Medicine, omental transposition not only arrested Alzheimer's disease, but also reversed it, resulting in the patient’s neurologic function being improved. Despite the promising results, this surgical procedure has not been popular because it is very invasive and therefore often causes unwanted complications to a patient, especially in the elderly. Accordingly, a less invasive procedure or a pharmaceutical approach in treatment of dementia remains a significant need.
Recent Developments
Reverse Acquisition of Cerebain
On January 17, 2012, the holders of a majority of Discount Dental’s common stock entered into a Stock Purchase Agreement with Cerebain Biotech Corp., a Nevada corporation, under which Cerebain agreed to purchase an aggregate of 3,800,000 shares of its common stock from those shareholders in exchange for $296,000. These shares represent approximately 90% of Discount Dental’s outstanding common stock (after taking into account the cancellation of 6,000,000 shares of Discount Dental’s common stock by R. Douglas Barton under the Spinoff Agreement as discussed herein). The transaction closed February 9, 2012. Concurrently with the close of the transaction, Discount Dental closed a transaction with the shareholders of Cerebain whereby it issued 4,556,800 shares of Discount Dental’s common stock in exchange for 22,784,000 shares of Cerebain’s common stock, which represented 100% of Cerebain’s outstanding common stock. In addition, concurrent with these two transactions, Discount Dental closed a transaction with its primary shareholder, Mr. R. Douglas Barton, whereby Discount Dental sold all of its then-existing assets to Mr. Barton in exchange for Mr. Barton assuming all of our then-existing liabilities, as well as the return of 6,000,000 shares of Discount Dental’s common stock. The shares were returned by Mr. Barton and were cancelled on our books on February 9, 2012.
As a result of these transactions: (i) Cerebain became Discount Dental’s wholly-owned subsidiary, (ii) all of its officers and one of its directors resigned immediately, and Discount Dental appointed one new director and retained new executive officers; and (iii) Discount Dental changed its business focus from one selling disposable dental supply products at discount prices over the Internet to one focusing on researching, developing, and testing medicinal treatments utilizing omentum under a patent Cerebain, its now wholly-owned subsidiary, licenses from Dr. Surinder Singh Saini, MD.
Discount Dental’s only operations are conducted through its wholly-owned subsidiary, Cerebain. In accordance with financial reporting for reverse merger transactions the financial reporting contained herein is only that of Cerebain and does not include Discount Dental’s financial results.
Agreement with Sonos
On May 16, 2012, we signed an agreement with medical device product development company Sonos Models, Inc. (“Sonos”) to assess our options for a medical device solution (“Initial Feasibility Study”).
Having completed the Initial Feasibility Study, we have established a development plan that should, within one year, produce medical device prototypes to be used in testing.
On September 24, 2012, we entered into an agreement with Sonos to build up to three medical device prototypes to be used for testing. The agreement calls for a total cash payment of up to $400,000 and the issuance of warrants to purchase up to 650,000 shares of our common stock, with the cash payments and warrants to be issued in stages once certain developmental thresholds are achieved. Any warrants issued under this agreement will be immediately exercisable, will be eligible for cashless exercise at the option of the holder, and will have a term of three years from the date of issuance and an exercise price based on the fair market value of the Company’s common stock on the date of the completion of the respective project phase. Pursuant to the agreement, we agreed to the following schedule:
i) Upon signing the agreement we issued Sonos warrants to purchase 50,000 shares of our common stock. The warrants have an exercise price of $0.20 per share.
ii) Phase 1 – Sonos will conduct a search of literature, patents, and sources for information to guide the definition of the device requirements, including, but not limited to, reviewing Dr. Saini’s patent, review other patents related to omentum, fluid extraction, and collection, stimulation, search medical literature for omentum texts, articles, research clinical studies related to the use of omentum in the treatment of omentum. In exchange for the services, we will pay Sonos a cash payment of approximately $20,000 and 50,000 warrants upon completion of the phase.
iii) Phase 2 – Sonos will define the design objective in terms of materials, fabrication, technology, and performance. In exchange for the services, we will pay Sonos a cash payment of approximately $19,000 and 50,000 warrants upon completion of the phase.
iv) Phase 3 – Sonos will develop a minimum of three design concepts that meet the design objectives outlined in Phase II, and document the designs in sketches, drawings, and draft specifications and estimate schedule, capital, and production costs for each approach. In exchange for these services, we will pay Sonos a cash payment of $12,500 and 100,000 warrants upon completion of the phase.
v) Phase 4 – Sonos will review concepts from Phase 3 and choose two or more of the design concepts for the development of prototypes for testing in Phase 5 (which will be pursuant to a subsequent agreement between the parties). In exchange for these services, we will pay Sonos a cash payment of up to $350,000 and 100,000 warrants for each of the three prototypes for a total of 300,000 warrants. In addition, should Sonos complete the first Omentum producing prototype by March 31, 2013, Sonos will receive an additional 100,000 warrants.
The value of the warrants will be recorded as research and development expense in the period earned. As of March 31, 2013, Sonos was progressing with Phase 1 of the agreement and delivered the product development report with the overview of the development plan from the feasibility study.
Limited Operating History; Need for Additional Capital
There is very limited historical financial information about us on which to base an evaluation of our performance. We are a developmental stage company and have not generated revenues from operations. We cannot guarantee we will be successful in our business operations. Our business is subject to risks inherent in the establishment of a new business enterprise, including limited capital resources, and possible cost overruns due to increases in the cost of services. To become profitable and competitive, we must receive additional capital. We have no assurance that future financing will materialize. If that financing is not available we may be unable to continue operations.
Overview
The following Management’s Discussion and Analysis (“MD&A”) of Cerebain includes the following sections:
• | Business Plan |
• | Results of Operations |
• | Liquidity and Capital Resources |
• | Capital Expenditures |
• | Development Stage Company |
• | Fiscal Year End |
• | Going Concern |
• | Critical Accounting Policies | ||
• | Recent Accounting Pronouncements |
• | Off-Balance Sheet Arrangements | ||
• | Inflation |
Business Plan
As a development-stage enterprise, we have had no operating revenues through March 31, 2013. At March 31, 2013 our cash balance was negligible.
Our plan of operations consists of:
· We will work with device manufacturers’ to develop a medical device while also pursuing with researchers and universities to develop a synthetic drug solution.
· Raising additional capital with which to develop a medical device solution, pursuing research for a synthetic drug solution, develop a sales and administrative infrastructure and fund ongoing operations until our operations generate positive cash flow.
· We will be working with already established affiliates and partnerships to promote our products to healthcare providers and Alzheimer patients. We will also market directly to consumers through direct-to-consumer advertising that communicates the uses, benefits and risks of our products. In addition, we will sponsor general advertising to educate the public on Alzheimer’s disease awareness, prevention and wellness, and public health issues.
However, we cannot assure you that we will be successful in raising additional capital to implement our business plan. Further, we cannot assure you, assuming that we raise additional funds, that we will achieve profitability or positive cash flow. If we are not able to timely and successfully raise additional capital and/or achieve profitability and positive cash flow, our operating business, financial condition, cash flows and results of operations may be materially and adversely affected.
On May 16, 2012, we signed an agreement with Sonos to assess our options for a medical device solution (“Initial Feasibility Study”).
Having completed the Initial Feasibility Study, we have established a development plan that should, within one year, if we have sufficient funding, produce medical device prototypes to be used in testing. In furtherance of this development plan we entered into the agreement with Sonos on September 24, 2012, which is detailed above.
Results of Operations
Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012
Revenue
For the three months ended March 31, 2013 and 2012, we did not generate any revenues.
Operating expenses
Operating expenses increased by $29,917, or 21.5%, to $168,966 in the three months ended March 31, 2013 from $139,049 in the three months ended March 31, 2012 primarily due to increases in expenses from the legal and audit fees, travel costs, employee costs and interest expense.
Operating expenses for the three months ended March 31, 2013 were comprised of $59,763 in employee expense; legal and audit costs of $22,606, travel costs of $33,081, loan interest expense of $15,752, accretion of debt discount of $34,779 and other operating expenses.
Operating expenses for the three months ended March 31, 2012 were comprised primarily $79,500 in consulting services costs; legal and audit costs of $31,942, travel costs of $15,000, loan interest expense of $3,200 and other operating expenses.
Net loss before income taxes
Net loss before income taxes for the three months ended March 31, 2013 totaled $168,966 primarily due to employee costs, legal and audit costs, accretion of debt discount, loan interest costs, and travel costs compared to $139,049 for the three months ended March 31, 2012 primarily due to purchase of shell, consulting services costs, legal and audit fees, and travel costs.
Assets and Liabilities
Assets were $117,735 as of March 31, 2013. Assets consisted of cash of $28,709, prepaid expenses of $5,126 and patent rights of $83,900. Liabilities were $736,617 as of March 31, 2013. Liabilities consisted of accounts payable of $87,502, related party payable of $45,545, related party notes payable of $338,700, accrued payroll and taxes of $41,341 and convertible note to stockholder, net of debt discount, of $223,529.
Stockholders’ Deficit
Stockholders’ deficit was $618,882 as of March 31, 2013. Stockholder’s deficit consisted of shares issued to founders and recorded as compensation in the amount of $13,900, shares issued for fundraising totaling $780,384, net of issuance costs, beneficial conversion feature associated with convertible note of $447,813, warrants issued for research and development of $108,500, and shares issued for patent rights totaling $6,600 offset by the deficit accumulated during the development stage of $1,976,079 at March 31, 2013.
Nine Months Ended March 31, 2013 Compared to Nine Months Ended March 31, 2012
Revenue
For the nine months ended March 31, 2013 and 2012, we have not generated any revenues.
Operating expenses
Operating expenses decreased by $276,280, or 34.6%, to $522,274 in the nine months ended March 31, 2013 from $798,554 in the nine months ended March 31, 2012 primarily due to decreases in expenses from our purchase of shell, consulting services costs, legal and audit fees, and investor relations costs, partially offset by increases in research and development costs, accretion of debt discount, loan interest costs, and travel costs.
Operating expenses for the nine months ended March 31, 2013 were comprised primarily of $99,096 in consulting services costs, research and development costs of $108,500, accretion of debt discount of $68,529, employee costs of $77,672 legal and audit costs of $47,994, travel costs of $83,501, loan interest expense of $30,602, and other operating expenses.
Operating expenses for the nine months ended March 31, 2012 were comprised primarily of purchase of shell of $397,000, $238,500 in consulting services costs, legal and audit costs of $74,520, investor relations costs of $10,000, travel costs of $43,500, loan interest expense of $5,950, and other operating expenses.
Net loss before income taxes
Net loss before income taxes for the nine months ended March 31, 2013 totaled $522,274 primarily comprised of employee costs, research and development costs, accretion of debt discount, legal and audit costs, travel costs, and investor relation costs compared to $798,554 for the nine months ended March 31, 2012 primarily comprised of purchase of shell, consulting services costs, legal and audit fees, investor relations costs, and travel costs.
Liquidity and Capital Resources
General – Overall, we had an increase in cash flows of $24,524 in the nine months ending March 31, 2013 resulting from cash provided by financing activities of $255,500, offset partially by cash used in operating activities of $230,976.
The following is a summary of our cash flows provided by (used in) operating and financing activities during the periods indicated:
Nine Months Ended March 31, | |||||
2013 | 2012 | ||||
Cash at beginning of period | $ | 4,185 | $ | 746 | |
Net cash used in operating activities | (230,976) | (771,812) | |||
Net cash used in investing activities | - | (8,000) | |||
Net cash provided by financing activities | 255,500 | 779,394 | |||
Cash at end of period | $ | 28,709 | $ | 328 |
Cash Flows from Operating Activities – For the nine months ending March 31, 2013, net cash used in operations was $230,976 compared to net cash used in operations of $771,812 for the nine months ending March 31, 2012. Net cash used in operations was primarily due to a net loss of $522,274 for the nine months ended March 31, 2013, adjusted for noncash operating expenses related to warrants issued for research and development of $108,500, accretion of debt discount of $68,529, and depreciation expense of $357, as well as the changes in operating assets and liabilities of $113,912, primarily due to the increase in related party payables, employee cost and accounts payable.
Cash Flows from Financing Activities – Net cash flows provided by financing activities in the nine months ending March 31, 2013 was $255,500, compared to net cash provided of $779,394 in the same period in 2012. The net cash provided by financing activities in the current period was mainly due to proceeds from notes payable to stockholders of $273,500, offset by $18,000 in repayment of related party notes payable..
Financing – We expect that our current working capital position, together with our expected future cash flows from operations will be insufficient to fund our operations in the ordinary course of business, anticipated capital expenditures, debt payment requirements and other contractual obligations for at least the next twelve months. However, this belief is based upon many assumptions and is subject to numerous risks (see “Risk Factors”), and we will require additional funding in the future.
We have no present agreements or commitments with respect to any material acquisitions of other businesses, products, product rights or technologies or any other material capital expenditures. However, we will continue to evaluate acquisitions of and/or investments in products, technologies, capital equipment or improvements or companies that complement our business and may make such acquisitions and/or investments in the future. Accordingly, we may need to obtain additional sources of capital in the future to finance any such acquisitions and/or investments. We may not be able to obtain such financing on commercially reasonable terms, if at all. Due to the ongoing global economic crisis, we believe it may be difficult to obtain additional financing if needed. 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 the case of equity financing.
Short-Term Note Payables
On January 18, 2013, the Company converted $356,700 of related party payables owed under consulting agreements, into related party notes payable. The notes mature on December 31, 2013 and accrue interest at seven and one-half (7.5) percent per annum at maturity. As of March 31, 2013, the outstanding balance of the related party payables is $338,700.
On December 27, 2012, the Company entered into an unsecured $10,000 promissory note with a stockholder. The terms of the note have not been negotiated.
In fiscal year 2011, we borrowed $19,490 from a stockholder for working capital purposes. The note payable bore no interest and was unsecured. As of June 30, 2012, the note had been paid in full.
Old Notes
On August 30, 2012, we entered into an unsecured $60,000 promissory note with a stockholder. The terms of the note have not been negotiated.
On July 25, 2012, we entered into an unsecured $100,000 promissory note (“Promissory Note”) with a stockholder. The Promissory Note matured on September 30, 2012 and accrued interest at seven and one-half (7.5) percent per annum at maturity.
On June 12, 2012, we entered into an unsecured $75,000 principal amount promissory note with a stockholder. This note, as amended, matured on September 30, 2012 and accrued interest beginning on the maturity date at 7.5% per annum. We determined that imputed interest on the note for the period from the issuance date to maturity is immaterial to the financial statements. On July 25, 2012, the Company entered into an unsecured $100,000 promissory note with the same stockholder. This note matured on September 30, 2012 and accrued interest at seven and one-half (7.5) percent per annum at maturity. On August 30, 2012, the Company entered into an unsecured $60,000 promissory note with the same stockholder. The terms of the note had not been negotiated. On November 1, 2012 we restructured the terms of these notes with the noteholder as described below.
On November 1, 2012, we entered into an unsecured $235,000 principal amount consolidation promissory note (“Consolidation Promissory Note”) with a non-affiliate stockholder (“Noteholder”). The Consolidation Promissory Note is a consolidation of the foregoing promissory notes totaling $235,000 with the same Noteholder. Such notes were voided as a result, however, the accrued interest on such notes is still owed and included with the accrued interest of the Consolidation Promissory Note until paid. We did not receive additional funds under the Consolidation Promissory Note, as it was a consolidation of prior notes owed to Noteholder. Under the terms of the Consolidation Promissory Note, it matures January 31, 2013, and accrues interest at 7.5% per annum beginning November 1, 2012. On March 14, 2013 we restructured the terms of the note with the noteholder as described below.
Long-Term Note Payables
Old Notes
On July 31, 2011, we entered into an unsecured $60,000 promissory note with a stockholder. This note matured on April 13, 2012 and accrued interest at six (6) percent per annum at maturity. On October 13, 2011, we entered into a $100,000 convertible note (“Convertible Note”) with the same stockholder. The Convertible Note matured on April 13, 2012, accrued interest at six (6) percent per annum, the holder was entitled to convert at $0.32 per share into our common stock, and provided for potential adjustments, as defined. To properly account for this transaction, we performed a detailed analysis to obtain a thorough understanding of the transaction, including understanding the terms of each instrument issued. In accordance with ASC Topic 470-20, “Debt with Conversion and Other Options”, conventional convertible debt is a financial instrument in which the holder may only realize the value of the conversion option by exercising the option and receiving the entire proceeds in a fixed number of shares or the equivalent amount of cash. Conventional convertible debt with a nondetachable conversion feature that does not contain a cash settlement option, and is not accounted for as a derivative, is recorded as a debt instrument in its entirety. In addition, there was no beneficial conversion feature since the conversion price was not lower than the estimated fair value of our common stock on the date of the transaction. On February 1, 2012, we entered into an unsecured $80,000 promissory note with the same stockholder. This note matured on April 13, 2012 and accrued interest at six (6) percent per annum. On June 18, 2012 we restructured the terms of these notes with the noteholder as described below.
On June 18, 2012, we entered into a $240,000 principal amount convertible promissory note (“Consolidation Note”) with a non-affiliate stockholder (“Noteholder”). The Consolidation Note is a consolidation of the foregoing Promissory and Convertible Notes totaling $240,000 with the same Noteholder. Such notes were voided as a result, however, the accrued interest on such notes is still owed and included with the accrued interest of the Consolidation Note until paid. We did not receive additional funds under the note, as it was a consolidation of prior notes owed to Noteholder, but Noteholder has loaned us an additional $235,000 under the terms of separate promissory notes (non-convertible), as described above. Under the terms of the Consolidation Note, it matures June 30, 2014, accrues interest at 6% per annum beginning July 1, 2012, is convertible into shares of our common stock at $0.32 per share, but only if such conversion would not cause the Noteholder to own more than 9.9% of our outstanding common stock, and contains piggyback registration rights. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was sophisticated and familiar with our operations at the time of the issuance of the shares.
To properly account for this transaction, we performed a detailed analysis to obtain a thorough understanding of the transaction, including understanding the terms of each instrument issued, and any related derivatives entered into. We first reviewed ASC Topic 815, “Broad Transactions – Derivatives and Hedging” (“Topic 815”) to identify whether any equity-linked features in the Consolidation Note are freestanding or embedded. We determined that there were no free standing features. The Consolidation Note was then analyzed in accordance with Topic 815 to determine if the Consolidation Note should be accounted for at fair value and remeasured at fair value in income. We determined that the Consolidation Note did not meet the requirements of Topic 815 and therefore accounted for the Consolidation Note as conventional convertible debt.
We then reviewed ASC Topic 470-20, “Debt with Conversion and Other Options”, and determined that the Consolidation Note met the criteria of a conventional convertible note and that the Consolidation Note had a beneficial conversion feature valued at $135,000, which was recorded as a debt discount against the face amount of the Consolidation Note, which is being accreted to interest expense over the 24 month term of the Consolidation Note. The Company used a recent sale of restricted stock to determine the fair value of the stock for purposes of calculating the beneficial conversion feature. On March 14, 2013 we restructured the terms of the note with the noteholder as described below.
New Note
On March 14, 2013, the Company entered into an unsecured $600,000 principal amount convertible promissory note (“Consolidation Note”) with a non-affiliate stockholder (“Noteholder”). The Consolidation Note is a consolidation of the foregoing Promissory and Convertible Notes totaling $485,000 with the same Noteholder. Such notes were voided as a result, however, the accrued interest on such notes is still owed and included with the accrued interest of the Consolidation Note until paid. The Company did receive additional funds totaling $115,000 under the Consolidation Note. Under the terms of the Consolidation Note, it matures July 15, 2014, accrues interest at 7.5% per annum beginning March 1, 2013, is convertible into shares of our common stock at $0.30 per share, but only if such conversion would not cause the Noteholder to own more than 9.9% of our outstanding common stock, and contains piggyback registration rights. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was sophisticated and familiar with our operations at the time of the issuance of the shares.
To properly account for this transaction, the Company performed a detailed analysis to obtain a thorough understanding of the transaction, including understanding the terms of each instrument issued, and any related derivatives entered into. The Company first reviewed ASC Topic 815, “Broad Transactions – Derivatives and Hedging” (“Topic 815”) to identify whether any equity-linked features in the Consolidation Note are freestanding or embedded. The Company determined that there were no free standing features. The Consolidation Note was then analyzed in accordance with Topic 815 to determine if the Consolidation Note should be accounted for at fair value and remeasured at fair value in income. The Company determined that the Consolidation Note did not meet the requirements of Topic 815 and therefore accounted the Consolidation Note as conventional convertible debt. The Company then reviewed ASC Topic 470-20, “Debt with Conversion and Other Options”, and determined that the Consolidation Note met the criteria of a conventional convertible note and that the Consolidation Note had a beneficial conversion feature valued at $400,000, which was recorded as a debt discount against the face amount of the Consolidation Note, which is being accreted to interest expense over the 17 month term of the Consolidation Note. The Company used a recent sale of restricted stock to determine the fair value of the stock for purposes of calculating the beneficial conversion feature.
Accrued interest on all notes payable to stockholders at March 31, 2013 totaled $40,152 and is included in related party payables.
Equity Financing
On May 10, 2012, we entered into a stock purchase agreement with a third party, under which we issued him 200,000 shares of our common stock, restricted in accordance with Rule 144, in exchange for $88,000, net of offering costs of $12,000. The stock purchase agreement includes piggyback registration rights. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was sophisticated and familiar with our operations at the time of the issuance of the shares.
On January 3, 2012, we entered into a stock purchase agreement with a third party, under which we issued him 25,000 shares of our common stock, restricted in accordance with Rule 144, in exchange for $9,000, net of offering costs of $1,000. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was sophisticated and familiar with our operations at the time of the issuance of the shares.
On December 8, 2011, Cerebain entered into a stock purchase agreement with a third party, under which it issued him 105,000 shares of its common stock, restricted in accordance with Rule 144, in exchange for $36,960, net of offering costs of $5,040. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was sophisticated and familiar with our operations at the time of the issuance of the shares.
On December 1, 2011, Cerebain entered into a stock purchase agreement with a third party, under which it issued him 337,500 shares of its common stock, restricted in accordance with Rule 144, in exchange for $118,800, net of offering costs of $16,200. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was sophisticated and familiar with our operations at the time of the issuance of the shares.
On November 21, 2011, Cerebain entered into a stock purchase agreement with a third party, under which it issued him 312,500 shares of its common stock, restricted in accordance with Rule 144, in exchange for $110,000, net of offering costs of $15,000. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was sophisticated and familiar with our operations at the time of the issuance of the shares.
On November 18, 2011, Cerebain entered into a stock purchase agreement with a third party, under which it issued them 187,500 shares of its common stock, restricted in accordance with Rule 144, in exchange for approximately $63,324, net of offering costs of approximately $11,676. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was sophisticated and familiar with our operations at the time of the issuance of the shares.
On October 28, 2011, Cerebain entered into a stock purchase agreement with a third party, under which it issued him 562,500 shares of its common stock, restricted in accordance with Rule 144, in exchange for $198,000, net of offering costs of $27,000. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was sophisticated and familiar with our operations at the time of the issuance of the shares.
On July 1, 2011, Cerebain entered into a stock purchase agreement with a third party, under which it issued him 12,500 Units (each a “Unit” and collectively the “Units”), with each Unit consisting of Two (2) shares of common stock and One (1) warrant to purchase One (1) share of common stock (each a “Warrant” and collectively the “Warrants”) at a price per Unit of $1.00 for a total of $8,800, net of offering costs of $1,200. The common stock is restricted in accordance with Rule 144. The issuance was exempt from registration pursuant to Section 4(2) of the Securities Act of 1933, and the investor was sophisticated and familiar with our operations at the time of the issuance of the shares.
Capital Expenditures
Other Capital Expenditures
We expect to purchase approximately $30,000 of equipment in connection with the expansion of our business.
Development Stage Company
We are a development stage company as defined by section 915-10-20 of the FASB Accounting Standards Codification. Although our planned principal operations have commenced, we are still devoting substantially all of our efforts on establishing the business and its planned. All losses accumulated since inception have been considered as part of our development stage activities.
Fiscal year end
Cerebain has a June 30 fiscal year end and on February 10, 2012 our Board of Directors changed Discount Dental’s fiscal year end to June 30 for ease of financial reporting.
Going Concern
The accompanying financial statements have been prepared assuming the Company will continue as a going concern, which contemplates, among other things, the realization of assets and satisfaction of liabilities in the normal course of business. The Company had a deficit accumulated during the development stage of $1,976,079 and $1,453,805 at March 31, 2013 and June 30, 2012, respectively, and had a net loss of $522,274 and $799,354 for the nine months ended March 31, 2013 and 2012, respectively, and net cash used in operating activities of $230,976 and $771,812 for the nine months ended March 31, 2013 and 2012, respectively, with no revenue earned since inception, and a lack of operational history. These matters, among others, raise substantial doubt about our ability to continue as a going concern.
Since we only recently commenced operations and have not generated any revenues, our cash position may not be significant enough to support the Company’s daily operations. Management intends to raise additional funds by way of a public or private offering. Management believes that the actions presently being taken to further implement our business plan and generate revenues provide the opportunity for us to continue as a going concern. While we believe in the viability of our strategy to generate revenues and in our ability to raise additional funds, there can be no assurances to that effect. Our ability to continue as a going concern is dependent upon our ability to further implement our business plan and generate revenues.
The financial statements do not include any adjustments that might be necessary if we are unable to continue as a going concern.
Critical Accounting Policies
The SEC has defined a company’s critical accounting policies as the ones that are most important to the portrayal of the Company’s financial condition and results of operations and which require the Company to make its most difficult and subjective judgments, often as a result of the need to make estimates of matters that are inherently uncertain. Based on this definition, we have identified the critical accounting policies and judgments addressed below. We also have other key accounting policies that are significant to understanding our results. For additional information, see Note 3 - Summary of Significant Accounting Policies on page 9.
The following are deemed to be the most significant accounting policies affecting the Company.
Use of Estimates
The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenue and expenses during the reporting periods. Measurement, estimates and assumptions are used for, but not limited to, useful lives and residual value of long-lived assets, and the valuation of equity instruments. Management makes these estimates using the best information available at the time the estimates are made; however actual results when ultimately realized could differ from those estimates. The current economic environment has increased the degree of uncertainty inherent in these estimates and assumption.
Revenue Recognition and Accounts Receivable
We will recognize revenues in accordance with the guidelines of the Securities and Exchange Commission (“SEC”) Staff Accounting Bulletin (“SAB”) No. 104 “Revenue Recognition”.
Under SAB 104, four conditions must be met before revenue can be recognized: (i) there is persuasive evidence that an arrangement exists, (ii) delivery has occurred or service has been rendered, (iii) the price is fixed or determinable, and (iv) collection is reasonably assured. The Company provides for an allowance for doubtful account based history and experience considering economic and industry trends. The Company does not have any off-Balance Sheet exposure related to its customers.
Income Taxes
We account for income taxes under the Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) No. 740, Income Taxes (“ASC 740”). Under ASC 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Under ASC 740, the effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
Stock Compensation
In accordance with ASC No. 718, Compensation – Stock Compensation (“ASC 718”), we measure the compensation costs of share-based compensation arrangements based on the grant-date fair value and recognize the costs in the financial statements over the period during which employees are required to provide services. Share-based compensation arrangements include stock options, restricted share plans, performance-based awards, share appreciation rights and employee share purchase plans. As such, compensation cost is measured on the date of grant at their fair value. Such compensation amounts, if any, are amortized over the respective vesting periods of the option grant. We apply this statement prospectively. Equity instruments (“instruments”) issued to other than employees are recorded on the basis of the fair value of the instruments, as required by ASC 718. ASC No. 505, Equity Based Payments to Non-Employees (“ASC 505”) defines the measurement date and recognition period for such instruments. In general, the measurement date is (a) when a performance commitment, as defined, is reached or (b) when the earlier of (i) the non-employee performance is complete or (ii) the instruments are vested. The measured value related to the instruments is recognized over a period based on the facts and circumstances of each particular grant as defined in the ASC 505.
Accounting for Derivative Financial Instruments
We evaluate financial instruments using the guidance provided by ASC 815 and apply the provisions thereof to the accounting of items identified as derivative financial instruments not indexed to our stock.
Fair Value of Financial Instruments
We follow the provisions of ASC 820. This Topic defines fair value, establishes a measurement framework and expands disclosures about fair value measurements.
We use fair value measurements for determining the valuation of derivative financial instruments payable in shares of its common stock. This primarily involves option pricing models that incorporate certain assumptions and projections to determine fair value. These require management’s judgment.
Recent Accounting Pronouncements
We have evaluated new accounting pronouncements that have been issued and are not yet effective for us and determined that there are no such pronouncements expected to have an impact on our future financial statements.
Off-Balance Sheet Arrangements
As of March 31, 2013, we have not entered into any transaction, agreement or other contractual arrangement with an entity unconsolidated under which it has:
• | a retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit; |
• | liquidity or market risk support to such entity for such assets; |
• | an obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument; or |
• | an obligation, including a contingent obligation, arising out of a variable interest in an unconsolidated entity that is held by, and material to the Company, where such entity provides financing, liquidity, market risk or credit risk support to or engages in leasing, hedging, or research and development services with the Company. |
Inflation
Management believes that inflation has not had a material effect on the Company’s results of operations.
ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
We are a smaller reporting Company as defined by Rule 12b-2 of the Securities Exchange Act of 1934 and are not required to provide the information under this item.
ITEM 4. CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
We maintain disclosure controls and procedures (as defined in Rule 13a-l5(e) under the Exchange Act) that are designed to ensure that information that would be required to be disclosed in Exchange Act reports is recorded, processed, summarized and reported within the time period specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including to our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
As required by Rule 13a-15 under the Exchange Act, our management, including our Chief Executive Officer and Chief Financial Officer, evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of March 31, 2013. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of March 31, 2013, and as of the date that the evaluation of the effectiveness of our disclosure controls and procedures was completed, our disclosure controls and procedures were not effective to satisfy the objectives for which they are intended.
Management’s Report on Internal Controls over Financial Reporting
Our management is responsible for establishing and maintaining effective internal control over financial reporting (as defined in Rule 13a-l5(f) of the Securities Exchange Act). Management assessed the effectiveness of the Company’s internal control over financial reporting as of March 31, 2013. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission (“COSO”). Based on that assessment, management believes that, as of March 31, 2013, the Company’s internal control over financial reporting was ineffective based on the COSO criteria, due to the following material weaknesses listed below.
Insufficient segregation of duties in our finance and accounting functions due to limited personnel. During the nine months ended March 31, 2013, we internally performed all aspects of our financial reporting process, including, but not limited to, access to the underlying accounting records and systems, the ability to post and record journal entries and responsibility for the preparation of the financial statements. Due to the fact these duties were performed by the same person, a lack of review was created over the financial reporting process that might result in a failure to detect errors in spreadsheets, calculations, or assumptions used to compile the financial statements and related disclosures as filed with the SEC.
Insufficient corporate governance policies. Our corporate governance activities and processes are not always formally documented nor are they reviewed and approved by anyone other than the CFO.
These control deficiencies could result in a material misstatement to our interim or annual financial statements that would not be prevented or detected.
When we are financially able, we intend to take appropriate and reasonable steps to make the necessary improvements to remediate these deficiencies and we intend to consider the results of our remediation efforts and related testing as part of our next assessment of the effectiveness of our internal control over financial reporting.
Changes in Internal Control over Financial Reporting
There was no change in our internal control over financial reporting during the period ended March 31, 2013, that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
PART II. OTHER INFORMATION
ITEM 1. LEGAL PROCEEDINGS
We are not a party to or otherwise involved in any legal proceedings.
In the ordinary course of business, we are from time to time involved in various pending or threatened legal actions. The litigation process is inherently uncertain and it is possible that the resolution of such matters might have a material adverse effect upon our financial condition and/or results of operations. However, in the opinion of our management, other than as set forth herein, matters currently pending or threatened against us are not expected to have a material adverse effect on our financial position or results of operations.
ITEM 1A. RISK FACTORS
There have been no changes to our Risk Factors included in our Annual Report on Form 10-K filed with the Securities and Exchange Commission on September 28, 2012.
ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
None.
ITEM 3. DEFAULTS UPON SENIOR SECURITIES
There have been no events which are required to be reported under this Item.
ITEM 4. MINING SAFETY DISCLOSURES
There have been no events which are required to be reported under this Item.
ITEM 5. OTHER INFORMATION
None.
ITEM 6. EXHIBITS
Item No. | Description | |
3.1 (1) | Articles of Incorporation of Discount Dental Materials, Inc., a Nevada corporation, filed with the Secretary of State for the State of Nevada on December 18, 2007 | |
3.2 (1) | Bylaws of Discount Dental Materials, Inc., a Nevada corporation | |
10.1 (1) | Agreement by and between Discount Dental Materials, Inc. and R. Douglas Barton dated January 2, 2009 | |
10.2 (1) | Agreement by and between Discount Dental Materials, Inc. and R. Douglas Barton dated January 2, 2009 | |
10.3 (2) | Share Exchange Agreement by and between Discount Dental Materials, Inc. and the shareholders of Cerebain Biotech Corp. dated January 17, 2012 |
10.4 (2) | Spinoff Agreement by and between Discount Dental Materials, Inc. and R. Douglas Barton dated January 17, 2012 | |
10.5 (2) | Stock Purchase Agreement by and between Cerebain Biotech Corp. and certain shareholders of Discount Dental Materials, Inc. dated January 17, 2012 | |
10.6 (2) | Patent License Agreement by and between Cerebain Biotech Corp. and Dr. Surinder Singh Saini dated June 10, 2010 | |
10.7 (3) | Letter Agreement with Sonos Models, Inc. dated September 24, 2012 | |
10.8 (4) | $240,000 Principal Amount Convertible Promissory Note dated June 18, 2012 | |
10.9 (6) | $235,000 Amended and Consolidated Promissory Note dated November 1, 2012 | |
10.10 (5) | Termination Agreement and General Release with Gerald A. DeCiccio dated January 18, 2013 | |
10.11 (5) | Termination Agreement and General Release with Eric Clemons dated January 18, 2013 | |
10.12 (5) | Termination Agreement and General Release with Paul Sandhu dated January 18, 2013 | |
10.13 (5) | Promissory Note Issued to Gerald A. DeCiccio dated January 18, 2013 | |
10.14 (5) | Promissory Note Issued to Eric Clemons dated January 18, 2013 | |
10.15 (5) | Promissory Note Issued to Paul Sandhu dated January 18, 2013 | |
10.16* | $600,000 Amended and Consolidated Promissory Note dated March 14, 2013 | |
10.17 (7) | Appointment of Eric Clemons as President | |
14 (1) | Code of Ethics of Discount Dental Materials, Inc. | |
31.1* | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14 of the Securities Exchange Act of 1934 as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2003. | |
32.1* | Certification of the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2003. | |
101** | Interactive Data File (Form 10-Q for the quarterly period ended March 31, 2013 furnished in XBRL). | |
101.INS | XBRL Instance Document | |
101.SCH | XBRL Taxonomy Extension Schema Document | |
101.CAL | XBRL Taxonomy Extension Calculation Linkbase Document | |
101.DEF | XBRL Taxonomy Extension Definition Linkbase Document | |
101.LAB | XBRL Taxonomy Extension Label Linkbase Document | |
101.PRE | XBRL Taxonomy Extension Presentation Linkbase Document |
* | filed herewith |
** | Furnished herewith. Pursuant to Rule 406T of Regulation S-T, the Interactive Data Files on Exhibit 101 hereto are deemed not filed or part of any registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933, are deemed not filed for purposes of Section 18 of the Securities and Exchange Act of 1934, and otherwise are not subject to liability under those sections |
(1) Incorporated by reference from our Registration Statement on Form S-1 filed with the Commission on January 27, 2009.
(2) Incorporated by reference from our Form 8-K filed with the Commission on February 10, 2012.
(3) Incorporated by reference from our Form 8-K filed with the Commission on September 28, 2012.
(4) Incorporated by reference from our Form 10-Q filed with the Commission on November 14, 2012.
(5) Incorporated by reference from our Form 8-K filed with the Commission on January 24, 2013.
(6) Incorporated by reference from our Form 10Q filed with the Commission on February 12, 2013.
(7) Incorporated by reference from our Form 8-K filed with the Commission on March 21, 2013.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
DISCOUNT DENTAL MATERIALS, INC.
A Nevada corporation
By: /s/ ERIC CLEMONS
Eric Clemons, President (Principal Executive Officer)
By: /s/ WESLEY TATE
Wesley Tate, Chief Financial Officer (Principal Financial and Accounting Officer)
Date: May 2, 2013
Exhibit 10.16
THIS PROMISSORY NOTE HAS NOT BEEN REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED. NO SALE OR DISPOSITION MAY BE EFFECTED EXCEPT IN COMPLIANCE WITH RULE 144 UNDER SAID ACT OR AN EFFECTIVE REGISTRATION STATEMENT RELATED THERETO OR AN OPINION OF COUNSEL FOR THE HOLDER SATISFACTORY TO THE COMPANY THAT SUCH REGISTRATION IS NOT REQUIRED UNDER THE ACT OR RECEIPT OF A NO-ACTION LETTER FROM THE SECURITIES AND EXCHANGE COMMISSION.
AMENDED AND CONSOLIDATED CONVERTIBLE PROMISSORY NOTE
$600,000 March 14, 2013
Irvine, CA
For value received, Cerebain Biotech Corp., a Nevada corporation (the “Company”), promises to pay to Brad Vroom, an individual, or his assigns (the “Holder”) the principal sum of Six Hundred Thousand Dollars ($600,000). The principal hereof and any unpaid accrued interest thereon shall be due and payable on or before 5:00 p.m., Pacific Standard Time, on July 15, 2014 (the “Maturity Date”) (unless such payment date is accelerated as provided in Section 5 hereof). Payment of all amounts due hereunder shall be made at the address of the Holder provided for in Section 6 hereof. Interest shall accrue on the outstanding principal amount beginning on March 14, 2013, at the rate of seven and on-half percent (7.5%) per annum, compounded annually based on a 365-day year and shall continue on the outstanding principal until paid in full.
1. HISTORY OF THE NOTE. This Note is an amendment and consolidation of the following (collectively, the “Original Notes”);
a. The consolidated Convertible Promissory Note entered into by and between the Company and the Holder on or about June 18, 2012 (“First Original Note”);
b. The Amended and Consolidated Promissory Note entered into by and between the Company and the Holder on or about November 1, 2012 (“Second Original Note”), for $235,000.00; and
c. The $10,000 loaned by the Holder to the Company on or about December 27, 2012, which amount was never documented (“Third Original Note”).
With the execution of this Note the Company and the Holder acknowledge and agree that the Original Notes are void and unenforceable. With the execution of this Note, the Holder is loaning the Company an additional $115,000, which brings the total principal due under this Note to $600,000 when combined with the principal amounts due under the Original Notes. The Company and Holder hereby acknowledge that as of March 14, 2013, Twenty Nine Thousand Nine Hundred Twenty Five Dollars ($29,925) interest has accrued on the Original Notes and is and owing to the Holder.
2. PREPAYMENT. The Company may at any time, upon thirty (30) days written notice (each a “Prepayment Notice”), prepay all or any part of the principal balance of this Note, provided that concurrently with each such prepayment the Company shall pay accrued interest on the principal, if any, prepaid to the date of such prepayment. Any Prepayment Notice must contain the amount of principal and interest to be prepaid by the Company. The end of the thirty-day period following a Prepayment Notice shall be referred to as a “Prepayment Date.” In the event that the Company sends a Prepayment Notice to Holder, Holder may elect prior to the Prepayment Date to convert into common stock of the Company pursuant to Section 3 hereof, all or part of the amount of principal and interest to be repaid under the Prepayment Notice instead of receiving such prepayment.
3. CONVERSION. The Holder of this Note is entitled, at its option and subject to the other terms set forth herein, at any time beginning on the date hereof, and in whole or in part, to convert the outstanding principal amount of this Note, or any portion of the principal amount hereof, and any accrued interest, into shares of the common stock of the Company. Any amounts the Holder elects to convert will be converted into common stock at a rate of $0.30 per share. Any conversion shall be effectuated by giving a written notice (“Notice of Conversion”) to the Company on the date of conversion, stating therein the amount of principal and accrued interest due to Holder under this Note being converted.
Notwithstanding the foregoing, the Holder may not convert any outstanding amounts due under this Note if at the time of such conversion the amount of common stock issued for the conversion, when added to other shares of Company common stock owned by the Holder or which can be acquired by Holder upon exercise or conversion of any other instrument, would cause the Holder to own more than nine and nine-tenths percent (9.9%) of the Company’s outstanding common stock. The restriction described in this paragraph may be revoked upon sixty-one (61) days prior notice from Holder to the Company.
4. CONVERSION PRICE ADJUSTMENTS. In the event the Company should at any time after the date hereof do either of the following: i) fix a record date for the effectuation of a split or subdivision of the outstanding common stock of the Company, or ii) grant the holders of the Company’s common stock a dividend or other distribution payable in additional shares of common stock or other securities or rights convertible into additional shares of common stock without the payment of any consideration by such holder for the additional shares of common stock (a “Stock Adjustment”), then, as of the record date (or the date of the Stock Adjustment if no record date is fixed), the conversion price of this Note shall be appropriately adjusted so that the number of shares of common stock issuable upon conversion of this Note is adjusted in proportion to such change in the number of outstanding shares in order to insure such Stock Adjustment does not decrease the conversion value of this Note.
5. DEFAULT. The occurrence of any one of the following events shall constitute an Event of Default:
(a) The non-payment, when due, of any principal or interest pursuant to this Note;
(b) The material breach of any representation or warranty in this Note. In the event the Holder becomes aware of a breach of this Section 5(b), then provided such breach is capable of being cured by Company, the Holder shall notify the Company in writing of such breach and the Company shall have thirty (30) business days after notice to cure such breach;
(c) The breach of any covenant or undertaking, not otherwise provided for in this Section 5;
(d) The commencement by the Company of any voluntary proceeding under any bankruptcy, reorganization, arrangement, insolvency, readjustment of debt, receivership, dissolution, or liquidation law or statute of any jurisdiction, whether now or hereafter in effect; or the adjudication of the Company as insolvent or bankrupt by a decree of a court of competent jurisdiction; or the petition or application by the Company for, acquiescence in, or consent by the Company to, the appointment of any receiver or trustee for the Company or for all or a substantial part of the property of the Company; or the assignment by the Company for the benefit of creditors; or the written admission of the Company of its inability to pay its debts as they mature; or
(e) The commencement against the Company of any proceeding relating to the Company under any bankruptcy, reorganization, arrangement, insolvency, adjustment of debt, receivership, dissolution or liquidation law or statute of any jurisdiction, whether now or hereafter in effect, provided, however, that the commencement of such a proceeding shall not constitute an Event of Default unless the Company consents to the same or admits in writing the material allegations of same, or said proceeding shall remain undismissed for 20 days; or the issuance of any order, judgment or decree for the appointment of a receiver or trustee for the Company or for all or a substantial part of the property of the Company, which order, judgment or decree remains undismissed for 20 days; or a warrant of attachment, execution, or similar process shall be issued against any substantial part of the property of the Company.
Upon the occurrence of any Default or Event of Default, the Holder, may, by written notice to the Company, declare all or any portion of the unpaid principal amount due to Holder, together with all accrued interest thereon, immediately due and payable, in which event it shall immediately be and become due and payable, provided that upon the occurrence of an Event of Default as set forth in paragraph (d) or paragraph (e) hereof, all or any portion of the unpaid principal amount due to Holder, together with all accrued interest thereon, shall immediately become due and payable without any such notice.
6. NOTICES. All notices required or permitted hereunder shall be in writing and shall be deemed effectively given: (a) upon personal delivery to the Party to be notified, (b) when sent by confirmed facsimile if sent during normal business hours of the recipient, if not, then on the next business day, or (c) one (1) day after deposit with a nationally recognized overnight courier, specifying next day delivery, with written verification of receipt. All communications shall be sent as follows:
If to the Company: | Cerebain Biotech Corp. | |
13455 Noel Road, Suite 1000 | ||
Dallas, TX 75240 | ||
Attn: Wesley Tate, President | ||
Facsimile No.: | ||
with a copy to: | Law Offices of Craig V. Butler | |
9900 Research Dr. | ||
Irvine, CA 92618 | ||
Attn: Craig V. Butler, Esq. | ||
Facsimile No.: (949) 209-2545 | ||
If to Holder: | ||
Facsimile No.: ____________ |
or at such other address as the Company or Holder may designate by ten (10) days advance written notice to the other Party hereto.
7. GOVERNING LAW; VENUE. The terms of this Note shall be construed in accordance with the laws of the State of California, as applied to contracts entered into by California residents within the State of California, and to be performed entirely within the State of California. The parties agree that any action brought to enforce the terms of this Note will be brought in the appropriate federal or state court having jurisdiction over Orange County, California.
8. ATTORNEY’S FEES. In the event the Holder hereof shall refer this Note to an attorney to enforce the terms hereof, the Company agrees to pay all the costs and expenses incurred in attempting or effecting the enforcement of the Holder’s rights, including reasonable attorney’s fees, whether or not suit is instituted.
9. CONFORMITY WITH LAW. It is the intention of the Company and of the Holder to conform strictly to applicable usury and similar laws. Accordingly, notwithstanding anything to the contrary in this Note, it is agreed that the aggregate of all charges which constitute interest under applicable usury and similar laws that are contracted for, chargeable or receivable under or in respect of this Note, shall under no circumstances exceed the maximum amount of interest permitted by such laws, and any excess, whether occasioned by acceleration or maturity of this Note or otherwise, shall be canceled automatically, and if theretofore paid, shall be either refunded to the Company or credited on the principal amount of this Note.
10. Modification; Waiver. No modification or waiver of any provision of this Note or consent to departure therefrom shall be effective unless in writing and approved by the Company and the Holder.
In witness whereof, Company has executed this Amended and Consolidated Convertible Promissory Note as of the date first written above.
“Company”
Cerebain Biotech Corp.,
a Nevada corporation
/s/ Wesley D. Tate
By: Wesley D. Tate
Its: Interim President
Acknowledged:
/s/ Brad Vroom
Brad Vroom
EXHIBIT 31.1
CERTIFICATION OF PRINCIPAL EXECUTIVE OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Eric Clemons, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Discount Dental Materials, Inc. for the three and nine months ended March 31, 2013.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this interim report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Dated: May 2, 2013
By: /s/ ERIC CLEMONS
___________________________________________
Eric Clemons
President (Principal Executive Officer)
EXHIBIT 31.2
CERTIFICATION OF PRINCIPAL FINANCIAL AND ACCOUNTING OFFICER
PURSUANT TO SECTION 302 OF THE SARBANES-OXLEY ACT OF 2002
I, Wesley Tate, certify that:
1. I have reviewed this Quarterly Report on Form 10-Q of Discount Dental Materials, Inc. for the three and nine months ended March 31, 2013.
2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report;
3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report;
4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal controls over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:
a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this interim report is being prepared;
b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;
c) evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation;
d) disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting;
5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of the registrant's board of directors (or persons performing the equivalent function):
a) all significant deficiencies and material weaknesses in the design or operation of internal controls over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and
b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls over financial reporting.
Dated: May 2, 2013
By: /s/ WESLEY TATE
___________________________________________
Wesley Tate
Chief Financial Officer (Principal Financial and Accounting Officer)
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Discount Dental Materials, Inc. (the "Company") on Form 10-Q for the period ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Eric Clemons, President of the Company, certify, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: May 2, 2013
By: /s/ ERIC CLEMONS
___________________________________________
Eric Clemons
President (Principal Executive Officer)
A signed original of this written statement required by Section 906 has been provided to Discount Dental Materials, Inc. and will be retained by Discount Dental Materials, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.
EXHIBIT 32.1
CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350,
AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002
In connection with the Quarterly Report of Discount Dental Materials, Inc. (the "Company") on Form 10-Q for the period ended March 31, 2013 as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Wesley Tate, Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. section 1350 of the Sarbanes-Oxley Act of 2002, that:
(1) The Report fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934; and
(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Dated: May 2, 2013
By: /s/ WESLEY TATE
___________________________________________
Wesley Tate
Chief Financial Officer (Principal Financial and Accounting Officer)
A signed original of this written statement required by Section 906 has been provided to Discount Dental Materials, Inc. and will be retained by Discount Dental Materials, Inc. and furnished to the Securities and Exchange Commission or its staff upon request.