(Unaudited)
Zenosense, Inc. (the "Company") was incorporated under the laws of the State of Nevada on August 11, 2008.
Effective December 4, 2013, the Company entered into a development and exclusive license agreement ("License Agreement") whereby the Company will provide a third party with capital for the development of sensory technology for a methicillin resistant Staphylococcus aureus / Staphylococcus aureus ("MRSA/SA") detection device and a cancer detective device and other improvements and variations to the products (the "Sgenia Products") to be used in the hospital and health care environments, in exchange for a worldwide, exclusive license to manufacture, market and sell the resulting products, subject to certain limitations and a royalty arrangement on a revenue sharing basis. The License Agreement was modified in April 2015 and July 2015 to extend to additional cancer sensory products and to modify and extend the development schedule and change the research funding budget to accommodate the lung cancer product as well as MRSA/SA product.
On June 20, 2016, the Company entered into a joint venture arrangement by way of a Subscription and Shareholders' Agreement ("MML SSA") with a third party medical detection device developer ("Partner") utilizing a joint venture vehicle, MIDS Medical Ltd ("MML"), a UK Limited company of which the Company owns a 40% interest awarded on July 1, 2016, in exchange for its participation and funding to support MML during a Phase 1 and prospectively during a Phase 2 development of the Partner's MIDS universal immunoassay detection technology platform ("MIDS"). MML will have the right, under license, to use the MIDS Intellectual Property ("MIDS IP") during the development and the MIDS IP will be transferred to MML in the event MML concludes a commercial deal for MIDS with a third party.
Following an extensive revision to the MIDS core Hall effect sensor electronics during the first half of 2018, MML reported, in June, 2018, that testing had confirmed and had materially improved upon the testing results announced in late 2017, with a near doubling of sensitivity of detection. MML informed the Company that two brands of commercia
lly available paramagnetic assay beads were tested: GE Sera-Mag™ (3μm) and Thermo Fisher Scientific M-270 Dynabeads® (2.8 μm), both of which are thought suitable for a HS troponin assay and have similar paramagnetic characteristics. MML also stated that th
e MIDS level of detail of both these brands was seen on a reliable, repeatable basis at around 50,000 beads, with good signal linearity (required for accurate assay quantitation) at higher numbers. This number of beads detected at the level of detail is, according to MML, well within the range advised by MML's assay consultants as suitable for a HS troponin assay.
On August 31, 2018, the Company and MML entered into an agreement with an investor for the funding of MML of up to US$1,200,000 in exchange for up to 10.31% equity ownership in MML. The Company's ownership of MML may be diluted based on the amount of the investor funds.
The financial statements have been prepared in accordance with generally accepted accounting principles applicable to a going concern, which assumes that the Company will be able to meet its obligations and continue its operations for 12 months. Realization values may be substantially different from carrying values as shown and these financial statements do not give effect to adjustments that would be necessary to the carrying values and classification of assets and liabilities should the Company be unable to continue as a going concern. At September 30, 2018, the Company had not yet achieved profitable operations, had accumulated losses of $2,483,489 since its inception and expects to incur further losses in the development of its business, all of which raises substantial doubt about the Company's ability to continue as a going concern for the twelve months following the issuance of these financial statements. The Company's ability to continue as a going concern is dependent upon its ability to generate future profitable operations and/or to obtain the necessary financing to meet its obligations and repay its liabilities arising from normal business operations when they come due.
The Company expects to continue to incur substantial losses as it executes its business plan and does not expect to attain profitability in the near future. Since its inception, the Company has funded operations through short-term borrowings, and advances in order to meet its strategic objectives. The Company's future operations are dependent upon external funding and its ability to execute its business plan, realize sales and control expenses. Management believes that sufficient funding will be available from additional borrowings and private placements to meet its business objectives including anticipated cash needs for working capital, for the next fiscal year. However, there can be no assurance that the Company will be able to obtain sufficient funds to continue the development of its business operation, or if obtained, upon terms favourable to the Company.
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Summary of significant accounting policies
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Basis of presentation
The accompanying unaudited interim financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission ("SEC") for interim financial information. Accordingly, they do not include all the information and footnotes required by accounting principles generally accepted in the United States of America ("U.S. GAAP"). In our opinion, the accompanying unaudited interim financial statements include all adjustments, consisting of normal recurring adjustments, which are necessary to present fairly our financial position, results of operations and cash flows. The balance sheet at December 31, 2017, has been derived from audited financial statements of the Company as of that date. The interim unaudited results of operations are not necessarily indicative of the results that may occur for the full fiscal year. Certain information and footnote disclosure normally included in financial statements prepared in accordance with U.S. GAAP have been omitted pursuant to instructions, rules and regulations prescribed by the SEC. We believe that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim consolidated financial statements are read in conjunction with the audited financial statements and notes previously included in the Company's Annual Report on Form 10-K for the year ended December 31, 2017.
ZENOSENSE, INC.
Notes to the Financial Statements
(Unaudited)
Use of estimates
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
Research and development
Research and development costs are expensed as incurred.
Income taxes
Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between their financial statement carrying amounts and their respective tax bases. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled.
Loss per common share
Basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. For periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all dilutive potential common shares is anti-dilutive. For the nine months ended September 30, 2018 and 2017, potentially dilutive securities included notes convertible to 18,132,556 and 31,436,571 common shares, respectively.
Equity method accounting for joint venture
As of September 30, 2018 and December 31, 2017, the Company had a 40% interest in a joint venture with the Partner by way of subscription and shareholders agreement in a third party medical detection device developer, MIDS Medical Limited. The investment in MML is accounted for using the equity method.
Subsequent events
The Company evaluated all events or transactions that occurred after September 30, 2018 through the date these financial statements were issued for subsequent event disclosure consideration.
Recent accounting standards
In February 2016, the FASB issued ASU 2016-02, a new lease standard requiring lessees to recognize lease assets and lease liabilities for most leases classified as operating leases under previous U.S. GAAP. The guidance is effective for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company will be required to use a modified retrospective approach for leases that exist or are entered into after the beginning of the earliest comparative period in the financial statements. The Company has evaluated the adoption of the standard and, due to there being only one operating lease currently in place, there will be minimal impact of the standard on its consolidated financial statements.
In August 2018, the FASB issued ASU 2018-13, "Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement". The amendments in this update are to improve the effectiveness of disclosures in the notes to the financial statements by facilitating clear communication of the information required by GAAP that is most important to users of each entity's financial statements. The amendments in this Update apply to all entities that are required, under existing GAAP, to make disclosures about recurring or nonrecurring fair value measurements. The amendments in this update are effective for all entities for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years. The Company does not expect that this guidance will have a material impact on its consolidated financial statements.
In July 2018, the FASB issued ASU 2018-11, "Leases (Topic 842): Target Improvements". The amendments in this Update also clarify which Topic (Topic 842 or Topic 606) applies for the combined component. Specifically, if the non-lease component or components associated with the lease component are the predominant component of the combined component, an entity should account for the combined component in accordance with Topic 606. Otherwise, the entity should account for the combined component as an operating lease in accordance with Topic 842. An entity that elects the lessor practical expedient also should provide certain disclosures. The Company is currently evaluating the adoption of this guidance and does not expect that this guidance will have a material impact on its consolidated financial statements. The Company has not adopted this Standard and will do so when specified by the FASB.
In July 2018, the FASB issued ASU 2018-10, "Codification Improvements to Topic 842, Leases". The amendments in this Update affect narrow aspects of the guidance issued in the amendments in Update 2016-02 as described in the table below. The amendments in this Update related to transition do not include amendments from proposed Accounting Standards Update, Leases (Topic 842): Targeted Improvements, specific to a new and optional transition method to adopt the new lease requirements in Update 2016-02. That additional transition method will be issued as part of a forthcoming and separate Update that will result in additional amendments to transition paragraphs included in this Update to conform with the additional transition method. The Company is currently evaluating the adoption of this guidance and does not expect that this guidance will have a material impact on its consolidated financial statements. The Company has not adopted this Standard and will do so when specified by the FASB.
The Company does not believe that any new accounting pronouncements that have been issued would have a material impact on its financial position or results of operations.
On June 20, 2016, the Company entered into the MML SSA with the Partner utilizing a joint venture vehicle, MML of which the Company owns a 40% interest awarded on July 1, 2016, in exchange for its participation and funding to support MML during a Phase 1 and prospectively during a Phase 2 development of the Partner's MIDS universal immunoassay detection technology platform. MML will have the right, under license, to use the MIDS IP during the development and the MIDS IP will be transferred to MML in the event MML concludes a commercial deal for MIDS with a third party.
ZENOSENSE, INC.
Notes to the Financial Statements
(Unaudited)
For the nine months ended September 30, 2018, the Company's equity share of the net losses in MML was $65,187. As of September 30, 2018, the Company had a net investment of $395,899 in MML. The summarized balance sheet of MML as of September 30, 2018 is as follows:
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|
|
|
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Cash
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$
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138,573
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Receivable
|
|
|
2,367
|
|
|
Prepaid expenses
|
|
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5,696
|
|
|
Total current assets
|
|
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146,636
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Intellectual property
|
|
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1,006,038
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Total assets
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$
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1,152,674
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|
|
|
|
|
|
|
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Current liabilities:
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|
|
|
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|
Accounts payable - trade
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|
$
|
8,577
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|
|
Accrued liabilities
|
|
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155,040
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|
Total current liabilities
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|
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163,617
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|
|
|
|
|
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Equity:
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|
|
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Share capital
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1,625,000
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Other comprehensive income
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|
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22,348
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|
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Accumulated deficit
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|
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(658,291
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)
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Total equity
|
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|
989,057
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|
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Total equity and liabilities
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$
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1,152,674
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The summarized statements of operations for MML for the nine months ended September 30, 2018 and 2017 are as follows:
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Nine Months Ended September 30, 2018
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Nine Months Ended September 30, 2017
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Revenue
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$
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–
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|
|
$
|
-
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|
|
General and administrative expenses
|
|
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162,967
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|
|
|
303,213
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|
|
Net loss
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$
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(162,967
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)
|
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$
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(303,213
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)
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On April 20, 2016, the Company issued a convertible note to a third party (the "Noteholder") in a principal amount of $40,000 (the "April Senior Note"). The note is due on April 19, 2018, cannot be prepaid and bears interest at 5% per annum. On September 20, 2016, at the noteholder's discretion, it became convertible into shares of common stock of the Company at a price of $0.007 per share, subject to a blocker provision that limits the amount of common stock that may be issued at any time to 4.99% of the then outstanding shares of common stock. The Company has initially reserved 5,714,286 shares of common stock issuable upon the conversion feature.
On May 17, 2016, the Noteholder of four unsecured promissory notes in the aggregate of $110,000 (the "Prior Notes") agreed to exchange these notes for two new convertible notes, (together the "May Senior Notes") under two separate Securities Exchange Agreements. One note for the principal amount of $53,197 (the "$53,197 May Senior Note"), and the other for the principal amount of $62,547 (the "$62,547 May Senior Note"), for a combined aggregate principal amount of $115,744. The May Senior Notes bear interest at 5% per annum and are due on May 16, 2018 and may not be prepaid by the Company. The May Senior Notes can be converted into shares of common stock of the Company at the discretion of the holder, at a price of $0.007 per share, subject to a blocker provision that limits the amount of common stock that may be issued at any time to 4.99% of the outstanding shares of common stock. The Company has initially reserved 16,534,857 shares of common stock issuable upon the conversion feature.
ZENOSENSE, INC.
Notes to the Financial Statements
(Unaudited)
On October 18, 2016, the Noteholder entered into a Debt Purchase and Assignment Agreement (the "Assignment Agreement") with an accredited investor as defined in Rule 501(a) of the 1933 Securities Act (the "Junior Holder") to purchase $42,000 (the "Junior Note") of the principal amount of the $62,547 May Senior Note. The Assignment Agreement stipulated that the Junior Note is (a) subordinate to the noteholder's balance of the $62,547 May Senior Note; and (b) unconvertible unless the trading price of the Company's securities is equal to or greater than $0.15 per share based on the volume weighted average price ("VWAP") of the preceding five trading days.
On November 1, 2016, after notice from the Noteholder, the Company reissued the $62,547 May Senior Note in two notes: (a) the Junior Note in an amount of $42,000 and (b) the balance of the $62,547 May Senior Note, this being $21,968 to include interest due through November 1, 2016 (the "November $21,968 Senior Note"). The Junior Note contains terms reflecting the Assignment Agreement stipulations of subordination and VWAP conversion otherwise the two notes carry forward the same terms of the May Senior Note.
On September 29, 2016, the Company issued an unsecured convertible note in the principal amount of $60,000 to the Noteholder (the "September 2016 Note") which also granted an option to the Noteholder to provide four unsecured convertible loans (the "Option Loans"): (a) by October 31, 2016, $140,000; (b) by November 30, 2016, $170,000 (c) by January 31, 2017, $180,000; and (d) by March 30, 2017, $100,000.
On October 27, 2016, under the Option Loans, the Company issued an unsecured note (the "October 2016 Note") in the principal amount of $140,000, to the Noteholder.
On December 6, 2016, the September 2016 Note was amended (the "Note Amendment") to revise the Option Loans amounts and timing to allow the Noteholder to provide four unsecured convertible loans to the Company (the "New Option Loans"): (a) on December 6, 2016, a loan of $30,000; (b) by January 31, 2017, a loan of $180,000; (c) by February 28, 2017, a loan of $140,000; and (d) by March 31, 2017, a loan of $100,000. All other terms and conditions remained the same. Simultaneously with the Note Amendment, the Company issued a note to the Noteholder in the principal amount of $30,000 (the "December 2016 Note").
On February 1, 2017, the September 2016 Note was further amended (the "Second Note Amendment") to revise the Option Loans amounts and timing to allow the Noteholder to provide three unsecured convertible loans to the Company (the "New Option Loans 2"): (a) by March 15, 2017, $160,000; (b) by April 15, 2017, $170,000; and (c) by May 15, 2017, $90,000. All other terms and conditions remained the same.
On March 3, 2017, the Company issued an unsecured note (the "March 2017 Note") in the principal amount of $160,000 to the Noteholder which retained the option to provide the balance of the New Option Loans 2. On receipt of these funds, a payment of $130,000 was made to MML.
On April 2, 2017, the Company issued an unsecured convertible note (the "April 2017 Note") in the principal amount of $170,000, to the Noteholder in exchange for a loan of $170,000. The Noteholder retained the option to provide the final amount of $90,000 of the New Option Loans 2. On receipt of these funds, a payment of $152,500 was made to MML.
On April 4, 2017, the Company was notified that the Junior Holder had sold and assigned an aggregate amount of $22,300 of the $42,000 Junior Note to a new investor (the "Junior Holder 2"). The Company therefore cancelled the Junior Note, and issued a new note in the principal amount of $22,300 to the Junior Holder 2 (the " Junior Note 2") and a new note in the principal amount of $14,712, which included accrued interest and a reducing adjustment for a prior conversion by the Junior Note Holder of $5,800 of the principal amount, to the Junior Holder.
On May 8, 2017, the Company issued an unsecured convertible note (the "May 2017 Note") in the principal amount of $90,000, to the Noteholder in exchange for a loan of $90,000 (representing the final balance of the New Option Loans 2). On receipt of these funds, a payment of $75,000 was made to MML.
On May 14, 2017, the Company issued an unsecured convertible note (the "May 14, 2017 Note") in the principal amount of $50,000, to the Noteholder in exchange for a loan of $50,000 for general working capital. The terms and conditions of the May 14, 2017 Note are essentially the same as the New Loans (as defined below) with the exception of a fixed conversion price of $0.40 and no option to provide further loans granted.
On September 12, 2017, the Company was notified that the Junior Holder 2 had sold and assigned the entire principal amount of $16,500 of the Junior Note 2 (the Junior Note 2 principal amount adjusted for a prior conversion of $5,800 of the principal amount), plus accrued interest of $42 to a new investor, (the "Junior Holder 3"), effective April 24, 2017. The Company therefore cancelled the Junior Note 2, and issued a new note in the principal amount of $16,542 to the Junior Holder 3 (the "Junior Note 3").
On November 8, 2017, the Company issued an unsecured convertible note (the "November 8, 2017 Note") in the principal amount of $50,000, to the Noteholder in exchange for a loan of $50,000 for general working capital. The terms and conditions of the November 8, 2017 Note are the same as the May 14, 2017 Note with the exception of a fixed conversion price of $0.23.
ZENOSENSE, INC.
Notes to the Financial Statements
(Unaudited)
On March 14, 2018, the Company issued an unsecured convertible note (the "March 14, 2018 Note") in the principal amount of $25,000, to the Noteholder in exchange for a loan of $25,000. The terms and conditions of the March 14, 2018 Note are the same as the May 14, 2017 Note with the exception of a fixed conversion price of $0.45.
On April 12, 2018, the Company entered into an amendment to the April Senior Note originally dated April 20, 2016, the $53,197 May Senior Note originally dated May 17, 2016, and the November Senior Note originally dated November 1, 2016, with the holder thereof, to extend the repayment period until April 11, 2019. In all other respects the terms of these notes has remained unchanged.
On May 2, 2018 the Company was notified that the Junior Holder 2 had sold and assigned the entire remaining principal amount of $14,712 of the Junior Note 2 plus $777 of accrued interest to a new investor (the "Junior Note Holder 4"), effective April 25, 2018. The Company therefore cancelled the Junior Note 2, and issued a new note in the principal amount of $15,489 (the "Junior Note 4"). The terms of the Junior Note 4 are essentially the same as the Junior Note 2 with the exception of a revised maturity date of November 16, 2018.
On May 10, 2018, the Company was notified that the Junior Holder 3 had sold and assigned the entire principal amount of $8,862 of the Junior Note 3 (the original principal amount adjusted for a prior conversion of the Junior Note 3 of $7,680 of the principal amount) plus $424 of accrued interest, to a new investor (the " Junior Note Holder 5"), effective April 9, 2018. The Company therefore cancelled the Junior Note 3, and issued a new note in the principal amount of $9,286 (the "Junior Note 5"). The terms of the Junior Note 5 are essentially the same as the Junior Note with the exception of a revised maturity date of August 16, 2018.
On June 22, 2018, the Company issued an unsecured convertible note (the "June 2018 Note") in the principal amount of $60,000 to the Noteholder in exchange for a loan of $60,000. The terms and conditions of the June 22, 2018 Note are the same as the May 14, 2017 Note with the exception of a fixed conversion price of $0.30.
The terms and conditions of certain commitment loans (see Note 6 below), the Option Loans, the New Option Loans, and the New Option Loans 2 (collectively the "New Loans") are the same (conversion and floor prices having been adjusted in line with the terms of the commitment loans at the time of the reverse stock split completed on August 4, 2016), and bear an interest rate of 10% per annum, based on a 360-day year, and are due four years from the issuance date. The Company may, at any time prior to the maturity date, prepay any unconverted amount of the New Loans in full or in part. The Noteholder may, at any time prior to the maturity date convert any or all of the New Loans into shares of common stock of the Company at either (a) $0.07 per share (subject to adjustment), or (b) a 15% discount to the 10-day Volume Weighted Average Price per share, provided that any such conversion is not at a price of less than $0.035 per share (subject to adjustment). In either scenario the total number of shares of common stock issued on conversion may not cause the total beneficial ownership held by the Investor and its affiliates, or the Noteholder and its affiliates to exceed 4.99% of the outstanding shares of common stock. On the maturity date of each of the New Loans, any outstanding amount shall automatically and mandatorily convert into common stock at a price of $0.07 per share (subject to adjustment). The New Loans also contain standard anti-dilution provisions.
The Company evaluated the notes to have beneficial conversion features with an intrinsic value exceeding the principal balances. The intrinsic value is based upon the difference between the market price of the Company's common stock on the date of issuance and the conversion price of $0.007 and $0.07. The total discount is being amortized through interest expense using the interest method over the term of the notes. For the nine months ended September 30, 2018, the Company recorded amortization of debt discount in the amount of $112,279. In addition, the Company recorded additional beneficial conversion feature related to the 2018 note issuances, mentioned above, in the amount of $18,409. During the nine months ended September 30, 2018, the Company issued 5,670,600 common shares for conversion of $39,694 debt at $0.007 per share. The summary of convertible notes payable activities for the nine months ended September 30, 2018 is as follows:
Balance at December 31, 2017
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$
|
284,450
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Principal of notes issued during the nine months ended September 30, 2018
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|
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85,000
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|
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Add accrued interest reclassified to principal
|
|
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1,614
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|
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Less conversion of note
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|
|
(39,694
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)
|
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Less discount related to beneficial conversion features
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|
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(18,409
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)
|
|
Add amortization of debt discount
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|
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112,279
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Balance at September 30, 2018
|
|
$
|
425,240
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ZENOSENSE, INC.
Notes to the Financial Statements
(Unaudited)
On July 28, 2014, the Company entered into a Securities Purchase Agreement under which the investor committed to purchase an aggregate of 1,370,000 shares of the Company's common stock, par value $0.001 per share, for an aggregate purchase price of $274,000. The initial purchase of shares was made on July 28, 2014 for 357,000 shares for a purchase price of $71,500. Two additional purchase instalments were made in August and September. Each instalment was for 337,500 shares at a purchase price of $67,500 per instalment. The shares when issued are pursuant to an exemption from registration under the federal securities laws. On November 11, 2014, the Company received $67,500 for 337,500 shares of common stock. As of September 30, 2018 and December 31, 2017, the shares in connection with the final investment have not been issued.
On February 13, 2018, the Company issued 800,000 shares of common stock for the conversion of $5,600 of the principal amount due under the $53,197 May Senior Note. Consequently, the principal amount owing on the $53,197 May Senior Note reduced to $5,836 plus accrued interest.
On April 4, 2018, the Company issued 833,714 common shares for conversion of $5,836 principal of $53,197 May Senior Note. Consequently, the principal amount owing on the $53,197 May Senior Note reduced to $0 plus accrued interest.
On May 28, 2018, the Company issued 1,348,000 common shares for conversion of $9,436 principal of the Junior Note 4. Consequently, the principal amount owing on the Junior Note 4 reduced to $6,053 plus accrued interest.
On June 11, 2018, the Company issued 1,340,000 common shares for conversion of $9,380 principal of the November $21,968 Senior Note. Consequently, the principal amount owing on the November $21,968 Senior Note reduced to $12,588 plus accrued interest.
On August 13, 2018, the Company issued 1,265,994 common shares for conversion of $8,861 principal of the Junior Note 5. Consequently, the principal amount owing on the Junior Note 5 reduced to $424 plus $157 accrued interest which was then converted into 82,892 common shares on August 16, 2018, reducing the amount owing to $0.
MML Funding Arrangement
The Company's funding of MML was limited to an initial committed aggregate payment of £450,500 (approximately $650,000 at exchange rates prevailing at the time of the MML SSA) for Phase 1, which was subsequently amended from the pound sterling amount into a U.S. dollar amount of $650,000. This funding has been provided to MML in full.
Sgenia License Agreement
On December 4, 2013, the Company entered into the License Agreement with Sgenia Industrial S.L. and its subsidiaries, Sgenia Soluciones S.L and ZENON Biosystem S.L (collectively, "Sgenia") for the development of an MRSA/SA detection device and cancer detective device and other improvements and variations to the devices (the "Sgenia Products"), to be based on the Sgenia sensory technology. Pursuant to the License Agreement, the Company will have a worldwide exclusive license to manufacture, market and sell the resulting products, subject to certain limitations and a royalty arrangement on a revenue sharing basis for funding the development. The Company entered into amendments (the "Sgenia Amendments") to the License Agreement to modify and extend the Sgenia Products to include a lung cancer product and change the product development schedule and the research funding budget to accommodate the additional lung cancer product as well as the continuation of the development of the MRSA product. Additionally, the development stage objectives and milestones were modified to reflect the current state of development of each of the Sgenia Products.
ZENOSENSE, INC.
Notes to the Financial Statements
(Unaudited)
At this time, the Company is not funding development activities under the License Agreement with Sgenia because certain milestones were not achieved by Sgenia and ZENON. If Sgenia is able to re-commence development and testing, then the parties to the License Agreement will have to revise the operating budget and then the Company will have to re-commence its funding so as to maintain its rights under the License Agreement. We believe that any future funding will be provided on an advance basis, per month, based on agreed development stages. In return, the Company will maintain the exclusive right to manufacture, formulate, package, market and sell the Sgenia Products world-wide, for a term of years, subject to a limitation on the inclusion of Spain in the territory. All intellectual property developed by Sgenia at any time during the term related to manufacturing, formulating and/or packaging process shall be shared ownership and licensed to the Company on a royalty-free basis. Sgenia will also supply to the Company, at a negotiated price based on quantity, all of the requirements for the integrated circuits on microchips that are necessary for the operation of the Sgenia Products. Sgenia and the Company will also work together to research and develop the Sgenia Products and establish written plans and reviewing committees for the management of the overall development project and commercialization of the Sgenia Products.
The Company's funding of the MRSA product development was limited to an approved budget joinly determined by Sgenia and the Company. To date, under the License Agreement with Sgenia, the Company advanced $769,787 under the terms of the then approved budgets. Under the current terms of the License Agreement, if development is re-commenced by Sgenia and ZENON, the Company will be required to advance a further amount of approximately EUR 656,000 (approximately $761,039 at September 30, 2018 exchange rates) for research and development subject to a mutually agreed current budget, and subject to Sgenia meeting certain milestones. However, if development is re-commenced, it is expected that the budget will be revised and the funding amounts re-established. The aggregate of the advances paid by the Company are recorded as research and development expenses. The budget may be changed by mutual agreement from time to time.
In addition to providing the development funding, the Company will also pay royalties for completed sales of the Sgenia Products, payable 60 days after each fiscal quarter of the Company. The royalties will be 20% of net sales, which is calculated based on gross sales of the device and the installation and training for the Sgenia Products, less various expenses, including manufacturing, components acquired from Sgenia, commissions, refunds and discounts and sales taxes. If the Sgenia Products are sold by Sgenia in Spain for original use in Spain, then the royalties on those sales will be reduced. The Company also has the right to sublicense to other parties throughout the world, except in Spain if and when, if at all, Sgenia seeks to act as the distributor in that territory.
The Company has the option to fund the development of future proposed products based on the Sgenia intellectual property, and if funded, the Company will obtain the right to manufacture, market and sell the resulting devices.
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Related party transactions
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On December 5, 2013, the Company entered into a one-year service agreement with Mr. Carlos Jose Gil, through his consulting firm, Ksego Engineering S.L., under which the Company will obtain his services as the Chief Executive Officer of the Company. Mr. Gil will receive a base salary and additional compensation equal to 10% of the net sales generated from the License Agreement. On August 12, 2016, the Company amended Mr. Carlos Jose Gil's service agreement to include additional compensation, if any, to be equal to 10% of the revenue received by Zenosense, Inc. from MML as a result of any future commercialization of the MIDS project.
During the nine months ended September 30, 2018, the Company recorded $49,600 of general and administrative expenses related to amounts paid/owed to Ksego Engineering S.L. for services rendered by Mr. Gil. As of September 30, 2018, the Company owes Mr. Gil $108,496. No additional compensation based on net sales has been earned to date.
On November 5, 2018, the Company entered into an amendment to the Junior Note 4 with the holder thereof, to extend the repayment period until May 16, 2019. In all other respects the terms of the note has remained unchanged.
Under a Subscription and Shareholder's Agreement dated August 31, 2018, MML was due to receive a Tranche 1 funding of $300,000.00 from a third party funder ("Funder") by October 31, 2018. To date, $150,000.00 has been sent to MML converted to and received in GBP £112,859.51. A Tranche 1 balance of $150,000.00 remains unpaid to MML. On November 12, 2018, MML, gave the Funder notice that MML would extend a continued opportunity to the Funder to fund Tranche 1. MML extended this offer on the condition that the Funder may be given notice of formal default should MML obtain alternative funding prior to the balance of Tranche 1 being paid and accepted by MML in its sole discretion. In the event that the Funder does not provide the balance of Tranche 1, it will not receive any of the 2.91% equity in MML due to be purchased by the full payment of Tranche 1. The Company and its Partner in MML are actively seeking alternative funding for MML.
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
Forward-Looking Statements
This section of this quarterly report includes a number of forward-looking statements that reflect our current views with respect to future events and financial performance. Forward-looking statements are often identified by words like: believe, expect, estimate, anticipate, intend, project and similar expressions, or words which, by their nature, refer to future events. You should not place undue certainty on these forward-looking statements, which apply only as of the date of this report. These forward-looking statements are subject to certain risks and uncertainties that could cause actual results to differ materially from historical results or our predictions. Respective statements concerning the development of both MIDS Cardiac™ and other devices under development have been made based on information obtained from MIDS Medical Ltd. and Zenon Biosystem, which the Company believes to be accurate, but have not been independently verified.
As used in this quarterly report, the terms "we," "us," "our," "our company" and "Zenosense" mean Zenosense, Inc., unless otherwise indicated. We have no subsidiaries and have a 40% equity interest in MIDS Medical Ltd ("MML").
General Overview
Zenosense, Inc. was incorporated on August 11, 2008 in the State of Nevada. In December 2013, we filed an amendment to our charter to change our name from "Braeden Valley Mines, Inc." to "Zenosense, Inc." and to increase the number of our authorized shares of Common Stock from 50,000,000 shares to 500,000,000 shares par value of $0.001.
The original purpose of the Company was to acquire and to develop mineral properties and to engage in the exploration for gold and other mineral properties. On May 15, 2013, our mining lease expired and we lost our right to explore the mining property. We then became a shell company, as defined under the Securities and Exchange Act of 1934, as amended, until December 4, 2013, when we entered into the transaction with Sgenia described below.
In the summer of 2013, we started to look for new business opportunities. We became interested in sensory technology devices for use in hospitals and health care environments. During the latter part of the year, we began to negotiate a license agreement with the developers of such technology (the "Sgenia Technology"), and in December 2013, we entered into a Development and Exclusive License Agreement (the "License Agreement") with Sgenia Industrial, S.L. ("Sgenia") and its subsidiaries Sgenia Soluciones, S.L. ("Sgenia Subsidiary") and ZENON Biosystem, S.L. ("Zenon"), all of which were formed under the laws of Spain. The products currently being developed under the License Agreement include one to be used in the detection of methicillin resistant Staphylococcus aureus/Staphylococcus aureus ("MRSA/SA") in the healthcare environment and another to be used to detect lung cancer in patients. Under the terms of the License Agreement, we will provide Zenon with capital for the development of the devices that utilizes the Sgenia Technology (the "Sgenia Products"), in exchange for a worldwide, exclusive license to manufacture, formulate, market and sell the resulting products, subject to certain limitations and a royalty arrangement on a revenue sharing basis. The License Agreement gives us additional rights to improvements and developments to the Sgenia Products and future products using the Sgenia Technology.
In June 2016, we were presented the opportunity of involvement in a joint venture complementary to our current medical device development business plan and we entered into a joint venture to develop the MIDS technology. On June 20, 2016, we entered into a joint venture by way of a Subscription and Shareholders' Agreement ("MML SSA") with a third party medical detection device developer ("Partner") utilizing a joint venture vehicle, MML, a UK Limited company of which we own a 40% interest as of July 1, 2016. Our interest in MML was obtained in exchange for a funding commitment to support MML during a Phase 1 and prospectively during a Phase 2 development of the Partner's MIDS universal immunoassay detection technology platform ("MIDS). MML will have the right, under license, to use the MIDS intellectual property during the development and the MIDS intellectual property will be transferred to MML in the event MML concludes a commercial deal for MIDS with a third party.
Following an extensive revision to the MIDS core Hall effect sensor electronics during the first half of 2018, MML reported, in June, 2018, that testing had confirmed and had materially improved upon the testing results announced in late 2017
, with a near doubling of sensitivity of detection. MML informed the Company that two brands of commercially available paramagnetic assay beads were tested: GE Sera-Mag™ (3μm) and Thermo Fisher Scientific M-270 Dynabeads® (2.8 μm), both of which are though
t suitable for a HS troponin assay and have similar paramagnetic characteristics. MML also stated that the MIDS level of detail of both these brands was seen on a reliab le, repeatable basis at around 50,000 beads, with good signal linearity (required for accurate assay quantitation) at higher numbers. This number of beads detected at the level of detail is, according to MML, well within the range advised by MML's assay consultants as suitable for a HS troponin assay.
To fund our obligations under the License Agreement and MML SSA, to date we have sold shares of common stock on a private placement basis, issued convertible debt and converted funds advanced to the Company into common shares of the Company.
Plan of Operations
Our business plan focus at this time is to develop devices to be used at the point-of-care ("POC") in hospitals and other medical care centers to detect Acute Myocardial Infarction, MRSA/SA and the signs of lung cancer, and where necessary, to fund the medical trials of those medical devices. Up to June 20, 2016, our principal activity was funding the development of the Sgenia Products. Because the development activities of the Sgenia Products has slowed, and certain milestones were not achieved, one of which is the start of hospital testing, we have not been providing additional funding for the development of the Sgenia Products as provided in the License Agreement. Additionally, because of the development status, we have not been successful in obtaining third-party funding of us for the directed development of the Sgenia Products.
As a result of the our participation in MML, our primary focus since June 2016 has been the funding and co-development of the MIDS technology platform to develop a hand held device, MIDS Cardiac™, to be used at the POC for the early detection of low levels of certain cardiac biomarkers, using high sensitivity cardiac assays for the diagnosis of AMI. Utilizing a magnetic nanoparticle detection technology ("MIDS"), the intention is to deliver a test platform that can produce laboratory accuracy standard results or better in a handheld device in less than eight minutes. The technology platform is already protected by two patent grants and several patent applications now in the national phase in key geographic areas. We believe that the initial cardiac device, if successful, would target a global market for cardiac biomarker testing predicted to reach $7.2 billion by 2018. We further believe that the test platform is also expected be applicable to a multiplicity of immunoassay tests representing a potential overall market opportunity estimated to be worth $23.7 billion per annum worldwide by 2019.
The MML SSA, as amended on September 28, 2016, December 6, 2017 and January 31, 2017 (the "Amendments") provides for a series of payments ("Phase 1 Payments") in an aggregate amount of $650,000, which was paid in full, and also provides for a contingency funding (the "Contingency") to be available after March 31, 2017 in an aggregate amount of up to £45,000 (approximately $63,000) to be paid by us within 20 days of receiving a written notice from MML.
The Amendments primarily reflected changes in the timings of funds required under the development budget which included a change to the original plan to allow MML to explore a potential enhancement to the MIDS nanoparticle detection method and the exploration of the potential development of a "Magnetic Bridge" detection technique based on the MIDS technology. As of the date of this report the Company has not received a request for the Contingency.
The MML SSA contains various provisions to govern our funding obligations: if no Contingency is drawn during Phase 1, the Partner will be awarded an enduring 2.5% profit after tax right in MML ("Override") which will increase to a 15% Override if we decline to fund Stage 2; if we decline to fund Phase 2 and any Contingency has been drawn, the Partner will be awarded a 15% Override decreased by 0.5% for each £7,500 tranche of Contingency drawn down during Phase 1. Any Override will convert on a ratio of 1% Override to 1% of ordinary shares in the event of a sale of MML.
The parties to the MML SSA envisage a second phase of development ("Phase 2") to follow Phase 1. This is expected to be over a similar timeframe and at a similar cost for MML development work. MML may decide to proceed with the development of its own assay using a third party assay developer which would materially increase this cost to an amount which is unknown at this time. MML may independently obtain funding for Phase 2 at MML's option, or invite the Company to fund.
At no time prior to a sale will the Company's ownership interest in MML's shares be less than 30%. The Company also has additional investor control rights over MML, including representation on the board of directors, rights over the appointment and employment of senior management persons, incurring indebtedness, entry into major transactions, budget approval rights, accounting practices and general operational management supervisory rights. Our Chief Executive Officer, Carlos Gil, is a director of MML.
As a condition of the MML SSA, MML has entered into Supply of Services Agreements under which it receives the services of a key person related to the MIDS development.
At September 30, 2018, we had a working capital deficit of $738,955. Our current cash assets are not sufficient to cover our current and expected expenses, including the contractual funding obligation under the License Agreement and the MML SSA, and therefore, we will need to obtain further financing, without which we will not be able to execute our business plan.
Assuming that we are able to obtain operational funding, in addition to any funding necessary to maintain our status as a public company, subject to regular review and additional assessment of requirements, currently we anticipate that we will incur the following expenses over the twelve month period following funding in connection with the development of our Products, principally being those based on the MIDS technology: (1) we may choose to fund MML to continue its MIDS development if alternate third party funding of MML's requirements cannot be obtained on acceptable terms, (2) we will have to fund the future development expenses of Sgenia in the approximate amount of €683,000, (3) payment of compensation to our officers, employees, and consultants of approximately $100,000, (4) legal, audit and reporting expenses of approximately $50,000, and (5) general working capital. Additional unknown expenses may arise from time to time, which we cannot currently identify or determine a possible expense. We will need additional funding to cover our anticipated expenses mentioned above, and for future development and implementation of our business plan.
Liquidity and Capital Resources
As of September 30, 2018 and December 31, 2017, our total assets were $412,627 and $480,694, respectively, and our total current liabilities were $755,683 and $534,265, respectively. As of September 30, 2018, we had a working capital deficit of $738,955. Our financial statements report a net loss of $356,803 and $437,765 for the nine months ended September 30, 2018 and 2017, respectively.
We have had recurring losses from operations. The continuation of our company is dependent upon our company attaining and maintaining profitable operations and raising additional capital as needed. Our financial statements reflect that there is a going concern qualification.
Based on our current operating plan, we do not expect to generate any revenue for at least the next twelve months. We do not have sufficient cash and cash equivalents to fund our operations for at least the next twelve months. We will need to obtain additional financing to operate our business for the next twelve months. We hope to obtain the capital necessary to fund our business through private placements and public offerings of our common stock. Additional financing, whether through public or private equity or debt financing, arrangements with stockholders or other sources to fund operations, may not be available, or if available, may be on terms unacceptable to us. Our ability to maintain sufficient liquidity is dependent on our ability to raise additional capital. If we issue additional equity securities to raise funds, the ownership percentage of our existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of our common stock. Debt incurred by us would be senior to equity in the ability of debt holders to make claims on our assets. The terms of any debt issued could impose restrictions on our operations. If adequate funds are not available to satisfy either short or long-term capital requirements, our operations and liquidity could be materially adversely affected and we could be forced to cease operations.
On March 14, 2018, we issued an unsecured convertible note in the principal amount of $25,000, to the Noteholder in exchange for a loan of $25,000. The terms and conditions of the March 14, 2018 Note are the same as the May 14, 2017 Note with the exception of a fixed conversion price of $0.45.
On June 22, 2018, the Company issued an unsecured convertible note (the "June 2018 Note") in the principal amount of $60,000, to the Noteholder in exchange for a loan of $60,000. The terms and conditions of the June 2018 Note are the same as the May 14, 2017 Note with the exception of a fixed conversion price of $0.30.
Net cash provided by (used in) operating, investing, and financing activities for the periods presented were as follows:
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Cash Flows
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Nine Months Ended
September 30,
2018
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Nine Months Ended
September 30,
2017
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Net cash used in operating activities
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$
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(106,095
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)
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$
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(91,199
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)
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Net cash used in investing activities
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$
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-
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$
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(357,500
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)
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Net cash provided by financing activities
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$
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85,000
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$
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470,000
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Cash increase (decrease) during the period
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$
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(21,095
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)
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$
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21,301
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We had cash of $7,728 as of September 30, 2018. We had a working capital deficit of $738,955 as of September 30, 2018, compared to working capital deficit of $505,442 as of December 31, 2017.
We used cash in operations of $106,095 and $91,199 during the nine months ended September 30, 2018 and 2017, respectively, principally for our corporate obligations and costs associated with our SEC reporting.
For the nine months ended September 30, 2018 and 2017, we used cash in investing activities of $0 and $357,500, respectively, due to the joint venture agreement with MIDS Medical Ltd.
During the nine months ended September 30, 2018 and 2017, we received cash proceeds from loans in the amount of $85,000 and $470,000, respectively.
Results of Operations
The following discussion of the results of operations and changes in our financial position should be read in conjunction with our audited financial statements and notes for the year ended December 31, 2017, which are included in our Form 10-K filed on April 17, 2018.
Three Months Ended September 30, 2018 and 2017
Operating Expenses
Our operating expenses for the three months ended September 30, 2018 and 2017 are outlined in the table below:
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Three Months Ended
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September 30,
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2018
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2017
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General and administrative expenses
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$
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35,155
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$
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36,429
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General and administrative expenses have decreased as a result of decreased consulting services and legal fees.
Other Expenses
For the three months ended September 30, 2018, interest expense was $56,388 compared to interest expense of $65,724 in the three months ended September 30, 2017. Decrease is due to less interest expense as some notes were fully converted to common stock during the current period.
During the three months ended September 30, 2018 and 2017, loss in equity investment was $19,247 and $42,148, respectively.
The Company has suffered recurring losses from operations. The continuation of our company is dependent upon our company attaining and maintaining profitable operations and raising additional capital as needed.
Nine Months Ended September 30, 2018 and 2017
Operating Expenses
Our operating expenses for the nine months ended September 30, 2018 and 2017 are outlined in the table below:
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Nine Months Ended
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September 30
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2018
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2017
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General and administrative expenses
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$
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116,543
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$
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126,269
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General and administrative expenses have decreased as a result of decrease in consulting services and decrease in our legal and accounting fees.
Other Expenses
For the nine months ended September 30, 2018, interest expense was $175,073 compared to interest expense of $190.211 in the nine months ended September 30, 2017. The decrease is related to interest expense due to some notes were fully converted during the current period.
During the nine months ended September 30, 2018 and 2017, loss in equity investment was $65,187 and $121,285 respectively. The decrease in the loss is related to a decrease in MML's general and administrative expenses.
The Company has suffered recurring losses from operations. The continuation of our company is dependent upon our company attaining and maintaining profitable operations and raising additional capital as needed.
Limited Operating History: Need for Additional Capital
Based on our current operating plan, we will not generate revenue that is sufficient to cover our expenses for at least the next twelve months. In addition, we do not have sufficient cash and cash equivalents to execute our operations for at least the next twelve months. We will need to obtain additional financing to operate our business for the next twelve months. We expect to raise the capital necessary to fund our company through advances or a private placement and public offering of our common stock. Additional financing, whether through public or private equity or debt financing, arrangements with stockholders or other sources to fund operations, may not be available, or if available, may be on terms unacceptable to us.
Our ability to maintain sufficient liquidity is dependent on our ability to raise additional capital. If we issue additional equity securities to raise funds, the ownership percentage of our existing stockholders would be reduced. New investors may demand rights, preferences or privileges senior to those of existing holders of our common stock. Debt incurred by us would be senior to equity in the ability of debt holders to make claims on our assets. The terms of any debt issued could impose restrictions on our operations. If adequate funds are not available to satisfy either short or long-term capital requirements, our operations and liquidity could be materially adversely affected and we could be forced to cease operations.
Off-Balance Sheet Arrangements
We do not have any significant off-balance sheet arrangements that have, or are reasonably likely to have, a current or future material effect on our financial condition, revenues or expenses, results of operations, liquidity, capital expenditures or capital resources.