CONDEN
S
ED NOTES TO CONSOLIDATED
FINANCIAL STATEMENTS
1. DESCRIPTION
OF BUSINESS AND BASIS OF PRESENTATION
Overview
QuantRx Biomedical Corporation was incorporated on December 5,
1986, in the State of Nevada. Our principal business office is
located at 10190 SW 90th Avenue, Tualatin, Oregon 97123. When used
in this Quarterly Report on Form 10-Q, the terms
“
Company
,”
“
we
,”
“
our
,”
“
ours
,”
or “
us
”
mean QuantRx Biomedical Corporation, a Nevada
corporation.
We have developed
and intend to
commercialize our innovative PAD based products for the
over-the-counter markets for the treatment of hemorrhoids, minor
vaginal infection, urinary incontinence, general catamenial uses
and other medical needs. We are developing and intend to
commercialize genomic diagnostics for the laboratory market, based
on our patented PadKit® technology. Our platforms
include: inSync®, Unique™, PadKit®, and OEM branded
over-the-counter and laboratory testing products based on our core
intellectual property related to our PAD
technology.
The continuation of our operations remain contingent on the receipt
of financing required to execute our business and operating plan,
which is currently focused on the commercialization of our PAD
technology either directly or through a joint venture, or other
relationship intended to increase shareholder value. In the
interim, we have nominal operations, focused principally on
maintaining our intellectual property portfolio and continuing to
comply with the public company reporting requirements. No
assurances can be given that we will obtain financing, or otherwise
successfully develop a business and operating plan or enter into an
alternative relationship to commercialize our PAD
technology.
Our diagnostic testing business, operating under our subsidiary QX
Labs, Inc. (“
QX
”) (the “
Diagnostic
Business
”) is based
principally on the Company’s proprietary PadKit®
technology, which we believe provides a patented platform
technology for genomic diagnostics, including fetal genomics.
Outside of the Diagnostic Business, our business line consists of
our over-the-counter business, including the InSync feminine
hygienic interlabial pad, the Unique® Miniform for hemorrhoid
application, and other treated miniforms (the
“
OTC
Business
”), as well as
established and continuing licensing relationships related to the
OTC Business. Management believes this corporate structure permits
the Company to more efficiently explore options to maximize the
value of the Diagnostics Business and the OTC Business
(collectively, the “
Businesses
”), with the objective of maximizing the
value of the Businesses for the benefit of the Company and its
stakeholders.
Our current focus is to obtain additional working capital necessary
to continue as a going concern, and develop a longer term financing
and operating plan to: (i) leverage our broad-based intellectual
property and patent portfolio to develop new and innovative
diagnostic products; (ii) commercialize our OTC Business and
Diagnostics Business either directly or through joint ventures,
mergers or similar transactions intended to capitalize on
commercial opportunities presented by each of the Businesses; (iii)
contract manufacturing to third parties while maintaining control
over the manufacturing process; and (iv) maximize the value of our
investments in non-core assets. However, as a result of
our current financial condition, our efforts in the short-term will
be focused on obtaining financing necessary to continue as a going
concern.
We follow the accounting guidance outlined in the Financial
Accounting Standards Board Codification guidelines. The
accompanying unaudited interim consolidated financial statements
have been prepared in accordance with generally accepted principles
for interim financial information and with the items under
Regulation S-X required by the instructions to Form 10-Q.
They may not include all information and footnotes required by
United States Generally Accepted Accounting Principles
(“
GAAP
”) for complete financial statements.
However, except as disclosed herein, there have been no material
changes in the information disclosed in the notes to the financial
statements for the year ended December 31, 2015 included in the
Company’s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on April 13, 2016. The
interim unaudited financial statements presented herein should be
read in conjunction with those financial statements included in the
Form 10-K. In the opinion of Management, all adjustments
considered necessary for a fair presentation, which unless
otherwise disclosed herein, consisting primarily of normal
recurring adjustments, have been made. Operating results for nine
months ended September 30, 2016 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2016.
Certain amounts in the prior period financial statements have been
reclassified to conform to the current period presentation. These
reclassifications had no effect on previously reported losses,
total assets or stockholders equity.
Recent Developments
Global Cancer Diagnostic, Inc. Letter of Intent
. On September 3, 2015, we entered into a
non-binding letter of intent (the “
Global LOI
”) with Global Cancer Diagnostics, Inc., a
privately held laboratory in Tempe, Arizona
(“
Global
”), for a proposed business combination. The
Global LOI had an original termination date of October 31, 2015
(the “
Termination
Date
”), but could be
terminated or extended anytime by the mutual written consent of the
parties.
During the quarter ended September 30, 2016, in accordance with the
terms and conditions of the executed Global LOI, the Company
deemed the Global LOI terminated. Accordingly, Global is obligated
to issue to us a number of shares of Global’s common stock
equal to 10% of its then outstanding shares of common stock, on a
fully-diluted basis, as payment of the Global Advance. In addition
to the share issuance, the Company is evaluating certain additional
remedies related to the Global LOI and the $50,000 advance. The
Company has deemed the $50,000 Global Advance to be fully impaired
as of September 30, 2016.
2. MANAGEMENT
STATEMENT REGARDING GOING CONCERN
The Company currently is not generating revenue from
operations. The Company has historically financed its
operations primarily through issuances of equity and the proceeds
from the issuance of promissory notes. In the past, the
Company also provided for its cash needs by issuing Common Stock,
options and warrants for certain operating costs, including
consulting and professional fees, as well as divesting its minority
equity interests and equity-linked investments.
The Company’s history of operating losses, limited cash
resources and the absence of an operating plan necessary to
capitalize on the Company’s assets raise
substantial doubt about our ability to continue as a going
concern, absent a strengthening of our cash
position. Management is currently pursuing various
funding options, including seeking debt or equity financing,
licensing opportunities and the sale of certain investment
holdings, as well as a strategic merger or other transaction, to
obtain additional funding to continue the development of, and to
successfully commercialize, its products. There can be
no assurance that we will be successful in our
efforts. Should the Company be unable to obtain adequate
financing or generate sufficient revenue in the future, our
business, result of operations, liquidity and financial condition
will be materially and adversely harmed, and we will be unable to
continue as a going concern.
There can be no assurance that, assuming that we are able to
strengthen our cash position, we will achieve sufficient revenue or
profitable operations to continue as a going concern.
3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is
presented to assist in understanding the Company’s financial
statements. The financial statements and notes are representations
of the Company’s management, which is responsible for their
integrity and objectivity. These accounting policies conform to
GAAP and have been consistently applied in the preparation of the
financial statements.
Accounting for Share-Based Payments.
The Company follows the provisions of ASC Topic
718, which establishes the accounting for transactions in which an
entity exchanges equity securities for services and requires
companies to expense the estimated fair value of these awards over
the requisite service period. The Company uses the Black-Scholes
option pricing model in determining fair value. Accordingly,
compensation cost has been recognized using the fair value method
and expected term accrual requirements as
prescribed. During the nine months ended September 30,
2016, the Company had no stock compensation
expense.
The Company accounts for share-based payments granted to
non-employees in accordance with ASC Topic 505,
“
Equity Based Payments to
Non-Employees
.” The
Company determines the fair value of the stock-based payment as
either the fair value of the consideration received or the fair
value of the equity instruments issued, whichever is more reliably
measurable. If the fair value of the equity instruments
issued is used, it is measured using the stock price and other
measurement assumptions as of the earlier of either (i) the date at
which a commitment for performance by the counterparty to earn the
equity instruments is reached, or (ii) the date at which the
counterparty’s performance is complete.
In the case of modifications, the Black-Scholes model is used to
value modified warrants on the modification date by applying the
revised assumptions. The difference between the fair value of the
warrants prior to the modification and after the modification
determines the incremental value. The Company has modified warrants
in connection with the issuance of certain notes and note
extensions. These modified warrants were originally issued in
connection with previous private placement investments. In the case
of debt issuances, the warrants were accounted for as original
issuance discount based on their relative fair values. When
modified in connection with a note issuance, the Company recognizes
the incremental value as a part of the debt discount calculation,
using its relative fair value in accordance with ASC Topic 470-20,
“
Debt
with Conversion and Other Options
.” When modified in connection with note
extensions, the Company recognized the incremental value as prepaid
interest, which is expensed over the term of the
extension.
The fair value of each share based payment is estimated on the
measurement date using the Black-Scholes model with the following
assumptions, which are determined at the beginning of each year and
utilized in all calculations for that year. During the year ended
December 31, 2015, the Company
used an average risk
free interest rate of 0.52%, a dividend yield of zero, and an
average expected volatility of 417%. The Company did not issue any
equity securities during the nine months ended September 30,
2016.
Risk-Free Interest Rate.
The interest rate used is based on the yield
of a U.S. Treasury security as of the beginning of the
year.
Expected Volatility.
The
Company calculates the expected volatility based on historical
volatility of monthly stock prices over a three-year
period.
Dividend Yield.
The
Company has never paid cash dividends, and does not currently
intend to pay cash dividends, and thus has assumed a 0% dividend
yield.
Expected Term.
For
options, the Company has no history of employee exercise patterns.
Therefore, the Company uses the option term as the expected term.
For warrants, the Company uses the actual term of the
warrant.
Pre-Vesting Forfeitures.
Estimates of pre-vesting option forfeitures
are based on Company experience. The Company will adjust its
estimate of forfeitures over the requisite service period based on
the extent to which actual forfeitures differ, or are expected to
differ, from such estimates. Changes in estimated forfeitures will
be recognized through a cumulative catch-up adjustment in the
period of change and will also impact the amount of compensation
expense to be recognized in future periods.
Earnings per Share.
The Company computes net income (loss) per common
share in accordance with ASC Topic 260. Net income (loss) per share
is based upon the weighted average number of outstanding common
shares and the dilutive effect of common share equivalents, such as
options and warrants to purchase Common Stock, convertible
preferred stock and convertible notes, if applicable, that are
outstanding each year. Basic and diluted earnings per share were
the same at the reporting dates of the accompanying financial
statements, as including Common Stock equivalents in the
calculation of diluted earnings per share would have been
antidilutive.
As of September 30, 2016, the Company had outstanding options
exercisable for 2,352,000 shares of its Common Stock, and preferred
shares convertible into 16,676,942 shares of its Common Stock,
which options and preferred shares were deemed to be antidilutive
for the nine months ended September 30, 2016.
As of September 30, 2015, the Company had outstanding options
exercisable for 2,452,000 shares of its Common Stock, and preferred
shares convertible into 16,676,972 shares of its Common Stock,
which options and preferred shares were deemed to be antidilutive
for the nine months ended September 30, 2015.
Fair Value.
The
Company has adopted ASC Topic 820, "
Fair Value Measurements
and Disclosures
" for both
financial and nonfinancial assets and liabilities. The
Company has not elected the fair value option for any of its assets
or liabilities.
Use of Estimates.
The accompanying financial statements are prepared
in conformity with accounting principles generally accepted in the
United States of America, and include certain estimates and
assumptions, which affect the reported amounts of assets and
liabilities at the date of the financial statements, and the
reported amounts of revenues and expenses during the reporting
period. Accordingly, actual results may differ from
those estimates.
Recent Accounting Pronouncements
.
Management has considered all recent accounting pronouncements in
the current period and identified no pronouncements that would have
an impact on our financial statements.
4. INVESTMENTS
In May 2006, the Company purchased 144,024 shares of common stock
of Genomics USA, Inc. (“
GUSA
”) for $200,000. After the investment,
QuantRx owned approximately 5% of the total issued and outstanding
common stock of GUSA. As of the end of September 30, 2016, the
Company’s position had been diluted to approximately
5%
of the issued and outstanding common stock of
GUSA. The investment is recorded at historical cost and
is assessed at least annually for impairment. Genomics
USA, Inc. now does business as GMS Biotech.
5. INTANGIBLE
ASSETS
Intangible assets as of the balance sheet dates consisted
of the following:
|
|
September 30,
2016
(unaudited)
|
|
|
Licensed
patents and patent rights
|
$
50,000
|
$
50,000
|
|
Patents
|
41,044
|
41,044
|
|
NuRx
licensed technology
|
13,200
|
13,200
|
|
Less:
accumulated amortization
|
(89,477
)
|
(84,295
)
|
|
Intangibles,
net
|
$
14,767
|
$
19,949
|
The Company’s intangible assets consist of patents, licensed
patents and patent rights, are carried at the legal cost to obtain
them. Costs to renew or extend the term of intangible assets are
expensed when incurred. In 2008, through our formerly majority
owned subsidiary, the Company also held technology licenses and
other acquired intangibles. Intangible assets are amortized using
the straight-line method over the estimated useful life. Useful
lives are as follows:
|
Asset
Categories
|
Estimated Useful Life in Years
|
|
Patents
|
17
|
|
Patents
under licensing
|
10
|
|
Intangibles
acquired in 2008 (weighted average)
|
15
|
Amortization expense for the nine months ended September 30, 2016
and 2015 totaled $5,182 and $6,429, respectively.
Patent under Licensing
The Company licenses patent rights and know-how for certain
hemorrhoid treatment pads and related coatings from The Procter
& Gamble Company. The five-year license agreement was entered
into July 2006 and has a five-year automatic renewal
option. Although the Company renewed the agreement in
2011, payments have been suspended due to the Company’s
current financial condition. The Company has
subsequently filed for a patent to address the technology used in
its treated miniforms, which was issued during 2015.
6. CONVERTIBLE
NOTES PAYABLE
2012 Notes and 2013 Notes.
In May 2012, in consideration for the extension of
certain promissory notes originally due and payable on March 31,
2012 (the “
2012 Notes
”) to June 30, 2012, the Company assigned to
the holders of the 2012 Notes FPMI Warrants to purchase a total of
113,127 shares of FPMI common stock for $0.50 per share
(the
“$0.50 FPMI
Warrants
”). In
August 2012, in consideration for the extension of the maturity
date of the 2012 Notes to November 15, 2012, the Company agreed to
assign a total of 155,877 $0.50 FPMI Warrants to the holders of the
2012 Notes. As a result, a total of 260,508 $0.50 FPMI
Warrants have been assigned to holders of 2012
Notes.
Between August 2012 and July 2013, the Company issued promissory
notes in the aggregate principal amount of $114,000 (the
“
2013
Notes
”). As additional
consideration for the 2013 Notes, the Company issued an aggregate
total of 200,000 shares of Common Stock, 8,496 $0.50 FPMI Warrants
and 64,000 FPMI Warrants exercisable for $1.00 per
share.
The 2012 and 2013 Notes accrue interest at the rate of 6% annually
prior to maturity, and 12% annually thereafter. All 2012 Notes and
2013 Notes have matured and are currently due and payable on
demand. The 2012 Notes and 2013 Notes are convertible at the option
of each respective holder into shares of Common Stock at a
conversion price equal to $0.10 per share. In addition, the holders
may exchange the 2012 Notes and 2013 Notes for Common Stock in the
event the Company consummates a qualified financing (the
“
Qualified
Financing
”), which is
defined in the 2012 Notes and 2013 Notes as a financing resulting
in gross proceeds to the Company of at least $500,000. While the
Company intends to pay the 2012 Notes and 2013 Notes using proceeds
from a Qualified Financing, such Qualified Financing may not occur
prior to the date the holders of the 2012 Notes and 2013 Notes
demand repayment.
In connection with the issuance of the 2012 Notes and 2013 Notes,
the Company has recorded debt discount and expenses of the
beneficial conversion feature of $106,261 and $28,998,
respectively. The Company will amortize these expenses
over the life of the 2012 Notes and 2013 Notes. As of
December 31, 2012, the Company recorded interest expense related to
the debt discount of $21,905 and $3,777 related to the beneficial
conversion feature.
In connection with the issuance of the 2013 Notes, the Company has
recorded debt discount and expenses in the amount of $27,753
related to the value of the 64,000 FPMI warrants to the holders of
the 2013 Notes. The Company will amortize the costs over
the remaining life of these 2013 Notes. As of September
30, 2014, the Company recorded other financing costs of $27,753
related to the debt discount on the 2013 Notes.
On October 29, 2013, the holder of certain outstanding 2012 Notes
and 2013 Notes totaling approximately $217,000 in principal and
accrued interest agreed to cancel such notes in exchange for a new
promissory note with a face amount of $217,000 maturing on March
31, 2014, and 100,000 FPMI Warrants. Separately, our financial
advisor agreed to exchange $216,000 of fees accrued from May
15, 2012 to October 15, 2013, otherwise payable in cash on or
before December 31, 2013, for a promissory note with a face amount
of $250,000 maturing on March 31, 2014, and 100,000 FPMI Warrants.
These promissory notes accrued interest at a rate of 8%
annually prior to maturity, and, following maturity of both
promissory notes on March 31, 2014, now accrue interest at rate of
12% annually.
Bridge Notes.
In
July 2014, the Company’s Board of Directors approved of a
private offering of convertible promissory demand notes (the
“
Bridge
Notes
”) to certain
accredited investors in the aggregate principal amount of up to
$500,000. As additional consideration for the purchase of the
Bridge Notes, the Board approved of the issuance of 200,000 shares
of the Company’s Common Stock to participating investors for
every $100,000 invested.
Each Bridge Note accrues interest at a rate of 10% per annum,
payable in either cash or shares of the Company’s Common
Stock. The Bridge Notes matured on December 31, 2015, and are
currently due and payable on demand. Each Bridge Note is
convertible, at the option of the holder thereof, into that number
of shares of Common Stock equal to the outstanding principal
balance of the Bridge Note, plus accrued but unpaid interest (the
“
Outstanding
Balance
”), divided by
$0.08 (the “
Conversion
Shares
”). Additionally,
in the event the Company completes an equity or equity-linked
financing with gross proceeds to the Company of at least $1.5
million (a “
Qualified
Financing
”), the
Outstanding Balance of all Bridge Notes will, at the discretion of
each respective holder, either (i) convert into securities sold in
the Qualified Financing, or (ii) automatically convert into
Conversion Shares.
During the year ended December 31, 2014, the Company issued Bridge
Notes in the aggregate principal amount of $386,000. As additional
consideration for the purchase of the Bridge Notes, the Company
issued an aggregate total of 772,000 shares of Common Stock to the
purchasers of the Bridge Notes.
In connection with the issuance of the Bridge Notes during the year
ended December 31, 2014, the Company recorded debt discount and
expenses related to the beneficial conversion feature in the amount
of $35,944 and $48,444, respectively. The Company will
amortize these amounts over the life of the debt and, accordingly,
recorded interest expense related to the debt discount and
beneficial conversion feature in the amount of $26,958, and
$36,333, respectively. The Company also incurred $46,000
of costs related to issuance of the Bridge Notes, which were
amortized over the life of the debt. Total issuance
costs recognized during the year ended December 31, 2014 amounted
to $34,263.
During the year ended December 31, 2014, the Company authorized the
issuance of 2,601,233 shares of Common Stock to the holders of all
outstanding notes payable with an aggregate outstanding principal
balance of $870,693 in order to satisfy all accrued, but unpaid,
interest on the notes issued between 2012 and June
2014. During the period, all of the authorized shares of
Common Stock were issued to settle the total outstanding interest
payable on the notes, which amounted to $93,924. The
Company recognized a loss of $62,150 in connection with the
settlement.
On January 2, 2015, the Company issued an additional Bridge Note in
the principal amount of $36,500 and issued 73,000 shares of Common
Stock to the purchaser of the additional Bridge Note. Additionally,
we issued 500,000 shares of Common Stock in January 2015 to certain
investors who purchased Bridge Notes during the year ended December
31, 2014, which were previously classified as shares to be
issued.
In February 2015, the Company issued an aggregate total of 815,061
shares of Common Stock as payment for accrued interest for the
period from July 1, 2014 through December 31, 2014 under
certain convertible notes payable.
On June 30, 2015, the Company issued two additional Bridge Notes in
the aggregate principal amount of $50,000 and issued an aggregate
total of 100,000 shares of Common Stock to the purchasers of these
Bridge Notes. In connection with the issuance of these notes, the
Company recorded debt discount expenses totaling $2,830 and will
amortize these costs over the life of the notes.
In June 2015, the Company authorized the issuance of an aggregate
total of 1,875,691 shares of Common Stock as payment for accrued
interest for the period from January 1, 2015 through June 30, 2015
under certain convertible notes payable. The Company
settled a total of $70,256 in accrued interest, recognizing a gain
on settlement in the amount of $23,364. The Company and
the holders of the Bridge Notes also agreed to extend the maturity
date of the Bridge Notes from June 30, 2015 to December 31, 2015.
As consideration for the extension of the maturity date of the
Bridge Notes, the Company issued an aggregate total of 286,500
shares of Common Stock to the Bridge Note holders.
In July 2015, the Company issued a Bridge Note in the principal
amount of $35,000 and issued an aggregate total of 70,000 shares of
Common Stock to the purchaser of the Bridge Note.
BHA Note
. On March 31, 2016,
Burnham Hill Advisors, LLC (“
BHA
”) agreed to exchange all amounts owed to
BHA pursuant to the Advisory Agreement by and between the Company
and BHA, dated October 2013 (the “
BHA
Agreement
”), for a
promissory note, on terms substantially similar to the Bridge
Notes, in the principal amount of $283,000 (the
“
BHA
Note
”). The BHA Note
matures on December 31, 2016.
At September 30, 2016 and December 31, 2015, the Company’s
Convertible Notes Payable are as follows:
|
|
September 30,
2016
(unaudited)
|
|
|
Notes
Payable
|
$
801,415
|
$
814,433
|
|
Notes
Payable, related party
|
778,591
|
495,340
|
|
Total
notes payable, net of discount
|
$
1,580,006
|
$
1,309,773
|
7. LONG-TERM
NOTES PAYABLE
The Company received a $44,000 loan from the Portland Development
Commission in 2007. The loan matures in 20 years and was interest
free through February 2010. The terms of the note stipulated
monthly interest only payments from April 2010 through December
2014, at a 5% annual rate. The Company recorded interest
expense on this loan of $677 and $709 for the three months ended
September 30, 2016 and 2015, respectively. The Company recorded
interest expense on this loan of $1,538 and $1,432 for the nine
months ended September 30, 2016 and 2015, respectively. The loan
balance as of September 30, 2016 and December 31, 2015 was $40,023
(current portion of $2,431) and
$41,766 (current
portion of $2,336)
,
respectively.
8. OTHER
BALANCE SHEET INFORMATION
Components of selected captions in the accompanying balance sheets
consist of:
|
Prepaid expenses:
|
September 30,
2016
(unaudited)
|
|
|
Prepaid
insurance
|
$
-
|
$
26,396
|
|
Prepaid expenses
|
$
-
|
$
26,396
|
|
|
|
|
|
Property and equipment:
|
|
|
|
Computers
and office furniture, fixtures and equipment
|
$
28,031
|
$
28,031
|
|
Machinery
and equipment
|
5,475
|
5,475
|
|
Less:
accumulated depreciation
|
(33,229
)
|
(32,408
)
|
|
Property and equipment, net
|
$
277
|
$
1,098
|
|
|
|
|
|
Accrued expenses:
|
|
|
|
Other
Accrued expenses
|
$
12,500
|
34,366
|
|
Accrued expenses
|
$
12,500
|
34,366
|
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of
the assets. The Company’s property and equipment at September
30, 2016 consisted of computer and office equipment, machinery and
equipment with estimated useful lives of three to seven years.
Depreciation expense for the three and nine months ended September
30, 2016 was $274 and $822, while depreciation expense for the
three and nine months ended September 30, 2015 was $273 and $820,
respectively.
Expenditures for repairs and maintenance are expensed as
incurred.
9. PREFERRED
STOCK
The Company has authorized 20,500,000 shares of preferred stock, of
which 20,500,000 is designated as Series B Convertible Preferred
Stock, $0.01 par value, with a stated value of approximately
$204,000 (“
Series B
Preferred
”). The
remaining authorized preferred shares have not been designated by
the Company as of September 30, 2016.
On November 19, 2010, the Company filed a Certificate of Withdrawal
of the Certificates of Designations of the Series A Preferred Stock
(“
Series A
Preferred
”) with the
Nevada Secretary of State, as there were no shares of Series A
Preferred issued and outstanding after the exchange transaction
discussed below.
Series B Convertible Preferred Stock
The Series B Preferred ranks prior to the Common Stock for purposes
of liquidation preference, and to all other classes and series of
equity securities of the Company that by their terms did not rank
senior to the Series B Preferred (“
Junior
Stock
”). Holders
of the Series B Preferred are entitled to receive cash dividends,
when, as and if declared by the Board of Directors, and they shall
be entitled to receive an amount equal to the cash dividend
declared on one share of Common Stock multiplied by the number of
shares of Common Stock equal to the outstanding shares of Series B
Preferred, on an as converted basis. The holders of Series B
Preferred have voting rights to vote as a class on matters a)
amending, altering or repealing the provisions of the Series B
Preferred so as to adversely affect any right, preference,
privilege or voting power of the Series B Preferred; or b) to
affect any distribution with respect to Junior Stock. At
any time, the holders of Series B Preferred may, subject to
limitations, elect to convert all or any portion of their Series B
Preferred into fully paid non-assessable shares of Common Stock at
a 1:1 conversion rate.
As of September 30, 2016 and December 31, 2015, the Company had
16,676,942 shares of Series B Preferred Stock issued and
outstanding with a liquidation preference of $166,769,
respectively, and convertible into 16,676,942 shares of Common
Stock.
10. COMMON
STOCK, OPTIONS AND WARRANTS
The Company has authorized 150,000,000 shares of its Common Stock,
of which 78,696,461 were issued and outstanding at each of
September 30, 2016.
On January 2, 2015, the Company issued 73,000 shares of Common
Stock to the purchaser of a Bridge Note in the principal amount of
$36,500. Additionally, we issued 500,000 shares of Common Stock to
certain investors who purchased Bridge Notes during the year ended
December 31, 2014, which were previously classified as shares
to-be-issued.
In February 2015, the Company agreed to issue Common Stock to two
consultants for services rendered under the terms of their
respective agreements, although neither consultant had fully
completed the obligations of their agreements. An aggregate of
925,003 common shares were issued during the three months ended
March 31, 2015.
In February 2015, the Company issued 815,061 shares of Common Stock
as payment for accrued interest for the period from July 1,
2014 through December 31, 2014 under certain convertible notes
payable.
On February 3, 2015, the Board of Directors granted an aggregate of
2.3 million stock options to its executive management at an
exercise price of $0.04 per share. The options have a
five-year term and are fully vested on the date of
grant.
In May 2013, the executive management received an aggregate of 1.0
million shares of Common Stock as compensation for the completion
of certain objectives. On February 20, 2015, the Board of Directors
agreed to cancel these shares, as the Company had failed to meet
the specified objectives. As of September 30, 2016,
these shares were still outstanding.
In June 2015, the Company’s Board of Directors authorized the
following issuances of Common Stock: (i) an aggregate total of
286,500 shares issuable to the Bridge Note holders as consideration
for the extension of the maturity date of the Bridge Notes to
December 31, 2015; (ii) an aggregate total of 1,875,691 shares of
Common Stock as payment of accrued but unpaid interest on certain
of the Company’s convertible promissory notes; and (iii) an
aggregate total of 100,000 shares of Common Stock to certain
investors who purchased Bridge Notes in the aggregate principal
amount of $50,000 during the three months ended June 30,
2015.
In July 2015, the Company issued an aggregate total of 70,000
shares of Common Stock to the purchaser of a $35,000 Bridge
Note.
In September 2015, the Company authorized an aggregate total of 1.5
million shares of Common Stock to its officers and directors as
consideration for services rendered to the Company, subject to
certain vesting schedules. These shares were issued during the
quarter ended December 31, 2015, and all shares were fully vested
as of December 31, 2015. Since the shares fully vested during the
year ended December 31, 2015, the Company elected to expense the
full amount during the 2015 period, rather than amortizing the
amount over multiple periods.
In July 2016, the Company issued an aggregate of 8,923,543 shares
of Common Stock as payment of accrued interest under certain
convertible notes payable, including the Bridge Notes and BHA
Note.
During the three months ended September 30, 2016 and 2015, there
were no warrants issued by the Company. As of September
30, 2016, the Company had no warrants issued and
outstanding.
2007 Incentive and Non-Qualified Stock Option Plan.
The fair value of options
granted under the Company’s 2007 Incentive and Non-Qualified
Stock Option Plan is recorded as compensation expense over the
vesting period, or, for performance based awards, the expected
service term.
During the nine months
ended September 30, 2015, the Company recorded stock compensation
expense related to options issued for director fees in the amount
of $15,000.
11. COMMITMENTS AND CONTINGENCIES
Professional Services Agreement.
On October 29, 2013, we entered into the BHA
Agreement. Pursuant to this agreement, we agreed to pay
a retainer in the amount of $100,000 and $15,000 per month
beginning on November 29, 2013. The initial term of the agreement
expired on December 31, 2014. BHA agreed to defer the cash fees due
under this agreement until June 30, 2014. On July 1, 2014, the
Company and BHA modified the terms of this agreement to provide for
a one-time $15,000 payment in August 2014, and deferral of all
other remaining cash fees until December 31, 2014 in consideration
for the issuance of the 109,917 FPMI Warrants. On March 31,
2016, BHA agreed to exchange all amounts owed to BHA under the BHA
Agreement for the BHA Note, which note contains terms substantially
similar to the Bridge Notes, in the principal amount of $283,000.
The BHA Note matures on December 31, 2016.
On May 28, 2014, we entered into a Consulting Services Agreement
for financial related services from Mayer & Associates
(“
Mayer
”) through November 30, 2014. Under the
terms of the agreement, Mayer will receive 300,000 shares of Common
Stock and four payments of $12,500. During the year ended December
31, 2014, the Company has recorded the expenses under this
agreement totaling $50,000 of which $25,000 has been paid,
additionally the Company has reserved for issuance 300,000 shares
of its Common Stock in connection with this agreement. Although the
Company has yet to receive proceeds sufficient to constitute an
Initial Capital Raise of $500,000, in February 2015, the Company
agreed to issue 300,000 shares of Common Stock to Mayer as
consideration for services rendered under the
agreement. In June 2015, the Company also authorized the
issuance of an aggregate total of 286,500 shares of Common Stock to
Mayer for services rendered under the Consulting Services Agreement
first executed on May 28, 2014. As of September 30, 2016, the
requirements under the Mayer agreement had not been
met.
On May 28, 2014, the Company entered into a Consulting Services
Agreement for financial related services from JFS Investments PR
LLC (
“JFS”
). Under
the terms of the agreement, JFS could receive a total of 2.5
million restricted shares of Common Stock as compensation under the
agreement. In February 2015, the Company agreed to issue an initial
payment of 625,003 shares as consideration for services rendered.
As of September 30, 2016, the requirements under the JFS agreement
had not been met and the Company has terminated this agreement and
no further compensation is due or will be paid.
12. SUBSEQUENT EVENTS
Between October 1, 2016 and November 15, 2016, a shareholder
advanced the Company $11,000. During fiscal 2016 the Company has
received $26,000 in advances from its shareholders to fund
operations.
We have evaluated subsequent events through the date of this filing
in accordance with the Subsequent Events Topic of the FASB ASC 855,
and have determined that no subsequent events occurred that are
reasonably likely to impact these financial
statements.