CONDEN
SED 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, 2016 included in the
Company’s Annual Report on Form 10-K filed with the
Securities and Exchange Commission on April 17, 2017. 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 the
three months ended March 31, 2017 are not necessarily indicative of
the results that may be expected for the year ending December 31,
2017.
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
On February 27, 2017, the Company entered into a memorandum of
understanding (“
MOU
”) with an unrelated third party regarding
the sale of certain assets of QX Labs, including the intellectual
property, trade-secrets and diagnostic applications related to the
Company’s PadKit technology and the lateral flow diagnostics
technology. Under the MOU, the Company retains all rights and
assets necessary to pursue marketing the over the counter miniform
products for female hygiene and hemorrhoid treatment. If the
transaction outlined in the MOU is completed, the Company would
receive a $1.0 million cash payment at closing, a 15% percent
ownership interest in the acquiring company and future cash
payments ranging from 1.5%-2% of gross revenue generated from the
Padkit and lateral flow technologies. The MOU is
subject to numerous contingencies and conditions, and there is no
assurance that a transaction will be completed.
The
Company has issued two convertible promissory demand notes in
connection with the MOU in the aggregate principal amount of
$50,000 (the "
MOU Notes
").
The MOU Notes mature on September 30, 2017, accrue interest at a
rate of 8% per annum, and are convertible, at the option of the
holder, into that number of shares of the Company's common stock,
par value $0.001 per share ("
Common Stock
") equal to the outstanding
balance, divided by $0.10.
2.
MANAGEMENT STATEMENT REGARDING GOING CONCERN
The Company currently is not generating revenue from operations,
and does not anticipate generating meaningful revenue from
operations or otherwise in the short-term. 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 the Company will be successful in its
efforts. Should the Company be unable to obtain adequate
financing or generate sufficient revenue in the future, the
Company’s business, result of operations, liquidity and
financial condition would be materially and adversely harmed, and
the Company will be unable to continue as a going
concern.
There can be no assurance that, assuming the Company is able
to strengthen its cash position, it 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 three months ended March 31, 2017
and 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 three month
ended March 31, 2017 and 2016, the Company did not make any
Black-Sholes model assumptions, as no share-based payments were
made during those periods.
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 March 31, 2017, the Company had outstanding options
exercisable for 2,352,000 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 three months ended March 31, 2017.
As of March 31, 2016, 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 three months ended March 31, 2016.
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 for $200,000. After the investment, QuantRx owned approximately
5% of the total issued and outstanding common stock of GMS Biotech,
formerly Genomics USA, Inc. (“
GUSA
”). As of the end of December 31, 2016, the
Company’s position had been diluted to approximately 2% of
the issued and outstanding common stock of GUSA. The
investment is recorded at historical cost and is assessed at least
annually for impairment. During the year ended December 31, 2016,
the Company has recorded a loss of $30,051 as an impairment on the
value of its common stock investment in GUSA. The Company has
valued the impairment based on the dilution of the Company’s
investment and certain other factors.
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.
5.
INTANGIBLE ASSETS
Intangible assets as of the balance sheet dates consisted
of the following:
|
March 31,
2017
(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
|
(91,264
)
|
(90,370
)
|
Intangibles,
net
|
$
12,980
|
$
13,874
|
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. 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 three months ended March 31, 2017 and
2016 totaled $894 and $2,143, 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
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.
During
the quarter ended March 31, 2017, the Company issued: (i) a Bridge
Note to an accredited investor in the principal amount of $25,000,
which Bridge Note matures on September 30, 2017, and (ii) a MOU
Note in the principal amount of $25,000.
BHA Note
. On March 31, 2016,
Burnham Hill Advisors, LLC (“
BHA
”)
agreed to exchange the amounts owed to BHA under
the October 29, 2013 agreement for a promissory note, on terms
substantially similar to the Bridge Notes (the
“
BHA
Note
”), in the principal
amount of $283,000 with issuance date of March 31, 2016. The BHA
Note is payable on demand as of December 31, 2016, and is past due
as of March 31, 2017.
At March 31, 2017 and December 31, 2016, the Company’s
Convertible Notes Payable are as follows:
|
|
|
Notes
Payable
|
1,094,579
|
1,058,784
|
Notes
Payable, related party
|
578,304
|
558,287
|
Total
notes payable
|
1,672,883
|
1,618,071
|
Notes Payable, Related Party.
As of
March 31, 2017, the Company owed Michael Abrams, a director of the
Company, an aggregate total of $2,178 for outstanding principal and
accrued and unpaid interest on certain Bridge Notes. As of March
31, 2017, the Company owes BHA an aggregate total of $850,495 for
outstanding principal and accrued and unpaid interest on certain
Bridge Notes. Mr. Abrams is an employee of BHA.
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 stipulate monthly
interest only payments from April 2010 through December 2014, at a
5% annual rate. Effective January 1, 2015, the Company began a
payment program whereby it would make quarterly payments towards
principal and interest through the life of the loan. During the
three months ended March 31, 2017, the Company made principal
payments of $1,203 and payments towards accrued interest of $986.
The Company recorded interest expense on this loan of $986 and $518
for the three months ended March 31, 2017 and 2016, respectively.
At March 31, 2017 and 2016, the balance of the loan payable was
$38,819 and $41,190, respectively.
8. OTHER
BALANCE SHEET INFORMATION
Components of selected captions in the accompanying balance sheets
consist of:
Prepaid expenses:
|
March 31,
2017
(unaudited)
|
|
Prepaid
insurance
|
$
18,730
|
$
28,094
|
Prepaid expenses
|
$
18,730
|
$
28,094
|
|
|
|
Property and equipment:
|
|
|
Computers
and office furniture, fixtures and equipment
|
$
28,031
|
$
28,031
|
Machinery
and equipment
|
5,475
|
5,475
|
Less:
accumulated depreciation
|
(33,506
)
|
(33,506
)
|
Property and equipment, net
|
$
-
|
$
-
|
|
|
|
Accrued expenses:
|
|
|
Other
Accrued expenses
|
$
26,889
|
36,342
|
Accrued expenses
|
$
26,889
|
36,342
|
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 March 31,
2017 consisted of computer and office equipment, machinery and
equipment with estimated useful lives of three to seven years. As
of December 31, 2016 and March 31, 2017, the Company’s
property and equipment was fully depreciated.
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 March 31, 2017.
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 March 31, 2017 and December 31, 2016, 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 March
31, 2017 and December 31, 2016.
In July 2016, the Company authorized an aggregate total of 8.9
million shares of Common Stock to be issued to certain convertible
note holders as payment of accrued and unpaid interest in the
amount of $151,700.
During the three months ended March 31, 2017 and 2016, there were
no warrants issued by the Company. As of March 31, 2017,
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.
The Company did not
issue any options during the three months ended March 31, 2017 or
2016.
11.
COMMITMENTS AND CONTINGENCIES
On May 28, 2014, we entered into a Consulting Services Agreement
for financial related services with 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 recorded expenses under this agreement
totaling $50,000 of which $25,000 has been paid, additionally, the
Company 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
March 31, 2017, the requirements under the Mayer agreement had not
been met and the Company has terminated this agreement and no
further compensation is due or will be paid.
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
Subsequent to March 31, 2017, the Company issued a MOU Note in the
principal amount of $25,000 in connection with the MOU described in
Note 1, under the heading “
Recent
Developments
.”
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, except as disclosed herein, no subsequent
events occurred that are reasonably likely to impact these
financial statements.