NOTES TO FINANCIAL STATEMENTS
1.
|
DESCRIPTION OF BUSINESS
|
Overview
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.
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.
|
CONSOLIDATED SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
|
This summary of significant accounting
policies of the Company is presented to assist in understanding the
Company’s consolidated financial statements. The consolidated
financial statements and notes are representations of the
Company’s management, which is responsible for their
integrity and objectivity. These accounting policies conform to
accounting principles generally accepted in the United States of
America (“
GAAP
”) and have been consistently applied in the
preparation of the consolidated 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, which resulted in employee stock-based
compensation expense for the years ended December 31, 2016 and 2015
of $0 and $122,000, respectively.
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. Accordingly, compensation cost has been
recognized for the issuance of common stock to non-employee
consultants for the years ended December 31, 2016 and 2015 of $0
and $25,000, respectively.
In the case of modifications, the
Black-Scholes model is used to value the warrant 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
2016, the Company had no share based payments. During
2015, the fair value of each share based payment is estimated on
the measurement date using the Black-Scholes model using an average
risk free interest rate of 0.52%, expected volatility of 417%, and
a dividend yield of zero.
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, 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.
Cash and Cash Equivalents
The
Company considers all highly liquid investments and short-term debt
instruments with maturities of three months or less from date of
purchase to be cash equivalents. Cash equivalents consisted of
money market funds at December 31, 2016 and 2015.
Concentration of Risks
Financial
instruments that potentially expose the Company to concentrations
of credit risk consist primarily of cash and cash equivalents. The
Company primarily maintains its cash balances with financial
institutions in federally insured accounts. At times, such balances
may exceed federally insured limits. The Company has not
experienced any losses to date resulting from this practice. At
December 31, 2016 and 2015, our cash was not in excess of these
limits.
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 December 31, 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. The
above options and preferred shares were deemed to be antidilutive
for the year ended December 31, 2016.
As
of December 31, 2015, the Company had outstanding options
exercisable for 2,452,000 shares of its Common Stock, and preferred
shares convertible into 16,676,942 shares of its Common Stock. The
above options and preferred shares were deemed to be antidilutive
for the year ended December 31, 2015.
Fair Value of Financial Instruments
Current
U.S. generally accepted accounting principles establishes a fair
value hierarchy that prioritizes the inputs used to measure fair
value. The hierarchy gives the highest priority to unadjusted
quoted prices in active markets for identical assets or liabilities
(Level 1 measurement) and the lowest priority to unobservable
inputs (Level 3 measurement).
The
three levels of the fair value hierarchy are as
follows:
Level
1 – Quoted prices are available in active markets for
identical assets or liabilities. Active markets are those in which
transactions for the asset or liability occur with sufficient
frequency and volume to provide pricing information on an ongoing
basis.
Level
2 – Pricing inputs are other than quoted prices in active
markets included in Level 1, which are either directly or
indirectly observable as of the reporting date. Level 2 includes
those financial instruments that are valued using models or other
valuation methodologies. These models are primarily
industry-standard models that consider various assumptions,
including quoted forward prices for commodities, time value,
volatility factors, and current market and contractual prices for
the underlying instruments, as well as other relevant economic
measures. Substantially all of these assumptions are observable in
the marketplace throughout the full term of the instrument, can be
derived from observable data or are supported by observable levels
at which transactions are executed in the marketplace.
Level
3 – Pricing inputs include significant inputs that are
generally unobservable from objective sources. These inputs may be
used with internally developed methodologies that result in
management’s best estimate of fair value. Level 3 instruments
include those that may be more structured or otherwise tailored to
the Company’s needs.
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.
In
determining fair value of our investment from GUSA (which
investment is further described in Note 6 below), the Company
estimated fair value based on historical experience and on various
other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making
judgments about the carrying value of this investment that are not
readily apparent from other sources.
Impairments
We
assess the impairment of long-lived assets, including our other
intangible assets, at least annually or whenever events or changes
in circumstances indicate that their carrying value may not be
recoverable. The determination of related estimated useful lives
and whether or not these assets are impaired involves significant
judgments, related primarily to the future profitability and/or
future value of the assets. Changes in our strategic plan and/or
market conditions could significantly impact these judgments and
could require adjustments to recorded asset balances. We hold
investments in companies having operations or technologies in
areas, which are within, or adjacent to our strategic focus when
acquired, all of which are privately held and whose values are
difficult to determine. We record an investment impairment charge
if we believe an investment has experienced a decline in value that
is other than temporary. Future changes in our strategic direction,
adverse changes in market conditions or poor operating results of
underlying investments could result in losses or an inability to
recover the carrying value of the investments that may not be
reflected in an investment’s current carrying value, thereby
possibly requiring an impairment charge in the future.
In
determining fair value of assets, the Company bases estimates on
historical experience and on various other assumptions that are
believed to be reasonable under the circumstances, the results of
which form the basis for making judgments about carrying values of
assets that are not readily apparent from other sources. Actual
fair value may differ from management estimates resulting in
potential impairments causing material changes to certain assets
and results of operations.
During 2016, the Company recorded losses from
impairments totaling $80,042 (the “
2016
Impairments
”). The 2016
Impairments consist the following:
Genomics USA, Inc.
(“
GUSA
”)
During the year ended December 31,
2016, the Company has recorded a loss of $30,052 on 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.
Global Cancer
Diagnostics, Inc. (“
GCD
”)
:
During 2015, the Company entered into a letter of intent with GCD,
which provided for, among other things, the advance payment of
$50,000 towards a potential business combination. During 2016, the
Company determined the full amount of the advanced payment to be
impaired.
Income Taxes
The
Company accounts for income taxes and the related accounts under
the liability method. Deferred tax assets and liabilities are
determined based on the differences between the financial statement
carrying amounts and the income tax bases of assets and
liabilities. A valuation allowance is applied against any net
deferred tax asset if, based on available evidence, it is more
likely than not that some or all of the deferred tax assets will
not be realized.
Our
policy is to recognize interest and/or penalties related to income
tax matters in income tax expense. We had no accrual for interest
or penalties on our balance sheets at December 31, 2016 or
2015, and have not recognized interest and/or penalties in the
statement of operations for the years ended December 31, 2016
or 2015. See Note 11, Income Taxes, below.
Intangible Assets
The
Company’s intangible assets consist of patents, licensed
patents and patent rights, and website development costs, and 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: patents, 17
years; patents under licensing, 10 years; website development
costs, three years, and in 2008, acquired intangibles had a
weighted average life of 15 years. Amortization expense for the
years ended December 31, 2016 and 2015, totaled $6,075 and $8,572.
The remaining unamortized costs will be amortized through
2024. The Company estimates its amortization expense for
2017 will be $3,575.
Inventories
Inventories,
consisting solely of products available for sale, are accounted for
using the first-in, first-out (FIFO) method, and are valued at the
lower of cost of market value. This valuation requires us to
make judgments, based on current market conditions, about the
likely method of dispositions and expected recoverable value
inventories.
Property and Equipment
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 December 31,
2016 and 2015 consisted of computer and office equipment, machinery
and equipment and leasehold improvements with estimated useful
lives of three to seven years. Estimated useful lives of leasehold
improvements do not exceed the remaining lease term. Depreciation
expense was $1,099 and $1,093 for the years ended December 31, 2016
and 2015. Expenditures for repairs and maintenance are expensed as
incurred. See Note 4below.
Research and Development Costs
Research
and development costs are expensed as incurred. The cost of
intellectual property purchased from others that is immediately
marketable or that has an alternative future use is capitalized and
amortized as intangible assets. Capitalized costs are amortized
using the straight-line method over the estimated economic life of
the related asset.
Revenue Recognition
The
Company recognizes revenue in accordance with SEC Staff Accounting
Bulletin Topic 13 when persuasive evidence of an arrangement exists
and delivery or performance has occurred, provided the fee is fixed
or determinable and collection is probable. The Company assesses
whether the fee is fixed and determinable based on the payment
terms associated with the transaction. If a fee is based upon a
variable such as acceptance by the customer, the Company accounts
for the fee as not being fixed and determinable. In these cases,
the Company defers revenue and recognizes it when it becomes due
and payable. Up-front engagement fees are recorded as deferred
revenue and amortized to income on a straight-line basis over the
term of the agreement, although the fee is due and payable at the
time the agreement is signed or upon annual renewal. Payments
related to substantive, performance-based milestones in an
agreement are recognized as revenue upon the achievement of the
milestones as specified in the underlying agreement when they
represent the culmination of the earnings process. The Company
assesses the probability of collection based on a number of
factors, including past transaction history with the customer and
the current financial condition of the customer. If the Company
determines that collection of a fee is not reasonably assured,
revenue is deferred until the time collection becomes reasonably
assured.
The
Company recognizes revenue from nonrefundable minimum royalty
agreements from distributors or resellers upon delivery of product
to the distributor or reseller, provided no significant obligations
remain outstanding, the fee is fixed and determinable, and
collection is probable. Once minimum royalties have been received,
additional royalties are recognized as revenue when earned based on
the distributor’s or reseller’s contractual reporting
obligations.
The Company’s strategy includes
entering into collaborative agreements with strategic partners for
the development, commercialization and distribution of its product
candidates. Such collaborative agreements may have multiple
deliverables. The Company evaluates multiple deliverable
arrangements pursuant to ASC Topic 605-25,
“
Revenue Recognition:
Multiple-Element Arrangements
.” Pursuant to this Topic, in
arrangements with multiple deliverables where the Company has
continuing performance obligations, contract, milestone and license
fees are recognized together with any up-front payments over the
term of the arrangement as performance obligations are completed,
unless the deliverable has standalone value and there is objective,
reliable evidence of fair value of the undelivered element in the
arrangement. In the case of an arrangement where it is determined
there is a single unit of accounting, all cash flows from the
arrangement are considered in the determination of all revenue to
be recognized. Cash received in advance of revenue recognition is
recorded as deferred revenue.
Development Agreements and Royalties
In 2007, the Company entered into a
development agreement for an at-home diagnostic test with Church
& Dwight Co., Inc. (“
C&D
”). The C&D agreement included milestone
based payments, which were recognized in 2007 and 2008. On August
14, 2008, the Company entered into a Technology License Agreement
with C&D. Under the terms of the agreement, C&D
acquired exclusive worldwide rights to use certain Company
technology related to the jointly developed test. Under the
ten-year agreement, the Company received royalties on net sales of
the product of $0 and $156 in 2016 and 2015,
respectively.
Reclassifications
Prior
period financial statement amounts have been reclassified to
conform to current period presentation.. The reclassifications had
no effect on net loss or earnings per share.
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
As of
December 31, 2016 and December 31, 2015, the Company does not
expect any of the recently issued accounting pronouncements to have
a material impact on its financial condition or results of
operations.
4.
|
OTHER BALANCE SHEET INFORMATION
|
Components
of selected captions in the accompanying balance sheets as of
December 31, 2016 and 2015 consist of:
|
|
|
Prepaid expenses:
|
|
|
Prepaid
insurance
|
28,094
|
26,396
|
Other
|
|
-
|
Prepaid expenses
|
$
28,094
|
$
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
|
(33,506
)
|
(32,408
)
|
Property and equipment, net
|
$
-
|
$
1,098
|
|
|
|
Accrued expenses:
|
|
|
Other
accrued expenses
|
36,342
|
34,366
|
Accrued expenses
|
$
36,342
|
$
34,366
|
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 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
$30,052 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. Genomics USA, Inc. now does business as GMS
Biotech.
Intangible
assets as of December 31, 2016 and 2015 consisted of the
following:
|
|
|
Licensed
patents and patent rights
|
$
50,000
|
$
50,000
|
Patents
|
41,044
|
41,044
|
NuRx
licensed technology
|
13,200
|
13,200
|
Less:
accumulated amortization
|
(90,370
)
|
(84,295
)
|
Intangibles,
net
|
$
13,874
|
$
19,949
|
Asset
Categories
|
Estimated Useful Life in Years
|
Patents
|
17
|
Patents
under licensing
|
10
|
Intangibles
acquired in 2008 (weighted average)
|
15
|
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.
7.
|
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.
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. This note is
past due as of December 31, 2016.
At
December 31, 2016 and 2015, the Company’s Convertible Notes
Payable are as follows:
|
|
|
|
|
Notes
Payable
|
1,058,784
|
1,042,529
|
Notes
Payable, related party
|
558,287
|
267,244
|
Total
notes payable, net of discount
|
1,618,071
|
1,309,773
|
Notes Payable, Related
Party.
As of December 31,
2016, the Company owed Mr. Michael Abrams, a director of the
Company, an aggregate total of $2,059 for outstanding principal and
accrued and unpaid interest on certain Bridge Notes. As of December
31, 2016, the Company owes BHA an aggregate total of $556,168 for
outstanding principal and accrued and unpaid interest on certain
Bridge Notes. Mr. Abrams is an employee of
BHA.
10.
|
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
towards principal and interest through the life of the loan. During
the year ended December 31, 2016, the Company made principal
payments of $1,744 and payments towards accrued interest of $1,539.
During the year ended December 31, 2015, the Company made principal
payments of $2,234 and payments towards accrued interest of $2,137.
The Company recorded interest expense on this loan of $2,040 and
$2,137 for the year ended December 31, 2016 and 2015,
respectively.
Pursuant
to ASC 740, income taxes are provided for based upon the liability
method of accounting. Under this approach, deferred income
taxes are recorded to reflect the tax consequences on future years
of differences between the tax basis of assets and liabilities and
their financial reporting amounts at each year-end.
We
are subject to taxation in the U.S. and the state of Oregon. The
Company is not current on its tax filings and is subject to
examination until the filings take place.
At
December 31, 2016 and 2015, the Company had gross deferred tax
assets calculated at an expected blended rate of 38% of
approximately $10,800,000 and $10,700,000, respectively,
principally arising from net operating loss carryforwards for
income tax purposes. As management of the Company cannot determine
that it is more likely than not that the Company will realize the
benefit of the deferred tax asset, a valuation allowance of
$10,800,000 and $10,700,000 has been established at December 31,
2016 and 2015, respectively.
Topic
740 in the Accounting Standards Codification (ASC 740) prescribes
recognition threshold and measurement attributes for the financial
statement recognition and measurement of a tax position taken or
expected to be taken in a tax return. ASC 740 also provides
guidance on de-recognition, classification, interest and penalties,
accounting in interim periods, disclosure and transition. At
December 31, 2016, the Company had taken no tax positions that
would require disclosure under ASC 740.
The
Company has analyzed its filing positions in all jurisdictions
where it is required to file income tax returns and found no
positions that would require a liability for unrecognized income
tax benefits to be recognized. We are subject to examinations
for all unfiled tax years. We deduct interest and penalties
as interest expense on the financial statements.
Additionally,
the future utilization of our net operating loss and R&D credit
carryforwards to offset future taxable income may be subject to an
annual limitation, pursuant to IRC Sections 382 and 383, as a
result of ownership changes that may have occurred previously or
that could occur in the future.
There
is no unrecognized tax benefit included in the balance sheet that
would, if recognized, affect the effective tax
rate.
|
|
|
Gross deferred tax
assets:
|
|
|
Net operating loss
carryforwards
|
$
9,800,000
|
$
9,700,000
|
Difference between
book and tax basis of former subsidiary stock held
|
|
|
Stock based
expenses
|
250,000
|
250,000
|
Tax credit
carryforwards
|
200,000
|
200,000
|
All
others
|
550,000
|
550,000
|
|
10,800,000
|
10,700,000
|
|
|
|
Deferred tax asset
valuation allowance
|
(10,800,000
)
|
(10,700,000
)
|
Net deferred tax
asset (liability)
|
$
-
|
-
|
At
December 31, 2016, the Company has net operating loss carryforwards
of approximately $9,800,000, which expire in the years 2015 through
2033. The net change in the allowance account was an increase of
approximately $100,000 for the year ended December 31, 2016 and
approximately $150,000 for the year ended December 31,
2015.
Preferred Stock
The Company has authorized 25,000,000 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
December 31, 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 Company has authorized 20,500,000 shares
of Series B Preferred, $0.01 par value. 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
effect 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 nonassessable shares of Common Stock at a
1:1 conversion rate.
As
of December 31, 2016 and 2015, the Company had 16,676,942 shares of
Series B Preferred Stock issued and outstanding with a liquidation
preference of $166,769 and convertible into 16,676,942 shares of
Common Stock.
Common Stock
The
Company has authorized 150,000,000 shares of its Common Stock,
$0.01 par value. The Company had issued and outstanding 78,696,461
and 69,772,918 shares of its Common Stock at December 31, 2016 and
2015.
On
January 2, 2015, the Company issued 73,000 shares of Common Stock
to the purchaser of a $36,500 note. 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.
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 subsequent to
September 30, 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 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.
13.
|
STOCK PURCHASE WARRANTS
|
During the years ended December 31, 2016 and 2015,
there were no warrants issued by the Company. As of
December 31, 2016, the Company had no warrants issued and
outstanding.
In 2007, the Company adopted the 2007
Incentive and Non-Qualified Stock Option Plan (hereinafter the
“
Plan
”), which replaced the 1997 Incentive and
Non-Qualified Stock Option Plan, as amended in 2001, and under
which 8,000,000 shares of Common Stock are reserved for issuance
under qualified options, nonqualified options, stock appreciation
rights and other awards as set forth in the
Plan.
Under the Plan, qualified options are available for issuance to
employees of the Company and non-qualified options are available
for issuance to consultants and advisors. The Plan provides
that the exercise price of a qualified option cannot be less than
the fair market value on the date of grant and the exercise price
of a nonqualified option must be determined on the date of grant.
Options granted under the Plan generally vest three to five years
from the date of grant and generally expire ten years from the date
of grant.
During the year ended December 31, 2016, no stock options were
granted by the Company. During the year ended December 31, 2015,
the Company issued options to purchase 2,300,000 shares of common
stock to its management team. Each option has an expiration date of
February 3, 2020, and are exercisable for $0.04 per
share.
The
following is a summary of all Common Stock option activity during
the year ended December 31, 2016 and 2015:
|
|
Shares Under
Options Outstanding
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at December 31, 2014
|
|
|
152,000
|
|
|
$
|
1.34
|
|
Options granted
|
|
|
2,300,000
|
|
|
|
0.04
|
|
Options
forfeited
|
|
|
-
|
|
|
$
|
-
|
|
Options exercised
|
|
|
-
|
|
|
|
-
|
|
Outstanding at December 31, 2015
|
|
|
2,452,000
|
|
|
|
0.12
|
|
Options granted
|
|
|
-
|
|
|
$
|
|
|
Options forfeited
|
|
|
(100,000)
|
|
|
$
|
1.60
|
|
Options exercised
|
|
|
|
|
|
$
|
|
|
Outstanding at December 31, 2016
|
|
|
2,352,000
|
|
|
$
|
$0.06
|
|
|
|
Weighted Average Exercise Price Per Share
|
Exercisable
at December 31, 2015
|
2,352,000
|
$
0.06
|
Exercisable
at December 31, 2016
|
2,352,000
|
$
0.06
|
The
following represents additional information related to Common Stock
options outstanding and exercisable at December 31,
2016:
|
|
|
|
|
Weighted Average
Remaining
Contract Life in Years
|
Weighted
Average
Exercise Price
|
|
Weighted Average
Exercise Price
|
$
0.04
|
2,300,000
|
3.09
|
$
0.04
|
2,300,000
|
$
0.04
|
$
0.80
|
1,000
|
1.16
|
$
0.80
|
1,000
|
$
0.80
|
$
0.85
|
51,000
|
0.77
|
$
0.85
|
51,000
|
$
0.85
|
|
|
|
$
|
|
$
|
|
2,352,000
|
2.00
|
$
0.06
|
2,352,000
|
$
0.06
|
The
weighted average remaining contractual term for both fully vested
share options (exercisable, above) and options expected to vest
(outstanding, above) is 2 years.
A
summary of the status of the Company’s nonvested stock
options as of December 31, 2016 and changes during the year ended
December 31, 2016 is presented below:
Nonvested Stock Options
|
|
Weighted Average Grant Date Fair Value
|
Nonvested
at December 31, 2014
|
100,500
|
$
100,000
|
Options
granted
|
-
|
-
|
Options
vested
|
-
|
$
-
|
Options
forfeited
|
|
-
|
Nonvested
at December 31, 2015
|
100,000
|
$
100.000
|
Options
granted
|
|
|
Options
vested
|
|
|
Options
forfeited
|
(100,000
)
|
(100,000
)
|
Nonvested
at December 31, 2016
|
-
|
-
|
15.
|
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 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 December 31, 2016, 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.
For the
quarter ended March 31, 2017, the Company received proceeds of
$75,000 from the issuance of promissory notes.
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.
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 in this note, no
subsequent events occurred that are reasonably likely to impact
these financial statements.
F-18