NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. ORGANIZATION AND GOING CONCERN
FluoroPharma Medical, Inc. (the “Company”) was organized on January 25, 2007 under the laws of the State of Nevada. The Company’s subsidiary, FluoroPharma Inc. (“FPI” or “the Subsidiary”), a Delaware corporation, is a molecular imaging company headquartered in Montclair, NJ. FPI was founded in 2003 to engage in the discovery, development and commercialization of proprietary products for the positron emission tomography (PET) market. The Company’s initial focus has been on the development of novel cardiovascular imaging agents that can more efficiently and effectively detect and assess acute and chronic forms of coronary artery disease (CAD). Molecular imaging pharmaceuticals are radiopharmaceuticals that enable early detection of disease through the visualization of subtle changes in biochemical and biological processes.
Going concern
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. The Company has experienced net losses and negative cash flows from operations since its inception. The Company has sustained cumulative losses attributable to common stockholders of $32,604,374 as of December 31, 2015. The Company has historically financed its operations through issuances of equity and the proceeds of debt instruments. In the past, the Company has also provided for its cash needs by issuing common stock, options and warrants for certain operating costs, including consulting and professional fees. During the year ended December 31, 2015, the Company raised net cash proceeds of $2,686,315 through the issuance of notes payable. In addition, during the year ended December 31, 2015, the Company received gross proceeds of $35,970 from the sale of freely tradable securities received as consideration for the issuance of promissory notes.
The Company continues to actively pursue various funding options, including equity offerings, to obtain additional funds to continue the development of its products and bring them to commercial markets. Management continues to assess fund raising opportunities to ensure minimal dilution to its existing shareholder base and to obtain the best price for its securities. Management is optimistic based upon its ability to raise funds in prior years, through private placement offerings (see Note 5), that it will be able to raise additional funds in the future. If the Company is unable to raise additional capital as may be needed to meet its projections for operating expenses, it could have a material adverse effect on liquidity or require the Company to cease or significantly delay some of its clinical trials. These financial statements do not include any adjustments relating to the recoverability of recorded asset amounts that might be necessary as a result of the above uncertainty.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Cash and Cash Equivalents
The Company considers all highly liquid investments with maturities of three months or less from date of purchase to be cash equivalents. All cash balances were highly liquid at December 31, 2015 and 2014.
Use of Estimates
The accompanying consolidated financial statements are prepared in conformity with accounting principles generally accepted in the United States of America, and include certain estimates and assumptions which affect the reported amounts of assets and liabilities at the date of the financial statements, and the reported amounts of expenses during the reporting period, including contingencies. Accordingly, actual results may differ from those estimates.
Concentration of Risks
Financial instruments that potentially expose the Company to concentrations of credit risk consist primarily of cash and cash equivalents. The Company primarily maintains its cash balances with financial institutions in federally insured accounts. The Company may from time to time have cash in banks in excess of FDIC insurance limits. The Company has not experienced any losses to date resulting from this practice.
As of December 31, 2015, the Company had sold all of the securities received in exchange for the issuance of a note payable resulting in a realized loss of $11,946 due to a decline in the value of that stock. As of December 31, 2014, the Company had sold all the securities received as consideration in the 2013 for Series B Preferred Stock offering resulting in a realized loss of $302,116.
Principles of Consolidation
The consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, FluoroPharma, Inc. Intercompany transactions and balances have been eliminated upon consolidation.
Investments that are purchased and held principally for the purpose of selling them in the near term are classified as “trading securities” and reflected on the balance sheet at fair value, with unrealized gains and losses included in earnings. All the Company’s investments are considered “trading securities” at December 31, 2014. As of December 31, 2015, the Company did not have any investments in trading securities. Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.
Property and Equipment
Property and equipment are stated at cost. Depreciation is computed using the straight-line method over the estimated useful lives of the assets. The Company’s property and equipment at December 31, 2015 and 2014 consisted of computer and office equipment and machinery and equipment with estimated useful lives of three to five years. Depreciation and amortization was $7,372 and $17,262 in the years ended December 31, 2015 and 2014, respectively.
Intangible Assets
The Company’s intangible assets consist of technology licenses and are carried at the legal cost to obtain them. Intangible assets are amortized using the straight-line method over the estimated useful life. Useful lives on technology licenses are 5 to 15 years.
Impairments
The Company assesses the impairment of long-lived assets, including other intangible assets, whenever events or changes in circumstances indicate that their carrying value may not be recoverable in accordance with ASC Topic 360-10-35, “Impairment or Disposal of Long-Lived Assets.” The determination of related estimated useful lives and whether or not these assets are impaired involves significant judgments, related primarily to the future profitability and/or future value of the assets. The Company records an impairment charge if it believes an investment has experienced a decline in value that is other than temporary.
Management has determined that no impairments were required as of December 31, 2015 and 2014, respectively.
Derivative financial instruments
The Company evaluates all of its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a binomial pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
The Company has derivative liabilities at December 31, 2015 and 2014 relating to certain warrants and an embedded conversion feature that contain anti-dilution provisions.
Fair Value of Financial Instruments
The Company's financial instruments primarily consist of cash, trading securities, accounts payable, notes payable and derivative liabilities. The fair value of these instruments is calculated using current market prices, or on a historical cost basis, which, due to the short maturity of these financial instruments, approximates the fair value at the reporting dates of these financial statements.
The Company groups its assets and liabilities measured at fair value, in three levels based on the markets in which the assets and liabilities are traded and the reliability of the assumptions used to determine fair value. Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date (an exit price).
Financial instruments with readily available active quoted prices or for which fair value can be measured from actively quoted prices generally will have a higher degree of market price observability and a lesser degree of judgment used in measuring fair value.
The three levels of the fair value hierarchy are as follows:
Level 1 – Valuation is based on quoted prices in active markets for identical assets or liabilities. Valuations are obtained from readily available pricing sources for market transactions involving identical assets or liabilities.
Level 2 – Valuation is based on observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities.
Level 3 – Valuation is based on unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities. Level 3 assets and liabilities include financial instruments whose value is determined using pricing models, discounted cash flow methodologies, or similar techniques, as well as instruments for which the determination of fair value requires significant management judgment or estimation.
In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, an instrument’s level within the fair value hierarchy is based on the lowest level of input that is significant to the fair value measurement. The Company’s assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the financial instrument.
The Company recognizes transfers between levels at the end of the reporting period as if the transfers occurred on the last day of the reporting period.
Assets and liabilities measured at fair value on a recurring basis are summarized below:
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December 31, 2015
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Level 1
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Level 2
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Level 3
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Fair Value
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December 31, 2014
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Level 1
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Level 2
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Level 3
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Fair Value
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Current Assets:
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The following table sets forth the changes in the estimated fair value for our Level 3 classified derivative liabilities:
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Year Ended
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Year Ended
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December 31, 2015
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December 31, 2014
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Fair value at beginning of the year
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Issuance of derivative warrant liability
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Embedded conversion feature
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Modification and reclassification of outstanding warrants
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Fair value at end of the year
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Of the 2014 modification and reclassification totaling $114,923, $81,802 was recorded as a modification expense and $33,121 was recorded as a reclassification from equity to derivative liability.
The Company uses the asset and liability method of accounting for income taxes. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to the differences between the financial statement carrying amounts of the existing assets and liabilities and the respective tax bases. 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 realized or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in results of operations in the period that the tax rate change occurs. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
The Company accounts for uncertain tax positions in accordance with FASB ASC Topic 740-10,
Accounting for Uncertainty in Income Taxes.
Income tax positions must meet a more-likely-than-not threshold in order to be recognized in the financial statements. There were no recognized uncertain tax positions at December 31, 2015 and 2014. The Company recognizes potential accrued interest and penalties related to unrecognized tax benefits within operations as income tax expense. As new information becomes available, the assessment of the recognition threshold and the measurement of the associated tax benefit of uncertain tax positions may result in financial statement recognition or de-recognition. The Company had no accrual for interest or penalties on its balance sheets at December 31, 2015 or 2014, and has not recognized interest and/or penalties in the statement of operations for the years ended December 31, 2015 and 2014. Further, the Company currently has no open tax years, subject to audit prior to December 31, 2012.
Accounting for Share-Based Payments
The Company follows the provisions of ASC Topic 718, which establishes the accounting for transactions in which an entity exchanges equity securities for services and requires companies to expense the estimated fair value of these awards over the requisite service period. The Company uses the Black-Scholes option pricing model in determining fair value. Accordingly, compensation cost has been recognized using the fair value method and expected term accrual requirements as prescribed, which resulted in stock-based compensation expense for the years ended December 31, 2015 and 2014 of $135,492 and $417,569, respectively.
The Company accounts for share-based payments granted to non-employees in accordance with ASC Topic 505, “Equity Based Payments to Non-Employees.” The Company determines the fair value of the stock-based payment as either the fair value of the consideration received or the fair value of the equity instruments issued, whichever is more reliably measurable. If the fair value of the equity instruments issued is used, it is measured using the stock price and other measurement assumptions as of the earlier of either (1) the date at which a commitment for performance by the counterparty to earn the equity instruments is reached, or (2) the date at which the counterparty’s performance is complete.
To compute compensation expense, the Company estimated the fair value of each option award on the date of grant using the Black-Scholes-Merton option pricing model for employees, and calculated the fair value of each option award at the end of the period for non-employees. The Company based the expected volatility assumption on a volatility index of peer companies as the Company did not have sufficient historical market information to estimate the volatility of its own stock. The expected term of options granted represents the period of time that options are expected to be outstanding. The Company estimated the expected term of stock options by using the simplified method. The expected forfeiture rates are based on the historical employee forfeiture experiences. To determine the risk-free interest rate, the Company utilized the U.S. Treasury yield curve in effect at the time of grant with a term consistent with the expected term of the Company’s awards. The Company has not declared a dividend on its common stock since its inception and has no intentions of declaring a dividend in the foreseeable future and therefore used a dividend yield of zero.
The fair value of each share-based payment is estimated on the measurement date using the Black-Scholes model with the following assumptions:
Net Loss per Common Share
The Company computes net loss per common share in accordance with ASC Topic 260. Net loss per share is based upon the weighted average number of outstanding common shares and the dilutive effect of common share equivalents, such as options and warrants to purchase common stock, and convertible notes, if applicable, that are outstanding each year.
Basic and diluted earnings per share were the same for all periods presented as including common stock equivalents in the calculation of diluted earnings per share would have been antidilutive. As of December 31, 2015, the Company had outstanding options exercisable for 4,996,095 shares of its common stock, warrants exercisable for 16,281,164 shares of its common stock, series A preferred stock (the “Series A Preferred Stock”) convertible into 357,163 shares of common stock, and series B preferred stock (the “Series B Preferred Stock”) convertible into 15,278,717 shares of common stock. At December 31, 2014, the Company had outstanding options exercisable for 4,644,428 shares of its common stock, and warrants exercisable for 14,854,035 shares of common stock, Series A Preferred Stock convertible into 1,576,132 shares of common stock, and Series B Preferred Stock convertible into 9,802,817 shares of common stock.
Research and Development Costs
Research and development costs are expensed as incurred.
Segment Reporting
The Company has determined that it operates in only one segment currently, which is biopharmaceutical research and development.
Recent Accounting Pronouncements
In August 2014, the FASB issued ASU 2014-15 “Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern.” The core principle of the guidance is that an entity’s management should evaluate whether there are conditions or events, considered in the aggregate, that raise substantial doubt about the entity’s ability to continue as a going concern within one year after the date that the financial statements are available to be issued. When management identifies conditions or events that raise substantial doubt about an entity’s ability to continue as a going concern, management should consider whether its plans that are intended to mitigate those relevant conditions or events that will alleviate the substantial doubt are adequately disclosed in the footnotes to the financial statements. This guidance will be effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter.
In November 2015, the Financial Accounting Standards Board (“FASB”) issued Accounting Standards Update (“ASU”) 2015-17, “Balance Sheet Classification of Deferred Taxes” (“ASU 2015-17”) which requires that deferred tax liabilities and assets be classified as noncurrent on the balance sheet. The current requirement that deferred tax liabilities and assets of a tax-paying component of an entity be offset and presented as a single amount is not affected by this guidance. ASU 2015-17 is effective for annual and interim periods beginning after December 15, 2016 but early application is permitted and the guidance may be applied either prospectively to all deferred tax liabilities and assets or retrospectively to all periods presented.
In April 2015, the FASB issued ASU 2015-03, 'Interest - Imputation of Interest (Subtopic 835-30): Simplifying the Presentation of Debt Issuance Costs”. ASU 2015-03 is intended to simplify the presentation of debt issuance costs. These amendments require that debt issuance costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of that debt liability, consistent with debt discounts. The recognition and measurement guidance for debt issuance costs are not affected by the amendments in this ASU. This new guidance is effective for fiscal years beginning after December 15, 2015 and interim periods within those fiscal years. Early adoption is permitted.
In January 2015, FASB issued ASU 2015-01 “Income Statement - Extraordinary and Unusual Items (Subtopic 225-20): Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items”. This ASU removes the concept of an extraordinary item. Subtopic 225-20, Income Statement - Extraordinary and Unusual Items, required that an entity separately classify, present, and disclose extraordinary events and transactions. Presently, an event or transaction is presumed to be an ordinary and usual activity of the reporting entity unless evidence clearly supports its classification as an extraordinary item. If an event or transaction meets the criteria for extraordinary classification, an entity is required to segregate the extraordinary item from the results of ordinary operations and show the item separately in the income statement, net of tax, after income from continuing operations. The entity also is required to disclose applicable income taxes and either present or disclose earnings-per-share data applicable to the extraordinary item. The amendments in this ASU are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted provided that the guidance is applied from the beginning of the fiscal year of adoption.
In February 2016, the FASB issued ASU 2016-02, “Leases”, which requires a lessee to recognize lease liabilities for the lessee’s obligation to make lease payments arising from a lease, measured on a discounted basis, and right-of-use assets, representing the lessee’s right to use, or control the use of, specified assets for the lease term. Additionally, the new guidance has simplified accounting for sale and leaseback transactions. Lessor accounting is largely unchanged. The ASU is effective for fiscal years beginning after December 15, 2018. Early application is permitted.
Management does not expect the above recently issued, but not yet effective, accounting standards to have a material effect on the accompanying financial statements.
3. OTHER BALANCE SHEET INFORMATION
Components of selected captions in the accompanying balance sheets as of December 31, 2015 and 2014 consist of:
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December 31,
2015
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December 31,
2014
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Prepaid expenses and other:
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Prepaid expenses and other
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Computers and office equipment
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Less: accumulated depreciation
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Property and equipment, net
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Accrued expenses and other:
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Accrued dividends Series B Preferred Stock
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Accrued interest on Notes Payable
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Accrued research and development
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Accrued expenses and other
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4. INTANGIBLE ASSETS
Intangible assets as of December 31, 2015 and 2014 consist of the following:
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December 31, 2015
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December 31, 2014
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Less: accumulated amortization
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Amortization expense relating to intangible assets was $38,994 and $25,208 during the years ended December 31, 2015 and 2014, respectively.
On June 26, 2014, the Company and The General Hospital Corporation, d/b/a Massachusetts General Hospital (“MGH”) entered into two license agreements, which replaced the single license agreement dated April 27, 2009. The Company paid to MGH an initial license fee of $175,000 for each license.
The assumptions and estimates used to determine future values and remaining useful lives of our intangible and other long-lived assets are complex and subjective. They can be affected by various factors, including external factors such as industry and economic trends, and internal factors such as changes in our business strategy. Based on our assessment, we did not recognize any impairment as of December 31, 2015 and 2014.
As of June 1, 2014, the Company relinquished its Alzheimer’s license and accordingly recorded a loss on disposal of $16,591 in the year ended December 31, 2014.
Future amortization will approximate $39,000 for each of the next five years.
See Note 11 for commitments and contingencies associated with the Company’s technology licenses.
5. CONVERTIBLE NOTES PAYABLE - SHORT TERM
2014 Convertible Notes Payable
In July, November and December 2014, the Company issued promissory notes (the “Notes”) pursuant to a Note Purchase Agreement entered into with certain accredited investors for an aggregate principal amount of approximately $1,998,500, $47,916 of which was received by the Company in marketable securities. The Notes mature one year from the date of issuance and bear interest at the rate of 8% per annum. All principal and accrued interest under the Notes will automatically convert into the Company’s next equity or equity-linked financing (a “Subsequent Financing”) in accordance with the following formula: (outstanding balance of the Notes as of the closing of the Subsequent Financing) x (1.15) / (the per security price of the securities sold in the Subsequent Financing). The investors shall be considered to be purchasers in the Subsequent Financing by way of their converted Notes. In addition, upon the closing of a Subsequent Financing, each of the investors shall be issued, in addition to any warrants issued in connection with a Subsequent Financing, an additional warrant to purchase a number of shares of common stock equal to fifty percent (50%) of the number of shares of common stock purchased by such investor in the Subsequent Financing assuming a per share purchase price of the securities to be issued in the Subsequent Financing.
In March 2015, the Company issued additional Notes for an aggregate principal amount of $200,000.
In connection with the issuance of the Convertible Notes (as defined and discussed below) issued in 2015, the holders of the Notes, in the outstanding principal amount of $2,198,416, amended their Notes to (i) extend the maturity date an additional six months, (ii) change the terms of the conversion premium from 1.15 to 1.25 to be consistent with conversion terms of the Convertible Notes, and (iii) provide that the issuance of promissory notes by the Company in a transaction with a substantially similar structure to the transactions contemplated by the Notes shall not be deemed a Subsequent Financing.
In addition, in September 2014, the Company issued a promissory note to a shareholder in the principal amount of $150,000. Interest accrues on the note at a rate of 12% per annum in the event this note is repaid upon maturity on December 31, 2014; otherwise interest accrues at a rate of 16% per annum. As of December 31, 2015, the Company repaid the outstanding principal balance of this note. The accrued interest on the note in the amount of $20,651 has not been repaid and is included in accrued expenses in the Company’s consolidated balance sheet.
2015 Convertible Notes Payable
On May 28, 2015, the Company accepted subscriptions pursuant to a new Note and Warrant Purchase Agreement, as amended on August 6, 2015, for the issuance and sale in a private placement of up to $3,000,000 of convertible promissory notes (the “Convertible Notes”). The Convertible Notes mature one year from the date of issuance and bear interest at the rate of 8% per annum. All principal and accrued interest under the Convertible Notes will, at the sole option of the investor (i) convert into the Company’s next equity or equity-linked financing in which the Company raises gross proceeds of at least $3,600,000 (the “Subsequent Financing”), into such securities, including warrants of the Company as are issued in the Subsequent Financing, the amount of which shall be determined in accordance with the following formula: (the outstanding balance of the Convertible Notes plus accrued interest as of the closing of the Subsequent Financing) x (1.25) / (the per security price of the securities sold in the Subsequent Financing), or (ii) convert into a new financing in which the Company shall issue to the investor one share of common stock and one-half of one warrant at a purchase price no greater than $0.35 per share. The per security price of the securities sold in the Subsequent Financing shall not exceed $0.35. In addition, the holders of the Convertible Notes shall have the option, at any time, to convert all principal and accrued interest into common stock at a price per share of $0.35. In the event that the Company shall, at any time, issue or sell additional shares of common stock or common stock equivalents, as defined, at a price per share less than $0.35, then the conversion price of the Convertible Notes shall be reduced to a price equal to the consideration paid for these additional shares of common stock.
Pursuant to the Note and Warrant Purchase Agreement, the Company issued warrants at an initial exercise price per share of $0.50 to purchase a number of shares of common stock equal to fifty percent of the number of shares of common stock such investor would receive upon full conversion of the Convertible Notes at a conversion price of $0.35 per share.
From May through December 2015, the Company issued Convertible Notes in the aggregate principal amount of $2,780,005 and warrants to purchase 3,971,436 shares of common stock at an exercise price of $0.50 per share. In connection with the issuance of the Convertible Notes, the Company paid to placement agents a cash fee of $142,400 and issued 406,859 five-year warrants to purchase shares of common stock at an exercise price of $0.50 per share. On the issuance date, the fair value of the placement agent warrants was $39,108 which was recorded as a deferred offering cost and as a derivative warrant liability.
Based upon the Company’s analysis of the criteria contained in ASC Topic 815-40, “Derivatives and Hedging—Contracts in Entity’s Own Equity” (“ASC Topic 815-40”), the Company has determined that since the exercise price of the warrants may be reduced if the Company issues shares at a price below the then-current exercise price, the warrants issued in connection with the Convertible Notes must be classified as derivative instruments. In accordance with ASC Topic 815-40, these warrants are also being re-measured at each balance sheet date based on estimated fair value, and any resultant changes in fair value is being recorded in the Company’s consolidated statement of operations.
In order to account for the issuance of the Convertible Notes and warrants, the Company allocated the total gross proceeds of $2,780,005 between the Convertible Notes and the warrants. The warrants were allocated their full fair value as of the respective grant dates totaling $358,255 and the residual net proceeds of $2,421,750 were allocated to the Convertible Notes. The conversion feature of the Convertible Notes was then analyzed. The Company determined that the embedded conversion feature did not meet the requirements for equity classification in accordance with ASC Topic 815-40. Therefore, the conversion feature fair value of $490,340 was bifurcated from the host contract, the Convertible Notes, and recorded as a derivative liability, thereby creating a further discount on the Convertible Notes. The conversion feature is also being re-measured at each balance sheet date based on estimated fair value, and any resultant changes in fair value is being recorded in the Company’s consolidated statement of operations.
In addition, during the year ended December 31, 2015, the Company issued other short-term financing notes in the aggregate amount of $365,000. As of December 31, 2015, the outstanding principal balance of these notes, and interest of $3,543, had been repaid.
In connection with the issuance of the short-term financing notes and the Convertible Notes in 2014 and 2015, the Company incurred $336,127 in issuance costs. These costs are recorded as deferred issuance costs, included in prepaid expenses and other current assets on the Company’s balance sheet and amortized to interest expense over the term of such Convertible Notes. For the year ended December 31, 2015 and 2014, the Company has amortized $155,479 and $44,388, respectively, of issuance costs to expense. For the year ended December 31, 2015 and 2014, the Company recorded non-cash interest expense related to the amortization of the discount on the Convertible Notes of $355,883 and $0, respectively.
Interest expense, including amortization of deferred issuance costs and debt discounts related to the warrants and beneficial conversion feature, totaled $792,887 and $104,132 for the years ended December 31, 2015 and 2014, respectively.
The issuance of the Convertible Notes has resulted in an adjustment to the conversion price and exercise price of certain of the Company’s outstanding securities, including its Series A Preferred Stock, Series B Preferred Stock and certain outstanding warrants, to $0.35 per share as a result of the various “full-ratchet” anti-dilution provisions contained in such securities.
Lewis Opportunity Fund, an affiliate of W. Austin Lewis, IV, a member of the Company’s Board of Directors, participated as an investor in the Convertible Notes in 2015 in an aggregate principal amount of $2,000,000 and was issued warrants to purchase an aggregate of 2,857,143 shares of common stock.
In connection with the private placement of the Convertible Notes, the Company entered into a registration rights agreement with the investors, in which the Company agreed to file a registration statement with the SEC to register for resale the shares underlying the Convertible Notes and the warrants within 90 calendar days of the final closing date of the Convertible Notes and to have the registration statement declared effective within 120 calendar days after the filing date.
6. CAPITAL STOCK
SERIES A PREFERRED STOCK
The Company is authorized to issue 100,000,000 shares of preferred stock, $0.001 par value, of which 3,500,000 shares have been designated Series A Preferred Stock. At December 31, 2015 and 2014, 150,611 and 949,477 shares of Series A Preferred Stock, respectively, were issued and outstanding.
The material terms of the Series A Preferred Stock, as specified in the Certificate of Designation for the Series A Preferred Stock, are as follows:
Conversion
Each share of Series A Preferred Stock may, at the holder’s option, convert into common stock. The conversion rate is equal to the sum of the stated value of the Series A Preferred Stock, which is $0.83 per share, plus all accrued and unpaid dividends, divided by the conversion price. As a result of the issuance of the Series B Preferred Stock pursuant to the Series B Preferred Stock offering in 2013, the conversion price of the Series A Preferred Stock was reduced from $0.83 to $0.50. As a result of the issuance of the Convertible Notes, the conversion price was further reduced to $0.35. During the year ended December 31, 2015, 856,219 shares of Series A Preferred Stock were converted into 1,923,324 shares of the Company’s common stock. In addition, the Company issued 45,987 shares of the Company’s common stock in satisfaction of $17,033 dividend accrued on the shares of Series A Preferred Stock that were converted. During the year ended December 31, 2014, 1,493,976 shares of Series A Preferred Stock were converted into 2,480,000 shares of the Company’s common stock. In addition, the Company issued 34,339 shares of the Company’s common stock in satisfaction of $17,170 dividend accrued on the shares of Series A preferred Stock that were converted.
Subject to the specified provisions, the Series A Preferred Stock will automatically convert into common stock at the conversion price on the mandatory conversion date, which is defined as the first date at least six (6) months after the issuance of the Series A Preferred Stock on which each of the following conditions shall have been satisfied: (i) the Company shall have consummated, a qualified financing for aggregate gross proceeds to the Company of $7,000,000, (ii) the volume weighted average trading price for the Company’s common stock for each day on thirty (30) consecutive trading days immediately preceding such date, must be above $1.50 and the trading volume over that period must exceed 1,500,000 shares, and (iii) as of such date, all shares of common stock issuable upon conversion of the Series A Preferred Stock are registered under the Securities Act of 1933, as amended (the “Act”) pursuant to an effective registration statement or are otherwise eligible for sale under Rule 144 under the Act. As of December 31, 2015, no mandatory conversion has taken place as all of the conditions required for such mandatory conversion have not occurred.
(a)
Cumulative Preferred Dividends
. Each holder of the Series A Preferred Stock shall be entitled to receive cash dividends payable on the stated value of the Series A Preferred Stock at a rate of 10% per annum which shall be cumulative and accrue daily from the original issuance date; provided however, if either (i) the Company shall not have consummated a qualified financing with aggregate gross proceeds to the Company of $7,000,000 on or before June 30, 2012, or (ii) for any reason, any shares of common stock issuable upon conversion of the Series A Preferred Stock are not registered pursuant to an effective registration statement on or before June 30, 2012 or are not otherwise eligible for sale under Rule 144 of the Act, then, effective July 1, 2012, the rate of dividends on the Series A Preferred Stock shall increase to 12% per annum. Both of the above conditions have been met by the Company and accordingly, the rate of dividends on the Series A Preferred Stock remains at 10% per annum.
(b)
Payment of Dividends
. The Company shall be required to pay all accrued and unpaid dividends (whether or not declared) in respect of the Series A Preferred Stock semi-annually on each June 30 and December 31 of each calendar year. All such dividends shall be paid in cash; provided, that, at the option of the Company, the Company may pay any accrued and unpaid dividends on the Series A Preferred Stock in the form of additional shares of Series A Preferred Stock, with each share of Series A Preferred Stock being valued for this purpose at the stated value in effect on the date of payment.
For the year ended December 31, 2015, the Company accrued a preferred stock dividend of $64,635 and issued 57,353 shares of Series A Preferred Stock in payment of such dividend. In addition, during the year ended December 31, 2015, the Company issued 45,987 shares of common stock in payment of such dividend as related to the shares of Series A Preferred Stock converted into common stock. For the year ended December 31, 2014, the Company accrued a preferred stock dividend of $94,573 and issued 93,257 shares of Series A Preferred Stock in payment of such dividend. In addition, during the year ended December 31, 2014, the Company issued 34,399 shares of common stock in payment of such dividend as related to the shares of Series A Preferred Stock converted into common stock
Liquidation preference
In the event of liquidation, dissolution or winding up of the business of the Company, whether voluntary or involuntary, each holder of Series A Preferred Stock shall be entitled to receive, for each share thereof, out of assets of the Company legally available therefor, a preferential amount in cash, per share of Series A Preferred Stock, equal to (and not more than) the sum of the (x) stated value, plus (y) all accrued and unpaid dividends thereon. All preferential amounts to be paid to the holders of Series A Preferred Stock in connection with such liquidation, dissolution or winding up shall be paid before the payment or setting apart for payment of any amount for, or the distribution of any assets of the Company to the holders of the Company's common stock. If upon any such distribution the assets of the Company shall be insufficient to pay the holders of the outstanding shares of Series A Preferred Stock the full amounts to which they shall be entitled, such holders shall share ratably in any distribution of assets in accordance with the sums which would be payable on such distribution if all sums payable thereon were paid in full.
Voting
The holders of the Series A Preferred Stock have the right to one vote for each share of common stock into which such Series A Preferred Stock could then convert.
The Company is authorized to issue 100,000,000 shares of preferred stock, $0.001 par value, of which 12,000,000 shares have been designated Series B Preferred Stock. At December 31, 2015 and 2014, 5,382,071 and 5,694,571 shares of Series B Preferred Stock were issued and outstanding, respectively.
The material terms of the Series B Preferred Stock, as specified in the Certificate of Designation for the Series B Preferred Stock, are as follows:
Ranking
The Series B Preferred Stock ranks junior to the Company’s Series A Preferred Stock and senior to the Company’s common stock with respect to distributions of assets upon the liquidation, dissolution or winding up of the Company.
Stated Value
Each share of Series B Preferred Stock will have a stated value of $0.80, subject to adjustment for stock splits, combinations and similar events.
Dividends
Cumulative dividends on the Series B Preferred Stock accrue at the rate of 10% of the stated value per annum, compounded annually, from and after the date of the initial issuance through the third anniversary of the issuance date; provided, however, that any holder of at least 4,500,000 shares of Series B Preferred Stock after the issuance date and prior to October 1, 2013 (a “Major Holder”) will be entitled to accrued dividends through the fourth anniversary of the issuance date (as applicable, the “Accrual Period”). Accrued dividends are payable upon the earliest to occur of (i) the third anniversary of the issuance date (or, with respect to the Major Holder, the fourth anniversary of the issuance date), (ii) mandatory conversion (as described below) and (iii) an automatic conversion upon a fundamental transaction (as such term is defined in the Certificate of Designation) or triggering event (as described below). Dividends are payable in Series B Preferred Stock valued at the stated value, or in cash upon the mutual agreement of the Company and the holder.
For the year ended December 31, 2015, the Company accrued a Series B Preferred Stock dividend of $509,399 which is included in accrued expenses in the Company’s consolidated balance sheet. In addition, the Company issued 160,267 shares of common stock in payment of such dividend as related to the 312,500 shares of Series B Preferred Stock converted to common stock during the year ended December 31, 2015. For the year ended December 31, 2014, the Company accrued a Series B Preferred Stock dividend of $466,966 which is included in accrued expenses in the Company’s consolidated balance sheet. The Company issued 2,507 shares of common stock in payment of such dividend as related to the 31,250 shares of Series B Preferred Stock converted to common stock during the year ended December 31, 2014
Liquidation Preference
If the Company voluntarily or involuntarily liquidates, dissolves or winds up its affairs, each holder of the Series B Preferred Stock will be entitled to receive out of the Company’s assets available for distribution to stockholders, after satisfaction of liabilities to creditors, if any, and payments due to holders of the Series A Preferred Stock but before any distribution of assets is made on the Company’s common stock or any of our other shares of stock ranking junior as to such a distribution to the Series B Preferred Stock, a liquidating distribution in the amount in the amount of the stated value of all such holder’s Series B Preferred Stock plus all accrued and unpaid dividends thereon.
Voluntary Conversion
Each share of Series B Preferred Stock is convertible at the holder’s option into the Company’s common stock in an amount equal to the stated value plus accrued and unpaid dividends thereon through the conversion date divided by the then applicable conversion price. The initial conversion price is $0.80 per share and is subject to customary adjustments for issuances of shares of common stock as a dividend or distribution on shares of the common stock, or mergers or reorganizations, as well as “full-ratchet” anti-dilution adjustments for future issuances of other Company securities. As a result of the issuance of common stock pursuant to the 2013 Common Stock Offering, the conversion price of the Series B Preferred Stock was reduced from $0.80 to $0.50, provided, however, Platinum waived its right to adjust the conversion price of the 4,523,076 shares of Series B Preferred Stock held by it and accordingly, such conversion price remained at $0.80 per share solely with respect to Platinum until the issuance of common stock to consultants in April 2014 with a fair value of $0.53 per share. As a result of the issuance of the Convertible Notes, the conversion price of all outstanding Series B Preferred Stock was further reduced to $0.35. During the year ended December 31, 2015, 312,500 shares of Series B Preferred Stock were converted into 714,285 shares of the Company’s common stock. During the year ended December 31, 2014, 31,250 shares of Series B Preferred Stock were converted into 50,000 shares of the Company’s common stock.
Holders also have the option to convert their Series B Preferred Stock upon the occurrence of a fundamental transaction or one of the following triggering events: Johan (Thijs) Spoor ceases to be the chief executive officer of the Company; or there is a change in three of the five current members of the Company’s board of directors, such conversion will be on the same terms as a mandatory conversion.
The Series B Preferred Stock is subject to mandatory conversion at such time as the volume weighted average price of the Company’s common stock is at least $1.20 (subject to adjustments for stock splits and similar events) provided, that, on the mandatory conversion date, (A) a registration statement providing for the resale of the shares underlying the Series B Preferred Stock is effective, or such shares may be offered for sale to the public without limitations pursuant to Rule 144, (B) trading in the common stock shall not have been suspended by the SEC or exchange or market on which the common stock is trading), (C) the daily volume of the common stock is at least 50,000 shares per day for the applicable ten (10) consecutive trading days, and (D) the Company is in material compliance with the terms and conditions of the transaction documents. In the event of mandatory conversion, each share of Series B Preferred Stock will convert into the number of shares of common stock equal to the stated value plus accrued and unpaid dividends for the Accrual Period divided by the conversion price.
Voting Rights
The holders of the Series B Preferred Stock will be entitled to vote upon all matters upon which holders of common stock have the right to vote, such votes to be counted together with all other shares of capital stock having general voting powers and not separately as a class. The holders of the Series B Preferred Stock will be entitled to the number of votes equal to the number of common stock into which the Series B Preferred Stock are then convertible.
In addition, as long as at least 25% of the Series B Preferred Stock remains outstanding, the Company will not, without the affirmative vote or consent of the holders of at least a majority of the outstanding Series B Preferred Stock, voting as a separate class, (i) amend, waive or repeal (including through a merger, consolidation or similar event) any provision of the Company’s articles of incorporation or by-laws in any manner that adversely affects the rights of the holders of the Series B Preferred Stock; (ii) alter or change adversely the preferences, rights, privileges, or restrictions of the Series B Preferred Stock; (iii) authorize or create any class or series of stock having rights, preferences or privileges in any respect senior to the Series B Preferred Stock; or (iv) reclassify, alter or amend any existing class or series of stock, if such reclassification, alteration or amendment would render such other class or series of stock as having rights, preferences or privileges in any respect senior to the Series B Preferred Stock.
COMMON STOCK
The Company has authorized 100,000,000 shares of its common stock, $0.001 par value, At December 31, 2015 and 2014, the Company had issued and outstanding 32,908,503 and 29,197,497, respectively, shares of its common stock.
In December 2015, the Company issued an aggregate of 867,143 shares of common stock, with a total fair value of $337,250, for consulting services and in settlement of certain outstanding liabilities to third parties. As of December 31, 2015, $30,000 of this settlement, relates to services to be performed in 2016 and is included in prepaid expense in the consolidated balance sheet. In addition, certain settlement agreements included a provision to issue, upon a Subsequent Financing as defined, an amount of warrants equal to fifty percent of the number of shares of common stock issued by the Company in the Subsequent Financing.
In January 2014, the Company issued 470,000 shares of common stock, at $0.50 per share for net cash proceeds of $203,055.
In April 2014, the Company issued 304,888 shares of common stock for services performed pursuant to a consulting agreement. The total fair value of these shares, $178,160, is included in operating expenses in the consolidated statement of operations.
7. STOCK PURCHASE WARRANTS
Common Stock Warrants
During the year ended December 31, 2015, the Company issued 3,971,436 common stock warrants to investors and 406,859 common stock warrants to the placement agents in connection with issuance of the Convertible Notes (see Note 5). These warrants are recorded as a derivative liability.
In addition, during the year ended December 31, 2015, the Company issued 607,229 common stock warrants at an exercise price of $0.50 per share with a five-year term. These warrants were issued in consideration of the warrant holder waiving its rights with respect to indebtedness incurred by the Company in excess of the amount permitted pursuant to the Certificate of Designation of Relative Rights and Preferences of the Company’s Series A Preferred Stock. The warrants had a fair value of $80,472 and are included in interest and other expense in the consolidated statement of operations.
During the year ended December 31, 2015, 3,558,395 stock purchase warrants expired with a weighted average exercise price of $1.29.
As a result of the issuance of the Convertible Notes, the exercise price of the 8,676,408 common stock warrants, which were issued in connection with the Company's Series B Preferred Stock in 2013 and 2014, was reduced to $0.35 per share.
During the year ended December 31, 2014, the Company issued 470,000 common stock warrants to investors and 45,000 common stock warrants to the placement agents in connection with the sale of common stock.
In addition, during the year ended December 31, 2014, the Company exchanged 546,470 common stock warrants for an equal number of warrants with the same terms as the warrants issued in connection with the sale of the Company’s Series B Preferred Stock. As a result of this exchange and because such new warrants are derivative instruments, the Company increased its derivative warrant liability by approximately $115,000, the fair value of the warrants on the date of the modification. In addition, in conjunction with the exchange, the Company recognized a one-time expense of approximately $82,000 representing the incremental fair value resulting from the modification, which is included in the accompanying statements of operations.
During the year ended December 31, 2014, various warrant holders exercised their rights to purchase 180,750 shares of the Company’s common stock, with an average exercise price of $0.50 per share, pursuant to a cash exercise whereby the Company received cash proceeds of $90,375.
The following is a summary of all common stock warrant activity during the year ended December 31, 2015:
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Number of Shares
Under Warrants
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Exercise
Price
Per Share
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Weighted
Average Exercise Price
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Warrants issued and exercisable at December 31, 2014
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Warrants Issued/Exchanged
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Warrants Expired/Forfeited
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Warrants issued and exercisable at December 31, 2015
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The following represents additional information related to common stock warrants outstanding and exercisable at December 31, 2015:
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Exercise Price
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Number of Shares Under Warrants
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Weighted Average Remaining Contract Life in Years
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Weighted Average Exercise Price
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Total warrants accounted for as
derivative liability
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Total warrants accounted for as equity
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Total for all warrants outstanding
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The Company used the Black-Scholes option price calculation to value the warrants granted in 2015 using the following assumptions: risk-free rate of 1.76%, volatility of 49.42%, actual term and exercise price of warrants granted. For warrants granted that are accounted for as a derivative liability, the Company used a Binomial Options Pricing model. The primary assumptions used to determine the grant date fair value of these warrants were: a risk free interest rate with the range from 1.37% - 1.76%, volatility of 49.42%, actual term and exercise price of the warrants granted. There were no material changes to the primary assumptions, as noted above, used to determine the fair value of the warrants as of December 31, 2015.
The Company used the Black-Scholes option price calculation to value the warrants granted in 2014 using the following assumptions: risk-free rate of 1.62%, volatility of 60.13%, actual term and exercise price of warrants granted. For warrants granted that are accounted for as a derivative liability, the Company used a Binomial Options Pricing model. The primary assumptions used to determine the grant date fair value of these warrants were: a risk free interest rate with the range from 1.59% - 3.40%, volatility of 60.13%, actual term and exercise price of the warrants granted. There were no material changes to the primary assumptions, as noted above, used to determine the fair value of the warrants as of December 31, 2014.
8. COMMON STOCK OPTIONS
On February 11, 2011, the Company adopted its 2011 Equity Incentive Plan (the “Plan”) under which 6,475,750 shares of common stock were reserved for issuance under options or other equity interests as set forth in the Plan. Under the Plan, options are available for issuance to employees, officers, directors, consultants and advisors. The Plan provides that the board of directors will determine the exercise price and vesting terms of each option on the date of grant. Options granted under the Plan generally expire ten years from the date of grant. As of December 31, 2015, there were 1,318,405 shares available for issuance under the Plan.
Under the Plan, the Company has issued 161,250 shares of fully paid and non-assessable restricted common stock to a director of the Company. These shares of restricted stock are subject to the terms of the Plan and are unvested and outstanding as of December 31, 2015 The shares shall vest upon the earlier of (i) the occurrence of a Change of Control, as defined in the Plan, (ii) the successful completion of a Phase II clinical trial for any of the Company’s products, or (iii) the determination by the board of directors to provide for immediate vesting. The weighted average grant-date fair value is $1.07 per share.
The following is a summary of all common stock option activity for the year ended December 31, 2015:
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Options Outstanding
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Weighted Average
Exercise Price
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Outstanding at December 31, 2014
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Outstanding at December 31, 2015
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Options Exercisable
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Weighted Average Exercise
Price per Share
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Exercisable at December 31, 2014
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Exercisable at December 31, 2015
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The weighted average fair value of options granted during the year ended December 31, 2015 was $0.11.
The weighted average remaining contractual term for exercisable and outstanding options is 4.85 and 5.44 years, respectively. The aggregate intrinsic value of all of the Company’s exercisable and outstanding options is approximately $87,750 and $87,750, respectively.
As of December 31, 2015, there was approximately $49,713 of unrecognized compensation cost related to non-vested options. The unrecognized compensation expense is estimated to be recognized over a period of 2.7 years at December 31, 2015.
The Company used the Black-Scholes option pricing model to value all option grants (see Note 2, Summary of Significant Accounting Policies, “Accounting for Share Based Payments”).
9. RETIREMENT PLAN
In 2011, the Company adopted a defined contribution plan intended to qualify under Section 401(k) of the Internal Revenue Code covering all eligible employees of the Company. All employees are eligible to become participants of the plan upon reaching age 21 on the first day of the month following the hire date. Each employee may elect, voluntarily, to contribute a percentage of their compensation to the plan each year, subject to certain limitations. The Company reserves the right to make additional contributions to the plan. The Company has elected to make “safe harbor” contributions equal to 100% of the first 6% of participants’ elective deferrals. In the years ended December 31, 2015 and 2014, the Company recognized expense related to its contributions of $37,175 and $25,079, respectively.
10. INCOME TAXES
The Company is subject to taxation in the U.S. and the State of New Jersey. At December 31, 2015 and 2014, the Company had gross deferred tax assets calculated at an expected blended rate of 39.94% of approximately $11,149,349 and $9,669,000, respectively. As the Company cannot determine that it is more likely than not that the Company will realize the benefit of the deferred tax asset, a valuation allowance of approximately $11,149,000 and $9,669,000 has been established at December 31, 2015 and 2014, respectively.
The significant components of the Company’s net deferred tax assets (liabilities) at December 31, 2015 and 2014 are as follows:
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December 31, 2015
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December 31, 2014
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Gross deferred tax assets:
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Net operating loss carry-forwards
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Tax credit carry-forwards
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Capital loss carry-forwards & unrealized losses on investments
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Deferred tax asset valuation allowance
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Income taxes computed using the federal statutory income tax rate differs from the Company’s effective tax rate primarily due to the following:
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December 31, 2015
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December 31, 2014
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Income taxes benefit (expense) at statutory rate
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State income tax, net of federal benefit
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Share-based compensation & Warrant adjustments
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Change in valuation allowance
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At December 31, 2015, the Company has gross net operating loss carry-forwards for federal income tax purposes of approximately $24,100,000 which expire in the years 2023 through 2035. The Company has gross state net operating loss carryforwards of approximately $15,000,000 which expire in the years 2031 through 2035. The Company also has federal research and development carryforwards of approximately $364,000 which expire twenty years from the date of inception. The net increase in the valuation allowance in the years ended December 31, 2015 and 2014 was approximately $1,500,000 and $2,000,000, respectively.
The Company is subject to the net operating loss utilization provisions of Section 382 of the Internal Revenue Code. Due to the reverse merger/recapitalization, the Company is restricted in the future use of net operating loss and tax credit carry-forwards generated by the Company before the effective date of the merger. Other ownership changes may cause the net operating losses to further be limited. Both of the separate loss years’ net operating losses will be subject to possible limitations concerning changes of control and other limitations under the Internal Revenue Code. The effect of an ownership change would be the imposition of an annual limitation on the use of NOL carryforwards attributable to periods before the change. The amount of the annual limitation depends upon the value of the Company immediately before the change, changes to the Company’s capital during a specified period prior to the change, and the federal published interest rate.
Topic 740 in the Accounting Standards Codification (ASC 740) prescribes recognition threshold and measurement attributes for the financial statement recognition and measurement of uncertain tax positions taken or expected to be taken in a tax return. ASC 740 also provides guidance on de-recognition, classification, interest and penalties, accounting in interim periods, disclosure and transition. At December 31, 2015, the Company had taken no uncertain tax positions that would require disclosure under ASC 740.
11. COMMITMENTS AND CONTINGENCIES
License Agreements
On June 26, 2014, the Company and The General Hospital Corporation, d/b/a Massachusetts General Hospital (“MGH”) entered into two license agreements (the “Agreements”), which Agreements replace the single license agreement between the Company and MGH dated April 27, 2009, as amended by letter dated June 21, 2011 and agreement dated October 31, 2011 (the “Original Agreement”). The Agreements provide exclusive licenses for the Company’s two lead product candidates, BFPET and CardioPET, two of the three cardiac imaging technologies covered by the Original Agreement. The Agreements were entered into primarily for the purpose of separating the Company’s rights and obligations with respect to its different product development programs. Each of the Agreements requires the Company to pay MGH an initial license fee of $175,000 and annual license maintenance fees of $125,000 each. The Agreements require the Company to meet certain obligations, including, but not limited to, meeting certain development milestones relating to clinical trials and filings with the United States Food and Drug Administration. MGH has the right to cancel or make non-exclusive certain licenses on certain patents should the Company fail to meet stipulated obligations and milestones. Additionally, upon commercialization, the Company is required to make specified milestone payments and royalties on commercial sales.
The Company is amortizing the cost of these intangible assets over the remaining useful life of the Agreements of 10 years.
On July 31, 2015, the Company paid annual maintenance fees of $125,000 for each of its license agreements. Upon payment, these costs were recorded as prepaid expenses, included in prepaid expenses and other current assets on the Company’s balance sheet and are being expensed over the term of one year. For the year ended December 31, 2015, the Company has recorded license fee expense of $153,332.
The Company is current with all stipulated obligations and milestones under the Agreements and the Agreements remain in full force and effect. The Company believes that it maintains a good relationship with MGH and will be able to obtain waivers or extension of its obligations under the Agreement, should the need arise. If MGH were to refuse to provide the Company with a waiver or extension of any of its obligations or were to cancel or make the license non-exclusive, this would have a material adverse impact on the Company as it may be unable to commercialize products without exclusivity and would lose its competitive edge for portions of the patent portfolio.
During 2014, the Company relinquished its Alzheimer’s license and accordingly recorded a loss on disposal of $16,591.
Clinical Research Services Agreement
On September 7, 2012, the Company entered into a Clinical Research Services Agreement with SGS Life Science Services (“SGS”), a company with its registered offices in Belgium, for clinical research services relating to the Company’s CardioPET Phase II study to assess myocardial perfusion and fatty acid uptake in coronary artery disease (CAD) patients. The phase II trial will be an open label trial designed to assess the safety and diagnostic performance of CardioPET as compared to stress echocardiography, myocardial perfusion imaging and angiography as a gold standard of background disease.
In addition, the Company engaged FGK Representative Service GmbH to serve as the Company’s sponsor in compliance with the laws governing clinical trials conducted in the European Union. On February 28, 2013, the Company announced that the Phase II trial had begun and released the initial data and images from the trial. On February 6, 2014, the Company presented interim data from the trial at the SNMMI mid-winter meeting. On October 20, 2014, the Company presented additional interim data at the EANM meeting in Gothenburg, Sweden. In December 2014, the Company announced that the enrollment for a Phase II clinical trial of CardioPET was closed. The estimated remaining cost payable to SGS through the completion of the trial, based upon the original contracted amount, is approximately $320,000.
On May 23, 2014, the Company entered into a Master Services Agreement with PPD Development, LP, a clinical research organization engaged in the business of managing clinical research programs and providing clinical development and other related services, for the clinical research services relating to the Company’s BFPET Phase II study. The Phase II trial will be an open label trial designed to assess the safety and diagnostic performance of BFPET. Multiple trial sites are planned in various locations in the United States. In connection with this agreement, the Company has recorded $235,000 as of December 31, 2015 related to start-up costs. The trial is expected to commence in the near future. The estimated cost of this program is $1.7 million.
Executive Employment Contracts
The Company maintains employment contracts with key Company executives that provide for the continuation of salary and the grant of certain options to the executives if terminated for reasons other than cause, as defined within the agreements. One contract also provides for a $1 million bonus should the Company execute transactions as specified in the contract, including the sale of substantially all of the Company’s assets or a stock, or merger transaction, any of which resulting in compensation to the Company’s stockholders aggregating in excess of $50 million for such transaction.
Operating Lease Commitment
In July 2011, the Company entered into a three-year lease for office space, which commenced May 1, 2012 with an expiration date of April 30, 2015. On July 1, 2014, the Company increased its office space and amended this agreement. The amended annual minimum lease payments for this office space are $76,200 per year plus common area costs. In accordance with the amended agreement, the Company maintains a $9,525 security deposit. On February 24, 2015, the Company signed a three-year renewal of the lease which will expire on April 30, 2018. Subsequent to April 30, 2016, the Company will have the option to terminate the lease with 6 months prior notice. The future minimum lease payments remaining through April 30, 2018 are as follows:
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Rent expense, net of sublease income, was $76,975 and $74,680 for the years ended December 31, 2015 and 2014, respectively.
Legal Contingencies
In July 2013, an action was filed against the Company in the United States District Court for the District of Nevada. The action,
Todd Nelson v. Fluoropharma Medical, Inc.
and Does 1 through 10, No. 13 CV 01152 JAD CWH
, alleges that the plaintiff suffered losses attributable to the Company’s refusal to honor certain stock options after February 28, 2012. Plaintiff seeks at least $325,200 in damages, as well as punitive and exemplary damages, prejudgment interest, and costs. Discovery has closed and on April 13, 2015, the Company filed a motion for summary judgment seeking to dismiss the entire action with prejudice. On January 4, 2016, the court issued its opinion granting the Company’s motion for summary judgment in its entirety, dismissing Plaintiff’s claims, and closing the case. As of today’s date, Plaintiff has not filed a notice of appeal.
The Company is not aware of any other material, active, pending or threatened proceeding, nor is the Company, or any subsidiary, involved as a plaintiff or defendant in any other material proceeding or pending litigation.
12. SUBSEQUENT EVENTS
Effective as of January 8, 2016, Mr. Andrew H. Sassine resigned as a director. The resignation was not due to any disagreement on any matter relating to the Company’s operations, policies or practices.
On January 19, 2016, 10,542 shares of Series A Preferred Stock were converted into 25,000 shares of common stock. In addition, the Company issued 130 shares of its common stock in satisfaction of a $45.66 dividend accrued on the shares of Series A Preferred Stock that were converted.
In January 2016, the Company issued 61,159 shares of common stock with a fair value of $21,406 in settlement of certain outstanding liabilities to third parties.
On January 20, 2016, the Company entered into a further amendment to the 2014 Convertible Notes Payable, which among other changes, provides for (i) extension of the maturity date for an additional six months, (ii) retroactive increase of the interest rate to 12%, (iii) the ability to voluntary convert the investment, including principal and interest multiplied by 1.25, at a conversion price of $0.35 per share (which results in an effective conversion price of $0.28 per share), (iv) resale registration rights, and (v) “full-ratchet” anti-dilutive protection. As a result of this amendment to the 2014 Convertible Notes Payable, the conversion price of each of the Company's existing Series A Preferred Stock, Series B Preferred Stock, the Convertible Notes and certain related warrants, has been adjusted to $0.28 per share.
In February and March, 2016, the Company issued 225,000 shares of common stock pursuant to the conversion of 2014 Convertible Notes.
On March 23, 2016, the Company issued promissory note for $150,000 with terms substantially similar to the 2014 Convertible Notes, as amended (see Note 5).