See accompanying notes, which are an integral part of these consolidated financial statements.
See accompanying notes, which are an integral part of these consolidated financial statements.
See accompanying notes, which are an integral part of these consolidated financial statements.
See accompanying notes, which are an integral part of these consolidated financial statements
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
Note 1. Organization and Liquidity
Organization
Taxus Cardium was incorporated in Delaware in December 2003. We are an operating company that manages a medical technologies portfolio of equity-based and potential royalty-driven investments as follows: (1) Angionetics, currently a majority-owned subsidiary focused on the late-stage clinical development and commercialization of Generx®, an angiogenic gene therapy product candidate designed for medical revascularization for the potential treatment of patients with myocardial ischemia and refractory angina due to advanced coronary artery disease; (2) Activation Therapeutics, a wholly owned subsidiary focused on the development and commercialization of the Excellagen® technology platform, an FDA-cleared flowable dermal matrix for advanced wound care that we believe has broad potential applications as a delivery platform for small molecule drugs, proteins and biologics; (3) LifeAgain a wholly-owned subsidiary that has developed an advanced medical data analytics (ADAPT®) technology platform focused on developing new and innovative products for the life insurance and healthcare sectors; and (4) a minority investment in Healthy Brands Collective, a functional food and nutraceutical company which acquired the Company’s To Go Brands® business.
Based on our business strategy of partnering or otherwise monetizing products and product candidates with third party commercialization partners, two subsidiaries have been formed to coordinate the independent monetization and funding activities of its core products and technologies. The Angionetics Inc. subsidiary will focus on the late-stage clinical development and commercialization of Generx ® an angiogenic gene therapy product candidate, and the Activation Therapeutics, Inc. subsidiary will focus on the commercialization of the Excellagen ® FDA-cleared wound care product and the joint clinical development of Excellagen product line extensions as an advanced biologic delivery platform for new and innovative wound healing therapeutics.
Formation of Angionetics Inc.
Angionetics, a biotechnology company, incorporated by Taxus Cardium on April 13, 2015, was formed to create a separate company to develop Taxus Cardium’s Generx® cardiovascular gene therapy product candidate and technology platform. Our management team believes that the Generx® platform is undervalued in the current Taxus Cardium capital structure and believes that contributing the Generx® business to a separate entity will increase the opportunities for financing the continued development of Generx® through Phase III clinical trials. Taxus Cardium contributed to Angionetics all of the rights to our Generx® platform technology and will sell shares in Angionetics in order to raise capital based on a valuation of the Generx® platform technology for the purpose of funding the development and commercialization of Generx®. Our management also believes that funding for Generx® as a stand-alone company can be done at better pricing, resulting in less dilution and a “value unlock” for Taxus Cardium shareholders. The Company intends to retain a significant interest in Angionetics and return value to shareholders based on an increased value of its holdings through the independent external market valuation of Angionetics and the Generx® platform technology.
Following the formation of Angionetics, our management team initiated a comprehensive review of the global Generx® regulatory and clinical dossier, and elected to primarily focus on the clinical advancement and registration of Generx® in the United States and China, which we believe to be the most dynamic medical markets in the world for new and novel breakthrough products such as the Generx® product candidate. As a result of this review, Angionetics now plans to focus on the late stage clinical and commercial development of Generx® in key target markets that include the U.S. and China.
LifeAgain Activities
On August 11, 2015, Symetra Financial Corporation (“Symetra”), our financial partner for LifeAgain initial Blue Metric term life insurance program for men with prostate cancer, announced that it entered into a definitive merger agreement with Sumitomo Life Insurance Company (“Sumitomo Life”) pursuant to which Sumitomo Life will acquire all of the outstanding shares of Symetra. Following the transaction, Symetra advised the Company that it was discontinuing its partnership with LifeAgain. LifeAgain plans to continue to seek opportunities for the application of medical analytics to commercialize “survivable risk” term life insurance for cancer survivors or others with medical conditions who are currently considered uninsurable based on traditional underwriting standards as well as other forms of survivable risk programs. On April 4, 2015, Taxus Cardium entered into a license agreement with Shenzhen Qianhi Taxus Industry Capital Management Co., Ltd., a company affiliated with Shanxi Taxus Pharamaceuticals Co. Ltd., for the license of LifeAgain’s medical analytics technology to develop and commercialize survivable risk life insurance products in Greater China.
Our business is focused on the acquisition and strategic development of product opportunities or businesses having the potential to address significant unmet medical needs, and having definable pathways to commercialization. We intend to consider various corporate development transactions designed to place its product candidates into larger organizations or with partners having existing commercialization, sales and marketing resources, and a need for innovative products. Such transactions could involve the sale, partnering or other monetization of particular product opportunities or businesses.
We ha
ve
yet to generate positive cash flows from operations, and
are
essentially dependent on
equity and
debt
funding
to finance
our
operations.
Liquidity and Going Concern
As of December 31, 2015, we had $21,547 in cash and cash equivalents. Our working capital deficit at December 31, 2015 was $3,800,864. We have incurred recurring losses and as of December 31, 2015, we have an accumulated deficit of $115 million. During the years ended December 31, 2015 and 2014, we used approximately $1.1 million and $2.6 million of cash in our operating activities.
Our primary source of capital resources is from proceeds from sales of our equity securities. During the years ended December 31, 2015 and 2014, we raised net proceeds of approximately $0.6 million and $2.1 million, respectively from the sale or subscription of common stock and preferred stock to be used for general corporate purposes, including, but not limited, research and development activities and for working capital.
We anticipate that negative cash flows from operations will continue for the foreseeable future. We have yet to generate positive cash flows from operations, and are essentially dependent on equity and debt funding to finance our operations. We currently do not have any unused credit facilities. As long as any shares of our Series A Convertible Preferred Stock are outstanding, we have agreed that we will not, without the consent of the holders of two-thirds of the Series A Convertible Preferred Stock, incur indebtedness other than specified “Permitted Indebtedness”, incur any liens other than specified “Permitted Liens”.
Our history of recurring losses and uncertainties as to whether our operations will become profitable raises substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments related to the recoverability of assets or classifications of liabilities that might be necessary should we be unable to continue as a going concern.
Our principal business objectives are to advance the independent monetization and funding activities of our core products and technologies, with our Angionetics Inc. subsidiary being focused on the Generx
®
angiogenic gene therapy product candidate, and our Activation Therapeutics, Inc. subsidiary being focused on the Excellagen
®
FDA-cleared wound care product and the joint clinical development of Excellagen product line extensions as an advanced biologic delivery platform for new and innovative wound healing therapeutics, and/or to complete alterative corporate transactions. If we fail to conclude such transaction in a timely manner or alternatively fail to generate sufficient cash from financing activities, we will not generate sufficient cash flows to cover our operating expenses.
The accompanying consolidated financial statements have been prepared in conformity with U.S. GAAP, which contemplates our continuation as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. Our ability to continue our operations is dependent on the execution of management’s plans, which include the raising of capital through the equity and/or debt markets, until such time that funds provided by operations are sufficient to fund working capital requirements. The consolidated financial statements contained in this report do not include any adjustments related to the recoverability of assets or classifications of liabilities that might be necessary should we be unable to continue as a going concern. If we were not to continue as a going concern, we would likely not be able to realize our assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the consolidated financial statements.
We intend to secure additional working capital through sales of equity and debt securities to finance our operations, or the sale of certain equity interests in our businesses, technology platforms, products or product candidates and licensing agreements covering the marketing and sale of Excellagen and Generx in certain geographic markets and regions.
On April 4, 2015 we entered into a term sheet with Shenzhen Qianhai Taxus, whereby we proposed to sell Shenzhen Qianhai Taxus 600,000 shares of common stock in our Angionetics subsidiary in exchange for $3.0 million in cash. The $3.0 million was to be paid in tranches that were to be completed by May 31, 2015. Shenzhen Qianhai Taxus paid $600,000 of the financing, which was recorded as common stock issuable. Since Shenzhen Qianhai Taxus did not complete this transaction, instead Huapont agreed to fund the investment. Shenzhen Qianhai Taxus is eligible to apply this amount toward the purchase of common stock of the Company or its subsuduaries based on terms and conditions approved by the Company’s Board of Directors. This contribution is committed and not refundable to Shenzhen Qianhai Taxus.
Note 2—Summary of Significant Accounting Policies
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with U.S. GAAP and the rules and regulations of the Securities and Exchange Commission (“SEC”).
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, accounts receivable, inventories, accounts payable, and accrued liabilities approximate fair value due to the short term maturities of these instruments.
Use of Estimates and assumptions and critical accounting estimates and a
ssumptions
The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period.
Critical accounting estimates are estimates for which (a) the nature of the estimate is material due to the levels of subjectivity and judgment necessary to account for highly uncertain matters or the susceptibility of such matters to change and (b) the impact of the estimate on financial condition or operating performance is material.
Management bases its estimates on historical experience and on various assumptions that are believed to be reasonable in relation to the financial statements taken as a whole under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities that are not readily apparent from other sources. Management regularly evaluates the key factors and assumptions used to develop the estimates utilizing currently available information, changes in facts and circumstances, historical experience and reasonable assumptions. After such evaluations, if deemed appropriate, those estimates are adjusted accordingly. Actual results could differ from those estimates.
The most significant estimates impacting the financial statements contained in this report include reserve for inventory, which is currently reserved at 100%, valuation allowance for deferred tax assets, and valuing options and warrants using option pricing models. These significant accounting estimates or assumptions bear the risk of change due to the fact that there are uncertainties attached to these estimates or assumptions, and certain estimates or assumptions are difficult to measure or value.
Impairment of Investments
The Company adjusts the carrying amount of its investments for any impairments that might occur due to other-than-temporary impairment (“OTTI”) declines. The Company considers the need for impairment if and when indicators of other than temporary declines in value are present. Management evaluates investments for OTTI declines on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
Principles of Consolidation
The consolidated financial statements include the accounts of Taxus Cardium Pharmaceuticals Group, Inc. and its consolidated subsidiaries, Angionetics Inc., Activation Therapeutics, Inc., and LifeAgain Insurance Solutions, Inc. (collectively, the “Company”). All significant inter-company transactions and balances have been eliminated in consolidation.
Business Acquisitions
Business combinations are accounted for using the acquisition method of accounting in accordance with ASC 850 “Business Combinations.” The cost of an acquisition is measured as the fair value of the consideration transferred on the acquisition date. When we acquire a business, we assess the acquired assets and liabilities assumed for the appropriate classification and designation in accordance with the contractual terms, economic circumstances and pertinent conditions at the acquisition date. The excess of the total consideration transferred over the net identifiable assets acquired and liabilities assumed is recognized as goodwill. If this consideration is lower than the fair value of the identifiable net assets acquired, the difference is recognized as a gain on business acquisition. Acquisition costs are expensed as incurred and included in general and administrative expenses in our consolidated statements of operations.
Cash and Cash Equivalents
We consider all highly liquid investments with maturities of three months or less when purchased to be cash equivalents.
Concentration of Credit Risk
Financial instruments that potentially subject us to significant concentrations of credit risk consist of cash and cash equivalents. At times, our cash and cash equivalents may be uninsured or in deposit accounts that exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance limits. As of December 31, 2015, we had no cash and cash equivalent balances in excess of the federally insured limit of $250,000.
Inventories, net
Inventories are stated at lower of cost or market and consist of raw materials associated with the Excellagen product. Inventories are valued on a first-in, first-out (FIFO) basis. We record reserves for inventories that are obsolete or exceed anticipated demand or carried at an amount that exceeds management’s estimate of net realizable. In establishing such reserves, management considers historical sales of identical and/or similar goods, product development plans and expected market demand. We recorded a reserve against inventory of approximately $0 and $160,000 as of December 31, 2015 and December 31, 2014, respectively.
Property and Equipment
, net
Property and equipment are stated at cost and include equipment, installation costs and materials less accumulated depreciation and amortization. Depreciation is calculated on a straight-line basis over the estimated useful lives of the assets. Estimated useful lives of the assets range from 3 to 5 years. Leasehold improvements are amortized over the lesser of the useful lives or the term of the respective lease.
Expenditures for maintenance and repairs, which do not extend the useful life of the assets, are charged to expense as incurred. Gains or losses on disposal of property and equipment are reflected in general and administrative expenses in the statement of operations.
Impairment of Long-Lived Assets
Long-lived assets to be held and used, including property and equipment as well as intangible assets, are reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable such as:
|
•
|
a significant decline in the observable market value of an asset;
|
|
•
|
a significant change in the extent or manner in which an asset is used; or
|
|
•
|
a significant adverse change that would indicate that the carrying amount of an asset or group of assets is not recoverable.
|
Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the assets, the assets are written-down to their estimated fair values. Long-lived assets to be disposed of are carried at fair value less costs to sell.
Preferred Stock
We apply the accounting standards for distinguishing liabilities from equity when determining the classification and measurement of its preferred stock. Shares that are subject to mandatory redemption (if any) are classified as liability instruments and are measured at fair value. We classify conditionally redeemable preferred shares, which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity. At all other times, preferred shares are classified as stockholders’ equity.
Revenue Recognition
We apply the revenue recognition principles set forth under the Securities and Exchange Commission’s Staff Accounting Bulletin (“SAB”) 104. Accordingly, revenue from product sales is recognized when (i) persuasive evidence of an arrangement exists, (ii) delivery has occurred, (iii) the sales price is fixed or determinable, and (iv) collectability is reasonably assured. These criteria are typically met when the risk of ownership and title passes to our customers.
Research and Development
In accordance with ASC Topic 730 (FASB Accounting Standard Codification) research and development costs are expensed as incurred. Research and development expenses consist of purchased technology, purchased research and development rights and outside services for research and development activities associated with product development. In accordance with ASC Topic 730, the cost to purchase such technology and research and development rights are required to be charged to expense if there is currently no alternative future use for this technology and, therefore, no separate economic value.
Income Taxes
We apply the elements of ASC 740–10 “Income Taxes — Overall” regarding accounting for uncertainty in income taxes. This clarifies the accounting for uncertainty in income taxes recognized in financial statements and requires the impact of a tax position to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority. As of December 31, 2015, we did not have any unrecognized tax benefits. We do not expect that the amount of unrecognized tax benefits will significantly increase or decrease within the next twelve months. Our policy is to recognize interest and penalties related to tax matters in the income tax provision in the Consolidated Statements of Operations. There were no interest or penalties for the years ended December 31, 2015 and 2014. Tax years from 2012 to 2014 are generally subject to examination by taxing authorities, (although net operating losses from all years are subject to examinations and adjustments for at least three years following the year in which the attributes are used.)
Deferred taxes are computed based on the tax liability or benefit in future years of the reversal of temporary differences in the recognition of income or deduction of expenses between financial and tax reporting purposes. The net difference, if any, between the provision for taxes and taxes currently payable is reflected in the balance sheet as deferred taxes. Deferred tax assets and/or liabilities, if any, are classified as current and non–current based on the classification of the related asset or liability for financial reporting purposes, or based on the expected reversal date for deferred taxes that are not related to an asset or liability. Valuation allowances are recorded to reduce deferred tax assets to that amount which is more likely than not to be realized.
We
follow the provision of ASC 740-10 related to Accounting for Uncertain Income Tax Positions. When tax returns are filed, there may be uncertainty about the merits of positions taken or the amount of the position that would be ultimately sustained. In acco
rdance with the guidance of ASC 740-10, the benefit of a tax position is recognized in the financial statements in the period during which, based on all available evidence, management believes it is more likely than not that the position will be sustained
upon examination, including the resolution of appeals or litigation processes, if any. Tax positions taken are not offset or aggregated with other positions.
Tax positions that meet the more likely than not recognition threshold are measured at the largest amount of tax benefit that is more than 50 percent likely of being realized upon settlement with the applicable taxing authority. The portion of the benefit associated with tax positions taken that exceed the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination. We believe our tax positions are all more likely than not to be upheld upon examination. As such, we have not recorded a liability for uncertain tax benefits.
Common Stock Purchase Warrants
We account for the issuance of common stock purchase warrants issued in connection with capital financing transactions in accordance with the provisions of ASC Topic 815. We classify as equity any contracts that (i) require physical settlement or net-share settlement or (ii) give us a choice of net-cash settlement or settlement in our own shares (physical settlement or net-share settlement). We classify as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside of our control), or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
Earnings (Loss) Per Common Share
We compute earnings (loss) per share, in accordance with ASC Topic 260 “Earnings per Share”, which requires dual presentation of basic and diluted earnings per share. Basic earnings (loss) per common share is computed by dividing net income or loss by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed by dividing net income or loss by the weighted average number of common shares outstanding, plus the issuance of common shares, if dilutive, that could result from the exercise of outstanding stock options and warrants. These potentially dilutive securities were not included in the calculation of loss per common share for the years ended December 31, 2015 or 2014 because their effect would be anti-dilutive.
As of December 31, 2015, potentially dilutive securities consisted of outstanding stock options and warrants to acquire 8,054,346 shares of our common stock and 1,041 shares of convertible Series A preferred stock convertible into 3,468,804 shares of our common stock. As of December 31, 2014, potentially dilutive securities consisted of outstanding stock options and warrants to acquire 2,788,242 shares of our common stock and 1,176 shares of convertible Series A preferred stock convertible into 1,826,381 shares of our common stock.
Fair Value Measurement
Valuation Hierarchy
The accounting standard of the FASB for fair value measurements establishes a valuation hierarchy for disclosure of the inputs to valuation used to measure fair value. This hierarchy prioritizes the inputs into three broad levels. Level 1 inputs are quoted prices (unadjusted) in active markets for identical assets or liabilities. Level 2 inputs are quoted prices for similar assets and liabilities in active markets or inputs that are observable for the asset or liability, either directly or indirectly through market corroboration, for substantially the full term of the financial instrument. Level 3 inputs are unobservable inputs based on our own assumptions used to measure assets and liabilities at fair value. A financial asset or liability’s classification within the hierarchy is determined based on the lowest level input that is significant to the fair value measurement.
The Company accounts for investments in other entities under the cost method of accounting when the Company does not hold significant interest in nor has any management control over those entities. Based on the assessment, the Company recorded impairment charges of $300,000 and $1,834,672 during the years ended December 31, 2015 and December 31, 2014, respectively. (See Note 3) Investments are classified within Level 3 of the valuation hierarchy.
The following non
-
recurring fair value measurements were recorded during the yea
rs ended December 31, 201
5
and 201
4
:
|
|
Total
Carrying
Value
|
|
|
Quoted
prices in
active
markets
(Level 1)
|
|
|
Significant
other
observable
inputs
(Level 2)
|
|
|
Significant
unobservable
inputs
(Level 3)
|
|
December 31, 2015
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
December 31, 2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Investment
|
|
$
|
300,000
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
300,000
|
|
We performed a valuation to estimate the fair value of our investment in Healthy Brands Collective preferred stock as of December 31, 2014. To determine the value of the equity instrument we considered the following three possible valuation methods: (1) the income approach, (2) the market approach and (3) the cost approach to estimate the enterprise value.
The income approach focuses on the income-producing capability of a business by estimating value based on the expectation of future cash flows that a company will generate—such as cash earnings, cost savings, tax deductions, and the proceeds from disposition. These cash flows are discounted to the present using a rate of return that incorporates the risk-free rate for the use of funds, the expected rate of inflation, and risks associated with the particular investment. The selected discount rate is generally based on rates of return available from alternative investments of similar type, quality and risk.
The market approach valuation method measures the value of an asset or business through an analysis of recent sales or offerings of comparable investments or assets. When applied to the valuation of equity interests, consideration is given to the financial condition and operating performance of the entity being appraised relative to those of publicly traded entities operating in the same or similar lines of business, potentially subject to corresponding economic, environmental and political factors and considered to be reasonable investment alternatives.
We selected the Income Approach to estimate the fair value of the preferred stock we hold in Cell-nique Corporation (the parent corporation of Healthy Brands Collective) as of December 31, 2014, based on the financial information provided to us by Cell-nique.
We used a discounted cash flow model to determine the fair value of the investment in preferred stock of Cell-nique Corporation using a discount rate of 14%.
We have also fully impaired our deposit on investment in SourceOne since we have determined it was probable it would not realize any benefit from its rights.
There were no transfers between level 1, 2 or 3 during the years ended December 31, 2015 and December 31, 2014.
Change in Level 3 assets measured at fair value on a non-recurring basis for the year ended December 31, 2015:
Balance – January 1, 2014
|
|
$
|
2,134,672
|
|
Impairment of investment
|
|
|
(1,399,672
|
)
|
Impairment of deposit
|
|
|
(435,000
|
)
|
Balance – December 31, 2014
|
|
|
300,000
|
|
Impairment of investment
|
|
|
(300,000
|
)
|
Balance – December 31, 2015
|
|
$
|
—
|
|
Stock-Based Compensation
We recognize compensation expense for all equity–based payments in accordance with ASC 718 “Compensation – Stock Compensation”. Under fair value recognition provisions, we recognize share–based compensation net of an estimated forfeiture rate and recognize compensation cost only for those shares expected to vest over the requisite service period of the award.
We have estimated the fair value of an option award on the date of grant using the Black–Scholes option valuation model. The Black–Scholes option valuation model requires the development of assumptions that are input into the model. These assumptions are the expected stock volatility, the risk–free interest rate, the option’s expected life, the dividend yield on the underlying stock and the expected forfeiture rate. Expected volatility is calculated based on the historical volatility of our common stock over the expected option life and other appropriate factors. Risk–free interest rates are calculated based on continuously compounded risk–free rates for the appropriate term. The dividend yield is assumed to be zero as we have never paid or declared any cash dividends on its common stock and does not intend to pay dividends on its common stock in the foreseeable future. The expected forfeiture rate is estimated based on historical experience.
Determining the appropriate fair value model and calculating the fair value of equity–based payment awards requires the input of the subjective assumptions described above. The assumptions used in calculating the fair value of equity–based payment awards
represent management’s best estimates, which involve inherent uncertainties and the application of management’s judgment. As a result, if factors change and
we use
different assumptions, equity–based compensation could be materially different in the future. In addition,
we
are
required to estimate the expected forfeiture rate and recognize expense only for those shares expected to vest. If actual forfeiture rate is
materially different from the estimates, the equity–based compensation could be significantly different from what
we have
recorded in the current period.
Total stock-based compensation expense included in the consolidated statements of operations was allocated to research and development and general and administrative expenses as follows:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Research and development
|
|
$
|
32,552
|
|
|
$
|
51,408
|
|
General and administrative
|
|
|
952,562
|
|
|
|
457,220
|
|
Total stock-based compensation
|
|
$
|
985,114
|
|
|
$
|
508,628
|
|
Recent Accounting Pronouncements
In March, 2016, the Financial Accounting Standards Board (
“
FASB
”
) issued (
“
ASU
”
)
ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This standard is intended to improve the accounting for employee share-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. We do not believe the adoption of this standard will have a material effect on our consolidated financial position and results of operations.
In February 2016, the FASB issued
ASU 2016-02, Leases (Topic 842).
ASU 2016-02 increases the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Certain qualitative and quantitative disclosures are required, as well as a retrospective recognition and measurement of impacted leases. The new ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. We are currently evaluating this ASU to determine its impact on our consolidated net income, financial position, cash flows and disclosures.
In November 2015, the FASB issued
ASU 2015-17, Balance Sheet Classification of Deferred Taxes
. ASU 2015-17 simplifies the presentation of deferred taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. ASU 2015-17 is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. The guidance may be adopted prospectively or retrospectively and early adoption is permitted. We are currently evaluating ASU 2015-17 to determine if this guidance will have a material impact on our financial position, results of operations or cash flows.
In July 2015, the FASB issued
ASU 2015-11, Simplifying the Measurement of Inventory
. ASU 2015-11 simplifies the subsequent measurement of inventory by requiring inventory to be measured at the lower of cost and net realizable value. ASU 2015-11 applies only to inventories for which cost is determined by methods other than last-in first-out and the retail inventory method. ASU 2015-11 is effective for public companies for annual reporting periods beginning after December 15, 2016, and interim periods within those fiscal years. Early adoption of ASU 2015-11 is permitted. We are currently evaluating ASU 2015-11 to determine if this guidance will have a material impact on our financial position, results of operations or cash flows.
In August 2014, the FASB issued Accounting Standards Update ASU 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. This ASU is intended to provide guidance on the responsibility of reporting entity management. Specifically, this ASU provides guidance to management related to evaluating whether there is substantial doubt about the reporting entity’s ability to continue as a going concern and about related financial statement note disclosures. The FASB issued this guidance to require management evaluation and potential financial statement disclosures. ASU 2014-15 is effective for financial statements with periods ending after December 15, 2016. We are currently evaluating ASU 2014-15 to determine its impact on our financial position, results of operations or cash flows.
NOTE 3—Disposal of Long-Lived Assets and Investment
On November 15, 2013, we sold the business conducted by our To Go Brands, Inc. subsidiary to Healthy Brands Collective in exchange for 33,441 shares of preferred stock of Cell-nique Corporation (“Cell-nique”) (the parent company of Healthy Brands Collective) and the assumption of certain liabilities. Because Cell-nique was a private company at the time of the sale, we recorded the value of the shares of preferred stock in our consolidated balance sheet as an investment in Cell-nique at the net asset value of the assets transferred and liabilities assumed by Cell-nique. The Company elected to defer recognition of any gain on the sale of the To Go Brands business until such time that the realization of the gain was reasonably assured. Accordingly, the Company is accounting
for its investment in Cell-nique using the cost method of account
ing, in which the cost is equal to the carrying amount of the net assets sold to Cell-nique as of the date that the transaction closed.
The preferred shares are convertible into Cell-nique common stock at the option of the Company, and at the time of the sale represented approximately 4% of the fully-diluted voting interests of Cell-nique. These preferred shares also accrue dividends at the rate of 8% per annum, are mandatorily convertible into common shares under certain circumstances, and feature customary rights of priority and a liquidation preference in the event of a dissolution or winding up Cell-nique’s affairs or upon the occurrence of other deemed liquidation events described in Cell-nique’s articles of incorporation.
During the year ended December 31, 2014, we believed there were certain impairment triggering events and circumstances which warranted an evaluation of our investment in the Cell-nique preferred shares and a non-cash impairment charge of $1,399,672 was recorded. As of December 31, 2014, the remaining fair value of preferred shares in Cell-nique was $300,000. During the year ended December 31, 2015, we believed there were certain impairment triggering events and circumstances which warranted an evaluation of our investment in the Cell-nique preferred shares and a non-cash impairment charge of $300,000 was recorded.
NOTE 4— Intangible Assets and Strategic Investment
In December 2011, Taxus Cardium entered into a series of agreements with Source One Global Partners, LLC, (“SourceOne”) related to a Strategic Partnership Agreement between the companies. Under these agreements, we made an equity investment in the form of unregistered, restricted shares of our common stock to acquire an option to purchase to a 15% ownership interest in SourceOne Global Partners. The option was acquired through the issuance of 75,000 shares of the Company’s common stock which were recorded at a value of $5.80 per share based on the closing price of the Company’s stock on December 19, 2011, and is exercisable for an exercise fee of $10,000. The Company also has certain rights to maintain its proportionate ownership interest in SourceOne, and a right of first refusal to acquire SourceOne on the terms that SourceOne were to offer a third-party acquirer. During the year ended December 31, 2014, we believed there were certain impairment triggering events and circumstances that warranted an evaluation of its SourceOne agreement and as a result a non-cash impairment charge of $435,000 was recorded. The Company also acquired the option to license certain technology from SourceOne in consideration of an additional 75,000 shares of the Company’s common stock (License Equity Stock), which were to be held in escrow until the exercise of such a license. The Company did not exercise the option to license technology within four years and as a result, pursuant to the terms of the agreements, in December of 2015, the License Equity Stock was released from escrow with half of the shares (37,500 shares) released in the name of SourceOne, and half (37,500 shares) released in the name of the Company. The Company then canceled the 37,500 License Equity Stock shares released in its name.
Note 5—Inventories
Inventories consisted of the following:
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Raw materials
|
|
$
|
467,761
|
|
|
$
|
467,761
|
|
|
|
|
467,761
|
|
|
|
467,761
|
|
Less provision for obsolete inventory
|
|
|
(467,761
|
)
|
|
|
(467,761
|
)
|
Inventories, net
|
|
$
|
—
|
|
|
$
|
—
|
|
Note 6—Property and Equipment
Property and equipment consisted of the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Computer and telecommunication equipment
|
|
$
|
425,331
|
|
|
$
|
425,331
|
|
Machinery and equipment
|
|
|
31,779
|
|
|
|
31,779
|
|
Office equipment
|
|
|
11,490
|
|
|
|
11,490
|
|
Office furniture and equipment
|
|
|
223,206
|
|
|
|
223,206
|
|
Leasehold improvements
|
|
|
23,053
|
|
|
|
23,053
|
|
|
|
|
714,859
|
|
|
|
714,859
|
|
Accumulated depreciation and amortization
|
|
|
(708,334
|
)
|
|
|
(698,445
|
)
|
Property and equipment, net
|
|
$
|
6,525
|
|
|
$
|
16,414
|
|
Depreciation and amortization of property and equipment totaled $9,889 and $13,782 for the years ended December 31, 2015 and 2014, respectively.
Note 7—Accrued Liabilities
Accrued Liabilities consisted of the following:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Payroll and benefits
|
|
$
|
789,852
|
|
|
$
|
465,512
|
|
Other
|
|
|
305,000
|
|
|
|
69,739
|
|
Total
|
|
$
|
1,094,852
|
|
|
$
|
535,251
|
|
Note 8—Commitments and Contingencies
Lease Commitments
On August 15, 2013, we entered into a lease for approximately 4,419 square feet of office space in San Diego, California to be used as our corporate headquarters. The lease commenced on September 1, 2013 once improvements were completed and has a term of 36 months from the commencement date. In addition to monthly base rent, we are also required to pay our proportionate share of any building operating expenses in excess of 2014 levels. In connection with the lease, we paid a security deposit of $9,231. Monthly base rent is $9,678 during the first year of the lease and increases to $10,016 in year two and $10,367 in year three.
On June 23, 2016, we entered into a thirty-eight month lease agreement to lease office space commencing on September 30, 2016. The approximate base monthly rent in the first, second and third years is $3,500, $3,700, and $3,800 respectively. The base monthly rent in the final two months of the agreement is $3,900. The total base rent over the lease term equals $139,800.
Future annual minimum rental payments under the leases are as follows:
Year Ending December 31,
|
|
Facilities
(Operating Lease)
|
|
2016
|
|
$
|
93,436
|
|
2017
|
|
|
42,600
|
|
2018
|
|
|
44,700
|
|
2019
|
|
|
42,000
|
|
Total
|
|
$
|
222,736
|
|
Rent expense was $125,203 and $149,371 for the years ended December 31, 2015 and 2014 respectively.
License Fees
In October 2005, we completed a transaction with Schering AG Group, Germany (now part of Bayer AG) and related licensors, including the University of California and New York University, for the transfer or license of certain assets and technology for potential use in treating ischemic and other cardiovascular conditions. Under the terms of the transaction, we paid Schering a $4 million fee, and would be required to pay a $10 million milestone payment upon the first commercial sale of each resulting product. We also may be obligated to pay the following future royalties to Schering: (i) 5% on net sales of an FGF-4 based product such as Generx, or (ii) 4% on net sales of other products developed based on technology transferred to Cardium by Schering.
As part of the Schering transaction, we acquired rights and corresponding obligations under the Regents of the University of California (Regents) September 1995 agreement, as amended. Under the University of California agreement, we are obligated to pay (1) an annual royalty fee of 2% based on net sales of products incorporating the technology licensed under the agreement, and (2) a minimum annual royalty fee (which may be offset against the net sales-based royalty fee) $100,000 for 2010, $100,000 for 2011, $150,000 for 2012, $150,000 for 2013 and $200,000 for 2014 and thereafter, payable on February 28 of the following year. We incurred the minimum license fee in 2013 and 2012. We may cancel that agreement at any time with 60 days’ notice, following which we would continue to be responsible only for obligations and liabilities accrued before termination.
As part of the Schering transaction, we acquired rights and corresponding obligations under the New York University March 1997 Agreement as amended, under which we may be obligated to pay an annual fee of $50,000 per year through the completion of the first full year of sales licensed technology as well as ongoing patent expenses incurred in connection with the licensed technologies. Should licensed products under the agreement reach the stage of filing of a product license application (PLA) and PLA approval or foreign equivalent thereof, we may be obligated to pay up to an aggregate amount of approximately $1.8 million for each product in milestone payments. In addition, beginning in the year in which we complete one full year of sales of licensed products and continuing thereafter until the agreement terminates or expires, we may also be obligated to pay annual royalty fees equal to 3% on net sales of products incorporating the licensed technology.
Legal Proceedings
In the course of our business, we are routinely involved in proceedings such as disputes involving goods or services provided by various third parties, which we do not consider likely to be material to the technology we develop or license, or the products we develop for commercialization, but which can result in costs and diversions of resources to pursue and resolve. In October 2014, we received a complaint filed by BioRASI LLC (“BioRASI”) in Broward County, Florida, seeking payments of approximately $0.5 million allegedly owed for services that BioRASI provided in connection with the Company’s clinical trial conducted in the Russian Federation. In June of 2015, BioRASI amended the complaint to include as plaintiffs additional parties affiliated with bioRASI including Vendevia Group, LLC, Biosciences Research Ltd., and Progressive Scientific Bioresearch, Ltd. We are defending the action and have filed counterclaims. Although at December 31, 2015, the probable outcome of this matter cannot be determined, we believe that we have supportable defenses and any negative decision, if any, is expected to be insignificant. Accordingly, we have not recorded any provisions related to this matter.
Note 9—Income Taxes
The Company files U. S. federal and state of California income tax returns. We are no longer subject to Federal and state income tax examinations by tax authorities for years prior to 2012.
The Company has U.S. federal and state net operating loss carryovers of $106.2 million and $104.2 million as of December 31, 2015 and 2014, respectively. These net operating losses are subject to Internal Revenue Code Section 382,
which could result in limitations on the amount of such losses that could be utilized during any taxable year. The net operating losses begin to expire in 2024 for federal income purposes and in 2015 for state income tax purposes.
The ultimate realization of deferred tax assets depends on the generation of future taxable income during the periods in which those net operating losses are available. We consider projected future taxable income and tax planning strategies in making our assessment. At present, we do not have a sufficient history of income to conclude that it is more-likely-than-not that we will be able to realize all of our tax benefits in the near future and therefore we have established a valuation allowance for the full value of the deferred tax asset.
A valuation allowance will be maintained until sufficient positive evidence exists to support the reversal of any portion or all of the valuation. For the years ended December 31, 2015 and 2014 the change in the valuation allowance was $1,459,897 and $9,072,799 respectively.
Our net deferred tax asset consisted of the following at December 31, 2015 and 2014:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Deferred tax asset:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
42,315,384
|
|
|
$
|
41,512,011
|
|
Deferred compensation
|
|
|
1,474,625
|
|
|
|
1,082,211
|
|
Depreciation and amortization
|
|
|
1,010,636
|
|
|
|
1,161,055
|
|
Research and development credits
|
|
|
3,788,752
|
|
|
|
3,761,004
|
|
Accrued expenses
|
|
|
314,633
|
|
|
|
47,356
|
|
Impairment loss
|
|
|
850,334
|
|
|
|
730,830
|
|
Other
|
|
|
248,933
|
|
|
|
248,933
|
|
Total deferred tax assets
|
|
|
50,003,297
|
|
|
|
48,543,400
|
|
Less: Valuation allowance
|
|
|
(50,003,297
|
)
|
|
|
(48,543,400
|
)
|
Net deferred tax asset
|
|
$
|
—
|
|
|
$
|
—
|
|
The income tax provision (benefit) from income taxes consists of the following at December 31, 2015 and 2014:
|
|
Years Ended December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Federal
|
|
|
|
|
|
|
|
|
Current
|
|
$
|
—
|
|
|
$
|
—
|
|
Deferred
|
|
|
(1,246,071
|
)
|
|
|
(6,333,053
|
)
|
State
|
|
|
|
|
|
|
|
|
Current
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
(213,826
|
)
|
|
|
(2,739,746
|
)
|
Total
|
|
|
(1,459,897
|
)
|
|
|
(9,072,799
|
)
|
Change in valuation allowance
|
|
|
1,459,897
|
|
|
|
9,072,799
|
|
Income tax provision (benefit)
|
|
$
|
—
|
|
|
$
|
—
|
|
As a result of
our
significant operating loss carry forwards and the corresponding valuation allowance, no
income tax benefit was recorded at December 31, 201
5
or 201
4
.
The provision for income taxes using the statutory federal tax rate as compared to
our
effective tax rate is summarized as follows:
|
|
December 31,
|
|
|
|
2015
|
|
|
2014
|
|
Federal income tax rate
|
|
|
(34.0
|
)%
|
|
|
(34.0
|
)%
|
State income tax rate, net of federal benefit
|
|
|
(4.8
|
)%
|
|
|
(14.6
|
)%
|
Deferred tax true-up
|
|
|
5.0
|
|
|
—
|
|
Other permanent differences
|
|
|
0.1
|
%
|
|
—
|
%
|
|
|
|
(33.7
|
)%
|
|
|
(48.6
|
)%
|
Change in valuation allowance
|
|
|
33.7
|
%
|
|
|
48.6
|
%
|
|
|
|
—
|
%
|
|
|
—
|
%
|
Note 10—Stockholders’ Equity
Common Stock
On February 28, 2014, we entered into a strategic collaboration and funding arrangement with Shanxi Taxus Pharmaceuticals Co., Ltd., which is based in the Peoples Republic of China (PRC) and is affiliated with Shenzhen Forntsea Taxus Industry Capital Management (“Shanxi Taxus”), to support the worldwide clinical and commercial development of Cardium’s advanced regenerative medicine therapeutics products, including the Generx product candidate and Excellagen. In connection with this arrangement, we entered into a Stock Purchase Agreement with Shanxi Taxus, pursuant to which, Shanxi Taxus agreed to purchase up to $5 million of shares of our unregistered common stock in multiple tranches, each at a 10% premium to the then-current trailing average market prices of our common stock at the time of each closing. In February 2014, we closed the initial tranche of funding by selling 714,286 shares of common stock at $0.70 per share. On May 12, 2014, Shanxi Taxus acquired a second tranche of $1.5 million by purchasing 2,330,278 shares of common stock at $0.6437 per share a mutually agreed upon price. In December 2014, Shanxi Taxus acquired a portion of the third tranche of $300,000 by purchasing 466,056 shares of common stock at $0.6437 per share a mutually agreed upon price. Although Shanxi Taxus originally had a right to purchase the third, fourth and fifth tranches of $1.0 million each, with the third tranche not timely closed for the full amount, it no longer has a contractual right to purchase additional shares pursuant to the terms of the Stock Purchase Agreement.
The common stock purchased by Shanxi Taxus is unregistered, but in the event that we file a registration statement for other shares of common stock, then we agreed to supplement such registration statement to provide “piggyback” registration rights for the shares purchased by the Shanxi Taxus. No warrants were issued in connection with the transaction.
On April 4, 2015 we entered into a term sheet with Shenzhen Qianhai Taxus, whereby we proposed to sell Shenzhen Qianhai Taxus 600,000 shares of common stock in our Angionetics subsidiary in exchange for $3.0 million in cash. The $3.0 million was to be paid in tranches that were to be completed by May 31, 2015. Shenzhen Qianhai Taxus paid $600,000 of the financing, which was recorded as common stock issuable. Since Shenzhen Qianhai Taxus did not complete this transaction, instead Huapont agreed to fund the investment. Shenzhen Qianhai Taxus is eligible to apply this amount toward the purchase of common stock of the Company or its subsuduaries based on terms and conditions approved by the Company’s Board of Directors. This contribution is committed and not refundable to Shenzhen Qianhai Taxus.
Preferred Stock
Exchange and Redemption Agreement with Sabby Healthcare Volatility Master Fund, Ltd.
On April 4, 2013, we entered into a securities purchase agreement with Sabby Healthcare Volatility Master Fund, Ltd. (“Sabby”) to purchase up to 4,012 shares of our newly authorized Series A Convertible Preferred Stock (the “Preferred Stock”) for maximum proceeds of $4.0 million. The Preferred Stock was convertible into shares of our common stock at an initial conversion price of $0.6437 per share. The conversion price is subject to downward adjustment if we issue common stock or common stock equivalents at a price less than the then effective conversion price. Sabby is limited to hold no more than 10% of Taxus Cardium’s issued and outstanding common stock at any time. As long as the Preferred Stock is outstanding, we have also agreed not to incur specified indebtedness without the consent of the holders of the Preferred Stock. These factors may restrict our ability to raise capital through equity or debt offerings in the future.
On July 22, 2015, we entered into an Exchange and Redemption Agreement with Sabby relating to the 1,176 outstanding shares of Preferred Stock that remained outstanding at that time. Under the terms of the Exchange and Redemption Agreement, we agreed to reduce the conversion price of the Preferred Stock to $0.30 per share. The Agreement grants Taxus Cardium (1) a right to redeem any or all of the outstanding Preferred Stock for its stated value (approximately $1,000 per share) at any time during a 120 day period after the date of the Agreement, and (2) increases the limitation on certain indebtedness contained in the Certificate of Designation for the Preferred Stock to allow Taxus Cardium to borrow up to $250,000. We entered into the Agreement to increase our options for retiring the outstanding Preferred Stock and financing our continued business operations. As a result of the effective conversion price
changing from $0.64 to $0.30 per share, the 1,176 shares of Preferred S
tock outstanding are convertible to 3,918,667 shares of Taxus Cardium common stock, an additional 2,092,350
shares
compared to before the conversion price change. A hypothetical conversion of all of the outstanding Preferred Stock into 3,468,804 common sha
res would increase the common stock outstanding
from 13,187,
544
shares as of December 31, 2015, to 16,656,348, an increase of 26%. As a result of such holder entering into the Agreement, for which the fair value of preferred stock before and after the
modification was a substantially different, the modification was accounted for as an extinguishment. As a result, the Company recorded a deemed dividend totaling $627,705 in the statement of operations in arriving at net loss to common shareholders
.
This reduction of the conversion price under the Exchange and Redemption Agreement triggered an anti-dilution protection in 3,585,908 previously granted common stock purchase warrants not held by Sabby, resulting in an additional 3,749,692 warrant shares to be granted for a total of 7,235,600 common stock purchase warrants with anti-dilutive provisions outstanding. The exercise price per common share in these warrants remains unchanged as the original common stock purchase warrant, a weighted average price of $0.71. Stock-based compensation expense of $693,801 related to this anti-dilution provision was recorded during the year ended December 31, 2015.
Stockholder Rights Plan
On July 10, 2006, our Board of Directors approved the adoption of a Stockholder Rights Plan (“Rights Plan”). Pursuant to the Rights Plan, we issued a dividend of one right for each share of our common stock held by stockholders of record as of the close of business on July 21, 2006. The rights are not immediately exercisable and will become exercisable only upon the occurrence of certain events. In general, if a person or group acquires, or announces a tender or exchange offer that would result in the acquisition of, 15% or more of our common stock while the Rights Plan remains in place, then, unless the Board of Directors elects to redeem the rights for $0.001 per right, the rights will become exercisable by all rights holders except the acquiring person or group, for 0.001 of a share of newly created Series A Junior Participating Preferred Stock at an exercise price of $40.00. Until the rights become exercisable, the rights are represented by, and automatically trade with, our common stock certificates.
The Rights Plan was reviewed in 2012 and will be evaluated every three years by a committee of independent directors of the Company’s Board of Directors to consider whether the plan continues to be in the best interests of Cardium and its stockholders. The Rights Plan may be amended or revoked by the Board of Directors at any time and unless earlier terminated or amended, the rights will expire on July 10, 2016.
Stock Options and Other Equity Compensation Plans
We have an equity incentive plan that was established in 2005 under which 283,058 shares of our common stock have been reserved for issuance to employees, non-employee directors and consultants.
At December 31, 2015, the following shares were outstanding and available for future issuance under the option plan:
Plan
|
|
Shares Outstanding
|
|
|
Shares Available
for Issuance
|
|
2005 Equity Incentive Plan
|
|
|
62,000
|
|
|
|
—
|
|
The 2005 Equity Incentive Plan expired on October 20, 2015, ten years after its adoption, and we are no longer able to issue share or awards under that plan. All options or other awards issued under the 2005 Equity Incentive plan prior to its expiration remain outstanding in accordance with their terms.
On February 28, 2014, outside of the 2005 Equity Incentive Plan, we issued 1,457,100 common stock warrants to directors, officers and chief medical advisor. The warrants were approved by our Board of Directors, have a ten year term and an exercise price of $0.80 per share, which represented a 57% premium to the closing stock price on the date of issuance. The common stock warrants had a fair value of $0.34 per share and vested immediately. We recorded $505,057 of stock-based compensation related to these common stock warrants. These warrants carry a preemptive anti-dilution right which is activated if shares are sold at a price below the $0.80 exercise price of the warrant. This feature increases the number of common shares in which these warrants are exercisable into, but the exercise price still remains at $0.80 per share. As a result of the final tranche of the Shanxi Taxus equity transaction completed in December 2014 and the Exchange and Redemption Agreement with Sabby, the 1,457,100 common stock warrants are now exercisable into 3,885,598 shares of common stock at a price of $0.80 per share. We recorded $371,770 and $505,057 of stock-based compensation during the years ended December 31, 2015 and 2014, respectively related to the additional common stock warrants.
On March 23, 2015, outside of the 2005 Equity Incentive Plan, we issued 1,125,000 common stock warrants to directors, officers and chief medical advisor. The warrants were approved by our Board of Directors, have a ten year term and an exercise price of $0.60 per share, which represented a 216% premium to the closing stock price on the date of issuance. The warrants had a fair value of $0.10 per share and vested immediately. We recorded $117,375 of stock-based compensation related to these common stock warrants. These warrants carry a preemptive anti-dilution right which is activated if shares are sold at a price below the $0.60 exercise price of the warrant. This feature increases the number of common shares in which these warrants are exercisable into, but the
exercise price still remains at $0.60 per share. As a result of the
Exchange and Redemption Agreement with Sabby,
the 1,125,000 common stock warrants are now exercisable into 2,250,000 shares of common stock at a price of $0.60 per share. We recorded $215
,893 in stock-based compensation related to the additional warrants.
On March 23, 2015, we issued 10,000 non-qualified stock options to directors. The options were approved by our Board of Directors, have a seven year term and an exercise price of $0.19 per share, which equaled the closing stock price on the date of issuance. The stock options had a fair value of $0.14 per share. We recorded $262 of stock-based compensation related to these stock options.
On May 1, 2015, outside of the 2005 Equity Incentive Plan, we issued 550,000 common stock warrants to directors and employees. The warrants were approved by our Board of Directors, have a ten year term and an exercise price of $0.60 per share, which represented a 20% premium to the closing stock price on the date of issuance. The warrants had a fair value of $0.37 per share and 300,000 vested immediately. 250,000 warrants have a 1 year cliff vesting. We recorded $166,627 of stock-based compensation related to these common stock warrants. These warrants carry a preemptive anti-dilution right which is activated if shares are sold at a price below the $0.60 exercise price of the warrant. This feature increases the number of common shares in which these warrants are exercisable into, but the exercise price still remains at $0.60 per share. As a result of the Exchange and Redemption Agreement with Sabby, the 550,000 common stock warrants are now exercisable into 1,100,000 shares of common stock at a price of $0.60 per share. We recorded $106,138 in stock-based compensation related to the additional warrants.
On May 8, 2015, outside of the 2005 Equity Incentive Plan, we issued 100,000 common stock warrants to a consultant. The warrants were approved by our Board of Directors, have a ten year term and an exercise price of $0.60 per share, which represented a 33% premium to the closing stock price on the date of issuance. The commons stock warrants had a fair value of $0.41 per share. 40,000 warrants vested immediately, and the remaining 60,000 warrants vested over three quarters. On August 4, 2015, the consulting agreement was terminated and the remaining 60,000 unvested warrants cancelled per the terms of the consulting agreement and the common stock purchase warrant. We recorded $6,868 of stock-based compensation related to these common stock warrants.
The following is a summary of stock option and warrant activities under our equity incentive plan and warrants issued outside of the plan to employees and consultants, during the years ended December 31, 2015 and 2014:
|
|
Number of
Options or
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in years)
|
|
Balance outstanding, January 1, 2014
|
|
|
144,000
|
|
|
$
|
31.74
|
|
|
|
2.10
|
|
Granted
|
|
|
1,812,906
|
|
|
|
0.80
|
|
|
|
9.1
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled (unvested)
|
|
|
(42,000
|
)
|
|
|
32.02
|
|
|
|
—
|
|
Expired (vested)
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Balance outstanding, December 31, 2014
|
|
|
1,914,906
|
|
|
|
2.44
|
|
|
|
8.74
|
|
Granted
|
|
|
5,534,692
|
|
|
|
0.67
|
|
|
|
8.85
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
Cancelled (unvested)
|
|
|
(60,000
|
)
|
|
|
0.60
|
|
|
|
—
|
|
Expired (vested)
|
|
|
(52,000
|
)
|
|
|
28.76
|
|
|
|
—
|
|
Balance outstanding, December 31, 2015
|
|
|
7,337,598
|
|
|
$
|
0.94
|
|
|
|
8.62
|
|
Balance exercisable, December 31, 2015
|
|
|
7,078,342
|
|
|
$
|
0.95
|
|
|
|
8.60
|
|
We calculate the fair value of stock options using the Black-Scholes option-pricing model. In determining the expected term, we separate groups of employees that have historically exhibited similar behavior with regard to option exercises and post-vesting cancellations. The option-pricing model requires the input of subjective assumptions, such as those included in the table above. The volatility rates are based principally on our historical stock prices and expectations of the future volatility of its common stock. The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant. The total expense to be recorded in future periods will depend on several variables, including the number of share-based awards and expected vesting.
The following table summarizes the stock options and warrants that we granted during the year ended December 31, 2015:
Grant Date
|
|
Quantity
Issued
|
|
|
Expected
Life
(Years)
|
|
|
Strike
Price
|
|
|
Volatility
|
|
|
Dividend
Yield
|
|
|
Risk-Free
Interest
Rate
|
|
|
Grant Date
Fair Value
Per Option
|
|
|
Aggregate
Fair Value
|
|
03/23/2015
|
|
|
1,125,000
|
|
|
|
5.0
|
|
|
$
|
0.60
|
|
|
|
96.32
|
%
|
|
|
0
|
%
|
|
|
1.42
|
%
|
|
$
|
0.10
|
|
|
$
|
117,683
|
|
03/23/2015
|
|
|
10,000
|
|
|
|
4.5
|
|
|
$
|
0.19
|
|
|
|
98.09
|
%
|
|
|
0
|
%
|
|
|
1.36
|
%
|
|
$
|
0.14
|
|
|
$
|
1,354
|
|
05/01/2015
|
|
|
550,000
|
|
|
|
5.2
|
|
|
$
|
0.60
|
|
|
|
99.45
|
%
|
|
|
0
|
%
|
|
|
1.47
|
%
|
|
$
|
0.37
|
|
|
$
|
203,500
|
|
05/08/2015
|
|
|
100,000
|
|
|
|
4.8
|
|
|
$
|
0.60
|
|
|
|
106.91
|
%
|
|
|
0
|
%
|
|
|
2.18
|
%
|
|
$
|
0.41
|
|
|
$
|
33,000
|
|
07/22/2015
|
|
|
71,192
|
|
|
|
8.6
|
|
|
$
|
0.80
|
|
|
|
95.11
|
%
|
|
|
0
|
%
|
|
|
2.23
|
%
|
|
$
|
0.23
|
|
|
$
|
16,328
|
|
07/22/2015
|
|
|
2,003,500
|
|
|
|
4.3
|
|
|
$
|
0.80
|
|
|
|
105.07
|
%
|
|
|
0
|
%
|
|
|
1.54
|
%
|
|
$
|
0.18
|
|
|
$
|
360,630
|
|
07/22/2015
|
|
|
1,675,000
|
|
|
|
4.8
|
|
|
$
|
0.60
|
|
|
|
100.05
|
%
|
|
|
0
|
%
|
|
|
1.69
|
%
|
|
$
|
0.19
|
|
|
$
|
318,250
|
|
As of December 31, 2015, we had $30,444 unvested stock-based compensation at fair value remaining to be expensed. During the years ended December 31, 2015 and 2014, we recognized $985,114 and $508,628 of stock-based compensation expense, respectively.
As of December 31, 2015 and 2014, there was an aggregate of $1,400 and $0 intrinsic value to the outstanding and exercisable options and warrants, respectively.
Warrants
The following table summarizes warrant activities for the years ended December 31, 2015 and 2014:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in years)
|
|
Balance outstanding, January 1, 2014
|
|
|
978,830
|
|
|
$
|
19.82
|
|
|
|
1.9
|
|
Warrants issued
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Warrants exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Warrants expired
|
|
|
(105,494
|
)
|
|
|
32.68
|
|
|
|
|
|
Warrants cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding, December 31, 2014
|
|
|
873,336
|
|
|
|
17.79
|
|
|
|
1.0
|
|
Warrants issued
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Warrants exercised
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
Warrants expired
|
|
|
(156,588
|
)
|
|
|
26.07
|
|
|
|
|
|
Warrants cancelled
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance outstanding, December 31, 2015
|
|
|
716,748
|
|
|
$
|
15.98
|
|
|
|
0.22
|
|
Warrants exercisable at December 31, 2015
|
|
|
716,748
|
|
|
$
|
15.98
|
|
|
|
0.22
|
|
Note 11—Subsequent Events
We have evaluated events that occurred subsequent to December 31, 2015 and through the date the consolidated financial statements were issued.
Angionetics Formation
On June 6, 2016, Taxus Cardium entered into a contribution agreement with Angionetics, pursuant to which Taxus Cardium contributed all of the assets and certain related liabilities related to the Generx
®
product candidate to Angionetics. In consideration of the contribution, Angionetics agreed to pay to Taxus Cardium a $2,000,000 technology fee, payable upon the earlier of a qualified initial public offering of Angionetics capital stock or a change in control of Angionetics. The contribution agreement also provides certain restrictions and registration rights related to Taxus Cardium’s holding in Angionetics capital stock. Taxus Cardium agreed to a twelve-month lock up on its shares of Angionetics following any qualified initial public offering of Angionetics common stock. Angionetics also granted Taxus Cardium piggyback registration rights, subject to certain cutbacks, for so long as Taxus Cardium continues to hold more than 9.99% of Angionetics’ outstanding capital stock. The contribution agreement contains mutual covenants regarding the protection of confidential non-public information shared between each entity. Finally, the contribution agreement provides for cross-indemnification where Taxus Cardium will indemnify Angionetics for any claims arising out of the operation of its business (excluding Generx and its related assets and liabilities), and Angionetics will indemnify Taxus Cardium for any claims arising out of the operation of its business.
On
June 6, 2016, Taxus Cardium entered into a services agreement with Angionetics, pursuant to which Taxus Cardium agreed to provide services to Angionetics during a transition period. The services agreement provides that Taxus Cardium will assist Angionetic
s with the transfer of the Generx assets and liabilities without charge. Taxus Cardium has also agreed to provide certain administrative, commercial and clinical development services to Angionetics on a cost basis. Angionetics has also been granted a licen
se to use certain of Taxus Cardium’s facilities in exchange for payment of 70% of the costs of the facilities. The transition services are provided without warranty or liability except in the case of fraud or willful misconduct. The services agreement also
contemplates that as Angionetics develops its financing and business plan, it is anticipated that certain Taxus Cardium employees critical to the development of the Generx
®
product candidate will become employees of Angionetics.
Schering AG Technology Transfer Agreement
We are party to a Technology Transfer Agreement between Schering AG (now Bayer Pharma AG), Berlex, Inc. (now Bayer Healthcare Pharmaceuticals Inc), Collateral Therapeutics, Inc., and Taxus Cardium which covers the transfer or license of certain assets and technology, including patents relating to (i) methods of gene therapy for the treatment of cardiovascular disease (including methods for the delivery of genes to the heart or vasculature and the use of angiogenic and/or non-angiogenic genes for the potential treatment of diseases of the heart or vasculature); (ii) therapeutic genes that include fibroblast growth factors (including FGF-4); insulin-like growth factors (including IGF-I); and potentially other related biologics; and (3) other technology and know-how, including manufacturing and formulation technology, as well as data relating to the clinical development of Generx and corresponding FDA regulatory matters. Under this agreement, we paid Schering AG a $4.0 million upfront fee and, as the current holder of the license rights, are obligated to make a $10 million milestone payment upon the first commercial sale of each product using the licensed technology.
On May 4, 2016, Bayer Pharma AG agreed to the transfer of the Technology Transfer Agreement from Taxus Cardium to Angionetics. Accordingly, Angionetics has assumed the obligation for any milestone payment required to be paid to Bayer Pharma AG. Under the terms of the Technology Transfer Agreement, Angionetics also may be obligated to pay the following royalties to Bayer Pharma AG: (i) 5% on net sales following a first commercial sale of an FGF-4 based product in the United States, Europe, or Japan, or (ii) 4% on net sales of other products developed based on technology transferred by Bayer Pharma AG (as successor to Schering AG) following a first commercial sale in the United States, Europe, or Japan, and (iii) a royalty of 2.5% (for FGF-4 based technology) or 2% (for other products) in territories where the product would not infringe the patents licensed by Bayer Pharma AG (as successor to Schering AG). Angionetics will also be obligated to reimburse Bayer Pharma AG for patent expenses, including the expenses of any interference or other proceedings, accrued on or after April 1, 2005 in connection with the transferred technologies. To date there have been no sales or payments under this agreement.
Huapont Life Sciences Angionetics Financing Agreement
On June 7, 2016, Taxus Cardium and Angionetics entered into a Share Purchase Agreement with Pineworld Capital Limited an entity affiliated with Huapont Life Sciences Co. Ltd, a China-based pharmaceutical, and active pharmaceutical ingredient company (“Huapont”). Huapont is focused on the research and development of new and innovative hea
lthcare products, and the manufacture, marketing and sale of leading pharmaceutical products, active pharmaceutical ingredients (known as APIs) and a portfolio of safe and effective agricultural herbicides (including NC16, NC34, NC36, NC125, NC201) serving the agricultural business throughout the U.S. and South American markets. Huapont’s pharmaceutical business includes dermatology products, cardiovascular products, anti-tuberculosis agents, autoimmune-related products and oncology-related products. Huapont’s API business involves the production and sale of bulk pharmaceutical chemicals, pharmaceutical intermediates and preparations of Western medicines, with curren t annual revenues of approximately $1.1 billion, and approximately 7,100 employees operating throughout mainland China. Huapont is listed on the Shenzhen Stock Exchange (002004.SZ) and trades at a current market capitalization of approximately $3.0 billion.
Pursuant to the Share Purchase Agreement, Angionetics agreed to sell 600,000, shares of its newly authorized Series A Convertible Preferred Stock (the “Shares”) to the Huapont affiliate in exchange for $3,000,000 in cash. The Shares represent an initial 15% equity interest in Angionetics, resulting in a post-money valuation of $20.0 million for Angionetics, subject to certain anti-dilution protection described below.
The investment from the Huapont affiliate was to be made in two tranches. The closing of the initial tranche of 200,000 Shares for $1,000,000 occurred on July 5, 2016. The closing of the second tranche of 400,000 Shares for $2,000,000 was conditioned upon Angionetics securing FDA clearance to initiate a new U.S.-based Phase 3 clinical study (the AFFIRM study) to evaluate the safety and definitive efficacy of the Generx® [Ad5FGF-4] product candidate for the treatment of patients with ischemic heart disease and refractory angina. On September 28, 2016, following FDA clearance of the Phase 3 AFFIRM study, Angionetics received $2,000,000 from the closing of the second tranche. Angionetics will require additional capital to complete the Phase 3 AFFIRM study, which it expects to secure through the sale of additional equity or debt securities. There are no agreements or arrangement for any additional financing in place at this time.
The
Angionetics Shares have the following rights, privileges and preferences:
|
•
|
Dividends
. Holders of the Shares are entitled to receive dividends as, when and if declared by the Angionetics board of directors on the Angionetics common stock, on an as-converted basis.
|
|
•
|
Liquidation
. In the event of a liquidation of Angionetics, including a change of control transaction, holders of sp the Shares are entitled to be paid an amount equal to their investment amount before any payment is made to Taxus Cardium or any other holders of Angionetics common stock.
|
|
•
|
Voting
. The Shares generally vote with the Angionetics common stock as a single class on an as-converted basis. Holders of the Shares also have certain special voting rights as a separate class including (a) the right to appoint a member to the Angionetics board of directors, (b) the right to approve any increase or decrease in the number of authorized shares of the Shares or the common stock, any merger or acquisition involving Angionetics, any liquidation or winding up of Angionetics, any increase in the number of directors and any dividend or distribution, and (c) the right to approve any amendment to the Angionetics certificate of incorporation in a manner that adversely affects the rights of the Shares. The voting rights under (a) and (b) terminate if Huapont does not complete the second closing under the share purchase agreement.
|
|
•
|
Conversion
. The Shares are convertible into shares of Angionetics common stock at any time at the holder’s election. The Shares automatically convert into common stock upon the closing of a firm commitment underwritten public offering of Angionetics common stock. The Shares are initially convertible on a one to one basis into Angionetics common stock. The Shares are subject to anti-dilution protection, such that in the event of a firm commitment underwritten public offering or a change in control each Share will be convertible into a pro rata portion of 15% of the outstanding Angionetics common stock at the time of the public offering or change in control.
|
Generx License Agreement in Mainland China
On June 7, 2016, Angionetics entered into a Distribution and License Agreement with an entity affiliated with Huapont. Under the terms of the agreement the Huapont affiliated entity has been granted an exclusive license to clinically develop, manufacture, market and sell the Generx® [Ad5FGF-4] angiogenic gene therapy product candidate in mainland China.
Angionetics will be responsible for conducting the planned U.S.-based Phase 3 clinical program. Working in cooperation with researchers at Angionetics, Huapont’s affiliated entity has agreed to use commercially reasonable efforts to conduct clinical trials,
make regulatory filings and take such other actions as may be necessary to commercialize Generx® in ma inland China. Huapont’s affiliated entity will assume the costs associated with the commercial development of Generx® in mainland China.
The Distribution and License Agreement provides for the Huapont affiliate to make quarterly royalty payments to Angionetics at a rate of 10% of net sales of Generx® products in mainland China, reducing to a 5% royalty based on the volume of annual sales. The royalty payments commence on the first commercial sale and expire on the earlier of the termination of any patent or regulatory exclusivity in China or fifteen years after the first commercial sale. The term of the agreement continues (unless terminated for breach) until Huapont’s affiliate has no remaining payment obligations to Angionetics. Upon expiration (but not an earlier termination) Huapont’s affiliate shall have a perpetual, non-exclusive, fully paid-up, and royalty free license to Generx® in mainland China.
FDA Approval of Phase 3 Clinical Trial for Generx
On December 18, 2015, pursuant to Section 505(i) of the U.S. Federal Food, Drug and Cosmetic Act, Angionetics submitted a request to the FDA Center for Biologics Evaluation and Research requesting transfer of sponsorship for the Generx Investigational New Drug (IND) application to Angionetics. Transfer of sponsorship was acknowledged by the FDA on January 5, 2016. Additionally, the FDA acknowledged Angionetics’ U.S. activation of the Ad5FGF-4 (Generx) Investigational New Drug Application (IND) pursuant to Section 505(i) of the Federal Food, Drug and Cosmetic Act. Consequently, the previously granted FDA “Fast Track” designation for the Generx development program continues forward. In addition, Angionetics submitted for FDA clearance a new U.S.-based Phase 3 clinical study protocol (the “AFFIRM” study) to evaluate the further safety and definitive efficacy of Generx [Ad5FGF-4] for men and women with advanced ischemic heart disease and refractory angina.
On September 9, 2016, the U.S. FDA Center for Biologics Evaluation and Research (CBER) cleared Angionetics’ AFFIRM Phase 3 clinical study protocol, thus allowing Angionetics to proceed with late-stage clinical evaluation of Generx. The AFFIRM study patient population and trial design are based on Ad5FGF-4 responder data from the four prior FDA-cleared clinical studies. The primary efficacy endpoint is improvement in exercise treadmill test (ETT) duration in Generx-treated patients compared to a placebo control group. Enrolled patients must have refractory angina, documented clinical evidence of myocardial ischemia, clinically significant limitation of physical activity due to angina, and angina-limited ETT duration of 3-7 minutes.
Status of Term Sheet with Dr. Reddy’s and Russian Generx Clinical Development Program
Following the formation of Angionetics, our management team initiated a comprehensive review of Taxus Cardium’s global Generx regulatory and clinical dossier, and elected to primarily focus on the clinical advancement and registration of Generx in the
United States and China, which we believe to be the most dynamic medical markets in the world for new and novel breakthrough products such as the Generx product candidate. As a result of this review, on July 13, 2016 the Co
mpany notified Dr. Reddy’s of its plan to discontinue its planned Generx development in the Russian Federation and other countries set forth in the term sheet and now plans to focus on the late stage clinical and commercial development of Generx in key tar
get markets that include the U.S. and China. Consequently, the commercialization opportunity with Dr. Reddy’s Laboratories, previously reported by Taxus Cardium, will not be advanced to a definitive agreement.
Exchange and Redemption Agreement with Sabby Healthcare Volatility Master Fund, Ltd.
On September 23, 2016, we entered into a second Exchange and Redemption Agreement with Sabby covering the 1,000 shares of Preferred Stock outstanding at the time. Under the terms of the Exchange and Redemption Agreement, Taxus Cardium agreed to reduce the conversion price at which Sabby can convert shares of Preferred Stock to common shares to an effective price of $0.18 per share. The Exchange and Redemption Agreement grants Taxus Cardium a right to redeem any or all of the outstanding Preferred Stock for its Stated Value (approximately $1,000 per share) at any time after the date of the Agreement until November 29, 2016. We entered into the Agreement to increase our options for retiring the outstanding Preferred Stock and financing our continued business operations. As a result of the conversion price changing from $0.30 to $0.18 per share, the 1,000 shares of Preferred Stock outstanding are convertible to 5,554,667 shares of Taxus Cardium common stock, an additional 2,221,867 compared to before the conversion price change. A hypothetical conversion of all of the outstanding Preferred Stock of 928 shares as of December 29, 2016 into 5,154,674 common shares would increase the common stock outstanding from 13,723,544 shares as of December 29, 2016, to 18,878,218, an increase of 38%.The reduction in the conversion price under the Exchange and Redemption Agreement triggered an anti-dilution protection in 7,235,600 previously granted common stock purchase warrants not held by Sabby, resulting in an additional 4,823,733 warrant shares to be granted for a total of 12,059,333 common stock purchase warrant with anti-dilutive provisions outstanding. The exercise price per common share in these warrants remains unchanged as the original common stock purchase warrant, a weighted average price of $0.71.
Office Lease
On June 23, 2016, we entered into a thirty-eight month lease agreement to lease office space commencing on September 30, 2016. The approximate base monthly rent in the first, second and third years is $3,500, $3,700, and $3,800 respectively. The base monthly rent in the final two months of the agreement is $3,900. The total base rent over the lease term equals $139,800.
Related Party Transactions
Officers of the Company occasionally incur or advance expenses on behalf of the Company, which are subsequently reimbursed to the officers along with any associated costs. As of December 31, 2015, $946,142 in net Company expenses incurred in the ordinary course of business have been paid by or with cash advanced by the Company’s Chief Executive Officer. From January 1, 2016 through December 29, 2016 an additional $112,086 in net expenses have been paid by or with cash advanced by the Company’s Chief Executive Officer resulting in a balance of $1,058,142 at December 29, 2016. This amount that has been advanced by the Chief Executive Officer is non-interest bearing.
Retirement of Members of the Board of Directors
In November 2016, Tyler Dylan-Hyde, Ph.D. and Mr. Lon Otremba retired as directors of the Company’s Board of Directors after almost a decade of service.