Q BioMed Inc. - Quarter Report: 2017 February (Form 10-Q)

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

Indicate by check mark whether the issuer (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.  Yes ☒   No ☐

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  Yes ☐   No ☒

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company or an emerging growth ompany.  See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company” and "emerging growth company" in Rule 12b-2 of the Exchange Act.:

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    ☐

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act)  Yes ☐   No ☒

Indicate the number of shares outstanding of each of the issuer's classes of common stock, as of the latest practicable date:

Q BIOMED INC.

Quarterly Report

 

Table of Contents

 

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PART I – FINANCIAL INFORMATION

Item 1. Condensed Consolidated Financial Statements

Q BIOMED INC.

Condensed Consolidated Balance Sheets

(Unaudited)

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Q BioMed Inc.

Condensed Consolidated Statements of Operation

(Unaudited)

Q BIOMED INC.

Condensed Consolidated Statements of Cash Flows

(Unaudited)

The accompanying notes are an integral part of these condensed consolidated financial statements

 

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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, sale or spinoff new public companies.

On December 7, 2016, the Company formed its wholly-owned subsidiary in Cayman Islands, “Q BioMed Cayman SEZC”. 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 February 28, 2017, the Condensed Consolidated Statements of Operations for the three months ended February 28, 2017 and February 29, 2016, and the Condensed Consolidated Statements of Cash Flows for the three months ended February 28, 2017 and February 29, 2016, 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, 2016 has been derived from audited financial statements included in the Company's Form 10-K, most recently filed with the SEC on February 28, 2017. The results for the three months ended February 28, 2017 and February 29, 2016 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 is pre-revenue, had approximately $313,000 in cash and a working capital deficit of approximately $1.8 million as of February 28, 2017.  The ability of the Company to continue as a going concern depends on the Company obtaining adequate capital to fund operating losses until it generates adequate cash flows from operations to fund its operating costs and obligations. If the Company is unable to obtain adequate capital, it could be forced to cease operations.

The Company depends upon its ability, and will continue to attempt, to secure equity and/or debt financing.  The Company might not be successful, and without sufficient financing it would be unlikely for the Company to continue as a going concern. The Company cannot be certain that additional funding will be available on acceptable terms, or at all.    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.

 

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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, 2016 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.

Fair value of financial instruments

 

Fair value measurements discussed herein are based upon certain market assumptions and pertinent information available to management as of February 28, 2017 and November 30, 2016.  The respective carrying value of cash and accounts payable approximated their fair values as they are short term in nature.

As of February 28, 2017, the estimated aggregate fair value of all outstanding convertible notes payable is approximately $2.6 million. The fair value estimate is based on the estimated option value of the conversion terms, since the strike price of each note series is in-the-money at February 28, 2017. The estimated fair value represents a Level 3 measurement.

Recent accounting pronouncements

In March 2016, the FASB issued ASU No. 2016-06, Derivatives and Hedging (Topic 815): Contingent Put and Call Options in Debt Instruments. This new standard simplifies the embedded derivative analysis for debt instruments containing contingent call or put options by removing the requirement to assess whether a contingent event is related to interest rates or credit risks. This new standard will be effective for the Company on January 1, 2017. The adoption of this standard is not expected to have a material impact on the Company's financial position, results of operations, or cash flows.

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 January 1, 2018. The Company is currently evaluating the impact of the new standard on its condensed consolidated financial statements.

In January 2017, the FASB issued an ASU 2017-01, Business Combinations (Topic 805) Clarifying the Definition of a Business. The amendments in this Update is to clarify the definition of a business with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The definition of a business affects many areas of accounting including acquisitions, disposals, goodwill, and consolidation. The guidance is effective for annual periods beginning after December 15, 2017, including interim periods within those periods. The Update may be adopted early. The Company adopted the provisions of ASC 2017-01 effective December 1, 2016. Adoption did not have a material impact on the Company's financial position, results of operations, or cash flows.

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.

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Note 5 – Convertible Notes

 

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Series A Notes

 

The Series A convertible notes payable (the “Series A Notes”) are due and payable 18 months after issuance and bear interest at 10% per annum.  At the election of the holder, outstanding principal and accrued but unpaid interest under the Series A Notes is convertible into shares of the Company’s common stock at any time prior to maturity at a conversion price per share equal to the higher of: (i) forty percent (40%) discount to the average closing price for the ten (10) consecutive trading days immediately preceding the notice of conversion or (ii) $1.25 per share.  At maturity, any remaining outstanding principal and accrued but unpaid interest outstanding under the Series A Notes will automatically convert into shares of the Company’s common stock under the same terms.

Series B Notes

 

The Series B convertible notes payable (the “Series B Notes”) have the same terms as the Series A Notes.

Series C Notes

The Series C convertible notes payable (the “Series C Notes”) are due and payable 18 months after issuance and bear interest at 10% per annum.  At the election of the holder, outstanding principal and accrued but unpaid interest under the Series C Notes is convertible into shares of the Company’s common stock at a conversion price per share equal to the lesser of a 40% discount to the average closing price for the 10 consecutive trading days immediately preceding the notice of conversion or $1.55, but in no event shall the conversion price be lower than $1.25 per share.  If the average VWAP, as defined in the agreement, for the ten trading days immediately preceding the maturity date $5.00 or more, any remaining outstanding principal and accrued but unpaid interest outstanding under the Series C Notes will automatically convert into shares of the Company’s common stock under the same terms.  

The terms of the Series C Notes also provided that up until maturity date, the Company cannot enter into any additional, or modify any existing, agreements with any existing or future investors that are more favorable to such investor in relation to the Series D Note holders, unless, the Series C Note holders are provided with such rights and benefits (“Most Favored Nations Clause”).

Series D Notes

The Series D convertible notes payable (the “Series D Notes”) are due and payable 18 months after issuance and bear interest at 10% per annum.  At the election of the holder, outstanding principal and accrued but unpaid interest under the Series D Notes is convertible into shares of the Company’s common stock at a fixed conversion price per share equal to $1.85.  The Series D Notes automatically convert upon maturity at $1.85 per share if the ten trading days VWAP immediately preceding maturity is $5.00 or greater.  Additionally, if the Company’s common shares are up-listed to a senior exchange such as the AMEX or NASDAQ, all monies due under the Series D Notes will automatically convert at $1.85 per share.

The terms of the Series D Notes also included the Most Favored Nations Clause. The Most Favored Nations Clause was viewed as providing the Series D Note holder with down-round price protection.  As such, the embedded conversion option in the Series D Note was separately measured at fair value upon issuance, with subsequent changes in fair value recognized in current earnings.

On September 30, 2016, the Company amended the Most Favored Nations Clause of the Series D Notes to restrict the Company from taking dilutive action without the Series D note holders’ consent, effectively removing the down-round price protection.

At the amendment date, the conversion price of the amended Series D Notes was below the quoted market price of the Company’s common stock. As such, the Company recognized a beneficial conversion feature equal to the intrinsic value of the conversion price on the amendment date, resulting in a discount to the amended Series D Notes of $160,000 with a corresponding credit to additional paid-in capital. The resulting debt discount is presented net of the related convertible note balance in the accompanying Condensed Consolidated Balance Sheets and is amortized to interest expense over the note’s term.

 

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Series E Notes

 

The Series E convertible notes payable (the “Series E Notes”) are due and payable 18 months after issuance and bear interest at 10% per annum.  At the election of the holder, outstanding principal and accrued but unpaid interest under the Series E Notes is convertible into shares of the Company’s common stock at a fixed conversion price per share equal to $2.50.  The Series E Notes automatically convert upon maturity at $2.50 per share if the ten trading days VWAP immediately preceding maturity is $5.00 or greater.  Additionally, if the Company’s common shares are up-listed to a senior exchange such as the AMEX or NASDAQ, all monies due under the Series E Notes will automatically convert at $2.50 per share.

At the issuance date, the conversion price of the Series E Notes was below the quoted market price of the Company’s common stock. As such, the Company recognized a beneficial conversion feature equal to the intrinsic value of the conversion price on the amendment date, resulting in a discount to the Series E Notes of approximately $141,000 with a corresponding credit to additional paid-in capital. The resulting debt discount is presented net of the related convertible note balance in the accompanying Condensed Consolidated Balance Sheets and is amortized to interest expense over the note’s term.

Embedded Conversion Options

The embedded conversion feature is separately measured at fair value, with changes in fair value recognized in current operations.  Management used a binomial valuation model, with fourteen steps of the binomial tree, to estimate the fair value of the embedded conversion option at issuance of the Series A, B, and C Notes with the following key inputs:

During the three months ended February 28, 2017 and February 29, 2016, the Company recognized interest expense of approximately $181,000 and $75,000, respectively, resulting from amortization of the debt discount for Series A, B, and C Notes. 

 

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As of February 28, 2017, the embedded conversion options have an aggregate fair value of $87,000 and are presented on a combined basis with the related loan host in the Company’s Condensed Consolidated Balance Sheets.  The table below presents changes in fair value for the embedded conversion options, which is a Level 3 fair value measurement:

Rollforward of Level 3 Fair Value Measurement for the Three Months Ended February 28, 2017

Conversions of debt

 

The following conversions of the convertible notes occurred during the three months ended February 28, 2017:

As the embedded conversion option in each note series had been separately measured at fair value, the conversion of each note was recognized as an extinguishment of debt.  The Company recognized a loss on conversion of debt of approximately $363,000 as the difference between the fair value of common stock issued to the holders of approximately $2.6 million and the aggregate net carrying value of the convertible notes, including the bifurcated conversion options, of approximately $2.2 million.

 

Events of default

 

The Company will be in default of the Series A, B, C, D and E Notes, and all amounts outstanding will become immediately due and payable upon: (i) maturity, (ii) any bankruptcy, insolvency, reorganization, cessation of operation, or liquidation events, (iii) if any money judgement, writ or similar process filed against the Company for more than $150,000 remains unvacated, unbonded or unstayed for a period of twenty (20) days, (iv) the Company fails to maintain the listing of the common stock on at least one of the OTC markets or the equivalent replacement exchange, (v) the Company’s failure to maintain any material intellectual property rights, personal, real property or other assets that are necessary to conduct its business, (vi) the restatement of any financial statements filed with the U.S. Securities and Exchange Commission (“SEC”) for any period from two years prior to the notes issuance date and until the notes are no longer outstanding, if the restatement would have constituted a material adverse effect of the rights of the holders of the notes, (vii) the Company effectuates a reverse stock split of its common stock without twenty (20) days prior written notice to the notes’ holders, (viii) in the event that the Company replaces its transfer agent but fails to provide, prior to the effective date, a fully executed irrevocable transfer agent instructions signed by the successor transfer agent and the Company, (ix)  in the event that the Company depletes the share reserve and fails to increase the number of shares within three (3) business days, (x) if the Company fails to remain current in its filings with the SEC for more than 30 days after the filing deadline, (xi) after 12 months following the date the Company no longer deems itself a shell company as reflected in a ’34 Act filing, the Lenders are unable to convert the notes into free trading shares, and (xii) upon fundamental change of management.

The Company is currently not in default for any convertible notes issued.

 

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Secured Convertible Debentures

On November 29, 2016, the Company entered into a securities purchase agreement with an accredited investor to place Convertible Debentures (the “Debentures”), which was later amended on March 7, 2017, with a one-year term in the aggregate principal amount of up to $4,000,000. The initial closing occurred on November 30, 2016 when the Company issued a Debenture for $1,500,000.  The second closing of $1 million was  on March 10, 2017, when the registration statement to register for resale all of the shares of common stock into which the Debentures may be converted (the “Conversion Shares”) was filed with the SEC.  The remaining balance of $1.5 million was received on April 6, 2017, the date the registration statement was declared effective by the SEC.  The Debentures bear interest at the rate of 5% per annum.  In addition, the Company must pay to an affiliate of the holder a fee equal to 5% of the amount of the Debenture at each closing.

The Debenture may be converted at any time on or prior to maturity at the lower of $4.00 or 93% of the average of the four lowest daily VWAP of the Company’s common stock during the ten consecutive trading days immediately preceding the conversion date, provided that as long as the Company is not in default under the Debenture, the conversion price may never be less than $2.00.  The Company may not convert any portion of the Debenture if such conversion would result in the holder beneficially owning more than 4.99% of the Company’s then issued common stock, provided that such limitation may be waived by the holder.

Any time after the six-month anniversary of the issuance of the Debenture, if the daily VWAP of the Company’s common stock is less than $2.00 for a period of twenty consecutive trading days (the “Triggering Date”) and only for so long as such conditions exist after a Triggering Date, the Company shall make monthly payments beginning on the last calendar day of the month when the Triggering Date occurred.  Each monthly payment shall be in an amount equal to the sum of (i) the principal amount outstanding as of the Triggering Date divided by the number of such monthly payments until maturity, (ii) a redemption premium of 20% in respect of such principal amount being paid (up to a maximum of $300,000 in redemption premium) and (iii) accrued and unpaid interest as of each payment date.  The Company may, no more than twice, obtain a thirty-day deferral of a monthly payment due as a result of a Triggering Date through the payment of a deferral fee in the amount equal to 10% of the total amount of such monthly payment.  Each deferral payment may be paid by the issuance of such number of shares as is equal to the applicable deferral payment divided by a price per share equal to 93% of the average of the four lowest daily VWAP of the Company’s common stock during the ten consecutive Trading Days immediately preceding the due date in respect of such monthly payment begin deferred, provided that such shares issued will be immediately freely tradable shares in the hands of the holder.

The Company also executed a Registration Rights Agreement pursuant to which it is required to file a registration statement for the resale of the shares of common stock into which the Debenture may be converted within 30 days of the initial closing. The Company is required to use its best efforts to cause such registration statement to be declared effective within 90 days of the initial closing.

The Company also entered into a Security Agreement to secure payment and performance of its obligations under the Debenture and related agreements pursuant to which the Company granted the investor a security interest in all of its assets.  The security interest granted pursuant to the Security Agreement terminates on (i) the effectiveness of the Registration Statement if the Company’s common stock closing price is greater than $2.00 for the twenty consecutive trading days prior to effectiveness or (ii) any time after the effectiveness of the registration statement that the Company’s common stock closing price is greater than $2.00 for the twenty consecutive trading days.

Upon issuance of the Debentures, the Company recognized a debt discount of approximately $297,000, resulting from the recognition of a beneficial conversion feature of $225,000 and a bifurcated embedded derivative of $72,000.  The beneficial conversion feature was recognized as the intrinsic value of the conversion option on issuance of the Debentures.  The monthly payment provision within the Debentures is a contingent put option that is required to be separately measured at fair value, with subsequent changes in fair value of $22,000 recognized in the Condensed Consolidated Statement of Operations during the three months ended February 28, 2017. The Company estimated the fair value of the monthly payment provision, as of November 30, 2016, using probability analysis of the occurrence of a Triggering Date applied to the discounted maximum redemption premium for any given payment. The probability analysis utilized an expected volatility for the Company's common stock range of 140.13% - 146.26% and a risk free rate of range of 0.53% to 0.88%. The maximum redemption was discounted at 20%, the calculated effective rate of the Debenture before measurement of the contingent put option. The fair value estimate is a Level 3 measurement.

 

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Note 6 – Note Payable

On November 10, 2016, the Company issued a promissory note with a principal amount of $150,000 and issued 15,000 restricted shares of the Company’s common stock for cash proceeds of $150,000 (the “OID Note”).  The OID Note does not pay interest and matures on November 3, 2017.  The OID Note is not convertible.

The fair value of the 15,000 common stock issued with the OID Note of approximately $52,000 was recognized as a debt discount, which will be amortized to interest expense over the term of the OID Note.

Note 7 – 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 expects to issue an aggregate of approximately 84,000 shares of common stock subsequent to February 28, 2017 through the end term of arrangements, March 2018.

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.  The technology platform may be expanded in scope beyond ophthalmological uses and may include cystic kidney disease and others.  Pursuant to the Executive License, the Company has an option to purchase the Mannin IP within the next four years upon: (i) investing a minimum of $4,000,000 into the development of the intellectual property and (ii) possibly issuing additional shares of the Company’s common stock based on meeting pre-determined valuation and market conditions. The purchase price for the 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.  

During the three months ended February 28, 2017, the Company incurred approximately $421,000 in research and development expenses to fund the costs of development of the eye drop treatment for glaucoma pursuant to the Exclusive License.  Through February 28, 2017, the Company has funded an aggregate of $1.1 million to Mannin under the Exclusive License.

In the event that: (i) the Company does not exercise the option to purchase the Mannin IP; (ii) the Company fails to invest the $4,000,000 within four years from the date of the Exclusive License; or (iii) the Company fails to make a diligent, good faith and commercially reasonable effort to progress the Mannin IP, all Mannin IP shall revert to the vendor and the Company will be granted the right to collect twice the monies invested through that date of reversion by way of a royalty along with other consideration which may be perpetual.

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.

In exchange for the consideration, the Company agreed to, upon reaching various milestones, issue to BNI an aggregate of 110,000 shares of common stock that are subject to restriction from trading until commercialization of the product (approximately 12 months) and subsequent leak-out conditions, and provide funding to BNI for an aggregate of $850,000 in cash, of which the Company had paid approximately $155,000 as of February 28, 2017.  Once the Company has funded up to $850,000 in cash, the Company may exercise its option to acquire the BNI IP at no additional charge.  In September 2016, the Company issued 50,000 shares of common stock, with a fair value of $160,500, to BNI pursuant to the BNI Exclusive License.

The Company is not obligated to provide further funding to BNI until BNI satisfies all of its pre-existing obligations totaling $163,500.  To this end, the Company had provided an aggregate of approximately $59,000 through February 28, 2017 to BNI to help settle its obligations, which the Company recognized as research and development expenses in the accompanying Statements of Operations.

In the event that: (i) the Company does not exercise the option to purchase the BNI IP; (ii) the Company fails to make the aggregate cash payment within three years from the date of the Exclusive License; or (iii) the Company fails to make a diligent, good faith and commercially reasonable effort to progress the BNI IP, all BNI IP shall revert to BNI and the Company shall be granted the right to collect twice the monies invested through that date of reversion by way of a royalty along with other consideration which may be perpetual.

 

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Legal

 

The Company is not currently involved in any legal matters arising in the normal course of business.  From time to time, the Company could become involved in disputes and various litigation matters that arise in the normal course of business.  These may include disputes and lawsuits related to intellectual property, licensing, contract law and employee relations matters.  Periodically, the Company reviews the status of significant matters, if any exist, and assesses its potential financial exposure. If the potential loss from any claim or legal claim is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss.  Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict.  Because of such uncertainties, accruals are based on the best information available at the time.  As additional information becomes available, the Company reassesses the potential liability related to pending claims and litigation.

Finder’s Agreement

In October 2016, the Company entered into two agreements to engage two financial advisors to assist the Company in its search for potential investors, vendors or partners to engage in a license, merger, joint venture or other business arrangement. As a compensation for their efforts, the Company agreed to pay the financial advisors a fee equal to 7% and 8% in cash, and to pay one of the financial advisors an additional fee equal to 7% in warrants of all consideration received by the Company.  The Company has not incurred any finders’ fees pursuant to the agreements to-date.

Note 8 - 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 approximately $105,000 and $25,000 for the three months ended February 28, 2017 and February 29, 2016, respectively, and were included within general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

Note 9 - Stockholders’ Equity Deficit

As of February 28, 2017, 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.

Issuance of shares for services

In December 2016, the Company issued an aggregate of 22,000 shares of the Company common stock to two vendors for investor relation and introductory services, valued at approximately $131,000 based on the estimated fair market value of the stock on the date of grant and was recognized within general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations for the three months ended February 28, 2017.

In addition, as of February 28, 2017, the Company recognized general and administrative expenses of approximately $672,000 as a result of the outstanding warrants issued to consultants during the year ended November 30, 2016 as disclosed in the Company’s Annual Form 10-K, filed with the SEC on February 28, 2017.

The estimated unrecognized stock-based compensation associated with these agreements is approximately $109,000 and will be recognized over the next 0.1 year.

 

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Note 10 - Warrants

The warrants issued as part of the Private Placement Units were initially classified as liabilities because the exercise price may be adjusted downward, in certain circumstances, for a ninety-day period following their initial issuance.   Warrant liabilities are measured at fair value, with changes in fair value recognized each reporting period in the Statement of Operations. The warrants ceased being liability classified at the conclusion of the ninetieth day from issuance.  As a result, an aggregate of approximately $228,000 in warrant liability was reclassified to equity during the three months ended February 28, 2017.  All other warrants are equity classified.

The following represents a summary of all outstanding warrants to purchase the Company’s common stock at February 28, 2017 and changes during the period then ended:

 

In January 2017, the Company issued 20,000 shares of the Company’s common stock upon receiving the notice to exercise the warrants at an exercise price of $3.50 included in Unit A sold in the May Private Placement, for an aggregate purchase price of $70,000.

Fair value of all outstanding warrants was calculated with the following key inputs:

 

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The warrant liability is a Level 3 fair value measurement, recognized on a recurring basis. Both observable and unobservable inputs may be used to determine the fair value of positions that the Company has classified within the Level 3 category. As a result, the unrealized gains and losses for liabilities within the Level 3 category may include changes in fair value that were attributable to both observable inputs (e.g., changes in market interest rates) and unobservable inputs (e.g., probabilities of the occurrence of an early termination event).

Note 11 – Subsequent Events

  

Issuance of shares for services

In March 2017, the Company issued an aggregate of 45,111 shares of the Company common stock to two vendors for investor relations services.

Conversion of debt

Subsequent to February 28, 2017, upon the lender’s request, the Company converted an aggregate of $12,500, $30,000, $160,000, $150,000 and $250,000 in Series A, B, D, E and Debenture Notes outstanding principal and all unpaid interest into an aggregate of 5,936, 15,067, 91,782, 63,255 and 84,640 shares of the Company’s common stock, respectively.

 

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Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operation

Forward-Looking Statements

This Quarterly Report contains forward-looking statements about our business, financial condition and prospects that reflect management’s assumptions and beliefs based on information currently available. The expectations indicated by such forward-looking statements might not be realized.  If any of our management’s assumptions should prove incorrect, or if any of the risks and uncertainties underlying such expectations should materialize, our actual results may differ materially from those indicated by the forward-looking statements.

The key factors that are not within our control and that may have a direct bearing on operating results include, but are not limited to, acceptance of our services, our ability to expand our customer base, managements’ ability to raise capital in the future, the retention of key employees and changes in the regulation of our industry.

There may be other risks and circumstances that management may be unable to predict.  When used in this Quarterly Report, words such as, "believes," "expects," "intends," "plans," "anticipates," "estimates"   and similar expressions are intended to identify forward-looking statements, although there may be certain forward-looking statements not accompanied by such expressions.

Overview

Q BioMed Inc. (or “the Company”) was incorporated in the State of Nevada on November 22, 2013 and is a biomedical acceleration and development company focused on licensing, acquiring and providing strategic resources to life sciences and healthcare companies. We intend to mitigate risk by acquiring multiple assets over time and across a broad spectrum of healthcare related products, companies and sectors.  We intend to develop these assets to provide returns via organic growth, revenue production, out-licensing, sale or spin out.

On December 7, 2016, the Company formed its wholly-owned subsidiary in Cayman Islands, “Q BioMed Cayman SEZC”.

Recent Developments

On September 6, 2016, we announced the closing of a definitive agreement to exclusively license worldwide and ultimately acquire all the assets from a private company related to an FDA approved generic drug for the treatment of pain associated with metastatic bone cancer, Generic Strontium Chloride Sr-89 Injection USP (“SR89”).

This licensed radiopharmaceutical agent is indicated for the treatment of pain associated with metastatic bone cancer. SR89 provides long lasting relief for patients suffering from bone pain due to metastatic cancer, typically caused by advanced-stage breast, prostate or lung cancer. The drug is preferentially absorbed in bone metastases. It has been proven to provide a long-term effect resulting in non-narcotic cancer pain relief and enhanced quality of life.  

We have focused on the material procurement and manufacturing process as well as preparing the marketing plan and distribution strategy. This drug is expected to be commercially available in mid 2017, ahead of the 12 month expectation we gave when we closed the transaction.

We intend to make this drug as widely available as possible and to ensure that the drug will be priced competitively. In light of the current opiate overuse and abuse crisis, we are pleased to be offering this non-narcotic cancer pain palliation drug to patients suffering from this debilitating condition.

 

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Generic Strontium Chloride Sr-89 Injection USP can be used in combination with (and reduce the dosage of) opiate based drugs like Oxycotin®, Morphine, Percocet® or replace them entirely.  It can also be used in combination with cancer therapeutic drugs. Clinical studies have demonstrated that the combination of alternating weekly chemohormonal therapies with SR-89 demonstrated a prolonged progression-free and overall survival with acceptable toxicity.

We believe there is an opportunity to invest additional resources into the program to grow the revenue potential significantly.

Additionally, Mannin Research Inc. (“Mannin”), our technology partner company focused on drug candidate MAN-01 for treatment of Primary Open Angle Glaucoma (POAG), has initiated pre-clinical lead candidate optimization of a small molecule for topical application. Lead candidate selection is progressing on-time and on-budget. The topical application in the form of an easy to administer eye drop is a key differentiator for Mannin and aims to solve the compliance problems and invasive procedures currently available to patients suffering from glaucoma.

We continue conducting due diligence on several potential assets that we feel will potentially deliver significant value to our pipeline and ultimately benefit the patients we aim to treat.

 

Financial Overview

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

 

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Critical Accounting Policies and Estimates

This management’s discussion and analysis of our financial condition and results of operations is based on our condensed consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”). The preparation of these condensed consolidated financial statements requires us to make estimates and judgments that affect the reported amounts of assets, liabilities, revenues and expenses and the disclosure of contingent assets and liabilities in our condensed consolidated financial statements. On an ongoing basis, we evaluate our estimates and judgments, including those related to fair value of financial instruments, research and development costs, accrued expenses and stock-based compensation. We base our estimates on historical experience, known trends and events and various other factors that we believe to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Actual results may differ from these estimates under different assumptions or conditions. Other than as set out in Note 3 to our accompanying unaudited condensed consolidated financial statements we believe there have been no significant changes in our critical accounting policies as described in the Form 10-K.

 

Unaudited Results of Operations for the three months ended February 28, 2017 and February 29, 2016:

 

 

Operating expenses

We incur various costs and expenses in the execution of our business. The increase in operating expenses was mainly due to more professional fees incurred in connection with the license agreements with Mannin and BNI as well as the issuance and conversion of convertible notes.

Other income (expenses)

During the three months ended February 28, 2017, other expenses included approximately $217,000 in interest expense, $905,000 for the change in fair value of embedded conversion options, approximately $60,000 for the change in fair value of warrant liability, and approximately $363,000 in loss on the conversion of debt.

During the three months ended February 29, 2016, other expenses included approximately $87,000 in interest expense, a gain of $128,000 for the change in fair value of embedded conversion options, approximately $60,000 in loss on the conversion of debt and $364,000 in loss on the issuance of convertible notes. 

The increase in other expenses were mainly due to the change in fair value of embedded conversion option.

 

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Net loss

In the three months ended February 28, 2017 and February 29, 2016, we incurred net losses of approximately $3.5 million and $2.3 million, respectively.  Our management expects to continue to incur net losses for the foreseeable future, due to our need to continue to establish a broader pipeline of assets, expenditure on R&D and implement other aspects of our business plan.

 

Liquidity and Capital Resources

We depend upon our ability, and will continue to attempt, to secure equity and/or debt financing. We cannot be certain that additional funding will be available on acceptable terms, or at all.  Our management has determined that there is substantial doubt about our 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.

Cash Flows

The following table sets forth the significant sources and uses of cash for the periods addressed in this report:
 

Net cash used in operating activities was approximately $1.2 million for the three months ended February 28, 2017 as compared to approximately $345,000 for the three months ended February 29, 2016.  The net cash used in operating activities of approximately $1.2 million for the three months ended February 28, 2017 results from the net loss of approximately $3.5 million, partially offset by aggregate non-cash expenses of approximately $2.3 million.  The net cash used in operating activities for the three months ended February 29, 2016 results primarily from the net loss of approximately $2.3 million, partially offset by a non-cash expense of $2 million.

Net cash provided by financing activities was $70,000 for the three months ended February 28, 2017, resulting from the proceeds received exercise of warrants.  Net cash provided by financing activities was $455,000 for three months ended February 29, 2016, resulting from the proceeds received from issuance of convertible notes.

 

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Commitments and Contingencies

Advisory Agreements

We entered into customary consulting arrangements with various counterparties to provide consulting services, business development and investor relations services, pursuant to which we agreed to issue shares of common stock as services are received.   We expect to issue an aggregate of approximately 84,000 shares of common stock subsequent to February 28, 2017 through the end term of arrangements, March 2018.

License Agreements

Pursuant to the license agreement with Mannin as disclosed in our Annual Form 10-K, filed with the SEC on February 28, 2017, we have an option to purchase the IP within the next four years upon: (i) investing a minimum of $4,000,000 into the development of the intellectual property and (ii) possibly issuing additional shares of our common stock based on meeting pre-determined valuation and market conditions. The purchase price for the IP is $30,000,000 less the amount of cash paid by us for development and the value of the common stock issued to the vendor.  During the three months ended February 28, 2017, we incurred approximately $421,000 in research and development expenses to fund the costs of development of the eye drop treatment for glaucoma pursuant to the Exclusive License.  Through February 28, 2017, we have funded an aggregate of $1.1 million to Mannin under the Exclusive License.

We are not obligated to provide further funding to BNI until BNI satisfies all of its pre-existing obligations totaling $163,500.  To this end, we had provided an aggregate of approximately $59,000 through February 28, 2017 to BNI to help settle its obligations, which we recognized as research and development expenses in the accompanying Statements of Operations.

Legal

 

We are not currently involved in any legal matters arising in the normal course of business.  From time to time, we could become involved in disputes and various litigation matters that arise in the normal course of business.  These may include disputes and lawsuits related to intellectual property, licensing, contract law and employee relations matters.  Periodically, we review the status of significant matters, if any exist, and assesses its potential financial exposure. If the potential loss from any claim or legal claim is considered probable and the amount can be estimated, we accrue a liability for the estimated loss.  Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict.  Because of such uncertainties, accruals are based on the best information available at the time.  As additional information becomes available, we reassess the potential liability related to pending claims and litigation.

Finder’s Agreement

In October 2016, we entered into two agreements to engage two financial advisors to assist us in our search for potential investors, vendors or partners to engage in a license, merger, joint venture or other business arrangement. As a compensation for their efforts, we agreed to pay the financial advisors a fee equal to 7% and 8% in cash, and to pay one of the financial advisors an additional fee equal to 7% in warrants of all consideration received by us.  We have not incurred any finders’ fees pursuant to the agreements to-date.

Related Party Transactions

We entered into consulting agreements with certain management personnel and stockholders for consulting and legal services.  Consulting and legal expenses resulting from such agreements were approximately $105,000 and $25,000 for the three months ended February 28, 2017 and February 29, 2016, respectively, and were included within general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

 

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Item 3. Quantitative and Qualitative Disclosure About Market Risk

This item is not applicable as we are currently considered a smaller reporting company.

 

Item 4. Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Our Principal Executive Officer and Chief Financial Officer evaluated the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) under the Exchange Act) as of the period covered by this Report. Based on that evaluation, it was concluded that our disclosure controls and procedures are not effective to reasonably assure that information we are required to disclose in the reports that we file or submit under the Exchange Act is recorded, processed, summarized, and reported within the time periods specified in the SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our principal executive and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

We do not have an Audit Committee; our board of directors currently acts as our Audit Committee.  We do not have an independent director, and none of our directors is considered a “Financial Expert,” within the meaning of Section 407 of the Sarbanes-Oxley Act.

Changes in internal controls over financial reporting

There were no changes in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting.

Limitations on Effectiveness of Controls and Procedures

In designing and evaluating the disclosure controls and procedures, management recognizes that any controls and procedures, no matter how well designed and operated, can provide only reasonable assurance of achieving the desired control objectives. In addition, the design of disclosure controls and procedures must reflect the fact that there are resource constraints and that management is required to apply its judgment in evaluating the benefits of possible controls and procedures relative to their costs.

 

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PART II – OTHER INFORMATION

Item 1. Legal Proceedings

We are not a party to any material legal proceedings.

Item 1A. Risk Factors

As a Smaller Reporting Company, we are not required to provide this information.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Since our most recent annual report for the period ended November 30, 2016, we have reported all sales of unregistered securities with the following exceptions:

       •      on March 22, 2017, we issued an aggregate of 45,111 shares of the Company common stock to two vendors for investor relations services;

•	on March 29, 2017, we issued 84,640 shares of common stock at $3.25 per share issued to the holder of a convertible note in exchange for the conversion of $274,863 of principal on such note and accrued interest thereon;

•	on March 29, 2017, we issued 15,067 shares of common stock at $2.25 per share issued to the holder of a convertible note in exchange for the conversion of $33,855 of principal on such note and accrued interest thereon;

•	on March 29, 2017, we issued 5,936 shares of common stock at $2.40 per share issued to the holder of a convertible note in exchange for the conversion of $14,240 of principal on such note and accrued interest thereon;

•	on April 11, 2017, we issued 91,782 shares of common stock at $1.85 per share issued to the holder of a convertible note in exchange for the conversion of $160,000 of principal on such note and accrued interest thereon; and

•	on April 11, 2017, we issued 63,255 shares of common stock at $2.50 per share issued to the holder of a convertible note in exchange for the conversion of $150,000 of principal on such note and accrued interest thereon.

We have made the issuances of unregistered securities discussed above in reliance on the registration exemption provided by Section 4(a)(2) of the Securities Act of 1933, as amended.

 

Item 3. Defaults Upon Senior Securities

None.

Item 4. Mine Safety Disclosures

Not applicable.

Item 5. Other Information

None.

 

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Item 6. Exhibits

(1)  In accordance with the temporary hardship exemption provided by Rule 201 of Regulation S-T, the date by which the interactive data file is required to be submitted has been extended by six business days.

 

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SIGNATURES

Pursuant to the requirements of the Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

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