Notes
to Condensed Consolidated Financial Statements
(Unaudited)
A.
Organization, Business and Summary of Significant Accounting
Policies
Organization
The
accompanying unaudited condensed consolidated financial statements
include the accounts of Aeolus Pharmaceuticals, Inc. and its
wholly-owned subsidiary, Aeolus Sciences, Inc. (collectively,
“we,” “us,” “Company” or
“Aeolus”). All significant intercompany accounts and
transactions have been eliminated in consolidation. Aeolus is a
Delaware corporation. The Company’s primary operations are
located in Mission Viejo, California.
Business
Aeolus
is developing a platform of novel compounds, known as
metalloporphyrins, for use in biodefense, fibrosis, oncology,
infectious disease and diseases of the central nervous system. Our
lead compound, AEOL 10150, is being developed as a medical
countermeasure against the pulmonary effects of radiation exposure
under a contract (“BARDA Contract”) valued at up to
$118.4 million with the Biomedical Advanced Research and
Development Authority (“BARDA”), a division of the
Department of Health and Human Services (“HHS”). Aeolus
is in its sixth year under the BARDA Contract and has billed BARDA
for 30.4 million of the 30.8 million total contract value exercised
by BARDA. Aeolus also receives development support from the
National Institutes of Health (“NIH”) for development
of the compound as a medical countermeasure against radiation and
exposure to chemical and nerve agents. Our strategy is to leverage
the substantial investment in toxicology, manufacturing, and
preclinical and clinical studies made by US Government agencies in
AEOL 10150 to develop the compound for the treatment of lung
fibrosis, including idiopathic pulmonary fibrosis
(“IPF”) and as a treatment to reduce side effects
caused by radiation toxicity and improve local tumor control in
cancer therapy. The Company is also developing AEOL 11114 as a
treatment for Parkinson’s disease and AEOL 20415 as a
treatment for cystic fibrosis and diseases that have developed a
resistance to existing antibiotic and anti-viral
therapies.
Basis of Presentation
All
significant intercompany activity has been eliminated in the
preparation of the unaudited condensed consolidated financial
statements. The unaudited condensed consolidated financial
statements have been prepared in accordance with the requirements
of Form 10-Q and Rule 10-01 of Regulation S-X. Some information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules
and regulations. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements include all
adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the consolidated financial position,
results of operations and cash flows of the Company. The condensed
consolidated balance sheet at September 30, 2016 was derived from
the Company’s audited financial statements included in the
Company’s Annual Report on Form 10-K for the fiscal year
ended September 30, 2016, filed with the Securities and Exchange
Commission (the “SEC”) on December 20,
2016.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The
Company invests available cash in short-term bank deposits. Cash
and cash equivalents include investments with maturities of three
months or less at the date of purchase. The carrying value of cash
and cash equivalents approximate their fair market value at
December 31, 2016 and September 30, 2016 due to their short-term
nature.
Significant customers and accounts receivable
For the
three months ended December 31, 2016, the Company’s only
customer was BARDA, which comprised 100% of total revenues. As of
December 31, 2016, the Company’s receivable balances were
comprised 100% from this customer. Unbilled accounts receivable,
included in accounts receivable, totaling $493,000 and $490,000 as
of December 31, 2016 and September 30, 2016, respectively, relate
to work that has been performed, though invoicing has not yet
occurred. All of the unbilled receivables are expected to be billed
and collected within the next 12 months. Accounts receivable are
stated at invoice amounts and consist primarily of amounts due from
the BARDA Contract. If necessary, the Company records a provision
for doubtful receivables to allow for any amounts which may be
unrecoverable. This provision is based upon an analysis of the
Company’s prior collection experience, customer
creditworthiness and current economic trends. As of December 31,
2016 and September 30, 2016, an allowance for doubtful accounts was
not recorded as the collection history from the Company’s
customer indicated that collection was probable.
Concentrations of credit risk
Financial
instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company places its cash and cash
equivalents with high quality financial institutions. Management
believes that the financial risks associated with its cash and cash
equivalents and investments are minimal. Because accounts
receivable consist primarily of amounts due from the U.S. federal
government agencies, management deems there to be minimal credit
risk.
Revenue Recognition
Aeolus
recognizes revenue in accordance with the authoritative guidance
for revenue recognition. Revenue is recognized when all
of the following criteria are met: (i) persuasive evidence of an
arrangement exists, (ii) delivery (or passage of title) has
occurred or services have been rendered, (iii) the seller’s
price to the buyer is fixed or determinable, and (iv)
collectability is reasonably assured.
The
BARDA Contract is classified as a “cost-plus-fixed-fee”
contract. Aeolus recognizes government contract revenue in
accordance with the authoritative guidance for revenue recognition
including the authoritative guidance specific to federal government
contracts. Reimbursable costs under the contract primarily include
direct labor, subcontract costs, materials, equipment, travel, and
indirect costs. In addition, the Company receives a fixed fee under
the BARDA Contract, which is unconditionally earned as allowable
costs are incurred and is not contingent on success factors.
Reimbursable costs under the BARDA Contract, including the fixed
fee, are generally recognized as revenue in the period the
reimbursable costs are incurred and become billable.
Fair Value of Financial Instruments
The
carrying amounts of Aeolus’ short-term financial instruments,
which include cash and cash equivalents, accounts receivable,
accounts payable, accrued liabilities, debt and redemption
liability, approximate their fair values due to their short
maturities.
Fair Value Measurements
The
Company applies Accounting Standards Codification
(“ASC”) Topic 820, Fair Value Measurements and
Disclosures, for financial and non-financial assets and
liabilities.
ASC
Topic 820 discusses valuation techniques, such as the market
approach (comparable market prices), the income approach (present
value of future income or cash flow) and the cost approach (cost to
replace the service capacity of an asset or replacement cost). The
statement utilizes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value into
three broad levels. The following is a brief description of those
three levels:
●
Level 1: Observable
inputs such as quoted prices (unadjusted) in active markets for
identical assets or liabilities.
●
Level 2: Inputs
other than quoted prices that are observable for the asset or
liability, either directly or indirectly. These include quoted
prices for similar assets or liabilities in active markets and
quoted prices for identical or similar assets or liabilities in
markets that are not active.
●
Level 3:
Unobservable inputs that reflect the reporting entity’s own
assumptions.
Research and Development
Research and
development costs are expensed in the period incurred.
Leases
The
Company leases office space and office equipment under month to
month operating lease agreements. For the three months ended
December 31, 2016 and 2015, total rent expense was approximately
$11,000 and $11,000, respectively.
Income Taxes
The
Company recognizes liabilities or assets for the deferred tax
consequences of temporary differences between the tax bases of
assets or liabilities and their reported amounts in the financial
statements. These temporary differences will result in taxable or
deductible amounts in future years when the reported amounts of the
assets or liabilities are recovered or settled. A valuation
allowance is established when management determines that is more
likely than not that all or a portion of a deferred tax asset will
not be realized. Management evaluates the Company’s ability
to realize its net deferred tax assets on a quarterly basis and
valuation allowances are provided, as necessary. During this
evaluation, management reviews its forecasts of income in
conjunction with other positive and negative evidence surrounding
the Company’s ability to realize its deferred tax assets to
determine if a valuation allowance is required. Adjustments to the
valuation allowance will increase or decrease the Company’s
income tax provision or benefit. Management also applies the
relevant guidance to determine the amount of income tax expense or
benefit to be allocated among continuing operations, discontinued
operations, and items charged or credited directly to
stockholders’ equity.
A tax
position must meet a minimum probability threshold before a
financial statement benefit is recognized. The minimum threshold is
a tax position that is more likely than not to be sustained upon
examination by the applicable taxing authority, including
resolution of any related appeals or litigation process, based on
the technical merits of the position. The Company recognizes
interest and penalties related to uncertain tax positions in income
tax expense.
Net Income (Loss) Per Common Share
The
Company computes net income (loss) attributable to common
stockholders using the two-class method required for participating
securities. Under the two-class method, securities that participate
in dividends, such as the Company’s outstanding preferred
shares, preferred warrants, and most common stock warrants, are
considered “participating securities.” Our preferred
shares, preferred warrants and common stock warrants are considered
“participating securities” because they include
non-forfeitable rights to dividends.
In
applying the two-class method, (i) basic net income (loss) per
share is computed by dividing net income (less any dividends paid
on participating securities) by the weighted average number of
shares of common stock and participating securities outstanding for
the period and (ii) diluted earnings per share may include the
additional effect of other securities, if dilutive, in which case
the dilutive effect of such securities is calculated using the
treasury stock method. The Company does have other securities with
a dilutive effect outstanding, so the Company’s basic net
income (loss) per share uses the two-class method and diluted net
income (loss) per share uses the treasury stock
method.
Accounting for Stock-Based Compensation
The
Company recognizes stock based compensation expense in the
statement of operations based upon the fair value of the equity
award amortized over the vesting period.
Segment Reporting
The
Company currently operates in one segment.
B.
Liquidity
As of
December 31, 2016, the Company had approximately $1,895,000 of cash
and cash equivalents, a decrease of $1,260,000 from
September 30, 2016. The decrease in cash was primarily due to
cash used in operations. In order to fund on-going operating
cash requirements, or to accelerate or expand our oncology and
other programs, we may need to raise significant additional
funds.
The
Company had a net loss of $1,087,000 for the three months ended
December 31, 2016, compared to a net loss of $1,033,000 for the
three months ended December 31, 2015. For the same periods, we had
cash outflows from operations of approximately $1,260,000 and cash
outflows from operations of approximately $820,000, respectively,
with the outflows increasing in 2016 due to lower revenue from
BARDA and the timing of cash flows related to accounts
payable.
Our
ongoing future cash requirements will depend on numerous factors,
particularly the progress of our development programs, clinical
trials and our ability to negotiate and complete collaborative
agreements or out-licensing arrangements. In order to help fund our
on-going operating cash requirements, we intend to seek new
collaborations for our antioxidant research program that include
initial cash payments and on-going research support. In addition,
we might sell additional shares of our stock and/or convertible
debentures and explore other strategic and financial alternatives,
including a merger with another company, the sale of stock and/or
debt, the establishment of new collaborations for current research
programs that include initial cash payments and ongoing research
support and the out-licensing of our compounds for development by a
third party. We expect to incur additional losses and negative cash
flow from operations for several more years.
Under the BARDA
Contract, substantially all of the costs of the development of
10150 as a medical countermeasure for pulmonary injuries resulting
from an acute exposure to radiation from a radiological/nuclear
accident or attack, particularly injuries associated with ARS or
DEARE could be paid for by the U.S. government through BARDA
funding. We recognized approximately $83,000 in revenue during the
three months ended December 31, 2016 related to the BARDA Contract.
As of December 31, 2016, the total contract value exercised by
BARDA under the BARDA Contract is $30.8 million. From inception of
the BARDA Contract, we have billed BARDA approximately $30.4
million. The lower revenue in this quarter reflected the
smaller number of tasks in progress under the BARDA Contract
compared to prior periods. The net result of this decreased billing
has been a decrease in our ability to charge operational costs to
the BARDA Contract, resulting in a higher than normal cash
burn.
C.
Stockholders’ Equity
Preferred Stock
The
Certificate of Incorporation of the Company authorizes the issuance
of up to 10,000,000 shares of Preferred Stock, at a par value of
$0.01 per share, of which 1,250,000 shares are designated Series A
Convertible Preferred Stock, 1,600,000 shares are designated Series
B Convertible Preferred Stock (the “Series B Stock”)
and 5,000 shares are designated Series C Convertible Preferred
Stock (the “Series C Stock”). The Board of Directors
has the authority to issue Preferred Stock in one or more series,
to fix the designation and number of shares of each such series,
and to determine or change the designation, relative rights,
preferences, and limitations of any series of Preferred Stock,
without any further vote or action by the stockholders of the
Company.
As of
December 31, 2016, 4,500 shares of Series C Convertible Preferred
Stock were outstanding. There are no shares of Series A Convertible
Preferred Stock or Series B Convertible Preferred Stock issued or
outstanding.
The
Series C Stock is non-voting stock. Each share of Series C Stock is
convertible into 4,545 shares of our common stock except to the
extent such conversion would result in such holder of Series C
Stock, and its affiliates, owning in the aggregate more than 9.99%
of the outstanding common stock. Dividends on the Series C Stock
are due whenever dividends are due on the Company’s common
stock on an as-if-converted basis, but shall be subordinate to any
dividends due to holders of the Company's Series B Stock as a
result of such common stock dividends. The Series C Stock shall
also be junior to the Series B Stock in the event of liquidation of
the Company.
On
December 10, 2015, the Company entered into securities purchase
agreements with certain accredited investors to sell and issue
4,500 preferred stock units issued to existing investors,
Biotechnology Value Fund, L.P. and other affiliates of BVF
Partners, L.P., for an aggregate purchase price of $4,500,000. The
preferred units collectively consist of (i) 4,500 shares of Series
C Stock of the Company that are collectively convertible into an
aggregate of 20,454,546 shares of common stock and (ii) warrants to
purchase an aggregate of 20,454,546 shares of common stock, in each
case subject to adjustment. The warrants have an initial exercise
price of $0.22 per share. The Series C Stock and warrants contain
provisions restricting the conversion or exercise of such
securities in circumstances where such event would result in the
holder and its affiliates to beneficially own in excess of 9.99% of
the Company’s outstanding common stock.
The
fair value of the December 10, 2015 financing warrants issued was
estimated to be $4,476,000 using the Black-Scholes option pricing
model with the following assumptions: dividend yield of 0%,
expected volatility of 109.74%, risk free interest rate of 1.67%,
and an expected life equal to the five year contractual term. The
proceeds from the December 10, 2015 financing were allocated based
upon the relative fair values of the warrants and preferred shares
issued in the transaction.
The
allocation of the proceeds based on relative fair values of the
instruments resulted in recognition of a discount on the Series C
Preferred Stock of $2,486,000 from a beneficial conversion feature,
which was being amortized from the date of issuance to the earliest
redemption date of 90 days post issuance. For the quarter ended
December 31, 2015 the Company recognized $580,000 of amortization
of the discount on Series C Preferred Stock as deemed dividends
charged to additional paid in capital. There was no amortization in
the quarter ended December 31, 2016 as the full value of the
beneficial conversion feature was fully amortized in the fiscal
year ended September 30, 2016. The value of the beneficial
conversion feature is calculated as the difference between the
effective conversion price of the Series C Preferred Stock and the
fair market value of the common stock into which the Series C
Preferred Stock are convertible at the commitment
date.
Common Stock
On
December 10, 2015, the Company entered into securities purchase
agreements with certain accredited investors to sell and issue (i)
an aggregate of 10,215,275 common units issued at a purchase price
of $0.22 per unit. Each common unit consists of one share of the
Company’s common stock and a five year warrant to purchase
one share of the Company’s common stock, subject to
adjustment. The warrants may not be exercised until after 90 days
following the date of issuance. The warrants contain provisions
restricting the conversion or exercise of such securities in
circumstances where such event would result in the holder and its
affiliates to beneficially own in excess of 9.99% of the
Company’s outstanding common stock.
On
September 29, 2015, the Company received funding in the form of
convertible promissory notes (the “BVF Notes”) from
Biotechnology Value Fund, L.P. and certain other affiliates of BVF
Partners, L.P. The BVF Notes had an aggregate principal balance of
$1,000,000, accrue interest at a rate of 6% per annum and had a
scheduled maturity date of September 28, 2016. The outstanding
principal and accrued interest on the BVF Notes were automatically
convertible into Company equity securities, provided a qualified
financing of not less than $4,000,000 occurred.
On
December 11, 2015, following the completion of a qualified
financing (consisting of the common units and preferred units
involving aggregate proceeds of $6,747,000 described above and
under “Preferred Stock,”) the principal and accrued
interest amounts under the BVF Notes were converted into 5,414,402
shares of the Company’s common stock and warrants to purchase
an additional 5,414,402 shares of the Company’s common stock
at an exercise price per share of $0.22 subject to adjustment. As a
result, the BVF Notes were no longer outstanding as of that
date.
Net
cash proceeds from the December 10, 2015 financing, after deducting
for $577,000 of expenses, were approximately $6,170,000. The
Company also incurred non-cash expenses in the form of 1,214,027
warrants issued to the placement agents with an estimated fair
value of $266,000, at similar terms as the financing warrants, for
services provided. These warrants were recorded to additional paid
in capital as a direct cost of the financing. The Company issued a
total of 37,298,250 warrants in connection with the December 10,
2015 financing.
The
fair value of the December 10, 2015 financing warrants and December
11, 2015 warrants issued for conversion of the BVF notes was
estimated to be $3,420,000 using the Black-Scholes option pricing
model with the following assumptions: dividend yield of 0%,
expected volatility of 109.74%, risk free interest rate of 1.67%,
and an expected life equal to the five year contractual term. The
proceeds from the December 10, 2015 financing and December 11, 2015
conversion of the BVF Notes were allocated based upon the relative
fair values of the warrants and common shares issued in the
transactions.
Dividends
The
Company has never paid a cash dividend on its common stock and does
not anticipate paying cash dividends on its common stock in the
foreseeable future. If the Company pays a cash dividend on its
common stock, it also must pay the same dividend on an as converted
basis on its outstanding Series C Stock.
Warrants
As of
December 31, 2016, warrants to purchase an aggregate of 52,947,877
shares of common stock were outstanding with a weighted average
exercise price of $0.23 per share. Details of the warrants for
common stock outstanding at December 31, 2016 are as
follows:
|
|
|
|
|
1,337,627
|
$
0.40
|
March
2017
|
|
325,000
|
$
0.40
|
April
2017
|
|
300,000
|
$
0.258
|
June
2017
|
|
50,000
|
$
0.26
|
June
2017
|
|
140,000
|
$
0.35
|
October
2017
|
|
12,205,000
|
$
0.25
|
February
2018
|
|
1,242,000
|
$
0.25
|
March
2018
|
|
50,000
|
$
0.49
|
January
2020
|
|
37,298,250
|
$
0.22
|
December
2020
|
|
52,947,877
|
|
|
Below
is a summary of warrant activity (“common and
preferred”) for the three months ended December 31,
2016:
|
|
|
|
|
|
|
|
|
Remaining
Contractual Term (in years)
|
Aggregate
Intrinsic Value
|
|
Outstanding at
9/30/2016
|
52,947,877
|
$
0.23
|
3.3
|
$
-
|
|
Granted
|
-
|
$
-
|
-
|
$
-
|
|
Exercised
|
-
|
$
-
|
-
|
$
-
|
|
Expired or
Canceled
|
-
|
$
-
|
-
|
$
-
|
|
Forfeited
|
-
|
$
-
|
-
|
$
-
|
|
Vested
|
-
|
$
-
|
-
|
$
-
|
|
Outstanding at
12/31/2016
|
52,947,877
|
$
0.23
|
3.1
|
$
-
|
D.
Stock-Based Compensation
Below
is a summary of stock option activity for the three months ended
December 31, 2016:
|
|
|
|
|
|
|
|
|
Remaining
Contractual Term (in years)
|
Aggregate
Intrinsic Value
|
|
Outstanding at
9/30/2016
|
12,204,000
|
$
0.38
|
5.0
|
$
1
|
|
Granted
|
450,000
|
$
0.20
|
-
|
$
-
|
|
Exercised
|
-
|
$
-
|
-
|
$
-
|
|
Expired or
Canceled
|
(231,000
)
|
$
0.62
|
-
|
$
-
|
|
Forfeited
|
-
|
$
-
|
-
|
$
-
|
|
Outstanding at
12/31/2016
|
12,423,000
|
$
0.37
|
5.0
|
$
1
|
For the
three months ended December 31, 2016, all stock options were
granted with an exercise price at or above the fair market value of
the Company’s common stock on the date of grant.
The
details of stock options for the three months ended December 31,
2016 were as follows:
|
|
|
|
|
|
Number
Outstanding At December 31, 2016
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Life (in years)
|
Number
Exercisable At December 31, 2016
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Life (in years)
|
|
$
0.19-$0.20
|
700,000
|
$
0.19
|
9.54
|
262,498
|
$
0.19
|
9.33
|
|
$
0.21-$0.30
|
3,537,500
|
$
0.27
|
5.58
|
3,537,500
|
$
0.27
|
5.58
|
|
$
0.31-$0.40
|
6,551,500
|
$
0.39
|
4.58
|
6,551,500
|
$
0.39
|
4.58
|
|
$
0.41-$0.50
|
502,000
|
$
0.45
|
4.99
|
502,000
|
$
0.45
|
4.99
|
|
$
0.51-$0.60
|
791,250
|
$
0.58
|
3.07
|
791,250
|
$
0.58
|
3.07
|
|
$
0.61-$0.70
|
4,000
|
$
0.69
|
0.20
|
4,000
|
$
0.69
|
0.20
|
|
$
0.71-$0.80
|
80,750
|
$
0.76
|
3.97
|
80,750
|
$
3.97
|
3.97
|
|
$
0.81-$0.90
|
254,000
|
$
0.90
|
0.53
|
254,000
|
$
0.90
|
0.53
|
|
|
2,000
|
$
1.19
|
0.33
|
2,000
|
$
1.19
|
0.33
|
|
|
12,423,000
|
$
0.37
|
4.97
|
11,985,498
|
$
0.38
|
4.80
|
Stock-based
compensation expense recognized in the statement of operations is
as follows (in thousands):
|
|
For the three
months ended
|
|
|
|
|
|
|
|
|
General and
Administrative Expenses
|
$
27
|
$
38
|
|
|
$
27
|
$
38
|
The
total unrecognized compensation expense for outstanding and
unvested stock options for the three months ended December 31, 2016
was $59,000. The weighted average remaining recognition period for
the total unrecognized compensation expense is approximately eight
months. The fair value of the options associated with the above
compensation expense was determined at the date of the grant using
the Black-Scholes option pricing model with the following weighted
average assumptions:
|
|
For the three
months ended
December
31,
|
|
|
|
|
|
Dividend
yield
|
0
%
|
0
%
|
|
Unvested forfeiture
rate
|
1.58
%
|
7.87
%
|
|
Expected
volatility
|
107
%
|
117
%
|
|
Risk-free interest
rate
|
1.17
%
|
1.42
%
|
|
Expected
term
|
|
5.27
years
|
E.
Net Income (Loss) Per Common Share
The
Company computes basic net income (loss) per weighted average share
attributable to common stockholders using the weighted average
number of shares of common stock outstanding during the period. The
Company computes diluted net income (loss) per weighted average
share attributable to common stockholders using the weighted
average number of shares of common and dilutive potential common
shares outstanding during the period. Potential common shares
outstanding consist of stock options, convertible debt, warrants
and convertible preferred stock using the treasury stock method and
are excluded if their effect is anti-dilutive. Diluted weighted
average common shares did not include any incremental shares for
the three months ended December 31, 2016 and 2015. Diluted weighted
average common shares excluded incremental shares of approximately
85,825,000 and 87,697,000, respectively, for the three months ended
2016 and 2015, due to their anti-dilutive effect.
|
|
For three months
ended
December
31,
|
|
|
|
|
|
|
(in thousands,
except per share data)
|
|
Numerator:
|
|
|
|
Net
loss
|
$
(1,087
)
|
$
(1,033
)
|
|
Less deemed
dividend on Series C preferred stock
|
—
|
(580
)
|
|
Net loss
attributable to common stockholders – basic
|
$
(1,087
)
|
$
(1,613
)
|
|
|
|
|
|
Net loss
attributable to common stockholders – diluted
|
$
(1,087
)
|
$
(1,613
)
|
|
Denominator:
|
|
|
|
Weighted-average
shares used in computing net loss per share attributable to common
stockholders – basic
|
152,086
|
139,439
|
|
Effect of
potentially dilutive securities:
|
|
|
|
Common stock
warrants
|
—
|
—
|
|
Convertible
preferred stock
|
—
|
—
|
|
Common stock
options
|
—
|
—
|
|
Weighted-average
shares used in computing net loss per share attributable to common
stockholders – diluted
|
152,086
|
139,439
|
|
Basic net loss per
common share
|
$
(0.01
)
|
$
(0.01
)
|
|
Diluted net loss
per common share
|
$
(0.01
)
|
$
(0.01
)
|
F.
Debt
Convertible Promissory Notes
On
September 29, 2015, the Company received funding from existing
investors, Biotechnology Value Fund, L.P. and other affiliates of
BVF Partners, L.P., in exchange for issuance of convertible
promissory notes (the "Notes").
The
Notes had an aggregate principal balance of $1,000,000, accrued
interest at a rate of 6% per annum and had a scheduled maturity
date of September 28, 2016 (the “Maturity
Date”). The outstanding principal and accrued
interest on the Notes shall automatically convert into Company
equity securities issued in a Qualified Financing (as defined
below) at a conversion rate carrying a 15% discount to the lowest
price per share (or share equivalent) issued in a Qualified
Financing (an “Automatic Conversion”). If, prior
to the Maturity Date, the Company enters into an agreement
pertaining to a Corporate Transaction (as defined below) and the
Notes have not been previously converted pursuant to an Automatic
Conversion, then, the outstanding principal balance and unpaid
accrued interest of the Notes shall automatically convert in whole
into the right of the holder to receive, in lieu of any other
payment and in cancellation of the Notes, an amount in cash upon
closing of the Corporate Transaction equal to two times the
outstanding principal amount of the Notes.
For
purposes of the foregoing: "Qualified Financing"
means a bona fide new money equity securities
financing on or before the Maturity Date with total proceeds
to the Company of not less
than four million dollars; and “Corporate
Transaction” means a sale, lease or other disposition of all
or substantially all of the Company’s assets or a
consolidation or merger of the Company with or into any
other corporation or other entity or person, or any other corporate
reorganization, in which the stockholders of the
Company immediately prior to such consolidation, merger or
reorganization own less than fifty percent (50%) of the voting
power of the surviving entity immediately after such consolidation,
merger or reorganization.
As of
September 30, 2015, the $1,000,000 principal balance of the Notes
was recorded in the financial statements at face value, net of a
discount of $273,000, as a result of separating the fair value of
the Qualified Financing redemption discount (“Redemption
Feature”) of 15% on the price per share in the Notes. The
Redemption Feature qualifies as a derivative and is subject to fair
value treatment. The Redemption Feature is amortized over the
expected life of the derivative, and the amortization expense is
presented with the interest expense from the Notes, yielding an
effective interest rate of 40% that is different than the 6% stated
in the Notes.
On
December 11, 2015, following the completion of a Qualified
Financing described above, the principal and accrued interest
amounts under the Notes were converted into 5,414,402 shares of the
Company’s common stock and warrants to purchase an additional
5,414,402 shares of the Company’s common stock at an exercise
price per share of $0.22 subject to adjustment. As a result, the
Notes were no longer outstanding as of that date.
G.
Recently Issued Accounting Pronouncements
From
time to time, new accounting pronouncements are issued by the
Financial Accounting Standards Board ("FASB") that are adopted by
us as of the specified effective date. Unless otherwise discussed,
we believe that the impact of recently issued standards that are
not yet effective will not have a material impact on our financial
position or results of operations upon adoption.
In May
2014, the FASB issued Accounting Standards Update ("ASU") 2015-14
Revenue, which deferred the effective date of ASU 2014-09 Revenue
from Contracts with Customers (ASC 606), which updates the
principles for recognizing revenue. ASU 2014-09 also amends the
required disclosures of the nature, amount, timing and uncertainty
of revenue and cash flows arising from contracts with customers.
ASU 2014-09 is now effective for annual reporting periods beginning
after December 15, 2017, including interim periods within that
reporting period. The Company is evaluating the potential impacts
of the new standard on its existing revenue recognition policies
and procedures.
In
August 2014, the FASB issued ASU 2014-15, Disclosure of
Uncertainties about an Entity's Ability to Continue as a Going
Concern. ASU 2014-15 requires that an entity's management evaluate
whether there are conditions or events that raise substantial doubt
about the entity's ability to continue as a going concern within
one year after the date that the financial statements are issued.
ASU 2014-15 is effective for annual periods beginning after
December 15, 2016 and for interim periods thereafter. The
Company is evaluating the potential impacts of this new standard on
its quarterly reporting process.
H.
Commitments
The
Company acquires assets still in development and enters into
research and development arrangements with third parties that often
require milestone and royalty payments to the third party
contingent upon the occurrence of certain future events linked to
the success of the asset in development. Milestone payments may be
required, contingent upon the successful achievement of an
important point in the development life-cycle of the pharmaceutical
product (e.g., approval of the product for marketing by a
regulatory agency). If required by the arrangement, the Company may
have to make royalty payments based upon a percentage of the sales
of the pharmaceutical product in the event that regulatory approval
for marketing is obtained. Because of the contingent nature of
these payments, they are not included in the table of contractual
obligations. No milestones have been met, nor have any payments
been paid, as of December 31, 2016.
We are
also obligated to pay patent filing, prosecution, maintenance and
defense costs, if any, for the intellectual property we have
licensed from National Jewish Health, National Jewish Medical and
Research Center and Duke University.
These
arrangements may be material individually, and in the unlikely
event that milestones for multiple products covered by these
arrangements were reached in the same period, the aggregate charge
to expense could be material to the results of operations in any
one period. In addition, these arrangements often give Aeolus the
discretion to unilaterally terminate development of the product,
which would allow Aeolus to avoid making the contingent payments;
however, Aeolus is unlikely to cease development if the compound
successfully achieves clinical testing objectives.
