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, sell 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 condensed 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 May 31, 2018, the Condensed Consolidated
Statements of Operations for the three and six months ended May 31,
2018 and 2017, and the Condensed Consolidated Statements of Cash
Flows for the six months ended May 31, 2018 and 2017, 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, 2017 has been derived from audited
financial statements included in the Company's Form 10-K, most
recently filed with the SEC on February 28, 2018. The results for
the three and six months ended May 31, 2018 and 2017 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 had a net loss and net cash used in operating
activities of approximately $4.2 million and $3.4 million,
respectively, during the six months ended May 31, 2018. These
matters, amongst others, raise doubt about the Company’s
ability to continue as a going concern.
As of May 31, 2018, 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. At May 31, 2018, the
Company had cash of approximately $2.3 million. On
February 1, 2018, the Company received net proceeds of
approximately $4,945,000 from the registered sale of common stock
and warrants to purchase common stock. The Company’s expected
monthly burn rate is approximately $528,000. As such, 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 condensed 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.
5
Q BIOMED INC.
Notes to Condensed Consolidated Financial Statements
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,
2017 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.
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.
On December 22, 2017, the United States enacted new tax
legislation, the Tax Cuts and Jobs Act (the “Tax
Act”). The Tax Act includes significant changes to
corporate taxation, including reduction of the U.S. corporate tax
rate from 35% to 21%, effective January 1, 2018, limitation of the
tax deduction for interest expense to 30% of earnings (except for
certain small businesses), limitation of the deduction for net
operating losses to 80% of current year taxable income and
elimination of net operating loss carrybacks. The Tax Act
states that the 21% U.S. federal corporate tax rate is effective
for tax years beginning on or after January 1, 2018. However,
existing tax law, which was not amended under the Tax Act, governs
when a change in tax rate is effective. Existing tax law provides
that if the taxable year includes the effective date of any rate
change (unless the change is the first date of the taxable year),
taxes should be calculated by applying a blended rate to the
taxable income for the year. Management has not yet determined the
impact the rate reduction will have on the Company's gross deferred
tax asset and liabilities and offsetting valuation allowance.
However, the Company has a full allowance against the deferred
tax asset and as a result there was no impact to income tax expense
for the six months ended May 31, 2018.
In conjunction with the tax law changes, the SEC staff issued Staff
Accounting Bulletin No. 118 (“SAB 118”) to address the
application of U.S. GAAP in situations when a registrant does not
have the necessary information available, prepared, or analyzed
(including computations) in reasonable detail to complete the
accounting for certain income tax effects of the Tax Act. The
ultimate impact, which is expected to be recorded by November 30,
2018, may differ from any provisional amounts, due to, among other
things, additional analysis, changes in interpretations and
assumptions we have made, additional regulatory guidance that may
be issued, and actions we may take as a result of the tax Act, and
the fact that we cannot definitively predict what our deferred tax
balance will ultimately be as of November 30, 2018.
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 new standard is effective for
the Company on December 1, 2019. The Company is
currently evaluating the effect the guidance will have on its
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. This new standard will be effective for the
Company on December 1, 2018. 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.
6
Q BIOMED INC.
Notes to Condensed 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. It is effective for the Company on December 1,
2019.
The Company is currently evaluating the impact of the new standard
on its consolidated financial statements.
Recent adopted pronouncements
In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock
Compensation (Topic 718): Scope of Modification
Accounting
. The new standard
provides guidance about which changes to the terms or conditions of
a share-based payment award require an entity to apply modification
accounting in Topic 718. Early adoption is permitted, including
adoption in any interim period. The Company adopted ASU 2017-09 as
of December 1, 2017. The adoption of this standard 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 six months ended May 31,
|
Potentially dilutive securities
|
|
|
Warrants
(Note 8)
|
4,877,558
|
1,111,500
|
Convertible
debt
|
-
|
985,723
|
Options (Note
8)
|
500,000 -
|
-
|
Note 5 – Commitments and Contingencies
Advisory Agreements
The Company entered into customary consulting arrangements with
various counterparties to provide consulting services, business
development and investor relations services, pursuant to which the
Company agreed to issue shares of common stock as services are
received. The Company issued an aggregate of
approximately 17,000 shares of common stock during the six months
ended May 31, 2018.
Master Service Agreement
On March 1, 2018, the Company entered into the master service
agreement (“Master Service Agreement”) with Chedwick
Marketing Group to have it perform the consulting services for a
maximum period of six months, which may be renewed after term at
the sole option of the Company. On March 1, 2018, the Company
entered into the Statement of Work No. 1 (“Statement of
Work”) with Chedwick Marketing Group. The Company agreed to
issue Chedwick Marketing Group 20,000 fully paid restricted common
shares on signing. The Company agreed to pay additional cash for
media spend as invoiced by Chedwick or other service providers. The
company agreed to issue 7,000 shares to Chedwick on execution of
the agreement and on the first day of each month until the
termination or renewal of the contract.
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 May 31,
|
For
the six months ended May 31,
|
|
|
|
|
|
Rent
expense
|
$
7,500
|
$
7,500
|
$
15,000
|
$
12,500
|
7
Q BIOMED INC.
Notes to Condensed Consolidated Financial Statements
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 six months ended May 31, 2018 and 2017, the Company
incurred approximately $1,220,000 and $852,000, respectively, in
research and development expenses to fund the costs of development
of the eye drop treatment for glaucoma pursuant to the Exclusive
License. Pursuant to the exclusive license from Mannin, we may
purchase the Mannin IP within the next four years in exchange for
investing a minimum of $4,000,000 into the development of the
Mannin IP. Through May 31, 2018, the Company has funded an
aggregate of $4.0 million to Mannin under the Exclusive License and
has not purchased the Mannin IP. The purchase price for the Mannin
IP is $30,000,000 less the amount of cash paid by the Company for
development and the value of the common stock issued to the
vendor.
Bio-Nucleonics
On September 6, 2016, the Company entered into the Patent and
Technology License and Purchase Option Agreement (the “BNI
Exclusive License”) with Bio-Nucleonics Inc.
(“BNI”) whereby the Company was granted a worldwide,
exclusive, perpetual, license on, and option to, acquire certain
BNI intellectual property (“BNI IP”) within the
three-year term of the BNI Exclusive License.
During the six months ended May 31, 2018 and 2017, the Company
incurred approximately $283,000 and $208,000, respectively, in
research and development expenses pursuant to the BNI Exclusive
License. As of May 31, 2018, the Company has funded
approximately $699,000 to BNI out of the maximum $850,000 cash
funding requirement.
Note 6 - 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:
|
For
the three months ended May 31,
|
For
the six months ended May 31,
|
|
|
|
|
|
Consulting and
legal expenses
|
$
60,000
|
$
130,000
|
$
120,000
|
$
243,000
|
Note 7 - Stockholders’ Equity Deficit
As of May 31, 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.
Registered public financing
On February 1, 2018, the Company sold an aggregate of 1,711,875
shares of common stock, and 1,711,875 warrants to purchase shares
of common stock, in a registered public offering for gross proceeds
of approximately $5,478,000. The warrants are exercisable for
five years at $3.20 per share. The Company paid placement
agent commissions of approximately $438,000 and issued the
placement agent five-year warrants to purchase 81,688 shares of
common stock at $3.84 per share. After the placement agents’
commissions and other offering expenses, the Company netted
approximately $4,945,000 of proceeds.
The Company intends to use the net proceeds from the offering to:
i) complete FDA manufacturing approval and launch our non-opioid
FDA approved Strontium Chloride 89 USP Injection (SR89), a
therapeutic drug for the treatment of skeletal pain associated with
metastatic cancers; ii) focus on the clinical planning and IND
filing for a Phase 4 post-marketing study to expand the indication
of the approved SR89; iii) complete pre-IND studies and the filing
of an IND for a phase II/III clinical program to test the efficacy
of QBM-001, our product candidate for the treatment of young
children with a rare autistic spectrum disorder that severely
inhibits their ability to communicate; iv) continue development
work on our novel chemotherapeutic drug for liver cancer; and v)
further the optimization and pre-clinical testing of our glaucoma
drug Man-01 for the treatment of open angle glaucoma.
Note 8 – 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 May 31, 2018 and changes
during the period then ended:
|
|
Weighted
Average
Exercise Price
|
Weighted
Average
Remaining Contractual
Life
(years)
|
|
Outstanding
at November 30, 2017
|
3,083,995
|
$
3.67
|
4.02
|
$
2,539,185
|
Issued
|
1,793,563
|
$
3.23
|
4.67
|
|
Outstanding
at May 31, 2018
|
4,877,558
|
$
3.51
|
3.95
|
$
1,479,375
|
Exercisable
at May 31, 2018
|
4,871,308
|
$
3.51
|
3.95
|
$
1,479,375
|
Fair value of all outstanding warrants issued to non-employees for
services was calculated with the following key inputs:
|
For
the six months ended May 31,
|
|
|
|
Stock
price
|
$
2.92 - $3.40
|
$
3.81 - $7.87
|
Term
(years)
|
2.0 - 4.3
|
1.75 - 4.5
|
Volatility
|
124.88% - 130.31
%
|
132.15% - 140.64
%
|
Risk-free
rate
|
2.25% - 2.68
%
|
1.17% - 1.45
%
|
Dividend
yield
|
0.00
%
|
0.00
%
|
8
Q BIOMED INC.
Notes to Condensed Consolidated Financial Statements
Options issued for services
The following represents a summary of all outstanding options to
purchase the Company’s common stock at May 31, 2018 and
changes during the six-month period then ended:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding
at November 30, 2017
|
450,000
|
$
4.00
|
4.51
|
$
220,500
|
Issued
|
50,000
|
$
3.00
|
4.70
|
$
20,000
|
Outstanding
at May 31, 2018
|
500,000
|
$
3.90
|
4.08
|
$
20,000
|
Exercisable
at May 31, 2018
|
350,000
|
$
3.96
|
4.04
|
$
5,000
|
|
|
|
|
|
Fair value of all outstanding options was calculated with the
following key inputs:
|
For
the six months ended May 31,
|
|
|
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 $164,000 and $684,000 as a result of the shares,
outstanding warrants and options issued to consultants and
employees during the three months ended May 31, 2018 and 2017,
respectively. The Company recognized general and administrative
expenses of approximately $567,000 and $1,356,000 as a result of
the shares, outstanding warrants and options issued to consultants
and employees during the six months ended May 31, 2018 and 2017,
respectively.
As of May 31, 2018, the estimated unrecognized stock-based
compensation associate with these agreements is approximately
$61,000 and will be recognized over the next 0.1 year.
Note 11 – Subsequent Events
On June 1, 2018, we issued 50,000 options to each of Denis Corin
and William Rosenstadt for their continued services as directors of
our company. Each option is to purchase a share of our common stock
for $3.61 per share. The options vest in quarterly amounts on May
31, 2018, September 1, 2018, December 1, 2018 and March 1,
2019.
On June 1, 2018, we issued 100,000 options to each of Denis Corin
and William Rosenstadt for their continued services as officers of
our company. Each option is to purchase a share of our common stock
for $3.61 per share. The options vest in quarterly amounts on May
31, 2018, September 1, 2018, December 1, 2018 and March 1,
2019.
On June 1, 2018, we entered into a new agreement with a consultant
to provide expertise in the areas of technology assessment and
product development. In exchange for such services, the consultant
will receive 84,000
warrants to
purchase a share of our common stock exercisable at $3.61 per
share.
In June 2018, we entered into an agreement with a consultant to
provide expertise in the areas of commercial marketing. In exchange
for such services, each month for the twelve months of the
agreement the consultant will receive shares of our common stock
equal to $22,000 divided by the market price of our common stock on
the first day of such month.
On June 1, 2018, we issued options to purchase 50,000 shares of our
common stock at $3.61 per option to each of two advisors in
exchange for consulting services. The options vest in quarterly
amounts every three months.
9