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. Its
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 U.S.
Department of Health and Human Services (“HHS”). Aeolus
is in its sixth year under the BARDA Contract. On March 23, 2017,
we announced that we had received notification from the Assistant
Secretary for Preparedness and Response (“ASPR”) that
BARDA had elected not to exercise additional options under the
contract at this time based upon an “In-Process Review”
(“IPR”) meeting held with BARDA on February 2, 2017
(the “BARDA 2017 Option Notice”). The notification did
not terminate the BARDA Contract, which currently has a term that
runs through May 2019.
We have
been in and plan to continue discussions with BARDA to determine
the possibility of additional option exercises to continue the
development work under the contract. The goal of the BARDA contract
is to achieve FDA approval for 10150 and the development of
commercial manufacturing capability. In order to achieve these
goals, we believe it will be necessary for BARDA to exercise
additional options under the contract, or for us to obtain funding
from other governmental agencies, such as the National Institutes
of Health (NIH). As of the date of this report, we cannot provide
guidance on whether BARDA is likely to exercise further options or
whether NIH will provide additional funding. If all of the options
were exercised by BARDA, the total value of the contract would be
approximately $118.4 million, of which $30.8 million has already
been exercised.
Aeolus
has also benefitted from funding of research to third party
researchers by the National Institutes of Health
(“NIH”) for development of the compound as a medical
countermeasure against radiation and exposure to chemical and nerve
agents. Aeolus' strategy is to leverage the substantial investment
in toxicology, manufacturing, and preclinical and clinical studies
made by U.S. 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 infection related to 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 June
30, 2017 and September 30, 2016 due to their short-term
nature.
Significant customers and accounts receivable
For the
nine months ended June 30, 2017, the Company’s primary
customer was BARDA, which comprised 100% of total revenues. As of
June 30, 2017, the Company’s receivable balances were
comprised 100% from this customer. Unbilled accounts receivable,
included in accounts receivable, totaling $313,000 and $495,000 as
of June 30, 2017 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 of amounts due from BARDA. If
necessary, the Company records a provision for doubtful receivables
to allow for any amounts that 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 June 30, 2017 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 Accounting Standards
Codification (“ASC”) Topic 605 Revenue Recognition and
ASC 912 Federal Government Contractors. 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, we receive 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
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, and accrued liabilities approximate their fair
values due to their short maturities.
Fair Value Measurements
The
Company applies 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 nine months ended June
30, 2017 and 2016, total rent expense was approximately $30,000 and
$32,000, 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 it 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 (deficit).
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.
Due to
the BARDA 2017 Option Notice, under the BARDA Contract, the Company
has concluded that, as of the date of these financial statements,
substantial doubt exists about its ability to continue as a going
concern given the Company’s lack of current revenue sources,
as well as recurring net losses, negative cash flows from
operations and working capital deficiency. The Company had cash and
cash equivalents of $403,000 on June 30, 2017, and $3,155,000 on
September 30, 2016. The decrease in cash was primarily due to a
decline in revenue following the BARDA 2017 Option Notice and cash
used in operating activities.
The
Company has incurred significant losses since its inception. At
June 30, 2017, the Company’s accumulated deficit was
$193,259,000. This raises substantial doubt about Aeolus’
ability to continue as a going concern, which will be dependent on
the Company’s ability to generate sufficient cash flows to
meet the Company’s obligations on a timely basis, obtain
additional financing and, ultimately, achieve operating profits
through product sales or BARDA procurements. The Company is
exploring strategic and financial alternatives, which may include a
merger or acquisition with or by another company, the sale of
shares of stock and/or convertible debentures, the establishment of
new collaborations for current research programs that include
initial cash payments and on-going research support and the
out-licensing of the Company’s compounds for development by a
third party. The Company believes that without additional
investment capital it will not have sufficient cash to fund its
activities in the near future, and will not be able to continue
operating. As such, the Company’s continuation as a going
concern is dependent upon its ability to raise additional financing
or receive prior levels of funding for medical countermeasure
development from BARDA. If the Company is unable to obtain
additional financing or BARDA support to fund operations, it will
need to eliminate some or all of its activities, merge with another
company, sell some or all of its assets to another company, or
cease operations entirely. There can be no assurance that the
Company will be able to obtain additional financing on acceptable
terms or at all, that the Company will be able to obtain additional
development support from BARDA, or that the Company will be able to
merge with another Company or sell any or all of its
assets.
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.
On June
14, 2016, 526,080 shares of Series B Stock were transferred from
Elan to a third party and converted to 526,080 shares of common
stock.
As of
June 30, 2017, 4,500 shares of Series C Convertible Preferred Stock
were outstanding. There are no shares of Series A and 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 warrants may not be exercised until
after 90 days following the date of issuance. 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 is being amortized from the date of issuance to the earliest
redemption date of 90 days post issuance. For the nine months ended
June 30, 2016 the Company recognized $2,486,000 of amortization of
the discount on Series C Preferred Stock as deemed dividends
charged to additional paid in capital. 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
June 30, 2017, warrants to purchase an aggregate of 50,935,250
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 June 30, 2017 are as
follows:
|
|
|
|
|
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
|
|
50,935,250
|
|
|
Below
is a summary of warrant activity (“common and
preferred”) for the nine months ended June 30,
2017:
|
|
|
|
|
|
|
|
|
Remaining
Contractual
Term (in
years)
|
Aggregate
Intrinsic
Value
|
|
Outstanding at
9/30/2016
|
52,947,877
|
$
0.23
|
2.2
|
$
-
|
|
Granted
|
-
|
$
-
|
-
|
$
-
|
|
Exercised
|
-
|
$
-
|
-
|
$
-
|
|
Expired
or Canceled
|
(2,012,627
)
|
$
0.38
|
-
|
$
-
|
|
Forfeited
|
-
|
$
-
|
-
|
$
-
|
|
Vested
|
-
|
$
-
|
-
|
$
-
|
|
Outstanding at
6/30/2017
|
50,935,250
|
$
0.23
|
2.7
|
$
-
|
Below
is a summary of warrant activity (“common and
preferred”) for the nine months ended June 30,
2016:
|
|
|
|
|
|
|
|
|
Remaining
Contractual
Term (in
years)
|
Aggregate
Intrinsic
Value
|
|
Outstanding at
9/30/2015
|
16,845,664
|
$
0.27
|
2.2
|
$
206,626
|
|
Granted
|
37,298,250
|
$
0.22
|
-
|
$
1,864,913
|
|
Exercised
|
-
|
$
-
|
-
|
$
-
|
|
Expired
or Canceled
|
(1,196,037
)
|
$
0.34
|
-
|
$
156,000
|
|
Forfeited
|
-
|
$
-
|
-
|
$
-
|
|
Vested
|
-
|
$
-
|
-
|
$
-
|
|
Outstanding at
6/30/2016
|
52,947,877
|
$
0.23
|
3.3
|
$
-
|
D.
Stock-Based Compensation
Below
is a summary of stock option activity for the nine months ended
June 30, 2017:
|
|
|
|
|
|
|
|
|
Remaining
Contractual
Term (in
years)
|
Aggregate
Intrinsic
Value
|
|
Outstanding at
9/30/2016
|
12,204,000
|
$
0.38
|
5.0
|
$
1,125
|
|
Granted
|
760,000
|
$
0.19
|
-
|
$
-
|
|
Exercised
|
-
|
$
-
|
-
|
$
-
|
|
Expired
or Canceled
|
(243,000
)
|
$
0.63
|
-
|
$
-
|
|
Forfeited
|
-
|
$
-
|
-
|
$
-
|
|
Outstanding at
6/30/2017
|
12,721,000
|
$
0.37
|
4.6
|
$
-
|
For the
nine months ended June 30, 2017, 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.
Below
is a summary of stock option activity for the nine months ended
June 30, 2016:
|
|
|
|
|
|
|
|
|
Remaining
Contractual
Term (in
years)
|
Aggregate
Intrinsic
Value
|
|
Outstanding at
9/30/2015
|
12,164,591
|
$
0.42
|
5.4
|
$
5,963
|
|
Granted
|
700,000
|
$
0.23
|
-
|
$
-
|
|
Exercised
|
-
|
$
-
|
-
|
$
-
|
|
Expired
or Canceled
|
(660,591
)
|
$
0.82
|
-
|
$
-
|
|
Forfeited
|
-
|
$
-
|
-
|
$
-
|
|
Outstanding at
6/30/2016
|
12,204,000
|
$
0.38
|
5.0
|
$
-
|
For the
nine months ended June 30, 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 nine months ended June 30, 2017
were as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
30, 2017
|
|
|
30, 2017
|
|
|
|
$
0.10-$0.20
|
1,010,000
|
$
0.19
|
9.25
|
622,497
|
$
0.19
|
9.07
|
|
$
0.21-$0.30
|
3,537,500
|
$
0.27
|
5.08
|
3,537,500
|
$
0.27
|
5.08
|
|
$
0.31-$0.40
|
6,551,500
|
$
0.39
|
4.08
|
6,551,500
|
$
0.39
|
4.08
|
|
$
0.41-$0.50
|
500,000
|
$
0.45
|
4.52
|
500,000
|
$
0.45
|
4.52
|
|
$
0.51-$0.60
|
791,250
|
$
0.58
|
2.57
|
791,250
|
$
0.58
|
2.57
|
|
$
0.61-$0.70
|
—
|
$
—
|
—
|
—
|
$
—
|
—
|
|
$
0.71-$0.80
|
80,750
|
$
0.76
|
3.48
|
80,750
|
$
0.76
|
3.48
|
|
$
0.81-$0.90
|
250,000
|
$
0.90
|
0.04
|
250,000
|
$
0.90
|
0.04
|
|
|
12,721,000
|
|
|
12,333,497
|
|
|
Stock-based
compensation expense recognized in the statement of operations is
as follows (in thousands):
|
|
For the three
months ended June 30,
|
For the nine
months ended June 30,
|
|
|
|
|
|
|
|
Research and
Development Expenses
|
$
—
|
$
—
|
$
—
|
$
—
|
|
General and
Administrative Expenses
|
29
|
33
|
83
|
108
|
|
|
$
29
|
$
33
|
$
83
|
$
108
|
The
total deferred compensation expense for outstanding and unvested
stock options as of June 30, 2017 was $46,000. The weighted average
remaining recognition period for the total deferred compensation
expense is approximately six 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 June 30,
|
For the nine
months ended June 30,
|
|
|
|
|
|
|
|
Dividend
yield
|
0
%
|
—
*
|
0
%
|
0
%
|
|
Pre-vest forfeiture
rate
|
1.50
%
|
—
*
|
7.11
%
|
7.87
%
|
|
Expected
volatility
|
112.28
%
|
—
*
|
107.51
%
|
117.14
%
|
|
|
1.91
%
|
—
*
|
1.52
%
|
1.42
%
|
|
|
5.27 years
|
—
*
|
|
|
*
No stock options were granted for the three months ended
June 30, 2017 and June 30, 2016
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 nine months ended June 30, 2017 and 2016 issuable upon the
exercise or conversion of convertible debt, stock options to
purchase common stock, convertible preferred stock and warrants to
purchase common stock. Diluted weighted average common shares
excluded incremental shares of approximately 84,111,000 and
86,348,000 for the nine months ended June 30, 2017 and 2016,
respectively, due to their anti-dilutive effect.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands,
except per share data)
|
|
Numerator:
|
|
|
|
|
|
Net
loss
|
$
(949
)
|
$
(872
)
|
$
(3,071
)
|
$
(2,535
)
|
|
Less deemed
dividend on Series C preferred stock
|
-
|
-
|
-
|
2,486
|
|
Net loss
attributable to common stockholders – basic
|
$
(949
)
|
$
(872
)
|
$
(3,071
)
|
$
(5,021
)
|
|
|
|
|
|
|
|
Net loss
attributable to common stockholders – diluted
|
$
(949
)
|
$
(872
)
|
$
(3,071
)
|
$
(5,021
)
|
|
|
|
|
|
|
|
Denominator:
|
|
|
|
|
|
Weighted-average
shares used in computing net loss per
|
|
|
|
|
|
share attributable
to common stockholders – basic
|
152,086
|
151,652
|
152,086
|
147,521
|
|
Effect of
potentially dilutive securities:
|
|
|
|
|
|
Common stock
warrants
|
-
|
-
|
-
|
-
|
|
Convertible
preferred stock
|
-
|
-
|
-
|
-
|
|
Common stock
options
|
-
|
-
|
-
|
-
|
|
Non-participating
common stock warrants
|
-
|
-
|
-
|
-
|
|
Weighted-average
shares used in computing net loss
|
|
|
|
|
|
per share
attributable to common stockholders - diluted
|
152,086
|
151,652
|
152,086
|
147,521
|
|
Basic net loss per
common share
|
$
(0.01
)
|
$
(0.01
)
|
$
(0.02
)
|
$
(0.03
)
|
|
Diluted net loss
per common share
|
$
(0.01
)
|
$
(0.01
)
|
$
(0.02
)
|
$
(0.03
)
|
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, accrue
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.
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 does not intend to adopt the standard
early and is evaluating the potential impacts of the new standard
on its existing revenue recognition policies and procedures as well
as the effects the adoption will have on its consolidated financial
statements.
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 ending after December 15,
2016 and for interim periods thereafter. Management's preliminary
assessment indicates that additional disclosures about
management’s liquidity, financing, and operational plans will
be required by ASU 2014-15.
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 June 30, 2017.
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, the University of Colorado 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.
Item 2.
Management’s Discussion and Analysis of Financial Condition
and Results of Operations
Introduction; Forward-Looking Statements
Unless
otherwise noted, the terms “we,” “our” or
“us” refer collectively to Aeolus Pharmaceuticals, Inc.
and our wholly owned subsidiary, Aeolus Sciences, Inc.
This
report contains, in addition to historical information, statements
by us with respect to expectations about our business and future
results which are “forward-looking” statements under
the Private Securities Litigation Reform Act of 1995. These
statements and other statements made elsewhere by us or by our
representatives, which are identified or qualified by words such as
“likely,” “will,” “suggests,”
“expects,” “might,” “believe,”
“could,” “should,” “may,”
“estimates,” “potential,”
“predict,” “continue,” “would,”
“anticipates,” “plans,” or similar
expressions, are based on a number of assumptions that are subject
to risks and uncertainties. Such statements include, but are not
limited to, those relating to our plans and efforts to reverse the
effects of the BARDA 2017 Option Notice, seeking NIH or other
government funding, our product candidates and funding options, as
well as our proprietary technologies and uncertainties and other
factors that may cause our actual results to be materially
different from historical results or from any results expressed or
implied by such forward-looking statements. Important factors that
could cause results or liquidity to differ include risks associated
with uncertainties of progress and timing of BARDA-related
developments, clinical trials, scientific testing, obtaining
regulatory approval, the need to obtain (and obtaining) funding for
pre-clinical and clinical trials and operations, the scope and
validity of intellectual property protection for our product
candidates, proprietary technologies and their uses, new accounting
and Securities and Exchange Commission (“SEC”)
requirements and competition from other biopharmaceutical
companies. Certain of these factors and others are more fully
described in our filings with the SEC, including, but not limited
to, our Annual Report on Form 10-K for the fiscal year ended
September 30, 2016, filed with the SEC on December 20, 2016 and in
our Quarterly Report on Form 10-Q for the period ended March 31,
2017 filed with the SEC on May 15, 2017. All forward-looking
statements are based on information available as of the date
hereof, and we do not assume any obligation to update such
forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak
only as of the date hereof.
Operations
Summary
Business
We are
a biopharmaceutical company leveraging significant U.S. Government
funding to develop a platform of novel compounds for use in
biodefense, fibrosis, oncology, infectious disease and diseases of
the central nervous system. The platform consists of approximately
180 compounds licensed from the University of Colorado
(“UC”), Duke University (“Duke”) and
National Jewish Health (“NJH”).
Our
lead compound, AEOL 10150 (“10150”), has been developed
to date under contract with the Biomedical Advanced Research and
Development Authority (“BARDA” and the “BARDA
Contract”), a division of the U.S. Department of Health and
Human Services (“HHS”), as a medical countermeasure
(“MCM”) against the pulmonary sub-syndrome of acute
radiation syndrome (“Pulmonary Acute Radiation
Syndrome” or “Lung-ARS”) and the delayed effects
of acute radiation exposure (“DEARE”). Lung-ARS is
caused by acute exposure to high levels of radiation due to a
nuclear detonation or radiological event.
We are
also developing 10150 for the treatment of lung fibrosis, including
idiopathic pulmonary fibrosis (”IPF”) and other
fibrotic diseases. This new development program was created based
upon the data generated from animal studies in Lung-ARS and
chemical gas exposure under the BARDA Contract and National
Institutes of Health (“NIH”) grants. On March 17, 2015,
we announced that 10150 was granted Orphan Drug Designation by the
U.S. Food and Drug Administration (“FDA”). AEOL 10150
has previously been tested in two Phase I human clinical trials
with no drug-related serious adverse events reported. In February
2017, we initiated a Phase 1 human clinical trial in healthy
subjects. We expect to report results from that study in the second
half of 2017.
We are
also developing 10150 for use in combination with radiation therapy
for cancer as a treatment to reduce side effects caused by
radiation toxicity and improve local tumor control. Pre-clinical
studies at Duke, the University of Maryland and Loma Linda
University have demonstrated that 10150 protects healthy, normal
tissue, while not interfering with the benefit of radiation therapy
or chemotherapy in prostate and lung cancer. Additional studies
have demonstrated that 10150 enhances the anti-tumor activity of
chemotherapy and radiation. A significant portion of the
development work funded by the BARDA Contract is applicable to the
development program for radiation oncology, including safety,
toxicology, pharmacokinetics and Chemistry, Manufacturing and
Controls (“CMC”).
We are
also developing 10150 as a MCM for exposure to chemical vesicants
(e.g., chlorine gas, sulfur mustard gas and phosgene gas) and nerve
agents (e.g., sarin gas and soman gas) with grant money from the
NIH Countermeasures Against Chemical Threats
(“NIH-CounterACT”) program. 10150 has consistently
demonstrated safety and efficacy in animal studies of chemical gas
exposure and nerve gas exposure.
We are
also developing a second compound, AEOL 11114B
(“11114”), as a treatment for Parkinson’s
disease. Research funded by the Michael J Fox Foundation for
Parkinson’s disease (“MJFF”) demonstrated the
neuro-protective activity of 11114 in mouse and rat models of
Parkinson’s disease. The compounds were invented by Aeolus in
collaboration with Brian J. Day, PhD at National Jewish Health and
Manisha Patel, PhD at the University of Colorado, Anschutz Medical
Campus, Department of Pharmaceutical Sciences in collaboration with
the Company. We have obtained worldwide, exclusive licenses to
develop the compounds from NJH and the UC. We plan to complete the
remaining work to file an Investigational New Drug
(“IND”) application with the FDA in 2017.
In
April 2015, we announced the discovery of a new compound, AEOL
20415 (“20415”), which has demonstrated
anti-inflammatory and anti-infective properties, and could be
effective in treating cystic fibrosis and combatting anti-biotic
resistant bacteria. The compound was developed under collaboration
between Brian J. Day, PhD at National Jewish Health in Denver,
Colorado and Aeolus Pharmaceuticals. We have obtained a worldwide,
exclusive license to develop the rights to the compound from NJH.
We plan to complete the remaining work to file an Investigational
New Drug (“IND”) application with the FDA in
2017.
Finally, we have a
pipeline of approximately 180 additional compounds. We expect that
the development of additional compounds in our portfolio could be
dependent on our finding non-dilutive capital sources to fund the
work.
BARDA
Contract
Our
most extensive development program to date is 10150 for Lung-ARS
and DEARE. On February 11, 2011, we signed a cost-plus contract
with BARDA for the development of 10150 as a MCM against Lung-ARS.
BARDA is the government agency responsible for the advanced
development and purchase of medical countermeasures for chemical,
biological, radiological and nuclear threats. The contract
contemplates the advanced development of 10150 through approval by
the FDA under 21 CFR Part 314 Subpart I and Part 601 Subpart H (the
"Animal Rule.") The Animal Rule allows for approval of drugs using
only animal studies when human clinical trials cannot be conducted
ethically. The ultimate goal of the BARDA Contract is to complete
all of the work necessary to obtain FDA approval for 10150 as a MCM
for Lung-ARS. In addition, the BARDA Contract is designed to
generate the data that would allow for acquisition of the drug by
BARDA prior to FDA approval under a pre-Emergency Use Authorization
(“EUA”).
Pursuant to the
BARDA Contract, we were awarded approximately $10.4 million for the
base period of the contract (from February 2011 to April 2012). On
April 16, 2012, we announced that BARDA had exercised two options
under the BARDA Contract worth approximately $9.1 million. On
September 17, 2013, we announced that BARDA had exercised $6.0
million in additional contract options. On May 7, 2014, we
announced that BARDA had exercised a Contract Modification worth
approximately $1.8 million. The Contract Modification allowed
Aeolus to reconcile actual costs incurred with billings under the
original provisional indirect billing rate. It established a new
provisional indirect billing rate and placed a cap on the current
and future provisional indirect billing rates. On June 26, 2015, we
announced that BARDA had exercised $3.0 million in additional
contract options under its advanced research and development
contract for AEOL 10150. On February 8, 2016, BARDA exercised
approximately $57,000 in additional contract options under its
advanced research and development contract for AEOL 10150. On May
25, 2016, BARDA exercised approximately $421,000 in additional
contract options under its advanced research and development
contract for AEOL 10150. The May 2016 option exercise brings the
total contract value exercised as of June 30, 2017 to approximately
$30.8 million.
On
March 23, 2017, we announced that we had received notification from
the Assistant Secretary for Preparedness and Response
(“ASPR”) that BARDA had elected not to exercise
additional options under the contract at this time based upon an
“In-Process Review” (“IPR”) meeting held
with BARDA on February 2, 2017. The notification did not terminate
the BARDA Contract, which currently has a term that runs through
May 2019.
We have
been in discussions with BARDA to determine the possibility of
additional option exercises to continue the development work under
the contract. The goal of the BARDA contract is to achieve FDA
approval for 10150 and the development of commercial manufacturing
capability. In order to achieve these goals, we believe it will be
necessary for BARDA to exercise additional options under the
contract, or for us to obtain funding from other governmental
agencies, such as the National Institutes of Health (NIH). As of
the date of this report, we cannot provide guidance on whether
BARDA is likely to exercise further options or whether NIH will
provide additional funding. If all of the options were exercised by
BARDA, the total value of the contract would be approximately
$118.4 million. As of June 30, 2017, 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
$30.8 million. Substantially all of the costs to date for the
Lung-ARS program have been funded by the BARDA
Contract.
We
believe there are no existing treatments for Lung-ARS or DEARE and
we are not aware of any compounds in development that have shown
efficacy when administered after exposure to radiation. 10150 has
demonstrated efficacy in two animal models (mouse and non-human
primate) when administered after exposure to radiation. The U.S.
government’s planning scenario for a radiation incident is a
10 kiloton detonation of a nuclear device in a major American city.
It is estimated that several hundred thousand civilians would be
exposed to high doses of radiation in this scenario.
Following the
events at the Fukushima nuclear plant in Japan in 2011, we
performed radiation exposure studies in mice at the request of
Japanese researchers to determine how the administration of AEOL
10150 would impact the use of leukocyte growth factors
(“LGF”) used to treat the hematopoietic or bone marrow
syndrome of ARS (“H-ARS”). Data showed that 10150 does
not interfere with the efficacy of LGF (in this case Amgen’s
Neupogen®). Additionally, the study demonstrated that
administration of Neupogen®, the current standard of care for
H-ARS, increased damage to the lungs. When 10150 was administered
with Neupogen® this damage was significantly reduced. We
believe that this finding may have important implications for the
potential procurement of 10150 for the Strategic National Stockpile
(“SNS”). In September 2013, BARDA announced that it had
entered into a procurement and inventory management agreement with
Amgen to provide Neupogen® for the SNS. On March 30, 2015, the
FDA approved Neupogen® for the treatment of
H-ARS.
The
BARDA Contract is designed to complete the work necessary for 10150
to be purchased for the SNS. BARDA currently acquires drugs for the
SNS through a Special Reserve Fund (the “SRF”) created
under Project BioShield and reauthorized under the Pandemic
All-Hazards Preparedness Reauthorization Act of 2013. Although the
final goal of the contract is full FDA approval under the Animal
Rule, BARDA, based on historical purchases from other suppliers,
may purchase product prior to FDA approval following the filing of
a pre-EUA application. Procurements from BARDA following a pre-EUA
application could result in a significant increase in revenues for
Aeolus and potential profitability.
Activities under
the contract to date include animal efficacy studies, animal model
development with radiation survival curve studies, dosing studies,
bulk drug manufacturing, bulk drug and final drug product
manufacturing, validation testing, compliance studies, stability
studies, absorption, distribution, metabolism and excretion
(“ADME”) studies, metabolic studies, genotoxicity
studies and the filing of an orphan drug status application and a
fast track designation application with the FDA. CMC
work has been completed and pilot lots have been prepared, with
three years of stability on those lots completed.
In
August 2014, we filed an Investigational New Drug
(“IND”) application with the Division of Medical
Imaging Products of the U.S. Food & Drug Administration
(“FDA”) for 10150 as a treatment for Lung-ARS. On
September 4, 2014, the Company announced positive results from a
study in non-human primates exposed to lethal radiation and treated
with 10150. The study demonstrated that administration of 10150 24
hours after exposure to lethal radiation impacted survival at six
months post-exposure as follows: survival in the 60 day treatment
group was 50%, compared to 25% survival in the radiation only
untreated control group. The data from this study, combined with
development work completed in manufacturing and human safety data,
will form the basis for a pre-EUA application.
The
Company initiated a Phase 1 study in healthy normal volunteers in
the first calendar quarter of 2017 and expects to announce results
in the second half of 2017. On June 7, 2017, the Company received a
letter from the FDA granting AEOL 10150 Fast Track Designation for
the Lung ARS indication.
The
Company initiated a Phase 1 study in healthy normal volunteers in
the first calendar quarter of 2017 and expects to announce results
in the second half of 2017. On June 7, 2017, the Company received a
letter from the FDA granting AEOL 10150 Fast Track Designation for
the Lung ARS indication.
10150
has been tested in two human Phase I safety studies where it was
well-tolerated and no adverse events were observed. Efficacy has
been demonstrated in animal models for Lung-ARS, chlorine gas
exposure, phosgene gas exposure, sulfur mustard gas exposure (lungs
and skin) and nerve gas exposure. In both mouse and non-human
primate (“NHP”) studies for Lung-ARS, 10150 treated
groups showed significantly reduced weight loss, inflammation,
oxidative stress, lung damage, and most importantly, mortality.
Therapeutic efficacy has been demonstrated when 10150 is
administered 24 hours after exposure to radiation, a requirement
for consideration as a radiation MCM for the SNS.
We have
also benefitted from research funded by grants for a variety of
other programs involving 10150 and programs other than 10150. These
grants, as well as the particular areas where we have identified
commercialization and development opportunities are described in
greater detail in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2016, filed with the SEC on December 20,
2016. This report on Form 10-Q focuses on our material
developments, results and trends with respect to the period covered
hereby.
Results of Operations
Three months ended June 30, 2017 versus three months ended June 30,
2016
We had
net losses of $949,000 and $872,000 and cash outflows from
operations of $578,000 and $753,000 for the three months ended June
30, 2017 and June 30, 2016, respectively.
Revenue
for the three months ended June 30, 2017 was $13,000, which
compares to $660,000 for the three months ended June 30, 2016. The
decline in revenue is associated with the BARDA 2017 Option Notice.
Under the BARDA Contract, we have generated contract revenue from a
cost-plus fee arrangement. Revenues on reimbursable contracts are
recognized as costs are incurred, which is based on allowable costs
incurred during the period, plus any recognizable earned fee. We
consider fixed fees under cost-plus fee contracts to be earned in
proportion to the allowable costs incurred in performance of the
contract.
Research and
Development (“R&D”) expenses decreased $479,000, or
53%, to $425,000 for the three months ended June 30, 2017 from
$904,000 for the three months ended June 30, 2016. The decrease is
primarily attributable to the timing of work related to the BARDA
Contract.
General
and administrative (“G&A”) expenses decreased
$92,000, or 15%, to $537,000 for the three months ended June 30,
2017 from $628,000 for the three months ended June 30, 2016. The
decrease is primarily attributable to decreased board of director
fees, investor relations costs and legal fees.
Nine months ended June 30, 2017 versus nine months ended June 30,
2016
We had
net losses of $3,071,000 and $2,535,000 and cash outflows from
operations of $2,752,000 and $2,508,000 for the nine months ended
June 30, 2017 and June 30, 2016, respectively.
Revenue
for the nine months ended June 30, 2017 was $225,000, which
compares to $1,530,000 for the nine months ended June 30, 2016. The
decline in revenue is associated with the BARDA 2017 Option
Notice.
Research and
Development (“R&D”) expenses decreased $389,000, or
21%, to $1,508,000 for the nine months ended June 30, 2017 from
$1,897,000 for the nine months ended June 30, 2016. The decrease is
primarily attributable to the timing of work related to the BARDA
Contract.
General
and administrative (“G&A”) expenses decreased
$94,000, or 5%, to $1,788,000 for the nine months ended June 30,
2017 from $1,883,000 for the nine months ended June 30, 2016 due to
lower legal fees, investor relations costs and consultant stock
expenses.
Liquidity and Capital Resources
We had
cash and cash equivalents of $403,000 on June 30, 2017, and
$3,155,000 on September 30, 2016. The decrease in cash was
primarily due to the decline in revenues associated with the BARDA
2017 Option Notice and cash used in operations.
We had
a net loss of $3,071,000 for the nine months ended June 30, 2017.
We had cash outflows from operations of $2,752,000. We expect to
incur additional losses and negative cash flow from operations
during the remainder of fiscal year 2017 and for several more
years.
On
February 11, 2011, we were awarded the BARDA Contract to fund the
development of AEOL 10150 as a medical countermeasure for Lung-ARS
from its current status to FDA approval in response to Special
Instructions Amendment 4 to a Broad Agency Announcement
(BAA-BARDA-09-34) for advanced research and development of medical
countermeasures for chemical, biological, radiological and nuclear
threats. The contract value could be up to $118.4 million depending
on options exercised by BARDA and the requirements for approval by
the FDA. Under the BARDA Contract, substantially all of the costs
of the development of AEOL 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 Delayed Effects of Acute Radiation
Exposure would be paid for by the U.S. government through BARDA
funding. We recognized $13,000 in revenue during the quarter ended
June 30, 2017 related to the BARDA Contract. The BARDA Contract
includes provisions to cover some, but not all, general corporate
overhead as well as a small provision for profit. The net impact of
the BARDA Contract on our liquidity is that our projected cash burn
has been reduced during the periods in which revenue has been
earned under options that have been exercised by BARDA under the
BARDA Contract. Certain costs, typically those of being a public
company, like legal costs associated with being a public company,
Investor Relations/Public Relations costs and patent-related costs,
are not included in overhead reimbursement in the BARDA Contract.
In order to fund on-going operating cash requirements or to
accelerate or expand our oncology and other programs we need to
raise additional funds and this need has been significantly
increased following our receipt of the BARDA 2017 Option Notice and
will continue to the extent that BARDA does not exercise additional
options or we do not obtain funding from another agency for this
program.
We do
not have any revenues from product sales and, therefore, we rely on
investors, grants, collaborations and licensing of our compounds to
finance our operations. We generate limited revenue from
reimbursable, cost-plus R&D contracts and grants. Revenues on
reimbursable contracts are recognized as costs are incurred,
generally based on allowable costs incurred during the period, plus
any recognizable earned fee. We consider fixed fees under cost-plus
fee contracts to be earned in proportion to the allowable costs
incurred in performance of the contract.
We have
incurred significant losses from operations to date. Our ongoing
future cash requirements will depend on numerous factors,
particularly the progress of our catalytic antioxidant program,
potential government procurements for the national stockpile,
clinical trials and/or ability to negotiate and complete
collaborative agreements or out-licensing arrangements. In
addition, we currently plan to sell additional shares of our stock
and/or debt and explore other strategic and financial alternatives,
including a merger or joint venture 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.
There
are significant uncertainties as to our ability to access potential
sources of capital. We may not be able to enter into any
collaboration on terms acceptable to us, or at all, due to
conditions in the pharmaceutical industry or in the economy in
general or based on the prospects of our programs. Even if we are
successful in obtaining collaboration for our programs, we may have
to relinquish rights to technologies, product candidates or markets
that we might otherwise develop ourselves. These same risks apply
to any attempt to out-license our compounds.
Similarly, due to
market conditions, the illiquid nature of our stock and other
possible limitations on equity offerings, we may not be able to
sell additional securities or raise other funds on terms acceptable
to us, if at all. Any additional equity financing, if available,
would likely result in substantial dilution to existing
stockholders.
Our
forecast of the period of time through which our financial
resources will be adequate to support our operations is
forward-looking information, and actual results could vary. (See
“Introduction”;“Forward-Looking
Statements”)
Off-Balance Sheet Arrangements
We do
not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or
capital resources.
Critical Accounting Policies and Estimates
Revenue Recognition
We do
not currently generate revenue from product sales, but do generate
revenue from the BARDA Contract. We recognize revenue from the
BARDA Contract in accordance Accounting Standards Codification
(“ASC”) Topic 605 Revenue Recognition and ASC 912
Federal Government Contractors. 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. We also comply
with the authoritative guidance for revenue recognition regarding
arrangements with multiple deliverables.
The
BARDA Contract is classified as a “cost-plus-fixed-fee”
contract. We recognize 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 BARDA Contract primarily
include direct labor, subcontract costs, materials, equipment,
travel and indirect costs. In addition, we receive 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 this BARDA Contract, including
the fixed fee, are generally recognized as revenue in the period
the reimbursable costs are incurred and become
billable.
Item 3.
Quantitative and Qualitative Disclosures About Market
Risk
Our
exposure to market risk is presently limited to the interest rate
sensitivity of our cash and cash equivalents, which is affected by
changes in the general level of U.S. interest rates. However, we
believe that we are not subject to any material market risk
exposure and do not expect that changes in interest rates would
have a material effect upon our financial position. A hypothetical
10% change in interest rates would not have a material effect on
our Statements of Operations or Cash Flows for the three months
ended June 30, 2017. We do not have any foreign currency or other
derivative financial instruments.
Item 4.
Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We
maintain “disclosure controls and procedures,” as such
term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”). In designing and evaluating our disclosure controls
and procedures, our management recognized that disclosure controls
and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of disclosure controls and procedures are met.
Additionally, in designing disclosure controls and procedures, our
management was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential
future conditions.
Based
on their evaluation as of the end of the period covered by this
Quarterly Report on Form 10-Q, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls
and procedures were effective as of the end of the period covered
by this Quarterly Report on Form 10-Q.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the quarter ended June 30, 2017 that have
materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
