Notwithstanding the decrease
in the number of outstanding shares
of our common stock by approximately 90% from 36,704,639 to approximately 3,670,400. Except for de minimis adjustments that may result from the treatment of fractional shares as described below, the reverse stock split will not have any dilutive effect on our stockholders, since each stockholder would hold the same percentage of our common stock outstanding immediately following the
reverse stock split as such stockholder held immediately prior to the reverse stock split. The relative voting and other rights that accompany the shares of common stock would not be affected by the reverse stock split.Although the reverse stock split will not have any dilutive effect onproposed Reverse Stock Split, our stockholders, the reverse stock split would reduce our outstanding shares of common stock by approximately 90% while the authorized capital shares would be only reduced by 50%. The resulting authorized and unissued shares of capital stock available after the reverse split could give our Board the authority to issue additional shares which would result in greater proportionate dilution to existing stockholders than would have been possible given the authorized and unissued shares available prior to filing the Amendment.
Reasons for theProposal
As noted above, the Board’s primary objective in proposing the reverse stock split is to enable the Company to raise the per share trading price of our common stock, which is currently trading on the over-the-counter markets, primarily through the OTCQB marketplace, to allow for an application to uplist our common stock on a national securities exchange, provided that at the time we submit our listing application, we satisfy the other listing criteria. Upon receiving stockholder approval, the Board may, in its sole discretion, file the Certificate of Amendment with the Secretary of State of the State of Delaware. Thereafter, the Board may, in its sole discretion, seek to obtain approval for listing on a national securities exchange.
Our Board believes that the reverse stock split, and any resulting increase in the per share price of our common stock, likely would enhance the acceptability and marketability of our common stock to the financial community and investing public allowing current shareholders to benefit from greater liquidity and improve the Company’s access to capital. Many institutional investors have policies prohibiting them from holding lower-priced stocks in their portfolios, which reduces the number of potential buyers of our common stock. Additionally, analysts at many brokerage firms are reluctant to recommend lower-priced stocks to their clients or monitor the activity of lower-priced stocks. Brokerage houses frequently have internal practices and policies that discourage individual brokers from dealing in lower-priced stocks, particularly stocks categorized as “penny stocks. “Further, because brokers’ commissions on lower-priced stock generally represent a higher percentage of the stock price than commissions on higher priced stock, investors in lower-priced stocks pay transaction costs which are a higher percentage of their total share value, which may limit the willingness of individual investors and institutions to purchase our common stock.
In light of the reverse stock split, our Board believes that the number of shares of our capital stock that is currently authorized (200 million shares of common stock and 20 million shares of preferred stock) would provide more available shares than would likely be required for our reasonably foreseeable needs. Our Board is mindful of the potential negative effects of a large number of authorized but unissued shares of common stock. The availability of a substantial number of authorized but unissued shares of common stock could, under certain circumstances, discourage or make more difficult efforts to obtain control of our Company. Further, because the amount of a Delaware corporation’s franchise tax fees is based on the number of authorized shares of its capital stock. Reducing the authorized shares of our capital stock will have the immediate effect of reducing our Delaware franchise tax obligations. Our Board believes the number of shares of common stock should be reduced by 50% to 100 million shares, and the number of shares of authorized preferred stock should be similarly reduced to 10 million shares.
Our Company will need to obtain additional funds to continue its operations and execute its current business plans, including completing the current Phase 1 clinical trial, planning for required future trials and pursuing regulatory approvals in the United States, the European Union and other international markets. We have been successful in the past in obtaining the necessary capital to support our operations principally through the sale of convertible debt and equity securities and we intend to seek additional financing through similar means before the end of the fiscal year. However, we have no current plans, agreements or arrangements, written or oral, to issue any of the authorized shares of capital stock that will be available as a result of the reverse stock split, if the Proposal is approved. If and when we do seek additional financing, there is no assurance that we will be able to obtain it under commercially reasonable terms and conditions, or at all. That risk would increase if our clinical data is inconclusive or not positive or economic conditions worsen in the market as a whole or in the pharmaceutical or biotechnology markets individually.
Neither our Board nor the Company has proposed the reverse stock split or reduction in authorized shares in response to any effort, nor are we aware of any such effort, to accumulate our shares of common stock or obtain control of the Company, nor is it a plan by management to recommend a series of similar actions to our Board or our stockholders. Further, the Board does not intend for this transaction to be the first step in a “going private transaction” within the meaning of Rule 13e-3 of the Securities Exchange Act of 1934 (the “Exchange Act”). Further, the Board is not aware of any attempt, or contemplated attempt, to acquire control of our Company or to pursue a “going private transaction.”
We do not believe that our officers or directors have interests in the Proposal that are different from or greater than those of any other of our stockholders.
Potential Disadvantages of theProposal
While we believe that the reverse stock split would be in the best interests of the Company and its stockholders, we cannot assure you that the reverse stock split, by itself, will be sufficient to allow us to accomplish our objective to obtain a listing on a national securities exchange. While we expect that the reduction in the number of outstanding shares of common stock will increase the market price of our common stock, we cannot assure you that after the reverse stock split the market price of our common stock will increase proportionately to reflect the ratio of the reverse stock split, that the market price of our common stock will not decrease to its pre-split level, that our market capitalization will be equal to the market capitalization before the reverse stock split or that we will satisfy the other listing criteria or will be able to obtain a listing on any national securities exchange, or to maintain such listing for any meaningful period of time.
The price of our common stock is dependent upon many factors, including the results of our clinical trials, business and financial performance, general market conditions and prospects for future success. If the per share market price does not increase proportionately as a result of the reverse stock split, then the value of our Company as measured by our market capitalization will be reduced, perhaps significantly.
The number of shares held by each individual stockholder would be reduced if the reverse stock split is implemented. This may also reduce the number of stockholders who hold more than a “round lot,” or 100 shares. This has two disadvantages. For example, decreasing our number of round lot shareholders may impair our ability to comply with the rules of The Nasdaq Capital Market, which requires companies applying for listing to have at least 300 round lot stockholders. Additionally, the transaction costs to stockholders selling “odd lots” are typically higher on a per share basis. Consequently, the reverse stock split could increase the transaction costs to existing stockholders in the event they wish to sell all or a portion of their shares.
Although our Board believes that the decrease in the number of shares of our common stock outstanding as a consequence of the reverse stock split and the anticipated increase in the market price of our common stock would likely encourage interest in our common stock and promote greater liquidity for our stockholders, such liquidity could also be adversely affected by the reduced number of shares outstanding after the reverse stock split. As a result, there can be no assurance that the reverse stock split, if completed, will result in the intended benefits described above, that the market price of our common stock will increase following the reverse stock split or that the market price of our common stock will not decrease in the future.
Our Board believes that 100 million authorized shares of common stock will be sufficient for our expected purposes for the foreseeable future. However, these expectations could turn out to be wrong and we may require additional authorized shares sooner than we expect. In that case, we would be required to obtain the approval of our stockholders to effect an increase to our authorized shares. Any such increase to our authorized shares may require us to solicit consents or proxies and hold a vote at an annual or special meeting of our stockholders. The stockholder meeting process can be costly and time-consuming and is subject to a variety of SEC rules that implement waiting periods throughout the process, which could prevent us from obtaining any increase to our authorized shares in a timely manner. Moreover, our stockholders may not approve any proposal to increase our authorized shares. Either of these outcomes could cause us to forego opportunities that we believe to be valuable or prevent us from using equity for compensation or other corporate purposes, which could limit our flexibility and prospects.
Effecting theAmendment
Upon receipt of stockholder approval for the Proposal, if our Board concludes, in its sole discretion, that it is in the best interests of our Company and our stockholders to effect the reverse stock split and reduction in authorized shares, then the Certificate of Amendment will be filed with the Secretary of State of the State of Delaware. The actual timing of the filing of the Certificate of Amendment will be determined by our Board. Notwithstanding stockholder approval, if at any time prior to the filing of the Certificate of Amendment, the Board deems the reverse stock split or reduction in authorized shares to no longer be in the best interests of our Company and our stockholders, the Board may abandon this effort, without further action by our stockholders. The reverse stock split will be effective as of the date of filing with the Secretary of State of the State of Delaware or at such time and date as may be specified in the Certificate of Amendment (the “Effective Time”).
Upon the filing of the Certificate of Amendment, without further action on our part or on the part our stockholders, the outstanding shares of common stock held by stockholders of record as of the Effective Time would be converted into a lesser number of shares of common stock based on the a reverse stock split ratio of one-for-ten (1:10). For example, if you presently hold 10,000 shares of our common stock, you would hold 1,000 shares of our common stock following the reverse stock split.
Effect of theAmendmenton Registration, Voting Rights and Authorized Shares
The reverse stock split will affect all stockholders equally and will not affect any stockholder’s proportionate equity interest in the Company. None of the rights currently accruing to holders of our common stock will be affected by the reverse stock split. If and when our Board elects to effect the reverse stock split, the principal effect will be to proportionately decrease the number of outstanding shares of our common stock based on the split ratio.
Proportionate voting rights and other rights of the holders of our common stock will not be affected by the reverse stock split, other than as a result of the treatment of fractional shares as described below. For example, a holder of 2% of the voting power of the outstanding shares of our common stock immediately prior to the effectiveness of the reverse stock split will generally continue to hold 2% of the voting power of the outstanding shares of our common stock after the reverse stock split. The number of stockholders of record will not be affected by the reverse stock split.
The Amendment, in connection with the reverse stock split, would also reduce the number of authorized shares of our capital stock as follows: the authorized number of shares of our common stock and preferred stock will be reduced by 50% to 100 million and 10 million, respectively. As a result, the proportion of shares owned by our stockholders relative to the number of shares authorized for issuance will decrease, and the resulting authorized and unissued shares of common stock available for issuance after the reverse split may be used at such times and for such purposes as our Board may deem advisable without further action by our stockholders, except as required by applicable laws and regulations. In accordance with our Certificate of Incorporation and the DGCL, our stockholders do not have any preemptive rights to purchase or subscribe for any of our unissued shares.
Our Company will need to obtain additional funds to continue its operations and execute its current business plans, including completing the current Phase 1 clinical trial, planning for required future trials and pursuing regulatory approvals in the United States, the European Union and other international markets. We have been successful in the past in obtaining the necessary capital to support our operations principally through the sale of convertible debt and equity securities and we intend to seek additional financing through similar means before the end of the fiscal year. However, we have no current plans, agreements or arrangements, written or oral, to issue any of the authorized shares of capital stock that will be available as a result of the reverse stock split, if the Proposal is approved. If and when we do seek additional financing, there is no assurance that we will be able to obtain it under commercially reasonable terms and conditions, or at all. That risk would increase if our clinical data is inconclusive or not positive or economic conditions worsen in the market as a whole or in the pharmaceutical or biotechnology markets individually.
Effects of the Reverse Stock Split on Issued and Outstanding Shares of Common Stock
At the time that the reverse stock split is effectuated, shares of our common stock issued and outstanding will be proportionately decreased based on the split ratio. Ten shares of existing common stock will be combined into one new share of common stock. The number of shares of common stock issued and outstanding will therefore be reduced. For example, as of August 2, 2017, we had 36,704,639 shares of common stock outstanding. Without giving effect to any fractional shares that may be eliminated as a part of the reverse stock split, approximately 3,670,463 shares of common stock would be outstanding after giving effect to the reverse stock split. However, as described below, holders of common stock otherwise entitled to a fractional share as a result of the reverse stock split will receive a cash payment in lieu of such fractional share. These cash payments will reduce the number of post-reverse stock split shares of our common stock outstanding and, to the extent there are currently stockholders who would otherwise receive less than one share of common stock after the reverse stock split, may also reduce the number of holders of our common stock.
Effect on Par Value and Loss per Share
The par value per share of the common stock will remain unchanged at $0.001 per share after the reverse stock split. As a result, on the Effective Time of the reverse stock split the stated capital on our balance sheet, which is the number of shares outstanding multiplied by the $0.001 par value, will be reduced proportionately, based on the split ratio, from its present amount and the additional paid-in capital account will be increased by the amount that the stated capital is reduced.
After the reverse stock split, net income or loss per share and other per share amounts will be increased proportionally because there will be fewer shares of our common stock outstanding. In future financial statements, net income or loss per share and other per share amounts for periods ending before the reverse stock split would be recast to give retroactive effect to the reverse stock split.
Effect on the Company’s Equity Incentive Plans
As of the Record Date, we had approximately 3,896,000 shares subject to stock options under our 2016 Omnibus Incentive Plan (the “2016 Plan”) and 2,943,600 shares subject to stock options under our 2011 Stock Option Plan (the “2011 Plan”).
Under the 2016 Plan, the Compensation Committee of the Board of Directors has sole discretion to determine the appropriate adjustment to the awards outstanding in the event of a stock split. Should the reverse stock split be effectuated, the number and class of shares underlying shares authorized to be granted or granted and the price per share payable upon exercise of an award, as applicable, would be equitably adjusted to reflect such changes. The Board has approved proportionate adjustments to the number of shares underlying awards outstanding and available for issuance and proportionate adjustments to the exercise price relating to any such awards.
Under the 2011 Plan, the outstanding awards granted thereunder are automatically adjusted in the event of a stock split. Should the reverse stock split be effectuated, the number of shares underlying awards granted under the 2011 Plan, and the price per share payable upon exercise of such an awards would be equitably adjusted to reflect such changes.
Accordingly, if the Proposal is approved by stockholders, upon the filing of the Certificate of Amendment with the Secretary of State of the State of Delaware, the number of all outstanding equity awards, the number of shares available for issuance and the exercise price relating to all outstanding equity awards under the 2016 Plan and 2011 Plan will be proportionately adjusted using the split ratio and fractional shares, if any, will be truncated.
The Compensation Committee is also authorized to effect any other changes necessary, desirable or appropriate to give effect to the reverse stock split, including any applicable technical, conforming changes to our 2016 Plan or 2011 Plan. For example, the 11,104,000 shares that remained available for issuance under the 2016 Plan as of the Record Date would be adjusted to 1,110,400 shares, subject to increase as and when awards made under such Plan expire or are forfeited and are returned per the terms of the 2016 Plan. In addition, under that example, the exercise price per share for each outstanding stock option would be increased by ten times, such that upon an exercise, the aggregate exercise price payable by the optionee to the Company would remain the same. For illustrative purposes only, an outstanding stock option for 10,000 shares of common stock, exercisable at $1.00 per share, would be adjusted into an option exercisable for 1,000 shares of common stock at an exercise price of $10.00 per share.
Effect on our OutstandingWarrants
If the reverse stock split is effectuated, the number of shares of our common stock that may be purchased upon exercise of outstanding warrants and the exercise prices for these securities will be ratably adjusted in accordance with their terms as of the Effective Time. Thus, if the reverse stock split is effectuated, the number of shares of common stock issuable upon exercise of any outstanding warrant will automatically be reduced in the same ratio as the reduction in the number of shares of outstanding common stock. Correspondingly, the per share exercise price will be increased in direct proportion to the stock split ratio, so that the aggregate dollar amount payable for the purchase of the shares underlying warrants will remain unchanged.
Effect on our OutstandingConvertible Promissory Notes
Our convertible notes are convertible into shares of common stock or other securities of the Company upon the occurrence of a Qualified Financing, including the sale of equity securities or a strategic partnership, raising gross proceeds of at least $2.0 million on or before the maturity of the 2017 Notes or upon the request of a holder of any 2017 Note at a fixed conversion rate of $1.01 per share. If the reverse stock split is effectuated, holders of the convertible notes retain the right to convert at a conversion price determined by applying a discount to the price of the common stock or securities sold in the Qualified Financing. As such the number of shares of our common stock into which the convertible notes may be converted in connection with a Qualified Financing would be unaffected by the reverse stock split. However, the fixed conversion price which may be elected by holders of the convertible notes will be increased in direct proportion to the stock split ratio.
Effect on Registration and Stock Trading
Our common stock is currently registered under Section 12(g) of the Exchange Act, and we are subject to the periodic reporting and other requirements of the Exchange Act. If our common stock becomes listed on a national securities exchange, we would file a short form registration statement for our common stock to be registered under Section 12(b) of the Exchange Act. We currently do not intend to seek any change in our status as a reporting company for federal securities law purposes, either before or after the reverse stock split, except to have our common stock moved from a registration pursuant to Section 12(g) to Section 12(b) under the Exchange Act.
Effect on Registered and Beneficial Holders
Upon completion of the reverse stock split, if you hold registered shares of pre-split common stock in a book-entry form, you do not need to take any action to receive your shares of post-split common stock in registered book-entry form. On or after the Effective Time, the Company’s transfer agent may be instructed to send a transaction statement to your address of record as soon as practicable after the Effective Time indicating the number of shares of post-split common stock you hold.
If any stockholders of record hold their shares of our Common stock in certificate form, upon completion of the reverse stock split they may receive a transmittal letter from the Company’s transfer agent after the effective time of the reverse stock split. The transmittal letter would be accompanied by instructions specifying how to exchange your certificate representing the pre-split common stock for a statement of holding or a certificate of post-split common stock. No service charges, brokerage commissions or transfer taxes shall be payable by any holder of any pre-split certificate, except that if any post-split certificate is to be issued in a name other than that in which the pre-split certificate(s) are registered, it will be a condition of such issuance that (1) the person requesting such issuance must pay to us any applicable transfer taxes or establish to our satisfaction that such taxes have been paid or are not payable, (2) the transfer complies with all applicable federal and state securities laws, and (3) the surrendered certificate is properly endorsed and otherwise in proper form for transfer. Stockholders will not have to pay any service charges in connection with the exchange of their certificates.
Stockholders who hold shares in street name through a nominee (such as a bank, broker or trust) will be treated in the same manner as stockholders whose shares are registered in their names, and nominees will be instructed to effect the reverse stock split for their beneficial holders. However, nominees may have different procedures and stockholders holding shares in street name should contact their nominees.
Fractional Shares
The Company does not intend to issue fractional shares in connection with the reverse stock split. Holders of record of our common stock who otherwise would be entitled to receive fractional shares because they hold, as of a date prior to the Effective Time, a number of shares of our common stock not evenly divisible by 10 will be entitled to a cash payment in lieu thereof. The cash payment will equal the product obtained by multiplying (a) the most recent sale price per share of the Common Stock as reported by OTC Markets Group, Inc. as of the date of the Effective Time, by (b) the fraction of one share owned by the stockholder. The ownership of a fractional interest will not give the holder thereof any voting, dividend or other rights except to receive payment therefor as described herein.
Holders of our common stock should be aware that, under the escheat laws of the various jurisdictions where our stockholders reside, where we are domiciled and where the funds will be deposited, sums due for fractional interests that are not timely claimed after the Effective Time may be required to be paid to the designated agent for each such jurisdiction. Thereafter, holders of our common stock otherwise entitled to receive such funds may have to seek to obtain them directly from the state to which they were paid.
As of the Record Date, we had 185 holders of record of our common stock (although we have significantly more beneficial holders). We do not expect the reverse stock split to result in a significant reduction in the number of record holders.
Anti-Takeover and Dilutive Effects
The purpose of reducing our authorized common stock by only 50% after the reverse stock split is to reduce our potential Delaware franchise tax obligation while preserving sufficient authorized shares to facilitate our ability to raise additional capital to support our operations. The reduction in our authorized common stock is not to intended to establish any barriers to a change of control or acquisition of our Company. The shares of common stock that are authorized but unissued provide our Board with flexibility to effect, among other transactions, public or private financings, acquisitions, stock dividends, stock splits and the granting of equity incentive awards. However, these authorized but unissued shares may also be used by our Board, consistent with and subject to its fiduciary duties, to deter future attempts to gain control of us or make such actions more expensive and less desirable.
In addition, given that the reverse stock split reduces our outstanding shares of common stock by approximately 90% while the authorized capital shares would be only reduced by 50%, the resulting authorized and unissued shares of capital stock available after the reverse split may give our Board the authority to issue additional shares which would result in greater proportionate dilution to existing stockholders than would have been possible given the authorized and unissued shares available prior to filing the Amendment. Our Board may issue shares of our capital stock from time to time without delay or further action by the stockholders except as may be required by applicable law or exchange rules. The reverse stock split is not being recommended in response to any specific effort of which we are aware to obtain control of us, nor does our Board have any present intent to use the authorized but unissued common stock to impede a takeover attempt. There are no plans or proposals to adopt other provisions or enter into any arrangements that have material anti-takeover effects.
No Appraisal Rights
Under the DGCL, our stockholders are not entitled to appraisal or dissenter’s rights with respect to the reverse stock split, and we will not independently provide our stockholders with any such rights.
Financial Information
Our audited consolidated financial statements and accompanying notes filed with our Annual Report on Form 10-K for the year ended December 31, 2016, (our “Annual Report”), are incorporated herein by reference.
Our unaudited condensed consolidated interim financial statements and accompanying notes filed with our Quarterly Reports on Form 10-Q for the periods ended March 31, 2017 and for the period ended June 30, 2017 (our “Quarterly Reports”), are incorporated herein by reference.
Item 7 of Part II of our Annual Report “Management’s Discussion and Analysis of Financial Condition and Results of Operations” is incorporated herein by reference.
Item 2 of Part I of our Quarterly Reports “Management’s Discussion and Analysis of Financial Condition and Results of Operations” are incorporated herein by reference.
CertainMaterial U.S. Federal Income Tax Consequences of the Reverse Stock Split