NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
NOTE 1. DESCRIPTION OF BUSINESS
Tenax
Therapeutics, Inc. (the “Company”) was originally
formed as a New Jersey corporation in 1967 under the name Rudmer,
David & Associates, Inc., and subsequently changed its
name to Synthetic Blood International, Inc. On June 17, 2008,
the stockholders of Synthetic Blood International approved the
Agreement and Plan of Merger dated April 28, 2008, between
Synthetic Blood International and Oxygen Biotherapeutics, Inc., a
Delaware corporation. Oxygen Biotherapeutics was formed on
April 17, 2008 by Synthetic Blood International to participate
in the merger for the purpose of changing the state of domicile of
Synthetic Blood International from New Jersey to Delaware.
Certificates of Merger were filed with the states of New Jersey and
Delaware and the merger was effective June 30, 2008. Under the
Plan of Merger, Oxygen Biotherapeutics was the surviving
corporation and each share of Synthetic Blood International common
stock outstanding on June 30, 2008 was converted to one share
of Oxygen Biotherapeutics common stock. On September 19, 2014, the
Company changed its name to Tenax Therapeutics, Inc.
On October 18, 2013, the Company created a wholly owned subsidiary,
Life Newco, Inc., a Delaware corporation (“Life
Newco”), to acquire certain assets of Phyxius Pharma, Inc., a
Delaware corporation (“Phyxius”) pursuant to an Asset
Purchase Agreement, dated October 21, 2013 (the “Asset
Purchase Agreement”), by and among the Company, Life Newco,
Phyxius and the stockholders of Phyxius (the “Phyxius
Stockholders”). As further discussed in Note 5 below, on
November 13, 2013, under the terms and subject to the conditions of
the Asset Purchase Agreement, Life Newco acquired certain assets,
including a license granting Life Newco an exclusive,
sublicenseable right to develop and commercialize pharmaceutical
products containing levosimendan, 2.5 mg/ml concentrate for
solution for infusion / 5ml vial in the United States and
Canada
.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING
POLICIES
Basis of Presentation
The accompanying unaudited condensed consolidated financial
statements include all adjustments (consisting of normal and
recurring adjustments) necessary for a fair presentation of these
financial statements. The condensed consolidated balance sheet at
December 31, 2018 has been derived from the Company’s audited
consolidated financial statements included in its Annual Report on
Form 10-K for the period ended December 31, 2018. Certain footnote
disclosures normally included in financial statements prepared in
accordance with accounting principles generally accepted in the
United States (“GAAP”) have been condensed or omitted
pursuant to Article 8 of Regulation S-X of the Securities and
Exchange Commission (“SEC”) rules and regulations.
Operating results for the three and six-month period ended June 30,
2019 are not necessarily indicative of results for the full year or
any other future periods. As such, it is suggested that these
condensed consolidated financial statements be read in conjunction
with the consolidated financial statements and notes thereto
included in the Company’s Annual Report on Form 10-K for
the period ended December 31, 2018.
Reclassifications
Certain prior period amounts in the accompanying condensed
consolidated financial statements have been reclassified to conform
to current period presentation.
The Company adjusted certain
previously reported financial statements to reflect the adoption of
ASU 2017-11 during the year ended December 31, 2018. The Company
has determined the impact of the adjustment on its condensed
consolidated financial statements for the six months ended June 30,
2019 not to be material.
Reverse Stock Split
The
Company initiated a 1-for-20 reverse stock split effective February
23, 2018. All shares and per share amounts in these condensed
consolidated financial statements and notes thereto have been
retroactively adjusted to give effect to the reverse stock
split.
Going Concern
Management
believes the accompanying condensed consolidated financial
statements have been prepared in conformity with GAAP, which
contemplate continuation of the Company as a going concern. The
Company has an accumulated deficit of $231,153,055 at June 30, 2019
and $227,801,743 at December 31, 2018 and used cash in operations
of $4,047,580 and $2,746,125 during the six months ended June 30,
2019 and 2018, respectively. The Company requires substantial
additional funds to complete clinical trials and pursue regulatory
approvals. Management is actively seeking additional sources of
equity and/or debt financing; however, there is no assurance that
any additional funding will be available.
In view
of the matters described above, recoverability of a major portion
of the recorded asset amounts shown in the accompanying June 30,
2019 balance sheet is dependent upon continued operations of the
Company, which in turn is dependent upon the Company’s
ability to meet its financing requirements on a continuing basis,
to maintain present financing, and to generate cash from future
operations. These factors, among others, raise substantial doubt
about the Company’s ability to continue as a going concern.
The condensed consolidated financial statements do not include any
adjustments relating to the recoverability and classification of
recorded asset amounts or amounts and classification of liabilities
that might be necessary should the Company be unable to continue in
existence.
Use of Estimates
In
preparing the unaudited
condensed
consolidated financial
statements, management is required to make estimates and
assumptions that affect the reported amounts of assets and
liabilities, the disclosure of contingent assets and liabilities at
the dates of the unaudited
condensed
consolidated financial statements
and the reported amounts of revenue and expenses during the
reporting periods. Actual results could differ from these estimates
and the operating results for the interim periods presented are not
necessarily indicative of the results expected for the full
year.
On an
ongoing basis, management reviews its estimates to ensure that
these estimates appropriately reflect changes in the
Company’s business and new information as it becomes
available. If historical experience and other factors used by
management to make these estimates do not reasonably reflect future
activity, the Company’s results of operations and financial
position could be materially impacted.
Principles of Consolidation
The
accompanying
condensed
consolidated financial statements include the accounts and
transactions of the Company and
Life
Newco, Inc. All material intercompany transactions and balances
have been eliminated in consolidation
.
Liquidity and Management’s Plan
At June 30, 2019, the Company had cash and cash equivalents,
including the fair value of its marketable securities, of
approximately $8.9 million. The Company used $4.0 million of cash
for operating activities during the six months ended June 30, 2019
and had stockholders’ equity of $8.6 million, versus $11.8
million at December 31, 2018.
The
Company expects to continue to incur expenses related to
development of levosimendan for pulmonary hypertension and other
potential indications, as well as identifying and developing other
potential product candidates. Based on its resources at June 30,
2019, the Company believes that it has sufficient capital to fund
its planned operations through the first quarter of calendar year
2020. 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.
Net Loss per Share
Basic
net 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 net 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, warrants and restricted stock 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.
|
Six months ended June 30,
|
|
|
|
|
|
|
Warrants
to purchase common stock
|
10,640,718
|
120,773
|
Options
to purchase common stock
|
244,229
|
241,744
|
Convertible
preferred shares outstanding
|
38,606
|
-
|
Restricted
stock grants
|
-
|
39,828
|
Leases
The
Company determines if an arrangement includes a lease at inception.
Operating leases are included in operating lease right-of-use
assets, other current liabilities, and long-term lease liabilities
in the Company’s consolidated balance sheet as of June 30,
2019. Right-of-use assets represent the Company’s right to
use an underlying asset for the lease term and lease liabilities
represent the Company’s obligation to make lease payments
arising from the lease. Operating lease right-of-use assets and
liabilities are recognized at the lease commencement date based on
the present value of lease payments over the lease term. In
determining the net present value of lease payments, the Company
uses the incremental borrowing rate based on the information
available at the lease commencement date. The operating lease
right-of-use assets also include any lease payments made and
exclude lease incentives. The Company’s leases may include
options to extend or terminate the lease which are included in the
lease term when it is reasonably certain that the Company will
exercise any such option. Lease expense is recognized on a
straight-line basis over the expected lease term. The Company has
elected to account for leases with an initial term of 12 months or
less similar to previous guidance for operating leases, under which
the Company will recognize those lease payments in the consolidated
statements of operations and comprehensive loss on a straight-line
basis over the lease term.
Prior
period amounts continue to be reported in accordance with the
Company’s historic accounting under previous lease guidance,
see “Recent Accounting Pronouncements” below, for more
information about the impact of the adoption of the new lease
standard.
Recent Accounting Pronouncements
In June
2016,
the Financial Accounting
Standards Board (“
FASB”) issued an 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 standard requires 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
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 an accounting standard intended to
improve financial reporting regarding leasing transactions. The
standard will require the Company to recognize on its balance sheet
the assets and liabilities for the rights and obligations created
by all leased assets. The 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 months. The standard is effective for
financial statements beginning after December 15, 2018, and interim
periods within those annual periods. Early adoption is
permitted.
The
Company adopted this standard on January 1, 2019, using the
required modified-retrospective approach as of the effective date.
The Company will elect the package of practical expedients
permitted under the transition guidance within the new standard,
which among other things, allows it to carryforward the historical
lease classification. The Company will make an accounting policy
election to account for leases with an initial term of 12 months or
less similar to previous guidance for operating leases, under which
the Company will recognize those lease payments in the consolidated
statements of operations and comprehensive loss on a straight-line
basis over the lease term. Results for the year ended December 31,
2018 continue to be reported in accordance with historical
accounting under previous lease guidance, the FASB Accounting
Standards Codification (“ASC”) Topic 840: Leases (Topic
840).
The
Company recorded a net reduction of $27,670 to opening accumulated
deficit as of January 1, 2019, due to the cumulative impact of
adopting the new leasing standard, with the impact relating to a
change in the classification of the Company’s office space.
The adoption of the lease standard did not have a material impact
on the Company’s condensed consolidated balance sheets. The
table below summarizes the impact of adopting the new standard on
its condensed consolidated balance sheet as of January 1,
2019.
|
|
New Lease Standard Adjustment
|
|
Operating
lease right-of-use asset
|
$
-
|
$
271,710
|
$
271,710
|
Operating
lease liabilites
|
$
-
|
$
271,710
|
$
271,710
|
Deferred
lease liabilities
|
$
27,670
|
$
(27,670
)
|
$
-
|
NOTE
3. FAIR VALUE
The
Company determines the fair value of its financial assets and
liabilities in accordance with the ASC 820 Fair Value Measurements.
The Company’s balance sheet includes the following financial
instruments: cash and cash equivalents, investments in marketable
securities, and warrant liabilities. The Company considers the
carrying amount of its cash and cash equivalents 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
condensed
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 in the
c
ondensed
consolidated
statements of comprehensive loss and are determined using the
specific identification method with transactions recorded on a
settlement date basis. 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 June 30, 2019, the Company
believes that the costs of its investments are recoverable in all
material respects.
The
following table summarizes the fair value of the Company’s
investments by type. The estimated fair value of the
Company’s fixed income investments is classified as Level 2
in the fair value hierarchy as defined in GAAP. These fair values
are obtained from independent pricing services which utilize Level
2 inputs:
|
|
|
|
|
|
|
|
Obligations
of U.S. Government and its agencies
|
$
113,816
|
$
278
|
$
866
|
$
(6
)
|
$
114,953
|
Corporate
debt securities
|
383,554
|
2,209
|
1,415
|
-
|
387,179
|
Total
investments
|
$
497,370
|
$
2,487
|
$
2,281
|
$
(6
)
|
$
502,132
|
The
following table summarizes the scheduled maturity for the
Company’s investments at June 30, 2019 and December 31,
2018.
|
|
|
Maturing
in one year or less
|
$
502,132
|
$
494,633
|
Maturing
after one year through three years
|
-
|
-
|
Total
investments
|
$
502,132
|
$
494,633
|
The
following tables summarize information regarding assets and
liabilities measured at fair value on a recurring basis as of June
30, 2019 and December 31, 2018:
|
|
Fair Value Measurements at Reporting Date Using
|
|
Balance as of
June 30,
2019
|
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
|
$
8,407,232
|
$
8,407,232
|
$
-
|
$
-
|
Marketable
securities
|
$
502,132
|
$
-
|
$
502,132
|
$
-
|
|
|
Fair Value Measurements at Reporting Date Using
|
|
Balance as of
December 31,
2018
|
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
|
$
12,367,321
|
$
12,367,321
|
$
-
|
$
-
|
Marketable
securities
|
$
494,633
|
$
-
|
$
494,633
|
$
-
|
There
were no significant transfers between levels in the six months
ended June 30, 2019.
NOTE 4. BALANCE SHEET COMPONENTS
Property and equipment, net
Property
and equipment consist of the following as of June 30, 2019 and
December 31, 2018:
|
|
|
Office
furniture and fixtures
|
$
130,192
|
$
130,192
|
Computer
equipment and software
|
80,669
|
96,593
|
Laboratory
equipment
|
-
|
354,861
|
|
210,861
|
581,646
|
Less:
Accumulated depreciation
|
(201,684
)
|
(573,121
)
|
|
$
9,177
|
$
8,525
|
Depreciation
expense was approximately $1,300 and $3,000 for the three months
ended June 30, 2019 and 2018, and approximately $2,400 and $5,000
for the six months ended June 30, 2019 and 2018,
respectively.
Accrued liabilities
Accrued
liabilities consist of the following as of June 30, 2019 and
December 31, 2018:
|
|
|
Operating
costs
|
$
281,222
|
$
244,456
|
Lease
liability
|
117,416
|
-
|
Employee
related
|
90,627
|
571,399
|
|
$
489,265
|
$
815,855
|
NOTE 5. COMMITMENTS AND CONTINGENCIES
Leases
As
described further in “NOTE 2. SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES” above, the Company adopted ASC 842 as of
January 1, 2019. Prior period amounts have not been adjusted and
continue to be reported in accordance with the Company’s
historic accounting under ASC 840.
In
January 2011, the Company entered into the Lease with Concourse
Associates, LLC for office facilities located at the premises in
Morrisville, North Carolina (the “Lease”). The
Lease was amended in August 2015 to extend the term for the 5,954
square foot rental. The current term began on March 1, 2016
and continues for 64 months to June 30, 2021. Rent payments began
on July 1, 2016, following the conclusion of a four-month rent
abatement period. The Company has two five-year options to
extend the Lease and a one-time option to terminate the Lease
thirty-six months after the commencement of the initial term if no
additional space (“Expansion Space”) became available;
none of these optional periods have been considered in the
determination of the right-of-use asset or the lease liability for
the Lease as the Company did not consider it reasonably certain
that it would exercise any such options. The Lease further
provides that the Company is obligated to pay to landlord certain
variable costs, including taxes and operating expenses. The Company
also has a right of first offer to lease the Expansion Space, of no
less than 1,000 square feet, as that additional space becomes
available adjacent to the premises over the remainder of the
initial term of the Lease, at the same rate per square foot as the
current premises, with an extension of the term of sixty additional
months starting at the commencement date of acquiring the Expansion
Space.
The
Company performed an evaluation of its other contracts with
customers and suppliers in accordance with ASC 842 and determined
that, except for the Lease described above, none of the
Company’s contracts contain a lease.
The
balance sheet classification of our lease liabilities was as
follows:
|
|
|
Current
portion included in accrued liabilities
|
$
117,416
|
$
-
|
Long
term lease liability
|
105,547
|
-
|
|
$
222,963
|
$
-
|
As of
June 30, 2019, the maturities of our operating lease liabilities
were as follows:
Year ending December 31,
|
|
2019
|
59,302
|
2020
|
121,084
|
2021
|
61,803
|
|
|
Total
lease payments
|
$
242,189
|
Less:
Imputed interest
|
(19,226
)
|
Operating lease liability
|
$
222,963
|
Operating
lease liabilities are based on the net present value of the
remaining Lease payments over the remaining Lease term. In
determining the present value of lease payments, the Company used
the incremental borrowing rate based on the information available
at the Lease commencement date. As of June 30, 2019, the remaining
Lease term is 2 years and the discount rate used to determine the
operating lease liability was 8.0%. For the six months ending June
30, 2019, the Company paid $62,610 in total lease expenses,
including $3,794 for common area maintenance charges.
Simdax license agreement
On November 13, 2013, the Company acquired,
through its
wholly owned subsidiary, Life Newco,
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 the Company
an exclusive, sublicenseable right to develop and
commercialize pharmaceutical products containing levosimendan (the
“Product”) in the United States and Canada (the
“Territory”) from Orion. 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, i.e.
line extension products. 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.
Pursuant to the terms of the License, the Company paid to Orion a
non-refundable up-front payment in the amount of $1.0
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 of
the License, 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
.
In June
2019, Orion filed a request for arbitration against the Company
seeking
a
declaration regarding the correct interpretation of the line
extension provisions of the License and whether or not such
provisions apply to the oral form of levosimendan recently
developed by Orion. Additionally, Orion requested the Company
reimburse Orion for all legal fees associated with the arbitration.
The Company recently submitted its response to the request for
arbitration and rejected Orion’s position that the oral
formation was not a line extension product under the
License
.
As of
June 30, 2019, the Company has not met any of the developmental
milestones and, accordingly, has not recorded any liability for the
contingent payments due to Orion.
NOTE 6. 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.
Series A Stock
On December 11, 2018, the Company closed its underwritten offering
of 5,181,346 units for net proceeds of approximately $9 million.
Each unit consists of (a) one share of the Company’s Series A
convertible preferred stock, par value $0.0001 per share (the
“Series A Stock”), (b) a two-year warrant to purchase
one share of common stock at an exercise price of $1.93 (the
“Series 1 Warrants”), and (c) a five-year warrant to
purchase one share of common stock at an exercise price of $1.93
(the “Series 2 Warrants”).
In accordance with
ASC 480, the estimated fair value of $1,800,016 for the beneficial
conversion feature was recognized as a deemed dividend on the
Series A Stock during the year ended December 31, 2018
.
The
table below sets forth a summary of the designation, powers,
preferences and rights of the Series A Stock.
Conversion
|
Subject to the ownership limitations described below, the Series A
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 A Stock by a
conversion price of $1.93 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 85% of the aggregate number of shares of
Series A Stock issued to all holders on the original issue date
have been converted to common stock, the Series A Stock has full
ratchet price-based anti-dilution protection, subject to customary
carve-outs, in the event of a down-round financing at a price per
share below the conversion price of the Series A Stock. If during
any 30 consecutive trading days (a “Measurement
Period”) the volume weighted average price of the
Company’s common stock exceeds 300% of the then-effective
conversion price of the Series A Stock and the daily dollar trading
volume for each trading day during such period exceeds $175,000,
the anti-dilution protection in the Series A Stock will expire and
cease to apply. Additionally, subject to certain exceptions, at any
time after the issuance of the Series A Stock, and subject to the
beneficial ownership limitations described below, the Company has
the right to cause each holder of the Series A Stock to convert all
or part of such holder’s Series A Stock in the event that (i)
the volume weighted average price of the Company’s common
stock for any Measurement Period exceeds 300% of the initial
conversion price of the Series A Stock (subject to adjustment for
forward and reverse stock splits, recapitalizations, stock
dividends and similar transactions), (ii) the average daily trading
volume for such Measurement Period exceeds $175,000 per trading day
and (iii) the holder is not in possession of any information that
constitutes or might constitute, material non-public information
which was provided by the Company.
The
Company will not affect any conversion of the
Series A Stock
, nor shall a holder convert
its shares of
Series A Stock
,
to the extent that such conversion would cause the holder to have
acquired, through conversion of the
Series A
Stock or otherwise, beneficial
ownership of a number shares of common stock in excess of 4.99%
(or, at the election of the holder prior to the issuance of any
shares of Series A Stock, 9.99%) of the common stock outstanding
after giving effect to such exercise.
|
Dividends
|
In the event the Company pays dividends on its shares of common
stock, the holders of the Series A Stock will be entitled to
receive dividends on shares of Series A Stock equal, on an
as-if-converted basis, to and in the same form as paid on the
common stock. No other dividends will be paid on the shares of
Series A Stock.
|
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, the holders of Series A Stock shall be
entitled to be paid out of the assets of the Company available for
distribution to its stockholders an amount equal to the amount that
a holder of common stock would receive if the Series A Stock were
fully converted to common stock, which amounts will be paid pari
passu with all holders of common stock.
|
Voting rights
|
Shares
of Series A Stock will generally have no voting rights, except as
required by law and except that the consent of holders of a
majority of the then outstanding Series A Stock will be required to
amend the terms of the Series A Stock or to take other action that
adversely affects the rights of the holders of Series A
Stock
.
|
During
the year ended December 31, 2018, 2,326,753 shares of
Series A Stock
were converted into
2,326,753 shares of common stock.
As of December 31, 2018, there were
2,854,593 shares of
Series A
Stock outstanding.
During
the six months ended June 30, 2019, an additional 2,815,987 shares
of
Series A Stock
were
converted into 2,815,987 shares of common stock.
As of June 30, 2019, there were
38,606 shares of
Series A
Stock
outstanding, which represents approximately 1% of the aggregate
number of shares of Series A Stock
issued to all holders on the original issue
date
.
In
accordance with the Series A Stock Certificate of Designations,
following the conversion of
85% of the
aggregate number of shares of Series A Stock issued to all holders
on the original issue date,
the
full ratchet price-based anti-dilution protection
in the event of a down-round financing at a price per share below
the conversion price of the Series A Stock is no longer in effect
for the remaining shares.
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 June
30, 2019, there were 6,670,431 shares of common stock issued and
outstanding.
Warrants
As of
June 30, 2019, the Company has 10,640,718 warrants outstanding. The
following table summarizes the Company’s warrant activity for
the six months ended June 30, 2019.
|
|
Weighted Average
Exercise Price
|
Outstanding
at December 31, 2018
|
10,690,718
|
$
2.45
|
Exercised
|
(50,000
)
|
1.93
|
Outstanding
at June 30, 2019
|
10,640,718
|
$
2.45
|
On
March 14, 2019, the Company received $96,500 and issued 50,000
shares of common stock upon the exercise of its outstanding Series
1 Warrants.
2016 Stock Incentive Plan
In June
2016, the Company adopted the 2016 Stock Incentive Plan (the
“2016 Plan”). 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.
On June 16, 2016, the Company’s stockholders approved the
2016 Plan and authorized for issuance under the 2016 Plan a total
of 150,000 shares of common stock. On June 13, 2019, the
Company’s stockholders approved an amendment to the 2016 Plan
which increased the number of shares of common stock authorized for
issuance under the 2016 Plan to a total of 750,000 shares, up from
150,000 previously authorized.
The
following table summarizes the shares available for grant under the
2016 Plan for the six months ended June 30, 2019:
|
Shares Available for Grant
|
Balances, at December 31, 2018
|
100,000
|
Additional
shares reserved
|
600,000
|
|
(2,500
)
|
Balances, at June 30, 2019
|
697,500
|
2016 Plan Stock Options
Stock
options granted under the 2016 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 2016 Plan may be granted with a term of up to ten
years and at prices no less than fair market value at the time of
grant. Stock options granted generally vest over three to four
years.
The
following table summarizes the outstanding stock options under the
2016 Plan for the six months ended June 30, 2019:
|
|
|
|
Weighted Average Exercise Price
|
Balances at December 31, 2018
|
50,000
|
$
6.10
|
Options
granted
|
2,500
|
$
1.72
|
Balances at June 30, 2019
|
52,500
|
$
5.89
|
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 recorded compensation expense for these stock option
grants of $16,008 and $29,731 for the three months ended June 30,
2019 and 2018, and $45,739 and $29,731 for the six months ended
June 30, 2019 and 2018, respectively.
As of
June 30, 2019, there were unrecognized compensation costs of
approximately $108,622 related to non-vested stock option awards
under the 2016 Plan that will be recognized on a straight-line
basis over the weighted average remaining vesting period of 1.98
years.
The
Company used the following assumptions to estimate the fair value
of options granted under the 2016 Plan for the six months ended
June 30, 2019 and 2018:
|
For the six months ended June 30,
|
|
|
|
Risk-free
interest rate (weighted average)
|
2.39
%
|
2.85
%
|
Expected
volatility (weighted average)
|
106.74
%
|
102.37
%
|
Expected
term (in years)
|
7
|
7
|
Expected
dividend yield
|
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 Company’s historical experience 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 does not anticipate paying any dividends in the near
future.
|
|
|
Forfeitures
|
Stock
compensation expense recognized in the statements of operations for
the six months ended June 30, 2019 and 2018 is based on awards
ultimately expected to vest, and 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.
|
1999 Amended Stock Plan
In
October 2000, the Company adopted the 1999 Stock Plan, as amended
and restated on June 17, 2008 (the “1999 Plan”).
Under the 1999 Plan, with the approval of the Compensation
Committee of the Board of Directors, the Company could grant stock
options, restricted stock, stock appreciation rights and new shares
of common stock upon exercise of stock options. On March 13, 2014,
the Company’s stockholders approved an amendment to the 1999
Plan which increased the number of shares of common stock
authorized for issuance under the 1999 Plan to a total of 200,000
shares, up from 15,000 previously authorized. On September 15,
2015, the Company’s stockholders approved an additional
amendment to the 1999 Plan which increased the number of shares of
common stock authorized for issuance under the 1999 Plan to a total
of 250,000 shares, up from 200,000 previously authorized. The 1999
Plan expired on June 17, 2018 and no new grants may be made under
that plan after that date. However, unexpired awards granted under
the 1999 Plan remain outstanding and subject to the terms of the
1999 Plan.
1999 Plan Stock Options
Stock
options granted under the 1999 Plan may be either incentive stock
options (“ISOs”), or nonqualified stock options
(“NSOs”). ISOs could be granted only to employees. NSOs
could be granted to employees, consultants and directors. Stock
options under the 1999 Plan could 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 six years.
The
following table summarizes the outstanding stock options under the
1999 Plan for the six months ended June 30, 2019:
|
|
|
|
Weighted Average Exercise Price
|
Balances at December 31, 2018
|
191,735
|
$
93.72
|
Options
cancelled
|
(6
)
|
$
1,793.00
|
Balances at June 30, 2019
|
191,729
|
$
93.67
|
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 recorded compensation expense for these stock options
grants of $25,658 and $63,347 for the three months ended June 30,
2019 and 2018, and $56,222 and $133,935 for the six months ended
June 30, 2019 and 2018, respectively.
As of
June 30, 2019, there were unrecognized compensation costs of
approximately $81,445 related to non-vested stock option awards
that will be recognized on a straight-line basis over the weighted
average remaining vesting period of 1.06 years. Additionally, there
were unrecognized compensation costs of approximately $5.9 million
related to non-vested stock option awards subject to
performance-based vesting milestones with a weighted average
remaining life of 0.76 years. As of June 30, 2019, none of these
milestones have been achieved.
Restricted Stock Grants
The
following table summarizes the restricted stock activity under the
1999 Plan for the six months ended June 30, 2019
.
|
Outstanding Restricted Stock Grants
|
|
|
Weighted Average Grant Date Fair Value
|
Balances, at December 31, 2018
|
19,914
|
$
6.29
|
Restricted
stock vested
|
(12,195
)
|
$
6.28
|
Restricted
stock cancelled
|
(7,719
)
|
$
6.27
|
Balances, at June 30, 2019
|
-
|
$
-
|
The Company did not record compensation expense for these
restricted stock grants for the six months ended June 30,
2019.
As of June 30, 2019, there was no unrecognized compensation costs
related to the non-vested restricted stock grants.