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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, 2012

 

OR

 

[  ]TRANSACTION 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 HOLDINGS, 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)
     
     

 

Issuer’s telephone number: (801) 582-5400
Issuer’s facsimile number: (801) 582-5401

  

(Registrant’s Telephone Number, Including Area Code)

 

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

 

Copies to:

Virginia K. Sourlis, Esq.

The Sourlis Law Firm

The Courts of Red Bank

130 Maple Avenue, Suite 9B2

Red Bank, New Jersey 07701

T: (732) 530-9007

F: (732) 530-9008

Virginia@SourlisLaw.com

www.SourlisLaw.com

 

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 [  ] No [X]

 

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 [  ]

 

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]

 

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

 

As of May 16, 2012, there were 24,699,298 shares of Common Stock, $0.0001 par value per share, issued and outstanding.

 

 

  

 
 

 

TABLE OF CONTENTS 

 

    Page
PART I – FINANCIAL INFORMATION  
Item 1. Financial Statements (Unaudited) 3
Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations 

18
Item 3. Quantitative and Qualitative Disclosures About Market Risk 23
Item 4. Controls and Procedures 23
     
PART II – OTHER INFORMATION  
Item 1. Legal Proceedings 24
Item 1A.

Risk Factors 

24
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds 24
Item 3. Defaults Upon Senior Securities 24
Item 4. Submission of Matters to a Vote of Security Holders 24
Item 5. Other Information 24
Item 6. Exhibits 25
     
SIGNATURES   26

 

2
 

 

PART I – Financial Information 

 

Item 1. Financial Statements (Unaudited)

  

Q HOLDINGS, INC. AND SUBSIDIARIES

(A Development Stage Company)

 

Condensed Consolidated Balance Sheets (Unaudited)

 

   March 31,   December 31, 
   2012   2011 
Assets          
           
Current assets:          
Cash  $2,366,088   $2,741,519 
Other receivable, net of allowance for doubtful accounts of $2,282 as of March 31, 2012 and December 31, 2011   31,468    53,796 
           
Total current assets   2,397,556    2,795,315 
           
Property and equipment, net   28,278    31,923 
Other assets   7,513    7,513 
           
Total assets  $2,433,347   $2,834,751 
           
Liabilities and Stockholders' Equity          
           
Current liabilities:          
Accounts payable  $52,442   $77,181 
Accrued liabilities   231,554    201,613 
Notes payable   -    15,000 
           
Total current liabilities   283,996    293,794 
           
Commitments and contingencies          
           
Stockholders' equity:          
Common stock, $0.0001 par value: 100,000,000 shares authorized; 24,722,632 and 24,582,632 shares issued and outstanding as of March 31, 2012 and December 31, 2011, respectively   2,472    2,458 
Additional paid-in capital   20,192,231    19,972,937 
Accumulated deficit   (18,045,352)   (17,434,438)
           
Total stockholders' equity   2,149,351    2,540,957 
           
Total liabilities and stockholders' equity  $2,433,347   $2,834,751 

 

See accompanying notes to condensed consolidated financial statements.

 

3
 

  

Q HOLDINGS, INC. AND SUBSIDIARIES

(A Development Stage Company)

 

Condensed Consolidated Statements of Operations (Unaudited)

 

           For the Period 
           From March 28, 
   For the Three   For the Three   2002 (Date of 
   Months Ended   Months Ended   Inception) Through 
   March 31,   March 31,   March 31, 
   2012   2011   2012 
             
Grant revenue  $-   $-   $605,228 
License fee/Other revenue   -    4,800    282,900 
                
Total revenue   -    4,800    888,128 
                
Operating expenses:               
Research and development   224,207    118,667    9,107,778 
General and administrative   385,734    214,036    8,046,881 
                
Total operating expenses   609,941    332,703    17,154,659 
                
Operating loss   (609,941)   (327,903)   (16,266,531)
                
Other income (expense):               
Interest income   441    -    183,783 
Interest expense   (2,020)   -    (2,111,197)
Other income/(expense)   606    (209)   148,593 
                
Total other expense, net   (973)   (209)   (1,778,821)
                
Loss before provision for income taxes   (610,914)   (328,112)   (18,045,352)
                
Provision for income taxes   -    -    - 
                
Net loss  $(610,914)  $(328,112)  $(18,045,352)
                
Weighted average number of common shares outstanding - basic and diluted   24,636,955    4,193,203      
                
Net loss per common share - basic and diluted  $(0.02)  $(0.08)     

 

See accompanying notes to condensed consolidated financial statements.

 

4
 

 

Q HOLDINGS, INC. AND SUBSIDIARIES

(A Development Stage Company)

 

Condensed Consolidated Statements of Stockholders' Equity (Unaudited)

 

   Series A1   Series A2   Series B           Additional           Total 
   Preferred Stock   Preferred Stock   Preferred Stock   Common Stock   Paid-in   Accumulated   Notes   Stockholders' 
   Shares   Amount   Shares   Amount   Shares   Amount   Shares   Amount   Capital   Deficit   Receivable   Equity 
                                                 
Balance, March 28, 2002   -   $-    -   $-    -   $-    -   $-   $-   $-   $-   $- 
                                                             
Recapitalization due to reverse merger   -    -    -    -    -    -    2,600,000    260    (260)   -    -    - 
                                                             
Common stock issued at inception, $0.001 per share   -    -    -    -    -    -    818,500    82    737    -    -    819 
                                                             
Common stock issued for technology   -    -    -    -    -    -    219,658    22    198    -    -    220 
                                                             
Series A1 preferred stock issued for cash, $1.20 per share   250,000    25    -    -    -    -    -    -    299,975    -    -    300,000 
                                                             
Series A2 preferred stock issued for:                                                            
                                                             
Cash, $2.24 per share (net of issuance costs of $178,827)   -    -    1,517,859    152    -    -    -    -    3,221,026    -    -    3,221,178 
                                                             
Conversion of notes payable, including accrued interest of $29,692; $2.24 per share   -    -    482,008    48    -    -    -    -    1,079,643    -    -    1,079,691 
                                                             
Series B preferred stock issued for:                                                            
                                                             
Cash, $2.30 per share (net of issuance costs of $130,441)   -    -    -    -    1,750,002    175    -    -    3,894,386    -    -    3,894,561 
                                                             
Conversion of notes payable, including accrued interest of $369,427; $2.30 per share   -    -    -    -    1,780,183    178    -    -    4,094,250    -    -    4,094,428 
                                                             
Exercise of Series A2 preferred stock warrants for cash   -    -    13,952    1    -    -    -    -    1,395    -    -    1,396 
                                                             
Exercise of options for cash   -    -    -    -    -    -    63,901    6    9,794    -    -    9,800 
                                                             
Proceeds from debt allocated to preferred stock warrants and beneficial conversion feature   -    -    -    -    -    -    -    -    940,819    -    -    940,819 
                                                             
Stock-based compensation expense   -    -    -    -    -    -    -    -    103,112    -    -    103,112 
                                                             
Exercise of options for notes receivable                                 491,144    49    135,253    -    (135,302)   - 
                                                             
Net loss (cumulative from March 28, 2002 through December 31, 2008)   -    -    -    -    -    -    -    -    -    (13,214,519)   -    (13,214,519)
                                                             
Balance, December 31, 2008   250,000    25    2,013,819    201    3,530,185    353    4,193,203    419    13,780,328    (13,214,519)   (135,302)   431,505 
                                                             
Stock-based compensation expense   -    -    -    -    -    -    -    -    42,776    -    -    42,776 
                                                             
Net loss   -    -    -    -    -    -    -    -    -    (755,731)   -    (755,731)
                                                             
Balance, December 31, 2009   250,000    25    2,013,819    201    3,530,185    353    4,193,203    419    13,823,104    (13,970,250)   (135,302)   (281,450)
                                                             
Series B preferred stock issued for:                                                            
                                                             
Cash, $2.30 per share   -    -    -    -    541,743    54    -    -    1,245,954    -    -    1,246,008 
                                                             
Conversion of notes payable, including accrued interest of $918; $2.30 per share   -    -    -    -    6,921    1    -    -    15,917    -    -    15,918 
                                                             
Subscription receivable; $2.30 per share   -    -    -    -    4,348    -    -    -    10,000    -    -    10,000 
                                                             
Exercise of Series A2 preferred stock warrants for cash   -    -    8,371    1    -    -    -    -    836    -    -    837 
                                                             
Stock-based compensation expense   -    -    -    -    -    -    -    -    83,298    -    -    83,298 
                                                             
Net loss   -    -    -    -    -    -    -    -    -    (864,850)   -    (864,850)
                                                             
Balance, December 31, 2010   250,000    25    2,022,190    202    4,083,197    408    4,193,203    419    15,179,109    (14,835,100)   (135,302)   209,761 
                                                             
Series B preferred stock issued for services; $2.30 per share   -    -    -    -    19,457    2    -    -    44,748    -    -    44,750 
                                                             
Stock-based compensation expense   -    -    -    -    -    -    -    -    42,378    -    -    42,378 
                                                             
Proceeds from debt allocated to preferred stock warrants and beneficial conversion feature   -    -    -    -    -    -    -    -    296,444    -    -    296,444 
                                                             
Conversion of preferred stock to common stock in conjunction with reverse merger   (250,000)   (25)   (2,022,190)   (202)   (4,102,654)   (410)   13,791,231    1,379    (742)   -    -    - 
                                                             
Conversion of bridge notes to common stock in conjunction with reverse merger   -    -    -    -    -    -    916,644    92    916,552    -    -    916,644 
                                                             
Exchange of Q Therapeutics, Inc. common stock for Q Holdings, Inc. common stock in conjunction with reverse merger   -    -    -    -    -    -    1,853,507    185    (135,487)   -    135,302    - 
                                                             
Common stock issued for cash, $1.00 per share (net of issuance costs of $197,729)   -    -    -    -    -    -    3,828,047    383    3,629,935    -    -    3,630,318 
                                                             
Net loss   -    -    -    -    -    -    -    -         (2,599,338)        (2,599,338)
                                                             
Balance, December 31, 2011   -    -    -    -    -    -    24,582,632    2,458    19,972,937    (17,434,438)   -    2,540,957 
                                                             
Stock-based compensation expense   -    -    -    -    -    -    -    -    29,308    -    -    29,308 
                                                             
Common stock issued for cash, $1.00 per share   -    -    -    -    -    -    190,000    19    189,981    -    -    190,000 
                                                             
Shares forfeited for loan default   -    -    -    -    -    -    (50,000)   (5)   5    -    -    - 
                                                             
Net loss   -    -    -    -    -    -    -    -    -    (610,914)   -    (610,914)
                                                             
Balance, March 31, 2012   -   $-    -   $-    -   $-    24,722,632   $2,472   $20,192,231   $(18,045,352)  $-   $2,149,351 

 

See accompanying notes to condensed consolidated financial statements.

 

5
 

  

Q HOLDINGS, INC. AND SUBSIDIARIES

(A Development Stage Company)

 

Condensed Consolidated Statements of Cash Flows (Unaudited)

 

           For the Period 
           From March 28, 
   For the Three   For the Three   2002 (Date of 
   Months Ended   Months Ended   Inception) Through 
   March 31,   March 31,   March 31, 
   2012   2011   2012 
             
Cash flows used in operating activities:               
Net loss  $(610,914)  $(328,112)  $(18,045,352)
Adjustments to reconcile net loss to net cash used in operating activities:               
Depreciation and amortization   4,968    9,649    378,593 
Original debt discount   -    -    450,000 
Accretion of debt costs and beneficial conversion feature   -    -    1,237,263 
Stock-based compensation   29,308    7,330    300,872 
Research and development and professional expenses   -    -    44,750 
Convertible debt issued for expenses   -    -    90,000 
Bad debt expense   -    -    16,813 
Decrease (increase) in:               
Grants/other receivables   22,328    80,322    (38,281)
Prepaid expenses and other assets   -    -    (7,513)
Increase (decrease) in:               
Accounts payable   (24,739)   (4,236)   52,442 
Accrued liabilities   29,941    8,002    648,235 
                
Net cash used in operating activities   (549,108)   (227,045)   (14,872,178)
                
Cash flows used in investing activities:               
Purchase of property and equipment   (1,323)   (5,626)   (406,651)
                
Cash flows from financing activities:               
Proceeds from issuance of notes payable   -    -    5,240,000 
Payments on notes payable   (15,000)   -    (90,000)
Issuance of preferred stock for cash   -    -    8,661,747 
Issuance of common stock for cash   190,000    -    3,821,137 
Proceeds from exercise of common stock options   -    -    9,800 
Proceeds from exercise of preferred stock warrants   -    -    2,233 
                
Net cash provided by financing activities   175,000    -    17,644,917 
                
Net change in cash   (375,431)   (232,671)   2,366,088 
                
Cash at beginning of the period   2,741,519    422,198    - 
                
Cash at end of the period  $2,366,088   $189,527   $2,366,088 
                
Supplemental disclosure of cash flow information:               
                
Cash paid for interest  $2,020   $-   $7,454 

 

See accompanying notes to condensed consolidated financial statements.

 

6
 

 

Q HOLDINGS, INC. AND SUBSIDIARIES

(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) through March 31, 2012:

 

The Company issued 219,658 shares of common stock in exchange for technology valued at $220.
The Company converted $1,050,000 of notes payable and $29,691 of accrued interest to 482,008 shares of Series A2 preferred stock.
The Company converted $3,740,000 of notes payable and $370,346 of accrued interest to 1,787,104 shares of Series B preferred stock.
The Company issued 19,457 shares of Series B preferred stock in exchange for $44,750 of research and development services provided.
The Company issued $360,000 of convertible bridge notes payable with an original debt discount of $360,000. The discount was accreted as interest expense over the term of the note.
The Company issued $90,000 in convertible bridge notes payable for professional services provided, with an original debt discount of $90,000. The discount was accreted as interest expense over the term of the note.
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 into 13,791,231 shares of common stock.

 

See accompanying notes to condensed consolidated financial statements.

 

7
 

 

Q HOLDINGS, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

 

1.  Organization and Summary of Significant Accounting Policies  

Organization

Q Holdings, Inc. (the Company) (formerly known as Grace 2, Inc.) was incorporated on October 27, 2005 as a Delaware corporation.

 

On October 13, 2011, Grace 2, Inc. entered into an Agreement and Plan of Merger (Agreement) with Q Acquisition, Inc., a Delaware corporation and wholly owned subsidiary of the Company (Merger Sub), and Q Therapeutics, Inc. Q Therapeutics, Inc. was incorporated on March 28, 2002 as a Delaware corporation. Pursuant to the Agreement, Merger Sub merged with and into Q Therapeutics, Inc. with Q Therapeutics, Inc. being the surviving corporation. Upon the consummation of the merger, the Company acquired 100% of Q Therapeutics, Inc. by issuing 2.1633835 shares of common stock for each outstanding equity instrument of Q Therapeutics, Inc. After the effective date of the transaction, the former Q Therapeutics, Inc. stockholders owned 89.7% of the issued and outstanding common shares of Grace 2, Inc. Also, at the time of the transaction Grace 2, Inc. was renamed Q Holdings, Inc. The transaction was accounted for as a reverse acquisition with Q Therapeutics, Inc. as the accounting acquirer. The condensed consolidated financial statements include the activity of Q Therapeutics, Inc. from inception (March 28, 2002) through March 31, 2012, and the activity of Q Holdings, Inc. and Q Therapeutics, Inc. from the date of acquisition (October 13, 2011) forward.

 

The Company is a development stage company in the process of developing products to treat debilitating and fatal diseases of the central nervous system.

 

     

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements include the accounts of Q Holdings, Inc. and its wholly owned subsidiary, Q Therapeutics, Inc. and Q Therapeutics, Inc.’s majority owned subsidiary, NeuroQ Research, Inc. (collectively, the Company). All significant intercompany amounts have been eliminated. There has been no activity in NeuroQ Research, Inc. since NeuroQ Research, Inc. was formed; therefore, no non-controlling interest is presented. The unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and regulations of the Securities and Exchange Commission (SEC) on a basis consistent with the Company’s annual financial statements and, in the opinion of management, reflect all adjustments, consisting only of normal recurring adjustments, necessary to present fairly the financial information set forth therein. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles have been condensed or omitted pursuant to SEC rules and regulations, although the Company believes that the following disclosures, when read in conjunction with the annual financial statements and the notes thereto, are adequate to make the information presented not misleading. Operating results for the three months ended March 31, 2012, are not necessarily indicative of the results that may be expected for the year ending December 31, 2012.

 

8
 

 

Q HOLDINGS, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

Continued

 

 

1.  Organization and Summary of Significant Accounting Policies Continued   

Development Stage and Liquidity

For the period from March 28, 2002 (date of inception) through March 31, 2012, the Company has not generated significant revenues and has been developing its products. Therefore, the Company is considered to be in the development stage in accordance with the provisions of Accounting Standards Codification (ASC) Topic 915, Development Stage Entities. As required by ASC Topic 915, cumulative amounts have been presented for the period from March 28, 2002 (date of inception) through March 31, 2012. Historically, the Company has been dependent on government grants and debt and equity raised from individual investors to sustain its operations. The Company’s products have not been approved by the U.S. Food and Drug Administration for commercial sale; therefore, the Company has not generated revenues from commercial product sales. The Company has incurred losses and used cash in operating activities since inception. As of March 31, 2012, the Company had an accumulated deficit of $18,045,352. From October 13, 2011 through March 31, 2012, the Company raised $4,018,047 in a private placement of the Company’s common stock. Although there can be no assurance, management believes that the Company has sufficient resources to fund the Company’s operations through at least March 31, 2013.

 

     

Use of Estimates

The preparation of financial statements in conformity with U.S. generally accepted accounting principles requires management to make estimates and assumptions that affect reported amounts and disclosures. Accordingly, actual results could differ from those estimates. Key estimates include useful lives for property and equipment, valuation allowances for net deferred income tax assets, and values of stock-based compensation awards.

 

     

Concentrations of Credit Risk

The Company maintains its cash in bank deposit accounts which, at times, exceed federally insured limits. To date, the Company has not experienced a loss or lack of access to its invested cash; however, there can be no assurance that access to the Company’s invested cash will not be impacted by adverse conditions in the financial markets.

9
 

 

Q HOLDINGS, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

Continued

 

1.  Organization and Summary of Significant Accounting Policies Continued  

Cash Equivalents

The Company considers all highly liquid investments with original maturities to the Company of three months or less to be cash equivalents. As of March 31, 2012 and 2011, the Company did not have any cash equivalents.

 

Grants Receivable

The Company periodically applies for research grants, generally as a sub-recipient to grants funded by government agencies through research universities. The Company records its grants receivable in accordance with the provisions of the grant agreement. The Company’s grants receivable are considered past due when payment has not been received within 30 days of the invoice date. The amounts of the specific reserves are estimated by management based on various assumptions including the age of the individual grant receivable, as well as changes in payment schedules and histories. Grants receivable balances are charged off against the allowance for doubtful accounts when the potential for recovery is remote. Recoveries of receivables previously charged off are recorded when payment is received.

       
     

Stock-Based Compensation

The Company calculates the estimated fair value of its stock options and warrants on the grant date using the Black-Scholes option-pricing model and recognizes the estimated fair value as compensation expense on a straight-line basis over the vesting period. The volatility assumption used in the Black-Scholes option-pricing model is based on the volatility of publicly traded companies in the same industry as the Company. The expected term of the options and warrants granted represent the period of time that the options granted are expected to be outstanding. The risk free rate for periods within the contractual life of the option and warrant is based on the U.S. treasury securities constant maturity rate that corresponds to the expected term in effect at the time of grant.

       
     

Net Loss Per Common Share

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

 

10
 

 

Q HOLDINGS, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

Continued

 

1.  Organization and Summary of Significant Accounting Policies Continued  

Net Loss Per Common Share - continued

Due to the fact that for all periods presented, the Company has incurred net losses, potential dilutive common share equivalents of 15,707,202 and 8,302,981 for the three months ended March 31, 2012 and 2011, respectively, are not included in the calculation of Diluted EPS because they are anti-dilutive. Therefore, basic loss per common share is the same as diluted loss per common share for the three months ended March 31, 2012 and 2011.

 

2.

Stockholders’

Equity

 

Common Stock

As of March 31, 2012, the Company is authorized to issue 100,000,000 shares of common stock, of which 24,722,632 shares were issued and outstanding. In addition, a sufficient number of shares of common stock have been reserved for issuance pursuant to the Company’s 2011 Stock Incentive Plan, as amended, as well as to permit the exercise in full of all outstanding warrants.

       
      Holders of shares of common stock are entitled to cast one vote for each share held at all stockholders’ meetings for all purposes, including the election of directors. The common stock does not have cumulative voting rights.
       
      Between October 13, 2011 and March 31, 2012, the Company has been conducting a private placement of its securities solely to accredited investors. The offering is being conducted on a best efforts basis, whereby the Company is offering for sale a minimum of 3,000,000 and a maximum of 6,000,000 Units, each Unit consisting of one share of common stock, one 7-year common stock purchase warrant exercisable at $1.00 per share, and one 7-year common stock purchase warrant exercisable at $2.00 per share. Units sold totaled 4,018,047 through March 31, 2012. The Company has raised an aggregate of $3,820,318 after paying issuance costs of $197,729. The Company expects to close the private placement by May 31, 2012.
       
     

Preferred Stock

As of March 31, 2012, the Company was authorized to issue 10,000,000 shares of preferred stock; however, no shares of preferred stock were outstanding.

       
     

Conversion of Preferred Stock to Common

On October 13, 2011, the Company completed a reverse merger with Q Therapeutics, Inc. at which time all Series A-1, A-2, and B preferred shares of Q Therapeutics, Inc. were converted into common stock of Q Holdings, Inc. with each preferred share converting into 2.1633835 common shares of Q Holdings, Inc. Along with this conversion to common stock of Q Holdings, Inc., the holders of Q Therapeutics, Inc. preferred stock forfeited all rights and preferences.

 

11
 

 

Q HOLDINGS, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

Continued

 

3. Stock Options and Warrants  

Stock Options

The Q Therapeutics, Inc. stock option plan, originally approved on April 10, 2002 and subsequently amended (the 2002 Plan), provides for the grant of incentive options, nonqualified options, and shares of restricted stock. Under the terms of the 2002 Plan, there are 4,586,373 common shares available for grant to employees, officers, directors and consultants. The Board of Directors determines the terms of each grant. Generally, the options have a vesting period of 4 years with 25% vesting after the first year of service and monthly thereafter, and have a 10-year contractual life. Certain stock options have provisions to accelerate vesting upon the occurrence of certain events. The 2002 Plan converted to a Q Holdings, Inc. plan in connection with the merger as discussed in Note 1. As of October 13, 2011, there were 228,472 common shares available to be issued under the 2002 Plan.

 

     

On October 13, 2011, the 2011 Stock Option Plan for Q Holdings, Inc. (the 2011 Plan) was adopted, authorizing 1,500,000 common shares available for grant to employees, officers, directors and consultants. On October 13, 2011, a majority of stockholders approved the 2011 Plan adopted by the Board of Directors and approved a total of 1,728,472 shares for issuance under the 2011 Plan with the remaining 228,472 shares previously available under the 2002 Plan made available for issuance under the 2011 Plan. As of March 31, 2012, there were 878,472 shares available for option grants under the 2011 Plan.

 

     

Stock-based compensation for the three months ended March 31, 2012 and 2011 was $29,308 and $7,330, respectively. As of March 31, 2012, the Company had $337,352 of unrecognized stock-based compensation expense related to non-vested awards that will be recognized over a weighted-average period of 3.36 years.

 

In conjunction with the 2011 reverse merger, the options to purchase preferred stock in Q Therapeutics, Inc. were exchanged for options to purchase common stock in Q Holdings, Inc. Each option in Q Therapeutics, Inc. was exchanged for 2.1633835 options in Q Holdings, Inc. with the exercise price adjusted down by the same factor, and all other terms remained unchanged. 

 

12
 

 

Q HOLDINGS, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

Continued

 

3. Stock Options and Warrants Continued   The following sets forth the outstanding common stock options and related activity for the three months ended March 31, 2012:

 

   Number of
Options
   Weighted
Average
Exercise
Price Per
Share
 
         
Outstanding as of December 31, 2011   3,156,948   $0.14 
Granted   850,000    1.00 
Exercised   -    - 
Forfeited   -    - 
           
Outstanding as of March 31, 2012   4,006,948   $0.32 

 

   

At March 31, 2012, the aggregate intrinsic value of all outstanding options was approximately $2,717,000.

 

The following summarizes information about stock options outstanding as of March 31, 2012:

 

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    1,043,220    7.28   $0.06    1,043,220   $0.06 
$0.15 – 0.19    2,113,728    6.96    0.17    1,923,531    0.17 
$1.00    850,000    9.76    1.00    53,125    1.00 
                            
      4,006,948    7.64    0.32    3,019,876    0.15 

 

    The fair value of each stock-based compensation award granted during the three months ended March 31, 2012 was estimated on the date of grant using the Black-Scholes option-pricing model with the following assumptions:

 

Risk-free interest rate   2.61 - 3.36%
Expected stock price volatility   62.19%
Expected dividend yield   0%
Expected life of options   5.5 – 6.5 years

 

13
 

 

Q HOLDINGS, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

Continued

 

3.  Stock Options and Warrants Continued  

Warrants

In conjunction with the reverse merger, the warrants to purchase preferred stock in Q Therapeutics, Inc. were exchanged for warrants to purchase common stock in Q Holdings, Inc. Each warrant in Q Therapeutics, Inc. was exchanged for 2.1633835 warrants in Q Holdings, Inc. the exercise price was adjusted down by the same factor, and all other terms remained unchanged. Additional warrants were issued in 2011 related to the bridge funding and private placement.

 

     

In connection with certain stock offerings and debt issuances, the Company has issued warrants to purchase stock. The following summarizes information about stock warrants as of March 31, 2012, all of which are exercisable: 

 

Warrants  Year of
Expiration
   Number of
Shares
   Exercise
Price
 
             
Common stock warrants issued for previously issued Series A2 warrants   2015    132,797   $0.046 
                
Common stock warrants issued for previously issued Series B warrants   2015    823,347    1.035 
                
Common stock warrants issued for previously issued Series B warrants   2017    192,242    0.532 
                
Warrants issued in conjunction with bridge notes (August 31, 2011)   2018    1,816,644    1.00 
                
Warrants issued in conjunction with bridge notes (August 31, 2011)   2018    916,644    2.00 

  

14
 

 

Q HOLDINGS, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

Continued

 

3. 

Stock Options and Warrants Continued

 

 

  

Warrants  Year of
Expiration
   Number of
Shares
   Exercise
Price
 
             
Warrants issued in conjunction with private placement (October 13 and December 30, 2011)   2018    3,828,047   $1.00 
                
Warrants issued in conjunction with private placement (October 13 and December 30, 2011)   2018    3,828,047    2.00 
                
Warrants issued for fees in conjunction with reverse merger (October 13 and December 30, 2011)   2018    22,750    1.20 
                
Warrants issued in conjunction with private placement (February 2 and March 30, 2012)   2019    190,000    1.00 
                
Warrants issued in conjunction with private placement (February 2 and March 30, 2012)   2019    190,000    2.00 
                
Warrants issued for fees in conjunction with private placement (February 2 and March 30, 2012)   2019    19,000    1.20 
                
         11,959,518      

 

 

 

 

Each warrant with an exercise price of $1.00 or $2.00 per share may be redeemed by the Company at a price of $0.001 per share in the event (i) the closing sales price of the Company’s common stock is at least $1.50 for the $1.00 warrants or $3.00 for the $2.00 warrants for ten consecutive trading days and (ii) there is an effective public registration statement covering the resale of the common stock issuable upon the exercise of the warrants.

 

15
 

 

Q HOLDINGS, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

Continued

 

4. Commitments and Contingencies  

License and Royalty Agreements

The Company has entered into an exclusive license agreement with a university, where the Company has obtained certain intellectual property from the university to commercialize, produce, manufacture, use and sell the patent rights. The Company is required to pay the university a contractual dollar amount for each new investigational drug application filed with the Food and Drug Administration (FDA) using the licensed intellectual property. Should the Company receive cash payments from licensing revenue during human trial research, the Company is required to pay 10% of all net licensing revenue (but not including payments for product development activities or equity purchases) to the university up to a certain maximum amount. The Company is also required to pay an amount upon New Drug Application (NDA) approval. The NDA approval occurs when the FDA has approved all prior drug testing and allows a new drug to go to the market. Once the Company has an NDA, the Company must pay the university a royalty of 2% of net sales up to a certain dollar amount and 2.5% of net sales in excess of that amount of human therapeutics and must pay the university a royalty of 5% of net sales on any services. If the Company sublicenses the intellectual property, then the Company must pay the university in accordance with the provisions of the agreement.

 

     

The Company has a product development agreement with an entity, whereby the Company has granted the entity a non-exclusive right to certain intellectual property owned by the Company and the entity has granted to the Company a non-exclusive right to use certain intellectual property owned by the entity in order to develop new products (Products) to be sold primarily by the Company or its designees to the research market. The Company has agreed to pay the entity certain amounts for product development in the form of the Company’s common stock. In addition, the Company has agreed to pay the entity royalty payments of 10% of net sales of the Company to third parties for Products developed using the entity’s intellectual property. If the Company agrees that the entity can also sell Products to third parties and if the entity has sales to a third party of Products using the Company’s intellectual property, then the entity will pay the Company a royalty payment of 10% of net sales. However, if the Products sold by the entity are covered solely by the Company’s patents and know-how, then a 50-50 financial sharing arrangement between the entity and the Company will apply to such Products.

 

     

Right of First Negotiation

Pursuant to an agreement (Agreement) the Company has irrevocably granted a stockholder with a right of first negotiation to license certain technology of the Company related to Q-Cells®. The term of the Agreement is for a period of the later of (i) 3-years from the effective date of the Agreement (October 6, 2011) or (ii) 6-months after the date of completion of certain dosing of the technology.

 

16
 

 

Q HOLDINGS, INC. AND SUBSIDIARIES

(A Development Stage Company)

Notes to Condensed Consolidated Financial Statements

Continued

 

4.

Commitments and Contingencies Continued

 

 

Asset Purchase Agreement

On March 26, 2012, Q Holdings, Inc., Q Therapeutics, Inc. and NeuroQ Research, Inc. executed an agreement to acquire certain intellectual property and technology. The agreement is milestone based and, if the milestones are achieved in 2012, it will provide the Company with manufacturing protocols for several types of neural cells. The Company will issue payment in the form of common stock and warrants as intellectual property and technology is delivered to the Company in 2012. In April 2012, the Company issued 10,000 units of common stock and warrants as initial payment for transfer of intellectual property.

 

     

Research Agreement

On March 27, 2012, the Company executed an agreement for outside research study services. The total contract price is $237,400 and the Company is required to make certain payments under the agreement as research milestones are met. A payment of $23,700 is due upon authorization of the study. The agreement is expected to conclude in 2012.

 

     

Operating Leases

The Company leases its office and lab facility under a non-cancelable operating lease. The current lease was renewed effective April 1, 2011 and expires in March 2013. The minimum future lease payments under this operating lease as of March 31, 2012 is $73,500 due during the year ending December 31, 2012 and $27,721 due during the year ending December 31, 2013.

 

Lease expense under operating leases was $36,576 and $38,532 for the three months ended March 31, 2012 and 2011, respectively.

 

5. Related-Party Transactions  

On January 9, 2010, the Company entered into an unsecured note payable agreement with a stockholder for $15,000 with an annual interest rate of 6% and a maturity date of December 31, 2010. The note was repaid during the three months ended March 31, 2012.

 

     

Pursuant to an agreement (Agreement) the Company has irrevocably granted a stockholder with a right of first negotiation to license certain technology of the Company related to Q-Cells®. The term of the Agreement is for a period of the later of (i) 3-years from the effective date of the Agreement (October 6, 2011) or (ii) 6-months after the date of completion of dosing of the technology.

  

17
 

 

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 and analysis of the Company as of March 31, 2012 and for the three months ended March 31, 2012 and 2011 should be read in conjunction with the condensed consolidated financial statements and accompanying notes included herein, as well as the Company’s financial statements for the year ended December 31, 2011 filed with its Annual Report on Form 10-K on March 23, 2012.

 

Forward Looking Statements

 

Some of the information in this section contains forward-looking statements that involve substantial risks and uncertainties. You can identify these statements by forward-looking words such as “may,” “will,” “expect,” “anticipate,” “believe,” “estimate” and “continue,” or similar words. You should read statements that contain these words carefully because they:

 

discuss our future expectations;
contain projections of our future results of operations or of our financial condition; and
state other “forward-looking” information.

 

We believe it is important to communicate our expectations. However, there may be events in the future that we are not able to accurately predict or over which we have no control. Our actual results and the timing of certain events could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth under “Risk Factors,” “Business” and elsewhere in this Report.

 

Company Overview

 

As discussed throughout this Report, Q Holdings, Inc. (hereinafter “Q Holdings” or the “Company”) conducts its business and operations through its wholly owned subsidiary, Q Therapeutics, Inc. (hereinafter “Q Therapeutics” or “Q”). 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 in March 2002.

 

The technology upon which these therapies are based was developed by Q’s 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 at the National Institutes of Health. Q is managed by an experienced team of biotechnology executives with demonstrated start-up success and advised by leaders in the neurology and stem cell therapeutics fields.

 

Every year, hundreds of thousands of people suffer with debilitating neurodegenerative diseases such as Amyotrophic Lateral Sclerosis (“ALS” or “Lou Gehrig’s Disease”), Multiple Sclerosis (“MS”), Transverse Myelitis (“TM”) and Spinal Cord Injury (“SCI”). Traditional drugs tend to fail to treat the nerve damage caused by these diseases due to the multifactorial nature of these diseases and the inability of most drugs to address all of these factors. Q Therapeutics is developing a new and nontraditional approach targeted to improve the health of people suffering from neurodegenerative diseases: a human cell based product called Q-Cells®.

 

Q-Cells® are healthy human glial cells. The role of glial cells in the brain and spine is to support and protect neurons, the signal transmission lines of the nervous system. Glial cells perform many functions including forming an insulating “myelin sheath” around neurons, 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 cells to treat these conditions, though no clear leader has emerged. In addition to utilizing its proprietary cellular products as therapeutic products, Q 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.

 

Q Therapeutics believes that a worldwide market measured in the tens of billions of dollars 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 stem cell 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.

 

18
 

 

Q Holdings is raising capital to enable Q Therapeutics to complete preparations necessary to move into and initiate human clinical trials, initially treating patients that suffer from the always-fatal ALS. Future trials are anticipated in other neurodegenerative diseases, such as MS and SCI.

 

Q’s Semi-Virtual Business Model

 

Q Therapeutics uses a semi-virtual business model to develop its products. Q believes this type of business model to be capital efficient while allowing it to augment its own expertise and capabilities with those of its development partners at the time that outside resources are needed. Q’s semi-virtual business model includes utilizing third parties for certain functions and outsourced services. For example, Q utilizes outside collaborators and contractors to:

 

·Leverage its research and development resources by forming collaborations with outside scientists specialized in our areas of interest;
·Contract Good Laboratory Practice (“GLP”) and Good Manufacturing Practice (“GMP”) manufacturing to facilities specialized in such production;
·Utilize experienced regulatory consultants to work with the Food and Drug Administration (“FDA”);
·Contract safety/toxicology studies to qualified GLP labs;
·Conduct the clinical trials with physicians and institutions with relevant experience;
·Enter into pharmaceutical company collaborations to maximize product sales.

 

Cell-Based Therapeutic Approach to Treatment of Degenerative Conditions of the Central Nervous System

 

Q Therapeutics was founded in 2002 to further the development and commercialization of the pioneering work of Mahendra Rao, M.D., Ph.D., conducted at the University of Utah and National Institutes of Health (“NIH”). Dr. Rao, a global leader in the development of stem cells as therapeutics, was one of the first 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 / NIH and raising capital, Q commenced operations in the spring of 2004 to develop cell-based therapeutic products that can be sold as “off-the-shelf” pharmaceuticals. That work continues to advance Dr. Rao’s initial findings toward a commercial product.

 

Objectives of Q Therapeutics

 

Q Therapeutics aims to change the way medicine is practiced in the treatment of many debilitating and often fatal diseases of the brain and spinal cord. Q intends to bring its initial product, Q-Cells® to the market to treat ALS, and eventually other indications, potentially including MS, SCI, Parkinson’s disease and Alzheimer’s disease.

 

Initially, Q is targeting orphan diseases, where the FDA allows applying for 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’s Approach to the Problem

 

Q Therapeutics believes it has taken a novel path to developing treatments for debilitating and sometimes fatal diseases of the CNS for which there are currently no long-term effective treatments. Traditional drugs have seen little success as long-term treatments for many neurodegenerative diseases, primarily due to the complex nature of those diseases and the difficulty of replacing damaged nerve cells, or neurons.

 

The majority of cells in the brain and spinal cord are glial cells that serve to support the health of the neurons. Without healthy and properly functioning glial cells, neurons cannot function properly and will eventually die. In many neurodegenerative diseases, damage to glial cells causes or accelerates loss of function and death of neurons. Q’s approach takes advantage of the normal support and repair mechanisms present in the healthy nervous system whereby supplementation of damaged glial cells with healthy glial cells in patients suffering from neurodegenerative diseases is intended to enable the return to healthy neuron function and/or prevent additional degeneration, thereby ameliorating the negative effects of the disease.

 

2010 Summary

 

In 2010, Q Therapeutics continued its work on development of Q-Cells® including with its collaborators, with the focus on development for ALS as the initial clinical indication in collaboration with Dr. Nicholas Maragakis’ laboratory at Johns Hopkins University. Q furthered manufacturing activities of Q-Cells® with increased production yields, resulting in filing of new patent applications. Q was awarded a grant from the federal government through the Patient Protection and Affordable Care Act for its ALS product development activities in 2009.

 

19
 

 

Q continued its work on defining and characterizing Q-Cells® and its ability to myelinate in animal models, including publication in peer reviewed journals (Sandrock et al, Regen Med 5, 381-394; 2010). Q also carried out research activities under an SBIR grant for development of an astrocyte cell product.

 

Q continued to prosecute and maintain its IP portfolio, resulting in issuance of one new patent in 2010:

 

U.S. Patent 7,795,021 issued September 14, 2010 and has claims drawn to an isolated population of mammalian CNS glial restricted precursor cells which generate oligodendrocytes and at least two distinct populations of astrocytes, but not neurons, said population of mammalian CNS glial restricted precursor cells being isolated from a mixture of cells by positive immunoselection with an A2B5 antibody.

 

Q employed a semi-virtual business model as described in the “Company Overview”, continuing to utilize outside collaborators and contractors to augment product development activities without needing to build up internal infrastructure for many of these activities, such as manufacturing and GLP animal safety studies. Some of these activities were partially paid for by grant funding, reducing Q’s need for outside financing.

 

2011 Summary

 

In 2011, Q Therapeutics focused on developing Q-Cells® for ALS and continued studies on safety and efficacy in animal models (collaboration with Dr. Maragakis’ laboratory, Lepore et al, PLoS One 6(10): e25968). This work documented the safety, survival and differentiation of Q-Cells® in the SOD1 mouse. In preparation for IND-enabling animal GLP safety studies, Q worked closely with its clinical collaborators on defining the clinical protocol and with regulatory consultants and the FDA on the design of preclinical studies to support the anticipated Phase I study after IND filing. Q also continued to work with its contractors on improvements on the manufacturing process in anticipation of GMP manufacturing for clinical trials, and continued work internally to further characterize its Q-Cells®. Q submitted information to the FDA in preparation for a January 2012, pre-IND meeting for use of Q-Cells® to treat ALS.

 

To further define potential applications of Q-Cells®, Q furthered work with collaborators on use of Q-Cells® in animal models of Spinal Cord Injury, both for inflammatory injury as well as mechanical injury. Recently published studies with Dr. Itzhak Fischer’s laboratory at Drexel University in an athymic rat model of thoracic contusion SCI document safety and statistically significant, reproducible, disease modifying activity of Q-Cells transplanted into the injury site (Jin et al., J Neurotrauma 28(4), 579-94; 2011). Walczak et al (Glia 59, 499-510; 2011), in collaboration with Q, demonstrated safety and benefits of Q-Cells® in a model of focal inflammatory SCI.

 

Q continued to prosecute and maintain its IP portfolio.

 

In 2011, Q Therapeutics established a subsidiary, NeuroQ Research, Inc, with offices in Utah and California, which is intended in the future to carry out activities utilizing Q Therapeutics’ intellectual property to develop products for the research market. Q entered into a development and non-exclusive license agreement with xCell Science LLC, to develop products using Q’s IP for ultimate sale to the research market, and into a non-exclusive license agreement with Molecular Transfer, Inc, for manufacturing and sale of such products.

 

Q continues to employ a semi-virtual business model, utilizing outside collaborators and contractors to achieve product development activities without needing to build up internal infrastructure for many of these activities, especially such as manufacturing and GLP animal safety studies. Some of these activities are partially paid for by grant funding, reducing Q’s need for outside financing. Q works closely with the collaborators and contractors.

 

Q Therapeutics anticipates that development activities and costs will increase going forward as we conduct the work necessary to include in our future IND submission. This includes GLP animal safety studies, injection device studies, manufacturing activities and working with clinical and regulatory consultants as well as other activities and costs. We may also increase research and development activities to evaluate use of our proprietary products in other disease indications, including working with outside collaborators. The Company’s general and administrative (“G&A”) expenses will increase going forward, including additional legal, officer salary and administration expenses needed to comply with SEC and FDA regulations, added costs such as insurance costs as we progress from a pre-clinical to a clinical company, as well as additional personnel costs.

 

Q1 2012 Summary

 

Q continued its development activities with Q-Cells® for treatment of ALS, and conducted its pre-IND meeting with the FDA in January. The meeting was positive and Q is continuing with its plans to carry out the remaining pre-clinical studies to support an IND submission for treatment of ALS targeted in 2013. Q is working with MPI Research to carry out GLP animal safety studies in rodents in support of the IND submission.

 

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Q completed a manufacturing services agreement with the University of Utah Cell Therapy Facility (“CTF”) and continued to work with CTF on production of Q-Cells® for the animal safety studies.

 

Q and its collaborators at Johns Hopkins (Nicholas Maragakis laboratory) continued studies further characterizing the activity of Q-Cells® in support of future testing in patients with ALS.

 

Q entered into an agreement with xCell Science LLC under which xCell will perform certain activities for Q to achieve manufacturing protocols owned by Q for several types of neural cells, derived from pluripotent cell sources (e.g., induced pluripotent stem cells, iPSC). Q will provide to xCell stock and warrants in Q Holdings as payment.

 

Q continued to prosecute its intellectual property portfolio in the US and internationally.

 

Results of Operations for the Three Months Ended March 31, 2012 compared to the Three Months Ended March 31, 2011

 

For the period from March 28, 2002 (date of inception) through March 31, 2012, the Company has not generated significant revenues and has been developing its products for commercial sale. Therefore, the Company is considered to be in the development stage.

 

Since entering the development stage, the Company has not generated revenues in excess of expenses and has been dependent on government grants and debt and equity raised from individual investors to sustain its operations. The Company’s products have not yet been approved by the FDA for commercial sale; therefore, the Company has not generated any revenues from commercial product sales. The Company has incurred losses and used cash in operating activities since inception. As of March 31, 2012, the Company had an accumulated deficit of $18,045,352. On August 30, 2011, Q Therapeutics raised bridge financing totaling $450,000. Between October 13, 2011 and December 31, 2011, the Company raised $3,828,047, before issuance costs of $197,729, in connection with a reverse merger with a public shell company, Grace 2, Inc. and a private placement offering to accredited investors. During the three months ended March 31, 2012, the Company raised an additional $190,000. As a result, management believes that the Company has sufficient liquidity to sustain operations through at least March 31, 2013.

 

   For the Three Months
Ended
March 31,
         
   2012   2011   Change   % 
                 
Grant revenues  $-   $-   $-    - 
                     
License fees and other revenues   -    4,800    (4,800)   (100.0)
                     
Research and development expense   224,207    118,667    105,540    88.9 
                     
General and administrative expense   385,734    214,036    171,698    80.2 
                     
Loss from operations   (609,941)   (327,903)   (282,038)   (86.0)
                     
Other income (expense), net   (973)   (209)   (764)   (365.6)
                     
Loss before provision for income taxes   (610,914)   (328,112)   (282,802)   (86.2)
                     
Provision for income taxes   -    -    -    - 
                     
Net loss  $(610,914)  $(328,112)  $(282,802)   (86.2)%

 

License Fees and Other Revenues

 

License fees and other revenues for the three months ended March 31, 2012 were $0, a decrease of $4,800, or 100.0%, from $4,800 for the three months ended March 31, 2011. The decrease was attributable to no sales of Q-cells® to product development partners and collaborators during the three months ended March 31, 2012. Other revenues for the three months ended March 31, 2012 and 2011 were $0.

 

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Research and Development Expense

 

Total research and development expense increased by $105,540, or 88.9%, from $118,667 for the three months ended March 31, 2011 to $224,207 for the three months ended March 31, 2012. The increase in research and development expense was primarily attributable to increases in research activities and the associated salaries and benefits, reagents, and cell manufacturing costs.

 

General and Administrative Expense

 

The following table details the general and administrative expenses incurred by the Company:

 

   For the Three Months Ended
March 31,
         
   2012   2011   Change   % 
                 
Salaries and benefits  $146,835   $110,003   $36,832    33.5 
Professional fees   135,555    45,266    90,289    199.5 
Stock-based compensation   29,308    7,330    21,978    299.8 
Rent   19,189    19,266    (77)   (0.4)
Insurance   13,475    7,863    5,612    71.4 
Other   41,372    24,308    17,064    70.2 
Total  $385,734   $214,036   $171,698    80.2 

 

The increase in general and administrative expense was principally due to increases in salaries and benefits, professional fees, stock-based compensation, and travel (included in other).

 

Liquidity and Capital Resources

 

The following summarizes the key sources and uses of cash for the three months ended March 31:

 

   2012   2011 
Net cash used in operating activities  $(549,108)  $(227,045)
Net cash used in investing activities   (1,323)   (5,626)
Net cash provided by financing activities   175,000    - 
Net increase in cash  $(375,431)  $(232,671)

 

For the three months ended March 31, 2012, net cash used in operating activities totaled $549,108 compared to $227,045 for the three months ended March 31, 2011. More cash was used in operating activities due to increases in salaries, professional fees, research activities and cell manufacturing.

 

For the three months ended March 31, 2012 and 2011, net cash used in investing activities was $1,323 and $5,626 for additions to property and equipment.

 

Net cash provided by financing activities was $175,000 for the three months ended March 31, 2012, compared to $0 for the three months ended March 31, 2011. The Company raised $190,000 from a private placement of its securities during the three months ended March 31, 2012, which was partially offset by the Company paying off a $15,000 note payable.

 

We believe that our current levels of cash, when combined with our expected cash flows from equity financing transactions will be sufficient to meet our liquidity needs through at least March 31, 2013. However, we will most likely require additional cash resources in the future, as we anticipate changed business conditions and other developments in the Company’s progress. 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 the issuance of debt or equity securities and the obtaining of a credit facility. Any future issuance of equity securities would cause dilution for our shareholders. 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 financing may be available to us in amounts or on terms that are not favorable to the Company or not available at all.

 

Recent Accounting Pronouncements

 

As of the date of this report, there are no accounting pronouncements that had not yet been adopted by the Company that we believe would have a material impact on our financial statements.

 

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Quantitative and Qualitative Disclosures about Market Risks

 

None

 

Off-Balance Sheet Arrangements

 

We do not have any off-balance sheet arrangements, financings, or other relationships with unconsolidated entities or other persons, also known as “special purpose entities” (SPEs).

 

Significant Accounting Policies

 

Our discussion and analysis of financial condition and results of operations is based upon the condensed consolidated financial statements included herein, which have been prepared in accordance with US generally accepted accounting principles and the requirements and regulations of the Securities and Exchange Commission. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of the financial statements and the reported amounts of sales and expenses during the reporting period. Significant accounting policies and areas where substantial judgments are made by management include:

 

Stock-Based Compensation – Q Holdings calculates the estimated fair value of its stock options and warrants on the grant date using the Black-Scholes option-pricing model and recognizes the estimated fair value as compensation expense on a straight-line basis over the vesting period. The volatility assumption used in the Black-Scholes option-pricing model is based on the volatility of publicly traded companies in the same industry as Q Holdings. The expected term of the options and warrants granted represent the period of time that the options granted are expected to be outstanding. The risk free rate for periods within the contractual life of the option and warrant is based on the U.S. treasury securities constant maturity rate that corresponds to the expected term in effect at the time of grant.

 

Grants Receivable Q Holdings applies for research grants generally as a sub-recipient to grants funded by government agencies through research universities. Q Holdings records grants receivable in accordance with the provisions of the grant agreement. The grants receivable are considered past due when payment has not been received within 30 days of the invoice date. The amounts of the specific reserves are estimated by management based on various assumptions including the age of the individual grant receivable, as well as changes in payment schedules and histories. Grants receivable balances are charged off against the allowance for doubtful accounts when the potential for recovery is remote. Recoveries of receivables previously charged off are recorded when payment is received.

 

Income Taxes – Q Holdings recognizes deferred income tax assets or liabilities for the expected future tax consequences of events that have been recognized in the financial statements or tax returns. Deferred income tax assets or liabilities are determined based upon the difference between the financial and income tax bases of assets and liabilities using enacted tax rates expected to apply when differences are expected to be settled.

 

Net Loss Per Common ShareBasic earnings (loss) per share (“EPS”) is calculated by dividing income (loss) available to common stockholders by the weighted-average number of common shares outstanding during the period.

 

Diluted EPS is similar to Basic EPS except that the weighted-average number of common shares outstanding is increased using the treasury stock method to include the number of additional common shares that would have been outstanding if the dilutive potential common shares had been issued. Such potentially dilutive common shares include convertible preferred stock, stock options, and warrants. Shares having an antidilutive effect on periods presented are not included in the computation of Diluted EPS.

 

Item 3. Quantitative and Qualitative Disclosures about Market Risk

 

N/A.

 

Item 4. Controls and Procedures.

 

Evaluation of Disclosure 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 Exchange Act 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. As of March 31, 2012, our Chief Executive Officer, who acts in the capacity of principal executive officer and our Vice President, Chief Financial Officer, who acts in the capacity of principal 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 Vice President, Chief Financial Officer have concluded that our disclosure controls and procedures were not effective as of March 31, 2012, based on their evaluation of these controls and procedures required by paragraph (b) of Exchange Act Rules 13a-15 or 15d-15.

 

Changes in Internal Controls.

 

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) occurred during the fiscal quarter ended March 31, 2012 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting. 

 

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PART II – Other Information

 

Item 1. Legal Proceedings.

 

The Company is not a party to any pending legal proceedings and no such action by or to the best of its knowledge, against the Company has been threatened.

 

Item 1A. Risk Factors.

 

N/A.

 

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

 

See “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

 

Item 3. Defaults Upon Senior Securities.

 

N/A.

 

Item 4. Submission of Matters to a Vote of Security Holders.

 

N/A.

 

Item 5. Other Information.

 

On March 28, 2012, Dr. Peter Grebow, an independent member of our Board of Directors, was officially appointed as the Chairman of the Company’s newly commissioned Compensation Committee.

 

As the Chairman of the Compensation Committee of the Board of Directors, Dr. Grebow is responsible for the effective functioning of the Compensation Committee. The Chairman of the Compensation Committee of the Board of Directors shall be appointed by the Board of Directors for a one-year term at the first meeting of the Board of Directors following the annual meeting of stockholders each year.

 

In this capacity, the Chairman of the Compensation Committee of the Board of Directors shall:

 

1. Ensure the Committee’s full discharge of its duties, including:

 

Working with the CEO, CFO and other members of management, where appropriate, to develop an agenda and materials for Committee meetings;
Gathering appropriate and adequate information in a timely manner from management to enable the Committee to exercise its responsibility;
Ensuring that any external advisors retained by the Committee are appropriately qualified and independent; and
Ensuring that the Committee has access to such members of senior management as may be required by the Board.

 

2. Discuss as necessary with the Chairman of the Board of Directors the human resources required for the Compensation Committee to function effectively.

 

3. Chair every meeting of the Committee and encourage free and open discussion at meetings of the Committee.

 

4. Report to the Board of Directors on behalf of the Committee.

 

5. Attend every meeting of stockholders and respond to such questions from stockholders as may be put to the Chairman of the Compensation Committee.

 

6. Carry out other duties as requested by the Board, depending on need and circumstances.

 

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Item 6. Exhibits.

 

Index to Exhibits

 

Exhibit   Description

 

31.1

 

 

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, 2012.

     
31.2   Certification of the Company’s Principal Financial and Principal 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, 2012.
     
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).
     
32.2   Certification pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (Principal Financial and Principal 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

 

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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 16, 2012 By: /s/ DEBORAH A. EPPSTEIN
 

Name: Deborah A. Eppstein, PhD

Title: Chief Executive Officer, President and Director

(Principal Executive Officer) 

 

Date: May 16, 2012 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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