Liquidity and Capital Resources
The
Company has financed its operations since September 1990 through
the issuance of debt and equity securities and loans from
stockholders. The Company had total current assets of $13,628,175
and $20,560,353 and working capital of $7,428,937 and $15,958,723
as of December 31, 2016 and 2015, respectively.
Cash
resources, including the fair value of the Company’s
available for sale marketable securities as of December 31, 2016
were approximately $21.9 million, compared to approximately $38.2
million as of December 31, 2015.
The
Company expects to continue to incur expenses related to
development of levosimendan for heart failure and other potential
indications, as well as identifying and developing other potential
product candidates. Based on its resources at December 31, 2016,
the Company believes that it has sufficient capital to fund its
planned operations through the first half of calendar year 2018.
However, the Company will need substantial additional financing in
order to fund its operations beyond such period and thereafter
until it can achieve profitability, if ever. The Company depends on
its ability to raise additional funds through various potential
sources, such as equity and debt financing, or to license its
product candidates to another pharmaceutical company. The Company
will continue to fund operations from cash on hand and through
sources of capital similar to those previously described. The
Company cannot assure that it will be able to secure such
additional financing, or if available, that it will be sufficient
to meet its needs.
To the
extent that the Company raises additional funds by issuing shares
of its common stock or other securities convertible or exchangeable
for shares of common stock, stockholders will experience dilution,
which may be significant. In the event the Company raises
additional capital through debt financings, the Company may incur
significant interest expense and become subject to covenants in the
related transaction documentation that may affect the manner in
which the Company conducts its business. To the extent that the
Company raises additional funds through collaboration and licensing
arrangements, it may be necessary to relinquish some rights to its
technologies or product candidates, or grant licenses on terms that
may not be favorable to the Company. Any or all of the foregoing
may have a material adverse effect on the Company’s business
and financial performance.
Deferred financing costs
Deferred
financing costs represent legal, due diligence and other direct
costs incurred to raise capital or obtain debt. Direct costs
include only “out-of-pocket” or incremental costs
directly related to the effort, such as a finder’s fee and
accounting and legal fees. These costs will be capitalized if the
efforts are successful, or expensed when unsuccessful. Indirect
costs are expensed as incurred. Deferred financing costs related to
debt are amortized over the life of the debt. Deferred financing
costs related to issuing equity are charged to Additional Paid-in
Capital.
Derivative financial instruments
The
Company does not use derivative instruments to hedge exposures to
cash flow, market or foreign currency risk. Terms of convertible
promissory note instruments and other convertible equity
instruments are reviewed to determine whether or not they contain
embedded derivative instruments that are required under FASB ASC
815, Derivatives and Hedging (“ASC 815”) to be
accounted for separately from the host contract, and recorded on
the balance sheet at fair value. The fair value of derivative
liabilities, if any, is required to be revalued at each reporting
date, with corresponding changes in fair value recorded in current
period operating results.
Freestanding
warrants issued by the Company in connection with the issuance or
sale of debt and equity instruments are considered to be derivative
instruments, and are evaluated and accounted for in accordance with
the provisions of ASC 815.
Beneficial conversion and warrant valuation
In
accordance with FASB ASC 470-20, Debt with Conversion and Other
Options, the Company records a beneficial conversion feature
(“BCF”) related to the issuance of convertible debt
that have conversion features at fixed rates that are in-the-money
when issued and the fair value of warrants issued in connection
with those instruments. The BCF for the convertible instruments is
recognized and measured by allocating a portion of the proceeds to
warrants, based on their relative fair value, and as a reduction to
the carrying amount of the convertible debt equal to the intrinsic
value of the conversion feature. As described in Note F, the
discount recorded in connection with the BCF and warrant valuation
is recognized as non-cash interest expense and is amortized over
the life of the convertible note.
Preclinical Study and Clinical Accruals
The
Company estimates its preclinical study and clinical trial expenses
based on the services received pursuant to contracts with several
research institutions and contract research organizations
(“CROs”) that conduct and manage preclinical and
clinical trials on its behalf. The financial terms of the
agreements vary from contract to contract and may result in uneven
expenses and payment flows. Preclinical study and clinical trial
expenses include the following:
-
fees
paid to CROs in connection with clinical trials,
-
fees
paid to research institutions in conjunction with preclinical
research studies, and
-
fees
paid to contract manufacturers and service providers in connection
with the production and testing of active pharmaceutical
ingredients and drug materials for use in preclinical studies and
clinical trials.
Property and Equipment, Net
Property
and equipment are stated at cost, subject to adjustments for
impairment, less accumulated depreciation and amortization.
Depreciation and amortization are computed using the straight-line
method over the following estimated useful lives:
Laboratory
equipment
|
3
– 5 years
|
Office
equipment
|
5
years
|
Office
furniture and fixtures
|
7
years
|
Computer
equipment and software
|
3
years
|
Leasehold
improvements
|
Shorter
of useful life or remaining lease term
|
Maintenance
and repairs are charged to expense as incurred, improvements to
leased facilities and equipment are capitalized.
Revenue Recognition
Revenues
from merchandise sales are recognized upon transfer of ownership,
including passage of title to the customer and transfer of the risk
of loss related to those goods. Revenues are reported on a net
sales basis, which is computed by deducting from gross sales the
amount of actual product returns received, discounts, incentive
arrangements with retailers and an amount established for
anticipated product returns. The Company’s practice is to
accept product returns from retailers only if properly requested,
authorized and approved.
Revenues
from a cost-reimbursement grant sponsored by the United States Army
(“Grant Revenue”), are recognized as milestones under
the Grant program are achieved. Grant Revenue is earned through
reimbursements for the direct costs of labor, travel, and supplies,
as well as the pass-through costs of subcontracts with third-party
CROs.
Research and Development Costs
Research
and development costs include, but are not limited to, (i) expenses
incurred under agreements with CROs and investigative sites, which
conduct our clinical trials and a substantial portion of our
preclinical studies; (ii) the cost of manufacturing and supplying
clinical trial materials; (iii) payments to contract service
organizations, as well as consultants; (iv) employee-related
expenses, which include salaries and benefits; and (v) facilities,
depreciation and other allocated expenses, which include direct and
allocated expenses for rent and maintenance of facilities and
equipment, depreciation of leasehold improvements, equipment,
laboratory and other supplies. All research and development
expenses are expensed as incurred.
Income Taxes
Deferred
tax assets and liabilities are recorded for differences between the
financial statement and tax bases of the assets and liabilities
that will result in taxable or deductible amounts in the future
based on enacted tax laws and rates applicable to the periods in
which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce
deferred tax assets to the amount expected to be realized. Income
tax expense is recorded for the amount of income tax payable or
refundable for the period increased or decreased by the change in
deferred tax assets and liabilities during the period.
Stock-Based Compensation
The
Company accounts for stock based compensation in accordance with
ASC 718 Compensation — Stock Compensation, which requires the
measurement and recognition of compensation expense for all
stock-based payment awards granted, modified and settled to our
employees and directors. The Company chose the
“straight-line” attribution method for allocating
compensation costs of each stock option on a straight-line basis
over the requisite service period using the Black-Scholes Option
Pricing Model to calculate the grant date fair value.
Loss Per Share
Basic
loss per share, which excludes antidilutive securities, is computed
by dividing net loss by the weighted-average number of common
shares outstanding for that particular period. In contrast, diluted
loss per share considers the potential dilution that could occur
from other equity instruments that would increase the total number
of outstanding shares of common stock. Such amounts include shares
potentially issuable under outstanding options, restricted stock
and warrants.
The
following outstanding options, restricted stock grants, convertible
note shares and warrants were excluded from the computation of
basic and diluted net loss per share for the periods presented
because including them would have had an anti-dilutive
effect.
|
|
Eight months ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
Options
to purchase common stock
|
4,742,032
|
4,032,698
|
3,718,298
|
3,647,858
|
Warrants
to purchase common stock
|
2,415,675
|
2,728,236
|
2,728,236
|
2,762,466
|
Restricted
stock grants
|
214
|
394
|
90
|
42,629
|
Convertible
note shares outstanding
|
-
|
-
|
-
|
6,652
|
Operating Leases
The
Company maintains operating leases for its office and laboratory
facilities. The lease agreements may include rent escalation
clauses and tenant improvement allowances. The Company recognizes
scheduled rent increases on a straight-line basis over the lease
term beginning with the date the company takes possession of the
leased space. Differences between rental expense and actual rental
payments are recorded as deferred rent liabilities and are included
in “Other liabilities” on the consolidated balance
sheets.
Recent Accounting Pronouncements
In
January 2017, the
Financial Accounting
Standards Board (the “
FASB”), issued a new
accounting standard that provides guidance for evaluating whether
transactions should be accounted for as acquisitions (or disposals)
of assets or businesses. The guidance provides a screen to
determine when an integrated set of assets and activities, or a
set, does not qualify to be a business. The screen requires that
when substantially all of the fair value of the gross assets
acquired (or disposed of) is concentrated in an identifiable asset
or a group of similar identifiable assets, the set is not a
business. If the screen is not met, the guidance requires a set to
be considered a business to include, at a minimum, an input and a
substantive process that together significantly contribute to the
ability to create outputs and removes the evaluation as to whether
a market participant could replace the missing elements. The new
standard will be effective for the Company on January 1, 2018 and
will be adopted on a prospective basis. Early adoption is
permitted. The Company is currently evaluating the effect that the
standard will have on its consolidated financial statements and
related disclosures.
In
August 2016, the FASB issued a new accounting standard that
clarifies how companies present and classify certain cash receipts
and cash payments in the statement of cash flows where diversity in
practice exists. The new standard is effective for the Company in
its first quarter of fiscal 2018 and earlier adoption is permitted.
The Company is currently evaluating the effect that the updated
standard will have on its consolidated financial statements and
related disclosures.
In June
2016,
the
FASB issued a new
accounting standard that amends how credit losses are measured and
reported for certain financial instruments that are not accounted
for at fair value through net income. This new standard will
require that credit losses be presented as an allowance rather than
as a write-down for available-for-sale debt securities and will be
effective for interim and annual reporting periods beginning
January 1, 2020, with early adoption permitted, but not
earlier than annual reporting periods beginning January 1,
2019. A modified retrospective approach is to be used for certain
parts of this guidance, while other parts of the guidance are to be
applied using a prospective approach. The Company is currently
evaluating the impact that this new standard will have on its
consolidated financial statements and
related disclosures
.
In
March 2016,
the FASB
issued a
new accounting standard intended to simplify various aspects
related to how share-based payments are accounted for and presented
in the financial statements.
The new
guidance includes provisions to reduce the complexity related to
income taxes, statement of cash flows, and forfeitures when
accounting for share-based payment transactions. The new standard
is effective for annual periods beginning after December 15, 2016,
and interim periods within those annual periods. Early adoption is
permitted.
The Company does not
believe adoption of this standard will have a material impact on
its consolidated financial statements and related
disclosures
.
In May 2014, the FASB issued a new accounting standard that
supersedes nearly all existing revenue recognition guidance under
GAAP. The new standard is principles-based and provides a five-step
model to determine when and how revenue is recognized. The core
principle of the new standard is that revenue should be recognized
when a company transfers promised goods or services to customers in
an amount that reflects the consideration to which the Company
expects to be entitled in exchange for those goods or services. In
March 2016, the FASB issued a new standard to
clarify the
implementation guidance on principal versus agent considerations,
and in April 2016, the FASB issued a new standard to clarify the
implementation guidance on identifying performance obligations and
licensing.
The new standard also
requires disclosure of qualitative and quantitative information
surrounding the amount, nature, timing and uncertainty of revenues
and cash flows arising from contracts with customers. In July 2015,
the FASB agreed to defer the effective date of the standard from
annual periods beginning after December 15, 2016, to annual periods
beginning after December 15, 2017, with an option that permits
companies to adopt the standard as early as the original effective
date. Early application prior to the original effective date is not
permitted. The standard permits the use of either the retrospective
or cumulative effect transition method. The Company has not yet
selected a transition method and the Company does not believe
adoption of this standard will have a material impact on its
consolidated financial statements and related
disclosures
.
In February 2016, the FASB issued a new accounting standard
intended to improve financial reporting regarding leasing
transactions. The new standard will require the Company to
recognize on the balance sheet the assets and liabilities for the
rights and obligations created by all leased assets. The new
standard will also require it to provide enhanced disclosures
designed to enable users of financial statements to understand the
amount, timing, and uncertainty of cash flows arising from all
leases, operating and capital, with lease terms greater than 12
month. The new standard is effective for financial statements
beginning after December 15, 2018, and interim periods within those
annual periods. Early adoption is permitted. See Note H for the
Company’s current lease commitments. The Company is currently
evaluating the impact that this new standard will have on its
financial statements and related disclosures.
In January 2016, the FASB issued a new accounting standard that
will enhance the Company’s reporting for financial
instruments. The new standard is effective for financial statements
issued for annual periods beginning after December 15, 2017, and
interim periods within those annual periods. Earlier adoption is
permitted for interim and annual reporting periods as of the
beginning of the fiscal year of adoption. The Company does not
believe the adoption of this standard will have a material impact
on its consolidated financial statements.
In November 2015, the FASB issued a new accounting standard that
changes the balance sheet classifications of deferred income taxes.
This standard amends existing guidance to require that deferred tax
liabilities and assets be classified as noncurrent in a classified
statement of financial position. It is effective for annual
reporting periods beginning after December 15, 2016, and interim
periods within those annual periods. Early adoption is permitted.
The Company does not expect adoption of this standard will have a
material impact on its consolidated financial
statements.
In
August 2014, the FASB issued a new accounting standard that will
require management to assess and evaluate whether conditions or
events exist, considered in the aggregate, that raise substantial
doubt about the entity’s ability to continue as a going
concern within one year after the financial statements issue date.
It is effective for annual periods ending after December 15,
2016 and for annual and interim periods thereafter; early adoption
is permitted. The adoption of this new standard did not have a
material effect on the Company’s consolidated financial
statements.
Fair Value
The
Company determines the fair value of its financial assets and
liabilities in accordance with the FASB Accounting Standards
Codification (“ASC”) 820 Fair Value Measurements. The
Company’s balance sheet includes the following financial
instruments: cash and cash equivalents, investments in marketable
securities, short-term notes payable, and warrant liabilities. The
Company considers the carrying amount of its cash and cash
equivalents and short-term notes payable to approximate fair value
due to the short-term nature of these instruments.
Accounting
for fair value measurements involves a single definition of fair
value, along with a conceptual framework to measure fair value,
with a fair value defined as “the price that would be
received to sell an asset or paid to transfer a liability in an
orderly transaction between market participants at the measurement
date.” The fair value measurement hierarchy consists of three
levels:
Level
one
|
Quoted
market prices in active markets for identical assets or
liabilities;
|
Level
two
|
Inputs
other than level one inputs that are either directly or indirectly
observable; and
|
Level
three
|
Unobservable
inputs developed using estimates and assumptions; which are
developed by the reporting entity and reflect those assumptions
that a market participant would use.
|
The
Company applies valuation techniques that (1) place greater
reliance on observable inputs and less reliance on unobservable
inputs and (2) are consistent with the market approach, the
income approach and/or the cost approach, and include enhanced
disclosures of fair value measurements in the Company’s
consolidated financial statements.
Investments in Marketable Securities
The
Company classifies all of its investments as available-for-sale.
Unrealized gains and losses on investments are recognized in
comprehensive income/(loss), unless an unrealized loss is
considered to be other than temporary, in which case the unrealized
loss is charged to operations. The Company periodically reviews its
investments for other than temporary declines in fair value below
cost basis and whenever events or changes in circumstances indicate
that the carrying amount of an asset may not be recoverable. The
Company believes the individual unrealized losses represent
temporary declines primarily resulting from interest rate changes.
Realized gains and losses are reflected in other income (expense)
in the Consolidated Statements of Operations and Comprehensive Loss
and are determined using the specific identification method with
transactions recorded on a settlement date basis.
For the year ended December 31, 2016, the Company recognized a loss
of $41,955, and
a loss of $43,871 for the eight months ended
December 31, 2015
. For the fiscal
years ended April 30, 2015 and 2014,
the Company recognized
a gain of $1,025, and $0
,
respectively.
Investments
with original maturities at date of purchase beyond three months
and which mature at or less than 12 months from the balance sheet
date are classified as current. Investments with a maturity beyond
12 months from the balance sheet date are classified as long-term.
At December 31, 2016, the Company believes that the costs of its
investments are recoverable in all material respects.
The
following tables summarize the fair value of the Company’s
investments by type. The estimated fair value of the
Company’s fixed income investments are classified as Level 2
in the fair value hierarchy as defined in U.S. GAAP. These fair
values are obtained from independent pricing services which utilize
Level 2 inputs:
|
|
|
|
|
|
|
|
Corporate
debt securities
|
$
11,780,631
|
$
108,813
|
$
5,385
|
$
(24,103
)
|
$
11,870,726
|
The
following table summarizes the scheduled maturity for the
Company’s investments at December 31, 2016 and 2015,
respectively:
|
|
|
Maturing
in one year or less
|
$
3,284,616
|
$
16,528,494
|
Maturing
after one year through three years
|
8,586,110
|
18,019,054
|
Total
investments
|
$
11,870,726
|
$
34,547,548
|
Warrant liability
On July 23, 2013, the Company issued common stock warrants in
connection with the issuance of Series C 8% Preferred Stock (the
“Series C Warrants”). As part of the offering, the
Company issued 2,753,348 warrants at an exercise price of $2.60 per
share and contractual term of 6 years
. On November 11, 2013,
the Company satisfied certain contractual obligations pursuant to
the Series C offering which caused
certain “down-round” price protection
clauses in the outstanding warrants to become effective on that
date. In accordance with ASC 815-40-35-9,
t
he Company reclassified these warrants as a
current liability and recorded a warrant liability of $1,380,883,
which represents the fair market value of the warrants at that
date. The initial fair value recorded as warrants within
stockholders’ equity of $233,036 was reversed and the
subsequent changes in fair value are recorded as a component of
other expense.
Financial
assets or liabilities are considered Level 3 when their fair
values are determined using pricing models, discounted cash flow
methodologies or similar techniques and at least one significant
model assumption or input is unobservable. The Series C Warrants
are measured using the Monte Carlo valuation model which is based,
in part, upon inputs for which there is little or no observable
market data, requiring the Company to develop its own
assumptions. The assumptions used in calculating the
estimated fair value of the warrants represent the Company’s
best estimates; however, these estimates involve inherent
uncertainties and the application of management judgment. As
a result, if factors change and different assumptions are used, the
warrant liabilities and the change in estimated fair value of the
warrants could be materially different.
Inherent
in the Monte Carlo valuation model are assumptions related to
expected stock-price volatility, expected life, risk-free interest
rate and dividend yield. The Company estimates the volatility
of its common stock based on historical volatility that matches the
expected remaining life of the warrants. The risk-free
interest rate is based on the U.S. Treasury zero-coupon yield curve
on the grant date for a maturity similar to the expected remaining
life of the warrants. The expected life of the warrants is
assumed to be equivalent to their remaining contractual term.
The dividend rate is based on the historical rate, which the
Company anticipates to remain at zero.
The
Monte Carlo model is used for the Series C Warrants to
appropriately value the potential future exercise price adjustments
triggered by the anti-dilution provisions. This requires Level 3
inputs which are based on the Company’s estimates of the
probability and timing of potential future financings and
fundamental transactions. The other assumptions used by the
Company are summarized in the following table for the Series C
Warrants that were outstanding as of December 31, 2016 and December
31, 2015:
Series C Warrants
|
|
|
Closing
stock price
|
$
1.95
|
$
3.28
|
Expected
dividend rate
|
0
%
|
0
%
|
Expected
stock price volatility
|
79.60
%
|
84.08
%
|
Risk-free
interest rate
|
1.35
%
|
1.44
%
|
Expected
life (years)
|
2.56
|
3.56
|
|
|
|
As of December 31, 2016, the fair value of the warrant liability
was $226,092. The Company recorded a gain of $298,248 for the
change in fair value as a component of other expense on the
consolidated statement of comprehensive loss for the year ended
December 31, 2016.
The Company recorded a gain of $48,105 for the change in fair value
as a component of other expense on the consolidated statement of
comprehensive loss for the eight months ended December 31,
2015.
For the fiscal years ended April 30, 2015 and 2014,
the
Company recognized a gain of $382,431 and a loss of
$721,840
, respectively, for the change
in fair value as a component of other expense on the consolidated
statement of operations.
A roll-forward of fair value measurements using significant
unobservable inputs (Level 3) for the warrants for the year ended
December 31, 2016, for the eight months ended December 31, 2015 and
the year ended April 30, 2015 are as follows:
Balance, at April 30, 2014
|
$
954,876
|
Issuance
of warrants
|
-
|
Exercise
of warrants
|
-
|
Gain
included in income from change in fair value of warrants for the
period
|
(382,431
)
|
Balance, at April 30, 2015
|
$
572,445
|
Issuance
of warrants
|
-
|
Exercise
of warrants
|
-
|
Gain
included in income from change in fair value of warrants for the
period
|
(48,105
)
|
Balance, at December 31, 2015
|
$
524,340
|
Issuance
of warrants
|
-
|
Exercise
of warrants
|
-
|
Gain
included in income from change in fair value of warrants for the
period
|
(298,248
)
|
Balance, at December 31, 2016
|
$
226,092
|
As of
December 31, 2016, 240,523 Series C Warrants are
outstanding.
The
following tables summarize information regarding assets and
liabilities measured at fair value on a recurring basis as of
December 31, 2016 and December 31, 2015:
|
|
Fair Value Measurements at Reporting Date Using
|
|
Balance as of
December 31, 2016
|
Quoted prices in Active Markets for Identical Securities
(Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
Current
Assets
|
|
|
|
|
Cash
and cash equivalents
|
$
9,995,955
|
$
9,995,955
|
$
-
|
$
-
|
Marketable
securities
|
$
3,284,616
|
$
-
|
$
3,284,616
|
$
-
|
|
|
|
|
|
Long-term
Assets
|
|
|
|
|
Marketable
securities
|
$
8,586,110
|
$
-
|
$
8,586,110
|
$
-
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
Warrant
liabilities
|
$
226,092
|
$
-
|
$
-
|
$
226,092
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Balance as of
December 31, 2015
|
Quoted prices in Active Markets for Identical Securities
(Level 1)
|
Significant Other Observable Inputs (Level 2)
|
Significant Unobservable Inputs (Level 3)
|
Current
Assets
|
|
|
|
|
Cash
and cash equivalents
|
$
3,660,453
|
$
3,660,453
|
$
-
|
$
-
|
Marketable
securities
|
$
16,528,494
|
$
-
|
$
16,528,494
|
$
-
|
|
|
|
|
|
Long-term
Assets
|
|
|
|
|
Marketable
securities
|
$
18,019,054
|
$
-
|
$
18,019,054
|
$
-
|
|
|
|
|
|
Current
Liabilities
|
|
|
|
|
Warrant
liabilities
|
$
524,340
|
$
-
|
$
-
|
$
524,340
|
There
were no significant transfers between levels during the year ended
December 31, 2016.
Change in Fiscal Year
In 2015, the Company’s Board of Directors approved a change
in the Company’s fiscal year to a fiscal year beginning on
January 1 and ending on December 31 of each year, such change
beginning as of January 1, 2016.
Accordingly, this annual
report on Form 10-K includes financial statements as of and for (i)
the calendar year ended December 31, 2016; (ii) the eight months
ended December 31, 2015; and (iii) the fiscal years ended April 30,
2015 and 2014.
For
comparative purposes, an unaudited consolidated statement of
operations and comprehensive loss has been included for the year
ended December 31, 2015 and for the eight month period from May 1,
2014 to December 31, 2014. The financial information for the year
ended December 31, 2015 and the eight months ended December 31,
2014 has not been audited and is derived from the Company’s
books and records. In the opinion of management, the financial
information for the year ended December 31, 2015 and the eight
months ended December 31, 2014 reflects all adjustments necessary
to present the financial position and results of operations in
accordance with generally accepted accounting principles. Prior to
the year-end change, the Company’s fiscal year ended on April
30 of each year
.
NOTE C—BALANCE SHEET COMPONENTS
Property and equipment, net
Property
and equipment consist of the following:
|
|
|
Laboratory
equipment
|
$
354,861
|
$
514,214
|
Computer
equipment and software
|
101,677
|
139,984
|
Office
furniture and fixtures
|
130,192
|
130,192
|
|
586,730
|
784,390
|
Less:
Accumulated depreciation
|
(567,625
)
|
(748,604
)
|
|
$
19,105
|
$
35,786
|
Depreciation
and amortization expense was $18,952 and $31,224 for the year ended
December 31, 2016 and for the eight months ended December 31, 2015,
respectively.
For the
fiscal years ended April 30, 2015 and 2014, depreciation and
amortization expense was $77,836 and $88,300,
respectively.
Accrued liabilities
Accrued
liabilities consist of the following:
|
|
|
Operating
costs
|
$
4,361,538
|
$
2,559,092
|
Employee
related
|
884,008
|
545,715
|
|
$
5,245,546
|
$
3,104,807
|
NOTE D—ACQUISITION
On November 13, 2013, the Company, through its wholly owned
subsidiary, Life Newco, acquired certain assets of Phyxius pursuant
to the Asset Purchase Agreement. The acquisition was accounted for
under the acquisition method of accounting for business
combinations in accordance with FASB ASC 805,
Business Combinations,
which requires, among other things
that the assets acquired and liabilities assumed be recognized at
their fair values as of the acquisition
date. Acquisition-related costs are not included as a
component of the acquisition accounting, but are recognized as
expenses in the periods in which the costs are
incurred. Any changes within the measurement period
resulting from facts and circumstances that existed as of the
acquisition date may result in retrospective adjustments to the
provisional amounts recorded at the acquisition
date.
Under the terms and subject to the conditions of the Asset Purchase
Agreement, Life Newco acquired (the “Acquisition”)
certain assets, including that certain License Agreement (the
“License”), dated September 20, 2013 by and between
Phyxius and Orion Corporation, a global healthcare company
incorporated under the laws of Finland (“Orion”), and
that certain Side Letter, dated October 15, 2013 by and between
Phyxius and Orion. The License grants Life Newco an
exclusive, sublicenseable right to develop and commercialize
pharmaceutical products containing Levosimedan, 2.5 mg/ml
concentrate for solution for infusion / 5ml vial (the
“Product”) in the United States and Canada (the
“Territory”). Pursuant to the License, Life
Newco must use Orion’s “Simdax®” trademark
to commercialize the Product. The License also grants to
Life Newco a right of first refusal to commercialize new
developments of the Product, including developments as to the
formulation, presentation, means of delivery, route of
administration, dosage or indication. Orion’s
ongoing role under the License includes sublicense approval,
serving as the sole source of manufacture, holding a first right to
enforce intellectual property rights in the Territory, and certain
regulatory participation rights. Additionally, Life
Newco must grant back to Orion a broad non-exclusive license to any
patents or clinical trial data related to the Product developed by
Life Newco under the License. The License has a fifteen
(15) year term, provided, however, that the License will continue
after the end of the fifteen year term in each country in the
Territory until the expiration of Orion’s patent rights in
the Product in such country (the
“Term”). Orion had the right to terminate
the License if the human clinical trial using the Product and
studying reduction in morbidity and mortality of cardiac surgery
patients at risk of low cardiac output syndrome (LCOS) as described
in the US Food and Drug Administration (the “FDA”)
agreed upon clinical study protocol (the “Study”) was
not started by July 31, 2014. While the Company did not commence
the trial by that date, on September 9, 2014, Orion notified the
Company in writing that it did not intend to terminate the License
so long as the trial was commenced on or before October 31, 2014.
The Company subsequently commenced the human clinical trial for
levosimendan on September 18, 2014 when the first patient was
enrolled.
The
following table summarizes the consideration transferred to acquire
Phyxius and the amounts of identified assets acquired and
liabilities assumed at the acquisition date.
Fair
Value of Consideration Transferred:
Common
stock
|
8,747,802
|
Series
E convertible preferred stock
|
15,299,198
|
Total
|
24,047,000
|
The
Company issued 1,366,844 shares of its common stock that had a
total fair value of approximately $8.7 million based on the closing
market price on November 13, 2013, the acquisition date. The
Company also issued 32,992
shares of
its Series E Convertible Preferred Stock (the “Series E
Stock”), which are convertible into an aggregate of 3,299,200
shares of common stock that had a total fair value of approximately
$
15.3 million
.
The rights, preferences and privileges of the Series E Stock are
set forth in the Certificate of Designation of Series E Convertible
Preferred Stock that the Company filed with the Secretary of State
of the State of Delaware on November 13, 2013. Each
share of Series E Stock automatically converted into 100 shares of
common stock following receipt of stockholder approval for the
transaction at the special meeting of stockholders held on March
13, 2014. Approximately 11% of the shares of converted
common stock vested immediately upon receipt of stockholder
approval for the transaction, while the remainder vested upon the
closing of the Company’s underwritten offering of
9,285,714 shares of common stock
on
March 21, 2014, which resulted in net proceeds of approximately $55
million.
The Series E Stock was convertible into restricted common shares
using a 100-for-one ratio at any time and in accordance with a
vesting schedule contingent upon achievement of Company-specific
non-financial conditions. As a result, the fair value of the
Preferred Shares was inferred based on their common stock
equivalent value given the conversion terms. The conditional
vesting of the Series E Stock was accounted for by subtracting the
fair value of an equal number of put options that would effectively
protect the common stock equivalent stock value as of the closing
date. The terms of the put options were as follows:
●
Exercise
price equal to the common stock price as of the Valuation
Date.
●
Term
based on management’s risk-adjusted expected time to meeting
the vesting condition, which was further increased by 6 months to
reflect the marketability restriction of the unregistered stock,
consistent with SEC Rule 144 of the Securities Act.
●
Volatility
was consistent with the term for the individual milestone payments
derived from the median historical asset volatility for a set of
comparable guideline companies. The volatility was then relevered
to estimate the equity volatility of the Company.
In accordance with the provisions of FASB ASC 805, the following
table presents the preliminary allocation of the total fair value
of consideration transferred, as discussed above, to the acquired
tangible and intangible assets and assumed liabilities of Phyxius
based on their estimated fair values as of the closing date of the
transaction, measurement period adjustments recorded since the
acquisition date and the adjusted allocation of the total fair
value:
|
November 13, 2013
(As initially reported)
|
Measurement
Period Adjustments (1)
|
November 13, 2013
(As adjusted)
|
IPR&D
|
$
22,000,000
|
$
-
|
$
22,000,000
|
Trade
and other payables
|
(256,000
)
|
-
|
(256,000
)
|
Liabilities
arising from a contingency
|
(1,000,000
)
|
-
|
(1,000,000
)
|
Deferred
tax liability related to intangibles acquired
|
-
|
(7,962,100
)
|
(7,962,100
)
|
Total
identifiable net assets
|
20,744,000
|
(7,962,100
)
|
12,781,900
|
Goodwill
|
3,303,000
|
7,962,100
|
11,265,100
|
Total
fair value of consideration
|
$
24,047,000
|
$
-
|
$
24,047,000
|
(1)
|
The measurement period adjustments primarily reflect the recording
of a deferred tax liability and resulting goodwill. The
measurement period adjustments were made to reflect facts and
circumstances existing as of the acquisition date and did not
result from intervening events subsequent to the acquisition
date.
|
The
fair value of the acquired IPR&D, intangible asset of
approximately $22.0 million was determined using the multi-period
excess earnings method. The Company did not acquire any other class
of assets as a result of the acquisition.
Pursuant to the terms of the License, the Company paid to Orion a
non-refundable up-front payment in the amount of $1
million.
The License also includes the following development milestones for
which the Company shall make non-refundable payments to Orion no
later than twenty-eight (28) days after the occurrence of the
applicable milestone event: (i) $2.0 million upon the grant of FDA
approval, including all registrations, licenses, authorizations and
necessary approvals, to develop and/or commercialize the Product in
the United States; and (ii) $1.0 million upon the grant of
regulatory approval for the Product in Canada. Once commercialized,
the Company is obligated to make certain non-refundable
commercialization milestone payments to Orion, aggregating up to
$13.0 million, contingent upon achievement of certain cumulative
net sales amounts in the Territory. The Company must also pay
Orion tiered royalties based on net sales of the Product in the
Territory made by the Company and its sublicensees. After the end
of the Term, the Company must pay Orion a royalty based on net
sales of the Product in the Territory for as long as the Company
sells the Product in the Territory.
In connection with the closing of the Acquisition, Phyxius’
co-founder, Chief Executive Officer and stockholder, John Kelley,
became the Company’s Chief Executive Officer and two other
Phyxius employees and stockholders, Doug Randall and Douglas Hay,
PhD became employees of the Company as Vice President, Business and
Commercial Operations and Vice President, Regulatory Affairs,
respectively. Michael Jebsen, the Company’s prior
Interim Chief Executive Officer and current Chief Financial
Officer, continued serving as the Company’s Chief Financial
Officer. In addition, Mr. Kelley was subsequently
appointed to the Company’s Board of Directors, and Gerald T.
Proehl, a designee of the Phyxius Stockholders, was appointed to
the Board of Directors on April 3, 2014 following receipt of
stockholder approval for the transaction. Pursuant to
the Asset Purchase Agreement, the Company agreed to propose that
its stockholders approve an amendment to the Company’s 1999
Stock Plan to increase the amount of stock options authorized for
issuance under the 1999 Stock Plan to not less than 4,000,000
shares of common stock. On March 13, 2014, the Company received
stockholder approval to increase the option plan. In accordance
with terms of the Acquisition, the Company issued an aggregate of
3,572,880 stock options with a grant date fair value of
$15,818,512, to the individuals described above. See Note G for
additional details.
The common stock and Series E Stock issued as the consideration in
the Acquisition were issued and sold without registration under the
Securities Act of 1933 (the “Securities Act”) in
reliance on the exemptions provided by Section 4(a)(2) of the
Securities Act and/or Regulation D promulgated thereunder and in
reliance on similar exemptions under applicable state
laws. Accordingly, the Phyxius Stockholders may sell the
shares of common stock and Series E Stock only pursuant to an
effective registration statement under the Securities Act covering
the resale of those securities, an exemption under Rule 144 under
the Securities Act or another applicable exemption under the
Securities Act.
NOTE E—INTANGIBLE ASSETS
The
following table summarizes our intangible assets as of December 31,
2016:
Asset Category
|
Weighted
Average Amortization Period (in Years)
|
Value Assigned
|
Accumulated
Amortization
|
Impairments
|
Carrying
Value (Net of Impairments and Accumulated
Amortization)
|
|
|
|
|
|
|
IPR&D
|
N/A
|
$
22,000,000
|
$
-
|
$
(22,000,000
)
|
$
-
|
Total
|
|
$
22,000,000
|
|
$
(22,000,000
)
|
$
-
|
The
following table summarizes our intangible assets as of December 31,
2015:
Asset Category
|
Weighted
Average Amortization Period (in Years)
|
Value Assigned
|
Accumulated
Amortization
|
Impairments
|
Carrying
Value (Net of Impairments and Accumulated
Amortization)
|
|
|
|
|
|
|
IPR&D
|
N/A
|
$
22,000,000
|
$
-
|
$
-
|
$
(22,000,000
)
|
Total
|
|
$
22,000,000
|
|
$
-
|
$
(22,000,000
)
|
There
was no amortization expense for the year ended December 31, 2016
and the eight months ended December 31, 2015.
For the
fiscal years ended April 30, 2015 and 2014 the aggregate
amortization expense on intangible assets was $70,304 and $62,189,
respectively.
In Process Research and Development
— The levosimendan
product in Phase III clinical trial represents an IPR&D asset.
The IPR&D asset is a research and development project rather
than a product or processes already in service or being sold.
Research and development intangible assets are considered
indefinite-lived until the abandonment or completion of the
associated research and development efforts. If abandoned, the
assets would be impaired. Research and development expenditures
that are incurred after the acquisition, including those for
completing the research and development activities related to the
acquired intangible research and development assets, are generally
expensed as incurred.
During
the year ended December 31, 2016, the Company recognized an
impairment charge of $33.3 million related to our levosimendan
product in Phase III clinical trial, which represents approximately
$22 million for IPR&D assets and approximately $11.3 million
for goodwill.
The
LEVO-CTS trial was completed in December of 2016. Based on the data
from the trial, l
evosimendan, given
prophylactically prior to cardiac surgery to patients with reduced
left ventricular function, had no effect on the co-primary
outcomes
.
The study
did not achieve statistically significant reductions in the dual
endpoint of death or use of a mechanical assist device at 30 days,
nor in the quad endpoint of death, myocardial infarction, need for
dialysis, or use of a mechanical assist device at 30 days. Based on
the results of the LEVO-CTS trial, the Company does not anticipate
additional development of levosimendan for the treatment of LCOS
in patients undergoing cardiac
surgery
. As of December 31, 2016, the Company determined the
IPR&D asset, and corresponding Goodwill, was more than
temporarily impaired.
Patents and License Rights
—The Company currently
holds, has filed for, or owns exclusive rights to, U.S. and
worldwide patents covering 9 various methods and uses of its
perfluorocarbon (“PFC”) technology. It capitalizes
amounts paid to third parties for legal fees, application fees and
other direct costs incurred in the filing and prosecution of its
patent applications. These capitalized costs are amortized on a
straight-line method over their useful life or legal life,
whichever is shorter. For the fiscal years ended April 30, 2015 and
2014, the Company capitalized patent costs of approximately
$105,000 and $137,000, respectively.
The
Company completed its annual impairment test of its patents and
license rights during the fourth quarter of fiscal years 2015 and
2014. The Company wrote-off approximately $929,000 and $0 of
capitalized costs for patent applications that were withdrawn or
abandoned during the years ended April 30, 2015 and 2014,
respectively. These asset impairment charges primarily related to
the Company’s Oxycyte and other PFC formulations which were
determined not to be a core component of the Company’s
development strategy.
Trademarks
—The Company currently holds, or has filed
for, trademarks to protect the use of names and descriptions of its
products and technology. It capitalizes amounts paid to third
parties for legal fees, application fees and other direct costs
incurred in the filing and prosecution of its trademark
applications. These trademarks are evaluated annually for
impairment in accordance with ASC 350, Intangibles – Goodwill
and other. The Company evaluates (i) its expected use of the
underlying asset, (ii) any laws, regulations, or contracts that may
limit the useful life, (iii) the effects of obsolescence, demand,
competition, and stability of the industry, and (iv) the level of
costs to be incurred to commercialize the underlying asset. The
Company wrote-off trademark costs of approximately $106,000 and $0,
for the years ended April 30, 2015 and 2014, respectively. These
asset impairment charges primarily related to the Company’s
Oxycyte and other PFC formulations which were determined not to be
a core component of the Company’s development
strategy.
NOTE F—NOTES PAYABLE
Convertible Note
On June
29, 2011, the Company issued a note (the “June Note”)
with a principal amount of approximately $300,000 and Warrants to
purchase 6,652 shares of common stock. On July 1, 2011, the Company
issued a separate note (together with the June Note, the
“Notes”) with a principal amount of $4,600,000 and
warrants to purchase 101,996 shares of common stock. The aggregate
gross proceeds to the Company from the offering were approximately
$4.9 million, excluding any proceeds from the exercise of any
warrants. The aggregate placement agent fees were $297,000 and
legal fees associated with the offering were $88,839. These costs
have been capitalized as debt issue costs and will be amortized as
interest expense over the life of the Notes. The Company recorded
amortization of debt issue costs of $21,427 and $128,616, for the
years ended April 30, 2015 and 2014, respectively. All debt issue
costs were fully amortized in the first quarter of fiscal year
ending April 30, 2015.
Interest
on the Notes accrues at a rate of 15% annually and will be paid in
quarterly installments commencing on the third month anniversary of
issuance. The Notes were scheduled to mature 36 months from the
date of issuance. The Notes may be converted into shares of common
stock at a conversion price of $45.10 per share (subject to
adjustment for stock splits, dividends and combinations,
recapitalizations and the like) (the "Conversion Price") in whole
or in part, at any time at the option of the holders of the Notes.
The Notes also will automatically convert into shares of common
stock at the Conversion Price at the election of a
majority-in-interest of the holders of notes issued under the
purchase agreement or upon the acquisition or sale of all or
substantially all of the assets of the Company. The Company could
make each applicable interest payment or payment of principal in
cash, shares of common stock at the Conversion Price, or any
combination thereof. The Company could elect to prepay all or any
portion of the Notes without prepayment penalties only with the
approval of a majority-in-interest of the note holders under the
purchase agreement at the time of the
election. The Notes contained various events of
default such as failing to timely make any payment under the Note
when due, which would have resulted in all outstanding obligations
under the Note becoming immediately due and payable.
On
August 22, 2013 holders of $4.6 million of the Notes received 4,600
shares of the Company’s Series D 8% Convertible Preferred
Stock (the “Series D Stock”) as consideration for
cancelling their outstanding Notes. On that date, the Company
recognized non-cash interest expense of $1,311,847 for the
remaining unamortized debt discount associated with this
Notes.
On June
29, 2014, the Company paid the remaining principal balance of
$300,000 to the June Note holders upon maturity.
The
Company recorded interest expense of $45,606 and $2,181,955 for the
years ended April 30, 2015 and 2014, respectively.
The
total value allocated to the warrants was $1,960,497 and was
recorded as a debt discount against the proceeds of the
notes. In addition, the beneficial conversion features related
to the Notes were determined to be $2,939,504. As a result,
the aggregate discount on the Notes totaled $4,900,001, and was
amortized over the term of the notes. For the fiscal years ended
April 30, 2015 and 2014, the Company recorded interest expense for
the amortization of debt discount of $16,678 and $483,330,
respectively.
NOTE G—STOCKHOLDERS’ EQUITY
Preferred Stock
Under
the Company’s Certificate of Incorporation, the Board of
Directors is authorized, without further stockholder action, to
provide for the issuance of up to 10,000,000 shares of preferred
stock, par value $0.0001 per share, in one or more series, to
establish from time to time the number of shares to be included in
each such series, and to fix the designation, powers, preferences
and rights of the shares of each such series and the
qualifications, limitations and restrictions thereof.
On November 13, 2013
, the Company filed a Certificate of
Designation with the Secretary of State of the State of Delaware
designating 32,992 shares of its authorized but unissued shares of
preferred stock as Series E Stock.
On August 22, 2013
, the Company filed a Certificate of
Designation with the Secretary of State of the State of Delaware
designating 4,600 shares of its authorized but unissued shares of
preferred stock as Series D Stock.
On July
22, 2013, the Company filed a Certificate of Designation with the
Secretary of State of the State of Delaware designating 5,369
shares of its authorized but unissued shares of preferred stock as
Series C Stock.
On
February 25, 2013, the Company filed a Certificate of Designation
with the Secretary of State of the State of Delaware designating
1,600 shares and 500 shares of its authorized but unissued shares
of preferred stock as Series B-1 Convertible Preferred Stock (the
“Series B-1 Stock”) and Series B-2 Convertible
Preferred Stock (the “Series B-2 Stock” and together
with the Series B-1 Stock, the “Series B Stock”),
respectively.
On
December 8, 2011, the Company filed a Certificate of Designation
with the Secretary of State of the State of Delaware designating
7,500 shares of its authorized but unissued shares of preferred
stock as Series A Stock.
Series E Stock
As
further discussed in Note D above, on November 13, 2013 the Company
issued 32,992
shares of its Series E
Stock, which were convertible into an aggregate of 3,299,200 shares
of common stock, as partial consideration to acquire certain assets
of Phyxius Pharma, Inc. pursuant to the Asset Purchase
Agreement.
The
rights, preferences and privileges of the Series E Stock are set
forth in the Certificate of Designation of Series E Convertible
Preferred Stock (the “Certificate of Designation”) that
the Company filed with the Secretary of State of the State of
Delaware on November 13, 2013. Each share of Series E
Stock will automatically convert into 100 shares of common stock
following receipt of stockholder approval for the
transaction. Approximately 11% of the shares of
converted common stock vest immediately upon receipt of stockholder
approval for the transaction, while the remainder will vest upon
achievement of certain performance milestones related to the
development and commercialization of the levosimendan product in
North America. In addition, all unvested converted
common stock will vest if certain change of control transactions or
significant equity financings occur within 24 months of the closing
of the Acquisition. The number of shares of common stock
into which the Series E Stock converts is subject to adjustment in
the case of stock splits, stock dividends, combinations of shares
and similar recapitalization transactions. The Series E
Stock does not carry dividend or a liquidation
preference. The Series E Stock carries voting rights
aggregating 4.99% of the Company’s common stock voting power
immediately prior to the closing of the Acquisition.
During
the year ended April 30, 2014, all 32,992 shares of
Series E Stock
were converted into
3,299,200
shares of
common stock.
As of December
31, 2016 and December 31, 2015 there were no shares of
Series E
Stock outstanding
.
Series D Stock
On August 22, 2013, the Company closed its private placement of an
aggregate of $4.6 million of shares of the Company’s Series D
Stock to JP SPC 3 obo OXBT FUND, SP (“OXBT
Fund”). In connection with the purchase of shares
of Series D Stock, OXBT Fund received a warrant to purchase
2,358,975 shares of common stock at an exercise price equal to
$2.60 (the “Series D Warrant”). As
consideration for the sale of the Series D Stock and Series D
Warrant, $4.6 million in outstanding principal amount of a Note
issued by the Company on July 1, 2011 and held by OXBT Fund was
cancelled. The Note carried interest at a rate of 15%
per annum and matured on July 1, 2014. Mr. Gregory
Pepin, one of the Company’s directors, is the investment
manager of OXBT Fund. Pursuant to the terms of a lock-up
agreement (the “Lock-Up Agreement”) executed prior to
the closing, OXBT Fund and its affiliates are prohibited from
engaging in certain transactions with respect to shares of the
Company’s common stock and common stock equivalents until
such time as the lead investor in the Company’s offering of
Series C Stock ceases to own at least 25% of the shares of Series C
Stock originally issued to such investor.
The table below sets forth a summary of the designation, powers,
preferences and rights of the Series D Stock.
Conversion
|
Subject to certain ownership limitations, the Series D Stock is
convertible at any time at the option of the holder into shares of
the Company’s common stock at a conversion ratio determined
by dividing the stated value of the Series C Stock (or $1,000) by a
conversion price of $1.95 per share. The conversion price is
subject to adjustment in the case of stock splits, stock dividends,
combinations of shares and similar recapitalization
transactions.
Until such time that for at least 25 trading days during any 30
consecutive trading days, the volume weighted average price of the
Company’s common stock exceeds 250% of the initial conversion
price, if the Company sells or grants any option to purchase or
sell any common stock or common stock equivalents entitling any
person to acquire shares of common stock at an effective price per
share that is lower than the then conversion price, or the Base
Conversion Price, then the conversion price shall be reduced to
equal the Base Conversion Price.
|
Dividends and Make-Whole Payment
|
Until the third anniversary of the date of issuance of the Series D
Stock, the holder of the Series D Stock is entitled to receive
dividends at the rate of 8% per annum of the stated value for each
share of Series D Stock held by such holder payable quarterly on
January 1, April 1, July 1 and October 1, beginning on the first
such date after the original issue date, and on each dividend
payment date. The Company can elect to pay the dividends
in cash or in duly authorized, validly issued, fully paid and
non-assessable shares of common stock, or a combination
thereof. If the Company pays the dividends in shares of
common stock, the shares used to pay the dividends will be valued
at 90% of the average volume weighted average price for the 20
consecutive trading days ending on the trading day immediately
prior to the applicable dividend payment date. From and
after the third anniversary of the date of issuance of the Series D
Stock, the holder of Series D Stock will be entitled to receive
dividends equal, on an as-if-converted to common stock basis, to
and in the same form as dividends actually paid on shares of common
stock when, as, and if such dividends are paid on shares of common
stock. The Company has never paid dividends on its
common stock and the Company does not intend to do so for the
foreseeable future.
In the event OXBT Fund converts its Series D Stock prior to the
third anniversary of the date of issuance of the Series D Stock,
the Company must also pay to OXBT Fund in cash, or at the
Company’s option in common stock valued as described above,
or a combination of cash and shares of common stock, with respect
to the Series D Stock so converted, an amount equal to $240 per
$1,000 of the stated value of the Series D Stock, less the amount
of any dividends paid in cash or in common stock on such Series D
Stock on or before the date of conversion.
|
Liquidation
|
Upon any liquidation, dissolution or winding up of the Company
after payment or provision for payment of debts and other
liabilities of the Company, but before any distribution or payment
is made to the holders of any junior securities, the holder of
Series D Stock shall be entitled to be paid out of the assets of
the Company available for distribution to its stockholders an
amount equal to $1,000 per share, after which any remaining assets
of the Company shall be distributed among the holders of the other
class or series of stock in accordance with the Company’s
Certificate of Incorporation.
|
Voting rights
|
Shares of Series D Stock will generally have no voting rights,
except as required by law and except that the consent of the holder
of the outstanding Series D Stock will, among other things, be
required to amend the terms of the Series D Stock.
|
During
the year ended April 30, 2014, 4,600 shares of
Series D Stock
were converted into
2,358,974
shares of
common stock
and the
Company issued 576,084 shares of
its common stock in the form of Series D Stock
dividends
.
As of December 31,
2016 and December 31, 2015 there were no shares of
Series D
Stock outstanding.
Series C Stock
On
July 21, 2013, the Company entered into a Securities Purchase
Agreement with certain investors providing for the issuance and
sale by the Company (the “Series C Offering”) of an
aggregate of approximately $5.4 million of shares of the
Company’s Series C Stock, which are convertible into a
combined total of 2,753,348 shares of common stock (the
“Conversion Shares”). In connection with the
purchase of shares of Series C Stock in the Series C Offering, each
investor will receive a warrant to purchase a number of shares of
common stock equal to 100% of the number of Conversion Shares at an
exercise price equal to $2.60 (the
“Warrants”). On July 23, 2013, the Company
sold 5,369 units for net proceeds of approximately $4.9
million.
The
table below sets forth a summary of the designation, powers,
preferences and rights of the Series C Stock.
Conversion
|
Subject to certain ownership limitations, the Series C Stock is
convertible at any time at the option of the holder into shares of
the Company’s common stock at a conversion ratio determined
by dividing the stated value of the Series C Stock (or $1,000) by a
conversion price of $1.95 per share. The conversion price is
subject to adjustment in the case of stock splits, stock dividends,
combinations of shares and similar recapitalization
transactions.
Until such time that for at least 25 trading days during any 30
consecutive trading days, the volume weighted average price of the
Company’s common stock exceeds 250% of the initial conversion
price, if the Company sells or grants any option to purchase or
sell any common stock or common stock equivalents entitling any
person to acquire shares of common stock at an effective price per
share that is lower than the then conversion price, or the Base
Conversion Price, then the conversion price shall be reduced to
equal the Base Conversion Price.
|
Dividends and Make-Whole Payment
|
Until the third anniversary of the date of issuance of the Series C
Stock, each holder of the Series C Stock is entitled to receive
dividends at the rate of 8% per annum of the stated value for each
share of Series C Stock held by such holder payable quarterly on
January 1, April 1, July 1 and October 1, beginning on the first
such date after the original issue date, and on each dividend
payment date. The Company can elect to pay the dividends
in cash or in duly authorized, validly issued, fully paid and
non-assessable shares of common stock, or a combination
thereof. If the Company pays the dividends in shares of
common stock, the shares used to pay the dividends will be valued
at 90% of the average volume weighted average price for the 20
consecutive trading days ending on the trading day immediately
prior to the applicable dividend payment date. From and
after the third anniversary of the date of issuance of the Series C
Stock, each holder of Series C Stock will be entitled to receive
dividends equal, on an as-if-converted to common stock basis, to
and in the same form as dividends actually paid on shares of common
stock when, as, and if such dividends are paid on shares of common
stock. The Company has never paid dividends on its
common stock and the Company does not intend to do so for the
foreseeable future.
In the event a holder converts his, her or its Series C Stock prior
to the third anniversary of the date of issuance of the Series C
Stock, the Company must also pay to the holder in cash, or at the
Company’s option in common stock valued as described above,
or a combination of cash and shares of common stock, with respect
to the Series C Stock so converted, an amount equal to $240 per
$1,000 of the stated value of the Series C Stock, less the amount
of any dividends paid in cash or in common stock on such Series C
Stock on or before the date of conversion.
|
Liquidation
|
Upon any liquidation, dissolution or winding up of the Company
after payment or provision for payment of debts and other
liabilities of the Company, but before any distribution or payment
is made to the holders of any junior securities, the holders of
Series C Stock shall be entitled to be paid out of the assets of
the Company available for distribution to its stockholders an
amount equal to $1,000 per share, after which any remaining assets
of the Company shall be distributed among the holders of the other
class or series of stock in accordance with the Company’s
Certificate of Incorporation.
|
Voting rights
|
Shares
of Series C Stock will generally have no voting rights, except as
required by law and except that the consent of holders of a
majority of the outstanding Series C Stock will, among other
things, be required to amend the terms of the Series C
Stock
.
|
During
the year ended April 30, 2014, 5,369 shares of
Series C Stock
were converted into
2,753,327 shares of common stock
and
the
Company issued 831,401 shares of its common stock for
the payment of $1,288,560 as dividends on the Series C
Stock
.
As of December 31, 2016
and December 31, 2015 there were no shares of
Series C
Stock outstanding
.
Series B Stock
On
February 22, 2013, the Company entered into a Securities Purchase
Agreement with an institutional investor providing for the issuance
and sale by the Company of $1.6 million of shares of the
Company’s Series B-1 Stock and $0.5 million of shares of the
Company's Series B-2 Stock which are convertible into a combined
total of 420,000 shares of common stock, subject to adjustment for
subsequent equity sales.
On
February 27, 2013, the Company sold 2,100 units for net proceeds of
approximately $1.9 million. Each unit sold consisted of (i) one
share of the Company’s Series B Stock and (ii) a Warrant
representing the right to purchase 300 shares of common stock at a
price of $1,000 per unit, less issuance costs. The shares of Series
B Stock were immediately convertible upon issuance.
The
table below sets forth a summary of the designation, powers,
preferences and rights of the Series B Stock.
Dividends
|
No
dividends shall be paid on shares of Preferred Stock.
|
Conversion
|
Holders
may elect to convert shares of Series B Stock into shares of common
stock at the then-existing conversion price at any time. The
initial conversion price is $5.00 per share of common stock, and is
subject to certain adjustments, including an anti-dilution
provision that reduces the conversion price upon the issuance of
any common stock or securities convertible into common stock at an
effective price per share less than the conversion price and a
one-time price reset following the effectiveness of a reverse split
of the Company’s outstanding common stock.
|
Liquidation
preference
|
In the
event of the Company’s voluntary or involuntary dissolution,
liquidation or winding up, each holder of Series B Stock will be
entitled to be paid a liquidation preference equal to the initial
stated value of such holder’s Series B Stock of $1,000 per
share, plus accrued and unpaid dividends and any other payments
that may be due on such shares, before any distribution of assets
may be made to holders of capital stock ranking junior to the
Series B Stock.
|
Voting
rights
|
Shares
of Series B Stock will generally have no voting rights, except as
required by law and except that the consent of holders of a
majority of the outstanding Series B Stock will among other things,
be required to amend the terms of the Series B Stock.
|
The
Company will not affect any conversion of the Series B Stock, nor
shall a holder convert its shares of Series B Stock, to the extent
that such conversion would cause the holder to have acquired,
through conversion of the Series B Stock or otherwise, beneficial
ownership of a number shares of common stock in excess of 4.99% of
the common stock outstanding immediately preceding the
conversion.
During
the year ended April 30, 2014, 987 shares of Series B Stock were
converted into 644,915 shares of common stock. As of December 31,
2016 and December 31, 2015 there were no shares of Series B Stock
outstanding.
On
February 23, 2015, the Company filed certificates of elimination
(the “Certificates of Elimination”) with the Secretary
of State of Delaware effecting the elimination of the Certificates
of Designations with respect to the Series A Stock, Series B-1
Stock, Series B-2 Stock, Series C Stock, Series D Stock and Series
E Stock. No shares of the Preferred Stock were outstanding at the
time of the filing of the Certificates of Elimination. The
Certificates of Elimination, which were effective upon filing,
canceled the Company’s Series A Stock, Series B-1 Stock,
Series B-2 Stock, Series C Stock, Series D Stock and Series E
Stock. At the time of filing the Certificates of Elimination, no
shares of preferred stock remained outstanding. As of December 31,
2016, 10,000,000 shares of preferred stock are
undesignated.
Common Stock
The
Company’s Certificate of Incorporation authorizes it to issue
400,000,000 shares of $0.0001 par value common stock. As of
December 31, 2016 and December 31, 2015 there were 28,120,021 and
28,119,694 shares of common stock issued and
outstanding.
Warrants
On
November 11, 2014, the Company issued common stock warrants in
connection with the execution of a service agreement for investor
relations and corporate communications. As part of the compensation
under the agreement, the Company issued up to 175,000 warrants at
an exercise price of $4.00 per share and contractual term of 5
years. The warrant is initially exercisable for 25,000 shares of
common stock, and the number of shares of common stock exercisable
under this warrant will be automatically increased by 50,000 upon
the first occurrence of market price goals of $6.00, $8.00 and
$10.00, respectively, during the eighteen month period beginning on
the effective date. In accordance with ASC 815, these warrants are
classified as equity and their estimated fair-value of $478,115 was
recorded as an operating expense in the consolidated statement of
operations and as additional paid in capital during the year ended
April 30, 2015. The estimated fair value is determined using the
Black-Scholes Option Pricing Model which is based on the value of
the underlying common stock at the valuation measurement date, the
remaining contractual term of the warrants, risk-free interest
rates, expected dividends and expected volatility of the price of
the underlying common stock.
Series D Warrants
On August 22, 2013, the Company closed its private placement of an
aggregate of $4.6 million shares of the Company’s Series D
Stock to OXBT Fund. In connection with the purchase of
shares of Series D Stock, OXBT Fund received the Series D Warrant
to purchase 2,358,975 shares of common stock at an exercise price
equal to $2.60 and contractual term of 6 years
. In
accordance with ASC 815, these warrants are classified as equity
and their relative fair-value of $1,531,167 was recognized as a
deemed dividend on the Series D Stock during the year ended April
30, 2014
. The estimated fair value is
determined using the
Black-Scholes Option Pricing Model
which is based on the value of the
underlying common stock at the valuation measurement date, the
remaining contractual term of the warrants, risk-free interest
rates, expected dividends and expected volatility of the price of
the underlying common stock.
The
Series D
Warrant is
exercisable beginning on the date of issuance and expires on August
22, 2019. The exercise price and the number of shares
issuable upon exercise of
Series D
Warrant is subject to appropriate adjustment in
the event of recapitalization events, stock dividends, stock
splits, stock combinations, reclassifications, reorganizations or
similar events affecting the Company’s common stock, and also
upon any distributions of assets, including cash, stock or other
property to the Company’s stockholders. In
addition, if stockholder approval for the transaction is obtained,
the
Series D
Warrant will be
subject to anti-dilution provisions until such time that for 25
trading days during any 30 consecutive trading day period, the
volume weighted average price of the Company’s common stock
exceeds $6.50 and the daily dollar trading volume exceeds $350,000
per trading day.
On January 30, 2014, the Company entered into an agreement with the
OXBT Fund to amend the terms of the outstanding Series D Warrants.
The amendment replaced the price protection anti-dilution provision
of each warrant with a covenant that the Company will not issue
common stock or common stock equivalents at an effective price per
share below the exercise price of such warrant without prior
written consent, subject to certain exceptions
.
The
Series D
Stock and
the
Series D
Warrant were
issued and sold without registration under the Securities Act in
reliance on the exemptions provided by Section 4(a)(2) of the
Securities Act and/or Regulation D promulgated thereunder and in
reliance on similar exemptions under applicable state
laws. Accordingly, OXBT Fund may exercise the Warrant
and sell the
Series D
Stock and
underlying shares only pursuant to an effective registration
statement under the Securities Act covering the resale of those
securities, an exemption under Rule 144 under the Securities Act or
another applicable exemption under the Securities
Act.
During
the year ended April 30, 2015, the Company received proceeds of
$544,000 and issued 209,230 shares of common stock upon the
exercise of the Series D warrants. As of December 31, 2016,
2,149,745 Series D Warrants are outstanding.
Series C Warrants
On July 23, 2013, as part of the offering of Series C Stock, the
Company issued 2,753,348 Series C Warrants at an exercise price of
$2.60 per share and contractual term of 6 years
. In
accordance with ASC 815, these warrants are classified as equity
and their relative fair-value of $1,867,991 was recognized as a
deemed dividend on the Series C Stock during the year ended April
30, 2014
. The estimated fair value is
determined using the
Black-Scholes Option Pricing Model
which is based on the value of the
underlying common stock at the valuation measurement date, the
remaining contractual term of the warrants, risk-free interest
rates, expected dividends and expected volatility of the price of
the underlying common stock.
In connection with the Series C Offering described above, the
Company entered into a Placement Agency Agreement (the
“Placement Agency Agreement”) with Ladenburg Thalmann
& Co. Inc. (the “Placement Agent”) pursuant to
which the Placement Agent agreed to act as the Company’s
exclusive placement agent for the Series C Offering. In accordance
with the Placement Agency Agreement, on July 23, 2013 the Company
issued to the Placement Agent warrants to purchase 53,539 shares of
common stock at an exercise price of $2.4375 per share and a
contractual term of 3 years
. In accordance with ASC 815,
these warrants are classified as equity and their relative
fair-value of $51,231 was recognized as additional paid in capital
during the year ended April 30, 2014
.
The estimated fair value is determined using the
Black-Scholes Option Pricing Model
which is based on the value of the underlying
common stock at the valuation measurement date, the remaining
contractual term of the warrants, risk-free interest rates,
expected dividends and expected volatility of the price of the
underlying common stock.
During
the year ended April 30, 2014, the Company received cash of
approximately $6.5 million and issued 2,512,825 shares of common
stock upon the exercise of outstanding Series C Warrants. As of
December 31, 2016, 240,523 Series C Warrants are
outstanding.
In accordance with ASC 815-40-35-8, the Company reassessed the
classification of the remaining Series C Warrants.
On
November 11, 2013, the Company satisfied certain contractual
obligations pursuant to the Series C offering which caused
certain “down-round” price
protection clauses in the outstanding warrants to become effective
on that date. In accordance with ASC 815-40-35-9, on November 11,
2013,
t
he Company reclassified
these warrants as a current liability and recorded a warrant
liability of $1,082,941 which represents the fair market value of
the warrants at that date. The initial fair value recorded as
warrants within stockholders’ equity of $233,036 was reversed
and the change in fair value was recorded as a component of other
expense.
The estimated fair value is determined using the Monte Carlo Model
which is based on the value of the underlying common stock at the
valuation measurement date, the remaining contractual term of the
warrants, risk-free interest rates, expected dividends, expected
volatility of the price of the underlying common stock as well as
other estimates and assumptions.
As of December 31, 2016, the fair value of the warrant liability
was $226,092. The Company recorded a gain of $298,248 for the
change in fair value as a component of other expense on the
consolidated statement of operations and comprehensive loss for the
year ended December 31, 2016.
For the eight months ended December 31, 2015,
the Company
recognized a gain of $48,105
for the
change in fair value as a component of other expense on the
consolidated statements of operations and comprehensive
loss.
For the fiscal years ended April 30, 2015 and 2014,
the
Company recognized a gain of $382,431 and a loss of
$721,840
, respectively, for the change
in fair value as a component of other expense on the consolidated
statements of operations and comprehensive
loss.
Series B Warrants
In
connection with the issuance of 2,100 shares of Series B Preferred
Stock described above, on February 27, 2013 the Company issued
Class A and Class B warrants to purchase an aggregate of 630,000
shares of common stock. The warrants were issued at an initial
exercise price equal to $10.00 and were immediately exercisable.
The Class A warrants were issued with a six-year term and the Class
B warrants were issued with a two-year term.
During
the year ended April 30, 2014, the Company received proceeds of
$567,000 and issued 630,000 shares of common stock upon the
exercise of the Series B warrants. As of December 31, 2016, there
were no Series B warrants outstanding.
As of
December 31, 2016, the Company has 2,415,675 warrants outstanding.
During the year ended December 31, 2016, no warrants were issued or
exercised.
The
following table summarizes the Company’s warrant activity for
the year ended December 31, 2016, the eight months ended December
31, 2015 and the fiscal years ended April 30, 2015 and
2014
:
|
|
Weighted
Average
Exercise Price
|
Outstanding at April 30, 2013
|
759,410
|
$
11.00
|
Issued
|
5,165,862
|
2.60
|
Exercised
|
(3,161,145
)
|
2.26
|
Forfeited
|
(1,661
)
|
126.00
|
Outstanding at April 30, 2014
|
2,762,466
|
$
4.28
|
Issued
|
175,000
|
4.00
|
Exercised
|
(209,230
)
|
2.60
|
Outstanding at April 30, 2015
|
2,728,236
|
$
4.39
|
Issued
|
-
|
-
|
Exercised
|
-
|
-
|
Outstanding at December 31, 2015
|
2,728,236
|
$
4.39
|
Issued
|
-
|
-
|
Exercised
|
-
|
-
|
Forfeited
|
(312,561
)
|
17.93
|
Outstanding at December 31, 2016
|
2,415,675
|
$
2.64
|
During the fiscal years ended April 30, 2015 and 2014, the Company
received approximately $544,000 and $7.1 million, issuing 209,230
and 3,161,145 shares of common stock, respectively upon the
exercise of outstanding warrants
.
1999 Amended Stock Plan
In
October 2000, the Company adopted the 1999 Stock Plan, as amended
and restated on June 17, 2008 (the “Plan”). Under
the Plan, with the approval of the Compensation Committee of the
Board of Directors, the Company may grant stock options, restricted
stock, stock appreciation rights and new shares of common stock
upon exercise of stock options. On September 30, 2011, the
Company’s stockholders approved an amendment to the Plan
which increased the amount of shares authorized for issuance under
the Plan to 300,000, up from 40,000 previously
authorized.
Pursuant to the Asset Purchase Agreement described in Note D above,
the Company agreed to propose that its stockholders approve an
amendment to the Company’s 1999 Stock Plan to increase the
amount of stock options authorized for issuance under the 1999
Stock Plan to not less than 4,000,000 shares of common
stock.
On March 13, 2014, the Company’s stockholders
approved an amendment to the Plan which increased the number of
shares of common stock authorized for issuance to a total of
4,000,000 shares, up from 300,000 previously authorized
.
In accordance with terms of the Acquisition, the Company issued an
aggregate of 3,572,880 stock options with a grant date fair value
of $15,818,512, to the Chief Executive Officer, the Chief Financial
Officer, the Executive Vice President, Business and Commercial
Operations and the Executive Vice President, Regulatory Affairs.
These options were issued with a six-year term and subject to
multiple performance-based vesting conditions. During the year
ended April 30, 2014, the Company recorded approximately $7.9
million of compensation expense for the vested options in its
consolidated statements of operations. An additional $7.9 million
of compensation expense related to these grants will be recognized
as performance vesting conditions are achieved.
On
September 15, 2015, the Company’s stockholders approved an
additional amendment to the Plan which increased the number of
shares of common stock authorized for issuance to a total of
5,000,000 shares, up from 4,000,000 previously
authorized.
As of
December 31, 2016 the Company had 268,500 shares of common stock
available for grant under the Plan.
The
following table summarizes the shares available for grant under the
Plan for the year ended December 31, 2016, the eight months ended
December 31, 2015 and the fiscal years ended April 30, 2015 and
2014:
|
Shares
Available for
Grant
|
Balances, at April 30, 2013
|
282,726
|
Additional
shares reserved
|
3,600,000
|
Options
granted
|
(3,637,822
)
|
Options
cancelled/forfeited
|
1,300
|
Restricted
stock granted
|
(135,662
)
|
Restricted
stock cancelled/forfeited
|
44,866
|
Balances, at April 30, 2014
|
155,408
|
Options
granted
|
(50,225
)
|
Options
cancelled/forfeited
|
4,785
|
Restricted
stock granted
|
(2,624
)
|
Restricted
stock cancelled/forfeited
|
15,055
|
Balances, at April 30, 2015
|
122,399
|
Additional
shares reserved
|
1,187,192
|
Options
granted
|
(315,050
)
|
Options
cancelled/forfeited
|
650
|
Restricted
stock granted
|
(610
)
|
Restricted
stock cancelled/forfeited
|
132
|
Balances, at December 31, 2015
|
994,713
|
Options
granted
|
(726,000
)
|
Restricted
stock granted
|
(430
)
|
Restricted
stock cancelled/forfeited
|
217
|
Balances, at December 31, 2016
|
268,500
|
Plan Stock Options
Stock options granted under the Plan may be either incentive stock
options (“ISOs”), or nonqualified stock options
(“NSOs”). ISOs may be granted only to employees. NSOs
may be granted to employees, consultants and directors. Stock
options under the Plan may be granted with a term of up to ten
years and at prices no less than fair market value for ISOs and no
less than 85% of the fair market value for NSOs. Stock options
granted generally vest over one to three years.
The following table summarizes the outstanding stock options under
the Plan
for the year ended December 31, 2016, the eight
months ended December 31, 2015 and the fiscal years ended April 30,
2015 and 2014:
|
|
|
|
|
Weighted Average
Exercise Price
|
Aggregate Intrinsic Value
|
Balances, at April 30, 2013
|
11,336
|
$
57.00
|
|
Options
granted
|
3,637,822
|
$
5.64
|
|
Options
cancelled
|
(1,300
)
|
$
43.90
|
|
Balances, at April 30, 2014
|
3,647,858
|
$
5.79
|
|
Options
granted
|
50,225
|
$
4.82
|
|
Options
cancelled
|
(4,785
)
|
$
63.84
|
|
Balances, at April 30, 2015
|
3,693,298
|
$
5.70
|
|
Options
granted
|
315,050
|
$
3.25
|
|
Options
cancelled
|
(650
)
|
$
35.09
|
|
Balances at December 31, 2015
|
4,007,698
|
$
5.50
|
|
Options
granted
|
726,000
|
$
2.12
|
|
Options
cancelled
|
-
|
$
-
|
|
Balances at December 31, 2016
|
4,733,698
|
$
4.98
|
$
-
(1)
|
(1)
|
Amount
represents the difference between the exercise price and $1.95, the
closing price of Tenax Therapeutics’ stock on December 31,
2016, as reported on the Nasdaq Capital Market, for all
in-the-money options outstanding.
|
The
following table summarizes all options outstanding as of December
31, 2016:
|
Options Outstanding at
December 31, 2016
|
Options Exercisable and Vested at
December 31, 2016
|
|
|
Weighted Average Remaining
Contractual Life (Years)
|
|
Weighted Average
Exercise Price
|
$
2.07 to $3.16
|
956,000
|
9.7
|
76,666
|
$
3.16
|
$
3.35 to $4.76
|
124,938
|
7.8
|
124,838
|
$
3.31
|
$
4.82 to $5.65
|
3,647,880
|
3.3
|
1,861,440
|
$
5.63
|
$
14.80 to $138.00
|
4,880
|
4.4
|
4,880
|
$
54.07
|
|
4,733,698
|
4.7
|
2,067,824
|
$
5.54
|
The
following table summarizes options outstanding that have vested and
are expected to vest based on options outstanding as of December
31, 2016:
|
|
Weighted Average
Exercise Price
|
Aggregate Intrinsic
Value (1)
|
Weighted Average Remaining Contractual Life (Years)
|
Vested
|
2,067,824
|
$
5.54
|
$
-
|
3.9
|
Vested
and expected to vest
|
2,743,720
|
$
4.75
|
$
-
|
5.3
|
(1)
|
Amount
represents the difference between the exercise price and $1.95, the
closing price of Tenax Therapeutics’ stock on December 31,
2016, as reported on the Nasdaq Capital Market, for all
in-the-money options outstanding.
|
The
Company chose the “straight-line” attribution method
for allocating compensation costs of each stock option over the
requisite service period using the Black-Scholes Option Pricing
Model to calculate the grant date fair value.
The
Company used the following assumptions to estimate the fair value
of options granted under its stock option plans for the year ended
December 31, 2016, the eight months ended December 31, 2015 and the
fiscal years ended April 30, 2015 and 2014:
|
For the year ended December 31,
|
For the eight months ended December 31,
|
For the year ended April 30
|
|
|
|
|
|
Risk-free
interest rate (weighted average)
|
2.28
%
|
1.99
%
|
2.23
%
|
1.80
%
|
Expected
volatility (weighted average)
|
83.38
%
|
85.45
%
|
98.43
%
|
98.20
%
|
Expected
term (in years)
|
7
|
7
|
7
|
6
|
Expected
dividend yield
|
0.00
%
|
0.00
%
|
0.00
%
|
0.00
%
|
Risk-Free
Interest Rate
|
The
risk-free interest rate assumption was based on U.S. Treasury
instruments with a term that is consistent with the expected term
of the Company’s stock options.
|
Expected
Volatility
|
The
expected stock price volatility for the Company’s common
stock was determined by examining the historical volatility and
trading history for its common stock over a term consistent with
the expected term of its options.
|
Expected
Term
|
The
expected term of stock options represents the weighted average
period the stock options are expected to remain outstanding. It was
calculated based on the historical experience that the Company has
had with its stock option grants.
|
Expected
Dividend Yield
|
The
expected dividend yield of 0% is based on the Company’s
history and expectation of dividend payouts. The Company has not
paid and do not anticipate paying any dividends in the near
future.
|
Forfeitures
|
As
stock-based compensation expense recognized in the statement of
operations for the year ended December 31, 2016, the eight months
ended December 31, 2015 and the fiscal years ended April 30, 2015
and 2014 is based on awards ultimately expected to vest, it has
been reduced for estimated forfeitures. ASC 718 requires
forfeitures to be estimated at the time of grant and revised, if
necessary, in subsequent periods if actual forfeitures differ from
those estimates. Forfeitures were estimated based on the
Company’s historical experience.
|
The
weighted-average grant-date fair value of options granted during
the year ended December 31, 2016 was $2.12.
The
weighted-average grant-date fair value of options granted during
the eight months ended December 31, 2015 was $3.25.
The
weighted-average grant-date fair value of options granted during
the years ended April 30, 2015 and 2014 was $4.82 and $5.64,
respectively.
The Company recorded compensation expense for these stock options
grants of $529,708 for the year ended December 31,
2016.
As of
December 31, 2016, there were unrecognized compensation costs of
approximately $963,000 related to non-vested stock option awards
that will be recognized on a straight-line basis over the weighted
average remaining vesting period of 2.1 years. Additionally, there
were unrecognized compensation costs of approximately $8.1 million
related to non-vested stock option awards subject to
performance-based vesting milestones with a weighted average
remaining life of 3.3 years. As of December 31, 2016, none of these
milestones have been achieved.
Inducement Stock Options
The
table below summarizes the employment inducement stock option award
for
25,000
shares of common
stock made to our Chief Medical Officer on February 15, 2015. This
employment inducement stock option was awarded in accordance with
the employment inducement award exemption provided by Nasdaq Rule
5635(c)(4) and was therefore not awarded under the Company’s
stockholder approved equity plan. The option award will vest over a
three year period, with one-third vesting per year, beginning one
year from the grant date. The options have a 10-year term and an
exercise price of $3.22 per share, the February 13, 2015 closing
price of the Company’s common stock.
A
summary of the activity and related information for our stock
options follows:
|
|
Weighted Average
Exercise Price
|
Inducement
Stock Options outstanding at April 30, 2014
|
-
|
$
-
|
Options
granted
|
25,000
|
3.22
|
Options
exercised
|
-
|
-
|
Options
forfeited or expired
|
-
|
-
|
Inducement
Stock Options outstanding at April 30, 2015
|
25,000
|
$
3.22
|
Options
granted
|
-
|
-
|
Options
exercised
|
-
|
-
|
Options
forfeited or expired
|
-
|
-
|
Inducement
Stock Options outstanding at December 31, 2015
|
25,000
|
$
3.22
|
Options
granted
|
-
|
-
|
Options
exercised
|
-
|
-
|
Options
forfeited or expired
|
(16,666
)
|
3.22
|
Inducement
Stock Options outstanding at December 31, 2016
|
8,334
|
$
3.22
|
Options
exercisable at December 31, 2016
|
8,334
|
$
3.22
|
Inducement
stock option compensation expense was approximately $20,000 for the
year ended December 31, 2016.
Inducement
stock option compensation expense was approximately $26,000 for the
eight months ended December 31, 2015.
For the
years ended April 30
, 2015
and
2014 Inducement stock option compensation expense totaled $9,830
and $0, respectively.
At
December 31, 2016
, there was
$8,641 of remaining unrecognized compensation expense related to
the inducement stock options. Inducement stock options outstanding
as of
December 31, 2016
had a
weighted average remaining contractual life of two
months.
The
estimated weighted average fair value per inducement option share
granted was
$
64,343 in 2015
using a Black-Scholes option pricing model based on market prices
and the following assumptions at the date of inducement option
grant: weighted average risk-free interest rate of 1.84
%
, dividend yield of
0%
, volatility factor for our common stock
of 93.90
%
and a weighted
average expected life of 7 years for inducement options not
forfeited.
Restricted Stock Grants
The following table summarizes the outstanding restricted stock
under the Plan for the year ended December 31, 2016,
the
eight months ended December 31, 2015 and the fiscal years ended
April 30, 2015 and 2014:
|
Outstanding Restricted Stock
|
|
|
Weighted Average Grant Date Fair Value
|
Balances, at April 30, 2013
|
1,917
|
$
48.40
|
Restricted
stock granted
|
135,662
|
$
3.00
|
Restricted
stock vested
|
(50,235
)
|
$
2.30
|
Restricted
stock cancelled
|
(31,503
)
|
$
1.67
|
Restricted
stock forfeited
|
(13,363
)
|
$
4.49
|
Balances, at April 30, 2014
|
42,478
|
$
6.39
|
Restricted
stock granted
|
2,624
|
$
4.90
|
Restricted
stock vested
|
(29,957
)
|
$
5.99
|
Restricted
stock cancelled
|
(15,055
)
|
$
6.95
|
Balances, at April 30, 2015
|
90
|
$
4.01
|
Restricted
stock granted
|
610
|
$
3.37
|
Restricted
stock vested
|
(174
)
|
$
3.61
|
Restricted
stock cancelled
|
(132
)
|
$
3.57
|
Balances, at December 31, 2015
|
394
|
$
3.34
|
Restricted
stock granted
|
430
|
$
2.72
|
Restricted
stock vested
|
(327
)
|
$
3.11
|
Restricted
stock cancelled
|
(283
)
|
$
3.13
|
Balances, at December 31, 2016
|
214
|
$
2.72
|
The Company recorded compensation expense for these restricted
stock grants of $1,758 for the year ended December 31,
2016.
The Company recorded compensation expense for these restricted
stock grants of $1,439 for the eight months ended December 31,
2015.
For the fiscal years ended April 30, 2015 and 2014, the Company
recorded compensation expense for these restricted stock grants of
$18,092 and $356,639 respectively.
As of
December 31, 2016, there were unrecognized compensation costs of
approximately $400 related to the non-vested restricted stock
grants that will be recognized on a straight-line basis over the
remaining vesting period.
2016 Stock Incentive Plan
On June
16, 2016, the Company’s stockholders approved the 2016 Stock
Incentive Plan (the “2016 Plan”), which provides for
the issuance of up to 3,000,000 shares of common stock. Under the
2016 Plan, with the approval of the Compensation Committee of the
Board of Directors, the Company may grant stock options, stock
appreciation rights, restricted stock, restricted stock units,
performance shares, performance units, cash-based awards or other
stock-based awards.
As of
December 31, 2016 the Company had not issued any awards under the
2016 Plan and there were 3,000,000 shares of common stock available
for grant under the 2016 Plan.
NOTE H—COMMITMENTS AND CONTINGENCIES
Operating Leases
The
Company leases its office space under an operating lease that
includes fixed annual increases and expires in June 2021. Total
rent expense was $91,208 for the year ended December 31, 2016.
Total rent expense was $75,933 for the eight months ended December
31, 2015.
For the
fiscal years ended April 30, 2015 and 2014, total rent expense was
$111,171 and $107,946, respectively.
The
future minimum payments for the long-term, non-cancelable lease are
as follows:
Year ending December 31,
|
|
2017
|
$
112,431
|
2018
|
115,220
|
2019
|
118,117
|
2020
|
121,084
|
2021
|
61,803
|
|
$
528,655
|
Simdax license agreement
As further discussed in Note D above, on November 13, 2013 the
Company acquired the License which granted it an exclusive,
sublicenseable right to develop and commercialize pharmaceutical
products containing Levosimedan in the United States and
Canada. Pursuant to the License, the Company must use
Orion’s “Simdax®” trademark to commercialize
the Product. The License also grants to the Company a
right of first refusal to commercialize new developments of the
Product, including developments as to the formulation,
presentation, means of delivery, route of administration, dosage or
indication.
Orion’s ongoing role under the License includes sublicense
approval, serving as the sole source of manufacture, holding a
first right to enforce intellectual property rights in the
Territory, and certain regulatory participation
rights. Additionally, the Company must grant back to
Orion a broad non-exclusive license to any patents or clinical
trial data related to the Product developed by the Company under
the License. The License has a fifteen (15) year term,
provided, however, that the License will continue after the end of
the fifteen year term in each country in the Territory until the
expiration of Orion’s patent rights in the Product in such
country. Orion had the right to terminate the License if
the Study is not started by July 31, 2014. While the Company did
not commence the trial by that date, on September 9, 2014, Orion
notified the Company in writing that it did not intend to terminate
the License so long as the trial was commenced on or before October
31, 2014. The Company subsequently commenced the human clinical
trial for levosimendan on September 18, 2014 when the first patient
was enrolled.
The License includes the following development milestones for which
the Company shall make non-refundable payments to Orion no later
than twenty-eight (28) days after the occurrence of the applicable
milestone event: (i) $2.0 million upon the grant of FDA approval,
including all registrations, licenses, authorizations and necessary
approvals, to develop and/or commercialize the Product in the
United States; and (ii) $1.0 million upon the grant of regulatory
approval for the Product in Canada. Once commercialized, the
Company is obligated to make certain non-refundable
commercialization milestone payments to Orion, aggregating up to
$13.0 million, contingent upon achievement of certain cumulative
net sales amounts in the Territory. The Company must
also pay Orion tiered royalties based on net sales of the Product
in the Territory made by the Company and its sublicensees. After
the end of the Term, the Company must pay Orion a royalty based on
net sales of the Product in the Territory for as long as Life Newco
sells the Product in the Territory.
As of
December 31, 2016, the Company has not met any of the developmental
milestones and, accordingly, has not recorded any liability for the
contingent payments due to Orion.
Agreement with Virginia Commonwealth University
In May
2008, the Company entered into a license agreement with Virginia
Commonwealth University (“Licensor”, “VCU”)
whereby it obtained a worldwide, exclusive license to valid claims
under three of the Licensor's patent applications that relate to
methods for non-pulmonary delivery of oxygen to tissue and the
products based on those valid claims used or useful for therapeutic
and diagnostic applications in humans and animals. The license
includes the right to sub-license to third parties. The term of the
agreement is the life of the patents covered by the patent
applications unless the Company elects to terminate the agreement
prior to patent expiration. Under the agreement, the Company has an
obligation to diligently pursue product development and pursue, at
its own expense, prosecution of the patent applications covered by
the agreement. As part of the agreement, the Company is required to
pay to VCU nonrefundable payments upon achieving development and
regulatory milestones. As of April 30, 2015, the Company has not
met any of the developmental milestones.
The
agreement with VCU also requires the Company to pay royalties to
VCU at specified rates based on annual net sales derived from the
licensed technology. Pursuant to the agreement, the Company must
make minimum annual royalty payments to VCU totaling $70,000 as
long as the agreement is in force. These payments are fully
creditable against royalty payments due for sales and sublicense
revenue earned during the fiscal year as described above. This fee
is recorded as an other current asset and is amortized over the
fiscal year. Amortization expense was $70,000 for each of the years
ended April 30, 2015 and 2014.
In
September 2014, the Company discontinued the development of its
Oxycyte product candidates. As part of the this change in
business strategy, on May 5, 2015 the Company provided VCU its 90
day notice terminating the license agreement entered into with the
Licensor, whose effective date was May 21, 2008. The license
agreement gave the Company exclusive rights to intellectual
property that was used for the development and commercialization of
Oxycyte and is therefore no longer needed.
Litigation
The
Company is subject to litigation in the normal course of business,
none of which management believes will have a material adverse
effect on the Company’s Consolidated Financial
Statements.
NOTE I—401(k) BENEFIT PLAN
The
Company sponsors a 401(k) Retirement Savings Plan (the
“401(k) Plan”) for all eligible employees. Full-time
employees over the age of 18 are eligible to participate in the
401(k) Plan after 90 days of continuous employment. Participants
may elect to defer earnings into the 401(k) Plan up to the annual
IRS limits and the Company provides a matching contribution up to
5% of the participants’ annual salary in accordance with the
401(k) Plan documents. The 401(k) Plan is managed by a third-party
trustee.
For the
year ended December 31, 2016, the eight months ended December 31,
2015, the fiscal year ended April 30, 2015 and the fiscal year
ended April 30, 2014, the Company recorded $83,589, $57,352,
$82,185 and $47,087 for matching contributions expense,
respectively.
NOTE J—INCOME TAXES
The
Company recorded an income tax benefit of $7,962,100 for the period
ended December 31,2016.
The
Company's provision for income taxes is summarized as
follows:
|
|
|
|
|
|
|
|
Current
federal income tax expense
|
$
-
|
$
-
|
Deferred
federal income tax benefit
|
(7,139,565
)
|
-
|
Provision
for federal income taxes:
|
(7,139,565
)
|
-
|
|
|
|
Current
state income tax expense
|
-
|
-
|
Deferred
state income tax benefit
|
(822,535
)
|
-
|
Provision
for state income taxes:
|
(822,535
)
|
-
|
|
|
|
Total
|
$
(7,962,100
)
|
$
-
|
The
reconciliation of income tax expenses (benefit) at the statutory
federal income tax rate of 34% for the periods ended December 31,
2016 and December 31, 2015 is as follows:
|
|
|
|
|
U.S.
federal taxes (benefit) at statutory rate
|
$
(17,641,231
)
|
$
(3,423,108
)
|
State
income tax benefit, net of federal benefit
|
(2,031,238
)
|
(394,142
)
|
Stock
compensation
|
141,807
|
37,264
|
Other
nondeductible, including goodwill impairment
|
4,160,717
|
(15,287
)
|
Change
in state tax rate
|
241,518
|
-
|
Other,
including effect of tax rate brackets
|
(57,490
)
|
(72,808
)
|
Change
in valuation allowance
|
7,223,817
|
3,868,081
|
|
$
(7,962,100
)
|
$
-
|
The tax
effects of temporary differences and carry forwards that give rise
to significant portions of the deferred tax assets are as
follows:
|
|
Deferred
Tax Assets
|
|
|
Net
operating loss carryforwards
|
$
46,227,681
|
$
39,190,436
|
Accruals
and other
|
902,546
|
691,341
|
Capital
loss carryforwards
|
12,395
|
-
|
Valuation
allowance
|
(47,086,442
)
|
(39,862,626
)
|
Net
deferred tax assets
|
56,180
|
19,151
|
Deferred
Tax Liabilities
|
|
|
IPR&D
|
-
|
(7,962,100
)
|
Other
liabilities
|
(56,180
)
|
(19,151
)
|
Net
Deferred Tax Liabilities
|
$
-
|
$
(7,962,100
)
|
The
Company has established a valuation allowance against net deferred
tax assets due to the uncertainty that such assets will be
realized. The Company periodically evaluates the recoverability of
the deferred tax assets. At such time that it is determined that it
is more likely than not that deferred tax assets will be
realizable, the valuation allowance will be reduced.
As of
December 31, 2016, the Company had Federal and State net operating
loss carryforwards of approximately $124.0 million and $101.8
million available to offset future federal and state taxable
income, respectively. The federal and state net operating loss
carryforwards begin to expire in 2018 and valuation allowances have
been provided.
Utilization
of the net operating loss carryforwards may be subject to an annual
limitation due to the ownership percentage change limitations
provided by the Internal Revenue Code of 1986 and similar state
provisions. The annual limitations may result in the expiration of
the net operating losses before utilization.
Management
has evaluated all other tax positions that could have a significant
effect on the financial statements and determined the Company had
no uncertain income tax positions at December 31,
2016.
The
Company files U.S. and state income tax returns with varying
statutes of limitations. The tax years 2001 and forward remain open
to examination due to the carryover of unused net operating losses
or tax credits.
NOTE K—TRANSITION PERIOD COMPARATIVE BALANCES
In
2015, the Company’s Board of Directors approved a change in
the Company’s fiscal year to a fiscal year beginning on
January 1 and ending on December 31 of each year, such change
beginning as of January 1, 2016. In accordance with certain rules
promulgated under the Securities Exchange Act of 1934, as amended,
the required transition period of May 1, 2015 to December 31, 2015
is included in these financial statements. For comparative
purposes, the unaudited consolidated statements of operations and
comprehensive loss for the year ended December 31, 2015 and for the
eight months ended December 31, 2014 are as follows:
|
|
|
|
|
|
Government
grant revenue
|
$
49,286
|
Total
net revenue
|
49,286
|
|
|
Operating
expenses
|
|
General
and administrative
|
6,671,568
|
Research
and development
|
8,904,787
|
Loss
on impairment of long-lived assets
|
1,034,863
|
Total
operating expenses
|
16,611,218
|
|
|
Net
operating loss
|
16,561,932
|
|
|
Interest
expense
|
3,851
|
Other
(income) expense
|
(633,632
)
|
Net
loss
|
$
15,932,151
|
|
|
Unrealized
(gain) loss on marketable securities
|
(29,332
)
|
Total
comprehensive loss
|
$
15,902,819
|
|
|
Net
loss per share, basic and diluted
|
$
(0.57
)
|
Weighted
average number of common shares outstanding, basic and
diluted
|
28,119,538
|
|
Eight months ended December 31,
|
|
|
|
|
Operating
expenses
|
|
General
and administrative
|
$
4,439,842
|
Research
and development
|
4,240,467
|
Total
operating expenses
|
8,680,309
|
|
|
Net
operating loss
|
8,680,309
|
|
|
Interest
expense
|
46,736
|
Other
(income) expense
|
(509,420
)
|
Net
loss
|
$
8,217,625
|
|
|
Unrealized
loss (gain) on marketable securities
|
158,775
|
Total
comprehensive loss
|
$
8,376,400
|
|
|
Net
loss per share, basic
|
$
(0.29
)
|
Weighted
average number of common shares outstanding, basic and
diluted
|
28,057,659
|