See accompanying notes, which are an integral part of these condensed consolidated financial statements.
See accompanying notes, which are an integral part of these condensed consolidated financial statements.
See accompanying notes, which are an integral part of these condensed consolidated financial statements.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
Note 1—Organization and Liquidity
Organization
Taxus Cardium was incorporated in Delaware in December 2003. We are an operating company that manages a medical technologies portfolio of equity-based and potential royalty-driven investments as follows: (1) Angionetics, currently a majority-owned subsidiary focused on the late-stage clinical development and commercialization of Generx™, an angiogenic gene therapy product candidate designed for medical revascularization for the potential treatment of patients with myocardial ischemia and refractory angina due to advanced coronary artery disease; (2) Activation Therapeutics, a wholly owned subsidiary focused on the development and commercialization of the Excellagen® technology platform, an FDA-cleared flowable dermal matrix for advanced wound care that we believe has broad potential applications as a delivery platform for small molecule drugs, proteins and biologics; (3) LifeAgain a wholly-owned subsidiary that has developed an advanced medical data analytics (ADAPT®) technology platform focused on developing new and innovative products for the life insurance and healthcare sectors; and (4) a minority investment in Healthy Brands Collective, a functional food and nutraceutical company which acquired the Company’s To Go Brands® business.
Our business is focused on the acquisition and strategic development of product opportunities or businesses having the potential to address significant unmet medical needs, and having definable pathways to commercialization. Our business model is designed to create a portfolio of opportunities for success, avoiding reliance on any single technology platform or product type. We focus on late-stage product development bridging the critical gap between promising new technologies and product opportunities that are ready for commercialization. As our product opportunities and businesses are advanced and corresponding valuations established, we intend to consider various corporate development transactions designed to place our product candidates into larger organizations or with partners having existing commercialization, sales and marketing resources, and a need for innovative products. Such transactions could involve the sale, partnering or other monetization of particular product opportunities or businesses.
Angionetics Formation
During 2015, we established Angionetics as a separate subsidiary for the purpose of continuing the development of our Generx
TM
product candidate. Our management established Angionetics to create additional opportunities to fund the capital needed to complete the clinical trials and commercialization of the Generx
TM
product candidate. During the three month period ended June 30, 2016 we undertook a number of actions to complete the formation, capitalization and launch of Angionetics.
We are party to a Technology Transfer Agreement between Schering AG (now Bayer Pharma AG), Berlex, Inc. (now Bayer Healthcare Pharmaceuticals Inc.), Collateral Therapeutics, Inc., and Taxus Cardium which covers the transfer or license of certain assets and technology, including patents relating to (i) methods of gene therapy for the treatment of cardiovascular disease (including methods for the delivery of genes to the heart or vasculature and the use of angiogenic and/or non-angiogenic genes for the potential treatment of diseases of the heart or vasculature); (ii) therapeutic genes that include fibroblast growth factors (including FGF-4); insulin-like growth factors (including IGF-I); and potentially other related biologics; and (3) other technology and know-how, including manufacturing and formulation technology, as well as data relating to the clinical development of Generx
TM
and corresponding FDA regulatory matters. Under this agreement, in October 2005, we paid Schering AG a $4.0 million upfront fee and, as the current holder of the license rights, are obligated to make a $10 million milestone payment upon the first commercial sale of each product using the licensed technology.
On May 4, 2016, Bayer Pharma AG agreed to the transfer of the Technology Transfer Agreement from Taxus Cardium to Angionetics. Accordingly, Angionetics has assumed the obligation for any milestone payment required to be paid to Bayer Pharma AG. Under the terms of the Technology Transfer Agreement, Angionetics also may be obligated to pay the following royalties to Bayer Pharma AG: (i) 5% on net sales following a first commercial sale of an FGF-4 based product in the United States, Europe, or Japan, or (ii) 4% on net sales of other products developed based on technology transferred by Bayer Pharma AG (as successor to Schering AG) following a first commercial sale in the United States, Europe, or Japan, and (iii) a royalty of 2.5% (for FGF-4 based technology) or 2% (for other products) in territories where the product would not infringe the patents licensed by Bayer Pharma AG (as successor to Schering AG). Angionetics will also be obligated to reimburse Bayer Pharma AG for patent expenses, including the expenses of any interference or other proceedings, accrued on or after April 1, 2005 in connection with the transferred technologies. To date there have been no sales or payments under this agreement.
On June 6, 2016, Taxus Cardium entered into a contribution agreement with Angionetics, pursuant to which Taxus Cardium contributed all of the assets and certain related liabilities related to the Generx
TM
product candidate to Angionetics. In consideration of the contribution, Angionetics agreed to pay to Taxus Cardium a $2,000,000 technology fee, payable upon the earlier of a qualified initial public offering of Angionetics capital stock or a change in control of Angionetics. The contribution agreement also provides certain restrictions and registration rights related to Taxus Cardium’s holding in Angionetics capital stock. Taxus Cardium agreed to a twelve-month lock up
6
on its shares of Angionetics following any qualified initial public offering of Angionetics common stock. Angion
etics also granted Taxus Cardium piggyback registration rights, subject to certain cutbacks, for so long as Taxus Cardium continues to hold more than 9.99% of Angionetics’ outstanding capital stock. The contribution agreement contains mutual covenants rega
rding the protection of confidential non-public information shared between each entity. Finally, the contribution agreement provides for cross-indemnification where Taxus Cardium will indemnify Angionetics for any claims arising out of the operation of its
business (excluding Generx
TM
and its related assets and liabilities), and Angionetics will indemnify Taxus Cardium for any claims arising out of the operation of its business.
On June 6, 2016, Taxus Cardium entered into a services agreement with Angionetics, pursuant to which Taxus Cardium agreed to provide services to Angionetics during a transition period. The services agreement provides that Taxus Cardium will assist Angionetics with the transfer of the Generx
TM
assets and liabilities without charge. Taxus Cardium has also agreed to provide certain administrative, commercial and clinical development services to Angionetics on a cost basis. Angionetics has also been granted a license to use certain of Taxus Cardium’s facilities in exchange for payment of 70% of the costs of the facilities. The transition services are provided without warranty or liability except in the case of fraud or willful misconduct. The services agreement also contemplates that as Angionetics develops its financing and business plan, it is anticipated that certain Taxus Cardium employees critical to the development of the Generx
TM
product candidate will become employees of Angionetics.
Liquidity and Going Concern
As of June 30, 2016, we had $12,845 in cash and cash equivalents. Our working capital deficit at June 30, 2016 was approximately $4.6 million.
We anticipate that negative cash flows from operations will continue for the foreseeable future. We have yet to generate positive cash flows from operations, and are essentially dependent on equity and debt funding to finance our operations. We currently do not have any unused credit facilities. As long as any shares of our Series A Convertible Preferred Stock are outstanding, we have agreed that we will not, without the consent of the holders of two-thirds of the Series A Convertible Preferred Stock, incur indebtedness other than specified “Permitted Indebtedness”, incur any liens other than specified “Permitted Liens”.
Our history of recurring losses and uncertainties as to whether our operations will become profitable raises substantial doubt about our ability to continue as a going concern. Our consolidated financial statements do not include any adjustments related to the recoverability of assets or classifications of liabilities that might be necessary should we be unable to continue as a going concern.
Our principal business objectives are to advance the independent monetization and funding activities of our core products and technologies, with our Angionetics Inc. subsidiary being focused on the Generx™ angiogenic gene therapy product candidate, and our Activation Therapeutics, Inc. subsidiary being focused on the Excellagen ® FDA-cleared wound care product and the joint clinical development of Excellagen product line extensions as an advanced biologic delivery platform for new and innovative wound healing therapeutics, and/or to complete alterative corporate transactions. If we fail to conclude such transaction in a timely manner or alternatively fail to generate sufficient cash from financing activities, we will not generate sufficient cash flows to cover our operating expenses.
The accompanying unaudited condensed consolidated financial statements have been prepared in conformity with the accounting principles generally accepted in the United States (“GAAP”), which contemplates continuation of the Company as a going concern and the realization of assets and satisfaction of liabilities in the normal course of business. The ability of the Company to continue its operations is dependent on the execution of management’s plans, which include the raising of capital through the debt and/or equity markets, until such time that funds provided by operations are sufficient to fund working capital requirements. The condensed consolidated financial statements contained in this report do not include any adjustments related to the recoverability of assets or classifications of liabilities that might be necessary should the Company be unable to continue as a going concern. If the Company were not to continue as a going concern, it would likely not be able to realize its assets at values comparable to the carrying value or the fair value estimates reflected in the balances set out in the condensed consolidated financial statements.
We have yet to generate positive cash flows from operations, and are dependent on equity and debt funding to finance our operations. We intend to raise capital to finance the operations of Angionetics through a sale of equity in that entity. Alternatively, we are seeking to raise sufficient capital to finance our operations through the sale of equity or assets in our investments in Activation Therapeutics, LifeAgain and Healthy Brands Collective. If we fail to complete a financing or conclude such a transaction in a timely manner, we will not generate sufficient cash flows to cover our operating expenses. Our history of recurring losses and uncertainties as to whether our operations will become profitable raise substantial doubt about our ability to continue as a going concern. The consolidated financial statements contained in this report do not include any adjustments related to the recoverability of assets or classifications of liabilities that might be necessary should we be unable to continue as a going concern.
On April 4, 2015, we entered into a term sheet with Shenzhen Qianhai Taxus Capital Management Co., Ltd. (“Shenzhen Qianhai Taxus”), a company affiliated with Shanxi Taxus Pharamaceuticals Co. Ltd., whereby we proposed to sell Shenzhen Qianhai Taxus
7
600,000 shares of common stock in our Angionetics subsidiary in exchange for $3.0 m
illion in cash. The $3.0 million was to be paid in tranches that were to be completed by May 31, 2015. Shenzhen Qianhai Taxus paid $600,000 of the financing. Shenzhen Qianhai Taxus did not complete this transaction and the funds have been recorded as c
ommon stock issuable. This subscription is committed and not refundable to Shenzhen Qianhai Taxus. Shenzhen Qianhai Taxus is eligible to apply this amount toward the purchase of common stock of the Company or its subsidiaries based on terms and condition
s approved by the Company’s Board of Directors.
In March 2016, we entered into a Preliminary Proposal for an Equity Investment in Angionetics, Inc. with Pineworld Capital Ltd., an entity affiliated with Huapont Life Sciences Co. Ltd, a China-based pharmaceutical company, and active pharmaceutical ingredient company (“Huapont”). On March 18, 2016, we received $250,000 as a stock subscription to be applied to preferred shares. See Note 7 to see the application of the $250,000 to the preferred shares issued on July 5, 2016.
On June 7, 2016, Taxus Cardium and Angionetics entered into a Share Purchase Agreement with an entity affiliated with Huapont Life Sciences Co. Ltd, a China-based pharmaceutical company, and active pharmaceutical ingredient company (“Huapont”). Huapont is focused on the research and development of new and innovative healthcare products, and the manufacture, marketing and sale of leading pharmaceutical products, active pharmaceutical ingredients (known as APIs) and a portfolio of safe and effective agricultural herbicides (including NC16, NC34, NC36, NC125, NC201) serving the agricultural business throughout the U.S. and South American markets. Huapont’s pharmaceutical business includes dermatology products, cardiovascular products, anti-tuberculosis agents, autoimmune-related products and oncology-related products. Huapont’s API business involves the production and sale of bulk pharmaceutical chemicals, pharmaceutical intermediates and preparations of Western medicines, with current annual revenues of approximately $1.1 billion, and approximately 7,100 employees operating throughout mainland China. Huapont is listed on the Shenzhen Stock Exchange (002004.SZ) and trades at a current market capitalization of approximately $3.0 billion.
Pursuant to the Share Purchase Agreement, Angionetics agreed to sell 600,000, shares of its newly authorized Series A Convertible Preferred Stock (the “Shares”) to the Huapont affiliate in exchange for $3,000,000 in cash. The Shares represent an initial 15% equity interest in Angionetics, resulting in a post-money valuation of $20.0 million for Angionetics, subject to certain anti-dilution protection described below.
The investment from the Huapont affiliate was made in two tranches. The closing of the initial tranche of 200,000 Shares for $1,000,000 occurred on July 5, 2016. We received $750,000 on July 5, 2016 in addition to the $250,000 we received on March 18, 2016. The closing of the second tranche of 400,000 Shares for $2,000,000 was conditioned upon Angionetics securing FDA clearance to initiate a new U.S.-based Phase 3 clinical study (the AFFIRM study) to evaluate the safety and definitive efficacy of the Generx™ [Ad5FGF-4] product candidate for the treatment of patients with ischemic heart disease and refractory angina. On September 28, 2016, following FDA clearance of the Phase 3 AFFIRM study, Angionetics received $2,000,000 from the closing of the second tranche. The 200,000 and 400,000 shares were issued on July 5, 2016 and September 28, 2016, respectively.
Note 2—Summary of Significant Accounting Policies
Basis of Presentation
The condensed consolidated financial statements contained in this report have been prepared in accordance with GAAP for interim financial statements and with Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not contain all information and footnotes required by GAAP for annual financial statements. In the opinion of our management, the accompanying unaudited condensed consolidated financial statements contain all the adjustments necessary (consisting only of normal recurring accruals) to present the financial position of the Company as of June 30, 2016 and the results of operations and cash flows for the periods presented. The results of operations for the three and six month periods ended June 30, 2016 are not necessarily indicative of the operating results for the full fiscal year or any future period.
These condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and related notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2015. Our accounting policies are described in the Notes to Consolidated Financial Statements in our Annual Report on Form 10-K for the year ended December 31, 2015, and updated, as necessary, in this Quarterly Report on Form 10-Q.
Estimates
The preparation of financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenue and expenses during the reporting period. Actual results could differ from those estimates. The most significant estimates impacting the financial statements contained in this report include reserve for inventory, which is currently reserved at 100%, valuing options and warrants using option pricing models.
8
Impairment of Investments
We adjust the carrying amount of our investments for any impairments that might occur due to other-than-temporary impairment (“OTTI”) declines. We consider the need for impairment if and when indicators of other than temporary declines in value are present. Management evaluates investments for OTTI declines on at least a quarterly basis, and more frequently when economic or market conditions warrant such an evaluation.
Fair Value of Financial Instruments
The carrying amounts of cash and cash equivalents, advances from related party, accounts payable, and accrued liabilities approximate fair value due to the short term maturities of these instruments.
Principles of Consolidation
The consolidated financial statements include the accounts of Taxus Cardium Pharmaceuticals Group, Inc. and its consolidated subsidiaries, Angionetics Inc., Activation Therapeutics, Inc. and LifeAgain Insurance Solutions, Inc. All significant inter-company transactions and balances have been eliminated in consolidation.
Preferred Stock
We apply the accounting standards for distinguishing liabilities from equity when determining the classification and measurement of our preferred stock. Shares that are subject to mandatory redemption, if any, are classified as liability instruments and are measured at fair value. We classify conditionally redeemable preferred shares, which includes preferred shares that feature redemption rights that are either within the control of the holder or subject to redemption upon the occurrence of uncertain events not solely within our control, as temporary equity. At all other times, preferred shares are classified as stockholders’ equity.
Research and Development
In accordance with Accounting Standard Codification (“ASC”) Topic 730 “Research and Development”, research and development costs are expensed as incurred. Research and development expenses consist of purchased technology, purchased research and development rights and outside services for research and development activities associated with product development. In accordance with ASC Topic 730, the cost to purchase such technology and research and development rights are required to be charged to expense if there is currently no alternative future use for this technology and, therefore, no separate economic value.
Income Taxes
Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in operations in the period enacted. A valuation allowance is provided when it is more likely than not that a portion or all of a deferred tax asset will not be realized. The ultimate realization of deferred tax assets is dependent upon the generation of future taxable income and the reversal of deferred tax liabilities during the period in which related temporary differences become deductible. The benefit of tax positions taken or expected to be taken in the Company’s income tax returns are recognized in the consolidated financial statements if such positions are more likely than not to be sustained upon examination.
The portion of the benefit associated with tax positions taken that exceed the amount measured as described above should be reflected as a liability for uncertain tax benefits in the accompanying balance sheet along with any associated interest and penalties that would be payable to the taxing authorities upon examination.
Common Stock Purchase Warrants
We account for common stock purchase warrants issued in connection with capital financing transactions in accordance with the provisions of ASC Topic 815 “Derivatives and Hedging”. Based upon the provisions of ASC Topic 815, we classify as equity any contracts that (i) require physical settlement or net-share settlement or (ii) give the Company a choice of net-cash settlement or settlement in its own shares (physical settlement or net-share settlement). We classify as assets or liabilities any contracts that (i) require net-cash settlement (including a requirement to net-cash settle the contract if an event occurs and if that event is outside the control of the Company) or (ii) gives the counterparty a choice of net-cash settlement or settlement in shares (physical settlement or net-share settlement).
9
Earnings (Loss) Per Common Share
We compute earnings (loss) per share, in accordance with ASC Topic 260 “Earnings per Share”, which requires dual presentation of basic and diluted earnings per share. Basic earnings (loss) per common share is computed by dividing earnings (loss) by the weighted average number of common shares outstanding during the period. Diluted earnings (loss) per common share is computed by dividing earnings (loss) by the weighted average number of common shares outstanding, plus the issuance of common shares, if dilutive, that could result from the exercise of outstanding stock options and warrants. As of June 30, 2016 and 2015, potentially dilutive securities consist of preferred stock convertible into 3,413,804 and 1,826,317 shares of common stock, respectively and outstanding stock options and warrants to acquire 7,292,598 and 4,454,995 shares of common stock, respectively.
These potentially dilutive securities were not included in the calculation of loss per common share for the three and six month periods ended June 30, 2016 or 2015 because their effect would be anti-dilutive.
Stock-Based Compensation
Stock-based compensation expense is recognized on a straight-line basis over the requisite service period of the award, which is generally the vesting term of the award.
Total stock-based compensation expense included in the condensed consolidated statements of operations was allocated to research and development and general and administrative expenses as follows:
|
|
For the Three Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
Research and development
|
|
$
|
—
|
|
|
$
|
—
|
|
General and administrative
|
|
|
8,932
|
|
|
|
140,388
|
|
Total stock-based compensation
|
|
$
|
8,932
|
|
|
$
|
140,388
|
|
|
|
For the Six Months Ended
June 30,
|
|
|
|
2016
|
|
|
2015
|
|
|
|
(unaudited)
|
|
Research and development
|
|
$
|
—
|
|
|
$
|
—
|
|
General and administrative
|
|
|
34,462
|
|
|
|
257,835
|
|
Total stock-based compensation
|
|
$
|
34,462
|
|
|
$
|
257,835
|
|
Recent Accounting Pronouncements
In March, 2016, the Financial Accounting Standards Board (“FASB”) issued
ASU 2016-09, Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting
. This standard is intended to improve the accounting for employee share-based payments and affects all organizations that issue share-based payment awards to their employees. Several aspects of the accounting for share-based payment award transactions are simplified, including income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. The standard is effective for fiscal years beginning after December 15, 2016. Early adoption is permitted. We do not believe the adoption of this standard will have a material effect on our consolidated financial position and results of operations.
In February 2016, the FASB issued
ASU 2016-02, Leases (Topic 842).
ASU 2016-02 increases the transparency and comparability among organizations by recognizing lease assets and lease liabilities on the balance sheet and disclosing key information about leasing arrangements. Certain qualitative and quantitative disclosures are required, as well as a retrospective recognition and measurement of impacted leases. The new ASU is effective for fiscal years and interim periods within those years beginning after December 15, 2018, with early adoption permitted. We are currently evaluating this ASU to determine its impact on our consolidated net income, financial position, cash flows and disclosures.
In November 2015, the FASB issued ASU 2015-17, Balance Sheet Classification of Deferred Taxes. ASU 2015-17 simplifies the presentation of deferred taxes by requiring deferred tax assets and liabilities be classified as noncurrent on the balance sheet. We do not believe the adoption of this standard will have a material effect on our consolidated financial position and results of operations.
In August 2014, the FASB issued Accounting Standards Update ASU 2014-15,
Presentation of Financial Statements—Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. This ASU is
10
intended to provide guidance on
the responsibility of reporting entity management. Specifically, this ASU provides guidance to management related to evaluating whether there is substantial doubt about the reporting entity’s ability to continue as a going concern and about related financi
al statement note disclosures. The FASB issued this guidance to require management evaluation and potential financial statement disclosures. ASU 2014-15 is effective for financial statements with periods ending after December 15, 2016. We are currently eva
luating ASU 2014-15 to determine its impact on our financial position, results of operations or cash flows.
Note 3—Accrued Liabilities
Accrued liabilities consisted of the following:
|
|
June 30,
2016
(unaudited)
|
|
|
December 31,
2015
|
|
Payroll and benefits
|
|
$
|
997,152
|
|
|
$
|
789,852
|
|
Other
|
|
|
586,400
|
|
|
|
305,000
|
|
Total
|
|
$
|
1,583,552
|
|
|
$
|
1,094,852
|
|
Note 4—Advances From Related Party - Officer
Officers of the Company occasionally incur or advance expenses on behalf of the Company, which are subsequently reimbursed to the officers along with any associated costs. As of June 30, 2016 and December 31, 2015, $1,070,119 and $946,142, respectively, in net Company expenses incurred in the ordinary course of business that have been paid by or with cash advanced by the Company’s Chief Executive Officer. During the three and six month periods ended June 30, 2016, $23,350 and $123,979, respectively, in net expenses were paid by or with cash advanced by our Chief Executive Officer.
Note 5—Stockholders’ Equity
Common Stock
On April 4, 2015, we entered into a term sheet with Shenzhen Qianhai Taxus Capital Management Co., Ltd. (“Shenzhen Qianhai Taxus”), a company affiliated with Shanxi Taxus Pharmaceuticals Co. Ltd., whereby we proposed to sell Shenzhen Qianhai Taxus 600,000 shares of common stock in our Angionetics subsidiary in exchange for $3.0 million in cash. The $3.0 million was to be paid in tranches that were to be completed by May 31, 2015. Shenzhen Qianhai Taxus paid $600,000 of the financing, which was recorded as common stock issuable. Shenzhen Qianhai Taxus did not complete this transaction. This subscription is committed and not refundable to Shenzhen Qianhai Taxus. Shenzhen Qianhai Taxus is eligible to apply this amount toward the purchase of common stock of the Company or its subsidiaries based on terms and conditions approved by the Company’s Board of Directors.
Preferred Stock
Preliminary Proposal for an Equity Investment in Angionetics, Inc.
In March 2016, we entered into a Preliminary Proposal for an Equity Investment in Angionetics, Inc. with Pineworld Capital Ltd., an entity affiliated with Huapont Life Sciences Co. Ltd, a China-based pharmaceutical company, and active pharmaceutical ingredient company (“Huapont”). On March 18, 2016, we received $250,000 as a stock subscription to be applied to preferred shares. See Note 7 to see the application of the $250,000 to the preferred shares issued on July 5, 2016.
Angionetics Financing Agreement with Huapont Life Sciences
On June 7, 2016, Taxus Cardium and Angionetics entered into a Share Purchase Agreement with an entity affiliated with Huapont Life Sciences Co. Ltd, a China-based pharmaceutical company, and active pharmaceutical ingredient company (“Huapont”). Huapont is focused on the research and development of new and innovative healthcare products, and the manufacture, marketing and sale of leading pharmaceutical products, active pharmaceutical ingredients (known as APIs) and a portfolio of safe and effective agricultural herbicides (including NC16, NC34, NC36, NC125, NC201) serving the agricultural business throughout the U.S. and South American markets. Huapont’s pharmaceutical business includes dermatology products, cardiovascular products, anti-tuberculosis agents, autoimmune-related products and oncology-related products. Huapont’s API business involves the production and sale of bulk pharmaceutical chemicals, pharmaceutical intermediates and preparations of Western medicines, with current annual revenues of approximately $1.1 billion, and approximately 7,100 employees operating throughout mainland China. Huapont is listed on the Shenzhen Stock Exchange (002004.SZ) and trades at a current market capitalization of approximately $3.0 billion.
11
Pursuant to the Share Purchase Agreement, Angionetics agreed to sell 600,000, shares of its newly authorized Series A Convertible Preferred Stock (the “Shares”) to the Huapont affiliate in exch
ange for $3,000,000 in cash. The Shares represent an initial 15% equity interest in Angionetics, resulting in a post-money valuation of $20.0 million for Angionetics, subject to certain anti-dilution protection described below. The agreement called for t
he investment from the Huapont affiliate to be made in two tranches—the closing of the initial tranche of 200,000 Shares for $1,000,000 shortly following the execution of the agreement and the closing of the second tranche of 400,000 Shares for $2,000,000
was conditioned upon Angionetics securing FDA clearance to initiate a new U.S.-based Phase 3 clinical study (the AFFIRM study) to evaluate the safety and definitive efficacy of the Generx
TM
[Ad5FGF-4] product candidate for the treatment of patients with i
schemic heart disease and refractory angina.
See Note 7 to see the preferred shares issued on July 5, 2016 and September 28, 2016.
The Angionetics Shares have the following rights, privileges and preferences:
|
•
|
Dividends
. Holders of the Shares are entitled to receive dividends as, when and if declared by the Angionetics board of directors on the Angionetics common stock, on an as-converted basis.
|
|
•
|
Liquidation
. In the event of a liquidation of Angionetics, including a change of control transaction, holders of sp the Shares are entitled to be paid an amount equal to their investment amount before any payment is made to Taxus Cardium or any other holders of Angionetics common stock.
|
|
•
|
Voting
. The Shares generally vote with the Angionetics common stock as a single class on an as-converted basis. Holders of the Shares also have certain special voting rights as a separate class including (a) the right to appoint a member to the Angionetics board of directors, (b) the right to approve any increase or decrease in the number of authorized shares of the Shares or the common stock, any merger or acquisition involving Angionetics, any liquidation or winding up of Angionetics, any increase in the number of directors and any dividend or distribution, and (c) the right to approve any amendment to the Angionetics certificate of incorporation in a manner that adversely affects the rights of the Shares. The voting rights under (a) and (b) terminate if the Huapont affiliate does not complete the second closing under the share purchase agreement.
|
|
•
|
Conversion
. The Shares are convertible into shares of Angionetics common stock at any time at the holder’s election. The Shares automatically convert into common stock upon the closing of a firm commitment underwritten public offering of Angionetics common stock. The Shares are initially convertible on a one to one basis into Angionetics common stock. The Shares are subject to anti-dilution protection, such that in the event of a firm commitment underwritten public offering or a change in control each Share will be convertible into a pro rata portion of 15% of the outstanding Angionetics common stock at the time of the public offering or change in control.
|
Exchange and Redemption Agreement with Sabby Healthcare Volatility Master Fund, Ltd.
On April 4, 2013, we entered into a securities purchase agreement with Sabby Healthcare Volatility Master Fund, Ltd. (“Sabby”), pursuant to which we sold 4,012 shares of our newly authorized Series A Convertible Preferred Stock (the “Preferred Stock”) for $4.0 million. The Preferred Stock was convertible into shares of our common stock at an initial conversion price of $0.6437 per share. The conversion price is subject to downward adjustment if we issue common stock or common stock equivalents at a price less than the then effective conversion price. Sabby is limited to hold no more than 10% of Taxus Cardium’s issued and outstanding common stock at any time. As long as the Preferred Stock is outstanding, we have also agreed not to incur specified indebtedness without the consent of the holders of the Preferred Stock. These factors may restrict our ability to raise capital through equity or debt offerings in the future.
On July 22, 2015, we entered into an Exchange and Redemption Agreement with Sabby relating to the 1,176 outstanding shares of Preferred Stock that remained outstanding at that time. Under the terms of the Exchange and Redemption Agreement, we agreed to reduce the conversion price of the Preferred Stock to $0.30 per share. The Agreement grants Taxus Cardium (1) a right to redeem any or all of the outstanding Preferred Stock for its stated value (approximately $1,000 per share) at any time during a 120 day period after the date of the Agreement, and (2) increases the limitation on certain indebtedness contained in the Certificate of Designation for the Preferred Stock to allow Taxus Cardium to borrow up to $250,000. We entered into the Agreement to increase our options for retiring the outstanding Preferred Stock and financing our continued business operations. As a result of the effective conversion price changing from $0.64 to $0.30 per share, the 1,176 shares of Preferred Stock outstanding were convertible into 3,918,667 shares of Taxus Cardium common stock, an additional 2,092,350 shares compared to before the conversion price change. A hypothetical conversion of all of the outstanding Preferred Stock into 3,413,804 common shares would increase the common stock outstanding from 13,242,544 shares as of June 30, 2016, to 16,656,348 an increase of 26%.
As a result of this reduction of the conversion price of the preferred stock, the Company was also required to issue an additional 3,749,692 of warrants, to such warrant holders (substantially all current and former employees), in accordance with the original terms of their agreements. The fair value of these issuances was recorded as compensation expense.
12
Stock Options and Other
Equity Compensation Plans
We have an equity incentive plan that was established in 2005 under which 283,058 shares of the Company’s common stock have been reserved for issuance to employees, non-employee directors and consultants of the Company.
At June 30, 2016, the following shares were outstanding under the option plan:
Plan
|
|
Shares
Outstanding
|
|
|
Shares
Available
for Issuance
|
|
2005 Equity Incentive Plan
|
|
|
17,000
|
|
|
|
—
|
|
The 2005 Equity Incentive Plan expired on October 20, 2015, ten years after its adoption, and we are no longer able to issue share or awards under that plan. All options or other awards issued under the 2005 Equity Incentive plan prior to its expiration remain outstanding in accordance with their terms.
On February 28, 2014, outside of the 2005 Equity Incentive Plan, we issued 1,457,100 common stock warrants to directors, officers and chief medical advisor. The warrants were approved by our Board of Directors, have a ten year term and an exercise price of $0.80 per share, which represented a 57% premium to the closing stock price on the date of issuance. The warrants had a fair value of $0.34 per share and vested immediately.
On March 23, 2015, outside of the 2005 Equity Incentive Plan, we issued 1,125,000 common stock warrants to directors, officers and chief medical advisor. The warrants were approved by our Board of Directors, have a ten year term and an exercise price of $0.60 per share, which represented a 216% premium to the closing stock price on the date of issuance. The warrants had a fair value of $0.10 per share and vested immediately.
On March 23, 2015, we issued 10,000 non-qualified stock options to directors. The options were approved by our Board of Directors, have a seven year term and an exercise price of $0.19 per share, which equaled the closing stock price on the date of issuance. The stock options had a fair value of $0.14 per share.
On May 1, 2015, outside of the 2005 Equity Incentive Plan, we issued 550,000 common stock warrants to directors and employees. The warrants were approved by our Board of Directors, have a ten year term and an exercise price of $0.60 per share, which represented a 20% premium to the closing stock price on the date of issuance. The warrants had a fair value of $0.37 per share. 300,000 vested immediately and 250,000 warrants vest on the one year anniversary of the date of grant.
On May 8, 2015, outside of the 2005 Equity Incentive Plan, we issued 100,000 common stock warrants to a consultant. The warrants were approved by our Board of Directors, have a ten year term and an exercise price of $0.60 per share, which represented a 33% premium to the closing stock price on the date of issuance. The warrants had a fair value of $0.41 per share. 40,000 warrants vested immediately, and the remaining 60,000 warrants vested over three quarters. On August 4, 2015, the consulting agreement was terminated and the remaining 60,000 unvested warrants were cancelled per the terms of the consulting agreement and the warrant.
The following is a summary of stock option and warrant activity under the 2005 Equity Incentive Plan as well as the warrants issued outside of the plan to employees and consultants, during the three months ended June 30, 2016:
|
|
Number of
Options or
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in years)
|
|
Balance outstanding, December 31, 2015
|
|
|
7,337,598
|
|
|
$
|
0.94
|
|
|
|
8.62
|
|
Granted
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
Cancelled (unvested)
|
|
|
—
|
|
|
—
|
|
|
|
—
|
|
Expired (vested)
|
|
|
(45,000
|
)
|
|
|
32.67
|
|
|
|
—
|
|
Balance outstanding, June 30, 2016
|
|
|
7,292,598
|
|
|
$
|
0.74
|
|
|
|
8.17
|
|
Balance exercisable, June 30, 2016
|
|
|
7,284,845
|
|
|
$
|
0.74
|
|
|
|
8.17
|
|
As of June 30, 2016, the Company had $978 of unvested stock-based compensation at fair value remaining to be expensed.
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As of
June 30
, 201
6
, there was no intrinsic value to the outstanding and exercisable options and warrants as their exercise price exceeded the market price of our common stock.
Warrants
In addition to the warrants that we have issued as a form of compensation above, we have issued warrants to investors in connection with certain financing transactions. The following table summarizes outstanding warrants as of June 30, 2016:
|
|
Number of
Warrants
|
|
|
Weighted
Average
Exercise
Price
|
|
|
Weighted
Average
Remaining
Contractual
Life
(in years)
|
|
Balance outstanding, December 31, 2015
|
|
|
716,748
|
|
|
$
|
15.98
|
|
|
|
0.20
|
|
Warrants expired
|
|
|
(716,748
|
)
|
|
|
15.98
|
|
|
|
—
|
|
Balance outstanding, June 30, 2016
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
Warrants exercisable at June 30, 2016
|
|
|
—
|
|
|
$
|
—
|
|
|
|
—
|
|
As of June 30, 2016, there were no finance warrants outstanding, each of such warrants having expired in accordance with their terms.
Note 6—Commitments and Contingencies
Note Payable
On June 20, 2016, in connection with the Huapont Financing we entered into a note payable with an advisor to the Company in the amount of $30,000. The note bears interest at a rate of 10%. The note and accrued interest is payable five days after the completion of the financing by Huapont. The note and accrued interest was repaid in full on July 13, 2016.
Office Lease
On June 23, 2016, we entered into a thirty-eight month lease agreement to lease office space commencing on September 30, 2016. The approximate base monthly rent in the first, second and third years is $3,500, $3,700, and $3,800 respectively. The base monthly rent in the final two months of the agreement is $3,900. The total base rent over the lease term equals $139,800.
Legal Proceedings
In the course of our business, we are routinely involved in proceedings such as disputes involving goods or services provided by various third parties, which we do not consider likely to be material to the technology we develop or license, or the products we develop for commercialization, but which can result in costs and diversions of resources to pursue and resolve.
In October 2014, BioRASI LLC (“BioRASI”) filed a complaint in Broward County, Florida, seeking payments of approximately $0.5 million allegedly owed for services that BioRASI provided in connection with the Company’s clinical trial conducted in the Russian Federation. In June of 2015, BioRASI amended the complaint to include as plaintiffs additional parties affiliated with BioRASI including Vendevia Group, LLC, Biosciences Research Ltd., and Progressive Scientific Bioresearch, Ltd. We are defending the action and have filed counterclaims. Although at June 30, 2016, the probable outcome of this matter cannot be determined, we believe that we have supportable defenses and any negative decision, if any, is expected to be insignificant. Accordingly, we have not recorded any provisions related to this matter.
Note 7—Subsequent Events
We have evaluated events that occurred subsequent to June 30, 2016 and through the date the condensed consolidated financial statements were issued.
Closing of Angionetics financing with Huapont
On July 5, 2016, the initial closing under the Share Purchase Agreement dated June 7, 2016 among Taxus Cardium and Angionetics an entity affiliated with Huapont took place and Angionetics sold 200,000 Shares in exchange for a cash payment of $750,000 in addition to $250,000 received on March 18, 2016.
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On September 28, 2016, following FDA clearance of the Phase 3 AFFIRM study discussed below, Ang
ionetics sold an additional 400,000 Shares in exchange for cash payment of $2,000,000. Angionetics will require additional capital to complete the Phase 3 AFFIRM study, which it expects to secure through the sale of additional equity or debt securities.
There are no agreements or arrangement for any additional financing in place at this time.
FDA Approval of Phase 3 Clinical Trial for Generx
TM
On December 18, 2015, pursuant to Section 505(i) of the U.S. Federal Food, Drug and Cosmetic Act, Angionetics submitted a request to the FDA Center for Biologics Evaluation and Research requesting transfer of sponsorship for the Generx
TM
Investigational New Drug (IND) application to Angionetics. Transfer of sponsorship was acknowledged by the FDA on January 5, 2016. Additionally, the FDA acknowledged Angionetics’ U.S. activation of the Ad5FGF-4 (Generx) Investigational New Drug Application (IND) pursuant to Section 505(i) of the Federal Food, Drug and Cosmetic Act. Consequently, the previously granted FDA “Fast Track” designation for the Generx
TM
development program continues forward. In addition, Angionetics submitted for FDA clearance a new U.S.-based Phase 3 clinical study protocol (the “AFFIRM” study) to evaluate the further safety and definitive efficacy of Generx
TM
[Ad5FGF-4] for men and women with advanced ischemic heart disease and refractory angina.
On September 9, 2016, the U.S. FDA Center for Biologics Evaluation and Research (CBER) cleared Angionetics’ AFFIRM Phase 3 clinical study protocol, thus allowing Angionetics to proceed with late-stage clinical evaluation of Generx
TM
. The AFFIRM study patient population and trial design are based on Ad5FGF-4 responder data from the four prior FDA-cleared clinical studies. The primary efficacy endpoint is improvement in exercise treadmill test (ETT) duration in Generx
TM
-treated patients compared to a placebo control group. Enrolled patients must have refractory angina, documented clinical evidence of myocardial ischemia, clinically significant limitation of physical activity due to angina, and angina-limited ETT duration of 3-7 minutes.
On February 3, 2017, Angionetics received notice that the FDA has granted Fast Track designation for the Phase 3 clinical investigation of Generx [Ad5FGF-4] cardiovascular angiogenic gene therapy as a one-time treatment for improving exercise tolerance in patients who have angina that is refractory to standard medical therapy and not amenable to conventional revascularization procedures (coronary artery bypass surgery and percutaneous coronary intervention and stents). Under the FDA Modernization Act of 1997, designation as a Fast Track product means that FDA will take actions, as appropriate, to expedite the development and review of a biologics license application (BLA) for product approval. The FDA’s Fast Track process is designed to facilitate clinical and commercial development and expedite the review of new drugs and biologics that are intended to treat serious conditions that demonstrate the potential to address an unmet medical need.
Status of Term Sheet with Dr. Reddy’s and Russian Generx
TM
Clinical Development Program
Following the formation of Angionetics, our management team initiated a comprehensive review of Taxus Cardium’s global Generx
TM
regulatory and clinical dossier, and elected to primarily focus on the clinical advancement and registration of Generx
TM
in the United States and China, which we believe to be the most dynamic medical markets in the world for new and novel breakthrough products such as the Generx
TM
product candidate. As a result of this review, on July 13, 2016 we notified Dr. Reddy’s of our decision to discontinue the planned Generx
TM
development in the Russian Federation and other countries set forth in the term sheet and to focus on the late stage clinical and commercial development of Generx
TM
in key target markets that include the U.S. and China. Consequently, the commercialization opportunity with Dr. Reddy’s Laboratories, previously reported by Taxus Cardium, will not be advanced to a definitive agreement.
Exchange and Redemption Agreement with Sabby Healthcare Volatility Master Fund, Ltd.
On September 23, 2016, we entered into a second Exchange and Redemption Agreement with Sabby covering the 1,000 shares of Preferred Stock outstanding at the time. Under the terms of the Exchange and Redemption Agreement, Taxus Cardium agreed to reduce the conversion price at which Sabby can convert shares of Preferred Stock to common shares to an effective price of $0.18 per share. The Exchange and Redemption Agreement grants Taxus Cardium a right to redeem any or all of the outstanding Preferred Stock for its Stated Value (approximately $1,000 per share) at any time after the date of the Agreement until November 29, 2016. We entered into the Agreement to increase our options for retiring the outstanding Preferred Stock and financing our continued business operations. As a result of the conversion price changing from $0.30 to $0.18 per share, the 1,000 shares of Preferred Stock outstanding are convertible to 5,554,667 shares of Taxus Cardium common stock, an additional 2,221,867 compared to before the conversion price change. A hypothetical conversion of all of the outstanding Preferred Stock of 829 shares as of March 6, 2017 into 4,604,674 common shares would increase the common stock outstanding from 14,173,544 shares as of March 6, 2017, to 18,778,218, an increase of 32%.
As a result of this reduction of the conversion price of the preferred stock, the Company was also required to issue an additional 4,823,733 of warrants, to such warrant holders (substantially all current and former employees), in accordance with the original terms of their agreements. The fair value of these issuances was recorded as compensation expenses.
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Retirement of Members of the Board of
Directors
In November 2016, Tyler Dylan-Hyde, Ph.D. and Mr. Lon Otremba retired as directors of the Company’s Board of Directors after almost a decade of service.
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