ALPHA-EN
CORPORATION
CONDENSED
CONSOLIDATED BALANCE SHEETS
(in
thousands, except share and per share data)
|
|
June 30, 2018
|
|
|
December 31, 2017
|
|
|
|
(Unaudited)
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
Current assets
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,089
|
|
|
$
|
562
|
|
Prepaid expenses
|
|
|
79
|
|
|
|
-
|
|
Restricted cash
|
|
|
15
|
|
|
|
15
|
|
Total current assets
|
|
|
1,183
|
|
|
|
577
|
|
|
|
|
|
|
|
|
|
|
Long-term deposit
|
|
|
35
|
|
|
|
35
|
|
Property and equipment, net
|
|
|
697
|
|
|
|
501
|
|
Total assets
|
|
$
|
1,915
|
|
|
$
|
1,113
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS’ DEFICIT AND TEMPORARY EQUITY
|
|
|
|
|
|
|
|
|
Current liabilities
|
|
|
|
|
|
|
|
|
Accounts payable and accrued expenses
|
|
$
|
723
|
|
|
$
|
1,103
|
|
Advances from related parties
|
|
|
36
|
|
|
|
308
|
|
Current portion of deferred rent
|
|
|
8
|
|
|
|
-
|
|
Total current liabilities
|
|
|
767
|
|
|
|
1,411
|
|
Deferred rent
|
|
|
111
|
|
|
|
-
|
|
Total liabilities
|
|
|
878
|
|
|
|
1,411
|
|
|
|
|
|
|
|
|
|
|
Preferred stock par value $0.01: 5,000,000 shares authorized; 4,005 shares and 1,935 shares issued and outstanding as of June 30, 2018 and December 31, 2017, respectively; aggregate liquidation preference of $4,005 and $1,935 as of June 30, 2018 and December 31, 2017, respectively
|
|
|
4,005
|
|
|
|
1,935
|
|
|
|
|
|
|
|
|
|
|
COMMITMENTS AND CONTINGENCIES
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Stockholders’ deficit:
|
|
|
|
|
|
|
|
|
Class B common stock no par value: 1,000,000 shares authorized; none issued or outstanding
|
|
|
-
|
|
|
|
-
|
|
Common stock par value $0.01: 57,000,000 shares authorized; 38,277,924 shares and 33,350,506 shares issued and 37,563,174 shares and 32,635,756 shares outstanding at June 30, 2018 and December 31, 2017, respectively
|
|
|
383
|
|
|
|
334
|
|
Additional paid-in capital
|
|
|
19,748
|
|
|
|
18,482
|
|
Treasury stock at cost: 714,750 shares as of June 30, 2018 and December 31, 2017
|
|
|
(69
|
)
|
|
|
(69
|
)
|
Accumulated deficit
|
|
|
(23,030
|
)
|
|
|
(20,276
|
)
|
Stockholders’ deficit attributed to alpha-En Corporation stockholders
|
|
|
(2,968
|
)
|
|
|
(1,529
|
)
|
Non-controlling interest
|
|
|
-
|
|
|
|
(704
|
)
|
Total stockholders’ deficit
|
|
|
(2,968
|
)
|
|
|
(2,233
|
)
|
TOTAL LIABILITIES AND STOCKHOLDERS’ DEFICIT AND TEMPORARY EQUITY
|
|
$
|
1,915
|
|
|
$
|
1,113
|
|
See
notes to condensed consolidated financial statements.
ALPHA-EN
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(in
thousands, except share and per share data)
(Unaudited)
|
|
For the Three Months Ended
June 30,
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Operating expenses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
General and administrative
|
|
$
|
1,389
|
|
|
$
|
517
|
|
|
$
|
2,183
|
|
|
$
|
1,437
|
|
Legal and professional fees
|
|
|
120
|
|
|
|
85
|
|
|
|
261
|
|
|
|
255
|
|
Research and development (includes stock based compensation of $227 and $(217) for the three and six months ended June 30, 2018, and $57 and $540 for the three and six months ended June 30, 2017, respectively. See Note 7)
|
|
|
739
|
|
|
|
99
|
|
|
|
465
|
|
|
|
620
|
|
Total operating expenses
|
|
|
2,248
|
|
|
|
701
|
|
|
|
2,909
|
|
|
|
2,312
|
|
Net loss
|
|
|
(2,248
|
)
|
|
|
(701
|
)
|
|
|
(2,909
|
)
|
|
|
(2,312
|
)
|
Less: net loss attributable to non-controlling interest
|
|
|
(126
|
)
|
|
|
(34
|
)
|
|
|
(155
|
)
|
|
|
(125
|
)
|
Net loss attributable to controlling interest
|
|
|
(2,122
|
)
|
|
|
(667
|
)
|
|
|
(2,754
|
)
|
|
|
(2,187
|
)
|
Less: Dividends accrued on preferred stock
|
|
|
(98
|
)
|
|
|
(22
|
)
|
|
|
(175
|
)
|
|
|
(22
|
)
|
Less: Deemed dividend on Series A preferred stock
|
|
|
-
|
|
|
|
(649
|
)
|
|
|
(687
|
)
|
|
|
(649
|
)
|
Less: Deemed dividend - beneficial conversion feature on preferred stock
|
|
|
-
|
|
|
|
(807
|
)
|
|
|
(956
|
)
|
|
|
(807
|
)
|
Net loss attributable to alpha-En Corporation common stockholders
|
|
$
|
(2,220
|
)
|
|
$
|
(2,145
|
)
|
|
$
|
(4,572
|
)
|
|
$
|
(3,665
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss per share attributable to alpha-En Corporation common stockholders
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.06
|
)
|
|
$
|
(0.06
|
)
|
|
$
|
(0.13
|
)
|
|
$
|
(0.11
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average shares outstanding:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
35,080,677
|
|
|
|
33,282,089
|
|
|
|
34,229,156
|
|
|
|
33,282,089
|
|
See
notes to condensed consolidated financial statements.
ALPHA-EN
CORPORATION
CONDENSED
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ DEFICIT
(in
thousands, except share and per share data)
(Unaudited)
|
|
|
|
|
|
|
|
Additional
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
|
|
Common
Stock
|
|
|
Paid-In
|
|
|
Treasury
Stock
|
|
|
Accumulated
|
|
|
Noncontrolling
|
|
|
Stockholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Shares
|
|
|
Amount
|
|
|
Deficit
|
|
|
Interest
|
|
|
Deficit
|
|
Balance
at December 31, 2017
|
|
|
33,350,506
|
|
|
$
|
334
|
|
|
$
|
18,482
|
|
|
|
714,750
|
|
|
$
|
(69
|
)
|
|
$
|
(20,276
|
)
|
|
$
|
(704
|
)
|
|
$
|
(2,233
|
)
|
Stock based compensation
|
|
|
-
|
|
|
|
-
|
|
|
|
1,092
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,092
|
|
Shares issued for acquiring
ownership of subsidiary
|
|
|
3,018,190
|
|
|
|
30
|
|
|
|
(889
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
859
|
|
|
|
-
|
|
Issuance of common stock
for cash in a private placement
|
|
|
867,768
|
|
|
|
9
|
|
|
|
991
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,000
|
|
Preferred stock converted
to common stock
|
|
|
31,460
|
|
|
|
-
|
|
|
|
55
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
55
|
|
Options exercised for
cash
|
|
|
10,000
|
|
|
|
-
|
|
|
|
2
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
2
|
|
Warrants exercised for
cash
|
|
|
1,000,000
|
|
|
|
10
|
|
|
|
190
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
200
|
|
Issuance of warrants
to purchase common stock associated with preferred stock offering
|
|
|
-
|
|
|
|
-
|
|
|
|
687
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
687
|
|
Deemed dividend on Series
A preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(687
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(687
|
)
|
Beneficial conversion
feature of Series A preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
956
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
956
|
|
Deemed dividends related
to beneficial conversion feature of Series A preferred stock
|
|
|
-
|
|
|
|
-
|
|
|
|
(956
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(956
|
)
|
Accrued Series A dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
(175
|
)
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(175
|
)
|
Net loss
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,754
|
)
|
|
|
(155
|
)
|
|
|
(2,909
|
)
|
Balance at June 30,
2018
|
|
|
38,277,924
|
|
|
$
|
383
|
|
|
$
|
19,748
|
|
|
|
714,750
|
|
|
$
|
(69
|
)
|
|
$
|
(23,030
|
)
|
|
$
|
-
|
|
|
$
|
(2,968
|
)
|
See
notes to condensed consolidated financial statements.
ALPHA-EN
CORPORATION
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in
thousands)
(Unaudited)
|
|
For the Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Cash flows from operating activities
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(2,909
|
)
|
|
$
|
(2,312
|
)
|
|
|
|
|
|
|
|
|
|
Adjustments to reconcile net loss to net cash used in operating activities:
|
|
|
|
|
|
|
|
|
Depreciation and amortization
|
|
|
51
|
|
|
|
17
|
|
Stock-based compensation
|
|
|
1,092
|
|
|
|
1,065
|
|
Warrant issued for services
|
|
|
-
|
|
|
|
249
|
|
Changes in operating assets and liabilities of business, net of acquisitions:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
|
(79
|
)
|
|
|
69
|
|
Accounts payable and accrued expenses
|
|
|
(450
|
)
|
|
|
(91
|
)
|
Deferred rent
|
|
|
119
|
|
|
|
-
|
|
Net cash used in operating activities
|
|
|
(2,176
|
)
|
|
|
(1,003
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities
|
|
|
|
|
|
|
|
|
Purchase of fixed assets
|
|
|
(177
|
)
|
|
|
(19
|
)
|
Net cash used in investing activities
|
|
|
(177
|
)
|
|
|
(19
|
)
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities
|
|
|
|
|
|
|
|
|
Proceeds from issuance of preferred stock and warrants
|
|
|
1,700
|
|
|
|
1,670
|
|
Proceeds from issuance of common stock in a private placement
|
|
|
1,000
|
|
|
|
-
|
|
Options exercised for cash
|
|
|
2
|
|
|
|
-
|
|
Warrants exercised for cash
|
|
|
200
|
|
|
|
-
|
|
Advances from related parties
|
|
|
-
|
|
|
|
150
|
|
Repayments of advances from related parties
|
|
|
(22
|
)
|
|
|
(42
|
)
|
Net cash provided by financing activities
|
|
|
2,880
|
|
|
|
1,778
|
|
|
|
|
|
|
|
|
|
|
Net increase in cash
|
|
|
527
|
|
|
|
756
|
|
Cash and restricted cash at beginning of period
|
|
|
562
|
|
|
|
442
|
|
Cash and restricted cash at end of period
|
|
$
|
1,089
|
|
|
$
|
1,198
|
|
|
|
|
|
|
|
|
|
|
Non cash financing and investing activities:
|
|
|
|
|
|
|
|
|
Beneficial conversion feature of Series A preferred stock
|
|
$
|
956
|
|
|
$
|
807
|
|
Deemed dividends related to beneficial conversion feature of Series A preferred stock
|
|
$
|
(956
|
)
|
|
$
|
(807
|
)
|
Issuance of warrants in preferred stock offering
|
|
$
|
687
|
|
|
$
|
649
|
|
Deemed dividend on Series A preferred stock
|
|
$
|
(687
|
)
|
|
$
|
(649
|
)
|
Accrued Series A dividends
|
|
$
|
(175
|
)
|
|
$
|
(22
|
)
|
Conversion of advances from related parties to preferred stock
|
|
$
|
250
|
|
|
$
|
150
|
|
Preferred stock converted to common stock
|
|
$
|
55
|
|
|
$
|
-
|
|
Purchases of fixed assets in accounts payable
|
|
$
|
70
|
|
|
$
|
-
|
|
Forgiveness of the lease payments
|
|
$
|
104
|
|
|
$
|
-
|
|
See
notes to condensed consolidated financial statements.
Note
1 - Organization and Operations
alpha-En
Corporation (together with its subsidiaries, the “Company”) was incorporated in Delaware on March 7, 1997.
Since
2008, the focus of the Company’s business has been developing new technologies for manufacturing highly pure lithium metal,
a raw material for use in lightweight, high energy density batteries, in an environmentally friendly manner for commercial purposes.
In 2013, the Company invented a new process for the production of highly pure lithium metal and associated products at room temperature.
The Company subsequently broadened its focus to develop products and processes derived from the Company’s new core proprietary
technology, including battery components and compounds of lithium.
Ownership of Subsidiary
In
September 2014, alpha-En Corporation formed Clean Lithium Corporation (“CLC”) under the laws of New York State as
a wholly owned subsidiary with a nominal share capital of $100,000. From 2014 to 2016, the Company sold 9.05% or 905,000 of CLC’s
shares to minority equity holder. Effective as of June 14, 2018, the Company completed the purchase all of the outstanding shares
of CLC such that CLC became a wholly-owned subsidiary of the Company and was immediately thereafter merged with and into the Company,
with the Company surviving. In connection with this transaction, the former minority equity holder of CLC prior to the merger
received an aggregate total of 3,018,190 shares of common stock of the Company. The Company recorded the acquisition of CLC as
a capital transaction.
Amended
and Restated Certificate of Incorporation
On
March 29, 2017 the Board of Directors of the Company and a subset of the Company’s stockholders representing in excess of
75% of the Company’s currently issued and outstanding voting stock approved of the amendment and restatement of the Company’s
Certificate of Incorporation (the “Restated Certificate”) to make certain corporate governance updates and to increase
the authorized capital stock of the Company to 60,000,000 shares, of which 57,000,000 are shares of Common Stock, par value $0.01
per share, 1,000,000 are shares of Class B Common Stock, par value $0.01 per share and 2,000,000 are shares of preferred stock,
par value $0.01 per share. The Company filed a definitive information statement on Schedule 14C with the Securities and Exchange
Commission on June 1, 2017 describing the changes in the Restated Certificate. The Restated Certificate was filed with the Secretary
of State for the State of Delaware and became effective on June 30, 2017. On February 8, 2018 the Company filed with the Secretary
of State of the State of Delaware an amended and restated certificate of incorporation increasing the authorized number of preferred
shares designated as series A preferred from 2,000 to 5,000.
Note
2 - Going Concern and Liquidity
The
Company’s condensed consolidated financial statements have been prepared assuming that it will continue as a going concern,
which contemplates continuity of operations, realization of assets, and liquidation of liabilities in the normal course of business.
As
reflected in the condensed consolidated financial statements, the Company had an accumulated deficit of approximately $23.0 million
at June 30, 2018, a net loss of approximately $2.9 million and approximately $2.2 million net cash used in operating
activities for the six months ended June 30, 2018. These factors raise substantial doubt about the Company’s ability to
continue as a going concern.
The
Company is attempting to further develop the intellectual property associated with its technology; broaden its patent portfolio;
scale up its production of various products; and begin generating revenue; however, the Company’s cash position is not sufficient
to support its daily operations for the foreseeable future. The ability of the Company to continue as a going concern is dependent
upon its ability to raise additional funds by way of a public or private offering and its ability to further develop its technology
and generate sufficient revenue. While the Company believes in the viability of its technology and in its ability to raise additional
funds by way of a public or private offering, there can be no assurances to that effect.
The
condensed consolidated financial statements do not include any adjustments related to the recoverability and classification of
recorded asset amounts or the amounts and classification of liabilities that might be necessary should the Company be unable to
continue as a going concern.
Note
3 - Significant and Critical Accounting Policies and Practices
Basis
of Presentation and Principles of Consolidation
On June 14, 2018 the Company completed
the purchase all of the outstanding shares of CLC such that CLC became a wholly-owned subsidiary of the Company and was immediately
thereafter merged with and into the Company, with the Company surviving. Accordingly, as of June 14, 2018 the Company no longer
has any subsidiaries consolidated in these financial statements.
For
the year ended December 31, 2017 and through June 14, 2018, the
accompanying condensed consolidated financial statements include the accounts of the Company’s subsidiaries. For consolidated
entities where the Company owns less than 100% of the subsidiary, the Company records net loss attributable to non-controlling
interests in its condensed consolidated statements of operations equal to the percentage of the economic or ownership interest
retained in such entities by the respective non-controlling parties.
The
condensed consolidated balance at December 31, 2017 was derived from audited annual financial statements but do not contain
all of the footnote disclosures from the annual financial statements.
The
unaudited condensed consolidated financial statements have been prepared by the Company pursuant to the rules and
regulations of the Securities and Exchange Commission (the “SEC”) and reflect all adjustments (consisting of
normal recurring adjustments unless otherwise indicated) which, in the opinion of management, are necessary for a fair
presentation of the results for the interim periods presented.
Certain
information in footnote disclosures normally included in the financial statements prepared in conformity with accounting principles
generally accepted in the United States of America have been condensed or omitted pursuant to the SEC rules and regulations for
interim reporting. The financial results for the periods presented may not be indicative of the full year’s results.
These
unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited consolidated
financial statements and the notes thereto for the fiscal year ended December 31, 2017 included in the Company’s Annual
Report on Form 10-K filed on April 2, 2018.
The
Company’s unaudited condensed consolidated financial statements include the accounts of the Company and its subsidiaries.
All intercompany balances and transactions have been eliminated.
Use
of Estimates
The
Company’s consolidated condensed financial statements include certain amounts that are based on management’s best
estimates and judgments. The Company’s significant estimates include, but are not limited to, useful lives assigned to long-lived
assets, fair value used in estimating the value of warrants, stock-based compensation, accrued expenses and provisions for income
taxes. Due to the uncertainty inherent in such estimates, actual results may differ from these estimates.
Cash
As
of June 30, 2018 and December 31, 2017, substantially all of the Company’s cash was held by major financial institutions
and the balance at certain times may exceed the maximum amount insured by the Federal Deposits Insurance Corporation. However,
the Company has not experienced losses on these accounts and management believes that the Company is not exposed to significant
risks on such accounts.
Property
and Equipment
Lab
equipment, leasehold improvements and office equipment are recorded at cost and depreciated using the straight-line method over
the estimated useful life of each asset, generally three to seven years.
Impairment
of Long-Lived Assets
The
Company reviews long-lived assets, including property and equipment, for impairment whenever events or changes in business circumstances
indicate that the carrying amount of the assets may not be fully recoverable. Factors that the Company considers in deciding when
to perform an impairment review include significant underperformance of the business in relation to expectations, significant
negative industry or economic trends, and significant changes or planned changes in the use of the assets. If an impairment review
is performed to evaluate a long-lived asset for recoverability, the Company compares forecasts of undiscounted cash flows expected
to result from the use and eventual disposition of the long-lived asset to its carrying value. An impairment loss would be recognized
when estimated undiscounted future cash flows expected to result from the use of an asset are less than its carrying amount. The
impairment loss would be based on the excess of the carrying value of the impaired asset over its fair value. There were no indicators
of impairment for long-lived assets during the six months ended June 30, 2018.
Fair
Value of Preferred Stock
The
fair value of Preferred stock was estimated based upon equivalent common shares that Preferred Stock could have been converted
into at the closing price on the purchase date.
Convertible
Financial Instruments
The
Company bifurcates conversion options from their host instruments and accounts for them as free standing derivative financial
instruments if certain criteria are met. The criteria include circumstances in which (a) the economic characteristics and risks
of the embedded derivative instrument are not clearly and closely related to the economic characteristics and risks of the host
contract, (b) the hybrid instrument that embodies both the embedded derivative instrument and the host contract is not re-measured
at fair value under otherwise applicable generally accepted accounting principles with changes in fair value reported in earnings
as they occur and (c) a separate instrument with the same terms as the embedded derivative instrument would be considered a derivative
instrument. An exception to this rule is when the host instrument is deemed to be conventional, as that term is described under
applicable GAAP.
When
the Company has determined that the embedded conversion options should not be bifurcated from their host instruments, discounts
are recorded for the intrinsic value of conversion options embedded in the instruments based upon the differences between the
fair value of the underlying common stock at the commitment date of the transaction and the effective conversion price embedded
in the instrument. Deemed dividends are also recorded for the intrinsic value of conversion options embedded in preferred shares
based upon the differences between the fair value of the underlying common stock at the commitment date of the transaction and
the effective conversion price embedded in the preferred shares.
Research
and Development
Research
and development costs are expensed as incurred. Advance payments for goods and services that will be used in future research and
development activities are expensed when the activity has been performed or when the goods have been received rather than when
the payment is made. Upfront and milestone payments due to third parties that perform research and development services on the
Company’s behalf will be expensed as services are rendered or when the milestone is achieved.
Research
and development costs primarily consist of personnel related expenses, including salaries, benefits, travel, and other related
expenses, stock-based compensation, payments made to third parties for license and milestone costs related to in-licensed products
and technology, payments made to third party contract research organizations, consultants, the cost of acquiring and manufacturing
research trial materials, and costs associated with regulatory filings, laboratory costs and other supplies.
In
accordance with ASC 730-10-25-1,
Research and Development
, costs incurred in obtaining technology licenses are charged
to research and development expense if the technology licensed has not reached commercial feasibility and has no alternative future
use. Certain licenses purchased by the Company require substantial completion of research and development and regulatory and marketing
approval efforts in order to reach commercial feasibility and have no alternative future use.
During
the six months ended June 30, 2018, in addition to ongoing efforts at one major research university, the Company entered
into additional contracts with a national research lab and another major research university for additional work related to development
and scale-up of the Company’s processes. The Company also commenced research and development efforts at the Company’s
Yonkers lab facility. These initiatives resulted in an increase in prepaid expenses of $79,000 as of June 30, 2018 and
the Company expects to record the benefits from these research initiatives through the 3rd quarter of 2018.
Contingencies
The
Company records accruals for contingencies and legal proceedings expected to be incurred in connection with a loss contingency
when it is probable that a liability has been incurred and the amount can be reasonably estimated.
If
a loss contingency is not probable but is reasonably possible, or is probable but cannot be estimated, the nature of the contingent
liability, together with an estimate of the range of possible loss if determinable and material, would be disclosed.
Stock-Based
Compensation
The
Company expenses stock-based compensation to employees over the requisite service period based on the estimated grant-date fair
value of the awards. For stock-based compensation awards to non-employees, the Company remeasures the fair value of the non-employee
awards at each reporting period prior to vesting and finally at the vesting date of the award. Changes in the estimated fair value
of these non-employee awards are recognized as compensation expense in the period of change.
The
Company estimates the fair value of stock options grants using the Black-Scholes option pricing model and the assumptions used
in calculating the fair value of stock-based awards represent management’s best estimates and involve inherent uncertainties
and the application of management’s judgment.
Income
Taxes
The
Company records income taxes using the asset and liability method. Deferred income tax assets and liabilities are recognized for
the future tax effects attributable to temporary differences between the financial statement carrying amounts of existing assets
and liabilities and their respective income tax bases, and operating loss and tax credit carryforwards. The Company establishes
a valuation allowance if it is more likely than not that the deferred tax assets will not be recovered based on an evaluation
of objective verifiable evidence. For tax positions that are more likely than not of being sustained upon audit, the Company recognizes
the largest amount of the benefit that is greater than 50% likely of being realized. For tax positions that are not more likely
than not of being sustained upon audit, the Company does not recognize any portion of the benefit.
Loss
Per Share
Basic
loss per share of common stock is computed by dividing net loss attributable to common stockholders by the weighted average number
of shares of common stock outstanding for the period. Diluted loss per share excludes the potential impact of common stock options,
convertible preferred stock and outstanding common stock purchase warrants because their effect would be anti-dilutive.
Securities
that could potentially dilute loss per share in the future that were not included in the computation of diluted loss per share
at June 30, 2018 and 2017 are as follows:
|
|
As
of June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Warrants
to purchase common stock
|
|
|
4,719,292
|
|
|
|
4,681,875
|
|
Options
to purchase common stock
|
|
|
15,824,000
|
|
|
|
5,030,000
|
|
Preferred
stock convertible into common stock
|
|
|
2,290,860
|
|
|
|
-
|
|
Total
|
|
|
22,834,152
|
|
|
|
9,711,875
|
|
Non-Controlling
Interests
Non-controlling
interests in consolidated entities represent the component of equity in consolidated entities held by third parties. Any change
in ownership of a subsidiary while the controlling financial interest is retained is accounted for as an equity transaction between
the controlling and non-controlling interests.
Recent
Accounting Pronouncements
The
Company considers the applicability and impact of all Accounting Standard Updates (“ASUs”). ASUs not discussed below were assessed
and determined to be either not applicable or are expected to have minimal impact on our consolidated balance sheets or statements
of operations.
In
June 2018, the Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Updates (the “ASU”)
2018-07, “Improvements to Nonemployee Share-Based Payment Accounting”, which simplifies the accounting for share-based
payments granted to nonemployees for goods and services. Under the ASU, most of the guidance on such payments to nonemployees
would be aligned with the requirements for share-based payments granted to employees. The changes take effect for public companies
for fiscal years starting after December 15, 2018, including interim periods within that fiscal year. For all other entities,
the amendments are effective for fiscal years beginning after December 15, 2019, and interim periods within fiscal years beginning
after December 15, 2020. Early adoption is permitted, but no earlier than an entity’s adoption date of Topic 606. The Company
expects that the adoption of this ASU would not have a material impact on the Company’s consolidated financial statements.
In
July 2017, the FASB issued ASU 2017-11,
Earnings Per Share (Topic 260), Distinguishing Liabilities from Equity (Topic 480)
and Derivatives and Hedging (Topic 815): I. Accounting for Certain Financial Instruments with Down Round Features; 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
, (ASU 2017-11). 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. Current accounting guidance creates cost and complexity for entities that issue financial instruments (such as warrants
and convertible instruments) with down round features that require fair value measurement of the entire instrument or conversion
option. 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 Accounting Standards Codification. This pending content is the result
of the indefinite deferral of accounting requirements about mandatorily redeemable financial instruments of certain nonpublic
entities and certain mandatorily redeemable noncontrolling interests. The amendments in Part II of this update do not have an
accounting effect. This ASU is effective for fiscal years, and interim periods within those years, beginning after December 15,
2018. The Company is currently assessing the potential impact of adopting ASU 2017-11 on its financial statements and related
disclosures.
In
May 2017, the FASB issued ASU 2017-09,
Compensation-Stock Compensation (Topic 718): Scope of Modification Accounting
, (ASU
2017-09). ASU 2017-09 provides clarity and reduces both (1) diversity in practice and (2) cost and complexity when applying the
guidance in Topic 718, to a change to the terms or conditions of a share-based payment award. The amendments in ASU 2017-09 should
be applied prospectively to an award modified on or after the adoption date. This ASU is effective for fiscal years, and interim
periods within those years, beginning after December 15, 2017. The Company adopted this ASU on January 1, 2018 and the adoption
did not have a material impact on the Company’s financial position or results of operations.
In
February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842).
ASU 2016-02 requires an entity to recognize right-of-use
assets and lease liabilities on its balance sheet and disclose key information about leasing arrangements. Lessees and lessors
are required to disclose qualitative and quantitative information about leasing arrangements to enable a user of the financial
statements to assess the amount, timing and uncertainty of cash flows arising from leases. ASU 2016-02 is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2018. Early adoption is permitted. The Company is
currently in the process of evaluating the impact of adoption of ASU 2016-02 on its condensed consolidated financial statements
and related disclosures.
In
August 2016, the FASB issued ASU 2016-15,
Statement of Cash Flows - Classification of Certain Cash Receipts and Cash Payments
,
which addresses eight specific cash flow issues with the objective of reducing the existing diversity in practice in how certain
cash receipts and cash payments are presented and classified in the statement of cash flows. The standard is effective for fiscal
years beginning after December 15, 2017, including interim periods within those fiscal years. The Company adopted the standard
as of January 1, 2018 and adoption did not have a material impact on its condensed consolidated statement of cash flows.
Note
4 - Property and Equipment
The
components of property and equipment as of June 30, 2018 and December 31, 2017, at cost are (dollars in thousands):
|
|
Useful
Life (Years)
|
|
|
June
30, 2018
|
|
|
December
31, 2017
|
|
Lab
equipment
|
|
|
3
|
|
|
$
|
415
|
|
|
$
|
173
|
|
Office
furniture and equipment
|
|
|
3
|
|
|
|
31
|
|
|
|
31
|
|
Leasehold
improvement
|
|
|
7
|
|
|
|
379
|
|
|
|
374
|
|
Gross
property and equipment
|
|
|
|
|
|
|
825
|
|
|
|
578
|
|
Less:
Accumulated depreciation and amortization
|
|
|
|
|
|
|
(128
|
)
|
|
|
(77
|
)
|
Property
and equipment, net
|
|
|
|
|
|
$
|
697
|
|
|
$
|
501
|
|
The
Company’s depreciation and amortization expense for the three and six months ended June 30, 2018 was $27,000 and $51,000,
and $12,000 and $17,000 for the three and six months ended June 30, 2017, respectively.
Note
5 - Related Party Transactions
Advances
from Stockholders
From
time to time, stockholders of the Company advances funds to the Company for working capital purposes. Those advances are unsecured,
non-interest bearing and due on demand.
As
of June 30, 2018 and December 31, 2017, the outstanding amounts of the advances from related parties was approximately $36,000
and $308,000, respectively. During the six months ended June 30, 2018, the Company repaid $15,000 in advances to Jerome Feldman
and $7,000 to Steven Fludder and $250,000 was converted into preferred stock. See Note 6 for more details on advances converted
to preferred stock.
Employment
Agreement with Chief Executive Officer
On
November 11, 2017, the Company appointed Sam Pitroda to serve as the Company’s new Chief Executive Officer. Since that time,
Mr. Pitroda has served as CEO without an employment agreement. The Company and Mr. Pitroda are in discussions to finalize the
terms of the employment agreement, although there can be no assurances that an agreement will be reached. On May 31, 2018, the
board of directors approved to grant Mr. Pitroda of an option to purchase 7,000,000 shares of the Company’s common stock
at an exercise price of $2.08 per share. The option expires seven years from the option grant date. The stock subject to the option
will vest upon the earlier to occur of (1) the five-year anniversary of the option grant date or (2) the achievement of certain
stock price and volume milestones, which are as follows:
|
|
|
For 20 consecutive business
|
|
Total option shares that
become vested on
|
Common stock price
|
|
|
days, with average daily
|
|
satisfaction
|
closes at or above
|
|
|
volumn in excess of
|
|
of conditions
|
$
|
3.00
|
|
|
20,000
|
|
2,000,000 (28.5%)
|
$
|
6.00
|
|
|
40,000
|
|
4,000,000 (51.7%)
|
$
|
11.00
|
|
|
60,000
|
|
7,000,000 (100.0%)
|
The
total fair value of this option award on the grant date was approximately $7.6 million. The fair value of the option award was
determined using the Black-Scholes model with the following assumptions: risk free interest rate – 2.7%, volatility –
78.0%, expected term – 4 years and dividends– N/A. The Company will amortize the option over its service period of
4.09 years which was derived from a Monte Carlo simulation. Stock-based compensation expense for this option recognized in
the three and six months ended June 30, 2018 was $155,000.
On
September 1 2017, Steven Fludder, former CEO, resigned from the Company. On June 22, 2018, the Company vested 150,000 stock options
that would have been forfeited. The Company recorded additional stock compensation expense of $210,000 during the three months
ended June 30, 2018 related to this stock option modification.
Note
6 - Temporary Equity
The
following table summarizes the Company’s Series A Preferred Stock activities for the six months ended June 30, 2018 (dollars
in thousands):
|
|
Series A Preferred Stock
|
|
|
|
Shares
|
|
|
Amount
|
|
Total temporary equity as of December 31, 2017
|
|
|
1,935
|
|
|
$
|
1,935
|
|
Sale of Series A preferred stock
|
|
|
1,700
|
|
|
|
1,700
|
|
Conversion of advances into preferred stock
|
|
|
250
|
|
|
|
250
|
|
Preferred stock converted to common stock
|
|
|
(55
|
)
|
|
|
(55
|
)
|
Beneficial conversion feature of Series A preferred stock
|
|
|
-
|
|
|
|
(956
|
)
|
Deemed dividends related to beneficial conversion feature of Series A preferred stock
|
|
|
-
|
|
|
|
956
|
|
Accrued Series A dividends
|
|
|
175
|
|
|
|
175
|
|
Deemed dividend on Series A preferred stock
|
|
|
-
|
|
|
|
687
|
|
Fair Value of common stock warrant issued with Series A preferred stock
|
|
|
-
|
|
|
|
(687
|
)
|
Total temporary equity as of June 30, 2018
|
|
|
4,005
|
|
|
$
|
4,005
|
|
On
February 8, 2018, the Company entered into a preferred stock purchase agreement (“Stock Purchase Agreement”) with
several accredited and institutional investors, pursuant to which the Company agreed to issue and sell in a private placement
1,950 shares of Series A Preferred Stock, as well as 975,000 warrants to purchase the Company’s common stock, at a purchase
price of $1,000 per share, for total gross proceeds of $1.95 million (including previous advances from related parties). The warrants
have a 5-year term and an exercise price of $2.00. Steven M. Payne converted $100,000, Jerome I. Feldman converted $50,000 and
Jim Kilman through KielStrand Capital LLC converted $100,000 advances into preferred stock. Sam Pitroda through Pitroda Group
LLC invested $500,000 and the Company issued 500 Series A Preferred Stock and 250,000 warrants on the same terms as other accredited
and institutional investors.
The
Series A Preferred is entitled to accrue cumulative dividends at a rate equal to 10.0% simple interest per annum on the original
issue price of $1,000 per share (the “Original Issue Price”). Accrued dividends will be payable quarterly based on
a 365-day year and may be paid in cash or in additional shares of Series A Preferred. Each share of Series A Preferred is convertible
into 572 shares of Common Stock, subject to customary increases or decreases for stock splits, stock dividends recapitalizations
and the like, and may be converted to Common Stock at any time after issuance at the option of a holder. The Company will have
the right, at the Company’s option, to redeem all or a portion of the shares of Series A Preferred Stock at any time or
times after the one year anniversary of the Issuance Date of such Series A Preferred Stock, at a price per share (the “Redemption
Price”) equal to the sum of the following (without duplication): (a) the Original Issue Price, plus (b) any accrued but
unpaid Dividends. Upon any liquidation, dissolution or winding up of the Company, liquidation of the Company’s assets will
be made in the following order of priority: (a) first, payment or provision for payment of debts and other liabilities; (b) second,
payment to the holders of Series A Preferred an amount with respect to each share of Series A Preferred equal to the Original
Issue Price, plus any accrued but unpaid Dividends thereon; and (c) third, payment to the holders of Common Stock. Except as required
by applicable law or as set forth herein, the holders of shares of Series A Preferred Stock will vote together with the holders
of shares of Common Stock and not as a separate class. Each share of Series A Preferred Stock will have a number of votes equal
to the number of shares of Common Stock then issuable upon conversion of such share of Series A Preferred Stock.
The
Series A Preferred Stock is being classified as temporary equity because it has redemption features that are outside of the Company’s
control upon certain triggering events, such as a deemed liquidation event. A “Deemed Liquidation Event” is defined
in the Company’s Amended and Restated Certificate of Incorporation as a merger that results in a change in control or the
sale of substantially all the assets of the Company. In the case of a Deemed Liquidation Event, the assets of the Company will
be paid in order of liquidation preference to the holders of preferred and common stock. Because certain holders of the Series
A Preferred Stock constitute a majority of the Company’s Board of Directors, a potential Deemed Liquidation Event is considered
to be outside the control of the Company along with the call provision that can be exercised in one year, resulting in classification
of the Series A Preferred Stock as temporary equity.
The
Company has determined that the warrants should be accounted as a component of stockholders’ equity. On the issuance date,
the Company estimated the fair value of the warrants at $1.2 million using the Black-Scholes option pricing model using the following
primary assumptions: contractual term of 5.0 years, volatility rate of 74.8%, risk-free interest rate of 2.57% and expected dividend
rate of 0%. Based on the warrant’s relative fair value to the fair value of the Series A Preferred, approximately $687,000
of the $1.2 million of aggregate fair value was allocated to the warrants, creating a corresponding preferred stock discount in
the same amount.
Due
to the reduction of allocated proceeds to Series A Preferred, the effective conversion price was approximately $1.13 per share
creating a beneficial conversion feature of $956,000 which reduced the carrying value of the Series A Preferred. Since the conversion
option of the Series A Preferred was immediately exercisable, the beneficial conversion feature was immediately accreted to preferred
dividends, resulting in an increase in the carrying value of the Series A Preferred.
During
six months ended June 30, 2018, there were 55 shares of preferred stock converted into 31,460 shares of common stock. As of June
30, 2018, the dividends accrued and outstanding were $285,000 and reflected in carrying value of temporary equity.
Note
7 - Stockholders’ (Deficit) Equity
Common
Stock
During
the six months ended June 30 2018, the Company entered into a private placement offering with an investor and issued 826,446 shares
of its common stock for $1.0 million. In addition, the Company granted this investor the non-exclusive rights to distribute
its product in China for a period of two years.
In connection with this private placement, the Company issued 41,322
shares of common stock to an investor as a finder’s fee.
Stock
Options
The
fair value of the Company’s common stock was based upon the publicly quoted price on the date that the final approval of
the awards was obtained. The Company does not expect to pay dividends in the foreseeable future so therefore the expected dividend
yield is 0%. The expected term for stock options granted with service conditions represents the average period the stock options
are expected to remain outstanding and is based on the expected term calculated using the approach prescribed by the Securities
and Exchange Commission’s Staff Accounting Bulletin for “plain vanilla” options. The expected term for stock
options granted with performance and/or market conditions represents the period estimated by management by which the performance
conditions will be met. The Company obtained the risk-free interest rate from publicly available data published by the Federal
Reserve. The Company uses a methodology in estimating its volatility percentage from a computation that was based on a comparison
of average volatility rates of similar companies to a computation based on the standard deviation of the Company’s own underlying
stock price’s daily logarithmic returns. The grant date fair value of stock options granted during the six months ended
June 30, 2018 and 2017 was $8.0 million and $611,000, respectively. The fair value of options granted during the six months ended
June 30, 2018 and 2017 were estimated using the following weighted-average assumptions:
|
|
For the Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
Exercise price
|
|
$
|
2.07
|
|
|
$
|
1.10
|
|
Expected stock price volatility
|
|
|
78
|
%
|
|
|
79
|
%
|
Risk-free rate of interest
|
|
|
2.67
|
%
|
|
|
1.49
|
%
|
Term (years)
|
|
|
4.0
|
|
|
|
3.0
|
|
A
summary of option activity under the Company’s employee stock option plan for the six months ended June 30, 2018 is presented
below:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average Remaining Contractual Life (in years)
|
|
Outstanding as of December 31, 2017
|
|
|
5,669,000
|
|
|
$
|
1.48
|
|
|
$
|
7,793,000
|
|
|
|
4.3
|
|
Employee options granted
|
|
|
7,260,000
|
|
|
|
2.07
|
|
|
|
-
|
|
|
|
6.8
|
|
Expired
|
|
|
(250,000
|
)
|
|
|
0.10
|
|
|
|
443,000
|
|
|
|
-
|
|
Outstanding as of June 30, 2018
|
|
|
12,679,000
|
|
|
$
|
1.84
|
|
|
$
|
2,103,000
|
|
|
|
5.6
|
|
Options vested and expected to vest as of June 30, 2018
|
|
|
12,679,000
|
|
|
$
|
1.84
|
|
|
$
|
2,103,000
|
|
|
|
5.6
|
|
Options vested and exercisable as of June 30, 2018
|
|
|
2,761,500
|
|
|
$
|
1.35
|
|
|
$
|
1,559,000
|
|
|
|
4.0
|
|
Estimated
future stock-based compensation expense relating to unvested employee stock options is approximately $8.8 million as of June 30,
2018 and will be amortized over 4.3 years.
A
summary of activity of options granted to non-employees for the six months ended June 30, 2018 is presented below:
|
|
Number of Shares
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average Remaining Contractual Life (in years)
|
|
Outstanding as of December 31, 2017
|
|
|
3,205,000
|
|
|
$
|
0.40
|
|
|
$
|
7,847,000
|
|
|
|
2.4
|
|
Non-employee options granted
|
|
|
100,000
|
|
|
|
1.78
|
|
|
|
12,000
|
|
|
|
3.3
|
|
Exercised
|
|
|
(10,000
|
)
|
|
|
0.20
|
|
|
|
22,000
|
|
|
|
-
|
|
Expired
|
|
|
(150,000
|
)
|
|
|
0.10
|
|
|
|
266,000
|
|
|
|
-
|
|
Outstanding as of June 30, 2018
|
|
|
3,145,000
|
|
|
$
|
0.46
|
|
|
$
|
4,484,000
|
|
|
|
2.1
|
|
Options vested and expected to vest as of June 30, 2018
|
|
|
3,145,000
|
|
|
$
|
0.46
|
|
|
$
|
4,484,000
|
|
|
|
2.1
|
|
Options vested and exercisable as of June 30, 2018
|
|
|
2,382,500
|
|
|
$
|
0.50
|
|
|
$
|
3,308,000
|
|
|
|
2.1
|
|
Warrants
A
summary of the status of the Company’s outstanding warrants as of June 30, 2018 and changes during the six months then ended
is presented below:
|
|
Number of Warrants
|
|
|
Weighted Average
Exercise Price
|
|
|
Total Intrinsic Value
|
|
|
Weighted Average Remaining Contractual Life (in years)
|
|
Outstanding as of December 31, 2017
|
|
|
4,744,292
|
|
|
$
|
1.24
|
|
|
$
|
7,884,000
|
|
|
|
3.6
|
|
Issued
|
|
|
975,000
|
|
|
|
2.00
|
|
|
|
-
|
|
|
|
4.6
|
|
Exercised
|
|
|
(1,000,000
|
)
|
|
|
0.20
|
|
|
|
1,680,000
|
|
|
|
-
|
|
Outstanding as of June 30, 2018
|
|
|
4,719,292
|
|
|
$
|
1.62
|
|
|
$
|
2,200,000
|
|
|
|
3.6
|
|
Warrants exercisable as of June 30, 2018
|
|
|
4,469,292
|
|
|
$
|
1.64
|
|
|
$
|
2,063,000
|
|
|
|
3.5
|
|
Stock-based
Compensation Expense
Stock-based
compensation expense for the six months ended June 30, 2018 and 2017 was comprised of the following (dollars in thousands):
|
|
For the Three Months Ended June 30,
|
|
|
For the Six Months Ended June 30,
|
|
|
|
2018
|
|
|
2017
|
|
|
2018
|
|
|
2017
|
|
Employee stock option awards
|
|
$
|
896
|
|
|
$
|
118
|
|
|
$
|
1,388
|
|
|
$
|
355
|
|
Non-employee option awards
|
|
|
278
|
|
|
|
70
|
|
|
|
(296
|
)
|
|
|
710
|
|
Total compensation expense
|
|
$
|
1,174
|
|
|
$
|
188
|
|
|
$
|
1,092
|
|
|
$
|
1,065
|
|