The following excerpt is from the company's
SEC filing.
Item 1. Financial Statements - Unaudited
Item 2. Management’s Discussion and Analysis of Financial
Condition and Results of Operations
Item 3. Quantitative and Qualitative Disclosures about Market
Risk
Item 4. Controls and Procedures
PART II - OTHER INFORMATION
Item 1. Legal Proceedings
Item 1A. Risk Factors
Item 2. Unregistered Sales of Equity Securities and Use of
Proceeds
Item 3. Defaults Upon Senior Securities
Item 4. Mine Safety Disclosures
Item 5. Other Information
Item 6. Exhibits
PART I - FINANCIAL INFORMATIO N
Item 1. Financial Statements
DARA BIOSCIENCES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(UNAUDITED)
September 30,
December 31,
Assets
Current assets:
Cash and cash equivalents
4,658,815
12,026,612
Accounts receivable, net
1,150,631
1,354,880
Inventory, net
266,955
265,280
Prepaid expenses and other assets, current portion
148,282
126,994
Total current assets
6,224,683
13,773,766
Furniture, fixtures and equipment, net
25,776
35,597
Restricted cash
12,893
12,888
Intangible assets, net
2,598,364
3,109,034
Goodwill
821,210
Total assets
9,682,926
17,752,495
Liabilities and stockholders’ equity
Current liabilities:
Accounts payable
891,680
483,244
Accrued liabilities
1,084,517
669,863
Accrued compensation
1,082,977
1,153,109
License milestone liability
1,231,559
Other financing agreements
52,276
Deferred revenue and other reserves
320,264
200,161
Capital lease obligation, current portion
Total current liabilities
3,439,919
3,745,278
Deferred lease obligation
56,823
68,869
Capital lease obligation, net of current portion
15,950
22,217
Total liabilities
3,512,692
3,836,364
Stockholders’ equity:
Preferred stock, $0.01 par value, 1,000,000 shares authorized at
September 30, 2015
Series A Preferred stock, 4,800 shares designated,
468 shares issued and outstanding at September 30, 2015, and
December 31, 2014.
Series B2 Preferred stock, 15,000 shares designated,
50 shares issued and outstanding at September 30, 2015 and
December 31, 2014.
Series C1 Preferred stock, 12,500 shares designated,
117 shares issued and outanding at September 30, 2015 and
December 31, 2014.
Common stock, $0.01 par value, 75,000,000 shares authorized,
19,755,595 shares issued and outstanding at September 30, 2015
and December 31, 2014.
197,556
Additional paid-in capital
80,499,326
79,712,290
Accumulated deficit
(74,526,655
(65,993,722
Total stockholders' equity
6,170,234
13,916,131
Total liabilities and stockholders’ equity
The accompanying notes are an integral part of these
consolidated financial statements.
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
Three months ended September 30,
Nine months ended September 30,
Net revenues
1,181,060
597,777
2,824,041
1,168,673
Operating expenses:
Cost of Sales
241,284
125,864
650,805
270,384
Sales and marketing
1,563,746
1,099,931
4,686,377
3,702,433
Research and development
336,950
383,159
1,070,430
1,062,339
General and administrative
1,563,307
1,004,081
4,410,226
3,364,368
Depreciation and amortization of intangibles
173,419
159,790
521,729
477,820
Total operating expenses
3,878,706
2,772,825
11,339,567
8,877,344
Loss from operations
(2,697,646
(2,175,048
(8,515,526
(7,708,671
Other income (expense):
Other income, net
228,375
Interest expense, net
(15,654
(17,407
(49,655
178,720
Net loss before income tax expense
(2,697,781
(2,190,702
(8,532,933
(7,529,951
Income tax benefit (expense)
Consolidated net loss
Loss attributable to noncontrolling interest
80,234
178,341
Loss attributable to controlling interest
(2,110,468
(7,351,610
Basic and diluted net loss per common share
attributable to controlling interest
Shares used in computing basic and diluted net loss per
19,461,538
12,512,866
CONSOLIDATED STATEMENT OF STOCKHOLDERS’ EQUITY
Nine Months ended September 30, 2015
Series A
Series B-2
Series C-1
Convertible
Paid-In
Preferred Stock
Common Stock
Deficit
Amount
Balance at December 31, 2014
Share-based compensation
787,036
Balance at September 30, 2015
CONSOLIDATED STATEMENTS OF CASH FLOWS
Operating activities
Adjustments to reconcile net loss to net cash used in
operating activities:
477,821
Inventory writedown
50,061
Accretion of debt discount and other
18,441
51,355
648,538
(12,046
Changes in operating assets and liabilities:
204,249
(288,683
(51,736
(137,968
151,484
180,743
Accounts payable and accrued liabilities
(376,939
544,918
Net cash used in operating activities
(7,240,654
(6,053,774
Investing activities
Purchases of furniture, fixtures and equipment
(1,238
(2,134
Net cash used in investing activities
Financing activities
Repayments of capital lease obligation
(5,404
(3,482
Repayments on other financing
(120,496
(141,398
Net proceeds from issuance of preferred stock and common
stock
16,777,425
Change in restricted cash
Net cash (used in) provided by financing activities
(125,905
16,632,540
Net (decrease) increase in cash and cash equivalents
(7,367,797
10,576,632
Cash and cash equivalents at beginning of period
3,425,543
Cash and cash equivalents at end of period
14,002,175
Supplemental disclosure of non-cash financing activity
Shares issued to third party for services
30,939
Equipment purchased through financing
14,755
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Basis of Presentation
The Company
DARA BioSciences, Inc. (the
Company”)
headquartered in Raleigh, North Carolina is a specialty
pharmaceutical company focused on the commercialization of oncology
treatment and oncology supportive care products
Through its acquisition of Oncogenerix, Inc., which occurred on
January 17, 2012, the Company acquired exclusive U.S. marketing
rights to its
first commercial, FDA-approved proprietary product license
Soltamox® (tamoxifen citrate) oral solution (“Soltamox”).
Soltamox has been approved by the U.S. Food and Drug
Administration (“FDA”) for the prevention and treatment of breast
cancer. On September 7, 2012 the Company entered into a license
agreement with Helsinn Healthcare SA (“Helsinn”) to distribute,
promote, market and sell Gelclair® (“Gelclair”), an FDA-cleared
unique oral gel whose key ingredients are polyvinylpyrrolidone
(PVP) and sodium hyaluronate (hyaluronic acid) for the treatment of
certain approved indications in the United States, including the
management of pain due to oral mucositis. On March 9, 2015, the
Company entered into a commercialization agreement with Onxeo SA
(“Onxeo”), giving the Company the exclusive, sublicensable rights
to distribute, promote, market and sell Oravig® (“Oravig”) in the
United States as well as the right to seek regulatory approval for
Oravig in Canada. Oravig is the first and only orally-dissolving
buccal tablet approved for oral thrush. The Company recently
launched Oravig at the beginning of October 2015.
Alamo Pharma Services (“Alamo”) provides the Company with a
dedicated national sales team of 20 sales representatives to
promote its commercial products (the “Sales Team”), as well as the
initiation, beginning in the quarter ended September 30, 2015, of a
tele sales effort to reach high volume prescribing oncologists in
“white space” areas. Pursuant to an agreement, exclusive to the
oncology market, with Mission Pharmacal (“Mission”), Alamo’s parent
company, Mission shares in the costs and expenses of the Sales
Team. The Sales Team promotes the Company’s products Soltamox and
Gelclair and, since its launch in early October 2015, is now
promoting Oravig. The Sales Team also promotes two Mission
products: Ferralet® 90, and Aquoral®. The Company’s agreements with
Alamo and Mission expand the Company’s presence in oncology
supportive care and the Mission products complement its portfolio
in presenting comprehensive offerings to the oncologist. The
Company believes its engagement of the 20-person Sales Team helps
us increase the Company’s revenues and its product portfolio’s
market acceptance. In March 2015, the Company entered into a
co-promotion agreement with Mission for Mission to exclusively
promote Oravig in the primary care market. Since the launch of
Oravig in early October, 2015 Mission is utilizing their primary
care sales force to promote the product within that market segment.
In consideration for receiving the exclusive rights to Oravig, the
Company will make certain milestone payments at defined sales
thresholds.
The Company has a clinical development asset, KRN5500, which is
a Phase 2 investigational product targeted for treating patients
with painful treatment-refractory chronic chemotherapy induced
peripheral neuropathy (“CCIPN”). In July of 2004, the Company
obtained an exclusive worldwide license (excluding Australia, New
Zealand and Asia) to compounds from Kirin Brewery Co., Ltd. (now
Kyowa Hakko Kirin Co., Ltd.) of Japan for the treatment of pain and
central and peripheral nervous system conditions or diseases. In
May of 2004, the Company also entered into an exclusive worldwide
license with Massachusetts General Hospital related to the use of
certain spicamycin derivatives for use in treating pain.
KRN5500 was designated a Fast Track Drug by the FDA in 2011.
Fast Track designation is intended to facilitate the development
and expedite review of drugs and biologics intended to treat
serious or life-threatening conditions and for those products that
demonstrate the potential to address unmet medical needs. On
February 21, 2014 the FDA granted Orphan Drug Designation to
KRN5500 for the parenteral treatment of painful CCIPN that is
refractory to conventional analgesics. On June 16, 2014 the FDA
granted Orphan Drug Designation to KRN5500 for treatment of
multiple myeloma. Upon receipt of FDA approval, orphan drug
designation provides extended market exclusivity, tax benefits, and
the waiver of certain fees associated with the FDA approval
process. On July 14, 2015 the Company was awarded a patent from the
US Patent and Trademark Office for a modified formulation of
KRN5500 that the Company anticipates may allow a simplified dosing
regimen. On July 9, 2015 the FDA provided formal agreement with the
Company’s proposed development plan, including design of the Phase
2b dose-escalation strategy in patients with a history of cancer
with CCIPN. The FDA also indicated agreement with proposed bridging
studies for the new KRN5500 formulation. The Company is evaluating
options to support further development of KRN5500.
The Company launched Soltamox in the U.S. in late 2012 and
subsequently launched its second product, Gelclair in the second
quarter of 2013. As of October of this year, the Company has
launched its third product, Oravig. In the near-term, the Company’s
ability to generate revenues is substantially dependent upon sales
of Gelclair, Oravig and Soltamox in the U.S. The Company completed
financings in February 2014 and June 2014, raising approximately
$5.5 million and $11.3 million, respectively, in net proceeds
through the issuance of preferred stock and warrants. See Note
3.
On June 3, 2015, the Company entered into an Agreement and Plan
of Merger (the “Merger Agreement”) with Midatech Pharma PLC, a
public limited company organized under the laws of England and
Wales (“Midatech”), Merlin Acquisition Sub, Inc., a Delaware
corporation and wholly owned subsidiary of Midatech (the “Merger
Sub”), Duke Acquisition Sub, Inc., a Delaware corporation and
wholly owned subsidiary of Midatech (the “Secondary Merger Sub”)
and Shareholder Representative Services, LLC, a Colorado limited
liability company, solely as a representative of the stockholders
of the Company (the “Stockholder Representative”), pursuant to
which (i) Merger Sub will merge with and into the Company (the
“Merger”), with the Company surviving the Merger (the “Surviving
Corporation”) as the wholly owned subsidiary of Midatech and (ii)
immediately following the Merger, Midatech will cause the Surviving
Corporation to merge with and into Secondary Merger Sub (the
“Secondary Merger”), with Secondary Merger Sub surviving the
Secondary Merger as the wholly owned subsidiary of Midatech.
Pursuant to the terms and subject to the conditions of the
Merger Agreement, at the effective time of the Merger, each share
of common stock, par value $0.01 per share, of the Company (other
than (i) any share of common stock that is outstanding immediately
prior to the effective time of the Merger and that is held by a
stockholder of the Company who has perfected and not withdrawn a
demand for, or lost their right to, appraisal with respect to such
shares (the “Dissenting Shares”), (ii) any shares held by the
Company as treasury stock, (iii) any shares authorized but unissued
or (iv) shares of common stock held by Midatech, Merger Sub or any
wholly owned subsidiary of Midatech or of the Company) will be
converted into rights to receive, without interest, (i) 0.272
ordinary shares (the “Midatech Ordinary Shares”) of Midatech (the
“Per Share Stock Consideration”) plus (ii) one contingent value
right (“CVR”), which represents the right to receive contingent
payments if specified milestones are achieved within agreed time
periods, subject to and in accordance with the terms and conditions
of the Contingent Value Rights Agreement (as described below). All
Midatech Ordinary Shares will be delivered to the holders of common
stock in the form of American Depositary Receipts, each
representing the right to receive such number of Midatech Ordinary
Shares as Midatech may determine to be the optimum number of shares
(the “Midatech Depositary Shares”).
The Merger Agreement includes a collar provision under which the
initial exchange ratio of 0.272 is subject to adjustment in the
event the Exchange Ratio Market Value (as defined in the Merger
Agreement) determined one business day prior to closing is less
than $1.08 or greater than $1.32 (the “Exchange Ratio”). In such
event, the Exchange Ratio shall be determined as follows: (1) if
the Exchange Ratio Market Value is an amount less than $1.08, then
the Exchange Ratio shall be equal to the quotient obtained by
dividing $1.08 by the Exchange Ratio Market Value (subject to a
maximum Exchange Ratio of 0.306); and (2) if the Exchange Ratio
Market Value is an amount greater than $1.32, then the Exchange
Ratio shall be equal to the quotient obtained by dividing $1.32 by
the Exchange Ratio Market Value (subject to a minimum Exchange
Ratio of 0.249).
In lieu of receiving any fractional shares of Midatech
Depositary Shares, holders of common stock will receive from
Midatech an amount of cash, without interest, less the amount of
any withholding taxes, equal to the product of (i) such fraction,
multiplied by (ii) the U.S. Dollar equivalent of the closing price
of Midatech Ordinary Shares underlying Midatech Depositary Shares
on the Alternative Investment Market of the London Stock Exchange
on the last trading day preceding the Closing Date (as defined in
the Merger Agreement).
The Per Share Stock Consideration and one CVR, together with any
cash to be paid in lieu of fractional shares of Midatech Depositary
Shares to be paid, are collectively referred to herein as the “Per
Share Merger Consideration.”
Additionally, under the terms and subject to the conditions of
the Merger Agreement, at the effective time of the Merger, each
share of issued and outstanding Series A Convertible Preferred
Stock, Series B-2 Convertible Preferred Stock and Series C-1
Convertible Preferred Stock, other than Dissenting Shares, will be
converted into the right to receive, without interest, $1,000 in
cash.
Each outstanding and unexercised warrant to purchase shares of
common stock (the “Warrant”) as of immediately prior to the
effective time of the Merger will be assumed or substituted by
Midatech in accordance with the terms of such Warrant and, as of
the effective time of the Merger, (i) will be exercisable for (A)
the number of whole shares of Midatech Ordinary Shares equal to the
product of the number of shares of common stock that were issuable
upon exercise of such Warrant immediately prior to the effective
time of the Merger multiplied by the Exchange Ratio, rounded down
to the nearest whole number of shares of Midatech Ordinary Shares
and (B) one CVR multiplied by the total number of shares of common
stock that were issuable upon exercise of such Warrants immediately
prior to the effective time of the Merger, and (ii) the per share
exercise price for each share of Midatech Ordinary Shares issuable
upon exercise of Warrants so converted will be equal to the
quotient determined by dividing the exercise price per share of
common stock at which such Warrant was exercisable immediately
prior to the effective time of the Merger by the Exchange Ratio,
rounded up to the nearest whole cent. All Midatech Ordinary Shares
delivered to the holders of Warrants will be delivered in the
appropriate amount of Midatech Depositary Shares.
On February 10, 2014, the Company effected a one-for-five
reverse split of its outstanding common stock pursuant to an
amendment to the Company’s certificate of incorporation. As a
result of the reverse stock split, each share of the Company’s
common stock outstanding as of 9:00 a.m. on February 10, 2014 was
automatically reclassified into one-fifth of a share of common
stock. No fractional shares were issued as a result of the reverse
split. Holders of common stock who would have otherwise received
fractional shares of the Company’s common stock pursuant to the
reverse split received cash in lieu of the fractional share. The
reverse split reduced the total number of shares of the Company’s
common stock outstanding from approximately 31.0 million shares to
approximately 6.2 million shares. In addition, the number of shares
of common stock subject to outstanding options, restricted stock
units and warrants issued by the Company and the number of shares
reserved for future issuance under the Company’s stock plans were
reduced by a factor of five to proportionately reflect the reverse
split. The reverse split was accounted for retroactively and is
reflected in our common stock, warrant, stock option and restricted
stock activity as of and for the year ended December 31, 2014 and
the periods ended September 30, 2015 and 2014. Unless stated
otherwise, all share data in this Quarterly Report on Form 10-Q has
been adjusted, as appropriate, to reflect the reverse split.
The Company’s business is subject to significant risks
consistent with specialty pharmaceutical and biotechnology
companies that develop/distribute products for human therapeutic
use. These risks include, but are not limited to, potential product
liability, uncertainties regarding research and development,
including in connection with any development partner, access to
capital, obtaining and enforcing patents and/or licenses, receiving
any required regulatory approval and the current regulatory
environment in which we sell our products, and competition with
other biotechnology and pharmaceutical companies.
Based on the Company’s current operating plan, the Company
believes that its existing cash, cash equivalents and marketable
securities provide for sufficient resources to fund its currently
planned operations into the first quarter of 2016. If the Company
incurs unanticipated expenses, its capital resources may be
expended more rapidly than is currently expected. The continued
losses and lack of capital raise substantial doubt about the
Company’s ability to continue independently as a going concern.
Should the Merger not occur, management will review alternatives to
source adequate financing to continue its business. If adequate
financing is not available on acceptable terms, if at all, the
Company may be forced to seek bankruptcy protection.
Unaudited Interim Financial Statements
The accompanying unaudited interim financial statements have
been prepared in accordance with U.S. generally accepted accounting
principles (“GAAP”) and applicable Securities and Exchange
Commission (“SEC”) regulations for interim financial information.
These financial statements are unaudited and, in the opinion of
management, include all adjustments (consisting of normal recurring
accruals) necessary to present fairly the consolidated balance
sheets, consolidated statements of operations, consolidated
statements of cash flows, and consolidated statement of
stockholders’ equity for the periods presented in accordance with
GAAP. Operating results for the interim periods presented are not
necessarily indicative of the results that may be expected for the
year ending December 31, 2015.
Certain information and footnote disclosures normally included
in financial statements prepared in accordance with GAAP have been
condensed or omitted pursuant to SEC rules and regulations.
The consolidated balance sheet at December 31, 2014 has been
derived from the audited financial statements at that date but does
not include all of the information and footnotes required by
generally accepted accounting principles for complete financial
statements.
For further information refer to the consolidated financial
statements and footnotes thereto included in the Company’s annual
report on Form 10-K for the year ended December 31, 2014.
References to “we”, “us”, “our”, or the “Company” refer to DARA
BioSciences, Inc.
Recent Accounting Pronouncements
There have been no recent accounting pronouncements that have
significance, or potential significance, to our consolidated
financial statements.
Recent Accounting Pronouncements Not Yet Effective
In May 2014, the Financial Accounting Standards Board (“FASB”)
issued Accounting Standards Update (“ASU”) 2014-09, "Revenue from
Contracts with Customers (Topic 606)." ASU 2014-09 completes the
joint effort by the FASB and International Accounting Standards
Board (“IASB”) to improve financial reporting by creating common
revenue recognition guidance for U.S. GAAP and International
Financial Reporting Standards (“IFRS”). ASU 2014-09 applies to all
companies that enter into contracts with customers to transfer
goods or services. ASU 2014-09 is effective for public entities for
interim and annual reporting periods beginning after December 15,
2016. Early application is not permitted and entities have the
choice to apply ASU 2014-09 either retrospectively to each
reporting period presented or by recognizing the cumulative effect
of applying ASU 2014-09 at the date of initial application and not
adjusting comparative information. The Company is currently
evaluating the requirements of ASU 2014-09 and has not yet
determined its impact on the Company's consolidated financial
statements.
In August 2014, the FASB issued ASU No. 2014-15, “Presentation
of Financial Statements - Going Concern (Subtopic 205-40):
Disclosure of Uncertainties about an Entity’s Ability to Continue
as a Going Concern”, which defines management’s responsibility to
evaluate, at each annual and interim reporting period, whether
there are conditions or events that raise substantial doubt about
an entity’s ability to continue as a going concern within one year
after the date the financial statements are issued and to provide
related footnote disclosures in certain circumstances. In
connection with each annual and interim period, management must
assess if there is substantial doubt about the company’s ability to
continue as a going concern within one year after the issuance
date. Disclosures are required if conditions give rise to
substantial doubt. This standard is effective for all companies in
the first annual period ending after December 15, 2016, and interim
periods thereafter, with early adoption permitted. The Company does
not expect this ASU will have a material impact on its consolidated
financial statements.
2. Summary of Significant Accounting Policies
Principles of Consolidation
During 2014, the Company merged DARA Pharmaceuticals, Inc. into
DARA BioSciences, Inc. and dissolved Oncogenerix, Inc. The Company
reacquired the remaining 25% minority interest in DARA Therapeutics
held by Massachusetts General Hospital (“MGH”). Accordingly, the
2015 and 2014 consolidated financial statements include the
accounts of DARA BioSciences, Inc. and its wholly-owned subsidiary,
DARA Therapeutics, Inc. The Company has control of all
subsidiaries, and as such, they are all consolidated in the
presentation of the consolidated financial statements. All
significant intercompany transactions have been eliminated in the
consolidation.
Use of Estimates
The preparation of financial statements in conformity with GAAP
requires management to make estimates and assumptions that affect
the amounts reported in the financial statements and accompanying
notes. Actual amounts could differ from those estimates.
Cash and Cash Equivalents
The Company considers all highly liquid investments with a
maturity of three months or less when purchased to be cash
equivalents. The carrying amounts reported in the consolidated
balance sheets for cash and cash equivalents approximate their fair
value.
Fair Value Measures
The Company utilizes FASB ASC 820,
Fair Value Measurements and Disclosures,
to value its financial assets and liabilities. FASB ASC 820’s
valuation techniques are based on observable and unobservable
inputs. Observable inputs reflect readily
obtainable data from independent sources, while unobservable
inputs reflect our market assumptions. FASB ASC 820 classifies
these inputs into the following hierarchy:
Level 1 Inputs – Quoted prices for identical instruments in
active markets.
Level 2 Inputs – Quoted prices for similar instruments in active
markets; quoted prices for identical or similar instruments in
markets that are not active; and model-derived valuations whose
inputs are observable or whose significant value drivers are
observable.
Level 3 Inputs – Instruments with primarily unobservable value
drivers.
In determining fair value, the Company utilizes techniques to
optimize the use of observable inputs, when available, and minimize
the use of unobservable inputs to the extent possible.
Concentration of Credit Risk
Financial instruments that potentially subject the Company to
concentrations of credit risk consist primarily of cash and cash
equivalents and marketable securities. The Company maintains cash
deposits with a federally insured bank that may at times exceed
federally insured limits. The majority of funds in excess of the
federally insured limits are held in sweep investment accounts
collateralized by the securities in which the funds are invested.
As of September 30, 2015 and December 31, 2014, the Company had
bank balances of $4,449,689 and $11,811,816, respectively, in
excess of federally insured limits of $250,000 held in
non-investment accounts. In addition, our top four customers,
Lindencare, Cardinal Health, McKesson Corporation, and Amerisource
Bergen Corporation collectively represented 100% and 99.9% of our
gross trade accounts receivable as of September 30, 2015 and
December 31, 2014, respectively.
Accounts Receivable
Accounts receivable at December 31, 2014 includes trade accounts
receivable and a receivable from the FDA of approximately $619,000
to be refunded to the Company due to a reduction in Prescription
Drug User Fee Act (“PDUFA”) fees resulting from a waiver granted by
the FDA in 2014. The refund from the FDA was received in the first
quarter of 2015.
Inventories
Inventories at September 30, 2015 and December 31, 2014 were
$266,955 and $265,280, respectively and consisted of finished
goods. The Company states finished goods inventories at the lower
of cost (which approximates actual cost on a first-in, first-out
cost method) or market value. In evaluating whether inventories are
stated at the lower of cost or market, management considers such
factors as the amount of inventory on hand and in the distribution
channel, estimated time required to sell such inventory, remaining
shelf life, and current and expected market conditions, including
levels of competition. Inventory adjustments are measured as the
difference between the cost of the inventory and estimated market
value based upon assumptions about future demand and charged to the
provision for inventory, which is a component of cost of sales. At
the point of the loss recognition, a new, lower-cost basis for that
inventory is established, and any subsequent improvements in facts
and circumstances do not result in the restoration or increase in
that newly established cost basis. During the nine months ended
September 30, 2015, the Company recorded an inventory write down of
approximately $50,000 associated with inventory still in its
warehouse that is approaching product expiration.
Furniture, Fixtures and Equipment
Furniture, fixtures and equipment are recorded at cost and
depreciated over the estimated useful lives of the assets (three to
five years) using the straight-line method.
Sales and Marketing Costs
Sales and marketing costs consist of salaries, commissions, and
benefits to sales and marketing personnel, sales personnel travel
and operating costs, contract sales force costs including
pass-throughs, marketing programs, administration costs and
advertising costs.
Research and Development Costs
The Company expenses research and development costs as incurred.
Research and development costs include personnel and personnel
related costs, formulation and API manufacturing costs, process
development, research costs, patent costs, pharmacovigilance costs,
PDUFA fees, regulatory costs and other consulting and professional
services.
Goodwill and Intangible Assets
Acquired businesses are accounted for using the acquisition
method of accounting, which requires that assets acquired,
including identifiable intangible assets, and liabilities assumed
be recorded at fair value, with limited exceptions. Any excess of
the purchase price over the fair value of the net assets acquired
is recorded as goodwill. If the acquired net assets do not
constitute a business, the transaction is accounted for as an asset
acquisition and no goodwill is recognized. Other purchases of
intangible assets, including product rights, are recorded at
cost.
Product rights are amortized over the estimated useful life of
the product or the license agreement term on a straight-line or
other basis to match the economic benefit received. Amortization
begins once product rights are secured. The Company evaluates its
product rights on an ongoing basis to determine whether a revision
to their useful lives should be made. This evaluation is based on
its projection of the future cash flows associated with the
products. As of September 30, 2015 and December 31, 2014, the
Company had an aggregate of $2.6 million and $3.1 million,
respectively, in capitalized product rights, which it expects to
amortize over remaining periods of approximately 2.8 to 7.0
years.
Goodwill is reviewed for impairment on an annual basis or more
frequently if events or circumstances indicate potential
impairment. The Company’s goodwill evaluation is based on both
qualitative and quantitative assessments regarding the fair value
of goodwill relative to its carrying value. The Company assesses
qualitative factors to determine if its sole reporting unit’s fair
value is more likely than not to exceed its carrying value,
including goodwill. In the event the Company determines that it is
more likely than not that its reporting unit’s fair value is less
than its carrying amount, quantitative testing is performed
comparing recorded values to estimated fair values. If the fair
value exceeds the carrying value, goodwill is not impaired. If the
carrying value exceeds the fair value, an impairment charge is
recognized through a charge to operations based upon the excess of
the carrying value of goodwill over the implied fair value. There
was no impairment to goodwill recognized during the three and nine
months ended September 30, 2015.
Under the terms of the original license agreement for Soltamox,
the Company was required to meet minimum sales requirements during
the license agreement’s term. However, as of October 1, 2015, the
Company and Rosemont amended the original agreement with new terms
that will be applicable for the duration of the agreement. Pursuant
to these terms, the minimum sales requirements have been deleted
and the Company will instead guarantee Rosemont an annual minimum
payment, which payment includes a minimum purchase of Soltamox
finished goods inventory that the Company believes should be
sufficient for its annual inventory needs. In addition, during the
final year of the initial term of the agreement, the Company has
agreed to pay Rosemont an additional royalty on gross margin for
units sold above a specified threshold. The initial term is
expected to end on June 29, 2018.
The Company evaluates the recoverability of its intangible
assets subject to amortization and other long-lived assets whenever
events or changes in circumstances suggest that the carrying value
of the asset or group of assets is not recoverable. The Company
measures the recoverability of assets by comparing the carrying
amount to future undiscounted net cash flows expected to be
generated by the asset. If such assets are considered to be
impaired, the impairment charge equals the amount by which the
carrying amount of the assets exceeds the fair value. Any
write-downs are recorded as permanent reductions in the carrying
amount of the assets. There was no impairment to intangible assets
recognized during the three and nine months ended September 30,
2015.
Revenue Recognition
The Company recognizes revenue when there is persuasive evidence
that an arrangement exists, title has passed, collection is
reasonably assured and the price is fixed or determinable The
Company sells Soltamox mostly to wholesalers who, in-turn, sell the
product to hospitals and other end-user customers. Sales to
wholesalers provide for selling prices that are fixed on the date
of sale, although the Company offers certain discounts to group
purchasing organizations and governmental programs. The wholesalers
take title to the product, bear the risk of loss of ownership, and
have economic substance to the inventory.
The Company allows for product to be returned beginning prior to
and following product expiration. During the quarter ended June 30,
2015, the Company determined that its wholesalers’ inventories had
been reduced to normalized amounts and that it now had sufficient
experience with Soltamox and the related wholesaler distribution
channel to reasonably estimate product returns from its wholesalers
while the wholesalers are still holding inventory. Therefore,
effective June 30, 2015, the Company no longer defers the
recognition of Soltamox revenue with the exception of one
wholesaler for whom the Company will continue to defer revenue
recognition until it has obtained sufficient sales history to
reasonably estimate that wholesalers’ returns and until that
wholesaler’s inventory levels are reduced to normalized amounts.
Shipments of Soltamox that are not recognized as revenue are
treated as deferred revenue until evidence exists to confirm that
pull through sales to retail and specialty pharmacies or other
end-user customers have occurred. Soltamox revenue is recognized
from products sales directly to hospitals, clinics, pharmacies and
other end-user customers at the time of direct shipment. Revenue
from Gelclair sales is recognized when the merchandise is shipped
to both wholesalers and direct sales to hospitals, clinics,
pharmacies and other end-user customers as the Company believes it
has achieved normalized inventory levels for Gelclair.
The Company recognizes sales allowances as a reduction of
revenues in the same period the related revenue is recognized.
Sales allowances are based on amounts owed or to be claimed on the
related sales. These estimates take into consideration the terms of
the Company’s agreements with wholesale distributors and the levels
of inventory within the distribution channels that may result in
future discounts taken. The Company must make significant judgments
in determining these allowances. If actual results differ from the
Company’s estimates, the Company will be required to make
adjustments to these allowances in the future, which could have an
effect on revenue in the period of adjustment. The following
briefly describes the nature of each provision and how such
provisions are estimated:
Payment discounts are reductions to invoiced amounts offered to
customers for payment within a specified period and are estimated
upon shipment utilizing historical customer payment experience.
The returns provision is based on management's return experience
for similar products and is booked as a percentage of product sales
recognized during the period. These recognized sales include
shipments that have occurred out of wholesalers as well as direct
shipments made by the Company to other third party purchasers. As
the Company gains greater experience with actual returns related to
its specific products the returns provisions and related reserves
will be adjusted accordingly. The returns reserve is recorded as a
reduction of revenue in the same period the related product sales
revenue is recognized and is included in accrued expenses.
Generally, credits may be issued to wholesalers for decreases
that are made to selling prices for the value of inventory that is
owned by the wholesaler at the date of the price reduction. Price
adjustment credits are estimated at the time the price reduction
occurs and the amount is calculated based on the level of the
wholesaler inventory at the time of the reduction.
There are arrangements with certain parties establishing prices
for products for which the parties independently select a
wholesaler from which to purchase. Such parties are referred to as
indirect customers. A chargeback represents the difference between
the sales invoice price to the wholesaler and the indirect
customer's contract price, which is lower. Provisions for
estimating chargebacks are calculated primarily using historical
chargeback experience, contract pricing and sales information
provided by wholesalers and chains, among other factors. The
Company recognizes chargebacks in the same period the related
revenue is recognized.
Share-Based Compensation Valuation and Expense
Share-based compensation for stock and stock-based awards issued
to employees and non-employee directors, is accounted for using the
fair value method prescribed by FASB ASC 718,
Stock Compensation,
and, is recorded as a compensation charge based on the fair
value of the award on the date of grant. Share based compensation
for stock and stock-based awards issued to non-employees in which
services are performed in exchange for the Company’s common stock
or other equity instruments is accounted for using the fair value
method prescribed by FASB ASC 505-50,
Equity-Based Payment to Non-Employees,
and is recorded on the basis of the fair value of the service
received or the fair value of the equity instruments issued,
whichever is more readily measurable at the date of issuance. See
Note 4 for further information.
Income Taxes
The Company uses the liability method in accounting for income
taxes as required by FASB ASC 740,
Income Taxes.
Under this method, deferred tax assets and liabilities are
recognized for operating loss and tax credit carry forwards and for
the future tax consequences attributable to the differences between
the financial statement carrying amounts of existing assets
and liabilities and their 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 recovered or settled. The
effect on deferred tax assets and liabilities of a change in tax
rates is recognized in the results of operations in the period that
includes the enactment date. A valuation allowance is recorded to
reduce the carrying amounts of deferred tax assets unless it is
more likely than not that such assets will be realized. At
September 30, 2015 and December 31, 2014 a valuation allowance has
been recorded to reduce the net deferred tax asset to zero.
The Company's policy for recording interest and penalties is to
record them as a component of interest income (expense), net.
Net Loss Per Common Share
The Company calculates its basic loss per share in accordance
with FASB ASC 260,
Earnings Per Share
, by dividing the earnings or loss applicable to common
stockholders by the weighted-average number of common shares
outstanding for the period less the weighted average unvested
common shares subject to forfeiture and without consideration for
common stock equivalents. Diluted loss per share is computed by
dividing the loss applicable to common stockholders by the
weighted-average number of common share equivalents outstanding for
the period less the weighted average unvested common shares subject
to forfeiture and dilutive common stock equivalents for the period
determined using the treasury-stock method. For purposes of this
calculation, in-the-money options and warrants to purchase common
stock and convertible preferred stock are considered to be common
stock equivalents but are not included in the calculation of
diluted net loss per share for the three and nine month periods
ended September 30, 2015 and 2014 as their effect is anti-dilutive.
For the three and nine month periods ended September 30, 2015 the
following in-the-money common stock equivalents have been excluded
from the calculation because their inclusion would be
anti-dilutive: 1,580,956 options with a weighted average exercise
price of $0.76. For the three and nine month periods ended
September 30, 2014 there were no in-the-money common stock
equivalents.
Net loss attributable to controlling interest
Basic and diluted net loss per sommon share
Weighted-average shares used in computing basic
3. Stockholders’ Equity
On May 30, 2014, the Company entered into a Securities Purchase
Agreement (the “May 2014 Purchase Agreement”) with certain
investors providing for the purchase of a total of $12,499,920 of
units consisting of (1) an aggregate of 12,499.92 shares of Series
C-1 Preferred Stock (convertible into a total of 11,261,189 shares
of common stock); (2) Five-Year Warrants to purchase an aggregate
of 5,630,595 shares of common stock at an exercise price of $1.67
per share; and (3) Thirteen-Month Warrants to purchase an aggregate
of 5,630,595 shares of common stock at an exercise price of $1.67
per share. The closing of the sale of the Series C-1 convertible
preferred shares and warrants under the May 2014 Purchase Agreement
took place in two closings on June 4, 2014 and June 5, 2014 for net
proceeds of approximately $11.3 million, after deducting placement
agent fees and other expenses totaling approximately $1,200,000. As
of September 30, 2015, 12,382.92 shares of Series C-1 preferred
stock have been converted into an aggregate 11,155,765 shares of
common stock.
On February 5, 2014, the Company filed with the Delaware
secretary of state a certificate of amendment to the Company’s
certificate of incorporation in order to effect a one-for-five
reverse split of its outstanding common stock. As a result of the
reverse stock split, each share of the Company’s common stock
outstanding as of 9:00 a.m. on February 10, 2014 was automatically
reclassified into one-fifth of a share of common stock. No
fractional shares were issued as a result of the reverse split.
Holders of common stock who would have otherwise received
fractional shares of the Company’s common stock pursuant to the
reverse split received cash in lieu of the fractional share. The
reverse split reduced the total number of
shares of the Company’s common stock outstanding from
approximately 31.0 million shares to approximately 6.2 million
shares. In addition, the number of shares of common stock subject
to outstanding options, restricted stock units and warrants issued
by the Company and the number of shares reserved for future
issuance under the Company’s stock plans were reduced by a factor
of five to proportionately reflect the reverse split. The reverse
split was accounted for retroactively and reflected in the
Company’s common stock, warrant, stock options and restricted stock
activity as of and for the year ended December 31, 2014 and for the
periods ended September 30, 2015 and 2014.
On February 11, 2014, the Company entered into a Securities
Purchase Agreement (the “February 2014 Purchase Agreement”) with
certain institutional investors providing for the issuance and sale
by the Company in a registered direct offering of 2,166,501 shares
of the Company’s common stock at an offering price of $2.765 per
share (the “February 2014 Share Offering”). In a concurrent private
placement, the Company granted to those institutional investors a
warrant to purchase one share of the Company’s common stock for
each share purchased in the February 2014 Share Offering. The
closing of the sale of the shares and warrants under the February
2014 Purchase Agreement and the concurrent private placement took
place on February 18, 2014 for net proceeds of approximately
$5,500,000 after deducting placement agent fees and other expenses
totaling approximately $500,000. Each warrant entitles the holder
to purchase shares of common stock for an exercise price per share
equal to $2.64 and will be exercisable for five years from the
closing.
During the nine month period ended September 30, 2014, investors
in the Series A preferred stock converted 110 Series A shares into
8,800 shares of common stock, investors in the Series B-4 preferred
stock converted 100 Series B-4 shares into 40,816 shares of common
stock, and investors in the Series C-1 preferred stock converted
12,382.92 Series C-1 shares into 11,155,765 shares of common stock.
After such conversions, there were no shares of Series B-4
preferred stock remaining outstanding.
4. Share-based Compensation
Effective with the adoption of FASB ASC 718,
Compensation-Stock Compensation,
the Company has elected to use the Black-Scholes option pricing
model to determine the fair value of options granted. Share price
volatility has historically been based on an analysis of historical
stock price data reported for a peer group of public companies.
Beginning with the first quarter of 2014 share price volatility is
based on an analysis of historical stock price data for the
Company. The expected life is the length of time options are
expected to be outstanding before being exercised. The Company
estimates expected life using the “simplified method” as allowed
under the provision of the Securities and Exchange Commission’s
Staff Accounting Bulletin No. 107,
Share-Based Payment
. The simplified method uses an average of the option vesting
period and the option’s original contractual term. The Company uses
the implied yield of U. S. Treasury instruments with terms
consistent with the expected life of options as the risk-free
interest rate. FASB ASC 718 requires companies to estimate a
forfeiture rate for options and accordingly reduce the compensation
expense reported. The Company used historical data among other
factors to estimate the forfeiture rate.
The fair value of options granted to employees and non-employee
directors for the three and nine months ended September 30, 2015
was estimated using a Black-Scholes option-pricing model with the
following weighted-average assumptions:
Expected dividend yield
Expected volatility
89.18
100.03
Weighted-average expected life (in years)
Risk free interest rate
Forfeiture rate
The Company’s consolidated statements of operations for the
three and nine months ended September 30, 2015 and 2014,
respectively, include the following share-based compensation
expense related to issuances of stock options to employees and
non-employee directors as well as warrants to non-employees as
follows:
Options to Employees and Non-employee Directors
16,431
26,870
69,764
21,705
21,941
104,466
86,232
147,892
120,635
655,700
461,603
Total stock-based compensation to
175,958
159,007
787.036
617,599
Warrants to non-employees
30,000
174,007
The Company accounts for equity instruments issued to
non-employees in accordance with the provisions of ASC 505
, using a fair-value approach. The equity instruments,
consisting of shares of restricted stock, stock options and
warrants granted to lenders and consultants, are valued using the
Black-Scholes valuation model. Measurements of share-based
compensation is subject to periodic adjustments as the underlying
equity instruments vest and are recognized as an expense over the
term of the related financing or the period over which services are
received.
The Company recognized $15,000 in share-based compensation
related to issuance of 12,000 shares of restricted stock to
non-employees (i.e. consultants) in exchange for services during
the three months ended September 30, 2014. The Company recognized
$30,000 in share-based compensation related to issuance of 24,000
shares of restricted stock to non-employees (i.e. consultants) in
exchange for services during the nine months ended September 30,
2014. The Company recognized $939 in share-based compensation
related to the issuance of 1,449 warrants in the second quarter of
2014 at an exercise price of...
More