Q BIOMED INC.
Condensed Statements of Operations
(Unaudited)
|
|
For the three months ended
|
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
|
|
|
|
|
|
|
Operating expenses:
|
|
|
|
|
|
|
General and administrative expenses
|
|
$
|
1,781,135
|
|
|
$
|
8,184
|
|
Research and development expenses
|
|
|
150,000
|
|
|
|
-
|
|
Total operating expenses
|
|
|
1,931,135
|
|
|
|
8,184
|
|
|
|
|
|
|
|
|
|
|
Other (income) expense:
|
|
|
|
|
|
|
|
|
Interest expense
|
|
|
86,843
|
|
|
|
-
|
|
Loss on conversion of debt
|
|
|
60,178
|
|
|
|
-
|
|
Loss on issunce of convertible debt
|
|
|
364,000
|
|
|
|
|
|
Change in fair value of embedded conversion option
|
|
|
(128,000
|
)
|
|
|
-
|
|
Total other expenses
|
|
|
383,021
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,314,156
|
)
|
|
$
|
(8,184
|
)
|
|
|
|
|
|
|
|
|
|
Net loss per share - basic and diluted
|
|
$
|
(0.27
|
)
|
|
$
|
(0.00
|
)
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding, basic and diluted
|
|
|
8,665,290
|
|
|
|
8,125,000
|
|
The accompanying notes are an integral part of these condensed financial statements.
Q BIOMED INC.
Condensed Statements of Cash Flows
(Unaudited)
|
|
For the three months ended
|
|
|
|
February 29, 2016
|
|
|
February 28, 2015
|
|
|
|
|
|
|
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,314,156
|
)
|
|
$
|
(8,184
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Issuance of common stock and warrants for services
|
|
|
836,488
|
|
|
|
-
|
|
Issuance of warrants for services to related party
|
|
|
765,000
|
|
|
|
-
|
|
Change in fair value of embedded conversion option
|
|
|
(128,000
|
)
|
|
|
-
|
|
Accretion of debt discount
|
|
|
75,084
|
|
|
|
-
|
|
Loss on conversion of debt
|
|
|
60,178
|
|
|
|
-
|
|
Loss on issuance of convertible debt
|
|
|
364,000
|
|
|
|
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
|
(15,827
|
)
|
|
|
(1,100
|
)
|
Accrued interest payable
|
|
|
11,758
|
|
|
|
-
|
|
Net cash used in operating activities
|
|
|
(345,475
|
)
|
|
|
(9,284
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds fron issuance of convertible notes
|
|
|
455,000
|
|
|
|
-
|
|
Net cash provided by financing activities
|
|
|
455,000
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents
|
|
|
109,525
|
|
|
|
(9,284
|
)
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents at beginning of period
|
|
|
131,408
|
|
|
|
12,649
|
|
Cash and cash equivalents at end of period
|
|
$
|
240,933
|
|
|
$
|
3,365
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Issuance of common stock upon conversion of convertible notes payable
|
|
$
|
121,193
|
|
|
$
|
-
|
|
Issuance of warrants to settle accounts payable to related party
|
|
$
|
30,000
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The accompanying notes are an integral part of these condensed financial statements.
Note 1 - Organization of the Company and Description of the Business
Q BioMed Inc. (“Q BioMed” or “the Company”) (formerly ISMO Tech Solutions, Inc.), incorporated in the State of Nevada on November 22, 2013, is a biomedical acceleration and development company focused on licensing, acquiring and providing strategic resources to life sciences and healthcare companies. Q BioMed intends to mitigate risk by acquiring multiple assets over time and across a broad spectrum of healthcare related products, companies and sectors. These assets will be developed to provide returns via organic growth, out-licensing, sale or spinoff new public companies.
Note 2 - Basis of Presentation
On August 5, 2015, the Company recorded a stock split effectuated in the form a stock dividend. The stock dividend was paid at a rate of 1.5 “additional” shares for every one issued and outstanding share held. All common share amounts and references to share and per share amounts in the condensed financial statements and accompanying notes have been retroactively restated to reflect the stock dividend as a stock split.
The accompanying interim period unaudited condensed financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission ("SEC") regarding interim financial reporting. The condensed balance sheet as of February 29, 2016, the condensed statements of operations for the three months ended February 29, 2016 and February 28, 2015, and the condensed statements of cash flows for the three months ended February 29, 2016 and February 28, 2015, are unaudited, but include all adjustments, consisting only of normal recurring adjustments, which the Company considers necessary for a fair presentation of its financial position, operating results and cash flows for the periods presented. The condensed balance sheet at November 30, 2015 has been derived from audited financial statements included in the Company's Form 10-K, most recently filed with the SEC on March 11, 2016 (as amended on March 15, 2016 solely to include interactive data files, the “Form 10-K”). The results for the three months ended February 29, 2016 are not necessarily indicative of the results expected for the full fiscal year or any other period.
The accompanying interim period unaudited condensed financial statements and related financial information included in this Quarterly Report on Form 10-Q should be read in conjunction with the audited financial statements and notes thereto included in the Company’s Form 10-K.
The Company currently operates in one business segment focusing on licensing, acquiring and providing strategic resources to life sciences and healthcare companies. The Company is not organized by market and is managed and operated as one business. A single management team reports to the chief operating decision maker, the Chief Executive Officer, who comprehensively manages the entire business. The Company does not currently operate any separate lines of business or separate business entities.
Going Concern
The Company’s condensed financial statements are prepared using U.S GAAP applicable to a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business. The Company has not yet established an ongoing source of revenues sufficient to cover its operating costs and allow it to continue as a going concern. The Company had an accumulated deficit of approximately $3.4 million as of February 29, 2016. The ability of the Company to continue as a going concern depends on the Company obtaining adequate capital to fund operating losses until it becomes profitable. If the Company is unable to obtain adequate capital, it could be forced to cease operations. These matters, among others, raise substantial doubt about the Company’s ability to continue as a going concern.
To continue as a going concern, the Company will need, among other things, additional capital resources. The Company is contemplating conducting an offering of its debt or equity securities to obtain additional operating capital. The Company depends upon its ability, and will continue to attempt, to secure equity and/or debt financing. The Company might not be successful, and without sufficient financing it would be unlikely for the Company to continue as a going concern. The accompanying financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.
Note 3 – Summary of Significant Accounting Policies
The Company’s significant accounting policies are disclosed in the audited financial statements for the year ended November 30, 2015 included in the Company’s Form 10-K. Since the date of such financial statements, there have been no changes to the Company’s significant accounting policies, other than those detailed below.
Fair value of financial instruments
Fair value is defined as the price that would be received for sale of an asset or paid for transfer of a liability, in an orderly transaction between market participants at the measurement date. U.S. GAAP establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). These tiers include:
|
·
|
Level 1, defined as observable inputs such as quoted prices for identical instruments in active markets;
|
|
·
|
Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly observable such as quoted prices for similar instruments in active markets or quoted prices for identical or similar instruments in markets that are not active; and
|
|
·
|
Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions, such as valuations derived from valuation techniques in which one or more significant inputs or significant value drivers are unobservable.
|
Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to management as of February 29, 2016 and November 30, 2015. The respective carrying value of cash and cash equivalents, accounts payable, accounts payable – related party, and accrued interest approximated their fair values as they are short term in nature. The fair value measurement of the embedded conversion option is a Level 3 estimate (see Note 4).
Loss per share
Basic net loss per share was calculated by dividing net loss by the weighted-average common shares outstanding during the period. Diluted net loss per share was calculated by dividing net loss by the weighted-average common shares outstanding during the period using the treasury stock method or the two-class method, whichever is more dilutive. The table below summarizes potentially dilutive securities that were not considered in the computation of diluted net loss per share because they would be anti-dilutive.
Potentially dilutive securities at 2/29/16
|
|
Number of shares
|
|
Warrants (Note 8)
|
|
|
450,000
|
|
Conversion option (Note 4)
|
|
|
323,482
|
|
Recent accounting pronouncements
Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.
Note 4 – Convertible Notes
|
|
February 29, 2016
|
|
|
November 30, 2015
|
|
Series A Notes:
|
|
|
|
|
|
|
Principal value of 10%, convertible at $2.24 and $1.92 at February 29, 2016 and November 30, 2015, repectively.
|
|
$
|
37,500
|
|
|
$
|
50,000
|
|
Fair value of bifurcated embedded conversion option of Series A Notes
|
|
|
36,000
|
|
|
|
64,000
|
|
Debt discount
|
|
|
(16,615
|
)
|
|
|
(28,832
|
)
|
Carrying value of Series A Notes
|
|
|
56,885
|
|
|
|
85,168
|
|
|
|
|
|
|
|
|
|
|
Series B Notes:
|
|
|
|
|
|
|
|
|
Principal value of 10%, convertible at $2.24 and $1.92 at February 29, 2016 and November 30, 2015, repectively.
|
|
$
|
80,000
|
|
|
$
|
50,000
|
|
Fair value of bifurcated embedded conversion option of Series B Notes
|
|
|
83,000
|
|
|
|
64,000
|
|
Debt discount
|
|
|
(58,502
|
)
|
|
|
(34,744
|
)
|
Carrying value of Series B Notes
|
|
|
104,498
|
|
|
|
79,256
|
|
|
|
|
|
|
|
|
|
|
Series C Notes:
|
|
|
|
|
|
|
|
|
Principal value of 10%, convertible at $1.55 at February 29, 2016 and November 30, 2015.
|
|
$
|
420,000
|
|
|
$
|
85,000
|
|
Fair value of bifurcated embedded conversion option of Series C Notes
|
|
|
693,000
|
|
|
|
101,000
|
|
Debt discount
|
|
|
(333,324
|
)
|
|
|
(54,424
|
)
|
Carrying value of Series C Notes
|
|
|
779,676
|
|
|
|
131,576
|
|
Total carrying value of convertible notes
|
|
$
|
941,059
|
|
|
$
|
296,000
|
|
Series A Notes
The Series A convertible notes payable (the “Series A Notes”) are due and payable 18 months after issuance and bear interest at 10% per annum. At the election of the holder, outstanding principal and accrued but unpaid interest under the Series A Notes is convertible into shares of the Company’s common stock at any time prior to maturity at a conversion price per share equal to the higher of: (i) forty percent (40%) discount to the average closing price for the ten (10) consecutive trading days immediately preceding the notice of conversion or (ii) $1.25 per share. At maturity, any remaining outstanding principal and accrued but unpaid interest outstanding under the Series A Notes will automatically convert into shares of the Company’s common stock under the same terms.
As of November 30, 2015, the Company had an aggregate of $50,000 outstanding in principal of Series A Notes to third party investors. No additional Series A notes were issued during the three months ended February 29, 2016.
Series B Notes
The Series B convertible notes payable (the “Series B Notes”) have the same terms as the Series A Notes, except that, at the election of the holder, outstanding principal and accrued but unpaid interest under the Series B Notes is convertible into shares of the Company’s common stock at any time prior to maturity at a conversion price per share equal to a forty percent (40%) discount to the average closing price for the ten (10) consecutive trading days immediately preceding the notice of conversion, but in no event shall the conversion price be lower than $1.25 per share.
As of November 30, 2015, the Company had an aggregate of $50,000 outstanding in principal of Series B Notes to third party investors. During the three months ended February 29, 2016, the Company issued an additional of $105,000 in principal of Series B notes to third party investors.
Series C Notes
The Series C convertible notes payable (the “Series C Notes”) have the same terms as the Series A and B Notes, except that, at the election of the holder, outstanding principal and accrued but unpaid interest under the Series C Notes is convertible into shares of the Company’s common stock at a conversion price per share equal to the lesser of a 40% discount to the average closing price for the 10 consecutive trading days immediately preceding the notice of conversion or $1.55, but in no event shall the conversion price be lower than $1.25 per share. If the average VWAP, as defined in the agreement prior to the maturity date is less than $1.25 per share, the lender has the right to demand repayment of principal and interest.
As of November 30, 2015, the Company had an aggregate of $85,000 outstanding in principal of Series C Notes to third party investors. During the three months ended February 29, 2016, the Company issued an additional of $350,000 in principal of Series C notes to third party investors.
Debt Discount
In connection with the issuance of the Series A, B and C Notes during the three months ended February 29, 2016, the Company recognized a debt discount of approximately $390,000,
and a loss on issuance of $364,000, which represents the excess of the fair value of the embedded conversion over the principal amount of convertible debt issued. The embedded conversion feature is separately measured at fair value, with changes in fair value recognized in current operations.
Management used a binomial valuation model, with twelve to eighteen steps of the binomial tree, to estimate the fair value of the embedded conversion option at issuance of the convertible note and at period end, with the following key inputs:
|
|
For the three months ended February 29, 2016
|
|
Stock price
|
|
$
|
3.55 - $4.24
|
|
Terms (years)
|
|
|
1.0 - 1.5
|
|
Volatility
|
|
|
112.57% - 148.63
|
%
|
Risk-free rate
|
|
|
1
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
The debt discount is amortized to interest expense using the effective interest method over the term of the notes. During the three months ended February 29, 2016, the Company recognized interest expense of approximately $75,000 resulting from amortization of the debt discount and recognized a gain from changes in fair value of the embedded conversion options of approximately $128,000. As of February 29, 2016, the embedded conversion option has a fair value of $812,000 and is presented on a combined basis with the loan host in the Company’s balance sheet. The table below presents changes in fair value for the embedded conversion option, which is a Level 3 fair value measurement:
Rollforward of Level 3 Fair Value Measurement for the Three Months Ended February 29, 2016
|
|
Balance at November 30, 2015
|
|
|
Issuance
|
|
|
Net unrealized (gain)/loss
|
|
|
Settlements
|
|
|
Balance at February 29, 2016
|
|
|
229,000
|
|
|
|
754,000
|
|
|
|
(128,000)
|
|
|
|
(43,000
|
)
|
|
|
812,000
|
|
Conversion
During the three months ended February 29, 2016, the Company converted an aggregate of $12,500, $75,000, and $15,000 in Series A,B and C Notes outstanding principal into 5,734, 34,811 and 6,159 common shares, respectively, upon the lender’s request according to the terms of the notes. As the embedded conversion option had been separately measured at fair value, in accordance with ASC 815, the conversion of the loan host was recognized as an extinguishment of debt. The Company recorded a loss on conversion of debt of approximately $60,000 as the difference between the carrying value of the debt and the bifurcated conversion option with the fair value of the common stock issued on conversion date.
Events of default
The Company will be in default of the convertible notes payable, and all amounts outstanding will become immediately due and payable upon: (i) maturity, (ii) any bankruptcy, insolvency, reorganization, cessation of operation, or liquidation events, (iii) if any money judgement, writ or similar process filed against the Company for more than $150,000 remains unvacated, unbonded or unstayed for a period of twenty (20) days, (iv) the Company fails to maintain the listing of the common stock on at least one of the OTC markets or the equivalent replacement exchange, (v) the Company’s failure to maintain any material intellectual property rights, personal, real property or other assets that are necessary to conduct its business, (vi) the restatement of any financial statements filed with the U.S. Securities and Exchange Commission (“SEC”) for any period from two years prior to the notes issuance date and until the notes are no longer outstanding, if the restatement would have constituted a material adverse effect of the rights of the holders of the notes, (vii) the Company effectuates a reverse stock split of its common stock without twenty (20) days prior written notice to the notes’ holders, (viii) in the event that the Company replaces its transfer agent but fails to provide, prior to the effective date, a fully executed irrevocable transfer agent instructions signed by the successor transfer agent and the Company, (ix) in the event that the Company depletes the share reserve and fails to increase the number of shares within three (3) business days, (x) if the Company fails to remain current in its filings with the SEC for more than 30 days after the filing deadline, (xi) after 12 months following the date the Company no longer deems itself a shell company as reflected in a ’34 Act filing, the Lenders are unable to convert the notes into free trading shares, and (xii) upon fundamental change of management.
The Company is currently not in default for any convertible notes issued.
Note 5 – Material Agreements
Advisory Agreement
On November 13, 2015, the Company entered into a one-year term consulting agreement with a vendor for technology assessment and product development services, effective December 1, 2015. In exchange for the services, the Company agreed to pay: (i) a monthly retainer of $2,500 once the Company has raised a minimum of $1,000,000 in the aggregate in capital or debt, and (ii) 100,000 five-year warrants, which were issued on December 1, 2015. The warrant has an exercise price of $3.00 per share is also exercisable on a cashless basis and vests 25% per quarter over the next year.
On November 16, 2015, the Company entered into an additional consulting agreement, effective December 1, 2015, to engage a vendor to provide introductory services to the Company for a six-month term. As compensation for the services, the Company agreed to issue 10,000 common shares as engagement fees and agreed to a monthly fee of 15,000 common shares. During the three months ended February 29, 2016, the Company has issued an aggregate of 55,000 common shares to the vendor pursuant to the agreement.
Effective December 1, 2015, the Company entered into a four-month business development contract with a vendor. As compensation for the services, the Company agreed to issue 10,000 common shares per month. During the three months ended February 29, 2016, the Company has issued 30,000 common shares to the vendor pursuant to the contract.
On December 15, 2015, the Company entered into a six-month contract with a vendor to provide media and investor relations services to the Company. Pursuant to that agreement, the Company agreed to issue 7,000 common shares per month and may issue additional shares based on the vendor’s performance. During the three months ended February 29, 2016, the Company has issued an aggregate of 21,000 common shares to the vendor pursuant to the contract.
Share based compensation recognized associated with these advisory agreements was approximately $836,000 for the three months ended February 29, 2016.
License Agreement
Pursuant to the license agreement with Mannin as disclosed in the Company’s Annual Form 10-K, most recently filed with the SEC on March 11, 2016 (as amended on March 15, 2016 solely to include interactive data files, the “Form 10-K”), the Company has an option to purchase the IP within the next four years in exchange for: (i) investing a minimum of $4,000,000 into the development of the intellectual property and (ii) possibly issuing additional shares of the Company’s common stock based on meeting pre-determined valuation and market conditions. The purchase price for the IP is $30,000,000 less the amount of cash paid by the Company for development of the drop treatment and the value of the common stock issued to the vendor. In addition to the initial shares issued in the fiscal year 2015, the Company has paid the accrued initial payment of $50,000 plus an additional $150,000 to fund the costs of development of the drop treatment for glaucoma pursuant the Exclusive License during the three months ended February 29, 2016.
In the event that: (i) the Company does not exercise the option to purchase the IP; (ii) the Company fails to invest the $4,000,000 within four years from the date of the Exclusive License; or (iii) the Company fails to make a diligent, good faith and commercially reasonable effort to progress the IP, all IP shall revert to the vendor and the Company will be granted the right to collect twice the monies invested through that date of reversion by way of a royalty along with other consideration which may be perpetual.
Note 6 - Related Party Transactions
In January 2016, the Company issued a five-year warrant to a Director and general counsel of the Company to purchase 250,000 shares of common stock at a price of $4.15 per share, valued at $795,000 based on management’s estimate using the Black-Scholes option-valuation model as described in Note 8, to the director for services and settlement of $30,000 in accounts payable. The warrant vests 25% every quarter starting March 4, 2016 and is also exercisable on a cashless basis.
Note 7 - Stockholders’ Deficit
As of February 29, 2016, the Company is authorized to issue up to 250,000,000 shares of its $0.001 par value common stock and up to 100,000,000 shares of its $0.001 par value preferred stock.
Share based compensation
During the three months ended February 29, 2016, the Company has issued an aggregate of 106,000 shares of the Company’s common stock to three vendors, valued at approximately $393,000 based on the estimated fair market value of the stock on the date of grant, recognized within general and administrative expenses in the accompanying condensed Statements of Operations.
Note 8 - Warrants
The following represents a summary of outstanding warrants to purchase the Company’s common stock at February 29, 2016 and changes during the period then ended:
|
|
|
|
|
Weighted Average
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
Outstanding at November 30, 2015
|
|
|
100,000
|
|
|
$
|
2.18
|
|
Granted
|
|
|
350,000
|
|
|
|
3.82
|
|
Expired/ Forfeited
|
|
|
-
|
|
|
|
-
|
|
Outstanding at February 29, 2016
|
|
|
450,000
|
|
|
$
|
3.46
|
|
Exercisable at February 29, 2016
|
|
|
25,000
|
|
|
$
|
2.18
|
|
The Company analyzed these outstanding warrants issued as February 29, 2016 (“Warrants”) to determine whether the Warrants meet the definition of a derivative and, if so, whether the Warrants meet the scope exception that contracts issued or held by the reporting entity that are both (1) indexed to its own stock and (2) classified in stockholders’ equity shall not be considered to be derivative instruments. Determining whether an instrument (or embedded feature) is indexed to an entity's own stock
apply to any freestanding financial instruments or embedded features that have the characteristics of a derivative, as defined by ASC 815 and to any freestanding financial instruments that are potentially settled in an entity’s own common stock. The Company concluded these warrants should be equity-classified since they contain no provisions which would require the Company to account for the warrants as a derivative liability.
Fair value of the warrant was calculated using the Black-Scholes option-valuation model, with the following key inputs:
|
|
|
|
|
|
For the three months ended February 29, 2016
|
|
Stock price
|
|
|
$3.55 - $4.15
|
|
Terms (years)
|
|
|
5
|
|
Volatility
|
|
|
101% - 105
|
%
|
Risk-free rate
|
|
|
1.22% - 1.76
|
%
|
Dividend yield
|
|
|
-
|
|