UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-Q
☑ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended September 30, 2014
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from _______ to _______
Commission file number 000-52315
AtheroNova Inc.
(Exact Name of Registrant as Specified in Its Charter)
Delaware (State or other jurisdiction of incorporation or organization) | 20-1915083 (I.R.S. Employer Identification No.) |
2301 Dupont Drive, Suite 525, Irvine, CA 92612
(Address of principal executive offices and zip code)
(949) 476-1100
(Registrant’s telephone number, including area code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
Yes☑ No☐
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
Yes☑ No☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.
Large accelerated filer ☐ | Accelerated filer ☐ | Non-accelerated filer ☐ | Smaller reporting company ☑ |
Indicate by check mark whether the registrant is a shell company (as defined by Rule 12b-2 of the Exchange Act).
Yes☐ No☑
As of November 10, 2014 there were 8,809,139 shares of the issuer’s common stock, $0.0001 par value per share, outstanding.
TABLE OF CONTENTS
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PART I | FINANCIAL INFORMATION |
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Item 1. | Financial Statements: |
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| Condensed Consolidated Balance Sheets as of September 30, 2014 (Unaudited) and December 31, 2013 | 3 |
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| Condensed Consolidated Statements of Operations (Unaudited) for thethree and nine month periods ended September 30, 2014 and 2013 | 4 |
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| Condensed Consolidated Statements of Stockholders’ Deficiency (Unaudited) for the period from December 31, 2013 through September 30, 2014 | 5 |
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| Condensed Consolidated Statements of Cash Flows (Unaudited) for the nine month periods ended September 30, 2014 and 2013 | 6 |
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| Notes to Condensed Consolidated Financial Statements (unaudited) | 8 |
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Item 2. | Management’s Discussion and Analysis of Financial Condition and Results of Operations | 21 |
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Item 3. | Quantitative and Qualitative Disclosure About Market Risk | 31 |
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Item 4. | Controls and Procedures | 31 |
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PART II | OTHER INFORMATION |
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Item 1A. | Risk Factor | 33 |
Item 2. | Unregistered Sales of Equity Securities and Use of Proceeds | 33 |
Item 6. | Exhibits | 34 |
Part I – Financial Information
Item 1. Financial Statements
ATHERONOVA INC.
CondensedConsolidated Balance Sheets
September 30, | December31, | |||||||
2014 | 2013 | |||||||
| (unaudited) | |||||||
| Assets | ||||||||
Current Assets | ||||||||
Cash | $ | 326,219 | $ | 266,210 | ||||
Deferred offering costs | 210,495 | -- | ||||||
Other current assets | 29,081 | 22,438 | ||||||
Total Current Assets | 565,795 | 288,648 | ||||||
Equipment, net | 6,474 | 7,405 | ||||||
Deposits and other assets | 8,917 | 12,777 | ||||||
Total Assets | $ | 581,186 | $ | 308,830 | ||||
Liabilities and Stockholders’Deficiency | ||||||||
Current Liabilities: | ||||||||
Accounts payable and accrued expenses | $ | 1,671,534 | $ | 811,404 | ||||
Interest payable | 160,318 | 76,462 | ||||||
Short term 8% secured convertible notes payable, net of discount of $475,343 as of September 30, 2014 and $0 as of December 31, 2013 | 24,657 | -- | ||||||
Derivative liabilities | 3,647,735 | -- | ||||||
Current portion of 2.5% Senior secured convertible note, net of discount of $0 as of September 30, 2014 and $37,377 as of December 31, 2013 | 427,500 | 390,123 | ||||||
Total Current Liabilities | 5,931,744 | 1,277,989 | ||||||
Senior secured convertible notes, net of current portion | 2,620,167 | 1,170,333 | ||||||
Discount on convertible notes | (1,842,133 | ) | (807,200 | ) | ||||
Senior secured convertible notes, net of discount | 778,034 | 363,133 | ||||||
Research and development costs payable in common stock | 469,850 | 1,170,712 | ||||||
Stockholders’Deficiency: | ||||||||
Preferred stock $0.0001 par value, 10,000,000 shares authorized, none outstanding at September 30, 2014 and December 31, 2013 | -- | -- | ||||||
Common stock $0.0001 par value, 100,000,000 shares authorized, 4,809,139 and 4,158,402 outstanding at September 30, 2014 and December 31, 2013, respectively | 481 | 416 | ||||||
Additional paid in capital | 23,591,075 | 19,526,374 | ||||||
Accumulated deficit | (30,189,998 | ) | (22,029,794 | ) | ||||
Total stockholders’ deficiency | (6,598,442 | ) | (2,503,004 | ) | ||||
Total Liabilities and Stockholders’ Deficiency | $ | 581,186 | $ | 308,830 | ||||
See accompanying notes to condensed consolidated financial statements.
ATHERONOVA INC.
Condensed Consolidated Statements of Operations
(Unaudited)
For thethree and nine month periodsendedSeptember 30, 2014 and 2013
Three months ended September 30, | Nine months ended September 30, | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
Revenue, net | $ | -- | $ | -- | $ | -- | $ | -- | ||||||||
Operating expenses: | ||||||||||||||||
Research and development | 376,160 | 470,074 | 1,777,206 | 1,342,990 | ||||||||||||
Research and development-related party | 314,776 | -- | 1,451,873 | 1,198,297 | ||||||||||||
General and administrative expenses | 264,365 | 573,818 | 1,489,822 | 2,311,642 | ||||||||||||
Total operating expenses | 955,301 | 1,043,892 | 4,718,901 | 4,852,929 | ||||||||||||
Loss from operations | (955,301 | ) | (1,043,892 | ) | (4,718,901 | ) | (4,852,929 | ) | ||||||||
Other income(expenses): | ||||||||||||||||
Other income (expense) | 59 | 230 | 673 | 2,323 | ||||||||||||
Interest expense | (303,063 | ) | (110,073 | ) | (1,039,612 | ) | (491,591 | ) | ||||||||
Private placement costs | -- | -- | (3,340,030 | ) | -- | |||||||||||
Change in fair value of derivative liabilities | (1,299,251 | ) | -- | 939,831 | -- | |||||||||||
Netloss before income taxes | (2,557,556 | ) | (1,153,735 | ) | (8,158,039 | ) | (5,342,197 | ) | ||||||||
Provision for income taxes | -- | -- | 2,165 | 1,365 | ||||||||||||
Netloss | $ | (2,557,556 | ) | $ | (1,153,735 | ) | $ | (8,160,204 | ) | $ | (5,343,562 | ) | ||||
Loss per share-basic and diluted | $ | (0.53 | ) | $ | (0.28 | ) | $ | (1.79 | ) | $ | (1.34 | ) | ||||
Weighted average shares outstanding-basic and diluted | 4,809,009 | 4,131,735 | 4,546,598 | 3,977,810 | ||||||||||||
See accompanying notes to condensed consolidated financial statements.
ATHERONOVA INC.
Condensed ConsolidatedStatements of Stockholders’Deficiency
For the period from December31, 2013 throughSeptember 30, 2014 (unaudited)
Description | Common Stock Shares | Common Stock Amount | Additional Paid-in Capital | Accumulated Deficit | Total Stockholders’ Deficiency | |||||||||||||||
Balance – December 31, 2013 | 4,158,402 | $ | 416 | $ | 19,526,374 | $ | (22,029,794 | ) | $ | (2,503,004 | ) | |||||||||
Fair value of common stock issued for services | 6,535 | 1 | 23,394 | -- | 23,395 | |||||||||||||||
Fair value of vested options and warrants | -- | -- | 344,965 | -- | 344,965 | |||||||||||||||
Fair value of modified warrants to induce purchase of 6% Secured convertible notes | -- | -- | 564,849 | -- | 564,849 | |||||||||||||||
Common stock issued for reverse split | 34,707 | 4 | (4 | ) | -- | -- | ||||||||||||||
Fair value of common stock issued upon conversion of notes payable and accrued interest | 187,390 | 18 | 478,804 | -- | 478,822 | |||||||||||||||
Fair value of common stock issued for services-related party | 422,105 | 42 | 2,152,693 | -- | 2,152,735 | |||||||||||||||
Fair value of warrants and beneficial conversion feature on short-term secured convertible notes payable | -- | -- | 500,000 | -- | 500,000 | |||||||||||||||
Net loss | -- | -- | -- | (8,160,204 | ) | (8,160,204 | ) | |||||||||||||
Balance – September 30, 2014 | 4,809,139 | $ | 481 | $ | 23,591,075 | $ | (30,189,998 | ) | $ | (6,598,442 | ) | |||||||||
See accompanying notes to condensed consolidated financial statements.
ATHERONOVA INC.
CondensedConsolidatedStatements of Cash Flows
(Unaudited)
For thenine month periods endedSeptember 30, 2014 and 2013
Nine months endedSeptember 30, | ||||||||
2014 | 2013 | |||||||
Operating Activities: | ||||||||
Net loss | $ | (8,160,204 | ) | $ | (5,343,562 | ) | ||
Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
Loss on settlement of payables and accrued interest | 6,113 | 6,980 | ||||||
Amortization of debt discount | 933,601 | 457,588 | ||||||
Depreciation | 3,072 | 3,194 | ||||||
Fair value of vested options and warrants | 344,965 | 725,442 | ||||||
Fair value of common stock issued for services | 1,005,418 | 1,198,297 | ||||||
Fair value of warrant modifications | 564,849 | -- | ||||||
Research and development costs payable in common stock | 469,850 | -- | ||||||
Fair value of shares transferred or sold to employees, directors and vendors by controlling stockholder | -- | 481,400 | ||||||
Cost of private placement | 2,681,066 | -- | ||||||
Change in fair value of derivative liabilities | (939,831 | ) | -- | |||||
Changes in operating assets and liabilities: | ||||||||
Other assets | (2,783 | ) | 974 | |||||
Accounts payable and accrued expenses | 960,029 | (199,327 | ) | |||||
Net cash used in operating activities | (2,133,855 | ) | (2,669,014 | ) | ||||
Investing Activities | ||||||||
Purchase of equipment | (2,141 | ) | (1,920 | ) | ||||
Net cash used in investing activities | (2,141 | ) | (1,920 | ) | ||||
Financing Activities | ||||||||
Proceeds from issuance of common stock | -- | 787,048 | ||||||
Proceeds from issuances sale of 6% senior secured convertible notes | 1,906,500 | -- | ||||||
Proceeds from issuance of 8% short term secured convertible notes | 500,000 | -- | ||||||
| Deferred offering costs | (210,495 | ) | -- | |||||
Net cash provided by financing activities | 2,196,005 | 787,048 | ||||||
Net change in cash | 60,009 | (1,883,886 | ) | |||||
Cash - beginning balance | 266,210 | 2,744,046 | ||||||
Cash - ending balance | $ | 326,219 | $ | 860,160 | ||||
Supplemental disclosure of cash flow information: | ||||||||
Cash paid for income taxes | $ | 2,165 | $ | 1,365 | ||||
Supplemental disclosure of non-cash investing and financing transactions: | ||||||||
Conversion of convertible notes and accrued interest payable to common stock | $ | 478,822 | $ | 169,765 | ||||
Accrued research and development costs paid in shares of common stock | $ | 1,170,712 | $ | -- | ||||
Common stock issued to settle accounts payable | $ | -- | $ | 4,518 | ||||
Beneficial conversion feature of short-term notes payable and fair value of attached warrants | $ | 500,000 | $ | -- | ||||
Derivative liability created on issuance of convertible notes and warrants | $ | 4,587,566 | $ | -- | ||||
See accompanying notes to condensed consolidated financial statements.
ATHERONOVA INC.
Notes toCondensedConsolidated FinancialStatements
Three and Nine Months Ended September 30, 2014 and 2013(Unaudited)
The accompanying unaudited condensed consolidated financial statements of AtheroNova Inc. and subsidiary (“AtheroNova,” “we,” “us, “our” and “the Company”) have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and the rules and regulations of the Securities and Exchange Commission. Accordingly, the unaudited condensed consolidated financial statements do not include all information and footnotes required by accounting principles generally accepted in the United States of America 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. Interim operating results are not necessarily indicative of results that may be expected for the year ending December 31, 2014 or for any other interim period. These unaudited condensed consolidated financial statements should be read in conjunction with the Company’s audited financial statements as of and for the year ended December 31, 2013, which are included in the Company’s Report on Form 10-K for such year filed on February 27, 2014. The condensed consolidated balance sheet as of December 31, 2013 has been derived from the audited financial statements included in the Form 10-K for that year.
1. ORGANIZATION
Z&Z Medical Holdings, Inc. (“Z&Z Nevada”) was incorporated under the laws of the State of Nevada on December 13, 2006 (Inception). On November 30, 2009, a separate corporation named Z&Z Medical Holdings, Inc. (“Z&Z Delaware”) was incorporated under the laws of the State of Delaware and on March 3, 2010 Z&Z Nevada was merged into Z&Z Delaware. On May 13, 2010, pursuant to an Agreement and Plan of Merger dated March 26, 2010 and our subsidiary, Z&Z Merger Corporation, merged with and into Z&Z Delaware and the surviving subsidiary corporation changed its name to AtheroNova Operations, Inc. (“AtheroNova Operations”).
As a result of the merger AtheroNova is now engaged, through AtheroNova Operations, in development of pharmaceutical preparations and pharmaceutical intellectual property. The Company will continue to be a development stage company for the foreseeable future.
On April 22, 2014, the Company effected a 1 - for - 10 reverse stock split through the amendment of its certificate of incorporation. As a result, all share and per share amounts have been retroactively restated as of the beginning of the earliest period presented to effect the reverse stock split.
The Company was considered a development stage through March 31, 2014. In June 2014, as discussed in Note 2, the Financial Accounting Standards Board issued new guidance that removed incremental financial reporting requirements from general accepted accounting principles in the United States for development stage entities. The Company adopted this new guidance and as a result, all inception-to-date financial information and disclosures have been omitted from this report.
2. BASIS OF PRESENTATION AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
The summary of significant accounting policies presented below is designed to assist in understanding the Company’s condensed consolidated financial statements.
Use of Estimates
In preparing these condensed consolidated financial statements, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities as of the date of the condensed consolidated financial statements and the reported amount of revenues and expenses during the reporting periods. Actual results could differ from those estimates. Significant estimates and assumptions included in the Company’s condensed consolidated financial statements relate to the valuation of long-lived assets, accrued other liabilities, and valuation assumptions related to share based payments and derivative liability.
Going Concern
The accompanying condensed consolidated financial statements have been prepared under the assumption that the Company will continue as a going concern. Such assumption contemplates the realization of assets and satisfaction of liabilities in the normal course of business. The Company has not generated any revenues from operations to date, and does not expect to do so in the foreseeable future. The Company has incurred operating losses and negative operating cash flows since inception and has financed its working capital requirements through recurring sales of its convertible notes and equity securities. As reflected in the accompanying condensed consolidated financial statements, the Company had a net loss of $8,160,204 and negative cash flow from operations of $2,133,855 for the period ended September 30, 2014 and stockholders’ deficiency of $6,598,442 at September 30, 2014. These factors, among others, raise substantial doubt about the Company’s ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might be necessary should the Company be unable to continue as a going concern. In addition, the Company’s independent registered public accounting firm, in its report on the Company’s December 31, 2013 financial statements, has raised substantial doubt about the Company’s ability to continue as a going concern.
The Company received $1,906,500 through the sale of its 6% Secured Convertible Notes as of February 2014 and an additional $500,000 through the sale of its 8% Secured Convertible Notes as of September 2014. In October 2014, the Company consummated an underwritten equity offering of $3,000,050 and received the net cash proceeds of approximately $2,600,000 as of October 31, 2014. Management will continue to explore additional equity and debt investors in its financing plan as it believes that current funds will be sufficient to fund operations through March 2015. Significant additional capital will be needed to advance the Company’s research and development and clinical trials as well as providing general working capital. There can be no assurances that sufficient subsequent funding, if any at all, will be raised by this or future offerings or that the cost of such funding will be reasonable.
Additionally, a 2.5% Senior Secured Convertible Note in the amount of $427,500, plus accrued interest of approximately $47,000, matured on November 12, 2014. The Company continues to negotiate with the holder of the note for an extension of the maturity date of the note but as of the date of filing of this quarterly report on Form 10-Q, the Company and the holder have not come to terms on an extension and the Company has not received any written notice of default or demand for payment from the note holder. In addition, provisions in both our 6% Secured Convertible Notes and our 8% Convertible Notes could accelerate the maturity of those Notes if the Company defaults on any obligation of $100,000 or greater, including obligations under the 2.5% Senior Secured Convertible Notes. (see Note 3).
In light of the foregoing, management will continue to seek funding through short-term and long-term loans, grants and other such funds available from private and public sources established to further research in health care and advancement of science. Management continues to meet with representatives of private and public sources of funding to continue the ongoing process of capital development sufficient to cover negative cash flows expected in future periods and will continue to do so in the coming months.
Principles of Consolidation
The condensed consolidated financial statements include the accounts of the Company and its majority-owned subsidiary. Intercompany transactions and balances have been eliminated in consolidation.
Research and Development Expenses
All research and development costs are expensed as incurred and include costs of consultants and contract research facilities who conduct research and development on our behalf and on behalf of AtheroNova Operations. We have contracted with third parties to facilitate, coordinate and perform agreed upon research and development of our technology. We have expensed all costs associated with the conduct of the laboratory research as well as the costs associated with peripheral clinical researchers as period costs.
Accounting for Share Based Research and Development Costs
Under its research and development (R&D) agreements, the Company is obligated to issue shares of common stock if milestones are met by the R&D vendor. It is the Company’s policy to recognize expense for these shares when it is estimated that there is a high probability of meeting the milestone. The Company accrues the share based expense based upon the estimated percentage of completion of the milestone. The shares are valued at the market price at the end of the period and revalued at each period until issued. At September 30, 2014, approximately 239,720 shares of common stock were expected to be issued pursuant to the agreement with a fair value of $469,850. Accordingly, a liability was recorded as part of “Research and development costs-payable in stock” in the accompanying balance sheet below long term liabilities as such liability is only payable in shares of common stock.
Reclassifications
The condensed consolidated financial statements include a reclassification of consulting fees in prior periods to properly compare to current period presentation. Such reclassification did not change the reported net loss during that period.
In presenting the Company’s statement of operations for the three and nine month periods ended September 30, 2013, the Company reclassified consulting fees and employee costs of $215,046 and $466,957, respectively, that were previously reflected as operating expenses to research and development expenses.
Earnings and Loss per Share
The Company’s computation of earnings per share (“EPS”) includes basic and diluted EPS. Basic EPS is measured as the income (loss) available to common stockholders divided by the weighted average common shares outstanding for the period. Diluted EPS is similar to basic EPS but presents the dilutive effect on a per share basis of potential common shares (e.g., warrants, options and convertible notes) as if they had been converted at the beginning of the periods presented, or issuance date, if later, determined using the treasury stock method. Potential common shares that have an anti-dilutive effect (i.e., those that increase income per share or decrease loss per share) are excluded from the calculation of diluted EPS.
Income (loss) per common share is computed by dividing net income (loss) by the weighted average number of shares of common stock outstanding during the respective periods. Basic and diluted (loss) per common share is the same for periods in which the Company reported an operating loss because all warrants, stock options and convertible notes outstanding are anti-dilutive.
There were no adjustments to net loss required for purposes of computing diluted earnings per share for the three and nine-month periods ended September 30, 2014 and 2013.
Warrants, options and other potentially dilutive securities that are antidilutive have been excluded from the dilutive calculations when their exercise or conversion price exceeds the average stock market price during the period or the effect would be anti-dilutive when applied to a net loss during the period(s) presented. The following tables set forth the shares excluded from the diluted calculation for the periods presented as follows:
Three and nine months ended September 30, | Three and nine months ended September 30, | |||||||
2014 | 2013 | |||||||
Senior secured Convertible notes | 2,539,281 | 550,977 | ||||||
Warrants | 1,419,487 | 853,967 | ||||||
Employee and director stock options | 548,950 | 559,950 | ||||||
Total potentially dilutive shares | 4,507,718 | 1,964,894 | ||||||
Such securities could potentially dilute earnings per share in the future.
DerivativeFinancial Instruments
The Company evaluates its financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is then re-valued at each reporting date, with changes in the fair value reported in the consolidated statements of operations. For stock-based derivative financial instruments, the Company uses a probability based weighted-average Black-Scholes-Merton option pricing model to value the derivative instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
The Company has derivative liabilities relating to conversion price adjustments on convertible notes and warrants issued in February 2014. Accordingly, the Company has calculated the value of the derivative liabilities as of the date of issuance of the notes and warrants and has revalued them as of the period ending September 30, 2014.
FairValue ofFinancialInstruments
Effective January 1, 2008, fair value measurements are determined by the Company’s adoption of authoritative guidance issued by the Financial Accounting Standards Board (FASB), with the exception of the application of the statement to non-recurring, non-financial assets and liabilities as permitted. The adoption of the authoritative guidance did not have a material impact on the Company’s fair value measurements. Fair value is defined in the authoritative guidance as the price that would be received to sell an asset or paid to transfer a liability in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants at the measurement date. A fair value hierarchy was established, which prioritizes the inputs used in measuring fair value into three broad levels as follows:
Level 1—Quoted prices in active markets for identical assets or liabilities.
Level 2—Inputs, other than the quoted prices in active markets, are observable either directly or indirectly.
Level 3—Unobservable inputs based on the Company’s assumptions.
The Company is required to use observable market data if such data is available without undue cost and effort.
The following table presents certain liabilities of the Company measured and recorded at fair value on the Company’s condensed consolidated balance sheets on a recurring basis and their level within the fair value hierarchy as of September 30, 2014.
Level 1 | Level 2 | Level 3 | Total | |||||||||||||
Fair Value of Derivative Liability | $ | -- | $ | 3,647,735 | $ | -- | $ | 3,647,735 | ||||||||
There was no corresponding derivative liability as of December 31, 2013.
At September 30, 2014 and December 31, 2013, the fair values of cash and cash equivalents, and accounts payable approximate their carrying values.
Recently Issued Accounting Standards
On August 27, 2014, the FASB issued ASU 2014-15, Disclosures of Uncertainties about and Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date the financial statements is issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2015, and interim periods thereafter, with early adoption permitted.
On June 10, 2014, the FASB issued ASU 2014-10,Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. ASU 2014-10 eliminates the requirement to present inception-to-date information about income statement line items, cash flows, and equity transactions, and clarifies how entities should disclose the risks and uncertainties related to their activities. ASU 2014-10 also eliminates an exception provided to development stage entities in Consolidations (ASC Topic 810) for determining whether an entity is a variable interest entity on the basis of the amount of investment equity that is at risk. The presentation and disclosure requirements in Topic 915 are no longer required for interim and annual reporting periods beginning after December 15, 2014. The revised consolidation standards will take effect in annual periods beginning after December 15, 2015, however, early adoption is permitted. The Company adopted the provisions of ASU 2014-10 for the periodic reports on Forms 10-K and 10-Q for the periods ended June 30, 2014 and later.
In April 2014, the FASB issued ASU 2014-08, "Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)." ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on the Company's operations and financial results should be presented as discontinued operations. This new accounting guidance is effective for annual periods beginning after December 15, 2014. The Company is currently evaluating the impact of adopting ASU 2014-08 on the Company's results of operations or financial condition.
On May 28, 2014, the FASB issued ASU 2014-09, “Revenue from Contracts with Customers”. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle-based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management has not yet determined the effect of adopting ASU 2014-09 on our ongoing financial reporting.
Other recent accounting pronouncements did not or are not believed by management to have a material impact on the Company's present or future consolidated financial statements.
3. SENIOR SECURED CONVERTIBLE NOTES PAYABLE
Convertible notes payable consist of the following as of September 30, 2014 and December 31, 2013:
September 30, | December 31, | |||||||
2014 | 2013 | |||||||
a. 2010 2.5% Convertible Notes | $ | 427,500 | $ | 427,500 | ||||
b. 2012 2.5% Convertible Notes | 753,667 | 1,170,333 | ||||||
c. 2014 6% Convertible Notes | 1,866,500 | -- | ||||||
| 3,047,667 | 1,597,833 | |||||||
Less Valuation Discount | (1,842,133 | ) | (844,577 | ) | ||||
| 1,205,534 | 753,256 | |||||||
Less Current Portion | (427,500 | ) | (390,123 | ) | ||||
Convertible Notes Payable, net | $ | 778,034 | $ | 363,133 | ||||
a. | 2010 2.5% Convertible Notes |
On May 13, 2010, we entered into a Securities Purchase Agreement with W-Net Fund I, L.P. (“W-Net”), Europa International, Inc. (“Europa”) and MKM Opportunity Master Fund, Ltd. (“MKM” and together with W-Net and Europa, the “Purchasers”), pursuant to which the Purchasers, on May 13, 2010, purchased from us (i) 2.5% Senior Secured Convertible Notes (the “Original Notes”) for a cash purchase price of $1,500,000, and (ii) Common Stock Purchase Warrants pursuant to which the Purchasers may purchase up to 190,880 shares of our common stock at an exercise price equal to approximately $2.90 per share, as amended, (the “Capital Raise Transaction”). We also entered into a Security Agreement and an Intellectual Property Security Agreement with the Purchasers and AtheroNova Operations, pursuant to which all of our obligations are secured by first priority security interests in all of our assets and the assets of AtheroNova Operations, including intellectual property. Upon an event of default, note holders may be entitled to foreclose on any of such assets or exercise other rights generally available to a secured creditor under California and Delaware law. In addition, under a Subsidiary Guarantee, AtheroNova Operations guaranteed all of our obligations under the Original Notes.
On July 6, 2011, we entered into the First Amendment and Exchange Agreement under which the Original Notes were exchanged for the Amended and Restated 2.5% Senior Secured Convertible Notes (the “first Amended Notes”).
On June 15, 2012, we entered into the Second Amendment and Exchange Agreement pursuant to which the First Amended Notes were exchanged for the Second Amended and Restated 2.5% Senior Secured Convertible Notes (the “Second Amended Notes”). The Second Amended Notes accrued 2.5% interest per annum with a maturity of four years after the closing of the original Capital Raise Transaction in 2010. No cash interest payments were required, except that accrued and unconverted interest is due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted. If there is an uncured event of default (as defined in the Original Notes), the holder of each Original Note may declare the entire principal and accrued interest amount immediately due and payable. Default interest will accrue after an event of default at an annual rate of 12%. If there is an acceleration, a mandatory default amount equal to 120% of the unpaid Original Note principal plus accrued interest may be payable. The Second Amended Notes greatly restrict the ability of the Company and AtheroNova Operations to issue indebtedness or grant liens on our or its respective assets without the Original Note holders’ consent. They also limit and impose financial costs on our acquisition by any third party.
As of December 31, 2013, the outstanding balance of the notes amounted to $427,500, unpaid interest of $31,453 and unamortized note discount of $37,375.
In May 2014, the Second Amended Notes were amended with the consent of the holder thereof to extend the maturity date from May 12, 2014 to September 12, 2014. In August 2014, the Second Amended Notes were further amended with the consent of the holder thereof to extend the maturity date from September 12, 2014 to November 12, 2014. All other terms and conditions of the Second Amended Notes remain unchanged.
The Second Amended Notes are currently past due and management continues to negotiate with the holder for a further extension of the maturity date. We can provide no assurance that we will obtain such an extension. The Second Amended Notes provide that our failure to pay amounts due under the Second Amended Notes on the earlier of 5 trading days after notice of such failure or 10 trading days after we become aware of such failure constitutes an event of default, but as of the date of filing of this report we have not received written notice of default or demand for payment from the note holder. Upon the occurrence of an event of default under the Second Amended Notes, interest will accrue at 12% per annum and all amounts due under the Second Amended Notes will become immediately due and payable at 120% of the then outstanding principal, plus 100% of accrued and unpaid interest and all other amounts due in respect thereof.
Each of the 6% Notes and 8% Notes provides that if we default on any of our obligations under any other note, mortgage, credit agreement or other facility, indenture agreement, factoring agreement or other instrument under which there may be issued, or by which there may be secured or evidenced any indebtedness for borrowed money or money due under any long term leasing or factoring arrangement in an amount exceeding $100,000, such default will constitute an event of default under each of the 6% Notes and 8% Notes. To the extent that our failure to pay amounts due under the Second Amended Notes, notwithstanding that such failure does not constitute an event of default under the Second Amended Notes, is determined to constitute an event of default under the 6% Notes and 8% Notes, or upon the occurrence of an event of default under the Second Amended Notes, interest will accrue at 24% per annum and we will be obligated to immediately pay the greater of (1) 120% of the outstanding principal (plus all accrued and unpaid interest) and (2) the product of (i) the highest closing price for the 5 trading days immediately preceding acceleration of such notes multiplied by (ii) a fraction the numerator of which is the outstanding principal and the denominator of which is the conversion price as of the date of determination.
During the period ended September 30, 2014, the Company recognized interest expense of $8,016 for the 2.5% interest rate and $37,375 to amortize the discount associated with the Second Amended Notes. The aggregate principal balance of the Second Amended Notes outstanding, unpaid interest and unamortized note discount as of September 30, 2014 amounted to $427,500, $47,543 and none, respectively.
b. | 2012 2.5% Convertible Notes |
In September and October 2012, the Company issued $1,498,333 of its 2.5% convertible notes (“2012 Notes”) that are due in four years or in 2016. The 2012 Notes are convertible into common stock at a per share price of $2.90 per share. As the market price on the date of the issuance of the 2012 Notes ranged between $5.80 and $8.00 per share, the Company recorded a beneficial conversion feature up to the face value of the 2012 Notes in the aggregate of $1,498,333 representing the difference between the market price and the note’s conversion price on the date of issuance. The beneficial conversion feature was recorded as a valuation discount and is being amortized over the term of the 2012 Notes. As of December 31, 2013, the outstanding balance on the 2012 Notes amounted to $1,170,333 and unamortized discount $807,202.
During the period ended September 30, 2014, $416,667 in aggregate principal amount of the 2012 Notes was converted at a per share price of $2.90 into 143,678 shares of the Company’s common stock. The Company also issued 5,171 shares of its common stock with a market value of $19,648 to settle accrued but unpaid interest associated with the converted 2012 Notes of $14,995. The issuance of these shares of common stock resulted in an additional charge of $4,653 that has been reflected as part of interest expense in the accompanying statement of operations. The Company also recorded interest expense of $270,439 to amortize the corresponding note discount of the converted notes.
During the period ended September 30, 2014, the Company recognized interest expense of $16,663 and $164,464 to amortize the note discount. The aggregate balance of the 2012 Notes outstanding, unpaid interest and unamortized note discount as of September 30, 2014 amounted to $753,667, $38,604 and $372,298 respectively.
Total 2010 and 2012 2.5% convertible notes purchased and held by Europa were $1,094,167 at both September 30, 2014 and December 31, 2013. Europa is an entity controlled by Knoll Capital Management of which Mr. Knoll, one of our directors, is the managing director.
c. | 2014 6% Convertible Notes |
In January and February 2014, we entered into Securities Purchase Agreements with approximately 31 accredited investors (the “Investors”), pursuant to which the Investors, on February 12, 2014, purchased from us (i) 6% Senior Secured Convertible Notes (the “6% Notes”) for a cash purchase price of $1,906,500, and (ii) Common Stock Purchase Warrants pursuant to which the Investors may purchase up to 454,460 shares of our common stock at an exercise price equal to approximately $2.30 per share (the “6% Notes Placement”). The 6% Notes have a three year term and are convertible into common stock at any time at the lesser of i) $2.30 per share and ii) seventy percent of the average of the three lowest daily volume-weighted average prices (“VWAPs”) occurring during the 20 consecutive trading days immediately preceding the applicable conversion date. The associated warrants are exercisable at $2.30 per share. The warrants may be exercised on a cashless basis under which a portion of the shares subject to exercise are not issued in payment of the purchase price, based on the then fair market value of the shares.
The 6% Notes accrue 6% interest per annum and do not require periodic cash interest payments, except that accrued and unconverted interest is due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted. If there is an uncured event of default (as defined in the 6% Notes), which may include default on the Company’s 2.5% Notes or its 8% Notes, the holder of each 6% Note may declare the entire principal and accrued interest amount immediately due and payable. Default interest will accrue after an event of default at an annual rate of 12%. If there is an acceleration, a mandatory default amount equal to 120% of the unpaid 6% Note principal plus accrued interest may be payable.
The 6% Notes and associated warrants include an anti-dilution provision that allows for the automatic reset of the conversion or exercise price upon any future sale of common stock instruments at or below the current conversion or exercise price, as applicable, and, as such, were accounted for as derivative liability. The value of the derivative liability at the date of issuance was $4,443,569, of which $1,906,500 was reflected as a note discount and the remaining balance of $2,537,069 has been reflected in the statement of operations as part of cost of the private placement (see Note 4 below for further discussion of Derivative Liability).
We also entered into a Security Agreement and an Intellectual Property Security Agreement with the Investors and AtheroNova Operations, pursuant to which all of our obligations under the 6% Notes are secured by security interests in all of our assets and the assets of AtheroNova Operations, including intellectual property on a pari passu basis with the 2.5% Senior Secured Convertible Notes outstanding. Upon an event of default under the 6% Notes or associated agreements, the 6% Note holders may be entitled to foreclose on any of such assets or exercise other rights generally available to a secured creditor under California and Delaware law. In addition, under a Subsidiary Guarantee, AtheroNova Operations guaranteed all of our obligations under the 6% Notes.
Additionally, several of the individuals or entities who participated in this offering were also existing holders of warrants to purchase 542,246 shares of common stock. As an incentive for their participation, the expiration dates of these warrants were extended to ten years from the date of each respective warrant’s original issuance while all other remaining provisions stayed the same. At the date of modification, the difference in the fair value of these warrants before and after the modification amounted to $564,849 using the Black-Scholes Merton valuation and was included as a cost of the private placement in the accompanying statement of operations. Furthermore, in August 2013, the Company agreed to issue similar warrants to participants of a private placement sale of our common stock held at that time. As a result, we issued warrants to purchase an additional 40,000 shares of our common stock with the same terms and conditions as the warrants issued in the note placement. These warrants included an anti-dilution provision that allows for the automatic reset of the conversion or exercise price upon any future sale of common stock instruments at or below the current conversion or exercise price, and, as such, were accounted for as derivative liability. Upon their issuance, the fair value of these warrants was determined to be $143,997 using a probability based weighted average Black-Scholes Merton valuation and was recorded as a derivative liability upon issuance and included in the cost of the private placement in the accompanying statement of operations (see Note 4 below for further discussion of derivative liability).
As a result of this offering, the Company recognized private placement costs in the aggregate of $3,340,030 to account for the following (i) commission and fees paid of $70,720; (ii) issuance of 6,535 shares of common stock to a placement agent with a fair value of $23,395; (iii) fair value of warrants modified of $564,849; and (iv) the excess fair value of the note’s conversion feature and warrants accounted as derivative liability of $2,681,066 on the face amount of the 6% Notes of $1,906,500.
In September 2014, in a separate offering, the Company issued its Short Term 8% Convertible Notes with a conversion price of $1.11 per share. As a result of this offering, the stated conversion price of the 6% Notes were reset from $2.30 per share to $1.11 per share and the exercise price of the attached warrants were reset from $2.00 per share to $1.11 per share. In connection with our follow-on public offering on October 31, 2014, the then-current stated conversion price of the 6% Notes was reset from $1.11 per share to $0.75 per share and the exercise price of the attached warrants was reset from $1.11 per share to $0.75 per share.
During the period ended September 30, 2014, $40,000 in aggregate principal amount of the 2014 Notes was converted into 37,558 shares of the Company’s common stock. The Company also issued 983 shares of its common stock with a market value of $2,508 to settle accrued but unpaid interest associated with the converted 2014 Notes of $1,048. The issuance of these shares of common stock resulted in an additional charge of $1,460 that has been reflected as part of interest expense in the accompanying statement of operations. The Company also recorded interest expense of $36,803 to amortize the corresponding note discount of the converted notes.
During the period ended September 30, 2014, the Company recognized interest expense of $73,218 and $399,862 to amortize the note discount. The aggregate balance of the 2014 Notes outstanding, unpaid interest and unamortized note discount as of September 30, 2014 amounted to $1,866,500, $72,171 and $1,469,835 respectively.
As of September 30, 2014, Europa held $300,000 in aggregate principal amount of the 6% Notes. Europa is an entity controlled by Knoll Capital Management of which Mr. Knoll, one of our directors, is the managing director.
4. SHORT TERM 8% SECURED CONVERTIBLE NOTES
Short term 8% convertible notes payable consist of the following as of September 30, 2014 and December 31, 2013:
September 30, | December 31, | |||||||
2014 | 2013 | |||||||
2014 8% Convertible Notes | $ | 500,000 | -- | |||||
Less Valuation Discount | (475,343 | ) | -- | |||||
Convertible Notes Payable, net | $ | 24,657 | $ | -- | ||||
In August and September 2014, we entered into Securities Purchase Agreements with approximately seven accredited investors (the “Investors”), pursuant to which the Investors, on September 12, 2014, purchased from us (i) 8% Senior Secured Convertible Notes (the “8% Notes”) for a cash purchase price of $500,000, and (ii) Common Stock Purchase Warrants pursuant to which the Investors may purchase up to 225,228 shares of our common stock at an exercise price equal to $2.00 per share (the “8% Notes Placement”). The 8% Notes have a one year term and are convertible into common stock at our election following a private placement or public offering of our securities after the issuance date. The associated warrants are exercisable at $2.00 per share. The warrants may be exercised on a cashless basis under which a portion of the shares subject to exercise are not issued in payment of the purchase price, based on the then fair market value of the shares.
The 8% Notes accrue 8% interest per annum and do not require periodic cash interest payments, except that accrued and unconverted interest is due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted. If there is an uncured event of default (as defined in the 8% Notes), which also may include default on the Company’s 2.5% Notes or its 6% Notes, the holder of each 8% Note may declare the entire principal and accrued interest amount immediately due and payable. Default interest will accrue after an event of default at an annual rate of 24%. If there is an acceleration, a mandatory default amount equal to 120% of the unpaid 8% Note principal plus accrued interest may be payable.
Upon issuance of the 8% Notes, we calculated the relative value of the beneficial conversion feature of the 8% Notes to be $275,356 and the relative fair value of the warrants to be $224,644 based upon a Black-Scholes-Merton option pricing model with the following assumptions: stock price of $2.06; exercise price of $2.00; term of 5 years; interest rate of 1.83%; dividend rate of 0%; and volatility of 136% for a total of $500,000. The beneficial conversion feature and fair value of the warrants were recorded as a discount to the 8% Notes, and will be amortized over the life of the 8% Notes.
We also entered into a Security Agreement and an Intellectual Property Security Agreement with the Investors and AtheroNova Operations, pursuant to which all of our obligations under the 8% Notes are secured by security interests in all of our assets and the assets of AtheroNova Operations, including intellectual property on a pari passu basis with the 2.5% & 6% Senior Secured Convertible Notes outstanding. Upon an event of default under the 8% Notes or associated agreements, the 8% Note holders may be entitled to foreclose on any of such assets or exercise other rights generally available to a secured creditor under California and Delaware law. In addition, under a Subsidiary Guarantee, AtheroNova Operations guaranteed all of our obligations under the 8% Notes.
During the period ended September 30, 2014, the Company recognized interest expense of $2,000 and $24,657 to amortize the note discount. The aggregate balance of the 2014 8% Notes outstanding, unpaid interest and unamortized note discount as of September 30, 2014 amounted to $500,000, $2,000 and $475,343, respectively.
As of September 30, 2014, Europa held $100,000 in aggregate principal amount of the 8% Notes. Europa is an entity controlled by Knoll Capital Management of which Mr. Knoll, one of our directors, is the managing director.
5. DERIVATIVE LIABILITY
In April 2008, the FASB issued a pronouncement which provides guidance on determining what types of instruments or embedded features in an instrument held by a reporting entity can be considered indexed to its own stock for the purpose of evaluating the first criteria of the scope exception in the pronouncement on accounting for derivatives. This pronouncement was effective for financial statements issued for fiscal years beginning after December 15, 2008. The adoption of these requirements can affect the accounting for warrants and many convertible instruments with provisions that protect holders from a decline in the stock price (or “down-round” provisions). For example, warrants with such provisions will no longer be recorded in equity. Down-round provisions reduce the exercise price of a warrant or convertible instrument if a company either issues equity shares for a price that is lower than the exercise price of those instruments or issues new warrants or convertible instruments that have a lower exercise price.
We determined that the 6% Notes and related warrants issued to the Investors in February 2014 and the additional 40,000 warrants issued to the August 2013 Investors concurrent with the issuance of the 6% Notes and related warrants contained provisions that protect holders from declines in the stock price or otherwise could result in modification of the exercise price under the respective convertible debt and warrant agreements. As a result, these instruments were recorded as derivative liability and valued using a probability based weighted-average Black-Scholes-Merton valuation with the following assumptions:
September 30, 2014 | February 12, 2014 (Issuance) | |||||||
(Unaudited) | (Unaudited) | |||||||
Conversion Feature : | ||||||||
Risk-free interest rate | 0.88 | % | 0.74 | % | ||||
Expected volatility | 135 | % | 211 | % | ||||
Expected life (in years) | 2.38 | 3.00 | ||||||
Expected dividend yield | 0.00 | % | 0.00 | % | ||||
Warrants : | ||||||||
Risk-free interest rate | 2.53 | % | 2.80 | % | ||||
Expected volatility | 135 | % | 211 | % | ||||
Expected weighted average life (in years) | 9.38 | 10 | ||||||
Expected dividend yield | 0.00 | % | 0.00 | % | ||||
Fair Value : | ||||||||
Conversion feature | $ | 2,779,630 | $ | 2,951,785 | ||||
Warrants | 868,105 | 1,635,781 | ||||||
| $ | 3,647,735 | $ | 4,587,566 | |||||
The risk-free interest rate was based on rates established by the Federal Reserve Bank. The Company uses the historical volatility of its common stock based upon the expected term of the instrument, and the expected life of the instrument is determined by the expiration date of the instrument. The expected dividend yield was based on the fact that the Company has not paid dividends to common stockholders in the past and does not expect to pay dividends to common stockholders in the future.
The Company measured the aggregate fair value of the conversion feature and the warrants issued on the date of issuance of February 12, 2014 as $4,587,566. At September 30, 2014, the aggregate fair value of the derivative liabilities amounted to $3,647,735. As a result, the Company recorded the change in fair value of the derivative liabilities of $939,831 in the accompanying statement of operations for the nine months ending September 30, 2014.
6. STOCKHOLDERS’ EQUITY
Common Stock
On February 12, 2014, in satisfaction of the equity portion of a compensation arrangement with an accredited broker who assisted in the placement of the 6% Notes, we issued 6,535 shares of our common stock, with a fair value of $23,395. This cost was recorded as a cost of the private placement in our statement of operations.
In May 2014, the Company issued 422,105 shares of its common stock valued at $2,152,735 to CardioNova pursuant to the terms of a licensing agreement to which the Company is a party, in connection with a milestone achievement in February 2014 (see Note 7).
In March and July 2014, the Company issued a total of 187,390 shares of common stock valued at $478,822 pursuant to the conversion of our convertible notes payable and accrued interest.
In April and May 2014, The Company issued a total of 34,707 shares of our common stock to adjust for the round lot treatment for stockholders holding under 500 shares of our common stock as approved by the stockholders in effectuating the 1 - for - 10 reverse stock split effective as of April 22, 2014.
Stock Options
The Company has a stockholder-approved stock incentive plan for employees under which it has granted stock options. In May 2010, the Company established the 2010 Stock Incentive Plan (the “2010 Plan”), which provides for the granting of awards to officers, directors, employees and consultants to purchase or acquire up to 7,362,964 shares, as amended, of the Company’s common stock. The awards have a maximum term of 10 years and vest over a period determined by the Company’s Board of Directors and are issued at an exercise price determined by the Board of Directors. Options issued under the 2010 Plan will have an exercise price equal to or greater than the fair market value of a share of the Company’s common stock at the date of grant. The 2010 Plan expires on May 20, 2020 as to any further granting of options. In the nine months ended September 30, 2014, a total of 10,000 options to purchase shares of the Company’s common stock were granted under the 2010 Plan. Additionally, options to purchase 22,500 shares of the Company’s common stock originally granted outside of the 2010 Plan were cancelled in accordance with the grant terms. There were options outstanding to purchase a total of 548,950 shares granted under the 2010 Plan as well as outside the 2010 Plan as of September 30, 2014. There were 299,797 shares reserved for future grants under the 2010 Plan as of September 30, 2014.
A summary of the status of the Company’s stock options as of September 30, 2014 and changes during the period then ended is presented below:
Shares | Weighted average exercise price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at December 31, 2013 | 568,950 | $ | 8.320 | 4.849 | $ | 86,271 | ||||||||||
Granted | 10,000 | 3.800 | 7.000 | -- | ||||||||||||
Exercised | -- | -- | -- | -- | ||||||||||||
Cancelled | (30,000 | ) | (5.000 | ) | -- | -- | ||||||||||
Outstanding at September 30, 2014 | 548,950 | $ | 8.421 | 4.080 | $ | 0 | ||||||||||
Exercisable at September 30, 2014 | 411,771 | $ | 9.031 | 3.612 | $ | 0 | ||||||||||
In March 2014, the Company granted options to purchase 10,000 shares of common stock to a consultant to the Company. The options have an exercise price of $3.80 per share, vest over a three month period and expire seven years form the date of grant.
During the nine months ended September 30, 2014, the Company recognized $344,965 of compensation costs as part of general and administrative expense related to the vesting of these options. As of September 30, 2014, future compensation cost related to non-vested options is estimated to be approximately $351,845. The weighted average period over which it is expected to be recognized is approximately 2.25 years.
The following table shows the weighted average assumptions the Company used to develop the fair value estimates for the determination of the compensation charges in the three and nine months ended September 30, 2014 and 2013:
Three months ended September 30, | Nine monthsended September 30, | |||||||||||||||
| �� | 2014 | 2013 | 2014 | 2013 | ||||||||||||
| Expected volatility | 196% | 218% | 196%- 201% | 113%-226% | ||||||||||||
Dividend yield | -- | -- | -- | -- | ||||||||||||
Expected term (in years) | 6.25 | 6.25 | 6.25 | 6.25 | ||||||||||||
Risk-free interest rate | 1.43%-1.96% | 2.05% | 1.43%-2.73% | 1.38-2.05% | ||||||||||||
To compute compensation expense, the Company estimated the fair value of each option award on the date of grant using the Black-Scholes-Merton option pricing model for employees, and calculated the fair value of each option award at the end of the period for non-employees. In the prior periods, 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. Starting in April of 2013, the Company determined that its stock price had matured and there was a consistent level of trading activity, as such, the Company used the volatility percentage of its common 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. 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.
Warrants
A summary of the status of our issued and outstanding warrants as of September 30, 2014 and changes during the period then ended is presented below:
Shares | Weighted average exercise price | Weighted Average Remaining Contractual Term (years) | Aggregate Intrinsic Value | |||||||||||||
Outstanding at December 31, 2013 | 853,946 | $ | 3.770 | 2.665 | $ | 783,258 | ||||||||||
Granted | 679,688 | 1.405 | 7.953 | -- | ||||||||||||
Exercised | -- | -- | -- | -- | ||||||||||||
Cancelled | (114,147 | ) | (5.981 | ) | -- | -- | ||||||||||
Outstanding at September 30, 2014 | 1,419,487 | $ | 3.266 | 6.668 | $ | 0 | ||||||||||
Exercisable at September 30, 2014 | 1,419,487 | $ | 3.266 | 6.668 | $ | 0 | ||||||||||
In February 2014, pursuant to the issuance of the 6% Notes, the Company issued warrants to purchase a total of 454,460 shares of common stock. The warrants are exercisable at $2.30/share, vest immediately and will expire in ten years. In September 2014, pursuant to the reset provision of the warrants, the exercise price of the warrants was reset to $1.11 per share. In connection with our follow-on public offering on October 31, 2014, the exercise price of the warrants was again reset to $0.75 per share. See Note 4 for further discussion.
In September 2014, pursuant to the issuance of the 8% Notes, the Company issued warrants to purchase 225,228 shares of common stock. The warrants are exercisable at $2.00/share and will expire in five years. See Note 4 for further discussion.
7. COMMITMENTS
CardioNova Agreement
In October 2011, we entered into two definitive agreements with OOO CardioNova, a wholly-owned subsidiary of Maxwell Biotech Group, a Russian biotech fund, covering our AHRO-001 compound. The agreements cover a territory represented by the Russian Federation, the Ukraine and various countries in central Asia (the “Territory”).
Under the licensing agreement OOO CardioNova (“CardioNova”) became an equity investor in our company in exchange for the funding of Phase 1 and 2 human clinical trials conducted by a Clinical Research Organization (“CRO”) located in Russia. A Joint Steering Committee was subsequently established between both entities and determined the final clinical protocols and approved a research budget of $3.8 million.
Pursuant to the agreement, common stock equal to specified percentages of the approved research budget of $3.8 million would be issued to CardioNova upon achievement of four milestones in the research plan. Through December 31, 2013, the Company had issued a total of 199,730 of non-refundable shares of common stock representing the first two milestones and 30% of the total budget with a fair value of $1,198,297, or $6.00 per share. Additionally, the Company determined that the achievement of the third milestone was probable and the percentage of achievement at 80% complete, therefore accrued additional research and development expense – related party of $1,170,712 as of December 31, 2013. There had been no work performed with respect to the fourth and last milestone through that date.
In February 2014, the third milestone was achieved. Pursuant to the agreement, the Company issued 422,105 shares of common stock to CardioNova with a fair value of $2,152,736. As a result, the Company recorded $982,024 in additional Research and development expense to account for the remaining fair value of the shares issued as $1,170,712 was already accrued in 2013.
As of September 30, 2014, the Company determined that the achievement of the final milestone was probable and the percentage of achievement at 40% complete. Accordingly, the Company accrued research and development expense-related party in the accompanying statement of operations of $314,776 and $469,850 for the three and nine months ended September 30, 2014, respectively to account for the potential issuance of approximately 240,000 shares of common stock at September 30, 2014.
If CardioNova successfully develops and commercializes AHRO-001 in the Territory, we will be entitled to receive a quarterly royalty, based on net sales during the period using an escalating scale. The royalty agreement shall remain in force for the period in which intellectual property rights for AHRO-001 are in full force and effect in the Territory.
Under the Securities Purchase Agreement, CardioNova purchased a total of 27,526 shares of our common stock in December 2011 and June 2013 for a cash purchase price of $9.70 per share or $267,000.
Research Agreements
We have a research agreement signed in September 2012, and amended in April 2013 and again in September 2013, with a major university in Southern California to conduct contract research in bile acid compounds, the use of which may be covered under our issued patents and pending patent applications. This agreement calls for payment of all research costs relating to the study of dosage and efficacy of bile salts on the atherosclerotic plaque in a non-human model. The cost of the project was $236,323, to be paid in four installments over the length of the study. The process is ongoing and to date, the entire $236,323 has been expensed in prior periods. As of September 30, 2014, $70,000 is still outstanding pending issuance of final research reports and is reported as part of Accounts Payable and accrued expenses in the accompanying balance sheet.
We have additional studies authorized in February and April 2014 for toxicology and other metabolic evaluations with expected aggregate cost of approximately $738,000, that are in various stages of planning or active execution of their protocols. The process is ongoing and to date, $425,610 and $597,790 has been expensed to Research and development costs on the accompanying statement of operations for the three and nine month periods ended September 30, 2014, respectively. The remaining $140,210 will be recorded in future periods once service has been rendered.
We also have a research agreement finalized in March 2014 and amended in August 2014 with an Australian hospital/research institution for a metabolic study of AHRO-001 in a standard animal model used in evaluation of plaque regression with an expected aggregate cost of approximately $212,000. To date, the study plan continues to be developed and initial study material has been provided for commencement during the 4th quarter of 2014. The process is ongoing and the total cost of $212,000 will be recorded in future periods once service has been rendered.
Formulation Development Agreement
We have a development agreement entered into in February 2014 with a Pennsylvania-based Clinical Research Organization (‘CRO”) specializing in formulation and manufacturing of clinical research grade pharmaceutical products. The agreement called for the CRO to use our Active Pharmaceutical Ingredient to manufacture clinical trial pharmaceutical products, completed and shipped in the 2nd quarter of 2014, as well as long-term stability testing of the completed product. The total expected cost of the project is $220,650, as amended, to be paid in progress installments over the length of the manufacturing, packaging and stability process. The process is ongoing and to date, $18,150 and $178,459 has been recorded as part of Research and development costs on the accompanying statement of operations for the three and nine month periods ending September 30, 2014, respectively. The remaining $42,191 will be recorded in future periods once service has been rendered.
Bioanalytical Analysis Agreements
We have analysis agreements for our next clinical trial in Russia entered into in May 2014, as amended, with several analytical laboratories to perform specialized serum analyses for biomarkers of certain gene expressions activated in previous non-human experiments when exposed to our Active Pharmaceutical Ingredient. The expected aggregate cost of these agreements is approximately $339,400 to be paid in installments upon progress completion points as the analyses are performed. The process is ongoing and to date, $32,563 and $128,610 has been recorded as part of Research and development costs on the accompanying statement of operations for both the three and nine month periods ended September 30, 2014, respectively. The remaining $210,790 will be recorded in future periods once services have been rendered.
8. RELATED PARTY TRANSACTIONS
Accounts payable includes $108,083 and $50,841 as of September 30, 2014 and December 31, 2013, respectively, that are payable to officers and directors of the Company.
As of September 30, 2014, Europa held $1,094,167 in aggregate principal amount of the 2.5% Notes, $300,000 in aggregate principal of the 6% Notes and $100,000 in aggregate principal of the 8% Notes. Europa is an entity controlled by Knoll Capital Management of which Mr. Knoll, one of our directors, is the managing directors.
9. SUBSEQUENT EVENTS
On October 31, 2014, the Company completed a follow-on public offering of 4,000,000 shares of its common stock, with each share of common stock sold together with warrants to purchase 1.25 shares of the Company’s common stock. The common stock with a warrant was sold at a price to the public of $0.75 per unit. The Company received gross proceeds from this offering of approximately $3,000,050 before deducting underwriting discounts, commissions and other estimated offering expenses. The warrants issued have an exercise price if $4.00 per share, subject to adjustments, and are exercisable immediately and expire five years from the date of issuance. In addition, the Company has granted the underwriters to the offering a 45-day option to purchase up to an additional 600,000 shares of the Company’s common stock and/or warrants to purchase up to an aggregate of 750,000 shares of common stock. Finally, the Company granted to the underwriters a warrant to purchase 200,000 shares of common stock at a per share exercise price of $0.9375, with a five year life.
The initial exercise price per share of common stock purchasable upon exercise of the warrants is subject to adjustment as follows:
• | Proportional adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting the Company’s common stock. |
• | The Company’s issuance or deemed issuance (other than with respect to explicitly defined excluded securities) of shares of the Company’s common stock at a price per share less than the exercise price then in effect will reduce the exercise price to the price (determined in accordance with the terms of the warrant) at which such shares are issued. |
• | If prior to October 31, 2015, the Company effects a reverse split and 125% of the closing market price of its common stock during any 3 consecutive trading days after the effective date of the reverse split is less than $0.75 (as adjusted for stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events), then the exercise price shall be reduced to 125% of the amount of the lowest closing market price of the Company’s common stock during such 3-trading day period, subject to a floor of 80% of the exercise price. This adjustment only applies to the first reverse split effected after the issuance date of the warrants. |
• | If immediately following the close of business on February 28, 2015, the exercise price then in effect exceeds 85% of the lowest volume-weighted average price on any trading day during the 10 consecutive trading day period ending on an including the trading day immediately prior to February 28, 2015 (the “Adjusted Exercise Price”), the exercise price shall automatically be reduced to the Adjusted Exercise Price. |
• | If the Company takes any action to which the provisions of the warrants are not strictly applicable, or if inapplicable, would not operate to protect the warrant holders from dilution, then the Company’s board of directors shall in good faith determine and implement an appropriate adjustment in the exercise price and the number of shares issuable upon exercise of the warrants so as to protect the rights of the holders of the warrants, provided that if a warrant holder does not accept such adjustments as appropriately protecting its interests against such dilution, then the Company’s board of directors and such holder shall agree, in good faith, upon an independent investment bank of nationally recognized standing to make such appropriate adjustments, whose determination shall be final and binding and whose fees and expenses shall be borne by the Company. |
Simultaneous with any of the foregoing adjustments, the number of warrant shares shall be increased or decreased proportionately so that after such adjustment the aggregate exercise price payable for the adjusted number of warrant shares equals the aggregate exercise price in effect immediately prior to the adjustment. To the extent that the adjustment provisions of the warrants are effected, the exercise of the warrants thereafter could result in signification dilution to the existing holders of the Company’s common stock.
The associated warrants include an anti-dilution provision that allows for the automatic reset of the exercise price upon any future sale of common stock or similar equity instrument and debt instrument at or below the current exercise price. As a result, we will account for these warrants as derivative liability pursuant to current accounting guidelines.
The value of the derivative liability at the date of issuance is estimated to be in excess of the net proceeds received by the Company from this offering based on our preliminary valuation. A final valuation on the fair value of these warrants will be prepared by December 31, 2014 and as such, we will account for the excess of the value of the derivative liability over the net proceeds as a financing cost in the fourth quarter of 2014.
Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations.
This discussion summarizes the significant factors affectingour operating results, financial condition and liquidity and cash flows for thethreeand nine months endedSeptember 30, 2014 and 2013. The discussion and analysis that follows should be read together with thecondensed consolidatedfinancial statementsand the notes to the financial statements included elsewhere in thisreport. Except for historical information, the matters discussed in this Management’s Discussion and Analysis of Financial Condition and Results of Operations(“MD & A”)are forward looking statements that involve risks and uncertainties and are based upon judgments concerning various factors that are beyond our control.Youcan identify forward-looking statements by the use of forward-looking terminology including “believes,” “expects,”“may,” “will,” “should,” “seeks,” “intends,” “plans,” “pro forma,” “estimates,” “anticipates” or the negative of thesewords and phrases or other variations of these words and phrases or comparable terminology.Our actual results could differ materially from the results anticipated in any forward-looking statements as a result of a variety of factors, including those discussed in the section of our annual report on Form 10-K captioned “Risk Factors.”
Overview
Z&Z Medical Holdings, Inc. (“Z&Z Nevada”) was incorporated in the State of Nevada on December 13, 2006 with contributed intellectual property from its founders. Z&Z Nevada was engaged in developing the contributed intellectual property while seeking sources of funding to conduct further research and development. In November 2009 we incorporated a separate company, Z&Z Medical Holdings, Inc. in Delaware (“Z&Z Delaware”) and merged Z&Z Nevada into Z&Z Delaware in March 2010. On March 26, 2010 we entered into a merger agreement between us, Z&Z Delaware and Z&Z Merger Corporation, our wholly-owned subsidiary and on May 13, 2010, Z&Z Delaware merged into Z&Z Merger Corporation and became our operating subsidiary. Concurrent with the merger, Z&Z Delaware changed its name to AtheroNova Operations Inc. (“AtheroNova Operations”) and we changed our name to AtheroNova Inc. The merger was accounted for as a reverse merger (recapitalization) with AtheroNova Operations deemed to be the accounting acquirer, and our company deemed to be the legal acquirer. The business of AtheroNova Operations, pharmaceuticals and pharmaceutical intellectual property, became our business upon consummation of the merger.
We have developed intellectual property, covered by our pending patent applications, which uses certain pharmacological compounds uniquely for the treatment of atherosclerosis, which is the primary cause of cardiovascular diseases. Atherosclerosis occurs when cholesterol of fats are deposited and form as plaques on the walls of the arteries. This buildup reduces the space within the arteries through which blood can flow. The plaque can also rupture, greatly restricting or blocking blood flow altogether. Through a process called delipidization, such compounds dissolve the plaques so they can be eliminated through normal body processes and avoid such rupturing or restriction of blood flow. Such compounds may be used both to treat and prevent atherosclerosis.
In the near future, we plan to continue studies and preparation for clinical trials to demonstrate the efficacy of our intellectual property and related Active Pharmaceutical Ingredient (“API”). Ultimately, we plan to use or license our technology to various licensees throughout the world who may use it in treating or preventing atherosclerosis and other medical conditions or sublicense the intellectual property or API to other such users. Our potential licensees may also produce, market or distribute products which utilize or add our compounds and technology in such treatment or prevention.
General
Operating expenses consist primarily of payroll and related costs, corporate infrastructure costs and research costs. We expect that our operating expenses will increase as we initiate production of API sufficient to use in toxicology studies, formulation development and tableting quantities necessary for Phase 1 and 2 clinical trials, advancing our business plan, in addition to the added costs of operating as a public company.
Historically, we have funded our working capital needs primarily through the sale of shares of our capital stock and debt financing.
The following represents a discussion of our operations for the periods presented.
Resultsof Operations
Three months ended September 30, 2014 Compared to the three months ended September 30, 2013
Quarters endedSeptember 30, | Increase | |||||||||||
2014 | 2013 | (decrease) | ||||||||||
Costs and expenses: | ||||||||||||
Research and development: | ||||||||||||
Share-based compensation | $ | 314,776 | $ | -- | $ | 314,776 | ||||||
Other research and development expenses | 376,160 | 470,074 | (93,914 | ) | ||||||||
Total research and development expenses | 690,936 | 470,074 | 220,862 | |||||||||
General and administrative: | ||||||||||||
Share-based compensation | 95,437 | 191,469 | (96,032 | ) | ||||||||
Other general and administrative expenses | 168,928 | 382,349 | (213,421 | ) | ||||||||
Total general and administrative expenses | 264,365 | 573,818 | (309,453 | ) | ||||||||
Interest expense | (303,063 | ) | (110,073 | ) | 192,990 | |||||||
Change in fair value of derivative liabilities | (1,299,251 | ) | -- | 1,299,251 | ||||||||
Other income (expense) | 59 | 230 | 171 | |||||||||
Total other income (expense) | (1,602,255 | ) | (109,843 | ) | 1,492,412 | |||||||
Net loss | $ | (2,557,556 | ) | $ | (1,153,735 | ) | $ | 1,403,821 | ||||
During the three month periods ended September 30, 2014 and 2013, we did not recognize any revenues. We are considered a development stage company and do not expect to have revenues relating to our products in the foreseeable future, if at all.
For the quarter ended September 30, 2014, research and development expenses increased to $690,936 from $470,074 in the same period in 2013. This increase is primarily due to the recognition of the Phase 1b progress costs in the current year compared to no expenses for CardioNova projects in the same period of 2013. Partially offsetting this increase was a decrease in expenses associated with toxicology work due to reaching the write-up phase of these studies in 2014 whereas we had preclinical research projects concluding during the three months ended September 30, 2013.
General and administrative costs decreased to $264,365 in the third quarter of 2014 compared to $573,818 for the quarter ended September 30, 2013, or a decrease of $309,453. The decrease in costs in 2014 is due to lower stock based compensation expense for our officers, directors and consultants upon completion of vesting of several stock option grants in 2014 compared to vesting of the same stock option grants to employees, directors and consultants in 2013.
For the quarter ended September 30, 2014, interest expense of $303,063 increased significantly when compared to $110,073 in the quarter ended September 30, 2013. Note discount amortization expense of $157,298 on the 6% Notes outstanding for the entire three month period in 2014 as well as recognition of amortization expense of $34,259 of unamortized note discounts for 6% Notes converted during the same period had no comparable expense in the prior year.
Change in fair value of derivative liabilities increased to $1,299,251 for the quarter ended September 30, 2014 due to the revaluation of derivative liabilities on the 6% senior convertible notes and associated warrants at the balance sheet date of September 30, 2014. There was no comparable activity in the three months ended September 30, 2013.
Net loss for the quarter ended September 30, 2014 was $2,557,556 compared to $1,153,735 for the quarter ended September 30, 2013 due to revaluation of the derivative liabilities in the current year and lower stock based compensation in research and development. This increased loss was partially offset by the lower expenses relating to toxicology and development testing, and decreased legal costs. There were no losses recognized on the revaluation of derivative liabilities in the comparable period in the prior year.
Nine months ended September 30, 2014 Compared to the nine months ended September 30, 2013
Nine months endedSeptember 30, | Increase | |||||||||||
2014 | 2013 | (decrease) | ||||||||||
Costs and expenses: | ||||||||||||
Research and development: | ||||||||||||
Share-based compensation | $ | 1,451,873 | $ | 1,198,297 | $ | 253,576 | ||||||
Other research and development expenses | 1,777,206 | 1,342,990 | 434,216 | |||||||||
Total research and development expenses | 3,229,079 | 2,541,287 | 687,792 | |||||||||
General and administrative: | ||||||||||||
Share-based compensation | 344,965 | 1,193,342 | (848,377 | ) | ||||||||
Other general and administrative expenses | 1,144,857 | 1,118,300 | 26,556 | |||||||||
Total general and administrative expenses | 1,489,822 | 2,311,642 | (821,821 | ) | ||||||||
Interest expense | (1,039,612 | ) | (491,591 | ) | 548,021 | |||||||
Private placement costs | (3,340,030 | ) | -- | 3,340,030 | ||||||||
Change in fair value of derivative liabilities | 939,831 | -- | (939,831 | ) | ||||||||
Other income (expense) | (1,492 | ) | 958 | 2,450 | ||||||||
Total other income (expense) | (3,441,303 | ) | (490,633 | ) | 2,950,670 | |||||||
Netloss | $ | (8,160,204 | ) | $ | (5,343,562 | ) | $ | (2,816,642 | ) | |||
During the nine month periods ended September 30, 2014 and 2013, we did not recognize any revenues. We are considered a development stage company and do not expect to have revenues relating to our products in the foreseeable future, if at all.
For the nine months ended September 30, 2014 and 2013, research and development expenses increased to $3,229,079 from $2,541,287. This increase is primarily the result of expenses associated with the toxicology testing program undertaken to support regulatory filings in the United States for AHRO-001 and increased costs for patent filing, prosecution and share-based compensation for current year progress to date in the clinical trial being conducted by CardioNova when compared to the same period in the prior year.
General and administrative costs decreased to $1,489,822 in the nine months ended September 30, 2014 compared to $2,311,642 for the nine months ended September 30, 2013, or a decrease of $821,821. The decrease in costs incurred in 2014 is due primarily to significantly lower share-based compensation costs as there were no below market purchases or gifts of stock involving a controlling stockholder as were recorded in 2013 as well as reduced costs recorded in the current year with a number of option grants reaching full vesting. Partially offsetting the decreased share based compensation were slight increased expenses for consultants and professional costs for the management of ongoing funding efforts during the current year.
For the nine month period ended September 30, 2014 interest expense was $1,039,612 compared to $491,591 in the nine month period ended September 30, 2013. This change is due to recognition of the note discounts on a higher outstanding Senior Note balance in the current year when compared to 2013 as well as the associated additional interest expense for amortization on notes converted prior to maturity.
For the nine months ended September 30, 2014 private placement costs increased to $3,340,030 with no comparable expense in the same period of 2013. This increase is due to recognition of the fair value of the embedded derivative in the 6% Notes and warrants issued in the current period with variable conversion price and exercise price, net of the principal amount of $1,906,500. Additionally, expenses in the current period included the cost of cash and equity commissions totaling $94,115 paid to an accredited broker that assisted in the placement of a portion of the note offering.
Change in fair value of derivative liabilities was income of $939,831 in the nine months ended September 30, 2014 for the change in the fair value during the period in which the 6% Notes and warrants were issued and outstanding. The fair value of these variable financial instruments is computed at the end of each periodic reporting date and any change is recorded as income or expense in the current period. There was no comparable charge in the same period of 2013.
Net loss for the nine month period ended September 30, 2014 was $8,160,204 compared to $5,343,562 for the nine month period ended September 30, 2013 due to the private placement costs recognized for the 6% Notes and warrants issued in the February 2014 offering, the cost of the research and development paid and payable through the issuance of our common stock and generally higher operating costs associated with our research and development.
Liquidity and Capital Resources
We had stockholders deficiency of $6,598,442 at September 30, 2014, and have incurred accumulated deficit of $30,189,998 primarily as a result of our losses from operations and the non-cash costs relating to the accounting of debt, derivative and warrant issuances as well as research and development costs paid and expected to be paid through the issuance of our common stock. These losses have been incurred through a combination of research and development activities as well as patent work related to our technology, expenses related to the merger and to public reporting obligations and the costs to supporting all of these activities. We expect to continue to incur additional losses for at least the next 12 months and for the foreseeable future. These factors, among others, raise substantial doubt about our ability to continue as a going concern. The condensed consolidated financial statements do not include any adjustments that might be necessary should we be unable to continue as a going concern.
We have financed our operations since inception primarily through equity and debt financings. During the nine months ended September 30, 2014, we had a net increase in cash and cash equivalents of $60,009. This increase resulted largely from net cash generated in the 6% and 8% Note financings of $1,906,500 and $500,000, respectively, largely offset by cash used in operating activities of $2,133,855. Total liquid resources as of September 30, 2014 were $326,219 compared to $266,210 at December 31, 2013.
As of September 30, 2014, we had a working capital deficit of $2,000,140, when excluding the derivative liability of $3,647,735 compared to a working capital deficit of $989,341 at December 31, 2013.
Our available working capital and capital requirements will depend upon numerous factors, including progress of our research and development programs, our progress in and the cost of ongoing and planned nonclinical and clinical testing, the timing and cost of obtaining regulatory approvals, the cost of filing, prosecuting, defending, and enforcing patent claims and other intellectual property rights, in-licensing activities, competing technological and market developments, the resources that we devote to developing manufacturing and commercializing capabilities, the status of our competitors, our ability to establish collaborative arrangements with other organizations and our need to purchase additional capital equipment.
Our continued operations will depend on our ability to raise additional funds through various potential sources, such as equity and debt financing, other collaborative agreements, strategic alliances, and our ability to realize the full potential of our technology in development. Such additional funds may not become available on acceptable terms or at all and there can be no assurance that any additional funding that we do obtain will be sufficient to meet our needs in the long term. Through September 30, 2014, a significant portion of our financing has been through private placements of common stock and warrants and debt financing. Unless our operations generate significant revenues and cash flows from operating activities, we will continue to fund operations from cash on hand and through sources of capital similar to those previously described. We can give no assurances that any additional capital that we are able to obtain will be sufficient to meet our needs. We believe that we will continue to incur net losses and negative cash flows from operating activities for the foreseeable future.
During February 2014, we realized gross proceeds of $1,906,500 from the sale of our 6% Secured Convertible Notes to 31 accredited investors. We paid fees and commissions of $70,720 to an accredited broker for their participation in the note placement.
During August 2014, we realized gross proceeds of $500,000 from the sale of our 8% Secured Convertible Notes to six accredited investors.
During October 2014, we consummated a follow-on offering of 4,000,000 shares our common stock at $0.75 per share, with each share of common stock sold together with warrants to purchase 1.25 shares of our common stock at $0.00001 per warrant, which resulted in net proceeds of approximately $2,600,000 upon deduction of underwriters’ commissions and other direct costs of the offering. The warrants have an exercise price of $4.00 per share, subject to adjustments, and are exercisable immediately and expire five years from the date of issuance. The initial exercise price per share of common stock purchasable upon exercise of the warrants is subject to adjustment as follows:
• | Proportional adjustment in the event of certain stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events affecting our common stock. |
• | Our issuance or deemed issuance (other than with respect to explicitly defined excluded securities) of shares of our common stock at a price per share less than the exercise price then in effect will reduce the exercise price to the price (determined in accordance with the terms of the warrant) at which such shares are issued. |
• | If prior to October 31, 2015, we effect a reverse split and 125% of the closing market price of our common stock during any 3 consecutive trading days after the effective date of the reverse split is less than $0.75 (as adjusted for stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events), then the exercise price shall be reduced to 125% of the amount of the lowest closing market price of our common stock during such 3-trading day period, subject to a floor of 80% of the exercise price. This adjustment only applies to the first reverse split effected after the issuance date of the warrants. |
• | If immediately following the close of business on February 28, 2015, the exercise price then in effect exceeds 85% of the lowest volume-weighted average price on any trading day during the 10 consecutive trading day period ending on an including the trading day immediately prior to February 28, 2015 (the “Adjusted Exercise Price”), the exercise price shall automatically be reduced to the Adjusted Exercise Price. |
• | If we take any action to which the provisions of the warrants are not strictly applicable, or if inapplicable, would not operate to protect the warrant holders from dilution, then our board of directors shall in good faith determine and implement an appropriate adjustment in the exercise price and the number of shares issuable upon exercise of the warrants so as to protect the rights of the holders of the warrants, provided that if a warrant holder does not accept such adjustments as appropriately protecting its interests against such dilution, then our board of directors and such holder shall agree, in good faith, upon an independent investment bank of nationally recognized standing to make such appropriate adjustments, whose determination shall be final and binding and whose fees and expenses shall be borne by us. |
Simultaneous with any of the foregoing adjustments, the number of warrant shares shall be increased or decreased proportionately so that after such adjustment the aggregate exercise price payable for the adjusted number of warrant shares equals the aggregate exercise price in effect immediately prior to the adjustment. To the extent that the adjustment provisions of the warrants are effected, the exercise of the warrants thereafter could result in signification dilution to the existing holders of our common stock.
Due to the warrants’ potential adjustment of the exercise price and number of warrant shares being subject to future events, we have conducted initial computations of the derivative liability that exists at the time of issuance of these warrants. Management estimates that this liability is significant and continues to work with its valuation advisors to quantify the liability for financial reporting for the period ending December 31, 2014 and its potential effect of reflecting a significant stockholders’ deficit in that and future periods.
On November 12, 2014, $427,500 of our Second Amended 2.5% Notes matured and is currently past due. Management is attempting to negotiate a further extension of the note’s maturity date. We can provide no assurance that we will obtain such an extension. The Second Amended Notes provide that our failure to pay amounts due under the Second Amended Notes on the earlier of 5 trading days after notice of such failure and 10 trading days after we become aware of such failure constitutes an event of default. Upon the occurrence of an event of default under the Second Amended Notes, interest will accrue at 12% per annum and all amounts due under the Second Amended Notes will become immediately due and payable at 120% of the then outstanding principal, plus 100% of accrued and unpaid interest and all other amounts due in respect thereof.
There can be no assurances that sufficient subsequent funding, if any at all, will be raised by these or future offerings or that the cost of such offerings will be reasonable. Furthermore, we will need additional financing thereafter to complete the development and commercialization of our products. There can be no assurances that we can successfully complete the development and commercialization of our products.
These matters raise substantial doubt about our ability to continue as a going concern. The accompanying financial statements do not include any adjustments that might result from the outcome of this uncertainty.
We have reported a net operating loss of $955,301 in the three months ended September 30, 2014, compared to a net operating loss of $1,043,892 for the three month period ended September 30, 2013. We have reported a net operating loss of $4,718,901, and non-operating expenses of $3,439,138, in the nine months ended September 30, 2014, compared to a net operating loss of $4,852,929, and non-operating expenses $489,268 in the nine months ended September 30, 2013. Management believes that we will continue to incur net losses through at least September 30, 2015.
2.5%SeniorSecured ConvertibleNotes Payable
On May 13, 2010, we entered into a Securities Purchase Agreement with W-Net Fund I, L.P. (“W-Net”), Europa and MKM Opportunity Master Fund, Ltd. (“MKM” and together with W-Net and Europa, the “Purchasers”), pursuant to which the Purchasers, on May 13, 2010, purchased from us (i) 2.5% Senior Secured Convertible Notes for a cash purchase price of $1,500,000 (the “Senior Notes”), and (ii) Common Stock Purchase Warrants pursuant to which the Purchasers may purchase up to 190,880 shares of our common stock at an exercise price equal to approximately $3.90 per share. The warrants may be exercised on a cashless basis by choice of the holder at any time. On May 13, 2010, we also entered into a Security Agreement and an Intellectual Security Agreement with the Purchasers and AtheroNova Operations, pursuant to which all of our obligations under the Senior Notes are secured by first priority security interest in all of our assets and the assets of AtheroNova Operations, including intellectual property. Upon event of default under the Senior Notes or such agreements, the Senior Note holders may be entitled to foreclose on any of such assets or exercise the rights available to a secured creditor under California and Delaware law. In addition, under a Subsidiary Guarantee, AtheroNova Operations guaranteed all of our obligations under the Senior Notes. As discussed in Note 3 to the financial statement included elsewhere in this quarterly report on Form 10-Q, we have twice amended the terms and conditions of the Senior Notes and, in 2012, we issued an additional $1,500,000 in Senior Notes under the same amended terms and conditions. The Senior Notes accrue 2.5% interest per annum with a maturity of four years after issuance. No periodic cash interest payments were required, except that accrued and unconverted interest is due on the maturity date and on each conversion date with respect to the principal amount being converted.
From issuance through December 31, 2013, the Purchasers exercised their option to convert a portion of the Senior Notes into our common stock. During that period, aggregate principal of $1,400,500 and accrued interest of $48,767 was converted into 474,070 and 20,704 shares, respectively, of our common stock. During the period ended September 30, 2014, principal in the amount of $416,667 was converted at a per share price of $2.90 into 143,678 shares of our common stock. In addition, we also issued 5,170 shares of our common stock with a market value of $19,646 to settle $14,994 of accrued interest relating to these notes. The aggregate balance of the Senior Notes outstanding as of September 30, 2014 amounted to $1,181,167, of which, $427,500 is presented as part of current liabilities in the accompanying balance sheet.
The Senior Notes may not be prepaid, or forced by us to be converted in connection with an acquisition of us, except in limited cases. The Senior Notes greatly restrict the ability of us and AtheroNova Operations to issue indebtedness or grant liens on our or its respective assets without the Senior Note holders’ consent. They also limit and impose financial costs on our acquisition by any third party.
On May 9, 2014, the holder of the Senior Note issued on May 13, 2010 signed an agreement extending the maturity date from May 12, 2014 to September 12, 2014, and on August 29, 2014, the maturity date was further extended to November 12, 2014.
As of the date of this report, $427,500 of our Second Amended 2.5% Notes has matured. Management is attempting to negotiate a further extension of the note’s maturity date. We can provide no assurance that we will obtain such an extension. The Second Amended Notes provide that our failure to pay amounts due under the Second Amended Notes on the earlier of 5 trading days after notice of such failure or 10 trading days after we become aware of such failure constitutes an event of default, but the Company has not received any written notice of default or demand for payment from the note holder. Upon the occurrence of an event of default under the Second Amended Notes, interest will accrue at 12% per annum and all amounts due under the Second Amended Notes will become immediately due and payable at 120% of the then outstanding principal, plus 100% of accrued and unpaid interest and all other amounts due in respect thereof.
As of September 30, 2014, total 2.5% convertible notes purchased and held by Europa were $1,094,167. Europa is an entity controlled by Knoll Capital Management of which Mr. Knoll, one of our directors, is the managing director.
6%Secured Convertible Notes Payable
In February 2014, we entered into Securities Purchase Agreements with approximately 31 accredited investors (the “Investors”), pursuant to which the Investors, on February 12, 2014, purchased from us (i) 6% Senior Secured Convertible Notes (the “6% Notes”) for a cash purchase price of $1,906,500, and (ii) Common Stock Purchase Warrants pursuant to which the Investors may purchase up to 414,457 shares of our common stock at an exercise price equal to approximately $2.30 per share (the “6% Notes Placement”). In connection with this note placement, we paid fees and commissions of $70,720 and issued 6,535 shares of common stock, with a fair value of $23,395, to an accredited broker that assisted in this note placement. The 6% Notes have a three year term and are convertible into common stock at any time at the lesser of i) $2.30 per share and ii) seventy percent of the average of the three lowest daily volume-weighted average prices (“VWAPs”) occurring during the 20 consecutive trading days immediately preceding the applicable conversion date. The associated warrants are exercisable at $2.30 per share. The warrants may be exercised on a cashless basis under which a portion of the shares subject to exercise are not issued in payment of the purchase price, based on the then fair market value of the shares. Additionally, as an incentive, the life of existing warrants held by participants in the 6% Notes Placement were extended to ten years from the date of each respective warrant’s original issuance.
The 6% Notes accrue 6% interest per annum, and do not require cash interest payments, except that accrued and unconverted interest is due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted. If there is an uncured event of default (as defined in the 6% Notes), which also may include default on the Company’s 2.5% Notes or its 8% Notes, the holder of each 6% Note may declare the entire principal and accrued interest amount immediately due and payable. Default interest will accrue after an event of default at an annual rate of 12%. If there is an acceleration, a mandatory default amount equal to 120% of the unpaid 6% Note principal plus accrued interest may be payable.
On February 12, 2014, we also entered into a Security Agreement and an Intellectual Property Security Agreement with the Investors and AtheroNova Operations, pursuant to which all of our obligations under the 6% Notes are secured by security interests in all of our assets and the assets of AtheroNova Operations, including intellectual property on a pari passu basis with the 2.5% Senior Secured Convertible Notes outstanding. Upon an event of default under the 6% Notes or such agreements, the 6% Note holders may be entitled to foreclose on any of such assets or exercise other rights available to a secured creditor under California and Delaware law. In addition, under a Subsidiary Guarantee, AtheroNova Operations guaranteed all of our obligations under the 6% Notes.
The 6% Notes and associated warrants include an anti-dilution provision that allows for the automatic reset of the conversion or exercise price upon any future sale of common stock instruments at or below the current conversion or exercise price, as applicable. We considered the current Financial Accounting Standards Board (FASB) guidance of “Determining Whether an Instrument Indexed to an Entity’s Own Stock” which indicates that any adjustment to the fixed amount (either conversion price or number of shares) of the instrument regardless of the probability or whether or not in the issuers’ control, means the instrument is not indexed to the issuers own stock. Accordingly, we determined that the conversion price of the 6% Notes and the strike price of the associated warrants contain conversion or exercise prices, as applicable, that may fluctuate based on the occurrence of future offerings or events, and, as such, are not fixed amounts. As a result, we determined that the conversion features of the 6% Notes and the associated warrants are not considered indexed to our own stock and characterized the fair value of the 6% Notes and the associated warrants as derivative liabilities upon issuance.
During the period ended September 30, 2014, $40,000 in aggregate principal amount of the 2014 Notes was converted at a per share price $1.06 into 37,558 shares of the Company’s common stock. The Company also issued 983 shares of its common stock with a market value of $2,507 to settle accrued but unpaid interest associated with the converted 2014 Notes of $1,047. The issuance of these shares of common stock resulted in an additional charge of $1,460 that has been reflected as part of interest expense in the accompanying statement of operations. The Company also recorded interest expense of $36,803 to amortize the corresponding note discount of the converted notes.
As of September 30, 2014, Europa held $300,000 in aggregate principal amount of the 6% Notes. Europa is an entity controlled by Knoll Capital Management of which Mr. Knoll, one of our directors, is the managing director.
8%Secured Convertible Notes Payable
In August and September 2014, we entered into Securities Purchase Agreements with approximately seven accredited investors (the “Investors”), pursuant to which the Investors, on September 12, 2014, purchased from us (i) 8% Senior Secured Convertible Notes (the “8% Notes”) for a cash purchase price of $500,000, and (ii) Common Stock Purchase Warrants pursuant to which the Investors may purchase up to 225,228 shares of our common stock at an exercise price equal to $2.00 per share (the “8% Notes Placement”). The 8% Notes have a one year term and are convertible into common stock at any time at $1.11 per share. The associated warrants are exercisable at $2.00 per share. The warrants may be exercised on a cashless basis under which a portion of the shares subject to exercise are not issued in payment of the purchase price, based on the then fair market value of the shares.
The 8% Notes accrue 8% interest per annum and do not require periodic cash interest payments, except that accrued and unconverted interest is due on the maturity date and on each conversion date with respect to the principal amount being converted, provided that such interest may be added to and included with the principal amount being converted. If there is an uncured event of default (as defined in the 8% Notes), which also may include default on the Company’s 2.5% Notes or its 6% Notes, the holder of each 8% Note may declare the entire principal and accrued interest amount immediately due and payable. Default interest will accrue after an event of default at an annual rate of 24%. If there is an acceleration, a mandatory default amount equal to 120% of the unpaid 8% Note principal plus accrued interest may be payable.
We also entered into a Security Agreement and an Intellectual Property Security Agreement with the Investors and AtheroNova Operations, pursuant to which all of our obligations under the 8% Notes are secured by security interests in all of our assets and the assets of AtheroNova Operations, including intellectual property on a pari passu basis with the 2.5% & 6% Senior Secured Convertible Notes outstanding. Upon an event of default under the 8% Notes or associated agreements, the 8% Note holders may be entitled to foreclose on any of such assets or exercise other rights generally available to a secured creditor under California and Delaware law. In addition, under a Subsidiary Guarantee, AtheroNova Operations guaranteed all of our obligations under the 8% Notes.
During the period ended September 30, 2014, the Company recognized interest expense of $2,000 and $24,657 to amortize the note discount. The aggregate balance of the 2014 8% Notes outstanding, unpaid interest and unamortized note discount as of September 30, 2014 amounted to $500,000, $2,000 and $475,343, respectively.
As of September 30, 2014, Europa held $100,000 in aggregate principal amount of the 8% Notes. Europa is an entity controlled by Knoll Capital Management of which Mr. Knoll, one of our directors, is the managing director.
Commitments
CardioNova Agreement
In October 2011, we entered into two definitive agreements with OOO CardioNova, a wholly-owned subsidiary of Maxwell Biotech Group, a Russian biotech fund, covering our AHRO-001 compound. The agreements cover a territory represented by the Russian Federation, the Ukraine and various countries in central Asia (the “Territory”).
Under the licensing agreement OOO CardioNova (“CardioNova”) became an equity investor in our company in exchange for the funding of Phase 1 and 2 human clinical trials conducted by a Clinical Research Organization (“CRO”) located in Russia. A Joint Steering Committee was subsequently established between both entities and determined the final clinical protocols and approved a research budget of $3.8 million.
Pursuant to the agreement, common stock equal to specified percentages of the approved research budget of $3.8 million would be issued to CardioNova upon achievement of four milestones in the research plan. Through December 31, 2013, we had issued a total of 199,730 of non-refundable shares of common stock representing the first two milestones and 30% of the total budget with a fair value of $1,198,297, or $6.00 per share. Additionally, we determined that the achievement of the third milestone was probable and the percentage of achievement at 80% complete, therefore accrued additional research and development expense – related party of $1,170,712 as of December 31, 2013. There had been no work performed with respect to the fourth and last milestone through that date.
In the period ending September 30, 2014, the third milestone was achieved and, in accordance with the licensing agreement, we issued a total of 422,105 of non-refundable shares of common stock with a fair value of $2,152,735. In December 31, 2013, we had recorded $1,170,712 of these costs. Accordingly, during the three and nine month periods ending September 30, 2014, $0 and $983,023 was recorded to research and development expense - related party, respectively. Additionally, as of September 30, 2014, we determined that the achievement of the final milestone was probable and the percentage of achievement at 45% complete. Accordingly, we accrued additional research and development expense-related party in the accompanying statement of operations of $314,776 and $469,850 for the three and nine months ended September 30, 2014, respectively.
If CardioNova successfully develops and commercializes AHRO-001 in the Territory, we will be entitled to receive a quarterly royalty, based on net sales during the period using an escalating scale. The royalty agreement shall remain in force for the period in which intellectual property rights for AHRO-001 are in full force and effect in the Territory.
Under the Securities Purchase Agreement, CardioNova purchased a total of 27,526 shares of our common stock for a cash purchase price of $9.70 per share. This transaction took place in two installments. The first installment, which took place in December 2011, was for the issuance of 15,464 shares upon receipt of $150,000 as specified in the License Agreement. The second installment of 12,062 shares was issued in June 2013 upon the receipt of the final $117,000 due upon shipment of clinical product used in the initial Phase 1 trial, which occurred in June 2013.
Research Agreements
We have a research agreement signed in September 2012, and amended in April 2013 and again in September 2013, with a major university in Southern California to conduct contract research in bile acid compounds, the use of which may be covered under our issued patents and pending patent applications. This agreement calls for payment of all research costs relating to the study of dosage and efficacy of bile salts on the atherosclerotic plaque in a non-human model. The total potential cost of the project is $236,323, to be paid in four installments over the length of the study. The process is ongoing and to date, the entire $236,323 has been expensed in prior periods. As of September 30, 2014, $70,000 is still outstanding pending issuance of final research reports and is reported as part of Accounts payable and accrued expenses in the accompanying balance sheet.
We have additional studies authorized in February and April 2014 for toxicology and other metabolic evaluations with expected aggregate cost of approximately $738,000, that are in various stages of planning or active execution of their protocols. The process is ongoing and to date, $425,610 and $597,790 has been expensed to Research and development costs on the accompanying statement of operations for the three and nine month periods ended September 30, 2014, respectively. The remaining $140,210 will be recorded in future periods once service has been rendered.
We also have a research agreement finalized in March 2014 and amended in August 2014 with an Australian hospital/research institution for a metabolic study of AHRO-001 in a standard animal model used in evaluation of plaque regression with an expected aggregate cost of approximately $212,000. To date, the study plan continues to be developed and initial study material has been provided for commencement during the 4th quarter of 2014. The process is ongoing and the total cost of $212,000 will be recorded in future periods once service has been rendered.
Formulation Development Agreement
We have a development agreement entered into in February 2014 with a Pennsylvania-based Clinical Research Organization (‘CRO”) specializing in formulation and manufacturing of clinical research grade pharmaceutical products. The agreement called for the CRO to use our Active Pharmaceutical Ingredient to manufacture clinical trial pharmaceutical products, completed and shipped in the 2nd quarter of 2014, as well as long-term stability testing of the completed product. The total expected cost of the project is $220,650, as amended, to be paid in progress installments over the length of the manufacturing, packaging and stability process. The process is ongoing and to date, $18,150 and $178,459 has been recorded as part of Research and development costs on the accompanying statement of operations for the three and nine month periods ending September 30, 2014, respectively. The remaining $42,191 will be recorded in future periods once service has been rendered.
Bioanalytical Analysis Agreements
We have analysis agreements for our next clinical trial in Russia entered into in May 2014, as amended, with several analytical laboratories to perform specialized serum analyses for biomarkers of certain gene expressions activated in previous non-human experiments when exposed to our Active Pharmaceutical Ingredient. The expected aggregate cost of these agreements is approximately $339,400 to be paid in installments upon progress completion points as the analyses are performed. The process is ongoing and to date, $32,563 and $128,610 has been recorded as part of Research and development costs on the accompanying statement of operations for both the three and nine month periods ended September 30, 2014, respectively. The remaining $210,790 will be recorded in future periods once services have been rendered.
Summary of Contractual Commitments
Employment Agreements
Employment agreements with our Chief Executive Officer and Chief Financial Officer are incorporated by reference to Exhibits 10.1 and 10.2 to the Quarterly Report on Form 10-Q (File No. 000-52315) filed with the Securities Exchange Commission (“SEC”) on August 5, 2014.
Off-Balance Sheet Arrangements
None.
Critical Accounting Policies
In December 2001, the SEC requested that all registrants discuss their most “critical accounting policies” in MD&A. The SEC indicated that a “critical accounting policy” is one which is both important to the portrayal of a company’s financial condition and results and requires management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain.
Use of Estimates
The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect certain reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of expenses during the reporting period. On an ongoing basis, management evaluates its estimates and judgment, including those related to revenue recognition, accrued expenses, financing operations and contingencies and litigation. Management bases its estimates and judgment on historical experience and on various other factors that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying value of assets and liabilities that are not readily apparent from other sources. Actual results could materially differ from those estimates under different assumptions or conditions. The following represents a summary of our critical accounting policies.
Research and Development Expenses
All research and development costs are expensed as incurred and include costs of consultants and contract research facilities who conduct research and development on our behalf and on behalf of AtheroNova Operations. We have contracted with third parties to facilitate, coordinate and perform agreed upon research and development of our technology. We have expensed all costs associated with the conduct of the laboratory research as well as the costs associated with peripheral clinical researchers as period costs.
Stock-Based Compensation
We periodically issue stock options and warrants to employees and non-employees in non-capital raising transactions for services and for financing costs. We account for stock option and warrant grants issued and vesting to employees based on the authoritative guidance provided by the FASB whereas the value of the award is measured on the date of grant and recognized over the vesting period. We account for stock option and warrant grants issued and vesting to non-employees in accordance with the authoritative guidance of the FASB whereas the value of the stock compensation is based upon the measurement date as determined at either a) the date at which a performance commitment is reached, or b) at the date at which the necessary performance to earn the equity instruments is complete. Non-employee stock-based compensation charges generally are amortized over the vesting period on a straight-line basis. In certain circumstances where there are no future performance requirements by the non-employee, option grants are immediately vested and the total stock-based compensation charge is recorded in the period of the measurement date.
The fair value of our common stock option and warrant grants is estimated using the Black-Scholes-Merton option pricing model, which uses certain assumptions related to risk-free interest rates, expected volatility, expected life of the common stock options, and future dividends. Compensation expense is recorded based upon the value derived from the Black-Scholes-Merton option pricing model, and based on actual experience. The assumptions used in the Black-Scholes-Merton option pricing model could materially affect compensation expense recorded in future periods.
Derivative FinancialInstruments
We evaluate all of our financial instruments to determine if such instruments are derivatives or contain features that qualify as embedded derivatives. For derivative financial instruments that are accounted for as liabilities, the derivative instrument is initially recorded at its fair value and is re-valued at each reporting date, with changes in fair value reported in the condensed consolidated statement of operations. For stock-based derivative financial instruments, we use the Black-Scholes-Merton option pricing model to value the derivatives instruments at inception and on subsequent valuation dates. The classification of derivative instruments, including whether such instruments should be recorded as liabilities or as equity, is evaluated at the end of each reporting period. Derivative instrument liabilities are classified in the balance sheet as current or non-current based on whether or not net-cash settlement of the derivative instrument could be required within 12 months of the balance sheet date.
Accounting for Share based Research and Development Costs
Under our research and development (R&D) agreements, we are obligated to issue shares of common stock if milestones are met by the R&D vendor. It is our policy to recognize expense for these shares when it is estimated that there is a high probability of meeting the milestone. We accrue the share based expense based upon the estimated percentage of completion of the milestone. The shares are valued at the market price at the end of the period and revalued at each period until issued. At September 30, 2014, we have recorded an accrual of $469,850 reflecting our estimate of approximately 45% progress on the milestone deemed achievable at that time.
Recently Issued Accounting Standards
On August 27, 2014, the FASB issued ASU 2014-15, Disclosures of Uncertainties about and Entity’s Ability to Continue as a Going Concern, which provides guidance on determining when and how to disclose going-concern uncertainties in the financial statements. The new standard requires management to perform interim and annual assessments of an entity’s ability to continue as a going concern within one year of the date of the financial statements is issued. An entity must provide certain disclosures if conditions or events raise substantial doubt about the entity’s ability to continue as a going concern. The ASU applies to all entities and is effective for annual periods ending after December 15, 2015, and interim periods thereafter, with early adoption permitted.
On June 10, 2014, the FASB has issued ASU 2014-10,Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation. The amendments in this ASU remove all incremental financial reporting requirements from U.S. GAAP for development stage entities, including the removal of Topic 915,Development Stage Entities, from the FASBAccounting Standards Codification™. In addition, the ASU: (a) adds an example disclosure in Topic 275,Risks and Uncertainties, to illustrate one way that an entity that has not begun planned principal operations could provide information about the risks and uncertainties related to the company’s current activities; and (b) removes an exception provided to development stage entities in Topic 810,Consolidation, for determining whether an entity is a variable interest entity. For public business entities, the presentation and disclosure requirements in Topic 915 will no longer be required for the first annual period beginning after December 15, 2014. The revised consolidation standards are effective one year later, in annual periods beginning after December 15, 2015. Early adoption is permitted.
In April 2014, the FASB issued ASU 2014-08,"Presentation of Financial Statements (Topic 205) and Property, Plant and Equipment (Topic 360)." ASU 2014-08 amends the requirements for reporting discontinued operations and requires additional disclosures about discontinued operations. Under the new guidance, only disposals representing a strategic shift in operations or that have a major effect on our operations and financial results should be presented as discontinued operations. This new accounting guidance is effective for annual periods beginning after December 15, 2014. We are currently evaluating the impact of adopting ASU 2014-08 on our results of operations or financial condition.
On May 28, 2014, the FASB issued ASU 2014-09,Revenue from Contracts with Customers. ASU 2014-09 will eliminate transaction- and industry-specific revenue recognition guidance under current U.S. GAAP and replace it with a principle based approach for determining revenue recognition. ASU 2014-09 will require that companies recognize revenue based on the value of transferred goods or services as they occur in the contract. The ASU also will require additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective for reporting periods beginning after December 15, 2016, and early adoption is not permitted. Entities can transition to the standard either retrospectively or as a cumulative-effect adjustment as of the date of adoption. Management has not determined the effect of adopting ASU 2014-09 on our ongoing financial reporting.
Recent accounting pronouncements did not or are not believed by management to have a material impact on our present or future consolidated financial statements.
Item 3. Quantitative and Qualitative Disclosure About Market Risk
As a “smaller reporting company” as defined by Rule 229.10(f)(1), we are not required to provide the information required by this Item 3.
Item 4. Controls and Procedures
Evaluation of Disclosure Controls and Procedures
As of September 30, 2014, we carried out an evaluation, under the supervision and with the participation of our Chief Executive Officer and Chief Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the “Exchange Act”)). Based upon that evaluation, our Chief Executive Officer and Chief Financial Officer concluded that our disclosure controls and procedures were effective as of that date to ensure that information required to be disclosed in our reports filed or submitted under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and forms, and to ensure that information required to be disclosed by it in such reports is accumulated and communicated to our management, including our Chief Executive Officer and Chief Financial Officer, as appropriate, to allow timely decisions regarding required disclosure.
Our disclosure controls and internal controls over financial reporting were designed to provide only reasonable assurance that such disclosure controls and internal control over financial reporting will prevent all errors or all instances of fraud, even as the same are improved to address any deficiencies. The design of any system of controls is based in part upon certain assumptions about the likelihood of future events, and there can be only reasonable, not absolute assurance, that any design will succeed in achieving its stated goals under all potential future conditions. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system’s objectives will be met. Over time, controls may become inadequate because of changes in conditions or deterioration in the degree of compliance with policies or procedures. Further, the design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs.
Because of the inherent limitation of a cost-effective control system, misstatements due to error or fraud may occur and not be detected. These inherent limitations include the realities that judgments in decision-making can be faulty, and that breakdowns can occur because of a simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls.
Changes in Internal Control
During the quarter ended September 30, 2014, there were no changes in internal controls over financial reporting in connection with the evaluation required by paragraph (d) of Rule 13a-15 or 15d-15 under the Exchange Act that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.
Part II – Other Information
Item 1A. Risk Factors.
We may be unable to continue as a going concern if we do not successfully raise additional capital.
To date, we have raised part of our operating capital through the placement of several issuances of Convertible Promissory Notes. A 2.5% Note issued in 2010, with a current outstanding balance of $427,500, plus accrued interest of $50,604, matured on November 12, 2014. The Company continues to negotiate with the holder regarding an extension of the maturity date. We can provide no assurance that we will obtain such an extension. The 2.5% Notes provide that our failure to pay amounts due thereunder on the earlier of 5 trading days after notice of such failure or 10 trading days after we become aware of such failure constitutes an event of default, but the Company has not received any written notice of default or demand for payment from the note holder. Upon the occurrence of an event of default under the 2.5% Notes, interest will accrue at 12% per annum and all amounts due under the 2.5% Notes will become immediately due and payable at 120% of the then outstanding principal, plus 100% of accrued and unpaid interest and all other amounts due in respect thereof. Additionally, the terms and conditions of our 6% Notes and 8% Notes contain provisions under which if we default on the 2.5% Notes, the outstanding balance of $1,866,500 outstanding under the 6% Notes and $500,000 outstanding under the 8% Notes may also become immediately due and payable and available cash on hand would not be sufficient to repay these Notes in full.
You may be diluted by exercises of outstanding options and warrants and conversions of outstanding convertible promissory notes.
As of October 31, 2014, we had outstanding options to purchase an aggregate of 548,950 shares of our common stock at a weighted average exercise price of $8.42 per share, warrants to purchase an aggregate of 6,414,789 shares of our common stock at a weighted average exercise price of $3.81 per share and convertible promissory notes convertible into an aggregate of 3,559,494 shares of our common stock (including 145,510 shares accounting for accrued interest through maturity) at a weighted average conversion price of $1.04 per share. The exercise of such outstanding options and warrants and the conversion of such outstanding convertible promissory notes will result in further dilution of your investment. In particular, in addition to proportional adjustments for stock dividends, splits, combinations, reclassifications and similar events, the warrants issued in our follow-on public offering on October 31, 2014 are subject to adjustment as follows:
• | Our issuance or deemed issuance (other than with respect to explicitly defined excluded securities) of shares of our common stock at a price per share less than the exercise price then in effect will reduce the exercise price to the price (determined in accordance with the terms of the warrant) at which such shares are issued. |
• | If prior to October 31, 2015, we effect a reverse split and 125% of the closing market price of our common stock during any 3 consecutive trading days after the effective date of the reverse split is less than $0.75 (as adjusted for stock dividends and distributions, stock splits, stock combinations, reclassifications or similar events), then the exercise price shall be reduced to 125% of the amount of the lowest closing market price of our common stock during such 3-trading day period, subject to a floor of 80% of the exercise price. This adjustment only applies to the first reverse split effected after the issuance date of the warrants. |
• | If immediately following the close of business on February 28, 2015, the exercise price then in effect exceeds 85% of the lowest volume-weighted average price on any trading day during the 10 consecutive trading day period ending on an including the trading day immediately prior to February 28, 2015 (the “Adjusted Exercise Price”), the exercise price shall automatically be reduced to the Adjusted Exercise Price. |
• | If we take any action to which the provisions of the warrants are not strictly applicable, or if inapplicable, would not operate to protect the warrant holders from dilution, then our board of directors shall in good faith determine and implement an appropriate adjustment in the exercise price and the number of shares issuable upon exercise of the warrants so as to protect the rights of the holders of the warrants, provided that if a warrant holder does not accept such adjustments as appropriately protecting its interests against such dilution, then our board of directors and such holder shall agree, in good faith, upon an independent investment bank of nationally recognized standing to make such appropriate adjustments, whose determination shall be final and binding and whose fees and expenses shall be borne by us. |
In addition, simultaneous with any of the foregoing adjustments, the number of shares issuable under those warrants shall be increased or decreased proportionately so that after such adjustment the aggregate exercise price payable for the adjusted number of warrant shares equals the aggregate exercise price in effect immediately prior to the adjustment. To the extent that the adjustment provisions of those warrants are effected, the exercise of the warrants thereafter could result in signification dilution to the existing holders of our common stock.
In addition, you may experience additional dilution if we issue common stock in the future, including the issuance of common stock upon the exercise of the warrants offered hereby. As a result of this dilution, you may receive significantly less in net tangible book value than the full purchase price you paid for the shares in the event of liquidation.
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds
In July 2014, we issued 38,541 shares of our common stock upon conversion by the holder hereof of $40,000 of principal and accrued interest of our 6% Secured Convertible Notes.
In making the stock issuances described above without registration under the Securities Act of 1933, as amended (the “Securities Act”), the Company relied upon one or more of the exemptions from registration contained in and/or promulgated under Section 4(2) of the Securities Act as each of the stock recipients was an accredited investor and no general solicitation or advertising was used in connection with the stock issuances.
Item 6. Exhibits
Exhibit No. | Description |
| 10.1 | Securities Purchase Agreement, dated as of September 12, 2014, among AtheroNova Inc., the purchasers of 8% Senior Secured Convertible Notes and W-Net Fund I, L.P., as Purchaser Representative. Incorporated by reference to Exhibit 10.1 the Current Report on Form 8-K (File No. 000-52315) filed with the Securities and Exchange Commission on September 16, 2014. |
| 10.2 | Form of 8% Senior Secured Convertible Note. Incorporated by reference to Exhibit 10.2 the Current Report on Form 8-K (File No. 000-52315) filed with the Securities and Exchange Commission on September 16, 2014. |
| 10.3 | Form of Common Stock Purchase Warrant. Incorporated by reference to Exhibit 10.3 the Current Report on Form 8-K (File No. 000-52315) filed with the Securities and Exchange Commission on September 16, 2014. |
| 10.4 | Security Agreement, dated as of September 12, 2014, among AtheroNova Inc., AtheroNova Operations, Inc. and the purchasers of 8% Senior Secured Convertible Notes. Incorporated by reference to Exhibit 10.4 the Current Report on Form 8-K (File No. 000-52315) filed with the Securities and Exchange Commission on September 16, 2014. |
| 10.5 | Intellectual Property Security Agreement, dated as of September 12, 2014, among AtheroNova Inc., AtheroNova Operations, Inc. and the purchasers of 8% Senior Secured Convertible Notes. Incorporated by reference to Exhibit 10.5 the Current Report on Form 8-K (File No. 000-52315) filed with the Securities and Exchange Commission on September 16, 2014. |
| 10.6 | Subsidiary Guaranty, dated as of September 12, 2014, made by AtheroNova Operations, Inc. in favor of the purchasers of 8% Senior Secured Convertible Notes. Incorporated by reference to Exhibit 10.6 the Current Report on Form 8-K (File No. 000-52315) filed with the Securities and Exchange Commission on September 16, 2014. |
31.1 | Certification of Principal Executive Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended. |
31.2 | Certification of Principal Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended. |
32.1 | Certification of Principal Executive Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002. |
32.2 | Certification of Principal Financial Officer pursuant to 18 U.S.C. §1350, as adopted pursuant to §906 of the Sarbanes-Oxley Act of 2002. |
101.INS** | XBRL Instance. |
101.SCH** | XBRL Taxonomy Extension Schema. |
101.CAL** | XBRL Taxonomy Extension Calculation. |
101.DEF** | XBRL Taxonomy Extension Definition. |
101.LAB** | XBRL Taxonomy Extension Labels. |
101.PRE** | XBRL Taxonomy Extension Presentation. |
** XBRL information is furnished and not filed or a part of a registration statement or prospectus for purposes of sections 11 or 12 of the Securities Act of 1933, as amended, is deemed not filed for purposes of section 18 of the Securities Exchange Act of 1934, as amended, and otherwise is not subject to liability under these sections.
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| ATHERONOVA INC. | ||
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Date: November 19, 2014 | By: | /s/Mark Selawski |
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| Mark Selawski | ||
| Chief Financial Officer (Principal financial and accounting officer) | ||
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