QUANTRX BIOMEDICAL CORP - Quarter Report: 2010 September (Form 10-Q)
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-Q
|
x
|
QUARTERLY REPORT UNDER SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
|
For the quarterly period ended September 30, 2010
OR
|
¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (d) OF THE SECURITIES EXCHANGE ACT OF 1934
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For the transition period from _________to_________
Commission File No. 0-17119
QUANTRX BIOMEDICAL CORPORATION
(Exact Name of Registrant as Specified in Its Charter)
|
Nevada
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33-0202574
|
|
|
(State or Other Jurisdiction of
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(I.R.S. Employer
|
|
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Incorporation or Organization)
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Identification Number)
|
5920 NE 112th Avenue, Portland, OR 97220
(Address of Principal Executive Offices) (Zip Code)
(503) 252-9565
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act during the preceding 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. x 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, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.:
|
Large accelerated filer
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¨
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Accelerated filer
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¨
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Non-accelerated filer
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¨
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Smaller reporting company
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x
|
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
The number of shares outstanding of the issuer’s common stock as of November 19, 2010 was 44,427,630.
QUANTRX BIOMEDICAL CORPORATION
INDEX
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Page
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PART I – FINANCIAL INFORMATION
CAUTIONARY STATEMENT REGARDING FORWARD-LOOKING INFORMATION
THIS QUARTERLY REPORT ON FORM 10-Q, INCLUDING EXHIBITS HERETO, CONTAINS FORWARD-LOOKING STATEMENTS WITHIN THE MEANING OF SECTION 27A OF THE SECURITIES ACT OF 1933, AS AMENDED, AND SECTION 21E OF THE SECURITIES EXCHANGE ACT OF 1934, AS AMENDED. THESE FORWARD-LOOKING STATEMENTS ARE TYPICALLY IDENTIFIED BY THE WORDS “ANTICIPATES,” “BELIEVES,” “EXPECTS,” “INTENDS,” “FORECASTS,” “PLANS,” “ESTIMATES,” “MAY,” “FUTURE,” “STRATEGY,” OR WORDS OF SIMILAR MEANING. VARIOUS FACTORS COULD CAUSE ACTUAL RESULTS TO DIFFER MATERIALLY FROM THOSE EXPRESSED IN THE FORWARD-LOOKING STATEMENTS; INCLUDING THOSE DESCRIBED IN “RISK FACTORS” IN OUR ANNUAL REPORT ON FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2009. WE ASSUME NO OBLIGATIONS TO UPDATE THESE FORWARD-LOOKING STATEMENTS TO REFLECT NEW INFORMATION, ACTUAL RESULTS, CHANGES IN ASSUMPTIONS, OR CHANGES IN OTHER FACTORS, EXCEPT AS REQUIRED BY LAW.
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ITEM 1.
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Financial Statements
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|
QUANTRX BIOMEDICAL CORPORATION
|
|
CONSOLIDATED BALANCE SHEETS
|
|
September 30,
|
December 31,
|
|||||||
|
2010
|
2009
|
|||||||
|
ASSETS
|
(unaudited)
|
|||||||
|
Current Assets:
|
||||||||
|
Cash and cash equivalents
|
$
|
49,607
|
$
|
376,211
|
||||
|
Accounts receivable
|
277,818
|
41,128
|
||||||
|
Accounts receivable – QN Diagnostics, LLC
|
414,719
|
31,500
|
||||||
|
Interest receivable – Genomics USA
|
59,689
|
47,689
|
||||||
|
Other receivable
|
38,000
|
-
|
||||||
|
Inventories
|
4,379
|
4,681
|
||||||
|
Prepaid expenses
|
38,937
|
128,228
|
||||||
|
Note receivable – Genomics USA
|
200,000
|
200,000
|
||||||
|
Total Current Assets
|
1,083,149
|
829,437
|
||||||
|
Investments
|
200,000
|
200,000
|
||||||
|
Investment in joint venture
|
-
|
63,601
|
||||||
|
Property and equipment, net
|
120,229
|
179,590
|
||||||
|
Intangible assets, net
|
48,870
|
59,780
|
||||||
|
Security deposits
|
11,093
|
11,093
|
||||||
|
Total Assets
|
$
|
1,463,341
|
$
|
1,343,501
|
||||
|
LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||
|
Current Liabilities:
|
||||||||
|
Accounts payable
|
$
|
1,056,465
|
$
|
749,225
|
||||
|
Accounts payable – QN Diagnostics, LLC
|
193,987
|
-
|
||||||
|
Accrued expenses
|
731,335
|
233,000
|
||||||
|
Deferred revenue
|
69,292
|
-
|
||||||
|
Deferred revenue – QN Diagnostics, LLC
|
-
|
337,160
|
||||||
|
Advances from shareholders
|
25,000
|
-
|
||||||
|
Security deposits
|
2,000
|
2,000
|
||||||
|
Total Current Liabilities
|
2,078,079
|
1,321,385
|
||||||
|
Notes payable, long-term
|
44,000
|
44,000
|
||||||
|
Total Liabilities
|
2,122,079
|
1,365,385
|
||||||
|
Commitments and Contingencies
|
-
|
|||||||
|
Stockholders’ Equity (Deficit):
|
||||||||
|
Preferred stock; $0.01 par value, 25,000,000 authorized shares; Series A-1 convertible preferred shares: 4,060,397 shares issued and outstanding
|
40,604
|
40,604
|
||||||
|
Common stock; $0.01 par value; 150,000,000 authorized; 44,427,630 shares issued and outstanding
|
444,276
|
444,276
|
||||||
|
Series A-1 dividend distributable
|
324,831
|
-
|
||||||
|
Additional paid-in capital
|
47,844,631
|
47,756,355
|
||||||
|
Accumulated deficit
|
(49,313,080
|
) |
(48,263,119
|
)
|
||||
|
Total Stockholders’ Equity (Deficit)
|
(658,738
|
) |
(21,884
|
)
|
||||
|
Total Liabilities and Stockholders’ Equity (Deficit)
|
$
|
1,463,341
|
$
|
1,343,501
|
||||
The accompanying condensed notes are an integral part of these interim financial statements.
|
QUANTRX BIOMEDICAL CORPORATION
|
|
CONSOLIDATED STATEMENTS OF OPERATIONS
|
|
Three Months Ended
September 30,
|
Nine Months Ended
September 30,
|
|||||||||||||||
|
|
2010
|
2009
|
2010
|
2009
|
||||||||||||
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
(unaudited)
|
|||||||||||||
|
Revenues:
|
||||||||||||||||
|
Revenues
|
$
|
30,941
|
$
|
108,957
|
$
|
60,379
|
$
|
440,859
|
||||||||
|
Revenues – QN Diagnostics, LLC
|
159,067
|
880,341
|
1,429,960
|
880,341
|
||||||||||||
|
Total Revenues
|
190,008
|
989,298
|
1,490,339
|
1,321,200
|
||||||||||||
|
Costs and Operating Expenses:
|
||||||||||||||||
|
Cost of goods sold (excluding depreciation and amortization)
|
135
|
26,274
|
264
|
27,737
|
||||||||||||
|
Sales, general and administrative
|
472,614
|
840,348
|
1,055,717
|
1,701,982
|
||||||||||||
|
Professional fees
|
12,556
|
222,480
|
553,986
|
311,649
|
||||||||||||
|
Research and development
|
309,784
|
910,435
|
1,443,217
|
1,194,713
|
||||||||||||
|
Amortization
|
2,066
|
5,450
|
10,910
|
17,153
|
||||||||||||
|
Depreciation
|
14,823
|
17,049
|
47,638
|
52,194
|
||||||||||||
|
Total Costs and Operating Expenses
|
924,978
|
2,022,036
|
3,111,732
|
3,305,428
|
||||||||||||
|
Loss from Operations
|
(734,970
|
) |
(1,032,738
|
)
|
(1,621,393
|
) |
(1,984,228
|
)
|
||||||||
|
Other Income (Expense):
|
||||||||||||||||
|
Interest and dividend income
|
6,629
|
6,542
|
18,016
|
35,761
|
||||||||||||
|
Interest expense
|
(1,653
|
) |
(79,839
|
)
|
(4,430)
|
(463,431
|
)
|
|||||||||
|
Rental income
|
2,750
|
5,138
|
11,000
|
16,673
|
||||||||||||
|
Amortization of debt discount to interest expense
|
-
|
(89,520
|
)
|
-
|
(361,666
|
)
|
||||||||||
|
Amortization of deferred finance costs to interest expense
|
-
|
-
|
-
|
(8,693
|
)
|
|||||||||||
|
Loss from deconsolidation of subsidiary
|
-
|
-
|
-
|
(43,286
|
)
|
|||||||||||
|
Loss from deconsolidated subsidiary
|
-
|
-
|
(63,601
|
) |
(272,579
|
)
|
||||||||||
|
Loss from equity method investment
|
-
|
(427,531
|
)
|
-
|
(427,531
|
) | ||||||||||
|
Loss on extinguishment of debt
|
-
|
-
|
-
|
-
|
||||||||||||
|
Gain on sale of investments
|
195,251
|
-
|
946,501
|
|||||||||||||
|
Net gain (loss) on disposition of assets
|
(29,045
|
) |
1,363,640
|
(11,223
|
) |
1,363,640
|
||||||||||
|
Total Other Income (Expense), net
|
173,932
|
778,430
|
896,263
|
(161,112
|
||||||||||||
|
Income (Loss) Before Taxes
|
(561,038
|
) |
(254,308
|
)
|
(725,130
|
) |
(2,145,340
|
) | ||||||||
|
Provision for Income Taxes
|
-
|
-
|
-
|
-
|
||||||||||||
|
Net Income (Loss)
|
|
(561,038
|
) |
|
(254,308
|
)
|
(725,130
|
) |
(2,145,340
|
)
|
||||||
| Preferred Stock Dividend | (324,831 | ) | - | (324,831 | ) | - | ||||||||||
| Net Loss Available to Common Sharesholders | $ | (885,869 | ) | $ | (254,308 | ) | $ | (1,049,961 | ) | $ | (2,145,340 | ) | ||||
|
Basic and Diluted Net Loss per Common Share
|
$
|
(0.02
|
) |
$
|
(0.01
|
)
|
$
|
(0.02
|
) |
$
|
(0.05
|
) | ||||
|
Basic and Diluted Weighted Average Shares Used in per Share Calculation
|
44,427,630
|
44,054,152
|
44,427,630
|
43,427,869
|
||||||||||||
The accompanying condensed notes are an integral part of these interim financial statements.
|
QUANTRX BIOMEDICAL CORPORATION
|
|
CONSOLIDATED STATEMENTS OF CASH FLOWS
|
|
Nine Months Ended
September 30,
|
||||||||
|
2010
|
2009
|
|||||||
|
(unaudited)
|
(unaudited)
|
|||||||
|
CASH FLOWS FROM OPERATING ACTIVITIES:
|
||||||||
|
Net loss
|
$
|
(725,130
|
) |
$
|
(2,145,340
|
)
|
||
|
Adjustments to reconcile net loss to net cash used by operating activities:
|
||||||||
|
Depreciation and amortization
|
58,548
|
69,347
|
||||||
|
Interest expense related to amortization of non-cash discount, non-cash beneficial conversion feature and deferred financing costs
|
-
|
370,359
|
||||||
|
Expenses related to employee stock based compensation
|
38,943
|
531,354
|
||||||
|
Expenses (re-measurement adjustment) related to options issued to non-employees
|
-
|
5,666
|
||||||
|
Expenses (re-measurement adjustment) related to common stock warrants issued for consulting
|
250
|
-
|
||||||
|
Non-cash incremental fair value of modified warrants issued for interest
|
-
|
6,250
|
||||||
|
Non-cash fair value of warrants issued for interest
|
-
|
72,075
|
||||||
|
Non-cash fair value of common stock issued for interest
|
-
|
78,000
|
||||||
|
Non-cash fair value of warrant issued for compensation
|
49,083
|
-
|
||||||
|
Loss from deconsolidation of subsidiary
|
-
|
43,286
|
||||||
|
Loss from deconsolidated subsidiary
|
-
|
272,579
|
||||||
|
Loss from joint venture
|
63,601
|
427,531
|
||||||
|
Net gain on disposition of assets and investments
|
(759,778
|
) |
(1,363,640
|
)
|
||||
|
Issuance of convertible notes for accrued interest
|
-
|
175,895
|
||||||
|
Issuance of preferred stock for accrued interest
|
-
|
60,823
|
||||||
|
Interest income settled in common stock of former subsidiary
|
-
|
(18,000
|
)
|
|||||
|
(Increase) decrease in:
|
||||||||
|
Accounts receivable
|
(619,909
|
) |
(173,443
|
)
|
||||
|
Interest receivable
|
(12,000
|
) |
(12,000
|
)
|
||||
|
Other receivable
|
(38,000
|
) |
-
|
|||||
|
Inventories
|
302
|
35,360
|
||||||
|
Prepaid expenses
|
89,291
|
42,832
|
||||||
|
Deposits
|
-
|
581
|
||||||
|
Security deposits
|
-
|
(426
|
)
|
|||||
|
Increase (decrease) in:
|
||||||||
|
Accounts payable
|
501,227
|
121,067
|
||||||
|
Accrued expenses
|
498,335
|
258,457
|
||||||
|
Deferred revenue
|
(267,868
|
) |
200,000
|
|||||
|
Net Cash Used by Operating Activities
|
(1,123,105
|
) |
(941,387
|
)
|
||||
|
CASH FLOWS FROM INVESTING ACTIVITIES:
|
||||||||
|
Cash proceeds from sale of investment securities
|
751,250
|
-
|
||||||
|
Cash paid for asset acquisition deposit
|
-
|
-
|
||||||
|
Cash proceeds from sale of equipment
|
20,251
|
-
|
||||||
|
Cash advances to subsidiary prior to deconsolidation
|
-
|
(13,800
|
)
|
|||||
|
Cash paid for purchases of fixed assets
|
-
|
(27,870
|
)
|
|||||
|
Cash paid for intangible assets
|
-
|
(250,000
|
)
|
|||||
|
Net Cash Provided (Used) by Investing Activities
|
771,501
|
(291,670
|
)
|
|||||
|
CASH FLOWS FROM FINANCING ACTIVITIES:
|
||||||||
|
Proceeds from issuance of promissory notes
|
25,000
|
430,000
|
||||||
|
Proceeds from issuance of senior secured convertible notes
|
- |
425,000
|
||||||
|
Proceeds from issuance of senior secured promissory notes
|
- |
250,000
|
||||||
|
Repayment of short-term debt
|
- |
(1,347,199
|
)
|
|||||
|
Distribution from joint venture
|
- |
2,000,000
|
||||||
|
Payments on loan payable used to finance equipment purchase
|
- |
(5,731
|
)
|
|||||
|
Payment of payables related to asset acquisition deposit
|
- |
(25,000
|
)
|
|||||
|
Payment of payables related to fixed asset purchases
|
- |
(8,803
|
)
|
|||||
|
Net Cash Provided by Financing Activities
|
25,000
|
1,718,267
|
||||||
|
Net Increase (Decrease) in Cash and Cash Equivalents
|
(326,604
|
) |
485,210
|
|||||
|
Net Cash of Deconsolidated Subsidiary
|
(413
|
)
|
||||||
|
Cash and Cash Equivalents, Beginning of Period
|
376,211
|
66,226
|
||||||
|
Cash and Cash Equivalents, End of Period
|
$
|
49,607
|
$
|
551,023
|
||||
|
Supplemental Cash Flow Disclosures:
|
||||||||
|
Interest expense paid in cash
|
$
|
4,430
|
$
|
70,193
|
||||
|
Income tax paid
|
$
|
-
|
$
|
-
|
||||
|
Supplemental Disclosure of Non-Cash Activities:
|
||||||||
|
Fair value of common stock issued with convertible notes
|
$
|
-
|
$
|
85,803
|
||||
|
Fair value of warrants issued with convertible notes
|
-
|
33,487
|
||||||
|
Fair value of beneficial conversion feature embedded in convertible notes
|
-
|
6,325
|
||||||
|
Fair value of common stock issued with promissory notes
|
-
|
51,848
|
||||||
|
Fair value of warrants issued with promissory notes
|
-
|
39,666
|
||||||
|
Fair value of warrants issued in conjunction with joint venture formation
|
1,000,000
|
|||||||
|
Fair value of warrants issued as compensation
|
49,083
|
-
|
||||||
|
Issuance of preferred stock to settle short-term debt
|
-
|
3,999,565
|
||||||
|
Increase in payables related to purchase of fixed assets
|
-
|
-
|
||||||
|
Exchange of promissory notes for senior secured convertible note
|
-
|
707,890
|
||||||
|
Elimination of deconsolidated subsidiary accounts:
|
-
|
|||||||
|
Prepaid expenses
|
-
|
104,506
|
||||||
|
Property and equipment, net
|
-
|
274,404
|
||||||
|
Intangible assets, net
|
-
|
1,907,193
|
||||||
|
Deposits
|
-
|
3,565
|
||||||
|
Accounts payable
|
-
|
1,311,839
|
||||||
|
Accrued expenses
|
-
|
215,050
|
||||||
|
Additional paid-in-capital
|
-
|
479,129
|
||||||
The accompanying condensed notes are an integral part of these interim financial statements.
|
QUANTRX BIOMEDICAL CORPORATION
|
|
CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
|
Description of Business and Basis of Presentation
QuantRx Biomedical Corporation was incorporated on December 5, 1986, in the State of Nevada. The Company’s principal business office is located at 5920 NE 112th Avenue, Portland, Oregon. When used in this Quarterly Report on Form 10-Q, the terms “Company,” “we,” “our,” “ours,” or “us” mean QuantRx Corporation, a Nevada corporation.
The Company is a diagnostics company focused on the development and commercialization of innovative diagnostic products for both the human and veterinary laboratory and Point-of-Care (“POC”) markets based on its patented technology platforms for the worldwide healthcare industry. These platforms include: RapidSense® and Q-Reader™ POC testing products, which are currently being developed through QN Diagnostics, LLC, a Delaware limited liability company (“QND”) jointly owned by the Company and NuRx Pharmaceuticals, Inc. (“NuRx”). These products are based on the Company’s core intellectual property related to lateral flow technology. Additionally, the Company’s PAD technology is intended for uses in the consumer markets for the treatment of hemorrhoids, minor vaginal infection, urinary incontinence, and other medical needs. The Company is currently exploring the PAD technology’s potential diagnostic uses as well.
Since July 2009, the Company has been focused on, among other development initiatives, the development of its POC lateral flow diagnostics products through QND. QND was formed to develop and commercialize products incorporating the Company’s lateral flow strip technology and related lateral flow strip readers. The Company and NuRx are currently involved in a dispute regarding the achievement of certain milestones, the requirement to make certain sustaining capital contributions, as well as certain governance matters related to QND. See Notes 3 and 10.
During the quarter ended September 30, 2010, the Company also had minority investments in Genomics USA (“GUSA”), which is developing Single Nucleotide Polymorphism (“SNP”) chips, genome-based diagnostic chips for the next generation of genomic and proteomic diagnostic markets, and FluoraPharma, Inc. (“FluoraPharma”), which is developing molecular imaging agents for Positron Emission Tomography (“PET”) and fluorescence imaging with initial application in cardiovascular disease, to provide clinical support for the Company’s POC cardiac diagnostics. FlouraPharma is formerly a majority-owned subsidiary of the Company, and, as a result of certain transactions described below, was 11.8% owned by the Company as of September 30, 2010. Subsequent to September 30, 2010, the Company divested substantially all of its equity interest in FluoraPharma. See Note 11.
The Company is currently evaluating GUSA and its remaining interest in FlouraPharma with the objective of extracting the value of such investments for the benefit of the Company and its shareholders.
The Company’s strategy is to: (i) leverage its broad-based intellectual property (IP) and patent portfolio to develop new and innovative diagnostic products; (ii) commercialize existing products through corporate partners and distributors, and Internet sales; (iii) contract manufacturing to third parties while maintaining control over the manufacturing process; and (iv) maximize the value of the Company’s investments in non-core assets, including GUSA.
The interim consolidated financial statements are unaudited; however, in the opinion of management, they include all adjustments (consisting only of normal recurring adjustments) necessary for a fair statement of financial position and results of operations for the periods reported. The interim financial statements have been prepared pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”). Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures included herein are adequate to make the information presented not misleading. Operating results for the periods presented are not necessarily indicative of future results. These interim financial statements should be read in conjunction with the financial statements and notes to financial statements included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2009, which was filed with the SEC on March 31, 2010.
|
1.
|
Management Statement Regarding Going Concern
|
The Company has not generated sufficient revenues from operations or its investment in IP to meet its operating expenses. The Company has therefore historically financed its operations primarily through issuances of equity and debt securities, and, during the quarters ended June 30 and September 30, 2010, through the sale of certain equity interests in FluoraPharma. In the past, the Company has also provided for its cash needs by issuing common stock, options and warrants for certain operating costs, including consulting and professional fees.
While equity and debt financing has historically provided for the Company’s working capital needs, including capital necessary to fund the development and commercialization of the Company’s lateral flow based products, no assurances can be given that such financing will continue to be available to the Company in the future. The Company has also actively reduced operating expenses, has recently consolidated its operations in Portland, Oregon, and intends to restructure certain of its liabilities in order to continue as a going concern. In the event the Company is unable to secure additional financing, or is otherwise unsuccessful in restructuring certain of its liabilities, the Company will be unable to continue as a going concern.
|
2.
|
Summary of Significant Accounting Policies
|
Accounting for Share-Based Payments
The Company follows the provisions of ASC Topic 718, which establishes the accounting for transactions in which an entity exchanges equity securities for services and requires companies to expense the estimated fair value of these awards over the requisite service period. The Company uses the Black-Scholes option pricing model in determining fair value. Accordingly, compensation cost has been recognized using the fair value method and expected term accrual requirements as prescribed, which resulted in employee stock-based compensation expense of $7,950 and $289,750, for the three months ended September 30, 2010 and 2009, respectively, and $38,941 and $531,354 for the nine months ended September 30, 2010 and 2009, respectively.
Black Scholes Option Pricing Model
The following assumptions were determined at the beginning of each year and have been utilized in all Black Scholes calculations for each year:
|
2010
|
2009
|
|||||||
|
Risk-free interest rate
|
2.43
|
%
|
3.24
|
%
|
||||
|
Expected volatility
|
72
|
%
|
70
|
%
|
||||
|
Dividend yield
|
0
|
%
|
0
|
%
|
||||
Earnings per Share
The Company computes net income (loss) per common share in accordance with ASC Topic 260. Net income (loss) per share is based upon the weighted average number of outstanding common shares and the dilutive effect of common share equivalents, such as options and warrants to purchase common stock, convertible preferred stock and convertible notes, if applicable, that are outstanding each year. Basic and diluted earnings per share were the same at the reporting dates of the accompanying financial statements, as all common stock equivalents outstanding for the three months ended September 30, 2010 were deemed to be anti-dilutive. Moreover, including common stock equivalents in the calculation of diluted earnings per share would have been anti-dilutive for the nine months ended September 30, 2010 and the three and nine months ended September 30, 2009.
As of September 30, 2010, the Company had outstanding options exercisable for 2,470,500 shares of its common stock, warrants exercisable for 13,286,466 shares of its common stock, and preferred shares convertible into 8,120,794 shares of its common stock. The above options, warrants, and preferred shares were deemed to be anti-dilutive for the three and nine months ended September 30, 2010.
As of September 30, 2009, the Company had outstanding options exercisable for 2,780,500 shares of its common stock, warrants exercisable for 14,193,434 shares of its common stock, and debt securities convertible into 8,120,794 shares of its common stock. The above options, warrants, and convertible debt securities were deemed to be anti-dilutive for the three and nine months ended September 30, 2009.
Fair Value
The Company has adopted ASC Topic 820, “Fair Value Measurements and Disclosures” for both financial and nonfinancial assets and liabilities. We have not elected the fair value option for any of our assets or liabilities.
Non-Controlling Interest
In January 2009, we adopted an amendment to ASC Topic 810 “Consolidation”, which required us to make certain changes to the presentation of our financial statements. This amendment requires non-controlling interests to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. Upon a loss of control, the interest sold, as well as any interest retained, is required to be measured at fair value, with any gain or loss recognized in earnings. The statement requires that the non-controlling interest continue to be attributed its share of losses even if that attribution results in a deficit non-controlling interest balance; if this would result in a material change to consolidated net income, pro forma financial information is required. As of January 1, 2009, the Company presented its financial statements in accordance with this statement. However, on May 5, 2009, the Company and FluoraPharma reorganized their relationship by terminating their investment and related agreements. The termination of these agreements, which were originally executed on March 10, 2006, allowed FluoraPharma to close an equity financing with third party investors. In conjunction with the termination of these agreements and the additional investment in FluoraPharma by third parties, the Company agreed to convert all outstanding receivables from FluoraPharma into common stock of FluoraPharma. As a result of these transactions and the third party investment, the Company’s ownership interest in FluoraPharma's issued and outstanding capital stock was reduced to a non-controlling interest, which resulted in deconsolidation and a loss at deconsolidation in accordance with ASC 810. See Note 4 for additional details.
Use of Estimates
The accompanying financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, and include certain estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results may differ from those estimates.
|
3.
|
Investment in QN Diagnostics, LLC
|
On July 30, 2009, the Company and NuRx jointly formed QND, a Delaware limited liability company. The Company contributed certain intellectual property and other assets related to its lateral flow strip technology and related lateral flow strip reader technology, including the Thyroid Stimulating Hormone Test System, which includes the Company’s Q-Reader™ POC testing product. The fair market value of the contributed assets is approximately $5,450,000, and NuRx contributed $5,000,000 in cash to QND. NuRx and the Company each own a 50% interest in QND. The purpose of QND is to develop and commercialize products incorporating the lateral flow strip technology and related lateral flow strip readers.
QND is currently managed by a board consisting of two Company designees and two NuRx designees. Subject to certain exceptions, board decisions are made by majority vote, provided that the Company and NuRx have veto rights with respect to certain matters. Since the Company does not have control of QND, the Company accounts for the investment in QND utilizing the equity method of accounting.
Under the terms of certain agreements related to QND, QND made a $2.0 million cash distribution to the Company. The Company is committed to further capital contributions to QND aggregating $1.55 million, consisting of: milestone payments to PRIA Diagnostics, LLC (“PRIA”) in Company common stock with a fair value of $750,000, the transfer of certain fixed assets with a fair value of $100,000 at QND’s discretion, and a $700,000 sustaining capital contribution as required by QND. Subsequent sustaining capital contributions are required to be made by the Company and NuRx on an equal basis.
The Company and QND also entered into a one year Development and Services Agreement on July 30, 2009 (“Development Agreement”), pursuant to which QND pays a monthly fee to the Company in exchange for the Company providing all services related to the development, regulatory approval and commercialization of lateral flow products, including the Company’s Thyroid Stimulating Hormone Test System. In the three months ended September 30, 2010, the revenues recognized by the Company associated with the Development Agreement were $159,067, and the expenses related thereto for the same period were $345,343. In the nine months ended September 30, 2010, the revenues recognized by the Company associated with the Development Agreement were $1,429,960, and the expenses related thereto for the same period were $1,615,887. Expenses are included in each appropriate expense category in the Company’s statement of operations. As of September 30, 2010 and December 31, 2009, deferred revenues related to the Development Agreement were $0 and $337,160, respectively. As of September 30, 2010 and December 31, 2009, accounts receivable from QND related to the Development Agreement were $414,719 and $31,500, respectively.
As part of the agreements with QND, the Company agreed to pay to QND amounts it received pursuant to its Development Agreement with ALT Bioscience, LLC to perform certain development services. As of September 30, 2010, ALT owed the Company $200,026, and the Company owed QND $193,987, with respect to services performed by the Company pursuant to the ALT Agreement.
On July 20, 2010, the Company notified NuRx that NuRx was in material breach of the Development Agreement, and had 60 days from the date of the notification to cure such breach. The notification is related to nonpayment of fees in accordance with the Development Agreement. Should the breach remain uncured, the Company reserved the right to terminate the Development Agreement. On August 24, 2010, NuRx filed suit naming as a defendant Dr. William Fleming, a member of the Company’s board of directors. On August 26, 2010, NuRx delivered to the Company a letter in which NuRx attempted to cure its breach. On October 20, 2010, on its own motion to intervene, the Company was added as a defendant. The suit, more fully discussed in Note 10, is based on allegations that QND is deadlocked over the Company’s rejection of a required capital contribution, and NuRx’s allegation that the Company has not met a “milestone” requirement in the Development Agreement that would give NuRx the right to have a Company appointed board member removed and replaced with a member designated by NuRx. The suit is currently stayed by mutual agreement of the parties to allow the parties to explore an amicable resolution of the proceedings.
In connection with the Company’s application before the U.S. Food and Drug Administration (“FDA”) to approve the Company’s Thyroid Stimulating Hormone Test System, which includes the Company’s Q-Reader™ POC testing product, the FDA has requested additional information, and the Company has until December 21, 2010 to respond. The Company is currently evaluating whether and how to respond to the FDA’s request.
|
4.
|
Investments
|
FluoraPharma, Inc.
On May 5, 2009, the Company and FluoraPharma reorganized their relationship by terminating their investment and related agreements. The termination of these agreements, which were originally executed on March 10, 2006, allowed FluoraPharma to close an equity financing with third party investors. Contemporaneously, the Company agreed to convert all outstanding receivables from FluoraPharma, consisting of previously issued notes and related accrued interest and advances in the aggregate amount of $1,568,567, into 1,148,275 shares of common stock of FluoraPharma. As a result of these transactions and the third party investment, the Company’s ownership interest in FluoraPharma’s issued and outstanding capital stock was reduced to a non-controlling interest.
At May 5, 2009, the Company’s remaining net basis in its investment in FluoraPharma, inclusive of receivables from FluoraPharma, was $43,286, after taking into account previously recorded losses of $5,056,304 ($231,046 in the first quarter of 2009) related to the consolidated results of FluoraPharma. These losses have been included in our consolidated financial statements commencing April 1, 2007, the original date of consolidation, through May 4, 2009, and are net of losses allocated to the then non-controlling interests as applicable. On May 5, 2009, subsequent to the execution of the above described transactions which led to the deconsolidation of FluoraPharma, the Company’s ownership of the outstanding capital stock of FluoraPharma was reduced to a non-controlling interest. At deconsolidation the fair market value of the Company’s remaining non-controlling interest in FluoraPharma was $842,876, based on the third party investment; however, FluoraPharma had a deficit equity balance, which resulted in the Company writing off the remaining basis in the investment of $43,286 and recording a loss from deconsolidation of $43,286 in accordance with ASC Topic 810.
During the quarter ended September 30, 2010, the Company entered into agreements with certain investors pursuant to which the Company sold 233,333 shares of common stock of FluoraPharma’s at a price of $0.75 per share, resulting in aggregate proceeds of $175,000. As a result, the Company recorded a gain on disposition of $175,000. In the nine months ended September 30, 2010, the Company sold 1,234,500 shares for aggregate proceeds of $926,250, resulting in gains on disposition of $926,250. As of September 30, 2010, $38,000 related to the agreements is reflected as “other receivable.” See Note 11.
Effective May 5, 2009, our financial statements reflect our investment in FluoraPharma under the equity method of accounting. As of September 30, 2010 and December 31, 2009, the Company owned approximately 26.8% and 39.81%, respectively, of the issued and outstanding capital stock of FluoraPharma. However, at September 30, 2010, due to FluoraPharma’s issuance of a separate class of common stock in 2009, the Company held 11.8% of the voting stock of FluoraPharma. Subsequent to September 30, 2010, the Company divested substantially all of its equity interest in FluoraPharma. See Note 11.
Genomics USA, Inc.
The Company currently owns approximately 10% of the equity of GUSA, as well as a note convertible into an additional 10% equity interest on a fully diluted basis. As of September 30, 2010 and December 31, 2009, interest receivable with respect to the note was $59,689 and $47,689, respectively.
Merger Agreement
On January 29, 2010, the Company entered into an Agreement and Plan of Merger with NuRx and NP Acquisition Corporation, a wholly-owned subsidiary of the Company. The Merger Agreement provided that at closing, NP Acquisition Corporation would be merged with and into NuRx, with NuRx continuing as the surviving corporation and a wholly-owned subsidiary of the Company.
On July 20, 2010, the Company terminated the Merger Agreement pursuant to Section 7.02(b) thereof, which permits any party to the Merger Agreement to terminate the Merger Agreement if the merger contemplated thereby was not consummated on or before June 30, 2010. The Company did not incur any termination penalties as a result of such termination.
|
5.
|
Intangible Assets
|
Intangible assets as of the balance sheet dates consisted of the following:
|
September 30,
2010
|
December 31,
2009
|
|||||||
|
Licensed patents and patent rights
|
$
|
50,000
|
$
|
50,000
|
||||
|
Patents
|
41,004
|
41,004
|
||||||
|
Website development
|
40,750
|
40,750
|
||||||
|
Less: accumulated amortization
|
(82,884
|
) |
(71,974
|
)
|
||||
|
Intangibles, net
|
$
|
48,870
|
$
|
59,780
|
||||
The Company’s intangible assets are carried at the legal cost to obtain them. Intangible assets are amortized using the straight line method over the estimated useful life. Useful lives are as follows: licensed patents and patent rights, eight to 15 years; patents, 17 years; technology license, five years; and website development costs, three years. Amortization expense totaled $2,066 and $5,450 for the three months ended September 30, 2010 and 2009, respectively. Amortization expense totaled $10,910 and $17,153 for the nine months ended September 30, 2010 and 2009, respectively. Impairment will be considered in accordance with the Company’s impairment policy which requires at least an annual analysis. No impairment was recognized as of September 30, 2010.
|
6.
|
Other Balance Sheet Information
|
Components of selected captions in the accompanying balance sheets consist of:
|
September 30,
2010
|
December 31,
2009
|
|||||||
|
Prepaid expenses:
|
||||||||
|
Prepaid consulting
|
$
|
-
|
$
|
83,375
|
||||
|
Prepaid insurance
|
27,962
|
22,960
|
||||||
|
Prepaid rent
|
-
|
16,533
|
||||||
|
Other
|
10,975
|
5,360
|
||||||
|
Prepaid expenses
|
$
|
38,937
|
$
|
128,228
|
||||
|
Property and equipment:
|
||||||||
|
Computers and office furniture, fixtures and equipment
|
$
|
89,014
|
$
|
124,877
|
||||
|
Machinery and equipment
|
173,295
|
181,347
|
||||||
|
Leasehold improvements
|
92,233
|
92,233
|
||||||
|
Less: accumulated depreciation
|
(234,313
|
) |
(218,867
|
)
|
||||
|
Property and equipment, net
|
$
|
120,229
|
$
|
179,590
|
||||
|
Accrued expenses:
|
||||||||
|
Payroll and related
|
$
|
644,168
|
$
|
175,000
|
||||
|
Professional fees
|
87,167
|
41,500
|
||||||
|
Other
|
-
|
16,500
|
||||||
|
Accrued expenses
|
$
|
731,335
|
$
|
233,000
|
||||
|
7.
|
Deferred Revenue
|
On May 19, 2008, the Company and CytoCore, Inc. (“CytoCore”) entered into a worldwide distribution and supply agreement for specified PAD technology of the Company. The agreement specified monthly license fees during CytoCore’s expected development period and additional milestone payments based upon CytoCore’s achievement of certain development and sales milestones. The Company received an up-front, non-refundable payment of $100,000 upon execution of this agreement, which was recorded as deferred revenue and was amortized into revenue over the expected development period of the agreement, estimated as 18 months. In the quarter ended June 30, 2010, CytoCore advanced an additional $20,000 toward an extension of this agreement in accordance with the original agreement. The Company recognized revenue of $25,000 and $33,335 in the three months ended September 30, 2010 and 2009, respectively, and $36,828 and $100,004 in the nine months ended September 30, 2010 and 2009, respectively, related to this agreement.
|
8.
|
Preferred Stock
|
The Company has authorized 25,000,000 shares of preferred stock, of which 9,750,000 are designated Series A Preferred and 10,000,000 are designated Series A-1 Convertible Preferred Stock, $0.01 par value (“Series A-1 Preferred”). At September 30, 2010 and December 31, 2009, 4,060,397 shares of Series A-1 Preferred were issued and outstanding.
In the quarter ended September 30, 2009, the Company issued 4,060,397 shares of Series A-1 Preferred to certain holders of the Company’s promissory notes in exchange for the cancellation of their respective notes and the releases of any security interests.
On July 30, 2010, the Board of Directors of the Company declared a stock dividend on the Series A-1 Preferred. The certificate of designation with respect to the Series A-1 Preferred provides for the payment of dividends on the Series A-1 Preferred at a rate of 8% per annum. The Company is therefore obligated to issue 324,831 shares of Series A-1 Preferred in connection with the required dividend payment.
On November 19, the Company filed a Certificate of Withdrawal of the Certificates of Designation establishing the Series A Preferred and the Series A-1 Preferred, and a Certificate of Designation designating 20,500,000 shares of its preferred stock as Series B Convertible Preferred Stock, $0.01 par value (“Series B Preferred”). The Series B Preferred has no voting rights other than as a class as related to the ownership of Series B Preferred. See Note 11.
|
9.
|
Common Stock, Options and Warrants
|
The Company has authorized 150,000,000 shares of its common stock, $0.01 par value. In December 2009, the shareholders of the Company approved an increase in the number of authorized common stock from 75,000,000 to 150,000,000 shares. The increase took effect in January 2010.
In the first nine months of 2010, no common stock, or options to purchase common stock were issued or granted. In August 2010, warrants to purchase 675,000 shares of the Company’s common stock were issued to a former executive in connection with his separation agreement. The warrants were issued in exchange for the cancellation of 375,000 outstanding stock options and 300,000 warrants.
2007 Incentive and Non-Qualified Stock Option Plan
The fair value of options granted under the Company’s 2007 Incentive and Non-Qualified Stock Option Plan is recorded as compensation expense over the vesting period, or, for performance based awards, the expected service term. Total compensation cost related to the Company’s employee options was $7,949 and $38,941 for the three and nine months ended September 30, 2010, and $136,000 and $223,704 for the three and nine months ended September 30, 2009, respectively.
|
10.
|
Commitments and Contingencies
|
QN Diagnostics and PRIA Diagnostics
The Company is committed to further capital contributions to QND aggregating $1.55 million, consisting of: (i) payment of milestone payments with PRIA Diagnostics in Company common stock (fair value of $750,000); (ii) transfer of fixed assets with a fair value of $100,000 at QND’s discretion; and (iii) a $700,000 sustaining capital contribution as required by QND. Subsequent sustaining capital contributions will be made by the Company and NuRx on an equal basis. Should either party fail to make sustaining contributions as required, such party would be subject to a reduction in ownership interest and loss of a board seat. See Notes 3, 4 and 11.
Operating Leases
The Company leases office space and research and development lab space under operating leases that expire at various times through 2011. Some of these leases include allocations for common expenses subject to future adjustment. Rent expense related to operating leases was approximately $28,980 and $33,602 for the three months ended September 30, 2010 ad 2009, respectively. Rent expense related to operating leases was approximately $95,447 and $99,103 for the nine months ended September 30, 2010 and 2009, respectively. In connection with facility leases, the Company has made security deposits totaling $10,310, which are included in long-term assets in the balance sheet. Future minimum lease obligations for operating leases as of September 30, 2010 are estimated as follows:
|
Remainder of year ending December 31, 2010
|
$
|
38,580
|
||
|
Year ending December 31, 2011
|
57,600
|
|||
|
Total minimum payments
|
$
|
96,180
|
In February 2007, the Company began subleasing research and development lab space under the non-cancellable operating leases. The sublease can be terminated upon ninety days notice by either party, and a $2,000 security deposit is being held by the Company pursuant to the terms of the lease. Sublease income was $2,750 and $5,138 for the three months ended September 30, 2010 and 2009, respectively. Sublease income was $11,000 and $16,673 for the nine months ended September 30, 2010 and 2009, respectively. Sublease income is recorded in other income.
Executive Employment Agreements
We have entered into employment agreements with key executives that provide for the continuation of salary to the executives if terminated for reasons other than cause or in connection with a change in control of the Company, as defined in those agreements. In August, 2010, two key executives terminated their relationship with the Company, resulting in the accrual of $180,000 in liabilities at September 30, 2010. The Company is currently evaluating its obligations under certain employment agreements to determine whether to adjust its accruals for termination-related expenses.
Litigation Contingencies
On August 24, 2010, NuRx filed an expedited action in the Delaware Court of Chancery relating to the QND, naming as a defendant one of the Company’s board members, Dr. William Fleming. On October 20, 2010, on its own motion to intervene, the Company was added as a defendant. The action is captioned NuRx v. Fleming/QuantRx and QN Diagnostics (nominally), C.A. No. 5755 (Del. Chancery Ct.). NuRx seeks declaratory and injunctive relief based on the following: (i) the alleged necessity of additional capital contributions; (ii) the Company’s appointee to the board of QND rejected the capital call, resulting in a deadlock; and (iii) the allegation that Company has not met a “milestone” payment required by the Development Agreement, which would give NuRx the right to have a Company appointed board member removed and replaced with a member designated by NuRx. The Company and Dr. Fleming maintain that the capital contribution was agreed to subject to the Company receiving credit toward the contribution for hundreds of thousands of dollars worth of services that have not been paid for by QND, and that all milestones have been met. The Company seeks declaration of its right to maintain its share of seats on QND’s management board. The action is currently stayed by mutual agreement of the parties to allow the parties to explore an amicable resolution of the proceedings.
|
11.
|
Subsequent Events
|
Sale of FluoraPharma
During October 2010, the Company entered into certain agreements with certain investors, pursuant to which the Company exchanged substantially all of its equity interest in FluoraPharma and shares of newly created Series B Preferred with a stated value of approximately $177,000, for and in consideration for cash aggregating $812,079, and the termination of certain shares of Series A-1 Preferred with a stated value of approximately $4.45 million ("the Exchange"). Contemporaneously with the consummation of the Exchange, on November 19, 2010, the Company filed a Certificate of Withdrawal of the Certificates of Designations of the Series A Preferred and the Series A-1 Preferred with the Nevada Secretary of State, as no shares or such preferred stock were issued and outstanding following the Exchange.
ITEM 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion of our financial condition should be read in conjunction with the financial statements and notes to financial statements included elsewhere in this filing. The following discussion (as well as statements in Item 1 above and elsewhere) contains forward-looking statements within the meaning of the Private Securities Litigation Act of 1995 that involve risks and uncertainties. Some or all of the results anticipated by these forward-looking statements may not occur. Forward-looking statements involve known and unknown risks and uncertainties including, but not limited to, trends in the biotechnology, healthcare, and pharmaceutical sectors of the economy; competitive pressures and technological developments from domestic and foreign genetic research and development organizations which may affect the nature and potential viability of our business strategy; and private or public sector demand for products and services similar to what we plan to commercialize. We disclaim any intention or obligation to publicly announce the results of any revisions to any of the forward-looking statements contained herein to reflect future events or developments.
Unless otherwise indicated or the context otherwise requires, all references in this report to “we,” “our,” “ours,” “us,” the “Company” or similar terms refer to QuantRx Biomedical Corporation, a Nevada corporation.
Overview
QuantRx Biomedical Corporation was incorporated on December 5, 1986 in the State of Nevada. The Company’s principal business office is located at 5920 NE 112th Avenue, Portland, Oregon.
The Company is a broad-based diagnostics company focused on the development and commercialization of innovative point-of-care diagnostic products for both the human and veterinary laboratory and POC markets based on its patented technology platforms for the worldwide healthcare industry. The Company’s overall growth strategy is to: (i) leverage its broad-based intellectual property (IP) and patent portfolio to develop new and innovative diagnostic products; (ii) commercialize products through corporate partners and distributors, and Internet sales; and (iii) contract manufacturing to third parties while maintaining control over the manufacturing process.
QN Diagnostics
On July 30, 2009, the Company and NuRx Pharmaceuticals, Inc. (“NuRx”) entered into agreements to form QN Diagnostics, LLC (“QND”), a Delaware limited liability company. Pursuant to the agreements, the Company contributed certain intellectual property and other assets related to its lateral flow strip technology and related lateral flow strip reader technology with a fair value of $5.45 million, and NuRx contributed $5.0 million in cash to QND. Following the respective contributions by NuRx and the Company to QND, NuRx and the Company each own a 50% interest in QND. The purpose of the joint venture is to develop and commercialize products incorporating the lateral flow strip technology and related lateral flow strip readers.
QND is currently managed by a board consisting of two Company designees and two NuRx designees. Subject to certain exceptions, board decisions are made by majority vote, provided that the Company and NuRx have veto rights with respect to certain matters. Since the Company does not have control of QND, the Company accounts for the investment in QND utilizing the equity method of accounting.
Under the terms of the agreements, QND made a $2.0 million cash distribution to the Company. The Company is committed to further capital contributions aggregating $1.55 million, comprised of: payment of milestone payments with PRIA Diagnostics (see Note 4 of the financial statements) in Company common stock (fair value of $750,000); transfer of fixed assets with a fair value of $100,000 at QND’s discretion; and a $700,000 sustaining capital contribution as required by QND. Subsequent sustaining capital contributions will be made by the Company and NuRx on an equal basis.
The Company and QND also entered into a one year Development and Services Agreement on July 30, 2009 (“Development Agreement”), pursuant to which QND pays a monthly fee to the Company in exchange for the Company providing all services related to the development, regulatory approval and commercialization of lateral flow products. The revenues recognized by the Company associated with the Development Agreement in the three months ended September 30, 2010 and 2009 were $159,069 and $880,341, respectively. The expenses related thereto for the three months ended September 30, 2010 and 2009 were $345,343 and $880,341, respectively. The revenues for the nine months ended September 30, 2010 and 2009 were $1,429,960 and $880,341, respectively. The expenses related thereto for the nine months ended September 30, 2010 and 2009 were $1,615,887 and $880,341, respectively. Expenses are included in each appropriate expense category in the statement of operations. As of September 30, 2010 and December 31, 2009, deferred revenues related to the Development Agreement were $0 and $337,160, respectively. As of September 30, 2010 and December 31, 2009, accounts receivable from QND related thereto were $414,719 and $31,500, respectively.
On July 20, 2010, the Company notified NuRx that NuRx was in material breach of the Development Agreement, and had 60 days from the date of the notification to cure such breach. The notification is related to nonpayment of fees in accordance with the Development Agreement between the Company and QND. Should the breach remain uncured, the Company reserved the right to terminate the Development Agreement.
On August 24, 2010, NuRx filed suit naming as a defendant Dr. William Fleming, a member of the Company’s board of Directors. On October 20, 2010, on its own motion to intervene, the Company was added as a defendant. The suit, more fully discussed in Note 10, is based on allegations that QND is deadlocked over the Company’s rejection of a required capital call, and NuRx’s allegation that the Company has not met a “milestone” requirement in the Development Agreement, that would give NuRx the right to have a Company appointed board member removed and replaced with a member appointed by NuRx. The suit is currently stayed by mutual agreement of the parties to allow the parties to explore an amicable resolution of the proceedings.
During the quarter ended June 30, 2010, the Company submitted an application for 510(k) clearance to the FDA for the Q-Reader™ thyroid testing system following the completion of clinical testing. This regulatory stage follows the completion of studies showing that the innovative Q-Reader thyroid testing system is capable of providing healthcare practitioners with laboratory level quantitative results within minutes, rather than waiting for results to be returned from a commercial laboratory. The 510(k) submission, together with the completion of a pre-production sample of the Q-Reader, satisfied the final two milestones contained in QND’s operating agreements. Subsequently, the FDA indicated that it could not determine whether the Company’s submission was substantially equivalent to a legally marketed device based solely on the information provided to it by the Company, and has requested certain additional information by December 20, 2010. Based on this feedback and the Company's current financial resources, management believes it is advisable to introduce the Q-Reader thyroid testing system into the veterinary market. The Company intends to coordinate with NuRx in pursuing the veterinary market, which does not require FDA clearance. Further, the Company has determined that responding to the FDA by the December 20th response date is currently not feasible and the initial filing with the FDA will be deemed withdrawn at that time. If the Company, in consultation with NuRx, determines that it is in the best interests of the Company and QND, the Company may elect to re-file the application with the FDA during 2011 with the additional requested information.
FluoraPharma
On May 5, 2009, the Company and FluoraPharma reorganized their relationship by terminating their investment agreement and related agreements. The termination of these agreements, which were originally executed on March 10, 2006, allowed FluoraPharma to close an equity financing with third party investors. In conjunction with the termination of these agreements and the additional investment in FluoraPharma, the Company agreed to convert all outstanding receivables from FluoraPharma, consisting of previously issued notes and related accrued interest and advances in the aggregate amount of $1,568,567, into 1,148,275 shares of common stock of FluoraPharma. As a result of these transactions and the third party investment, the Company’s ownership interest in FluoraPharma’s issued and outstanding capital stock was reduced to a non-controlling interest, which resulted in the deconsolidation of FluoraPharma as a subsidiary of the Company. Subsequent to the termination of the agreements between the Company and FluoraPharma, the Company has no continuing obligations or commitments to FluoraPharma.
At May 5, 2009, the Company’s remaining net basis of the investment in FluoraPharma, inclusive of receivables from FluoraPharma, was $43,286, after taking into account previously recorded losses of $5,056,304 ($231,046 in the first quarter of 2009; $272,579 through deconsolidation) related to the consolidated results of FluoraPharma. These losses have been included in our consolidated financial statements commencing April 1, 2007, the original date of consolidation, through May 4, 2009, and are net of losses allocated to the then non-controlling interests as applicable. On May 5, subsequent to the execution of the aforementioned transactions which led to the deconsolidation of FluoraPharma, the Company’s ownership of the outstanding capital stock of FluoraPharma was reduced to a non-controlling interest of 45.55%. At deconsolidation the fair market value of the Company’s remaining non-controlling interest in FluoraPharma was $842,876, based on the third party investment; however, FluoraPharma had a deficit equity balance, which resulted in the Company writing off the remaining basis in the investment of $43,286 and recording a loss from deconsolidation of $43,286. The Company has reflected the results of its former subsidiary as a single line item as of January 1, 2009. The Company’s allocation of FluoraPharma’s net loss for the period commencing May 5, 2009 through June 30, 2010, was not recorded ($420,000), since the remaining investment in FluoraPharma had a carrying value of $0 as of the deconsolidation of FluoraPharma at May 5, 2009.
During the quarter ended September 30, 2010, the Company entered into certain agreements with certain investors pursuant to which the Company sold 233,333 shares of common stock of FluoraPharma to such investors at a price of $0.75 per share, resulting in aggregate proceeds of $175,000. As a result, the Company recorded a gain on disposition of $175,000. In the nine months ended September 30, 2010, the Company sold 1,234,500 shares for aggregate proceeds of $926,250, resulting in gains on disposition of $926,250. As of September 30, 2010, $38,000 related to the agreements is reflected as “other receivable.”
Effective May 5, 2009, our financial statements reflect our investment in FluoraPharma under the equity method of accounting. As of September 30, 2010 and December 31, 2009, the Company owned approximately 26.8% and 39.81%, respectively, of the issued and outstanding capital stock of FluoraPharma. However, at September 30, 2010, due to FluoraPharma’s issuance of a separate class of common stock in 2009, the Company held 11.8% of the voting stock of FluoraPharma. Subsequent to September 30, 2010, the Company divested substantially all of its equity interest in FluoraPharma.
Consolidated Results of Operations
Comparison of the Three Months Ended September 30, 2010 to the Three Months Ended September 30, 2009
Total revenues for the three months ended September 30, 2010 were $190,008 as compared to $989,298 for the three months ended September 30, 2009. This $799,290 decrease in total revenues is primarily due to decreases in revenues pursuant to the terms of the Development Agreement with QND of $721,274.
Sales, general and administrative expense for the three months ended September 30, 2010 was $472,614 as compared to $834,792 for the three months ended September 30, 2009. This $367,734 decrease in sales, general and administrative expense is primarily due to decreased personnel expenses. The decrease in sales, general and administrative expense is partially offset by severance expense to the Company's former CFO of $180,000 accrued during the quarter ended September 30, 2010. The Company is currently evaluating its obligations under certain employment agreements to determine whether any adjustments to such accruals are necessary.
Professional fees for the three months ended September 30, 2010 were $125,556 as compared to $222,480 for the three months ended September 30, 2009. The decrease of $96,924 in professional fees is primarily due to decreased legal and financial advisory consulting fees. Professional fees include the costs of legal, consulting and auditing services provided to the Company.
Research and development expense for the three months ended September 30, 2010 were $309,784 as compared to $910,435 for the three months ended September 30, 2009. The decrease of $600,651 in research and development expense is primarily due to decreased consulting, personnel and supply and material expenses related to the Development Agreement with QND
The Company’s net loss for the three months ended September 30, 2010 was $561,038, as compared to $254,308 in net loss for the three months ended September 30, 2009. The $306,730 increase in net loss for the three months ended September 30, 2010 is primarily due to lower revenues of $799,290 related to the Development Agreement with QND, partially offset by lower costs of operations described above, and a $195,251 gain on disposition of common stock of our former subsidiary.
Comparison of the Nine Months Ended September 30, 2010 to the Nine Months Ended September 30, 2009
Total revenues for the nine months ended September 30, 2010 were $1,490,939 as compared to $1,321,200 for the nine months ended September 30, 2009. This $169,739 increase in total revenues is primarily due to increased related party revenues of $549,619 under the terms of the Development Agreement with QND, partially offset by decreased revenues of $380,480 due to lower revenues from the Company's medical diagnostic products.
Sales, general and administrative expense for the nine months ended September 30, 2010 was $1,055,717 as compared to $1,701,982 for the nine months ended September 30, 2009. This $664,265 decrease in sales, general and administrative expense is primarily due to decreased personnel expenses. The overall decrease in sales, general and administrative expense is partially offset by severance expense to the Company's former CFO of $180,000 accrued in the quarter.
Professional fees for the nine months ended September 30, 2010 were $553,986 as compared to $311,649 for the nine months ended September 30, 2009. The increase of $242,337 in professional fees is primarily due to increased legal and financial advisory consulting fees. Professional fees include the costs of legal, consulting and auditing services provided to the Company.
Research and development expense for the nine months ended September 30, 2010 were $1,443,217 as compared to $1,194,713 for the nine months ended September 30, 2009. The increase of $248,504 in research and development expense is primarily due to increased consulting, personnel and supply and material expenses related to the Development Agreement with QND.
The Company’s net loss for the nine months ended September 30, 2010 was $725,130, as compared to $2,145,340 in net loss for the nine months ended September 30, 2009. The $1,415,910 decrease in net loss in the 2010 period is primarily due higher revenues from the contract development agreement with QND of $549,619 and a $946,501 gain on disposition of common stock of our former subsidiary.
Liquidity and Capital Resources
As of September 30, 2010, the Company had cash and cash equivalents of $49,607, as compared to cash and cash equivalents of $376,211 as of December 31, 2009. The net decrease in cash of $326,604 for the nine months ended September 30, 2010, is primarily attributable to net cash used for operating activities of $1,123,105 offset by $796,501 in cash proceeds received in the nine months ended September 30, 2010 related to the sale of stock in our former subsidiary. The Company has used its proceeds from dispositions as well as its revenues to fund current operating expenses and investments intended to strategically expand our platforms and technologies.
The Company has not generated sufficient revenues from operations or its investment in IP to meet its operating expenses. The Company has therefore historically financed its operations primarily through issuances of equity and debt securities, and, during the quarters ended June 30 and September 30, 2010, through the sale of equity interests in FluoraPharma. In the past, the Company has also provided for its cash needs by issuing common stock, options and warrants for certain operating costs, including consulting and professional fees.
While equity and debt financing has historically provided for the Company’s working capital needs, including capital necessary to fund the development and commercialization of the Company’s lateral flow based products, no assurances can be given that such financing will continue to be available to the Company in the future. The Company has also actively reduced operating expenses, has recently consolidated its operations in Portland, Oregon, and intends to restructure certain of its liabilities in order to continue as a going concern. In the event the Company is unable to secure additional financing, or is otherwise unsuccessful in restructuring certain of its liabilities, the Company will be unable to continue as a going concern.
Off-Balance Sheet Arrangements
As described above, on July 30, 2009, the Company formed a joint venture with NuRx Pharmaceuticals, Inc., whereby, pursuant to the terms of the operating agreements, each member will be required to make sustaining capital contributions from time to time as the Board of the joint venture determines is necessary. Should the Board of the joint venture determine that additional capital contributions are required, such sustaining capital contributions will be made by the Company and NuRx on an equal basis provided that the Company solely will be responsible for making a sustaining capital contribution with respect to the first $700,000 determined to be required by the Board of the joint venture.
We have not entered into any other transactions with unconsolidated entities in which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.
Critical Accounting Policies
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin Topic 13 when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is fixed or determinable and collection is probable. The Company assesses whether the fee is fixed and determinable based on the payment terms associated with the transaction. If a fee is based upon a variable such as acceptance by the customer, the Company accounts for the fee as not being fixed and determinable. In these cases, the Company defers revenue and recognizes it when it becomes due and payable. Up-front engagement fees are recorded as deferred revenue and amortized to income on a straight-line basis over the term of the agreement, although the fee is due and payable at the time the agreement is signed or upon annual renewal. Payments related to substantive, performance-based milestones in an agreement are recognized as revenue upon the achievement of the milestones as specified in the underlying agreement when they represent the culmination of the earnings process.
The Company assesses the probability of collection based on a number of factors, including past transaction history with the customer and the current financial condition of the customer. If the Company determines that collection of a fee is not reasonably assured, revenue is deferred until the time collection becomes reasonably assured. Significant management judgment and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.
The Company recognizes revenue from nonrefundable minimum royalty agreements from distributors or resellers upon delivery of product to the distributor or reseller, provided no significant obligations remain outstanding, the fee is fixed and determinable, and collection is probable. Once minimum royalties have been received, additional royalties are recognized as revenue when earned based on the distributor’s contractual reporting obligations. The Company is able to recognize minimum royalty payments on an accrual basis, as they are specified in the contract. However, since the Company cannot forecast product sales by licensees, royalty payments that are based on product sales by the licensees are not determinable until the licensee has completed their computation of the royalties due and/or remitted their cash payment to us. Should information on licensee product sales become available so as to enable the Company to recognize royalty revenue on an accrual basis, materially different revenues and results of operations could occur.
Our strategy includes entering into collaborative agreements with strategic partners for the development, commercialization and distribution of our product candidates. Such collaboration agreements may have multiple deliverables. In arrangements with multiple deliverables where we have continuing performance obligations, contract, milestone and license fees are recognized as revenue together with any up-front payments over the term of the arrangement as performance obligations are completed, unless the deliverable has stand-alone value and there is objective, reliable evidence of fair value of the undelivered element in the arrangement. In the case of an arrangement where it is determined there is a single unit of accounting, all cash flows from the arrangement are considered in the determination of all revenue to be recognized. Cash received in advance of revenue recognition is recorded as deferred revenue.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. The accounting policies discussed below are considered by management to be the most important to the Company’s financial condition and results of operations, and require management to make its most difficult and subjective judgments due to the inherent uncertainty associated with these matters. All significant estimates and assumptions are developed based on the best information available to us at the time made and are regularly reviewed and adjusted when necessary. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions. Additional information on significant accounting principles is provided in Note 1 of the attached financial statements.
Impairment of Assets
We assess the impairment of long-lived assets, including our other intangible assets, whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments, related primarily to the future profitability and/or future value of the assets. Changes in our strategic plan and/or market conditions could significantly impact these judgments and could require adjustments to recorded asset balances. We hold investments in companies having operations or technologies in areas which are within or adjacent to our strategic focus when acquired, all of which are privately held and whose values are difficult to determine. We record an investment impairment charge if we believe an investment has experienced a decline in value that is other than temporary. Future changes in our strategic direction, adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.
In determining fair value of assets, the Company bases estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets that are not readily apparent from other sources. Actual fair value may differ from management estimates resulting in potential impairments causing material changes to certain assets and results of operations.
Share-Based Payments
We grant options to purchase our common stock to our employees and directors under our stock option plan. We estimate the value of stock option awards on the date of grant using a Black-Scholes pricing model (Black-Scholes model). The determination of the fair value of share-based payment awards on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, and risk-free interest rate. If factors change and we employ different assumptions in future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period.
We determine the fair value of the share-based compensation awards granted to non-employees as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or (2) the date at which the counterparty’s performance is complete.
Estimates of share-based compensation expenses are significant to our financial statements, but these expenses are based on option valuation models and will never result in the payment of cash by us.
The above listing is not intended to be a comprehensive list of all of our accounting policies. In most cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States.
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ITEM 4.
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Controls and Procedures
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(a)
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Evaluation of Disclosure Controls and Procedures
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The Company maintains disclosure controls and procedures that are designed to ensure that information required to be disclosed in our SEC reports is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and that such information is communicated to our management including our Chief Executive Officer and Principal Financial and Accounting Officer as appropriate. With the supervision and with the participation of our management, including the Chief Executive Officer and Principal Financial and Accounting Officer, we have evaluated the effectiveness of our disclosure controls and procedures (as defined under Exchange Act Rules 13a-15(e) and 15(d)-15(e)), as of the end of the period covered by this report. Based on that evaluation, our Chief Executive Officer and Chief Financial and Accounting Officer have concluded that these disclosure controls and procedures were effective as of September 30, 2010.
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(b)
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Changes in Internal Control over Financial Reporting
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During the period covered by this quarterly report on Form 10-Q, there were no changes in our internal control over financial reporting that have materially affected, or are reasonably likely to affect, our internal control over financial reporting.
Given the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances of fraud, if any, will have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of simple error or mistake. Further, the design of a control system must reflect the fact that there are resource constraints, and that the benefits of a control system must be considered relative to its cost. The design of any system of controls is also based in part on certain assumptions regarding the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all potential future conditions.
PART II - OTHER INFORMATION
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ITEM 1.
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Legal Proceedings.
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On August 24, 2010, NuRx filed an expedited action in the Delaware Court of Chancery relating to QND, naming as a defendant one of the Company’s board members, Dr. William Fleming. On October 20, 2010, on its own motion to intervene, the Company was added as a defendant. The action is captioned NuRx v. Fleming/QuantRx and QN Diagnostics (nominally), C.A. No. 5755 (Del. Chancery Ct.). NuRx seeks declaratory and injunctive relief based on the following: (i) the alleged necessity of additional capital contributions; (ii) the Company’s appointee to the board of QND rejected the capital call, resulting in a deadlock; and (iii) the allegation that Company has not met a “milestone” payment required by the Development Agreement, which would give NuRx the right to have a Company appointed board member removed and replaced with a member designated by NuRx. The Company and Dr. Fleming maintain that the capital contribution was agreed to subject to the Company receiving credit toward the contribution for hundreds of thousands of dollars worth of services that have not been paid for by QND, and that all milestones have been met. The Company seeks declaration of its right to maintain its share of seats on QND’s management board. The action is currently stayed by mutual agreement of the parties to allow the parties to explore an amicable resolution of the proceedings.
As of the date hereof, there are no other material pending legal proceedings to which we are a party to or of which any of our property is the subject.
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ITEM 2.
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Unregistered Sales of Equity Securities, and Use of Proceeds
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As of the date hereof, there were no additional sales of unregistered securities other than as reported in prior reports on Forms 10-K, 10-Q or 8-K.
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ITEM 3.
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Defaults Upon Senior Securities
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None.
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ITEM 4.
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Reserved
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ITEM 5.
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Other Information
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None.
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ITEM 6.
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Exhibits
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Exhibit
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Description
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31
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Certification of Chief Executive Officer and Principal Financial and Accounting Officer required under Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934, as amended.
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32*
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Certification of Chief Executive Officer and Principal Financial and Accounting Officer required under Rule 13a-14(a) or Rule 15d-14(a) of the Securities and Exchange Act of 1934, as amended, and 18 U.S.C. Section 1350.
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*The certifications attached as Exhibits 32.1 and 32.2 accompany this Quarterly Report on Form 10-Q pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 and shall not be deemed “filed” by QuantRx Biomedical Corporation for purposes of Section 18 of the Exchange Act, or otherwise subject to the liability of that section.
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.
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QuantRx Biomedical Corporation
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Date: November 19, 2010
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/s/ Barry J. London
Barry J. London, Chief Executive Officer
(Principal Executive, Financial and Accounting Officer)
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