Notes
to Condensed Consolidated Financial Statements
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 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
February 28, 2019, the Condensed Consolidated Statements of Operations for the three months ended February 28, 2019 and 2018,
and the Condensed Consolidated Statements of Cash Flows for the three months ended February 28, 2019 and 2018, 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, 2018 has been derived from audited financial statements included in the Company's Form 10-K, most
recently filed with the SEC on March 7, 2019. The results for the three months ended February 28, 2019 and 2018 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
has and is expected to incur net losses and cash outflows from operations in pursuit of extracting value from its acquired intellectual
property. These matters, amongst others, raise doubt about the Company’s ability to continue as a going concern.
As of February
28, 2019, the Company has raised operating funds through contacts, high net-worth individuals and strategic investors.
The Company has not generated any revenue from operations since inception and has limited assets upon which to commence its business
operations. Management anticipates that the Company will have to raise additional funds and/or generate revenue from
drug sales within twelve months to continue operations. Additional funding will be needed to implement the Company’s business
plan that includes various expenses such as fulfilling our obligations under licensing agreements, legal, operational set-up,
general and administrative, marketing, employee salaries and other related start-up expenses. Obtaining additional funding will
be subject to a number of factors, including general market conditions, investor acceptance of our business plan and initial results
from our business operations. These factors may impact the timing, amount, terms or conditions of additional financing available
to us. If the Company is unable to raise sufficient funds, management we will be forced to scale back the Company’s operations
or cease our operations.
Management has
determined that there is substantial doubt about the Company's ability to continue as a going concern within one year after the
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, 2018 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.
Q
BIOMED INC.
Notes
to Condensed Consolidated Financial Statements
Income Taxes
Deferred tax
assets and liabilities are computed based upon the difference between the financial statement and income tax basis of assets and
liabilities using the enacted marginal tax rate applicable when the related asset or liability is expected to be realized or settled.
Deferred income tax expenses or benefits are based on the changes in the asset or liability each period. If available
evidence suggests that it is more likely than not that some portion or all of the deferred tax assets will not be realized, a
valuation allowance is required to reduce the deferred tax assets to the amount that is more likely than not to be realized. Future
changes in such valuation allowance are included in the provision for deferred income taxes in the period of change.
In its interim
consolidated financial statements, the Company utilizes an expected annual effective tax rate in determining its income tax provisions
for the interim periods. That rate differs from U.S. statutory rates primarily as a result of valuation allowance related to the
Company’s net operating loss carryforward as a result of the historical losses of the Company.
Recent accounting
pronouncements
On February
2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
. Under the new guidance, lessees will be
required to recognize all leases (with the exception of short-term leases) on the balance sheet as a lease
liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and
a right-of-use asset, which is an asset that represents the lessee¹s right to use, or control the use of, a specified asset
for the lease term. The guidance in ASU 2017-11 is effective for the Company on December 1, 2019. Early adoption is permitted,
and the guidance is to be applied using a full or modified retrospective approach. The Company is currently evaluating the impact
of the new standard on its consolidated financial statements.
In July 2017,
the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives
and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception.
The ASU allows companies to exclude a down round feature
when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own
stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required
to be accounted classified as liabilities. A company will recognize the value of a down round feature only when it is triggered
and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, such as warrants, an
entity will treat the value of the effect of the down round, when triggered, as a dividend and a reduction of income available
to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing
down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized
to earnings. The guidance in ASU 2017-11 is effective for the Company on December 1, 2019. Early adoption is permitted, and the
guidance is to be applied using a full or modified retrospective approach. The Company is currently evaluating the impact of the
new standard on its consolidated financial statements.
Recent adopted pronouncements
In May 2014,
the FASB issued ASU 2014-09,
Revenue from Contracts with Customers (Topic 606), as modified by ASU 2015-14, Revenue from Contracts
with Customers (Topic 606): Deferral of the Effective Date
, ASU 2016-08,
Revenue from Contracts with Customers (Topic 606):
Principal versus Agent Considerations (Reporting Revenue Gross versus Net),
ASU 2016-10,
Revenue from Contracts with Customers
(Topic 606): Identifying Performance Obligations and Licensing
, and ASU 2016-12,
Revenue from Contracts with Customers
(Topic 606): Narrow-Scope Improvements and Practical Expedients
. The revenue recognition principle in ASU 2014-09 is that
an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration
to which the entity expects to be entitled in exchange for those goods or services. In addition, new and enhanced disclosures
will be required. Companies may adopt the new standard either using the full retrospective approach, a modified retrospective
approach with practical expedients, or a cumulative effect upon adoption approach. The adoption of this standard on December
1, 2018 did not impact the Company’s consolidated financial statements.
Q
BIOMED INC.
Notes
to Condensed Consolidated Financial Statements
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. The adoption of this standard on December 1, 2018 did not impact the Company’s
consolidated financial statements.
In June 2018,
the FASB issued ASU 2018-07,
Compensation – Stock Compensation (Topic 718), Improvements to Nonemployee Share-Based Payment
Accounting
. This ASU is intended to simplify aspects of share-based compensation issued to non-employees by making the guidance
consistent with the accounting for employee share-based compensation. The adoption of this standard on December 1, 2019 did not
impact the Company’s consolidated 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.
|
|
|
For
the Three Months Ended February 28,
|
|
Potentially dilutive
securities
|
|
|
2019
|
|
|
2018
|
|
Warrants
|
|
|
4,984,058
|
|
|
4,877,558
|
|
Convertible Notes
|
|
|
2,042,014
|
|
|
—
|
|
Stock Options
|
|
|
900,000
|
|
|
500,000
|
|
Note 5 -
Convertible Notes
|
|
|
February
28, 2019
|
|
|
November
30, 2018
|
|
Convertible Notes:
|
|
|
|
|
|
|
|
Principal value of 5.5%, convertible at $2.00
at February 28, 2019 and November 30, 2018, due March 21, 2020
|
|
$
|
4,000,000
|
|
$
|
4,000,000.00
|
|
Fair value of bifurcated contingent put option
of convertible notes
|
|
|
289,000
|
|
|
262,000
|
|
Debt discount
|
|
|
(1,152,604
|
)
|
|
(1,388,728
|
)
|
Carrying value of convertible notes
|
|
|
3,136,396
|
|
|
2,873,272
|
|
Total long-term carrying value of convertible notes
|
|
$
|
3,136,396
|
|
$
|
2,873,272
|
|
The monthly
payment provision within the convertible notes is a contingent put option that is required to be separately measured at fair value,
with subsequent changes in fair value recognized in the Consolidated Statement of Operations. The maximum redemption is discounted
at 35.17%, the calculated effective rate of the convertible notes before measurement of the contingent put option. The
fair value estimate is a Level 3 measurement. The Company estimated the fair value of the monthly payment provision, using probability
analysis of the occurrence of a Triggering Date applied to the discounted maximum redemption premium for any given payment
with the following key inputs:
|
|
|
For
the Three Months Ended February 28, 2019
|
|
Stock price
|
|
|
$1.88
|
|
Terms (years)
|
|
|
1.0 - 1.1
|
|
Volatility
|
|
|
81.70%
|
|
Risk-free rate
|
|
|
2.44 - 2.54%
|
|
Dividend yield
|
|
|
0.00%
|
|
Amortization
of the debt discount associated with the convertible notes was approximately $236,000 for the three-month period ended February
28, 2019 and was included in interest expense in the accompanying condensed consolidated statements of operations.
Q
BIOMED INC.
Notes
to Condensed Consolidated Financial Statements
Note 6 –
Commitments and Contingencies
Legal
On December
28, 2018, the Company commenced litigation against BioNucleonics, Inc. (“BNI”) and parties related to BNI in the Supreme
Court of New York, New York County (removed to federal court in February 2019). The litigation stems from a license agreement
that the Company entered into with BNI in 2016 and amended from time to time. Under the agreement with BNI, the Company were granted
a worldwide, exclusive license on certain BNI intellectual property and the option to acquire the BNI IP within three years of
the agreement. The BNI IP consists of generic Strontium Chloride SR89 (generic Metastron®) (“SR89”) and all of
BNI’s intellectual property relating to it (“BNI IP”). SR89 is a radiopharmaceutical therapeutic for cancer
bone pain therapy.
In exchange
for the consideration, the Company agreed, upon reaching various milestones, to issue to BNI an aggregate of up to 110,000 shares
of common stock and to provide funding to BNI for an aggregate of $850,000 in cash. Under the agreement, once the Company has
funded up to $850,000 in cash, the Company may exercise the option to acquire the BNI IP at no additional charge. By our accounts,
the Company have provided BNI with over $950,000 in cash. The Company has exercised our option to acquire the BNI IP, but BNI
has not transferred the BNI IP to us. As a result, the Company has commenced litigation to, among other actions, obtain all of
the BNI IP. The Company also seeks judgments against BNI and related parties for the misappropriation of funds, breach of contract,
fraud and fraudulent inducement.
Periodically,
the Company reviews the status of significant matters, if any exist, and assesses our 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.
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.
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 expense
is classified within general and administrative expenses on a straight-line basis and included in the accompanying Condensed Consolidated
Statements of Operations as follows:
|
|
|
For
the three months ended February 28,
|
|
|
|
|
2019
|
|
|
2018
|
|
Rent expense
|
|
$
|
7,500
|
|
$
|
7,500
|
|
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
months ended February 28, 2019 and 2018, the Company incurred approximately $604,000 and $619,000, respectively, in research and
development expenses to fund the costs of development of the eye drop treatment for glaucoma pursuant to the Exclusive License.
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 included within general and administrative expenses in the accompanying
Condensed Consolidated Statements of Operations as follows:
Q
BIOMED INC.
Notes
to Condensed Consolidated Financial Statements
|
|
|
For
the three months ended February 28,
|
|
|
|
|
2019
|
|
|
2018
|
|
Consulting and legal expenses
|
|
$
|
102,446
|
|
$
|
60,000
|
|
Note 8 -
Stockholders’ Equity Deficit
As of February
28, 2019 and November 30, 2018, 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
During the three
months ended February 28, 2019, the Company issued an aggregate of 175,919 shares of the Company common stock to various vendors
for advisory services, valued at approximately $327,000 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.
Note 9 –
Warrants and Options
Summary of
warrants
The following
represents a summary of all outstanding warrants to purchase the Company’s common stock, including warrants issued to vendors
for services and warrants issued as part of the units sold in the private placements, at February 28, 2019 and the changes during
the period then ended:
|
|
|
Warrants
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average
Remaining Contractual
Life (years)
|
|
|
Intrinsic
Value
|
|
Outstanding at November 30, 2018
|
|
|
4,984,058
|
|
$
|
3.48
|
|
|
3.51
|
|
$
|
250,000
|
|
Issued
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Expired
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Outstanding at February 28, 2019
|
|
|
4,984,058
|
|
$
|
3.48
|
|
|
3.26
|
|
$
|
215,000
|
|
Exercisable at February 28, 2019
|
|
|
4,868,558
|
|
$
|
3.50
|
|
|
3.24
|
|
$
|
215,000
|
|
Q
BIOMED INC.
Notes
to Condensed Consolidated Financial Statements
Fair value of
all outstanding warrants issued to non-employees for services was calculated with the following key inputs:
|
|
|
For
the Three Months Ended February 28,
|
|
|
|
|
2019
|
|
|
2018
|
|
Stock price
|
|
|
$1.95
|
|
|
$2.99 - $4.80
|
|
Term (years)
|
|
|
2.5 - 4.8
|
|
|
3.0 - 5.0
|
|
Volatility
|
|
|
105 - 128%
|
|
|
122.78 - 131.37%
|
|
Risk-free rate
|
|
|
2.80 - 2.84%
|
|
|
1.78 - 2.65%
|
|
Dividend yield
|
|
|
0.00%
|
|
|
0.00%
|
|
Options issued
for services
The following
represents a summary of all outstanding options to purchase the Company’s common stock at February 28, 2019 and the changes
during the period then ended:
|
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted
Average Remaining Contractual Life (years)
|
|
|
Intrinsic
Value
|
|
Outstanding at November 30, 2018
|
|
|
900,000
|
|
$
|
3.68
|
|
|
3.99
|
|
$
|
—
|
|
Issued
|
|
|
—
|
|
$
|
—
|
|
|
—
|
|
$
|
—
|
|
Outstanding at February 28, 2019
|
|
|
900,000
|
|
$
|
3.68
|
|
|
3.74
|
|
$
|
—
|
|
Exercisable at February 28, 2019
|
|
|
800,000
|
|
$
|
3.72
|
|
|
3.68
|
|
$
|
—
|
|
Fair value of options issued in the
three-month period ended February 28, 2018 was calculated with the following key inputs. No options were granted in the three-month
period ended February 28, 2019.
|
|
|
For
the Three Months
Ended February 28, 2018
|
|
Exercise price
|
|
|
$3.00
|
|
Expected term (years)
|
|
|
5.0
|
|
Volatility
|
|
|
127.70%
|
|
Risk-free rate
|
|
|
2.52%
|
|
Dividend yield
|
|
|
0.00%
|
|
Stock-based Compensation
The Company
recognized general and administrative expenses of approximately $157,000 and $402,000 as a result of the shares, outstanding warrants
and options issued to consultants and employees during the three months ended February 28, 2019 and 2018, respectively.
As of February
28, 2019, the estimated unrecognized stock-based compensation associate with these agreements is approximately $82,000 and will
be recognized over the next four months.
Note 10 –
Subsequent Events
Issuance
of shares for services
On April 9,
2019, the Company issued an aggregate of 185,128 shares of the Company’s common stock to various vendors for advisory services
and the extension of the Mannin Purchase Option Agreement.
Entry into
Exclusive License Agreement
On March 9,
2019, the Company entered into an Exclusive License Agreement with Washington University for license of a diagnostic marker for
determining the severity of glaucoma using the expression levels of Growth Differentiation Factor 15.
Entry into
Amendment to Patent and Technology License and Purchase Option Agreement
Q
BIOMED INC.
Notes
to Condensed Consolidated Financial Statements
On March 26,
2019, the Company entered into an amendment to the Patent and Technology License and Purchase Option Agreement that it initially
entered into with Mannin Research Inc. on October 29, 2015 (the “Mannin Agreement”). Under such amendment, the term
of the option granted under the Mannin Agreement was extended to October 29, 2021 in exchange for the Company issuing 100,000
shares to Mannin Research Inc.