Notes to Financial Statements
(Unaudited)
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. The Company intends to develop these assets to provide returns via organic growth, revenue production, out-licensing, sale or spinoff new public companies.
Note 2 - Basis of Presentation
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 August 31, 2016, the Condensed Statements of Operations for the three and nine months ended August 31, 2016 and 2015, and the Condensed Statements of Cash Flows for the nine months ended August 31, 2016 and 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 and nine months ended August 31, 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 had a working capital deficit of approximately $1.1 million as of August 31, 2016. The accompanying 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 had a net loss of approximately $1.7 million and $4.8 million during the three and nine months ended August 31, 2016, respectively, and had net cash used in operating activities of approximately $870,000 during the nine months ended August 31, 2016. These matters, among others, raise substantial doubts about the Company’s ability to continue as a going concern.
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.
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.
Recent accounting pronouncements
Management does not believe that any recently issued, but not yet effective or adopted, accounting standards if currently adopted would have a material effect on the accompanying financial statements.
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
|
August 31, 2016
|
August 31, 2015
|
Warrants (Note 8)
|
976,500
|
-
|
Convertible debt (Note 4)
|
506,757
|
-
|
Note 5 – Convertible Notes
|
|
August 31, 2016
|
|
|
November 30, 2015
|
|
Series A Notes:
|
|
|
|
|
|
|
Principal value of 10%, convertible at $1.91 and $1.92 at August 31, 2016 and November 30, 2015, repectively.
|
|
$
|
37,500
|
|
|
$
|
50,000
|
|
Fair value of bifurcated embedded conversion option of Series A Notes
|
|
|
30,000
|
|
|
|
64,000
|
|
Debt discount
|
|
|
(10,101
|
)
|
|
|
(28,832
|
)
|
Carrying value of Series A Notes
|
|
|
57,399
|
|
|
|
85,168
|
|
|
|
|
|
|
|
|
|
|
Series B Notes:
|
|
|
|
|
|
|
|
|
Principal value of 10%, convertible at $1.91 and $1.92 at August 31, 2016 and November 30, 2015, repectively.
|
|
$
|
55,000
|
|
|
$
|
50,000
|
|
Fair value of bifurcated embedded conversion option of Series B Notes
|
|
|
44,000
|
|
|
|
64,000
|
|
Debt discount
|
|
|
(28,362
|
)
|
|
|
(34,744
|
)
|
Carrying value of Series B Notes
|
|
|
70,638
|
|
|
|
79,256
|
|
|
|
|
|
|
|
|
|
|
Series C Notes:
|
|
|
|
|
|
|
|
|
Principal value of 10%, convertible at $1.55 at August 31, 2016 and November 30, 2015.
|
|
|
576,383
|
|
|
$
|
85,000
|
|
Fair value of bifurcated embedded conversion option of Series C Notes
|
|
|
725,000
|
|
|
|
101,000
|
|
Debt discount
|
|
|
(343,447
|
)
|
|
|
(54,424
|
)
|
Carrying value of Series C Notes
|
|
|
957,936
|
|
|
|
131,576
|
|
|
|
|
|
|
|
|
|
|
Series D Notes:
|
|
|
|
|
|
|
|
|
Principal value of 10%, convertible at $1.85 at August 31, 2016.
|
|
$
|
160,000
|
|
|
$
|
-
|
|
Fair value of bifurcated embedded conversion option of Series D Notes
|
|
|
177,000
|
|
|
|
-
|
|
Debt discount
|
|
|
(158,688
|
)
|
|
|
-
|
|
Carrying value of Series D Notes
|
|
|
178,312
|
|
|
|
-
|
|
Total short-term carrying value of convertible notes
|
|
$
|
787,378
|
|
|
$
|
-
|
|
Total long-term carrying value of convertible notes
|
|
$
|
476,907
|
|
|
$
|
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.
Series B Notes
The Series B convertible notes payable (the “Series B Notes”) have the same terms as the Series A Notes. During the nine months ended August 31, 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”) 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. At no point since issuance has the conversion rate fallen below $1.25 per share.
During the nine months ended August 31, 2016, the Company issued an additional of $550,000 in principal of Series C notes to third party investors.
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 Note 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 is more favorable to such investor in relation to the Series D note holders, unless, the Series D note holders has been provided with such rights and benefits.
On September 30, 2016, the Company amended the terms of the Series D Note agreement to restrict the Company from taking dilutive action without the Series D note holder’ consent.
During the nine months ended August 31, 2016, the Company issued $160,000 in principal of Series D notes to third party investors.
Debt Discount
Series A, B and C, D Notes
In connection with the issuance of the Series A, B, C and D Notes during the nine months ended August 31, 2016, the Company recognized a debt discount of approximately $750,000, and a loss on issuance of $481,000, which represents the excess of the fair value of the embedded conversion at initial issuance of $1.2 million 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 fourteen steps of the binomial tree, to estimate the fair value of the embedded conversion option at issuance of the convertible note issued during the nine months ended August 31, 2016, with the following key inputs:
Embedded derivatives at inception
|
|
|
|
|
|
|
|
|
For the nine months ended August 31, 2016
|
|
|
For the year ended November 30, 2015
|
|
Stock price
|
|
$
|
2.60 - $3.26
|
|
|
$
|
2.02 - $3.55
|
|
Terms (years)
|
|
|
1.5
|
|
|
|
1.25 - 1.5
|
|
Volatility
|
|
|
116.77
|
%
|
|
|
108.40% - 162.89
|
%
|
Risk-free rate
|
|
|
0.51% - 0.76
|
%
|
|
|
0.66% - 0.85
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
During the nine months ended August 31, 2016, the Company recognized interest expense of approximately $262,000 resulting from amortization of the debt discount for Series A, B, C and D Notes.
Embedded conversion options
As of August 31, 2016, the embedded conversion options have an aggregate fair value of approximately $976,000 and are presented on a combined basis with the related loan host in the Company’s Condensed 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 Nine Months Ended August 31, 2016
|
|
|
|
|
|
|
|
|
|
|
|
Balance at November 30, 2015
|
|
Issuance
|
|
Net unrealized gain/(loss)
|
|
Settlements
|
|
Balance at August 31, 2016
|
229,000
|
|
1,231,000
|
|
(362,000)
|
|
(122,000)
|
|
976,000
|
Management used a binomial valuation model, with fourteen steps of the binomial tree, to estimate the fair value of the embedded conversion option at August 31, 2016, with the following key inputs:
Embedded derivatives at period end
|
|
|
|
|
|
|
|
|
As of
|
|
|
|
August 31, 2016
|
|
|
November 30, 2015
|
|
Stock price
|
|
$
|
3.15
|
|
|
$
|
3.55
|
|
Term (years)
|
|
|
0.68 - 1.3
|
|
|
|
1.26 - 1.49
|
|
Volatility
|
|
|
115.76
|
%
|
|
|
108.4% - 121.62
|
%
|
Risk-free rate
|
|
|
0.61% - 0.80
|
%
|
|
|
0.94
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Conversions of debt
The following conversions of convertible notes occurred during the nine months ended August 31, 2106:
Conversion of debt
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Principal
|
|
|
Shares
|
|
Series A conversions
|
|
$
|
12,500
|
|
|
|
5,734
|
|
Series B conversions
|
|
|
100,000
|
|
|
|
51,111
|
|
Series C conversions
|
|
|
58,617
|
|
|
|
44,869
|
|
Series D conversions
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
$
|
171,117
|
|
|
|
101,714
|
|
As the embedded conversion option had been separately measured at fair value, the conversion of the loan host was recognized as an extinguishment of debt. The Company recorded a loss on conversion of debt of approximately $89,000 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 each 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 6 – Commitments and Contingencies
Advisory Agreements
The Company entered into customary consulting arrangements with various counterparties to provide consulting services, business development and investor relations services, pursuant to which the Company agreed to issue shares of common stock as services are received. The Company expects to issue an aggregate of approximately 136,000 shares of common stock from September 1, 2016 through the term of arrangements.
License Agreement
Mannin
Pursuant to the license agreement with Mannin as disclosed in the Form 10-K, the Company has an option to purchase the IP within the next four years upon: (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 and the value of the common stock issued to the vendor.
During the three and nine months ended August 31, 2016, the Company incurred approximately $443,000 and $664,000 in research and development expenses to fund the costs of development of the eye drop treatment for glaucoma pursuant to the Exclusive License. As of August 31, 2016, the Company has funded an aggregate of approximately $1.26 million under the Exclusive License.
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.
Legal
The Company is not currently involved in any legal matters arising in the normal course of business. From time to time, the Company could become involved in disputes and various litigation matters that arise in the normal course of business. These may include disputes and lawsuits related to intellectual property, licensing, contract law and employee relations matters. Periodically, the Company reviews the status of significant matters, if any exist, and assesses its potential financial exposure. If the potential loss from any claim or legal claim is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending claims and litigation.
Note 7 - 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 approximately $200,000 and $27,000 for the nine months ended August 31, 2016 and 2015, respectively, and were included within general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.
Note 8 - Stockholders’ Equity Deficit
As of August 31, 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.
Issued for services
During the nine months ended August 31, 2016, the Company issued an aggregate of 259,150 shares of common stock in connection with the advisory agreements as described in Note 6, and five-year warrants to purchase 550,000 shares of common stock at exercise prices ranging from of $1.45 to $3.00 per share for other services. The warrants vest 25% per quarter over the next year and were valued at $650,000 using the Black-Scholes option-valuation model with inputs described in Note 9. The Company recognized the value of the warrants over the vesting period.
In addition, the Company issued fully-vested five-year warrants to a director and general counsel of the Company to purchase an aggregate of 300,000 shares of common stock at strike prices ranging from $1.45 to $4.15 per share. The warrants were valued at $860,000 using the Black-Scholes option-valuation model with inputs described in Note 9. The warrants were issued for services and settlement of a $30,000 in accounts payable.
The Company recognized general and administrative expenses of approximately $3 million and $32,000, as a result of these transactions, of which approximately $860,000 and $29,000 resulted from related party transactions, during the nine months ended August 31, 2016 and 2015, respectively.
The estimated unrecognized stock-based compensation associated with these agreements is approximately $994,000 and will be recognized over the next 0.3 year.
Private Placement
In May 2016, the Company entered into a subscription agreement with an investor in connection with the Company’s private placement (“May Private Placement”), generating gross proceeds of $50,000 by selling 20,000 units (each, Unit A”) at a price per Unit A of $2.50, with each Unit A consisting of one share of common stock and a two-year warrant to purchase one share of the Company’s common stock at an exercise price of $3.50 per share.
The subscription agreement requires the Company to issue such investor (“May investor”) additional common shares if the Company were to issue common stock or issue securities convertible or exercisable into shares of common stock at a price below $2.50 per share within 90 days from the closing of the Private Placement. The additional shares are calculated as the difference between the common stock that would have been issued in the May Private Placement using the new price per unit less shares of common stock already issued pursuant to the May Private Placement.
In August 2016, the Company consummated another private placement, for gross proceeds of approximately $10,000 by selling 6,500 Units at a purchase price of $1.55 per Unit. As a result, the Company issued the May investor an additional 12,258 shares of common stock according to the agreement.
Note 9 - Warrants
The following represents a summary of outstanding warrants to purchase the Company’s common stock at August 31, 2016 and changes during the period then ended:
|
|
|
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Weighted Average
|
|
|
Remaning Contractual
|
|
|
|
Warrants
|
|
|
Exercise Price
|
|
|
Life (years)
|
|
Outstanding at November 30, 2015
|
|
|
100,000
|
|
|
$
|
2.18
|
|
|
|
4.80
|
|
Issued
|
|
|
876,500
|
|
|
|
2.46
|
|
|
|
4.56
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at August 31, 2016
|
|
|
976,500
|
|
|
$
|
2.43
|
|
|
|
4.51
|
|
Exercisable at August 31, 2016
|
|
|
564,000
|
|
|
$
|
2.98
|
|
|
|
4.33
|
|
Fair value of the warrants was calculated using the Black-Scholes option-valuation model, with the following key inputs:
|
|
|
|
|
|
For the nine months ended August 31, 2016
|
|
Stock price
|
|
|
$1.60 - $4.15
|
|
Term (years)
|
|
|
2 - 5
|
|
Volatility
|
|
|
101.13% - 147.36
|
%
|
Risk-free rate
|
|
|
0.76% - 1.76
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Note 10 – Subsequent Events
Bio-Nucleonics
On September 6, 2016, the Company entered into the Patent and Technology License and Purchase Option Agreement (“Patent and Technology License and Purchase Option Agreement”) 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 Exclusive License.
In exchange for the consideration, the Company agreed to, upon reaching various milestones, issue to BNI an aggregate of 110,000 shares of common stock
that are subject to restriction from trading until commercialization of the product (approximately 12 months) and subsequent leak-out conditions,
and pay to BNI the total cash payment of $850,000, of which the Company has paid $10,000 as of August 31, 2016.
Once the Company has paid the aggregate cash payment, the Company may exercise its option to acquire the BNI IP at no additional charge. The Company issued 50,000 shares of common stock to BNI pursuant to the
Patent and Technology License and Purchase Option Agreement
in September 2016.
In the event that: (i) the Company does not exercise the option to purchase the BNI IP; (ii) the Company fails to make the aggregate cash payment within three 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 BNI IP, all BNI IP shall revert to BNI and we shall 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.
Series E Notes
The Series E convertible notes payable (the “Series E Notes”) have the same terms as the Series D Notes, except that 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. Subsequent to August 31, 2016, the Company issued $150,000 in principal of Series E notes to third party investors.
Private Placement
In September 2016, the Company entered into a subscription agreement with certain investors in connection with the Company’s private placement (“September Private Placement”), generating gross proceeds of $112,500 by selling 37,500 units (each, “Unit B”) at a price per Unit B of $3.00, with each Unit B consisting of one share of common stock and a two-year warrant to purchase one share of the Company’s common stock at an exercise price of $5.00 per share.
Finder’s Agreement
In October 2016,
the Company entered into two agreements to engage two financial advisors to assist the Company on its search for potential investors, vendors or partners to engage in a license, merger, joint venture or other business arrangement. As a compensation for their efforts, the Company agreed to pay the financial advisors a fee equal to 7% and 8% in cash, and to pay one of the financial advisors an additional fee equal to 7% in warrants of all consideration received by the Company. The Company has not incurred any finders’ fees pursuant to the agreement to-date.