NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
MARCH 31, 2019
(Unaudited)
Note 1. Basis of Presentation and Nature of Operations
Unaudited Interim Financial Information
The accompanying unaudited condensed consolidated financial statements of Innovation Pharmaceuticals Inc. have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or the SEC, including the instructions to Form 10-Q and Regulation S-X. Certain information and note disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles in the United States of America (“U.S. GAAP”) have been condensed or omitted from these statements pursuant to such rules and regulations and, accordingly, they do not include all the information and notes necessary for comprehensive consolidated financial statements and should be read in conjunction with our audited financial statements for the year ended June 30, 2018, included in our Annual Report on Form 10-K for the year ended June 30, 2018.
In the opinion of the management of Innovation Pharmaceuticals Inc., all adjustments, which are of a normal recurring nature, necessary for a fair statement of the results for the three-month and nine-month periods have been made. Results for the interim period presented are not necessarily indicative of the results that might be expected for the entire fiscal year. When used in these notes, the terms “Company,” “we,” “us” or “our” mean Innovation Pharmaceuticals Inc.
Basis of Presentation
Innovation Pharmaceuticals Inc. (“Innovation”) was incorporated on August 1, 2005 in the State of Nevada. Effective June 5, 2017, the Company amended its Articles of Incorporation and changed its name from Cellceutix Corporation to Innovation Pharmaceuticals Inc. On February 15, 2019, the Company formed IPIX Pharma Limited (“IPIX Pharma”), a wholly-owned subsidiary incorporated under the Companies Act 2014 of Ireland. IPIX Pharma is a Private Company Limited by Shares. The subsidiary will serve as a key hub for strategic collaboration with European companies and medical communities in addition to providing cost-saving efficiencies and flexibility with respect to developing Brilacidin under European Medicines Agency standards.
The Company is a clinical stage biopharmaceutical company and has no customers, products or revenues to date. The Company’s common stock is quoted on OTCQB, symbol “IPIX.”
Basis of Consolidation
These condensed consolidated financial statements include the accounts of Innovation, a Nevada corporation, and our wholly-owned subsidiaries, IPIX Pharma, an Ireland limited company. All significant intercompany transactions and balances have been eliminated in consolidation. Translation gains and losses for the nine months ended March 31, 2019 and 2018 were not significant.
Nature of Operations - Overview
We are in the business of developing innovative small molecule therapies to treat diseases with significant medical need, particularly in the areas of inflammatory diseases, cancer, dermatology and anti-infectives. Our strategy is to use our business and scientific expertise to maximize the value of our pipeline. We will do this by focusing initially on our lead compounds, Brilacidin and Kevetrin, and advancing them as quickly as possible along the regulatory pathway. We aim to develop the highest quality data and broadest intellectual property to support our compounds. We discontinued the Prurisol psoriasis program.
We currently own all development and marketing rights to our products. In order to successfully develop and market our products, we may have to partner with other companies. Prospective partners may require that we grant them significant development and/or commercialization rights in return for agreeing to share the risk of development and/or commercialization.
Note 2. Going Concern and Liquidity
These financial statements have been prepared on the assumption that the Company is a going concern, which contemplates the realization of its assets and the settlement of its liabilities in the normal course of operations.
We have incurred recurring losses since inception and expect to continue to incur losses as a result of costs and expenses related to our research and continued development of our compounds and our corporate general and administrative expenses. As of March 31, 2019, the Company has an accumulated deficit of approximately $93.0 million, representative of recurring losses since inception. The Company is a development stage pharmaceutical company that has no sales as it does not have any products in the market and will continue to not have any revenues until it begins to market its products after it has obtained the necessary Federal Drug Administration (the “FDA”) and/ or other health authorities approval. As a result, the Company expects to continue to incur losses over the next 12 months from the date of this filing. Accordingly, the Company’s planned operations, including total budgeted expenditures of approximately $12.5 million for the next twelve months, raise substantial doubt about its ability to continue as a going concern.
At March 31, 2019, the Company’s cash amounted to $0.5 million and current liabilities amounted to $7.6 million, of which $6.7 million were payables to related parties with no immediate payment terms (See Note 8 - Related Party Transactions). The Company had expended substantial funds on its clinical trials and expects to continue our spending on research and development expenditures. The Company’s net cash used in operating activities for the nine months ended March 31, 2019 was approximately $5.0 million, and current projections indicate that the Company will have continued negative cash flows from operating activities for the foreseeable future. Our net losses incurred for the nine months ended March 31, 2019 and 2018, amounted to $7.2 million and $11.5 million, respectively, and we had a working capital deficit of approximately $7.1 million and $6.1 million, respectively at March 31, 2019 and June 30, 2018.
The Company's primary sources of liquidity are cash and cash equivalents as well as issuances of its equity securities. The Company is party to a common stock purchase agreement (the “Purchase Agreement”) with Aspire Capital Fund, LLC (“Aspire Capital”) that provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company's common stock over the 36-month term of the Purchase Agreement. As of March 31, 2019, the available balance under the Purchase Agreement is approximately $22.3 million. However, as of the date of this report, the conditions for sales under the Purchase Agreement are not satisfied and no sales may occur thereunder. In particular, the Purchase Agreement provides that the Company and Aspire Capital will not affect any sales under the Purchase Agreement when the closing sales price of the Company’s common stock is less than $0.25 per share. Recently, the Company’s common stock has traded below $0.25 per share, and there is substantial uncertainty regarding the Company’s continued ability to sell shares under the Purchase Agreement in order to meet the Company's projected working capital requirements for the next 12 months from the date of the issuance of the financial statements (or available to be issued).
On October 5, 2018, the Company entered into a securities purchase agreement with one multi-family office for the sale of an aggregate of 2,000 shares of the Company’s newly-created Series B 5% convertible preferred stock for aggregate gross proceeds of approximately $2.0 million. Under this securities purchase agreement, the Company issued to the investors warrants to purchase up to an additional 8,000 shares of preferred stock. The Company received the proceeds from exercise of 1,275 Series 1-2 warrants of approximately $1.3 million from October 2018 to March 31, 2019. As the Company cannot be certain the remaining warrants will be exercised, there can be no assurance those funds will be available when needed.
The Company expects to seek to obtain additional funding through business development activities (i.e. licensing and partnerships) and future equity issuances. There can be no assurance as to the availability or terms upon which such financing and capital might be available. The Company will be unable to proceed with its planned drug development programs, meet its administrative expense requirements, capital costs, or staffing costs without additional financing from Aspire Capital, the multi-family office or another source of capital. These financial statements do not include any adjustments related to the carrying values and classifications of assets and liabilities that would be necessary should the Company be unable to continue as a going concern.
3. Significant Accounting Policies and Recent Accounting Pronouncements
Use of Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting periods. Significant items subject to such estimates and assumptions include contract research accruals, recoverability of long-lived assets, valuation of equity grants and income tax valuation. The Company bases its estimates on historical experience and various other assumptions that management believes to be reasonable under the circumstances. Changes in estimates are recorded in the period in which they become known. Actual results could differ from those estimates.
Basic Loss per Share
Basic and diluted loss per share is computed based on the weighted-average common shares and common share equivalents outstanding during the period. Common share equivalents consist of warrants, stock options, convertible notes payable underlying shares, unvested restricted stock and Series B Convertible Preferred Stock at a conversion price at approximately $0.10 per share. Common share equivalents of 66 million shares and 47 million shares of common stock were excluded from the computation of diluted loss per share for the three and nine months ended March 31, 2019 and 2018, because we incurred net losses for the nine months ended March 31, 2019 and 2018, and the effect of including these potential common shares in the net loss per share calculations would be anti-dilutive and are therefore not included in the calculations.
Treasury Stock
The Company accounts for treasury stock using the cost method. There were 228,218 shares and 0 shares of treasury stock outstanding, purchased at a total cumulative cost of $91,000 and $0, at March 31, 2019 and 2018, respectively (see Note 11 to the notes to the condensed consolidated financial statements).
Treasury stock, representing shares of the Company’s common stock that have been acquired for payroll tax withholding on vested stock grants, is recorded at its acquisition cost and these shares are not considered outstanding.
Accounting for Stock Based Compensation
The stock-based compensation expense incurred by the Company for employees and directors in connection with its stock option plan is based on the employee model of ASC 718, and the fair market value of the options is measured at the grant date. Under ASC 718 employee is defined as “An individual over whom the grantor of a share-based compensation award exercises or has the right to exercise sufficient control to establish an employer-employee relationship based on common law as illustrated in case law and currently under U.S. “tax regulations.” Our consultants do not meet the employer-employee relationship as defined by the IRS and therefore are accounted for under ASC 505-50.
ASC 505-50-30-11 further provides that an issuer shall measure the fair value of the equity instruments in these transactions using the stock price and other measurement assumptions as of the earlier of the following dates, referred to as the measurement date:
|
|
i.
|
The date at which a commitment for performance by the counterparty to earn the equity instruments is reached (a performance commitment); and
|
|
|
|
|
|
|
ii.
|
The date at which the counterparty’s performance is complete.
|
We have elected to use the Black-Scholes-Merton pricing model to determine the fair value of stock options on the dates of grant. Restricted stock units are measured based on the fair market values of the underlying stock on the dates of grant. We recognize stock-based compensation using the straight-line method.
The components of stock-based compensation expense included in the Company’s Condensed Statement of Operations for the three months and nine months ended March 31, 2019 and 2018 are as follows (rounded to nearest thousand):
|
|
|
Three months ended
March 31
|
|
|
Nine months ended
March 31
|
|
|
|
|
2019
|
|
|
2018
|
|
|
2019
|
|
|
2018
|
|
|
Stock-based compensation expense
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
19,000
|
|
|
$
|
80,000
|
|
|
$
|
44,000
|
|
|
$
|
80,000
|
|
|
Employees’ bonus
|
|
|
41,000
|
|
|
|
41,000
|
|
|
|
134,000
|
|
|
|
115,000
|
|
|
Officers’ bonus
|
|
|
222,000
|
|
|
|
144,000
|
|
|
|
620,000
|
|
|
|
1,470,000
|
|
|
Total stock-based compensation expense
|
|
$
|
282,000
|
|
|
$
|
265,000
|
|
|
$
|
798,000
|
|
|
$
|
1,665,000
|
|
Fair Value of Financial Instruments and Fair Value Measurements
FASB Accounting Standards Codification (“ASC”) Topic 820, “Fair Value Measurements and Disclosures,” requires disclosure of the fair value of financial instruments held by the Company. ASC Topic 825, “Financial Instruments,” defines fair value, and establishes a three-level valuation hierarchy for disclosures of fair value measurement that enhances disclosure requirements for fair value measures. The carrying amounts reported in the balance sheets for current liabilities, convertible notes and preferred stock liability (all as defined below) are a reasonable estimate of their fair values because of the short period of time between the origination of such instruments and their expected realization and their current market rate of interest. The carrying value of all other financial liabilities at cost approximates fair value.
Recently Adopted Accounting Pronouncements
In July 2017, the FASB issued Accounting Standards Update (“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; and II. Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non-controlling Interests with a Scope Exception. Part I of this update addresses the complexity of accounting for certain financial instruments with down round features. Down round features are features of certain equity-linked instruments (or embedded features) that result in the strike price being reduced on the basis of the pricing of future equity offerings. 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 non-controlling 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, with early adoption permitted. The adoption of ASU 2017-11, during the year ended June 30, 2018, did not have any impact on the 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 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. This new pronouncement has been adopted in the fourth quarter of fiscal 2018 and did not have a material effect on the Company’s financial position, results of operations or cash flows.
In May 2014, the FASB issued ASU 2014-09, Revenue from Contracts with Customers (Topic 606), which defines how companies should report revenues from contracts with customers. The standard requires an entity to recognize revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. It provides companies with a five-step, principles-based model to use in accounting for revenue and supersedes current revenue recognition requirements, including most industry-specific and transaction-specific revenue guidance. In August 2015, the FASB deferred the effective date of the new revenue standard by one year. As a result, the new standard would not be effective for the Company until 2019. In addition, the FASB is allowing companies to early adopt this guidance for non-public entities beginning in fiscal year 2017. The guidance permits an entity to apply the standard retrospectively to all prior periods presented, with certain practical expedients, or apply the requirements in the year of adoption, through a cumulative adjustment. This new pronouncement has been adopted in the first quarter of fiscal 2019 and did not have a material effect on the Company’s financial position, results of operations or cash flows.
In August 2016, the FASB issued ASU No. 2016-15, “Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force)” (“ASU No. 2016-15”). ASU No. 2016-15 clarifies how certain cash receipts and payments should be presented in the statement of cash flows. ASU No. 2016-15 is effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2017. The Company adopted the new standard effective July 1, 2018. The application of this standard did not have a material impact on the Company’s unaudited condensed statements of cash flows.
Recently Issued Accounting Guidance
In June 2018, the FASB issued ASU 2018-07, Compensation – Stock Compensation (Topic 718): Improvements to Nonemployee Share-Based Payment Accounting, which allows companies to account for nonemployee awards in the same manner as employee awards. The guidance is effective for fiscal years beginning after December 15, 2018, and interim periods within those annual periods. The adoption of ASU 2018-07 will not have a material impact on the financial statements.
In February 2016, the FASB issued ASU No. 2016-02, Leases (Topic 842) which requires lessees to recognize a right-of-use asset and lease liability for most lease arrangements. The new standard is effective for fiscal years beginning after December 15, 2018, with early adoption permitted, and must be adopted using the modified retrospective approach. The Company will adopt this new pronouncement beginning July 1, 2019. Interpretations are on-going and could have a material impact on the Company's implementation. Currently, the Company expects that the adoption of the ASU 2016-02 (Topic 842) Leases will have a material impact on its consolidated balance sheet due to the recognition of right-of-use assets and lease liabilities principally for certain leases currently accounted for as operating leases, and expects it to have a material impact on our results of operations.
4. Patents, net
Patents, net consisted of the following (rounded to nearest thousand):
|
|
|
Useful life
|
|
|
March 31,
2019
|
|
|
June 30,
2018
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Purchased Patent Rights- Brilacidin, and related compounds
|
|
14
|
|
|
$
|
4,082,000
|
|
|
$
|
4,082,000
|
|
|
Purchased Patent Rights-Anti-microbial- surfactants and related compounds
|
|
12
|
|
|
|
144,000
|
|
|
|
144,000
|
|
|
Patents - Kevetrin and related compounds
|
|
17
|
|
|
|
1,090,000
|
|
|
|
1,219,000
|
|
|
|
|
|
|
|
|
5,316,000
|
|
|
|
5,445,000
|
|
|
Less: Accumulated amortization for Brilacidin, Anti-microbial- surfactants and related compounds
|
|
|
|
|
|
(1,690,000
|
)
|
|
|
(1,462,000
|
)
|
|
Accumulated amortization for Patents-Kevetrin and related compounds
|
|
|
|
|
|
(220,000
|
)
|
|
|
(203,000
|
)
|
|
Total
|
|
|
|
|
$
|
3,406,000
|
|
|
$
|
3,780,000
|
|
The patents are amortized on a straight-line basis over the useful lives of the assets, determined to be 12-17 years from the date of acquisition.
Amortization expense for the three months ended March 31, 2019 and 2018 was approximately $92,000 and $96,000, respectively and was approximately $277,000, and $289,000 for the nine months ended March 31, 2019 and 2018, respectively.
During the nine months ended March 31, 2019 and 2018, the Company has written off the Prurisol patent and other patents of approximately $155,000 and $0, respectively, and included in general and administrative expenses.
At March 31, 2019, the future amortization period for all patents was approximately 6.43 years to 15.87 years. Future estimated annual amortization expenses are approximately $92,000 for the year ending June 30, 2019, $366,000 for each year from 2020 to 2022, and total of $2,216,000 for the year ending June 30, 2023 and thereafter.
5. Accrued Expenses – Related Parties and Other
Accrued expenses consisted of the following (rounded to nearest thousand):
|
|
|
March 31,
2019
|
|
|
June 30,
2018
|
|
|
|
|
|
|
|
|
|
|
Accrued research and development consulting fees
|
|
$
|
167,000
|
|
|
$
|
208,000
|
|
|
Accrued rent (Note 8) - related parties
|
|
|
8,000
|
|
|
|
10,000
|
|
|
Accrued interest (Note 9) - related parties
|
|
|
66,000
|
|
|
|
48,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
241,000
|
|
|
$
|
266,000
|
|
6. Accrued Salaries and Payroll Taxes - Related Parties and Other
Accrued salaries and payroll taxes consisted of the following (rounded to nearest thousand):
|
|
|
March 31,
2019
|
|
|
June 30,
2018
|
|
|
|
|
|
|
|
|
|
|
Accrued salaries - related parties
|
|
$
|
2,999,000
|
|
|
$
|
2,823,000
|
|
|
Accrued payroll taxes - related parties
|
|
|
130,000
|
|
|
|
130,000
|
|
|
Accrued employee bonuses
|
|
|
-
|
|
|
|
214,000
|
|
|
Withholding tax - payroll
|
|
|
45,000
|
|
|
|
52,000
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
3,174,000
|
|
|
$
|
3,219,000
|
|
7. Commitments and Contingencies
Lease Commitments
Operating Leases – Rental Property
On October 1, 2018, the Company’s lease agreement with Cummings Properties automatically renewed. The lease is for a term of five years ending on September 30, 2023, and requires monthly payments of approximately $19,000.
As of March 31, 2019, future minimum lease payments to Cummings Properties required under the non-cancelable operating lease are as follows (rounded to nearest thousand):
|
Year ending June 30,
|
|
|
|
|
2019
|
|
$
|
57,000
|
|
|
2020
|
|
|
228,000
|
|
|
2021
|
|
|
228,000
|
|
|
2022
|
|
|
228,000
|
|
|
2023
|
|
|
228,000
|
|
|
Thereafter
|
|
|
57,000
|
|
|
Total
|
|
$
|
1,026,000
|
|
Rent expense, net of lease income, under this operating lease agreement was approximately $58,000 and $53,000 for the three months ended March 31, 2019 and 2018, respectively and was approximately $168,000 and $157,000 for the nine months ended March 31, 2019 and 2018, respectively. As of September 1, 2018, Kard Scientific no longer leases space from the Company (See Note 8 to the notes to the condensed consolidated financial statements).
Contractual Commitments
The Company has total non-cancelable contractual minimum commitments of approximately $1.8 million to contract research organizations as of March 31, 2019. Expenses are recognized when services are performed by the contract research organizations.
8. Related Party Transactions
Office Lease
The Company charged Kard Scientific (“KARD”) $1,800 for space for the two months of July and August, 2018. Dr. Menon, the Company’s principal shareholder, and former President of Research, also serves as the Chief Operating Officer and Director of Kard Scientific. Dr. Menon’s employment was terminated with the Company on September 18, 2018, and Dr. Menon resigned from the Company’s Board of Directors on December 11, 2018. As of September 1, 2018, KARD no longer leases space from the Company.
Pre-clinical Studies
The Company previously engaged KARD to conduct specified pre-clinical studies. The Company did not have an exclusive arrangement with KARD. All work performed by KARD needed prior approval by the executive officers of the Company, and the Company retained all intellectual property resulting from the services by KARD. The Company no longer uses KARD. At March 31, 2019 and June 30, 2018, the accrued research and development expenses payable to KARD was approximately $1,486,000 and this amount was included in accounts payable.
Other related party transactions are disclosed in Note 9 to the notes to the condensed consolidated financial statements below.
9. Convertible Note Payable - Related Party
During the year ended June 30, 2010, Mr. Ehrlich, the Company’s Chairman and CEO, loaned the Company a total of approximately $973,000. A condition for this note was that the Ehrlich Promissory Note A and Ehrlich Promissory Note B be replaced with a new note, Ehrlich Promissory Note C. The Ehrlich Promissory Note C is an unsecured demand note that bears 9% simple interest per annum and is convertible into the Company’s Class A common stock at $0.50 per share. The note requires that the interest rate on the amounts due on Ehrlich Promissory Notes A and B be changed retroactively, beginning October 1, 2009, to 9%. On April 1, 2011, the Company amended the Ehrlich Promissory Note C and agreed to retroactively convert accrued interest of approximately $97,000 through December 31, 2010 into additional principal. During the year ended June 30, 2011, Mr. Ehrlich loaned the Company an additional approximately $997,000 which brought the total balance of the demand note to approximately $2,002,000. During the year ended June 30, 2012, Mr. Ehrlich loaned the Company an additional $20,000 which brought the balance of this demand note to approximately $2,022,000.
On May 8, 2012, the Company did not have the ability to repay the Ehrlich Promissory Note C loan and agreed to change the interest rate on the outstanding balance of principal and interest of approximately $2,248,000, as of March 31, 2012, from 9% simple interest to 10% simple interest, and the Company issued 2,000,000 Equity Incentive Options exercisable at $0.51 per share equal to 110% of the closing bid price of $0.46 per share on May 7, 2012. Options are valid for ten years from the date of issuance.
As of March 31, 2019 and June 30, 2018, the balance of accrued interest payable were $66,000 and $12,000, respectively (see Note 5 to the notes to the condensed consolidated financial statements).
On January 29, 2019, Mr. Ehrlich cancelled $100,000 of debt owed to him by the Company to satisfy the exercise price for the purchase of 909,090 shares of Class B common stock at the option exercise price of $0.11 per share. As of March 31, 2019 and June 30, 2018, principal balance of this demand note was approximately $1,922,000 and $2,022,000, respectively. As of March 31, 2019 and June 30, 2018, the total outstanding balance of principal and interest were approximately $1,988,000 and $2,034,000, respectively.
10. Equity Incentive Plans, Stock-Based Compensation, Exercise of Options and Warrants Outstanding
Equity Incentive Plans
2016 Equity Incentive Plan
On June 30, 2016, the Board of Directors adopted the Company’s 2016 Equity Incentive Plan (the “2016 Plan”). The 2016 Plan became effective upon adoption by the Board of Directors on June 30, 2016.
Up to 20,000,000 shares of the Company’s Class A common stock may be issued under the 2016 Plan (subject to adjustment as described in the 2016 Plan); provided that (1) no Outside Director (as defined in the 2016 Plan) may be granted awards covering more than 250,000 shares of common stock in any year and (2) no participant shall be granted, during any one year period, options to purchase common stock and stock appreciation rights with respect to more than 4,000,000 shares of common stock in the aggregate or any other awards with respect to more than 2,500,000 shares of common stock in the aggregate. The 2016 Plan permits the grant of ISOs, non-qualified stock options, stock appreciation rights, restricted awards, performance share awards and performance compensation awards to employees, directors, and consultants of the Company and its affiliates.
In connection with adoption of the 2016 Plan, the Board of Directors also approved forms of Incentive Stock Option Agreement for Employees, Non-qualified Stock Option Agreement for Employees, Non-qualified Stock Option Agreement for Non-Employee Directors, Restricted Stock Award Agreement for Employees and Restricted Stock Award Agreement for Non-Employee Directors that will be utilized by the Company to grant options and restricted shares under the 2016 Plan.
Stock Options Issued and Outstanding
The following table summarizes all stock option activity under the Company’s equity incentive plans:
|
|
|
Number of
Options
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life
(Years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
41,643,571
|
|
|
|
0.22
|
|
|
|
2.76
|
|
|
$
|
17,523,113
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
1,195,826
|
|
|
|
0.31
|
|
|
|
7.89
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Forfeited/expired
|
|
|
(1,235,424
|
)
|
|
|
1.65
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
41,603,973
|
|
|
|
0.18
|
|
|
|
2.24
|
|
|
$
|
-
|
|
|
Exercisable at March 31, 2019
|
|
|
40,068,405
|
|
|
$
|
0.17
|
|
|
|
2.01
|
|
|
$
|
-
|
|
The fair value of options granted for the nine months ended March 31, 2019 and 2018 was estimated on the date of grant using the Black Scholes model that uses assumptions noted in the following table.
|
|
|
Nine months ended
March 31,
|
|
|
|
|
2019
|
|
|
2018
|
|
|
Expected term (in years)
|
|
5 - 10
|
|
|
5 - 10
|
|
|
Expected stock price volatility
|
|
67.34% to 104.11%
|
|
|
52.80% to 106.01%
|
|
|
Risk-free interest rate
|
|
2.51% to 2.86%
|
|
|
2.15% to 2.56%
|
|
|
Expected dividend yield
|
|
0
|
|
|
0
|
|
Stock-Based Compensation
The Company recognized approximately $798,000 and $1,665,000 of total stock-based compensation costs related to equity grant awards for the nine months ended March 31, 2019 and 2018, respectively.
The $798,000 of stock-based compensation expense for the nine months ended March 31, 2019 included approximately $349,000 of stock options expense and $449,000 of restricted stock awards.
The $1,665,000 of stock-based compensation expense for the nine months ended March 31, 2018 included approximately $677,000 of stock options expense and $988,000 of restricted stock awards (see Note 11 to the notes to the condensed consolidated financial statements).
During the nine months ended March 31, 2019
On February 1, 2019, the Company agreed to issue 400,000 stock options to purchase shares of the Company’s common stock to each of two consultants for specified services to be provided from February 1, 2019 to January 31, 2020 in accordance with agreements with the two consultants. These options were issued with an exercise price of $0.13 per share and vest 33 1/3% on February 1, 2019, 33 1/3% on August 1, 2019, and 33 1/3% on January 31, 2020. The value of the total 800,000 options for two consultants was approximately $60,000. During the nine months ended March 31, 2019, the Company recorded approximately $13,000 of related stock-based compensation.
On September 1, 2018, the Company issued to Dr. Arthur Bertolino, the President and Chief Medical Officer of the Company, for his services rendered 1,066,667 shares of common stock, vesting 50% upon the first anniversary of the grant date and 50% upon the second anniversary of the grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 617,839 stock options to purchase shares of the Company’s common stock. These stock options are valued at approximately $225,000, based on the closing bid price as quoted on the OTC on August 31, 2018 at $0.40 per share. These options were issued with an exercise price of $0.40 per share and vest 50% upon the first anniversary of the grant date and 50% upon the second anniversary of the grant date, with acceleration as defined in award agreement, with a ten year option term. These options have piggyback registration rights.
During the three months and nine months ended March 31, 2019, the Company recorded approximately $80,000 and $188,000 of stock-based compensation, respectively. The $80,000 of stock-based compensation expense for the three months ended March 31, 2019 included approximately $28,000 of stock option expense and $52,000 of stock awards. The $188,000 of stock-based compensation expense for the nine months ended March 31, 2019 included approximately $65,000 of stock option expense and $123,000 of stock awards.
On September 1, 2018, the Company also issued to Ms. Jane Harness, the Senior Vice President, Clinical Sciences and Portfolio Management of the Company, 58,394 shares of the Company’s common stock, 33 1/3% vesting upon the first anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date and 33 1/3% upon the third anniversary of the grant date, with acceleration in certain circumstances as provided in the award agreement. The Company also issued 172,987 options to purchase common stock. These stock options are valued at approximately $63,000, based on the closing bid price as quoted on the OTC on August 31, 2018 at $0.40 per share. These options were issued with an exercise price of $0.40 per share and vest 33 1/3% upon the first anniversary of the grant date, 33 1/3% upon the second anniversary of the grant date, and 33 1/3% upon the third anniversary of the grant date, with acceleration of vesting upon certain events.
During the three months and nine months ended March 31, 2019, the Company recorded approximately $7,000 and $17,000 of total stock-based compensation, respectively. The $7,000 of stock-based compensation expense for the three months ended March 31, 2019 included approximately $5,000 of stock option expense and $2,000 of stock awards. The $17,000 of stock-based compensation expense for the nine months ended March 31, 2019 included approximately $12,000 of stock option expense and $5,000 of stock awards.
On September 1, 2018, the Company also issued to Ms. Anne Ponugoti, Associate Director, Clinical Sciences of the Company, 5,000 shares of the Company’s common stock and 5,000 options to purchase common stock with same vesting periods as the common stock and options issued to Ms. Ponugoti. The total value of the 5,000 shares and 5,000 options were approximately $2,000 each, based on the closing bid price as quoted on the OTC on August 31, 2018 at $0.40 per share. During the three months and nine months ended March 31, 2019, the stock-based compensation expense was not significant. She left the Company on January 15, 2019.
Restricted Stock Awards Outstanding
The following summarizes our restricted stock activity for our restricted stock issuances:
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
Number of
|
|
|
Grant Date
|
|
|
|
|
Shares
|
|
|
Fair Value
|
|
|
Total awards outstanding at June 30, 2018
|
|
|
1,208,157
|
|
|
$
|
0.72
|
|
|
Total shares granted
|
|
|
1,130,061
|
|
|
$
|
0.40
|
|
|
Total shares vested
|
|
|
(584,763
|
)
|
|
$
|
0.72
|
|
|
Total shares forfeited
|
|
|
(11,667
|
)
|
|
$
|
0.76
|
|
|
Total unvested shares outstanding at March 31, 2019
|
|
|
1,741,788
|
|
|
$
|
0.51
|
|
Scheduled vesting for outstanding restricted stock awards at March 31, 2019 is as follows:
|
|
|
Year Ending June 30,
|
|
|
|
|
2019
|
|
|
2020
|
|
|
2021
|
|
|
2022
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Scheduled vesting
|
|
|
12,500
|
|
|
|
1,137,562
|
|
|
|
572,262
|
|
|
|
19,464
|
|
|
|
1,741,788
|
|
As of March 31, 2019, there was approximately $0.5 million of net unrecognized compensation cost related to unvested restricted stock-based compensation arrangements. This compensation is recognized on a straight-line basis resulting in approximately $0.4 million of compensation expected to be expensed over the next twelve months, and the total unrecognized stock-based compensation expense having a weighted average recognition period of 1.12 years.
Exercise of options
During the three months and nine months ended March 31, 2019 and 2018, there were no stock options exercised under the Company’s equity incentive plans.
Stock Warrants Outstanding
Warrants to Purchase Preferred Stock
On October 5, 2018, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with one multi-family office for the sale of an aggregate of 2,000 shares of the Company’s newly-created Series B 5% convertible preferred stock (the “Series B preferred stock”), for aggregate gross proceeds of approximately $2.0 million. Each share of preferred stock was sold together with three warrants: (i) a Series 1 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to nine months following issuance, (ii) a Series 2 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to 15 months following issuance, and (iii) a Series 3 warrant, which entitles the holder thereof to purchase 1.50 shares of preferred stock at $982.50 per share, or 3,000 shares of preferred stock in the aggregate for approximately $2.9 million in aggregate exercise price, for a period of up to 24 months following issuance.
The warrants issued in connection with the Series B preferred stock are deemed to be free standing equity instruments and are recorded in permanent equity (additional paid in capital) based on a relative fair value allocation of proceeds (i.e. warrants’ relative fair value to the Series B preferred stock fair value (without the warrants)) with an offsetting discount to the Series B preferred stock. There were 1,275 Series 1-2 warrants exercised during the nine months ended March 31, 2019. As of March 31, 2019, 6,725 Series 1-3 warrants to purchase 6,725 preferred stock were outstanding (see Note 12 to the notes to the condensed consolidated financial statements).
|
The following table summarizes the outstanding preferred stock warrants:
|
|
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
-
|
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
8,000
|
|
|
|
982.50
|
|
|
|
1.37
|
|
|
|
|
|
|
Exercised
|
|
|
(1,275
|
)
|
|
|
982.50
|
|
|
|
1.00
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
|
6,725
|
|
|
$
|
985.50
|
|
|
|
1.00
|
|
|
$
|
-
|
|
Warrants to Purchase Common Stock
During the nine months ended March 31, 2019 and 2018, there were no warrants issued to purchase common stock.
On June 28, 2018, the Company entered into a Securities Purchase Agreement with Aspire Capital Fund, LLC, pursuant to which the Company has agreed to sell up to $7.0 million of shares of the Company’s Class A common stock to Aspire Capital, without an underwriter or placement agent. The Company issued to Aspire Capital warrants to purchase 8,000,000 shares of its common stock exercisable for 5 years at an exercise price of $0.38 per share (see Note 11 to the notes to the condensed consolidated financial statements). The warrants were recorded within stockholders’ deficiency. The fair value of the warrants issued on June 28, 2018 was estimated on the date of issuance using the Black Scholes Model that uses assumptions noted in the following table. The value of the warrants issued was approximately $1.7 million.
|
Expected term (in years)
|
|
|
3
|
|
|
Expected stock price volatility
|
|
|
82.36
|
%
|
|
Risk-free interest rate
|
|
|
2.73
|
%
|
|
Expected dividend yield
|
|
|
0
|
|
|
The following table summarizes the outstanding common stock warrants:
|
|
|
|
Warrants
|
|
|
Weighted Average Exercise Price
|
|
|
Weighted Average Remaining Contractual Life (Years)
|
|
|
Aggregate
Intrinsic Value
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding at June 30, 2018
|
|
|
8,000,000
|
|
|
$
|
0.38
|
|
|
|
5.0
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
Outstanding at March 31, 2019
|
|
8.000.000
|
|
|
$
|
0.38
|
|
|
|
4.25
|
|
|
$
|
-
|
|
11. Equity Transactions
On January 29, 2019, Leo Ehrlich, the Company’s Chairman and CEO, cancelled $100,000 of debt owed to him by the Company to satisfy the exercise price for the purchase of 909,090 shares of Common Stock Class B, $0.0001 par value at the option exercise price of $0.11. As of March 31, 2019, 909,090 shares of Common Stock Class B were outstanding.
Purchase of Treasury Stock
On September 1, 2018, 38,930 shares of the Company’s restricted stock vested to Ms. Harness according to Ms. Harness’s employment agreement. The total taxable compensation to Ms. Harness for the 38,930 vested shares was approximately $3,690, which is priced at the closing stock price on September 1, 2018 at $0.40 a share.
The Company issued 29,658 common shares (net share issuance amount), which was approximately 76% of the total vested common share amount of 38,930 common shares due to be issued to Ms. Harness. The remaining 9,272 shares of common stock were withheld from Ms. Harness for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.
On September 1, 2018, 533,334 shares of the Company’s restricted stock vested to Dr. Bertolino according to Dr. Bertolino’s employment agreement. The total taxable compensation to Dr. Bertolino for the 533,334 vested shares was approximately $87,140, which is priced at the closing stock price on September 1, 2018 at $0.40 a share.
The Company issued 314,387 common shares (net share issuance amount), which was approximately 59% of the total vested common share amount of 533,334 common shares due to be issued to Dr. Bertolino. The remaining 218,946 shares of common stock were withheld from Dr. Bertolino for the payment of payroll taxes to the Federal and State taxing authorities and these shares withheld are being reported by the Company as treasury stock, at cost, on the Company’s accompanying balance sheets.
There were 228,218 shares and 0 shares of treasury stock outstanding at March 31, 2019 and June 30, 2018, respectively, purchased at a total cumulative cost of $90,830 and $0 at March 31, 2019 and June 30, 2018, respectively.
Securities Purchase Agreement Dated June 28, 2018
On June 28, 2018, we entered into a Securities Purchase Agreement with Aspire Capital Fund, LLC, pursuant to which the Company has agreed to sell up to $7.0 million of shares of the Company’s Class A common stock to Aspire Capital, without an underwriter or placement agent.
Pursuant to the Securities Purchase Agreement, and in connection with Aspire Capital’s commitment to purchase additional securities from the Company, on June 28, 2018, the Company agreed to (i) sell to Aspire Capital 5,263,158 shares for a purchase price of $2.0 million and (ii) issue to Aspire Capital 2,736,842 shares of common stock and warrants to purchase 8,000,000 shares of common stock, with such warrants having an exercise price equal to $0.38 per share (the “Commitment Fee”). The Securities Purchase Agreement provides for the sale of up to an additional $5.0 million of the Company’s common stock to Aspire Capital upon the achievement of certain milestones by September 30, 2018, which were not achieved by the Company.
The total commitment fee of $2.7 million was allocated to the $2 million offering first based on historical price discounts that Aspire Capital has received and the balance of the commitment fee was allocated to the $5 million of potential future milestone funding from Aspire Capital. The portion of the commitment fee allocated to the $2 million of initial proceeds was approximately $0.5 million and was effectively netted against the $2 million of initial proceeds, resulting in a discounted purchase price of $0.29 per share. The remaining $2.2 million of the commitment fee was allocated to the future milestone funding and was fully expensed under Other Expenses as of June, 30, 2018. As of March 31, 2019, the $5 million of milestone funding was not received and expired.
$30 million Class A Common Stock Purchase Agreement with Aspire Capital
On September 6, 2017, the Company entered into the Purchase Agreement with Aspire Capital, which replaced the prior 2015 $30 million Aspire Capital stock purchase agreement and provides that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital is committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the Stock Purchase Agreement. The Company issued 300,000 shares of its Class A common stock to Aspire Capital as a commitment fee. The commitment fee of approximately $215,000 is amortized pro-rata as the funding is received. The amortized amount of the commitment fee of $55,000 was recorded to additional paid-in capital for the year ended June 30, 2018. The remaining $159,000 of the unamortized portion of the commitment fee was carried on the balance sheet as deferred offering costs and was fully expensed in December, 2018. The Company registered the sale of all shares that Aspire Capital will purchase under this common stock purchase agreement. To the extent Aspire Capital purchases shares under this Purchase Agreement and subsequently sells those shares purchased, the other holders of shares of our Class A common stock may experience dilution, which may be substantial. In addition, the sale of a substantial number of shares of our Class A common stock by Aspire Capital, or anticipation of such sales, could make it more difficult for us to sell equity or equity-related securities in the future at a time and price that we might otherwise wish to effect sales.
During the period from September 6, 2017 to June 30, 2018, the Company generated proceeds of approximately $7.7 million under the 2017 agreement with Aspire Capital from the sale of approximately 16.7 million shares of its common stock. During the nine months ended March 31, 2019, we did not have any financing from the 2017 agreement with Aspire Capital, the available balance under the new equity line agreement was approximately $22.3 million. However, as of date of this report, the conditions for sales under the Purchase Agreement are not satisfied and no sales may occur thereunder. See Note 2 to the notes to the condensed consolidated financial statements- Going Concern and Liquidity.
On March 30, 2015, the Company entered into its prior common stock purchase agreement with Aspire Capital, which provided that, upon the terms and subject to the conditions and limitations set forth therein, Aspire Capital was committed to purchase up to an aggregate of $30.0 million of the Company’s common stock over the 36-month term of the 2015 purchase agreement. In consideration for entering into this stock purchase agreement, the Company issued to Aspire Capital 160,000 shares of its Class A common stock as a commitment fee. The commitment fee of approximately $499,000 was amortized as the funding was received. The unamortized portion of deferred offering costs from this stock purchase agreement of $227,000 was recorded to additional paid-in capital in September 2017, since the Company entered into a new $30 million common stock purchase agreement with Aspire Capital, to replace this prior $30 million 2015 Aspire Capital agreement, on September 6, 2017. During the period from July 1, 2017 to September 5, 2017, the Company generated proceeds of approximately $2.1 million under this 2015 agreement with Aspire Capital, from the sale of approximately 2.6 million shares of its common stock.
12. Series B 5% convertible preferred stock
On October 5, 2018, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with one multi-family office for the sale of an aggregate of 2,000 shares of the Company’s newly-created Series B 5% convertible preferred stock (the “Series B preferred stock”), for aggregate gross proceeds of approximately $2.0 million. An initial closing for the sale of 1,250 shares of the Series B preferred stock closed on October 9, 2018, and a second closing for the sale of 750 shares of the Series B preferred stock closed on October 12, 2018. Under the Securities Purchase Agreement, the Company also issued to the investors warrants to purchase up to an additional 8,000 shares of preferred stock.
The Series B preferred stock is mandatorily redeemable under certain circumstances and, as such, is presented as a liability on the consolidated balance sheets. The Company has elected to measure the value of its preferred stock using the fair value method with offsetting discounts associated with the fair value allocated to the warrants and for the intrinsic value attributed to the BCF. The fair value of the Series B preferred stock (without the warrants) will be assessed at each subsequent reporting date with changes in fair value recorded in the profit and loss as a separate line item below the “loss from operations” section (See ASC 480-10-35-5).
The warrants issued in connection with the Series B preferred stock are deemed to be free standing equity instruments and are recorded in permanent equity (additional paid in capital) based on a relative fair value allocation of proceeds (i.e. warrants’ relative fair value to the Series B preferred stock fair value (without the warrants)) with an offsetting discount to the Series B preferred stock. Given that the Series B preferred stock is convertible at any time under these features, the underlying warrant discounts were accreted upon issuance and recorded as interest (resulting in no remaining discount to the Series B preferred stock liability after the issuance).
The Company recorded the October 9, 2018 issuance of 1,250 shares Series B Preferred Stock at approximately $0.7 million and the underlying Series 1, Series 2 and Series 3 warrants at approximately $0.5 million in total by allocating the gross proceeds to Series B preferred stock (without the warrants) and warrants based on their relative fair values or direct valuation as appropriate. The Company recorded BCF of approximately $1.2 million associated with the issuance of the 1,250 shares of Series B preferred stock to additional paid-in capital. The Company then recorded interest of approximately $1.2 million for the BCF and warrant discounts as a first day interest given that the Series B preferred shares can be converted at any time to common stock and given no set term.
The Company recorded the October 12, 2018 issuance of 750 shares Series B Preferred Stock at approximately $0.4 million and the underlying Series 1, Series 2 and Series 3 warrants at approximately $0.3 million in total by allocating the gross proceeds to Series B preferred stock (without the warrants) and warrants based on their relative fair values or direct valuation as appropriate. The Company recorded BCF of approximately $0.7 million associated with the issuance of the 750 shares of Series B preferred stock to additional paid-in capital. The Company then recorded interest of approximately $0.7 million for the BCF and warrant discounts as a first day interest given that Series B preferred shares can be converted at any time to common stock and given no set term.
The issuance costs associated with the Series B preferred stock transaction were attributed to the Series B preferred stock (without the warrants) and to the Series 1, Series 2 and Series 3 warrants based on their relative fair values. The issuance costs attributed to the warrants of $32,000 were reflected as a reduction to additional paid-in capital. The issuances costs associated with the Series B preferred stock liability of $41,000 was recorded immediately as an element of interest cost, which are reflected in interest expense - preferred stock. The change in fair value of the total Series B preferred stock was $50,000 during the quarter ended March 31, 2019, which is reflected in interest expense—preferred stock liability.
Underlying Series B preferred stock dividends, paid quarterly, was accrued as interest (given the liability classification of the Series B preferred stock) on a daily basis given fixed dividend terms under the Series B preferred stock. The Company recorded 5% dividend accretion on total outstanding Series B preferred stock at March 31, 2019 and the total dividends of approximately $32,000 are treated as interest during the period from October 5, 2018 (date of issuance of preferred stock and warrants) to March 31, 2019.
Terms of the Preferred Stock
The rights and preferences of the preferred stock are set forth in a Certificate of Designation of Preferences, Rights and Limitations of Series B 5% Convertible Preferred Stock filed with the Nevada Secretary of State on October 5, 2018 (the “Certificate of Designation”). Each share of preferred stock has an initial stated value of $1,080 and may be converted at any time at the holder’s option into shares of the Company’s common stock at a conversion price equal of the lower of (i) $0.32 per share and (ii) 85% of the lowest volume weighted average price of the Company’s common stock on a trading day during the ten trading days prior to and ending on, and including, the conversion date. The conversion price may be adjusted following certain triggering events and subsequent equity sales and is subject to appropriate adjustment in the event of stock splits, stock dividends, recapitalization or similar events affecting the Company’s common stock.
The holders of the preferred stock are limited in the amount of stated value of the preferred stock they can convert on any trading day. The conversion cap limits conversions by the holders to the greater of $75,000 and an amount equal to 30% of the aggregate dollar trading volume of the Company’s common stock for the five trading days immediately preceding, and including, the conversion date. However, the conversion cap will be increased if the trading volume in the first 30 minutes of any trading session exceeds certain trailing average daily volume amounts. In addition, the holders of the preferred stock may not convert shares of preferred stock if, after giving effect to the conversion, a holder together with its affiliates would beneficially own in excess of 9.99% of the outstanding shares of the Company’s common stock.
Redemption Rights
Following 30 days after the initial closing, the Company may elect to redeem the preferred stock for 120% of the aggregate stated value then outstanding, plus all accrued but unpaid dividends and all liquidated damages and other amounts due in respect of the preferred stock. The Company’s right to redeem the preferred stock is contingent upon it having complied with a number of conditions, including compliance with its obligations under the Certificate of Designation. Shares of preferred stock generally have no voting rights, except as required by law and except that the Company shall not take certain actions without the consent of the holders of the preferred stock.
Warrants
Each share of preferred stock was sold together with three warrants: (i) a Series 1 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to nine months following issuance, (ii) a Series 2 warrant, which entitles the holder thereof to purchase 1.25 shares of preferred stock at $982.50 per share, or 2,500 shares of preferred stock in the aggregate for approximately $2.5 million in aggregate exercise price, for a period of up to 15 months following issuance, and (iii) a Series 3 warrant, which entitles the holder thereof to purchase 1.50 shares of preferred stock at $982.50 per share, or 3,000 shares of preferred stock in the aggregate for approximately $2.9 million in aggregate exercise price, for a period of up to 24 months following issuance.
Subject to the satisfaction of certain circumstances, the Company had the option to compel the holders to exercise up to $250,000 of the Series 1 warrants 30 days after the initial closing of the sale of the preferred stock. On November 2, 2018, the Company notified the holders of the warrants of the Company’s election to compel the exercise of $245,625 of warrants, which exercise closed on or about November 12, 2018. In addition, subject to the satisfaction of certain circumstances, the Company may call for cancellation any or all of the warrants following 90 days after their issuance, for a payment in cash equal to 8% of the aggregate exercise price of the warrants being called. The warrants subject to any such call notice will be cancelled 30 days following the Company’s payment of the call fee, provided that the warrant holders have not exercised the warrants prior to cancellation.
Exercise of warrants
During the period from October 5, 2018 (date of issuance of preferred stock and warrants) to March 31, 2019, the Company issued 1,275 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of $1,252,688, upon exercise of 1,275 warrants issued by the Company in October 2018.
As of March 31, 2019, 6,725 Series 1-3 warrants to purchase 6,725 shares of Series B preferred stock were outstanding.
Conversion of preferred stock to common stock
In December, 2018, one preferred stockholder converted all of its 1,300 shares of Series B preferred stock into 12,734,258 shares of common stock; another preferred stockholder converted 10 shares of Series B preferred stock into 74,130 shares of common stock, with a total of 12,808,388 shares of common stock being issued upon conversion of the Series B preferred stock.
With regard to conversions, the Company reversed Series B preferred stock liability relating to the conversion and recorded as Additional paid-in capital at par value. The Company reversed the amount of approximately $963,000 based on the proportion of Series B preferred stock converted relative to the original total issued.
During the three months ended March 31, 2019, one preferred stockholder converted all of its 450 shares of Series B preferred stock into 5,730,883 shares of common stock; another preferred stockholder converted 504 shares of Series B preferred stock into 5,575,574 shares of common stock, with a total of 11,306,457 shares of common stock being issued upon conversion of the Series B preferred stock.
With regard to conversions, the Company reversed Series B preferred stock liability relating to the conversion and recorded as Additional paid-in capital at par value. The Company reversed the amount of approximately $761,000 based on the proportion of Series B preferred stock converted relative to the original total issued.
As of March 31, 2019, 1,027 shares of preferred stock were outstanding.
13. Fair Value Measurement
The Company has elected to measure its preferred stock using the fair value method. The fair value of the preferred stock is the estimated amount that would be paid to redeem the liability in an orderly transaction between market participants at the measurement date. The Company calculates the fair value of:
A financial asset or liability’s classification within the hierarchy is determined based on the lowest level of input that is significant to the fair value measurement.
The three levels of valuation hierarchy are defined as follows:
|
|
·
|
Level 1: Observable inputs such as quoted prices in active markets;
|
|
|
·
|
Level 2: Inputs, other than the quoted prices in active markets, that are observable either directly or indirectly; and
|
|
|
·
|
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
The Company has elected to measure its preferred stock using the fair value method. The fair value of the preferred stock is the estimated amount that would be paid to redeem the liability in an orderly transaction between market participants at the measurement date. The Company calculates the fair value of the Series B Preferred stock using a lattice model that takes into consideration the future redemption value on the instrument, which is tied to the Company’s stock price.
These valuations are considered to be Level 3 fair value measurements as the significant inputs are unobservable and require significant management judgment or estimation. Considerable judgment is required in interpreting market data to develop the estimates of fair value. Accordingly, the Company’s estimates are not necessarily indicative of the amounts that the Company, or holders of the instruments, could realize in a current market exchange. Significant assumptions used in the fair value models include: the estimates of the redemption dates; credit spreads; dividend payments; and the market price of the Company’s common stock. The use of different assumptions and/or estimation methodologies could have a material effect on the estimated fair values.
The table below sets forth a reconciliation of the Company’s beginning and ending Level 3 preferred stock liability balance for the period from October 5, 2018 (date of issuance of preferred stock and warrants) to March 31, 2019.
|
|
|
2019
|
|
|
Balance, beginning of period
|
|
$
|
—
|
|
|
Issuance of preferred stock at fair value
|
|
|
1,116,000
|
|
|
Issuance of preferred stock by exercise of 1,275 warrants
|
|
|
1,253,000
|
|
|
Conversion of preferred stock to common stock
|
|
|
(1,698,000
|
)
|
|
Value of the warrants exercise
|
|
|
65,000
|
|
|
Change in fair value of preferred stock (1)
|
|
|
(50,000
|
)
|
|
5% dividend
|
|
|
15,000
|
|
|
Balance, end of period
|
|
$
|
701,000
|
|
|
(1)
|
Change in fair value of preferred stock is reported in interest expense—preferred stock.
|
14. Subsequent Events
From April 1, 2019 to May 10, 2019, the Company issued 550 shares of its Series B 5% convertible preferred stock, for aggregate gross proceeds of approximately $540,000, upon exercise of 550 warrants issued by the Company in October 2018, including 500 warrants exercised pursuant to the Issuance Agreement (as defined below). In addition, there were 375 preferred stock shares converted to 4,557,103 common stock.
On May 9, 2019, the Company entered into a Warrant Restructuring and Additional Issuance Agreement (the “Issuance Agreement”) with the holders of its Series B preferred stock and warrants to purchase Series B preferred stock (collectively, the “Series B holders”), pursuant to which the Series B holders agreed to exercise warrants to purchase up to $2.5 million of Series B preferred stock through November 2019, subject to the conditions described therein. Pursuant to the Issuance Agreement, the Company also issued the Series B holders 100 shares of additional Series B preferred stock following the execution of the Issuance Agreement and agreed to issue up to an additional 400 shares of additional Series B preferred stock upon exercise of warrants to purchase Series B preferred stock. The Company also issued Series 4 warrants to purchase up to 2,500 shares of Series B preferred stock to the Series B holders following execution of the Issuance Agreement.