UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2016

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ______ to ______

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 o

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.

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o 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.

 CEREBAIN BIOTECH CORP.

TABLE OF CONTENTS

PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

The unaudited condensed consolidated financial statements of registrant for the three-month periods ended September 30, 2016 and 2015 follow. The unaudited 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.

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

CONDENSED CONSOLIDATED BALANCE SHEETS

See accompanying notes to unaudited condensed consolidated financial statements

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

See accompanying notes to unaudited condensed consolidated financial statements

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

UNAUDITED CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

See accompanying notes to unaudited condensed consolidated financial statements

NOTE 1 – ORGANIZATION AND PRINCIPAL ACTIVITIES

Description of Business

Cerebain Biotech Corp. (Formerly Discount Dental Materials, Inc.) (“Cerebain Biotech”), was incorporated on December 18, 2007 under the laws of Nevada. The Company is a smaller reporting biomedical company and through its wholly owned subsidiary, Cerebain Operating, Inc. (Formerly Cerebain Biotech Corp.), the Company’s business revolves around the discovery of products for the treatment of Alzheimer’s disease utilizing Omentum. The Company plans to produce products that will include both a medical device solution as well as a synthetic drug solution.

Cerebain Operating, Inc. was incorporated on February 22, 2010, in the State of Nevada.

The accompanying (a) condensed balance sheet at June 30, 2016 has been derived from audited statements and (b) unaudited interim condensed financial statements as of September 30, 2016 and for the three-month periods ended September 30, 2016 and 2015 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, 2016 included on Form 10-K filed with the Securities and Exchange Commission on September 27, 2016.

NOTE 2 – BASIS OF PRESENTATION

The Company operates in one segment in accordance with accounting guidance Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“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.

Going Concern

The accompanying unaudited condensed consolidated 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 an accumulated deficit of approximately $15,700,000 and $11,500,000 at September 30, 2016 and June 30, 2016, respectively, and had a net loss of approximately $4,200,000 and $555,000 for the three-month periods ended September 30, 2016 and 2015, respectively, and net cash used in operating activities of approximately $200,000 and $75,000 for the three-month periods ended September 30, 2016 and 2015, respectively, with no revenue earned since inception. These matters raise substantial doubt about our ability to continue as a going concern.

FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2016 AND 2015 

While the Company is attempting to commence operations and generate 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 condensed consolidated financial statements. The condensed consolidated 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 condensed consolidated financial statements.

Use of Estimates

The preparation of these condensed consolidated 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 condensed consolidated 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 condensed consolidated financial statements. The more significant estimates and assumptions by management include among others: useful lives and residual values of long-lived assets, the valuation of equity instruments and the valuation of warrants and options. 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 Cerebain Biotech Corp. and its wholly-owned subsidiary, Cerebain Operating, Inc. (collectively referred to as the “Company”). There are no material intercompany transactions.

Reclassifications

Certain reclassifications have been made to prior fiscal year amounts or balances to conform to the presentation adopted in the current fiscal year, which did not have any impact to consolidated net loss or stockholder’s deficit amounts previously reported.

Advertising Costs

Advertising costs are recorded as general and administrative expenses when they are incurred. Advertising costs charged to operations were approximately $3,000 and $35,000 for the three-month periods ended September 30, 2016 and 2015, respectively.

Research and Development

The Company expenses the cost of research and development as incurred. Research and development costs charged to operations were approximately $70,000 and $0 for the three-month periods ended September 30, 2016 and 2015, respectively, and are included in research and development costs in the accompanying condensed consolidated statements of operations.

Debt

The Company issues debt that may have separate warrants, conversion features, or no equity-linked attributes.

Debt with warrants

In accordance with Accounting Standards Codification (“ASC”) Topic 470-20-25, when the Company issues debt with warrants, the Company treats the warrants as a debt discount, records as a contra-liability against the debt, and amortizes the balance over the life of the underlying debt as amortization of debt discount expense in the condensed consolidated statements of operations. The offset to the contra-liability is recorded as additional paid in capital in our condensed consolidated balance sheets. The Company determines the value of the warrants using the Black-Scholes Option Pricing Model (“Black-Scholes”) using the stock price on the date of issuance, the risk free interest rate associated with the life of the debt, and the volatility of the stock. If the debt is retired early, the associated debt discount is then recognized immediately as amortization of debt discount expense in the condensed consolidated statements of operations. The debt is treated as conventional debt.

Convertible debt – derivative treatment

When the Company issues debt with a conversion feature, the Company must first assess whether the conversion feature meets the requirements to be treated as a derivative, as follows: a) one or more underlying’s, typically the price of our common stock; b) one or more notional amounts or payment provisions or both, generally the number of shares upon conversion; c) no initial net investment, which typically excludes the amount borrowed; and d) net settlement provisions, which in the case of convertible debt generally means the stock received upon conversion can be readily sold for cash. An embedded equity-linked component that meets the definition of a derivative does not have to be separated from the host instrument if the component qualifies for the scope exception for certain contracts involving an issuer’s own equity. The scope exception applies if the contract is both a) indexed to its own stock; and b) classified in stockholders’ equity in its statement of financial position.

If the conversion feature within convertible debt meets the requirements to be treated as a derivative, the Company estimates the fair value of the convertible debt derivative using Black-Scholes upon the date of issuance. If the fair value of the convertible debt derivative is higher than the face value of the convertible debt, the excess is immediately recognized as interest expense. Otherwise, the fair value of the convertible debt derivative is recorded as a liability with an offsetting amount recorded as a debt discount, which offsets the carrying amount of the debt. The convertible debt derivative is revalued at the end of each reporting period and any change in fair value is recorded as a gain or loss in the consolidated statements of operations. The debt discount is amortized through interest expense over the life of the debt.

Convertible debt – beneficial conversion feature

If the conversion feature is not treated as a derivative, the Company assesses whether it is a beneficial conversion feature (“BCF”). A BCF exists if the conversion price of the convertible debt instrument is less than the stock price on the commitment date. This typically occurs when the conversion price is less than the fair value of the stock on the date the instrument was issued. The value of a BCF is equal to the intrinsic value of the feature, the difference between the conversion price and the common stock into which it is convertible, and is recorded as additional paid in capital and as a debt discount in the consolidated balance sheets. The Company amortizes the balance over the life of the underlying debt as amortization of debt discount expense in the consolidated statements of operations. If the debt is retired early, the associated debt discount is then recognized immediately as amortization of debt discount expense in the consolidated statements of operations.

If the conversion feature does not qualify for either the derivative treatment or as a BCF, the convertible debt is treated as traditional debt.

Debt Modifications and Extinguishments

When the Company modifies or extinguishes debt, it does so in accordance with ASC Topic 470-50-40, which requires modification to debt instruments to be evaluated to assess whether the modifications are considered “substantial modifications”. A substantial modification of terms shall be accounted for like an extinguishment. Based on the guidance relied upon and the analysis performed, if the Company believes the embedded conversion feature has no fair value on the date of issuance (measurement date) and the embedded conversion feature has no beneficial conversion feature, the embedded conversion feature does not meet the criteria in ASC 470-50-40-10 or 470-20-25 and the issuance of the convertible note payable is considered a modification, and not an extinguishment that would require the recognition of a gain or loss. If the Company determines the change in terms meet the criteria for substantial modification under ASC 470 it will treat the modification as extinguishment and recognize a gain or loss from debt extinguishment.

Fair Value of Financial Instruments

The Company applies the provisions of accounting guidance, Financial Accounting Standards Board (“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 September 30, 2016 and 2015, 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 Measurement, 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.

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 is a startup company 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 common share is computed by dividing net earnings applicable to common stockholders by the weighted-average number of common shares outstanding during the period. Diluted earnings (loss) per common share is determined using the weighted-average number of common shares 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 common stock outstanding excludes common shares equivalents, because their inclusion would be anti-dilutive.

Basic earnings per share are based on the weighted-average number of shares of common stock outstanding. Diluted earnings per share is based on the weighted-average number of shares of common stock outstanding adjusted for the effects of common stock that may be issued as a result of the following types of potentially dilutive instruments:

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 earnings (loss) per share are the same since the Company had net losses for all periods presented and including the additional potential common shares would have an anti-dilutive effect.

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.

NOTE 4 – COMMITMENTS AND CONTINGENCIES

Employment Agreements

Eric Clemons

On June 15, 2013, the Company entered into an employment agreement with Eric Clemons. Terms of the agreement included the following:

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2016 AND 2015

On October 1, 2014, the Company entered into an addendum to the employment agreement. The addendum had no accounting impact on the prior agreement. Terms of the addendum include included the following:

On March 1, 2015, the Company entered into an addendum to the employment agreement. The addendum had no accounting impact on the prior agreements. Terms of the addendum included a cash placement bonus equal to an amount up to 10% of the aggregate purchase price paid by each purchaser of the Company’s Securities and Convertible Debt, where the purchaser of said Securities and Convertible Debt has been directly introduced to the Company by Mr. Clemons. For the three-month periods ended September 30, 2016 and 2015, a cash placement bonus was earned of approximately $15,000 and $0, respectively, which was recognized as a reduction of the proceeds from the sale of shares of common stock and debt issuances and recorded as an expense.

On September 29, 2016, the Company issued Mr. Clemons an option to acquire up to 105,000 shares of our common stock under the Company’s 2014 Omnibus Stock Grant and Option Plan at an exercise price of $0.75 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $78,000, and is recognized ratably over the vesting period in selling, general and administrative expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 206%; risk-free interest rate of 1.13%; expected term of 6 years; and 0% dividend yield. As of September 30, 2016, 21,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $20,000 and $0 for the three-month periods ended September 30, 2016 and 2015, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $58,000.

To date, no employee or employer payroll taxes have been withheld, remitted to taxing authorities, or recognized by the Company for cash compensation paid. As a result, the Company could be liable such payroll taxes and any related penalties and interest.

Wesley Tate

On June 15, 2013, the Company entered into an employment agreement with Wesley Tate. Terms of the agreement included the following:

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2016 AND 2015

On April 1, 2014, the Company entered into an addendum to this agreement. The addendum had no accounting impact on the prior agreement. Terms of the addendum included 25,000 of the Company’s common restricted shares representing a retention bonus as an incentive for him to remain in the employment of the Company for 12 months. The Company recognized a prepaid expense of approximately $37,500, which has been fully amortized to selling, general and administrative.

On October 1, 2014, the Company entered into an addendum to the employment agreement. The addendum had no accounting impact on the prior agreements. Terms of the agreement included the following:

On October 1, 2015, the Company entered into a new employment agreement. The new contract had no accounting impact on the prior agreements. Terms of the agreement included the following:

On September 29, 2016, the Company issued Mr. Tate an option to acquire up to 105,000 shares of our common stock under the Company’s 2014 Omnibus Stock Grant and Option Plan at an exercise price of $0.75 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $78,000, and is recognized ratably over the vesting period in selling, general and administrative expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 206%; risk-free interest rate of 1.13%; expected term of 6 years; and 0% dividend yield. As of September 30, 2016, 21,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $20,000 and $0 for the three-month periods ended September 30, 2016 and 2015, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $58,000.

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2016 AND 2015

To date, no employee or employer payroll taxes have been withheld, remitted to taxing authorities, or recognized by the Company for cash compensation paid. As a result, the Company could be liable such payroll taxes and any related penalties and interest.

Commitments

In September 2012, the Company entered into an agreement with Sonos Models, Inc. (“Sonos”) to build up to three medical device prototypes to be used for testing. In April 2014, the Company entered into an addendum to the agreement with Sonos, which included a commitment by the Company to pay Sonos up to One Million Dollars ($1,000,000) cash, excluding stock based compensation, for research and development costs. These costs will be recognized in research and development expense as costs are incurred. To date, Sonos has been issued 325,000 restricted shares of the Company’s stock, 20,000 warrants to purchase the Company’s stock and the Company has paid approximately $220,000, of which $65,000 has been incurred towards the Company’s monetary commitment.

Consulting Agreements

Between December 2013 and September 2016, the Company entered into service and consulting agreements with various vendors to provide assistance to the Company in several areas including the marketing of its biomedical products upon the availability of the device, capital markets and marketing strategies, research and development, advertising services and assistance in the introduction of the Company to medical device testing organization and to facilitate access to doctors in numerous countries, including Poland, Uzbekistan and China. They were compensated an approximate aggregate 1,340,000 shares of the Company’s fully vested and non-forfeitable common stock. These contracts are for twelve to twenty-four months and may be renewed or extended for any period as may be agreed by the parties. As of September 30, 2016 the Company has extended some of the contracts for additional periods. Any of the parties may terminate their respective agreement by providing thirty (30) days written notice of such termination. The Company has recognized $30,000 in accounts payable which is in arrears with one contractual obligation and is in discussions with the consultant to renegotiate the terms of the contract. As these contracts are for a period of up to twelve months to twenty-four months, the Company recorded the original approximate $2,400,000 as the value of the shares issued to prepaid expense and is amortizing the expense associated with these issuances over a twelve to twenty-four-month period. For the three-month periods ended September 30, 2016 and 2015, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $116,000 and $69,000, respectively. The unamortized prepaid expenses of these contracts are approximately $290,000 and included in prepaid expenses on the consolidated balance sheets at September 30, 2016.

In January 2016, the Company entered into a consulting agreement with an individual to provide business consulting services for a period of thirty-six months. Compensation was issuance of 75,000 shares of the Company’s stock (See note 7) and fully vested and non-forfeitable options to acquire up to 300,000 shares of our common stock, at an exercise price of $0.33 per share. Fair Market Value of these options totaled approximately $83,500, and is to be recognized ratably over the service period in selling, general and administrative expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 210%; risk-free interest rate of 1.07%; expected term of 3 years; and 0% dividend yield. For the three-month periods ended September 30, 2016 and 2015, the Company amortized from prepaid expenses to selling, general and administrative expenses approximately $7,000 and $0, respectively. The unamortized prepaid expense of this contract is approximately $70,000 and included in prepaid expenses on the consolidated balance sheets at September 30, 2016.

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2016 AND 2015

As of September 30, 2016, future maturities of prepaid expenses on value of shares issued for consulting are as follows:

Legal

On July 21, 2016, the Company was sued in the United States District Court for the Eastern District of Pennsylvania (Miriam Weber Miller v. Cerebain Biotech Corp. and Eric Clemons, Civil Action No. 16-3943) by Miriam Weber Miller. According to the Complaint, the Plaintiff alleges: (i) she was hired by the Company to perform public relations, investor relations, corporate growth strategies, and was to be an advisor to the Company’s Chief Executive Officer, (ii) she performed services, and (iii) that she was not fully compensated for those services. The Complaint claims causes of action for breach of contract, violation of the Pennsylvania wage payment and collection law, and unjust enrichment, and seeks damages of approximately $400,000. The Company completely rejects the Plaintiff’s allegations in the Complaint and plan to vigorously defend against this lawsuit. The Company was served with the Complaint on August 2, 2016. On October 3, 2016, the Company filed a Motion to Dismiss the Complaint on the basis that the Complaint fails to state a claim upon which relief can be granted. The Plaintiff filed a Response to the Company’s Motion to Dismiss and on October 19, 2016, the Company filed a Reply to the Plaintiff’s Response. Currently, the Company is awaiting the Court’s decision on its Motion to Dismiss. All dates related to the lawsuit, if any, will not be determined until the Court issues a decision on the Motion to Dismiss.

While incapable of estimation, in the opinion of the management, the individual regulatory and legal matters in which it might involve in the future are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows. The Company has accrued $150,000 in Accounts Payable for consulting compensation, but no accrual has been made for additional legal contingencies in the consolidated financial statements as of September 30, 2016 as it is too early in the process to determine the outcome or potential loss.

NOTE 5 – 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 has paid rights fees of $50,000 to Dr. Saini, and the Company issued Dr. Saini 825,000 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. 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. To date, Dr. Saini has not participated in any sales of equity.

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2016 AND 2015

In addition, the Patent License agreement provides for 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 the fourth (June 2014), fifth (June 2015), and sixth (June 2016) 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 Company has accrued the minimum patent royalty expense associated with the patent rights in accounts payable and is currently in arrears and in discussions to renegotiate the terms 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.

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.

Legal fees pertaining to the patent are recorded as general and administrative expenses when they are incurred. Legal fees charged to operations were approximately $600 and $200 for the three-month periods ended September 30, 2016 and 2015, respectively.

The Company recognized a patent royalty expense of approximately $25,000 for the three-month periods ended September 30, 2016 compared to $112,500 for the three-month periods ended September 30, 2015. The accrued payable of $175,000 pertaining to the patent royalty expense at September 30, 2016 is included in related party payables.

NOTE 6 – NOTES PAYABLE

Short Term Notes Payable

Related Party Notes Payable

(A)  In 2012, the Company issued a note payable to a related party. The note was scheduled to mature on December 31, 2013 and accrued interest at seven and one-half (7.5) percent per annum. In February 2016, the noteholder provided the Company with an additional $1,000. As of September 30, 2016, the outstanding balance was $114,000. The Company is currently in default and is in discussions with the noteholder to restructure the terms of the note.

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2016 AND 2015

Convertible Notes to Stockholders

Convertible Notes Payable (A)

Between September 2013 and September 2016, the Company entered into various unsecured convertible promissory notes with non-affiliate stockholders for principal amounts of approximately $7,500 to $30,000, totaling approximately $127,000. Under the terms of these notes, maturity dates range from June 2015 and July 2019, interest rates range from 7.5% to 8.0% per annum, and are convertible into shares of our common stock at rates that range from $0.20 and $5.00 per share, but only if such conversion would not cause the noteholders to own more than 9.9% of our outstanding common stock, and contains piggyback registration rights. In addition, the Company granted to certain noteholders a cashless option to purchase one (1) share of the Company’s common stock, $.001 par value, at the exercise price of $0.50 to $1.25 per share, for each share the noteholders are entitled pursuant to the promissory notes. The options are fully vested and shall expire from one to three years from date of execution. For the period ended September 30, 2016, the Company is in default approximately $48,000 on various notes. As a result, these notes are included in the current portion of convertible notes payable, and the Company is in discussions with the noteholders to restructure the terms of the notes.

The Company determined that some of the notes had a beneficial conversion feature of approximately $28,000.

The Company recognized an accretion of debt discount expense of approximately $8,000 and $14,000 for the three-month periods ended September 30, 2016 and 2015, respectively. The accretion of debt discount expense to be recognized in future years is approximately $11,000.

During the three-month periods ended September 30, 2016, convertible notes of approximately $8,000 have been converted to 40,000 shares of the Company’s common stock. During the three-month periods ended September 30, 2016, the Company issued 40,000 shares of our common stock, pursuant to warrant agreements that were exercised, in exchange for $20,000, (See Note 8).

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2016 AND 2015 

Unsecured, Amended and Consolidated Convertible Note Payable (B)

December 2014 Convertible Note

In December 2014, the Company entered into an unsecured convertible promissory note with a non-affiliate stockholder for a principal amount of $200,000. The note payable matures in December 2016, accrued interest at 7.5% per annum, and convertible into shares of our common stock at a conversion rates of $1.00 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 Company determined that the note had a beneficial conversion feature of approximately $90,000.

December 2015 Convertible Note

In December 2015, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of $260,000. In exchange, the Company extinguished a $10,000 short term note payable, the $200,000 convertible note payable issued in December 2014, and received cash of $50,000. The amended and consolidated note payable matures in October 2019, accrues interest at 7.5% per annum, and convertible into shares of our common stock at a conversion rates of $0.20 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. In addition, the Company granted to the noteholder a cashless warrant to purchase one (1) share of the Company’s common stock, $.001 par value, at the exercise price of $0.50 per share, for each share the noteholder is entitled pursuant to the promissory note. The options are fully vested and shall expire three years from date of execution.

The Company determined the estimated relative fair value discount of the warrants was approximately $128,000 which was valued using the Black-Scholes option pricing model with the following inputs: volatility of 240%; risk-free interest rate of 1.05%; expected term of 3 years; and 0% dividend yield.

The Company determined that the note had a beneficial conversion feature of approximately $141,000.

In connection with the $260,000 convertible note, the Company recognized a loss from extinguishment of debt of approximately $269,000 for the year ended June 30, 2016.

In connection with the $200,000 convertible note, the Company recognized a loss from extinguishment of debt of approximately $50,000 for the year ended June 30, 2016.

Unsecured, Amended and Consolidated Convertible Notes Payable (C)

June 2015 Convertible Note

In June 2015, the Company entered into an unsecured convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $1,475,000. The note matured on June 9, 2017 and accrued interest at 7.5% per annum and is convertible into shares of our common stock at a conversion rate of $1.00 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.

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2016 AND 2015

December 2015 Convertible Note

In December 2015, the Company entered into an unsecured $112,000 promissory note with a stockholder. The note matured on March 31, 2016 and accrued no interest. In addition, the Company issued to the noteholder 125,000 shares of the Company’s common stock.

In connection with the issuance of the 125,000 shares of stock in December 2015, the Company recorded the approximate $39,000 value of the shares issued, included in loss on extinguishment. The Company used a recent sale of stock to determine the fair market value of the transaction.

February 2016 Convertible Note

In February 2016, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,100,000. In exchange, the Company modified the $1,475,000 convertible note payable issued in June 2015, the $112,000 note payable issued in December 2015, accounts payable related to accrued interest of approximately $293,000, and received cash of $200,000. The amended and consolidated note payable matures February 2018, accrues interest at 5% per annum, and is convertible into shares of our common stock at a conversion rate of $0.50 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.

In connection with the $2,100,000 convertible note payable, the Company determined the embedded conversion feature does not meet the criteria in ASC 470-50-40-10 or 470-20-25, and the issuance of the convertible promissory note payable is considered a modification, and not an extinguishment that would require the recognition of a gain or loss.

April 2016 Convertible Note

In April 2016, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,130,000. In exchange, the Company modified the $2,080,112 convertible promissory note payable issued in February 2016 and received cash of $55,000. The amended and consolidated convertible note payable matures in February 2018, accrues interest at 5% per annum, and is convertible into shares of our common stock at a conversion rate of $0.50 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.

In connection with the $2,130,000 convertible note payable, the Company determined the embedded conversion feature does not meet the criteria in ASC 470-50-40-10 or 470-20-25, and the issuance of the convertible promissory note payable is considered a modification, and not an extinguishment that would require the recognition of a gain or loss.

August 2016 Convertible Note

In August 2016, the Company entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,285,000. In exchange, the Company extinguished the $2,135,112 convertible promissory note payable issued in April 2016 and received cash of $150,000. The amended and consolidated convertible note payable matures in August 2018, accrues interest at 5% per annum, and is convertible into shares of our common stock at a conversion rate of $0.40 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.

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2016 AND 2015 

In connection with the $2,285,000 convertible note, the Company determined the embedded conversion feature does meet the criteria in ASC 470-50-40-10 or 470-20-25, and the issuance of the convertible promissory note payable is considered an extinguishment that would require the recognition of a gain or loss. The Company recognized a loss from extinguishment of debt of approximately $3.7 million for the three-month periods ended September 30, 2016 compared to $0 for the three-month periods ended September 30, 2015.

The Company recognized interest expense on all notes payable to stockholders of approximately $38,000 and $35,000 for the three-month periods ended September 30, 2016 and 2015, respectively. Accrued interest on all notes payable to stockholders at September 30, 2016 and 2015 totaled approximately $140,000 and $299,000, respectively, and is included in accounts payables.

As of September 30, 2016, future maturities of convertible notes payable are as follows:

NOTE 7 – STOCK TRANSACTIONS

For the three-month periods ended September 30, 2016, the Company entered into various stock purchase agreements with a third party between July and September of 2016, under which the Company issued 40,000 shares of its common stock, in exchange for $20,000. The aggregate value of these shares was $20,000 as the exercise price was $0.50 per share. The stock purchase agreements include piggyback registration rights.

For the three-month periods ended September 30, 2016, the Company issued 40,000 shares of its common stock to an individual for conversion of notes payable. The aggregate value of these shares was approximately $8,000 as the conversion price was $0.20 per share.

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2016 AND 2015 

NOTE 8 – OPTIONS AND WARRANTS

Options

For the three-month periods ended September 30, 2016, the Company had 910,000 options outstanding at an average exercise price of $1.45, with 652,000 options exercisable. For the three-month periods ended September 30, 2016 and 2015, the Company recognized an expense of approximately $115,000 and $90,000, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $435,000.

On September 29, 2016, the Company issued Eric Clemons and Wesley Tate options to acquire up to a total of 210,000 Shares of our Common Stock under the Company’s 2014 Omnibus Stock Grant and Option Plan at an exercise price of $0.75 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $156,000, and is recognized ratably over the vesting period in selling, general and administrative expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 206%; risk-free interest rate of 1.13%; expected term of 6 years; and 0% dividend yield. As of September 30, 2016, 42,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $40,000 and $0 for the three-month periods ended September 30, 2016 and 2015, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $116,000.

Warrants

For the three-month period ended September 30, 2016, the Company had approximately 1,477,000 warrants outstanding at an average exercise price of $0.58. The Company recognized the issuance of approximately 50,000 warrants, offset by the exercise of 40,000 warrants and the expiration of 10,000 warrants which is included in the approximate 1,477,000 warrants outstanding for the three-month period ended September 30, 2016. For the three-month period ended September 30, 2016 and 2015, the Company recognized an accretion of debt discount related to warrants expense of approximately $700 and $0, respectively. The approximate expense expected to be recognized in future years is $7,300.

In July 2016, the Company entered into a $10,000 unsecured convertible promissory note with a non-affiliate stockholder. In association with this note, the Company granted to noteholder a cashless warrant to purchase one (1) share of the Company’s common stock, $.001 par value, at the exercise price of $0.50 per share, for each share the holder is entitled pursuant to the promissory note, totaling 50,000 shares. Relative value of the warrants totaled approximately $8,000, and is to be recognized ratably over the note period in interest expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 211%; risk-free interest rate of 0.81%; expected term of 3 years; and 0% dividend yield.

NOTE 9 – RELATED PARTY TRANSACTIONS

On September 29, 2016, the Company issued Eric Clemons and Wesley Tate options to acquire up to a total of 210,000 shares of our common stock under the Company’s 2014 Omnibus Stock Grant and Option Plan at an exercise price of $0.75 per share subject to a vesting schedule. Fair Market Value of these options totaled approximately $156,000, and is recognized ratably over the vesting period in selling, general and administrative expense. The options were valued using the Black-Scholes value option pricing model with the following inputs: volatility of 206%; risk-free interest rate of 1.13%; expected term of 6 years; and 0% dividend yield. As of September 30, 2016, 42,000 options to purchase the Company’s common stock have vested. The Company recognized selling, general and administrative expense of approximately $40,000 and $0 for the three-month periods ended September 30, 2016 and 2015, respectively. The compensation expected to be recognized in selling, general and administrative expense in future years is approximately $116,000.

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2016 AND 2015 

On March 1, 2015, the Company entered into an addendum to the employment agreement related to Mr. Clemons. The addendum had no accounting impact on the prior agreements. Terms of the addendum included a cash placement bonus equal to an amount up to 10% of the aggregate purchase price paid by each purchaser of the Company’s Securities and Convertible Debt, where the purchaser of said Securities and Convertible Debt has been directly introduced to the Company by Mr. Clemons. For the three-month periods ended September 30, 2016 and 2015, a cash placement bonus was earned of approximately $15,000 and $0, respectively, which was recognized as a reduction of the proceeds from the sale of shares of common stock and debt issuances and recorded as an expense.

NOTE 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.

The total number of potential additional dilutive options and warrants outstanding was approximately 2,390,000 and 430,000 for the three-month periods ended September 30, 2016 and 2015, respectively. In addition, the convertible notes convert at an exercise price of between $0.20 and $5.00 per share of common stock representing approximately 7.2 million shares. The options, 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:

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2016 AND 2015

NOTE 11 – INCOME TAXES

The provision (benefit) for income taxes for the periods ended September 30, 2016 and June 30, 2016, assumes a 34% effective tax rate for federal income taxes and 1.5% for state income taxes:

The Company had deferred income tax assets as of September 30, 2016 and June 30, 2016 are as follows:

CEREBAIN BIOTECH CORP. AND SUBSIDIARY

NOTES TO THE UNAUDITED CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

FOR THE THREE MONTH PERIOD ENDED SEPTEMBER 30, 2016 AND 2015

The Company provided a valuation allowance equal to the deferred income tax assets for the periods ended September 30 and June 30, 2016 respectively, because it is not presently known whether future taxable income will be sufficient to utilize the loss carryforwards. 

At September 30, 2016, the Company had approximately $15,700,000 in Federal and State tax loss carryforwards that can be utilized in future periods to reduce taxable income, and begin to expire in 2030. Pursuant to Internal Revenue Code Section 382, the future utilization of our net operating loss carryforwards to offset future taxable income may be subject to an annual limitation as a result of ownership changes that may have occurred previously or that could occur in the future.

The Company did not identify any material uncertain tax positions on tax returns that will be filed.

The Company has not filed any of its income tax returns. The fiscal years ended June 30, 2010 thru 2016 are open for examination.

NOTE 12 – SUBSEQUENT EVENTS

In October 2016, convertible notes of approximately $400 have been converted to 2,000 shares of the Company’s common stock. During the same period, the Company issued 2,000 shares of our common stock, pursuant to warrant agreements that were exercised, in exchange for $1,000.

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.

Business Overview

We were incorporated on December 18, 2007, in the State of Nevada. We are a smaller reporting biomedical company and through our wholly owned subsidiary, Cerebain Operating, Inc. (“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.

On January 17, 2012, the holders of a majority of our common stock entered into a Stock Purchase Agreement with Cerebain Operating, Inc., a Nevada corporation, under which Cerebain Operating, Inc. agreed to purchase an aggregate of 380,000 shares of our common stock from those shareholders in exchange for $296,000. These shares represented approximately 90% of our outstanding common stock at the time of the transaction (after taking into account the cancellation of 600,000 shares of our 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, we closed a transaction with the shareholders of Cerebain whereby we issued 455,680 shares of our 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, we closed a transaction with our primary shareholder, Mr. R. Douglas Barton, whereby we sold all of our then-existing assets to Mr. Barton in exchange for Mr. Barton assuming all of our then-existing liabilities, as well as the return of 600,000 shares of our 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 Operating, Inc. became our wholly-owned subsidiary, (ii) all of our officers and one of our directors resigned immediately, and we appointed one new director and retained new executive officers; and (iii) we changed our 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 licenses from Dr. Surinder Singh Saini, MD.

On April 15, 2014, we completed the solicitation of votes of stockholders. A majority of our shareholders voted to amend our Articles of Incorporation to change our name to Cerebain Biotech Corp. As a result of this action, we changed the name of our wholly-owned subsidiary to Cerebain Operating Inc. In addition, a majority of our shareholders voted to amend our Articles of Incorporation to effectuate a reverse split of our common stock at a ratio of 1-for-10 and approved the 2014 Cerebain Biotech Corp. Omnibus Stock Grant and Option Plan. All share and per share information was retroactively adjusted at that time to reflect the reverse split of our common stock.

Our only operations are conducted through our wholly-owned subsidiary, Cerebain Operating, Inc. The term “we” as used throughout this document refers to Cerebain Biotech Corp. and our wholly-owned subsidiary, Cerebain Operating, Inc

In accordance with our current business plan the testing, research and development of both a medical device solution as well as a synthetic drug solution are underway, and we have contracted with certain third party companies to research, develop, and test certain products that could be used to treat dementia utilizing Omentum. We have also contracted with various individuals to facilitate the introduction of the company to medical device testing organizations in overseas locations including Poland, China and Uzbekistan for the purpose of testing our medicinal treatments utilizing Omentum. Our management anticipates that we may form subsidiaries and joint ventures to develop different drugs based on the intellectual property. Although we have contracted with a firm to research, develop and test products that could be used to treat dementia utilizing Omentum, in order to fully execute on that agreement, as well as hire one or more firms to research, develop and test medicinal treatments utilizing Omentum, we will need to raise additional funds. There can be no assurance we will be successful in raising the necessary funds. There can also be no assurance that further research and development will validate and support the results of our preliminary research and studies, or that the necessary regulatory approvals will be obtained or that we will be able to develop commercially viable products on the basis of our technologies.

Description of Patent License Agreement

On June 10, 2010, our subsidiary, Cerebain Operating, Inc., entered into a Patent License Agreement under which it 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 issued Dr. Saini 825,000 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. 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.

In addition, the Patent License agreement provides for 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 the fourth (June 2014), fifth (June 2015), and sixth (June 2016) 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. We have recognized costs associated with the patent rights for $137,500 in accounts payable for the patent rights and are currently in arrears and in discussions to renegotiate the terms 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.

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.

Legal fees pertaining to the patent are recorded as general and administrative expenses when they are incurred. Legal fees charged to operations were approximately $600 and $200 for the three-month periods ended September 30, 2016 and 2015, respectively.

We recognized a patent royalty expense of approximately $25,000 for the three-month periods ended September 30, 2016 compared to $12,500 for the three-month periods ended September 30, 2015. The accrued payable of $175,000 pertaining to the patent royalty expense at September 30, 2016 is included in related party payables.

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 human brain function. 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:

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 controlled or reversed.

Statistics

According to the Alzheimer’s Association 2016 Alzheimer’s Disease Facts and Figures, an estimated 5.4 million Americans have Alzheimer's disease, including approximately 200,000 individuals younger than age 65 who have younger-onset Alzheimer's. By 2050, it is estimated that up to 16 million Americans will have the disease. Almost two-thirds, 3.3 million, of American seniors living with Alzheimer's are women. By 2025, it is estimated that 20 states will see a 35 percent or greater growth in the number of people with Alzheimer’s. Someone in the United States develops Alzheimer’s every 66 seconds. In 2050, it is predicted that someone in the United States will develop the disease every 33 seconds.

In addition, the Alzheimer’s Association stated Alzheimer’s disease is the 6^th leading cause of death in the United States and the 5^th leading cause of death for those aged 65 and older. In 2013, over 84,000 Americans officially died from Alzheimer’s; in 2016, an estimated 700,000 people will die with Alzheimer’s, meaning they will die after having developed the disease. Deaths from Alzheimer increased 71 percent from 2000 to 2013, while deaths from other major diseases (including heart disease, stroke, breast and prostate cancer, and HIVAIDS) decreased. Alzheimer’s is the only cause of death among the top 10 in America that cannot be prevented, cured, or even slowed.

According to the 2015 World Alzheimer Report, in 2015 about 46.8 million people had dementia worldwide. The report stated that this figure is likely to nearly double every 20 years, to nearly 74.7 million in 2030 and 131.5 million in 2050. For 2015, they estimate over 9.9 million new cases of dementia each year worldwide, implying one new case every 3.2 seconds. The regional distribution of new dementia cases is 4.9 million (49% of the total) in Asia, 2.5 million (25%) in Europe, 1.7 million (18%) in the Americas, and 0.8 million (8%) in Africa.

According to the Alzheimer’s Association 2016 Alzheimer’s Disease Facts and Figures, unpaid caregivers are primarily immediate family members, but they may be other relatives and friends. In 2015, 15.9 million family and friends provided an estimated 18.1 billion hours of unpaid care, a contribution to the nation valued at over $221.3 billion. Nearly half of care contributors cut back on their own expenses (including food, transportation and medical care) to pay for dementia-related care of a family member or friend. Care contributors are 28 percent more likely than other adults to eat less or go hungry because they cannot afford to pay for food. One in five care contributors cut back on their own doctor visits because of their care responsibilities. And, among caregivers, 74 percent report they are “somewhat” to “very” concerned about maintaining their own health since becoming a caregiver. On average care contributors lose over $15,000 in annual income as a result of reducing or quitting work to meet the demand of caregiving.

According to the 2015 World Alzheimer Report, the global cost of care for dementia will likely exceed $818 billion in 2015, or 1.09 percent of the world's gross domestic product (GDP). 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 dramatically as the affected population of dementia increases.

According to the Alzheimer’s Association 2016 Alzheimer’s Disease Facts and Figures, Alzheimer’s disease is the most expensive condition in the nation. In 2016, the direct costs to American society of caring for those with Alzheimer's will total an estimated $236 billion, with just under half of the costs borne by Medicare. Nearly one in every five Medicare dollars is spent on people with Alzheimer’s and other dementias. In 2050, it is estimated it will be one in every three dollars. The average per-person Medicare spending for those with Alzheimer's and other dementias is three times higher than for those without these conditions. The average per-person Medicaid spending for seniors with Alzheimer's and other dementias is 19 times higher than average per-person Medicaid spending for all other seniors. Unless something is done, in 2050, Alzheimer’s will cost over $1.1 trillion (in 2016 dollars). Costs to Medicare will increase over 365 percent to $589 billion.

Current Approaches to Treating Dementia

Currently, there is no cure for dementia. There are a number of prescription drugs that target those with Alzheimer’s and dementia, however those drugs primarily relieve some of the disease mechanisms 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 presently 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.

Agreement with Sonos

In an effort to develop a less invasive procedure in the treatment of dementia, 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”).

We completed the Initial Feasibility Study and, as a result of the findings, entered into an agreement with Sonos in September 2012 to build up to three medical device prototypes to be used for testing. In April 2014, we entered into an addendum to the agreement with Sonos, which included a commitment by us to pay Sonos up to One Million Dollars ($1,000,000) cash, excluding stock based compensation, for research and development costs. These costs will be recognized in research and development expense as costs are incurred. To date, Sonos has been issued 325,000 restricted shares of our stock, 20,000 warrants to purchase shares of our common stock and paid approximately $220,000, of which $65,000 has been incurred towards our monetary commitment.

To date, the results of the research suggest we have three options for implantable devices with a bias towards having them as non-invasive as possible. The options are comprised of two electro-stim types that have a multitude of variable test parameters that can be changed and modified externally as the testing facility conducts clinical trials on each patient. It is theorized that if a patient’s response to the Omentum stimulation is successful, the clinical facility should be able to perform various tests for the purpose of setting “markers” for the patient and then perform the standardized cognitive testing for Alzheimer’s patient with the intent of developing a testing matrix. It is our objective to test various methods and modalities with the aim of developing an enormous matrix of input to direct us to the best solution. Our goal is to be less invasive, as small as possible and as simple as possible to reach the broadest patient base. We intend to “Shape and Innovate History” as we visualize and create a solution for this debilitating disease.

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 smaller reporting biomedical 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 of financial condition and results of operations (“MD&A”) of Cerebain includes the following sections:

Results of Operations

Three Months Ended September 30, 2016 Compared to Three Months Ended September 30, 2015

Revenue

For the three-month periods ended September 30, 2016 and 2015, we did not generate any revenues.

Operating expenses

Operating expenses decreased by approximately $600, or 0.2%, to approximately $488,100 in the three-month periods ended September 30, 2016 from approximately $488,700 in the three-month periods ended September 30, 2015 primarily due to the following: increase in research and development cost; increase in compensation expense; increase in professional fees; and increase in travel and entertainment expenses, offset by decrease in marketing expense; decrease in consultant costs, including costs related to fair value of stock and warrants issued for services and amortization of compensation costs related to stock options; and decrease in patent royalty expense.

Operating expenses for the three-month periods ended September 30, 2016 were approximately comprised of marketing costs of $3,000, research and development costs of $70,000, patent royalty expense of $25,000, consulting services costs primarily paid through the issuance of our common stock of $212,000, compensation expense of $109,000, professional fees of $50,000, investor relations expense of $4,000, travel and entertainment costs of $10,000, and other operating expenses of $5,000.

Approximate operating expenses for the three months ended September 30, 2015 were comprised of marketing costs of $35,000, $257,000 in consulting services costs, patent royalty expense of $112,000, compensation expense of $68,000, professional fees of $4,000, travel costs of $7,000, and other operating expenses of $5,000.

Other income (expenses)

Other expense increased by approximately $3,635,000, or 5497.8.7%, to approximately $3,702,000 in the three-month periods ended September 30, 2016 from approximately $555,000 in the three-month periods ended September 30, 2015 primarily due to the decrease in accretion of recorded debt discounts related to notes payable and financing fee of $22,000 offset by the recognition of loss from extinguishment of debt of $3,656,000.

Net loss before income taxes

Net loss before income taxes for the three-month periods ended September 30, 2016 totaled approximately $4,200,000 primarily due to the following increase in research and development cost; increase in compensation expense; increase in professional fees; and increase in travel and entertainment expenses; recognition of loss from extinguishment of debt; offset by decrease in marketing expense; decrease in consultant costs, including costs related to fair value of stock and warrants issued for services and amortization of compensation costs related to stock options; and decrease in patent royalty expense; decrease in accretion of recorded debt discounts related to notes payable and financing fee, compared to $555,000 for the fiscal year ended September 30, 2015 primarily due to the following: marketing costs, consulting services costs, patent royalty expense, costs related to fair value of stock and warrants issued for services and amortization of compensation costs related to stock options, and professional fees.

Assets and Liabilities

Assets were approximately $414,000 as of September 30, 2016. Assets approximately consisted of cash of $1,600 and prepaid expense of $412,000. Liabilities were approximately $3,800,000 as of September 30, 2016. Liabilities approximately consisted of accounts payable of $769,000, related party payables of $294,000, short term related party notes payable of $114,000, current portion of convertible notes of $63,000 and convertible notes to stockholders, net of debt discount, of $2,600,000.

Stockholders’ Deficit

Stockholders’ deficit was approximately $3,400,000 as of September 30, 2016. Stockholder’s deficit consisted primarily of deficit accumulated of approximately $15,700,000 at September 30, 2016, offset by shares issued to founders and recorded as compensation in the amount of $13,900, shares issued for fundraising totaling $1,375,000, net of issuance costs, beneficial conversion feature associated with convertible note of $5,150,000, shares issued in conversion of liabilities of $752,000, shares associated with warrants, options and issuances for services of $4,980,000 and shares issued for patent rights totaling $6,600.

Liquidity and Capital Resources

General – Overall, we had a decrease in cash flows of approximately $18,600 in the three month-period ended September 30, 2016 resulting from cash used in operating activities of approximately $199,000, offset partially by cash provided by financing activities of approximately $180,000.

The following is a summary of our cash flows provided by (used in) operating and financing activities during the periods indicated:

Cash Flows from Operating Activities – For the three-month periods ended September 30, 2016, net cash used in operations was approximately $199,000 compared to net cash used in operations of approximately $75,000 for the three-month periods ended September 30, 2015. Net cash used in operations was primarily due to a net loss of approximately $4,200,000 for the three-month periods ended September 30, 2016, accretion of debt discount of approximately $8,000, loss from extinguishment of debt of approximately $3,700,000, stock based compensation of approximately $109,000, amortization of prepaid consulting compensation of approximately $123,000, and the changes in operating assets and liabilities of approximately $96,000.

Cash Flows from Financing Activities – Net cash flows provided by financing activities in the three-month periods ended September 30, 2016 was approximately $180,000, compared to net cash provided of approximately $75,000 in the same period in 2015. The cash provided by financing activities was due to proceeds from convertible notes payable to stockholders of approximately $160,000 and proceeds from exercise of warrants of approximately $20,000.

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, 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 previous 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.

Capital Expenditures

Other Capital Expenditures

If we have the funds available, we expect to purchase approximately $30,000 of equipment in connection with the expansion of the business.

Fiscal year end

Cerebain and Cerebain Biotech each has a June 30 fiscal year end.

Going Concern

The accompanying unaudited condensed consolidated financial statements have been prepared assuming we 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. We had an accumulated deficit of approximately $15,700,000 and $11,500,000 at September 30, 2016 and June 30, 2016, respectively, and had a net loss of approximately $4,200,000 and $555,000 for the three-month periods ended September 30, 2016 and 2015, respectively, and net cash used in operating activities of approximately $200,000 and $75,000 for the three-month periods ended September 30, 2016 and 2015, respectively, with no revenue earned since inception. These matters raise substantial doubt about our ability to continue as a going concern.

While we are attempting to commence operations and attempting to generate revenues, our cash position will not be significant enough to support our 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 us to continue as a going concern. While we believe 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. Our ability to continue as a going concern is dependent upon our ability to further implement our business plan, generate revenues, and successfully borrow money or sell our securities for cash.

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 Commission has defined a company’s critical accounting policies as the ones that are most important to the portrayal of our financial condition and results of operations and which require us 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 us.

Use of Estimates

The preparation of financial statements in conformity with generally accepted accounting principles in the United States requires us 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. We make 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.

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

We account for employee and non-employee stock awards under ASC 718, Compensation – Stock Compensation, whereby equity instruments issued to employees for services are recorded based on the fair value of the instrument issued and those issued to nonemployees are recorded based on the fair value of the consideration received or the fair value of the equity instrument, whichever is more reliably measurable.

Accounting for Derivative Financial Instruments

We evaluate 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 815-40, Derivative Instruments and Hedging: Contracts in Entity’s Own Equity (“ASC 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 815-40 are reclassified to a liability account at the fair value of the instrument on the reclassification date.

The common stock purchase warrants were not issued with the intent of effectively hedging any future cash flow, fair value of any asset, liability or any net investment in a foreign operation. The warrants do not qualify for hedge accounting, and as such, all future changes in the fair value of these warrants are recognized currently in earnings until such time as the warrants are exercised, expire or the related rights have been waived. These common stock purchase warrants do not trade in an active securities market. We estimate the fair value of these warrants using the Black-Scholes Option Pricing Model.

If a conversion feature of conventional convertible debt is not accounted for as a derivative instrument and provides for a rate of conversion that is below market value, this feature is characterized as a beneficial conversion feature (“BCF”). A BCF is recorded by the Company as a debt discount. The convertible debt is recorded net of the discount related to the BCF. The Company amortizes the discount to interest expense over the life of the debt using the straight-line method, which approximates the effective interest rate method.

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 our 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

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.

Inflation

Management believes that inflation has not had a material effect on our 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 (our Principal Executive Officer) and Chief Financial Officer (our Principal Financial Officer), evaluated the effectiveness of the design and operation of our disclosure controls and procedures as of September 30, 2016. Based on that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that as of September 30, 2016, 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 September 30, 2016. In making this assessment, management used the criteria set forth by the Committee of Sponsoring Organizations of the Treadway Commission in the 2013 Internal Control – Integrated Framework (“COSO”). Based on that assessment, management believes that, as of September 30, 2016, our internal control over financial reporting was ineffective, based on the COSO criteria, due to the following material weaknesses listed below.

Despite the material weaknesses reported above, our management believes that our financial statements included in this report fairly present in all material respects our financial condition, results of operations and cash flows for the periods presented and that this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report.

Changes in Internal Control over Financial Reporting

There was no change in our internal control over financial reporting during the period ended September 30, 2016, 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

On July 21, 2016, we were sued in the United States District Court for the Eastern District of Pennsylvania (Miriam Weber Miller v. Cerebain Biotech Corp. and Eric Clemons, Civil Action No. 16-3943) by Miriam Weber Miller. Per the Complaint, the Plaintiff alleges: (i) she was hired by us to perform public relations, investor relations, corporate growth strategies, and was to be an advisor to our Chief Executive Officer, (ii) she performed services, and (iii) that she was not fully compensated for those services. The Complaint claims causes of action for breach of contract, violation of the Pennsylvania wage payment and collection law, and unjust enrichment, and seeks damages of approximately $400,000. We completely reject the Plaintiff’s allegations in the Complaint and plan to vigorously defend against this lawsuit. We were served with the Complaint on August 2, 2016. On October 3, 2016, we filed a Motion to Dismiss the Complaint on the basis that the Complaint fails to state a claim upon which relief can be granted. The Plaintiff filed a Response to our Motion to Dismiss and on October 19, 2016, we filed a Reply to the Plaintiff’s Response. Currently, we are awaiting the Court’s decision on our Motion to Dismiss. All dates related to the lawsuit, if any, will not be determined until the Court issues a decision on our Motion to Dismiss.

While incapable of estimation, in the opinion of the management, the individual regulatory and legal matters in which it might involve in the future are not expected to have a material adverse effect on the Company’s financial position, results of operations, or cash flows. The Company has accrued $150,000 in Accounts Payable for consulting compensation, but no accrual has been made for additional legal contingencies in the consolidated financial statements as of September 30, 2016 as it is too early in the process to determine the outcome or potential loss.

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 27, 2016.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

For the three-month periods ended September 30, 2016, we entered into various stock purchase agreements with a third party between July and September of 2016, under which we issued 40,000 shares of our common stock, restricted in accordance with Rule 144, in exchange for $20,000. The stock purchase agreements include piggyback registration rights. The issuances were exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investors were sophisticated and familiar with our operations at the time of the issuance of the shares.

On September 29, 2016, we issued Eric Clemons and Wesley Tate, our executive officers, options to acquire up to a total of 210,000 shares of our common stock under our 2014 Omnibus Stock Grant and Option Plan at an exercise price of $0.75 per share subject to a vesting schedule. The issuances were exempt from registration pursuant to Section 4(a)(2) of the Securities Act of 1933, and the investors were sophisticated and familiar with our operations at the time of the issuance of the shares.

In August 2016, we entered into an unsecured amended and consolidated convertible promissory note with a non-affiliate stockholder for a principal amount of approximately $2,285,000. In exchange for the issuance of the promissory note, the stockholder agreed to extinguish a $2,135,112 convertible promissory note payable issued in April 2016 and paid us cash of $150,000. The amended and consolidated convertible note payable matures in August 2018, accrues interest at 5% per annum, and is convertible into shares of our common stock at a conversion rate of $0.40 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 of the promissory note was exempt from registration pursuant to Section 4(a)(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 promissory note.

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

There have been no events which are required to be reported under this Item.

ITEM 6. EXHIBITS

_____________

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.