| September 30, | December 31, | |||||||
| 2011 | 2010 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 287,229 | $ | 422,198 | ||||
| Grants receivable, net of allowance for doubtful accounts of $16,813 and $14,531 as of September 30, 2011 and December 31, 2010 | - | 72,950 | ||||||
| Other receivable | - | 10,000 | ||||||
| Total current assets | 287,229 | 505,148 | ||||||
| Property and equipment, net | 37,172 | 54,025 | ||||||
| Deposit | 7,513 | 7,513 | ||||||
| Total assets | $ | 331,914 | $ | 566,686 | ||||
| Liabilities and Stockholders' Equity (Deficit) | ||||||||
| Current liabilities: | ||||||||
| Accounts payable | $ | 315,312 | $ | 287,574 | ||||
| Accrued liabilities | 134,205 | 54,351 | ||||||
| Notes payable, net of debt discount of $215,639 and $0 as of September 30, 2011 and December 31, 2010 | 699,361 | 15,000 | ||||||
| Total current liabilities | 1,148,878 | 356,925 | ||||||
| Commitments and contingencies | ||||||||
| Stockholders' equity (deficit): | ||||||||
| Series A1 convertible preferred stock, $0.0001 par value: 250,000 shares authorized; 250,000 shares outstanding | 25 | 25 | ||||||
| Series A2 convertible preferred stock, $0.0001 par value: 2,400,000 shares authorized; 2,022,190 shares outstanding | 202 | 202 | ||||||
| Series B convertible preferred stock, $0.0001 par value: 7,000,000 shares authorized; 4,102,654 and 4,083,197 shares outstanding, respectively | 410 | 408 | ||||||
| Common stock, $0.0001 par value: 20,000,000 shares authorized; 1,593,203 shares outstanding | 159 | 159 | ||||||
| Additional paid-in capital | 15,555,760 | 15,179,369 | ||||||
| Notes receivable from stockholders | (135,302 | ) | (135,302 | ) | ||||
| Accumulated deficit | (16,238,218 | ) | (14,835,100 | ) | ||||
| Total stockholders' equity (deficit) | (816,964 | ) | 209,761 | |||||
| Total liabilities and stockholders' equity (deficit) | $ | 331,914 | $ | 566,686 | ||||
| See accompanying notes to condensed consolidated financial statements. | 1 |
| For the Nine | For the Nine | |||||||||||
| Months Ended | Months Ended | Cumulative | ||||||||||
| September 30, | September 30, | From | ||||||||||
| 2011 | 2010 | Inception | ||||||||||
| Grant revenue | $ | 10,173 | $ | 176,762 | $ | 605,228 | ||||||
| License revenue | 14,400 | 29,800 | 132,900 | |||||||||
| 24,573 | 206,562 | 738,128 | ||||||||||
| Operating expenses: | ||||||||||||
| General and administrative | 598,203 | 586,539 | 6,692,338 | |||||||||
| Research and development | 286,738 | 403,312 | 8,725,475 | |||||||||
| Total operating expenses | 884,941 | 989,851 | 15,417,813 | |||||||||
| Operating loss | (860,368 | ) | (783,289 | ) | (14,679,685 | ) | ||||||
| Other income (expense): | ||||||||||||
| Interest income | - | - | 182,795 | |||||||||
| Interest expense | (542,639 | ) | (2,484 | ) | (1,888,728 | ) | ||||||
| Other income (expense) | (111 | ) | 11,445 | 147,400 | ||||||||
| Total other income (expense), net | (542,750 | ) | 8,961 | (1,558,533 | ) | |||||||
| Loss before provision for income taxes | (1,403,118 | ) | (774,328 | ) | (16,238,218 | ) | ||||||
| Provision for income taxes | - | - | - | |||||||||
| Net loss | $ | (1,403,118 | ) | $ | (774,328 | ) | $ | (16,238,218 | ) | |||
| See accompanying notes to condensed consolidated financial statements. | 2 |
| For the Nine | For the Nine | |||||||||||
| Months Ended | Months Ended | Cumulative | ||||||||||
| September 30, | September 30, | From | ||||||||||
| 2011 | 2010 | Inception | ||||||||||
| Cash flows from operating activities: | ||||||||||||
| Net loss | $ | (1,403,118 | ) | $ | (774,327 | ) | $ | (16,238,218 | ) | |||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||||||
| Adjustments for non-cash items: | ||||||||||||
| Depreciation and amortization | 22,480 | 34,345 | 368,376 | |||||||||
| Accretion of debt costs and beneficial conversion feature | 530,804 | - | 1,471,623 | |||||||||
| Stock-based compensation | 35,200 | 58,156 | 264,386 | |||||||||
| Research and development and professional expenses | 134,750 | - | 134,750 | |||||||||
| Bad debt expense | 2,282 | - | 16,813 | |||||||||
| Changes in assets and liabilities: | ||||||||||||
| Grants receivable | 70,667 | (48,480 | ) | (16,814 | ) | |||||||
| Other receivable | 10,000 | - | 10,000 | |||||||||
| Prepaid expenses and other assets | - | 1,768 | (7,513 | ) | ||||||||
| Accounts payable | 27,737 | (114,614 | ) | 315,311 | ||||||||
| Accrued liabilities | 79,855 | 34,251 | 534,243 | |||||||||
| Net cash used in operating activities | (489,343 | ) | (808,901 | ) | (13,147,043 | ) | ||||||
| Cash flows from investing activities: | ||||||||||||
| Purchase of property and equipment | (5,626 | ) | - | (405,327 | ) | |||||||
| Cash flows from financing activities: | ||||||||||||
| Proceeds from issuance of notes payable | 360,000 | 15,000 | 5,240,000 | |||||||||
| Principal payments on notes payable | - | (40,000 | ) | (75,000 | ) | |||||||
| Proceeds from issuance of preferred stock | - | 1,000,000 | 8,661,747 | |||||||||
| Proceeds from issuance of common stock | - | - | 819 | |||||||||
| Proceeds from exercise of common stock options | - | - | 9,800 | |||||||||
| Proceeds from exercise of preferred stock warrants | - | - | 2,233 | |||||||||
| Net cash provided by financing activities | 360,000 | 975,000 | 13,839,599 | |||||||||
| Net change in cash | (134,969 | ) | 166,099 | 287,229 | ||||||||
| Cash at beginning of the period | 422,198 | 12,147 | - | |||||||||
| Cash at end of the period | $ | 287,229 | $ | 178,246 | $ | 287,229 | ||||||
| Supplemental disclosure of cash flow information: | ||||||||||||
| Cash paid for interest | $ | 1,691 | $ | 2,484 | $ | 6,924 | ||||||
| See accompanying notes to condensed consolidated financial statements. | 3 |
| · | The Company issued 219,658 shares of Common Stock in exchange for technology valued at $220. |
| · | The Company converted $1,050,000 of notes payable and $29,691 of accrued interest to 482,008 shares of Series A2 Preferred Stock. |
| · | The Company converted $3,740,000 of notes payable and $370,346 of accrued interest to 1,787,104 shares of Series B Preferred Stock. |
| · | The Company issued 19,457 shares of Series B Preferred Stock in exchange for research and development services provided, valued at $44,750. |
| · | The Company issued $360,000 of convertible notes on August 30, 2011, with an original discount of $360,000, the discount is being accreted as interest expense over the term of the note. |
| · | The Company issued $90,000 in convertible notes for professional services provided, with an original discount of $90,000. The discount is being accreted as interest expense over the term of the note. |
| · | The Company issued warrants in connection with the convertible notes valued at $296,444, which was recorded as a debt discount and additional paid-in capital, and is being accreted as interest expense over the term of the bridge notes. |
| See accompanying notes to condensed consolidated financial statements. | 4 |
1. Organization and Summary of Significant Accounting Policies | Organization Q Therapeutics, Inc. was incorporated on March 28, 2002 as a Delaware corporation. The Company is a development stage company in the process of developing products to treat debilitating and fatal diseases of the central nervous system. See Note 5 for a discussion of changes in ownership and structure subsequent to September 30, 2011. | |
Basis of Presentation The accompanying unaudited condensed consolidated financial statements include the accounts of Q Therapeutics, Inc. and its wholly-owned subsidiary, NeuroQ Research (collectively, the Company). All significant intercompany amounts have been eliminated. The unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (“SEC”) on a basis consistent with the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations, although the Company believes that the following disclosures, when read in conjunction with the annual financial statements and the notes thereto included in this filing, are adequate to make the information presented not misleading. Operating results for the nine months ended September 30, 2011, are not necessarily indicative of the results that may be expected for the year ending December 31, 2011. | ||
Development Stage For the period from March 28, 2002 (date of inception) through September 30, 2011, the Company has not generated significant revenues and has been developing its products. Therefore, the Company is considered to be in the development stage in accordance with the provisions of Accounting Standards Codification (ASC) Topic 915, Development Stage Entities. As required by ASC Topic 915, cumulative amounts have been presented for the period from March 28, 2002 (date of inception) through September 30, 2011. |
| 5 |
1. Organization and Summary of Significant Accounting Policies Continued | Liquidity Since entering the development stage, the Company has not generated revenues in excess of expenses and has been dependent on government grants and debt and equity raised from individual investors to sustain its operations. The Company’s products have not yet been approved by the U.S. Food and Drug Administration for commercial sale; therefore, the Company has not generated revenues from product sales. The Company has incurred losses and used cash in operating activities since inception. As of September 30, 2011, the Company had an accumulated deficit of $16,238,218 and negative working capital. On August 30, 2011, the Company raised bridge financing totaling $450,000 and on October 13, 2011, the Company raised $3,803,047 in connection with a reverse merger with Grace 2, Inc. (see Note 5). Management believes that the Company has sufficient resources to fund the Company’s operations through at least September 30, 2012. | |
Use of Estimates The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Key estimates include allowances for doubtful accounts, useful lives for property and equipment, valuation allowances for net deferred income tax assets, and valuation of stock-based awards. | ||
Concentrations of Credit Risk The Company maintains its cash in bank deposit accounts which, at times, exceed federally insured limits. To date, the Company has not experienced a loss or lack of access to its invested cash; however, there can be no assurance that access to the Company’s invested cash will not be impacted by adverse conditions in the financial markets. | ||
Cash Equivalents The Company considers all highly liquid investments with original maturities to the Company of three months or less to be cash equivalents. As of September 30, 2011 and December 31, 2010, the Company did not have any cash equivalents. |
| 6 |
1. Organization and Summary of Significant Accounting Policies Continued | Grants Receivable The Company applies for research grants generally as a sub-recipient to grants funded by government agencies through research universities. The Company records its grants receivable in accordance with the provisions of the grant agreement. The Company’s grants receivable are considered past due when payment has not been received within 30 days of the invoice date. The amounts of the specific reserves are estimated by management based on various assumptions including the age of the individual grant receivable, as well as changes in payment schedules and histories. Grants receivable balances are charged off against the allowance for doubtful accounts when the potential for recovery is remote. Recoveries of receivables previously charged off are recorded when payment is received. |
Stock-Based Compensation The Company calculates the estimated fair value of its stock options and warrants on the grant date using the Black-Scholes option-pricing model and recognizes the estimated fair value as compensation expense on a straight-line basis over the vesting period. The volatility assumption used in the Black-Scholes option-pricing model is based on the volatility of publicly traded companies in the same industry as the Company. The expected term of the options and warrants granted represent the period of time that the options granted are expected to be outstanding. The risk free rate for periods within the contractual life of the option and warrant is based on the U.S. treasury securities constant maturity rate that corresponds to the expected term in effect at the time of grant. | ||
Net Loss Per Common Share Basic net income or loss per common share (“Basic EPS”) is computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted net income or loss per common share (“Diluted EPS”) is computed by dividing net income or loss by the sum of the weighted average number of common shares outstanding and the dilutive potential common share equivalents then outstanding. Potential common share equivalents consist of the weighted average number of shares issuable upon the exercise of outstanding stock options and warrants to acquire common stock, and shares issuable upon conversion of preferred stock. If the potential common share equivalents are dilutive, the Company computes Diluted EPS using the treasury stock method. | ||
| Due to the fact that for all periods presented the Company has incurred net losses, common share equivalents of 8,379,779 and 7,609,427 for the nine months ended September 30, 2011 and 2010, respectively, are not included in the calculation of Diluted EPS because they are anti-dilutive. |
| 7 |
2. Stockholders’ Equity (Deficit) | Common Stock The Company is authorized to issue 20,000,000 shares of common stock, of which 250,000, 2,022,190, and 4,102,654 are reserved for issuance upon conversion of the Series A1 Preferred Stock, Series A2 Preferred Stock, and Series B Preferred Stock, respectively. In addition, a sufficient number of shares of common stock have also been reserved for issuance pursuant to the Company’s 2002 Stock Incentive Plan, as amended, as well as to permit the exercise in full of all outstanding warrants. | |
Rights and Preferences of Convertible Series A1, A2, and B Preferred Stock · Dividend rights – Series A1, A2 and B Preferred Stockholders are entitled to receive dividends, when, as and if declared by the board of directors. Dividends to Series B Preferred Stockholders are payable in preference and priority to any declaration or payment to Series A1 and A2 Preferred Stockholders and common stockholders. Series A2 Preferred Stockholders are paid in preference and priority to any declaration or payment to series A1 Preferred Stockholders and common stockholders. Dividends to Series A1 Preferred Stockholders are paid in preference and priority to any declaration or payment to common stockholders. | ||
· Voting rights – The holders of each series of Convertible Preferred Stock and common stock vote together as one class. The Preferred Stockholders are entitled to the number of votes equal to the number of shares of common stock into which the shares of Preferred Stock could be converted. · Liquidation preference – First, any net proceeds shall be applied to the redemption of any outstanding Series B Preferred Stock; secondly to the redemption of any outstanding Series A1 and A2 Preferred Stock; and finally any remaining proceeds shall be paid ratably to the common stockholders and Preferred Stockholders, on an as-if-converted to common stock basis. |
| 8 |
2. Stockholders’ Equity (Deficit) Continued | · Redemption rights – At any time after the fifth anniversary of the Series B Preferred Stock original issue date (February 14, 2008), at the written election of the holders of the majority of the Series B Preferred Stock, the Company shall redeem all outstanding shares of Series B Preferred Stock in three annual installments with the first installment within 30 days after the Company receives the notice of the call for redemption and the second and third installment on the first and second anniversaries of such dates. In addition, at any time after the fifth anniversary of the Series B Preferred Stock, at the written election of two thirds of the holders of the Series A2 Preferred Stock, the Company shall redeem all outstanding shares of Series A2 Preferred Stock in three annual installments with the first installment within 30 days after the Company receives the notice of the call for redemption and the second and third installment on the first and second anniversaries of such dates. | |
| In the event of a redemption call, all Series B and A2 Preferred Shares shall be redeemed at the respective series original issue price, plus all dividends declared but unpaid. | ||
| The Preferred Stock is not mandatorily redeemable and thus has been recorded in the equity section of the balance sheet as management believes the redemption of these shares is not probable. | ||
· Conversion rights – Each share of Preferred Stock shall be convertible, at the option of the holder, at any time after the date of issuance into the number of common shares determined by dividing the original issue price for the relevant series by the conversion price for such series. In addition, shares of each series of Preferred Stock shall automatically convert as certain events occur. | ||
Issuance of Series B Preferred Stock During the nine months ended September 30, 2011, the Company issued 19,457 shares of Series B Preferred Stock in exchange for research and development services provided, valued at $44,750. |
| 9 |
3. Stock Options and Warrants | Stock Options The Company’s stock option plan, originally approved on April 10, 2002 and subsequently amended (the Plan), provides for the grant of incentive options, nonqualified options, and shares of restricted stock. Under the terms of the Plan, there are 2,120,000 common shares available for grant to employees, officers, directors and consultants. The Board of Directors determines the terms of each grant. Generally, the options have a vesting period of 4 years with 25% vesting after the first year of service and monthly thereafter, and have a ten-year contractual life. Certain stock options have provisions to accelerate vesting upon the occurrence of certain events. There are 105,690 shares available for grant under the Plan as of September 30, 2011. | |
| Stock-based compensation for the nine months ended September 30, 2011 and 2010 was $35,200 and $58,156, respectively. As of September 30, 2011, the Company had $18,190 of unrecognized stock-based compensation costs related to non-vested awards that will be recognized over a weighted-average period of 0.85 years. |
| The fair value of each stock-based compensation award granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions: |
| Risk-free interest rate | 2.61 - 3.36 | % | |
| Expected stock price volatility | 62.19 | % | |
| Expected dividend yield | 0 | % | |
| Expected life of options | 5.5 – 6.5 years |
Warrants In connection with certain preferred stock offerings and debt issuances, the Company has issued warrants to purchase Preferred Stock. The following summarizes information about Preferred Stock warrants as of September 30, 2011: |
| Year of | Number | Exercise | ||||||||
| Warrants to Purchase | Expiration | of Shares | Price | |||||||
| Series A2 Preferred Stock | ||||||||||
| warrants, issued in conjunction | ||||||||||
| with convertible debt in 2008 | 2015 | 61,384 | $ | 0.10 | ||||||
| Series B Preferred Stock | ||||||||||
| warrants, issued in conjunction | ||||||||||
| with convertible debt in 2008 | 2015 | 380,583 | $ | 2.24 | ||||||
| Series B Preferred Stock | ||||||||||
| warrants, issued in conjunction | ||||||||||
| with Series B Preferred Stock | ||||||||||
| purchase agreement | 2017 | 88,862 | $ | 1.15 | ||||||
| 530,829 | ||||||||||
| 10 |
4. Related-Party Transactions | On June 1, 2009, the Company entered into a note payable agreement with a company who is a stockholder. The note payable was for $40,000, with an interest rate of 6% per annum and a maturity date of July 1, 2010. The note along with interest of $2,484 was paid in full in June 2010. | |
| On December 23, 2009, the Company entered into a note payable agreement with a stockholder for $15,000, with an interest rate of 6% per annum and a maturity date of December 31, 2010. The note along with accrued interest of $918 was exchanged for 4,348 shares of Series B Preferred Stock in December 2010. | ||
| On January 9, 2010, the Company entered into an unsecured note payable agreement with a stockholder for $15,000 with an interest rate of 6% per annum and a maturity date of December 31, 2010. The note remains outstanding as of September 30, 2011. | ||
Beginning on May 31, 2011 and ending on October 13, 2011, the Company's CEO and CFO agreed to work without salary. Upon completion of the reverse merger and obtaining funding, the Company's CEO and CFO began receiving compensation. No retroactive payments of salary or benefits to these individuals will be made by the Company. | ||
5. Subsequent Events | As of October 13, 2011, the Company closed on a private placement of its securities solely to accredited investors. The offering was conducted on a best efforts basis, whereby the Company offered for sale a minimum of 3,000,000 and a maximum of 6,000,000 Units, each Unit consisting of one share of common stock, one 7-year common stock purchase warrant exercisable at $1.00 per share, and one 7-year common stock purchase warrant exercisable at $2.00 per share. Units sold totaled 3,803,047 to 12 accredited investors. The Company raised an aggregate of $3,803,047. | |
| On October 13, 2011, $900,000 of bridge notes and $16,644 of accrued interest converted to 916,644 shares of common stock. | ||
| The Company completed a merger on October 13, 2011 with Grace 2, Inc. This transaction is being accounted for as a reverse acquisition. |
| 11 |
