ITEM 1. Business
QuantRx Biomedical Corporation was incorporated on December 5, 1986, in the State of Nevada. The Company’s principal business office is located at 10190 SW 90th Avenue, Tualatin, Oregon 97123. When used in this Quarterly Report on Form 10-K, the terms “Company,” “we,” “our,” “ours,” or “us” mean QuantRx Corporation, a Nevada corporation.
Recent Developments
Issuance of Additional Promissory Notes. Between August 2012 and April 2013, the Company issued promissory notes to two investors in the principal amounts of $10,000 (the “$10K Note”), $25,000 (the “$25K Note”), $15,000 (the “$15K Note”), $20,000 (the “$20K Note”) and $16,000 (the "$16K Note") (together, the “Notes”). As additional consideration for the purchase of the Notes, the Company issued: (i) 200,000 shares of its common stock, par value $0.001 per share, to the purchaser of the $25K Note and the $15K Note, (ii) 8,496 $0.50 FPMI Warrants, defined below, to the purchaser of the $10K Note, and (iii) 36,000 warrants to purchase shares of FluoroPharma Medical, Inc. (“FPMI”) common stock, for $1.00 per share (“$1.00 FPMI Warrants”), to the purchaser of the $20K Note and the $16K Note. The $1.00 FPMI Warrants expire on February 15, 2019.
The Notes accrue interest at the rate of 6% annually. The $10K Note and the $25K Note are currently due and payable on demand, while the $15K Note, the $20K Note and the $16K Note are due and payable on June 30, 2013 (the “Maturity Date”). The Notes are convertible at the option of each respective holder into shares of common stock at a conversion price equal to $0.10 per share. In addition, the holders may exchange the Notes for common stock in the event the Company consummates a qualified financing (the “Qualified Financing”), which is defined in the Notes as a financing resulting in gross proceeds to the Company of at least $500,000. While the Company intends to pay the Notes using proceeds from a Qualified Financing, such Qualified Financing may not occur prior to the date the holders of the $10K Note and $25K Note demand repayment, or the Maturity Date of the $15K Note, the $20K Note or the $16K Note.
The Company presently intends to issue additional Notes to finance its current working capital needs. However, there can be no assurance that the Company will be able to issue additional Notes.
Modification of June 2012 Notes. The Company entered into agreements with the holders of the promissory notes that became due and payable on June 30, 2012 (the “June 2012 Notes”) to extend the maturity date to November 15, 2012. As consideration for the extension of the maturity date, the Company assigned to the holders warrants to purchase a total of 269,004 shares of common stock of FPMI held by the Company for $0.50 per share (the “$0.50 FPMI Warrants”). The $0.50 FPMI Warrants expire on April 19, 2014. The June 2012 Notes are currently due and payable, on demand.
Overview
The Company has developed and ultimately intends to commercialize its innovative PAD based products for the OTC and laboratory markets based on its patented technology platforms, and its genomic diagnostics, based on its patented PadKit® technology for the worldwide healthcare industry. These platforms include: inSync®, Unique™, PadKit®, and OEM branded OTC and laboratory testing products based on the Company’s core intellectual property related to its PAD technology. These products are intended for the treatment of hemorrhoids, minor vaginal infection, urinary incontinence, general catamenial uses and other medical needs.
The Company’s efforts to commercialize its products are currently contingent on additional financing to execute its business and operating plan, which is currently focused on the commercialization of the Company’s PAD technology either directly or through a joint venture or other relationship intended to increase shareholder value. In the interim, the Company has executed a plan to substantially reduce expenses, including headcount, and to restructure and/or eliminate many of its outstanding liabilities. This plan was necessary in order for the Company to continue as a going concern. No assurances can be given that the Company will obtain financing, or otherwise successfully develop a business and operating plan or enter into an alternative relationship to commercialize the Company’s PAD technology.
On June 20, 2012, the Company formed a wholly-owned subsidiary, QX Labs, Inc. (“QX”), to convey and transfer to QX all intellectual property and assets related to the Company’s diagnostic testing business ("Diagnostics Business"). The Diagnostic Business is based principally on the Company’s proprietary PadKit® technology, which the Company believes provides a patented platform technology for genomic diagnostics, including fetal genomics. Following the transfer of the Diagnostics Business to QX, the Company’s other business line will consist of its over-the-counter business, including the InSync feminine hygienic interlabial pad, the Unique pad for hemorrhoid application, and other treated miniforms (the “OTC Business”), as well as established and continuing licensing relationships related to the OTC Business. Management believes the creation of QX permits the Company to more efficiently explore different options to maximize the value of the Diagnostics Business and the OTC Business (collectively, the “Businesses”), with the objective of maximizing the value of the Businesses for the benefit of the Company and its stakeholders.
The Company’s current focus is to develop a financing and operating plan to: (i) leverage its broad-based intellectual property (IP) and patent portfolio to develop new and innovative diagnostic products; (ii) commercialize its OTC Business and its Diagnostics Business either directly or through joint ventures, mergers or similar transactions intended to capitalize on commercial opportunities presented by each of the Businesses; (iii) contract manufacturing to third parties while maintaining control over the manufacturing process; and (iv) maximize the value of the Company’s investments in non-core assets. As a result of its current financial condition, however, the Company’s efforts in the short-term will be focused on obtaining financing necessary to maintain the Company as a going concern.
Our Business
Management’s objective is to develop the Company’s innovative PAD based products though genomic testing, although commercialization efforts are conditioned on securing adequate financing. Assuming the availability of adequate working capital, the Company’s objective is to target significant market opportunities for its products through the following platforms:
PAD/Health and Wellness
PAD products are based on the Company’s non-woven disposable absorbent pad technology, with products for aiding the treatment of hemorrhoids, minor vaginal infection, urinary incontinence, the OTC catamenial markets, and other medical needs, including diagnostic sampling products which enable self-collection and worldwide transport for indications such as various cancers, premature delivery, and genomic testing.
Diagnostic Products
Diagnostic products constitute the core of the Company’s historical product development focus. The Company’s healthcare technologies are currently in different stages of development ranging from commercialization to proof of concept. The Company ultimately plans to bring its products to commercialization; however, commercialization of these technologies is currently contingent on the development of a financing and operating plan that permits the Company to successfully capitalize on its development efforts to date. Such plan may include seeking a strategic or other partner to economically commercialize or finance the Company’s technologies. The Company’s objective in the interim is to maintain strict cost control measures, as well as maintain control of its technologies, in order to continue as a going concern. The discussion below assumes the Company continues with the development and commercialization of its technologies, although no assurances can be given.
Product and Product Candidates
The Company has historically operated under a two-fold product development strategy: (i) the maximization of the value of internally developed products that are market-ready for near-term distribution, and (ii) the aggressive development of technology platforms for products that the Company believes will address medical diagnostic and treatment issues into the future.
In introducing its PAD product lines and other products, the Company sought to align itself with experienced marketing partners that have established distribution channels. The Company teamed with a manufacturing partner in Asia, as well as niche United States manufacturers, in order to bring products to market in an efficient manner while controlling product quality. While these relationships are currently in effect, each has been suspended pending the development of a financing and operating plan to commercialize the Company’s products and technology.
PADs for Diagnosis and Treatment
The miniform PAD is a Company patented technology that provides the basis for a line of products that address an array of consumer health issues including: temporary relief of hemorrhoid and minor vaginal infection itch and discomfort, feminine urinary incontinence, catamenial needs, drug delivery, and medical sample collection and transport for diagnostic testing.
The Company’s PAD products for the consumer markets are FDA Class I OTC devices, and are easy to use, non-invasive, fully biodegradable, highly absorbent pads. Additionally, the unique non-woven technology utilized for the PADs allows for a PAD to be used as a sample collection device, providing a sample for diagnostic purposes, or to provide local or systemic therapy.
PADKit®
The PADKit integrates the miniform technology with the Company’s diagnostic expertise. The PADKit contains a miniform used as a collection device to collect a sample for diagnostic evaluation. Vaginally, the miniform collects blood along with numerous cells, vaginal mucous and discharge flushed out by the menstrual flow or during normal daily exfoliation. The PADKit is designed to provide the preferred sample collection system population scale testing for indications such as HPV, Human Immunodeficiency Virus (HIV), and general health screening, where healthcare professionals are not readily accessible.
Although significant improvements have been made in the area of Pap test sample reading and sample preparation, clinical indications support broad testing for HPV that will have a greater impact in lowering the incidence of cervical cancer. The Company believes the PADKit will provide a superior and more consistent sample, as well as a simpler, more comfortable and convenient procedure for HPV testing. The Company further hopes to demonstrate viability of the PADKit as the basis of various other diagnostic and screening tests.
The Company holds several patents for the method and apparatus for collecting vaginal fluid and exfoliated vaginal cells for diagnostic purposes; collection of a sample for general diagnostic screening, and the collection of an anal sample for prostate and other diagnostic purposes. Several clinical studies have been conducted with and on the PADKit, which have provided data needed to show the degree to which the sample collected can be used to replace other accepted samples, ability to provide a genomic testing sample as well as its safety and ease of use.
Unique® Miniforms
Miniform is a safe, convenient, and flushable technology for the underserved OTC hemorrhoid, feminine hygiene and urinary incontinence markets. The disposable miniform pads contain no adhesives and require no insertion, and are small enough to fit in the palm of a hand.
The Unique miniform is available as a treated pad for the temporary relief of the itch and discomfort associated with hemorrhoids and minor vaginal infection, and as an untreated pad, for the daily protection of light urinary, vaginal or anal leakage.
While the Company initiated a limited web-based domestic roll-out of the Unique miniform, it is in search of a strategic partnership(s) to expand the retail availability of the product across the United States and internationally.
The Company has significant experience manufacturing its miniform and a clear understanding of its costs. The miniform technology is protected by numerous patents covering various applications, the manufacturing process, and certain materials. The Company currently has contracted with a firm based in Taiwan to manufacture its pads, although the manufacturing relationship is currently suspended due to the Company’s financial condition, and pending the development of a financing and operations plan that allows the Company to recommence active operations.
Competition
Our industry is highly competitive and characterized by rapid and significant technological change. Significant competitive factors in our industry include, among others, product efficacy and safety; the timing and scope of regulatory approvals; the government reimbursement rates for and the average selling price of products; the availability of raw materials and qualified manufacturing capacity; manufacturing costs; intellectual property and patent rights and their protection; and sales, marketing and distribution capabilities.
We face, and will continue to face, competition from organizations such as pharmaceutical and biotechnology companies, as well as academic and research institutions.
Any product candidates that we successfully develop, which are cleared for sale by the FDA or similar international regulatory authorities in other countries, may compete with competitive products currently being used or that may become available in the future. Most of our competitors have substantially greater capital resources than we have, and greater capabilities and resources for research, conducting preclinical studies and clinical trials, regulatory affairs, manufacturing, marketing and sales. As a result, we may face competitive disadvantages relative to these organizations should they develop or commercialize a competitive product. In addition, given our current lack of working capital, our competitors will have the opportunity to capture market opportunities missed by the Company as it attempts to secure additional financing necessary to commercialize our products.
Raw Materials and Manufacturing
The Company currently does not have manufacturing capacity for any of its products and therefore has historically contracted for the manufacturing of its products to third-party manufacturers in and outside the United States. All manufactured products are produced under FDA mandated Good Manufacturing Practices (GMP) standard operating procedures developed and controlled by the Company’s quality system, which specifies approved raw materials, vendors, and manufacturing methodology. During the quarter ended June 30, 2012, the Company’s operations were inspected by the FDA and found to be in full compliance.
Intellectual Property Rights and Patents
As of December 31, 2012, the Company had twelve (12) patents issued, three (3) patents pending, and two (2) licensed patents. Our issued patents expire between 2014 and 2021; however, the Company may obtain continuations, which would extend the rights granted under our issued patents, and additional patents to cover technology in development. The Company also holds both United States and foreign trademarks, including QuantRx, PADkit, inSync, and Unique, and has applied for the rights to several others.
Patents and other proprietary rights are an integral part of our business. It is our policy to seek patent protection for our inventions and also to rely upon trade secrets and continuing technological innovations and licensing opportunities to develop and maintain our competitive position.
However, the patent positions of companies like ours involve complex legal and factual questions and, therefore, their enforceability cannot be predicted with any certainty. Our issued patents, those licensed to us, and those that may be issued to us in the future may be challenged, invalidated or circumvented, and the rights granted thereunder may not provide us with proprietary protection or competitive advantages against competitors with similar technology. Furthermore, our competitors may independently develop similar technologies or duplicate any technology developed by us. Because of the extensive time required for development, testing and regulatory review of a potential product, it is possible that, before any of our product candidates can be approved for sale and commercialized, our relevant patent rights may expire or remain in force for only a short period following commercialization. Expiration of patents we own or license could adversely affect our ability to protect future product development and, consequently, our operating results and financial position.
Licensing, Distribution and Development Agreements
The Church & Dwight agreement included milestone based payments, which were recognized in 2007 and 2008. On August 14, 2008, the Company entered into a ten-year Technology License Agreement with Church & Dwight Co., Inc. Under the terms of the Agreement, Church & Dwight acquired exclusive world-wide rights to use certain Company technology related to the jointly developed test and began distributing the product in early 2009, resulting in the Company receiving royalties on net sales of the product in 2012 and 2011 of $14,529 and $18,196, respectively.
The Company licenses patent rights and know-how for certain hemorrhoid treatment pads and related coatings from The Procter & Gamble Company. The five-year license agreement was entered into July 2006 and has a five-year automatic renewal option. This agreement remains in effect, and the Company has paid quarterly royalty payments to Procter & Gamble, as stipulated in the license agreement. Although the Company renewed the agreement in 2011, payments have been suspended, due to the Company’s current financial condition. The Company has subsequently filed for its own intellectual property rights to address the technology used in its treated miniforms.
Regulatory Requirements
Some of our products and manufacturing activities are, or will be subject to regulation by the FDA, and by other federal, state, local and foreign regulatory authorities. Pursuant to the Food, Drug and Cosmetic Act of 1938, commonly known as the FD&C Act, and the regulations promulgated under it, the FDA regulates the research, development, clinical testing, manufacture, packaging, labeling, storage, distribution, promotion, advertising and sampling of medical devices and medical imaging products. Before a new device or pharmaceutical product can be introduced to the market, the manufacturer must generally obtain marketing clearance through a section 510(k) notification, through a Premarket Approval (“PMA”), or New Drug Approval (“NDA”).
In the United States, medical devices intended for human use are classified into three categories, Class I, II or III, on the basis of the controls deemed reasonably necessary by the FDA to assure their safety and effectiveness with Class I requiring the fewest controls and Class III the most controls. Class I, unless exempted, and Class II devices are marketed following FDA clearance of a Section 510(k) premarket notification. Since Class III devices (e.g., a device whose failure could cause significant human harm or death) tend to carry the greatest risks, the manufacturer must demonstrate that such a device is safe and effective for its intended use by submitting a PMA application. PMA approval by the FDA is required before a Class III device can be lawfully marketed in the United States. Usually, the PMA process is significantly more time consuming and costly than the 510(k) process.
The U.S. regulatory scheme for the development and commercialization of new pharmaceutical products, which includes the targeted molecular imaging agents, can be divided into three distinct phases: an investigational phase including both preclinical and clinical investigations leading up to the submission of an NDA; a period of FDA review culminating in the approval or refusal to approve the NDA; and the post-marketing period.
All of our OTC products derived from the miniform technology, including Unique, are currently classified as Class I - exempt devices, requiring written notification to the FDA before marketing. RapidSense product candidates generally require validation and notification to the FDA under Section 510(k) prior to commercialization. The Company does not currently market any product that requires full clinical validation as a Class III product under FDA regulations, nor is it involved in RapidSense regulatory issues.
In addition, the FD&C Act requires device manufacturers to obtain a new FDA 510(k) clearance when there is a substantial change or modification in the intended use of a legally marketed device, or a change or modification, including product enhancements, changes to packaging or advertising text and, in some cases, manufacturing changes, to a legally marketed device that could significantly affect its safety or effectiveness. Supplements for approved PMA devices are required for device changes, including some manufacturing changes that affect safety or effectiveness, or disclosure to the consumer, such as labeling. For devices marketed pursuant to 510(k) determinations of substantial equivalence, the manufacturer must obtain FDA clearance of a new 510(k) notification prior to marketing the modified device. For devices marketed with PMA, the manufacturer must obtain FDA approval of a supplement to the PMA prior to marketing the modified device. Such regulatory requirements may require the Company to retain records for up to seven years, and be subject to periodic regulatory review and inspection of all facilities and documents by the FDA.
The FD&C Act requires device manufacturers to comply with Good Manufacturing Practices regulations. The regulations require that medical device manufacturers comply with various quality control requirements pertaining to design controls, purchasing contracts, organization and personnel, including device and manufacturing process design, buildings, environmental control, cleaning and sanitation; equipment and calibration of equipment; medical device components; manufacturing specifications and processes; reprocessing of devices; labeling and packaging; in-process and finished device inspection and acceptance; device failure investigations; and record keeping requirements including complaint files and device tracking. Company personnel and non-affiliated contract auditors periodically inspect the contract manufacturers to assure they remain in compliance.
The Company’s operations are currently in compliance with current FDA requirements. In the quarter ended June 30, 2012, the FDA audited the Company, and its operations were found to be fully compliant.
Additionally, the Centers for Medicare & Medicaid Services (“CMS”) regulates all laboratory testing (except research) performed on humans in the U.S. through the Clinical Laboratory Improvement Amendments (“CLIA”). In total, CLIA covers approximately 225,000 laboratory entities. The Division of Laboratory Services, within the Survey and Certification Group, under the Office of Clinical Standards and Quality (“OCSQ”) has the responsibility for implementing the CLIA Program.
The objective of the CLIA program is to ensure quality laboratory testing. Although all clinical laboratories must be properly certified to receive Medicare or Medicaid payments, CLIA has no direct Medicare or Medicaid program responsibilities.
In the event the Company’s current operating plan includes such a facility, it will fall under CLIA regulatory requirements.
Certain of our product candidates will require significant clinical validation prior to obtaining marketing clearance from the FDA. The Company intends to contract with appropriate and experienced CROs (contract research organizations) to prepare for and review the results from clinical field trials. The Company engages certain scientific advisors, consisting of scientific Ph.D.s and M.D.’s, who contribute to the scientific and medical validity of its clinical trials when appropriate.
Research and Development Activities
The Company spent $24,894 and $47,868 on research and development activities during the years ended December 31, 2012 and 2011, respectively. The decrease in research and development fees in the 2012 periods is directly attributable to the elimination of staff and research and development efforts following the suspension of operations at December 31, 2010.
Employees
As of December 31, 2012, we had no employees; however, the Company has four part-time consultants providing services to the Company in order to maintain the Company as a going concern and to protect the Company’s intellectual property and other assets. Our employees have never been represented by a labor organization or covered by a collective bargaining agreement.
ITEM 1A.
ITEM 1A. RISK FACTORS
You should consider carefully the following risks, along with other information contained in this Form 10-K. The risks and uncertainties described below are not the only ones that may affect us. Additional risks and uncertainties may also adversely affect our business and operations, including those discussed in Item 7 - Management’s Discussion and Analysis of Financial Condition and Results of Operation. If any of the following risks actually occur, our business, result of operations, and financial condition could be adversely affected.
The Company currently is not generating significant revenue. There can be no assurances that it will generate significant revenue in the future, achieve profitable operations or continue as a going concern.
The Company currently is not generating significant revenue from operations. The Company has historically financed its operations primarily through issuances of equity and the proceeds from the issuance of promissory notes. In the past, the Company also provided for its cash needs by issuing common stock, options and warrants for certain operating costs, including consulting and professional fees, as well as divesting its minority equity interests and equity-linked investments.
The Company’s history of operating losses, limited cash resources and the absence of an operating plan necessary to capitalize on the Company’s assets raise substantial doubt about our ability to continue as a going concern, absent a strengthening of our cash position. Management is currently pursuing various funding options, including seeking debt or equity financing, licensing opportunities and the sale of certain investment holdings, as well as a strategic, merger or other transaction to obtain additional funding to continue the development of, and to successfully commercialize, its products. There can be no assurance that the Company will be successful in its efforts. Should the Company be unable to obtain adequate financing or generate sufficient revenue in the future, the Company’s business, result of operations, liquidity and financial condition would be materially and adversely harmed, and the Company will be unable to continue as a going concern.
There can be no assurance that, assuming the Company is able to strengthen its cash position, it will achieve adequate revenue or profitable operations sufficient to continue as a going concern.
We have promissory notes in the aggregate principal amount of approximately $ 396,000 that are due and payable on demand. In the event that demand for repayment is made, and we are not able to raise sufficient capital to pay such notes or otherwise restructure the same, we will be in default and will not be able to continue as a going concern.
During the years ended December 31, 2012 and 2011, we issued promissory notes with a principal amount aggregating approximately $396,000, bearing interest at 6.0% per annum. Such notes became due and payable on demand throughout 2012. In the event the holders demand repayment and we are unable to pay such notes or restructure the notes, the notes will be in default, and the Company may not be able to continue as a going concern. In the event of a default, among other remedies, the interest rate paid in connection with the notes increases to 12% per annum.
Commercialization of our products is contingent on the development of a financing and operating plan, and we might not successfully develop a plan to develop our technology or products, or otherwise commercialize the same.
Commercialization of our innovative PAD-based products are conditioned on securing adequate financing, or entering into an alternative relationship necessary to allow the Company to commercialize its products and technology. Although no assurances can be given, in the event the Company is unable to successfully raise additional capital, develop a plan or otherwise enter into an alternative relationship to allow the Company to capitalize on its products and technology, we may not be able to attract or retain the management or personnel necessary to execute such plan and commercialize our technology or products. In the event we are unable to successfully develop a plan, attract or retain necessary and qualified personnel, or otherwise enter into an alternative relationship necessary to allow the Company to commercialize its products and technology, we may be unable to continue as a going concern.
Our ability to operate as a going concern is dependent upon raising adequate financing.
Although we are pursuing various funding and related options to commercialize our innovative PAD-based products, management has been unsuccessful to date in securing financing other than bridge financing. There can be no assurance that we will be successful in our efforts to obtain adequate financing. Should we be unable to raise adequate financing or generate revenue in the future, the Company’s business prospects would be materially and adversely harmed. As a result, management believes that given the current economic environment and the continuing need to strengthen our cash position, there is substantial doubt about our ability to continue as a going concern.
We have a history of incurring net losses and we may never become profitable.
As of the year ended December 31, 2012, the Company had an accumulated deficit of $49,321,532. Our losses resulted principally from costs related to our research programs and the development of our product candidates and general and administrative costs relating to our operations. Since the Company presently has limited sources of revenues, we will incur substantial and increasing losses in 2013. We cannot assure you that we will ever become profitable.
We will need to obtain additional funding to recommence and support our operations, and we may not be able to obtain such capital on a timely basis or under commercially reasonable terms, if at all.
We expect that our need for additional capital to recommence operations will be substantial and the extent of this need will depend on many factors, some of which are beyond our control, including the continued development of our product candidates; the costs associated with maintaining, protecting and expanding our patent and other intellectual property rights; future payments, if any, received or made under existing or possible future collaborative arrangements; the timing of regulatory approvals needed to market our product candidates; and market acceptance of our products.
It is possible that the Company will not generate positive cash flow from operations for several years. We cannot assure you that funds will be available to us in the future on favorable terms, if at all. If adequate funds are not available to us on terms that we find acceptable, or at all, we may be required to delay, reduce the scope of, or eliminate research and development efforts or clinical trials on any or all of our product candidates. We may also be forced to curtail or restructure our operations, obtain funds by entering into arrangements with collaborators on unattractive terms or relinquish rights to certain technologies or product candidates that we would not otherwise relinquish in order to continue independent operations.
Further testing of certain of our product candidates is required and regulatory approval may be delayed or denied, which would limit or prevent us from marketing our product candidates and significantly impair our ability to generate revenues.
Human pharmaceutical products are subject to rigorous preclinical testing and clinical trials and other approval procedures mandated by the FDA and foreign regulatory authorities. Various federal and foreign statutes and regulations also govern or influence the manufacturing, safety, labeling, storage, record keeping and marketing of pharmaceutical products. The process of obtaining these approvals and the subsequent compliance with appropriate U.S. and foreign statutes and regulations is time-consuming and requires the expenditure of substantial resources. In addition, these requirements and processes vary widely from country to country.
To varying degrees based on the regulatory plan for each product candidate, the effect of government regulation and the need for FDA and other regulatory agency approval will delay commercialization of our product candidates, impose costly procedures upon our activities, and put us at a disadvantage relative to larger companies with which we compete. There can be no assurance that FDA or other regulatory approval for any products developed by us will be granted on a timely basis, or at all. If we discontinue the development of one of our product candidates, our business and stock price may suffer.
The Company faces intense competition.
Upon recommencement of operations, the Company will be engaged in a segment of the biomedical industry that is highly competitive. If successfully brought into the marketplace, any of the Company’s products will likely compete with several existing products. The Company anticipates that it will face intense and increasing competition in the future as new products enter the market and advanced technologies become available. We cannot assure that existing products or new products developed by competitors will not be more effective, or more effectively marketed and sold than those by the Company. Competitive products may render the Company’s products obsolete or noncompetitive prior to the Company’s recovery of development and commercialization expenses.
Many of the Company’s competitors also have significantly greater financial, technical and human resources and will likely be better equipped to develop, manufacture and market products. Smaller companies may also prove to be significant competitors, particularly through collaborative arrangements with large biotechnology companies. Furthermore, academic institutions, government agencies and other public and private research organizations are becoming increasingly aware of the commercial value of their inventions and are actively seeking to commercialize the technology they have developed. Accordingly, competitors may succeed in commercializing products more rapidly or effectively than the Company, which would have a material adverse effect on the Company.
Assuming the Company is able to successfully develop a financing and operating plan, and therefore recommence operations, there is no assurance that the Company’s products will gain market acceptance.
Efforts to commercialize our products are conditioned on the development of a financing and operating plan that allows the Company to recommence operations. Assuming the successful development of such a plan, the success of the Company will depend in substantial part on the extent to which our products achieve market acceptance. We cannot predict or guarantee that physicians, patients, healthcare insurers or maintenance organizations, or the medical community in general, will accept or utilize any products of the Company.
If we fail to establish marketing and sales capabilities or fail to enter into effective sales, marketing and distribution arrangements with third parties, we may not be able to successfully commercialize our products.
Upon recommencement of operations, we will be primarily dependent on third parties for the sales, marketing and distribution of our products. We may enter into various agreements providing for the commercialization of our product candidates. We intend to sell our product candidates primarily through third parties and establish relationships with other companies to commercialize them in other countries around the world. We currently have no internal sales and marketing capabilities, and only a limited infrastructure to support such activities. Therefore, our future profitability will depend in part on our ability to enter into effective marketing agreements. To the extent that we enter into sales, marketing and distribution arrangements with other companies to sell our products in the United States or abroad, our product revenues will depend on their efforts, which may not be successful.
The Company’s success will be dependent on licenses and proprietary rights it receives from other parties, and on any patents it may obtain.
Our success will depend in large part on the ability of the Company and its licensors to (i) maintain license and patent protection with respect to our products, (ii) defend patents and licenses once obtained, (iii) maintain trade secrets, (iv) operate without infringing upon the patents and proprietary rights of others, and (v) maintain and obtain appropriate licenses to patents or proprietary rights held by third parties if infringement would otherwise occur, both in the United States and in foreign countries.
The patent positions of biomedical companies, including those of the Company, are uncertain and involve complex legal and factual questions. There is no guarantee that the Company or its licensors have or will develop or obtain the rights to products or processes that are patentable, that patents will issue from any of the pending applications or that claims allowed will be sufficient to protect the technology licensed to the Company. In addition, we cannot be certain that any patents issued to or licensed by the Company will not be challenged, invalidated, infringed or circumvented, or that the rights granted thereunder will provide competitive disadvantages to the Company.
Litigation, which could result in substantial cost, may also be necessary to enforce any patents to which the Company has rights, or to determine the scope, validity and unenforceability of other parties’ proprietary rights, which may affect the rights of the Company. United States patents carry a presumption of validity and generally can be invalidated only through clear and convincing evidence. There can be no assurance that the Company’s patents would be held valid by a court or administrative body or that an alleged infringer would be found to be infringing. The mere uncertainty resulting from the institution and continuation of any technology-related litigation or interference proceeding could have a material adverse effect on the Company pending resolution of the disputed matters.
The Company may also rely on unpatented trade secrets and know-how to maintain its competitive position, which it seeks to protect, in part, by confidentiality agreements with employees, consultants and others. There can be no assurance that these agreements will not be breached or terminated, that the Company will have adequate remedies for any breach, or that trade secrets will not otherwise become known or be independently discovered by competitors.
Protecting our proprietary rights is difficult and costly.
The patent positions of biotechnology companies can be highly uncertain and involve complex legal and factual questions. Accordingly, we cannot predict the breadth of claims allowed in these companies’ patents or whether the Company may infringe or be infringing these claims. Patent disputes are common and could preclude the commercialization of our products. Patent litigation is costly in its own right and could subject us to significant liabilities to third parties. In addition, an adverse decision could force us to either obtain third-party licenses at a material cost or cease using the technology or product in dispute.
We have substantially reduced our headcount to reduce expenses and we may be unable to attract skilled personnel and maintain key relationships at such point as we recommence operations.
The success of our business will depend, in large part, on our ability to attract and retain highly qualified management, scientific and other personnel, and on our ability to develop and maintain important relationships with leading research institutions and consultants and advisors. Competition for these types of personnel and relationships is intense among numerous pharmaceutical and biotechnology companies, universities and other research institutions. As a result of the suspension of the development of our PAD based products, we have substantially reduced our headcount and currently rely on consultants to manage the business and operations of the Company. There can be no assurance that the Company will be able to attract and retain skilled personnel at such time as it recommences operations, and the failure to do so would have a material adverse effect on the Company.
The Company may not be able to efficiently develop manufacturing capabilities or contract for such services from third parties on commercially acceptable terms.
The Company has established relationships with third-party manufacturers for the commercial production of our products, which relationships have been suspended due to the suspension of direct, active operations. There can be no assurance that the Company will be able to reestablish or maintain relationships with third-party manufacturers on commercially acceptable terms or that third-party manufacturers will be able to manufacture our products on a cost-effective basis in commercial quantities under good manufacturing practices mandated by the FDA.
The dependence upon third parties for the manufacture of products may adversely affect future costs and the ability to develop and commercialize our products on a timely and competitive basis. Further, there can be no assurance that manufacturing or quality control problems will not arise in connection with the manufacture of our products or that third party manufacturers will be able to maintain the necessary governmental licenses and approvals to continue manufacturing such products. Any failure to establish relationships with third parties for its manufacturing requirements on commercially acceptable terms would have a material adverse effect on the Company. Additionally, the Company may rely upon foreign manufacturers. Any event which negatively impacts these manufacturing facilities, manufacturing systems or equipment, or suppliers, including, among others, wars, terrorist activities, natural disasters and outbreaks of infectious disease, could delay or suspend shipments of products or the release of new products.
In the future, we anticipate that we will need to obtain additional or increased product liability insurance coverage and it is uncertain that such increased or additional insurance coverage can be obtained on commercially reasonable terms.
The business of the Company will expose it to potential product liability risks that are inherent in the testing, manufacturing and marketing of pharmaceutical products. There can be no assurance that product liability claims will not be asserted against the Company. The Company has obtained insurance coverage; however, there can be no assurance that the Company will be able to obtain additional product liability insurance on commercially acceptable terms or that the Company will be able to maintain such insurance at a reasonable cost or in sufficient amounts to protect against potential losses. A successful product liability claim or series of claims brought against the Company could have a material adverse effect on the Company.
Insurance coverage is increasingly more difficult to obtain or maintain.
Obtaining insurance for our business, property and products is increasingly more costly and narrower in scope, and we may be required to assume more risk in the future. If we are subject to third-party claims or suffer a loss or damage in excess of our insurance coverage, we may be required to share that risk in excess of our insurance limits. Furthermore, any first- or third-party claims made on any of our insurance policies may impact our ability to obtain or maintain insurance coverage at reasonable costs or at all in the future.
The market price of our shares, like that of many biotechnology companies, is highly volatile.
Market prices for the Company’s common stock and the securities of other medical and biomedical technology companies have been highly volatile and may continue to be highly volatile in the future. Factors such as announcements of technological innovations or new products by the Company or its competitors, government regulatory action, litigation, patent or proprietary rights developments, and market conditions for medical and high technology stocks in general can have a significant impact on any future market for common stock of the Company.
Trading of our common stock is limited, which may make it difficult for you to sell your shares at times and prices that you feel are appropriate.
Trading of our common stock, which is conducted on the OTC Bulletin Board, has been limited. This adversely affects the liquidity of our common stock, not only in terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions and reduction in security analysts and the media’s coverage of us. This may result in lower prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and ask prices for our common stock.
The issuance of shares of our preferred stock may adversely affect our common stock.
The board of directors of the Company is authorized to designate one or more series of preferred stock and to fix the rights, preferences, privileges and restrictions thereof, without any action by the stockholders. The designation and issuance of such shares of our preferred stock may adversely affect the common stock, if the rights, preferences and privileges of such preferred stock (i) restrict the declaration or payment of dividends on common stock, (ii) dilute the voting power of common stock, (iii) impair the liquidation rights of the common stock, or (iv) delay or prevent a change in control of the Company from occurring, among other possibilities.
Because we do not expect to pay dividends, you will not realize any income from an investment in our common stock unless and until you sell your shares at a profit.
We have never paid dividends on our common stock and do not anticipate paying any dividends for the foreseeable future. You should not rely on an investment in our stock if you require dividend income. Further, you will only realize income on an investment in our shares in the event you sell or otherwise dispose of your shares at a price higher than the price you paid for your shares. Such a gain would result only from an increase in the market price of our common stock, which is uncertain and unpredictable.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
At December 31, 2012, the Company had reduced its operations and does not maintain a corporate headquarters. During 2011, the Company was leasing a facility in Portland Oregon with a lease agreement that expired on September 30, 2011. The Company has no further obligation under this lease agreement, and currently is planning to transfer operations to a new facility pending obtaining financing to recommence operations.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On April 8, 2013, the Company filed a Summary Judgement in Lieu of Complaint (the "Complaint") against Genomics USA, Inc. ("GUSA") to recover all amounts due the Company under the terms of a promissory note in the principal amount of $200,000 (the "GUSA Note"). The Complaint was filed in the Supreme Court of the State of New York, and seeks repayment of all amounts due under the terms of the GUSA Note, and accrued interest thereon, plus attorney's fees.
As of the date hereof, there are no additional material pending legal proceedings to which we are a party to or of which any of our property is the subject.
ITEM 4.
ITEM 4. MINE SAFETY DISCLOSURES
None.
PART II
ITEM 5.
ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
Our Common Stock
Our common stock trades on the OTC Markets under the symbol “QTXB.QB”. The prices below are based on high and low reported sales prices as reported by the OTC Markets during the calendar quarters indicated. The prices represent quotations between dealers without adjustment for retail mark-up, mark-down or commission and do not necessarily represent actual transactions.
Stockholders
As of December 31, 2012, there were approximately 260 holders of record of our common stock, one of which was Cede & Co., a nominee for the Depository Trust Company or DTC. Shares of common stock that are held by financial institutions, as nominees for beneficial owners, are deposited into principal accounts at the DTC, and are considered to be held of record by Cede & Co. as one stockholder.
Dividends
We have not declared nor paid any cash dividends on our common stock. We currently anticipate that we will retain all of our future earnings for use in the expansion and operation of our business, thus we do not anticipate paying any cash dividends on our common stock in the foreseeable future.
Recent Sales of Unregistered Securities
We issued shares of our common as well as unsecured promissory notes in unregistered transactions during fiscal year 2012. All of the notes and shares of common stock issued were issued in non-registered transactions in reliance on Section 3(a)(9) and/or Section 4(2) of the Securities Act of 1933, as amended (the “Securities Act”), and were reported in our Quarterly Reports on Form 10-Q and in our Current Reports on Form 8-K filed with the Commission during the fiscal year ended December 31, 2012.
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Not required under Regulation S-K for “smaller reporting companies.”
ITEM 7.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATION
Overview
The Company has developed and ultimately intends to commercialize its innovative PAD based products for the OTC and laboratory markets based on its patented technology platforms, and its genomic diagnostics, based on its patented PadKit® technology for the worldwide healthcare industry. These platforms include: inSync®, Unique™, PadKit®, and OEM branded OTC and laboratory testing products based on the Company’s core intellectual property related to its PAD technology. These products are intended for the treatment of hemorrhoids, minor vaginal infection, urinary incontinence, general catamenial uses and other medical needs.
The Company’s efforts to commercialize its products are currently contingent on additional financing to execute its business and operating plan, which is currently focused on the commercialization of the Company’s PAD technology either directly or through a joint venture or other relationship intended to increase shareholder value. In the interim, the Company has executed a plan to substantially reduce expenses, including headcount, and to restructure and/or eliminate many of its outstanding liabilities. This plan was necessary in order for the Company to continue as a going concern. No assurances can be given that the Company will obtain financing, or otherwise successfully develop a business and operating plan or enter into an alternative relationship to commercialize the Company’s PAD technology.
For the year ended December 31, 2012, the Company had minority investments in Genomics USA, Inc. ("GUSA"). The Company is currently evaluating its minority equity interest in GUSA with the objective of extracting the value of such investment for the benefit of the Company and its shareholders. The Company currently does not realize any material value in its investment in GUSA.
On June 20, 2012, the Company formed a wholly-owned subsidiary, QX Labs, Inc. (“QX”), to convey and transfer to QX all intellectual property and assets related to the Company’s diagnostic testing business ("Diagnostics Business"). The Diagnostic Business is based principally on the Company’s proprietary PadKit® technology, which the Company believes provides a patented platform technology for genomic diagnostics, including fetal genomics. Following the transfer of the Diagnostics Business to QX, the Company’s other business line will consist of its over-the-counter business, including the InSync feminine hygienic interlabial pad, the Unique pad for hemorrhoid application, and other treated miniforms (the “OTC Business”), as well as established and continuing licensing relationships related to the OTC Business. Management believes the creation of QX permits the Company to more efficiently explore different options to maximize the value of the Diagnostics Business and the OTC Business (collectively, the “Businesses”), with the objective of maximizing the value of the Businesses for the benefit of the Company and its stakeholders.
The Company’s current focus is to develop a financing and operating plan to: (i) leverage its broad-based intellectual property (IP) and patent portfolio to develop new and innovative diagnostic products; (ii) commercialize its OTC Business and its Diagnostics Business either directly or through joint ventures, mergers or similar transactions intended to capitalize on commercial opportunities presented by each of the Businesses; (iii) contract manufacturing to third parties while maintaining control over the manufacturing process; and (iv) maximize the value of the Company’s investments in non-core assets, including GUSA. As a result of its current financial condition, however, the Company’s efforts in the short-term will be focused on obtaining financing necessary to maintain the Company as a going concern.
The following discussion of our financial condition should be read together with our financial statements and related notes included in this Annual Report on Form 10-K.
Recent Developments
Issuance of Additional Promissory Notes. Between August 2012 and April 2013, the Company issued promissory notes to two investors in the principal amounts of $10,000 (the “$10K Note”), $25,000 (the “$25K Note”), $15,000 (the “$15K Note”), $20,000 (the “$20K Note”) and $16,000 (the "$16K Note") (together, the “Notes”). As additional consideration for the purchase of the Notes, the Company issued: (i) 200,000 shares of its common stock, par value $0.001 per share, to the purchaser of the $25K Note and the $15K Note, (ii) 8,496 $0.50 FPMI Warrants, defined below, to the purchaser of the $10K Note, and (iii) 36,000 warrants to purchase shares of FluoroPharma Medical, Inc. (“FPMI”) common stock, for $1.00 per share (“$1.00 FPMI Warrants”), to the purchaser of the $20K Note and the $16K Note. The $1.00 FPMI Warrants expire on February 15, 2019.
The Notes accrue interest at the rate of 6% annually. The $10K Note and the $25K Note are currently due and payable on demand, while the $15K Note, the $20K Note and the $16K Note are due and payable on June 30, 2013 (the “Maturity Date”). The Notes are convertible at the option of each respective holder into shares of common stock at a conversion price equal to $0.10 per share. In addition, the holders may exchange the Notes for common stock in the event the Company consummates a qualified financing (the “Qualified Financing”), which is defined in the Notes as a financing resulting in gross proceeds to the Company of at least $500,000. While the Company intends to pay the Notes using proceeds from a Qualified Financing, such Qualified Financing may not occur prior to the date the holders of the $10K Note and $25K Note demand repayment, or the Maturity Date of the $15K Note, the $20K Note or the $16K Note.
The Company presently intends to issue additional Notes to finance its current working capital needs. However, there can be no assurance that the Company will be able to issue additional Notes.
Modification of June 2012 Notes. The Company entered into agreements with the holders of June 2012 Notes to extend the maturity date to November 15, 2012. As consideration for the extension of the maturity date, the Company assigned a total of 269,004 FPMI Warrants, which FPMI Warrants have an exercise price of $0.50 per share and expire on April 19, 2019. The June 2012 Notes are currently due and payable, on demand.
Our Results of Operations
We recognized total revenues of $15,236 and $19,085 for the years ended December 31, 2012 and 2011, respectively, due to lower revenues from PAD sales and lower royalty revenues in the 2012 period. Included in total revenues are $14,529 and $18,196, attributable to royalty payments from Church & Dwight Co., Inc. (“Church & Dwight”) for 2012 and 2011, respectively. The Church & Dwight royalty payments began in the second quarter of 2009, for the license of certain Company technology to Church & Dwight. The Company expects only nominal revenues pending the successful launch of its PAD-based products and no assurances can be given that the Company’s revenues will return to prior levels.
Total costs and operating expenses for the years ended December 31, 2012 and 2011 were $509,524 and $815,850, respectively. Highlights of the major components of our results of operations are detailed and discussed below:
Sales, general and administrative expense includes, but is not limited to, consulting expense, office and insurance expense, accounting and other costs to maintain compliance with the Company’s SEC reporting requirements. The increase in sales, general and administrative expenses in the year ended December 31, 2012 compared to the year ended December 31, 2011 represent increased costs for patent related expenses. Included in sales, general and administrative expenses for the year ended December 31, 2012 are non-cash expenses of $45,000 related to stock issued as payment for board and other administrative services.
Professional fees include the costs of legal, consulting and auditing services provided to us. The decrease in professional fees in the 2012 period is directly related to decreased costs of consulting and professional services provided to the Company. Included in the professional fees expenses for the year ended December 31, 2012 are non-cash expenses of $152,494 related to stock and warrants issued as payment for professional services.
Research and development expense during 2012 primarily reflects technical consulting and expenses incurred to support the PAD-development and related products. The decrease in research and development expenses in the year ended December 31, 2012 are directly related to the suspension of operations on December 31, 2010.
Other income and expense for the years ended December 31, 2012 and 2011 was a loss of $223,679 and $242,447, respectively. Highlights of the major components of other income and expense our results of operations are detailed and discussed below:
During the years ended December 31, 2012 and 2011, the Company recorded gains on the settlement of accounts payable and accrued expense related to settlement agreements reached with its vendors and compensation settlements reached with executive management. During 2012, the Company settled an aggregate total of $32,515 of accounts payable for $15,000 in cash. During 2012, the Company disposed of $33,603 assets related to its former joint venture. During 2011, the Company settled $334,257 of accounts payable for $32,133 in cash and 900,000 in shares of its common stock.
During the years ended December 31, 2012 and 2011, interest expense increased to $25,247 from $6,501 primarily due to outstanding notes payable in the 2012 period.
During the years ended December 31, 2011, the Company recorded net losses of $229,297 from discontinuing operations of QN Diagnostics, LLC, a joint venture between the Company and NuRx Pharmaceuticals, Inc. (“QND”).
Net loss for 2012 was $717,967 compared to net loss of $ $783,616 reported for 2011. The decrease in net losses during the year ended December 31, 2012 as compared to the same period for 2011 is due to lower losses on dispositions in the 2012 period partially offset by higher professional fees, as well as all the factors previously discussed.
Liquidity and Capital Resources
At December 31, 2012, the Company had cash and cash equivalents of $9,989 as compared to $7,565 at December 31, 2011.
During the year ended December 31, 2012, we used $182,101 of cash for operating activities, as compared to $427,379 during the year ended December 31, 2011. The overall net increase in cash of $2,424 for the year ended December 31, 2012, is attributable to net cash used for operating activities offset by cash received from financing activities. Also included in net cash used during the year ended December 31, 2012, is cash used to purchase capital assets of $5,475.
Cash provided by financing activities during the year ended December 31, 2012 was $190,000 as compared to $205,000 during the year ended December 31, 2011. During 2012, cash provided for financing activities was through the issuance of Notes.
The Company has not generated sufficient revenues from operations to meet its operating expenses. In addition, the Company will require additional funding to complete the development and launch of its products, or to otherwise capitalize on its PAD technology. The Company has historically financed its operations primarily through issuances of equity and the proceeds of debt instruments. In the past, the Company has also provided for its cash needs by issuing common stock, options and warrants for certain operating costs, including consulting and professional fees.
Management believes that given the current economic environment and the continuing need to strengthen our cash position, there is substantial doubt about our ability to continue as a going concern. We are pursuing various funding options, including licensing opportunities and the sale of investment holdings, as well as a strategic transaction with our joint venture partner, to obtain additional funding to continue the development of our products and bring them to commercial markets. There can be no assurance that we will be successful in our efforts. Should we be unable to raise adequate financing or generate sufficient revenue in the future, the Company’s business, results of operations, liquidity and financial condition would be materially and adversely harmed.
The Company believes that the ability of the Company to recommence operations, and therefore continue as a going concern is dependent upon its ability to do any or all of the following:
●
obtain adequate sources of funding to pay operating expenses and fund long-term business operations;
●
enter into a licensing or other relationship that allows the Company to commercialize its products;
●
manage or control working capital requirements by reducing operating expenses; and
●
develop new and enhance existing relationships with product distributors and other points of distribution for the Company’s products.
There can be no assurance that the Company will be successful in achieving its short- or long-term plans as set forth above, or that such plans, if consummated, will enable the Company to obtain profitable operations or continue in the long-term as a going concern.
Off-Balance Sheet Arrangements
We have not entered into any transactions with unconsolidated entities in which we have financial guarantees, subordinated retained interests, derivative instruments or other contingent arrangements that expose us to material continuing risks, contingent liabilities or any other obligations under a variable interest in an unconsolidated entity that provides us with financing, liquidity, market risk or credit risk support.
Critical Accounting Policies
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin Topic 13 when persuasive evidence of an arrangement exists and delivery has occurred, provided the fee is fixed or determinable and collection is probable. The Company assesses whether the fee is fixed and determinable based on the payment terms associated with the transaction. If a fee is based upon a variable such as acceptance by the customer, the Company accounts for the fee as not being fixed and determinable. In these cases, the Company defers revenue and recognizes it when it becomes due and payable. Up-front engagement fees are recorded as deferred revenue and amortized to income on a straight-line basis over the term of the agreement, although the fee is due and payable at the time the agreement is signed or upon annual renewal. Payments related to substantive, performance-based milestones in an agreement are recognized as revenue upon the achievement of the milestones as specified in the underlying agreement when they represent the culmination of the earnings process.
The Company assesses the probability of collection based on a number of factors, including past transaction history with the customer and the current financial condition of the customer. If the Company determines that collection of a fee is not reasonably assured, revenue is deferred until the time collection becomes reasonably assured. Significant management judgment and estimates must be made and used in connection with the revenue recognized in any accounting period. Material differences may result in the amount and timing of our revenue for any period if our management made different judgments or utilized different estimates.
The Company recognizes revenue from nonrefundable minimum royalty agreements from distributors or resellers upon delivery of product to the distributor or reseller, provided no significant obligations remain outstanding, the fee is fixed and determinable, and collection is probable. Once minimum royalties have been received, additional royalties are recognized as revenue when earned based on the distributor’s contractual reporting obligations. The Company is able to recognize minimum royalty payments on an accrual basis, as they are specified in the contract. However, since the Company cannot forecast product sales by licensees, royalty payments that are based on product sales by the licensees are not determinable until the licensee has completed their computation of the royalties due and/or remitted their cash payment to us. Should information on licensee product sales become available so as to enable the Company to recognize royalty revenue on an accrual basis, materially different revenues and results of operations could occur.
Our strategy includes entering into collaborative agreements with strategic partners for the development, commercialization and distribution of our product candidates. Such collaboration agreements may have multiple deliverables. In arrangements with multiple deliverables where we have continuing performance obligations, contract, milestone and license fees are recognized as revenue together with any up-front payments over the term of the arrangement as performance obligations are completed, unless the deliverable has stand-alone value and there is objective, reliable evidence of fair value of the undelivered element in the arrangement. In the case of an arrangement where it is determined there is a single unit of accounting, all cash flows from the arrangement are considered in the determination of all revenue to be recognized. Cash received in advance of revenue recognition is recorded as deferred revenue.
Use of Estimates
The preparation of financial statements and related disclosures in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, revenues and expenses and related disclosures of contingent assets and liabilities in the financial statements and accompanying notes. The accounting policies discussed below are considered by management to be the most important to the Company’s financial condition and results of operations, and require management to make its most difficult and subjective judgments due to the inherent uncertainty associated with these matters. All significant estimates and assumptions are developed based on the best information available to us at the time made and are regularly reviewed and adjusted when necessary. We believe that our estimates and assumptions are reasonable under the circumstances; however, actual results may vary from these estimates and assumptions. Additional information on significant accounting principles is provided in Note 1 of the attached financial statements.
Impairment of Assets
We assess the impairment of long-lived assets, including our other intangible assets, at least annually or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments, related primarily to the future profitability and/or future value of the assets. Changes in our strategic plan and/or market conditions could significantly impact these judgments and could require adjustments to recorded asset balances. We hold investments in companies having operations or technologies in areas which are within or adjacent to our strategic focus when acquired, all of which are privately held and whose values are difficult to determine. We record an investment impairment charge if we believe an investment has experienced a decline in value that is other than temporary. Future changes in our strategic direction, adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.
In determining fair value of assets, the Company bases estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets that are not readily apparent from other sources. Actual fair value may differ from management estimates resulting in potential impairments causing material changes to certain assets and results of operations.
Share-Based Payments
We grant options to purchase our common stock to our employees and directors under our stock option plan. We estimate the value of stock option awards on the date of grant using a Black-Scholes pricing model (Black-Scholes model). The determination of the fair value of share-based payment awards on the date of grant using the Black-Scholes model is affected by our stock price as well as assumptions regarding a number of complex and subjective variables. These variables include, but are not limited to, our expected stock price volatility over the term of the awards, actual and projected employee stock option exercise behaviors, and risk-free interest rate. If factors change and we employ different assumptions in future periods, the compensation expense that we record may differ significantly from what we have recorded in the current period.
We determine the fair value of the share-based compensation awards granted to non-employees as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either of (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached or (2) the date at which the counterparty’s performance is complete.
Estimates of share-based compensation expenses are significant to our financial statements, but these expenses are based on option valuation models and will never result in the payment of cash by us.
The above listing is not intended to be a comprehensive list of all of our accounting policies. In most cases, the accounting treatment of a particular transaction is specifically dictated by accounting principles generally accepted in the United States.
Deferred Taxes
We recognize deferred tax assets and liabilities based on differences between the financial statement carrying amounts and tax bases of assets and liabilities, which requires management to perform estimates of future transactions and their respective valuations. We review our deferred tax assets for recoverability and establish a valuation allowance if it is more likely than not that the Company will not realize the benefit of the net deferred tax asset. At December 31, 2012 and 2011, a valuation allowance has been established. The likelihood of a material change in the valuation allowance depends on our ability to generate sufficient future taxable income. In the future, if management determines that the likelihood exists to utilize the Company’s deferred tax assets, a reduction of the valuation allowance could materially increase the Company’s net deferred tax asset.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
N/A
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Audited balance sheets for the years ended December 31, 2012 and 2011 and audited statements of operations, changes in stockholders’ equity and cash flows for the years ended December 31, 2012 and 2011 are included immediately following the signature page to this Annual Report, beginning on page.
ITEM 9.
ITEM 9. CHANGE IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A(T).
ITEM 9A(T). CONTROLS AND PROCEDURES
Evaluation of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our principal executive officer and principal financial officer, we conducted an evaluation of the effectiveness of the design and operations of our disclosure controls and procedures, as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the "Exchange Act"), as of December 31, 2012. Based on this evaluation, and in light of the material weaknesses in internal controls over financial reporting described below, the Company’s Chief Executive Officer and Principal Financial Officer concluded that our disclosure controls and procedures were not effective.
Management's Annual Report on Internal Control over Financial Reporting
Our Chief Executive Officer/Principal Accounting Officer is responsible for establishing and maintaining adequate internal control over financial reporting as defined in Rule 13a-15(f) and 15d-(f) under the Exchange Act. Our internal control over financial reporting are designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of consolidated financial statements for external purposes in accordance with U.S. generally accepted accounting principles. Our internal control over financial reporting include those policies and procedures that:
(i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of our assets;
(ii) provide reasonable assurance that transactions are recorded as necessary to permit the preparation of our consolidated financial statements in accordance with U.S. generally accepted accounting principles, and that our receipts and expenditures are being made only in accordance with authorizations of our management and directors; and
(iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of our assets that could have a material effect on the consolidated financial statements.
Our Chief Executive Officer/Principal Accounting Officer assessed the effectiveness of our internal control over financial reporting presented in conformity with accounting principles generally accepted in the U.S. as of December 31, 2012. In conducting its assessment, our Chief Executive Officer/Principal Accounting Officer used the criteria issued by the Committee of Sponsoring Organizations of the Treadway Commission in Internal Control-Integrated Framework. Based on this assessment, our Chief Executive Officer/Principal Accounting Officer concluded that, as of December 31, 2012, our internal control over financial reporting was not effective based on those criteria due to the material weakness in our entity level control environment described in the 2010 Annual Report on Form 10-K.
In an effort to remediate the identified material weaknesses in our entity level control environment, we have initiated and/or undertaken the following actions:
Management has retained, and will continue to retain, additional personnel with technical knowledge, experience, and training in the application of generally accepted accounting principles commensurate with our financial reporting and U.S. GAAP requirements. Where necessary, we will supplement personnel with qualified external advisors.
While the Company has retained competent accounting and finance professionals necessary to ensure timely and accurate reporting with the SEC, the weaknesses in our entity level control environment arguably persist, and will continue to persist pending financing necessary to allow the Company to recruit additional accounting and/or finance professionals to address the material weakness in our entity level control environment.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting that occurred during our most recent fiscal year that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting. There has been no progress towards remediating our previously disclosed material weakness due to the lack of funding.
ITEM 9B.
ITEM 9B. OTHER INFORMATION
None.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
The following table sets forth the Company’s executive officers and directors:
(1)
Drs. Fleming and Hirschman and Mr. Abrams have been elected to hold office until the 2013 annual meeting of stockholders, or until their successor is duly elected or appointed, unless their office is earlier vacated.
Shalom Hirschman, M.D. was appointed Chief Executive Officer and Principal Accounting Officer on December 31, 2010, and has served as a Director of the Company since September 2005. Dr. Hirschman was Professor of Medicine, Director of the Division of Infectious Diseases and Vice-Chairman of the Department of Medicine at Mt. Sinai School of Medicine and the Mount Sinai Hospital. He spent nearly three decades at Mt. Sinai until his retirement. He then became the CEO, President and Chief Scientific Officer of Advanced Viral Research Corp. from which he retired in 2004.
Dr. Hirschman’s extensive experience in healthcare, in both academia and as an executive working in advanced clinical research, contribute to the efforts of the Board of Directors in shaping the direction of the Company as it seeks to execute its business plan.
William H. Fleming, Ph.D., has served as President since November 2008, Chief Scientific Officer of the Company since July 2005, and as a Director and Secretary of the Company since February 1994. Prior to that, he served as Vice President of Diagnostics from August 1997 through July 2005, and as Acting CEO from 2003 until May 2005. From February 1994 through August 1997, Dr. Fleming served as President and Chief Operating Officer. In addition, he was President, Chief Operating Officer and a Director of ProFem from July 1993 until its merger with the Company in June 1994. From April 1992 until July 1993, Dr. Fleming served as an associate with Sovereign Ventures, a healthcare consulting firm; concurrently he served as director of corporate development of Antivirals, Inc., a biotechnology company involved in antisense technology. Dr. Fleming is a director of ERC, a non-profit organization.
The Board of Directors believes that Dr. Fleming’s tenure with the Company dating back to 1994, together with his extensive experience in women’s healthcare, including biotechnology expertise, contribute to the Board’s deliberations regarding efforts to commercialize the Company’s PAD technologies.
Michael S. Abrams was appointed to the Board of Directors in March 2012. Mr. Abrams is currently the Interim Chief Financial Officer and Director of Bond Laboratories, Inc., and is a Managing Director of Burnham Hill Partners LLC, a New York-based investment and merchant banking firm he joined in August of 2003. Mr. Abrams holds a Master of Business Administration with Honors from the Booth School of Business at the University of Chicago.
The Board of Directors believes that Mr. Abrams’ broad experience in corporate finance, including restructurings, as well as his experience as a finance executive working with public companies, provides necessary and relevant experience to the Board of Directors given the Company’s financing challenges and efforts to restructure its business and operations.
Compliance with Section 16(a) of the Exchange Act
Section 16(a) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), requires the Company’s Directors and Officers, and persons who own more than 10% of a registered class of the Company’s equity securities (“Section 16 Persons”), to file with the SEC initial reports of ownership and reports of changes in ownership of common stock and other equity securities of the Company. Section 16 Persons are required by SEC regulation to furnish the Company with copies of all Section 16(a) reports they file. Based on the Company’s review of the forms it has received, on other reports filed by Section 16 Persons with the SEC and on the Company’s records, the Company believes that during 2012, no delinquent Section 16 reports were filed with the SEC.
Code of Ethics
The Company has adopted a code of ethics, which applies to all our directors, officers and employees. Our code of ethics is intended to comply with the requirements of Item 406 of Regulation S-K. Any person may also obtain a copy of the Company’s code of ethics without charge by sending a written request addressed to: QuantRx Biomedical Corporation, 10190 SW90th Avenue, No. 4690, Tualatin, Oregon, 97123.
Audit Committee
At December 31, 2012, the Company did not have an audit committee. Considering the current suspension of active development of our PAD based products, together with the costs associated with procuring and providing the infrastructure to support an independent audit committee and the limited number of transactions, Management has concluded that the risks associated with the lack of an independent audit committee are justified and manageable. Management will, however, periodically reevaluate its position with a view to establishing an audit committee in the event it is deemed to be in the best interests of the Company’s stockholders.
Compensation Committee
The Company does not currently have a compensation committee due to the lack of sufficient independent directors. At such time as the Company actively recruits additional management in connection with the recommencement of active operations, the Board of Directors will establish a compensation committee to administer the Company’s stock option plans and to reestablish general policies relating to compensation.
Nominating Committee
The Company’s entire Board participates in consideration of director nominees. The Board will consider candidates who have experience as a board member or senior officer of a company or who are generally recognized in a relevant field as a well-regarded practitioner, faculty member or senior government officer. The Board will also evaluate whether the candidate’s skills and experience are complementary to the existing Board’s skills and experience as well as the Board’s need for operational, management, financial, international, technological or other expertise. The Board will interview candidates that meet the criteria, and then select nominees that the Board believes best suit the Company’s needs.
The Board will consider qualified candidates suggested by stockholders for director nominations. Stockholders can suggest qualified candidates for director nominations by writing to the Company’s Corporate Secretary, William Fleming, at 10190 SW 90th Avenue, No. 4690, Tualatin, Oregon, 97123. Submissions that are received that meet the criteria described above will be forwarded to the Board for further review and consideration. The Board will not evaluate candidates proposed by stockholders any differently than other candidates.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Summary Compensation
The following table sets forth information concerning the compensation paid to the Company’s Chief Executive Officer, and the Company’s two most highly compensated executive officers other than its chief executive officer, who were serving as executive officers as of December 31, 2012 and whose annual compensation exceeded $100,000 during such year (collectively the “Named Executive Officers”):
(1)
Amount represents the fair value of 150,000 shares of common stock issued to Dr. Hirschman as compensation.
(2)
Amount represents the fair value of 500,000 shares of common stock issued to Dr. Hirschman as compensation.
(3)
During the years ended December 31, 2012 and 2011, the Company did not grant stock options to its Named Executive Officers.
Outstanding Equity Awards at Fiscal Year-End
There are no outstanding stock awards as of December 31, 2012. Exercise prices of all the above option awards were equal to or exceeded the closing stock price on the date of grant.
Director Compensation
The Company did not pay its directors separate compensation associated with their service to the Board of Directors during 2012 or 2011.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
The following table sets forth certain information as of April 10, 2013, concerning the ownership of common stock by (i) each stockholder of the Company known by the Company to be the beneficial owner of more than 5% of the outstanding shares of common stock, (ii) each current member of the Board of Directors of the Company, and (iii) each Executive Officer of the Company named in the Summary Compensation Table appearing under “Executive Compensation” above.
The number and percentage of shares beneficially owned is determined in accordance with Rule 13(d)(3) of the Securities Exchange Act and the information is not necessarily indicative of beneficial ownership for any other purpose. Under that rule, beneficial ownership includes any shares as to which the individual or entity has voting power or investment power and any shares that the individual has the right to acquire within 60 days through the exercise of any stock option or other right. Unless otherwise indicated in the footnotes or table, each person or entity has sole voting and investment power, or shares such powers with his or her spouse, with respect to the shares shown as beneficially owned.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Transactions with Related Parties
Mr. Michael Abrams, a director of the Company, is an employee of BHA. BHA is a party to a Consulting Agreement for Services ("Agreement") by and between the Company and BHA, dated as of May 16, 2011. The Agreement was amended dated August 1, 2012. The Amended Agreement terminates December 31, 2013. As compensation for services rendered to the Company under the terms of the Amended Agreement, the Company is required to issue to BHA 100,000 shares of restricted stock monthly through the date of termination, as well as accrue $12,000 per month, which amount continues to accrue until the earlier to occur of such time as the Company's cash balance exceeded $1.5 million, or the date of termination of the Amended Agreement. Prior to August 1, 2012, the Company issued BHA 200,000 warrants monthly as consideration for the services rendered to the Company under the terms of the Amended Agreement. On August 1, 2012, the Company exchanged all previously issued warrants, exercisable for 3.0 million shares of common stock, for 1.5 million shares of restricted common stock.
Director Independence
The Company has determined that none of its three directors that served on the Company’s Board of Directors at December 31, 2012 were independent on such date, as determined under Rule 10A-3(b)(1) of the Securities Exchange Act of 1934 adopted pursuant to the Sarbanes-Oxley Act.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Audit Fees
The aggregate fees billed for professional services rendered by MartinelliMick PLLC ("MartinelliMick") for the audit of our annual financial statements and the reviews of financial statements for years 2012 and 2011 were $17,501 and $31,628, respectively. Additionally, BehlerMick PS, our former independent registered public accounting firm prior to October 2011, billed $30,063 in aggregate fees for professional services rendered during the year ended December 31, 2011.
Audit-Related Fees
During the years ended December 31, 2012 and 2011, no assurance or related services were performed MartinelliMick that were reasonably related to the performance of the audit or review of our financial statements.
Tax Fees
During the year ended December 31, 2012 and 2011, no fees were billed by MartinelliMick for tax compliance, tax advice or tax planning services. During the year ended December 31, 2011, $415 in fees were billed by BehlerMick PS for tax compliance, tax advice or tax planning services.
All Other Fees
During the years ended December 31, 2012 and 2011, no fees were billed by MartinelliMick or BehlerMick PS, other than the fees set forth under the captions “Audit Fees” and “Tax Fees” above.
ITEM 15.
ITEM 15. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
The following exhibits are filed as part of this annual report:
* Certain exhibits and schedules are omitted but will be furnished to the Commission supplementally upon request.
** Document is filed herewith.
† Pursuant to Rule 406T of Regulation S-T, these interactive data files are deemed not filed or part of a registration statement or prospectus for purposes of Sections 11 or 12 of the Securities Act of 1933 or Section 18 of the Securities Exchange Act of 1934 and otherwise are not subject to liability.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant and in the capacities and on the dates indicated.
QUANTRX BIOMEDICAL CORPORATION
FINANCIAL STATEMENTS
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and
Stockholders of QuantRx Biomedical Corporation
We have audited the accompanying consolidated balance sheets of QuantRx Biomedical Corporation as of December 31, 2012 and 2011, and the related consolidated statements of operations, stockholders’ equity, and cash flows for each of the years in the two-year period ended December 31, 2012. QuantRx Biomedical Corporation’s management is responsible for these financial statements. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. The company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the company’s internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of QuantRx Biomedical Corporation as of December 31, 2012 and 2011, and the results of its operations and its cash flows for each of the years in the two-year period ended December 31, 2012 in conformity with accounting principles generally accepted in the United States of America.
The accompanying consolidated financial statements have been prepared assuming the Company will continue as a going concern. As discussed in Note 2, the Company has a history of operating losses, has limited cash resources, and its viability is dependent upon its ability to meet its future financing requirements. These factors raise substantial doubt about the Company’s ability to continue as a going concern. Management’s plans regarding those matters are also described in Note 2. The consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
MartinelliMick PLLC
Spokane, WA
April 15, 2012
QUANTRX BIOMEDICAL CORPORATION
The accompanying notes are an integral part of these financial statements.
QUANTRX BIOMEDICAL CORPORATION
The accompanying notes are an integral part of these financial statements.
QUANTRX BIOMEDICAL CORPORATION
The accompanying notes are an integral part of these financial statements.
QUANTRX BIOMEDICAL CORPORATION
STATEMENT OF STOCKHOLDERS’ EQUITY
The accompanying notes are an integral part of these financial statements.
QUANTRX BIOMEDICAL CORPORATION
NOTES TO FINANCIAL STATEMENTS
1.
DESCRIPTION OF BUSINESS
Recent Developments
Issuance of Additional Promissory Notes. Between August 2012 and April 2013, the Company issued promissory notes to two investors in the principal amounts of $10,000 (the “$10K Note”), $25,000 (the “$25K Note”), $15,000 (the “$15K Note”), $20,000 (the “$20K Note”) and $16,000 (the "$16K Note") (together, the “Notes”). As additional consideration for the purchase of the Notes, the Company issued: (i) 200,000 shares of its common stock, par value $0.001 per share, to the purchaser of the $25K Note and the $15K Note, (ii) 8,496 $0.50 FPMI Warrants, defined below, to the purchaser of the $10K Note, and (iii) 36,000 warrants to purchase shares of FluoroPharma Medical, Inc. (“FPMI”) common stock, for $1.00 per share (“$1.00 FPMI Warrants”), to the purchaser of the $20K Note and the $16K Note. The $1.00 FPMI Warrants expire on February 15, 2019.
The Notes accrue interest at the rate of 6% annually. The $10K Note and the $25K Note are currently due and payable on demand, while the $15K Note, the $20K Note and the $16K Note are due and payable on June 30, 2013 (the “Maturity Date”). The Notes are convertible at the option of each respective holder into shares of common stock at a conversion price equal to $0.10 per share. In addition, the holders may exchange the Notes for common stock in the event the Company consummates a qualified financing (the “Qualified Financing”), which is defined in the Notes as a financing resulting in gross proceeds to the Company of at least $500,000. While the Company intends to pay the Notes using proceeds from a Qualified Financing, such Qualified Financing may not occur prior to the date the holders of the $10K Note and $25K Note demand repayment, or the Maturity Date of the $15K Note, the $20K Note or the $16K Note.
The Company presently intends to issue additional Notes to finance its current working capital needs. However, there can be no assurance that the Company will be able to issue additional Notes.
Modification of June 2012 Notes. The Company entered into agreements with the holders of June 2012 Notes to extend the maturity date to November 15, 2012. As consideration for the extension of the maturity date, the Company assigned a total of 269,004 FPMI Warrants, which FPMI Warrants have an exercise price of $0.50 per share and expire on April 19, 2019. The June 2012 Notes are currently due and payable, on demand.
Overview
The Company has developed and ultimately intends to commercialize its innovative PAD based products for the OTC and laboratory markets based on its patented technology platforms, and its genomic diagnostics, based on its patented PadKit® technology for the worldwide healthcare industry. These platforms include: inSync®, Unique™, PadKit®, and OEM branded OTC and laboratory testing products based on the Company’s core intellectual property related to its PAD technology. These products are intended for the treatment of hemorrhoids, minor vaginal infection, urinary incontinence, general catamenial uses and other medical needs.
The Company’s efforts to commercialize its products are currently contingent on additional financing to execute its business and operating plan which is currently focused on the commercialization of the Company’s PAD technology either directly or though a joint venture or other relationship intended to increase shareholder value. In the interim, the Company has executed a plan to substantially reduce expenses, including headcount, and to restructure and/or eliminate many of its outstanding liabilities. This plan was necessary in order for the Company to continue as a going concern. No assurances can be given that the Company will obtain financing, or otherwise successfully develop a business and operating plan or enter into an alternative relationship to commercialize the Company’s PAD technology.
The Company’s current strategy is to develop a financing and operating plan to: (i) leverage its broad-based intellectual property (IP) and patent portfolio to develop new and innovative diagnostic products; (ii) commercialize existing products either directly or through joint ventures or similar relationships intended to capitalize on the Company’s PAD technology; (iii) contract manufacturing to third parties while maintaining control over the manufacturing process; and (iv) maximize the value of the Company’s investments in non-core assets. As a result of its current financial condition, however, the Company’s efforts in the short-term will be focused on obtaining financing necessary to maintain the Company as a going concern.
2.
MANAGEMENT STATEMENT REGARDING GOING CONCERN
The Company currently is not generating revenue from operations. The Company has historically financed its operations primarily through issuances of equity and the proceeds from the issuance of promissory notes. In the past, the Company also provided for its cash needs by issuing common stock, options and warrants for certain operating costs, including consulting and professional fees, as well as divesting its minority equity interests and equity-linked investments.
The Company’s history of operating losses, limited cash resources and the absence of an operating plan necessary to capitalize on the Company’s assets raise substantial doubt about our ability to continue as a going concern absent a strengthening of our cash position. Management is currently pursuing various funding options, including seeking debt or equity financing, licensing opportunities and the sale of certain investment holdings, as well as a strategic, merger or other transaction to obtain additional funding to continue the development of, and to successfully commercialize, its products. There can be no assurance that the Company will be successful in its efforts. Should the Company be unable to obtain adequate financing or generate sufficient revenue in the future, the Company’s business, result of operations, liquidity and financial condition would be materially and adversely harmed, and the Company will be unable to continue as a going concern.
There can be no assurance that, assuming the Company is able to strengthen its cash position, it will achieve sufficient revenue or profitable operations to continue as a going concern.
3.
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
This summary of significant accounting policies of the Company is presented to assist in understanding the Company’s financial statements. The financial statements and notes are representations of the Company’s management, which is responsible for their integrity and objectivity. These accounting policies conform to accounting principles generally accepted in the United States of America (GAAP) and have been consistently applied in the preparation of the financial statements.
Accounting for Share-Based Payments
The Company follows the provisions of ASC Topic 718, which establishes the accounting for transactions in which an entity exchanges equity securities for services and requires companies to expense the estimated fair value of these awards over the requisite service period. The Company uses the Black-Scholes option pricing model in determining fair value. Accordingly, compensation cost has been recognized using the fair value method and expected term accrual requirements as prescribed, which resulted in employee stock-based compensation expense for the years ended December 31, 2012 and 2011 of $27,000 and $45,000, respectively.
The Company accounts for share-based payments granted to non-employees in accordance with ASC Topic 505, “Equity Based Payments to Non-Employees.” The Company determines the fair value of the stock-based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.
In the case of modifications, the Black-Scholes model is used to value the warrant on the modification date by applying the revised assumptions. The difference between the fair value of the warrants prior to the modification and after the modification determines the incremental value. The Company has modified warrants in connection with the issuance of certain notes and note extensions. These modified warrants were originally issued in connection with previous private placement investments. In the case of debt issuances, the warrants were accounted for as original issuance discount based on their relative fair values. When modified in connection with a note issuance, the Company recognizes the incremental value as a part of the debt discount calculation, using its relative fair value in accordance with ASC Topic 470-20, “Debt with Conversion and Other Options.” When modified in connection with note extensions, the Company recognized the incremental value as prepaid interest, which is expensed over the term of the extension.
The fair value of each share based payment is estimated on the measurement date using the Black-Scholes model with the following assumptions, which are determined at the beginning of each year and utilized in all calculations for that year:
During 2012, the fair value of each share based payment is estimated on the measurement date using the Black-Scholes model using an average risk free interest rate of 3.08%, expected volatility of 261%, and a dividend yield of zero. During 2011, the fair value of each share based payment is estimated on the measurement date using the Black-Scholes model using a risk free interest rate of 3.22%, expected volatility of 300%, and a dividend yield of zero.
Risk-Free Interest Rate. The interest rate used is based on the yield of a U.S. Treasury security as of the beginning of the year.
Expected Volatility. The Company calculates the expected volatility based on historical volatility of monthly stock prices over a three year period.
Dividend Yield. The Company has never paid cash dividends, and does not currently intend to pay cash dividends, and thus has assumed a 0% dividend yield.
Expected Term. For options, the Company has no history of employee exercise patterns; therefore, uses the option term as the expected term. For warrants, the Company uses the actual term of the warrant.
Pre-Vesting Forfeitures. Estimates of pre-vesting option forfeitures are based on Company experience. The Company will adjust its estimate of forfeitures over the requisite service period based on the extent to which actual forfeitures differ, or are expected to differ, from such estimates. Changes in estimated forfeitures will be recognized through a cumulative catch-up adjustment in the period of change and will also impact the amount of compensation expense to be recognized in future periods.
Accounts, Notes and Interest Receivable and Allowance for Bad Debts
The Company carries its receivables at net realizable value. Interest on notes receivable is accrued based upon the terms of the note agreement. The Company provides reserves against receivables and related accrued interest for estimated losses that may result from a debtor’s inability to pay. The amount is determined by analyzing known uncollectible accounts, economic conditions, historical losses and customer credit-worthiness. Additionally, all accounts with aged balances greater than one year are fully reserved. Amounts later determined and specifically identified to be uncollectible are charged or written off against the reserve. At December 31, 2012, the Company has determined that its Accounts, Notes and Interest Receivable outstanding are deemed to be collectible, and accordingly has not recorded a reserve for the year ended December 31, 2012.
Cash and Cash Equivalents
The Company considers all highly liquid investments and short-term debt instruments with maturities of three months or less from date of purchase to be cash equivalents. Cash equivalents consisted of money market funds at December 31, 2012 and 2011.
Concentration of Risks
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company primarily maintains its cash balances with financial institutions in federally insured accounts. At times, such balances may exceed federally insured limits. The Company has not experienced any losses to date resulting from this practice. At December 31, 2012 and 2011, our cash was not in excess of these limits.
Earnings per Share
The Company computes net income (loss) per common share in accordance with ASC Topic 260. Net income (loss) per share is based upon the weighted average number of outstanding common shares and the dilutive effect of common share equivalents, such as options and warrants to purchase common stock, convertible preferred stock and convertible notes, if applicable, that are outstanding each year. Basic and diluted earnings per share were the same at the reporting dates of the accompanying financial statements, as including common stock equivalents in the calculation of diluted earnings per share would have been antidilutive.
As of December 31, 2012, the Company had outstanding options exercisable for 304,500 shares of its common stock, warrants exercisable for 2,771,000 shares of its common stock, and preferred shares convertible into 20,416,228 shares of its common stock. The above options, warrants, and preferred shares were deemed to be antidilutive for the year ended December 31, 2012.
As of December 31, 2011, the Company had outstanding options exercisable for 304,750 shares of its common stock, warrants exercisable for 5,632,971 shares of its common stock, and preferred shares convertible into 20,416,228 shares of its common stock. The above options, warrants, and preferred shares were deemed to be antidilutive for the year ended December 31, 2011.
Fair Value of Financial Instruments
The Company has adopted ASC Topic 820, “Fair Value Measurements and Disclosures” for both financial and nonfinancial assets and liabilities. The Company has not elected the fair value option for any of its assets or liabilities.
In determining fair value of our investment and note receivable from GMS, the Company estimated fair value based on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of this investment that are not readily apparent from other sources.
As of December 31, 2012, the Company had 373,917 warrants to purchase common stock of FPMI. The Company has estimated the fair value of the warrants at $87,000, in accordance with ASC Topic 820, Level 3. At December 31, 2012, the Company deems the options and warrants to be fully impaired.
Impairments
We assess the impairment of long-lived assets, including our other intangible assets, at least annually or whenever events or changes in circumstances indicate that their carrying value may not be recoverable. The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments, related primarily to the future profitability and/or future value of the assets. Changes in our strategic plan and/or market conditions could significantly impact these judgments and could require adjustments to recorded asset balances. We hold investments in companies having operations or technologies in areas which are within or adjacent to our strategic focus when acquired, all of which are privately held and whose values are difficult to determine. We record an investment impairment charge if we believe an investment has experienced a decline in value that is other than temporary. Future changes in our strategic direction, adverse changes in market conditions or poor operating results of underlying investments could result in losses or an inability to recover the carrying value of the investments that may not be reflected in an investment’s current carrying value, thereby possibly requiring an impairment charge in the future.
In determining fair value of assets, the Company bases estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about carrying values of assets that are not readily apparent from other sources. Actual fair value may differ from management estimates resulting in potential impairments causing material changes to certain assets and results of operations.
At December 31, 2012, the Company has determined that its interest receivable from a related party in the amount of $95,684 is fully impaired.
Income Taxes
The Company accounts for income taxes and the related accounts under the liability method. Deferred tax assets and liabilities are determined based on the differences between the financial statement carrying amounts and the income tax bases of assets and liabilities. A valuation allowance is applied against any net deferred tax asset if, based on available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized.
Our policy is to recognize interest and/or penalties related to income tax matters in income tax expense. We had no accrual for interest or penalties on our balance sheets at December 31, 2012 or 2011, and have not recognized interest and/or penalties in the statement of operations for the years ended December 31, 2012 or 2011. See Note 12, Income Taxes.
Intangible Assets
The Company’s intangible assets consist of patents, licensed patents and patent rights, and website development costs, and are carried at the legal cost to obtain them. Costs to renew or extend the term of intangible assets are expensed when incurred. In 2008, through our formerly majority owned subsidiary, the Company also held technology licenses and other acquired intangibles. Intangible assets are amortized using the straight-line method over the estimated useful life. Useful lives are as follows: patents, 17 years; patents under licensing, 10 years; website development costs, three years, and in 2008, acquired intangibles had a weighted average life of 15 years. Amortization expense for the years ended December 31, 2012 and 2011, totaled $7,412. The estimated aggregate amortization expense for 2012 through 2015 is $7,412 for each year.
Noncontrolling Interest
In January 2009, we adopted an amendment to ASC Topic 810 “Consolidation”, which required us to make certain changes to the presentation of our financial statements. This amendment required noncontrolling interests to be treated as a separate component of equity, not as a liability or other item outside of permanent equity. Upon a loss of control, the interest sold, as well as any interest retained, is required to be measured at fair value, with any gain or loss recognized in earnings. The statement required that the noncontrolling interest continue to be attributed its share of losses even if that attribution results in a deficit noncontrolling interest balance; if this would result in a material change to net income, pro forma financial information is required. As of January 1, 2009, the Company presented its financial statements in accordance with this statement.
On May 5, 2009, the Company and FluoroPharma reorganized their relationship by terminating their investment and related agreements. The termination of these agreements, which were originally executed on March 10, 2006, allowed FluoroPharma to close an equity financing with third party investors. In conjunction with the termination of these agreements and the additional investment in FluoroPharma by third parties, the Company agreed to convert all outstanding receivables from FluoroPharma into common stock of FluoroPharma. As a result of these transactions and the third party investment, the Company’s ownership interest in FluoraPharma’s issued and outstanding capital stock was reduced to a noncontrolling interest, which resulted in deconsolidation and a loss at deconsolidation in accordance with ASC 810. See Note 8 for additional details.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The Company’s property and equipment at December 31, 2012 and 2011 consisted of computer and office equipment, machinery and equipment and leasehold improvements with estimated useful lives of three to seven years. Estimated useful lives of leasehold improvements do not exceed the remaining lease term. Depreciation expense was $2,926 and $26,473 for the years ended December 31, 2012 and 2011. Expenditures for repairs and maintenance are expensed as incurred. See Note 6.
Recent Accounting Pronouncements
Management does not believe that any recently issued, but not yet effective, accounting standards if currently adopted would have a material effect on the accompanying financial statements.
In May 2011, the FASB issued further additional authoritative guidance related to fair value measurements and disclosures. The new guidance results in a consistent definition of fair value and common requirements for measurement of and disclosure about fair value between accounting principles generally accepted in the United States (U.S. GAAP) and International Financial Reporting Standards (IFRS). The guidance is effective for fiscal years and interim periods within those years beginning after December 15, 2011. We are currently assessing the impact of the guidance.
In June 2011, the FASB issued authoritative guidance requiring entities to present net income and other comprehensive income (OCI) in one continuous statement or two separate, but consecutive, statements of net income and comprehensive income. The option to present items of OCI in the statement of changes in equity has been eliminated. The new requirements are effective for annual reporting periods beginning after December 15, 2011 and for interim reporting periods within those years. We do not expect the adoption to have a material impact on our financial statements.
Research and Development Costs
Research and development costs are expensed as incurred. The cost of intellectual property purchased from others that is immediately marketable or that has an alternative future use is capitalized and amortized as intangible assets. Capitalized costs are amortized using the straight-line method over the estimated economic life of the related asset.
Revenue Recognition
The Company recognizes revenue in accordance with SEC Staff Accounting Bulletin Topic 13 when persuasive evidence of an arrangement exists and delivery or performance has occurred, provided the fee is fixed or determinable and collection is probable. The Company assesses whether the fee is fixed and determinable based on the payment terms associated with the transaction. If a fee is based upon a variable such as acceptance by the customer, the Company accounts for the fee as not being fixed and determinable. In these cases, the Company defers revenue and recognizes it when it becomes due and payable. Up-front engagement fees are recorded as deferred revenue and amortized to income on a straight-line basis over the term of the agreement, although the fee is due and payable at the time the agreement is signed or upon annual renewal. Payments related to substantive, performance-based milestones in an agreement are recognized as revenue upon the achievement of the milestones as specified in the underlying agreement when they represent the culmination of the earnings process. The Company assesses the probability of collection based on a number of factors, including past transaction history with the customer and the current financial condition of the customer. If the Company determines that collection of a fee is not reasonably assured, revenue is deferred until the time collection becomes reasonably assured.
The Company recognizes revenue from nonrefundable minimum royalty agreements from distributors or resellers upon delivery of product to the distributor or reseller, provided no significant obligations remain outstanding, the fee is fixed and determinable, and collection is probable. Once minimum royalties have been received, additional royalties are recognized as revenue when earned based on the distributor’s or reseller’s contractual reporting obligations.
The Company’s strategy includes entering into collaborative agreements with strategic partners for the development, commercialization and distribution of its product candidates. Such collaborative agreements may have multiple deliverables. The Company evaluates multiple deliverable arrangements pursuant to ASC Topic 605-25, “Revenue Recognition: Multiple-Element Arrangements.” Pursuant to this Topic, in arrangements with multiple deliverables where the Company has continuing performance obligations, contract, milestone and license fees are recognized together with any up-front payments over the term of the arrangement as performance obligations are completed, unless the deliverable has standalone value and there is objective, reliable evidence of fair value of the undelivered element in the arrangement. In the case of an arrangement where it is determined there is a single unit of accounting, all cash flows from the arrangement are considered in the determination of all revenue to be recognized. Cash received in advance of revenue recognition is recorded as deferred revenue.
Development Agreements and Royalties
In 2007, the Company entered into a development agreement for an at-home diagnostic test with Church & Dwight Co., Inc. (“C&D”). The C&D agreement included milestone based payments, which were recognized in 2007 and 2008. On August 14, 2008, the Company entered into a Technology License Agreement with C&D. Under the terms of the agreement, C&D acquired exclusive worldwide rights to use certain Company technology related to the jointly developed test. Under the ten-year agreement, the Company received royalties on net sales of the product of $14,529 and $18,196 in 2012 and 2011, respectively.
Use of Estimates
The accompanying financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, and include certain estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Accordingly, actual results may differ from those estimates.
4.
INVESTMENT IN JOINT VENTURE - QN DIAGNOSTICS, LLC
On July 30, 2009, the Company and NuRx entered into agreements to form QN Diagnostics, LLC, a Delaware limited liability company (“QND”). Pursuant to the agreements, the Company contributed certain intellectual property and other assets related to its lateral flow strip technology and related lateral flow strip reader technology with a fair value of $5,450,000, and NuRx contributed $5,000,000 in cash to QND. Following the respective contributions by NuRx and the Company to the joint venture, NuRx and the Company each owned a 50% interest in QND. The purpose of the joint venture was to develop and commercialize products incorporating the lateral flow strip technology and related lateral flow strip readers.
Under the terms of the agreements, QND made a $2,000,000 cash distribution to the Company. The Company was committed to further capital contributions aggregating $1.55 million, comprised of: payment of milestone payments with PRIA Diagnostics (see Note 5) in Company common stock (fair value of $750,000); transfer of fixed assets with a fair value of $100,000 at QND’s discretion; and a $700,000 sustaining capital contribution as required by QND. Subsequent sustaining capital contributions were required to be made by the Company and NuRx on an equal basis.
The Company and QND also entered into the Development Agreement, pursuant to which QND was required to pay a monthly fee to the Company in exchange for the Company providing all services related to the development, regulatory approval and commercialization of lateral flow products.
On July 20, 2010, the Company notified NuRx that NuRx was in material breach of the Development Agreement, and on August 24, 2010, NuRx filed suit against the Company and one of its directors. On July 7, 2011, the Company and NuRx settled all disputes between the parties relating to a complaint brought against the Company by NuRx relating to QND. Under the terms of the settlement with NuRx, the Company transferred its entire membership interest in QND to NuRx, including all assets held by the Company relating to QND, for and in consideration for the issuance to the Company of 12.0 million shares of common stock of NuRx (the "Settlement Shares"). As a result of the issuance of the Settlement Shares, the Company held an approximate 25% equity interest in NuRx at December 31, 2012, and the Company had no further contractual obligations or liabilities associated with its former interest in QND.
On March 1, 2013, the Company entered into an Exchange Agreement with NuRx and QND, pursuant to which the Company exchanged its Settlement Shares for certain patents, trademarks and other intellectual property formerly held by NuRx and QND covering point-of-care lateral flow diagnostics (RapidSenseTM) and related oral fluid collection technologies.
During the year ended December 31, 2011, the Company recorded net losses from the discontinuation of its interest in QND of $229,298.
5.
PRIA ASSET PURCHASE AGREEMENT
On July 30, 2009, the Company executed an asset purchase agreement with PRIA Diagnostics, LLC, pursuant to which PRIA agreed to sell to the Company certain of PRIA’s patents, trademarks, other intellectual property assets and certain fixed assets. The aggregate purchase price for such assets was $725,000, comprised of cash and shares of Company common stock.
Under the asset purchase agreement, the Company was required to make additional contingent payments, in the form of cash and common stock, upon the occurrence of certain milestone events. Such cash milestone payments were to be made by QND (see Note 4). In addition, QND was required to pay royalties to PRIA on a quarterly basis upon the commercialization of a product utilizing the acquired technologies for five years from the initial sales date of the first such product sold. The Company also agreed under the asset purchase agreement to offer to PRIA the first opportunity to manufacture certain products utilizing the acquired technologies before entering into any agreement or arrangement with a third party to manufacture such products.
During the year ended December 31, 2011, in connection with the settlement of litigation related to QND, the Company settled its obligations to PRIA in consideration for the payment to PRIA of $5,000, and the issuance of 500,000 shares of the Company's common stock with a deemed value of $15,000.
6.
OTHER BALANCE SHEET INFORMATION
Components of selected captions in the accompanying balance sheets as of December 31, 2012 and 2011 consist of:
7.
NOTES RECEIVABLE
Genomics USA, Inc.
In January 2007, the Company advanced $200,000 to GMS through an 8% promissory note due April 8, 2007 (the “GMS Note”). On September 24, 2012, the Company sent a final notice to GMS, demanding immediate payment in full of all amounts due under the terms of the GMS Note. GMS has made certain claims to avoid repayment of the GMS Note. The Company believes that all amounts due under the GMS Note are valid claims of the Company and therefore filed a Summary Judgement in Lieu of Complaint against GUSA on April 8, 2013 to collect all principal and interest amounts due under the GMS Note.
8.
INVESTMENTS
In May 2011, FluoroPharma, Inc. ("FPI") entered into a reverse merger with FPMI. In connection with this transaction, the Company's warrants and options in FPI were exchanged for warrants and options in FPMI. During the year ended December 31, 2012, all options held by the Company in FPMI were exchanged for substantially identical warrants in FPMI. During 2012, the Company issued 277,500 warrants, exercisable at $.50 and set to expire April 19, 2014, in consideration for the extension on the terms of notes set to mature during the year. The Company recognized a gain in the amount of $115,752 as a result of the warrants issued in consideration of debt extension. As of December 31, 2012, the Company retained control over 373,917 warrants exercisable at $1.00 that are set to expire on February 15, 2019. The Company continues to deem the value of the $1.00 FPMI warrants to be fully impaired at December 31, 2012.
9.
INTANGIBLE ASSETS
Intangible assets as of December 31, 2012 and 2011 consisted of the following:
Patent under Licensing
In 2006, the Company entered into a patent license agreement with The Procter & Gamble Company, effective July 1, 2006. The agreement licenses patent rights and know-how for certain hemorrhoid treatment pads and related coatings. The term of the agreement is five years with a five year automatic renewal option. In consideration of this agreement, the Company paid a one-time, non-refundable engagement fee, and pays royalties based on net sales of such licensed products.
The Company has capitalized this engagement fee and amortizes the capitalized cost over the expected term of the patent license agreement. Amortization of $5,000 and $5,000 in connection with this licensed patent was recognized in the years ended December 31, 2009 and 2008. All royalties due pursuant to the terms of the agreement are expensed as incurred. Impairment is considered in accordance with the Company’s impairment policy. No impairment was recognized as of December 31, 2009 or 2008.
10.
CONVERTIBLE NOTES PAYABLE
During the three months ended June 30, 2011, the Company issued promissory notes to certain investors resulting in gross proceeds to the Company of $105,000 (the “Notes”). The Notes accrued interest at the rate of 3% annually, and were due and payable on or before November 19, 2011. On November 19, 2011 these Notes were cancelled and reissued in the original principal amount plus $1,373 of accrued interest, under the terms of the Notes described below. Concurrently with this debt financing commitment, the lender agreed to surrender and cancel 2,069,000 warrants held by it, and in consideration therefore the Company issued the lender 2,069,000 shares of common stock valued at $62,070.
In May 2012, in consideration for the extension of the Notes due and payable on March 31, 2012 to June 30, 2012, the Company agreed to assign a total of 113,127 $0.50 FPMI Warrants to the holders of the Notes. In August 2012, in consideration for the extension of the Maturity Date of the Notes maturing on June 30, 2012 to November 15, 2012, the Company agreed to assign a total of $0.50 155,877 FPMI Warrants to the holders of the Notes. As a result, and together with the assignment of 8,496 $0.50 FPMI Warrants in connection with the issuance of the $10K Note described below, a total of 269,004 $0.50 FPMI Warrants have been assigned to holders of Notes.
Between August 2012 and April 2013, the Company issued promissory notes to two investors in the principal amounts of $10,000 (the “$10K Note”), $25,000 (the “$25K Note”), $15,000 (the “$15K Note”), $20,000 (the “$20K Note”) and $16,000 (the "$16K Note") (together, the “Notes”). As additional consideration for the purchase of the Notes, the Company issued: (i) 200,000 shares of its common stock, par value $0.001 per share, to the purchaser of the $25K Note and the $15K Note, (ii) 8,496 $0.50 FPMI Warrants, defined below, to the purchaser of the $10K Note, and (iii) 36,000 warrants to purchase shares of FluoroPharma Medical, Inc. (“FPMI”) common stock, for $1.00 per share (“$1.00 FPMI Warrants”), to the purchaser of the $20K Note and the $16K Note. The $1.00 FPMI Warrants expire on February 15, 2019.
The Notes accrue interest at the rate of 6% annually. The $10K Note and the $25K Note are currently due and payable on demand, while the $15K Note, the $20K Note and the $16K Note are due and payable on June 30, 2013 (the “Maturity Date”). The Notes are convertible at the option of each respective holder into shares of common stock at a conversion price equal to $0.10 per share. In addition, the holders may exchange the Notes for common stock in the event the Company consummates a qualified financing (the “Qualified Financing”), which is defined in the Notes as a financing resulting in gross proceeds to the Company of at least $500,000. While the Company intends to pay the Notes using proceeds from a Qualified Financing, such Qualified Financing may not occur prior to the date the holders of the $10K Note and $25K Note demand repayment, or the Maturity Date of the $15K Note, the $20K Note or the $16K Note.
In connection with the issuance of all Notes, the Company has recorded debt discount and expenses of the beneficial conversion feature of $106,261 and $28,998, respectively. The Company will amortize these expenses over the life of the Notes. During the year ended December 31, 2012, the Company recorded interest expense related to the debt discount of $81,945 and $25,722 related to the beneficial conversion feature. During the year ended December 31, 2011, the Company recorded interest expense related to the debt discount of $21,905 and $3,777 related to the beneficial conversion feature.
11.
LONG-TERM NOTES PAYABLE
The Company received a $44,000 loan from the Portland Development Commission in 2007. The loan matures in 20 years and was interest free through February 2010. The terms of the note stipulate monthly interest only payments from April 2010 through December 2014, at a 5% annual rate. The Company recorded interest expense on this loan of 2,506 for the year ended December 31, 2012.
12.
INCOME TAXES
Pursuant to ASC 740, income taxes are provided for based upon the liability method of accounting. Under this approach, deferred income taxes are recorded to reflect the tax consequences on future years of differences between the tax basis of assets and liabilities and their financial reporting amounts at each year-end.
We are subject to taxation in the U.S. and the state of Oregon. With few exceptions, the Company is no longer subject to U.S. federal, state and local income tax examinations by tax authorities for years before 2006.
At December 31, 2012 and 2011, the Company had gross deferred tax assets calculated at an expected blended rate of 38% of approximately $10,115,000 and $9,892,800, respectively, principally arising from net operating loss carryforwards for income tax purposes. As management of the Company cannot determine that it is more likely than not that the Company will realize the benefit of the deferred tax asset, a valuation allowance of $10,115,000 and $9,892,800 has been established at December 31, 2012 and 2011, respectively.
Topic 740 in the Accounting Standards Codification (ASC 740) prescribes recognition threshold and measurement attributes for the financial statement recognition and measurement of a tax position taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. At December 30, 2011, the Company had taken no tax positions that would require disclosure under ASC 740.
The Company has analysed its filing positions in all jurisdictions where it is required to file income tax returns and found no positions that would require a liability for unrecognized income tax benefits to be recognized. We are subject to possible tax examinations for the years 2008 through 2011. We deduct interest and penalties as interest expense on the financial statements.
Additionally, the future utilization of our net operating loss and R&D credit carryforwards to offset future taxable income may be subject to an annual limitation, pursuant to IRC Sections 382 and 383, as a result of ownership changes that may have occurred previously or that could occur in the future.
There is no unrecognized tax benefit included in the balance sheet that would, if recognized, affect the effective tax rate.
The significant components of the Company’s net deferred tax assets (liabilities) at December 31, 2012 and 2011 are as follows:
At December 31, 2012, the Company has net operating loss carryforwards of approximately $9,187,000, which expire in the years 2011 through 2030. The net change in the allowance account was an increase of $222,000 for the year ended December 31, 2012.
13.
CAPITAL STOCK
Preferred Stock
The Company has authorized 25,000,000 shares of preferred stock, of which 20,500,000 is designated as Series B Convertible Preferred Stock, $0.01 par value, with a stated value of approximately $204,000 (“Series B Preferred”). The remaining 4,500,000 authorized preferred shares have not been designated by the Company as of December 31, 2012.
On November 19, 2010, the Company filed a Certificate of Withdrawal of the Certificates of Designations of the Series A Preferred Stock (“Series A Preferred”) with the Nevada Secretary of State, as there were no shares of Series A Preferred issued and outstanding after the exchange transaction discussed below.
Series A-1 Preferred Stock
In October 2010, the Company entered into certain agreements with certain investors, pursuant to which the Company exchanged substantially all of its equity interest in FluoraPharma and shares of newly created Series B Preferred for and in consideration for cash aggregating $789,704, and the termination of certain shares of Series A-1 Preferred Stock (“Series A-1 Preferred”) with a stated value of approximately $4.45 million (the “Exchange”), including accrued and unpaid dividends of $63.186. Contemporaneously with the consummation of the Exchange, on November 19, 2010, the Company filed a Certificate of Withdrawal of the Certificates of Designations of the Series A Preferred with the Nevada Secretary of State, as no shares or such preferred stock were issued and outstanding following the Exchange.
Series B Convertible Preferred Stock
The Company has authorized 20,500,000 shares of Series B Preferred, $0.01 par value. The Series B Preferred ranks prior to the common stock for purposes of liquidation preference, and to all other classes and series of equity securities of the Company that by their terms did not rank senior to the Series B Preferred (“Junior Stock”). Holders of the Series B Preferred are entitled to receive cash dividends, when, as and if declared by the Board of Directors, and they shall be entitled to receive an amount equal to the cash dividend declared on one share of common stock multiplied by the number of shares of common stock equal to the outstanding shares of Series B Preferred, on an as converted basis. The holders of Series B Preferred have voting rights to vote as a class on matters a) amending, altering or repealing the provisions of the Series B Preferred so as to adversely affect any right, preference, privilege or voting power of the Series B Preferred; or b) to effect any distribution with respect to Junior Stock. At any time, the holders of Series B Preferred may, subject to limitations, elect to convert all or any portion of their Series B Preferred into fully paid nonassessable shares of common stock at a 1:1 conversion rate.
In December 2010, the Company issued 17,916,228 shares of its Series B Preferred in exchange for 3,583,246 shares of Series A-1 Preferred. In May 2011, the Company issued 2,500,000 shares of its Series B Preferred to its financial advisor, with a deemed value of $37,500, for and in consideration for past professional services provided the Company, consisting of financial advisory, strategic consulting, litigation support, among other services. At December 31, 2012, the Company had 20,416,228 shares of Series B Preferred issued and outstanding with a liquidation preference of $204,162, and convertible into 20,416,228 shares of common stock.
Common Stock
The Company has authorized 150,000,000 shares of its common stock, $0.01 par value. The Company had issued and outstanding 52,528,644 and 47,377,630 shares of its common stock at December 31, 2012 and 2011. In December 2009, the shareholders of the Company approved an increase to authorized common stock to 150,000,000 shares. The increase took effect in January 2010 with the filing of the amendment to the articles of incorporation with the State of Nevada.
During the year ended December 31, 2012, the Company issued 900,000 shares of common stock related to settlement agreements, 1,732,015 shares of common stock in connection with debt financing, 2,018,999 shares of common stock in connection with a financial services agreement, 450,000 shares of common stock as compensation to each of its two board members and 50,000 shares of common stock in exchange for warrants. At December 31, 2012, the Company had reserved for issuance a total of 2,000,000 shares of common stock valued at $82,500, including 200,000 shares to be issued in connection with debt financing, and 1,800,000 shares of common stock to be issued in exchange for warrants related to a financial services agreement.
During the year ended December 31, 2011, the Company issued 2,069,000 shares of common stock in exchange for outstanding warrants in connection with debt financing, 500,000 shares of common stock to each of its two board members, and 500,000 shares of common stock to an advisor to the board of directors, 1,031,967 shares of common stock related to the 2011 Notes and 900,000 shares of common stock pursuant to settlement of accounts payable valued at $43,000.
14.
STOCK PURCHASE WARRANTS
Common Stock Warrants
In May 2011, the Company entered into a consulting agreement with a financial advisory firm to provide services to the Company for an initial term of eighteen (18) months at a rate of $12,000 per month. Under the terms of the agreement, the Company may defer the monthly payment, in exchange for the issuance of 200,000 common stock purchase warrants. The warrants have a five (5) year term and an exercise price of $0.20 per share or 105% on the date of issuance. As of December 31, 2011, the Company has issued 1,600,000 warrants under this agreement, valued at $119,094.
In June 2011, the Company extended the exercise period for one year on 956,873 warrants to purchase common stock in the Company that had an original termination date of July 31, 2011.
In the fourth quarter of 2009, warrants to purchase 1,750,000 shares of common stock (fair value of $295,050) were granted in settlement of $195,000 in outstanding accounts payable and a six-month financial advisory services contract with the Company’s financial advisory firm, which warrants were allocated to principals of the firm (“Advisory Warrants”). The Advisory Warrants have an exercise price of $0.55 and a term of five years. Of the $100,050 allocated to the financial advisory services contract, $16,675 was expensed as consulting expense in 2009, and as of December 31, 2009, $83,375 was recorded as prepaid consulting.
In May 2011, the Company exchanged the Advisory Warrants together with warrants to purchase 319,000 shares of common stock held by principals of the Company’s financial advisory firm for 2,069,000 shares of common stock in consideration for $100,000 of debt financing.
In consideration for the management and other executive services provided by Drs. Shalom Hirschman and William Fleming, the Company issued 500,000 restricted shares of the Company's common stock to each of Drs. Hirschman and Fleming. The shares are subject to certain vesting requirements and are subject to forfeiture under certain circumstances. Drs. Hirschman and Fleming serve as the Company's Principal Executive Officer and Principal Accounting Officer, and President and Chief Science Officer, respectively.
The following is a summary of all common stock warrant activity during the two years ended December 31, 2012:
The following represents additional information related to common stock warrants outstanding and exercisable at December 31, 2012:
The Company used the Black-Scholes option price calculation to value the warrants granted in 2012 and 2011 using the following assumptions: an average risk-free rate of 3.08% and 3.22%; volatility of 2.6and 03.0; actual term and exercise price of warrants granted. See Note 3, Summary of Significant Accounting Policies, “Accounting for Share-Based Payments.”
15.
COMMON STOCK OPTIONS
In 2007, the Company adopted the 2007 Incentive and Non-Qualified Stock Option Plan (hereinafter “the Plan”), which replaced the 1997 Incentive and Non-Qualified Stock Option Plan, as amended in 2001, and under which 8,000,000 shares of common stock are reserved for issuance under qualified options, nonqualified options, stock appreciation rights and other awards as set forth in the Plan.
Under the Plan, qualified options are available for issuance to employees of the Company and non-qualified options are available for issuance to consultants and advisors. The Plan provides that the exercise price of a qualified option cannot be less than the fair market value on the date of grant and the exercise price of a nonqualified option must be determined on the date of grant. Options granted under the Plan generally vest three to five years from the date of grant and generally expire ten years from the date of grant.
During the year ended December 31, 2012, no stock options were granted by the Company.
The following is a summary of all common stock option activity during the two years ended December 31, 2012:
The following represents additional information related to common stock options outstanding and exercisable at December 31, 2012:
The weighted average remaining contractual term for both fully vested share options (exercisable, above) and options expected to vest (outstanding, above) is 3.0 years.
A summary of the status of the Company’s nonvested stock options as of December 31, 2012 and changes during the year ended December 31, 2012 is presented below:
The Company used the Black-Scholes option price calculation to value the options granted in 2012 and 2011 using the following assumptions: an average risk-free rate of 3.08% and 3.22%; volatility of 2.6 and 3.0; actual term and exercise price of options granted. See Note 3, Summary of Significant Accounting Policies, “Accounting for Share-Based Payments.”
16.
SUBSEQUENT EVENTS
On March 1, 2013, the Company entered into an Exchange Agreement with NuRx and QND, pursuant to which the Company exchanged its Settlement Shares for certain patents, trademarks and other intellectual property formerly held by NuRx and QND covering point-of-care lateral flow diagnostics (RapidSenseTM) and related oral fluid collection technologies.
On February 11, 2013 and March 15, 2013, the Company issued two additional promissory notes to an investor in the principal amount of $20,000 and $16,000, respectively, which notes accrue interest at the rate of 6% annually, and are payable on June 30, 2013, on demand. As additional consideration for the issuance of the notes, the Company issued to the investor a warrant to purchase a total of 36,000 shares of common stock of FluoroPharma, Inc., with an exercise price of $1.00 and an expiration date of February 15, 2019 (the “Warrants”), which Warrants were originally issued to the Company.
On April 8, 2013, the Company filed a Summary Judgement in Lieu of Complaint (the "Complaint") against Genomics USA, Inc. ("GUSA") to recover all amounts due the Company under the terms of a promissory note in the principal amount of $200,000 (the "GUSA Note"). The Complaint was filed in the Supreme Court of the State of New York, and seeks repayment of all amounts due under the terms of the GUSA Note, and accrued interest thereon, plus attorney's fees.
Management has reviewed and evaluated subsequent events and transactions occurring after the balance sheet date through the filing of this Annual Report on Form 10-K on April 15, 2013 and determined that no additional subsequent events occurred.