See Accompanying Notes to Interim Condensed Consolidated Financial Statements.
The operations presented in the Interim Condensed Consolidated Financial Statements and Accompanying Notes for the three months ended September 30, 2017 represent the operations of the Company following the Stock Purchase Transaction. The Interim Condensed Consolidated Financial Statements and Accompanying Notes for the three months ended September 30, 2016 represent the operations of the Company when it was private, making a comparison between periods difficult.
See Accompanying Notes to Interim Condensed Consolidated Financial Statements.
The operations presented in the Interim Condensed Consolidated Financial Statements for the three months ended September 30, 2017 represent the operations of the Company following the Stock Purchase Transaction. The Interim Condensed Consolidated Financial Statements for the three months ended September 30, 2016 represent the operations of the Company when it was private, making a comparison between periods difficult.
See Accompanying Notes to Interim Condensed Consolidated Financial Statements.
The operations presented in the Interim Condensed Consolidated Financial Statements for the three months ended September 30, 2017 represent the operations of the Company following the Stock Purchase Transaction. The Interim Condensed Consolidated Financial Statements for the three months ended September 30, 2016 represent the operations of the Company when it was private, making a comparison between periods difficult.
Notes to Condensed Consolidated Financial Statements (Unaudited)
1. Description of Business and Basis of Presentation
Description of Business
Daré Bioscience, Inc. (“Daré” or the “Company”), is a healthcare company committed to the development and commercialization of innovative products in women’s reproductive health. Daré’s business strategy is to license the rights to novel reproductive health product candidates, some of which have existing clinical proof-of-concept data, and to take those candidates through advanced stages of clinical development.
On July 19, 2017, all of the outstanding shares of capital stock of Daré Bioscience Operations, Inc., a private Delaware corporation, (“Private Daré”) were purchased by Cerulean Pharma Inc. (“Cerulean”) in accordance with the terms of a stock purchase agreement dated as of March 19, 2017 (the “Stock Purchase Agreement”), by and among Cerulean, Private Daré and the holders of capital stock and securities convertible into capital stock of Private Daré named therein (the “Private Daré Stockholders”). Pursuant to the Stock Purchase Agreement, each Private Daré Stockholder sold its shares of common stock in Private Daré to Cerulean in exchange for newly issued shares of Cerulean common stock. On July 19, 2017, Cerulean also completed the sale of its proprietary Dynamic Tumor Targeting™ Platform (the “Platform”) to Novartis Institutes for BioMedical Research, Inc. (“Novartis”) for $6.0 million.
Following the closing of the transactions contemplated by the Stock Purchase Agreement (collectively, the “Stock Purchase Transaction”) and the sale of the Platform, Cerulean changed its name to Daré Bioscience, Inc. As a result of the Stock Purchase Transaction, Private Daré became a wholly owned subsidiary of Daré Bioscience, Inc. and the Private Daré Stockholders became majority shareholders of Daré Bioscience, Inc. owning approximately 51% of the issued and outstanding shares of the Company’s shares of common stock.
On July 20, 2017, the Company effected a 1-for-10 reverse stock split of its common stock (the “Reverse Stock Split”). All share and per share amounts of common stock, options and warrants in this Quarterly Report on Form 10-Q, including those amounts included in the accompanying condensed consolidated financial statements, have been restated for all periods to give retroactive effect to the Reverse Stock Split.
The operations presented in the accompanying condensed consolidated financial statements and related notes for the period ending September 30, 2017 represent the operations of the Company and give effect to the Stock Purchase Transaction, including stock-based compensation awards. The condensed consolidated financial statements and related notes for all periods prior to the Stock Purchase Transaction represent the operations of Private Daré, making a comparison between historical and recent periods difficult.
Following the Stock Purchase Transaction, the Company began trading on the Nasdaq Capital Market under the symbol “DARE.” Prior to the Stock Purchase Transaction, the Company traded under the symbol “CERU.”
Basis of presentation
The condensed consolidated financial statements have been prepared in conformity with accounting principles generally accepted in the United States (“U.S. GAAP”) as defined by the Financial Accounting Standards Board (“FASB”). These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2016 that were attached as Exhibit 99.1 to the Company’s Amendment No. 1 to the Current Report on Form 8-K filed with the Securities and Exchange Commission (“SEC”) on October 2, 2017.
4
Unaudited Interim Financial Information
The interim condensed consolidated financial statements included in this document are unaudited. The unaudited interim financial statements have been prepared on the same basis as the annual financial statements and reflect, in the opinion of management, all adjustments of a normal and recurring nature that are necessary for a fair statement of the Company’s financial position as of September 30, 2017, and its results of operations for the three and nine months ended September 30, 2017 and 2016, and cash flows for the nine months ended September 30, 2017 and 2016. The results of operations for the three and nine months ended September 30, 2017 are not necessarily indicative of the results to be expected for the year ending December 31, 2017 or for any other future annual or interim period. The December 31, 2016 consolidated balance sheet was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. These condensed consolidated financial statements should be read in conjunction with the audited financial statements and notes thereto for the year ended December 31, 2016.
2. Summary of Significant Accounting Policies
Liquidity
As of September 30, 2017, the Company had an accumulated deficit of approximately $3.10 million. The Company also had negative cash flow from operations of approximately $1.58 million during the nine months ended September 30, 2017. The Company had cash and cash equivalents of approximately $8.53 million as of September 30, 2017. The Company will need additional capital to further fund the development of, and seek regulatory approvals for, its current product candidate and any future candidates it may license as well as to commercialize any approved products.
The Company is currently focused primarily on the
development and commercialization of innovative products in women’s reproductive health
and believes such activities will result in the Company’s continued incurrence of significant research and development and other expenses related to those programs. If the clinical trials for any of the Company’s product candidates fail or produce unsuccessful results and those product candidates do not gain regulatory approval, or if any of the Company’s product candidates, if approved, fails to achieve market acceptance, the Company may never become profitable. Even if the Company achieves profitability in the future, it may not be able to sustain profitability in subsequent periods. The Company intends to cover its future operating expenses through cash and cash equivalents on hand and through a combination of equity offerings, debt financings, government or other grant funding, collaborations and strategic alliances. The Company cannot be sure that additional financing will be available when needed or that, if available, financing will be obtained on terms favorable to the Company or its stockholders.
If additional funding is not available on a timely basis or at adequate levels, the Company will need to reevaluate its operating plans. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.
Principles of Consolidation
The condensed consolidated financial statements of the Company are stated in U.S. dollars and are prepared using U.S. GAAP. These financial statements include the accounts of the Company and its wholly owned subsidiaries, Daré Bioscience Operations, Inc., and Daré Bioscience Australia PTY LTD. The financial statements of the Company’s wholly owned subsidiaries are recorded in their functional currency and translated into the reporting currency. The cumulative effect of changes in exchange rates between the foreign entity’s functional currency and the reporting currency is reported in Accumulated Other Comprehensive Income. All intercompany transactions and accounts have been eliminated in consolidation.
5
Use of Estimates
The preparation of financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Significant estimates include the fair value of stock-based compensation, goodwill impairment and purchase accounting. Actual results could differ from those estimates and could materially affect the reported amounts of assets, liabilities and future operating results.
Risks and Uncertainties
The Company will require approvals from the U.S. Food and Drug Administration or foreign regulatory agencies prior to being able to sell any products. There can be no assurance that the Company’s current or future product candidates will receive the necessary approvals. If the Company is denied regulatory approval of its product candidates, or if approval is delayed, it may have a material adverse impact on the Company’s business, results of operations and its financial position.
The Company is subject to a number of risks similar to other life science companies, including, but not limited to, risks related to the ability to license product candidates, successfully develop product candidates, raise additional capital, compete with other products, and protect proprietary technology. In the event the Company receives a regulatory approval for a product, the market’s acceptance of the product remains a risk. As a result of these and other factors and the related uncertainties, there can be no assurance of the Company’s future success.
For a more comprehensive list of risk factors, please refer to
the Company’s interim report on Form 10-Q for the quarterly period ended June 30, 2017.
Cash and Cash Equivalents
The Company considers cash and all highly liquid debt instruments with an original maturity of three months or less to be cash and cash equivalents.
Concentration of Credit Risk
Financial instruments, which potentially subject the Company to concentrations of credit risk, consist principally of cash and cash equivalents. The Company places its cash and cash equivalents with a limited number of high quality financial institutions and at times may exceed the amount of insurance provided on such deposits. The Company has not experienced any loss on deposits of cash and cash equivalents.
Business Combinations
Assets acquired, and liabilities assumed as part of a business acquisition are recorded at their estimated fair value at the date of acquisition. The excess of the total purchase consideration over the fair value of assets acquired and liabilities assumed is recorded as goodwill. Determining fair value of identifiable assets, particularly intangibles, and liabilities acquired also requires management to make estimates, which are based on all available information and, in some cases, assumptions with respect to the timing and amount of future revenue and expenses associated with an asset.
Goodwill
Goodwill is not amortized but is tested annually for impairment or more frequently if impairment indicators exist. The Company adopted accounting guidance related to annual and interim goodwill impairment tests which allows the Company to first assess qualitative factors before performing a quantitative assessment of the fair value of a reporting unit. If it is determined on the basis of qualitative factors that the fair value of the reporting unit is more likely than not less than the carrying amount, a quantitative impairment test is required. The Company recorded goodwill of approximately $12.88 million related to the Stock Purchase Transaction, from the acquisition date, July 19, 2017. The Company assessed goodwill at September 30, 2017 and determined there was no impairment during the period.
6
Segment Reporting
Operating segments are identified as components of an enterprise about which separate discrete financial information is available for evaluation by the chief operating decision maker, or decision-making group, in making decisions on how to allocate resources and assess performance. Our chief operating decision maker is the chief executive officer. The Company has one operating segment, women’s reproductive health.
Fair Value of Financial Instruments
Certain assets and liabilities are carried at fair value in accordance with Accounting Standards Codification (“ASC”) 820, Fair Value Measurement. Fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. Valuation techniques used to measure fair value must maximize the use of observable inputs and minimize the use of unobservable inputs. A fair value hierarchy is based on three levels of inputs which are used to measure fair value, of which the first two levels are considered observable and the last is considered unobservable:
|
•
|
Level 1—Quoted prices in active markets for identical assets or liabilities.
|
|
•
|
Level 2—Observable inputs (other than Level 1 quoted prices) such as quoted prices in active markets for similar assets or liabilities, quoted prices in markets that are not active for identical or similar assets or liabilities, or other inputs that are observable or can be corroborated by observable market data.
|
|
•
|
Level 3—Unobservable inputs that are supported by little or no market activity and that are significant to determining the fair value of the assets or liabilities, including pricing models, discounted cash flow methodologies and similar techniques.
|
The Company’s instruments that are carried at fair value are cash and cash equivalents, accounts payable and accrued interest. The carrying values of accounts payable and accrued interest approximate their fair value due to the short-term nature of these liabilities.
Net Loss Per Share
Basic net loss attributable to common stockholders per share is calculated by dividing the net loss by the weighted average number of shares of common stock outstanding during the period without consideration of common stock equivalents. Since the Company was in a loss position for all periods presented, diluted net loss per share is the same as basic net loss per share for all periods presented as the inclusion of all potential dilutive securities would have been antidilutive. All per share figures have been retroactively adjusted for the Reverse Stock Split.
Stock-Based Compensation
The Company records compensation expense for all stock-based awards granted based on the fair value of the award at the time of grant. The Company uses the Black-Scholes Pricing Model to determine the fair value of each of the awards which considers factors such as expected term, volatility, risk free interest rate and dividend yield. Due to the limited history of the Company, the simplified method was utilized in order to determine the expected term of the awards. Additionally, the Company considered comparable companies in the industry which have available share price history to calculate the volatility. The Company compared U.S. Treasury Bills in determining the risk-free interest rate appropriate given the expected term. Finally, the Company has not established and has no plans to establish a dividend policy or declare any dividends in the foreseeable future and thus no dividend yield was determined necessary in the calculation of fair value.
7
Income Taxes
The Company accounts for income taxes using the asset and liability method in accordance with ASC 740, Income taxes. Under this method deferred income taxes are provided to reflect the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting amounts based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company follows the two-step approach to recognizing and measuring uncertain tax positions. The first step is to evaluate the tax position for recognition by determining if the weight of available evidence indicates it is more likely than not, that the position will be sustained on audit, including resolution of related appeals or litigation processes, if any. The second step is to measure the tax benefit as the largest amount, which is more than 50% likely of being realized upon ultimate settlement. The Company considers many factors when evaluating and estimating the Company's tax positions and tax benefits, which may require periodic adjustments. At September 30, 2017, the Company did not record any liabilities for uncertain tax positions.
As the Company has significant operating losses, the Company does not expect to pay any income taxes for 2017 and as such no income tax provision has been made. Management evaluated the Company’s tax positions and concluded that the Company had taken no uncertain tax positions that require adjustment to the financial statements. The tax years 2015 to 2016 remain open to examination by federal and state taxing authorities.
Recent Accounting Pronouncements
On May 28, 2014, the FASB issued Accounting Standards Update (“ASU”) 2014-09,
Revenue From Contracts With Customers
, which impacts the way in which some entities recognize revenue for certain types of transactions. The new standard will become effective beginning in 2018 for public companies. As the Company does not currently have any contracts with customers we do not expect any impact from this accounting standard.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which sets out the principles for the recognition, measurement, presentation and disclosure of leases for both parties to a contract (i.e., lessees and lessors). The new standard requires lessees to apply a dual approach classifying leases as either finance or operating leases based on the principle of whether or not the lease is effectively a financed purchase by the lessee. This classification will determine whether lease expense is recognized based on an effective interest method or on a straight-line basis over the term of the lease. A lessee is also required to record a right-of-use asset and a lease liability for all leases with a term of greater than 12 months regardless of their classification. Leases with a term of 12 months or less will be accounted for similar to existing guidance for operating leases. The new standard requires lessors to account for leases using an approach that is substantially equivalent to existing guidance for sales-type leases, direct financing leases and operating leases. The new standard is effective for public companies for fiscal years beginning after December 15, 2018, with early adoption permitted. The Company is currently assessing the potential impact of this accounting standard and the effect it might have on the financial statements.
In August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments
, which intended to add or clarify guidance on the classification of certain cash receipts and payments on the statement of cash flows. The new guidance addresses cash flows related to the following: debt prepayment or extinguishment costs, settlement of zero-coupon bonds, contingent consideration payments made after a business combination, proceeds from the settlement of insurance claims, proceeds from the settlement of corporate-owned life insurance policies and bank-owned life insurance policies, distributions received from equity method investees, beneficial interest in securitization transactions, and the application of predominance principle to separately identifiable cash flows. The standard is effective for the Company for annual periods beginning after December 15, 2017, and interim periods within those fiscal years with early adoption permitted. Daré is currently evaluating the effect of this new guidance on its financial statements.
8
In January 2017, the FASB issued ASU 2017-01,
Business Combinations (Topic 805): Clarifying the Definition of a Business
, which intended to clarify the definition of a business with the objective of adding guidance to assist
entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The standard is effective for Daré for annual periods beginning after December 15, 2017. Daré’s early adoption of this standard di
d not have a material impact on the Company’s financial statements.
In January 2017, the FASB issued ASU 2017-04,
Simplifying the Test for Goodwill Impairment (Topic 350)
. The guidance removes Step 2 of the goodwill impairment test, which requires a hypothetical purchase price allocation. A goodwill impairment will now be the amount by which a reporting unit’s carrying value exceeds its fair value, not to exceed the carrying amount of goodwill. The guidance should be adopted on a prospective basis for the annual or any interim goodwill impairment tests beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment tests performed on testing dates after January 1, 2017. Daré adoption of this standard on September 30, 2017 did not have a material impact on the Company’s financial statements.
In May 2017, the FASB issued ASU 2017-09,
Compensation – Stock Compensation (Topic 718): Scope of Modification Accounting
, which intended to provide clarity when to account for a change to the terms or conditions of a share-based payment award as a modification. Under the new guidance, modification accounting is required only if the fair value, the vesting conditions, or the classification of the award (as equity or liability) changes as a result of the change in terms or conditions. The standard is effective for the Daré for annual periods beginning on or after December 15, 2017 with early adoption permitted. The Company’s early adoption of this standard did not have a material impact on the Company’s financial statements.
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): (I) Accounting for Certain Financial Instruments with Down Round Features, (II) Replacement for the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Noncontrolling Interests with a Scope Exception.
This update was issued to provide additional clarity related to accounting for certain financial instruments that have characteristics of both liabilities and equity. In particular, this update addresses freestanding and embedded financial instruments with down round features and whether they should be treated as a liability or equity instrument. Part II simply replaces the indefinite deferral for certain mandatorily redeemable non-controlling interests and mandatorily redeemable financial instruments of nonpublic entities contained within the ASC Topic 480 with a scope exception and does not impact the accounting for these mandatorily redeemable instruments. For public business entities, the amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. The Company is currently evaluating the impact that the adoption of the standard may have on its consolidated financial statements.
3
. Acquisitions
On
July 19, 2017
,
Private Daré completed the Stock Purchase Transaction with Cerulean as discussed in Note 1.
For purposes of clarity, prior to the Stock Purchase Transaction, we sometimes refer to the Company as Cerulean. The Stock Purchase Transaction was accounted for as a reverse merger under the acquisition method of accounting whereby Private Daré was considered to have
acquired Cerulean for financial reporting purposes because immediately upon completion of the Stock Purchase Transaction, Private Daré stockholders held a majority of the voting interest of the combined company. Pursuant to business combination accounting, the Company applied the acquisition method, which requires the assets acquired and liabilities assumed be recorded at fair value with limited exceptions. The excess of the purchase price over the assets acquired and liabilities assumed represents goodwill. The goodwill is primarily attributable to the cash and cash equivalents at closing of approximately $9.92 million and the impact of the unamortized fair value of Cerulean stock options of approximately $3.65 million. The unamortized fair value of the Cerulean stock options relates to an option modification approved on March 19, 2017 that provided for an acceleration of vesting upon a change in control event. Such modification became effective upon the completion of the Stock Purchase Transaction. Hence, the unamortized fair value of such options is deemed to be part of total purchase consideration and goodwill. Transaction costs associated with the Stock Purchase Transaction of $963,380 are included in general and administrative expense. The total purchase price consideration of approximately $24.28 million represents the fair value of the shares of Cerulean stock issued in connection with the Stock Purchase Transaction and the unamortized fair value of Cerulean options assumed on July 19, 2017 which was allocated as follows:
9
Purchase Consideration
|
|
(in thousands)
|
|
Fair value of shares issued
|
|
$
|
20,625
|
|
Unamortized fair value of Cerulean options
|
|
|
3,654
|
|
Fair value of total consideration
|
|
$
|
24,279
|
|
Assets acquired and liabilities assumed
|
|
|
|
|
Cash and cash equivalents
|
|
$
|
9,918
|
|
Prepaid expense and other current assets
|
|
|
1,689
|
|
Accounts payable
|
|
|
(209
|
)
|
Total assets acquired and liabilities assumed
|
|
|
11,398
|
|
Goodwill
|
|
$
|
12,881
|
|
The final allocation of the purchase price is dependent on the finalization of the valuation of the fair value of assets acquired and liabilities assumed and may differ from the amounts included in these financial statements. The Company expects to complete the final allocation as soon as practical but no later than one year from the acquisition date.
4. Convertible Promissory Notes
On December 4, 2015, Private Daré issued convertible promissory notes in the aggregate principal amount of $500,000. The convertible promissory notes accrue interest at a rate of 8% per annum, are convertible into Private Daré’s next preferred stock financing round and are payable following the delivery of a demand by the holders of a majority in interest of the outstanding principal (including the outstanding principal amount under the convertible promissory notes issued on or after November 18, 2016, as described further below) on or after December 4, 2017. In the event of a preferred stock financing, all outstanding principal and unpaid interest under the convertible promissory notes will convert into the shares of Private Daré’s preferred stock issued in such financing at the price per share paid by the purchasers of such shares and an additional number of shares equal to 15% to 25% of the outstanding principal and unpaid interest based on the amount of time that has passed between the issuance of the convertible promissory notes and the closing of such preferred stock financing.
During the week of November 18, 2016, Private Daré’s issued additional convertible promissory notes, and amended the terms of certain of the outstanding convertible promissory notes held by persons who purchased additional convertible promissory notes on or after November 18, 2016. These convertible promissory notes (including the convertible promissory notes issued in December 2015 and amended in connection with the sale of additional convertible promissory notes in November 2016) accrue interest at a rate of 8% per annum, are convertible into Private Daré’s next preferred stock financing round and are payable following the delivery of a demand by the holders of a majority in interest of the outstanding principal (including the outstanding principal amount under the convertible promissory notes issued in December 2015) on or after December 4, 2017. In the event of a preferred stock financing, all outstanding principal and unpaid interest under the convertible promissory notes (including the amended convertible promissory notes originally issued in December 2015) will convert into the shares of Private Daré’s preferred stock issued in such financing at the price per share paid by the purchasers of such shares and an additional number of shares equal to 40% of the outstanding principal and unpaid interest. In addition, in the event of a change of control in which the convertible promissory notes (including the amended convertible promissory notes originally issued in December 2015) are repaid, the holders of such notes are entitled to receive 2 to 5 times the amount of the principal based on the proceeds payable to Private Daré or its stockholders in connection with such change of control. During the week of November 18, 2016, Private Daré issued convertible promissory notes in the aggregate principal amount of $197,500 and amended the terms of prior notes in the aggregate principal amount of $275,000 to correspond with the terms of such additional convertible promissory notes. On February 17, 2017 the Company issued an additional convertible promissory note in the principal amount of $100,000.
10
In connection with the Stock Purchase Transaction, described in further detail below, all outstanding convertible promissory notes issued prior to March 31, 2017 were furth
er amended to provide that such notes will convert into shares of Private Daré common stock at a price per share of $0.18727 (subject to stock splits, combinations and similar events) effective as of immediately prior to the closing of the Stock Purchase T
ransaction and that the Stock Purchase Transaction would not constitute a change of control, including for purposes of the repayment premium described above.
On July 19, 2017, Private Daré amended the notes to provide that (i) the interest on the notes be subject to compounding on an annual basis as of December 31 of each year and (ii) the number of shares of common stock issuable upon conversion of the convertible promissory notes issued prior to March 31, 2017 will be equal to the outstanding principal amount plus accrued interest through March 31, 2017 divided by $0.18727 (subject to stock splits, combinations and similar events) plus, in the case of the convertible promissory notes issued in December 2015, 25% of the principal amount plus accrued interest through March 31, 2017 divided by $0.18727 (subject to stock splits, combinations and similar events), and, in the case of the convertible promissory notes issued on or after November 18, 2016 (including certain of the amended convertible promissory notes originally issued in December 2015 the holders of which also participated in the November 2016 note offering), 40% of the principal amount plus accrued interest through March 31, 2017 divided by $0.18727 (subject to stock splits, combinations and similar events).
Between April 1, 2017 and June 6, 2017 Private Daré issued additional convertible promissory notes in the aggregate principal amount of $55,000 pursuant to a new note purchase agreement. One note in the principal amount of $20,000 was issued on May 31, 2017 and two notes in the aggregate principal amount of $35,000 were issued during the first week of June. The new note purchase agreement provides for one or more additional closings through the earlier to occur of September 28, 2017 and the date on which the Company’s stockholders approve the Stock Purchase Transaction, and limits the aggregate principal amount of the convertible promissory notes issued thereunder to $2.0 million. The convertible promissory notes issued pursuant to the May 31, 2017 note purchase agreement bear an annual interest rate of 8% and will automatically convert immediately prior to closing of the transaction into the number of shares of Private Daré common stock equal to 120% of the original principal amount of each such note divided by $0.38. The interest on such notes will not convert into shares of Private Daré’s common stock. In addition, the holders of such notes issued pursuant to the new note purchase agreement are entitled to convert the value of any then outstanding notes plus unpaid and accrued interest plus an additional 20% of the principal amount of their notes into Qualified and Non-Qualified Equity Financings (with such terms having the same meaning as in the December 2015 note purchase agreement) at the price paid by investors in the Qualified and Non-Qualified Equity Financings. Each purchaser of notes pursuant to the new note purchase agreement also executed and delivered a counterpart signature page to the Stock Purchase Agreement.
Immediately prior to the closing of the Stock Purchase Transaction, all of the convertible promissory notes of Private Daré, in aggregate principal of, and accrued interest on, were converted into shares of common stock of Private Daré and all of the outstanding shares of common stock of Private Daré were exchanged for shares of common stock of the Company pursuant to the exchange ratio defined in the Stock Purchase Agreement. As a result of the conversion, the Company recognized an expense of $316,804 relating to the beneficial conversion feature present in each of the note agreements.
5. Stock-based Compensation
Prior to the Stock Purchase Transaction, the 2015 Employee, Director and Consultant Equity Incentive Plan of Private Daré, (the “2015 Plan”) governed the issuance of incentive stock options, non-qualified stock options, stock grants and stock-based awards to individuals who were then employees, officers, non-employee directors or consultants of the Company. Upon closing of the Stock Purchase Transaction, the 2015 Plan was assumed by the Company and each outstanding option to acquire stock of Private Daré that was not exercised prior to the closing of the Stock Purchase Transaction was assumed on the same terms and conditions as were applicable under the 2015 Plan, and became an option to acquire such shares of the Company’s common stock as was equal to the number of Private Daré shares subject to such unexercised option multiplied by the exchange ratio defined in the Stock Purchase Agreement, at a correspondingly adjusted exercise price.
11
Stock Options Under the 2015 Plan of Private Daré (the 2015 Plan)
Options granted under the 2015 Plan have terms of ten years from the date of grant unless earlier terminated and generally vest over a three-year period. There were no options granted under the 2015 Plan during the nine months ended September 30, 2017 and effective as of July 19, 2017 following closing of the Stock Purchase Transaction, no further options may be granted under the 2015 Plan.
The exercise price of the 50,000 options granted for the year ended December 31, 2016 was equal to the estimated fair value of the common stock of Private Daré on the date of grant. On July 19, 2017, these options in Private Daré were assumed by the Company and 10,148 options were outstanding as of September 30, 2017 after adjustments for the Stock Purchase Transaction and Reverse Stock Split.
Stock Options Under the 2014 Plan (the Current Plan)
Options granted under the Company’s 2014 Stock Incentive Plan (the “2014 Plan” or “Current Plan”) have terms of no more than ten years from the date of grant unless earlier terminated.
The Company’s board of directors approved two modifications to the stock options issued under the 2014 Plan to participants who were providing services to the Company as of March 19, 2017. The Company extended the exercise period for such stock options to two years beyond such participant’s termination date, unless the original option terms provided for a longer exercise period, and provided for the acceleration of vesting for such stock options upon a change in control event (such as the Stock Purchase Transaction). Modifications to the existing option terms resulted in unamortized fair value expense of approximately $3.7 million and was recorded as part of the total consideration in the Stock Purchase Transaction and discussed in Note 3.
As part of the Stock Purchase Transaction, 544,040 Cerulean stock options were assumed by the Company and remain outstanding as of September 30, 2017. Together with the Private Daré options assumed in connection with the Stock Purchase Transaction, the Company had 554,040 options outstanding as of September 30, 2017.
A summary of stock option activity with regards to the 2015 Plan and the Current Plan, and related information for the nine months ended September 30, 2017 is as follows:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
Outstanding at December 31, 2016
|
|
|
412,248
|
|
|
$
|
42.04
|
|
Granted
|
|
|
156,349
|
|
|
|
8.11
|
|
Exercised
|
|
|
—
|
|
|
|
—
|
|
Cancelled/expired
|
|
|
(14,557
|
)
|
|
|
51.38
|
|
Outstanding at September 30, 2017 (unaudited)
|
|
|
554,040
|
|
|
|
29.93
|
|
Exercisable at September 30, 2017 (unaudited)
|
|
|
545,640
|
|
|
$
|
32.62
|
|
Options outstanding and exercisable at September 30, 2017 had a weighted average contractual life of 8.15 years. As of September 30, 2017, $44,460 represents unamortized stock-based compensation expense which will be amortized over the weighted average period of 1.79 years.
Compensation Expense
The Company has recorded stock-based compensation expense related to the issuance of stock option awards to employees of $6,947 for the three months ended September 30, 2017 with no comparable expense in the same period of the prior year, and $6,953 and $3 for the nine months ended September 30, 2017 and 2016, respectively. There were no stock options granted during the three or nine months ended September 30, 2016.
The assumptions used in the Black-Scholes option-pricing model for stock options granted to employees and to directors in respect of board services during the three and nine months ended September 30, 2017 are as follows:
12
|
|
Three months ended
|
|
|
Nine months ended
|
|
|
|
September 30, 2017
|
|
|
September 30, 2017
|
|
Expected life in years
|
|
|
10.0
|
|
|
4.6-10
|
|
Risk-free interest rate
|
|
|
2.26%
|
|
|
1.7-2.4%
|
|
Expected volatility
|
|
|
127%
|
|
|
67%-
127%
|
|
Forfeiture rate
|
|
|
23.6%
|
|
|
1.86%-29.9%
|
|
Dividend yield
|
|
|
0.0%
|
|
|
|
0.0%
|
|
Weighted-average fair value of options granted
|
|
$
|
6.30
|
|
|
$
|
4.49
|
|
Restricted Stock After the Stock Purchase Transaction
The 3.14 million shares of common stock issued in connection with the Stock Purchase Transaction to the shareholders of Private Daré have not been registered with the SEC and may only be sold pursuant to an exemption from the SEC’s registration requirements. Some of these shares may become eligible for sale beginning six months after the date of the Stock Purchase Transaction
pursuant to Rule 144.
Common Stock Warrants
No warrants were exercised during the nine months ended September 30, 2017. The following table summarizes the outstanding warrants for the Company’s common stock as of September 30, 2017:
Shares Underlying
Outstanding Warrants
|
|
|
Exercise Price
|
|
|
Expiration Date
|
|
169
|
|
|
$
|
17.70
|
|
|
August 8, 2018
|
|
2,906
|
|
|
$
|
12.04
|
|
|
December 1, 2021
|
|
3,737
|
|
|
$
|
12.04
|
|
|
December 6, 2021
|
|
17,190
|
|
|
$
|
6.05
|
|
|
January 8, 2020
|
|
6,500
|
|
|
$
|
1.00
|
|
|
April 4, 2026
|
|
30,502
|
|
|
|
|
|
|
|
6. Commitments and Contingencies
Operating Leases
The Company entered into a lease agreement that commenced on January 1, 2017 and provided for termination by either party upon 30 days’ notice. In July 2017, the Company provided notice of termination of this lease agreement.
The Company entered into a new sublease agreement on July 27, 2017 which provides facilities space as well as other administrative services for a monthly fee of $5,651 that increases 3% annually. The sublease agreement commenced on August 1, 2017 and expires on June 30, 2019. The parties have agreed to negotiate in good faith for an extension of this sublease agreement under similar terms. The Company may terminate the sublease by providing 30 days’ written notice.
Other Legal Contingencies
From time to time, the Company may be involved in various claims arising in the normal course of business. Management is not aware of any material claims, disputes or unsettled matters that would have a material adverse effect on the Company’s results of operations, liquidity or financial position that the Company has not adequately provided for in the accompanying financial statements.
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Risk Management
The Company maintains various forms of insurance that the Company’s management believes are adequate to reduce the exposure to these risks to an acceptable level.
Employment Agreements
Certain executive officers are entitled to payments if they are terminated without cause or as a result of a change in control of the Company. Upon termination without cause, and not as a result of death or disability, each officer is entitled to receive a payment of an amount equal to six to twelve months of base salary and to receive continuing health benefits coverage for periods ranging between six to twelve months following the termination of employment or until such officer is covered under a separate plan from another employer. Upon termination other than for cause or for good reason within three months prior or twelve months following a change in control of the Company, each officer will be entitled to receive a payment of an amount equal to nine to eighteen months of base salary and target bonus and to receive continuing health benefits coverage for periods ranging between nine to eighteen months following the termination of employment. In addition, upon a change in control of the Company, each officer’s outstanding unvested options shall fully vest and accelerate subject to the conditions outlined in such officer’s employment agreement.
License and Royalty Agreements
The Company signed an agreement to obtain a license from ADVA-Tec (the “
ADVA-Tec Agreement
”) for the exclusive right to develop and commercialize Ovaprene for human contraceptive use worldwide that became effective once the initial funding called for by the ADVA-Tec Agreement was secured. ADVA-Tec and its affiliates own issued patents or patent applications covering Ovaprene, and control proprietary trade secrets covering the manufacture of Ovaprene. As of the date of these financial statements, this patent portfolio includes 12 issued patents worldwide, along with 8 patent applications, all of which are exclusively licensed to the Company in accordance with the terms of the ADVA-Tec Agreement. The Company also has a right of first refusal to license these patents and patent applications for purposes of additional indications for Ovaprene. Under the ADVA-Tec Agreement, ADVA-Tec will conduct certain research and development work as necessary to allow the Company to seek a Premarket Approval (“PMA”) from the United States Food and Drug Administration (“FDA”), and will supply the Company with its requirements of Ovaprene for clinical and commercial use on commercially reasonable terms.
Under the ADVA-Tec Agreement, the Company is required to make payments of up to $14.6 million in the aggregate to ADVA-Tec based on the achievement of specified development and regulatory milestones, which include the completion of a successful Postcoital Clinical Trial (“PCT”) Study (as defined in the ADVA-Tec Agreement); approval by the FDA to commence the Phase 3 pivotal human clinical trial; successful completion of the Phase 3 pivotal human clinical trial; the FDA’s acceptance of the filing of a PMA for Ovaprene; the FDA’s approval of the PMA for Ovaprene; Conformite Europeene (“CE”) Marking of Ovaprene in at least three designated European countries; obtaining regulatory approval in at least three designated European countries; and obtaining regulatory approval in Japan. In addition, after the commercial launch of Ovaprene, the Company is also required to make royalty payments to ADVA-Tec based on aggregate annual net sales of Ovaprene in specified regions, which percentage royalty rate will vary between 1% and 10% and will increase based on various net sales thresholds. Finally, the Company is also required to make up to $20.0 million in the aggregate in commercial milestone payments to ADVA-Tec upon reaching certain worldwide net sales milestones.
The Company is obligated to use commercially reasonable efforts to develop and commercialize Ovaprene, and must meet certain minimum spending amounts per year, such amounts totaling $5.0 million in the aggregate over the first three years, to cover such activities until a final PMA is filed, or until the first commercial sale of Ovaprene, whichever occurs first.
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The ADVA-Tec licen
se continues on a country-by-country basis until the later of the life of the licensed patents or the Company’s last commercial sale of Ovaprene, and the ADVA-Tec Agreement includes customary termination rights for both parties, and provides the Company th
e right to terminate with or without cause in whole or on a country-by-country basis upon 60 days prior written notice. In addition, ADVA-Tec may terminate the ADVA-Tec Agreement if the Company fails to do any of the following: (i) satisfy the annual spend
ing obligation described above, (ii) fail to use commercially reasonable efforts to complete all necessary pre-clinical and clinical studies required to support and submit a PMA, (iii) fail to conduct clinical trials as set forth in the development plan th
at is agreed by Daré and ADVA-Tec, and as may be modified by a joint research committee, where such failure is not caused by events outside of the Company’s reasonable control, or (iv) fail to enroll a patient in the first non-significant risk medical devi
ce study or clinical trial as allowed by an institutional review board within six months of the production and release of Ovaprene, where non-enrollment is not caused by events outside of the its reasonable control. In addition, ADVA-Tec may terminate the
ADVA-Tec Agreement if the Company develops or commercializes any non-hormonal ring-based vaginal contraceptive device which is deemed competitive to Ovaprene or, in certain limited circumstances, if the Company fails to commercialize Ovaprene in certain de
signated countries within three years of the first commercial sale of Ovaprene.
15