We have audited the
accompanying balance sheets of RegeneRx Biopharmaceuticals, Inc. (the “Company”) as of December 31, 2018 and 2017, and
the related statements of operations, changes in stockholders’ deficit and cash flows for the years then ended and the related
notes (collectively referred to as the “financial statements”). In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial position of the Company as of December 31, 2018 and 2017, and
the results of its operations and its cash flows for the years then ended in conformity with accounting principles generally accepted
in the United States of America.
These financial statements
are the responsibility of the Company’s management. Our responsibility is to express an opinion on the Company’s financial
statements based on our audits. We are a public accounting firm registered with the Public Company Accounting Oversight Board
(United States) (“PCAOB”) and are required to be independent with the respect to the Company in accordance with the
U.S. Federal securities laws and the applicable rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance
with the standards of the PCAOB. Those standards require that we plan and perform the audit to obtain reasonable assurance about
whether the financial statements are free of material misstatement, whether due to fraud or error. The Company is not required
to have, nor were we engaged to perform, an audit of its internal control over financial reporting. As part of our audits, we
are required to obtain an understanding of internal control over financial reporting, but not for the purposes of expressing an
opinion on the effectiveness of the Company’s internal control over financial reporting. Accordingly, we express no such
opinion.
Our audits included performing procedures
to assess the risks of material misstatement of the financial statements, whether due to error or fraud, and performing procedures
that respond to those risks. Such procedures included examining, on a test basis, evidence regarding amounts and disclosures in
the financial statements. Our audits also included evaluating the accounting principles used and significant estimates made by
management, as well as evaluating the overall presentation of the financial statements. We believe that our audits provide a reasonable
basis for our opinion.
The accompanying
notes are an integral part of these financial statements.
The accompanying
notes are an integral part of these financial statements.
The accompanying
notes are an integral part of these financial statements.
The accompanying
notes are an integral part of these financial statements.
Notes to Financial Statements
December 31, 2018
|
1.
|
ORGANIZATION AND
BUSINESS
|
Organization
and Nature of Operations.
RegeneRx
Biopharmaceuticals, Inc. (“RegeneRx”, the “Company”, “We”, “Us”, “Our”),
a Delaware corporation, was incorporated in 1982. We are focused on the discovery and development of novel molecules to accelerate
tissue and organ repair. Our operations are confined to one business segment: the development and marketing of product candidates
based on Thymosin Beta 4 (“Tß4”), an amino acid peptide.
Management
Plans to Address Operating Conditions.
Our
strategy is aimed at being capital efficient while leveraging our portfolio of clinical assets by seeking strategic relationships
with organizations with clinical development capabilities including development capital. Currently, we have active partnerships
in four major territories: North America, Europe, China and Pan Asia. In each case, the cost of development is being borne by
our partners with no financial obligation for RegeneRx. We still have significant clinical assets to develop, primarily RGN-352
(injectable formulation of Tß4 for cardiac and CNS disorders) in the U.S., Pan Asia, and Europe, and RGN-259 in the EU.
Our goal is to wait until satisfactory results are obtained from the current ophthalmic clinical program in the U.S. before moving
into the EU. However, we intend to continue to develop RGN-352, our injectable systemic product candidate for cardiac and central
nervous system indications, either by obtaining grants to fund a Phase 2a clinical trial in the cardiovascular or central nervous
system fields or finding a suitable partner with the resources and capabilities to develop it as we have with RGN-259.
Since
inception, and through December 31, 2018, we have an accumulated deficit of $106 million and we had cash and cash equivalents
of $237,261 as of December 31, 2018. We anticipate incurring additional operating losses in the future as we continue to explore
the potential clinical benefits of Tß4-based product candidates over multiple indications. We have entered into a series
of strategic partnerships under licensing and joint venture agreements where our partners are responsible for advancing development
of our product candidates by sponsoring multiple clinical trials. On February 27, 2019, we sold a series of convertible promissory
notes to
management, the Company’s Board of Directors and
accredited investors including
Essetifin S.p.A., our largest shareholder. The sale of the notes will result in gross proceeds to the Company of $1,300,000 over
two closings. The first closing in the amount of $650,000 occurred on February 27
th
and the second closing, also in
the amount of $650,000 will occur within three days of the Company providing notice of the enrollment of the first patent in the
ARISE-3 clinical trial in DES sponsored by ReGenTree. ReGenTree has informed us that they now expect the ARISE-3 clinical trial to occur in the second quarter of 2019. Because the Company does not control the timing of the ARISE-3 clinical trial, we cannot be certain that this timing is correct or that it may not change. The notes contain a $0.12 conversion
price and the purchasers also received a warrant exercisable at $0.18 to purchase additional shares of common stock equal to 75%
of the number of shares into which each note is initially convertible. At present, with the receipt of the sale proceeds from
the first closing coupled with the anticipated proceeds from the second closing, we will have sufficient cash to fund planned
operations through the first quarter of 2020.
While
we successfully secured additional operating capital to continue operations through the first quarter of 2020 we will need substantial
additional funds in order to significantly advance development of our unlicensed programs. Accordingly, we will continue to evaluate
opportunities to raise additional capital and are in the process of exploring various alternatives, including, without limitation,
a public or private placement of our securities, debt financing, corporate collaboration and licensing arrangements, or the sale
of our Company or certain of our intellectual property rights.
These
factors raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements have been
prepared assuming that we will continue as a going concern. This basis of accounting contemplates the recovery of our assets and
the satisfaction of our liabilities in the normal course of business.
Although
we intend to continue to seek additional financing or additional strategic partners, we may not be able to complete a financing
or corporate transaction, either on favorable terms or at all. If we are unable to complete a financing or strategic transaction,
we may not be able to continue as a going concern after our funds have been exhausted, and we could be required to significantly
curtail or cease operations, file for bankruptcy or liquidate and dissolve. There can be no assurance that we will be able to
obtain any sources of funding. The financial statements do not include any adjustments relating to the recoverability and classification
of recorded asset amounts and classification of liabilities that might be necessary should we be forced to take any such actions.
In
addition to our current operational requirements, we continually refine our operating strategy and evaluate alternative clinical
uses of Tß4. However, substantial additional resources will be needed before we will be able to achieve sustained profitability.
Consequently, we continually evaluate alternative sources of financing such as the sharing of development costs through strategic
collaboration agreements. There can be no assurance that our financing efforts will be successful and, if we are not able to obtain
sufficient levels of financing, we would delay certain clinical and/or research activities and our financial condition would be
materially and adversely affected. Even if we are able to obtain sufficient funding, other factors including competition, dependence
on third parties, uncertainty regarding patents, protection of proprietary rights, manufacturing of peptides, and technology obsolescence
could have a significant impact on us and our operations.
To
achieve profitability, we, and/or a partner, must successfully conduct pre-clinical studies and clinical trials, obtain required
regulatory approvals and successfully manufacture and market those pharmaceuticals we wish to commercialize. The time required
to reach profitability is highly uncertain, and there can be no assurance that we will be able to achieve sustained profitability,
if at all.
|
2.
|
SUMMARY OF SIGNIFICANT
ACCOUNTING POLICIES
|
Use
of Estimates.
The preparation of financial statements in conformity with accounting principles generally accepted in the United
States of America (“U.S. GAAP”) requires management to make certain estimates and assumptions that affect the reported
earnings, financial position and various disclosures. Critical accounting policies involved in applying our accounting policies
are those that require management to make assumptions about matters that are highly uncertain at the time the accounting estimate
was made and those for which different estimates reasonably could have been used for the current period. Critical accounting estimates
are also those which are reasonably likely to change from period to period and would have a material impact on the presentation
of our financial condition, changes in financial condition or results of operations. Our most critical accounting estimates relate
to accounting policies for revenue recognition, valuation of derivatives and share-based arrangements. Management bases its estimates
on historical experience and on various other assumptions that it believes are reasonable under the circumstances. Actual results
could differ from these estimates.
Cash
and Cash Equivalents.
Cash and cash equivalents consist of cash and highly-liquid investments with original maturities of
three months or less when acquired and are stated at cost that approximates their fair market value.
Concentration
of Credit Risk.
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist primarily
of cash and cash equivalents. We limit our exposure to credit loss by placing our cash and cash equivalents with high quality
financial institutions and, in accordance with our investment policy, in securities that are rated investment grade.
Property
and Equipment.
Property and equipment consist of office furniture and equipment and is stated at cost and depreciated over
the estimated useful lives of the assets (generally two to five years) using the straight-line method. Expenditures for maintenance
and repairs which do not significantly prolong the useful lives of the assets are charged to expense as incurred. Depreciation
expense was $2,753 and $3,048 for the years ended December 31, 2018 and 2017, respectively.
Impairment
of Long-lived Assets.
When we record long-lived assets, our policy is to regularly perform reviews to determine if and when
the carrying value of our long-lived assets becomes impaired. During the years ended December 31, 2018 and 2017, no impairment
losses were recorded.
Convertible
Notes with Detachable Warrants.
In accordance with the Financial Accounting Standards Board (“FASB”) Accounting
Standards Codification (“ASC”) 470-20,
Debt with Conversion and Other Options
, the proceeds received from convertible
notes are allocated to the instruments based on the relative fair values of the convertible notes without the warrants and of
the warrants themselves at the time of issuance. The portion of the proceeds allocated to the warrants is recognized as additional
paid-in capital and a debt discount. The debt discount related to warrants is accreted into interest expense through maturity
of the notes.
Derivative
Financial Instruments.
Derivative financial instruments consist of financial instruments or other contracts that contain a
notional amount and one or more underlying variables (e.g. interest rate, security price or other variable), which require no
initial net investment and permit net settlement. Derivative financial instruments may be free-standing or embedded in other financial
instruments. Further, derivative financial instruments are initially, and subsequently, measured at fair value and recorded as
liabilities or, in rare instances, assets.
The
Company does not use derivative financial instruments to hedge exposures to cash-flow, market or foreign-currency risks. However,
the Company has issued financial instruments including warrants that are either (i) not afforded equity classification, (ii) embody
risks not clearly and closely related to host contracts, or (iii) may be net-cash settled by the counterparty. In certain instances,
these instruments are required to be carried as derivative liabilities, at fair value, in the Company’s financial statements.
The
Company estimates the fair values of its derivative financials instrument using the Black-Scholes option pricing model because
it embodies all of the requisite assumptions (including trading volatility, estimated terms and risk-free rates) necessary to
fair value these instruments. Estimating fair values of derivative financial instruments requires the development of significant
and subjective estimates that may, and are likely to, change over the duration of the instrument with related changes in internal
and external market factors. In addition, option-based techniques are highly volatile and sensitive to changes in the trading
market price of the Company’s common stock, which has a high-historical volatility. Since derivative financial instruments
are initially and subsequently carried at fair values, the Company’s operating results reflect the volatility in these estimate
and assumption changes in each reporting period.
Upon
the adoption of new accounting guidance on January 1, 2018, the embedded conversion features in the Company’s convertible
notes are no longer accounted for as derivative liabilities.
Revenue
Recognition. Subsequent to the adoption of Accounting Standards Codification Revenue from Contracts with Customers (“ASC
606”) on January 1, 2018
The
Company analyzes contracts to determine the appropriate revenue recognition using the following steps: (i) identification of contracts
with customers, (ii) identification of distinct performance obligations in the contract, (iii) determination of contract transaction
price, (iv) allocation of contract transaction price to the performance obligations and (v) determination of revenue recognition
based on timing of satisfaction of the performance obligation. The Company recognizes revenues upon the satisfaction of its performance
obligation (upon transfer of control of promised goods or services to our customers) in an amount that reflects the consideration
to which it expects to be entitled to in exchange for those goods or services. Whenever we determine that an arrangement should
be accounted for as a single unit of accounting, we must determine the period over which the performance obligations will be performed,
and revenue will be recognized. Revenue will be recognized using either a relative performance or straight-line method. We recognize
revenue using the relative performance method provided that we can reasonably estimate the level of effort required to complete
our performance obligations under an arrangement and such performance obligations are provided on a best-efforts basis. Revenue
recognized is limited to the lesser of the cumulative amount of payments received or the cumulative amount of revenue earned,
as determined using the relative performance method, as of each reporting period.
The
Company’s contracts with customers may at times include multiple promises to transfer products and services. Contracts with
multiple promises are analyzed to determine whether the promises, which may include a license together with performance obligations
such as providing a clinical supply of product and steering committee services, are distinct and should be accounted for as separate
performance obligations or whether they must be accounted for as a single performance obligation. The Company accounts for individual
performance obligations separately if they are distinct. Determining whether products and services are considered distinct performance
obligations may require significant judgment. If we cannot reasonably estimate when our performance obligation either ceases or
becomes inconsequential and perfunctory, then revenue is deferred until we can reasonably estimate when the performance obligation
ceases or becomes inconsequential. Revenue is then recognized over the remaining estimated period of performance.
Whenever
the Company determines that an arrangement should be accounted for as a combined performance obligation, we must determine the
period over which the performance obligation will be performed and when revenue will be recognized. Revenue is recognized using
either a relative performance or straight-line method. We recognize revenue using the relative performance method provided that
the we can reasonably estimate the level of effort required to complete our performance obligation under an arrangement and such
performance obligation is provided on a best-efforts basis. Revenue recognized is limited to the lesser of the cumulative amount
of payments received or the cumulative amount of revenue earned, as determined using the relative performance method, as of each
reporting period.
If
the Company cannot reasonably estimate the level of effort required to complete our performance obligation under an arrangement,
the performance obligation is provided on a best-efforts basis and we can reasonably estimate when the performance obligation
ceases or the remaining obligations become inconsequential and perfunctory, then the total payments under the arrangement, excluding
royalties and payments contingent upon achievement of substantive milestones, would be recognized as revenue on a straight-line
basis over the period we expect to complete our performance obligations. Revenue is limited to the lesser of the cumulative amount
of payments received or the cumulative amount of revenue earned, as determined using the straight-line basis, as of the period
ending date.
If
the Company cannot reasonably estimate when our performance obligation either ceases or becomes inconsequential and perfunctory,
revenue is deferred until we can reasonably estimate when the performance obligation ceases or becomes inconsequential. Revenue
is then recognized over the remaining estimated period of performance.
At
the inception of each arrangement that includes development milestone payments, the Company evaluates the probability of reaching
the milestones and estimates the amount to be included in the transaction price using the most likely amount method. If it is
probable that a significant revenue reversal would not occur in the future, the associated milestone value is included in the
transaction price. Milestone payments that are not within the control of the Company or the licensee, such as regulatory approvals,
are not considered probable of being achieved until those approvals are received and therefore revenue recognized is constrained
as management is unable to assert that a reversal of revenue would not be possible. The transaction price is then allocated to
each performance obligation on a relative standalone selling price basis, for which the Company recognizes revenue as or when
the performance obligations under the contract are satisfied. At the end of each subsequent reporting period, the Company re-evaluates
the probability of achievement of such development milestones and any related constraint, and if necessary, adjusts its estimate
of the overall transaction price. Any such adjustments are recorded on a cumulative catch-up basis, which would affect revenues
and earnings in the period of adjustment.
Amounts
received prior to satisfying the above revenue recognition criteria are recorded as unearned revenue in our accompanying balance
sheets.
Contract
assets are generated when contractual billing schedules differ from revenue recognition timing. Contract assets represent a conditional
right to consideration for satisfied performance obligations that becomes a billed receivable when the conditions are satisfied.
There were no contract assets as of December 31, 2018.
Contract
liabilities result from arrangements where we have received payment in advance of performance under the contract. Changes in contract
liabilities are generally due to either receipt of additional advance payments or our performance under the contract.
We
have the following amounts recorded for contract liabilities:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
|
|
Unearned revenue
|
|
$
|
2,254,848
|
|
|
$
|
2,124,515
|
|
The
contract liabilities amount disclosed above as of December 31, 2018, is primarily related to revenue being recognized on a straight-line
basis over periods ranging from 23 to 30 years, which, in management’s judgment, is the best measure of progress towards
satisfying the performance obligations and represents the Company’s best estimate of the period of the obligation.
Revenue
recognized from contract liabilities during the year ended December 31, 2018, totaled $58,073. Revenue
is expected to be recognized in the future from contract liabilities as the related performance obligations are satisfied.
For
details about the Company’s revenue recognition policy prior to the adoption of ASC 606, refer to the Company’s annual
report on form 10-K for the year ended December 31, 2017.
Variable
Interest Entities
On January 28, 2015, the Company entered into a Joint Venture Agreement with GtreeBNT, a shareholder in
the Company. The Joint Venture Agreement provides for the operation of the joint venture, jointly owned by the Company and GtreeBNT,
which is commercializing RGN-259 for the treatment of dry eye and neurotrophic keratopathy in the U.S. and Canada. The Company
has determined that the Joint Venture is a “variable interest entity”, since the total equity investment at risk is
not sufficient to permit the Joint Venture to finance its activities without additional subordinated financial support. Further,
because of GtreeBNT’s majority equity stake in the Joint Venture, voting control, control of the board of directors, and
substantive management rights, and given that the Company does not have the power to direct the Joint Venture’s activities
that most significantly impact its economic performance, the Company determined that it is not the primary beneficiary of the
Joint Venture and therefore is not required to consolidate the Joint Venture. The Company reports its equity stake in the Joint
Venture using the equity method of accounting because, while it does not control the Joint Venture, the Company can exert significant
influence over the Joint Ventures activities by virtue of its board representation.
Because
the Company is not obligated to fund the Joint Venture and has not provided any financial support and has no commitment to provide
financial support in the future to the Joint Venture, the carrying value of its investment in the Joint Venture is zero at both
December 31, 2018 and 2017. As a result, the Company is not recognizing its share (38.5%) of the Joint Venture’s operating
losses and will not recognize any such losses until the Joint Venture produces net income (as opposed to net losses) and at that
point the Company will reduce its share of the Joint Venture’s net income by its share of previously suspended net losses.
As of December 31, 2018, because it has not provided any financial support, the Company has no financial exposure as a result
of its variable interest in the Joint Venture.
Research
and Development
. Research and development (“R&D”) costs are expensed as incurred and include all of the wholly-allocable
costs associated with our various clinical programs passed through to us by our outsourced vendors. Those costs include: manufacturing
T
b
4; formulation of T
b
4 into the various product
candidates; stability for both T
b
4 and the various formulations; pre-clinical toxicology;
safety and pharmacokinetic studies; clinical trial management; medical oversight; laboratory evaluations; statistical data analysis;
regulatory compliance; quality assurance; and other related activities. R&D includes cash and non-cash compensation, employee
benefits, travel and other miscellaneous costs of our internal R&D personnel, who are wholly dedicated to R&D efforts.
R&D also includes a pro-ration of our common infrastructure costs for office space and communications.
Patent
Costs.
Costs related to filing and pursuing patent applications are recognized as general and administrative expenses as incurred
since recoverability of such expenditures is uncertain.
Income
Taxes.
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized
for the estimated future tax consequences attributable to differences between the financial statement carrying amounts of existing
assets and liabilities and their respective tax basis and operating loss and tax credit carryforwards. Deferred tax assets and
liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences
are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized
in income in the period that includes the enactment date. The Tax Cuts and Jobs Act, which was enacted on December 22, 2017, included
a number of changes to existing U.S. tax laws, most notably the reduction of the U.S. corporate income tax rate from 35% to 21%,
beginning in 2018. We remeasured our deferred tax assets and deferred tax liabilities as of December 31, 2017 to reflect the reduction
in the enacted U.S. corporate income tax rate.
The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during the periods in which
those temporary differences become deductible. Management considers the scheduled reversal of deferred tax liabilities, projected
future taxable income, and tax planning strategies in making that assessment. We recorded a full valuation allowance against all
estimated net deferred tax assets at December 31, 2018 and 2017.
We
recognize the effect of income tax positions only if those positions are more likely than not of being sustained. Recognized income
tax positions are measured at the largest amount that is greater than 50% likely of being realized. Changes in recognition or
measurement are reflected in the period in which the change in judgment occurs. Our policy for recording interest and penalties
associated with audits is that penalties and interest expense are recorded in “Income taxes” in our statements of
operations.
We
have significant net operating loss carryforwards to potentially reduce future federal and state taxable income, and research
and experimentation tax credit carryforwards available to potentially offset future federal and state income taxes. Use of our
net operating loss and research and experimentation credit carryforwards may be limited due to changes in our ownership as defined
within Section 382 of the Internal Revenue Code.
Net
(Loss) Income Per Common Share.
Basic net (loss) income per common share for 2018 and 2017 is based on the weighted-average
number of shares of common stock outstanding during the years. Diluted loss per share is based on the weighted-average number
of shares of common stock outstanding during each year in which a loss is incurred potentially dilutive shares are excluded because
the effect is antidilutive. In years where there is net income, diluted income per share is based on the weighted-average number
of shares of common stock outstanding plus dilutive securities with a purchase or conversion price below the per share price of
our common stock on the last day of the year. The potentially dilutive securities include 14,182,086 shares and 25,146,533 shares
in 2018 and 2017, respectively, reserved for the conversion of convertible debt or exercise of outstanding options and warrants.
For the year ended December 31, 2017, 13,485,897 dilutive securities related to convertible debt and options, were included in
the diluted income per share calculation.
Share-Based
Compensation.
We measure share-based compensation expense based on the grant date fair value of the awards which is then recognized
over the period which service is required to be provided. We estimate the grant date fair value using the Black-Scholes option-pricing
model (“Black-Scholes”). We recognized $276,129 and $271,377 in share-based compensation expense for the years ended
December 31, 2018 and 2017, respectively.
Fair
Value of Financial Instruments.
The carrying amounts of our financial instruments, as reflected in the accompanying balance
sheets, approximate fair value. Financial instruments consist of cash and cash equivalents, accounts payable, and convertible
debt and accrued interest. Because the convertible debt with an interest rate of 5% is with related parties, it was not practicable
to estimate the effect of subjective risk factors, which might influence the value of the debt. The most significant of these
risk factors include the lack of collateralization.
Recently
Adopted Accounting Pronouncements.
In May
2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09,
Revenue from Contracts with Customers
, which
provides guidance for revenue recognition for contracts, superseding the previous revenue recognition requirements, along with
most existing industry-specific guidance. The guidance requires an entity to review contracts in five steps: 1) identify the contract,
2) identify performance obligations, 3) determine the transaction price, 4) allocate the transaction price, and 5) recognize revenue.
In March 2016, the FASB issued an accounting standard update to clarify the implementation guidance on principal versus agent
considerations. In April 2016, the FASB issued an accounting standard update to clarify the identification of performance obligations
and the licensing implementation guidance, while retaining the related principles for those areas. In May 2016, the FASB issued
an accounting standard update to clarify guidance in certain areas and add some practical expedients to the guidance. The amendments
in these 2016 updates do not change the core principle of the previously issued guidance in May 2014. Effective January 1, 2018,
the Company adopted ASU 2014-09 (Topic 606) using the modified retrospective method through a cumulative adjustment to equity,
which resulted in an immaterial difference and no adjustment to our opening balance of accumulated deficit as of January 1, 2018.
In July
2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity (Topic 480); Derivatives
and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instruments with Down Round Features, (Part II) Replacement
of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily
Redeemable Noncontrolling Interests with a Scope Exception
. Part I of this Update addresses the complexity of accounting for
certain financial instruments with down round features. Down round features are features of certain equity-linked instruments
(or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. When
determining whether certain financial instruments should be classified as liabilities or equity instruments, a down round feature
no longer precludes equity classification when assessing whether the instrument is indexed to an entity’s own stock. Part
II of this Update addresses the difficulty of navigating Topic 480,
Distinguishing Liabilities from Equity
, because of
the existence of extensive pending content in the FASB ASC. For public business entities, the amendments in Part I of this Update
are effective for years beginning after December 15, 2018. Effective January 1, 2018, the Company adopted ASU 2017-11. As a result,
the December 31, 2017 qualifying liabilities of approximately $1.3 million were reclassified as equity as of January 1, 2018.
Accordingly, no previously issued financial statements were adjusted as this guidance was applied prospectively.
In May
2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718) Scope of Modification Accounting
. ASU 2017-09
provides clarification on when modification accounting should be used for changes to the terms or conditions of a share-based
payment award. This ASU does not change the accounting for modifications but clarifies that modification accounting guidance should
only be applied if there is a change to the value, vesting conditions, or award classification and would not be required if the
changes are considered non-substantive. The Company adopted ASU 2017-09 in the first quarter of 2018 and the adoption of this
ASU did not have a material effect on the financial statements.
Recent
Accounting Pronouncements
In February
2016, the FASB issued ASU 2016-02,
Leases
(Topic 842) (“ASC 842”), which amends the existing accounting standards
for leases. The new standard requires lessees to record a right-of-use (“ROU”) asset and a corresponding lease liability
on the balance sheet (with the exception of short-term leases), whereas under current accounting standards, the Company’s
lease portfolio consists of an operating lease and is not recognized on its balance sheets. The new standard also requires expanded
disclosures regarding leasing arrangements. The new standard is effective for the Company beginning January 1, 2019. In July 2018,
the FASB issued ASU 2018-11,
Leases (Topic 842): Targeted Improvements
, which provides an alternative modified transition
method. Under this method, the cumulative-effect adjustment to the opening balance of retained earnings is recognized on the date
of adoption with prior periods not restated.
The new
standard provides a number of optional practical expedients in transition. The Company expects to elect: (1) the ‘package
of practical expedients’, which permits it not to reassess under the new standard its prior conclusions about lease identification,
lease classification, and initial direct costs; (2) the use-of-hindsight; and (3) the practical expedient pertaining to land easements.
In addition, the new standard provides practical expedients for an entity’s ongoing accounting that the Company anticipates
making, such as the (1) the election for certain classes of underlying asset to not separate non-lease components from lease components
and (2) the election for short-term lease recognition exemption for all leases that qualify.
The Company
will adopt ASC 842 as of January 1, 2019, using the alternative modified transition method. The Company has substantially completed
its evaluation of the impact on the Company’s lease portfolio. The Company believes the largest impact will be on the balance
sheet for the accounting of its facilities-related lease, which is its only operating lease entered as a lessee. This lease will
be recognized under the new standard as an ROU asset and operating lease liability. The Company will also be required to provide
expanded disclosures for its leasing arrangement. As of December 31, 2018, the Company had approximately $77,000 of undiscounted
future minimum operating lease commitments that are not recognized on its balance sheet as determined under the current standard.
While substantially
complete, the Company is still in the process of finalizing its evaluation of the effect of ASC 842 on the Company’s financial
statements and disclosures. The Company will finalize its accounting assessment and quantitative impact of the adoption during
the first quarter of fiscal year 2019. As the Company completes its evaluation of this new standard, new information may arise
that could change the Company’s current understanding of the impact to leases. Additionally, the Company will continue to
monitor industry activities and any additional guidance provided by regulators, standards setters, or the accounting profession,
and adjust the Company’s assessment and implementation plans accordingly.
In June
2018, the FASB issued ASU 2018-07:
Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based
Payment Accounting.
This ASU expands the scope of Topic 718 to include share-based payment transactions for acquiring goods
and services from non-employees, and as a result, the accounting for share-based payments to non-employees will be substantially
aligned. ASU 2018-07 is effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal
year, early adoption is permitted but no earlier than an entity’s adoption date of Topic 606. The Company does not expect
this new guidance will have a material impact on its financial statements and related disclosures.
The Company
has evaluated all other issued and unadopted ASUs and believes the adoption of these standards will not have a material impact
on its results of operations, financial position or cash flows.
3.
|
FAIR VALUE MEASUREMENTS
|
The authoritative
guidance for fair value measurements defines fair value as the exchange price that would be received for an asset or paid to transfer
a liability (an exit price) in the principal or the most advantageous market for the asset or liability in an orderly transaction
between market participants on the measurement date. Market participants are buyers and sellers in the principal market that are
(i) independent, (ii) knowledgeable, (iii) able to transact, and (iv) willing to transact. The guidance describes a fair value
hierarchy based on the levels of inputs, of which the first two are considered observable and the last unobservable, that may
be used to measure fair value which are the following:
|
•
|
Level 1 — Quoted prices in active markets for identical assets and liabilities.
|
|
|
|
|
•
|
Level 2 — Observable inputs other than quoted prices in active markets for identical assets and liabilities.
|
|
|
|
|
•
|
Level 3 — Unobservable inputs.
|
As of December
31, 2018 and 2017, our only qualifying assets that required measurement under the foregoing fair value hierarchy were funds held
in our Company bank accounts included in Cash and Cash Equivalents valued at $237,261 and $181,708, respectively, using Level
1 inputs. Our December 31, 2017 balance sheet reflects qualifying liabilities resulting from the price protection provision in
the convertible promissory notes issued in March, July and September of 2013 and January 2014 (see Note 7). Previously we evaluated
the derivative liability embedded in the series of convertible notes using the Black-Scholes model to determine if an adjustment
to the carrying value of the liability was required each reporting period. Given the conditions surrounding the trading of the
Company’s equity securities, the Company had valued its derivative instruments related to embedded conversion features from
the issuance of convertible debentures in accordance with the Level 3 guidelines. Our December 31, 2018 balance sheet no longer
reflects these liabilities pursuant to the adoption ASU 2017-11. As a result, the December 31, 2017 qualifying liabilities were
reclassified as equity.
For the
year ended December 31, 2018, the following table reconciles the beginning and ending balances for financial instruments that
are recognized at fair value in these financial statements.
|
|
Balance at
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
|
|
|
|
December 31,
|
|
|
New
|
|
|
Change in
|
|
|
|
|
|
December 31,
|
|
|
|
2017
|
|
|
Issuances
|
|
|
Fair Values
|
|
|
Reclassifications
|
|
|
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Level 3 -
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liabilities from:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Conversion features
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
March 2013
|
|
$
|
412,500
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(412,500
|
)
|
|
$
|
-
|
|
July 2013
|
|
|
183,334
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(183,334
|
)
|
|
|
-
|
|
September 2013
|
|
|
588,500
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(588,500
|
)
|
|
|
-
|
|
January 2014
|
|
|
100,835
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(100,835
|
)
|
|
|
-
|
|
Derivative instruments
|
|
$
|
1,285,169
|
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
(1,285,169
|
)
|
|
$
|
-
|
|
4.
|
LICENSES, INTELLECTUAL PROPERTY, AND RELATED PARTY TRANSACTIONS
|
We have
an exclusive, worldwide licensing agreement with the National Institutes of Health (“NIH”) for all claims to T
b
4
within their broadly-defined patent application. In exchange for this exclusive worldwide license, we must make certain royalty
and milestone payments to the NIH. In 2013, we amended certain provisions of the exclusive license; we were permitted to credit
amounts paid to prosecute or maintain the licensed patent rights during 2013 calendar year against the 2013 minimum annual royalty
of $25,000. Beginning in 2014 the minimum annual royalty is $2,000. No assurance can be given as to whether or when a patent will
be issued, or as to any claims that may be included or excluded within the patent. We have also filed numerous additional patent
applications covering various compositions, uses, formulations and other components of T
b
4,
as well as to novel peptides resulting from our research efforts. Some of these patents have been issued, while many patent applications
are still pending.
We have
also entered into an agreement with a university under the terms of which we have received an exclusive license to technology
and intellectual property. The agreement, which is generally cancelable by us, provided for the payment of a license issue
fee and/or minimum annual payments. The initial license fee of $25,000 was paid in 2010 and no minimum fees were due for
the year ended December 31, 2011. Beginning in 2012, minimum annual maintenance fees are $5,000 annually which was paid in 2012
but has not been paid since. In addition, the agreements provide for payments upon the achievement of certain milestones in product
development. The agreement also requires us to fund certain costs associated with the filing and prosecution of patent applications.
In February 2013, this agreement was amended to include additional technology and intellectual property. The expanded license
does not require payment of an initial license fee or additional annual maintenance fees but will be subject to payments upon
the achievement of certain milestones for a product developed under the amended license of the additional technology and intellectual
property.
All license
fees are included in Research and Development in the accompanying statements of operations.
In 2012,
we entered into a License Agreement (the “Agreement”) with Lee’s Pharmaceutical (HK) Limited (“Lee’s”),
headquartered in Hong Kong, for the license of Thymosin Beta 4 in any pharmaceutical form, including our RGN-259, RGN-352 and
RGN-137 product candidates, in China, Hong Kong, Macau and Taiwan. Under the License Agreement, we are eligible to receive milestone
payments and royalties, ranging from low double digit to high single digit percentages of any commercial sales of the licensed
products. Lee’s will pay for all developmental costs associated with each product candidate. We will provide Tß4 to
Lee’s at no charge for a Phase 2 ophthalmic clinical trial and will provide Tß4 to Lee’s for all other developmental
and clinical work at a price equal to our cost. We will also have the right to exclusively license any improvements made by Lee’s
to RegeneRx’s products outside of the licensed territory. Lee’s paid us $200,000 upon signing of a term sheet in March
2012, and Lee’s paid us an additional $200,000 upon signing of the definitive license agreement. The Company is accounting
for the License Agreement as a revenue arrangement. Since participation in the joint development committee is required it was
deemed to be a material promise. Management has concluded that the participation in the joint development committee is not distinct
from other promised goods and services. The Company assessed the License Agreement in accordance with ASC 606. The Company evaluated
the promised goods and services under the License Agreement and determined that there was one combined performance obligation
representing a series of distinct goods and services including the license to research, develop and commercialize Tß4 in
any pharmaceutical form and participation in the joint development committee. To-date, management has not been able to reasonably
measure the outcome of the performance obligation, but still expects to recover the costs incurred in satisfying the performance
obligation. Accordingly, the Company has deferred all revenue until such time that it can reasonably measure the outcome of the
performance obligation or until the performance obligation becomes onerous. As of December 31, 2018 and 2017, we have unearned
revenue totaling $400,000 pursuant to this Agreement. Revenue will be recognized for future royalty payments as they are earned.
In February 2019, the License Agreement was amended and assigned by Lee’s to their affiliate, Zhaoke Ophthalmology Pharmaceutical
Limited. There are no economic changes to the License Agreement.
On March
7, 2014, we entered into license agreements with GtreeBNT Co., Ltd. The two Licensing Agreements are for the license of territorial
rights to two of our Thymosin Beta 4-based products candidates, RGN-259 and RGN-137.
Under the
License Agreement for RGN-259, our preservative-free eye drop product candidate, GtreeBNT will have the right to develop and commercialize
RGN-259 in Asia (excluding China, Hong Kong, Taiwan, and Macau). The rights will be exclusive in Korea, Japan, Australia, New
Zealand, Brunei, Cambodia, East Timor, Indonesia, Laos, Malaysia, Mongolia, Myanmar (Burma), Philippines, Singapore, Thailand,
Vietnam, and Kazakhstan, and semi-exclusive in India, Pakistan, Bangladesh, Bhutan, Maldives, Nepal, Sri Lanka, Kyrgyzstan, Tajikistan,
Turkmenistan and Uzbekistan, collectively, the Territory (the “259 Territory”). Under the 259 License Agreement we
are eligible to receive aggregate potential milestone payments of up to $3.5 million. In addition, we are eligible to receive
royalties of a low double digit percentage of any commercial sales of the licensed product sold by GtreeBNT in the 259 Territory.
Under the
License Agreement for RGN-137, our topical dermal gel product candidate, GtreeBNT will have the exclusive right to develop and
commercialize RGN-137 in the U.S. (the “137 Territory”). Under the 137 License Agreement we are eligible to receive
aggregate potential milestone payments of up to $3.5 million. In addition, we are eligible to receive royalties of a low double-digit
percentage of any commercial sales of the Company’s licensed product sold by GtreeBNT in the 137 Territory. In August 2017,
we amended the License Agreement for RGN-137 held by GtreeBNT. Under the amendment, the 137 Territory was expanded to include
Europe, Canada, South Korea, Australia and Japan. Under the License Agreement, the Company received a series of non-refundable
payments and is entitled to receive royalties on the future sales of products. The Company is accounting for the license agreement
as a revenue arrangement. Since participation in the joint development committee is required it was deemed to be a material promise.
Management has concluded that the participation in the joint development committee is not distinct from other promised goods and
services. The Company assessed the license agreement in accordance with ASC 606. The Company evaluated the promised goods and
services under the license agreement and determined that there was one combined performance obligation representing a series of
distinct goods and services including the license to research, develop and commercialize RGN-137 and participation in the joint
development committee. Revenue is being recognized on a straight-line basis over a period of 23 years, which, in management’s
judgment, is the best measure of progress towards satisfying the performance obligation and represents the Company’s best
estimate of the period of the obligation. As of December 31, 2018 and 2017, we have unearned revenue totaling $753,623 and $575,971,
respectively, pursuant to this agreement. Revenue will be recognized for future royalty payments as they are earned.
Each License
Agreement contains diligence provisions that require the initiation of certain clinical trials within certain time periods that,
if not met, would result in the loss of rights or exclusivity in certain countries. GtreeBNT will pay for all developmental costs
associated with each product candidate. We have the right to exclusively license any improvements made by GtreeBNT to our products
outside of the licensed territory on a royalty free basis. The two firms have created a joint development committee and continue
to discuss the development of the licensed products and share information relating thereto. Both companies will also share all
non-clinical and clinical data and other information related to development of the licensed product candidates.
On January
28, 2015, the Company entered into the Joint Venture Agreement with GtreeBNT, a shareholder in the Company. The Joint Venture
Agreement provides for the creation of the Joint Venture, jointly owned by the Company and GtreeBNT, which is commercializing
RGN-259 for treatment of dry eye and neurotrophic keratopathy in the U.S. and Canada.
GtreeBNT
is solely responsible for funding all the product development and commercialization efforts of the Joint Venture. GtreeBNT made
an initial contribution of $3 million in cash and received an initial equity stake of 51%. RegeneRx’s ownership interest
in ReGenTree was reduced to 38.5% when the Clinical Study Report was filed for the Phase 2/3 dry eye clinical trial. Based on
when, and if, certain additional development milestones are achieved in the U.S. with RGN-259, our equity ownership may be incrementally
reduced to between 38.5% and 25%, with 25% being the final equity ownership upon approval of an NDA for DES in the U.S. In addition
to our equity ownership, RegeneRx retains a royalty on net sales that varies between single and low double digits, depending on
whether commercial sales are made by ReGenTree or a licensee. In the event ReGenTree is acquired or there is a change of control
that occurs following achievement of an NDA, RegeneRx shall be entitled to a minimum of 40% of all proceeds paid or payable and
will forgo any future royalties. The Company is not required or otherwise obligated to provide financial support to the Joint
Venture.
The Joint
Venture is responsible for executing all development and commercialization activities under the License Agreement, which activities
will be directed by a joint development committee comprised of representatives of the Company and GtreeBNT. The License Agreement
has a term that extends to the later of the expiration of the last patent covered by the License Agreement or 25 years from the
first commercial sale under the License Agreement. The License Agreement may be earlier terminated if the Joint Venture fails
to meet certain commercialization milestones, if either party breaches the License Agreement and fails to cure such breach, as
a result of government action that limits the ability of the Joint Venture to commercialize the product, as a result of a challenge
to a licensed patent, following termination of the license between the Company and certain agencies of the United States federal
government, or upon the bankruptcy of either party.
Under the
License Agreement, the Company received $1.0 million in up-front payments and is entitled to receive royalties on the Joint Venture’s
future sales of products. On April 6, 2016, we received $250,000 from ReGenTree and executed an amendment to the license agreement
on April 28, 2016. Under the amendment the territorial rights were expanded to include Canada. The Company is accounting for the
License Agreement with the Joint Venture as a revenue arrangement. Since participation in the joint development committee is required
it was deemed to be a material promise. Management has concluded that the participation in the joint development committee is
not distinct from other promised goods and services. The Company assessed the license agreements in accordance with ASC 606. The
Company evaluated the promised goods and services under the license agreements and determined that there was one combined performance
obligation representing a series of distinct goods and services including the license to research, develop and commercialize RGN-259
and participation in the joint development committee. Revenue is being recognized on a straight-line basis over a period of 30
years, which, in management’s judgment, is the best measure of progress towards satisfying the performance obligation and
represents the Company’s best estimate of the period of the obligation. As of December 31, 2018 and 2017, we have unearned
revenue totaling $1,101,225 and $1,148,544, respectively, pursuant to this agreement. Revenue will be recognized for future royalty
payments as they are earned.
5.
|
COMPOSITION OF CERTAIN FINANCIAL STATEMENT CAPTIONS
|
Prepaid
expenses and other current assets are comprised of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Prepaid insurance
|
|
$
|
7,604
|
|
|
$
|
2,508
|
|
Other
|
|
|
29,005
|
|
|
|
32,934
|
|
|
|
$
|
36,609
|
|
|
$
|
35,442
|
|
Accrued
expenses are comprised of the following:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Accrued professional fees
|
|
$
|
9,480
|
|
|
$
|
9,156
|
|
Accrued other
|
|
|
32,459
|
|
|
|
34,771
|
|
Accrued compensation
|
|
|
35,411
|
|
|
|
32,368
|
|
Accrued interest - convertible debt
|
|
|
13,708
|
|
|
|
156,070
|
|
|
|
$
|
91,058
|
|
|
$
|
232,365
|
|
|
6.
|
EMPLOYEE BENEFIT
PLANS
|
In 2018
and 2017, the Company provided health and dental insurance to an employee under a group plan. No retirement plan was in place
for 2018 or 2017.
2012
Convertible Note
On October
19, 2012, we completed a private placement of convertible notes (the “2012 Notes”) raising an aggregate of $300,000
in gross proceeds. The 2012 Notes were originally scheduled to mature after twenty-four (24) months from issuance. The 2012 Notes
bore interest at a rate of five percent (5%) per annum and were convertible into shares of our common stock at a conversion price
of fifteen cents ($0.15) per share (subject to adjustment as described in the 2012 Notes) at any time prior to repayment, at the
election of the investors. In the aggregate, the 2012 Notes were convertible into up to 2,000,000 shares of our common stock excluding
interest.
At any
time prior to maturity of the 2012 Notes, with the consent of the holders of a majority in interest of the 2012 Notes, we could
prepay the outstanding principal amount of the 2012 Notes plus unpaid accrued interest without penalty. Upon the commission of
any act of bankruptcy by the Company, the execution by the Company of a general assignment for the benefit of creditors, the filing
by or against the Company of a petition in bankruptcy or any petition for relief under the federal bankruptcy act or the continuation
of such petition without dismissal for a period of ninety (90) days or more, or the appointment of a receiver or trustee to take
possession of the property or assets of the Company, the outstanding principal and all accrued interest on the 2012 Notes would
accelerate and automatically become immediately due and payable.
In connection
with the issuance of the 2012 Notes, we also issued warrants to each Investor. The warrants were exercisable for an aggregate
of 400,000 shares of common stock with an exercise price of fifteen cents ($0.15) per share for a period of five years. The relative
fair value of the warrants issued was $27,097, calculated using the Black-Scholes-Merton valuation model value of $0.07 with an
expected and contractual life of 5 years, an assumed volatility of 74.36%, and a risk-free interest rate of 0.77%. The warrants
were recorded as additional paid-in-capital and a discount on the 2012 Notes of $27,097.
The investors,
and the principal amount of their respective 2012 Notes and number of shares of common stock issuable upon exercise of their respective
warrants, are as set forth below:
Investor
|
|
Note Principal
|
|
|
Warrants
|
|
Sinaf S.A.
|
|
$
|
200,000
|
|
|
|
266,667
|
|
Joseph C. McNay
|
|
$
|
50,000
|
|
|
|
66,667
|
|
Allan L. Goldstein
|
|
$
|
35,000
|
|
|
|
46,666
|
|
J.J. Finkelstein
|
|
$
|
15,000
|
|
|
|
20,000
|
|
Sinaf S.
A. has historically been affiliated with our largest stockholder. The other investors are members of our Board of Directors including
Mr. Finkelstein who serves as our CEO and also the Chairman of our Board of Directors Dr. Goldstein who also serves as our
Chief Scientific Officer.
During
2014, the Company amended the existing October 2012 convertible debt agreement with the holders, solely to extend the due date
of the principal and accrued unpaid until interest October 19, 2017. No other terms of the original debt were amended or
modified, and the holders did not reduce the borrowed amount or change the interest rate of the debt. The Company considered
the restructuring a troubled debt restructuring as a result of the Company’s financial condition (see Note 1 discussion
of “going concern”). At the date of the amendment, all existing debt discounts and deferred financing fees were
fully amortized and the amendment did not involve any additional fees paid to the holders or third parties; as such there was
no gain recognized as a result of the amendment. The 2012 Notes matured, and the holders elected to convert the note balances
of $300,000 and accrued interest of approximately $76,000 into common stock and also exercised the associated warrants in October
2017.
2013
Convertible Notes
On March
29, 2013, we completed a private placement of convertible notes (the “March 2013 Notes”) raising an aggregate of $225,000
in gross proceeds. The March 2013 Notes bore interest at a rate of five percent (5%) per annum, matured sixty (60) months after
their date of issuance and were convertible into shares of our common stock at a conversion price of six cents ($0.06) per share
(subject to adjustment as described in the March 2013 Notes) at any time prior to repayment, at the election of the investors.
In the aggregate, the March 2013 Notes were initially convertible into up to 3,750,000 shares of our common stock.
At any
time prior to maturity of the March 2013 Notes, with the consent of the holders of a majority in interest of the March 2013 Notes,
we could prepay the outstanding principal amount of the March 2013 Notes plus unpaid accrued interest without penalty. Upon the
commission of any act of bankruptcy by the Company, the execution by the Company of a general assignment for the benefit of creditors,
the filing by or against the Company of a petition in bankruptcy or any petition for relief under the Federal bankruptcy act or
the continuation of such petition without dismissal for a period of ninety (90) days or more, or the appointment of a receiver
or trustee to take possession of the property or assets of the Company, the outstanding principal and all accrued interest on
the March 2013 Notes would accelerate and automatically become immediately due and payable.
The investors
in the offering included two members of the Board of Directors, Dr. Goldstein and Joseph C. McNay, an outside director. The principal
amounts of their respective March 2013 Notes are as set forth below:
Investor
|
|
Note Principal
|
|
Joseph C. McNay
|
|
$
|
50,000
|
|
Allan L. Goldstein
|
|
$
|
25,000
|
|
The Company
evaluated the terms of the March 2013 Notes which contained a down round provision under which the conversion price could be decreased
as a result of future equity offerings, as defined in the March 2013 Notes. The adjustment would reduce the conversion
price of the March 2013 Notes to be equivalent to that of the newly issued stock or stock-related instruments. As a
result, the Company concluded that the conversion feature represented an embedded conversion feature for accounting purposes and
should be recognized as a derivative liability, requiring a mark-to-market adjustment at the end of each reporting period until
the related March 2013 Notes have been settled prior to the adoption of ASU 2017-11. The bifurcated liability of $225,000
was recorded on the date of issuance which resulted in a residual debt value of $0. The discount related to the embedded
feature was accreted as an addition to the debt through the maturity of the notes. The March 2013 Notes matured, and the holders
elected to convert the note balances of $225,000 and accrued interest of approximately $57,000 into common stock in March 2018.
On July
5, 2013, we completed a private placement of convertible notes (the “July 2013 Notes”) raising an aggregate of $100,000
in gross proceeds. The July 2013 Notes bore interest at a rate of five percent (5%) per annum, matured sixty (60) months after
their date of issuance and were convertible into shares of our common stock at a conversion price of six cents ($0.06) per share
(subject to adjustment as described in the July 2013 Notes) at any time prior to repayment, at the election of the investors.
In the aggregate, the July 2013 Notes were initially convertible into up to 1,666,667 shares of our common stock.
At any
time prior to maturity of the July 2013 Notes, with the consent of the holders of a majority in interest of the July 2013 Notes,
we could prepay the outstanding principal amount of the July 2013 Notes plus unpaid accrued interest without penalty. Upon the
commission of any act of bankruptcy by the Company, the execution by the Company of a general assignment for the benefit of creditors,
the filing by or against the Company of a petition in bankruptcy or any petition for relief under the Federal bankruptcy act or
the continuation of such petition without dismissal for a period of ninety (90) days or more, or the appointment of a receiver
or trustee to take possession of the property or assets of the Company, the outstanding principal and all accrued interest on
the July 2013 Notes would accelerate and automatically become immediately due and payable.
The investors
in the offering included three current and one former member of Board of Directors, Mr. Finkelstein, Dr. Goldstein, Mr. McNay
and L. Thompson Bowles, previously an outside director. The principal amounts of their respective July 2013 Notes are as set forth
below:
Investor
|
|
Note Principal
|
|
Joseph C. McNay
|
|
$
|
50,000
|
|
Allan L. Goldstein
|
|
$
|
10,000
|
|
J.J. Finkelstein
|
|
$
|
5,000
|
|
L. Thompson Bowles
|
|
$
|
5,000
|
|
The Company
evaluated the terms of the July 2013 Notes which contained a down round provision under which the conversion price could be decreased
as a result of future equity offerings, as defined in the July 2013 Notes. The adjustment would reduce the conversion
price of the July 2013 Notes to be equivalent to that of the newly issued stock or stock-related instruments. As a
result, the Company concluded that the conversion feature represented an embedded conversion feature for accounting purposes and
should be recognized as a derivative liability, requiring a mark-to-market adjustment at the end of each reporting period until
the related July 2013 Notes have been settled prior to the adoption of ASU 2017-11. The bifurcated liability of $66,667 was recorded
on the date of issuance which resulted in a residual debt value of $33,333. The discount related to the embedded feature was accreted
back to debt through the maturity of the notes. The July 2013 Notes matured, and the holders elected to convert the note balances
of $100,000 and accrued interest of approximately $25,000 into common stock in July 2018.
On September
11, 2013, we completed a private placement of convertible notes raising an aggregate of $321,000 in gross proceeds (the “September
2013 Notes”). The September 2013 Notes bore interest at a rate of five percent (5%) per annum, matured sixty
(60) months after their date of issuance and were convertible into shares of our common stock at a conversion price of six cents
($0.06) per share (subject to adjustment as described in the September 2013 Notes) at any time prior to repayment, at the election
of the investor. In the aggregate, the September 2013 Notes were initially convertible into up to 5,350,000 shares
of our common stock.
At any
time prior to maturity of the September 2013 Notes, with the consent of the holders of a majority in interest of the September
2013 Notes, we could prepay the outstanding principal amount of the September 2013 Notes plus unpaid accrued interest without
penalty. Upon the commission of any act of bankruptcy by the Company, the execution by the Company of a general assignment
for the benefit of creditors, the filing by or against the Company of a petition in bankruptcy or any petition for relief under
the federal bankruptcy act or the continuation of such petition without dismissal for a period of ninety (90) days or more, or
the appointment of a receiver or trustee to take possession of the property or assets of the Company, the outstanding principal
and all accrued interest on the September 2013 Notes would accelerate and automatically become immediately due and payable.
The investors
in the offering included an affiliate and three current and one former member of the Board of Directors. The principal amounts
of their respective September 2013 Notes are as set forth below:
Investor
|
|
Note Principal
|
|
SINAF S.A.
|
|
$
|
150,000
|
|
Joseph C. McNay
|
|
$
|
100,000
|
|
Allan L. Goldstein
|
|
$
|
11,000
|
|
L. Thompson Bowles
|
|
$
|
5,000
|
|
R. Don Elsey
|
|
$
|
5,000
|
|
The Company
evaluated the terms of the September 2013 Notes which contained a down round provision under which the conversion price could
be decreased as a result of future equity offerings, as defined in the September 2013 Notes. The adjustment would reduce
the conversion price of the September 2013 Notes to be equivalent to that of the newly issued stock or stock-related instruments. As
a result, the Company concluded that the conversion feature represented an embedded conversion feature for accounting purposes
and should be recognized as a derivative liability, requiring a mark-to-market adjustment at the end of each reporting period
until the related September 2013 Notes have been settled prior to the adoption of ASU 2017-11. The bifurcated liability of $267,500
was recorded on the date of issuance which resulted in a residual debt value of $53,500. The discount related to the embedded
feature was accreted back to debt through the maturity of the notes. The September 2013 Notes matured, and the holders elected
to convert the note balances of $321,000 and accrued interest of approximately $81,000 into common stock in September 2018.
2014
Convertible Notes
On January
7, 2014, we completed a private placement of convertible notes raising an aggregate of $55,000 in gross proceeds (the “January
2014 Notes”). The January 2014 Notes bear interest at a rate of 5% per annum, mature sixty (60) months after
their date of issuance and are convertible into shares of our common stock at a conversion price of six cents ($0.06) per share
(subject to adjustment as described in the January 2014 Notes) at any time prior to repayment, at the election of the investor. In
the aggregate, the January 2014 Notes are initially convertible into up to 916,667 shares of our common stock.
At any
time prior to maturity of the January 2014 Notes, with the consent of the holders of a majority in interest of the January 2014
Notes, we may prepay the outstanding principal amount of the January 2014 Notes plus unpaid accrued interest without penalty. Upon
the commission of any act of bankruptcy by the Company, the execution by the Company of a general assignment for the benefit of
creditors, the filing by or against the Company of a petition in bankruptcy or any petition for relief under the federal bankruptcy
act or the continuation of such petition without dismissal for a period of 90 days or more, or the appointment of a receiver or
trustee to take possession of the property or assets of the Company, the outstanding principal and all accrued interest on the
January 2014 Notes will accelerate and automatically become immediately due and payable.
The investors
in the offering included two current and one former member of the Board of Directors. The principal amounts of their respective
January 2014 Notes are as set forth below:
Investor
|
|
Note Principal
|
|
Joseph C. McNay
|
|
$
|
25,000
|
|
Allan L. Goldstein
|
|
$
|
10,000
|
|
L. Thompson Bowles
|
|
$
|
5,000
|
|
The Company
evaluated the terms of the January 2014 Notes which contain a down round provision under which the conversion price could be decreased
as a result of future equity offerings, as defined in the January 2014 Notes. The adjustment would reduce the conversion
price of the January 2014 Notes to be equivalent to that of the newly issued stock or stock-related instruments. As
a result, the Company concluded that the conversion feature represented an embedded conversion feature for accounting purposes
and should be recognized as a derivative liability, requiring a mark-to-market adjustment at the end of each reporting period
until the related January 2014 Notes have been settled prior to the adoption of ASU 2017-11. The bifurcated liability of $55,000
was recorded on the date of issuance which resulted in a residual debt value of $0. The discount related to the embedded feature
is being accreted back to debt through the maturity of the notes. The January 2014 Notes matured, and the holders elected to convert
the note balances of $55,000 and accrued interest of approximately $14,000 into common stock in January 2019.
The outstanding
balance of the derivative liability is as follows:
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
March 2013 Notes
|
|
$
|
-
|
|
|
$
|
412,500
|
|
|
|
|
|
|
|
|
|
|
July 2013 Notes
|
|
|
-
|
|
|
|
183,334
|
|
|
|
|
|
|
|
|
|
|
September 2013 Notes
|
|
|
-
|
|
|
|
588,500
|
|
|
|
|
|
|
|
|
|
|
January 2014 Notes
|
|
|
-
|
|
|
|
100,835
|
|
Total fair value of derivative liability
|
|
$
|
-
|
|
|
$
|
1,285,169
|
|
The change
in fair value of the derivative liability is as follows:
|
|
For the years ended
|
|
|
|
December 31,
2018
|
|
|
December 31,
2017
|
|
|
|
|
|
|
|
|
March 2013 Notes
|
|
$
|
-
|
|
|
$
|
(562,500
|
)
|
|
|
|
|
|
|
|
|
|
July 2013 Notes
|
|
|
-
|
|
|
|
(250,000
|
)
|
|
|
|
|
|
|
|
|
|
September 2013 Notes
|
|
|
-
|
|
|
|
(802,500
|
)
|
|
|
|
|
|
|
|
|
|
January 2014 Notes
|
|
|
-
|
|
|
|
(146,668
|
)
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
|
-
|
|
|
|
(190,000
|
)
|
|
|
|
|
|
|
|
|
|
Rights liability
|
|
|
-
|
|
|
|
(48,937
|
)
|
|
|
|
|
|
|
|
|
|
Total change in fair value of derivative
|
|
$
|
-
|
|
|
$
|
(2,000,605
|
)
|
The Company
recorded interest expense and discount accretion as set forth below:
|
|
For the years ended
|
|
|
|
December 31, 2018
|
|
|
December 31, 2017
|
|
|
|
|
|
|
|
|
2012 Notes
|
|
$
|
-
|
|
|
$
|
12,999
|
|
|
|
|
|
|
|
|
|
|
March 2013 Notes
|
|
|
14,192
|
|
|
|
56,250
|
|
|
|
|
|
|
|
|
|
|
July 2013 Notes
|
|
|
9,677
|
|
|
|
18,335
|
|
|
|
|
|
|
|
|
|
|
September 2013 Notes
|
|
|
49,661
|
|
|
|
69,550
|
|
|
|
|
|
|
|
|
|
|
January 2014 Notes
|
|
|
13,750
|
|
|
|
13,749
|
|
|
|
|
|
|
|
|
|
|
Total interest expense
|
|
$
|
87,280
|
|
|
$
|
170,883
|
|
Common
Stock.
In March, July and September of 2018, the March 2013, July 2013 and September 2013 Notes matured, and the holders elected
to convert the note balances and accrued interest into common stock. As a result, we issued 4,700,520, 2,089,120 and 6,706,076
shares of common stock, respectively. (see Note 7)
On March
2, 2018, we entered into the Reprice Agreement with Sabby Healthcare Master Fund, Ltd., and Sabby Volatility Warrant Master Fund,
Ltd. (collectively, “Sabby”). In connection with that certain securities purchase agreement between the Company and
Sabby dated June 27, 2016 (the “Purchase Agreement”) we also issued to Sabby warrants to purchase 5,147,059 shares
of common stock (the “Warrant Shares”) at an exercise price of $0.51 per share (the “Sabby Warrants”).
Under the terms of the Reprice Agreement, in consideration of Sabby exercising in full all of the Sabby Warrants (the “Warrant
Exercise”), the exercise price per share of the Sabby Warrants was reduced to $0.20 per share. In addition, and as further
consideration, we issued to Sabby warrants to purchase up to 3,860,294 shares of common stock at an exercise price of $0.2301
per share, the closing bid price for the Company’s Common Stock on February 28, 2018 (the “New Warrants”). We
received gross proceeds of approximately $1,029,000 from the warrant reprice transaction.
The Reprice
Agreement was accounted for as an inducement and consequently, we recognized a non-operating expense of $582,904 equal to the
fair value of the New Warrants calculated using a customized Monte Carlo simulation. The repricing of the Warrant Shares did not
result in any incremental fair value and consequently did not result in any additional expense.
In conjunction
with the Reprice Agreement we incurred $101,110 of expenses comprised of: (i) 102,947 warrants valued at $15,545 issued to an
outside third party as a fee for the transaction and (ii) $85,565 of expenses for professional fees. Such expenses were netted
against the proceeds from the transaction. The warrants contained the same terms and conditions as the New Warrants and were valued
using the Black-Scholes model.
Registration
Rights Agreements.
In connection with the sale of certain equity instruments, we have entered into Registration Rights Agreements.
Generally, these Agreements required us to file registration statements with the Securities and Exchange Commission to register
common shares to permit re-sale of common shares previously sold under an exemption from registration or to register common shares
that may be issued on exercise of outstanding warrants.
The Registration
Rights Agreements usually require us to pay penalties for any failure or time delay in filing or maintaining the effectiveness
of the required registration statements. These penalties are usually expressed as a fixed percentage, per month, of the original
amount we received on issuance of the common shares, options or warrants. While to date we have not incurred any penalties under
these agreements, if a penalty is determined to be probable we would recognize the amount as a contingent liability and not as
a derivative instrument.
Share-Based
Compensation.
We recognized $276,129 and $271,377 in stock-based compensation expense for the years ended December 31,
2018 and 2017, respectively. We expect to recognize the compensation cost related to non-vested options as of December 31,
2018 of $273,000 over the weighted average remaining recognition period of 1.23 years.
Stock
Option and Incentive Plans.
On June 13, 2018, at our Annual Meeting of Stockholders, our stockholders approved the 2018 Equity
Incentive Plan (the “2018 Plan”). The terms of the 2018 Plan provide for the discretionary grant of incentive stock
options, nonstatutory stock options, stock appreciation rights, restricted stock awards, restricted stock unit awards, performance
stock awards, other stock awards and performance cash awards to our employees, directors and consultants. The total number of
shares of our common stock reserved for issuance under the 2018 Plan is initially 5,000,000 shares of common stock with additional
shares being available for grant under the plan annually in an amount equal to 2% of the then outstanding shares of common stock
on July 1 of each calendar year.
We have
previously adopted two equity incentive plans, known as the 2000 Equity Incentive Plan, or the 2000 Plan, and the 2010 Equity
Incentive Plan, or the 2010 Plan. Both the 2000 Plan and the 2010 Plan have a term of ten years, with the 2000 Plan already expired
and the 2010 Plan scheduled to expire in July 2020. No further awards may be granted under the 2010 Plan with the approval
of the 2018 Plan. All outstanding option awards granted under the 2000 Plan and the 2010 Plan will continue to be subject to the
terms and conditions as set forth in the agreements evidencing such option awards and the terms of the 2000 Plan and the 2010
Plan. Shares remaining available for issuance under the shares reserve of the 2010 Plan will not be subject to future awards under
the 2018 Plan, and shares subject to outstanding awards under the 2000 Plan and the 2010 Plan that are terminated or forfeited
in the future will not be subject to future awards under the 2018 Plan.
The following
summarizes share-based compensation expense for the years ended December 31, 2018 and 2017, which was allocated as follows:
|
|
December 31,
|
|
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Research and development
|
|
$
|
79,143
|
|
|
$
|
83,425
|
|
General and administrative
|
|
|
196,986
|
|
|
|
187,952
|
|
|
|
$
|
276,129
|
|
|
$
|
271,377
|
|
The following
summarizes stock option activity for the years ended December 31, 2018 and 2017:
|
|
|
|
|
Options Outstanding
|
|
|
|
Shares available for grants
|
|
|
Number of shares
|
|
|
Exercise price range
|
|
|
Weighted average exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
608,029
|
|
|
|
7,698,711
|
|
|
$
|
0.14 - 0.64
|
|
|
$
|
0.29
|
|
Grants
|
|
|
(1,000,000
|
)
|
|
|
1,000,000
|
|
|
|
0.28
|
|
|
|
0.28
|
|
Exercises
|
|
|
-
|
|
|
|
(95,608
|
)
|
|
|
0.16
|
|
|
|
0.16
|
|
Forfeitures
|
|
|
124,750
|
|
|
|
(167,915
|
)
|
|
|
0.21 - 0.64
|
|
|
|
0.40
|
|
Expirations*
|
|
|
376,400
|
|
|
|
(376,400
|
)
|
|
|
0.27
|
|
|
|
0.27
|
|
December 31, 2017
|
|
|
109,179
|
|
|
|
8,058,788
|
|
|
|
0.14 - 0.64
|
|
|
|
0.29
|
|
2018 Plan approved
|
|
|
5,000,000
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Grants
|
|
|
(1,605,000
|
)
|
|
|
1,605,000
|
|
|
|
0.21
|
|
|
|
0.21
|
|
Expirations
|
|
|
618,963
|
|
|
|
(618,963
|
)
|
|
|
0.16
- 0.22
|
|
|
|
0.19
|
|
December 31, 2018
|
|
|
4,123,142
|
|
|
|
9,044,825
|
|
|
$
|
0.14
- 0.64
|
|
|
$
|
0.28
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2018
|
|
|
|
|
|
|
8,955,810
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2018
|
|
|
|
|
|
|
7,039,825
|
|
|
|
|
|
|
|
|
|
The following
summarizes information about stock options outstanding at December 31, 2018:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Weighted
Average
Remaining
Contractual Life
|
|
|
Aggregate
Intrinsic Value
|
|
Options Outstanding, December 31, 2017
|
|
|
8,058,788
|
|
|
$
|
0.29
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,605,000
|
|
|
|
0.21
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(618,963
|
)
|
|
|
0.19
|
|
|
|
|
|
|
|
|
|
Options Outstanding, December 31, 2018
|
|
|
9,044,825
|
|
|
$
|
0.28
|
|
|
|
4.3
years
|
|
|
$
|
20,000
|
|
Vested and unvested but expected to vest, December 31, 2018
|
|
|
8,955,810
|
|
|
$
|
0.28
|
|
|
|
4.3
years
|
|
|
$
|
20,000
|
|
Exercisable at December 31, 2018
|
|
|
7,039,825
|
|
|
$
|
0.28
|
|
|
|
3.1
years
|
|
|
$
|
20,000
|
|
Determining
the Fair Value of Options.
We use the Black-Scholes valuation model to estimate the fair value of options granted. Black-Scholes
considers a number of factors, including the market price and volatility of our common stock. We used the following forward-looking
range of assumptions to value each stock option granted to employees, directors and consultants during the years ended December 31,
2018 and 2017:
|
|
2018
|
|
|
2017
|
|
|
|
|
|
|
|
|
Dividend yield
|
|
|
0.0
|
%
|
|
|
0.0
|
%
|
Risk-free rate of return
|
|
|
2.76
|
%
|
|
|
1.73
|
%
|
Expected life in years
|
|
|
5.88
|
|
|
|
5.88
|
|
Volatility
|
|
|
89
|
%
|
|
|
90
|
%
|
Forfeiture rate
|
|
|
2.6
|
%
|
|
|
2.6
|
%
|
Our dividend
yield assumption is based on the fact that we have never paid cash dividends and do not anticipate paying cash dividends in the
foreseeable future. Our risk-free interest rate assumption is based on yields of U.S. Treasury notes in effect at the date of
grant. Our expected life represents the period of time that options granted are expected to be outstanding and is calculated in
accordance with the Securities and Exchange Commission (“SEC”) guidance provided in the SEC’s Staff Accounting
Bulletin (“SAB”) 107 and SAB 110, using a “simplified” method. The Company has used the simplified method
and will continue to use the simplified method as it does not have sufficient historical exercise data to provide a reasonable
basis upon which to estimate an expected term. Our volatility assumption is based on reviews of the historical volatility of our
common stock. Using Black-Scholes and these factors, the weighted average fair value of stock options granted to employees and
directors was $0.16 and $0.21 for the years ended December 31, 2018 and 2017, respectively. We do not record tax-related
effects on stock-based compensation given our historical and anticipated operating experience and offsetting changes in our valuation
allowance which fully reserves against potential deferred tax assets.
The following
table summarizes our warrant activity for 2018 and 2017:
|
|
|
Warrants Outstanding
|
|
|
|
|
Number of
shares
|
|
|
Exercise price
range
|
|
|
Weighted
average
exercise
price
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2016
|
|
|
|
5,804,412
|
|
|
$
|
0.15 - 0.51
|
|
|
$
|
0.48
|
|
Exercises
|
|
|
|
(400,000
|
)
|
|
|
0.15
|
|
|
|
0.15
|
|
December 31, 2017
|
|
|
|
5,404,412
|
|
|
|
0.37 - 0.51
|
|
|
|
0.50
|
|
Issuances
|
|
|
|
3,963,241
|
|
|
|
0.23
|
|
|
|
0.23
|
|
Exercises
|
|
|
|
(5,147,059
|
)
|
|
|
0.20
|
|
|
|
0.20
|
|
December 31, 2018
|
|
|
|
4,220,594
|
|
|
$
|
0.23
- 0.37
|
|
|
$
|
0.24
|
|
The Company’s
provision for income taxes consists of the following for the years ended December 31, 2018 and 2017:
|
|
2018
|
|
|
2017
|
|
Current income tax provision (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Foreign
|
|
|
-
|
|
|
|
98,605
|
|
Total
|
|
|
-
|
|
|
|
98,605
|
|
|
|
|
|
|
|
|
|
|
Deferred income tax provision (benefit):
|
|
|
|
|
|
|
|
|
Federal
|
|
|
(344,794
|
)
|
|
|
4,816,966
|
|
State
|
|
|
(107,009
|
)
|
|
|
771,423
|
|
Foreign
|
|
|
-
|
|
|
|
-
|
|
Total
|
|
|
(451,803
|
)
|
|
|
5,588,389
|
|
|
|
|
|
|
|
|
|
|
Change in valuation allowance
|
|
|
451,803
|
|
|
|
(5,588,389
|
)
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
-
|
|
|
$
|
98,605
|
|
Significant
components of the Company’s deferred tax assets at December 31, 2018 and 2017 and related valuation allowances are
presented below:
|
|
Year ended December 31,
|
|
|
|
2018
|
|
|
2017
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss carryforwards
|
|
$
|
13,499,000
|
|
|
$
|
13,045,000
|
|
Research and experimentation credit carryforward
|
|
|
2,268,000
|
|
|
|
2,268,000
|
|
Charitable contribution carryforward
|
|
|
4,000
|
|
|
|
4,000
|
|
Accrued expenses, deferred revenue and other
|
|
|
632,000
|
|
|
|
538,000
|
|
Depreciation and amortization
|
|
|
-
|
|
|
|
(1,000
|
)
|
Share-based compensation
|
|
|
743,000
|
|
|
|
840,000
|
|
|
|
|
17,146,000
|
|
|
|
16,694,000
|
|
|
|
|
|
|
|
|
|
|
Less - valuation allowance
|
|
|
(17,146,000
|
)
|
|
|
(16,694,000
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
At December
31, 2018, we had net operating loss carryforwards for income tax purposes of approximately $49.1 million, which are available
to offset future federal and state taxable income, if any, and, research and experimental tax credit carryforwards of approximately
$2.3 million. Approximately $47.9 million of the net operating loss carryforward, generated prior to 2018, expires in increments
through 2037, while the carryforward generated in 2018 does not expire.
Section
382 of the Internal Revenue Code imposes substantial restrictions on the utilization of net operating losses and tax credits in
the event of a corporation’s ownership change. During 2009, the Company completed a preliminary study to compute any limits
on the net operating losses and credit carryforwards for purposes of Section 382. It was determined that the Company experienced
a cumulative change in ownership, as defined by the regulations, in 2002. This change in ownership triggers an annual limitation
on the Company’s ability to utilize certain U.S. federal and state net operating loss carryforwards and research tax credit
carryforwards, resulting in the potential loss of approximately $9.8 million of net operating loss carryforwards and $0.2 million
in research credit carryforwards. The Company has reduced the deferred tax assets associated with these carryforwards in its balance
sheets. The Company believes that the future use of net operating losses and tax credits presented above may be further reduced
as a result of additional ownership changes subsequent to 2009.
The provision
for income taxes on earnings subject to income taxes differs from the statutory federal rate for the years ended December 31,
2018 and 2017, due to the following:
|
|
2018
|
|
|
2017
|
|
US Federal statutory rate
|
|
|
21.00
|
%
|
|
|
34.00
|
%
|
State income tax, net of Federal benefit
|
|
|
6.52
|
%
|
|
|
5.45
|
%
|
Foreign tax
|
|
|
0.00
|
%
|
|
|
25.61
|
%
|
Change in fair value of derivative liabilities
|
|
|
0.00
|
%
|
|
|
-204.92
|
%
|
Share-based compensation
|
|
|
-2.64
|
%
|
|
|
13.56
|
%
|
Permanent differences and other
|
|
|
-9.30
|
%
|
|
|
16.61
|
%
|
Research and experimentation credits
|
|
|
0.01
|
%
|
|
|
-0.57
|
%
|
Foreign tax credits
|
|
|
0.00
|
%
|
|
|
-25.61
|
%
|
Changes in federal tax rate due to Tax Cuts and Jobs Act
|
|
|
0.00
|
%
|
|
|
1612.67
|
%
|
Change in valuation allowance
|
|
|
-22.66
|
%
|
|
|
-1451.18
|
%
|
Other
|
|
|
7.07
|
%
|
|
|
0.00
|
%
|
|
|
|
|
|
|
|
|
|
|
|
|
0.00
|
%
|
|
|
25.62
|
%
|
The most
significant impact on our effective tax rate in 2017 was the revaluation of our deferred tax assets and liabilities at the lower
21% U.S. corporate tax rate, as proscribed by the Tax Cuts and Jobs Act, which was enacted on December 22, 2017 and lowered
the U.S. corporate tax rate from 35% to 21% beginning in 2018.
As discussed
in Note 2, we recognize the effect of income tax positions only if those positions more likely than not of being sustained. At
December 31, 2018 and 2017, we had no gross unrecognized tax benefits. We do not expect any significant changes in unrecognized
tax benefits over the next 12 months. In addition, we did not recognize any interest or penalties related to uncertain tax positions
at December 31, 2018 and 2017.
The 2008
through 2018 tax years generally remain subject to examination by federal and most state tax authorities. In addition, we would
remain open to examination for earlier years if we were to utilize net operating losses or tax credit carryforwards that originated
prior to 2012.
Lease
.
In February 2017, we amended our office lease agreement and the term was extended through July 2020. During the extended term
our rental payments will average approximately $4,000 per month.
The future
minimum rent payments as of December 31, are as follows:
2019
|
|
$
|
48,101
|
|
2020
|
|
|
28,850
|
|
Total
|
|
$
|
76,951
|
|
Employment
Continuity Agreements
. We have entered into employment contracts with our executive officers which provide for severance if
the executive is dismissed without cause or under certain circumstances after a change of control in our ownership. At December 31,
2018, these obligations, if triggered, could amount to a maximum of approximately $170,000.
Convertible
Debt Placement
On February
27, 2019 we sold a series of convertible promissory notes to management, the Company’s Board of Directors and accredited
investors including Essetifin S.p.A., our largest shareholder. The sale of the notes will result in gross proceeds to the Company
of $1,300,000 over two closings. The first closing in the amount of $650,000 occurred on February 27
th
and the second
closing, also in the amount of $650,000 will occur within three days of the Company providing notice of the enrolment of the first
patent in the ARISE-3 clinical trial in DES sponsored by ReGenTree. ReGenTree has informed us that they now expect the ARISE-3 clinical trial to occur in the second quarter of 2019. The notes contain
a $0.12 conversion price and the purchasers also received a warrant exercisable at $0.18 to purchase additional shares of common
stock equal to 75% of the number of shares into which each note is initially convertible. At present, with the receipt of the
sale proceeds from the first closing coupled with the anticipated proceeds from the second closing, we will have sufficient cash
to fund planned operations through the first quarter of 2020.