10-Q 1 tm2029669-1_10q.htm FORM 10-Q

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

FORM 10-Q

 

x QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the quarterly period ended: August 31, 2020

 

or

 

¨ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from ____________ to _____________

 

Commission File Number: 000-55535

 

Q BIOMED INC.
(Exact name of registrant as specified in its charter)

 

Nevada 30-0967746
(State or other jurisdiction of incorporation or organization) (I.R.S. Employer Identification No.)

 

c/o Ortoli Rosenstadt LLP

366 Madison Avenue, 3rd Floor

New York, NY 10017

(Address of principal executive offices)

 

(212) 588-0022
(Registrant’s telephone number, including area code)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class Symbol Name of each exchange on which registered
None None None

 

Indicate by check mark whether the registrant (1) filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 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. Yes x No ¨

 

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files). Yes x No ¨

 

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

 

Large accelerated filer ¨    Accelerated filer ¨ 
Non-accelerated filer x    Smaller reporting company x 
      Emerging growth company ¨ 

 

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

 

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

 

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

 

Common Stock, $0.001 par value 23,410,573 shares
(Class) (Outstanding as at October 12, 2020)

 

 

 

 

 

Q BIOMED INC.

Table of Contents

 

    Page  
PART I - FINANCIAL INFORMATION     2  
         
Item 1. Condensed Consolidated Financial Statements (Unaudited)     2  
         
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations     17  
         
Item 3. Quantitative and Qualitative Disclosure About Market Risk     24  
         
Item 4. Controls and Procedures     24  
         
PART II - OTHER INFORMATION     24  
         
Item 1. Legal Proceedings     24  
         
Item 1A. Risk Factors     24  
         
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds     24  
         
Item 3. Defaults Upon Senior Securities     25  
         
Item 4. Mine Safety Disclosures     25  
         
Item 5. Other Information     25  
         
Item 6. Exhibits     25  
         
SIGNATURES     26  

 

 

 

 

PART I - FINANCIAL INFORMATION

 

Item 1. Condensed Consolidated Financial Statements

 

Q BIOMED INC.
Condensed Consolidated Balance Sheets
(Unaudited)

 

   As of August 31,   As of November 30, 
   2020   2019 
ASSETS          
Current assets:          
Cash  $1,326,359   $172,636 
Accounts receivable   12,300    - 
Prepaid expenses and other current assets   133,964    17,662 
Total current assets   1,472,623    190,298 
Intangible assets, net   412,500    450,000 
Total Assets  $1,885,123   $640,298 
           
LIABILITIES AND STOCKHOLDERS' DEFICIT          
Current liabilities:          
Accounts payable  $357,973   $652,051 
Accrued expenses   1,265,571    1,145,660 
Accrued expenses - related party   4,000    7,500 
Accrued interest payable   40,876    189,801 
Convertible note payable, net   -    3,243,292 
Total current liabilities   1,668,420    5,238,304 
           
Long-term liabilities:          
Convertible notes payable, net   90,096    447,335 
Total long-term liabilities   

90,096

    447,335 
Total Liabilities   1,758,516    5,685,639 
           
Commitments and Contingencies (Note 6)          
           
Stockholders' Equity (Deficit):          
Preferred stock, $0.001 par value; 100,000,000 shares authorized as of August 31, 2020 and November 30, 2019          
Convertible Series A, 500,000 shares designated - 227,998 and 0 shares issued and outstanding at August 31, 2020 and November 30, 2019, respectively   2,189,846    - 
Convertible Series B, 1,000,000 shares designated - 503,134 and 0 shares issued and outstanding at August 31, 2020 and November 30, 2019, respectively   5,024,973    - 
Common stock, $0.001 par value; 250,000,000 shares authorized; 22,774,232 and 19,709,068 shares issued and outstanding as of August 31, 2020 and November 30, 2019, respectively   22,774    19,709 
Additional paid-in capital   45,345,017    37,328,827 
Accumulated deficit   (52,456,003)   (42,393,877)
Total Stockholders' Equity (Deficit)   126,607    (5,045,341)
Total Liabilities and Stockholders' Equity (Deficit)  $1,885,123   $640,298 

 

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

 

2

 

 

Q BioMed Inc.
Condensed Consolidated Statements of Operations
(Unaudited)

   For the Three Months ended   For the Nine Months ended 
   August 31, 2020   August 31, 2019   August 31, 2020   August 31, 2019 
Net Sales  $15,000   $-   $30,000   $- 
Cost of sales   158,516    -    193,211    - 
Gross loss   (143,516)   -    (163,211)   - 
Operating expenses:                    
General and administrative expenses   1,491,613    968,383    8,659,819    3,406,853 
Research and development expenses   613,707    786,600    896,908    2,672,715 
Total operating expenses   2,105,320    1,754,983    9,556,727    6,079,568 
Loss from operations   (2,248,836)   (1,754,983)   (9,719,938)   (6,079,568)
Other (income) expenses:                    
Interest expense   9,025    476,627    291,626    1,137,271 
Change in fair value of embedded derivatives   -    118,000    19,163    396,000 
Loss on induced conversion of debt   -    197,078    -    197,078 
Loss on debt extinguishment   -    -    31,399    - 
Total other expenses   9,025    791,705    342,188    1,730,349 
Net loss   (2,257,861)   (2,546,688)   (10,062,126)   (7,809,917)
Accumulated dividend on convertible preferred stock   (146,227)   -    (230,699)   - 
Deemed dividend on convertible preferred stock due to beneficial conversion feature   -    -    (482,945)   - 
Net loss attributable to common stockholders  $(2,404,088)  $(2,546,688)  $(10,775,770)  $(7,809,917)
                     
Net loss per share - basic and diluted  $(0.11)  $(0.17)  $(0.50)  $(0.54)
                     
Weighted average shares outstanding, basic and diluted   22,433,141    14,756,302    21,731,159    14,580,630 

 

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

 

3

 

 

Q BIOMED INC.
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
(Unaudited)

 

   For the Three Months Ended August 31, 2020 
   Series A Preferred Stock   Series B Preferred Stock   Common Stock   Additional Paid   Accumulated   Total Stockholders' 
   Shares   Amount   Shares   Amount   Shares   Amount   in Capital   Deficit   Equity (Deficit) 
Balance as of June 1, 2020   227,998   $2,144,246    503,134   $4,924,346    22,650,685   $22,650   $45,219,938   $(50,198,142)  $2,113,038 
Accumulated dividend on convertible preferred stock   -    45,600    -    100,627    -    -    (146,227)   -    - 
Share based compensation for services   -    -    -    -    123,547    124    271,306    -    271,430 
Net loss   -    -    -    -    -    -    -    (2,257,861)   (2,257,861)
Balance as of August 31, 2020   227,998   $2,189,846    503,134   $5,024,973    22,774,232   $22,774   $45,345,017   $(52,456,003)  $126,607 

 

   For the Nine Months Ended August 31, 2020 
   Series A Preferred Stock   Series B Preferred Stock   Common Stock   Additional Paid   Accumulated   Total Stockholders' 
   Shares   Amount   Shares   Amount   Shares   Amount   in Capital   Deficit   Equity (Deficit) 
Balance as of December 1, 2019   -   $-    -   $-    19,709,068   $19,709   $37,328,827   $(42,393,877)  $(5,045,341)
Issuance of Series A and Series B preferred stock for cash   100,000    975,000    300,000    2,975,000    -    -    -    -    3,950,000 
Issuance of Series A and Series B preferred stock to convert notes payable and accrued interest   127,998    1,279,980    203,134    2,031,340    -    -    -    -    3,311,320 
Offering cost related issuance of Series A and Series B preferred stock   -    (138,600)   -    (138,600)   -    -    277,200    -    - 
Beneficial conversion feature of Series A convertible preferred stock   -    (252,786)   -    -    -    -    252,786    -    - 
Deemed dividends related to immediate accretion of beneficial conversion feature of Series A convertible preferred stock   -    252,786    -    -    -    -    (252,786)   -    - 
Beneficial conversion feature of Series B convertible preferred stock   -    -    -    (230,159)   -    -    230,159    -    - 
Deemed dividends related to immediate accretion of beneficial conversion feature of Series B convertible preferred stock   -    -    -    230,159    -    -    (230,159)   -    - 
Accumulated dividend on convertible preferred stock   -    73,466    -    157,233    -    -    (230,699)   -    - 
Issuance of common stock to convert notes payable   -    -    -    -    2,811,198    2,811    2,732,489    -    2,735,300 
Cashless warrants exercise   -    -    -    -    20,860    21    (21)   -    - 
Share based compensation for services   -    -    -    -    233,106    233    4,982,213    -    4,982,446 
Share based compensation related to warrants modification   -    -    -    -    -    -    255,008    -    255,008 
Net loss   -    -    -    -    -    -    -    (10,062,126)   (10,062,126)
Balance as of August 31, 2020   227,998   $2,189,846    503,134   $5,024,973    22,774,232   $22,774   $45,345,017   $(52,456,003)  $126,607 

 

4

 

 

Q BIOMED INC.
Condensed Consolidated Statements of Changes in Shareholders’ Equity (Deficit)
(Unaudited)

 

   For the Three Months Ended August 31, 2019 
   Common Stock   Additional Paid in   Accumulated   Total Stockholders' 
   Shares   Amount   Capital   Deficit   Deficit 
Balance as of June 1, 2019   14,677,136   $14,676   $33,002,224   $(37,377,376)  $(4,360,476)
Share based compensation for services   139,641    141    340,986    -    341,127 
Issuance of common stock to partially convert notes payable   146,863    147    293,579    -    293,726 
Issuance of common stock as inducement to partially convert notes payable   187,693    188    196,890    -    197,078 
Issuance of common stock to defer monthly contingent payment of convertible note   30,894    30    32,408    -    32,438 
Net loss   -    -    -    (2,546,688)   (2,546,688)
Balance as of August 31, 2019   15,182,227   $15,182   $33,866,087   $(39,924,064)  $(6,042,795)

 

   For the Nine Months Ended August 31, 2019 
   Common Stock   Additional Paid in   Accumulated   Total Stockholders' 
   Shares   Amount   Capital   Deficit   Deficit 
Balance as of December 1, 2018   14,290,236   $14,290   $31,994,129   $(32,114,147)  $(105,728)
Share based compensation for services   526,541    527    1,349,081    -    1,349,608 
Issuance of common stock to partially convert notes payable   146,863    147    293,579    -    293,726 
Issuance of common stock as inducement to partially convert notes payable   187,693    188    196,890    -    197,078 
Issuance of common stock to defer monthly contingent payment of convertible note   30,894    30    32,408    -    32,438 
Net loss   -    -    -    (7,809,917)   (7,809,917)
Balance as of August 31, 2019   15,182,227   $15,182   $33,866,087   $(39,924,064)  $(6,042,795)

 

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

 

5

 

 

 

 

 

Q BIOMED INC.
Condensed Consolidated Statements of Cash Flows
(Unaudited)

 

   For the Nine Months ended 
   August 31, 2020   August 31, 2019 
Cash flows from operating activities:          
Net loss  $(10,062,126)  $(7,809,917)
Adjustments to reconcile net loss to net cash used in operating activities          
Share based compensation for services   4,982,446    1,349,608 
Share based compensation related to warrants modification   255,008    - 
Change in fair value of embedded conversion option   19,163    396,000 
Accretion of debt discount   136,705    907,437 
Amortization expense   37,500    37,500 
Loss on debt extinguishment   31,399    - 
Loss on induced conversion of debt   -    197,078 
Non-cash interest expense   -    32,438 
Changes in operating assets and liabilities:          
Accounts receivable   (12,300)   - 
Prepaid expenses   (116,302)   (16,046)
Accounts payable and accrued expenses   (187,667)   1,646,699 
Accrued expenses - related party   -    17,500 
Accrued interest payable   154,897    165,713 
Net cash used in operating activities   (4,761,277)   (3,075,990)
           
Cash flows from financing activities:          
Proceeds from issuance of Series A and Series B convertible preferred stock, net of issuance costs   3,950,000    - 
Proceeds received from issuance of convertible note   1,965,000    500,000 
Proceeds from investor advances   -    193,250 
Net cash provided by financing activities   5,915,000    693,250 
           
Net increase (decrease) in cash   1,153,723    (2,382,740)
           
Cash at beginning of period   172,636    2,684,413 
Cash at end of the period  $1,326,359   $301,673 
           
Supplemental disclosures:          
Cash paid for interest  $-   $31,524.00 
Cash paid for income taxes  $-   $- 
           
Supplemental disclosures for noncash investing and financing activities:          
Issuance of common stock to convert notes payable and accrued interest  $2,735,300   $293,726.00 
Accrued debt issuance costs  $-   $15,000.00 
Issuance of Series A and Series B preferred stock in exchange for outstanding convertible notes payable and accrued interest  $3,311,320   $- 
Accumulated dividend on convertible preferred stock  $230,699   $- 
Shares payable related to debt modification  $10,000   $- 

 

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

 

6

 

 

Q BIOMED INC.

Notes to Condensed Consolidated Financial Statements

 

Note 1 - Organization of the Company and Description of the Business

 

Q BioMed Inc. (“Q BioMed”) and its wholly owned subsidiaries Q BioMed Cayman SEZC and QBMG Q BioMed Germany UG (collectively, “the Company”), is a biomedical acceleration and development company focused on licensing, acquiring and providing strategic resources to life sciences and healthcare companies. Q BioMed intends to mitigate risk by acquiring multiple assets over time and across a broad spectrum of healthcare related products, companies and sectors. The Company intends to develop these assets to provide returns via organic growth, revenue production, out-licensing, sale or spinoff new public companies.

 

The accompanying condensed consolidated financial statements include the accounts of the Company’s wholly-owned subsidiary. All intercompany balances and transactions have been eliminated in consolidation.

 

Note 2 - Financial Condition, Going Concern and Management Plans

 

The Company currently operates in one business segment focusing on licensing, acquiring and providing strategic resources to life sciences and healthcare companies. The Company is not organized by market and is managed and operated as one business. A single management team reports to the chief operating decision maker, the Chief Executive Officer, who comprehensively manages the entire business. The Company does not currently operate any separate lines of business.

 

The accompanying condensed consolidated financial statements are prepared assuming the Company will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.

 

The Company has and is expected to incur net losses and cash outflows from operations in pursuit of extracting value from its acquired intellectual property. These matters, amongst others, raise doubt about the Company’s ability to continue as a going concern.

 

The Company does not generate material revenue from operations since inception and has limited assets upon which to commence its business operations. Management anticipates that the Company will have to raise additional funds and/or generate significant revenue from drug sales within twelve months to continue operations. Additional funding will be needed to implement the Company’s business plan that includes various expenses such as fulfilling our obligations under licensing agreements, legal, operational set-up, general and administrative, marketing, employee salaries and other related start-up expenses. Obtaining additional funding will be subject to a number of factors, including general market conditions, investor acceptance of our business plan and initial results from our business operations. These factors may impact the timing, amount, terms or conditions of additional financing available to us. If the Company is unable to raise sufficient funds, management will be forced to scale back the Company’s operations or cease its operations.

 

Management has determined that there is substantial doubt about the Company's ability to continue as a going concern within one year after the condensed consolidated financial statements are issued. The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts, or amounts and classification of liabilities that might result from this uncertainty.

 

The impact of the worldwide spread of a novel strain of coronavirus (“COVID-19”) has been unprecedented and unpredictable, but based on the Company’s current assessment, the Company does not expect any material impact on its long-term strategic plans, operations and its liquidity due to the worldwide spread of COVID-19. However, the Company is continuing to assess the effect on its operations by monitoring the spread of COVID-19 and the actions implemented to combat the virus throughout the world and its assessment of the impact of COVID-19 may change. 

 

Note 3 - Summary of Significant Accounting Policies

 

Basis of Presentation

 

The accompanying interim period unaudited condensed consolidated financial statements have been prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting. These condensed consolidated financial statements are unaudited and should be read in conjunction with the audited consolidated financial statements included in the Company’s Annual Report on Form 10-K for the year ended November 30, 2019. Certain disclosures included in the annual financial statements have been condensed or omitted from these financial statements as they are not required for interim financial statements under U.S. GAAP and the rules of the SEC. These unaudited consolidated financial statements reflect all adjustments that are, in the opinion of management, necessary for a fair statement of the results for the interim periods presented. These adjustments are of a normal, recurring nature. Interim period operating results may not be indicative of the operating results for a full year.

 

7

 

 

Q BIOMED INC.

Notes to Condensed Consolidated Financial Statements

 

The Company’s significant accounting policies are disclosed in the audited financial statements for the year ended November 30, 2019 included in the Company’s Form 10-K.

 

Revenue Recognition

 

The core principle of Topic 606 (FASB ASC 606) is that an entity should recognize revenue to depict the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. The revenue recognition guidance contained in Topic 606, to follow the five-step revenue recognition model along with other guidance impacted by this standard: (1) identify the contract with the customer; (2) identify the performance obligations in the contract; (3) determine the transportation price; (4) allocate the transportation price; (5) recognize revenue when or as the entity satisfies a performance obligation. Previous practices were broadly consistent with this approach, and the company determined the amount of revenue based on the amount customer paid or promised to pay.

 

The Company satisfies its performance obligation to deliver products when the customer has received the products, which is when title to the goods has transferred and the customer has control of the products. Payments from customers are generally received within 90 days of when the product is delivered.

 

Because the Company’s agreements have an expected duration of one year or less, the Company has elected the practical expedient in ASC 606-10-50-14(a) to not disclose information about its remaining performance obligations.

 

Concentration of Credit Risk

 

Financial instruments that potentially subject the Company to credit risk consist principally of cash held in banks and accounts receivable. Cash is maintained in accounts with financial institutions, which, at times may exceed the federal depository insurance coverage of $250,000. At August 31, 2020, the Company has not experienced losses on these cash accounts.

 

The Company sells its product through a global marketer, wholesale distributors and specialty contracted pharmacies on 90-day or better payment terms. The Company continuously monitors the creditworthiness of its customers and adheres to internal policies regarding customer credit limits. The Company estimates an allowance for doubtful accounts primarily based on historical payment patterns, aging of receivable balances and general economic conditions. The Company has not experienced any credit losses to-date.

 

Recent Accounting Standards

 

In December 2019, the FASB issued ASU No. 2019-12, “Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes (“ASU 2019-12”), which is intended to simplify various aspects related to accounting for income taxes. ASU 2019-12 removes certain exceptions to the general principles in Topic 740 and also clarifies and amends existing guidance to improve consistent application. This guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2020, with early adoption permitted. The Company is currently evaluating the impact of this standard on its consolidated financial statements and related disclosures.

 

In August 2020, the FASB issued ASU No. 2020-06, Debt—Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40): Accounting for Convertible Instruments and Contracts in an Entity’s Own Equity, which simplifies accounting for convertible instruments by removing major separation models required under current GAAP. The ASU removes certain settlement conditions that are required for equity contracts to qualify for the derivative scope exception and it also simplifies the diluted earnings per share calculation in certain areas. The ASU is effective for the Company on December 1, 2022, Early adoption is permitted, but no earlier than December 1, 2021. The Company is currently evaluating the impact of this standard on its condensed consolidated financial statements and related disclosures.

 

8

 

 

 

Q BIOMED INC.

Notes to Condensed Consolidated Financial Statements

 

Recently Adopted Standards

 

On February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842). Under the new guidance, lessees will be required to recognize all leases (with the exception of short-term leases) on the balance sheet as a lease liability, which is a lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis and a right-of-use asset, which is an asset that represents the lessee¹s right to use, or control the use of, a specified asset for the lease term. The Company adopted ASC 842 on December 1, 2019, using the optional transition method to apply the new guidance as of December 1, 2019, rather than as of the earliest period presented, and elected the package of practical expedients described above. The adoption of this standard on December 1, 2019 did not impact the Company’s condensed consolidated financial statements as the Company is not subject to any lease agreements on December 1, 2019.

 

In July 2017, the FASB issued ASU 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception. The ASU allows companies to exclude a down round feature when determining whether a financial instrument (or embedded conversion feature) is considered indexed to the entity’s own stock. As a result, financial instruments (or embedded conversion features) with down round features may no longer be required to be accounted classified as liabilities. A company will recognize the value of a down round feature only when it is triggered and the strike price has been adjusted downward. For equity-classified freestanding financial instruments, such as warrants, an entity will treat the value of the effect of the down round, when triggered, as a dividend and a reduction of income available to common shareholders in computing basic earnings per share. For convertible instruments with embedded conversion features containing down round provisions, entities will recognize the value of the down round as a beneficial conversion discount to be amortized to earnings. Early adoption is permitted, and the guidance is to be applied using a full or modified retrospective approach. The adoption of this standard on December 1, 2019, did not impact the Company’s condensed consolidated financial statements.

 

Note 4 - Loss per share

 

Basic net loss per share was calculated by dividing net loss attributable to common stockholders by the weighted-average common shares outstanding during the period. Diluted net loss per share was calculated by dividing net loss attributable to common stockholders by the weighted-average common shares outstanding during the period using the treasury stock method or the two-class method, whichever is more dilutive. The table below summarizes potentially dilutive securities that were not considered in the computation of diluted net loss per share because they would be anti-dilutive.

 

Potentially dilutive securities  August 31, 2020   November 30, 2019 
Series A convertible preferred stock   2,280,000    - 
Series B convertible preferred stock   3,787,000    - 
Warrants   9,801,000    7,180,000 
Stock Options   2,150,000    1,200,000 
Convertible Notes   56,000    5,732,000 
Potentially dilutive securities   18,074,000    14,112,000 

 

9

 

 

Q BIOMED INC.

Notes to Condensed Consolidated Financial Statements

 

Note 5 - Convertible Notes

 

    August 31, 2020     November 30, 2019  
Convertible Notes Payable, current:                
Principal value of 2018 Debenture   $ -     $ 2,730,000  
Fair value of bifurcated contingent put option     -       74,000  
Debt discount     -       (61,000 )
Carrying value of 2018 Debenture     -       2,743,000  
Principal value of 2019 August Debenture     -       550,000  
Debt discount     -       (50,000 )
Carrying value of 2019 August Debenture     -       500,000  
Total carrying value of convertible notes payable, current   $ -     $ 3,243,000  
                 
Convertible Notes Payable, long-term:                
Principal value of 2019 October Debenture   $ -     $ 500,000  
Fair value of bifurcated contingent put option     -       29,000  
Debt discount     -       (82,000 )
Carrying value of 2019 October Debenture     -       447,000  
        Principal value of 2019 August Debenture     100,000       -  
        Debt discount     (10,000 )     -  
Carrying value of 2019 August Debenture     90,000       -  
Total carrying value of convertible notes, long-term   $ 90,000     $ 447,000  

 

During the nine months ended August 31, 2020, the Company raised approximately $2.0 million from the issuance of various debentures (the “Debentures”). The Debentures have a maturity date of June 6, 2021. The Debentures bear interest at the rate of 5.5% per annum, and on issuance, the Company paid to the holder a commitment fee equal to 2.5% of the amount of the Debentures.

 

The Debentures may be converted at any time on or prior to maturity at the lower of $3.00 or 93% of the average of the four lowest daily VWAPs during the 10 consecutive trading days immediately preceding the conversion date, provided that as long as we are not in default under the Debenture, the conversion price may never be less than $2.00. Any time after the six-month anniversary of the issuance of the Debentures that the daily VWAP is less than $2.00 for a period of twenty consecutive trading days (the “Triggering Date”) and only for so long as such conditions exist after a Triggering Date, the Company shall make monthly payments beginning on the last calendar day of the month when the Triggering Date occurred. Each monthly payment shall be in an amount equal to the sum of (i) the principal amount outstanding as of the Triggering Date divided by the number of such monthly payments until maturity, (ii) a redemption premium of 20% in respect of such principal amount and (iii) accrued and unpaid interest hereunder as of each payment date. The Company may, no more than twice, obtain a thirty-day deferral of a monthly payment due as a result of a Triggering Date through the payment of a deferral fee in the amount equal to 10% of the total amount of such monthly payment. Each deferral payment may be paid at the option of the Company in cash or by the issuance of such number of shares as is equal to the applicable deferral payment divided by a price per share equal to 93% of the average of the four lowest daily VWAPs during the 10 consecutive Trading Days immediately preceding the due date in respect of such monthly payment being deferred, provided that such shares issued will be immediately freely tradable shares in the hands of the holder.

 

Upon issuance of the Debentures, the Company recognized a debt discount of approximately $0.3 million, resulting from the recognition of issuance costs of $35,000 and a bifurcated embedded derivative of $0.3 million. The monthly payment provision within the Debentures is a contingent put option that is required to be separately measured at fair value, with subsequent changes in fair value recognized in the Condensed Consolidated Statement of Operations. The fair value estimate is a Level 3 measurement. The Company estimated the fair value of the monthly payment provision by estimating the probability of the occurrence of a Triggering Date and applying the probability to the discounted maximum redemption premium for any given payment with the following key inputs:

 

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Q BIOMED INC.

Notes to Condensed Consolidated Financial Statements

 

   January 15, 2020   December 6, 2019 
Strike price  $3.00   $3.00 
Terms (years)   1.4    1.5 
Volatility   97%   98%
Risk-free rate   1.7%   1.6%
Dividend yield   0%   0%

 

The following table summarizes key inputs for embedded convers features on the date of conversions:

 

   Conversion Date 
Strike price  $1.00 - $3.00  
Terms (years)   0.8 
Volatility   126%
Risk-free rate   0.2%
Dividend yield   0%

 

As of August 31, 2020, there are no notes outstanding with embedded conversion features.

 

Debt Conversion

 

The following table summarizes debt conversion during the nine months ended August 31, 2020:

 

Principal value of 2018 Debenture  $2,730,000 
Remaining debt discount   (28,000)
Accrued interest   223,000 
Fair value of bifurcated contingent put option   126,000 
Sub-total   3,051,000 
Principal value of 2019 Debenture   1,950,000 
Remaining debt discount   (220,000)
Accrued interest   58,000 
Fair value of bifurcated contingent put option   157,000 
Sub-total   1,945,000 
Principal value of 2020 Debenture   1,000,000 
Remaining debt discount   (140,000)
Accrued interest   22,000 
Fair value of bifurcated contingent put option   137,000 
Sub-total   1,019,000 
Total debt conversion amount   6,015,000 
      
Fair value of Series A convertible preferred stock issued (127,998 shares)   1,280,000 
Fair value of Series B convertible preferred stock issued (2,031,340 shares)   2,031,000 
Fair value of common stock issued (2,811,198 shares)   2,735,000 
Loss on debt extinguishment during the nine months ended August 31, 2020  $(31,000)

 

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Q BIOMED INC.

Notes to Condensed Consolidated Financial Statements

 

Debt Modification

 

On August 25, 2020, the Company entered into an extension agreement (the “Agreement”) with the holder of August 2019 debenture (the “Holder”) to extend the maturity date from August 29, 2020 to September 30, 2021. As a consideration, the Company agreed to issue the Holder $10,000 worth of common stock on or before September 30, 2020 based on the closing price on August 25, 2020. The Agreement was recognized as a debt modification. The Company recognized an additional $10,000 debt discount on the amendment date, which will be amortized to interest expense over the remaining term of the debt.

 

Interest expense

 

Interest expense, included in the accompanying Condensed Consolidated Statements of Operations, is comprised of the following for each period presented:

 

   For the Three Months ended   For the Nine Months ended 
   August 31, 2020   August 31, 2019   August 31, 2020   August 31, 2019 
Interest expense based on the coupon interest rate of the outstanding debt  $6,000    55,000   $156,000    166,000 
Accretion of debt discount   3,000    390,000    136,000    907,000 
Costs incurred to defer monthly contingent payments of convertible notes   -    32,000    -    64,000 
Total interest expense  $9,000   $477,000   $292,000   $1,137,000 

 

Note 6 - Commitments and Contingencies

 

Legal

 

Periodically, the Company reviews the status of significant matters, if any exist, and assesses its potential financial exposure. If the potential loss from any claim or legal claim is considered probable and the amount can be estimated, the Company accrues a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. As additional information becomes available, the Company reassesses the potential liability related to pending claims and litigation.

 

Note 7 - Related Party Transactions

 

The Company entered into consulting agreements with certain management personnel and stockholders for consulting and legal services. Consulting and legal expenses resulting from such agreements were included within general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations as follows:

 

   For the Three Months ended   For the Nine Months ended 
   August 31, 2020   August 31, 2019   August 31, 2020   August 31, 2019 
Consulting and legal expenses  $105,000   $78,000   $315,000   $270,000 

 

Note 8 - Stockholders’ Equity Deficit

 

Common Shares

 

Issuance of shares for services

 

During the nine months ended August 31, 2020, the Company issued an aggregate of 0.2 million shares of the Company common stock to various vendors for advisory services, valued at approximately $0.5 million based on the estimated fair market value of the stock on the date of grant and was recognized within general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations.

 

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Q BIOMED INC.

Notes to Condensed Consolidated Financial Statements

 

Preferred Shares

 

Amendments to Articles of Incorporation or Bylaws

 

On April 3, 2020, the Company’s Board of Directors authorized the creation of up to 500,000 shares of Series A Convertible Preferred Stock (the “Series A Preferred Shares”) and up to 1,000,000 shares of Series B Convertible Preferred Stock (the “Series B Preferred Shares”). On April 6, 2020, the Company filed a Certificate of Designations with the Secretary of Nevada creating such Series A and Series B Preferred Shares (collectively, the “Preferred Shares”).

 

The original issue price and the liquidation value per share, as of August 31, 2020, of each class of preferred stock is as follows:

 

    Original Issue Price     Liquidation Value  
    Per Share     Per Share  
Series A Preferred Share   $ 10.00     $ 10.32  
Series B Preferred Share   $ 10.00     $ 10.31  

 

The following is a summary of the rights of the holders of the Preferred Shares:

 

Voting. Except to the extent required by law, the holders of the Preferred Shares do not have the right to vote on the matters that the holders of the common stock have the right to vote upon. The holders of the Preferred Shares may vote upon matters affecting the Preferred Shares, provided that if the vote concerns all Preferred Shares, the holders of the Series A Preferred Shares shall vote together with the holders of the Series B Preferred Shares.

 

Liquidation. The holders of the Preferred Shares have a liquidation preference over the holders of the common stock. Such preference consists of the right to receive upon the Company’s voluntary or involuntary liquidation, dissolution or winding up the liquidation value of each Series A and Series B Preferred Share prior to the payment of any amounts to the holders of the common stock. The liquidation value of each Series A and Series B Preferred Share shall be equal to $10 plus any accrued but unpaid dividends thereon.

 

Dividends. Every three months, the Company is required to pay each holder of Preferred Shares a dividend equal to 2% of the liquidation value of such shares (which is equal to 8% on annual basis). Such dividends shall be paid in shares of the Company’s common stock in an amount equal to the dollar amount of such payment divided by the VWAP of the Company’s common stock on the date that such dividend payment is due, provided that the Company may not issue such shares of common stock if such share issuance would cause the holder to beneficially own more than 9.99% of the Company’s common stock.

 

Conversion of Series A Preferred Shares. Each Series A Preferred Share may be converted into shares of the Company’s common stock in an amount that is equal to the liquidation value divided by $1.00. The Company may force the conversion of the Series A Preferred Shares if each of the following conditions (the “Forced Equity Conditions”) has been met:

 

  (i) on each trading day during the period beginning ten trading days prior to the forced conversion (the "Equity Conditions Measuring Period"), the VWAP of the Company’s common stock is in excess of $5.00,
     
  (ii) on each trading day during Equity Conditions Measuring Period, the dollar volume of the Company’s common stock traded is in excess of $750,000,
     
  (iii) on each day during the Equity Conditions Measuring Period, the shares of the Company’s common stock underlying the Series A Preferred Shares to be converted shall either (x) be registered for resale on an effective registration statement or (y) eligible for resale without restriction and without the need for registration under any applicable federal or state securities laws,
     
  (iv) on each day during the Equity Conditions Measuring Period, the Company’s common stock is designated for quotation on the Company’s principal market and shall not have been suspended from trading on such exchange or market nor shall delisting or suspension by such exchange or market been threatened or pending either (A) in writing by such exchange or market or (B) by falling below the then effective minimum listing maintenance requirements of such exchange or market; and

 

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Q BIOMED INC.

Notes to Condensed Consolidated Financial Statements

 

  (v) during the Equity Conditions Measuring Period, there shall not have occurred either (A) an Event of Default or (B) an event that with the passage of time or giving of notice would constitute an Event of Default.

 

Conversion of Series B Preferred Shares. Each Series B Preferred Share may be converted into shares of the Company’s common stock in an amount that is equal to the liquidation value divided by the applicable conversion rate. The conversion rate shall be the lower of: (a) $2.70 or (b) 93% of the average of the four lowest daily VWAPs during the 10 consecutive trading days immediately preceding the conversion date, provided that the conversion price may not be less than $1.00; further provided that if the VWAP of the Company’s common stock for any 40 consecutive trading days is less than $1.00 for 30 of those days, then such floor conversion price shall be reduced from $1.00 to $0.35.

 

The Company may not issue shares of common stock upon pursuant to the conversions discussed above if such conversion would cause a holder to beneficially own more than 9.99% of our then outstanding common stock.

 

Financing Agreements

 

On April 6, 2020, the Company entered into a securities purchase agreement (the “SPA”) with accredited investors (the “Investors”). Pursuant to the SPA, the Company issued the following securities:

 

  127,998 shares of Series A Convertible Preferred Stock (the “Series A”) in exchange for convertible debentures with principal and interest of approximately $1.3 million;
     
  100,000 Series A Preferred Shares for cash of $1.0 million,
     
  203,134 shares of Series B Convertible Preferred Stock (‘the “Series B”) in exchange for convertible debentures with principal and interest of approximately $2.0 million;
     
  300,000 Series B Preferred Shares for cash of $3.0 million

 

The fair value of the Company’s common stock on the issuance date is higher than the effective conversion price of both the Series A Preferred Shares and the Series B Preferred Shares (collectively, the “Preferred Shares”), therefore the Company recorded a beneficial conversion feature (“BCF”) of approximately $0.5 million on the Preferred Shares. The discount to the aggregate stated value of the Preferred Shares, resulting from recognition of the BCF was immediately accreted as a reduction of additional paid-in capital and an increase in the carrying value of the Preferred Shares. The accretion is presented in the Consolidated Statement of Operations as a deemed dividend, increasing net loss to arrive at net loss attributable to common stockholders.

 

The Company had accumulated dividends payable on the Preferred Shares of approximately $0.2 million as of August 31, 2020.

 

14

 

 

 

Q BIOMED INC.
Notes to Condensed Consolidated Financial Statements

 

Note 9 - Warrants and Options

 

Summary of warrants

 

The following represents a summary of all outstanding warrants to purchase the Company’s common stock, including warrants issued to vendors for services and warrants issued as part of the units sold in the private placements, at May 31, 2020 and the changes during the period then ended:

 

           Weighted Average     
       Weighted Average   Remaining Contractual     
   Warrants   Exercise Price   Life (years)   Intrinsic Value 
Outstanding at December 1, 2019   7,180,000   $2.22    3.2   $2,463,000 
Issued   3,065,000    2.13    4.3    - 
Cashless exercise   (30,000)   0.86    -    - 
Forfeited/expired   (414,000)   3.95    -    - 
Outstanding at August 31, 2020   9,801,000   $2.11    3.1   $1,668,000 
Exercisable at August 31, 2020   9,788,000   $2.11    3.1   $1,668,000 

 

During the nine months ended August 31, 2020, the Company issued 1,500,000 warrants to the Company’s two officers in exchange for services rendered. The warrants are exercisable into shares of the Company’s common stock in six months from their issuance until five years from the date of issuance at an exercise price of $2.12 per share.

 

During the nine months ended August 31, 2020, the Company issued 901,000 warrants to certain consultants and service providers in exchange for services rendered. The warrants are exercisable into shares of the Company’s common stock between 3-5 years from the date of issuance at an exercise price between $2.00 to $2.12 per share.

 

During the nine months ended August 31, 2020, the Company issued 250,000 warrants to certain consultants for legal services provided regarding issuance of Preferred Shares and preparation of registration statement. The warrants are exercisable into shares of the Company’s common stock in six months from their issuance until five years from the date of issuance at an exercise price of $2.12 per share. The Company recorded approximately $0.1 million as a direct offering cost in Stockholders’ equity.

 

The following assumptions were used to estimate the fair value of warrants granted during the nine months ended August 31, 2020:

 

   For the Nine Months
ended
 
   August 31, 2020 
Strike price  $2.12 
Term (years)   5.0 
Volatility   120%
Risk-free rate   1.3%
Dividend yield   0.0%

 

Modification of Warrants

 

On February 12, 2020, the Company modified an aggregate of 245,625 warrants that were originally granted to certain investors and consultants. The exercise price of the warrants was reduced to $2.33 per share and the term of the warrants were extended for 2 years from the original expiration date. The Company received $20,000 cash from one of the investors as consideration for this modification.

 

On May 1, 2020, the Company modified an aggregated of 168,000 warrants that were originally granted to certain consultants. The exercise price of the warrants was reduced to $2.00 per share and the term of the warrants were extended for 2-3 years from the original expiration date.

 

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Q BIOMED INC.
Notes to Condensed Consolidated Financial Statements

 

The Company immediately recognized approximately $0.2 million of incremental stock-based compensation for the modifications during the nine months ended August 31, 2020 based on the following weighted average assumptions:

 

   After Modification   Before Modification 
Strike price  $2.20   $4.20 
Term (years)   3.7    1.5 
Volatility   124%   164%
Risk-free rate   0.9%   1.1%
Dividend yield   0.0%   0.0%

 

Options Issued for Services

 

The following represents a summary of all outstanding options to purchase the Company’s common stock at August 31, 2020 and the changes during the period then ended:

 

           Weighted Average     
       Weighted Average   Remaining Contractual     
   Options   Exercise Price   Life (years)   Intrinsic Value 
Outstanding at December 1, 2019   1,200,000   $1.35    3.4   $721,000 
Issued   950,000    1.46    4.9    - 
Outstanding at August 31, 2020   2,150,000   $1.40    3.6   $161,000 
Exercisable at August 31, 2020   1,290,000   $1.36    2.7   $161,000 

 

The following assumptions were used to compute the fair value of options granted during the nine months ended August 31, 2020:

 

   For the Nine Months
ended
 
   August 31, 2020 
Strike price  $1.46 
Term (years)   5.00 
Volatility   115%
Risk-free rate   0.5%
Dividend yield   0.0%

 

Stock-based Compensation

 

The Company recognized general and administrative expenses of approximately $5 million and $0.5 million as a result of the shares, outstanding warrants and options issued to consultants and employees during the nine months ended August 31, 2020 and 2019, respectively.

 

As of August 31, 2020, the estimated unrecognized stock-based compensation associate with these agreements is approximately $0.9 million and will be fully recognized over the next 12 months.

 

Note 10 – Subsequent Events

 

On September 15, 2020, the Company issued 416,667 shares of common stock to Mannin to settle outstanding payables of $0.75 million, which was net of $61,000 receivables. The fair value the common shares was approximately $0.55 million on September 15, 2020.

 

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

 

Forward-Looking Statements

 

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

 

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

 

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

 

Overview

 

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

 

Since our inception, we have been busy building value ranging from potential blockbuster drugs to revenue producing opportunities. Our mission is to solve problems by accelerating the development of important therapies and the availability of those therapies to patients.

 

We are extremely pleased to have reached our initial goal of becoming a commercial pharmaceutical company in the start of 2020.

 

Strontium89 - FDA Approved Drug Launched

 

The COVID-19 pandemic slowed the diagnosis and treatment of cancer in many patients throughout spring and into summer, and severely limited the industry’s access to physicians due to restrictions on access and availability. Despite these challenges, the reintroduction of Strontium89 has received a warm response and enthusiasm from physicians who are pleased that it is once again available for the benefit of their patients.

 

We are aware of free-standing clinics in at least eight states that are undergoing the required operational steps to become a ‘Strontium89 practice’, including having it on their radioactive materials license, with several clinics already up and running with patients being treated. Beginning in October, we expect treatment with Strontium89 in the hospital out-patient setting will be fully reimbursed by Medicare and Medicaid. Once this is approved, we will launch a hospital-focused marketing initiative and expect to see hospitals more actively treat patients as well.

 

We are deploying a multi-channel marketing campaign, driving awareness among our target audiences, both on the physician and the patient side. We will exhibit Strontium89 at several conferences including ASTRO (American Society of Therapeutic Radiation Oncology) and ONS (Oncology Nursing Society) and will begin speaker programs later this fall. Virtual and live sales calls have been ongoing since June within the confines of COVID-19 access and we intend to expand our field force efforts in the last quarter of 2020.

 

In September 2020, we launched our international ‘Named Patient’ program that enables physicians worldwide to order Strontium89 for their patients in need, and we consider the response to this program to be robust with orders pending from at least seven other countries (we had one order in the United Kingdom, but sadly the patient succumbed to his condition prior to treatment.) The regulatory registration process for full commercial access in the EU has commenced, with pan-EU approval expected by end of year. In parallel, we are midway through the registration process in many other countries, with approvals expected to begin in our fourth quarter of 2020 and to continue into our next fiscal year.

 

17

 

 

 

We anticipate revenues from Strontium89 to continue to ramp up in our fourth quarter as we build capacity and demand worldwide. Looking towards 2021, we are assessing several potential clinical trial programs that may expand the indication beyond palliation into a therapeutic use that may increase patient survival, accessing the much larger therapeutic market.

 

Launching Strontium89 distinguishes us from publicly traded biotech companies that have yet to launch a regulatory approved commercial product and generate revenues. Building a robust pipeline, we continue to work closely with our technology partners to develop treatments for unmet needs in multi-billion-dollar markets.

 

Mannin Technology Collaboration - COVID19, Glaucoma and Others

 

Our technology partner Mannin Research Inc. (Mannin) was recently granted up to $7.7 million in Europe, which will fund 65 percent of every dollar incurred to advance a portfolio of therapeutic assets for vascular diseases currently in development at Mannin, including: glaucoma, cardiovascular diseases, acute kidney disease, and infectious diseases such as influenza and coronavirus, among others.

 

Given the urgent need for therapeutics to treat COVID-19, Mannin is rapidly accelerating the time to the first clinical milestone for MAN-19. An Investigational New Drug (IND) application (or similar clinical trial proposal) to regulators are planned for late 2020 with trials expected to begin in the first quarter of our 2021 fiscal year.

 

It is important to note that we believe that the MAN-19 therapeutic is virus-agnostic, which makes it relevant to other viral diseases today like influenza and future viral pandemic outbreaks. Therefore, a successful infectious disease application in COVID-19 could position MAN-19 as a potential government stockpile drug for inevitable future pandemics. Furthermore, a successful proof-of-concept clinical trial with MAN-19 in COVID-19 patients would provide the clinical dataset to quickly support the development of therapeutics for other vascular diseases such as sepsis, acute kidney injury, and of course glaucoma. All of these are large markets with significant potential.

 

We continue to support the development of Mannin’s MAN-01 and MAN-11 therapeutics, a novel small-molecule, and novel biologic therapeutic for glaucoma, respectively. There are over 60 million patients worldwide with primary open-angle glaucoma. The MAN-01 program is developing topical drops designed to reduce pressure build-up in the eye by assisting with, and correcting, drainage problems in tiny vessels in the eye. We have advanced this asset from ‘concept to compound’ and have seen very promising preliminary data that inspires confidence in the program and the market it addresses. Again, as we assess this against our mission, we have found a unique opportunity in a neglected market with significant potential and are advancing it towards real value.

 

Our next steps for the MAN-01 and MAN-11 programs are to initiate toxicology studies in 2021, with the goal of initiating a Phase 1 proof of concept trial in late 2021. These successful data points should command a significant value proposition with potential partner companies that have a specific interest in ophthalmology.

 

GDF 15 Diagnostic for Glaucoma - In Clinical Trial and Product Development and FDA approval anticipated early 2021

 

In early 2019, we licensed a diagnostic biomarker known as GDF-15 for determining the severity of glaucoma from Washington University in St. Louis. GDF-15 is a perfect companion diagnostic for the MAN-01 and MAN-11 drugs, as well as a novel tool for practicing ophthalmologists and drug developers, because it allows them to assess the efficacy of the treatment or disease progression in their practice. This product represents a unique opportunity and current clinical trials are yielding promising results. In partnership with Mannin Research Inc. and McMaster University, we are nearing the completion of development of an in-vitro-diagnostic (IVD) with both point-of-care (detection in a doctor’s office) as well as an external laboratory-based detection (i.e. for use in existing CLIA laboratories using existing diagnostic equipment). We anticipate completion of the IVD device by the end of March 2021 with submission to the FDA (510K) for in vitro diagnostic approval in late 2021.

  

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UTTROSIDE B - Liver Cancer Chemotherapeutic

 

We are innovating in the treatment of liver cancer, a disease indication that currently has a high unmet need. Currently, there are only two approved first-line therapies. We licensed and have advanced Uttroside-B, a new molecule that showed ten times the potency of the current standard of care in early pre-clinical investigation. Uttroside-B was discovered in the leaf of the Black Nightshade plant in India. As it is not feasible to use the plant as the source for a drug, we successfully synthesized the molecule thereby creating an exact replica of the naturally occurring chemical compound. We are now preparing to advance this into a pre-clinical program leading to an orphan drug application and IND application with the FDA and a proof of concept clinical program. Initiation of scale up and GMP material has begun. If we are successful in achieving a positive proof of concept, we would expect the commercial market to recognize the additional value created in this billion-dollar market.

 

QBM-001 - Early Stage Treatment for young minimally verbal children on the Autism Spectrum

 

While our immediate focus is on the above-mentioned assets, we are also developing a new drug candidate to treat young children with pediatric minimally verbal autism. The advancement of this program will depend on the availability of funds and resources as we prioritize our clinical development milestones. There is no effective treatment available to help an estimated 250,000 children born with the condition worldwide each year, 20,000 of them in the U.S. We are working on a discovery and development program to address this highly unmet need.

 

Corporate Strategic Goals

 

Since our inception seven years ago, we have been busy building value ranging from potential blockbuster drugs to revenue producing opportunities. Our mission is to solve problems by accelerating the development of important therapies and availability of those therapies to patients. We believe we are creating value for our shareholders as we approach some significant milestones and catalysts. To that end, early this year we completed a debt restructuring and financing resulting in the conversion of approximately $4 million in debt to equity and a new cash investment of $4 million. This transaction had a very positive impact on our balance sheet and shareholder equity improving from negative $5 million to a positive balance and positions us well for an up-listing once our share price reaches the required metric and we implement the necessary corporate structure and board composition. It is our goal to uplist as soon as possible and anticipate this milestone by year end, though we cannot guarantee that it will occur by then if at all.

 

Financial Overview

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Critical Accounting Policies and Estimates

 

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

 

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Unaudited Results of Operations for the three months ended August 31, 2020 and 2019:

 

   For the Three Months ended 
   August 31, 2020   August 31, 2019 
Net Sales  $15,000   $- 
Cost of sales   158,516    - 
Gross loss   (143,516)   - 
Operating expenses:          
General and administrative expenses   1,491,613    968,383 
Research and development expenses   613,707    786,600 
Total operating expenses   2,105,320    1,754,983 
Loss from operations   (2,248,836)   (1,754,983)
Other (income) expenses:          
Interest expense   9,025    476,627 
Change in fair value of embedded derivatives   -    118,000 
Total other expenses   9,025    791,705 
Net loss  $(2,257,861)  $(2,546,688)

 

Net Sales

 

During the three months ended August 31, 2020, we recognized $15,000 revenue from sale of Strontium89.

 

Cost of Sales

 

During the three months ended August 31, 2020, we recognized approximately $0.2 million cost of sales. These costs were related to raw materials cost, manufacturing cost and distribution cost.

 

Operating expenses

 

We incur various costs and expenses in the execution of our business. The increase in general and administrative expenses was due to an increased charge in investor relations compared to the same period in the prior year. The decrease in research and development compared to the same period in the prior year was mainly due to less fees incurred in connection with the license agreements with Mannin.

 

Interest expenses

 

During the three months ended August 31, 2020, interest expense decreased to approximately $9,000 from $0.5 million in same period in the prior year due primarily to the exchange of outstanding Debentures for Series A and Series B preferred stock.

 

The following table summarizes interest expenses incurred during the three months ended August 31, 2020 and 2019, respectively:

 

   For the Three Months ended 
   August 31, 2020   August 31, 2019 
Interest expense based on the coupon interest rate of the outstanding debt  $6,000   $55,000 
Accretion of debt discount   3,000    390,000 
Costs incurred to defer monthly contingent payments of convertible notes   -    32,000 
Total interest expense  $9,000   $477,000 

  

Change in fair value of embedded derivatives

 

We recognized $0 and approximately $0.1 million loss resulting from the change in fair value of embedded contingent put options in convertible notes during the three months ended August 31, 2020 and 2019, respectively. All embedded derivatives were extinguished as of May 31, 2020.

 

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Loss on Induced Conversion of Debt

 

During the three months ended August 31, 2019, we recognized a loss of $0.2 million resulting from the share settlement of deferral fee and additional shares issued beyond conversion terms for conversion of $0.2 million principal and accrued interest of $0.1 million on 2018 Debentures.

 

Net loss

 

During the three months ended August 31, 2020 and 2019, we incurred net losses of approximately $2.3 million and $2.5 million, respectively. Our management expects to continue to incur net losses for the foreseeable future, due to our need to continue to establish a broader pipeline of assets, expenditure on R&D and implement other aspects of our business plan.

 

Unaudited Results of Operations for the nine months ended August 31, 2020 and 2019:

 

   For the Nine Months ended 
   August 31, 2020   August 31, 2019 
Net Sales  $30,000   $- 
Cost of sales   193,211    - 
Gross loss   (163,211)   - 
Operating expenses:          
General and administrative expenses   8,659,819    3,406,853 
Research and development expenses   896,908    2,672,715 
Total operating expenses   9,556,727    6,079,568 
Loss from operations   (9,719,938)   (6,079,568)
Other (income) expenses:          
Interest expense   291,626    1,137,271 
Change in fair value of embedded derivatives   19,163    396,000 
Loss on debt extinguishment   31,399    - 
Total other expenses   342,188    1,730,349 
Net loss  $(10,062,126)  $(7,809,917)

 

Net Sales

 

During the nine months ended August 31, 2020, we recognized $30,000 revenue from sale of Strontium89.

 

Cost of Sales

 

During the nine months ended August 31, 2020, we recognized approximately $0.2 million cost of sales. These costs were related to raw materials cost, manufacturing cost and distribution cost.

 

Operating expenses

 

We incur various costs and expenses in the execution of our business. The increase in general and administrative expenses was due to an increased charge in stock-based compensation and consulting expense compared to the same period in the prior year. We recorded approximately $5.2 million and $1.3 million of stock-based compensation under general and administrative expense during the nine months ended August 31, 2020 and 2019, respectively. The decrease in research and development compared to the same period in the prior year was mainly due to less fees incurred in connection with the license agreements with Mannin.

 

Interest expenses

 

During the nine months ended August 31, 2020, interest expense decreased to approximately $0.3 million from $1.1 million in the same period in the prior year due primarily to the exchange of outstanding Debentures for Series A and Series B preferred stock.

 

The following table summarizes interest expenses incurred during the nine months ended August 31, 2020 and 2019, respectively:

 

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   For the Nine Months ended 
   August 31, 2020   August 31, 2019 
Interest expense based on the coupon interest rate of the outstanding debt  $156,000   $166,000 
Accretion of debt discount   136,000    907,000 
Costs incurred to defer monthly contingent payments of convertible notes   -    64,000 
Total interest expense  $292,000   $1,137,000 

 

Change in fair value of embedded derivatives

 

We recognized approximately $19,000 and $0.4 million loss resulting from the change in fair value of embedded contingent put options in convertible notes during the nine months ended August 31, 2020 and 2019, respectively. The fluctuation is mainly due the change of stock price during the reporting periods and conversion of existing debt, reducing the penalty payments due.

 

Loss on debt extinguishment

 

We recognized approximately $31,000 loss due to the exchange outstanding Debentures to common shares and preferred shares during the nine months ended August 31, 2020.

 

Net loss

 

During the nine months ended August 31, 2020 and 2019, we incurred net losses of approximately $10.1 million and $7.8 million, respectively. Our management expects to continue to incur net losses for the foreseeable future, due to our need to continue to establish a broader pipeline of assets, expenditure on R&D and implement other aspects of our business plan.

 

Liquidity and Capital Resources

 

We prepared the accompanying condensed consolidated financial statements assuming that we will continue as a going concern, which contemplates the realization of assets and liquidation of liabilities in the normal course of business.

 

We have not yet established an ongoing source of significant revenues and must cover our operating through debt and equity financings to allow us to continue as a going concern. We had approximately $1.3 million in cash as of August 31, 2020. Our ability to continue as a going concern depends on the ability to obtain adequate capital to fund operating losses until we generate adequate cash flows from operations to fund our operating costs and obligations. If we are unable to obtain adequate capital, we could be forced to cease operations.

 

We depend upon our ability, and will continue to attempt, to secure equity and/or debt financing. We cannot be certain that additional funding will be available on acceptable terms, or at all. Our management determined that there was substantial doubt about our ability to continue as a going concern within one year after the condensed consolidated financial statements were issued, and management’s concerns about our ability to continue as a going concern within the year following this report persist.

 

The accompanying condensed consolidated financial statements do not include any adjustments relating to the recoverability and classification of recorded asset amounts or amounts and classification of liabilities that might result from this uncertainty.

 

Cash Flows

 

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

 

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   For the Nine Months ended 
   August 31, 2020   August 31, 2019 
Net cash (used in) provided by:          
Operating activities  $(4,761,000)  $(3,076,000)
Financing activities   5,915,000    693,000 
Net increase (decrease) in cash  $1,154,000   $(2,383,000)

 

Net Cash Used in Operating Activities

 

During the nine months ended August 31, 2020, operating activities used $4.8 million of cash, resulting from a net loss of $10.1 million, partially offset by $5.2 million of share -based compensation, other non-cash expenses $0.2 million and changes in our operating assets and liabilities. During the nine months ended August 31, 2019, operating activities used $3.1 million of cash, resulting from a net loss of $7.8 million, partially offset by $1.3 million of share-based compensation, change in fair value of embedded conversion options of $0.4 million, and non-cash interest expense resulting from accretion of debt discounts of $0.9 million and changes in our operating assets and liabilities.

 

Net Cash Provided by Financing Activities

 

Net cash provided by financing activities for the nine months ended August 31, 2020 and 2019 was $5.9 million and $0.6 million, respectively. The net cash provided in the 2020 period relates to proceeds received from the issuance of preferred shares and debentures.  The net cash provided in the 2019 period relates to proceeds received from the issuance of debentures and investor advances. 

 

Commitments and Contingencies

 

Legal

 

Periodically, we review the status of significant matters, if any exist, and assesses its potential financial exposure. If the potential loss from any claim or legal claim is considered probable and the amount can be estimated, we accrue a liability for the estimated loss. Legal proceedings are subject to uncertainties, and the outcomes are difficult to predict. Because of such uncertainties, accruals are based on the best information available at the time. As additional information becomes available, we reassess the potential liability related to pending claims and litigation.

 

Office Facility Agreement

 

In December 2016, we entered into a license to occupy a shared office facility in Cayman Islands for $30,000 per annum. The initial term of the agreement ended in December 2019 and we renewed the agreement for another three years with the same terms.

 

This agreement does not identify a specific asset and does not convey the use of substantially all of the shared office capacity. As such, this agreement does not contain a lease under ASC 842. We recognize monthly license payments as incurred over the term of the arrangement.

 

The associated expense is classified within general and administrative expenses.

 

Related Party Transactions

 

We entered into consulting agreements with certain management personnel and stockholders for consulting and legal services. Consulting and legal expenses resulting from such agreements were included within general and administrative expenses in the accompanying Condensed Consolidated Statements of Operations as follows:

 

   For the Three Months ended   For the Nine Months ended 
   August 31, 2020   August 31, 2019   August 31, 2020   August 31, 2019 
Consulting and legal expenses  $105,000   $78,000   $315,000   $270,000 

 

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Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements.

 

Item 3. Quantitative and Qualitative Disclosure About Market Risk

 

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

 

Item 4. Controls and Procedures

 

Evaluation of Disclosure Controls and Procedures

 

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

 

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

 

Changes in internal controls over financial reporting

 

There were no changes in our internal controls over financial reporting that occurred during the period covered by this report, which has materially affected, or is reasonably likely to materially affect, our internal controls over financial reporting. We have engaged accounting and compliance consultants to review our internal controls over financial reporting and other compliance requirements.

 

Limitations on Effectiveness of Controls and Procedures

 

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

 

PART II - OTHER INFORMATION

 

Item 1. Legal Proceedings

 

None.

 

Item 1A. Risk Factors

 

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

 

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

 

On September 15, 2020, we issued 416,667 shares of common stock to Mannin to settle outstanding payables of $0.75 million , which was net of $61,000 receivables.

 

The issuance of the Securities mentioned above qualified for the exemption from registration continued in section 4(a) of the securities act of 1933.

 

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Item 3. Defaults Upon Senior Securities

 

None.

 

Item 4. Mine Safety Disclosures

 

Not applicable.

 

Item 5. Other Information

 

None.

 

Item 6. Exhibits

 

Exhibit Number   Name and/or Identification of Exhibit

 

31.1   Rule 13a-14(a)/15d-14(a) Certifications
32.1   Certification under Section 906 of the Sarbanes-Oxley Act (18 U.S.C. Section 1350)
   
101   Interactive Data File
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema Document
101.CAL   XBRL Taxonomy Extension Calculation Linkbase Document
101.DEF   XBRL Taxonomy Extension Definition Linkbase Document
101.LAB   XBRL Taxonomy Extension Label Linkbase Document
101.PRE   XBRL Taxonomy Extension Presentation Linkbase Document

 

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SIGNATURES

 

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

 

  Q BIOMED INC.
     
Dated: October 14, 2020 By:  /s/ Denis Corin
    Denis Corin
    President, Chief Executive Officer, Acting Principal Accounting Officer, Principal Financial Officer

 

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