CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(unaudited)
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, unless context otherwise
requires.
We have developed and intend to commercialize our patented miniform
pads (“
PADs
”)
and PAD based over-the-counter products for the treatment of
hemorrhoids, minor vaginal infection, urinary incontinence, general
catamenial uses and other medical needs. We are also developing and
intend to commercialize genomic diagnostics for the laboratory
market, based on our lateral flow patents. Our platforms include:
inSync®, Unique
TM
, 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 remains contingent upon the
receipt of additional 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 maintaining compliance with the public company
reporting requirements. In order to continue as a going concern, we
will need to raise capital, which may include the issuance of debt
and/or equity securities. No assurances can be given that the 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 principal business line consists of over-the-counter
commercialization of our InSync feminine hygienic interlabial pad,
the Unique® Miniform for hemorrhoid application, and other
treated miniforms (the “
OTC
Business
”), as well as
maintaining established and continuing licensing relationships
related to these products. We also own certain diagnostic testing
technology (the “
Diagnostic
Business
”) that is based
on our lateral flow patents. Management believes this corporate
structure permits us to more efficiently explore options to
maximize the value of our products and intellectual property
portfolio, with the objective of maximizing the value of the
Businesses for the benefit of the Company and our
shareholders.
Our current focus is to obtain additional working capital necessary
to continue as a going concern, and to develop a longer term
financing and operating plan to: (i) commercialize our over
the-counter products either directly or through joint ventures,
mergers or similar transactions intended to capitalize on potential
commercial opportunities; (ii) contract manufacturing of our
over-the counter products to third parties, while maintaining
control over the manufacturing process; (iii) maintain our
intellectual property portfolio with respect to patents and
licenses pertaining to both the OTC Business and the Diagnostics
Business; and (iv) maximize the value of our investments in
non-core assets. As a result of our current financial
condition, however, our efforts in the short-term will be focused
on obtaining financing necessary to maintain the Company 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, 2017 included in the Company’s Annual
Report on Form 10-K, filed with the Securities and Exchange
Commission on April 17, 2018. 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 nine months ended September 30,
2018 are not necessarily indicative of the results that may be
expected for the year ending December 31,
2018.
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.
2.
MANAGEMENT STATEMENT REGARDING GOING CONCERN
Currently, we are not generating revenue from operations, and do
not anticipate generating meaningful revenue from operations or
otherwise in the short-term. We have historically financed our
operations primarily through issuances of equity and the proceeds
from the issuance of promissory notes. In the past, we also
provided for our cash needs by issuing common stock, options and
warrants for certain operating costs, including consulting and
professional fees, as well as divesting our minority equity
interests and equity-linked investments. In addition, in the fiscal
year ended December 31, 2017, we received a cash payment as
consideration for the sale and transfer of the certain assets to
Preprogen LLC (“
Preprogen
”).
Our history of operating losses, limited cash resources and
the absence of an operating plan necessary to capitalize on our
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, our products. There can be no assurance that we
will be successful in our efforts. Should we be unable to
obtain adequate financing or generate sufficient revenue in the
future, our business, result of operations, liquidity and financial
condition would be materially and adversely harmed, and we will be
unable to continue as a going concern.
There can be no assurance that, assuming we are able to
strengthen our cash position, we will achieve sufficient revenue or
profitable operations to continue as a going concern.
3. SUMMARY
OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is
presented to assist in understanding the Company’s financial
statements. The financial statements and notes are representations
of the Company’s management, which is responsible for their
integrity and objectivity. These accounting policies conform to
GAAP and have been consistently applied in the preparation of the
financial statements.
Accounting for Share-Based Payments.
The Company follows the provisions of ASC Topic
718, which establishes the accounting for transactions in which an
entity exchanges equity securities for services and requires
companies to expense the estimated fair value of these awards over
the requisite service period. The Company uses the Black-Scholes
option pricing model in determining fair value. Accordingly,
compensation cost has been recognized using the fair value method
and expected term accrual requirements as prescribed. During
the nine months ended September 30, 2018 and 2017, 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. In the past, 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 nine months
ended September 30, 2018 and 2017, the Company did not make any
Black-Scholes 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.
Diluted earnings per
share, if presented, would include the dilution that would occur
upon the exercise or conversion of all potentially dilutive
securities into common stock using the “treasury stock”
and/or “if converted” methods as applicable. For the
quarter ended September 30, 2018, including potentially dilutive
securities in diluted shares outstanding would be
immaterial.
For the three and nine months ended September 30, 2017 and the nine
months ended September 30, 2018, b
asic and diluted earnings per share were the same
at the reporting dates of the accompanying financial statements, as
including common stock equivalents in the calculation of diluted
earnings per share would have been
antidilutive.
As of September 30, 2018, the Company had outstanding options
exercisable for 2,300,000 shares of its common stock, outstanding
warrants exercisable for 15,000,000 shares of its common stock, and
outstanding preferred shares convertible into 6,196,858 shares of
its common stock, which options, warrants and preferred shares were
deemed to be antidilutive for the nine months ended September 30,
2018. At September 30, 2018, the Company had reserved for issuance
to certain investors 860,000 shares of its Series B Convertible
Preferred Stock, convertible into 860,000 shares of its common
stock. As of September 30, 2018, the Company has estimated and
reserved for issuance approximately 20.0 million shares of common
stock for a future conversion of its issued and outstanding
Convertible Notes Payable.
As of September 30, 2017, the Company had outstanding options
exercisable for 2,352,000 shares of its common stock, and preferred
shares convertible into 16,676,942 shares of its common stock,
which options and preferred shares were deemed to be antidilutive
for the nine months ended September 30, 2017. At September 30,
2017, the Company had reserved for issuance to certain investors,
860,000 shares of its Series B Convertible Preferred Stock,
convertible into 860,000 shares of its common stock.
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 revenue
and expense 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 GMS Biotech, formerly Genomics USA, Inc.
(“
GUSA
”) for $200,000. After the investment, the
Company owned approximately 5% of the total issued and outstanding
common stock of GUSA. As of December 31, 2017, 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, 2017, the Company
recorded a loss of $169,948 to fully impair 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 December 15, 2017, the Company executed an agreement with
Preprogen, pursuant to which the Company sold, assigned and
licensed-back certain assets pertaining to its Diagnostic Business
(the “
Preprogen
Transaction
”).
As a part of the Preprogen
Transaction, the Company acquired a 15% interest in
Preprogen.
5.
INTANGIBLE
ASSETS
On December 15, 2017, the Company entered into an agreement with
Preprogen, pursuant to which the parties agreed to the sale,
assignment, and license-back of certain assets, including
intellectual property transferred to Preprogen necessary to the
development, manufacture, marketing and sale of the Company’s
OTC miniform products for the feminine hygiene and hemorrhoid
treatment markets. At September 30, 2018 and December 31, 2017, the
Company had reduced its capitalized intangible assets to
zero.
Amortization expense for the nine months ended September 30, 2018
and 2017 totaled $0 and $2,682, respectively.
6.
CONVERTIBLE NOTES PAYABLE
On January 2, 2015, the Company issued a Bridge Note in the
principal amount of $36,500 and issued 73,000 shares of its common
stock to the purchaser of the Bridge Note. Additionally, the
Company issued 500,000 shares of its common stock in January 2015
to certain investors who purchased Bridge Notes during the year
ended December 31, 2014.
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 its common stock to the purchasers of
these Bridge Notes. In connection with the issuance of these notes,
the Company recorded debt discount expense totaling $2,830 and has
amortized 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 its 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
its common stock to the Bridge Note holders. These Bridge Notes are
now payable on demand.
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
its common stock to the purchaser of the Bridge 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 the issuance date of March 31, 2016.
The BHA Note is payable on demand as
of December 31, 2016, and was past due as of September 30, 2017. On
April 1, 2017, BHA assigned the BHA Note to certain of its then
employees, including Michael Abrams, who serves as a director of
the Company, under the same terms.
During each of the quarters ended March 31, 2017 and June 30, 2017,
the Company issued an MOU Note in the principal amount of
$25,000.
In July and August 2017, the Company issued certain investors
Bridge Notes in the aggregate principal amount of $86,000 (the
“
2017
Bridge Notes
”). Each 2017
Bridge Note accrues interest at a rate of 10% per annum, and
matured on September 30, 2017. The 2017 Bridge Notes are now
payable on demand.
In October 2017, the Company issued an additional MOU Note in the
principal amount of $15,000.
The three MOU Notes, with an aggregate principal amount of $65,000,
were all cancelled and applied as part of the purchase price in the
Preprogen Transaction.
In
September 2018, the Company paid three of its note holders an
aggregate of $60,750 to settle $121,500 of note principal plus
$47,637 of accrued interest.
At September 30, 2018 and December 31, 2017, the Company’s
Convertible Notes Payable and Accrued Interest were as
follows:
|
|
|
Notes
Payable and accrued interest payable
|
$
1,820,511
|
$
1,825,135
|
Notes
Payable and accrued interest payable, related party
|
131,936
|
120,611
|
Total
notes payable
|
$
1,952,447
|
$
1,945,746
|
Notes Payable, Related Party
As of September 30, 2018, the Company owed Michael Abrams, a
director of the Company, an aggregate total of $131,936 for
outstanding principal and accrued and unpaid interest the BHA
Notes.
As of December 31, 2017,
the Company owed Mr. Abrams an aggregate total of $120,611 for
outstanding principal and accrued and unpaid interest on the BHA
Notes. Mr. Abrams was formerly affiliated with
BHA.
On April 1, 2017, BHA assigned the BHA Notes, including all accrued
but unpaid interest to its employees, and is no longer a related
party note payable.
As noted
above, Michael Abrams, one of the Company’s directors and
previously an affiliate of BHA, was assigned $50,000 of the
outstanding principal amount of the BHA Note, plus all accrued and
unpaid interest on such amount.
7. RELATED
PARTY TRANSACTIONS
During the nine months ended September 30, 2018, the Company paid
its CEO, Shalom Hirschman, a bonus of $15,000 for his significant
contributions to the Company.
In April 2018, the Company paid BHA $30,000 as consideration for
certain advisory services, which included the oversight and
management of the relocation of the Company’s assets held in
Oregon to New Jersey as well as the structuring, negotiation
and execution of the Purchased Shares transaction referenced above.
Michael Abrams, a director of the Company, is formerly an affiliate
of BHA.
8. OTHER
BALANCE SHEET INFORMATION
Components of selected captions in the accompanying balance sheets
consist of:
Prepaid expense:
|
|
|
Prepaid
insurance
|
$
-
|
$
28,160
|
Total prepaid expense
|
$
-
|
$
28,160
|
|
|
|
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 expense:
|
|
|
Other
Accrued expense
|
$
-
|
$
26,708
|
Total accrued expense
|
$
-
|
$
26,708
|
Property and equipment are stated at cost. Depreciation is computed
using the straight-line method over the estimated useful lives of
the assets. The Company’s property and equipment at September
30, 2018 consisted of computer and office equipment, machinery and
equipment with estimated useful lives of three to seven years. As
of December 31, 2017 and September 30, 2018, the Company’s
property and equipment was fully depreciated.
Expenditures for repairs and maintenance are expensed as
incurred.
9.
COMMITMENTS AND CONTINGENCIES
In December 2017, in connection with the Preprogen Transaction, the
Company committed to share in 50% of certain fees and costs
incurred in connection with the future manufacturing costs for the
miniform pads;
provided, however,
that the Company’s expenses
shall not exceed $400,000. The Company has reserved that same
amount in an escrow account until an acceptable manufacturer is
identified by Preprogen and the Company.
On
October 8, 2018, the Preprogen Agreement was amended to provide
for, among other things, the release of funds held in escrow
related to the manufacture of the miniform pads (the
“
Preprogen
Amendment
”), which resulted in both parties receiving
$200,000 in cash. As consideration for the Preprogen Amendment, the
Company agreed to pay Preprogen a royalty of 5% from the sale of
all over-the-counter miniform products;
provided, however,
that such royalty
payments shall terminate when Preprogen has received $200,000 in
aggregate consideration from the royalties paid by the Company, and
that the Company shall be entitled to offset such royalty payments
due and payable to Preprogen by amounts equal to certain other
payments otherwise due and payable to the Company by Preprogen
pursuant to the terms of the Preprogen Agreement.
10.
PREFERRED STOCK
The Company has authorized 25,000,000 shares of preferred stock, of
which 20,500,000 are designated as Series B Convertible Preferred
Stock, $0.01 par value, with a stated value of approximately
$204,000 (“
Series B
Preferred
”). The
remaining authorized preferred shares have not been designated by
the Company as of September 30, 2018.
Series B Convertible Preferred Stock
The Series B Preferred ranks senior to the Company’s 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 the
Company’s common stock at a 1:1 conversion
rate.
As disclosed under Note 6 above, in July and August, 2017, the
Company entered into Note Purchase Agreements with two existing
stockholders, pursuant to which the Company issued the 2017 Bridge
Notes in the aggregate principal amount of $86,000. As additional
consideration for the purchase of the 2017 Bridge Notes, the
Company has reserved for issuance an aggregate of 860,000 shares of
Series B Preferred to be issued to the purchasers of the 2017
Bridge Notes. The Company has valued the Series B Preferred and has
recorded a discount on the 2017 Bridge Notes of $7,818, which was
amortized in full during the year ended December 31,
2017.
In April 2018, the Company completed the purchase of 10,480,084
shares of Series B Preferred (the “
Purchased
Shares
”) from an
institutional shareholder for an aggregate purchase price of
$20,000. Following this transaction, the shareholder no longer
holds shares in the Company.
As of September 30, 2018, the Company had 6,196,858 shares of
Series B Preferred issued and outstanding, with a liquidation
preference of $61,969 and convertible into 6,196,858 shares of the
Company’s common stock.
As of
December 31, 2017, the Company had 16,676,942
shares of Series B Preferred issued and outstanding with a
liquidation preference of $166,769 and convertible into 16,676,942
shares of the Company’s common
stock.
11. COMMON
STOCK, OPTIONS AND WARRANTS
The Company has authorized 150,000,000 shares of its common stock
for issuance, of which 78,696,461 were issued and outstanding at
each of September 30, 2018 and December 31, 2017.
During the nine months ended September 30, 2018 and 2017, there
were no warrants issued by the Company. As of September 30,
2018, the Company has one warrant issued and outstanding, which
warrant was issued in December 2017 to Preprogen’s designee
to purchase up to 15.0 million shares of the Company’s common
stock, at an exercise price of $0.05 per share. The warrant was
exercisable immediately upon issuance, and expires on December 14,
2022.
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 nine months ended September 30, 2018
or 2017.
12.
SUBSEQUENT EVENTS
On
October
8, 2018, the Preprogen Agreement was amended to provide for, among
other things, the release of funds held in escrow related to the
manufacture of the miniform pads, which resulted in both parties
receiving $200,000 in cash. As consideration for the Preprogen
Amendment, the Company agreed to pay Preprogen a royalty of 5% from
the sale of all over-the-counter miniform products;
provided, however,
that such royalty
payments shall terminate when Preprogen has received $200,000 in
aggregate consideration from the royalties paid by the Company, and
that the Company shall be entitled to offset such royalty payments
due and payable to Preprogen by amounts equal to certain other
payments otherwise due and payable to the Company by Preprogen
pursuant to the terms of the Preprogen Agreement.
In
October 2018, the Board of Directors approved bonus payments to Dr.
Hirschman and Mr. Abrams in the amount of $12,500 each for services
rendered to the Company.
In
October 2018, the Board of Directors approved a payment to Burnham
Hill Advisors of $12,500 for advisory services provided to the
Company.