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 started 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 accrued rights fees of $50,000 payable 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
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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.
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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. Pursuant to the agreement, we agreed to the following schedule:
i) Upon signing the agreement we will issue Sonos warrants to purchase 50,000 shares of our common stock. The warrants are immediately exercisable, have a term of three years, cashless at the option of the holder, and 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. Warrants are immediately exercisable, have a term of three years, cashless at the option of the holder, and have an exercise price based on the fair market value of the stock on the date of 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. Warrants are immediately exercisable, have a term of three years, cashless at the option of the holder, and have an exercise price based on the fair market value of the stock on the date of 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. Warrants are immediately exercisable, have a term of three years, cashless at the option of the holder, and have an exercise price based on the fair market value of the stock on the date of 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. Warrants are immediately exercisable, have a term of three years, cashless at the option of the holder, and have an exercise price based on the fair market value of the stock on the date of completion of the phase.
The value of the warrants will be recorded as research and development expense in the period earned.
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”) or Plan of Operations of Cerebain includes the following sections:
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Liquidity and Capital Resources
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Development Stage Company
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Critical Accounting Policies
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Recent Accounting Pronouncements
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Off-Balance Sheet Arrangements
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Inflation
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Plan of Operations
As a development-stage enterprise, we have had no operating revenues through September 30, 2012. At September 30, 2012 our cash balance was negligible.
Our plan of operations consists of:
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We will work with device manufacturers’ to develop a medical device while also pursuing with researchers and universities to develop a synthetic drug solution.
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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.
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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.
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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 September 30, 2012 Compared to Three Months Ended September 30, 2011
Revenue
For the three months ended September 30, 2012 and September 30, 2011, we did not generate any revenues.
Operating expenses
Operating expenses increased by $179,181, or 168.1%, to $285,759 in the three months ended September 30, 2012 from $106,578 in the three months ended September 30, 2011 primarily due to research and development costs, as well as increases in legal and audit fees, travel costs, and loan interest costs.
Operating expenses for the three months ended September 30, 2012 were comprised of research and development costs of $108,500, $88,500 in consulting services costs; legal and audit costs of $18,476, travel costs of $39,740, loan interest expense of $23,955, investor relations costs of $4,870, rent of $417, depreciation expense of $214, and $1,087 of other operating expenses, primarily patent licensing charges.
Operating expenses for the three months ended September 30, 2011 were comprised of $88,500 in consulting services costs, investor relations costs of $10,000, travel costs of $6,000, legal and audit fees of $1,344, depreciation expense of $214, and $520 of other operating expenses, primarily office supplies.
Net loss before income taxes
Net loss before income taxes for the three months ended September 30, 2012 totaled $285,759 primarily due to research and development costs, consulting services costs, legal and audit costs, loan interest costs, and travel costs compared to $106,578 for the three months ended September 30, 2011 primarily due to consulting services costs, investor relations costs, and travel costs.
Assets and Liabilities
Assets were $92,518 as of September 30, 2012. Assets consisted of cash of $1,845, prepaid expenses of $6,630, computer equipment of $143, and patent rights of $83,900. Liabilities were $776,198 as of September 30, 2012. Liabilities consisted of accounts payable of $63,076, related party payable of $353,434, notes payable to stockholders of $235,000, and convertible note to stockholder, net of debt discount, of $124,688.
Stockholders’ Deficit
Stockholders’ deficit was $(683,680) as of September 30, 2012. Stockholder’s deficit consisted of shares issued to founders and recorded as compensation in the amount of $13,900, shares issued for fundraising totaling $791,884, net of issuance costs, beneficial conversion feature associated with convertible note of $135,000, 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 $1,739,564 at September 30, 2012.
Liquidity and Capital Resources
General
– Overall, we had a decrease in cash flows of $2,340 in the three months ending September 30, 2012 resulting from cash used in operating activities of $162,340, offset partially by cash provided by financing activities of $160,000.
The following is a summary of our cash flows provided by (used in) operating and financing activities during the periods indicated:
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Three Months Ended September 30,
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2012
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2011
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Cash at beginning of period
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$
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4,185
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$
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746
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Net cash used in operating activities
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(162,340
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(65,477
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Net cash provided by financing activities
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160,000
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65,800
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Cash at end of period
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$
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1,845
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1,069
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Cash Flows from Operating Activities
– For the three months ending September 30, 2012, net cash used in operations was $162,340 compared to net cash used in operations of $65,477 for the three months ending September 30, 2011. Net cash used in operations was primarily due to a net loss of $(285,759) for the three months ended September 30, 2012, warrants issued for research and development of $108,500, accretion of debt discount of $16,875, depreciation expense of $214, and the changes in operating assets and liabilities of $2,170, primarily due to the increase in accounts payable.
Cash Flows from Financing Activities
– Net cash flows provided by financing activities in the three months ending September 30, 2012 was $160,000, compared to net cash provided of $65,800 in the same period in 2011. The increase in net cash provided by financing activities was mainly due to proceeds from notes payable to stockholders of $160,000.
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
In fiscal year 2011, we borrowed $19,490 from a stockholder for working capital purposes. The note payable pays no interest and is unsecured. As of June 30, 2012, the note has 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
New Note
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.
Long-Term Note Payables
Old Notes
On July 31, 2011, we entered into an unsecured $60,000 promissory note (“Promissory Note”) with a stockholder. The Promissory Note matured on April 13, 2012 and accrued interest at six (6) percent per annum.
On October 13, 2011, we entered into a $100,000 convertible note (“Convertible Note”) with a stockholder.
The Convertible Note matures in six (6) months, accrued interest at six (6) percent per annum, the holder is 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 (“Promissory Note”) with a stockholder. The Promissory Note matured on April 13, 2012 and accrued interest at six (6) percent per annum.
New Note
On June 18, 2012, we entered into a $240,000 principal amount convertible promissory 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 did loan us an additional $75,000 under the terms of a separate promissory note (non-convertible). Under the terms of the 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, and is accreting the discount to interest expense over the 24 month term of the Consolidation Note.
Equity Financing
On September 17, 2012, we initiated a private placement offering of 5,000,000 shares of our restricted (as that term is defined by Rule 144 of the Securities Act of 1933) common stock at a price of $1.10 per share. Issuance costs paid for broker and finder’s fees will offset against capital raised. As Noted above, pursuant to our agreement with Dr. Saini, Dr. Saini has the right to participate in certain offerings of our securities by selling his shares in the offering up to 10% of the total shares sold in the offering. If Dr. Saini does elect to participate in an offering then the proceeds received by us from the offering would be reduced by approximately 10%. As of the date of this filing, we have not sold any shares under this private placement offering.
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 $66,657, net of offering costs of approximately $10,343. 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. 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 $1,739,564 and $1,453,805 at September 30, 2012 and June 30, 2012, respectively, and had a net loss of $285,759 and $106,578 for the three months ended September 30, 2012 and 2011, respectively, and net cash used in operating activities of $162,340 and $65,477 for the three months ended September 30, 2012 and 2011, 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 September 30, 2012, we have not entered into any transaction, agreement or other contractual arrangement with an entity unconsolidated under which it has:
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a retained or contingent interest in assets transferred to the unconsolidated entity or similar arrangement that serves as credit;
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liquidity or market risk support to such entity for such assets;
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an obligation, including a contingent obligation, under a contract that would be accounted for as a derivative instrument; or
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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.
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Inflation
Management believes that inflation has not had a material effect on the Company’s results of operations.