Propanc Biopharma, Inc. 10-K

Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations. You should read the following discussion and analysis of our business and results of operations in conjunction with the information set forth in our consolidated financial statements and notes thereto appearing under Part II, Item 8, “Financial Statements and Supplementary Data” of this Annual Report. Our discussion includes forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Actual results and the timing of events could differ materially from those anticipated in these forward-looking statements as a result of a number of factors. See “Forward-Looking Statements” on page 3 of this Annual Report. As used herein, references to the “Company,” “Propanc,” “we,” “our,” and “us” refer to Propanc Biopharma, Inc. and its consolidated subsidiary, unless otherwise indicated. U.S. Dollars are denoted herein by “USD,” “$” and “dollars”. COVID-19 At Propanc, our highest priority remains the safety, health and well-being of our employees, their families and our communities. The COVID-19 pandemic is a highly fluid situation and it is not currently possible for us to reasonably estimate the impact it may have on our financial and operating results. We will continue to evaluate the impact of the COVID-19 pandemic on our business as we learn more and the impact of COVID-19 on our industry becomes clearer. We are complying health guidelines regarding safety procedures, including, but are not limited to, social distancing, remote working, and teleconferencing. The extent of the future impact of the COVID-19 pandemic on our business is uncertain and difficult to predict. Adverse global economic and market conditions as a result of COVID-19 could also adversely affect our business. If the pandemic continues to cause significant negative impacts to economic conditions, our results of operations, financial condition and liquidity could be adversely impacted. Overview We were incorporated in the state of Delaware as Propanc Health Group Corporation on November 23, 2010. In January 2011, to reorganize our Company, we acquired all of the outstanding shares of Propanc PTY LTD, an Australian corporation, on a one-for-one basis and Propanc PTY LTD became our wholly-owned subsidiary. Effective April 20, 2017, we changed our name to “Propanc Biopharma, Inc.” to better reflect our current stage of operations and development. We are a development-stage healthcare company that is currently focused on developing new cancer treatments for patients suffering from pancreatic, ovarian and colorectal cancer. Utilizing our scientific and oncology consultants, we have developed a rational, composite formulation of anti-cancer compounds, which together exert a number of effects designed to control or prevent tumors from recurring and spreading through the body. Our lead product candidate, PRP, is a variation upon our novel formulation and involves pro-enzymes, the inactive precursors of enzymes. Recent Developments On October 1, 2020, the Company entered into a two-year collaboration agreement with the University of Jaén (the “University”) to provide certain research services to the Company. In consideration of such services, the Company agreed to pay the University approximately 30,000 Euros ($35,145 USD) which shall be paid in four installment payments of 5,000 Euros in November 2020, 5,000 Euros ($5,858) in March 2021, 10,000 Euros ($11,715) in December 2021 and 10,000 Euros ($11,715) in September 2022. Additionally, the University shall hire and train a doctoral student for this project and as such the Company shall pay the University 25,837 Euros ($30,268 USD). In exchange for full ownership of the intellectual property, the Company agreed to pay royalties of 2% of net revenues to the University. On November 17, 2020, the Company effected a one-for-one thousand (1:1,000) reverse stock split of the Company’s issued and outstanding shares of common stock (the “Reverse Stock Split”). Proportional adjustments for the Reverse Stock Split were made to the Company’s outstanding stock options, warrants and equity incentive plans. All share and per-share data and amounts have been retroactively adjusted as of the earliest period presented in the consolidated financial statements and in this annual report to reflect the Reverse Stock Split. On May 11, 2021, the Company’s scientific researchers with the Universities of Jaén and Granada, published data in a peer reviewed journal, Expert Opinion on Biological Therapy , confirming the anti-tumor potential of a mixture of two pancreatic proenzymes trypsinogen and chymotrypsinogen. Treatment with proenzymes sensitizes cancer stem cells which may allow standard treatment approaches like chemotherapy and radiotherapy to be more effective. Between August 6, 2020 to June 29, 2021, advancements were made with the Company’s patent portfolio including allowed claims describing a pharmaceutical composition for treating cancer in Brazil (covering the Company’s lead patent application), a first granted patent describing a method to treat cancer stem cells in Australia, and granted patents in Australia and Indonesia, with allowed claims in Singapore, citing higher doses of a pharmaceutical composition. The advancements represent three of four patent families covering the Company’s lead product, PRP. 20 Results of Operations The following discussion should be read in conjunction with the Company’s consolidated financial statements and notes thereto included elsewhere in this Report. The results discussed below are of the Company and its wholly-owned Australian subsidiary, Propanc PTY LTD. Fiscal Year Ended June 30, 2021, as compared to the Fiscal Year Ended June 30, 2020 Revenue For the fiscal years 2021 and 2020 we generated no revenue because we are currently undertaking research and development activities for market approval and no sales were generated in this period. Administration Expense Administration expense decreased to $1,553,075 for the year ended June 30, 2021 as compared to $3,281,464 for the year ended June 30, 2020. This decrease of approximately $1,728,000 is primarily attributable to a decrease of approximately $1,190,000 in stock-based expenses for services, decrease of approximately $128,000 of indirect capital raising costs, decrease in general consulting, legal, and investor relation fees of approximately $265,000, decrease in accounting fees of approximately $17,000, decrease in insurance expense of approximately $75,000, decrease of approximately $124,000 in marketing and market research expense, decrease in travel expenses of approximately $28,000, decrease of approximately $19,000 of other general and administrative expenses and offset by increase of approximately $118,000 in employee remuneration expense. Occupancy Expense Occupancy expense decreased by approximately $4,700 to $28,112 for the year ended June 30, 2021. The decrease primarily relates to exchange rate movements over the period when compared to the same period in 2020. Research and Development Expenses Research and development expenses were $230,956 for the year ended June 30, 2021, as compared to $179,987 for the year ended June 30, 2020. The increase in research and development expenses is primarily attributable to the two-year collaboration agreement with University Jaén which was executed in October 2020 to provide certain research services to the Company. Interest Expense/Income Interest expense decreased to $449,457 for the year ended June 30, 2021, as compared to $1,748,381 for the year ended June 30, 2020. Interest expense is primarily comprised of approximately $337,000 of debt discount amortization and accretion of put premium for the year ended June 30, 2021, and interest expense from conversion fees, prepayment penalty fees and accrual of interest expense for a total of approximately $113,000 for the year ended June 30, 2021. This decrease of $1,298,924 is primarily attributable to a decrease in the issuance of convertible notes and was further reduced due to the conversion and repayment of convertible notes during the year ended June 30, 2021 which resulted to a decrease in accretion of put premium of approximately $636,000 during the year ended June 30, 2021, and the decrease in amortization of debt discount of approximately $598,000 during the year ended June 30, 2021. Additionally, interest expense from prepayment penalty fees decreased by approximately $99,000 offset by increase in conversion fees and accrual of interest expense for a total of $34,000 during the year ended June 30, 2021. Change in Fair Value of Derivative Liabilities Change in fair value of derivative liabilities changed by $393,479, to a loss of $8,186 for the year ended June 30, 2021, as compared to a gain of $385,293 for the year ended June 30, 2020. This change is primarily attributable to a decrease in the principal amount of convertible notes with bifurcated embedded conversion option derivatives during the year ended June 30, 2021. Gain from Settlement of Debt, net During the year ended June 30, 2021, the Company recorded gain from settlement of debt, net of $49,319 relating to two transactions. On March 22, 2021, the Company entered into a settlement agreement with our former counsel, Foley Shechter, whereby both parties agreed to settle all claims for professional fees owed for a total of $51,057. The Company paid the settlement amount of $51,057 on March 22, 2021. Prior to the settlement agreement, the Company recorded total accounts payable and accrued expenses $143,614. Accordingly, the Company recognized gain from settlement of debt of $92,557 during the year ended June 30, 2021. Additionally, on March 15, 2021, the Company entered into a Settlement and Mutual Release Agreement with Regal whereby both parties agreed to settle all claims and liabilities under the August 10, 2017 Convertible note for a total of $100,000. All other terms of the August 10, 2017 Convertible Note shall remain in full force and effect. Both parties agree that all future penalties under this note are waived unless the Company fails to authorize to distribute the requested shares upon conversion. The Company has the right to pay off the balance of any remaining amounts dues under this note in cash at any time more than 60 days after March 15, 2021. Prior to the Settlement Agreement, the Company recorded total liabilities $56,762 consisting of remaining principal amount of $8,500, accrued interest of $23,262 and accrued expenses of $25,000. Accordingly, the Company recognized loss from settlement of debt of $43,238 during the year ended June 30, 2021. 21 Gain (loss) on Extinguishment of Debt, net During the year ended June 30, 2020, notes with principal amounts totaling $254,500 and accrued interest of $15,408 contained bifurcated embedded conversion option derivatives. Accordingly, the fair market value of the shares issued was $565,746 resulting in a loss on extinguishment at the time of conversion of $295,838 and $362,961 of derivative fair value was recorded as a gain on extinguishment at the time of conversion. During the year ended June 30, 2021, notes with principal amounts totaling $95,000 and accrued interest of $3,000 contained bifurcated embedded conversion option derivatives. Accordingly, the fair market value of the shares issued was $178,368 resulting in a loss on extinguishment at the time of conversion of $80,368 and $130,975 of derivative fair value was recorded as a gain on extinguishment at the time of conversion, resulting in a net gain of $50,607. Foreign Currency Transaction Gain (Loss) Foreign currency transaction changed to a gain of $30,497 for the year ended June 30, 2021 as compared with a loss of $143,808 for the year ended June 30, 2020. The foreign currency transaction decreased to a gain is partially attributable to the increase in exchange rates during the year ended June 30 2021, as compared to the year ended June 30, 2020. Benefit (provision) for taxes During the year ended June 30, 2021 and 2020, the Company applied for and received from the Australian Taxation Office a research and development tax credit in the amount of $113,415 and $134,728, respectively. Net loss Net loss decreased to $2,025,947 for the year ended June 30, 2021 as compared to a net loss of $4,740,723 for the year ended June 30, 2020. The change relates to the factors discussed above. Deemed dividend The Company recognized the value of the effect of a down round feature related to our Series A and C warrants when triggered. Upon the occurrence of the triggering event that resulted in a reduction of the strike price, the Company measured the value of the effect of the feature as the difference between the fair value of the warrants without the down round feature or before the strike price reduction and the fair value of the warrants with a strike price corresponding to the reduced strike price upon the down round feature being triggered. Accordingly, the Company recognized deemed dividend of $391,749 and a corresponding reduction of income available to common stockholders upon the alternate cashless exercise of these warrants. Net loss available to common stockholders Net loss available to common stockholders decreased to $2,417,696 for the year ended June 30, 2021 as compared to a net loss of $4,740,723 for the year ended June 30, 2020. The change relates to the factors discussed above. Liquidity and Capital Resources Current Financial Condition As of June 30, 2021, we had total assets of $13,101, comprised primarily of cash of $2,255, GST tax receivable of $4,341, property and equipment, net, of $4,255 and security deposit of $2,250. As compared to June 30, 2020, we had total assets of $98,518, comprised primarily of cash of $67,007, GST tax receivable of $2,015, property and equipment, net, of $5,747 and operating lease right of use asset, net, $21,682. We had current liabilities of $3,080,674, primarily comprised of net convertible debt of $624,583, accounts payable and accrued expenses of $1,894,486, employee benefit liability of $418,538, and embedded conversion option liabilities of $54,220 as of June 30, 2021. As compared to June 30, 2020, we had current liabilities of $3,739,943, primarily comprised of net convertible debt of $1,557,734, accounts payable and accrued expenses of $1,544,387, employee benefit liability of $354,109, and embedded conversion option liabilities of $354,109. We have funded our operations primarily through the issuance of equity and/or convertible securities for cash. The cash was used primarily for payments for research and development, administration expenses, occupancy expenses, professional fees, consultants and travel. During the year ended June 30, 2021 we received proceeds from exercise of warrants of $776,044 and proceeds from issuance of convertible notes of $325,000. We have substantial capital resource requirements and have incurred significant losses since inception. As of June 30, 2021, we had $2,255 in cash. We depend upon debt and/or equity financing to fund our ongoing operations and to execute our current business plan. Such capital requirements are in excess of what we have in available cash and for which we currently have commitments. Therefore, we presently do not have enough available cash to meet our obligations over the next 12 months. If continued funding and capital resources are unavailable at reasonable terms, we may curtail our plan of operations. We will be required to obtain alternative or additional financing from financial institutions, investors or otherwise, in order to maintain and expand our existing operations. The failure by us to obtain such financing would have a material adverse effect upon our business, financial condition and results of operations, and adversely affecting our ability to complete ongoing activities in connection with our research and development programs. Sources and Uses of Cash For the years ended June 30, 2021 2020 Net cash used in operating activities $ (1,145,264 ) $ (1,849,589 ) Net cash provided by financing activities $ 1,058,044 $ 1,890,240 Effect of exchange rate changes on cash $ 22,468 $ 23,962 22 Net Cash Flow from Operating Activities Net cash used in operating activities was $1,145,264 for the year ended June 30, 2021, due to our net loss of $2,025,947, offset primarily by non-cash charges of amortization of debt discount of $136,527, stock-based compensation of $208,444, non-cash interest expense of $16,500, accretion of put premium of $200,410, change in fair value of derivatives of $8,186 addback foreign currency transaction gain of $30,497, gain from settlement of debt of $48,390 and $50,607 gain on extinguishment of debt. Net changes in operating assets and liabilities totaled $92,277, which is primarily attributable to increase in accounts payable of $177,382, increase in accrued expenses and other payables of $152,861, employee benefit liability of $33,134, and accrued interest of $80,582. Net cash used in operating activities was $1,849,589 for the year ended June 30, 2020, due to our net loss of $4,740,723 offset primarily by non-cash charges of amortization of debt discount of $734,130, stock-based compensation of $1,398,868, accretion of put premium of $836,724, non-cash interest expense of $15,000, foreign currency transaction loss of $143,808 addback gain on extinguishment of debt of $67,123 and $385,293 of change in fair value of derivatives. Net changes in operating assets and liabilities totaled $212,547, which is primarily attributable to decrease in prepaid expenses and other assets of $83,157, increase in employee benefit liability of $35,724, and accrued interest of $156,417 and offset by decrease in accounts payable of $29,737 and accrued expenses and other payables of $9,740. Net Cash Flow from Financing Activities Cash flows provided by financing activities for the year ended June 30, 2021 were $1,058,044 as compared to $1,890,240 for the year ended June 30, 2020. During the year ended June 30, 2021 we received proceeds from the exercise of warrants of $776,044 and proceeds from issuance of convertible notes of $325,000 offset by repayments of convertible notes of $43,000. During the year ended June 30, 2020, we received proceeds from the sale of convertible promissory notes of $1,465,250 and sale of common stock of $450,000, net of $25,010 in issue costs. Effect of Exchange Rate The effect of the exchange rate on cash resulted in a $22,468 positive adjustment to cash flows in the year ended June 30, 2021 as compared to an adjustment of $23,962 to cash flows in the year ended June 30, 2020. The reason for the fluctuation is due to the application of currency translation rates throughout the cash flow statement, the volume of transactions within each period and the daily fluctuation in exchange rates. Critical Accounting Estimates Below is a discussion of our more subjective accounting estimation processes for purposes of explaining (i) the methodology used in calculating the estimates, (ii) the inherent uncertainties pertaining to such estimates, and (iii) the possible effects of a significant variance in actual experience, from that of the estimate, on our financial condition. Estimates involve numerous assumptions that, if incorrect, could create a material adverse impact on the Company’s results of operations and financial condition. Reference is frequently made herein to the Financial Accounting Standards Board (the “FASB”) Accounting Standards Codification (“ASC”). This is the source of authoritative US GAAP recognized by the FASB to be applied to non-governmental entities. Each ASC reference in this filing is presented with a three-digit number, which represents its Topic. As necessary for explanation and as applicable, an ASC topic may be followed with a two-digit subtopic, a two-digit section or a two-or-three-digit paragraph. Foreign Currency Translation and Comprehensive Income (Loss) : The Company’s wholly owned subsidiary’s functional currency is the AUD. For financial reporting purposes, the Australian Dollar (“AUD”) has been translated into USD as the Company’s reporting currency. Assets and liabilities are translated at the exchange rate in effect at the balance sheet date. Revenues and expenses are translated at the average rate of exchange prevailing during the reporting period. Equity transactions are translated at each historical transaction date spot rate. Translation adjustments arising from the use of different exchange rates from period to period are included as a component of stockholders’ equity (deficit) as “accumulated other comprehensive income (loss).” Gains and losses resulting from foreign currency transactions are included in the statement of operations and comprehensive loss as other income (expense). Effective fiscal year 2021, the parent company determined that intercompany loans will not be repaid in the foreseeable future and thus, per ASC 830-20-35-3, gains and losses from measuring the intercompany balances are recorded within cumulative translation adjustment, a component of other comprehensive income. Accounting for Income Taxes: We are governed by Australian and United States income tax laws, which are administered by the Australian Taxation Office and the United States Internal Revenue Service, respectively. We follow ASC 740, “ Accounting for Income Taxes,” which requires an asset and liability approach to financial accounting and reporting for income taxes. Deferred income tax assets and liabilities are computed annually for temporary differences between the financial statements and tax bases of assets and liabilities that will result in taxable or deductible amounts in the future based on enacted tax laws and rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary, to reduce deferred tax assets to the amount expected to be realized. Income tax expense is the tax payable or refundable for the period plus or minus the change during the period in deferred tax assets and liabilities. The Company adopted provisions of ASC 740, Sections 25 through 60, “ Accounting for Uncertainty in Income Taxes .” These sections provide detailed guidance for the financial statement recognition, measurement and disclosure of uncertain tax positions recognized in the financial statements. Tax positions must meet a “more-likely-than-not” recognition threshold at the effective date to be recognized upon the adoption of ASC 740 and in subsequent periods. 23 Accounting for Stock Based Compensation : We record stock-based compensation in accordance with ASC 718, “ Stock Compensation ” and Staff Accounting Bulletin No. 107 issued by the SEC in March 2005 regarding its interpretation of ASC 718. ASC 718 requires the fair value of all stock-based employee compensation awarded to employees to be recorded as an expense over the related requisite service period. The statement also requires the recognition of compensation expense for the fair value of any unvested stock option awards outstanding at the date of adoption. We value any employee or non-employee stock-based compensation at fair value using the Black-Scholes Option Pricing Model. We account for non-employee share-based awards in accordance with the measurement and recognition criteria of ASC 718. Derivative Instruments: ASC 815, “ Derivatives and Hedging, ” establishes accounting and reporting standards for derivative instruments and for hedging activities by requiring that all derivatives be recognized in the balance sheet and measured at fair value. Gains or losses resulting from changes in the fair value of derivatives are recognized in earnings. On the date of conversion, or payoff, of debt, we record the fair value of the conversion shares, remove the fair value of the related derivative liability, remove any discounts and record a net gain or loss on debt extinguishment. Convertible Notes with Variable Conversion Options : We have entered into convertible notes, some of which contain variable conversion options, whereby the outstanding principal and accrued interest may be converted, by the holder, into common shares at or around a fixed discount to the price of the common stock at the time of conversion. We treat these convertible notes as stock settled debt under ASC 480 and measure the fair value of the notes at the time of issuance, which is the result of the share price discount at the time of conversion and record the put premium as accretion to interest expense. Research and Development Tax Credits : We may apply for Research and Development tax concessions with the Australian Taxation Office on an annual basis. Although the amount is possible to estimate at year end, the Australian Taxation Office may reject or materially alter the claim amount. Accordingly, we do not recognize the benefit of the claim amount until cash receipt since collectability is not certain until such time. The tax concession is a refundable credit. If we have net income then we can receive the credit which reduces its income tax liability. If we have net losses, then we may still receive a cash payment for the credit, however, our net operating loss carry forwards are reduced by the gross equivalent loss that would produce the credit amount when the income tax rate is applied to that gross amount. The concession is recognized as an income tax benefit, in operations, upon receipt. Leases: In February 2016, the Financial Accounting Standards Board (“FASB”) issued ASU 2016-02, Leases (Topic 842). The updated guidance requires lessees to recognize lease assets and lease liabilities for most operating leases. In addition, the updated guidance requires that lessors separate lease and non-lease components in a contract in accordance with the new revenue guidance in ASC 606. This guidance is effective for interim and annual reporting periods beginning after December 15, 2018. The Company adopted this guidance effective July 1, 2019. On July 1, 2019, the Company adopted ASU No. 2016-02, applying the package of practical expedients to leases that commenced before the effective date whereby the Company elected to not reassess the following: (i) whether any expired or existing contracts contain leases and; (ii) initial direct costs for any existing leases. For contracts entered into on or after the effective date, at the inception of a contract the Company assessed whether the contract is, or contains, a lease. The Company’s assessment is based on: (1) whether the contract involves the use of a distinct identified asset, (2) whether we obtain the right to substantially all the economic benefit from the use of the asset throughout the period, and (3) whether it has the right to direct the use of the asset. The Company will allocate the consideration in the contract to each lease component based on its relative stand-alone price to determine the lease payments. Operating lease ROU assets represents the right to use the leased asset for the lease term and operating lease liabilities are recognized based on the present value of future minimum lease payments over the lease term at commencement date. As most leases do not provide an implicit rate, the Company use an incremental borrowing rate based on the information available at the adoption date in determining the present value of future payments. Lease expense for minimum lease payments is amortized on a straight-line basis over the lease term and is included in general and administrative expenses in the consolidated statements of operations. Recent Accounting Pronouncements Please see section captioned “Recent Accounting Pronouncements” in Note 1 to our consolidated financial statements included in this Annual Report for a discussion of recently issued and adopted accounting pronouncements. Going Concern Qualification The accompanying consolidated financial statements have been prepared in conformity with US GAAP, which contemplate continuation of the Company as a going concern. For the fiscal year ended June 30, 2021, the Company had no revenues, had a net loss of $2,025,947 and had net cash used in operations of $1,145,264. Additionally, as of June 30, 2021, the Company had a working capital deficit, stockholders’ deficit and accumulated deficit of $3,074,078, $3,067,573, and $58,199,466, respectively. 24 Our independent registered public accounting firm has included a “Going Concern Qualification” in their audit report for each of the fiscal years ended June 30, 2021 and 2020. In addition, we have negative working capital and convertible debt that is past maturity that we are currently negotiating with lenders in order to amend the maturity dates. The foregoing raises substantial doubt about our ability to continue as a going concern for a period of 12 months from the issue date of this report. Our ability to continue as a going concern is dependent on our ability to execute our strategy and on our ability to raise additional funds and/or to consummate a public offering. Management is currently seeking additional funds, primarily through the issuance of equity and/or debt securities for cash to operate our business. No assurance can be given that any future financing will be available or, if available, that it will be on terms that are satisfactory to us. Even if we are able to obtain additional financing, it may contain undue restrictions on our operations, in the case of debt financing or cause substantial dilution for our stockholders, in case of equity and/or convertible debt financing. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty. The “Going Concern Qualification” might make it substantially more difficult to raise capital. Off-Balance Sheet Arrangements We do not have any off-balance sheet arrangements that have or are reasonably likely to have a current or future effect on our financial condition, changes in financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources. Item 7A. Quantitative and Qualitative Disclosures about Market Risk. Not applicable to smaller reporting companies.