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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, DC 20549

 

 

FORM 10-Q

 

 

(Mark One)

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

For the quarterly period ended March 31, 2014

OR

 

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

For the transition period from                      to                     

Commission file number: 000-52062

 

 

Q THERAPEUTICS, INC.

(Exact Name of Registrant as Specified in Its Charter)

 

 

 

Delaware   20-3708500

(State or Other Jurisdiction of

Incorporation or Organization)

 

(I.R.S. Employer

Identification Number)

615 Arapeen Drive, Suite 102

Salt Lake City, UT

  84108
(Address of Principal Executive Offices)   (Zip Code)

(801) 582-5400

(Registrant’s Telephone Number, Including Area Code)

N/A

(Former Name, Former Address and Former Fiscal Year, If Changed Since Last Report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    Yes  x    No  ¨

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

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨  (Do not check if a smaller reporting company)    Smaller reporting company   x

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

As of May 15, 2014, there were 29,417,363 shares of Common Stock, $0.0001 par value per share, issued and outstanding.

 

 

 


Table of Contents

Q Therapeutics, Inc.

(A Development Stage Company)

TABLE OF CONTENTS

 

PART 1 – FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Condensed Consolidated Balance Sheets (Unaudited)

     1   

Condensed Consolidated Statements of Operations (Unaudited)

     2   

Condensed Consolidated Statements of Cash Flows (Unaudited)

     3   

Notes to Condensed Consolidated Financial Statements (Unaudited)

     5   

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

     11   

Item 3. Quantitative and Qualitative Disclosures about Market Risk

     13   

Item 4. Controls and Procedures

     13   

PART II – OTHER INFORMATION

  

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

     13   

Item 5. Other Information

     14   

Item 6. Exhibits

     14   

Signatures

     14   


Table of Contents

Q Therapeutics, Inc.

(A Development Stage Company)

PART I

Item 1. Financial Statements

Condensed Consolidated Balance Sheets (Unaudited)

 

     March 31,
2014
    December 31,
2013
 
Assets     

Current assets:

    

Cash

   $ 284,407      $ 142,532   

Receivables, net of allowance of $28,800 as of March 31, 2014 and December 31, 2013

     —          5,556   

Prepaid financing costs, net

     —          63,333   

Prepaid expenses and other

     10,683        10,109   
  

 

 

   

 

 

 

Total current assets

     295,090        221,530   

Property and equipment, net

     31,296        27,999   

Other assets

     7,513        7,513   
  

 

 

   

 

 

 

Total assets

   $ 333,899      $ 257,042   
  

 

 

   

 

 

 
Liabilities and Stockholders’ Deficit     

Current liabilities:

    

Accounts payable

   $ 386,838      $ 2,364,001   

Accrued liabilities

     106,192        81,156   

Accrued compensation

     481,489        353,950   

Notes payable

     400,000        500,000   

Derivative liability

     99,344        —     
  

 

 

   

 

 

 

Total current liabilities

     1,473,863        3,299,107   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ deficit:

    

Common stock, $0.0001 par value: 100,000,000 shares authorized; 27,869,863 and 24,936,833 shares outstanding as of March 31, 2014 and December 31, 2013 , respectively

     2,787        2,494   

Additional paid-in capital

     23,908,526        20,836,811   

Accumulated deficit

     (25,051,277     (23,881,370
  

 

 

   

 

 

 

Total stockholders’ deficit

     (1,139,964     (3,042,065
  

 

 

   

 

 

 

Total liabilities and stockholders’ deficit

   $ 333,899      $ 257,042   
  

 

 

   

 

 

 

See accompanying notes to condensed consolidated financial statements.

 

1


Table of Contents

Q Therapeutics, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Operations (Unaudited)

 

     For the Three Months Ended     Cumulative
From
Inception
 
     March 31,
2014
    March 31,
2013
   
        

Grant revenues

   $ —        $ 5,501      $ 1,104,434   

License fees and other revenues

     —          —          294,900   
  

 

 

   

 

 

   

 

 

 

Total operating revenues

     —          5,501        1,399,334   

Cost of revenues

     —          —          4,800   
  

 

 

   

 

 

   

 

 

 

Gross profit

     —          5,501        1,394,534   
  

 

 

   

 

 

   

 

 

 

Operating expenses:

      

Research and development

     484,144        131,109        13,284,569   

General and administrative

     583,862        374,719        11,087,809   
  

 

 

   

 

 

   

 

 

 

Total operating expenses

     1,068,006        505,828        24,372,378   
  

 

 

   

 

 

   

 

 

 

Operating loss

     (1,068,006     (500,327     (22,977,844
  

 

 

   

 

 

   

 

 

 

Other income (expense):

      

Interest income

     —          —          187,616   

Interest expense

     (102,417     (325     (2,415,942

Other income, net

     516        1,373        154,893   
  

 

 

   

 

 

   

 

 

 

Total other income (expense), net

     (101,901     1,048        (2,073,433
  

 

 

   

 

 

   

 

 

 

Loss before provision (benefit) for income taxes

     (1,169,907     (499,279     (25,051,277

Provision (benefit) for income taxes

     —          —          —     
  

 

 

   

 

 

   

 

 

 

Net loss

   $ (1,169,907   $ (499,279   $ (25,051,277
  

 

 

   

 

 

   

 

 

 

Weighted average number of common shares outstanding - basic and diluted

     25,017,018        24,778,221     
  

 

 

   

 

 

   

Net loss per common share - basic and diluted

   $ (0.05   $ (0.02  
  

 

 

   

 

 

   

See accompanying notes to condensed consolidated financial statements.

 

2


Table of Contents

Q Therapeutics, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

     For the Three Months Ended     Cumulative
From
Inception
 
     March 31,
2014
    March 31,
2013
   

Cash flows from operating activities:

      

Net loss

   $ (1,169,907   $ (499,279   $ (25,051,277

Adjustments to reconcile net loss to net cash used in operating activities:

      

Depreciation and amortization

     2,318        4,337        405,812   

Original debt discount

     63,333        —          513,333   

Accretion of debt costs and beneficial conversion feature

     —          —          1,423,930   

Stock-based compensation

     248,822        25,438        782,376   

Debt issued for services

     —          —          90,000   

Common stock issued for services

     24,500        25,001        356,250   

Preferred stock issued for services

     —          —          44,750   

Warrants issued for services

     —          8,162        78,370   

Provision for losses on receivables

     —          —          (43,677

Decrease (increase) in:

      

Receivables

     5,556        475,968        43,677   

Prepaid expenses and other assets

     (574     709        (18,196

Increase (decrease) in:

      

Accounts payable and accrued liabilities

     355,903        (187,563     3,200,179   

Accrued compensation

     127,539        26,923        481,489   
  

 

 

   

 

 

   

 

 

 

Net cash used in operating activities

     (342,510     (120,304     (17,692,984
  

 

 

   

 

 

   

 

 

 

Cash flows from investing activities:

      

Purchase of property and equipment

     (5,615     (19,851     (436,888
  

 

 

   

 

 

   

 

 

 

Cash flows from financing activities:

      

Proceeds from issuance of notes payable

     —          —          5,507,562   

Payments on short-term note payable

     —          —          (90,000

Issuance of preferred stock for cash

     —          —          8,671,747   

Issuance of common stock for cash

     490,000        —          4,311,137   

Proceeds from exercise of common stock options

     —          —          11,600   

Proceeds from exercise of preferred stock warrants

     —          —          2,233   
  

 

 

   

 

 

   

 

 

 

Net cash provided by financing activities

     490,000        —          18,414,279   
  

 

 

   

 

 

   

 

 

 

Net increase (decrease) in cash

     141,875        (140,155     284,407   

Cash as of beginning of the period

     142,532        794,207        —     
  

 

 

   

 

 

   

 

 

 

Cash as of end of the period

   $ 284,407      $ 654,052      $ 284,407   
  

 

 

   

 

 

   

 

 

 

Supplemental disclosure of cash flow information:

      

Cash paid for interest

   $ 214      $ 325      $ 8,894   

See accompanying notes to condensed consolidated financial statements.

 

3


Table of Contents

Q Therapeutics, Inc.

(A Development Stage Company)

Condensed Consolidated Statements of Cash Flows (Unaudited) Continued

 

Supplemental disclosure of noncash investing and financing activities for the period from March 28, 2002 (date of inception) to March 31, 2014:

 

    The Company issued 219,658 shares of common stock in exchange for technology valued at $220.

 

    The Company converted $1,050,000 of notes payable and $29,691 of accrued interest to 482,008 shares of Series A2 preferred stock.

 

    The Company converted $3,740,000 of notes payable and $370,346 of accrued interest to 1,787,104 shares of Series B preferred stock.

 

    The Company recorded a debt discount of $1,237,263 related to preferred stock warrants issued with debt and the beneficial conversion feature.

 

    The Company converted $900,000 of bridge notes payable and $16,644 of accrued interest to 916,644 shares of common stock.

 

    The Company converted 250,000 shares of Series A1 preferred stock, 2,022,190 shares of Series A2 preferred stock, and 4,102,654 shares of Series B preferred stock to 13,791,231 shares of common stock.

 

    Two stockholders forfeited, and the Company retired, 200,000 shares of common stock with a net impact on equity of $19 as a result of untimely payments on their notes.

 

    The Company received $250,000 in cash proceeds in exchange for notes payable of $500,000.

 

    The Company converted $2,304,030 of accounts payable and $104,000 of notes payable into an aggregate of 2,408,030 shares of common stock.

See accompanying notes to condensed consolidated financial statements.

 

4


Table of Contents

Q Therapeutics, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited)

1. Organization

Q Therapeutics, Inc. (Q Therapeutics) conducts its operations through its wholly owned subsidiary, Q Therapeutic Products, Inc. (Q Products), and its wholly owned subsidiary, NeuroQ Research, Inc. (collectively, the Company). Q Therapeutics is a Salt Lake City, Utah-based biopharmaceutical company that is developing human cell-based therapies intended to treat degenerative diseases of the brain and spinal cord, the primary components of the central nervous system (CNS). Q Products was incorporated in the state of Delaware on March 28, 2002, and merged with Q Acquisition, Inc., a Delaware corporation and a wholly owned subsidiary of Grace 2, Inc., on October 13, 2011. Grace 2, Inc. was incorporated on October 27, 2005. On November 2, 2011, Grace 2 changed its name to Q Holdings, Inc., and on December 10, 2012, it changed its name to Q Therapeutics, Inc.

These potential therapies are based on our technology developed by Q Products’ co-founder Mahendra Rao, M.D., Ph.D., a leader in glial stem cell biology, during his tenure at the University of Utah and as Head of the Stem Cell Section in the Laboratory of Neuroscience at the National Institutes of Health (NIH). Dr. Rao was one of the first scientists to identify and seek patent coverage on stem cells and their progeny cells found in the CNS. After licensing Dr. Rao’s technology from the University of Utah and NIH, Q Products commenced operations in the spring of 2004 to develop cell-based therapeutic products that can be sold as “off-the-shelf” pharmaceuticals.

2. Significant Accounting Policies

The following significant accounting policies are followed by the Company in preparing its condensed consolidated financial statements:

Basis of Presentation and Consolidation

These unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes included in the Company’s Form 10-K filed with the Securities and Exchange Commission (SEC) on April 15, 2014. The results of operations for the three-month period ended March 31, 2014 are not necessarily indicative of the results to be expected for the full year ending December 31, 2014. In the opinion of management, all adjustments that are necessary for a fair presentation of the financial information for the interim periods reported have been made. All such adjustments are of a normal recurring nature.

The accompanying unaudited condensed consolidated financial statements have been prepared by management in accordance with U.S. generally accepted accounting principles (US GAAP), and include all assets and liabilities of Q Therapeutics and its wholly owned subsidiary, Q Products. All material intercompany transactions and balances have been eliminated.

Development Stage and Liquidity

For the period from March 28, 2002 (date of inception) through March 31, 2014, the Company has not generated significant revenues and has been developing its products. Therefore, the Company is considered to be in the development stage in accordance with the provisions of Accounting Standards Codification (ASC) Topic 915, Development Stage Entities. Cumulative amounts are presented for the period from March 28, 2002 (date of inception) through March 31, 2014. Historically, the Company has been dependent on government grants and debt and equity raised from individual investors to sustain its operations. The Company’s continued operations will depend on its ability to raise funds through various sources such as government grants and equity and debt financing. The Company expects to continue to fund operations through similar sources of capital previously described. There can be no assurance that such capital will be available on favorable terms or at all. If it is unable to raise additional capital, the Company will likely be forced to curtail desired development activities, which will delay the development of its product candidates. The Company’s products have not been approved by the U.S. Food and Drug Administration (FDA) for commercial sale; therefore, the Company has not generated revenues from commercial therapeutic product sales. The Company has incurred losses and used cash for operating activities since inception. As of March 31, 2014, the Company had an accumulated deficit of $25,051,277.

2014 Financing Transactions

Between March 7 and April 14, 2014, the Company issued an aggregate of 4,420,530 units, each containing one share of the Company’s common stock and one warrant to purchase one share of the Company’s common stock, resulting from two tranches of financing in which the Company received cash consideration of $2,012,500 and settled indebtedness of $2,408,030 (2014 Financing

 

5


Table of Contents

Q Therapeutics, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) Continued

 

Transactions). The warrants were issued at an initial exercise price of $1.00 per share, are immediately exercisable, and expire in no more than four years. Both the shares of common stock and the warrants have a down-round provision provided to the stockholders in the event that the Company does another offering of units, which consists of one share of common stock and one warrant to purchase one share of common stock, at a price below $1.00 per share. The down-round provision expires upon the earlier of the effectiveness of a registration statement with the SEC or one year after the issuance date.

Use of Estimates

The preparation of financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosures of contingent assets and liabilities as of the dates of the financial statements and the reported amounts of revenues and expenses during the reporting periods. Accordingly, actual results could differ from those estimates. Key estimates include allowances for doubtful accounts receivable, useful lives for property and equipment, valuation allowances for net deferred income tax assets, and valuations for stock-based compensation awards. The Company bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances.

Revenue Recognition and Grants Receivable

The Company periodically applies for research grants, including as a sub-recipient to grants funded by government agencies through research universities. Grant revenues are recognized as associated expenses are incurred and are billed in conjunction with the terms of the grants. The Company records its grants receivable in accordance with the provisions of the grant agreements. The Company’s grants receivable are considered past due when payment has not been received within 30 days of the invoice date, although certain institutions customarily do not pay within these terms. The amounts of the specific reserves are estimated by management based on various assumptions including the age of the individual receivable, as well as changes in payment schedules and histories. Receivable balances are charged off against the allowance for doubtful accounts when management determines the potential for recovery is remote. Recoveries of receivables previously charged off are recorded when payment is received.

In December 2012, the Company was notified of a sub-award as part of grant funding awarded to The Johns Hopkins University (JHU) from the National Institute of Neurological Disorders and Stroke (NINDS) of the National Institutes of Health. The sub-award for the 2012-2013 grant plan year is $631,383. In May 2013, JHU applied for, and was granted a six-month extension for completing the analysis and remitting data and expenses. As of March 31, 2014, the 2012-2013 grant plan year was closed. The Company is awaiting the notification of the award for year 4. As of March 31, 2014, there are no amounts outstanding related to this sub-award.

Stock-Based Compensation

The Company calculates the estimated fair value of its stock options and warrants on the grant date using the Black-Scholes option-pricing model. The Company recognizes stock-based compensation expense as services are provided, which is generally over the vesting period of the individual equity instruments. Expense related to stock options issued in lieu of cash to non-employees for services performed are measured at the fair value of the options on the date they are earned.

The volatility assumption used in the Black-Scholes option-pricing model is based on the volatility of publicly traded companies in the same industry segment as the Company. The expected lives of the options and warrants granted represent the periods of time that the options granted are expected to be outstanding. The risk free rates for periods within the contractual lives of the options and warrants are based on the U.S. treasury securities constant maturity rate that corresponds to the expected terms in effect at the time of grant. Stock-based compensation is included in general and administrative expense in the statements of operations.

Net Loss Per Common Share

Basic net income or loss per common share (Basic EPS) is computed by dividing net income or loss by the weighted average number of common shares outstanding. Diluted net income or loss per common share (Diluted EPS) is computed by dividing net income or loss by the sum of the weighted average number of common shares outstanding and the dilutive potential common share equivalents then outstanding. Potential dilutive common share equivalents consist of shares issuable upon the exercise of outstanding stock options and warrants to acquire common stock.

Due to the fact that for all periods presented the Company has incurred net losses, potential dilutive common share equivalents as of March 31, 2014 and 2013, totaling 21,437,251 and 15,907,458, respectively, are not included in the calculation of Diluted EPS because they are anti-dilutive. Therefore, basic net loss per common share is the same as diluted net loss per common share for the three months ended March 31, 2014 and 2013.

 

6


Table of Contents

Q Therapeutics, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) Continued

 

Recent Accounting Pronouncements

The Company has reviewed accounting pronouncements that become effective subsequent to March 31, 2014 and does not believe the future adoption of those pronouncements will have a material impact on the Company’s financial position, results of operations or liquidity.

3. Accounts Payable

On March 7, 2014, the Company settled through the issuance of common units indebtedness of $2,408,030, of which $2,304,030 was previously classified as accounts payable (see Note 2).

4. Accrued Compensation

Accrued compensation consists of the following:

 

     March 31, 2014      December 31, 2013  

Accrued wages

   $ 394,351       $ 278,393   

Accrued vacation expense

     87,138         75,557   
  

 

 

    

 

 

 

Total accrued compensation

   $ 481,489       $ 353,950   
  

 

 

    

 

 

 

Starting in March 2013, certain of the Company’s executives agreed to defer part, if not all, of their salaries until additional funding is obtained.

5. Notes Payable

Between August 12 and September 30, 2013, the Company received $250,000 in cash proceeds resulting from a bridge financing by certain note holders, some of which were also considered affiliates, as evidenced by promissory notes. The notes were issued at 50% of face value, bore interest at the rate of 8% per annum, and matured beginning February 5, 2014.

In February 2014, the largest note holder agreed to extend the maturity date for its $400,000 note for an additional 180 days, in exchange for certain call right language being removed from warrants the note holder had acquired in 2011. On March 7, 2014, the remaining note holder converted its note totaling $104,000, including interest, into units consisting of one share of common stock and one warrant to purchase a share of common stock as part of the 2014 Financing Transactions (see Note 2).

To date, the Company has recorded interest relating to the notes of $273,733, of which $250,000 pertained to the amortization of the debt discount. As of March 31, 2014, the debt discount has been fully amortized. Notes payable as of March 31, 2014 were $400,000.

The effective interest rate related to this financing is approximately 156%.

6. Derivative Liability

In connection with the first tranche of the 2014 Financing Transactions, the Company issued 2,898,030 common units, each unit consisting of one share of common stock and one warrant to purchase one share of common stock (see Note 2), and recorded a derivative liability related to down-round protection provided to the stockholders in the event that the Company does another offering of units, similar to those issued in the 2014 Financing Transactions, at a price below $1.00 per share. The down-round provision expires upon the earlier of the effectiveness of a registration statement with the SEC or one year after the issuance date. With the assistance of a third-party valuation specialist, the Company valued the derivative liability pursuant to the accounting guidance of ASC 820-10, Fair Value Measurements.

Fair values for warrants and common stock are determined using the Monte-Carlo Simulation Model valuation technique. The Monte-Carlo Simulation Model valuation model provides for dynamic assumptions regarding volatility and risk-free interest rates within the total period to expected conversion. In addition, management assessed the probabilities of future financing assumptions.

 

7


Table of Contents

Q Therapeutics, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) Continued

 

As defined in FASB ASC 820-10, fair value is based on the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. In order to increase consistency and comparability in fair value measurements, FASB ASC 820-10 establishes a fair value hierarchy that prioritizes observable and unobservable inputs used to measure fair value into three broad levels, which are described below:

 

Level 1    Quoted prices (unadjusted) in active markets that are accessible at the measurement date for assets or liabilities.
Level 2    Other inputs that are observable directly or indirectly, such as quoted prices for similar assets and liabilities or market corroborated inputs.
Level 3    Unobservable inputs that are used when little or no market data is available, which require the Company to develop its own assumptions about how market participants would value the assets or liabilities.

Determining which category an asset or liability falls within the hierarchy requires significant judgment. The Company evaluates its hierarchy disclosure each quarter. Assets and liabilities measured at fair value on a recurring basis as of March 31, 2014 are summarized as follows:

 

     Fair Value as of March 31, 2014  
     Level 1      Level 2      Level 3      Total  

Derivative liability

   $ —         $ —         $ 99,344       $ 99,344   
  

 

 

    

 

 

    

 

 

    

 

 

 

The following table presents the fair value reconciliation of Level 3 liabilities measured at fair value on a recurring basis during the three months ended March 31, 2014.

 

     Fair Value
Measurements
Using Significant
Unobservable Inputs
(Level 3)
 
     Derivative  

Beginning balance, December 31, 2013

   $ —     

Issuances:

  

Derivatives liability related to down-round provision of common stock units

     99,344   
  

 

 

 

Ending balance, March 31, 2014

   $ 99,344   
  

 

 

 

Given the nature of the derivative liability, the carrying amount of $99,344 as of March 31, 2014, was derived from Level 3 inputs and represent management’s best estimate of fair value.

7. Stockholders’ Equity

Common Stock

On March 7, 2014, the Company issued 2,898,030 units, each consisting of one share of common stock and one warrant to purchase one share of common stock, to individual investors as part of the 2014 Financing Transactions (see Note 2). The units have a down-round provision to the stockholders in the event that the Company sells units similar to those in the previous offering at a price below $1.00 per share. The down-round provision expires upon the earlier of the effectiveness of a registration statement with the SEC or one year after the issuance date.

 

8


Table of Contents

Q Therapeutics, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) Continued

 

Additionally during the quarter ended March 31, 2014, the Company issued an aggregate of 35,000 shares of its common stock in lieu of cash for services and for technology acquired from a collaborative partner. As of March 31, 2014, 27,869,863 shares of common stock are outstanding.

Stock Options

The following summarizes the outstanding common stock options and related activity for the three months ended March 31, 2014:

 

     Number of
Options
     Weighted
Average Exercise
Price Per Share
     Weighted
Average
Remaining Life
(Years)
 

Outstanding as of December 31, 2013

     3,865,440       $ 0.34         6.98   

Granted

     2,319,263         0.70         9.95   

Exercised

     —           —        

Forfeited

     —           —        
  

 

 

       

Outstanding as of March 31, 2014

     6,184,703         0.48         7.39   
  

 

 

       

Exercisable as of March 31, 2014

     4,201,370         0.34         6.27   
  

 

 

       

As of March 31, 2014, options to purchase 1,668,266 shares of common stock under the Plan were available for future grant. The following summarizes information about stock options outstanding as of March 31, 2014:

 

Exercise Price

   Number of
Options
Outstanding
     Weighted
Average
Remaining
Contractual
Life (Years)
     Weighted
Average
Exercise
Price
     Number of
Options
Exercisable
     Weighted
Average
Exercise
Price
 

$ 0.06 - $0.08

     902,600         5.13       $ 0.08         902,600       $ 0.08   

$ 0.15 - $0.19

     2,072,840         5.32         0.17         2,072,840         0.17   

             $0.70

     2,319,263         9.95         0.70         707,597         0.70   

             $1.00

     890,000         7.84         1.00         518,333         1.00   
  

 

 

          

 

 

    
     6,184,703         7.39         0.48         4,201,370         0.34   
  

 

 

          

 

 

    

As of March 31, 2014, the aggregate intrinsic value of outstanding and exercisable stock options was $3,245,404 and $2,761,905, respectively.

Stock-based compensation for the three months ended March 31, 2014 and 2013 was $248,822 and $25,438, respectively. As of March 31, 2014, the Company had $696,499 of unrecognized stock-based compensation expense related to non-vested awards that is expected to be recognized over a weighted-average period of 2.89 years.

 

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Q Therapeutics, Inc.

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements (Unaudited) Continued

 

The fair value of each stock-based compensation award granted during the three months ended March 31, 2014 was estimated on the date of grant using the Black-Scholes option pricing model with the following assumptions:

 

Risk-free interest rate

   2.07%

Expected stock price volatility

   71.05%

Expected dividend yield

   0%

Expected life of options

   6.26 years

Warrants

In January 2014, the Company issued a warrant to purchase 50,000 shares of common stock to a business consulting firm (see Note 8).

On March 7, 2014, the Company issued warrants to purchase 2,898,030 shares of common stock as a result of the first tranche of the 2014 Financing Transactions (see Note 2). The warrants have an initial exercise price of $1.00 per share, have up to a four-year life, are exercisable immediately, and have down-round protection in the event that the Company subsequently sells similar units at a price less than $1.00 per share (see Note 6).

As of March 31, 2014, 15,252,548 warrants to purchase common stock had been issued and were outstanding with exercise prices ranging from $.046 to $2.75 per share and terms ranging from two to seven years. The weighted average warrant exercise price is $1.33 and the weighted average remaining life is 4.16 years.

8. Commitments and Contingencies

Advisory Agreements

In July 2013, the Company entered into a business consulting services agreement effective through December 31, 2015. Under the agreement, the Company issued an initial payment of a warrant to purchase 75,000 shares of common stock at an exercise price of $1.01 per share, with a five-year life and a cashless exercise option. In January 2014, the Company issued an additional warrant to purchase 50,000 shares of common stock with similar terms to the initial issuance. Under the agreement, the business consulting firm is entitled to receive additional warrants for up to 50,000 shares of common stock with similar terms.

In May 2014, the Company and its investor relations firm amended their service agreement such that the consulting firm will receive 25,000 shares of the Company’s common stock each quarter in lieu of cash for services rendered. As of March 31, 2014, 25,000 shares of common stock have been issued under this amendment.

9. Subsequent Events

On April 14, 2014, the Company received $1,522,500 from the second tranche of the 2014 Financing Transactions. The Company issued 1,522,500 units consisting of one share of common stock and one warrant to purchase common stock (see Note 2). The terms of the warrants are similar to those issued in the first tranche of the 2014 Financing Transactions (see Note 7).

 

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

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION

AND RESULTS OF OPERATIONS

The following discussion contains forward-looking statements based upon current expectations that involve risks and uncertainties, such as our plans, objectives, expectations and intentions. Our actual results and the timing of events could differ materially from those anticipated as a result of a number of factors, including those set forth under the Risk Factors, Cautionary Notice Regarding Forward-Looking Statements and Business sections in our 2013 Annual Report on Form 10-K filed with the Securities and Exchange Commission. The following discussion of our financial condition and results of operations should be read with our unaudited consolidated financial statements and the related notes included elsewhere in this Form 10-Q. We use words such as “anticipate,” “estimate,” “plan,” “project,” “continuing,” “ongoing,” “expect,” “believe,” “intend,” “may,” “will,” “should,” “could,” and similar expressions to identify forward-looking statements.

Company Overview

Q Therapeutics, Inc. (hereinafter Q Therapeutics or the Company) conducts its business and operations through its wholly owned subsidiary, Q Therapeutic Products, Inc. (hereinafter Q Products) and Q Products’ wholly owned subsidiary, NeuroQ Research, Inc. Q Therapeutics is a Salt Lake City, Utah-based biopharmaceutical company that is developing human cell-based therapies intended to treat degenerative diseases of the brain and spinal cord, the primary components of the central nervous system (CNS). Q Therapeutics was incorporated in the state of Delaware on October 27, 2005. Q Products was incorporated in the state of Delaware on March 28, 2002.

These therapies are based upon the technology developed by Q Products’ co-founder, Mahendra Rao, M.D., Ph.D., a global leader in glial stem cell biology, during Dr. Rao’s tenure as a Professor at the University of Utah and as Head of the Stem Cell Section in the Laboratory of Neuroscience at the National Institutes of Health (NIH) Institute of Aging. Dr. Rao was one of the first scientists to identify and seek patent coverage on stem cells and their progeny cells found in the CNS. After licensing Dr. Rao’s technology from the University of Utah and NIH, Q Products commenced operations in the spring of 2004 to develop cell-based therapeutic products that can be sold as “off -the-shelf” pharmaceuticals.

Objectives of Q Therapeutics

Every year, hundreds of thousands of people suffer with debilitating neurodegenerative diseases of the brain and spinal cord. Q Therapeutics’ primary business objective is to develop and commercialize novel therapeutic products to treat these diseases as they represent areas of significant clinical need and commercial opportunity. Q Therapeutics is advancing its initial product, trademarked “Q-Cells®” to the market to treat Amyotrophic Lateral Sclerosis (Lou Gehrig’s disease or ALS), and eventually other indications, potentially including Multiple Sclerosis (MS), Transverse Myelitis (TM), Spinal Cord Injury (SCI), Stroke, Huntington’s Disease, Parkinson’s Disease and Alzheimer’s disease.

Q-Cells are healthy human glial cells. The role of glial cells in the brain and spine is to support and protect neurons, which form the signal transmission lines of the CNS. Glial cells perform many functions including forming an insulating “myelin sheath” around neuronal axons providing the necessary growth factors needed to maintain a healthy nervous system, and removing compounds that are toxic to neurons. Many neurodegenerative diseases arise when glial cells are damaged or destroyed, causing neurons to malfunction and eventually die. Q-Cells technology aims to treat neurodegenerative diseases by supplementing the damaged or missing glia in the CNS with new, healthy cells that can help maintain and/or restore neuron function to a more robust state.

The diseases targeted by Q Therapeutics’ products are not well treated with current drug therapies. At best, patients suffering from these diseases can, in some cases, only hope to slow their inexorable progression and the associated disabilities. A handful of companies are exploring the possibility of harnessing the power of stem or progenitors cells to treat these conditions, although no clear leader has emerged. In addition to utilizing its proprietary cellular products as therapeutic products, Q Therapeutics may evaluate novel ways to utilize these cells to screen for new drugs (such as small molecule compounds) that could also provide treatments for neurological diseases.

Initially, Q Therapeutics is targeting orphan diseases where the U.S. Food and Drug Administration (FDA) can allow fast-track approvals and market exclusivity, and for which smaller, less-expensive clinical trials may be warranted. This approach can result in accelerated commercialization efforts while maintaining a financing approach focused on capital efficiency.

Q Therapeutics believes that a worldwide market exists for those companies whose cell-based treatments become commercial products. Q Therapeutics’ patent protected technology represents an opportunity to build on the recent advancements in the cell therapy field and bring to market a therapeutic approach that will change the way medicine is practiced in treating many disabling and fatal conditions of the CNS.

 

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Results of Operations for the Three Months Ended March 31, 2014 compared to the Three Months Ended March 31, 2013:

For the period from March 28, 2002 (date of inception) through March 31, 2014, we have not generated significant revenues and have been focused on developing our products for therapeutic use for commercial sale. Q Therapeutics is considered to be a development stage company.

We have not generated revenues in excess of expenses and have been dependent on government grants and debt and equity raised from investors to sustain our operations. Our products have not yet been approved by the FDA for commercial sale, and as a result we have not generated revenues from therapeutic product sales. We have incurred losses and used cash in operating activities since inception. As of March 31, 2014, the Company had an accumulated deficit of $25,051,277 and negative working capital of $1,178,773.

Revenues

The Company has generated minimal revenues through (1) research grants from foundations and government agencies such as the National Institutes of Health (NIH), (2) granting rights to the Company’s technology to other entities, and (3) sales of its products for research purposes.

Grant revenues for the three months ended March 31, 2014 and 2013 were $0 and $5,501, respectively. Grant revenues consisted of a sub-award we received as part of a grant awarded to The Johns Hopkins University. We anticipate grant revenues to increase when the year 4 funding of the NIH grant is approved.

Research and Development Expenses

Q Therapeutics anticipates that development activities and costs will remain approximately the same as we advance the work necessary to complete our future Investigational New Drug (IND) submission. This includes Good Laboratory Practices (GLP) animal safety studies, injection device studies, manufacturing activities and working with clinical and regulatory consultants. Should additional financing be obtained, we may also increase research and development activities to evaluate use of our proprietary products in other disease indications, including working with outside collaborators.

Research and development expenses for the three months ended March 31, 2014, were $481,144, an increase of $353,035, or 267%, from $131,109 for the three months ended March 31, 2013. The increase is primarily due to the one-time costs associated with the commencement of a large animal safety study. We anticipate research and development expenses to remain at approximately the same levels, or increase as necessary, as we progress towards commercializing our product candidates.

General and Administrative Expenses

General and administrative expenses for the three months ended March 31, 2014 were $583,862, an increase of $209,143, or 56%, from $374,719 for the three months ended March 31, 2013. The increase is primarily related to stock-based compensation expense resulting from director, officer and employee option grants of $223,384 offset, in part, by a decrease in legal and professional fees of $16,859. We anticipate general and administrative expenses to remain at approximately the same levels going forward.

Liquidity and Capital Resources

For the three months ended March 31, 2014, net cash used in operating activities totaled $342,510 compared to $120,304 for the three months ended March 31, 2013. Cash outflows increased in 2014 primarily due to increases in research and development expenses

For the three months ended March 31, 2014, net cash used in investing activities related to the purchase of lab and computer equipment of $5,615 compared to $19,851 for the three months ended March 31, 2013.

For the three months ended March 31, 2014, net cash provided by financing activities was $490,000 compared to $0 for the three months ended March 31, 2013. Cash provided by financing activities was sourced from the 2014 Financing Transactions.

As of March 31, 2014, the Company had negative working capital of $1,178,773.

Between March 7 and April 14, 2014, the Company received $2,012,500 in cash proceeds from two separate tranches of the 2014 Financing Transactions.

 

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We believe that our current levels of cash, when combined with (1) our expected cash flows from grant revenues, and (2) reductions to our current operating expenses, will be sufficient to meet our liquidity needs through at least December 31, 2014. However, we will need additional cash resources in the future if we pursue opportunities for investment, acquisition, strategic cooperation or other similar actions. To satisfy future cash requirements, we expect to seek funding through government grants, the issuance of debt or equity securities and/or the obtaining of a credit facility. Any future issuance of equity securities would cause dilution for our stockholders. Any incurrence of indebtedness will increase our debt service obligations and may cause us to be subject to restrictive operating and financial covenants. It is possible that we will be unsuccessful securing future government grants and financing may not be available to us in amounts or on terms that are favorable to the Company or not available at all.

Subsequent Events

On April 14, 2014, we received $1,522,500 from the second tranche of the 2014 Financing Transactions. The Company issued 1,522,500 units consisting of one share of common stock and one warrant to purchase common stock. The terms of the warrants are similar to those issued in the first tranche of the 2014 Financing Transactions.

Recent Accounting Pronouncements

The Company has reviewed recently issued, but not yet effective, accounting pronouncements and does not believe the future adoption of any such pronouncements will have a material impact on the Company’s financial position, results of operations, or liquidity.

Off-Balance Sheet Arrangements

We do not have any off-balance sheet arrangements.

Significant Accounting Policies

Significant accounting policies are those policies which are both important to the presentation of a company’s financial condition and results of operations and require management’s most subjective or complex judgments. Often estimates are required to be made about matters that are inherently uncertain. No significant changes to our accounting policies occurred during the periods presented. For a further discussion of our significant accounting policies, see our Annual Report on Form 10-K for the year ended December 31, 2013.

Item 3. Quantitative and Qualitative Disclosures about Market Risk

None.

Item 4. Controls and Procedures.

We maintain disclosure controls and procedures that are designed to ensure that information required to be disclosed in our filings under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the periods specified in the rules and forms of the SEC. This information is accumulated and communicated to our executive officers to allow timely decisions regarding required disclosure. Our Chief Executive Officer and Chief Financial Officer have evaluated the effectiveness of our disclosure controls and procedures as of the end of the period covered by this report. Based upon that evaluation, our Chief Executive Officer and the Chief Financial Officer have concluded that our disclosure controls and procedures were effective as of March 31, 2014.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Securities Exchange Act of 1934) occurred during the quarter ended March 31, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

PART II

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

On April 28, 2014, the Company agreed to issue to a service provider in return for services rendered, 25,000 shares of restricted common stock, beginning with the first quarter of 2014 and each quarter thereafter, until such time as the Company has completed a financing of at least $7,500,000.

On March 17, 2014, the Company issued 10,000 shares of restricted common stock to a collaborative partner upon execution of a licensing agreement.

 

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Additionally, on January 1, 2014, the Company issued 50,000 warrants to a consulting firm for services rendered.

In connection with the issuance of the common stock and the warrants to acquire shares of common stock described above, the Company relied upon Section 4(2) of the Securities Act of 1933, as amended, as transactions by an issuer not involving any public offering. For each such transaction, the Company did not use general solicitation or advertising to market the securities, the securities were offered to a limited number of persons, the investors had access to information regarding the Company (including information contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2012, Quarterly Reports on Form 10-Q for the periods ended March 31, 2013, June 30, 2013 and September 30, 2013 and Current Reports on Form 8-K filed with the Securities and Exchange Commission and press releases made by the Company), and management of the Company was available to answer questions by prospective investors. The Company reasonably believes that each of the investors is an accredited investor.

Item 5. Other Information.

None.

Item 6. Exhibits.

Index to Exhibits

 

Exhibit

 

Description

  31.1(1)   Certification of the Company’s Principal Executive Officer pursuant to 15d-15(e) under the Securities and Exchange Act of 1934, as amended, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.
  31.2(1)   Certification of the Company’s Principal Financial and Accounting Officer pursuant to 15d-15(e) under the Securities and Exchange Act of 1934, as amended, with respect to the registrant’s Quarterly Report on Form 10-Q for the quarter ended March 31, 2014.
  32.1*   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Executive Officer ) and (Principal Financial and Accounting Officer).
101.INS   XBRL Instance Document
101.SCH   XBRL Taxonomy Extension Schema
101.CAL   XBRL Taxonomy Extension Calculation Linkbase
101.DEF   XBRL Taxonomy Extension Definition Linkbase
101.LAB   XBRL Taxonomy Extension Label Linkbase
101.PRE   XBRL Taxonomy Presentation Linkbase

 

(1) Filed herewith.
* Furnished herewith.

SIGNATURES

In accordance with the requirements of the Exchange Act, the registrant caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

 

Date: May 15, 2014     By:  

/s/ DEBORAH A. EPPSTEIN

    Name:   Deborah A. Eppstein, PhD
    Title:   Chief Executive Officer, President
      (Principal Executive Officer)
Date: May 15, 2014     By:  

/s/ STEVEN J. BORST

    Name:   Steven J. Borst
    Title:   Vice President, Chief Financial Officer
      (Principal Financial Officer and Principal Accounting Officer)

 

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