Qrons Inc. - Quarter Report: 2019 June (Form 10-Q)

 

Form 10-Q

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Yes [X] No [  ]

 

Yes [  ]  No [X ]

 

As of August 14, 2019, there were 13,054,809 shares of the registrant's common stock outstanding.

PART I -- FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

 

 

 

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

 

 

 

Organization and nature of business:

 

Qrons Inc.  ("Qrons" or the "Company") was incorporated under the laws of the State of Wyoming on August 22, 2016 under the name BioLabMart Inc.

 

 

 

Use of Estimates: The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the amounts reported therein. Due to the inherent uncertainty involved in making estimates, actual results reported in future periods may be based upon amounts that differ from these estimates.

 

Cash Equivalents: The Company considers all highly liquid investments with maturities of 90 days or less from the date of purchase to be cash equivalents.

 

 

Note 2 – Summary of Significant Accounting Policies (continued)

 

Research and Development Costs: The Company charges research and development costs to expense when incurred in accordance with FASB ASC 730, "Research and Development". Research and development costs were $138,374 and $303,528 for the three and six months ended June 30, 2019, respectively. Research and development costs were $140,733 and $210,117for the three and six months ended June 30, 2018, respectively.

 

 

Stock-Based Compensation and Other Share-Based Payments: The expense attributable to the Company's directors is recognized over the period the amounts are earned and vested, and the expense attributable to the Company's non-employees is recognized when vested, as described in Note 7, Stock Plan.

 

Fair Value of Financial Instruments

 

FASB ASC 820, "Fair Value Measurements and Disclosures", defines fair value as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. FASB ASC 820 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. FASB ASC 820 describes three levels of inputs that may be used to measure fair value:

 

Level 1 – Quoted prices in active markets for identical assets or liabilities.

 

Level 2 – Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.

 

Level 3 – Unobservable inputs that are supported by little or no market activity and that are financial instruments whose values are determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant judgment or estimation.

 

If the inputs used to measure the financial assets and liabilities fall within more than one level described above, the categorization is based on the lowest level of input that is significant to the fair value measurement of the instrument.

 

The following table provides a summary of the fair value of the Company's derivative liabilities as of June 30, 2019 and December 31, 2018:

 

 

 

Note 2 – Summary of Significant Accounting Policies (continued)

 

Warrants: The Company accounts for common stock warrants in accordance with applicable accounting guidance provided in ASC Topic 815 "Derivatives and Hedging – Contracts in Entity's Own Equity" (ASC Topic 815), as either derivative liabilities or as equity instruments depending on the specific terms of the warrant agreement.  For warrants classified as equity instruments the Company applies the Black Scholes model.   Presently all warrants issued and outstanding are accounted for as equity instruments.

 

Income taxes: The Company has adopted ASC Topic 740 – "Income Taxes," which requires the use of the asset and liability method of accounting for income taxes. Under the asset and liability method of ASC Topic 740, deferred tax assets and liabilities are recognized for the future tax consequences attributable to temporary differences between the financial statement carrying amounts of existing assets and liabilities 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.

 

Basic and Diluted Loss Per Share: In accordance with ASC Topic 260 – "Earnings Per Share," the basic loss per share of common stock is computed by dividing net loss available to common stockholders by the weighted average number of common stock outstanding. Diluted loss per share of common stock is computed similar to basic loss per share of common stock except that the denominator is increased to include the number of additional shares of common stock that would have been outstanding if the potential common stock had been issued and if the additional shares of common stock were dilutive.

 

Potential common stock consists of the incremental common stock issuable upon the exercise of common stock warrants (using the if-converted method), convertible notes, classes of shares with conversion features, and stock awards and stock options. The computation of basic loss per share for the periods ended June 30, 2019 and December 31, 2018 excludes potentially dilutive securities of underlying share purchase warrants, convertible notes, stock options and preferred shares, because their inclusion would be antidilutive. As a result, the computations of net loss per share for each period presented is the same for both basic and fully diluted.

 

The table below reflects the potentially dilutive securities at each reporting period which have been excluded from the computation of diluted net loss per share:

 

 

 

 

 

The financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amount and classification of liabilities that might cause results from this uncertainty.

 

Note 4 – Convertible Note – Related Party and Derivative Liabilities

 

On September 1, 2016, the Company entered into a convertible debenture agreement with CubeSquare, LLC ("CubeSquare"), of which its Chief Executive Officer is the managing partner and its President is a 25% owner. The Company received proceeds of $10,000 during fiscal 2016 ("Note 1"). The note bears interest at 8% per annum and was due on September 1, 2017. Interest accrues from September 1, 2016 and is payable on maturity. Interest is payable, at the lender's option, in cash or common stock. Any portion of the loan and unpaid interest is convertible at any time at the option of the lender into shares of common stock of the Company at a conversion price of the greater of (i) $0.0625 per share if the Company's shares are not trading on a public market and; (ii) in the event the Company's shares are listed for trading on a public market, the conversion price shall be equal to a 50% discount to  the average of the five  lowest trading prices during the previous twenty trading days prior to the date of the notice of conversion from the lender.

 

On September 28, 2017 the Company and CubeSquare amended Note 1 to extend the maturity date from September 1, 2017 to September 1, 2018 and on September 9, 2018, the Company further amended Note 1 to extend the maturity date to September 1, 2019, under the same terms and conditions.

 

 

 

 

 

The fair value at the commitment and re-measurement dates for the Company's derivative liabilities were based upon the following management assumptions as of June 30, 2019 and commitment date:

 

 

On December 14, 2016, the Company entered into the License Agreement with Ariel under which the Company paid Ariel $100,000 to fund research for 12 months (with an option to extend such research financing and research period). In consideration therefore, the Company received an exclusive worldwide royalty-bearing license in Ariel patents and know-how to develop and commercialize products based on or incorporating coral-based conditioned medium for neuronal tissue regeneration and/or repair, resulting from Ariel's research or technology or the Company's research funding in accordance with milestones set forth in the Agreement.

 

 

The Company and Ariel entered into Addendum #1 to the License Agreement, effective December 13, 2017 (the "Addendum") pursuant to which Ariel was permitted to exercise a portion of the warrant granted pursuant to the License Agreement. On December 13, 2017, the Company issued 119,950 shares of common stock to Ariel, representing 1% of the issued and outstanding shares of the Company on such date, and valued at $335,860. The right to the balance of the shares subject to the warrant remains subject to the terms of the License Agreement and the occurrence of an Exit Event (as described in the License Agreement). In addition, the Addendum provides that Ariel may not request a demand registration until the balance of the shares subject to the warrant is exercised.

 

In addition to the other payments, the Company will pay Ariel upon the occurrence of the following milestone events, additional payments which shall be due within 6 months of completion of the milestone:

 

-	Upon successful clinical FDA Phase II completion - $130,000; and
-	Upon successful clinical FDA Phase III completion - $390,000

 

Upon successful development and commercialization and in recognition of the rights and licenses granted to the Company pursuant to the License Agreement, the Company will be subject to certain royalty payments as specified in the License Agreement.

 

 

Note 8 – Commitments

 

 

On December 14, 2017, the Company entered into the Services Agreement pursuant to which a team at Ariel under the direction of Prof. Danny Baranes will conduct molecular biology research activities involving the testing of implant materials for the Company. As compensation for the services provided, the Company will pay Ariel (i) $17,250 within five business days of the execution of the Services Agreement, and (ii) $17,250 by May 1, 2018.

 

The Services Agreement may be terminated by the non-breaching party upon a material breach that is not cured within 30 days or by the Company upon thirty days' prior written notice to Ariel. Ariel must keep confidential information of the Company confidential for five years after the term of the Services Agreement.

 

During the year ended December 31, 2017, $17,250 was paid and on April 26, 2018, the remaining installment of $17,250 was paid.

On April 12, 2018, the Services Agreement was amended to provide for the payment by the Company of an additional monthly fee, commencing March 2018, of up to $2,200 (8,000 Israeli shekels) as compensation for additional costs which the Company may request. During the year ended December 31, 2018, the Company paid $16,935 for these additional costs.

On December 12, 2018, the Company further amended the Services Agreement with Ariel (the "Second Amendment") to extend the term thereof for an additional twelve-month period until December 14, 2019. The Second Amendment also provides that the Company pay Ariel $17,250 within 30 days of the date of the Amendment and an additional $17,250 on or before May 1, 2019. All other terms and conditions of the Services Agreement not amended remain in effect.

 

Note 8 – Commitments (continued)

  

 

On March 6, 2018, the Company entered into a service agreement for the services of Professor Gadi Turgeman and his neurobiology research team in their lab. As compensation for the services provided, the Company paid Ariel $20,580 on each of March 19, 2018 and August 22, 2018.

 

 

 

 

 

On January 23, 2018, the Company entered into a one-year advisory board member consulting agreement with Pavel Hilman, the controlling shareholder of Conventus Holdings SA, a BVI corporation ("Conventus"), under which Mr. Hilman will serve on the Company's Advisory Board as a business advisor. The Advisory Board Agreement will automatically renew for up to two additional one-year periods, unless earlier terminated by either party upon 30 days' prior written notice to the other party. In consideration for serving on the Advisory Board, the Company awarded 10,000 shares of its common stock to Mr. Hilman under its 2016 Stock Option and Stock Award Plan. On January 28, 2019, the Company issued 30,000 shares of common stock to Pavel Hilman for his continuing service on the Company's Advisory Board.

 

 

On April 23, 2018, the Company entered into a six-month investor relations agreement with an investor relations firm for a monthly consulting fee of $5,000 and the issuance of 75,000 shares of common stock payable on signing the agreement. On June 23, 2018, the Company gave notice of rescission of the agreement to such firm and requested the return of the consulting fee paid and the 75,000 shares of common stock. As a result, the Company has not recorded any fees for services rendered past June 23, 2018.  A total of $10,000 representing April 2018 and May 2018 monthly consulting fees is reflected in the statement of operations and a total of $150,000, the fair market value of the issued shares, was expensed on issue. As at the date of this report no fees or shares have been recovered.

 

 

On July 12, 2018, the Company entered into a one-year Sponsored Research Agreement with Dartmouth pursuant to which the Company will support and fund the cost of research conducted by Dartmouth of mutual interest to the parties in accordance with the Agreement.  Intellectual property invented or developed solely by a party shall be owned by such party and intellectual property jointly invented or developed shall be jointly owned.  Dartmouth shall retain an irrevocable worldwide right to use intellectual property owned by it resulting from its research under the Agreement on a non-exclusive royalty-free basis for research and education purposes. The Company funded $36,293 on August 20, 2018 and funded an additional $18,147 on December 17, 2018 and funded an additional $18,146 on June 20, 2019. The parties are in the process of preparing an extension to the Agreement, which expired on July 14, 2019, while continuing to advance the research.

The Agreement may be terminated earlier than one year upon written agreement of the parties, a material breach which is not cured within 30 days of notice thereof, if Professor Ke no longer conducts the research under the Agreement and a successor acceptable to both parties is not available, or in the event of an unauthorized assignment of the Company's rights and obligations under the Agreement.

 

2016 Stock Option and Stock Award 

 

On December 14, 2016, the Board adopted the Company's 2016 Stock Option and Stock Award Plan (the "Plan"). The Plan provides for the award of stock options (incentive and non-qualified), stock awards and stock appreciation rights to officers, directors, employees and consultants who provide services to the Company. The terms of awards under the Plan are made by the Administrator of the Plan appointed by the Company's Board of Directors (the "Board"), or in the absence of an Administrator, by the Board. The Company has reserved 10 million shares for issuance under the Plan. 

 

 

 

The value of the vested awards had been recorded as research and development expenses in the respective periods.  A total of 290,000 stock awards did not vest during the fourth quarter of fiscal 2018.

 

On January 23, 2018, the Company awarded 10,000 shares of its common stock to Mr. Hilman under its 2016 Stock Option and Stock Award Plan, which shares were fully vested and recorded as advisory services on issuance.  On January 28, 2019, the Company issued 30,000 shares of common stock to Pavel Hilman for his continuing service on the Company's Board of Advisors.

 

 

 

 

On November 15, 2017, under the 2016 Stock Option and Award Plan, the Board awarded two of its Science Advisors the following three-year stock options: (i) an immediately exercisable option to purchase 6,667 shares of common stock at an exercise price of $2.00 per share, (ii) an option to purchase 6,667 shares of common stock exercisable on November 15, 2018 at an exercise price of $2.00 per share and (iii) an option to purchase 6,666 shares of common stock exercisable on November 15, 2019 at an exercise price of $2.00 per share, provided the advisors are still providing services to the Company.

 

 

Note 9 – Stock Plan (continued)

  

 

  

A summary of the activity for the Company's stock options for the periods ended June 30, 2019 and December 31, 2018, is as follows:

 

 

 

 

The Series A Preferred Stock is redeemable at the option of the Company at any time, in whole or in part, upon 10 trading days prior notice, at a price of $1.00 per share plus 4% per annum from the date of issuance (the "Stated Value"). The holders of the Series A Preferred Stock are entitled to a liquidation preference equal to the Stated Value, prior to the holders of other preferred stock or common stock. The holders of the Series A Preferred Stock have the right to convert such stock into common stock at a conversion rate equal to the Stated Value as of the conversion date divided by the average closing price of the common stock for the five previous trading days. The Company is required to reserve sufficient number of shares for the conversion of the Series A Preferred Stock. The holders of Class A Preferred Stock shall vote together as a single class with the holders of the Company's common stock and the holders of any other class or series of shares entitled to vote with the common stock, with the holders of Class A Preferred Stock being entitled to 66 2/3% of the total votes on all such matters, regardless of the actual number of shares of Class A Preferred Stock then outstanding.

 

There was a total of 2,000 shares of Series A Preferred Stock issued and outstanding as of June 30, 2019 and December 31, 2018.

On January 28, 2019, the Company issued 30,000 shares for advisory services (Note 9(4)). The shares were valued at fair market value on the date of issuance for a total of $37,500 or $1.25 per share.

There was a total of 12,967,309 and 12,872,309 shares of common stock issued and outstanding as of June 30, 2019 and December 31, 2018, respectively.

 

Share Purchase Warrants

 

In accordance with authoritative accounting guidance, the fair value of the aforementioned warrants was calculated using the Black-Scholes option-pricing model with the following assumptions at the measurement date(s):

 

Share Purchase Warrants (continued)

 

(1) Each two shares of common stock purchased under the private placement provides for one warrant to acquire an additional share of common stock together with the payment of $0.40.

 

(2) During the year ended December 31, 2018, investors exercised warrants to purchase an aggregate of 2,000 shares of common stock and received 1,715 shares for exercises on a cashless basis.

The weighted average remaining contractual term is 0.5 years.

 

Note 11 – Other Events

Note 12 – Subsequent Events

On June 25, 2019, the Company entered into a term sheet ("Term Sheet") with John N. Bonfiglio, PhD ("Bonfiglio") pursuant to which Dr. Bonfiglio will serve as the Company's chief operating officer, effective July 1, 2019. As compensation therefor,  Dr. Bonfiglio was granted (i) 50,000 shares of common stock of the Company, 37,500 of which shares  vested upon issuance on July 1, 2019 and 12,500 of which shares will vest on the earlier of (i) January 1, 2020 and (ii) the date the Company raises equity capital of $500,000 as described in the Term Sheet, provided Dr. Bonfiglio is in the employ of the Company on such date. The Term Sheet also provides for the grant of a stock option to purchase 100,000 shares of common stock at an exercise price of $2.00 per share, 50,000 of which shares will vest upon grant and 25,000 shares will vest on each of July 1, 2020 and July 1, 2021, provided Dr. Bonfiglio is in the employ of the Company on such dates and further provided that if the Company raises equity capital of $1.5 million before December 31, 2019, unvested shares subject to the option will immediately vest and become exercisable, so long as Dr. Bonfiglio is in the Company's employ on such date.

If the Company raises equity capital of $1.5 million by April 1, 2020, Dr. Bonfiglio will be appointed to the Company's board of directors.

In addition, Dr. Bonfiglio will be entitled to a salary of $12,000 per month which will be deferred and payable at the rate of 5% of equity capital raised by the Company up to $12,000 per month as described in the Term Sheet.

The Term Sheet may be terminated by either party if by October 31, 2019, the Company has not raised equity capital of $750,000 and thereafter by either party upon 30 days' prior notice. The Company may also terminate the Term Sheet for willful misconduct.

 

ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION

This Quarterly Report on Report contains predictions, estimates and other forward-looking statements relating to future events or our future financial performance. In some cases, you   can identify forward-looking statements by terminology such as "may", "should", "intends", "expects", "plans", "anticipates", "believes", "estimates", "predicts", "potential", or "continue" or the negative of these terms or other comparable terminology. Forward-looking statements involve known and unknown risks, uncertainties and other factors  including the risks set forth in the section entitled "Risk Factors" in our Post-Effective Amendment No. 1 to our Registration Statement on Form S-1, as filed with the Securities and Exchange Commission (the "SEC") on March 15, 2018, that may cause our actual results, performance or achievements to be materially different from any future results, performances or achievements expressed or implied by the forward-looking statements.

Forward-looking statements represent our management's beliefs and assumptions only as of the date of this Report. You should read this Report with the understanding that our actual future results may be materially different from what we expect.

All forward-looking statements speak only as of the date on which they are made. We undertake no obligation to update such statements to reflect events that occur or circumstances that exist after the date on which they are made, except as required by federal securities and any other applicable law.

The management's discussion and analysis of our financial condition and results of operations are based upon our condensed financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States of America ("U.S. GAAP").

The following discussion of our financial condition and results of operations should be read in conjunction with our unaudited condensed financial statements for the three months ended June 30, 2019 and the notes thereto appearing elsewhere in this Report and the Company's audited financial statements for the fiscal year ended December 31, 2018, as filed with the SEC in its Annual Report on Form 10-K on March 25, 2019, along with the accompanying notes. As used in this Quarterly Report, the terms "we", "us", "our", and the "Company" means BioLabMart Inc. prior to August 8, 2017 and Qrons Inc. since August 8, 2017.

Overview

The Company was incorporated under the laws of the State of Wyoming on August 22, 2016 as BioLabMart Inc. and changed its name to Qrons Inc. on August 8, 2017.

The Company is a preclinical stage biotechnology company developing advanced stem cell synthetic hydrogel-based solutions to combat neuronal injuries and achieve a breakthrough in the treatment of traumatic brain injuries ("TBIs") for both concussions and penetrating injuries, an unmet medical need. We believe that our approach is pushing the boundaries of science by using the latest advances in molecular biology and chemistry. The Company collaborates with universities and scientists in the fields of regenerative medicine, tissue engineering and 3D printable hydrogels to develop a treatment that integrates proprietary, engineered mesenchymal stem cells, 3D printable implant, smart materials and a novel delivery system.

To date, the Company has two product candidates for treating TBIs, both integrating proprietary, modified mesenchymal stem cells ("MSCs") and smart synthetic material. QS100TM is an injury specific, 3D printable, implantable MSCs-synthetic hydrogel, to treat penetrating brain injuries and QS200TM is an injectable MSCs-synthetic hydrogel for the treatment of diffused injuries commonly referred to as concussions.

As described below, while continuing research under the Company's sponsored research agreement (the "Sponsored Research Agreement") with the Trustees of Dartmouth College ("Dartmouth") to develop innovative 3D printable, biocompatible advanced materials, the Company is currently engaged in discussions with Dartmouth to finalize terms of a worldwide, royalty bearing, exclusive license for such 3D printable materials in the field of human and animal health. In addition, the Company is engaged in laboratory research relating to neuronal tissue regeneration and/or repair in Israel in connection with service agreements with Ariel University R&D Co., Ltd., now known as Ariel Scientific Innovations Ltd., a wholly owned subsidiary of Ariel University, in Ariel, Israel ("Ariel").

The Company has relied primarily on its two co-founders, Jonah Meer, Chief Executive Officer, and Ido Merfeld, President, who are its sole directors to manage its day-to-day business. Effective July 1, 2019, the Company appointed John N. Bonfiglio as its Chief Operating Officer.  We currently outsource all professional services to third parties in an effort to maintain lower operational costs.

Messrs. Meer and Merfeld, as the holders of the Company's issued and outstanding shares of the Company's Class A Preferred Stock, collectively have 66 2/3% of the voting rights of the Company. Acting together, they will be able to influence the outcome of all corporate actions requiring approval of our stockholders.

The Company's common stock was approved by the Financial Industry Regulatory Authority ("FINRA") for quotation on the OTC pink sheets under the symbol "BLMB" as of July 3, 2017. On July 6, 2017, the Company's board of directors and shareholders approved an amendment to its Articles of Incorporation changing the name of the Company from "BioLabMart Inc." to "Qrons Inc. The Secretary of State of the State of Wyoming approved such name change, effective August 8, 2017.   FINRA announced the Company's name change to Qrons Inc. on its Daily List on August 9, 2017. The new name and symbol, "QRON", became effective on August 10, 2017.

The Company's common stock was upgraded from the Pink Market and commenced trading on the OTCQB Venture Market on August 12, 2019. The common stock will continue to be traded under the symbol "QRON".

 

On October 17, 2017, the Company entered into an option agreement (the "Option Agreement") with Dartmouth which provides for, among other things, the grant to the Company of a one-year exclusive option to negotiate a worldwide, royalty bearing, exclusive license with Dartmouth for 3D printable materials in the field of human and animal health. During the option period, the Company agreed to use all commercially reasonable resources to evaluate the intellectual property and provide quarterly milestone reports and a commercialization plan upon exercise of the option. Pursuant to the Option Agreement, the Company agreed to finance the prosecution of patents by Dartmouth to protect its intellectual property.  Further, the Agreement provides for the payment by the Company of an option fee and certain license fees and royalty payments based upon the Company's product sales, as part of a final negotiated license agreement. The Company exercised its option on March 26, 2018 to negotiate definitive license terms, as it continues further evaluation and research. The Company and Dartmouth are engaged in discussions to finalize terms of the license. Presently the parties are awaiting certain required insurance approvals prior to concluding the license terms.

On July 12, 2018, the Company entered into a one-year Sponsored Research Agreement with Dartmouth pursuant to which the Company will fund research conducted by Dartmouth of mutual interest to the parties in accordance with the Agreement. Intellectual property invented or developed solely by a party shall be owned by such party and intellectual property jointly invented or developed shall be jointly owned. Dartmouth shall retain an irrevocable worldwide right to use intellectual property owned by it resulting from its research under the Sponsored Research Agreement on a non-exclusive royalty-free basis for research and education purposes.

If either party desires to obtain patent and copyright protection for intellectual property created under the Sponsored Research Agreement, such party shall notify the other party and the parties shall agree upon intellectual property protection strategy and cost allocation. Each party shall have the right to grant licenses under jointly-owned patents to third parties, subject to the Company's option to the exclusive right to license Dartmouth intellectual property and/or Dartmouth's ownership in jointly-owned intellectual property upon notification to Dartmouth in accordance with the terms of the Agreement and at the Company's cost. If the Company exercises its option to license intellectual property, Dartmouth shall negotiate exclusively with the Company for 180 days (or such additional period as agreed upon by the parties) for such licenses. The Company will be required to reimburse Dartmouth for the costs of patent prosecution and maintenance in the United States and any foreign country and demonstrate reasonable efforts to commercialize the technology.

The Sponsored Research Agreement may be terminated earlier than one year upon written agreement of the parties, a material breach which is not cured within 30 days of notice thereof, if Professor Ke no longer conducts the research under the Agreement and a successor acceptable to both parties is not available, or in the event of an unauthorized assignment of the Company's rights and obligations under the Agreement. The parties are in the process of preparing an extension to the agreement, which expired on July 14, 2019, while continuing to advance the research.

On December 14, 2016, the Company entered into a license and research funding agreement (the "License Agreement") with Ariel under which the Company paid Ariel $100,000 to fund research for 12 months (with an option to extend such research financing and research period). In consideration therefor, the Company received an exclusive worldwide royalty-bearing license in Ariel patents and know-how to develop and commercialize products based on or incorporating coral-based conditioned medium for neuronal tissue regeneration and/or repair, resulting from Ariel's research or technology or the Company's research funding in accordance with milestones set forth in the Agreement.

The License Agreement provides that the Company make royalty payments of 4% of net sales (which may be increased if any patent is challenged by the Company or its affiliates or decreased if there is a valid patent claim) within 30 days of each calendar quarter for the later of (i) 15 years from the date of the first sale in a country and (ii) until the last to expire of Ariel's patents in a country. The Company may provide a sublicense for cash in a bonafide arm's length transaction. The Company agreed to pay Ariel 15% of any consideration received by the Company in connection with any such sublicense (except royalties on net sales) within 30 days of receipt. The Company is also required to make milestone payments of (i) $130,000 upon the successful completion of clinical U.S. Food and Drug Administration ("FDA") Phase II trials and (ii) $390,000 upon the successful completion of clinical FDA Phase III trials, within 6 months of completion. Any late payments under the License Agreement will bear interest at 3% plus LIBOR.

Patent expenses incurred by Ariel under the License Agreement will be reimbursed by the Company. Any infringement action instituted by a party to the License Agreement that results in a recovery in excess of such party's expenses will belong 85% to the party bringing such action and 15% to the other party.

Under the License Agreement, at the Company's discretion, Ariel will transfer its technology to the Company upon the earliest to occur of (i) a successful Phase II FDA trial of a product developed under the Agreement; (ii) the acquisition of the Company by a third party of at least 45% of the share capital of the Company in a bonafide transaction valued at least at $100 million and the assumption of the License Agreement by such third party, or (iii) Ariel's written consent.

The License Agreement provides that each of the Company and Ariel are required to keep the other party's proprietary information confidential for the longer of (i) the term of the License Agreement and seven years from the date of disclosure. The License Agreement shall continue in effect until all of the Company's payment obligations under the Agreement have been made. After the expiration of the License Agreement, the Company will have a non-exclusive worldwide license to the Ariel technology. The Company can terminate the License Agreement for any reason upon 60 days prior written notice in which event Ariel will be required to reimburse the Company for any unused research funds. The License Agreement will terminate upon a material breach of either party that is not cured in 30 days from notice thereof, or by bankruptcy, dissolution, liquidation or the discontinuance of business. Ariel may immediately terminate the License Agreement upon a challenge to its patent validity by the Company or an affiliate of the Company. Without Ariel's prior written consent, the Company may not assign the License Agreement except to an affiliate or to a successor entity in a merger or acquisition provided the assignee assumes the License Agreement obligations.

Upon the earliest occurrence of (i) an underwritten public offering with proceeds of at least $25 million, (ii) the consolidation, merger or reorganization, or (iii) the sale of all or substantially all of its shares or assets of the Company or its affiliates, the Company is required to issue to Ariel an immediately exercisable warrant for that number of shares equal to 4% of the issued and outstanding shares of the Company at the time of issuance (the "Ariel Warrant"). The License Agreement also provides that the Company register shares exercised pursuant to the warrant by Ariel within 6 months of a request by Ariel by either "piggyback" or a demand registration.

The Company and Ariel entered into Addendum #1, effective December 13, 2017 (the "Addendum") to the License Agreement pursuant to which Ariel was permitted to exercise a portion of the Ariel Warrant On December 13, 2017, the Company issued 119,950 shares of common stock to Ariel, representing 1% of the issued and outstanding shares of the Company on such date. The right to the balance of the shares subject to the Ariel Warrant remains subject to the terms of the License Agreement and the occurrence of an Exit Event (as described in the License Agreement). In addition, the Addendum provides that Ariel may not request a demand registration until the balance of the shares subject to the Ariel Warrant is exercised.

The issuance of shares upon exercise of the balance of the Ariel Warrant in the future will result in dilution to the interests of other stockholders.

In lieu of extending the research financing and research period under the License Agreement beyond the initial 12 months, on December 14, 2017, the Company entered into a 12-month services agreement with Ariel (the "Services Agreement") pursuant to which a team at Ariel University under the direction of Prof. Danny Baranes will conduct molecular biology research activities involving the testing of implant materials for the Company. If Prof. Baranes ceases to provide services, the Company must be notified and a replacement acceptable to the Company must be found within 30 days or the Company may terminate the Services Agreement. As compensation for such services, the Company paid Ariel (i) $17,250 on December 19, 2017 and (ii) $17,250 on April 26, 2018. On April 12, 2018, the Services Agreement was amended to provide for the payment by the Company of an additional monthly fee, commencing March 2018, of up to 8,000 Israeli shekels as compensation for additional costs which the Company may request.

The Services Agreement may be terminated by a non-breaching party upon a material breach that is not cured within 30 days by the other party. The Services Agreement may also be terminated by the Company upon thirty days' written notice to Ariel. Ariel must keep confidential information of the Company confidential for five years after the term of the Services Agreement.

On March 6, 2018, the Company entered into an additional services agreement with Ariel for the services of Professor Gadi Turgeman and his neurobiology research team in their lab pursuant to which the Company paid Ariel $20,580 on each of March 19, 2018 and August 22, 2018. On April 11, 2019, the services agreement was amended to extend the term for an additional twelve months until March 6, 2020 for an aggregate of $41,160 to be paid by the Company to Ariel in quarterly payments of $10,290 on each of April 11, 2019, June 1, 2019, September 1, 2019 and December 1, 2019.

Plan of Operations

 

We have not generated any revenue from the sales of products.

To date, we have identified two product candidates. We have completed an in-vivo efficacy experiment with QS100TM for treating penetrating brain injuries in an animal model that was successful in substantiating our theories and practices regarding cell regeneration. We have begun animal in-vivo efficacy experiments with QS200TM for treating concussions and other diffused axonal injuries. We are currently conducting an extensive animal proof of concept for our products which will include a product mix study.

In the next 12 months, we currently plan on completing development of our product candidates. This will require us to continue working with Dartmouth under the Sponsored Research Agreement in our development of innovative 3D printable biocompatible advanced materials and stem cell delivery techniques. At our research facilities located in Ariel's labs our Stem Cells Team will continue development of our proprietary, neuro-regenerative MSC lines. Upon completion of the development of our product candidates we will begin testing for efficacy. This will require us to establish an Efficacy Team, in preparation to reach clinical trials. Subject to sufficient resources, we also plan to expand our research and development, including engaging FDA experienced personnel, advisors and contract research organizations for an investigational new drug ("IND") application.

John N. Bonfiglio, PhD, has served as our Chief Operating Officer since July 1, 2019 to oversee and coordinate our IND activities in an effort to accelerate the IND process in preparation for human clinical trials.

As our research progresses, if and when we achieve functional supporting results, the Company intends to file for additional patents.

We will continue exploring sources of additional debt and equity financings as well as available grants.

There is substantial doubt that we can continue as an on-going business unless we obtain additional capital to pay our expenditures. We do not currently have sufficient resources to accomplish all of the conditions necessary for us to generate revenue.

RESULTS OF OPERATIONS

Three Months Ended June 30, 2019 and June 30, 2018

Revenue

We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the near future.

Net Loss

Our net loss for the three months ended June 30, 2019 and 2018 is as follows:

Operating Expenses

Total operating expenses for the three months ended June 30, 2019 were $199,157 compared to total operating expenses of $683,257 for the three months ended June 30, 2018. During the three months ended June 30, 2019, the Company incurred $138,374 of research and development expenses which included payroll of $54,968, service fees related to certain research and development agreements of $63,006, fees associated with a sponsored research agreement of $18,146, legal and filing fees related to patents of $1,659, and purchases of expendable lab supplies and equipment of $595, compared $140,733 of research and development expenses which included payroll of $33,421, service fees related to certain research and development agreements of $72,588, patent consultation and filing fees of $14,880, other associated expenses of $2,061 and purchases of expendable lab supplies and equipment of $17,784. The Company incurred general and administrative expenses of $33,143 for the three months ended June 30, 2019 compared to general and administrative expenses of $534,525 for the three months ended June 30, 2018. The substantial decrease in general and administrative expense during the three months ended June 30, 2019 was primarily due to stock-based compensation costs of $353,430 related to the issuance of stock options to our officers, and $196,763 for stock awards and shares for services to members of our advisory board and investor relations consultants during the three months ended June 30, 2018, with no comparative expense during the three months ended June 30, 2019. Professional fees were $27,640 for the three months ended June 30, 2019, which included audit fees for the Company's financial statements for the year ended December 31, 2018 which were billed in the three months ended June 30, 2019, and an increase in legal fees as a result of certain tax advice received in the period compared to professional fees of $7,969 during the three months June 30, 2018.   Other expense in the three months ended June 30, 2019 was $18,426 and included a loss of $17,006 as a result of the change in value of our derivative liabilities and interest expense of $1,420. Other expense was $5,386 in the three months ended June 30, 2018, which represents interest expense related to the accretion of our convertible notes of $6,432, as well as accrued interest of $501, and a gain from the change in the value of derivative liabilities of $1,547.

 

We had a net loss of $217,583 in the three months ended June 30, 2019 compared to a net loss of $688,643 in the three months ended June 30, 2018.

Six Months Ended June 30, 2019 and June 30, 2018

Revenue

We have not generated any revenue since our inception and do not expect to generate any revenue from the sale of products in the near future.

Net Loss

Our net loss for the six months ended June 30, 2019 and 2018 is as follows:

Operating Expenses

Total operating expenses for the six months ended June 30, 2019 were $462,671 compared to total operating expenses of $1,171,885 for the six months ended June 30, 2018. During the six months ended June 30, 2019, the Company incurred $303,528 of research and development expenses which included payroll of $107,062, service fees related to certain research and development agreements of $123,050, fees associated with a sponsored research agreement of $36,293, legal and filing fees related to patents of $19,497, software fees of $1,374 and purchases of expendable lab supplies and equipment of $16,252, compared to research and development expenses of $210,117 which included payroll of $55,633, service fees related to certain research and development agreements of $112,818 patent consultation and filing fees of $20,856 and purchases of expendable lab supplies and equipment of $16,996 during the six months ended June 30, 2018. The Company incurred general and administrative expenses of $115,917 for the six months ended June 30, 2019 compared to general and administrative expenses of $932,619 for the six months ended June 30, 2018. The substantial decrease in general and administrative expense during the six months ended June 30, 2019 was primarily due to stock-based compensation costs of $706,860 related to the issuance of stock options to our officers, and $224,738 for stock awards and shares issued for services to members of our advisory board and investor relations consultants during the six months ended June 30, 2018, with no similar expense during the six months ended June 30, 2019. Professional fees were $43,226 for the six months ended June 30, 2019 compared to professional fees of $29,149 during the six months June 30, 2018. Other expense in the six months ended June 30, 2019 included a loss of $14,457 as a result of the change in value of our derivative liabilities and interest expense of $1,916. Other expense was $10,228 in the six months ended June 30, 12,794, which represents accrued interest of $997 and a gain from the change in the value of derivative liabilities of $3,563.

 

We had a net loss of $479,044 in the six months ended June 30, 2019 compared to a net loss of $1,182,113 in the six months ended June 30, 2018.

Liquidity and Capital Resources

As of June 30, 2019, we had cash of $66,705. We are in the early stage of development and have experienced net losses to date and have not generated revenue from operations which raises substantial doubt about our ability to continue as a going concern. There are a number of conditions that we must satisfy before we will be able to commercialize potential products and generate revenue, including successful development of product candidates, which includes clinical trials, FDA approval, demonstration of effectiveness sufficient to generate commercial orders by customers, establishing production capabilities as well as effective marketing and sales capabilities for our product. We do not currently have sufficient resources to accomplish any of these conditions necessary for us to generate revenue and currently expect to incur increasing operating expenses. We will require substantial additional funds for operations, the service of debt and to fund our business objectives. We will have to continue to rely on equity and debt financing. There can be no assurance that financing, whether debt or equity, will always be available to us in the amount required at any particular time or for any particular period or, if available, that it can be obtained on terms favorable to us.

The Company raised an aggregate of $281,000 between November 2, 2016 and January 27, 2017 from 37 accredited investors and an aggregate of $575,000 during 2018 from accredited investors in private placement offerings under Regulation D and Regulation S under the Securities Act of 1933, as amended, respectively. The Company raised an additional $65,000 from accredited investors in private offerings in 2019. Additionally, on May 1, 2019, CubeSquare, LLC, a Delaware limited liability company whose managing member is Jonah Meer, our Chief Executive Officer and which is 25% owned by Ido Merfeld, our President, loaned the Company $50,000 pursuant to a demand promissory note which accrues interest at 8% per annum. We received $100,000 during the current period from a third party in the form of an unsecured, demand, non-interest bearing, short term advance to meet our ongoing operating needs. On August 1, 2019, Jonah Meer, our Chief Executive Officer provided  a demand, short-term advance of $50,000 to the Company to meet ongoing operating needs. However, without additional financing, we do not believe our resources will be sufficient to meet our operating and capital needs beyond the third quarter of 2019.

 

Working Capital

Cash Flows

 

Operating Activities

Net cash used in operating activities was $292,157 for the six months ended June 30, 2019 compared to $218,872 for the six months ended June 30, 2018.  Cash used in operating activities for the six months ended June 30, 2019 was primarily the result of our net loss, offset by non-cash items including compensation in the form of stock options for research and development expense totaling $87,933,  stock options recorded as advisory services of $37,500 and changes to our operating assets and liabilities including a decrease to prepaid expenses and increases to our accounts payable and accounts payable – related parties.  Cash used in the six months ended June 30, 2018 was primarily the result of our net loss, offset by non-cash items including compensation in the form of stock options for research and development expense totaling $74,738, stock awards totaling $28,000, and stock-based compensation of $150,000 related to shares issued under the terms of an investor relations agreement, stock options recorded as administrative expenses totaling 706,860, and changes to our operating assets and liabilities including an increase to prepaid expenses and increases to our accounts payable and accounts payable-related parties. In the six months ended June 30, 2018, we also recorded $12,794 as the non-cash accretion of the debt discount related to certain convertible notes.

Investing Activities

 

There were no investing activities during the six months ended June 30, 2019 and June 30, 2018.

 

Financing Activities

Net cash provided by financing activities was $215,000 for the six months ended June 30, 2019 compared to $500,000 for the six months ended June 30, 2018. We received proceeds from private placement offerings totaling $65,000 in the six months ended June 30, 2019 as compared to $500,000 in the six months ended June 30, 2018. During the six months ended June 30, 2019 we received $50,000 in proceeds from related parties in the form of a demand loan, and $100,000 as a short-term advance from a third party with no comparative transactions during the six months ended June 30, 2018.

Going Concern

Our financial statements have been prepared assuming that we will continue as a going concern and, accordingly, do not include adjustments relating to the recoverability and realization   of assets and classification of liabilities that may be necessary should we be unable to continue in operation. Our report from our independent registered public accounting firm for the fiscal year ended December 31, 2018 includes an explanatory paragraph stating the Company has experienced net losses to date, and it has not generated revenue from operations, and will need additional working capital for ongoing operations. These factors, among others, raise substantial doubt about the Company's ability to continue as a going concern. If we are unable to obtain sufficient funding, our business, prospects, financial condition and results of operations will be materially and adversely affected and we may be unable to continue as a going concern.

Off-Balance Sheet Arrangements

We have no off-balance sheet arrangements.

Critical Accounting Policies and Estimates

The preparation of our financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the 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. On an on-going basis, management evaluates its estimates and judgments which are based on historical experience and on various other factors that are believed to be reasonable under the circumstances. The results of their evaluation form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions and circumstances. Our significant accounting policies are more fully discussed in Note 2 to our unaudited financial statements contained herein.

Recent Accounting Pronouncements

There were various accounting standards and interpretations issued recently, none of which are expected to have a material effect on the Company's operations, financial position or cash flows.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

We are a smaller reporting company and are not required to provide this information.

ITEM 4. CONTROLS AND PROCEDURES

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, as of June 30, 2019, we conducted an evaluation of our disclosure controls and procedures, as such term is defined under Rule 13a-15(e) and Rule 15d-15(e) promulgated under the Securities Exchange Act of 1934, as amended. Based on this evaluation, our principal executive officer and principal financial officer have concluded that, based on the material weaknesses discussed below, our disclosure controls and procedures were not effective as of such date to ensure that information required to be disclosed by us in reports filed or submitted under the Securities Exchange Act were recorded, processed, summarized, and reported within the time periods specified in the Securities and Exchange Act Commission's rules and forms and that our disclosure controls are not effectively designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act is accumulated and communicated to management, including our principal executive officer and principal financial officer, or persons performing similar functions, as appropriate to allow timely decisions regarding required disclosure.

Our internal controls are not effective for the following reasons: (i) there is an inadequate segregation of duties consistent with control objectives as management is comprised of only two persons, one of which is the Company's principal executive officer and principal financial officer and, (ii) the Company does not have a formal audit committee with a financial expert, and thus the Company lacks the board oversight role within the financial reporting process.

In order to mitigate the foregoing material weakness, we have engaged an outside accounting consultant with significant experience in the preparation of financial statements in conformity with U.S. GAAP to assist us in the preparation of our financial statements to ensure that these financial statements are prepared in conformity to U.S. GAAP. We will continue to monitor the effectiveness of this action and make any changes that our management deems appropriate.

We would need to hire additional staff to provide greater segregation of duties. Currently, it is not feasible to hire additional staff to obtain optimal segregation of duties. Management will reassess this matter in the following year to determine whether improvement in segregation of duty is feasible. In addition, we would need to expand our board to include independent members.

Going forward, we intend to evaluate our processes and procedures and, where practicable and resources permit, implement changes in order to have more effective controls over financial reporting.

Changes in Internal Control over Financial Reporting

During the period covered by this report, there were no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.

PART II – OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

There are no pending legal proceedings to which the Company is a party or in which any director, officer or affiliate of the Company, any owner of record or beneficially of more than 5% of any class of voting securities of the Company, or security holder is a party adverse to the Company or has a material interest adverse to the Company. The Company's property is not the subject of any pending legal proceedings.

ITEM 1A. RISK FACTORS

The Company is a smaller reporting company and is not required to provide this information.

ITEM 2. UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS

There were no sales of equity securities sold during the period covered by this Report that were not registered under the Securities Act and were not previously reported in a Current Report on Form 8-K filed by the Company.

 

ITEM 3. DEFAULTS UPON SENIOR SECURITIES

None

ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable

ITEM 5. OTHER INFORMATION

None

 

ITEM 6. EXHIBITS

SIGNATURES

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