The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
Q BIOMED INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)
|
|
2017
|
|
|
2016
|
|
Cash flows from operating activities:
|
|
|
|
|
|
|
Net loss
|
|
$
|
(6,386,147
|
)
|
|
$
|
(3,098,109
|
)
|
Adjustments to reconcile net loss to net cash used in operating activities
|
|
|
|
|
|
|
|
|
Issuance of common stock and warrants for services
|
|
|
1,849,149
|
|
|
|
1,342,148
|
|
Issuance of warrants for services to related parties
|
|
|
-
|
|
|
|
765,000
|
|
Issuance of common stock for acquired in-process research and development
|
|
|
487,500
|
|
|
|
-
|
|
Change in fair value of embedded conversion option
|
|
|
845,000
|
|
|
|
(312,000
|
)
|
Change in fair value of warrant liability
|
|
|
59,870
|
|
|
|
-
|
|
Accretion of debt discount
|
|
|
354,766
|
|
|
|
164,180
|
|
Loss on conversion of debt
|
|
|
365,373
|
|
|
|
60,178
|
|
Loss on issuance of convertible debt
|
|
|
-
|
|
|
|
453,000
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(20,000
|
)
|
|
|
(6,495
|
)
|
Accounts payable and accrued expenses
|
|
|
(202,171
|
)
|
|
|
18,074
|
|
Accrued expenses - related party
|
|
|
(63,002
|
)
|
|
|
-
|
|
Accrued interest payable
|
|
|
78,341
|
|
|
|
25,569
|
|
Net cash used in operating activities
|
|
|
(2,631,321
|
)
|
|
|
(588,455
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities:
|
|
|
|
|
|
|
|
|
Proceeds received from issuance of convertible notes
|
|
|
2,500,000
|
|
|
|
570,000
|
|
Proceeds received from exercise of warrants
|
|
|
70,000
|
|
|
|
-
|
|
Proceeds received from issuance of common stock and warrants
|
|
|
-
|
|
|
|
50,000
|
|
Net cash provided by financing activities
|
|
|
2,570,000
|
|
|
|
620,000
|
|
|
|
|
|
|
|
|
|
|
Net (decrease) increase in cash
|
|
|
(61,321
|
)
|
|
|
31,545
|
|
|
|
|
|
|
|
|
|
|
Cash at beginning of period
|
|
|
1,468,724
|
|
|
|
131,408
|
|
Cash at end of period
|
|
$
|
1,407,403
|
|
|
$
|
162,953
|
|
|
|
|
|
|
|
|
|
|
Non-cash financing activities:
|
|
|
|
|
|
|
|
|
Issuance of common stock upon conversion of convertible notes payable
|
|
$
|
2,879,273
|
|
|
$
|
121,193
|
|
Issuance of warrants to settle accounts payable to related party
|
|
$
|
-
|
|
|
$
|
30,000
|
|
Reclassification of warrant liability to equity
|
|
$
|
227,940
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
Cash paid for interest
|
|
$
|
-
|
|
|
$
|
-
|
|
Cash paid for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these condensed consolidated financial statements
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The accompanying notes are an integral part of these unaudited condensed consolidated financial statements.
4
Note 1 - Organization of the Company and Description of the Business
Q BioMed Inc. (“Q BioMed” or “the Company”), 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. The Company intends to develop these assets to provide returns via organic growth, revenue production, out-licensing, sale or spinoff new public companies.
On December 7, 2016, the Company formed its wholly-owned subsidiary in Cayman Islands, “Q BioMed Cayman SEZC” (the “Subsidiary”). The accompanying condensed consolidated financial statements include the accounts of the Company’s wholly-owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation.
Note 2 - Basis of Presentation
The accompanying interim period unaudited condensed consolidated 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 Consolidated Balance Sheet as of May 31, 2017, the Condensed Consolidated Statements of Operations for the three and six months ended May 31, 2017 and 2016, and the Condensed Consolidated Statements of Cash Flows for the six months ended May 31, 2017 and 2016, 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 Consolidated Balance Sheet at November 30, 2016 has been derived from audited financial statements included in the Company's Form 10-K, most recently filed with the SEC on February 28, 2017. The results for the three and six months ended May 31, 2017 and 2016 are not necessarily indicative of the results expected for the full fiscal year or any other period.
The accompanying interim period unaudited condensed consolidated 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.
Going Concern
The accompanying condensed consolidated financial statements are prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.
The Company is pre-revenue, had approximately $1.4 million in cash and a working capital deficit of approximately $1.9 million as of May 31, 2017. The ability of the Company to continue as a going concern depends on the Company obtaining adequate capital to fund operating losses until it generates adequate cash flows from operations to fund its operating costs and obligations. If the Company is unable to obtain adequate capital, it could be forced to cease operations.
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 Company cannot be certain that additional funding will be available on acceptable terms, or at all. Management has determined that there is substantial doubt about the Company's ability to continue as a going concern within one year after the condensed consolidated financial statements are issued.
The accompanying condensed consolidated 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, 2016 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.
Fair value of financial instruments
Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to management as of May 31, 2017 and November 30, 2016. The respective carrying value of cash and accounts payable approximated their fair values as they are short term in nature.
4
As of May 31, 2017, the estimated aggregate fair value of all outstanding convertible notes payable is approximately $3.8 million. The fair value estimate is based on the estimated option value of the conversion terms, since the strike price of each note series is in-the-money at May 31, 2017. The estimated fair value represents a Level 3 measurement.
Recent accounting pronouncements
In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. This new standard simplifies the embedded derivative analysis for debt instruments containing contingent call or put options by removing the requirement to assess whether a contingent event is related to interest rates or credit risks. This new standard will be effective for the Company on January 1, 2017. The adoption of this standard is not expected to have a material impact on the Company's financial position, results of operations, or cash flows.
In August 2016, the FASB issued ASU No. 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments. This new standard clarifies certain aspects of the statement of cash flows, including the classification of debt prepayment or debt extinguishment costs or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies, distributions received from equity method investees and beneficial interests in securitization transactions. This new standard also clarifies that an entity should determine each separately identifiable source of use within the cash receipts and payments on the basis of the nature of the underlying cash flows. In situations in which cash receipts and payments have aspects of more than one class of cash flows and cannot be separated by source or use, the appropriate classification should depend on the activity that is likely to be the predominant source or use of cash flows for the item. This new standard will be effective for the Company on January 1, 2018. The Company is currently evaluating the impact of the new standard on its condensed consolidated financial statements.
In January 2017, the FASB issued an ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. The amendments in this Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Update may be adopted early. The Company adopted the provisions of ASC 2017-01 effective December 1, 2016. Adoption did not have a material impact on the Company's financial position, results of operations, or cash flows.
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
|
|
May 31, 2017
|
|
May 31, 2016
|
Warrants (Note 10)
|
|
1,111,500
|
|
470,000
|
Convertible debt (Note 5)
|
|
985,723
|
|
401,280
|
Note 5 – Convertible Notes
|
|
|
|
|
|
|
|
|
May 31, 2017
|
|
|
November 30, 2016
|
|
Series A Notes:
|
|
|
|
|
|
|
Principal value of 10%, convertible at $2.00 at November 30, 2016.
|
|
$
|
-
|
|
|
$
|
12,500
|
|
Fair value of bifurcated embedded conversion option of Series A Notes
|
|
|
-
|
|
|
|
12,000
|
|
Debt discount
|
|
|
-
|
|
|
|
(2,194
|
)
|
Carrying value of Series A Notes
|
|
|
-
|
|
|
|
22,306
|
|
|
|
|
|
|
|
|
|
|
Series B Notes:
|
|
|
|
|
|
|
|
|
Principal value of 10%, convertible at $2.00 at November 30, 2016.
|
|
|
-
|
|
|
|
55,000
|
|
Fair value of bifurcated embedded conversion option of Series B Notes
|
|
|
-
|
|
|
|
55,000
|
|
Debt discount
|
|
|
-
|
|
|
|
(19,229
|
)
|
Carrying value of Series B Notes
|
|
|
-
|
|
|
|
90,771
|
|
|
|
|
|
|
|
|
|
|
Series C Notes:
|
|
|
|
|
|
|
|
|
Principal value of 10%, convertible at $1.55 at November 30, 2016.
|
|
|
-
|
|
|
|
576,383
|
|
Fair value of bifurcated embedded conversion option of Series C Notes
|
|
|
-
|
|
|
|
838,000
|
|
Debt discount
|
|
|
-
|
|
|
|
(250,969
|
)
|
Carrying value of Series C Notes
|
|
|
-
|
|
|
|
1,163,414
|
|
|
|
|
|
|
|
|
|
|
Series D Notes:
|
|
|
|
|
|
|
|
|
Principal value of 10%, convertible at $1.85 at November 30, 2016.
|
|
|
-
|
|
|
|
160,000
|
|
Debt discount
|
|
|
-
|
|
|
|
(140,961
|
)
|
Carrying value of Series D Notes
|
|
|
-
|
|
|
|
19,039
|
|
|
|
|
|
|
|
|
|
|
Series E Notes:
|
|
|
|
|
|
|
|
|
Principal value of 10%, convertible at $2.50 at May 31, 2017 and November 30, 2016.
|
|
|
30,000
|
|
|
|
180,000
|
|
Debt discount
|
|
|
(5,477
|
)
|
|
|
(124,164
|
)
|
Carrying value of Series E Notes
|
|
|
24,523
|
|
|
|
55,836
|
|
|
|
|
|
|
|
|
|
|
Secured Convertible Debenture:
|
|
|
|
|
|
|
|
|
Principal value of 5%, convertible at $3.59 and $2.98 at May 31, 2017 and November 30, 2016, respectively.
|
|
|
3,500,000
|
|
|
|
1,500,000
|
|
Fair value of bifurcated contingent put option of Secured Convertible Debenture
|
|
|
49,833
|
|
|
|
72,000
|
|
Debt discount
|
|
|
(693,650
|
)
|
|
|
(297,000
|
)
|
Carrying value of Secured Convertible Debenture Note
|
|
|
2,856,183
|
|
|
|
1,275,000
|
|
Total short-term carrying value of convertible notes
|
|
$
|
2,880,706
|
|
|
$
|
2,394,849
|
|
Total long-term carrying value of convertible notes
|
|
$
|
-
|
|
|
$
|
231,517
|
|
|
|
|
|
|
|
|
|
|
5
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 May 31, 2017, the Company has no Series A Notes outstanding.
Series B Notes
The Series B convertible notes payable (the “Series B Notes”) have the same terms as the Series A Notes. As of May 31, 2017, the Company has no Series B Notes outstanding.
Series C Notes
The Series C convertible notes payable (the “Series C 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 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, for the ten trading days immediately preceding the maturity date $5.00 or more, any remaining outstanding principal and accrued but unpaid interest outstanding under the Series C Notes will automatically convert into shares of the Company’s common stock under the same terms.
The terms of the Series C Notes also provided that up until maturity date, the Company cannot enter into any additional, or modify any existing, agreements with any existing or future investors that are more favorable to such investor in relation to the Series D Note holders, unless, the Series C Note holders are provided with such rights and benefits (“Most Favored Nations Clause”). As of May 31, 2017, the Company has no Series C Notes outstanding.
Series D Notes
The Series D convertible notes payable (the “Series D 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 D Notes is convertible into shares of the Company’s common stock at a fixed conversion price per share equal to $1.85. The Series D Notes automatically convert upon maturity at $1.85 per share if the ten trading days VWAP immediately preceding maturity is $5.00 or greater. Additionally, if the Company’s common shares are up-listed to a senior exchange such as the AMEX or NASDAQ, all monies due under the Series D Notes will automatically convert at $1.85 per share.
The terms of the Series D Notes also included the Most Favored Nations Clause. The Most Favored Nations Clause was viewed as providing the Series D Note holder with down-round price protection. As such, the embedded conversion option in the Series D Note was separately measured at fair value upon issuance, with subsequent changes in fair value recognized in current earnings.
On September 30, 2016, the Company amended the Most Favored Nations Clause of the Series D Notes to restrict the Company from taking dilutive action without the Series D note holders’ consent, effectively removing the down-round price protection.
At the amendment date, the conversion price of the amended Series D Notes was below the quoted market price of the Company’s common stock. As such, the Company recognized a beneficial conversion feature equal to the intrinsic value of the conversion price on the amendment date, resulting in a discount to the amended Series D Notes of $160,000 with a corresponding credit to additional paid-in capital. The resulting debt discount is presented net of the related convertible note balance in the accompanying Condensed Consolidated Balance Sheets and is amortized to interest expense over the note’s term. As of May 31, 2017, the Company has no Series D Notes outstanding.
Series E Notes
The Series E convertible notes payable (the “Series E 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 E Notes is convertible into shares of the Company’s common stock at a fixed conversion price per share equal to $2.50. The Series E Notes automatically convert upon maturity at $2.50 per share if the ten trading days VWAP immediately preceding maturity is $5.00 or greater. Additionally, if the Company’s common shares are up-listed to a senior exchange such as the AMEX or NASDAQ, all monies due under the Series E Notes will automatically convert at $2.50 per share.
6
At the issuance date, the conversion price of the Series E Notes was below the quoted market price of the Company’s common stock. As such, the Company recognized a beneficial conversion feature equal to the intrinsic value of the conversion price on the amendment date, resulting in a discount to the Series E Notes of approximately $141,000 with a corresponding credit to additional paid-in capital. The resulting debt discount is presented net of the related convertible note balance in the accompanying Condensed Consolidated Balance Sheets and is amortized to interest expense over the note’s term.
Secured Convertible Debentures
On November 29, 2016, the Company entered into a securities purchase agreement with an accredited investor to place Convertible Debentures (the “Debentures”), which was later amended on March 7, 2017, with a one-year term in the aggregate principal amount of up to $4,000,000. The initial closing occurred on November 30, 2016 when the Company issued a Debenture for $1,500,000 (“Initial Debenture Note”). The second closing of $1 million was on March 10, 2017 (“Second Debenture Note”), when the registration statement to register for resale all of the shares of common stock into which the Debentures may be converted (the “Conversion Shares”) was filed with the SEC. The remaining balance of $1.5 million was received on April 6, 2017 (“Third Debenture Note”), the date the registration statement was declared effective by the SEC. The Debentures bear interest at the rate of 5% per annum. In addition, the Company must pay to an affiliate of the holder a fee equal to 5% of the amount of the Debenture at each closing.
The Debenture may be converted at any time on or prior to maturity at the lower of $4.00 or 93% of the average of the four lowest daily VWAP of the Company’s common stock during the ten consecutive trading days immediately preceding the conversion date, provided that as long as the Company is not in default under the Debenture, the conversion price may never be less than $2.00. The Company may not convert any portion of the Debenture if such conversion would result in the holder beneficially owning more than 4.99% of the Company’s then issued common stock, provided that such limitation may be waived by the holder.
Any time after the six-month anniversary of the issuance of the Debenture, if the daily VWAP of the Company’s common stock is less than $2.00 for a period of twenty consecutive trading days (the “Triggering Date”) and only for so long as such conditions exist after a Triggering Date, the Company shall make monthly payments beginning on the last calendar day of the month when the Triggering Date occurred. Each monthly payment shall be in an amount equal to the sum of (i) the principal amount outstanding as of the Triggering Date divided by the number of such monthly payments until maturity, (ii) a redemption premium of 20% in respect of such principal amount being paid (up to a maximum of $300,000 in redemption premium) and (iii) accrued and unpaid interest as of each payment date. The Company may, no more than twice, obtain a thirty-day deferral of a monthly payment due as a result of a Triggering Date through the payment of a deferral fee in the amount equal to 10% of the total amount of such monthly payment. Each deferral payment may be paid by the issuance of such number of shares as is equal to the applicable deferral payment divided by a price per share equal to 93% of the average of the four lowest daily VWAP of the Company’s common stock during the ten consecutive Trading Days immediately preceding the due date in respect of such monthly payment begin deferred, provided that such shares issued will be immediately freely tradable shares in the hands of the holder.
The Company also entered into a Security Agreement to secure payment and performance of its obligations under the Debenture and related agreements pursuant to which the Company granted the investor a security interest in all of its assets. The security interest granted pursuant to the Security Agreement terminated on the effectiveness of the Registration Statement on April 6, 2017.
Upon issuance of the Second and Third Debenture Notes, the Company recognized a debt discount of $731,000, resulting from the recognition of a beneficial conversion feature of $645,000 and a bifurcated embedded derivative of $86,000. The beneficial conversion feature was recognized as the intrinsic value of the conversion option on issuance of the Debentures. The monthly payment provision within the Debentures is a contingent put option that is required to be separately measured at fair value, with subsequent changes in fair value recognized in the Condensed Consolidated Statement of Operations during the six months ended May 31, 2017. The Company estimated the fair value of the monthly payment provision, as of May 31, 2017 and November 30, 2016, using probability analysis of the occurrence of a Triggering Date applied to the discounted maximum redemption premium for any given payment. The probability analysis utilized an expected volatility for the Company's common stock range of 101.58% - 146.26% and a risk free rate of range of 0.53% to 1.08%. The maximum redemption was discounted at 20%, the calculated effective rate of the Debenture before measurement of the contingent put option. The fair value estimate is a Level 3 measurement.
7
Embedded Conversion Options
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 fourteen steps of the binomial tree, to estimate the fair value of the embedded conversion option at issuance of the Series A, B, and C Notes with the following key inputs:
Embedded derivatives at inception and upon conversion
|
|
|
|
|
|
|
|
|
For the six months ended May 31,
|
|
|
|
2017
|
|
|
2016
|
|
Stock price
|
|
$
|
4.93 - $7.05
|
|
|
$
|
3.05 - $4.24
|
|
Terms (years)
|
|
|
0.11 - 0.85
|
|
|
|
0.75 - 1.1
|
|
Volatility
|
|
|
144.26% - 157.35
|
%
|
|
|
123.53% - 154.70
|
%
|
Risk-free rate
|
|
|
0.53% - 0.76
|
%
|
|
|
0.58% - 1
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Embedded derivatives at period end
|
|
|
|
|
|
|
|
|
|
|
May 31, 2017
|
|
|
November 30, 2016
|
|
Stock price
|
|
|
-
|
|
|
$
|
3.43
|
|
Term (years)
|
|
|
-
|
|
|
|
0.25 - 1.05
|
|
Volatility
|
|
|
-
|
|
|
|
156.74% - 163.49
|
%
|
Risk-free rate
|
|
|
-
|
|
|
|
0.48% - 0.80
|
%
|
Dividend yield
|
|
|
-
|
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
During the six months ended May 31, 2017 and 2016, the Company recognized interest expense of approximately $355,000 and $164,000, respectively, resulting from amortization of the debt discount for the outstanding convertible notes.
As of May 31, 2017, the embedded conversion options have an aggregate fair value of $50,000 and are presented on a combined basis with the related loan host in the Company’s Condensed Consolidated Balance Sheets. The table below presents changes in fair value for the embedded conversion options, which is a Level 3 fair value measurement:
Rollforward of Level 3 Fair Value Measurement for the Six Months Ended May 31, 2017
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2016
|
|
|
Issuance
|
|
|
Net unrealized gain/(loss)
|
|
|
Conversion
|
|
|
Balance at May 31, 2017
|
|
|
$
|
977,000
|
|
|
|
86,000
|
|
|
|
845,000
|
|
|
|
(1,858,167
|
)
|
|
$
|
49,833
|
|
Conversions of debt
The following conversions of the convertible notes occurred during the six months ended May 31, 2017:
|
|
Principal
|
|
|
Shares
|
|
Series A conversions
|
|
|
12,500
|
|
|
|
5,936
|
|
Series B conversions
|
|
|
55,000
|
|
|
|
27,995
|
|
Series C conversions
|
|
|
576,383
|
|
|
|
407,484
|
|
Series D conversions
|
|
|
160,000
|
|
|
|
91,782
|
|
Series E conversions
|
|
|
150,000
|
|
|
|
63,255
|
|
Secured Debenture conversions
|
|
|
500,000
|
|
|
|
155,199
|
|
Total
|
|
$
|
1,453,883
|
|
|
|
751,651
|
|
|
|
|
|
|
|
|
|
|
8
As the embedded conversion option in each note series had been separately measured at fair value, the conversion of each note was recognized as an extinguishment of debt. The Company recognized a loss on conversion of debt of approximately $365,000 as the difference between the fair value of common stock issued to the holders of approximately $2.7 million and the aggregate net carrying value of the convertible notes, including the bifurcated conversion options, of approximately $2.3 million.
Events of default
The Company will be in default of the Series E Notes, 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 6 – Note Payable
As of May 31, 2017 and November 30, 2017, the Company had an outstanding promissory note of $150,000 (“OID Note”). The OID Note does not pay interest and matures on November 3, 2017.
Note 7 – Commitments and Contingencies
Lease Agreement
In December 2016, the Subsidiary entered into a lease agreement for its office space located in Cayman Islands for $30,000 per annum. The initial term of the agreement ends in December 2019 and can be renewed for another three years.
Rent expenses was classified within general and administrative expenses and was approximately $7,500 and $13,000 for the three and six months ended May 31, 2017.
License Agreement
Mannin
On October 29, 2015, the Company entered into a Patent and Technology License and Purchase Option Agreement (“Exclusive License”) with a vendor whereby the Company was granted a worldwide, exclusive, license on, and option to, acquire certain intellectual property (“Mannin IP”) which initially focused on developing a first-in-class eye drop treatment for glaucoma within the four-year term of the Exclusive License.
During the three and six months ended May 31, 2017, the Company incurred approximately $431,000 and $852,000, respectively, in research and development expenses to fund the costs of development of the eye drop treatment for glaucoma pursuant to the Exclusive License. Through May 31, 2017, the Company had funded an aggregate of $1.7 million to Mannin under the Exclusive License.
Bio-Nucleonics
On September 6, 2016, the Company entered into the Patent and Technology License and Purchase Option Agreement (the “BNI Exclusive License”) with Bio-Nucleonics Inc. (“BNI”) whereby the Company was granted a worldwide, exclusive, perpetual, license on, and option to, acquire certain BNI intellectual property (“BNI IP”) within the three-year term of the BNI Exclusive License.
As of May 31, 2017, the Company had paid approximately $208,000 to BNI out of the $850,000 cash funding requirement. The Company is not obligated to provide further funding to BNI until BNI satisfies all of its pre-existing obligations totaling $163,500. To this end, the Company had provided an aggregate of approximately $59,000 through May 31, 2017 to BNI to help settle its obligations, which the Company recognized as research and development expenses in the accompanying Statements of Operations.
9
Asdera
On April 21, 2017, the Company entered into a License Agreement on Patent & Know-How Technology (“Asdera License”) with Asdera LLC (“Asdera”) whereby the Company weas granted a worldwide, exclusive, license on certain Asdera intellectual property (“Asdera IP”). The initial cost to acquire the Asdera License is $50,000 and the issuance of 125,000 shares of the Company’s common stock, with a fair value of $487,500, of which the Company had fully paid and issued as of May 31, 2017, and recorded in research and development expenses in the accompanying Condensed Consolidated Statements of Operations. In addition to royalties based upon net sales of the product candidate, if any, the Company is required to make certain additional payments upon the following milestones:
|
the filing of an investigational new drug application (the “IND”) with the US Food and Drug Administration (“FDA”);
|
|
successful interim results of Phase II/III clinical trial of the product candidate;
|
|
FDA acceptance of a new drug application;
|
|
FDA approval of the product candidate; and
|
|
achieving certain worldwide net sales.
|
Subject to the terms of the Agreement, the Company will be in control of the development and commercialization of the product candidate and are responsible for the costs of such development and commercialization. The Company has undertaken a good-faith commitment to (i) initiate a Phase II/III clinical trial at the earlier of the two-year anniversary of the agreement or one year from the FDA’s approval of the IND and (ii) to make the first commercial sale by the fifth-anniversary of the agreement. Failure to show a good-faith effort to meet those goals would mean that the Asdera IP would revert to Asdera. Upon such reversion, Asdera would be obligated to pay the Company royalties on any sales of products derived from the Asdera IP until such time that Asdera has paid the Company twice the sum that the Company had provided Asdera prior to the reversion.
Milestones
No milestones have been reached to date on these license agreements.
Note 8 - Related Party Transactions
The Company entered into consulting agreements with certain management personnel and stockholders for consulting and legal services. Consulting and legal expenses resulting from such agreements were $130,000 and $78,000 for the three months ended May 31, 2017 and 2016, respectively, and were approximately $243,000 and $103,000 for the six months ended May 31, 2017 and 2016, respectively, included within general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.
Note 9 - Stockholders’ Equity Deficit
As of May 31, 2017, 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.
Issuance of shares for services
The Company entered into customary consulting arrangements with various counterparties to provide consulting services, business development and investor relations services.
During the six months ended May 31, 2017, the Company issued an aggregate of 108,705 shares of the Company common stock to various vendors for investor relation and introductory services, valued at approximately $493,000 based on the estimated fair market value of the stock on the date of grant and was recognized within general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations for the three and six months ended May 31, 2017.
The Company recognized general and administrative expenses of approximately $1.8 million and $1.3 million, as a result of the shares and outstanding warrants issued to consultants during the six months ended May 31, 2017 and 2016, respectively.
As of May 31, 2017, the estimated unrecognized stock-based compensation associated with these agreements is approximately $1.1 million and will be recognized over the next 0.5 year.
Note 10 - Warrants
As of November 30, 2016, the Company had outstanding warrants issued as part of the private placement units initially classified as liabilities because the exercise price may be adjusted downward, in certain circumstances, for a ninety-day period following their initial issuance. Warrant liabilities are measured at fair value, with changes in fair value recognized each reporting period in the Statement of Operations. The warrants ceased being liability classified at the conclusion of the ninetieth day from issuance. As a result, an aggregate of approximately $228,000 in warrant liability was reclassified to equity during the six months ended May 31, 2017. All other warrants are equity classified.
10
The following represents a summary of all outstanding warrants to purchase the Company’s common stock at May 31, 2017 and changes during the period then ended:
|
|
|
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
Remaining Contractual
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Intrinsic Value
|
|
|
Life (years)
|
|
Outstanding at November 30, 2016
|
|
|
1,047,500
|
|
|
$
|
2.54
|
|
|
$
|
1,158,000
|
|
|
|
4.10
|
|
Issued
|
|
|
84,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
(20,000
|
)
|
|
|
3.50
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at May 31, 2017
|
|
|
1,111,500
|
|
|
$
|
2.64
|
|
|
$
|
1,426.015
|
|
|
|
3.59
|
|
Exercisable at May 31, 2017
|
|
|
1,027,500
|
|
|
$
|
2.52
|
|
|
$
|
1,426,015
|
|
|
|
3.65
|
|
In January 2017, the Company issued 20,000 shares of the Company’s common stock upon receiving the notice to exercise the warrants at an exercise price of $3.50 included in Unit A sold in the May Private Placement, for an aggregate purchase price of $70,000.
Fair value of all outstanding warrants was calculated with the following key inputs:
|
|
For the six months ended May 31, 2017
|
|
Stock price
|
|
$
|
3.81 - $7.87
|
|
Term (years)
|
|
|
1.75 - 4.5
|
|
Volatility
|
|
|
132.15% - 140.64
|
%
|
Risk-free rate
|
|
|
1.17% - 1.45
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
The warrant liability is a Level 3 fair value measurement, recognized on a recurring basis. Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains and losses for liabilities within the Level 3 category may include changes in fair value that were attributable to both observable inputs (e.g., changes in market interest rates) and unobservable inputs (e.g., probabilities of the occurrence of an early termination event).
Fair value of warrant liability at November 30, 2016
|
|
$
|
168,070
|
|
Issuance of new warrant liability
|
|
|
-
|
|
Change in fair value of warrant liability
|
|
|
59,870
|
|
Reclassification of warrant liability to equity
|
|
|
(227,940
|
)
|
Fair value of warrant liability at May 31, 2017
|
|
$
|
-
|
|
Note 11 – Subsequent Events
Executive Service Agreement
On June 5, 2017, the
Subsidiary
entered into an agreement with Denis Corin to provide services as our President and Chief Executive Officer (“Executive Service Agreement”). In exchange for the services, Mr. Corin is to receive $15,000 per month and options to acquire 100,000 shares of the Company’s common stock at $4.00 per share. The agreement has a term of two years and may be terminated by either party with 90 days’ notice. If the Company terminates the Executive Service Agreement without cause, the Company will owe the monthly fee for each remaining month during the term of the agreement.
OMRF License Agreement
On June 15, 2017, the Company entered into a Technology License Agreement (“OMRF License Agreement”) with the Rajiv Gandhi Centre for Biotechnology, an autonomous research institute under the Government of India (“RGCB”), and the Oklahoma Medical Research Foundation (“OMRF” and together with RGCB, the “Licensors”), whereby the Licensors granted the Company a worldwide, exclusive, license on intellectual property related to Uttroside B (the “Uttroside B IP”). Uttroside B is a chemical compound derived from the plant
Solanum nigrum Linn, also known as Black Nightshade or Makoi. The Company seeks to use the Uttroside B IP to create a
chemotherapeutic agent against liver cancer.
11
The initial cost to acquire the OMRF License Agreement is $10,000. In addition to royalties based upon net sales of the product candidate, if any, the Company is required to make additional payments upon the following milestones:
|
the completion of certain preclinical studies (the “Pre-Clinical Trials”);
|
|
the filing of an investigational new drug application (the “IND”) with the US Food and Drug Administration (“FDA”) or the filing of the equivalent of an IND with the foreign equivalent of the FDA;
|
|
successful completion of each of Phase I, Phase II and Phase III clinical trials;
|
|
FDA approval of the product candidate;
|
|
approval by the foreign equivalent of the FDA of the product candidate;
|
|
achieving certain worldwide net sales; and
|
|
a change of control of QBIO.
|
Subject to the terms of the Agreement, the Company will be in control of the development and commercialization of the product candidate and are responsible for the costs of such development and commercialization. The Company has undertaken a good-faith commitment to (i) fund the Pre-Clinical Trials and (ii) to initiate a Phase II clinical trial within six years of the date of the Agreement. Failure to show a good-faith effort to meet those goals would mean that the RGCB License Agreement would revert to the Licensors.
Issuance of securities
On June 5, 2017, the Company issued warrants to purchase up to 350,000 shares of the Company’s common stock to each of Denis Corin, its President and Chief Executive Officer, and William Rosenstadt, its General Counsel, and warrants to purchase up to 85,000 shares of the Company’s common stock to Ari Jatwes. The warrants were issued as a bonus for their business development services to the Company over the last 12 months. The warrants are exercisable for five years at a per share price of $4.00. The warrants may not be exercised within the first six months of their issuance.
Also on June 5, 2017, the Company issued options to purchase up to 150,000 shares of the Company’s common stock to each of Denis Corin, and William Rosenstadt. 50,000 of the options were issued as compensation for their continued services on the Company’s board of directors through June 1, 2018 and 100,000 of the options were issued as compensation as officers through June 1, 2018. 37,500 of the options vest on September 1, 2017, 37,500 of the options vest on December 1, 2017, 37,500 of the options vest on March 1, 2018 and 37,500 of the options vest on June 1, 2018. The options are exercisable for five years at a per share price of $4.00. The options may not be exercised within the first six months of vesting.
In addition, on June 5, 2017, the Company issued warrants to purchase up to 145,000 shares of the Company’s common stock to four consultants. The warrants are exercisable for five years at a per share price of $4.00. The warrants may not be exercised within the first six months of their issuance.
On June 8, 2017, the Company converted
an aggregate of $500,000 of the Third Debenture Note outstanding principal and all unpaid interest into an aggregate of
153,268 shares of the Company’s common stock.
On June 19, 2017, the Company converted
an aggregate of $500,000 of the Third Debenture Note outstanding principal and $822 of unpaid interest into an aggregate of
152,736 shares of the Company’s common stock.
12