Notes to the Financial Statements
Note 1 – Organization and Nature of
Business
NanoViricides, Inc. (the “Company”)
was incorporated under the laws of the State of Colorado on July 25, 2000 as Edot-com.com, Inc
.
which was organized for
the purpose of conducting internet retail sales. On April 1, 2005, Edot-com.com, Inc. was incorporated under the laws
of the State of Nevada for the purpose of re-domiciling as a Nevada corporation. On May 12, 2005, the corporations were
merged and Edot-com.com, Inc
.,
the Nevada corporation, became the surviving entity.
On June 1, 2005, Edot-com.com, Inc. (“ECMM”)
acquired Nanoviricide, Inc., a privately owned Florida corporation (“NVI”), pursuant to an Agreement and Plan of Share
Exchange (the “Exchange”). Nanoviricide, Inc. was incorporated under the laws of the State of Florida on
May 12, 2005.
Pursuant to the terms of the Exchange, ECMM
acquired NVI in exchange for an aggregate of 80,000,000 newly issued shares of ECMM common stock resulting in an aggregate of 100
million shares of ECMM common stock issued and outstanding. NVI then became a wholly-owned subsidiary of ECMM. The ECMM
shares were issued to the NVI shareholders on a pro rata basis, on the basis of 4,000 shares of the Company’s common stock
for each share of NVI common stock held by such NVI shareholder at the time of the Exchange.
As a result of the Exchange transaction, the
former NVI stockholders held approximately 80% of the voting capital stock of the Company immediately after the Exchange. For
financial accounting purposes, this acquisition was a reverse acquisition of ECCM by NVI, under the purchase method of accounting,
and was treated as a recapitalization with NVI as the acquirer. Accordingly, the financial statements have been prepared to give
retroactive effect to May 12, 2005 (date of inception), of the reverse acquisition completed on June 1, 2005, and represent the
operations of NVI.
On June 28, 2005, NVI was merged into its parent
ECMM and the separate corporate existence of NVI ceased. Effective on the same date, Edot-com.com, Inc. changed its
name to NanoViricides, Inc. and its stock symbol to “NNVC”, respectively.
NanoViricides, Inc. (the “Company”),
is a nano-biopharmaceutical company whose business goals are to discover, develop and commercialize therapeutics to advance the
care of patients suffering from life-threatening viral infections. NanoViricides is unique in the bio-pharma field in that it possesses
its own state of the art facilities for the design, synthesis, analysis and characterization of the nanomedicines that we develop,
as well as for production scale-up, and e-GMP-like production in quantities needed for human clinical trials. The biological studies
such as the effectiveness, safety, bio-distribution and Pharmacokinetics/Pharmacodynamics on our drug candidates are performed
by external collaborators and contract organizations.
We are a company with several drugs in various
stages of early development. Our drugs are based on several patents, patent applications, provisional patent applications, and
other proprietary intellectual property held by TheraCour Pharma, Inc. (“TheraCour”), to which we have the necessary
exclusive licenses in perpetuity. The first agreement we executed with TheraCour on September 1, 2005, gave us an exclusive, worldwide
license for the treatment of the following human viral diseases: Human Immunodeficiency Virus (HIV/AIDS), Hepatitis B Virus (HBV),
Hepatitis C Virus (HCV), Herpes Simplex Virus (HSV), Influenza and Asian Bird Flu Virus.
On February 15, 2010 the Company executed an
Additional License Agreement with TheraCour. Pursuant to the Additional License Agreement, the Company was granted exclusive
licenses, in perpetuity, for technologies, developed by TheraCour, for the development of drug candidates for the treatment of
Dengue viruses, Ebola/Marburg viruses, Japanese Encephalitis, viruses causing viral Conjunctivitis (a disease of the eye) and Ocular
Herpes. As consideration for obtaining these exclusive licenses, we agreed to pay a one-time licensing fee equal to
2,000,000 shares (adjusted for the 3.5 to 1 reverse split) of the Company’s Series A Convertible Preferred Stock (the “Series
A Preferred Stock”). The Series A Preferred Stock is convertible, only upon sale or merger of the Company, or
the sale of or license of substantially all of the Company’s intellectual property, into shares of the Company’s common
stock at the rate of 3.5 shares of common stock for each share of Series A Preferred Stock. The Series A Preferred Stock
has a preferred voting preference at the rate of nine votes per share. The Series A Preferred Stock do not contain any rights to
dividends, have no liquidation preference, and are not to be amended without the Holder’s approval. The 2,000,000 shares
were valued at the par value of $2,000.
Note 2 – Summary of Significant Accounting Policies
Basis of Presentation
The Company’s financial statements have
been prepared in accordance with accounting principles generally accepted in the United States (“GAAP”) and include
all adjustments necessary for the fair presentation of the Company’s financial position for the periods presented.
Reclassifications
Certain prior year amounts have been reclassified
for consistency with the current year presentation. These reclassifications had no effect on the reported results or operations.
Net Loss per Common Share
Basic net loss per common share is computed
by dividing net loss by the weighted average number of shares of common stock outstanding during the period. Diluted net loss per
common share is computed by dividing net loss by the weighted average number of shares of common stock and potentially outstanding
shares of common stock during the period to reflect the potential dilution that could occur from common shares issuable through
stock options, warrants, convertible preferred stock, and convertible debentures.
The following table shows the number of
potentially outstanding dilutive common shares excluded from the diluted net loss per common share calculation as they were anti-dilutive:
|
|
Potentially Outstanding
Dilutive Common Shares
|
|
|
|
For the Years Ended
|
|
|
|
June 30, 2016
|
|
|
June 30, 2015
|
|
|
|
|
|
|
|
|
Stock options
|
|
|
-
|
|
|
|
535,715
|
|
|
|
|
|
|
|
|
|
|
Warrants
|
|
|
6,616,700
|
|
|
|
5,976,675
|
|
|
|
|
|
|
|
|
|
|
Total potentially outstanding dilutive common shares
|
|
|
6,616,700
|
|
|
|
6,512,390
|
|
In addition, the Company has issued Convertible
Debentures, to investors. A portion of the interest required to be paid on the debentures had been paid in shares of the Company’s
$0.001 par value common stock (“Interest Shares”) according to the terms of such Debenture. No additional Interest
Shares are required to be issued under the terms of the debenture. The Company issued 571,433 warrants on February 1, 2016 relating
to the additional interest to be paid on the Series B debentures under the terms of the debenture. Coupon interest payable quarterly
related to the Series B Debentures is payable in cash or shares of common stock at the average of the open and close value on the
date such interest payment is due at the option of the Holder. For the year ended June 30, 2016, the Holders of the Series B Debenture
controlled by Dr. Milton Boniuk, a director of the Company elected to receive the December 31, 2015 and March 31, 2016 quarterly
interest in restricted common stock of the Company.
At June 30, 2016, the number of potentially
dilutive shares of the Company’s common stock into which the Series B debentures can be converted based upon the conversion
price of $3.50 is 1,714,286.
Pursuant to the redemption provisions of the
Series C Debentures, the Company, at its sole option, shall have the right, but not the obligation, to repurchase the Debenture
at any time prior to the Maturity Date (the “Redemption”). If the Company intends to repurchase the Debenture, and
if the closing bid price of the common Stock is greater than $5.25 on the Redemption Date, unless the Holder, on or prior to the
Redemption Date, elects to receive the “Redemption Payment”, as that term is defined herein, the Company shall pay
to the Holder: (i) 952,381 shares of common Stock in consideration of the exchange of the principal amount of the Debenture; and
(ii) any and all accrued coupon interest. If on or prior to the Redemption Date, the Holder elects to receive the Redemption Payment,
or the closing bid price of the common stock is less than $5.25, the Company shall issue to the Holder: (i) the principal amount
of the Debenture; (ii) any accrued coupon interest; (iii) additional interest of 7% per annum for the period from the date of issuance
of the Debenture to the Redemption Date; and (iv) warrants to purchase 619,048 shares of common Stock which shall expire in three
years from the date of issuance at an exercise price of $6.05 per share of common Stock (the “Redemption Warrants”,
and collectively with (i) – (iv), the “Redemption Payment”). The Company shall use its best efforts to register
the shares underlying the Redemption Warrants under a “shelf” registration statement, provided same is available to
the Company, in accordance with the provisions of the Securities Act. Coupon interest payable quarterly related to the Series C
debenture is payable in cash or shares of common stock at the average of the open and close price. Such interest payment is due
at the option of the Holder. The Holder of the Series C Debenture elected to receive the December 31, 2015, March 31, 2016 and
June 30, 2016 quarterly interest in restricted common stock of the Company. The Holder is an entity controlled by Dr. Milton Boniuk,
a director of the Company.
At June 30, 2016 the number of potentially
dilutive shares of the Company’s common stock into which the Series C debentures can be converted based upon the conversion
provisions contained in the debenture is 952,381.
The Company has also issued 4,091,094 shares
of Series A Convertible Preferred Stock to investors and others as of June 30, 2016. Only in the event of a “Change of Control”
of the Company, each Series A preferred share is convertible to 3.5 shares of its new common stock. A “Change of Control”
is defined as an event in which the Company’s shareholders become 60% or less owners of a new entity as a result of a change
of ownership, merger or acquisition. In the absence of a Change of Control event, the Series A Convertible Preferred Stock is not
convertible into common stock, and does not carry any dividend rights or any other financial effects. At June 30, 2016, the number
of potentially dilutive shares of the Company’s common stock into which these Series A Preferred shares can be converted
into is 14,318,829 and is not included in diluted earnings per share since the shares are contingently convertible only upon a
Change of Control.
The following represents a reconciliation of
the numerators and denominators of the basic and diluted per share calculations for loss from continuing operations:
|
|
For the Year Ended
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
June 30,
2014
|
|
Calculation of basic loss per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(10,724,629
|
)
|
|
$
|
(2,198,172
|
)
|
|
$
|
(13,601,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic weighted average shares of common stock
|
|
|
57,669,472
|
|
|
|
56,553,848
|
|
|
|
51,225,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic loss per share of common stock
|
|
$
|
(0.19
|
)
|
|
$
|
(0.04
|
)
|
|
$
|
(0.27
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Calculation of diluted loss per share of common stock:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders
|
|
$
|
(10,724,629
|
)
|
|
$
|
(2,198,172
|
)
|
|
$
|
(13,601,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Add: Loss impact of assumed conversion of Debentures
|
|
|
-
|
|
|
|
(3,077,864
|
)
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss attributable to common stockholders plus assumed conversions
|
|
$
|
(10,724,629
|
)
|
|
$
|
(5,276,036
|
)
|
|
$
|
(13,601,616
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for basic weighted average shares of common stock
|
|
|
57,669,472
|
|
|
|
56,553,848
|
|
|
|
51,225,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Incremental shares from assumed conversions of Debentures payable
|
|
|
-
|
|
|
|
2,666,667
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Denominator for diluted weighted average shares of common stock
|
|
|
57,669,472
|
|
|
|
59,220,515
|
|
|
|
51,225,622
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted loss per share of common stock
|
|
$
|
(0.19
|
)
|
|
$
|
(0.09
|
)
|
|
$
|
(0.27
|
)
|
Series B and Series C debentures were excluded
from the loss per share calculation for the year ended June 30, 2016 because the impact is anti-dilutive. Series B debentures were
excluded from the loss per share calculation for the year ended June 30, 2014 because the impact is anti-dilutive.
Use of Estimates
The preparation of financial statements in
conformity with GAAP requires management to make estimates and assumptions that affect the amounts reported in the financial statements
and accompanying notes. The Company bases its estimates on historical experience and on various assumptions that are believed to
be reasonable under the circumstances. The amounts of assets and liabilities reported in the Company’s balance sheet and
the amounts of expenses reported for each of the periods presented are affected by estimates and assumptions, which are used for,
but not limited to, accounting for share-based compensation, accounting for derivatives and accounting for income taxes. Actual
results could differ from those estimates.
Fair Value of Financial Instruments
Fair value is defined as the price that would
be received from selling an asset or paid to transfer a liability in an orderly transaction between market participants at the
measurement date. When determining the fair value for applicable assets and liabilities, we consider the principal or most advantageous
market in which we would transact and we consider assumptions market participants would use when pricing the asset or liability,
such as inherent risk, transfer restrictions, and risk of nonperformance. This guidance also establishes a fair value hierarchy
to prioritize inputs used in measuring fair value as follows:
●
|
Level 1: Observable inputs such as quoted prices in active markets;
|
●
|
Level 2: Inputs, other than quoted prices in active markets, that are observable either directly or indirectly; and
|
●
|
Level 3: Unobservable inputs in which there is little or no market data, which require the reporting entity to develop its own assumptions.
|
Long-Lived Assets
Long-lived assets are reviewed for impairment
whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. Recoverability
of assets to be held and used is measured by a comparison of the carrying amount of the assets to the future undiscounted net cash
flows expected to be generated by the asset. If such assets are considered to be impaired, the impairment to be recognized is measured
by the amount by which the carrying amount of the assets exceeds the fair value of the assets and would be charged to earnings.
Fair value is determined through various valuation techniques including discounted cash flow models, quoted market values and third-party
independent appraisals, as considered necessary. The Company has not recorded an impairment charge for the years ended June 30,
2016, 2015 and 2014.
Cash and Cash Equivalents
The Company considers all highly liquid instruments
with original maturities of three months or less to be cash equivalents.
Property and Equipment
Property and equipment is stated at cost and
depreciated over the estimated useful lives of the assets, using the straight-line method. The Company generally assigns useful
lives of thirty years for assets classified as GMP facility, fifteen years for assets classified as furniture
and fixtures, ten years for assets classified as lab equipment, and five years for assets classified as office equipment. Expenditures
for major additions and betterments are capitalized. Maintenance and repairs are charged to operations as incurred.
Upon sale or retirement of property and equipment, the related cost and accumulated depreciation are removed from the accounts
and any gain or loss is reflected in the statements of operations.
Trademarks and Patents
The Company amortizes the costs of trademarks and patents on a straight-line
basis over their estimated useful lives, the terms of the exclusive licenses and/or agreements, or the terms of legal lives of
the patents, whichever is shorter. Upon becoming fully amortized, the related cost and accumulated amortization are removed from
the accounts.
Research and Development
Research and development expenses consist primarily
of costs associated with the preclinical and/ or clinical trials of drug candidates, compensation and other expenses for research
and development, personnel, supplies and development materials, costs for consultants and related contract research and facility
costs. Expenditures relating to research and development are expensed as incurred.
Stock-Based Compensation
The Company follows the provisions of
ASC
718 – Stock Compensation
, which requires the measurement of compensation expense for all shared-based payment awards
made to employees and non-employee directors, including employee stock options. Stock-based compensation expense is based on the
grant date fair value estimated in accordance with the provisions of ASC 718 and is generally recognized as an expense over the
requisite service period, net of forfeitures.
The fair value of common stock issued as employee compensation is
the average of the open and close share price on the date the common shares are issued.
The Series A preferred shares are not traded in any market. The
assumptions used to determine the fair value of the Series A preferred shares issued as employee compensation are presented in
Note 8 to the financial statements.
The fair value of each option award is estimated
on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for inputs are
as follows:
·
|
Expected
term of share options and similar instruments: The expected life of options and similar instruments represents the period of
time the option and/or warrant are expected to be outstanding. The expected term of share options and similar instruments
represents the period of time the options and similar instruments are expected to be outstanding taking into consideration
the contractual term of the instruments and employees’ expected exercise and post-vesting employment termination
behavior into the fair value of the instruments. It may be appropriate to use the
simplified method
, if (i) A company
does not have sufficient historical exercise data to provide a reasonable basis upon which to estimate expected term due to
the limited period of time its equity shares have been publicly traded; (ii) A company significantly changes the terms of
its share option grants or the types of employees that receive share option grants such that its historical exercise data
may no longer provide a reasonable basis upon which to estimate expected term; or (iii) A company has or expects to have
significant structural changes in its business such that its historical exercise data may no longer provide a reasonable
basis upon which to estimate expected term. The Company uses the simplified method to calculate expected term of share
options and similar instruments as the Company does not have sufficient historical exercise data to provide a reasonable
basis upon which to estimate the expected term.
|
·
|
Expected volatility of the Company’s shares and the method used to estimate it: Expected volatility is based on the average historical volatility of the Company’s common stock over the expected term of the option.
|
·
|
Expected annual rate of quarterly dividends: The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the expected term of the option and similar instruments.
|
·
|
Risk-free rate(s): The risk-free interest
rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the expected term of the option
and similar instruments.
The Company’s policy is to recognize
compensation cost for awards with only service conditions and a graded vesting schedule on a straight-line basis over the requisite
service period for the entire award.
|
Equity Instruments Issued to Parties
other than Employees for Acquiring Goods or Services
The Company follows the provisions of ASC 505
- Equity, which accounts for equity instruments issued to parties other than employees for acquiring goods or services. Pursuant
to ASC 505, all transactions in which goods or services are the consideration received for the issuance of equity instruments are
accounted for based on the fair value of the consideration received or the fair value of the equity instrument issued, whichever
is more reliably measurable. The measurement date used to determine the fair value of the equity instrument issued is the earlier
of the date on which the performance is complete or the date at which a commitment for performance is reached. The assumptions
used in determining the fair value of the Series A Preferred shares are presented in Note 8 to the financial statements.
The Company uses the average of the open and
close share price of the Company’s common stock at each measurement date to determine the fair value of the restricted common
stock issued as compensation for goods and services.
The Company has issued securities to acquire
goods or services at or after the delivery of the goods or services for which it contracted. The securities when issued are fully
vested and the Company has recognized such issuances as an immediate expense.
The fair value of share options and similar
instruments is estimated on the date of grant using a Black-Scholes option-pricing valuation model. The ranges of assumptions for
inputs are as follows:
·
|
Expected term of share options and similar instruments: The expected term of share options and similar instruments represents the contractual term of the instruments.
|
·
|
Expected volatility of the Company’s shares and the method used to estimate it. Expected volatility is based on the average historical volatility of the Company’s common stock over the contractual term of the option and similar instruments.
|
·
|
Expected annual rate of quarterly dividends. The expected dividend yield is based on the Company’s current dividend yield as the best estimate of projected dividend yield for periods within the contractual term of the option and similar instruments.
|
·
|
Risk-free rate(s). The risk-free interest rate is based on the U.S. Treasury yield curve in effect at the time of grant for periods within the contractual term of the option and similar instruments.
|
Income Tax Provision
The Company uses the asset and liability method
of accounting for deferred income taxes. Deferred income taxes are measured by applying enacted statutory rates to net operating
loss carryforwards and to the differences between the financial reporting and tax bases of assets and liabilities. Deferred tax
assets are reduced, if necessary, by a valuation allowance if it is more likely than not that some portion or all of the deferred
tax assets will not be realized.
The Company recognizes uncertainty in income
taxes in the financial statements using a recognition threshold and measurement attribute of a tax position taken or expected to
be taken in a tax return. The Company applies the “more-likely-than-not” recognition threshold to all tax positions,
commencing at the adoption date of the applicable accounting guidance, which resulted in no unrecognized tax benefits as of such
date. Additionally, there have been no unrecognized tax benefits subsequent to adoption. The Company has opted to classify interest
and penalties that would accrue, if any, according to the provisions of relevant tax law as selling, general, and administrative
expenses, in the statements of operations. For the years ended June 30, 2016, 2015 and 2014 there was no such interest or penalty.
Concentrations of Risk
Financial instruments that potentially subject
us to a significant concentration of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits
in federally insured institutions in excess of federally insured limits. The Company does not believe it is exposed to significant
credit risk due to the financial position of the depository institutions in which those deposits are held.
Recently Issued Accounting Pronouncements
In March 2016, the FASB issued ASU No. 2016-09,
Stock Compensation (Topic 718), which includes provisions intended to simplify various aspects related to how share-based payments
are accounted for and presented in the financial statements. The standard is effective for annual periods beginning after December
15, 2016, with early adoption permitted. The Company is currently in the process of assessing the impact of this ASU on its financial
statements.
In August 2014, the FASB issued ASU No. 2014-15,
“Presentation of Financial Statements - Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s
Ability to Continue as a Going Concern” (“ASU 2014-15”). ASU 2014-15 is intended to define management’s
responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and
to provide related footnote disclosures. Specifically, ASU 2014-15 provides a definition of the term substantial doubt and
requires an assessment for a period of one year after the date that the financial statements are issued (or available to be issued).
It also requires certain disclosures when substantial doubt is alleviated as a result of consideration of management’s plans
and requires an express statement and other disclosures when substantial doubt is not alleviated. The new standard will be
effective for reporting periods beginning after December 15, 2016, with early adoption permitted. Management is currently
evaluating the impact of ASU 2014-15 on the Company’s financial statements and disclosures.
In November 2014, the FASB issued ASU 2014-16,
“Derivatives and Hedging (Topic 815).” ASU 2014-16 addresses whether the host contract in a hybrid financial instrument
issued in the form of a share should be accounted for as debt or equity. ASU 2014-16 is effective for annual periods beginning
after December 15, 2015 and interim periods within those fiscal years. ASU 2014-16 did not have a material impact on the Company’s
financial statements and disclosures.
In April 2015, the FASB issued ASU 2015-03, Interest - Imputation
of Interest (Subtopic 835-30), “Simplifying the Presentation of Debt Issuance Costs,” which requires that debt issuance
costs related to a recognized debt liability be presented in the balance sheet as a direct deduction from the carrying amount of
that debt liability, consistent with debt discounts. This ASU requires retrospective adoption and will be effective for fiscal
years beginning after December 15, 2015 and for interim periods within those fiscal years. This guidance does not have a material
impact on our financial statements.
Note 3 – Financial Condition
The Company’s financial statements have
been prepared on a going concern basis, which contemplates the realization of assets and settlement of liabilities and commitments
in the normal course of business.
The Company has an accumulated deficit at June
30, 2016 of ($64,824,201) and had a net loss and net cash used in operating activities for the fiscal year then ended. In addition,
the Company has not generated any revenues and no revenues are anticipated in the foreseeable future. Since May 2005, the Company
has been engaged exclusively in research and development activities focused on developing targeted antiviral drugs. The Company
has not yet commenced any product commercialization. Such losses are expected to continue for the foreseeable future and until
such time, if ever, as the Company is able to attain sales levels sufficient to support its operations. There can be no assurance
that the Company will achieve or maintain profitability in the future. As of June 30, 2016, the Company had cash and cash equivalents
of $24,162,185. The Company’s Series B Convertible Debenture, in the amount of $6 million, matures on February 1, 2017. The
holder(s) at their option, may convert some or all of the principal balance and accrued interest if any, into a number of restricted
shares of common stock of the Company equal to the outstanding balance being converted divided by 3.5. Any principal balance not
being converted will be paid in cash on February 1, 2017. The Company has sufficient capital to continue its business, at least
through June 30, 2018, at the current rate of expenditure.
While the Company continues to incur significant
operating losses with significant capital requirements, the Company has been able to finance its business through sale of its securities.
The Company may require additional capital to finance planned and currently unplanned capital costs and additional staffing requirements
during the next 24 months. The Company has in the past adjusted its priorities and goals in line with the cash on hand and capital
availability. The Company believes it can adjust its priorities of drug development and its plan of operations as necessary, if
it is unable to raise additional funds.
Note 4 – Related Party Transactions
Related Parties
Related parties with whom the Company had transactions
are:
Related Parties
|
|
Relationship
|
|
|
|
Anil R. Diwan
|
|
Chairman, President, significant stockholder and director
|
|
|
|
Eugene Seymour
|
|
CEO, significant stockholder, director
|
|
|
|
TheraCour Pharma, Inc.
|
|
An entity owned and controlled by a significant stockholder
|
|
|
|
Inno-Haven, LLC
|
|
An entity owned and controlled by a significant stockholder
|
|
|
|
Milton Boniuk, MD
|
|
Director and significant stockholder
|
Property and Equipment
|
|
For the Year Ended
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
June 30,
2014
|
|
The Company acquired 1 Controls Drive, Shelton, Connecticut from InnoHaven, LLC
|
|
$
|
-
|
|
|
$
|
4,222,549
|
|
|
$
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
During the reporting period, TheraCour Pharma, Inc. acquired property and equipment on behalf of the Company from third party vendors and sold such property and equipment at cost, to the Company
|
|
$
|
39,938
|
|
|
$
|
255,019
|
|
|
$
|
528,720
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Inno-Haven, LLC, acquired property and equipment on behalf of the Company from third party vendors and sold such property and equipment at cost, to the Company
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,500,000
|
|
Accounts Payable Related Party
|
|
As of
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Pursuant to an Exclusive License Agreement we entered into with TheraCour Pharma, Inc., (TheraCour), the Company was granted exclusive licenses in perpetuity for technologies developed by TheraCour for the virus types: HIV, HCV, Herpes, Asian (bird) flu, Influenza and rabies. In consideration for obtaining this exclusive license, we agreed: (1) that TheraCour can charge its costs (direct and indirect) plus no more than 30% of direct costs as a development fee and such development fees shall be due and payable in periodic installments as billed, (2) we will pay $25,000 per month for usage of lab supplies and chemicals from existing stock held by TheraCour, (3) we will pay $2,000 or actual costs each month, whichever is higher for other general and administrative expenses incurred by TheraCour on our behalf. Accounts payable due TheraCour Pharma Inc. on the reporting date was
|
|
$
|
767,454
|
|
|
$
|
316,196
|
|
Research and Development Costs Paid to
Related Parties
|
|
For the Year Ended
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
June 30,
2014
|
|
Development fees and other costs charged by and paid to TheraCour Pharma, Inc. pursuant to exclusive License Agreements between TheraCour and the Company for the development of the Company’s drug pipeline. No royalties are due TheraCour from the Company at June 30, 2016, 2015 and 2014
|
|
$
|
3,731,498
|
|
|
$
|
2,403,126
|
|
|
$
|
2,611,754
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Long Term Debentures Payable to a Director
|
|
As of
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
|
|
|
|
|
|
Series B Convertible Debentures - Milton Boniuk
|
|
$
|
4,000,000
|
|
|
$
|
4,000,000
|
|
|
|
|
|
|
|
|
|
|
Series C Convertible Debentures - Milton Boniuk
|
|
|
5,000,000
|
|
|
|
5,000,000
|
|
|
|
|
|
|
|
|
|
|
Total Long Term Debentures Payable to a Director
|
|
$
|
9,000,000
|
|
|
$
|
9,000,000
|
|
|
|
As of
|
|
Debenture Interest Payable to a Director
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Coupon interest payable on $5,000,000 Series C Convertible Debentures and deferred. The deferred interest is paid out quarterly over the remaining term of the debenture commencing September 30, 2015:
|
|
|
|
|
|
|
|
|
Deferred interest payable - short-term
|
|
$
|
166,667
|
|
|
$
|
166,667
|
|
Deferred interest payable - long-term
|
|
|
166,667
|
|
|
|
333,333
|
|
|
|
$
|
333,334
|
|
|
$
|
500,000
|
|
Stock and warrant interest paid in kind on
Series B Convertible Debentures to Dr. Milton Boniuk and recognized at fair value was $37,410, $1,001,532 and $1,730,763 for the
years ended June 30, 2016, 2015, and 2014, respectively.
Coupon interest expense on the Series B
Debentures to two holders controlled by Dr. Milton Boniuk for the years ending June 30, 2016, 2015 and 2014 was $320,000,
$320,000 and $320,000, respectively. For the year ending June 30, 2016, two holders controlled by Dr. Boniuk elected to receive $160,000 of such
interest in common stock of the Company calculated at the average of the open and close market value of the Company’s
stock on the due date of such interest resulting in the issuance of 101,558 shares of the Company’s $0.001 par value
common stock.
Coupon interest expense on the Series C Debenture
to Dr. Milton Boniuk for the years ended June 30, 2016 and 2015 was $500,000 and $500,000 respectively. For the year ending June
30, 2016, Dr. Boniuk elected to receive $375,000 of such interest in restricted common shares of the Company calculated at the
average of the open and close market value of the Company’s stock on the due date of such interest resulting in the issuance
of 235,310 shares of the Company’s $0.001 par value common stock. Dr. Boniuk also elected to receive $125,000 of the deferred
interest due under the debenture in common stock of the Company calculated at the average of the open and close market value of
the Company’s stock on the due date of such deferred interest resulting in the issuance of 78,475 shares of the Company’s
$0.001 par value common stock.
Note 5 – Property and Equipment
Property and equipment, stated at cost, less
accumulated depreciation consisted of the following:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
|
|
|
|
|
|
GMP Facility
|
|
$
|
7,996,402
|
|
|
$
|
7,905,938
|
|
|
|
|
|
|
|
|
|
|
Land
|
|
|
260,000
|
|
|
|
260,000
|
|
|
|
|
|
|
|
|
|
|
Office Equipment
|
|
|
46,897
|
|
|
|
65,241
|
|
|
|
|
|
|
|
|
|
|
Furniture and Fixtures
|
|
|
5,607
|
|
|
|
1,400
|
|
|
|
|
|
|
|
|
|
|
Lab Equipment
|
|
|
5,302,677
|
|
|
|
5,264,272
|
|
|
|
|
|
|
|
|
|
|
Total Property and Equipment
|
|
|
13,611,583
|
|
|
|
13,496,851
|
|
|
|
|
|
|
|
|
|
|
Less Accumulated Depreciation
|
|
|
(1,850,816
|
)
|
|
|
(1,534,203
|
)
|
Property and Equipment, Net
|
|
$
|
11,760,767
|
|
|
$
|
11,962,648
|
|
Depreciation expense for the years ended June
30, 2016, 2015 and 2014 was $651,275, $294,217 and $203,234, respectively.
On December 31, 2014, the Company entered into
and consummated an Agreement for the Purchase and Sale of a cGMP-compliant pilot manufacturing and lab facility at 1 Controls Drive,
Shelton, Connecticut. The purchase price of the facility was comprised solely of the repayment of the direct costs of the seller,
Inno-Haven, LLC (“Inno-Haven”), an entity owned and controlled by a significant stockholder, incurred in acquiring
and renovating the property and the facility plus Inno-Haven’s closing costs in connection with the sale. The purchase price
consisted of the repayment of Inno-Haven’s acquisition and renovation expenses of $4,222,549 and closing costs of $81,230.
During the year ended June 30, 2016, the Company
completed the transfer of laboratories and personnel from its previous laboratory facilities at 135 Wood Street, West Haven, CT
to 1 Controls Drive, Shelton, CT. The Company recorded the abandonment of fully depreciated non-removable laboratory fixtures and
leasehold improvements associated with the 135 Wood Street rented facility of $332,476 as a reduction to Property and Equipment
with a corresponding reduction to Accumulated Depreciation.
Note 6 – Trademark and Patents
Trademark and patents, stated at cost, less
accumulated amortization consisted of the following:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
|
|
|
|
|
|
Trademarks and Patents
|
|
$
|
458,954
|
|
|
$
|
458,954
|
|
Less Accumulated Amortization
|
|
|
(67,487
|
)
|
|
|
(59,217
|
)
|
Trademarks and Patents, Net
|
|
$
|
391,467
|
|
|
$
|
399,737
|
|
Amortization expense amounted to $8,270, $8,521,
and $8,775 for the years ended June 30, 2016, 2015 and 2014, respectively.
The Company amortizes our trademarks and patents over their expected
original useful lives of 17 years.
Amortization expense in future years is as follows:
|
2017
|
|
|
$
|
8,270
|
|
|
2018
|
|
|
|
8,270
|
|
|
2019
|
|
|
|
8,270
|
|
|
2020
|
|
|
|
8,270
|
|
|
2021
|
|
|
|
8,270
|
|
|
Thereafter
|
|
|
|
350,117
|
|
|
|
|
|
|
|
|
|
Total amortization
|
|
|
$
|
391,467
|
|
Note 7 – Convertible Debentures
and Derivatives
On February 1, 2013, the Company raised
gross proceeds of $6,000,000 which includes $4,000,000 from a family investment office and a charitable foundation controlled
by Dr. Milton Boniuk, a member of the Company’s board of directors, through the issuance of our Series B Debentures. The
investors purchased unsecured convertible debentures with a 4-year term. The debentures bear an interest rate of 8% p.a. payable
quarterly in cash or the Holder at its option may elect to receive such coupon interest payment in shares of common stock and
calculated on the date of issuance, using the average of the open and close prices of the Company’s common stock on the
date such interest payment is due. For the year ended June 30, 2016, the Company paid cash interest of $320,000. Two holders of
the Company’s Series B Convertible Debentures elected to receive coupon interest of $160,000 in restricted common shares
of the Company. For the year ended June 30, 2016, the Board of Directors authorized the issuance of 101,558 shares of the Company’s
restricted $0.001 par value common shares in payment of such coupon interest to such holders. Additional interest was payable
in restricted common stock of 571,429 shares at issuance, and on February 1, 2014 and 2015, and additional interest payable in
571,433 warrants on February 1, 2016 and recognized an interest expense of $56,115 which was their fair value on the date of issuance.
On February 1, 2014 and 2015 the Company issued 571,433 and 571,433 restricted shares of the Company’s $0.001 par value
common stock, respectively and recorded interest expense of $2,605,716 and $1,502,870, respectively. The warrants are exercisable
at $3.50 per warrant and will be valid for 3 years after issuance. The investors can convert the principal of the debentures and
any accrued interest into common stock at a fixed price of $3.50 per share. The Company can prepay the debentures, in which case
the base interest rate shall increase by a 7% prepayment penalty. The Company agreed to use its best efforts to register the interest
shares and the shares issuable from the interest warrants under a “shelf” registration statement provided same is
available, in accordance with the provisions of the Securities Act.
The Company estimated the fair value of the warrants granted
to the holders of the Series B Debentures for additional interest on the date of grant using the Black-Scholes Option-Pricing
Model with the following weighted-average assumptions:
Expected life
(year)
|
|
|
3
|
|
|
|
|
|
|
Expected volatility
|
|
|
44.18
|
%
|
|
|
|
|
|
Expected annual rate of quarterly
dividends
|
|
|
0.00
|
%
|
|
|
|
|
|
Risk-free rate(s)
|
|
|
1.01
|
%
|
The following table
presents the balance of the Series B Debenture payable, net of discount at June 30, 2016 and 2015. The debt discount is being
accreted to interest expense over the term of the debenture:
|
|
June
30,
2016
|
|
|
June 30,
2015
|
|
|
|
|
|
|
|
|
Proceeds
|
|
$
|
6,000,000
|
|
|
$
|
6,000,000
|
|
Debt discount for bifurcated derivative
|
|
|
(2,735,310
|
)
|
|
|
(2,735,310
|
)
|
|
|
|
3,264,690
|
|
|
|
3,264,690
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization of debt discount
|
|
|
2,210,047
|
|
|
|
1,435,892
|
|
|
|
|
|
|
|
|
|
|
Debenture payable - Series
B, net
|
|
$
|
5,474,737
|
|
|
$
|
4,700,582
|
|
The debenture contains
embedded derivatives which are not clearly and closely related to the host instrument. The embedded derivatives are bifurcated
from the host debt instrument and treated as a liability.
The single compound
embedded derivative features valued include the:
|
1.
|
Principal conversion
feature at maturity based on fixed conversion price subject to standard adjustments.
|
|
2.
|
Redemption
additional interest and Redemption Warrants offering.
|
|
3.
|
Additional
Interest Shares and Interest Warrants.
|
The Company recognized
amortization of this discount as an additional interest charge to “Discount on convertible debentures” for the years
ended June 30, 2016, 2015 and 2014, in the amounts of $774,155, $663,014 and $569,495 respectively.
The Company uses
a lattice model that values the compound embedded derivatives bifurcated from the Series B Convertible Debenture based on a probability
weighted discounted cash flow model at June 30, 2016 and 2015.
The following assumptions
were used for the valuation of the compound embedded derivative at June 30, 2016 and June 30, 2015:
|
·
|
The
balance of the Series B Convertible Debenture as of June 30, 2016 and June 30, 2015 is $6,000,000;
|
|
·
|
The
underlying stock price was used as the fair value of the common stock. The stock price decreased to
$1.60
at June 30,
2016 which decreased the warrant value with the $3.50 exercise price. The stock price decreased to $1.75 at June 30, 2015
which decreased the warrant value with the $3.50 exercise price;
|
|
·
|
The projected
annual volatility was based on the Company historical volatility:
|
1 year
6/30/2016 83%
6/30/15 62%
|
·
|
An
event of default would occur 0% of the time, increasing 1.00% per month to a maximum of
10%
;
|
|
·
|
The
Company would redeem the debentures projected initially at 0% of the time and increase monthly by 1.0% to a maximum of
20.0%
(from alternative financing being available for a Redemption event to occur);
|
|
·
|
The
Holder would automatically convert the interest if the Company was not in default and its shares value would be equivalent
to the cash value;
|
|
·
|
The
Holder would automatically convert the debenture at maturity if the registration was effective and the Company was not in
default.
|
|
·
|
The
weighted cost of capital discount rate (based on the market value of the transaction at issuance) adjusted for changes in
the risk free rate is
21.74%.
|
|
·
|
Even
though the shares are restricted, the underlying assumption is that any restriction on resale will be removed either through
registration or the passage of time at the time of issuance.
|
The fair value
of the compound embedded derivatives of the Series B Convertible Debenture at June 30, 2016 and 2015 was $203,030 and $366,764,
respectively.
On July 2, 2014
(the “Closing Date”), the Company accepted a subscription in the amount of $5,000,000 for a 10% Coupon Series C Convertible
Debenture (the “Debenture”) from Dr. Milton Boniuk, a member of the Company’s Board of Directors (the “Holder”).
The Debenture is due on June 30, 2018 (the “Maturity Date”) and is convertible, at the sole option of the Holder,
into restricted shares of the Company’s common stock, par value $0.001 per share (the “Common Stock”) at the
conversion price of $5.25 per share of Common Stock. The Debenture bears interest at the coupon rate of ten percent (10%) per
annum, computed on an annual basis of a 365 day year, payable in quarterly installments on March 31, June 30, September 30 and
December 31 of each calendar year until the Maturity Date. In accordance with the debenture agreement, the interest for the initial
year of the debenture for a total of $500,000 shall be deferred and paid over the remainder of the term at $166,667 per year.
The Holder at its option may choose to receive such coupon interest payment in shares of common stock calculated using the average
of the open and close prices of the Company’s common stock on the date such interest payment is due. For the year ended
June 30, 2016, the Holder of the Company’s C Convertible Debenture elected to receive quarterly coupon interest of $375,000
and $125,000 of the deferred interest in restricted common shares of the Company. The Board of Directors authorized the issuance
of 313,785 shares of the Company’s restricted $.001 par value common shares in payment of such coupon interest. For the
year ended June 30, 2016, the Company paid cash interest of $166,667 on the Series C Debentures. The Company has the right, but
not the obligation, to repay the Debenture prior to the Maturity Date (the “Redemption Payment”). If the closing bid
price of the common Stock is in excess of $5.25 when the Company notifies the Holder it has elected to prepay the Debenture (the
“Redemption Date”), the Company must redeem the Debenture by delivering to the Holder 952,381 shares of Common Stock
and any unpaid coupon interest in lieu of a cash Redemption Payment. If the Holder elects to receive the Redemption Payment in
cash, or if the closing bid price of the Common Stock is less than $5.25, the Company shall pay to the Holder a Redemption Payment
in cash equal to the principal amount of the Debenture, plus any accrued coupon interest, plus additional interest of 7% per annum
for the period from the Closing Date to the Redemption Date and warrants to purchase 619,048 shares of Common Stock which shall
expire in three years from the date of issuance at the exercise price of $6.05 per share of Common Stock. The Company cannot conclude
that it has sufficient authorized and unissued shares to settle the contract after considering all other commitments that may
require the issuance of stock during the maximum period the derivative instrument could remain outstanding. This is due to the
fact that the interest payments are payable in stock of the Company, at the option of the Holder, based on the current market
price of the common stock on the date such payments are due. Therefore, the number of shares due as interest payments is essentially
indeterminate and the Company cannot conclude that it has sufficient authorized and unissued shares to settle the conversion feature.
Accordingly, the Company bifurcated the embedded features from the host contract and recorded them as a derivative liability at
fair value. A debt discount was recognized in the same amount as the derivative liability associated with embedded features bifurcated
from the Series C Convertible Debenture.
On July 2, 2014,
in conjunction with the issuance of the Company’s Series C Convertible Debentures, the Company issued 187,000 shares of
its Series A Convertible Preferred stock (the “Series A”) to Dr. Milton Boniuk, pursuant to the terms of the Debenture.
Proceeds received in a financing transaction are allocated to the instruments issued prior to evaluating hybrid contracts for
bifurcation of embedded derivatives. Since the Series A Convertible Preferred Stock is classified as equity, the proceeds allocated
to the Preferred Stock are recorded at relative fair value. The fair value of the Series A was $1,645,606 at issuance and the
relative fair value was calculated as $1,152,297. The remaining amount of the proceeds was allocated to the Debenture and a debt
discount of $1,152,297 was recorded to offset the amount of the proceeds allocated to the Series A. Then, the embedded derivative
was bifurcated at its fair value of $1,879,428 with the remaining balance allocated to the host instrument (Debenture). The total
debt discount will be amortized over the term of the Debenture using the effective interest method. The Company recognized amortization
of this discount as an additional interest charge to “Discount on convertible debentures” in the amount of $653,063
and $512,330 for the years ended June 30, 2016 and 2015 respectively.
The following represents the balance
of the Debenture payable – Series C, net of discount at June 30, 2016 and June 30, 2015:
|
|
June
30,
2016
|
|
|
June
30,
2015
|
|
|
|
|
|
|
|
|
Proceeds
|
|
$
|
5,000,000
|
|
|
$
|
5,000,000
|
|
Debt Discount:
|
|
|
|
|
|
|
|
|
Series A Preferred
|
|
|
(1,152,297
|
)
|
|
|
(1,152,297
|
)
|
Embedded derivative
|
|
|
(1,879,428
|
)
|
|
|
(1,879,428
|
)
|
|
|
|
1,968,275
|
|
|
|
1,968,275
|
|
|
|
|
|
|
|
|
|
|
Accumulated amortization of debt discount
|
|
|
1,165,393
|
|
|
|
512,330
|
|
|
|
|
|
|
|
|
|
|
Debenture payable - Series
C, net
|
|
$
|
3,133,668
|
|
|
$
|
2,480,605
|
|
The Company uses
a lattice model that values the compound embedded derivatives of the Series C Convertible Debenture based on a probability weighted
discounted cash flow model at June 30, 2016 and June 30, 2015.
The following assumptions
were used for the valuation of the compound embedded derivative at June 30, 2016 and June 30, 2015:
|
·
|
The
balance of the Series C Convertible Debenture as of June 30, 2016 and 2015 is $5,000,000;
|
|
·
|
The
underlying stock price was used as the fair value of the common stock; The stock price decreased to
$1.60
at June 30,
2016 and higher projected annual volatility decreased the warrant value with the $6.05 exercise price. The stock price decreased
to $1.75 at June 30, 2015 which decreased the warrant value with the $6.05 exercise price;
|
|
·
|
The
projected annual volatility was based on the Company historical volatility:
|
1 year
6/30/16 83%
6/30/15 62%
|
·
|
An
event of default would occur 0% of the time, increasing 1.00% per month to a maximum of
10%
;
|
|
·
|
The
Company would redeem the debentures projected initially at 0% of the time and increase monthly by 1.0% to a maximum of
5.0%
(from alternative financing being available for a Redemption event to occur);
|
|
·
|
The
Holder would automatically convert the interest if the Company was not in default and its share value was equivalent to the
cash value;
|
|
·
|
The
Holder would automatically convert the debenture at maturity if the registration was effective and the Company was not in
default.
|
|
·
|
The
weighted cost of capital discount rate (based on the market value of the transaction at issuance) adjusted for changes in
the risk free rate is 21.74%.
|
|
·
|
Even
though the shares are restricted the underlying assumption is that any restriction on resale will be removed either through
registration or the passage of time at the time of issuance.
|
The fair value
of the compound embedded derivatives of the Series C Convertible Debenture at June 30, 2016 and 2015 was $343,673 and $476,289,
respectively.
Note 8 –
Equity Transactions
Fiscal Year
Ending June 30, 2014 Transactions
On September 9,
2013, the Company entered into a Securities Purchase Agreement (the “Agreement”) with certain purchasers (the “Purchasers”),
relating to the offering and sale (the “Offering”) of units (“Units”) at the aggregate purchase price
of $3.50 (“Purchase Price”) per Unit, consisting of one share of the Company’s common stock, par value $0.001
per share (the “Common Stock”) and a warrant to purchase one share of Common Stock (“Warrant”), issuable
upon exercise of the Warrant at the exercise price of $5.25 per share (the “Warrant Shares”, collectively with the
Units, Common Stock and Warrant, the “Securities”) The Warrants are exercisable immediately and expire five years
after issuance.
On September 12,
2013, post reverse split the Company and the Purchasers consummated the purchase and sale of the Securities (the “Closing”),
and the Company raised gross proceeds of $10,308,996 before expenses of the Offering of $618,540, which includes placement agent
and attorneys’ fees. The Company issued 2,945,428 Units. On September 25, 2013 certain of these Unit Holders exercised 35,357
Warrants to purchase 35,357 shares of the Company’s common stock, par value $0.001 per share, for gross proceeds of $185,624.
On January 21, 2014 and February 6, 2014 certain of these Unit Holders exercised 75,000 and 25,000 Warrants, respectively, to
purchase 75,000 and 25,000 shares of the Company’s common stock, par value $0.001 per share, for gross proceeds of $393,750
and $131,250 respectively.
The Offering was
made pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-184626), which was declared effective
by the Securities and Exchange Commission on December 21, 2012. The Company, pursuant to Rule 424(b) under the Securities Act
of 1933, has filed with the Securities and Exchange Commission a prospectus supplement relating to the Offering.
In connection with
the Offering, pursuant to a Placement Agency Agreement dated September 9, 2013 among Midtown Partners & Co., LLC and Chardan
Capital Markets, LLC (collectively, the “Placement Agents”), the Company paid the Placement Agents an aggregate cash
fee representing 6% (3% each) of the gross Purchase Price paid by the Purchasers and warrants to purchase an aggregate of 2% (1%
each) of the number of shares of Common Stock sold in the Offering (the “Compensation Warrants”) and substantially
similar to the Warrants, at an exercise price equal to $5.25 per share. The Compensation Warrants will otherwise comply with FINRA
Rule 5110(g)(1) in that for a period of nine months after the issuance date of the Compensation Warrants, neither the Compensation
Warrants nor any warrant shares issued upon exercise of the compensation warrants shall be sold, transferred, assigned, pledged,
or hypothecated, or be the subject of any hedging, short sale, derivative, put, or call transaction that would result in the effective
economic disposition of the securities by any person for a period of 180 days immediately following the Closing. Upon issuance
of the 58,910 compensation warrants, the Company recognized costs associated with the sale of securities ( a capital item ) of
$113,696 and a corresponding increase in additional paid in capital of $113,696.
On September 25,
2013, the Company’s Common Stock began trading on the NYSE MKT exchange under the symbol NNVC.
On January 21,
2014, the Company entered into a Securities Purchase Agreement (the “Agreement”) with certain purchasers (the “Purchasers”),
relating to the offering and sale (the “Offering”) of units (“Units”) at the aggregate purchase price
of $5.25 (“Purchase Price”) per Unit. The price per Unit was equal to a four percent (4%) discount to the 20-day VWAP
of the Company’s stock price on Friday, January 17, 2014. The exercise price of the Warrant was equal to the closing price
of the Company’s stock on Friday, January 17, 2014. Each Unit consisted of one share of the Company’s common
stock, par value $0.001 per share (the “Common Stock”) and Sixty-Five Hundredths (65/100) of a warrant to purchase
one share of Common Stock (“Warrant”), issuable upon exercise of the Warrant at the exercise price of $6.05 per share
(the “Warrant Shares”, collectively with the Units, Common Stock and Warrant, the “Securities”). The Warrants
are exercisable immediately and expire five years after issuance.
On January 24, 2014, the Company and the
Purchasers consummated the purchase and sale of the Securities (the “Closing”) of 3,815,285 shares of Common Stock
and 2,479,935 Warrants, and the Company raised gross proceeds of $20,030,207 before expenses of the Offering of approximately
$1,200,000, which includes placement agent fees. The Company intends to use the proceeds for general business purposes and expects
that it will be able to accelerate the development of its drug candidate pipeline with this additional funding.
The Offering was
made pursuant to the Company’s shelf registration statement on Form S-3 (File No. 333-184626), which was declared effective
by the Securities and Exchange Commission on December 21, 2012 and Form S-3MEF (File No. 333-193439).
In
connection with the Offering, pursuant to a Placement Agency Agreement dated January 20, 2014 among Midtown Partners &
Co., LLC and Chardan Capital Markets, LLC (collectively, the “Placement Agents”), the Company paid the Placement
Agents an aggregate cash fee representing 6% of the gross Purchase Price paid by the Purchasers and warrants to purchase an
aggregate of 2% of the number of shares of Common Stock sold in the Offering (the “Compensation Warrants”)
representing two percent of the Shares and substantially similar to the Warrants, at an exercise price equal to $6.05 per
share. The Compensation Warrants will otherwise comply with FINRA Rule 5110(g)(1) in that for a period of six months after
the issuance date of the Compensation Warrants, neither the Compensation Warrants nor any warrant shares issued upon exercise
of the compensation warrants shall be sold, transferred, assigned, pledged, or hypothecated, or be the subject of any
hedging, short sale, derivative, put, or call transaction that would result in the effective economic disposition of the
securities by any person for a period of 180 days immediately following the Closing. The Company issued 76,306 Compensation
Warrants and recognized costs associated with the sale of securities (a capital item) of $135,062 and a corresponding
increase in additional paid in capital.
The
above warrants contain a full
reset feature. As a result of a 2014 reset event, the $6.05 exercise price of the
January 21, 2014 warrants were adjusted to $5.25.
In conjunction with the Company’s
registered direct offering of Units, consisting of the Company’s common stock and warrants, on January 24, 2014 the Company
issued 2,479,935 warrants which are outstanding at June 30, 2016. Additionally, the Company issued
76,306 warrants to the placement agents which are also outstanding at June 30, 2016, for a total number of 2,556,241
warrants outstanding pursuant to the aforesaid registered direct offering.
The Company accounts for stock purchase
warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant agreements. Under
applicable accounting guidance, stock warrants must be accounted for as derivative financial instruments if the warrants contain
full-ratchet anti-dilution provisions, which preclude the warrants from being considered indexed to its own stock. The warrants
described above contained a full-ratchet anti-dilution feature and are thus classified as a derivative liability.
The Company used a lattice model to calculate
the fair value of the derivative warrants based on a probability weighted discounted cash flow model. This model is based on future
projections of the various potential outcomes. The features that were analyzed and incorporated into the model included the exercise
and full reset features.
The Warrants were valued as of issuance,
exercise, and the annual periods.
The primary factors driving the economic value of warrants are
stock price; stock volatility; reset events and exercise behavior. Projections of these variables over the remaining term of the
warrant are either derived or based on industry averages. Based on the above, a probability was assigned to each scenario for each
future period, and the appropriate derivative value was determined for each scenario. The warrant value was then probability weighted
and discounted to the present. Based upon the above, the Company, at issuance of the warrants allocated $5,740,540 of the proceeds
of the offering to the Derivative liability of the Investor Warrants.
Unregistered Securities
In December, 2013, the Company issued 7,143
shares of common stock with a restrictive legend at $3.50 per share upon the exercise of warrants.
For the year ended June 30, 2014,
the Company’s Board of Directors authorized the issuance of 29,662 fully vested shares of its common stock with
a restrictive legend for consulting services. The Company recorded an expense of $102,001 which is the fair value at the
date of issuance using the fair market value of the Company’s common stock on the date issued.
On February 1, 2014, the Board
of Directors authorized the issuance of 571,429 fully vested shares of its $.001 par value common stock with a
restrictive legend for the payment of additional interest payable to the holders of the Company’s Series B Convertible
Debentures. The Company recorded an interest expense of $2,605,716 for the year ended June 30, 2014 using the fair market
value of the Company’s common stock on the date issued.
For the year ended June 30, 2014, the Company’s
Board of Directors authorized the issuance of 13,146 fully vested shares of its common stock with a restrictive legend for Director
services. The Company recorded an expense of $45,000 which is the fair value at the date of issuance using the fair market value
of the Company’s common stock on the date issued.
For the year ended June 30, 2014 the Board
of Directors authorized the issuance of 203,079 fully vested shares of its Series A Preferred stock $.001 par value with a restrictive
legend pursuant to existing employment agreements and recorded an expense of $2,123,014 which is the fair value at the date of
issuance.
For the year ended June 30, 2014, the
Company authorized the issuance of 71,430 fully vested shares of its $.001 par value common stock with a restrictive legend pursuant
to existing employment agreements and recorded an expense of $287,860 which is the fair value at the date of issuance using the
fair market value of the Company’s common stock on the date issued.
For the year ended June 30, 2014 the Scientific
Advisory Board (SAB) was granted fully vested warrants to purchase 72,439 shares of common stock. The warrants expire during the
fiscal year ending June 30, 2018. The Company recorded a consulting expense of $199,849.
The Company estimated the fair value of
the warrants granted quarterly to the Scientific Advisory Board on the date of grant using the Black-Scholes Option-Pricing Model
with the following weighted-average assumptions:
|
|
June
30,
2014
|
|
|
|
|
|
Expected life
(year)
|
|
|
4
|
|
|
|
|
|
|
Expected volatility
|
|
|
78.39%-98.09
|
%
|
|
|
|
|
|
Expected annual rate of quarterly
dividends
|
|
|
0.00
|
%
|
|
|
|
|
|
Risk-free rate(s)
|
|
|
.37-1.12
|
%
|
There is currently
no market for the shares of Series A Preferred Stock and they can only be converted into shares of common stock upon a change
of control of the Company. The Company, therefore, estimated the fair value of the Series A Preferred stock granted to various
employees on the date of grant. The Preferred stock fair value is based on the greater of i) the converted value to common at
a ratio of 1:3.5; or ii) the value of the voting rights since the holder would lose the voting rights upon conversion. The conversion
of the shares is triggered either by the Company or a Change of Control. The valuation of the Series A Preferred Stock as of 6/30/14
used the following inputs:
|
a.
|
The common stock price (post-reverse
split) was in the range $2.45 to $3.90;
|
|
b.
|
47,026,173
to 54,614,930 shares outstanding and Series A Preferred shares with 2,572 (post–split 9/10/13) issued monthly; and 169,644
issued annually to employees;
|
|
c.
|
A 5.36% premium over the common
shares for the voting preferences;
|
|
d.
|
54,506,459
to 62,208,499 total voting shares and the monthly shares representing voting rights of 0.042% to 0.484% of the total; and
the annual shares representing 1.02% to 2.389% of the total;
|
|
e.
|
The
conversion value is based on an assumption for calculation purposes only of a Change of Control in 4 years from 3/1/13 and
a restricted term of 3.67 to 2.67 years;
|
|
f.
|
42.87%
to 27.11% restricted stock discount (based on a restricted stock analysis and call-put analysis curve: 121.97% to 265.70%
volatility, 0.37% to 1.62% risk-free rate) applied to the converted common.
|
Based upon the
above assumptions the estimated fair value of the preferred shares issued to Company employees as a whole for the fiscal year
ended June 30, 2014 was calculated to be $2,123,014. There are no assurances that such estimated fair value represents a market
value between a willing buyer and seller.
The
fair value of the Series A Preferred Stock at each date of issuance was as follows:
Date
|
|
Shares
|
|
|
Value
|
|
7/31/2013
|
|
|
5,144
|
|
|
$
|
25,456
|
|
8/31/2013
|
|
|
2,572
|
|
|
$
|
16,950
|
|
9/30/2013
|
|
|
2,572
|
|
|
$
|
22,197
|
|
10/31/2013
|
|
|
2,572
|
|
|
$
|
27,572
|
|
11/30/2013
|
|
|
2,572
|
|
|
$
|
28,972
|
|
12/31/2013
|
|
|
2,572
|
|
|
$
|
27,337
|
|
1/31/2014
|
|
|
2,572
|
|
|
$
|
27,711
|
|
2/28/2014
|
|
|
2,572
|
|
|
$
|
27,329
|
|
3/31/2014
|
|
|
2,572
|
|
|
$
|
24,521
|
|
4/30/2014
|
|
|
2,572
|
|
|
$
|
20,897
|
|
5/31/2014
|
|
|
2,572
|
|
|
$
|
20,379
|
|
6/30/2014
|
|
|
172,215
|
|
|
$
|
1,853,693
|
|
|
|
|
|
|
|
|
|
|
|
|
|
203,079
|
|
|
$
|
2,123,014
|
|
Fiscal Year
Ending June 30, 2015 Transactions
On July 17, 2014,
the Company filed a registration statement on Form S-3 (the “Form S-3”) registering an aggregate of 3,071,986 shares
of common stock underlying warrants previously issued by the Company in various private placement offerings between 2005 and September
2009, (“Old Warrants”) as described more fully in the Form S-3 (the “Registered Warrants”). The Form S-3
was declared effective by the Securities and Exchange Commission on August 1, 2014. Holders of the Old Warrants were required
to submit Notice of Exercise by August 15, 2014, or their warrants would expire. The Company received Notices to Exercise Warrants
and the exercise price to purchase an aggregate of 1,926,656 shares of the Company’s common stock at the exercise price
of $3.50 per share for an aggregate purchase price of $6,743,297.
On February 1,
2015 the Company’s Board of Directors authorized the issuance of 571,429 shares of the Company’s $0.001 par value
common stock as annual interest payable to holders of the Company’s Series B Debentures. The Company recorded interest expense
of $1,502,870 for the year ended June 30, 2015 calculated using the fair market value of the Company’s common stock on the
date issued.
Unregistered
Securities
As discussed in
Note 7, on July 2, 2014, in conjunction with the issuance of the Company’s Series C Convertible Debentures, the Company
issued 187,000 shares of its Series A Convertible Preferred stock to Dr. Milton Boniuk, pursuant to the terms of the Debenture.
The Company allocated the proceeds received between the Debenture and the Preferred Stock on a relative fair value basis. The
amount allocated to the Preferred stock was $1,152,297.
For the year ended
June 30, 2015, the Scientific Advisory Board was granted fully vested warrants to purchase 68,592 shares of common stock at exercise
prices between $2.00- $5.02 per share expiring in the fiscal year ending June 30, 2019. These warrants were valued
at $59,675 and recorded as consulting expense.
For the year ended
June 30, 2015, the Company estimated the fair value of the warrants granted quarterly to the Scientific Advisory Board on the
date of grant using the Black-Scholes Option-Pricing Model with the following weighted-average assumptions:
Expected life
(year)
|
|
|
4
|
|
|
|
|
|
|
Expected volatility
|
|
|
37.44%
-45.84
|
%
|
|
|
|
|
|
Expected annual rate of quarterly
dividends
|
|
|
0.00
|
%
|
|
|
|
|
|
Risk-free rate(s)
|
|
|
1.20
- 1.67
|
%
|
For the year ended
June 30, 2015, the Company’s Board of Directors authorized the issuance of 35,154 shares of its common stock which are fully
vested with a restrictive legend for consulting services. The Company recorded an expense of $109,360 which is the fair value
at date of issuance.
For the year ended
June 30, 2015, the Company’s Board of Directors authorized the issuance of 16,408 shares of its common stock which are fully
vested with a restrictive legend for Director services. The Company recorded an expense of $45,000 which is the fair value at
date of issuance.
For the year ended
June 30, 2015, the Company’s Board of Directors authorized the issuance of 2,858 shares of its Series A Convertible Preferred
Stock which are fully vested for consulting services. The Company recorded an expense of $24,474.
For the year ended
June 30, 2015, the Company's Board of Directors authorized the issuance of 71,430 shares of its common stock which are fully vested
with a restricted legend for employee compensation. The Company recorded an expense of $125,003 which is the fair value at date
of issuance.
For the year ended
June 30, 2015, the Company’s Board of Directors authorized the issuance of 200,508 shares of its Series A Convertible Preferred
Stock which are fully vested with a restrictive legend for employee compensation. The Company recorded an expense of $852,760
which is the fair value at date of issuance.
The fair value of the Series A Preferred
stock at each date of issuance was as follows:
Date
|
|
Shares
|
|
|
Value
|
|
7/31/2014
|
|
|
2,572
|
|
|
$
|
25,821
|
|
8/31/2014
|
|
|
2,572
|
|
|
|
27,560
|
|
9/30/2014
|
|
|
2,572
|
|
|
|
19,602
|
|
10/31/2014
|
|
|
2,572
|
|
|
|
18,765
|
|
11/30/2014
|
|
|
2,572
|
|
|
|
22,025
|
|
12/31/2014
|
|
|
2,572
|
|
|
|
18,849
|
|
1/31/2015
|
|
|
2,572
|
|
|
|
16,501
|
|
2/28/2015
|
|
|
2,572
|
|
|
|
15,943
|
|
3/31/2015
|
|
|
2,572
|
|
|
|
16,299
|
|
4/30/2015
|
|
|
2,572
|
|
|
|
14,124
|
|
5/31/2015
|
|
|
2,572
|
|
|
|
11,460
|
|
6/30/2015
|
|
|
172,216
|
|
|
|
645,811
|
|
|
|
|
|
|
|
|
|
|
|
|
|
200,508
|
|
|
$
|
852,760
|
|
There is no market
for the shares of Series A Preferred Stock and they can only be converted into shares of common stock upon a Change of Control
of the Company as more fully described in the Certificate of Designation. The Company, therefore, estimated the fair value of
the Series A Preferred stock granted to various employees and others on the date of grant. The Series A Preferred stock fair value
is based on the greater of i) the converted value to common at a ratio of 1:3.5; or ii) the value of the voting rights since the
holder would lose the voting rights upon conversion. The conversion of the shares is triggered by a Change of Control. The valuations
of the Series A Preferred Stock at each issuance used the following inputs:
|
a.
|
The common
stock price was in the range $2.29 to $1.55;
|
|
b.
|
The calculated
weighted average number of shares of common stock in the period;
|
|
c.
|
A 5.36% premium
over the common shares for the voting preferences;
|
|
d.
|
The calculated
weighted average number of total voting shares and the monthly shares representing voting rights of 4.896% to 5.046% of
the total;
|
|
e.
|
The conversion
value is based on an assumption for calculation purposes only of a Change of Control in 4 years from March 1, 2013 and
a remaining restricted term of 1.92 to 1.67 years;
|
|
f.
|
30.86%
to 31.42% restricted stock discount (based on a restricted stock analysis and call-put analysis curve: 63.52% to 69.38%
volatility, 0. 22% to 0.26% risk free rate) applied to the converted common.
|
Fiscal Year Ending June 30, 2016
Transactions
On January 23, 2016, the Company’s
Board of Directors and a majority of the holders of the Company’s Series A Convertible Preferred Shares (the “Series
A Shares”) approved an amendment to the Certificate of Designation of the Series A Shares to increase the number of authorized
Series A Shares from 4,000,000 to 8,500,000.
Unregistered
Securities
On February 1,
2016, 571,433 warrants were issued for interest in accordance with the terms of the Series B debenture. The warrants are exercisable
at $3.50 per warrant and will be valid for 3 years after issuance. The Company recorded an expense of $56,115 for the fair value
of the warrants. The Company estimated the fair value of the warrants issued to the Holders of the Company’s Series B Debentures
on the date of issuance using the Black-Scholes Option-Pricing Model.
Expected life
(year)
|
|
|
3
|
|
|
|
|
|
|
Expected volatility
|
|
|
44.18
|
%
|
|
|
|
|
|
Expected annual rate of quarterly
dividends
|
|
|
0.00
|
%
|
|
|
|
|
|
Risk-free rate(s)
|
|
|
1.01
|
%
|
For the year ended
June 30, 2016, the Scientific Advisory Board was granted fully vested warrants to purchase 68,592 shares of common stock at exercise
prices between $1.44- $2.18 per share expiring in the fiscal year ending June 30, 2020. These warrants were valued
at $42,886 and recorded as consulting expense.
For the year ended
June 30, 2016, the Company estimated the fair value of the warrants granted quarterly to the Scientific Advisory Board on the
date of grant using the Black-Scholes Option-Pricing Model with the following weighted-average assumptions:
Expected life
(year)
|
|
|
4
|
|
|
|
|
|
|
Expected volatility
|
|
|
57.81%
-73.4
0
|
%
|
|
|
|
|
|
Expected annual rate of quarterly
dividends
|
|
|
0.00
|
%
|
|
|
|
|
|
Risk-free rate(s)
|
|
|
1.07
- 1.63
|
%
|
For the year ended
June 30, 2016, the Company’s Board of Directors authorized the issuance of 57,649 shares of its Series A Convertible Preferred
Stock which are fully vested with a restrictive legend for employee compensation. The Company recorded an expense of $263,698
which is the fair value at date of issuance.
On July 21, 2015,
the Board of Directors approved a new employment agreement with Dr. Anil Diwan, the Company’s president. Pursuant to the
terms of the employment agreement, the Company’s Board of Directors authorized the issuance of 225,000 Series A preferred
shares to Dr. Diwan. 75,000 shares will vest on June 30, 2016 and the remainder of the shares will vest over the three years of
the employment agreement and are subject to forfeiture. The Company recognized a noncash compensation expense related to the issuance
of the Series A Preferred Shares of $309,344 for the year ended June 30, 2016. The balance of $564,410 will be recognized
as the remaining shares are vested.
On July 21, 2015,
the Board of Directors approved a new employment agreement with Dr. Eugene Seymour, the Company’s Chief Executive Officer.
Pursuant to the terms of the employment agreement, the Company’s Board of Directors authorized the issuance of 225,000 of
the Company’s Series A preferred shares to Dr. Seymour. 75,000 shares will vest on June 30, 2016 and the remainder of the
shares will vest over the three years of the employment agreement and are subject to forfeiture. The Company recognized a noncash
compensation expense related to the issuance of the Series A Preferred Shares of $309,344 for the year ended June 30, 2016. The
balance of $564,410 will be recognized as the remaining shares are vested.
The fair value of the Series A Preferred
stock at each date of issuance was as follows:
Date
|
|
Shares
|
|
|
Value
|
|
7/21/2015
|
|
|
|
408,839
|
|
|
$
|
1,587,669
|
|
7/31/2015
|
|
|
|
2,572
|
|
|
|
10,998
|
|
8/31/2015
|
|
|
|
2,572
|
|
|
|
9,631
|
|
9/30/2015
|
|
|
|
2,572
|
|
|
|
7,220
|
|
10/31/2015
|
|
|
|
2,572
|
|
|
|
7,440
|
|
11/30/2015
|
|
|
|
2,572
|
|
|
|
7,837
|
|
12/31/2015
|
|
|
|
2,572
|
|
|
|
8,068
|
|
1/31/2016
|
|
|
|
43,732
|
|
|
|
167,677
|
|
2/29/2016
|
|
|
|
2,572
|
|
|
|
9,332
|
|
3/31/2016
|
|
|
|
2,572
|
|
|
|
15,565
|
|
4/30/2016
|
|
|
|
2,572
|
|
|
|
14,948
|
|
5/31/2016
|
|
|
|
2,572
|
|
|
|
11,332
|
|
6/30/2016
|
|
|
|
29,358
|
|
|
|
153,490
|
|
|
|
|
|
|
|
|
|
|
|
|
|
507,649
|
|
|
$
|
2,011,207
|
|
There is currently
no market for the shares of Series A Preferred Stock and they can only be converted into shares of common stock upon a Change
of Control of the Company as more fully described in the Certificate of Designation. The Company, therefore, estimated the fair
value of the Series A Preferred stock granted to various employees and others on the date of grant. The Series A Preferred stock
fair value is based on the greater of i) the converted value to common at a ratio of 1:3.5; or ii) the value of the voting rights
since the holder would lose the voting rights upon conversion. The conversion of the shares is triggered by a Change of Control.
The valuations of the Series A Preferred Stock at each issuance used the following inputs:
|
a.
|
The common
stock price was in the range $1.82 to $1.20;
|
|
b.
|
The calculated
weighted average number of shares of common stock in the period;
|
|
c.
|
A 5.36% premium
over the common shares for the voting preferences;
|
|
d.
|
The
calculated weighted average number of total voting shares and the monthly shares representing voting rights of 4.896% to 5.046%
of the total;
|
|
e.
|
The
conversion value is based on an assumption for calculation purposes only of a Change of Control in 4 years from March 1, 2013
and a remaining restricted term of 1.92 to 1.67 years;
|
|
f.
|
30.86%
to 31.42% restricted stock discount (based on a restricted stock analysis and call-put analysis curve: 63.52% to 69.38% volatility,
0.22% to 0.26% risk free rate) applied to the converted common.
|
For the year ended
June 30, 2016, the Company’s Board of Directors authorized the issuance of 106,554 shares of its common stock which are
fully vested with a restrictive legend for consulting services. The Company recorded an expense of $158,000 which is the fair
value at date of issuance.
For the year ended
June 30, 2016, the Company’s Board of Directors authorized the issuance of 29,852 shares of its common stock which are fully
vested with a restrictive legend for Director services. The Company recorded an expense of $45,000 which is the fair value at
date of issuance.
For the year ended
June 30, 2016, the Company's Board of Directors authorized the issuance of 72,725 shares of its common stock which are fully vested
with a restricted legend for employee compensation. The Company recorded an expense of $142,589 which is the fair value at date
of issuance.
For the year ended
June 30, 2016, the Company’s Board of Directors authorized the issuance of 313,155 shares of its common stock for the exercise
of 428,573 stock options on a cashless basis.
For
the year ended June 30, 2016, the Company's Board of Directors authorized the issuance of 101,558 shares of its common stock to
holders of the Company’s Series B Debentures.
T
wo
Holders of the Company’s Series B Debentures elected to receive a total of $160,000 of the quarterly interest payments in
restricted common stock of the Company. The Holders are entities controlled by Dr. Milton Boniuk, a director of the Company.
For the year ended
June 30, 2016, the Company's Board of Directors authorized the issuance of 313,785 shares of its common stock to the Holder of
the Company’s Series C Debentures. The Holder of the Company’s Series C Debentures elected to receive $375,000 of
the quarterly interest payments and $125,000 of the deferred interest in restricted common stock of the Company. The Holder is
an entity controlled by Dr. Milton Boniuk, a director of the Company.
Note 9 –
Stock Options and Warrants
The following table presents the activity
of stock options issued for the period ended June 30, 2016 as follows:
Stock Options
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
per share ($)
|
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic
Value ($)
|
|
Outstanding and exercisable at June
30, 2013
|
|
|
535,715
|
|
|
$
|
0.35
|
|
|
|
2.23
|
|
|
$
|
1,521,429
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2014
|
|
|
535,715
|
|
|
$
|
0.35
|
|
|
|
1.23
|
|
|
$
|
2,094,643
|
|
Granted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2015
|
|
|
535,715
|
|
|
$
|
0.35
|
|
|
|
0.23
|
|
|
$
|
749,997
|
|
Granted
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
428,573
|
|
|
|
-
|
|
|
|
-
|
|
|
|
364,287
|
|
Expired
|
|
|
107,142
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding at June 30, 2016
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
For the years ended June 30, 2016, 2015
and 2014 there was no compensation expense recorded. As of June 30, 2016 there was no unrecognized compensation cost.
Stock Warrants
|
|
Number of
Shares
|
|
|
Weighted
Average
Exercise
Price
per share ($)
|
|
|
Weighted
Average
Remaining
Contractual
Term (years)
|
|
|
Aggregate
Intrinsic
Value ($)
|
|
Outstanding at June 30, 2013
|
|
|
3,400,559
|
|
|
$
|
4.025
|
|
|
|
0.86
|
|
|
$
|
134,559
|
|
Granted
|
|
|
5,629,152
|
|
|
|
5.63
|
|
|
|
4.37
|
|
|
|
-
|
|
Exercised
|
|
|
142,500
|
|
|
|
3.50
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding and exercisable at June 30, 2014
|
|
|
8,887,211
|
|
|
$
|
5.01
|
|
|
|
2.78
|
|
|
$
|
2,278,458
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
68,592
|
|
|
|
3.63
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
1,926,656
|
|
|
|
3.50
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
1,052,472
|
|
|
|
3.50
|
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at June 30, 2015
|
|
|
5,976,675
|
|
|
$
|
5.14
|
|
|
|
3.20
|
|
|
$
|
19,000
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Granted
|
|
|
640,025
|
|
|
|
3.31
|
|
|
|
-
|
|
|
|
-
|
|
Exercised
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Expired
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Canceled
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Outstanding and exercisable at June 30, 2016
|
|
|
6,616,700
|
|
|
$
|
4.96
|
|
|
|
2.55
|
|
|
$
|
4,459
|
|
Of the above warrants;
414,284 expire in fiscal year ending June 30, 2017; 68,577 in fiscal year ending June 30, 2018; 6,065,247 in fiscal year ending
June 30, 2019 and 68,592 expire in fiscal year ending June 30, 2020.
Note 10 – Fair Value Measurement
Fair value measurements
At June 30, 2016
and 2015, the fair value of derivative liabilities is estimated using a lattice model that is based on the individual characteristics
of our warrants, preferred and common stock, the derivative liability on the valuation date as well as assumptions for volatility,
remaining expected life, risk-free interest rate and, in some cases, credit spread. The derivative liabilities are the only Level
3 fair value measures.
At June 30, 2016
and 2015, the estimated fair values of the liabilities measured on a recurring basis are as follows:
|
|
Fair Value Measurements at
|
|
|
|
June 30, 2016:
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability – Series B debentures
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
203,030
|
|
Derivative liability – Series C debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
343,673
|
|
Derivative liability – Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
3,197,182
|
|
Total derivatives
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
3,743,885
|
|
|
|
Fair Value Measurements at
|
|
|
|
June 30, 2015:
|
|
|
|
(Level 1)
|
|
|
(Level 2)
|
|
|
(Level 3)
|
|
|
|
|
|
|
|
|
|
|
|
Derivative liability – Series B debentures
|
|
$
|
-
|
|
|
|
-
|
|
|
$
|
366,764
|
|
Derivative liability – Series C debentures
|
|
|
-
|
|
|
|
-
|
|
|
|
476,289
|
|
Derivative liability – Warrants
|
|
|
-
|
|
|
|
-
|
|
|
|
3,442,754
|
|
Total derivatives
|
|
$
|
-
|
|
|
$
|
-
|
|
|
$
|
4,285,807
|
|
In conjunction
with the Company’s registered direct offerings of Units, consisting of the Company’s common stock and warrants, on
September 12, 2013 and January 24, 2014 the Company issued 2,945,428, and 2,479,935 warrants respectively, and, of which, 2,810,071
and 2,479,935 respectively are outstanding at June 30, 2016. Additionally, the Company issued 58,910 and 76,306 warrants, respectively,
to the placement agents which are also outstanding at June 30, 2016, for a total number of 5,425,222 warrants outstanding pursuant
to the aforesaid registered direct offerings.
The Company accounts
for stock purchase warrants as either equity instruments or derivative liabilities depending on the specific terms of the warrant
agreements. Under applicable accounting guidance, stock warrants must be accounted for as derivative financial instruments if
the warrants contain full-ratchet anti-dilution provisions, which preclude the warrants from being considered indexed to its own
stock. The warrants described above contained a full-ratchet anti-dilution feature and are thus classified as a derivative liability.
The Company used
a lattice model to calculate the fair value of the derivative warrants based on a probability weighted discounted cash flow model.
This model is based on future projections of the various potential outcomes. The features that were analyzed and incorporated
into the model included the exercise and full reset features.
The Warrants were
valued as of issuance, exercise, and the annual periods with the following assumptions:
|
-
|
The 5 year warrants issued on
9/12/13 and 1/24/14 included Investor and Placement Agent Warrants with an exercise price of $5.25 and $6.05 (subject
to adjustments-full ratchet reset).
A reset event occurred during
the quarter ended September 30, 2014 adjusting the $6.05 exercise price to $5.25
|
|
-
|
The
stock price would fluctuate with the Company projected volatility.
|
|
-
|
The
Holder would exercise the warrant as they become exercisable (effective registration at issuance) at target prices of the
higher of
2 times
the projected exercise/reset price or
2 times
the stock price.
|
|
-
|
The
next capital raise would fluctuate with an annual volatility. The projected volatility curve was based on historical volatilities
of the Company for the valuation periods. The projected annual volatility for the valuation dates are:
|
1 Year
|
|
|
|
9/12/13
|
|
|
87
|
%
|
1/24/14
|
|
|
93
|
%
|
6/30/14
|
|
|
92
|
%
|
6/30/15
|
|
|
62
|
%
|
6/30/16
|
|
|
83
|
%
|
The primary factors
driving the economic value of options are stock price; stock volatility; reset events and exercise behavior. Projections of these
variables over the remaining term of the warrant are either derived or based on industry averages. Based on the above, a probability
was assigned to each scenario for each future period, and the appropriate derivative value was determined for each scenario. The
option value was then probability weighted and discounted to the present.
The following table presents the activity
for liabilities measured at estimated fair value using unobservable inputs for the years ended June 30, 2014, 2015 and 2016:
|
|
Fair Value Measurement
Using Significant
|
|
|
|
Unobservable
Inputs
|
|
|
|
Derivative
liability –
Series B
|
|
|
Derivative
liability –
Series C
|
|
|
Derivative
liability -
warrant
|
|
Balance at July 1, 2013
|
|
$
|
3,751,645
|
|
|
$
|
-
|
|
|
$
|
-
|
|
Additions during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
5,740,540
|
|
Change in fair value
|
|
|
1,948,057
|
|
|
|
-
|
|
|
|
(504,858
|
)
|
Transfer in and/or out of
Level 3
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at July 1, 2014
|
|
$
|
5,699,702
|
|
|
$
|
-
|
|
|
$
|
5,235,682
|
|
Additions during the year
|
|
|
-
|
|
|
|
1,879,428
|
|
|
|
-
|
|
Change in fair value
|
|
|
(5,332,938
|
)
|
|
|
(1,403,139
|
)
|
|
|
(1,792,928
|
)
|
Transfer in and/or out of
Level 3
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at July 1, 2015
|
|
$
|
366,764
|
|
|
$
|
476,289
|
|
|
$
|
3,442,754
|
|
Additions during the year
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Change in fair value
|
|
|
(163,735
|
)
|
|
|
(132,616
|
)
|
|
|
(245,572
|
)
|
Transfer in and/or out of
Level 3
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
Balance at June 30, 2016
|
|
$
|
203,030
|
|
|
$
|
343,673
|
|
|
$
|
3,197,182
|
|
Note 11 – Income Tax Provision
Deferred Tax
Assets/(Liabilities)
The Company has
no current tax expense due to its losses.
The income tax
expense for the years ended June 30, 2016, 2015, and 2014 differed from the amounts computed by applying the U.S.
federal income tax rate of 34% as follows:
|
|
For the Year Ended
|
|
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
|
June 30,
2014
|
|
Federal Statuary Rate
|
|
|
-34.00
|
%
|
|
|
-34.00
|
%
|
|
|
-34.00
|
%
|
Permanent Differences
|
|
|
-
|
|
|
|
-37.00
|
%
|
|
|
-37.00
|
%
|
Research and Development Credit
|
|
|
-6.10
|
%
|
|
|
-
|
|
|
|
-
|
|
State Tax Rate
|
|
|
-6.18
|
%
|
|
|
-
|
|
|
|
-
|
|
Valuation Allowance
|
|
|
46.28
|
%
|
|
|
71.00
|
%
|
|
|
71.00
|
%
|
Effective Tax Rate
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
The significant
components of the Company’s deferred tax assets and liabilities at June 30, 2016 and 2015 are as follows:
|
|
June 30,
2016
|
|
|
June 30,
2015
|
|
Net Operating losses
|
|
$
|
20,782,598
|
|
|
$
|
16,394,801
|
|
Research and Development Credit
|
|
|
5,105,024
|
|
|
|
4,800,186
|
|
Other
|
|
|
8,349,142
|
|
|
|
5,214,064
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
34,326,764
|
|
|
|
26,409,051
|
|
|
|
|
|
|
|
|
|
|
Less Valuation Allowance
|
|
|
(34,326,764
|
)
|
|
|
(26,409,051
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
$
|
-
|
|
|
$
|
-
|
|
At June 30, 2016 and 2015,
the Company has recorded a full valuation allowance against its net deferred tax assets of $34,326,764 and $26,409,051,
respectively. The change in the valuation allowance during the year ended 2016 was $7,917,713 and a full valuation allowance
has been recorded since, in the judgment of management, these assets are not more likely than not to be realized. The
ultimate realization of deferred tax assets is dependent upon the generation of future taxable income during periods in which
those temporary differences and carry forwards become deductible or are utilized.
As of June 30, 2016, the Company has approximately
$52,000,000 of gross net operating loss carryforwards. As of June 30, 2016, credit carryforwards for federal and state purposes
are $4,830,536 and $274,491 respectively. The net operating loss and credit carryforwards begin to expire in 2025.
Due to the change
in ownership provisions of the Internal Revenue Code, the availability of the Company’s net operating loss carry forwards
could be subject to annual limitations against taxable income in future periods, which could substantially limit the eventual
utilization of such carry forwards. The Company has not analyzed the historical or potential impact of its equity financings on
beneficial ownership and therefore no determination has been made whether the net operating loss carry forward is subject to any
Internal Revenue Code Section 382 limitation. To the extent there is a limitation, there could be a reduction in the deferred
tax asset with an offsetting reduction in the valuation allowance.
The Company applies
the elements of FASB ASC 740-10 “Income Taxes - Overall” regarding accounting for uncertainty in income taxes. This
clarifies the accounting for uncertainty in income taxes recognized in financial statements and required impact of a tax position
to be recognized in the financial statements if that position is more likely than not of being sustained by the taxing authority.
As of June 30, 2016 the Company did not have any unrecognized tax benefits and has not accrued any interest or penalties through
2016. The Company does not expect to have any unrecognized tax benefits within the next twelve months. The Company’s policy
is to recognize interest and penalties related to tax matters within the income tax provision.
Note 12 –
Commitments and Contingencies
Legal Proceedings
There are no pending
legal proceedings against the Company to the best of the Company’s knowledge as of the date hereof and to the Company’s
knowledge, no action, suit or proceeding has been threatened against the Company.
Employment
Agreements
The Company and
Dr. Diwan, President and Chairman of the Board of Directors, entered into an employment agreement effective July 1, 2015 for a
term of three years. Dr. Diwan’s compensation would be $350,000 for the first year of employment, $375,000 for the second
year and $400,000 for the final year. Additionally, Dr. Diwan was awarded a grant of 225,000 shares of the Company’s Series
A Preferred Stock. 75,000 shares will vest on June 30, 2016 and the remainder of the shares will vest equally over the three years
of the term of the employment agreement. Any unvested shares of Series A Preferred Stock are subject to forfeiture upon termination
for cause or resignation of Dr. Diwan. The employment agreement also provides incentive bonuses of $75,000 per year payable on
or before July 31, 2015, 2016 and 2017. For the years ended June 30, 2016 and 2015, the Company paid bonuses of $75,000 and $75,000,
respectively.
The Company and Dr. Seymour, the Company’s
Chief Executive Officer and Director, entered into an employment agreement effective July 1, 2015, for a term of three years.
Dr. Seymour’s compensation would be $350,000 for the first year of employment, $375,000 for the second year and $400,000
for the final year. Additionally, Dr. Seymour was awarded a grant of 225,000 shares of the Company’s Series A Preferred
Stock. 75,000 shares will vest on June 30, 2016 and the remainder of the shares will vest equally over the three years of the
term of the employment agreement. Any unvested shares of Series A Preferred Stock are subject to forfeiture upon termination for
cause or resignation of Dr. Seymour. The employment agreement also provides incentive bonuses of $75,000 per year payable on or
before July 31, 2015, 2016 and 2017. For the years ended June 30, 2016 and 2015, the Company paid bonuses of $75,000 and $75,000,
respectively.
On March 3, 2010,
the Company entered into an employment agreement with Dr. Jayant Tatake to serve as Vice President of Research and Development. The
employment agreement provides for a term of four years with a base salary of $150,000. In addition, the Company issued
26,786 shares of Series A Preferred Stock and 35,715 shares of common stock upon entering into the agreement, and issued an additional
26,786 shares of Series A Preferred Stock and 35,715 shares of common stock on each anniversary date of the agreement. The shares
of Series A Preferred Stock were issued in recognition of Dr. Tatake’s work towards the achievement of several patents by
the Company. The Compensation Committee of the Board of Directors has extended the current provisions of the Employment Agreement
pending its review of current industry compensation arrangements and Employment agreements. For the years ending June 30, 2016,
2015 and 2014 compensation under the agreement was $168,300, $168,300 and $167,625, respectively.
On March
3, 2010, the Company entered into an employment agreement with Dr. Randall Barton to serve as Chief
Scientific Officer. The employment agreement provided for a term of four years with a base salary of
$150,000. In addition, the Company issued 35,715 shares of common stock upon entering into the agreement, and
issued an additional 35,715 shares of common stock on each anniversary date of the agreement. Dr. Tatake receives 26,736
shares of the Company’s Series A Preferred Stock annually. The Compensation Committee of the Board of Directors has
extended the current provisions of the Employment Agreement pending its review of current industry compensation arrangements
and Employment agreements. For the years ending June 30, 2016, 2015 and 2014 compensation under the agreement was $168,300,
$168,300 and $167,625, respectively.
On May 30, 2013,
the Company entered into an Employment Agreement with Meeta Vyas to serve as its Chief Financial Officer. The employment
agreement provided for a term of three years with a base salary of $9,000 per month and 2,572 shares of Series A Preferred Stock,
also on a monthly basis. On January 1, 2015, her compensation was increased to $10,800 per month. The Agreement is renewable on
an annual basis. On May 31, 2016, the Agreement was renewed for one year. For the years ending June 30, 2016, 2015 and 2014 compensation
under the agreement was $129,600, $118,800 and $108,000, respectively.
License Agreements
The Company is
dependent upon its license agreement with TheraCour Pharma, Inc. (See Note 4). If the Company lost the right to utilize any of
the proprietary information that is the subject of the TheraCour Pharma license agreement on which it depends, the Company will
incur substantial delays and costs in development of its drug candidates.