Quarterly report pursuant to Section 13 or 15(d)

C. Stockholders' Equity

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C. Stockholders' Equity
9 Months Ended
Jun. 30, 2017
Notes to Financial Statements  
Stockholders' Equity

Preferred Stock

 

The Certificate of Incorporation of the Company authorizes the issuance of up to 10,000,000 shares of Preferred Stock, at a par value of $0.01 per share, of which 1,250,000 shares are designated Series A Convertible Preferred Stock, 1,600,000 shares are designated Series B Convertible Preferred Stock (the “Series B Stock”) and 5,000 shares are designated Series C Convertible Preferred Stock (the “Series C Stock”). The Board of Directors has the authority to issue Preferred Stock in one or more series, to fix the designation and number of shares of each such series, and to determine or change the designation, relative rights, preferences, and limitations of any series of Preferred Stock, without any further vote or action by the stockholders of the Company.

 

On June 14, 2016, 526,080 shares of Series B Stock were transferred from Elan to a third party and converted to 526,080 shares of common stock.

 

As of June 30, 2017, 4,500 shares of Series C Convertible Preferred Stock were outstanding. There are no shares of Series A and Series B Convertible Preferred Stock issued or outstanding.

 

The Series C Stock is non-voting stock. Each share of Series C Stock is convertible into 4,545 shares of our common stock except to the extent such conversion would result in such holder of Series C Stock, and its affiliates, owning in the aggregate more than 9.99% of the outstanding common stock. Dividends on the Series C Stock are due whenever dividends are due on the Company’s common stock on an as-if-converted basis, but shall be subordinate to any dividends due to holders of the Company's Series B Stock as a result of such common stock dividends. The Series C Stock shall also be junior to the Series B Stock in the event of liquidation of the Company.

 

On December 10, 2015, the Company entered into securities purchase agreements with certain accredited investors to sell and issue 4,500 preferred stock units issued to existing investors, Biotechnology Value Fund, L.P. and other affiliates of BVF Partners, L.P., for an aggregate purchase price of $4,500,000. The preferred units collectively consist of (i) 4,500 shares of Series C Stock of the Company that are collectively convertible into an aggregate of 20,454,546 shares of common stock and (ii) warrants to purchase an aggregate of 20,454,546 shares of common stock, in each case subject to adjustment. The warrants have an initial exercise price of $0.22 per share. The warrants may not be exercised until after 90 days following the date of issuance. The Series C Stock and warrants contain provisions restricting the conversion or exercise of such securities in circumstances where such event would result in the holder and its affiliates to beneficially own in excess of 9.99% of the Company’s outstanding common stock.

 

The fair value of the December 10, 2015 financing warrants issued was estimated to be $4,476,000 using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 109.74%, risk free interest rate of 1.67%, and an expected life equal to the five year contractual term. The proceeds from the December 10, 2015 financing were allocated based upon the relative fair values of the warrants and preferred shares issued in the transaction.

 

The allocation of the proceeds based on relative fair values of the instruments resulted in recognition of a discount on the Series C Preferred Stock of $2,486,000 from a beneficial conversion feature, which is being amortized from the date of issuance to the earliest redemption date of 90 days post issuance. For the nine months ended June 30, 2016 the Company recognized $2,486,000 of amortization of the discount on Series C Preferred Stock as deemed dividends charged to additional paid in capital. The value of the beneficial conversion feature is calculated as the difference between the effective conversion price of the Series C Preferred Stock and the fair market value of the common stock into which the Series C Preferred Stock are convertible at the commitment date.

 

Common Stock

 

On December 10, 2015, the Company entered into securities purchase agreements with certain accredited investors to sell and issue (i) an aggregate of 10,215,275 common units issued at a purchase price of $0.22 per unit. Each common unit consists of one share of the Company’s common stock and a five year warrant to purchase one share of the Company’s common stock, subject to adjustment. The warrants may not be exercised until after 90 days following the date of issuance. The warrants contain provisions restricting the conversion or exercise of such securities in circumstances where such event would result in the holder and its affiliates to beneficially own in excess of 9.99% of the Company’s outstanding common stock.

 

On September 29, 2015, the Company received funding in the form of convertible promissory notes (the “BVF Notes”) from Biotechnology Value Fund, L.P. and certain other affiliates of BVF Partners, L.P. The BVF Notes had an aggregate principal balance of $1,000,000, accrue interest at a rate of 6% per annum and had a scheduled maturity date of September 28, 2016. The outstanding principal and accrued interest on the BVF Notes were automatically convertible into Company equity securities, provided a qualified financing of not less than $4,000,000 occurred.

 

On December 11, 2015, following the completion of a qualified financing (consisting of the common units and preferred units involving aggregate proceeds of $6,747,000 described above and under “Preferred Stock,”) the principal and accrued interest amounts under the BVF Notes were converted into 5,414,402 shares of the Company’s common stock and warrants to purchase an additional 5,414,402 shares of the Company’s common stock at an exercise price per share of $0.22 subject to adjustment. As a result, the BVF Notes were no longer outstanding as of that date.

 

Net cash proceeds from the December 10, 2015 financing, after deducting for $577,000 of expenses, were approximately $6,170,000. The Company also incurred non-cash expenses in the form of 1,214,027 warrants issued to the placement agents with an estimated fair value of $266,000, at similar terms as the financing warrants, for services provided. These warrants were recorded to additional paid in capital as a direct cost of the financing. The Company issued a total of 37,298,250 warrants in connection with the December 10, 2015 financing.

 

The fair value of the December 10, 2015 financing warrants and December 11, 2015 warrants issued for conversion of the BVF notes was estimated to be $3,420,000 using the Black-Scholes option pricing model with the following assumptions: dividend yield of 0%, expected volatility of 109.74%, risk free interest rate of 1.67%, and an expected life equal to the five year contractual term. The proceeds from the December 10, 2015 financing and December 11, 2015 conversion of the BVF Notes were allocated based upon the relative fair values of the warrants and common shares issued in the transactions.

 

Dividends

 

The Company has never paid a cash dividend on its common stock and does not anticipate paying cash dividends on its common stock in the foreseeable future. If the Company pays a cash dividend on its common stock, it also must pay the same dividend on an as converted basis on its outstanding Series C Stock.

 

Warrants

 

As of June 30, 2017, warrants to purchase an aggregate of 50,935,250 shares of common stock were outstanding with a weighted average exercise price of $0.23 per share. Details of the warrants for common stock outstanding at June 30, 2017 are as follows:

 

  Number of Shares     Exercise Price   Expiration Date
    140,000     $ 0.35   October 2017
    12,205,000     $ 0.25   February 2018
    1,242,000     $ 0.25   March 2018
    50,000     $ 0.49   January 2020
    37,298,250     $ 0.22   December 2020
    50,935,250            

 

Below is a summary of warrant activity (“common and preferred”) for the nine months ended June 30, 2017:

 

          Weighted Average        
    Number of Shares     Exercise Price    

Remaining

Contractual

Term (in years)

   

Aggregate Intrinsic

Value

 
Outstanding at 9/30/2016     52,947,877     $ 0.23       2.2     $ -  
    Granted     -     $ -       -     $ -  
    Exercised     -     $ -       -     $ -  
    Expired or Canceled     (2,012,627 )   $ 0.38       -     $ -  
    Forfeited     -     $ -       -     $ -  
    Vested     -     $ -       -     $ -  
Outstanding at 6/30/2017     50,935,250     $ 0.23       2.7     $ -  

 

Below is a summary of warrant activity (“common and preferred”) for the nine months ended June 30, 2016:

 

          Weighted Average        
    Number of Shares     Exercise Price    

Remaining Contractual

Term (in years)

   

Aggregate Intrinsic

Value

 
Outstanding at 9/30/2015     16,845,664     $ 0.27       2.2     $ 206,626  
    Granted     37,298,250     $ 0.22       -     $ 1,864,913  
    Exercised     -     $ -       -     $ -  
    Expired or Canceled     (1,196,037 )   $ 0.34       -     $ 156,000  
    Forfeited     -     $ -       -     $ -  
    Vested     -     $ -       -     $ -  
Outstanding at 6/30/2016     52,947,877     $ 0.23       3.3     $ -