1. ORGANIZATION, BASIS OF PRESENTATION AND GOING CONCERN
FluoroPharma Medical, Inc., a Nevada corporation (the “Company”), is a molecular imaging company headquartered in Montclair, N.J. The Company was founded as FluoroPharma Inc. 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.
The accompanying unaudited condensed consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, FluoroPharma, Inc., a Delaware corporation. All intercompany transactions have been eliminated in consolidation.
Basis of Presentation
The accompanying unaudited condensed consolidated financial statements of FluoroPharma Medical, Inc. and subsidiary have been prepared in accordance with accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim financial information and the rules and regulations of the U.S. Securities and Exchange Commission (the "SEC"). Accordingly, the unaudited condensed consolidated financial statements do not include all information and footnotes required by U.S. GAAP for complete annual financial statements. In the opinion of management, the accompanying unaudited condensed consolidated financial statements reflect all adjustments, consisting of only normal recurring adjustments, considered necessary for a fair presentation. Certain prior year amounts in the condensed consolidated financial statements and notes thereto have been reclassified to conform to the current period’s presentation. Interim operating results are not necessarily indicative of results that may be expected for the year ending December 31, 2016 or for any other interim period. The unaudited condensed consolidated financial statements should be read in conjunction with the audited financial statements of the Company and the notes thereto as of and for the year ended December 31, 2015, as included in the Company's Form 10-K filed with the SEC on March 30, 2016.
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 $34,309,877 as of March 31, 2016. 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 three months ended March 31, 2016, the Company raised net cash proceeds of $144,140 through the issuance of notes payable. 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, 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
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 its 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 March 31, 2016 and December 31, 2015, respectively.
Fair Value Measurements
The Company has various financial instruments that must be measured at fair value on a recurring basis, including certain marketable securities and derivatives. Certain assets and liabilities are measured at fair value on a non-recurring basis. These assets and liabilities are not measured at fair value on an ongoing basis, but are subject to fair value adjustments only in certain circumstances. During the three months ended March 31, 2016, the Company valued the Amended 2014 Notes (see Note 4) at fair value in connection with a modification in terms that was accounted for as a Debt Extinguishment. The Amended 2014 Notes were recorded at fair value on the date of the modification and are not subsequently adjusted to fair value.
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 at March 31, 2016 are summarized below:
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March 31, 2016
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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 Liabilities:
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Assets and liabilities measured at fair value on a recurring basis at December 31, 2015 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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The following table sets forth the changes in the estimated fair value for our Level 3 classified derivative liability:
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Three Months Ended
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Three Months Ended
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March 31, 2016
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March 31, 2015
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Fair value at beginning of period
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Embedded conversion feature - 2014
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Embedded conversion feature - 2016
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Fair value at end of period
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Assets and liabilities measured at fair value on a non-recurring basis at March 31, 2016 are summarized below:
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March 31, 2016
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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 Liabilities:
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There were no assets or liabilities measured at fair value on a non-recurring basis at December 31, 2015.
The fair value of the Amended 2014 Notes was estimated using a discounted cash flow analysis which included an estimated discount rate of 14% reflecting various risk factors including the specific terms of the notes, company-specific credit risk and interest rate risk, among others. The difference between the fair value of the Amended 2014 Notes and the carrying value of the 2014 Notes is primarily the result of the retroactive increase in the interest rate (see Note 4).
Recently Issued Accounting Standards
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 Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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. The Company adopted ASU 2015-03 on January 1, 2016 and applied the standard retrospectively. The adoption of ASU 2015-03 resulted in the reclassification of $78,305 and $136,260 of unamortized debt issuance costs related to the Company's Convertible Notes (see Note 4) from prepaid expenses and other current assets to convertible notes payable within the Company’s condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015, respectively. Other than this reclassification, the adoption of ASU 2015-03 did not have an impact on the Company's financial statements.
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. The Company adopted this standard on January 1, 2016. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements.
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. The Company is currently evaluating the impact of adopting this ASU on the financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation”. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the impact of adopting this ASU on the financial statements.
3. OTHER BALANCE SHEET INFORMATION
Components of selected captions in the accompanying balance sheets as of March 31, 2016 and December 31, 2015 consist of:
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March 31,
2016
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December 31,
2015
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Prepaid expenses & other:
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Accrued expenses & other:
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Accrued dividends Series A and B Preferred Stock
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Accrued interest on notes payable
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4. CONVERTIBLE NOTES PAYABLE – SHORT TERM
2014 Convertible Notes Payable
During 2014 and 2015, the Company issued promissory notes (the “2014 Notes”) pursuant to a Note Purchase Agreement entered into with certain accredited investors for an aggregate principal amount of $2,198,416. The 2014 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 2014 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 2014 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 May 2015, in connection with the issuance of the Convertible Notes (as defined and discussed below), the holders of the 2014 Notes, in the outstanding principal amount of $2,198,416, amended their 2014 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 2014 Notes shall not be deemed a Subsequent Financing.
On January 20, 2016, the Company further amended the 2014 Notes (the “Amended 2014 Notes”), in order to (i) extend the maturity date for an additional six months, (ii) retroactively increase the interest rate to 12%, (iii) provide the ability to voluntary convert the notes, 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) provide resale registration rights, and (v) provide “full-ratchet” anti-dilutive protection. As a result of this amendment, 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.
The Company applied guidance in FASB ASC 470-50, “Debt Modifications and Extinguishments,” (ASC 470-50) and determined that the amendment qualified as a debt extinguishment (the “Debt Extinguishment”). This determination was made after calculating that the newly amended terms increased the fair value of the embedded conversion feature in excess of 10 percent.
In order to account for the Debt Extinguishment, the Company recorded the Amended 2014 Notes and the embedded conversion feature at their then fair values of $2,495,582 and $945,951, respectively. The embedded conversion feature was recorded as a derivative liability after determining the requirements for equity classification, in accordance with ASC Topic 815-40, were not met. The difference between the carrying value of the 2014 Notes, including all principal, accrued interest and deferred financing costs and the fair value of the Amended 2014 Notes and embedded conversion feature was recorded as a loss on debt extinguishment of $1,017,148 in the statement of operations. The difference between the principal amount of the Amended 2014 Notes and the fair value of the Amended 2014 Notes of $238,515 will be amortized to interest expense over the term of the notes. During the three months ended March 31, 2016, the Company amortized interest of $64,719 on the Amended 2014 Notes.
The calculation of the loss on extinguishment is as follows:
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March 31,
2016
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Fair value – Amended 2014 Notes
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Fair value – embedded conversion feature
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Accrued interest – 2014 Notes
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Deferred financing costs – 2014 Notes
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The derivative liability related to the embedded conversion feature is 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 February and March 2016, the Company issued 225,000 shares of common stock pursuant to the conversion of Amended 2014 Notes. The carrying value of the converted Amended 2014 Notes was approximately $61,396.
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 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. As a result of the 2016 amendment to the 2014 Notes, the conversion price of the Convertible Notes was adjusted to $0.28 per share.
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. As a result of the 2016 amendment to the 2014 Notes, the exercise price of the warrants was adjusted to $0.28 per share.
From May through September 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 $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.
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.
2016 Convertible Notes Payable
On March 23, 2016, the Company accepted subscriptions pursuant to a new Note Purchase Agreement for the issuance and sale in a private placement of an aggregate principal amount of up to $1,000,000 of convertible promissory notes (the “2016 Convertible Notes”), convertible into shares of common stock. The initial closing of the private placement was consummated on March 23, 2016 for an aggregate amount of $150,000, which was invested by Dr. Thomas H. Tulip, the Company’s chief executive officer. The Company may conduct any number of additional closings so long as the final closing occurs on or before the 120
th
day following the initial closing date.
The 2016 Convertible Notes mature one year from the date of issuance and bear interest at the rate of 12% per annum payable upon the earlier of (i) exchange or voluntary conversion of the 2016 Convertible Notes in accordance with the terms thereof and (ii) the maturity date. All principal and accrued interest under the 2016 Convertible Notes (the “Outstanding Balance”) will automatically convert into the Company’s next equity or equity-linked financing (the “Subsequent Financing”), without any action on the part of the investor, into such securities, including warrants of the Company that are issued in the Subsequent Financing, the amount of which shall be determined in accordance with the following formula: (the Outstanding Balance as of the closing of the Subsequent Financing) x (1.25) / (the per security price of the securities sold in the Subsequent Financing). For the purpose of calculating the formula above, the per security price of the securities sold in the Subsequent Financing shall not exceed $0.35. The issuance of promissory notes by the Company in a transaction with a substantially similar structure to the 2016 Convertible Notes (as determined in good faith by the Company’s board of directors) shall not be deemed a Subsequent Financing.
Each investor also has the right, at its option at any time, to convert the Outstanding Balance into shares of common stock as is obtained by dividing (i) the Outstanding Balance to be converted multiplied by 1.25, by (ii) a conversion price, $0.35 per share; provided, however, if an event of default has occurred and is continuing, the conversion price shall be adjusted to $0.15 per share. The 2016 Convertible Notes are 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 (subject to certain standard carve-outs).
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 (the “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. The terms of the Additional Warrants shall be substantially identical to the terms of the warrants issued in the Subsequent Financing, except the exercise price per share of the Additional Warrants shall be equal to the per share purchase price of the securities issued in the Subsequent Financing. In the event no warrants are issued in the Subsequent Financing, each of the investors shall nonetheless be entitled to an Additional Warrant, which Additional Warrant shall be non-callable, exercised on a cash only basis and have a term of five (5) years following the closing date of the Subsequent Financing.
The conversion feature of the 2016 Convertible Notes was 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 with a fair value of $33,911 was bifurcated from the host contract, the 2016 Convertible Notes, and recorded as a derivative liability, thereby creating a discount on the 2016 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 connection with the issuance of the short-term financing notes and the convertible notes in 2014, 2015 and 2016, the Company incurred $341,986 in issuance costs. These costs are recorded as deferred issuance costs, which are offset against the proceeds from the convertible notes on the Company’s balance sheet and amortized to interest expense over the term of such convertible notes. For the three months ended March 31, 2016 and 2015, the Company has amortized $52,178 and $31,674, respectively, of issuance costs to expense. For the three months ended March 31, 2016 and 2015, the Company recorded non-cash interest expense related to the amortization of the discount on the convertible notes of $212,997 and $0, respectively.
A reconciliation of the Company’s Convertible Notes Payable – Short Term, as of March 31, 2016, is as follows:
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2014 Amended
Notes
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2015 Convertible
Notes
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2016 Convertible
Notes
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Total
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Adjustments to fair value, net of accretion
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Interest expense, including amortization of deferred issuance costs and debt discounts related to the warrants and beneficial conversion feature, totaled $399,076 and $77,102 for the three months ended March 31, 2016 and 2015, respectively.
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.
For embedded conversion features that are accounted for as a derivative liability, the Company used a Binomial Options Pricing model. The primary assumptions used to determine the fair values of these embedded conversion features were: risk free interest rate of 0.35%, volatility of 68.09%, and actual term of the related convertible notes.
5. CAPITAL STOCK
SERIES A PREFERRED STOCK
The Company is authorized to issue 100,000,000 shares of preferred stock, $0.001 par value per share, of which 3,500,000 shares have been designated Series A Preferred Stock. At March 31, 2016 and December 31, 2015, 140,069 and 150,611 shares of Series A Preferred Stock, respectively, were issued and outstanding.
During the three months ended March 31, 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.
For the three months ended March 31, 2016 and 2015, the Company accrued a preferred stock dividend of $2,935 and 18,111, respectively.
During the three months ended March 31, 2015, 75,301 shares of Series A Preferred Stock were converted into 125,000 shares of the Company’s common stock. In addition, the Company issued 2,441 shares of the Company’s common stock in satisfaction of a $1,220 dividend accrued on the shares of Series A Preferred Stock that were converted.
SERIES B PREFERRED STOCK
The Company is authorized to issue 100,000,000 shares of preferred stock, $0.001 par value per share, of which 12,000,000 shares have been designated Series B Preferred Stock. At March 31, 2016 and December 31, 2015, 5,382,071 shares of Series B Preferred Stock were issued and outstanding.
For the three months ended March 31, 2016 and 2015, the Company accrued a Series B Preferred Stock dividend of $129,889 and $123,564, respectively.
During the three months ended March 31, 2016 and 2015, there were no voluntary conversions.
COMMON STOCK
The Company has authorized 100,000,000 shares of its common stock, $0.001 par value per share. At March 31, 2016 and December 31, 2015, the Company had issued and outstanding 33,219,792 and 32,908,503 shares of its common stock, respectively.
In January 2016, the Company issued an aggregate of 61,159 shares of common stock with fair value of $21,406 in settlement of certain outstanding liabilities to third parties.
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 related to services that were 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 therein, an amount of warrants equal to fifty percent of the number of shares of common stock issued by the Company in the subsequent financing.
6. STOCK PURCHASE WARRANTS
During the three months ended March 31, 2016, there were no stock purchase warrants issued.
During the three months ended March 31, 2016, 23,403 stock purchase warrants expired with a weighted average exercise price of $1.33.
As a result of the amendment to the 2014 Notes entered into with existing convertible note holders on January 20, 2016, the conversion price of certain related warrants has been adjusted to $0.28 per share.
The following represents additional information related to common stock warrants outstanding and exercisable at March 31, 2016:
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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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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 fair values of these warrants were: risk free interest rate of 1.21%, volatility of 68.09%, and actual term and exercise price of the warrants granted.
7. 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.
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 March 31, 2016. 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 three months ended March 31, 2016:
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Options Outstanding
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Weighted Average
Exercise Price
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Outstanding at December 31, 2015
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Outstanding at March 31, 2016
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Options Exercisable
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Weighted Average Exercise
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Exercisable at December 31, 2015
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Exercisable at March 31, 2016
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The weighted average fair value of options granted during the three months ended March 31, 2016 was $0.14.
At March 31, 2016, the weighted average remaining contractual term for exercisable and outstanding options is 4.24 and 5.19 years, respectively. At March 31, 2016, the aggregate intrinsic value of all of the Company’s exercisable and outstanding options is $54,000 and $54,000, respectively.
Employee stock-based compensation expense for the three months ended March 31, 2016 and 2015 is $22,206 and $98,222, respectively.
To compute compensation expense, the Company estimated the fair value of each option award on the date of grant using the Black-Scholes 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 as of March 31, 2016 and 2015, respectively: risk-free rate with a range from 1.78% - 1.83% and 1.82% - 1.94%, respectively, volatility of 68.08% and 49.42%, respectively, and expected term of 5 years and 5 years, respectively. There was no dividend yield included in the calculations.
As of March 31, 2016, there was $45,496 of unrecognized compensation cost related to non-vested options. The unrecognized compensation expense is estimated to be recognized over a period of 2.45 years at March 31, 2016.
8. 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 Company and MGH are in discussions regarding the exclusive license to VasoPET, the third product candidate covered by the Original Agreement, the Company’s rights to which ceased upon the termination of the Original Agreement contemporaneously with the execution of the new Agreements. 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. For the three months ended March 31, 2016, the Company has recorded license fee expense of $20,833.
On July 31, 2015, the Company paid annual maintenance fees of $125,000 for each of its license agreements. These costs are recorded as prepaid expenses, included in prepaid expenses and other current assets on the Company’s balance sheet and expensed over the term of one year.
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.
Clinical Research Services Agreements
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 $0 and $ 68,880 in the three months ended March 31, 2016 and 2015, respectively, 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 and was to expire on 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. On January 18, 2016, the Company submitted the lease termination notice effective July 31, 2016.
Effective January 1, 2016, the Company has entered into a sub-lease agreement with AzurRx BioPharma Inc., in which, Johan (Thijs) Spoor, a member of the Company’s board of directors, is the president and C.E.O. As of March 1, 2016, the sublease is for $38,330 per annum, payable in equal monthly installments of $3,240.06 per month.
Rent expense, net of sublease income, was $11,880 and $19,050 for the three months ended March 31, 2016 and 2015, 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 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.
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.
9. SUBSEQUENT EVENTS
In April 2016, the Company issued 135,000 shares of common stock pursuant to the conversion of Amended 2014 Notes with a carrying value of $36,372.
On April 26, 2016 and May 4, 2016, the Company issued additional 2016 Convertible Notes for the aggregate amount of $150,000 (see Note 4).
This report contains forward-looking statements. These forward-looking statements include, without limitation, statements containing the words “believes”, “anticipates”, “expects”, “intends”, “projects”, “will” and other words of similar import or the negative of those terms or expressions. Forward-looking statements in this report include, but are not limited to, expectations of future levels of research and development spending, general and administrative spending, levels of capital expenditures and operating results, sufficiency of our capital resources, our intention to pursue and consummate strategic opportunities available to us.. Forward-looking statements are subject to certain known and unknown risks, uncertainties and other factors that may cause our actual results, performance or achievements to be materially different from any future results, performance or achievements expressed or implied by such forward-looking statements. These risks and uncertainties include, but are not limited to those described in “Risk Factors” of the reports we file with the SEC.
The following discussion should be read in conjunction with our consolidated financial statements and notes thereto included elsewhere herein.
Overview
We are a biopharmaceutical company specializing in discovering, developing and commercializing molecular imaging pharmaceuticals with initial applications in the area of cardiology. Molecular imaging pharmaceuticals are radiopharmaceuticals that enable early detection of disease through the visualization of subtle changes in biochemical and biological processes. We currently have two clinical-stage molecular imaging pharmaceutical product candidates: CardioPET and BFPET. Additionally we have identified potential candidates that may be useful in the detection and/or treatment of vulnerable plaque.
Our Product Candidates
BFPET (18-F FTPP)
Our BFPET program employs a ([18F]-labeled cationic lipophilic tetraphenylphosphonium ion (18-F TPP) as an imaging agent designed for use in stress-testing for patients with presumptive or proven CAD. 18-F FTPP measures the extent and severity of cardiovascular disease through the detection of ischemic (i.e. reversible and viable) and infarcted (i.e., irreversibly damaged) myocardial (i.e., heart) tissue. Its mechanism of action allows it to enter the myocardial cells of the heart muscle in direct proportion to blood flow and membrane potential--the most important indicators of adequate cardiac blood supply. Since ischemic and infarcted myocardial cells take up significantly less 18-F FTPP than normal healthy myocardial cells do, 18-F FTPP can distinguish ischemic and infarcted cells from those that are healthy. If approved, 18-F FTPP will represent one of the first molecular imaging blood flow agents commercialized for use in the cardiovascular segment of the PET imaging market. 18-F FTPP may also provide information on cardiac mitochondrial membrane potential, enabling global and regional assessment of the electro-physiologic integrity of the myocardium.
Currently, cardiac perfusion imaging is performed routinely with SPECT tracers such as Sestamibi, Tetrofosmin, Thallium-201 or the PET tracers Rubidium-82 and N-13 ammonia. However, the industry standard SPECT imaging has a diagnostic accuracy of approximately 75%, with research indicating that 10% of patients cleared as “normal” were subsequently found to be “abnormal” using PET imaging. The current PET tracer Rubidium-82 has experienced an FDA recall and high cost issues, while N-13 ammonia is produced in a cyclotron and must be used locally within a matter of minutes due to a very short physical half-life. The introduction of a Fluorine-labeled myocardial agent, with its longer half-life enabling the existing supply-chain potential, would be a catalyzing event toward advancing the role of PET imaging in cardiovascular disease and improving diagnostic imaging.
18-F FTPP successfully completed a Phase I clinical trial in 12 healthy volunteers with no adverse events and no clinically significant changes noted in follow-up clinical and laboratory testing. The results of the trial demonstrated the required dosimetry, safety profile and high resolution myocardial imaging pharmacokinetics to justify a controlled Phase II clinical trial. We have announced that we will begin Phase II trials at Massachusetts General Hospital to assess its efficacy in CAD subjects; and expect enrollment to commence in 2016.
CardioPET (18-F FCPHA)
Our CardioPET program employs Trans-9-[18F]-Fluoro-3, 4-Methyleneheptadecanoic Acid (18-F FCPHA) as a molecular imaging agent designed to assess myocardial blood flow and metabolism in patients with CAD, including patients unable to perform exercise cardiac stress-testing. 18-F FCPHA allows for the potential detection of ischemic (i.e. reversible and viable) and infarcted (i.e. irreversibly damaged) myocardial tissue in patients with presumptive or proven acute and chronic CAD and related cardiac diseases.
In addition, 18-F FCPHA could be useful for assessing myocardial viability for the prediction of improvement prior to and/or following revascularization in patients with acute CAD, including myocardial infarction (heart attack). 18-F FCPHA allows for the identification of compromised but viable heart tissue, which is important since revascularization in those patients with substantial viable myocardium results in improved left ventricular function and survival. Importantly, 18-F FCPHA, if approved, may have several significant advantages for assessing cardiac viability using PET, and would likely represent the first imaging agent available in the U.S. for use in patients with chronic CAD and underlying metabolic disorders. 18-F FCPHA is designed to provide the fatty-acid metabolic component for assessing myocardial metabolism and viability, which play a central role in the progression of diabetes and heart failure.
The safety and tolerability of 18-F FCPHA have been demonstrated in a Phase I trial conducted at the Massachusetts General Hospital. Enrollment in a Phase IIa trial has been completed at four sites in Belgium to assess its safety and efficacy in CAD patients. This Phase IIa study was an open label trial designed to assess the safety and diagnostic performance of 18-F FCPHA compared with standard-of-care myocardial perfusion imaging, and angiography as a gold standard of epicardial coronary artery disease. Specifically, the Phase IIa trial consisted of approximately 30 individuals with known or suspected stable chronic CAD who underwent imaging at rest and after pharmacologic and exercise stress-testing for the evaluation of suspected or proven CAD. Interim safety and imaging results were presented in February 2014, and the final safety and efficacy analysis is ongoing. The enrollment for the Phase IIa clinical trial of CardioPET was closed in December 2014.
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 Financial Accounting Standards Board (the “FASB”) issued Accounting Standards Update (“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. The Company adopted ASU 2015-03 on January 1, 2016 and applied the standard retrospectively. The adoption of ASU 2015-03 resulted in the reclassification of $78,305 and $136,260 of unamortized debt issuance costs related to the Company's Convertible Notes (see Note 4) from prepaid expenses and other current assets to convertible notes payable within the Company’s condensed consolidated balance sheets as of March 31, 2016 and December 31, 2015, respectively. Other than this reclassification, the adoption of ASU 2015-03 did not have an impact on the Company's financial statements.
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. The Company adopted this standard on January 1, 2016. The adoption of this ASU did not have a material impact on the Company’s condensed consolidated financial statements
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. The Company is currently evaluating the impact of adopting this ASU on the financial statements.
In March 2016, the FASB issued ASU No. 2016-09, “Compensation – Stock Compensation”. The areas for simplification in this update involve several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. For public entities, the amendments in this update are effective for annual periods beginning after December 15, 2016, and interim periods within those annual periods. Early adoption is permitted in any interim or annual period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity that elects early adoption must adopt all of the amendments in the same period. The Company is currently evaluating the impact of adopting this ASU on the financial statements.
Management does not expect any other recently issued, but not yet effective, accounting standards to have a material effect on its results of operations or financial condition.
Critical Accounting Policies
This summary of significant accounting policies is presented to assist in understanding our consolidated financial statements. The consolidated financial statements and notes are representations of our management, which is responsible for their integrity and objectivity. These accounting policies conform to U.S. GAAP and have been consistently applied in the preparation of the financial statements.
Intangible Assets
Our 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
We assess the impairment of its 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. We record an impairment charge if it believes an investment has experienced a decline in value that is other than temporary.
We have determined that no impairments were required as of March 31, 2016 and December 31, 2015, respectively.
Fair Value of Financial Instruments
We group our 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. Our 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.
We recognize transfers between levels at the end of the reporting period as if the transfers occurred on the last day of the reporting period.
RESULTS OF OPERATIONS
General
To date, we have not generated any revenues from operations and at March 31, 2016, we had an accumulated deficit of approximately $34.3 million, primarily as a result of research and development, or R&D, expenses and general and administrative, or G&A, expenses. While we may in the future generate revenue from a variety of sources, including license fees, research and development payments in connection with strategic partnerships and/or government grants, our product candidates are at an early stage of development and may never be successfully developed or commercialized. Accordingly, we expect to continue to incur substantial losses from operations for the foreseeable future and there can be no assurance that we will ever generate significant revenues.
R&D Expenses
Conducting R&D is central to our business. R&D expenses consist primarily of:
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license fees and annual payments related to in-licensed products and intellectual property;
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expenses incurred under agreements with clinical research organizations, investigative sites and consultants that conduct or provide other services relating to our clinical trials and a substantial portion of our preclinical activities;
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costs associated with non-clinical activities, patent filings and regulatory filings.
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We expect to continue to incur substantial expenses related to our R&D activities for the foreseeable future as we continue product development. Since product candidates in later stages of clinical development generally have higher development costs than those in earlier stages of clinical development, primarily due to the increased size and duration of later stage clinical trials, we expect that our R&D expenses will increase in the future. In addition, if our product development efforts are successful, we expect to incur substantial costs to prepare for potential commercialization of any late-stage product candidates and, in the event one or more of these product candidates receive regulatory approval, to fund the launch of the product.
G&A Expenses
G&A expenses consist principally of personnel-related costs, professional fees for legal, consulting and audit services, rent and other general operating expenses not otherwise included in R&D. We anticipate G&A expenses will increase in future periods, reflecting continued and increasing costs associated with:
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support of our expanded R&D activities;
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an expanding infrastructure and increased professional fees and other costs associated with the compliance with the Exchange Act, the Sarbanes-Oxley Act and stock exchange regulatory requirements and compliance; and
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business development and financing activities.
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Comparison of Three Months Ended March 31, 2016 and 2015
G&A expenses were $492,311 and $678,636 for the three months ended March 31, 2016 and 2015, respectively. The 27.2% decrease was due primarily to a decrease in legal costs related to litigation and financings, reduced investor relations activities, as well as a general decrease in operating expenses. We expect G&A expenses to increase going forward as we proceed to advance our product candidates through the development and regulatory process.
R&D expenses were $189,660 and $182,405 for the three months ended March 31, 2016 and 2015, respectively. We expect R&D expenses to increase in future periods as our product candidates continue through clinical trials and we seek strategic collaborations.
Other (expense) income, net was ($890,663) and $286,945 for the three months ended March 31, 2016 and 2015, respectively. For the three months ended March 31, 2016, other expense, net consisted primarily of loss on debt extinguishment of approximately $1,020,000 and a gain on revaluation and modification of the Company’s derivative liability of approximately $502,000 and interest and other expense of $400,000, which primarily related to the interest expense on convertible notes payable. In addition, for the three months ended March 31, 2016, we recorded a gain on settlements of accounts payable of approximately $21,000 and dividend income of approximately $2,500. For the three months ended March 31, 2015, other expenses consisted primarily of realized and unrealized losses on trading securities of approximately $4,000 and a gain on revaluation and modification of the Company’s derivative liability of approximately $368,000 and interest expense of $77,000, which primarily related to the issuance of convertible notes payable.
Liquidity and Capital Resources
We have experienced net losses and negative cash flows from operations since our inception. We have sustained cumulative losses attributable to common stockholders of approximately $34.3 million as of March 31, 2016. We have historically financed our operations through issuances of equity and the proceeds of debt instruments. In the past, we have also provided for our cash needs by issuing common stock, options and warrants for certain operating costs, including consulting and professional fees. During the three months ended March 31, 2016, we issued convertible promissory notes to a certain accredited investor and received gross proceeds of $150,000.
At March 31, 2016, we had cash, cash equivalents of approximately $40,000. We continue to actively pursue various funding options, including equity offerings, to obtain additional funds to continue our product development activities beyond such date. We will seek funds through equity or debt financings, collaborative or other arrangements with corporate sources, or through other sources. Adequate additional funding may not be available to us on acceptable terms or at all. If adequate funds are not available to us, we will be required to delay, curtail or eliminate one or more of our research and development programs.
During the year ended December 31, 2015, we issued convertible promissory notes to certain accredited investors and received gross proceeds of $2,980,005. In addition, during the year ended December 31, 2015, we received gross proceeds of $365,000 from the issuance of short-term notes payable and $35,970 from the sale of freely tradable securities received pursuant to the issuance and sale in a private placement of promissory notes.
Cash Flows for the Three Months Ended March 31, 2016 and 2015
Net cash used in operating activities for the three months ended March 31, 2016 was $393,815, which primarily reflected our net loss of $1,572,634 including a non-cash gain on revaluation of the derivative liability of $501,670, offset by other non-cash expenses of $1,416,749, and changes in the components of working capital of $263,740. Net cash used in operating activities for the three months ended March 31, 2015 was $390,211, which primarily reflected our net loss of $574,096, including a non-cash gain on revaluation of the derivative liability of $368,007, offset by other non-cash expenses of $146,674 and changes in the components of working capital of $405,218.
Net cash provided by investing activities was $0 for the three months ended March 31, 2016. Net cash provided by investing activities was $35,970 for the three months ended March 31, 2015, which primarily reflected the proceeds from the sale of trading securities.
For the three months ended March 31, 2016, net cash provided by financing activities was $144,140, which reflects net proceeds related to the issuance of convertible notes payable. For the three months ended March 31, 2015, net cash provided by financing activities was $188,060 which reflects net proceeds related to the issuance of notes payable.