NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1.
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Nature of Business and Basis of Presentation
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Galectin Therapeutics Inc. (the
Company) is a clinical stage biopharmaceutical company that is applying its leadership in galectin science and drug development to create new therapies for fibrotic disease and cancer. These candidates are based on the Companys
targeting of galectin proteins which are key mediators of biologic and pathologic function. These compounds also may have application for drugs to treat other diseases and chronic health conditions.
The Company was founded in July 2000, was incorporated in the State of Nevada in January 2001 under the name Pro-Pharmaceuticals,
Inc., and changed its name to Galectin Therapeutics Inc. on May 26, 2011. On March 23, 2012, the Company effected a one-for-six reverse stock split. All common share and per share amounts in these financial statements
have been adjusted to reflect the effect of the reverse split.
The Company has operated at a loss since its inception and has had no
revenues. The Company anticipates that losses will continue for the foreseeable future. At December 31, 2016, the Company had $15,362,000 of unrestricted cash and cash equivalents available to fund future operations. Additionally, from
January 1, 2017 through March 1, 2017, the Company raised $1,247,000 in net proceeds from the issuance of common stock under its At the Market sales arrangement (See Note 5). On February 28, 2017, the Company closed a transactions
with individual investors through private placements of common stock and warrants. In total, the Company issued 102,368 shares of common stock for proceeds of $200,000. The Company also issued, to the investors, warrants to purchase 76,776 shares of
common stock at $5.00 per share. The Company believes there is sufficient cash to fund currently planned operations through December 31, 2017.
The Company is subject to a number of risks similar to those of clinical stage companies, including dependence on key individuals, uncertainty
of product development and generation of revenues, dependence on outside sources of capital, risks associated with clinical trials of products, dependence on third-party collaborators for research operations, need for regulatory approval of
products, risks associated with protection of intellectual property, and competition with larger, better-capitalized companies. Successful completion of the Companys development program and, ultimately, the attainment of profitable operations
is dependent upon future events, including obtaining adequate financing to fulfill its development activities and achieving a level of revenues adequate to support the Companys cost structure. There are no assurances that the Company will be
able to obtain additional financing on favorable terms, or at all, or successfully market its products.
2.
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Summary of Significant Accounting Policies
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The accompanying consolidated financial
statements have been prepared in conformity with accounting principles generally accepted in the United States (GAAP).
Basis of Consolidation.
The consolidated financial statements include the accounts of the Company and Galectin Therapeutics
Security Corp., its wholly-owned subsidiary, which was incorporated in Delaware on December 23, 2003 and Galectin Sciences LLC (see Note 10). All intercompany transactions have been eliminated.
Use of Estimates.
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America requires management to make estimates and judgments that may affect the reported amounts of assets, liabilities, equity, revenue, expenses and related disclosure of contingent assets and liabilities. Managements estimates and
judgments include assumptions used in stock option and warrant liability valuations, useful lives of property and equipment and intangible assets, accrued liabilities, deferred income taxes and various other assumptions that are believed to be
reasonable under the circumstances. Actual results may differ from those estimates under different assumptions or conditions.
F-8
Fair Value Measurements
. The Company has certain financial assets and liabilities
recorded at fair value. Fair values determined by Level 1 inputs utilize observable data such as quoted prices in active markets. Fair values determined by Level 2 inputs utilize data points other than quoted prices in active markets that are
observable either directly or indirectly. Fair values determined by Level 3 inputs utilize unobservable data points in which there is little or no market data, which require the reporting entity to develop its own assumptions. The estimated value of
accounts payable and accrued expenses approximates their carrying value due to their short-term nature. There were no Level 2 or 3 assets or liabilities at December 31, 2016 or 2015.
Cash and Cash Equivalents.
The Company considers all highly-liquid investments with original maturities of 90 days or less at the
time of acquisition to be cash equivalents. The Company had no cash equivalents at December 31, 2016 or 2015.
Prepaid Expenses and
Other Current Assets.
Prepaid expenses and other assets consist principally of prepaid insurance.
Property and
Equipment.
Property and equipment, including leasehold improvements, are stated at cost, net of accumulated depreciation and amortization, and are depreciated or amortized using the straight-line method over the estimated useful lives of
the related assets of generally three years for computers and office equipment, five years for furniture and fixtures and the shorter of the useful life or life of the lease for leasehold improvements.
Security Deposit.
At December 31, 2016 and 2015, the Company had a security deposit of $6,000 for leased office space included
in Prepaid Expenses and Other Current Assets.
Intangible Assets.
Intangible assets include patent costs, consisting primarily
of related capitalized legal fees, which are amortized over an estimated useful life of five years from issuance. Amortization expense in 2016 and 2015 was approximately $7,000 and $7,000, respectively. Gross intangible assets at December 31,
2016 and 2015 totaled $78,000 each year, and accumulated amortization at December 31, 2016 and 2015 totaled $76,000 and $69,000, respectively.
Long-Lived Assets.
The Company reviews all long-lived assets for impairment whenever events or circumstances indicate the carrying
amount of such assets may not be recoverable. Recoverability of assets to be held or used is measured by comparison of the carrying value of the asset to the future undiscounted net cash flows expected to be generated by the asset. If such asset is
considered to be impaired, the impairment recognized is measured by the amount by which the carrying value of the asset exceeds the discounted future cash flows expected to be generated by the asset.
Accrued Expenses
. As part of the process of preparing our consolidated financial statements, we are required to estimate accrued
expenses. This process involves identifying services that third parties have performed on our behalf and estimating the level of service performed and the associated cost incurred on these services as of each balance sheet date in our consolidated
financial statements. Examples of estimated accrued expenses include contract service fees in conjunction with clinical trials, professional service fees, such as those arising from the services of attorneys and accountants and accrued payroll
expenses. In connection with these service fees, our estimates are most affected by our understanding of the status and timing of services provided relative to the actual services incurred by the service providers. In the event that we do not
identify certain costs that have been incurred or we under- or over-estimate the level of services or costs of such services, our reported expenses for a reporting period could be understated or overstated. The date on which certain services
commence, the level of services performed on or before a given date, and the cost of services are often subject to our judgment. We make these judgments based upon the facts and circumstances known to us in accordance with accounting principles
generally accepted in the U.S.
Warrants Modification.
The Company has issued common stock warrants in connection with the
execution of certain equity and debt financings. Certain warrants were accounted for as derivative liabilities at fair value. Such warrants did not meet the accounting criteria that a contract should not be considered a derivative instrument if it
is (1) indexed to its own stock and (2) classified in stockholders equity. Changes
F-9
in fair value of derivative liabilities are recorded in the consolidated statement of operations under the caption Change in fair value of warrant liabilities. Warrants that are not
considered derivative liabilities are accounted for at fair value at the date of issuance in additional paid-in capital. The fair value of warrants was determined using the Black-Scholes option-pricing model using assumptions regarding volatility of
our common share price, remaining life of the warrant, and risk-free interest rates at each period end. There were no warrant liabilities as of December 31, 2016 or 2015.
Research and Development Expenses.
Costs associated with research and development are expensed as incurred. Research and
development expenses include, among other costs, salaries and other personnel-related costs, and costs incurred by outside laboratories and other accredited facilities in connection with clinical trials and preclinical studies.
Income Taxes.
The Company accounts for income taxes in accordance with the accounting rules that requires an asset and liability
approach to accounting for income taxes based upon the future expected values of the related assets and liabilities. Deferred income tax assets and liabilities are determined based on the differences between the financial reporting and tax bases of
assets and liabilities and for tax loss and credit carry forwards, and are measured using the expected tax rates estimated to be in effect when such basis differences reverse. Valuation allowances are established, if necessary, to reduce the
deferred tax asset to the amount that will, more likely than not, be realized.
Concentration of Credit Risk.
Financial
instruments that subject the Company to credit risk consist of cash and cash equivalents and certificates of deposit. The Company maintains cash and cash equivalents and certificates of deposit with well-capitalized financial institutions. At times,
those amounts may exceed federally insured limits. The Company has no significant concentrations of credit risk.
Stock-Based
Compensation.
Stock-based compensation cost is measured at the grant date based on the fair value of the award and is recognized as expense over the service period, which generally represents the vesting period. For awards that have
performance based vesting conditions the Company recognizes the expense over the estimated period that the awards are expected to be earned. The Company generally uses the Black-Scholes option-pricing model to calculate the grant date fair value of
stock options. For options that only vest upon the achievement of market conditions, the Company values the options using a Monte Carlo model to calculate the grant date fair value of the stock options. The expense related to options that vest based
on market conditions is not reversed should those options not ultimately vest. The expense recognized over the service period is required to include an estimate of the awards that will be forfeited. Stock options issued to non-employees are
accounted for in accordance with the provisions of ASC Subtopic 505-50,
Equity-Based Payments to Non-employees
, which requires valuing the stock options using an option pricing model (the Company uses Black-Scholes) and measuring such stock
options to their current fair value when they vest.
New Accounting Pronouncements.
In August 2014, the FASB issued Accounting
Standard Update No. 2014-15,
Disclosure of Uncertainties About an Entitys Ability to Continue as a Going Concern.
The amendments require management to perform interim and annual assessments of an entitys ability to continue
as a going concern and provides guidance on determining when and how to disclose going concern uncertainties in the financial statements. The standard applies to all entities and is effective for annual and interim reporting periods ending after
December 15, 2016, with early adoption permitted. The Company has adopted this standard for its year ended December 31, 2016 financial statements.
In February 2016, the FASB issued ASU No. 2016-02,
Leases (Topic 842)
, which requires lessees to recognize the most leases on the
balance sheet. The provisions of this guidance are effective for the annual periods beginning after December 15, 2018, and interim periods within those years, with early adoption permitted. The Company is evaluating the requirements of this
guidance and has not yet determined the impact of the adoption on the our financial position or results of operations.
F-10
3.
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Property and Equipment
|
Property and equipment consists of the following at
December 31:
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|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
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(in thousands)
|
|
Leasehold improvements
|
|
$
|
2
|
|
|
$
|
2
|
|
Computer and office equipment
|
|
|
13
|
|
|
|
13
|
|
Furniture and fixtures
|
|
|
59
|
|
|
|
59
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
74
|
|
|
|
74
|
|
Less accumulated depreciation and amortization
|
|
|
(74
|
)
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|
|
(74
|
)
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|
|
|
|
|
|
|
|
|
Property and equipmentnet
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization expense for the years ended December 31, 2016 and 2015 was $0 and $1,000,
respectively.
Accrued expenses consist of the following at December 31:
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|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Legal and accounting fees
|
|
$
|
14
|
|
|
$
|
123
|
|
Accrued compensation
|
|
|
614
|
|
|
|
626
|
|
Accrued research and development costs and other
|
|
|
2,174
|
|
|
|
96
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
2,802
|
|
|
$
|
845
|
|
|
|
|
|
|
|
|
|
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At December 31, 2016, the Company had 50,000,000 shares
of common stock and 20,000,000 undesignated shares authorized. As of December 31, 2016, 5,000,000 shares have been designated for Series A 12% Convertible Preferred Stock, 900,000 shares have been designated for Series B-1 Convertible Preferred
Stock, 2,100,000 shares have been designated for Series B-2 Convertible Preferred Stock, 1,000 shares have been designated for Series C Super Dividend Convertible Preferred Stock, 6,000,000 shares have been designated for Series B-3 Convertible
Preferred Stock and 5,999,000 remain undesignated.
At Market Issuances of Common Stock
On March 30, 2014, the Company entered into an At Market Issuance Sales Agreement (the 2014 At Market Agreement) with a sales
agent under which the Company may issue and sell shares of its common stock having an aggregate offering price of up to $30.0 million from time to time through the sales agent. Sales of the Companys common stock through the sales agent, if
any, will be made by any method that is deemed an at the market offering as defined by the U.S. Securities and Exchange Commission. The Company will pay to the sales agent a commission rate equal to 3.0% of the gross proceeds from the
sale of any shares of common stock sold through the sales agent under the 2014 At Market Agreement. In 2016 and 2015, the Company issued 329,234 and 1,297,216 shares of common stock for net proceeds of approximately $416,000 and $4,571,000,
respectively, under the 2014 At Market Agreement.
2015 Registered Direct Offering
On November 25, 2015, the Company completed an offering of 4,761,900 shares of common stock to three institutional investors at $2.06 per
share for net proceeds of approximately $9,130,000. The Company also
F-11
issued, to the three investors, warrants to purchase 3,571,425 shares of common stock at $2.50 per share. The warrants have an expiration date of May 25, 2021. The warrants are exercisable
beginning on May 25, 2016. The warrants provide for cashless exercise if at any time during the term of the warrants if there is no effective registration statement for the issuance or resale of the underlying warrant shares. The exercise price
of each warrant is adjustable in the event of a stock split or stock combination, capital reorganization, merger or similar event. The warrants were valued at $5,893,000 as of the issuance date of November 25, 2015, using the closing price of
$2.28, a life of 5.5 years, a volatility of 93% and a risk free interest rate of 1.84%. Based upon the Companys analysis of the criteria contained in ASC Topic 815-40, Derivatives and Hedging Contracts in Entitys Own
Equity the Company has determined that warrants issued in connection with this financing transaction were not derivative liabilities and therefore, were recorded as additional paid-in capital.
2016 Private Placement
In December 2016, the Company closed two transactions with individual investors through private placements of common stock and warrants. In
total, the Company issued approximately 2,814,000 shares of common stock for proceeds of $3,000,000. The Company also issued, to the two investors, warrants to purchase 2,110,672 shares of common stock at $5.00 per share. The warrants have an
expiration date in late December 2023. The warrants are exercisable beginning in late June 2017. The exercise price of each warrant is adjustable in the event of a stock split or stock combination, capital reorganization, merger or similar event.
The warrants were valued at $1,258,000 as of the issuance dates in late December 2016, using a weighted average closing price of $0.97, a life of 7 years, a volatility of 96% and a risk free interest rate of 1.90%. Based upon the Companys
analysis of the criteria contained in ASC Topic 815-40, Derivatives and Hedging Contracts in Entitys Own Equity the Company has determined that warrants issued in connection with this financing transaction were not
derivative liabilities and therefore, were recorded as additional paid-in capital.
Series A 12% Convertible Preferred Stock
February 4, 2008 Private Placement
On February 4, 2008, the Company closed a private placement begun in
October 2007 of its Series A 12% Convertible Preferred Stock (Series A) and related warrants. In this transaction, the Company sold units of securities at $6.00 per unit, each unit comprised of (i) one share of Series A
Preferred, (ii) a warrant to purchase one share of common stock for $9.00, and (iii) a warrant to purchase one share of common stock for $12.00. Each share of the Series A is entitled to dividends at the rate of 12% per annum payable
at the Companys option in cash or shares of common stock valued at the higher of $6.00 per share or 100% of the value weighted average price of the Companys share price for the 20 consecutive trading days prior to the applicable dividend
payment date. Dividends are payable semi-annually on March 30 and September 30. The dividend paid on the initial dividend payment date is calculated from the date the Company deposited each subscription advance.
The shares of Series A are entitled to vote as a class with the Companys common stock and each share of Series A is convertible at any
time to one-sixth of a share of common stock, subject to adjustment in the event of a stock dividend, stock split or combination, reclassification or similar event. The Company has the right to require conversion if the closing price of the common
stock exceeds $18.00 for 15 consecutive trading days and a registration statement covering the resale of the shares of common stock issuable upon conversion of the Series A is then in effect. Each warrant is exercisable solely for cash beginning
August 3, 2008 and expired on February 4, 2012. The exercise price of each warrant is adjustable in the event of a stock split or stock combination, capital reorganization, merger or similar event.
As of December 31, 2007, the Company had received subscription advances of $1,667,500 for Series A. In 2008, the Company received
additional subscription advances of $75,000 resulting in total gross proceeds of $1,742,500. On February 4, 2008 the Company closed the private placement. The Company incurred $52,000 of cash transaction costs resulting in net cash proceeds of
$1,691,000. In addition, the Company
F-12
incurred $3,000 of costs for 1,400 warrants exercisable at $9.00 issued to placement agents. Proceeds of $984,000 were allocated to investor warrants using the Black-Scholes method with the
following assumptions as of February 4, 2008: risk free interest rate 2.51%, volatility 95%, fair market value of the Companys common stock on February 4, 2008, and the share price on the closing date of the transaction of $3.54. The
warrants were originally accounted for as freestanding derivative instruments in the consolidated balance sheet formerly under the caption Warrant Liabilities. These warrants were originally classified as a liability because the February
2006 warrants contain an anti-dilution provision in the event of a subsequent dilutive issuance and the potential number of shares issuable exceeded the Companys authorized shares. Changes in fair value were recognized as either a gain or loss
in the consolidated statement of operations under the caption Change in fair value of warrant liabilities. In the second quarter of 2008, the warrants were reclassified to equity as a result of an amendment to the Companys articles
of incorporation approved at the May 21, 2008 annual meeting of shareholders increasing the Companys authorized common. Through May 21, 2008, these warrants were marked to market resulting in a reduction in warrant liabilities in the
balance sheet and an offsetting credit to change in fair value of warrant liabilities in the statement of operations in the amount of $100,000. The remaining fair value of $502,000 was credited to additional paid-in capital in the balance sheet.
In 2015, 25,000 shares of Series A were converted into 4,167 shares of common stock. Prior to 2015, a total of 340,000 shares of Series A
had been converted into 56,721 shares of common stock.
Series B Redeemable Convertible Preferred Stock
On February 12, 2009, the Company entered into a securities purchase agreement (the 10X Agreement) pursuant to which it agreed
to issue and sell to 10X Fund LP, at two or more closings, up to: (i) 3,000,000 shares its Series B-1 and B-2 convertible preferred stock with an aggregate stated value of $6.0 million and convertible into 2,000,000 shares of common stock at
December 31, 2011 and (ii) warrants to purchase 6,000,000 shares of common stock.
Through a series of closings from February
2009 through May 2010, the Company issued and sold, pursuant to the 10X Agreement, a total of (i) 900,000 shares of Series B-1 convertible preferred stock (Series B-1 convertible preferred stock or Series B-1) and
related common stock warrants for 1,800,000 shares of common stock and (ii) 2,100,000 shares of Series B-2 convertible preferred stock (Series B-2 convertible preferred stock or Series B-2) and related warrants for
4,200,000 shares of common stock for total net proceeds of $5,483,000.
On September 22, 2016, the Company entered into a securities
purchase agreement (the B-3 Agreement) pursuant to which it agreed to issue and sell to 10X Fund LP: (i) 1,500,000 shares its Series B-3 convertible preferred stock (Series B-3 preferred stock or
Series B-3) with an aggregate stated value and proceeds of $1.5 million and convertible into 892,349 shares of common stock, and (ii) warrants to purchase up to 669,262 shares of common stock. Also, pursuant to agreements
signed on September 22, 2016 with 10X Fund LP, the Company issued 875,000 warrants to purchase common stock in exchange in exchange for the 10X Fund LP agreeing not to sell any shares of common or preferred stock in the Company for 18 months,
except in limited circumstances. Additionally, as previously agreed to by the 10X Fund LP, the sole holder of the Companys Series B-1, Series B-2 and Series B-3 preferred stock (collectively, with the Series B-1 and Series B-2, the
Series B), in the Second Amended and Restated Certificate of Designation of Preferences, Rights and Limitations of Series B preferred stock we removed the ability of the holders of the Series B to cause a redemption of their shares of
Series B. Accordingly, the Company accounted for the removal of this redemption feature as a modification and reclassified the Series B-1 and Series B-2 preferred stock into permanent equity at September 30, 2016 and forward.
On December 23, 2016, the Company and 10X Fund LP amended the B-3 Agreement whereby the Company agreed to issue and sell to 10X Fund LP an
additional (i) 1,008,000 shares of its B-3 preferred stock with an aggregate stated value and proceeds of $1.0 million and convertible into 896,997 shares of common stock, and (ii) warrants to purchase up to 924,780 shares of common stock.
F-13
The terms of the Series B are as follows:
Dividends
. Holders of the Series B will be entitled to receive cumulative dividends at the rate of 12% for Series B-1 and
B-2 and 8% for Series B-3 per annum (compounding monthly) payable quarterly which may, at the Companys option, be paid in cash or common stock. Pursuant to an agreement with the holder of all shares of Series B, on January 26,
2011, the Company amended and restated the Certificate of Designation of Preferences, Rights and Limitations for the Series B-1 and Series B-2, to provide that dividends are payable in cash or shares of Common Stock valued at 100% of the volume
weighted average price of the Common Stock for the 20 consecutive trading days prior to the dividend payment date on and after September 30, 2011. If the Company does not pay any dividend on the Series B, dividends will accrue at the rate
of 15% per annum (compounding monthly).
Conversion Rights
. Each share of Series B-1 and B-2 is convertible into
two-thirds (approximately 0.667) shares of common stock at the conversion price of $3.00 per share at the option of the holder, at any time. The shares of Series B-3 are convertible into 1,789,346 shares of common stock at the option of the holder,
at any time.
Liquidation Rights
. In the event of any liquidation, dissolution or winding up of the Company, either voluntarily
or involuntarily, the holders of Series B-1 and B-2 will receive $2 per share and holders of B-3 will receive $1 per share plus accrued and unpaid dividends, payable prior and in preference to any distributions to the holders of Common Stock but
pari passu
with the holders of the Series A 12% Convertible Preferred Stock.
Voting Rights
. Except as noted below, the
holder of each share of Series B-3 shall be entitled to the number of votes equal to the number of shares of Common Stock into which such share of Series B-3 would be convertible, and shall otherwise have voting rights and powers equal to the voting
rights and powers of the Common Stock. With respect to the election of directors, the holders of the Series B-3, together with the holders of Series B-1 and Series B-2, shall vote together as a separate class to elect two (2) members of the
Board of Directors (the Series B Directors), and the Company shall take all reasonably necessary or desirable actions within its control (including, without limitation, calling special meetings of the Board of Directors, nominating such
persons designated by the holders of the Series B as directors on the applicable proxy statements and recommending their election) to permit the holders of the Series B to appoint three additional (3) members of the Board of Directors (the
Series B Nominees), who shall be subject to election by all shares of voting stock of the Company voting together as a single group,) until there are no longer any shares of Series B outstanding. The holders of Series B shall vote
together with the holders of Common Stock and other voting capital stock of the Company to elect all other members of the Board of Directors.
Other Restrictions
. So long as any shares of the Series B remain outstanding, the Company may not, without the approval of the
holders of a majority of the shares of Series B outstanding, among other things, (i) change the size of the Companys Board of Directors; (ii) amend or repeal the Companys Articles of Incorporation or Bylaws or file any articles
of amendment designating the preferences, limitations and relative rights of any series of preferred stock, that would alter or change the preferences, rights, privileges or powers of, or restriction provided for the benefit of the Series B;
(iii) create or increase the authorized amount of any additional class or series of shares of stock that is equal to or senior to Series B; (iv) increase or decrease the authorized number of shares of the Series B; (v) purchase,
redeem or otherwise acquire for value any shares of any class of capital stock; (vi) merge or consolidate the Company into or with any other corporation or sell, assign, lease, pledge, encumber or otherwise dispose of all or substantially all
of the Companys assets or those of any subsidiary; (vii) voluntarily or involuntarily liquidate, dissolve or wind up the Company or the Companys business; (viii) pay or declare dividends on any capital stock other than the
Preferred Stock, unless the Series B share ratably in such dividend and all accrued dividends payable with respect to the Series B have been paid prior to the payment or declaration of such dividend; (ix) acquire an equitable interest in, or
the assets or business of any other entity in any form of transaction; (x) create or commit us to enter into a joint venture, licensing agreement or exclusive marketing or other distribution
F-14
agreement with respect to the Companys products, other than in the ordinary course of business; (xi) permit the Company or any subsidiary to sell or issue any security of such
subsidiary to any person or entity other than the Company; (xii) enter into, create, incur, assume or guarantee any indebtedness for borrowed money of any kind (other than indebtedness existing on the initial closing date and approved by Series
B shareholders); (xiii) enter into, create, incur or assume any liens of any kind (other than certain permitted liens); (xiv) issue any common stock or common stock equivalents; (xv) increase the number of shares of the Companys
common stock that may be issued pursuant to options, warrants or rights to employees, directors, officers, consultants or advisors above the number of shares that were authorized for issuance under our 2001 Stock Incentive Plan, 2003 Non-Employee
Director Stock Incentive Plan and 2009 Incentive Compensation Plan as of September 9, 2016.
Warrants
. Each Series B-1 or
B-2 related warrant is exercisable at $3.00 per share of common stock at any time on or after the date of issuance until the fifth anniversary of the respective issue date. The Company may, upon 30 days notice and so long as an effective
registration statement regarding the underlying shares of common stock is in effect, issue a termination notice with respect to (i) each Class A-1 warrant on any trading day on which the market value of the common stock for each of the 15
previous trading days exceeded $7.50 per share and (ii) each Class A-2 warrant on any trading day on which the market value of the common stock for each of the 15 previous trading days exceeded $10.50 per share. All Class A-1 warrants
were exercised for cash proceeds of $3,000,000 in 2011 and 500,000 of the Class A-2 warrants were exercised for cash proceeds of $1,500,000 in 2013. Subsequently, in January 2014, the remaining 500,000 Class A-2 warrants were exercised for
cash proceeds of $1,500,000.
The fair value of the warrants issued in connection with the Series B-1 was $1,296,000 at the date of
issuance based on the following assumptions: an expected life of 5 years, volatility of 118%, risk free interest rate of 1.79% and zero dividends. The Company allocated the gross proceeds based on the relative fair value of the Series B-1 and the
related warrants, resulting in $1,105,000 of the proceeds being allocated to additional paid-in capital. The Company analyzed the Series B-1, post-allocation of the gross proceeds, and determined that there was no beneficial conversion feature at
the date of issuance. The issuance costs of the Series B-1 and the amounts allocated to warrants were recorded as a reduction to the carrying value of the Series B-1 when issued, and are accreted to the redemption value of the Series B-1 through the
earliest redemption date. Due to the redemption feature, the Company has presented the Series B-1 outside of permanent equity, in the mezzanine of the consolidated balance sheets at December 31, 2015. As noted above, the Series B-1 preferred
was reclassified to permanent equity as of September 30, 2016 and forward and accretion was ended.
The fair value of the warrants
issued during the year ended December 31, 2010 in connection with the Series B-2 was $4,148,000 at the dates of issuance based on the following assumptions: an expected life of 5 years, volatility of 126% to 129%, risk free interest
rates of 2.27% to 2.43% and zero dividends. The fair value of the warrants issued during the year ended December 31, 2009 in connection with the Series B-2 was $5,333,000 at the dates of issuance based on the following assumptions: an
expected life of 5 years, volatility of 124% to 127%, risk free interest rates of 1.98% to 2.70% and zero dividends. The Company allocated the gross proceeds based on the relative fair value of the Series B-2 and the related warrants, resulting in
$1,028,000 and $1,732,000 of the proceeds being allocated to additional paid-in capital for the years ended December 31, 2010 and 2009, respectively. The issuance costs of the Series B-2 and the amounts allocated to warrants were recorded as a
reduction to the carrying value of the Series B-2 when issued, and are accreted to the redemption value of the Series B-2 through the earliest redemption dates. Due to the redemption feature, the Company has presented the Series B-2 outside of
permanent equity, in the mezzanine of the consolidated balance sheets at December 31, 2015. As noted above, the Series B-2 preferred was reclassified to permanent equity as of September 30, 2016 and forward and accretion was ended.
F-15
The Company analyzed the Series B-2, post-allocation of the gross proceeds, and determined that
there was a beneficial conversion feature at the dates of issuance. Because the closing price of the common stock on the closing date was greater than the effective conversion price, $388,000 and $628,000 of the proceeds (limited to the allocation
of the proceeds) during the years ended December 31, 2010 and 2009, respectively, were allocated to an embedded beneficial conversion feature of the Series B-2. The amount allocated to the beneficial conversion feature was recorded as a
discount to the Series B-2 is being accreted, with such accretion being charged through the earliest redemption dates. As noted above, the Series B-2 preferred was reclassified to permanent equity as of September 30, 2016 and forward and
accretion was ended.
All warrants issued in the Series B-3 transaction are exercisable at $3.00 per share of common stock at any time on
or after the date of issuance until the seventh anniversary of the respective issue date.
The fair value of the warrants issued in
connection with the September 22, 2016, Series B-3 was $2,262,000 at the date of issuance based on the following assumptions: an expected life of 7 years, volatility of 95%, risk free interest rate of 1.42% and zero dividends. The Company
allocated the gross proceeds of $1.5 million based on the relative fair value of the Series B-3 and the related warrants, resulting in $890,000 of the proceeds being allocated to additional paid-in capital and $610,000 being allocated to the Series
B-3.
The Company analyzed the September 22, 2016, Series B-3, post-allocation of the gross proceeds, and determined that there was a
beneficial conversion feature at the dates of issuance. Because the closing price of the common stock on the closing date was greater than the effective conversion price, an embedded beneficial conversion feature of the Series B-3 amounting to
$991,000 was charged to additional paid in capital and accumulated deficit.
The fair value of the warrants issued in connection with the
December 23, 2016, Series B-3 was $658,000 at the date of issuance based on the following assumptions: an expected life of 7 years, volatility of 96%, risk free interest rate of 2.35% and zero dividends. The Company allocated the gross proceeds
of $1.008 million based on the relative fair value of the Series B-3 and the related warrants, resulting in $394,000 of the proceeds being allocated to additional paid-in capital and $614,000 being allocated to the Series B-3.
The Company analyzed the December 23, 2016, Series B-3, post-allocation of the gross proceeds, and determined that there was a beneficial
conversion feature at the dates of issuance. Because the closing price of the common stock on the closing date was greater than the effective conversion price, an embedded beneficial conversion feature of the Series B-3 amounting to $310,000
was charged to additional paid in capital and accumulated deficit.
Series C 6% Super Dividend Convertible Preferred Stock
On December 29, 2010, the Company designated and authorized the sale and issuance of up to 1,000 shares of Series C Super Dividend
Convertible Preferred Stock (Series C) with a par value of $0.01 and a stated value equal to $10,000 (the Stated Value).
On December 30, 2010, the Company sold and issued 212 shares of Series C at a price of $10,000 per share for gross proceeds of $2,120,000.
The Company incurred $47,000 of cash transaction costs resulting in net cash proceeds of $2,073,000. In addition, the Company issued 500 warrants exercisable at $7.20 to a placement agent which had a de minimis value. Additionally, in January 2011,
the Company sold and issued 13 shares of Series C at a price of $10,000 per share for gross proceeds of $130,000.
The terms of the Series
C are as follows:
Conversion Rights
. Each holder of Series C may convert all, but not less than all, of his Series C shares
plus accrued and unpaid dividends into Common Stock at the price of $6.00 per share of Common Stock (Conversion Price), such that approximately 1,667 shares of Common Stock will be issued per each converted share of Series C (accrued and
unpaid dividends will be issued as additional shares). At December 31, 2016 and 2015, the 176 outstanding shares of Series C were convertible into a total of approximately 293,340 shares of Common Stock.
F-16
Subject to the continuing obligation to pay post conversion dividends, the Company may convert
all, but not less than all, of the Series C (plus all accrued and unpaid dividends) into Common Stock, at the Conversion Price, upon such time that the closing price of the Common Stock is no less than $18.00 per share for 15 consecutive trading
days.
Dividends
. Holders of Series C shall be entitled to receive cumulative non-compounding dividends at the rate per share
of Series C equal to the greater of (i) 6% per annum of the Stated Value (also defined as the Floor) or (ii) 2.5% of net sales until the total dividends paid is equal to the initial investment and 1.25% of net sales
thereafter. The maximum amount each Series C shareholder will receive in dividend payments is equal to $100,000 (the Maximum Payout). For purposes of this dividend calculation, net sales shall mean gross revenues actually received
by the Company, from the sale or licensing of the product DAVANAT
®
(GM-CT-01), less chargebacks, returns, expenses attributable to product recalls, duties, customs, sales tax, freight,
insurance, shipping expenses, allowances and other customary deductions.
The dividend shall be payable in arrears semiannually on
March 31 and September 30, beginning with the first such date after the original issue date; provided, however, that all dividends and all other distributions shall cease, and no further dividends or other distributions shall be paid, in
respect of each share of Series C from and after such time that the Maximum Payout has been paid in respect of such share of Series C. Such dividends shall be payable at the Companys option either in cash or in duly authorized, fully paid
and non-assessable shares of Common Stock valued at the higher of (i) $3.00 per share or (ii) the average of the Common Stock trading price for the ten (10) consecutive trading days ending on the trading day that is immediately prior
to the dividend payment date.
Series C Post Conversion Dividend Right
. In the event that any share of Series C is converted
into Common Stock before the Maximum Payout is paid in respect of such converted share of Series C, then the holder shall have the right to continue to receive dividends in respect of such converted share of Series C equal to the remaining payout
(the Series C Preferred Stock Post Conversion Dividend Right) which shall be equal to the Maximum Payout less the cumulative dividends received through the conversion date. One share of Series C Preferred Stock Post Conversion Dividend
Right shall be issued for each such converted share of Series C. The holder of each Series C Preferred Stock Post Conversion Dividend Right shall receive the remaining payout on an equal basis and in conjunction with the then outstanding shares of
Series C and all the other then outstanding Series C Post Conversion Dividend Rights, in the same manner and subject to the same terms and conditions as applicable to the payment of dividends on each share of Series C, except that for purposes of
calculating the dividend the Floor shall not apply. The Series C Preferred Stock Post Conversion Dividend Right shall have no stated value, liquidation preference or right to any dividends or distributions other than the remaining payout. The Series
C Preferred Stock Post Conversion Right is subject to redemption in the same manner as outstanding Series C shares.
At the date of
issuance, the Series C have an embedded dividend right to continue to receive dividend payments after conversion to common stock (the Series C Post Conversion Dividend Right) which requires bifurcation. The value of this post conversion dividend
right on the date of issuance was determined to be de minimis due to the fact that the payment of a dividend stream other than the 6% dividend and conversion of Series C prior to the Company achieving sales of GM-CT-01 was deemed improbable at that
time. Upon a conversion of the Series C, the Company will be required to record a liability and the related expense during the period of conversion.
In July 2011, 5 shares of Series C were converted into 8,334 shares of common stock and 5 Series C Post Conversion Dividend Rights (Dividend
Rights) were issued. In 2013, 24 shares of Series C were converted into 40,193 shares of common stock and 24 Dividend Rights were issued. In 2014, 20 shares of Series C were converted into 33,756 shares of common stock and 20 Dividend Rights
were issued. Per the terms of the Series C, these Dividend Rights shall continue to participate in dividends, however the Floor shall not apply. At December 31, 2016 and 2015, these Dividend Rights were determined to have a de minimis value, as
the payment of a dividend is considered improbable at this time. The Company will continue to evaluate and assess the Series C Post Conversion Dividend Right for each reporting period.
F-17
Liquidation Rights
. In the event of any liquidation, dissolution or winding up of the
Company, either voluntarily or involuntarily, the holders of Series C will receive $10,000 per share plus accrued and unpaid dividends, payable prior and in preference to any distributions to the holders of Common Stock but after and subordinate to
the Series A 12% Convertible Preferred Stock (Series A), Series B-1 and Series B-2, subject to the Maximum Payout.
Redemption
. Upon a sale of the Company, the Company shall redeem all of the then outstanding shares of Series C and Series C
Preferred Stock Post Conversion Rights within thirty (30) days after the transaction constituting the sale of the Company is closed and such closing is fully funded. The price to redeem a share of Series C and each redeemed Series C Preferred
Stock Post Conversion Redemption Right shall be equal to (i) (A) the applicable return on investment (ROI) percentage, multiplied by (B) $10,000, minus (ii) the cumulative dividends received through the redemption
date. The redemption price shall be payable at the Companys option either in cash or in shares of common stock valued at the higher of (i) $3.00 per share or (ii) the average market price for the ten consecutive trading days ending
immediately prior to the date of redemption. The ROI Percentage shall mean the percentage that applies as of the redemption date, as follows:
ROI
Percentage
|
|
|
200%
|
|
before the second anniversary of the date of issuance;
|
250%
|
|
on or after the second anniversary of the date of issuance, but before the third anniversary of the
date of issuance;
|
300%
|
|
on or after the third anniversary of the date of issuance, but before the fourth anniversary of the
date of issuance;
|
350%
|
|
on or after the fourth anniversary of the date of issuance, but before the fifth anniversary of the
date of issuance;
|
400%
|
|
on or after the fifth anniversary of the date of issuance, but before the sixth anniversary of the
date of issuance;
|
450%
|
|
on or after the sixth anniversary of the date of issuance, but before the seventh anniversary of the
date of issuance;
|
500%
|
|
on or after the seventh anniversary of the date of issuance, but before the eighth anniversary of the
date of issuance; and
|
550%
|
|
on or after the eighth anniversary of the date of issuance, but before the ninth anniversary of the
date of issuance.
|
Due to the redemption feature, the Company has presented the Series C outside of permanent equity, in the mezzanine of the consolidated
balance sheets at December 31, 2016 and 2015. At December 31, 2016, the Series C redemption value was $7,262,000.
Voting
Rights
. The Series C shares have no voting rights.
F-18
6. Warrants
Warrant activity is summarized as follows:
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
5,470,995
|
|
Issued
|
|
|
3,571,425
|
|
Cancelled
|
|
|
(133,834
|
)
|
Exercised
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
8,908,586
|
|
|
|
|
|
|
Issued
|
|
|
4,579,710
|
|
Cancelled
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
13,488,296
|
|
|
|
|
|
|
The following table summarizes information with regard to outstanding warrants issued in connection with
equity and debt financings and consultants as of December 31, 2016.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued in Connection With
|
|
Number
Issued
|
|
|
Exercise
Price
|
|
|
Exercisable Date
|
|
|
Expiration Date
|
|
February 12, 2009 Series B-1 Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.00 Investor WarrantsClass B
|
|
|
1,200,000
|
|
|
$
|
3.00
|
|
|
|
February 12, 2009
|
|
|
|
February 12, 2019
|
|
May 13, 2009 Series B-2 Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.00 Investor WarrantsClass B
|
|
|
600,000
|
|
|
$
|
3.00
|
|
|
|
May 13, 2009
|
|
|
|
May 13, 2019
|
|
June 30, 2009 Series B-2 Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.00 Investor WarrantsClass B
|
|
|
333,333
|
|
|
$
|
3.00
|
|
|
|
June 30, 2009
|
|
|
|
June 30, 2019
|
|
August 12, 2009 Series B-2 Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.00 Investor WarrantsClass B
|
|
|
200,000
|
|
|
$
|
3.00
|
|
|
|
August 12, 2009
|
|
|
|
August 12, 2019
|
|
September 30, 2009 Series B-2 Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.00 Investor WarrantsClass B
|
|
|
216,666
|
|
|
$
|
3.00
|
|
|
|
September 30, 2009
|
|
|
|
September 30, 2019
|
|
November 4, 2009 Series B-2 Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.00 Investor WarrantsClass B
|
|
|
206,666
|
|
|
$
|
3.00
|
|
|
|
November 4, 2009
|
|
|
|
November 4, 2019
|
|
December 8, 2009 Series B-2 Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.00 Investor WarrantsClass B
|
|
|
216,667
|
|
|
$
|
3.00
|
|
|
|
December 8, 2009
|
|
|
|
December 8, 2019
|
|
January 29, 2010 Series B-2 Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.00 Investor WarrantsClass B
|
|
|
216,667
|
|
|
$
|
3.00
|
|
|
|
January 29, 2010
|
|
|
|
January 29, 2020
|
|
March 8, 2010 Series B-2 Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.00 Investor WarrantsClass B
|
|
|
223,334
|
|
|
$
|
3.00
|
|
|
|
March 8, 2010
|
|
|
|
March 8, 2020
|
|
April 30, 2010 Series B-2 Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.00 Investor WarrantsClass B
|
|
|
206,667
|
|
|
$
|
3.00
|
|
|
|
April 30, 2010
|
|
|
|
April 30, 2020
|
|
May 10, 2010 Series B-2 Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.00 Investor WarrantsClass B
|
|
|
380,000
|
|
|
$
|
3.00
|
|
|
|
May 10, 2010
|
|
|
|
May 10, 2020
|
|
March 28, 2012 Offering Warrants
|
|
|
1,317,161
|
|
|
$
|
5.63
|
|
|
|
March 28, 2012
|
|
|
|
March 28, 2017
|
|
October 30, 2014 Consultant Warrants
|
|
|
20,000
|
|
|
$
|
5.45
|
|
|
|
October 30, 2014
|
|
|
|
October 30, 2017
|
|
November 25, 2015 Offering Warrants
|
|
|
3,571,425
|
|
|
$
|
2.50
|
|
|
|
May 25, 2016
|
|
|
|
May 25, 2021
|
|
September 22, 2016 Series B-3 Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.00 Investor Warrants
|
|
|
698,158
|
|
|
$
|
3.00
|
|
|
|
September 22, 2016
|
|
|
|
September 22, 2023
|
|
September 29, 2016 Series B-3 Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.00 Investor Warrants
|
|
|
846,100
|
|
|
$
|
3.00
|
|
|
|
September 29, 2016
|
|
|
|
September 29, 2023
|
|
December 22, 2016 Private placement warrants
|
|
|
1,466,204
|
|
|
$
|
5.00
|
|
|
|
December 22, 2016
|
|
|
|
December 23, 2023
|
|
F-19
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Issued in Connection With
|
|
Number
Issued
|
|
|
Exercise
Price
|
|
|
Exercisable Date
|
|
|
Expiration Date
|
|
December 23, 2016 Series B-3 Transaction
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
$3.00 Investor Warrants
|
|
|
924,780
|
|
|
$
|
3.00
|
|
|
|
December 23, 2016
|
|
|
|
December 23, 2023
|
|
December 28, 2016 Private placement warrants
|
|
|
644,468
|
|
|
$
|
5.00
|
|
|
|
December 28, 2016
|
|
|
|
December 28, 2023
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total outstanding warrants
|
|
|
13,488,296
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Consultant Warrants
In October 2014, the Company granted warrants to a consultant for the purchase of 20,000 shares of common stock at an exercise price of $5.45
per share. The warrants were valued at $76,000 on issuance based on the following assumptions: an expected life of 3 years, volatility of 117%, risk free interest rate of 0.91% and zero dividends. The warrants vested immediately and the Company
recognized an expense of $76,000 related to these warrants during the year ended December 31, 2014. These warrants remain outstanding at December 31, 2016.
Offering Warrants
On March 28, 2012, the Company sold and issued 1,333,361 Units (2,666,722 shares of common stock and related $5.63 warrants to purchase
1,333,361 shares of common stock) for gross proceeds of $12.0 million (net cash proceeds of $10,403,000 after the underwriting discount and offering costs). The warrants were valued at $4,445,000 as of the issuance date of March 28, 2012, using
the closing price of $4.20, a life of 5 years, a volatility of 119% and a risk free interest rate of 1.05%. Based upon the Companys analysis of the criteria contained in ASC Topic 815-40, Derivatives and Hedging Contracts in
Entitys Own Equity the Company has determined that warrants issued in connection with this financing transaction were not derivative liabilities and therefore, were recorded as additional paid-in capital. At December 31, 2016,
1,317,161 of these warrants remain outstanding and have an expiration date of March 28, 2017.
7. Stock-Based Compensation
Summary of Stock-Based Compensation Plans
At December 31, 2016, the Company has a stock-based compensation plan where the Companys common stock has been made available for
equity-based incentive grants as part of the Companys compensation programs. In February 2009, the Company adopted the 2009 Incentive Compensation Plan (the 2009 Plan) which originally provided for the issuance of up to 3,333,334,
which was subsequently increased to 4,733,334 in May 2014, shares of the Companys common stock in the form of options, stock appreciation rights, restricted stock and other stock-based awards to employees, officers, directors, consultants and
other eligible persons. At December 31, 2016, 166 shares were available for future grant under the 2009 Plan.
In addition, the
Company has awarded 1,477,379 non-plan stock option grants to employees and non-employees. These non-plan grants have vesting periods and expiration dates similar to those options granted under the Incentive Plans. At December 31, 2016,
1,416,669 non-plan grants were outstanding.
F-20
Stock-Based Compensation
Following is the stock-based compensation expense related to common stock options, restricted common stock and common stock warrants:
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2016
|
|
|
2015
|
|
Research and development
|
|
$
|
831
|
|
|
$
|
1,018
|
|
General and administrative
|
|
|
1,648
|
|
|
|
2,382
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation expense
|
|
$
|
2,479
|
|
|
$
|
3,400
|
|
|
|
|
|
|
|
|
|
|
The fair value of the options granted is determined using the Black-Scholes option-pricing model. The following
weighted average assumptions were used:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
Risk-free interest rate
|
|
|
1.49
|
%
|
|
|
1.65
|
%
|
Expected life of the options
|
|
|
6 years
|
|
|
|
6 years
|
|
Expected volatility of the underlying stock
|
|
|
96
|
%
|
|
|
101
|
%
|
Expected dividend rate
|
|
|
0
|
%
|
|
|
0
|
%
|
As noted above, the fair value of stock options is determined by using the Black-Scholes option pricing model.
For all options granted since January 1, 2006 the Company has generally used option terms of between 5 to 10 years, generally with 5 to 6 years representing the estimated life of options granted to employees. The volatility of the common stock
is estimated using historical volatility over a period equal to the expected life at the date of grant. The risk-free interest rate used in the Black-Scholes option pricing model is determined by reference to historical U.S. Treasury constant
maturity rates with terms equal to the expected terms of the awards. An expected dividend yield of zero is used in the option valuation model, because the Company does not expect to pay any cash dividends in the foreseeable future. At
December 31, 2016, the Company does not anticipate any option awards will be forfeited in the calculation of compensation expense due to the limited number of employees that receive stock option grants and the Companys historical employee
turnover.
The following table summarizes the stock option activity in the stock based compensation plans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
Outstanding, December 31, 2014
|
|
|
3,332,617
|
|
|
$
|
5.79
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
454,000
|
|
|
|
3.23
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(348,718
|
)
|
|
|
4.42
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(95,574
|
)
|
|
|
1.80
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
3,342,325
|
|
|
$
|
5.70
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,434,750
|
|
|
|
0.97
|
|
|
|
|
|
|
|
|
|
Forfeited/Cancelled
|
|
|
(120,187
|
)
|
|
|
3.41
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
4,656,888
|
|
|
$
|
4.30
|
|
|
|
6.83
|
|
|
$
|
120
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2016
|
|
|
3,384,238
|
|
|
$
|
5.44
|
|
|
|
5.78
|
|
|
$
|
22
|
|
The aggregate intrinsic value in the table above represents the total pre-tax amount, net of exercise price,
which would have been received by option holders if all option holders had exercised all options with an exercise price lower than the market price on December 31, 2016, based on the closing price of the Companys common stock of $0.98 on
that date.
F-21
The weighted-average grant-date fair values of options granted during 2016 and 2015 were $0.97
and $2.57, respectively. As of December 31, 2016 and 2015, there were unvested options to purchase 1,272,650 and 801,026 shares of common stock, respectively. Total expected unrecognized compensation cost related to such unvested options is
$1,194,000 at December 31, 2016, which is expected to be recognized over a weighted-average period of 1.14 years.
During the year
ended December 31, 2015, the Company issued shares totaling 95,574 upon the exercise of options valued at $146,000. During the year ended December 31, 2015, the Company received $0 for the exercise of stock options. During 2015, 212,501
options were exercised on a cashless basis resulting in the issuance of 95,574 shares. The intrinsic value of options exercised during the year ended December 31, 2015, was $313,000. There were no options exercised during the year ended
December 31, 2016.
During the years ended December 31, 2016 and 2015, 963,126 and 535,692 options became vested, respectively.
The total grant date fair value of options vested during the years ended December 31, 2016 and 2015 was $3,682,000 and $2,753,000, respectively.
The following table summarizes additional information regarding outstanding and exercisable options under our stock based compensation plans at
December 31, 2016:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise
Price (Range)
|
|
Number of
Shares
|
|
|
Weighted
Average
Remaining
Contractual
Life
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
|
|
|
|
|
|
|
(in years)
|
|
|
|
|
|
|
|
|
|
|
$0.87 1.00
|
|
|
1,157,250
|
|
|
|
9.9
|
|
|
$
|
0.88
|
|
|
|
206,250
|
|
|
$
|
0.88
|
|
$1.37 1.83
|
|
|
341,668
|
|
|
|
8.2
|
|
|
|
1.45
|
|
|
|
197,147
|
|
|
|
1.51
|
|
$2.08 2.79
|
|
|
810,000
|
|
|
|
6.0
|
|
|
|
2.28
|
|
|
|
703,999
|
|
|
|
2.21
|
|
$3.45 4.41
|
|
|
564,517
|
|
|
|
7.3
|
|
|
|
3.82
|
|
|
|
498,712
|
|
|
|
3.87
|
|
$6.24 7.56
|
|
|
1,466,953
|
|
|
|
4.2
|
|
|
|
6.99
|
|
|
|
1,466,953
|
|
|
|
7.00
|
|
$13.38
|
|
|
316,500
|
|
|
|
7.0
|
|
|
|
13.38
|
|
|
|
311,177
|
|
|
|
13.38
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
4,656,888
|
|
|
|
6.8
|
|
|
$
|
4.30
|
|
|
|
3,384,238
|
|
|
$
|
5.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the restricted stock grant activity in the Companys equity incentive
plans from December 31, 2014 through December 31, 2016:
|
|
|
|
|
|
|
Shares
|
|
Outstanding, December 31, 2014
|
|
|
416,670
|
|
Granted
|
|
|
337,935
|
|
Exercised
|
|
|
|
|
Options forfeited/cancelled
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2015
|
|
|
754,605
|
|
Granted
|
|
|
|
|
Exercised
|
|
|
|
|
Options forfeited/cancelled
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2016
|
|
|
754,605
|
|
|
|
|
|
|
On March 12, 2015, the Company granted 81,352 shares of restricted stock to non-employee directors as a
component of their compensation. A total of 77,784 shares were issued to seven directors representing non-cash compensation cost of $280,000 which will be recognized on a straight-line basis from the grant date through December 15, 2016, when
the restricted shares vested in full. A total of 3,568 shares were issued to
F-22
two directors, who were not nominated for reelection, representing non-cash compensation cost of $12,845 that will be recognized on a straight-line basis from the grant date through
December 15, 2016, when the restricted shares vested in full.
On April 8, 2015, the Company granted 177,618 shares of restricted
stock to non-employee directors in exchange for cancelation of 222,615 stock options. As the exchange was made at fair value, there was no additional non-cash compensation expense recorded in accordance with FASB ASC 718-20. Additionally, on
April 8, 2015, the Company granted 71,378 shares of restricted stock to one non-employee director representing $236,975 of non-cash compensation expense which was recorded on a straight-line basis from grant date to December 15, 2016, when
the restricted shares vested in full. Also, in April and May 2015, the Company granted a total of 7,587 shares of restricted stock to four non-employee directors for service as committee chairs or lead independent director representing $23,500 of
non-cash compensation expense which was be recorded on a straight-line basis from grant date to December 15, 2016, when the restricted shares vested in full.
Other Stock Based Compensation Transactions
In October 2015, the Company entered into an agreement with a consultant that provided for the grant of 30,000 shares of common stock. The
Company recognized an expense of $71,000, representing the fair value of the common stock at issuance, during the fourth quarter of 2015.
8. Loss Per
Share
Basic net loss per common share is computed by dividing the net loss available to common stockholders by the weighted average
number of common shares outstanding during the period. Diluted net loss per common share is computed by dividing the net loss available to common stockholders by the weighted average number of common shares and other potential common shares then
outstanding. Potential common shares consist of common shares issuable upon the assumed exercise of in-the-money stock options and warrants and potential common shares related to the conversion of the preferred stock. The computation of diluted net
loss per share does not assume the issuance of common shares that have an anti-dilutive effect on net loss per share.
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
(in thousands, except share
and per share amounts)
|
|
|
|
2016
|
|
|
2015
|
|
Net loss
|
|
$
|
(21,436
|
)
|
|
$
|
(20,027
|
)
|
Preferred stock dividends
|
|
|
(741
|
)
|
|
|
(868
|
)
|
Preferred stock accretion
|
|
|
(173
|
)
|
|
|
(229
|
)
|
|
|
|
|
|
|
|
|
|
Net loss applicable to common stockholders
|
|
$
|
(22,350
|
)
|
|
$
|
(21,124
|
)
|
|
|
|
|
|
|
|
|
|
Basic and diluted net loss per share
|
|
$
|
(0.76
|
)
|
|
$
|
(0.88
|
)
|
Shares used in computing basic and diluted net loss per share
|
|
|
29,216
|
|
|
|
24,120
|
|
F-23
Dilutive shares which could exist pursuant to the exercise of outstanding stock instruments and
which were not included in the calculation because their affect would have been anti-dilutive are as follows:
|
|
|
|
|
|
|
|
|
|
|
Year Ended
December 31,
|
|
|
|
2016
(Shares)
|
|
|
2015
(Shares)
|
|
Warrants to purchase shares of common stock
|
|
|
13,488,296
|
|
|
|
8,908,586
|
|
Options to purchase shares of common stock
|
|
|
4,656,888
|
|
|
|
3,342,325
|
|
Shares of common stock issuable upon conversion preferred stock
|
|
|
4,312,282
|
|
|
|
2,522,936
|
|
|
|
|
|
|
|
|
|
|
|
|
|
22,457,466
|
|
|
|
14,807,681
|
|
|
|
|
|
|
|
|
|
|
9. Commitments and Contingencies
Lease Commitments
In September 2012, the Company entered into an operating lease for office space in Norcross, GA for a term of twenty-six months, beginning on
October 1, 2012 and ending November 30, 2014 at a rate of approximately $3,000 per month. In June 2014, the Company signed an amendment to the lease extending the term through November 30, 2017 with a base monthly rental of
approximately $3,300 through the extended term. The original lease provided for free rent for the first two months of the lease and required a security deposit of $6,000. In addition to base rental payments included in the contractual obligations
table above, the Company is responsible for our pro-rata share of the operating expenses for the building.
Rent expense under this
operating lease was $50,000 and $47,000 for the years ended December 31, 2016 and 2015, respectively. Future minimum payments under this lease as of December 31, 2016 are as follows (in thousands):
|
|
|
|
|
Year ended December 31,
|
|
|
|
2017
|
|
|
41
|
|
|
|
|
|
|
Total
|
|
$
|
41
|
|
|
|
|
|
|
Shareholder Class Actions and Derivative Lawsuits
Between July 30, 2014, and August 6, 2014, three putative class action complaints were filed in the United States District Court for
the District of Nevada (the Nevada District Court) alleging claims for purported violations of the federal securities laws against the Company and certain of its officers and directors on behalf of all persons who purchased or otherwise
acquired the Companys stock between January 6, 2014 and July 28, 2014. On August 22, 2014, the Nevada District Court entered an order consolidating the three cases, relieving the defendants of any obligation to respond to the
complaints then on file, and providing that defendants may respond to a consolidated amended complaint to be filed by a lead plaintiff(s) to be appointed pursuant to the Private Securities Litigation Reform Act of 1995. On January 5, 2015, the
Nevada District Court granted Defendants motion to transfer the consolidated putative securities class action to the United States District Court for the Northern District of Georgia. On March 24, 2015, the Court appointed a lead
plaintiff (Plaintiff). Plaintiff filed his Consolidated Class Action Complaint (the Complaint) on May 8, 2015. The Complaint asserts claims on behalf of a putative class of all persons who purchased or otherwise acquired
the Companys common stock between October 25, 2013 and July 28, 2014. The Complaint alleges that the Company and certain of its officers and directors (the Class Action Individual Defendants) violated Section 10(b)
of the Securities Exchange Act of 1934 (the Exchange Act) and SEC Rule 10b-5 through allegedly false or misleading statements in certain SEC filings, press releases and other public statements. The Complaint further alleges that the
Class Action Individual Defendants and one of the Companys shareholders face liability for the alleged Section 10(b) and Rule 10b-5 violations pursuant to Section 20(a) of the Exchange Act. The Complaint seeks class certification,
unspecified monetary damages, costs, and attorneys fees. The Company disputes the
F-24
allegations and filed a motion to dismiss the Complaint on June 26, 2015. On December 30, 2015, the Court dismissed the putative class action with prejudice and entered a final judgment
in favor of the defendants. Plaintiff filed a notice of appeal seeking review of the dismissal order and final judgment. Following full briefing and oral argument of the appeal, the United States Court of Appeals for the Eleventh Circuit entered an
order on December 15, 2016, affirming the judgment dismissing all claims against the defendants with prejudice.
On August 1 and
25, 2014, persons claiming to be Galectin shareholders filed putative shareholder derivative complaints in the Nevada District Court, seeking recovery on behalf of the Company against certain of the Companys directors and officers. On
September 10, 2014, the Nevada District Court entered an order consolidating the two cases, relieving the defendants of any obligation to respond to the initial complaints, and providing that defendants may respond to a consolidated complaint
to be filed by the plaintiffs. On January 5, 2015, the Nevada District Court granted Defendants motion to transfer the consolidated putative derivative litigation to the United States District Court for the Northern District of Georgia
(hereinafter referred to as the Georgia Federal Derivative Action.). The plaintiffs filed a consolidated complaint on February 27, 2015. On April 6, 2015, the Company and defendants filed motions to dismiss the consolidated
complaint. Rather than respond to those motions, the plaintiffs sought and obtained leave to file an amended complaint. Plaintiffs filed their amended complaint (the Complaint) on May 26, 2015. The Complaint alleges that certain of
the Companys directors and officers (the Derivative Action Individual Defendants) breached their fiduciary duties to the Companys shareholders by causing or permitting the Company to make allegedly false and misleading public
statements concerning the Companys financial and business prospects. The Complaint also alleges that the Derivative Action Individual Defendants violated the federal securities laws by allegedly making false or misleading statements of
material fact in the Companys proxy filings, committed waste of corporate assets, were unjustly enriched, and that certain defendants breached their fiduciary duties through allegedly improper sales of Galectin stock. In addition, the
Complaint alleges that the Derivative Action Individual Defendants and one of the Companys shareholders aided and abetted the alleged breaches of fiduciary duties. The Complaint seeks unspecified monetary damages on behalf of the Company,
corporate governance reforms, disgorgement of profits, benefits and compensation by the defendants, costs, and attorneys and experts fees. The Company and defendants filed motions to dismiss the Complaint on July 8, 2015. On
December 30, 2015, the United States District Court for the Northern District of Georgia dismissed the Georgia Federal Derivative Action with prejudice and entered a final judgment in favor of the defendants. Plaintiffs filed a notice of appeal
seeking review of the dismissal order and final judgment. On July 7, 2016, the United States Court of Appeals for the Eleventh Circuit dismissed the appeal as the Plaintiffs failed to timely file their appeal brief. In September 2016, the Board
received a demand letter from one of the plaintiffs in the Georgia Federal Derivative Action. The demand letter, among other things, requests that the Board investigate the conduct alleged in the Complaint and implement certain remedial measures
purportedly designed to address the alleged conduct. It is expected that the Board will consider the demand letter in due course and in light of the related pending shareholder litigation described herein.
On August 29, 2014, another alleged Galectin shareholder filed a putative shareholder derivative complaint in state court in Las Vegas,
Nevada, seeking recovery on behalf of the Company against the same Galectin directors and officers who are named as defendants in the derivative litigation pending in the Georgia Federal Derivative Action. The plaintiff in the Nevada action
subsequently filed first and second amended complaints. The second amended complaint alleges claims for breach of fiduciary duties, unjust enrichment, and waste of corporate assets, based on allegations that are substantially similar to those
asserted in the Georgia Federal Derivative Action (except that the Nevada action does not allege violations of the federal securities laws and does not assert any claim against the Galectin shareholder named as a defendant in the Georgia Federal
Derivative Action), and seeks unspecified monetary damages on behalf of the Company, corporate governance reforms, disgorgement of profits, benefits and compensation by the defendants, costs, and attorneys and experts fees. The Company
and defendants filed motions to dismiss the second amended complaint on April 22, 2015. On April 29, 2015, the plaintiffs in the Georgia Federal Derivative Action (the Intervenor Plaintiffs) filed a motion to intervene in the
Nevada action which, among other things, raised questions regarding the Nevada plaintiffs standing. Thereafter, the Nevada plaintiff filed a motion to join additional plaintiffs. At a hearing held
F-25
on June 11, 2015, the Nevada court: (i) granted the Intervenor Plaintiffs motion to intervene; (ii) directed the Intervenor Plaintiffs to file a complaint in intervention;
(iii) directed the Nevada plaintiff to file a motion for leave to file a further amended complaint to add additional plaintiffs; (iv) stated that the defendants motions to dismiss the second amended complaint were denied at
this point; (v) ordered the Nevada action stayed until December 11 , 2015; and (vi) directed the parties to submit a status report on December 11, 2015, updating the court on the progress and status of the Georgia Federal
Derivative Action. On July 9, 2015, pursuant to the Nevada State Courts instruction, the Intervenor Plaintiffs filed a complaint-in-intervention in Nevada State Court, asserting similar claims to the ones they alleged in the Georgia
Federal Derivative Action described above. On December 11, 2015, further to the Nevada State Courts instruction, the parties submitted status reports detailing the status of the Georgia Federal Derivative Action. On January 5, 2016,
the Nevada State Court held a status conference during which the dismissal of the Georgia Federal Derivative Action was discussed. Subsequent to that conference, on January 19, 2016, the defendants filed a motion to dismiss the Nevada State
Court litigation based on the dismissal of the similar Georgia Federal Derivative Action, among other grounds. Following full briefing and a hearing on March 3, 2016, the Nevada State Court granted dismissal of the Nevada State Court
litigation. Notice of Entry of the Nevada State Courts order dismissing the Nevada State Court litigation was docketed on June 21, 2016. The Nevada plaintiff and Intervenor Plaintiffs (Appellants) have filed notices of appeal
seeking review of the Nevada State Courts dismissal order. It is expected that the appeal will be fully briefed by May 2017.
Estimating an amount or range of possible losses resulting from litigation proceedings is inherently difficult and requires an extensive
degree of judgment, particularly where the matters involve indeterminate claims for monetary damages, are in the early stages of the proceedings, and are subject to appeal. In addition, because most legal proceedings are resolved over extended
periods of time, potential losses are subject to change due to, among other things, new developments, changes in legal strategy, the outcome of intermediate procedural and substantive rulings and other parties settlement posture and their
evaluation of the strength or weakness of their case against us. For these reasons, we are currently unable to predict the ultimate timing or outcome of, or reasonably estimate the possible losses or a range of possible losses resulting from, the
matters described above. Based on information currently available, the Company does not believe that any reasonably possible losses arising from currently pending legal matters will be material to the Companys results of operations or
financial condition. However, in light of the inherent uncertainties involved in such matters, an adverse outcome in one or more of these matters could materially and adversely affect the Companys financial condition, results of operations or
cash flows in any particular reporting period.
Other Legal Proceedings
The Company records accruals for such contingencies to the extent that the Company concludes that their occurrence is probable and the related
damages are estimable. There are no other pending legal proceedings except as noted above.
10. Galectin Sciences LLC
In January 2014, we created Galectin Sciences, LLC (the LLC or Investee), a collaborative joint venture co-owned by SBH
Sciences, Inc. (SBH), to research and develop small organic molecule inhibitors of galectin-3 for oral administration. The LLC was initially capitalized with a $400,000 cash investment to fund future research and development activities,
which was provided by the Company, and specific in-process research and development (IPR&D) contributed by SBH. The estimated fair value of the IPR&D contributed by SBH, on the date of contribution, was
$400,000. Initially, the Company and SBH have a 50% equity ownership interest in the LLC, with neither party having control over the LLC. Accordingly from inception through the fourth quarter of 2014, the Company accounted for its
investment in the LLC using the equity method of accounting. Under the equity method of accounting, the Companys investment was initially recorded at cost with subsequent adjustments to the carrying value to recognize additional
investments in or distributions from the Investee, as well as the Companys share of the Investees earnings, losses and/or changes in capital. The estimated fair value of the IPR&D contributed to the LLC was immediately expensed
F-26
upon contribution as there was no alternative future use available at the point of contribution. The operating agreement provides that if either party does not desire to contribute its equal
share of funding required after the initial capitalization, then the other party, providing all of the funding, will have its ownership share increased in proportion to the total amount contributed from inception. In the fourth quarter of 2014,
after the LLC had expended the $400,000 in cash, SBH decided not to contribute its share of the funding required. As a result, the Company contributed the $73,000 needed for the fourth quarter of 2014 expenses of the LLC. The Company contributed
$659,000 and $687,000 for the LLC expenses in 2016 and 2015, respectively, and SBH contributed $50,000 in 2016. As of December 31, 2016, the Companys ownership percentage in the LLC was 80.3%. The Company accounts for the interest in the
LLC as a consolidated, less than wholly owned subsidiary. Because the LLCs equity is immaterial, the value of the non-controlling interest is also deemed to be immaterial. The Companys portion of the LLCs net loss for 2014, prior
to the change in accounting discussed previously, was $400,000, which includes the Companys proportionate share of the non-cash charge associated with the contributed IPR&D of $200,000.
11. Income Taxes
The components of the
net deferred tax assets are as follows at December 31:
|
|
|
|
|
|
|
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(in thousands)
|
|
Operating loss carryforwards
|
|
$
|
44,219
|
|
|
$
|
37,152
|
|
Tax credit carryforwards
|
|
|
1,195
|
|
|
|
1,195
|
|
Other temporary differences
|
|
|
5,707
|
|
|
|
5,048
|
|
|
|
|
|
|
|
|
|
|
|
|
|
51,121
|
|
|
|
43,395
|
|
Less valuation allowance
|
|
|
(51,121
|
)
|
|
|
(43,395
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
The primary factors affecting the Companys income tax rates were as follows:
|
|
|
|
|
|
|
|
|
|
|
2015
|
|
|
2014
|
|
Tax benefit at U.S. statutory rates
|
|
|
(34%)
|
|
|
|
(34%)
|
|
State tax benefit
|
|
|
(3.7%)
|
|
|
|
(5.3%)
|
|
Permanent differences
|
|
|
2.3%
|
|
|
|
5.4%
|
|
Expiring state NOLs
|
|
|
1.6%
|
|
|
|
1.4%
|
|
Changes in valuation allowance
|
|
|
33.8%
|
|
|
|
32.5%
|
|
|
|
|
|
|
|
|
|
|
|
|
|
0%
|
|
|
|
0%
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2016, the Company has federal and state net operating loss carryforwards totaling
$135,945,000 and $97,530,000 respectively, which expire through 2035. The net operating losses include Federal and State excess benefits related to stock options of $707,000 that will be charged to additional paid-in capital when utilized. In
addition, the Company has federal and state research and development credits of $998,000 and $196,000, respectively, which expire through 2034. Ownership changes, as defined by Section 382 of the Internal Revenue Code, may have limited the
amount of net operating loss carryforwards that can be utilized annually to offset future taxable income. Subsequent ownership changes could further affect the limitation in future years. Because of the Companys limited operating history and
its recorded losses, management has provided, in each of the last two years, a 100% valuation allowance against the Companys net deferred tax assets.
The Company is subject to taxation in the U.S. and various states. Based on the history of net operating losses all jurisdictions and tax years
are open for examination until the operating losses are utilized or the statute of limitations expires. As of December 31, 2016 and 2015, the Company does not have any significant uncertain tax positions.
F-27