Hepion Pharmaceuticals, Inc. - Quarter Report: 2019 September (Form 10-Q)

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UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

FORM 10-Q

 

(Mark One)

 

x      QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the Quarterly Period Ended: September 30, 2019

 

o         TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to

 

Commission File Number: 001-36856

 

HEPION PHARMACEUTICALS, INC.

(Exact name of registrant as specified in its charter)

 

 

399 Thornall Street, First Floor, Edison, New Jersey
(Address of principal executive offices)

 

08837
(Zip Code)

 

(732) 902-4000

(Registrant’s telephone number)

 

Securities registered pursuant to Section 12(b) of the Act:

 

Title of each class:		Trading Symbol(s)		Name of each exchange on which registered:
Common Stock, par value $.0001 per share		HEPA		Nasdaq Capital Market

 

Indicate by check mark whether the registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x  No o

 

Indicate by check mark whether the Registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the Registrant was required to submit such files). Yes x  No o

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company”, and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

 

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.    x

 

The number of the registrant’s shares of common stock outstanding was 3,453,755 as of November 11, 2019.

 

 

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NOTE REGARDING FORWARD-LOOKING STATEMENTS

 

This Quarterly Report on Form 10-Q for Hepion Pharmaceuticals, Inc. may contain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. Such forward-looking statements are characterized by future or conditional verbs such as “may,” “will,” “expect,” “intend,” “anticipate,” believe,” “estimate” and “continue” or similar words. You should read statements that contain these words carefully because they discuss future expectations and plans, which contain projections of future results of operations or financial condition or state other forward-looking information. Such statements are only predictions and our actual results may differ materially from those anticipated in these forward-looking statements. We believe that it is important to communicate future expectations to investors. However, there may be events in the future that we are not able to accurately predict or control. Factors that may cause such differences include, but are not limited to, those discussed under Item 1A. Risk Factors and elsewhere in the audited condensed consolidated financial statements as of and for the year ended December 31, 2018 contained in the Company’s Annual Report on Form 10-K (“Form 10-K”) filed with the Securities and Exchange Commission (“SEC”) on March 14, 2019. These factors include the uncertainties associated with product development, the risk that products that appeared promising in early clinical trials do not demonstrate safety and efficacy in larger-scale clinical trials, the risk that we will not obtain approval to market our products, the risks associated with dependence upon key personnel and the need for additional financing. We do not assume any obligation to update forward-looking statements as circumstances change and thus you should not unduly rely on these statements.

 

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HEPION PHARMACEUTICALS, INC.

 

FORM 10-Q

 

TABLE OF CONTENTS

 

		Page
PART I—FINANCIAL INFORMATION		1
Item 1.	Consolidated Financial Statements (unaudited):	1
	Condensed Consolidated Balance Sheets as of September 30, 2019 and December 31, 2018	1
	Condensed Consolidated Statements of Operations for the Three Months Ended September 30, 2019 and 2018 and for the Nine Months Ended September 30, 2019 and 2018	2
	Condensed Consolidated Statements of Changes in Stockholders’ Equity for the Nine Months Ended September 30, 2019 and 2018	3
	Condensed Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2019 and 2018	5
	Notes to Condensed Consolidated Financial Statements	6
Item 2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	27
Item 3.	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4.	Controls and Procedures	36
PART II—OTHER INFORMATION		37
Item 6.	Exhibits	38
SIGNATURES		39

 

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PART I—FINANCIAL INFORMATION

 

Item 1. Consolidated Financial Statements

 

HEPION PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED BALANCE SHEETS

 

		September 30, 2019 (Unaudited)			December 31, 2018
ASSETS
Current assets:
Cash		$	14,863,946		$	2,832,429
Prepaid expenses		320,706			135,591
Total current assets		15,184,652			2,968,020
Property and equipment, net		57,574			32,434
Right of use assets		642,405			—
In-process research and development		3,190,000			3,190,000
Goodwill		1,870,924			1,870,924
Other assets		127,940			127,794
Total assets		$	21,073,495		$	8,189,172
LIABILITIES AND SHAREHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	675,470		$	748,428
Accrued expenses		308,387			661,421
Operating lease liabilities, current		191,254			—
Convertible debt		330,000			1,440,000
Total current liabilities		1,505,111			2,849,849
Contingent consideration		2,520,000			2,590,000
Deferred tax liability		360,700			360,700
Operating lease liabilities, non-current		460,685			—
Deferred rent liability		—			9,235
Derivative financial instruments, at estimated fair value-warrants		409			404,337
Total liabilities		4,846,905			6,214,121
Commitments and contingencies (Note 12)
Stockholders’ Equity:
Convertible Preferred stock, par value $0.0001 per share. Authorized 20,000,000 shares
Series A convertible stock, stated value $10.00 per share, 85,581 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		855,808			855,808
Series C convertible stock, stated value $1,000 per share, 1,827 and 1,974 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		861,033			930,311
Common stock, par value of $.0001 per share. Authorized 120,000,000 shares, and 3,453,755 and 247,0130 shares issued and outstanding at September 30, 2019 and December 31, 2018, respectively		345			25
Additional paid-in capital		95,797,628			76,652,839
Accumulated deficit		(81,288,224		)	(76,463,932		)
Total stockholders’ equity		16,226,590			1,975,051
Total liabilities and stockholders’ equity		$	21,073,495		$	8,189,172

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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HEPION PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS

(Unaudited)

 

		Three Months Ended September 30, (unaudited)						Nine Months Ended September 30, (unaudited)
		2019			2018			2019			2018
Revenues		$	—		$	—		$	—		$	—
Cost and expenses:
Research and development		846,453			2,167,951			2,120,152			6,551,553
General and administrative		1,064,081			1,684,594			3,407,650			5,047,000
Loss from operations		(1,910,534		)	(3,852,545		)	(5,527,802		)	(11,598,553		)
Other income (expense):
Change in fair value of debt		(22,197		)	(14,542		)	(175,992		)	17,406
Interest expense		(15,354		)	(55,458		)	(555,441		)	(287,406		)
Change in fair value of derivative instruments-warrants and contingent consideration, net		128,402			3,765,487			473,929			4,455,932
Loss before income taxes		(1,819,683		)	(157,058		)	(5,785,306		)	(7,412,621		)
Income tax benefit		—			—			961,014			536,000
Net loss		(1,819,683		)	(157,058		)	(4,824,292		)	(6,876,621		)
Deemed dividend (see note 6)		(8,460		)	(8,805,809		)	(5,444,826		)	(8,805,809		)
Net loss attributable to common shareholders		$	(1,828,143	)	$	(8,962,867	)	$	(10,269,118	)	$	(15,682,430	)
Weighted Average Common Shares Outstanding
Basic and Diluted		3,453,628			202,451			1,532,927			166,687
Net Loss per Common Share
Basic and Diluted		$	(0.53	)	$	(44.27	)	$	(6.70	)	$	(94.08	)

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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HEPION PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

		Preferred Stock Series A					Preferred Stock Series C					Preferred Stock Series D					Preferred Stock Series E					Common Stock					Additional Paid-In			Accumulated			Total Stockholders’
		Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount			Shares		Amount			Capital			Deficit			Equity
Balance at January 1, 2019		85,581		$	855,808		1,974		$	930,311		—		$	—		—		$	—		247,013		$	25		$	76,652,839		$	(76,463,932	)	$	1,975,051
Issuance of common stock, Private Placement		—		—			—		—			—		—			—		—			47,429		5			486,278			—			486,283
Issuance of common stock, Debt Redemption		—		—			—		—			—		—			—		—			11,883		1			149,917			—			149,918
Accretion of Series C Preferred stock discount upon conversion		—		—			—		24,321			—		—			—		—			—		—			(24,321		)	—			—
Conversion of Series C Preferred		—		—			(46	)	(46,000		)	—		—			—		—			424		0			46,000			—			0
Stock based compensation expense		—		—			—		—			—		—			—		—			—		—			17,506						17,506
Net loss		—		—			—		—			—		—			—		—			—		—			—			(1,983,711		)	(1,983,711		)
Balance at March 31, 2019		85,581		$	855,808		1,928		$	908,632		—		$	—		—		$	—		306,748		$	31		$	77,328,219		$	(78,447,643	)	$	645,047
Issuance of common stock, Debt Redemption		—		—			—		—			—		—			—		—			42,439		4			400,059			—			400,063
Issuance of common stock, Private Placement		—		—			—		—			—		—			—		—			—		—			330			—			330
Issuance of common stock, net		—		—			—		—			—		—			—		—			1,031,071		103			5,844,421			—			5,844,524
Issuance of Preferred Stock		—		—			—		—			521		312,600			10,570		6,976,201			—		—			3,802,201			—			11,091,002
Offering cost related to issuance of preferred stock		—		—			—		—			—		(29,526		)	—		(472,311		)	—		—			(536,787		)	—			(1,038,624		)
Placement agents warrants		—		—			—		—			—		(48,250		)	—		(244,895		)	—		—			293,145			—			—
Beneficial conversion feature of preferred stock		—		—			—		—			—		(186,692		)	—		(581,350		)	—		—			768,042			—			—
Accretion of beneficial conversion feature of preferred stock		—		—			—		—			—		186,692			—		581,350			—		—			(768,042		)	—			—
Accretion of preferred stock discount upon conversion		—		—			—		44,941			—		286,176			—		4,311,007			—		—			(4,642,124		)	—			—
Conversion of preferred stock		—		—			(85	)	(85,000		)	(521	)	(521,000		)	(10,570	)	(10,570,002		)	1,824,473		182			11,175,820			—			—
Exercise of warrants		—		—			—		—			—		—			—		—			248,877		25			2,090,542			—			2,090,567
Stock based compensation expense		—		—			—		—			—		—			—		—			—		—			17,133			—			17,133
Net loss		—		—			—		—			—		—			—		—			—		—			—			(1,020,898		)	(1,020,898		)
Balance at June 30, 2019		85,581		$	855,808		1,843		$	868,573		—		$	—		—		$	—		3,453,608		$	345		$	95,772,959		$	(79,468,541	)	$	18,029,144
Accretion of preferred stock discount upon conversion		—		—			—		8,460			—		—			—		—			—		—			(8,460		)	—			—
Conversion of preferred stock		—		—			(16	)	(16,000		)	—		—			—		—			147		—			16,000			—			—
Stock based compensation expense		—		—			—		—			—		—			—		—			—		—			17,129			—			17,129
Net loss		—		—			—		—			—		—			—		—			—		—			—			(1,819,683		)	(1,819,683		)
Balance at September 30, 2019		85,581		$	855,808		1,827		$	861,033		—		$	—		—		$	—		3,453,755		$	345		$	95,797,628		$	(81,288,224	)	$	16,226,590

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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HEPION PHARMACEUTICALS, INC.

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS’ EQUITY

(Unaudited)

 

		Preferred Stock Series A					Preferred Stock Series C					Common Stock					Additional Paid-In			Accumulated			Total Stockholders’
		Shares		Amount			Shares		Amount			Shares		Amount			Capital			Deficit			Equity
Balance at January 1, 2018		104,013		$	1,040,128		—		$	—		139,893		$	14		$	69,677,652		$	(67,014,637	)	$	3,703,157
Issuance of common stock, net		—		—			—		—			11,806		1			1,821,074			—			1,821,075
Stock based compensation expense		—		—			—		—			—		—			217,387			—			217,387
Net loss		—		—			—		—			—		—			—			(2,690,488		)	(2,690,488		)
Balance at March 31, 2018		104,013		$	1,040,128		—		$	—		151,699		$	15		$	71,716,113		$	(69,705,125	)	$	3,051,131
Issuance of common stock, net		—		—			—		—			361		0			73,663			—			73,663
Conversion of Series A Preferred		(18,432	)	(184,320		)	—		—			686		0			184,320			—			0
Stock based compensation expense		—		—			—		—			—		—			152,764			—			152,764
Net loss		—		—			—		—			—		—			—			(4,029,075		)	(4,029,075		)
Balance at June 30, 2018		85,581		$	855,808		—		$	—		152,746		$	15		$	72,126,860		$	(73,734,200	)	$	(751,517	)
Issuance of Series C Preferred		—		—			10,826		9,853,148			—		—			—			—			9,853,148
Conversion of Series C Preferred		—		—			(8,573	)	(4,535,392		)	79,014		8			4,535,384			—			—
Fair value of warrant issued in connection with issuance of Series C		—		—			—		(5,091,373		)	—		—			—			—			(5,091,373		)
Costs related to warrants issued in rights offering		—		—			—		—			—		—			561,593			—			561,593
Warrants		—		—			—		—			1,314		0			176,736			—			176,736
Stock based compensation expense		—		—			—		—			—		—			62,881			—			62,881
Net loss		—		—			—		—			—		—			—			(157,058		)	(157,058		)
Balance at September 30, 2018		85,581		$	855,808		2,253		$	226,383		233,074		$	23		$	77,463,454		$	(73,891,258	)	$	4,654,410

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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HEPION PHARMACEUTICALS, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS

 

		Nine Months Ended September 30, (unaudited)
		2019			2018
CASH FLOWS FROM OPERATING ACTIVITIES:
Net loss		$	(4,824,292	)	$	(6,876,621	)
Adjustments to reconcile net loss to net cash used in operating activities:
Stock-based compensation expense		51,768			433,032
Change in fair value of derivative instrument-warrants		(403,928		)	(4,380,932		)
Change in fair value of contingent consideration		(70,000		)	(75,000		)
Change in fair value of debt		175,992			(17,406		)
Non-cash interest expense		—			87,406
Amortization of debt discount recorded as interest expense		486,608			—
Non-cash offering costs related to warrants in rights offering		—			561,593
Non-cash interest for shares issued for debt redemption payments		49,732			—
Change in deferred tax liability		—			(536,000		)
Loss on the sale of assets		—			4,474
Depreciation and amortization expense		20,196			14,146
Changes in operating assets and liabilities:
Accounts payable and accrued expenses		(425,992		)	293,072
Deferred rent liability		—			8,321
Prepaid expenses and other assets		(184,962		)	(69,622		)
Net cash used in operating activities		(5,124,878		)	(10,553,537		)
CASH FLOWS FROM INVESTING ACTIVITIES:
Additions to property and equipment		(45,336		)	—
Proceeds from the sale of fixed assets		—			900
Net cash (used in) provided by investing activities		(45,336		)	900
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds of issuance of common stock, net of issuance costs		5,844,530			1,635,140
Proceeds from issuance of Series C and warrants, net of issuance costs		—			9,853,148
Proceeds from issuance of Series D and warrants, net of issuance costs		403,120			—
Proceeds from issuance of Series E and warrants, net of issuance costs		9,649,258			—
Proceeds from the exercise of warrants		2,090,567			142,600
Proceeds from debt financing		—			2,000,000
Proceeds from issuance of debt and common stock in private placement		1,250,000			—
Repayment of convertible debt		(785,744		)	—
Repayment of debt financing		(1,250,000		)	—
Net cash provided by financing activities		$	17,201,731		$	13,630,888
Net change in cash		12,031,517			3,078,251
Cash, beginning of period		2,832,429			5,954,017
Cash, end of period		$	14,863,946		$	9,032,268
Supplementary Disclosure of Cash Financing Activities :
Cash paid for interest		$	26,756		$	—
Supplementary Disclosure of Non-Cash Financing Activities:
Stock issued to employees in lieu of cash payment for accrued bonuses		$	—		$	259,598
Reclass of derivative liability for warrant exercise		$	—		$	34,136
Conversion of Series A convertible preferred stock		$	—		$	184,320
Conversion of Series C convertible preferred stock		$	147,000		$	4,535,392
Conversion of Series D convertible preferred stock		$	521,000		$	—
Conversion of Series E convertible preferred stock		$	10,570,002		$	—
Accretion of Series C, D, and E preferred stock discount upon conversion		$	4,674,905		$	—
Fair value of warrants issued in conjunction with Series C preferred stock offering		$	—		$	5,091,373
Beneficial Conversion Factor of preferred stock accreted as deemed dividend		$	768,042		$	3,771,639
Issuance of common stock for debt redemption		$	500,248		$	—
Adoption of Lease Accounting		$	642,405		$	—
Warrants issued to Placement Agent		$	293,145		$	221,269

 

The accompanying notes are an integral part of these condensed consolidated financial statements.

 

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HEPION PHARMACEUTICALS, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

 

(Unaudited)

 

1. Business Overview

 

Hepion Pharmaceuticals, Inc. (“Hepion” or the “Company”) is a biopharmaceutical company headquartered in Edison, New Jersey, focused on the development of pleiotropic drug therapy for treatment of chronic liver disease. This therapeutic approach targets fibrosis and hepatocellular carcinoma (“HCC”) associated with non-alcoholic steatohepatitis (“NASH”), viral hepatitis, and other liver diseases. The Company’s cyclophilin inhibitor, CRV431, is being developed to offer benefits to address these multiple complex pathologies. CRV431 is a cyclophilin inhibitor that targets multiple biochemical pathways involved in the progression of liver disease. Preclinical studies with CRV431 in NASH models demonstrated consistent reductions in liver inflammation, fibrosis, and cancerous tumors. CRV431 additionally shows antiviral activity towards hepatitis B, C, and D viruses which also trigger liver disease.

 

On July 18, 2019, the Company filed a certificate of amendment (the “Certificate of Amendment”) to the Company’s certificate of incorporation (the “Certificate”) to change the Company’s name from “ContraVir Pharmaceuticals, Inc.” to “Hepion Pharmaceuticals, Inc.” The name change became effective as of July 18, 2019.

 

The Company is developing CRV431 as its lead molecule. CRV431 is a cyclophilin inhibitor that targets specific isomerases that play an important role in protein folding in health and in disease. To date, in vitro and/or in vivo studies have demonstrated reductions in HBV DNA, HBsAg, HBeAg, inhibition of virus uptake (NTCP transport inhibition), and stimulation of innate immunity. Importantly, in vivo studies in a NASH model of fibrosis and HCC have repeatedly demonstrated CRV431 reduces fibrosis scores and overall liver tumor burden. Hence, CRV431 is a pleiotropic molecule that may not only treat liver disease but may also serve to reduce important risk factors (e.g., HBV) for developing the disease. The Company has completed a phase 1 study with CRV431 demonstrating safety, tolerability, and pharmacokinetics (PK).

 

CRV431

 

On May 10, 2018, the Company submitted an Investigational New Drug Application (“IND”) to the U.S. Food and Drug Administration (“FDA”) to support initiation of the Company’s CRV431 HBV clinical development program in the United States and received approval in June 2018. The Company completed the first segment of Phase 1 clinical activities for CRV431 in October 2018 wherein the Company reached a major clinical milestone of positive data from a Phase I trial of CRV431 in humans. This achievement triggered the first milestone payment, as stated in the Merger Agreement for the acquisition of Ciclofilin Pharmaceuticals, Inc. (“Ciclofilin”) and the Company paid a related milestone payment of $1,000,000 and issued 1,439 shares of the Company’s common stock with a fair value of $55,398, representing 2.5% of the Company’s issued and outstanding common stock as of June 2016, to the Ciclofilin shareholders.

 

On June 17, 2019, the Company submitted an IND to the FDA to support initiation of the Company’s CRV431 NASH clinical development program in the United States and received approval in July 2019.

 

TXL

 

On December 18, 2014, the Company and Chimerix, Inc. (“Chimerix”), entered into a Licensing Agreement pursuant to which it licensed CMX157 (now known as tenofovir exalidex, “TXL”) from Chimerix for further clinical development and commercialization for an upfront payment of 120,000 shares of our preferred stock, valued at $1.2 million.

 

The termination of the License Agreement became effective on June 1, 2019. Upon the effectiveness of the termination of the License Agreement, Chimerix reacquired all worldwide rights to TXL. The Company made the decision to terminate the License Agreement following the decision to no longer pursue development of TXL, and to focus the Company’s resources and development programs on further advancing CRV431. The Company does not owe any fees or payments to Chimerix.

 

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2. Basis of Presentation and Going Concern

 

These unaudited condensed consolidated financial statements have been prepared following the requirements of the Securities and Exchange Commission (“SEC”) and accounting principles generally accepted in the United States of America (“U.S. GAAP”) for interim reporting. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments, which include only normal recurring adjustments, necessary to present fairly the Company’s interim financial information. The condensed consolidated balance sheet as of December 31, 2018 was derived from the audited annual consolidated financial statements but does not include all disclosures required by GAAP. The accompanying unaudited condensed consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto as of and for the year ended December 31, 2018 contained in the Company’s Annual Report on Form 10-K (“Form 10-K”) filed with the SEC on March 14, 2019.

 

Principles of Consolidation

 

The accompanying condensed consolidated financial statements include the accounts of Hepion and the Company’s subsidiaries, Hepion Research Inc. and Hepion Research Corp, which conducts its operations in Canada. All intercompany balances and transactions have been eliminated in consolidation.

 

Reverse Stock Split

 

On May 28, 2019, the Company effected a 1 for 70 reverse stock split of the Company’s common stock. The par value and the number of authorized shares of the common and convertible preferred stock were not adjusted as a result of the reverse stock split. All common stock share and per-share amounts for all periods presented in these financial statements have been adjusted retroactively to reflect the reverse stock split.

 

Going Concern

 

As of September 30, 2019, the Company had $14.9 million in cash. Net cash used in operating activities was $5.1 million for the nine months ended September 30, 2019. Net loss for the nine months ended September 30, 2019 was $4.8 million. As of September 30, 2019, the Company had working capital of $13.7 million. The Company has not generated revenue to date and has incurred substantial losses and negative cash flows from operations since inception. The Company has historically funded operations through issuances of convertible debt, common stock and preferred stock. The Company expects to continue to incur losses for the next several years as it expands research, development and clinical trials of CRV431. The Company is unable to predict the extent of any future losses or when the Company will become profitable, if at all.

 

These condensed consolidated financial statements have been prepared under the assumption that the Company will continue as a going concern. Due to the Company’s recurring and expected continuing losses from operations, the Company has concluded there is substantial doubt in the Company’s ability to continue as a going concern within one year of the issuance of these condensed consolidated financial statements without additional capital becoming available to attain further operating efficiencies and, ultimately, to generate revenue. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of this uncertainty.

 

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The Company will be required to raise additional capital within the next year to continue the development and commercialization of current product candidates and to continue to fund operations at the current cash expenditure levels. The Company cannot be certain that additional funding will be available on acceptable terms, or at all. To the extent that the Company raises additional funds by issuing equity securities, the Company’s stockholders may experience significant dilution. Any debt financing, if available, may involve restrictive covenants that impact the Company’s ability to conduct business. If the Company is unable to raise additional capital when required or on acceptable terms, the Company may have to (i) significantly delay, scale back or discontinue the development and/or commercialization of one or more product candidates; (ii) seek collaborators for product candidates at an earlier stage than otherwise would be desirable and on terms that are less favorable than might otherwise be available; or (iii) relinquish or otherwise dispose of rights to technologies, product candidates or products that the Company would otherwise seek to develop or commercialize on unfavorable terms.

 

3. Summary of Significant Accounting Policies

 

Use of Estimates

 

The preparation of condensed consolidated financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the condensed consolidated financial statements and the reported amounts of expenses during the reporting period. Changes in estimates and assumptions are reflected in reported results in the period in which they become known. Actual results could differ from those estimates.

 

The Company’s significant accounting policies are disclosed in the audited consolidated financial statements for the year ended December 31, 2018 included in the Company’s Form 10-K filed with the SEC on March 14, 2019. Since the date of such consolidated financial statements, there have been no changes to the Company’s significant accounting policies.

 

Cash

 

As of September 30, 2019, and December 31, 2018, the amount of cash was approximately $14.9 million and $2.8 million, respectively, consisting primarily of checking accounts held at U.S. and Canadian commercial banks. Cash is maintained at financial institutions and, at times, balances may exceed federally insured limits. The Company has never experienced losses related to these balances.

 

Fair Value of Financial Instruments

 

Accounting Standards Codification (“ASC”) Topic 820, Fair Value Measurement (“ASC 820”), establishes a fair value hierarchy for instruments measured at fair value that distinguishes between assumptions based on market data (observable inputs) and the Company’s own assumptions (unobservable inputs). Observable inputs are inputs that market participants would use in pricing the asset or liability based on market data obtained from sources independent of the Company. Unobservable inputs are inputs that reflect assumptions about the inputs that market participants would use in pricing the asset or liability and are developed based on the best information available in the circumstances.

 

ASC 820 identifies fair value as the exchange price, or exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. As a basis for considering market participant assumptions in fair value measurements, ASC Topic 820 establishes a three-tier fair value hierarchy that distinguishes among the following:

 

·                  Level 1—Valuations based on unadjusted quoted prices in active markets for identical assets or liabilities that the Company has the ability to access.

 

·                  Level 2—Valuations based on quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active and models for which all significant inputs are observable, either directly or indirectly.

 

·                  Level 3—Valuations based on inputs that are unobservable and significant to the overall fair value measurement.

 

To the extent that the valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement.

 

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Financial instruments consist of cash and accounts payable, derivative instruments — warrants , convertible debt and contingent consideration. These financial instruments are stated at their respective historical carrying amounts, which approximate fair value due to their short term nature, except for derivative instruments— warrants , convertible debt and contingent consideration, which were marked to market at the end of each reporting period. See Note 7 for additional information of the fair value of the derivative liabilities. The Company recorded contingent consideration from the 2016 acquisition of Ciclofilin, which is required to be carried at fair value. See Note 7 for additional information on the fair value of the contingent consideration.

 

Derivative financial instruments

 

The Company has issued common stock warrants in connection with the execution of certain equity financings. The fair value of the warrants, which were deemed to be derivative instruments based on certain contingent put features, was recorded as a derivative liability under the provisions of ASC Topic 815 Derivatives and Hedging (“ASC 815”) upon issuance. Subsequently, the liability is adjusted to fair value as of the end of each reporting period and the changes in fair value of derivative liabilities are recorded in the statements of operations under the caption “Change in fair value of derivative financial instruments—warrants.” See Note 6 for additional information.

 

The fair value of the warrants, issued in connection with the October 2015, April 2016 and April 2017 common stock offerings and deemed to be derivative instruments due to a certain contingent put feature, was determined using the Black-Scholes option pricing model, deemed to be an appropriate model due to the terms of the warrants issued, including a fixed term and exercise price.

 

The warrants, issued in connection with the July 2018 Rights Offering (See Note 6) are deemed to be derivative instruments since if the Company does not maintain an effective registration statement, the Company is obligated to deliver registered shares upon exercise and settlement of the warrant because there are further registration and prospectus delivery requirements that are outside of the control of the Company. Therefore, the fair value of the warrants was determined using the Black-Scholes option pricing model, deemed to be an appropriate model due to the terms of the warrants issued, including a fixed term and exercise price.

 

The fair value of warrants was affected by changes in inputs to the Black-Scholes option pricing model including the Company’s stock price, expected stock price volatility, the contractual term, and the risk-free interest rate. This model uses Level 3 inputs, including stock price volatility, in the fair value hierarchy established by ASC 820 Fair Value Measurement. At September 30, 2019 and December 31, 2018, the fair value of such warrants was approximately $409 and $0.4 million, respectively, which are classified as a long-term derivative liability on the Company’s balance sheets.

 

Property, equipment and depreciation

 

As of September 30, 2019, and December 31, 2018 the Company had $57,574 and $32,434, respectively, of property and equipment, consisting primarily of computer equipment, furniture and fixtures. Expenditures for additions, renewals and improvements will be capitalized at cost. Depreciation will generally be computed on a straight-line method based on the estimated useful lives of the related assets. The estimated useful lives of the depreciable assets are 3 to 5 years. Leasehold improvements are amortized using the straight-line method over their estimated useful lives, or the remaining term of the lease, whichever is shorter. Depreciation and amortization expense for the nine months ended September 30, 2019, and the nine months ended September 30, 2018, was $20,196 and $14,146, respectively. Expenditures for repairs and maintenance are charged to operations as incurred. The Company will periodically evaluate whether current events or circumstances indicate that the carrying value of depreciable assets may not be recoverable. There were no adjustments to the carrying value of property and equipment at September 30, 2019 and December 31, 2018.

 

Goodwill and In-Process Research & Development

 

In accordance with ASC Topic 350, Intangibles — Goodwill and Other (“ASC Topic 350”), goodwill and acquired IPR&D are determined to have indefinite lives and, therefore, are not amortized. Instead, they are tested for impairment annually, in the Company’s fourth quarter, and between annual tests if the Company becomes aware of an event or a change in circumstances that would indicate the carrying value may be impaired. Pursuant to ASU No. 2011-08, Intangibles — Goodwill and Other (Topic 350): Testing Goodwill for Impairment, and ASU No. 2012-02, Intangibles — Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, the Company has the option to first assess qualitative factors to determine whether the existence of events or circumstances leads the Company to determine that it is more likely than not (that is, a likelihood of more than 50%) that the goodwill or the acquired IPR&D is impaired. If the Company chooses to first assess qualitative factors and determines that it is not more likely than not goodwill or acquired IPR&D is impaired, the Company is not required to take further action to test for impairment. The Company also has the option to bypass the qualitative assessment and perform only the quantitative impairment test, which the Company may choose to do in some periods but not in others. The Company’s CRV431 intangible asset and goodwill are assessed for impairment annually as of December 31st of the Company’s fiscal year or more frequently if impairment indicators exist.

 

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If the Company performs a quantitative assessment of goodwill, it utilizes the two-step approach prescribed under ASC Topic 350. Step 1 requires a comparison of the carrying value of a reporting unit, including goodwill, to its estimated fair value. The Company tests for impairment at the entity level because it operates on the basis of a single reporting unit. If the carrying value exceeds fair value, the Company then performs Step 2 to measure the amount of impairment loss, if any. In Step 2, the Company estimates the fair value of individual assets, including identifiable intangible assets, and liabilities to determine the implied fair value of goodwill. The Company then compares the carrying value of goodwill to the implied fair value. The excess of the carrying value of goodwill over implied fair value, if any, is recorded as an impairment charge.

 

Goodwill relates to amounts that arose in connection with the acquisition of Ciclofilin. Goodwill represents the excess of the purchase price over the fair value of the net assets acquired when accounted for using the acquisition method of accounting for business combinations. There was no impairment of goodwill for the nine months ended September 30, 2019, or the nine months ended September 30, 2018.

 

IPR&D acquired in a business combination is capitalized as indefinite-lived assets on the Company’s condensed consolidated balance sheets at the acquisition-date fair value. Once the project is completed, the carrying value of the IPR&D is reclassified to other intangible assets, net and is amortized over the estimated useful life of the asset. Post-acquisition research and development expenses related to the IPR&D projects are expensed as incurred. The projected discounted cash flow models used to estimate the fair values of the Company’s IPR&D assets, acquired in connection with the Ciclofilin acquisition, reflect significant assumptions regarding the estimates a market participant would make in order to evaluate a drug development asset, including: (i) probability of successfully completing clinical trials and obtaining regulatory approval; (ii) market size, market growth projections, and market share; (iii) estimates regarding the timing of and the expected costs to advance clinical programs to commercialization; (iv) estimates of future cash flows from potential product sales; and (v) a discount rate. These assumptions are based on significant inputs not observable in the market and thus represent Level 3 measurements within the fair value hierarchy. The use of different inputs and assumptions could increase or decrease our estimated discounted future cash flows, the resulting estimated fair values and the amounts of related impairments, if any.

 

If IPR&D becomes impaired or is abandoned, the carrying value of the IPR&D is written down to the revised fair value with the related impairment charge recognized in the period in which the impairment occurs. If the carrying value of the asset becomes impaired as the result of unfavorable data from any ongoing or future clinical trial, changes in assumptions that negatively impact projected cash flows, or because of any other information regarding the prospects of successfully developing or commercializing the Company’s programs, the Company could incur significant charges in the period in which the impairment occurs.

 

There was no impairment of IPR&D for the nine months ended September 30, 2019 or the nine months ended September 30, 2018.

 

Income Taxes

 

The Company accounts for income taxes under the asset and liability method. The Company recognizes deferred tax assets and liabilities for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases, as well as for operating loss and tax credit carry-forwards. The Company measures deferred tax assets and liabilities using enacted tax rates expected to apply to taxable income in the years in which the Company expects to recover or settle those temporary differences. The Company recognizes the effect of a change in tax rates on deferred tax assets and liabilities in the results of operations in the period that includes the enactment date. The Company reduces the measurement of a deferred tax asset, if necessary, by a valuation allowance if it is more likely than not that the Company will not realize some or all of the deferred tax asset. The Company accounts for uncertain tax positions by recognizing the financial statement effects of a tax position only when, based upon technical merits, it is ‘‘more-likely-than-not’’ that the position will be sustained upon examination. Potential interest and penalties associated with unrecognized tax positions are recognized in income tax expense.

 

In conjunction with the acquisition of Ciclofilin in June 2016, a deferred tax liability of $1.3 million was recorded reflecting the difference between the book basis and tax basis of acquired IPR&D. Such deferred income tax liability cannot be used to offset the deferred tax assets when analyzing the Company’s valuation allowance as the acquired IPR&D is considered to have an indefinite life until the Company completes or abandons development of the related IPR&D. The re-measurement of the deferred tax balances to the new corporate rate was completed as of December 31, 2017 and resulted in an adjustment of approximately $900,000 recorded as a reduction in the deferred tax liability offset by a credit to Income Tax benefit at that time. The 2017 Tax Act also changed the Net Operating Loss carry forwards’ period to now have an indefinite life. The Company performed an evaluation with regard to the impact of Deferred Tax Assets (“DTA”) that were generated by Temporary Differences (such as Stock Compensation, Accrued Vacation, depreciation, etc.) which would reverse and turn into indefinite lived NOL carry forwards and whether the Deferred Tax Liability associated with In-Process R&D could be used to offset indefinite lived DTAs. In March 2018, the Company recorded an adjustment to the valuation allowance in the approximate amount of $536,000. This adjustment reflects the adjustment allowed by the Tax Cuts and Jobs Act of 2017 to utilize indefinite deferred tax liabilities as a source of income against indefinite lived portions of the Company’s deferred tax assets in conjunction with the evaluation of the amount of valuation allowance needed.

 

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In April 2019, the Company transferred state net operating loss tax credits and received approximately $1.0 million in connection with the sale of the state net operating losses to a third party recorded as an income tax benefit in the condensed consolidated statement of operations. The Company received approval for the sale of net operating losses through participation in the New Jersey Technology Business Tax Certificate Transfer (NOL) Program.

 

Contingencies

 

In the normal course of business, the Company is subject to loss contingencies, such as legal proceedings and claims arising out of the Company’s business that cover a wide range of matters, including, among others, government investigations, shareholder lawsuits, product and environmental liability, and tax matters. In accordance with ASC Topic 450, Accounting for Contingencies, (“ASC 450”), the Company records accruals for such loss contingencies when it is probable that a liability will be incurred, and the amount of loss can be reasonably estimated. The Company, in accordance with this guidance, does not recognize gain contingencies until realized.

 

Research and Development

 

Research and development costs, which include expenditures in connection with an in-house research and development laboratory, salaries and staff costs, application and filing for regulatory approval of proposed products, purchased in-process research and development, license costs, regulatory and scientific consulting fees, as well as contract research, insurance and FDA consultants, are accounted for in accordance with ASC Topic 730, Research and Development, (“ASC 730”). Also, as prescribed by this guidance, patent filing and maintenance expenses are considered legal in nature and therefore classified as general and administrative expense, if any.

 

The Company does not currently have any commercial biopharmaceutical products, and does not expect to have such for several years, if at all. Accordingly, our research and development costs are expensed as incurred. While certain of the Company’s research and development costs may have future benefits, the Company’s policy of expensing all research and development expenditures is predicated on the fact that the Company has no history of successful commercialization of product candidates to base any estimate of the number of future periods that would be benefited.

 

Also as prescribed by ASC 730, non-refundable advance payments for goods or services that will be used or rendered for future research and development activities should be deferred and capitalized. As the related goods are delivered or the services are performed, or when the goods or services are no longer expected to be provided, the deferred amounts would be recognized as an expense. At September 30, 2019 and December 31, 2018, the Company had prepaid research and development costs of $214,963 and $41,514, respectively.

 

Share-based payments

 

ASC Topic 718 “Compensation—Stock Compensation” (“ASC 718”) requires companies to measure the cost of employee and non-employee services received in exchange for the award of equity instruments based on the estimated fair value of the award at the date of grant. The expense is to be recognized over the period during which an employee is required to provide services in exchange for the award. Generally, the Company issues stock options with only service-based vesting conditions and records the expense for these awards using the straight-line method.

 

The fair value of each stock option grant is estimated on the date of grant using the Black-Scholes option-pricing model. The Company has a limited trading history in the Company’s common stock and lacks company-specific historical and implied volatility information. Therefore, the Company estimates expected stock volatility based on the historical volatility of a publicly traded set of peer companies and expects to continue to do so until such time as it has adequate historical data regarding the volatility of the Company’s own traded stock price. The expected term of the Company’s stock options has been determined utilizing the “simplified” method for awards that qualify as “plain-vanilla” options. The expected term of stock options granted to non-employees is equal to the contractual term of the option award. The risk-free interest rate is determined by reference to the U.S. Treasury yield curve in effect at the time of grant of the award for time periods approximately equal to the expected term of the award. Expected dividend yield is based on the fact that the Company has never paid cash dividends and does not expect to pay any cash dividends in the foreseeable future.

 

Foreign Exchange

 

The functional currency of Hepion and ContraVir Research Inc. is the U.S. dollar. The functional currency of ContraVir Research Corp. is the Canadian dollar. The Company’s reporting currency is the U.S. dollar. The assets and liabilities of Ciclofilin are translated into U.S. dollars using period-end exchange rates; income and expenses are translated using the average exchange rates for the reporting period. Unrealized foreign currency translation adjustments are deferred in accumulated other comprehensive loss, a

 

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separate component of shareholders’ equity. The amount of currency translation adjustment was immaterial at September 30, 2019 and December 31, 2018.

 

Transactions in foreign currencies are remeasured into the functional currency of the relevant subsidiaries at the exchange rate in effect at the date of the transaction. Any monetary assets and liabilities arising from these transactions are translated into the functional currency at exchange rates in effect at the balance sheet date or on settlement. Resulting gains and losses are recorded in other foreign exchange (gain) loss within the condensed consolidated statements of operations. The impact of foreign exchange gains (losses) was immaterial for the nine months ended September 30, 2019 and 2018.

 

Segment Information

 

Operating segments are defined as components of an enterprise about which separate discrete information is available for evaluation by the chief operating decision maker, or decision-making group, in deciding how to allocate resources and in assessing performance. The Company, through the chief operating decision maker, views the Company’s operations and manages the business in one segment.

 

Net loss per share

 

Basic and diluted net loss per share is presented in conformity with ASC Topic 260, Earnings per Share, (“ASC 260”) for all periods presented. In accordance with this guidance, basic and diluted net loss per common share was determined by dividing net loss applicable to common stockholder by the weighted-average common shares outstanding during the period.

 

4. Recent Accounting Pronouncements

 

In August of 2018, the FASB issued ASU 2018-13 — Fair Value Measurement (Topic 820): Disclosure Framework—Changes to the Disclosure Requirements for Fair Value Measurement (“ASU 2018-13”), which amends disclosure requirements on fair value measurements in Topic 820. This amendment modifies the valuation process of fair value measurements by removing the disclosure requirements for the valuation processes for Level 3 fair value measurements, clarifying the timing of the measurement uncertainty disclosure, and including the changes in unrealized gains and losses for recurring Level 3 fair value measurements in other comprehensive income if held at the end of the reporting period. It also allows the disclosure of other quantitative information in lieu of the weighted average of significant unobservable inputs used to develop Level 3 fair value measurements. The amendments in this ASU are effective for fiscal years beginning after December 15, 2019 and should be applied prospectively for the most recent period presented in the initial fiscal year of adoption. The Company is currently evaluating the impact that this guidance will have on the Company’s results of operations, financial position and cash flows.

 

In July of 2018, the FASB issued ASU 2018-11 — Leases (Topic 842) Targeted Improvements (“ASU 2018-11”), which addresses stakeholder’s inquiries that are applicable to the Company regarding reporting requirements for initial adoption of ASU 2016-02. ASU 2018-11 provides entities with an additional (and optional) transition method to adopt the new leases standard in ASU 2016-02, allowing an entity to initially apply the new lease standard at the adoption date and recognize a cumulative-effect adjustment to the opening balance of retained earnings in the period of adoption. An entity that elects this additional (and optional) transition method must provide the required Topic 840 disclosures for all periods that continue to be in accordance with Topic 840.

 

Additionally, in July of 2018, the FASB issued ASU 2018-10 — Codification Improvements to Topic 842, Leases (“ASU 2018-10”), which amends narrow aspects of the guidance issued in the amendments in ASU 2016-02 based on comments and questions raised by stakeholders during the assessment and implementation of ASU 2016-02. The Company has adopted this guidance in conjunction with the adoption of FASB issued ASU 2016-02, Leases (Topic 842) (“ASU 2016-02”). The new standard establishes a right-of-use (ROU) model that requires a lessee to record a ROU asset and a lease liability on the balance sheet for all leases with terms longer than 12 months. Leases will be classified as either finance or operating, with classification affecting the pattern of expense recognition in the income statement. ASU 2016-02 is effective for annual periods beginning after December 15, 2018, including interim periods within those annual periods, with early adoption permitted. A modified retrospective transition approach is required for lessees for capital and operating leases existing at or entered after the beginning of the earliest comparative period presented in the financial statements, with certain practical expedients available. The Company’s primary lease arrangements are associated with a lease for the Company’s corporate office. ASU 2016-02 became effective for the Company on January 1, 2019. The Company adopted ASU 2016-02 using a modified retrospective transition approach as of the effective date as permitted by the amendments in ASU 2018-11, which provides an alternative modified retrospective transition method (See Note 12). As a result, the Company was not required to adjust comparative period financial information for effects of the standard or make the new required lease disclosures for periods before the date of adoption (i.e. January 1, 2019). The Company has elected to adopt the package of transition practical expedients and, therefore, have not reassessed (1) whether existing or expired contracts contain a lease, (2) lease classification for existing or expired leases or (3) the accounting for initial direct costs that were previously capitalized. As of January 1, 2019, the Company recorded an operating lease liability of approximately $773 thousand and operating right of use assets of approximately $764 thousand.

 

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In June of 2018, the FASB issued ASU 2018-07 — Compensation — Stock Compensation (Topic 718) (“ASU 2018-07”), which expands the scope of Topic 718 to include share-based payment transaction for acquiring goods and services from nonemployees. The amendments specify that Topic 718 applies to all share-based payment transactions in which a grantor acquires goods or services to be used or consumed in a grantor’s own operations by issuing share-based payment awards. The amendments in this ASU are effective for fiscal years beginning after December 15, 2018, including interim periods within that fiscal year. The Company adopted this ASU with no significant impact on the Company’s condensed consolidated financial statements.

 

In July of 2017 the FASB issued ASU No. 2017-11, Earnings Per Share (Topic 260); Distinguishing Liabilities from Equity Topic (480); Derivatives and Hedging (Topic 815): (Part I) Accounting for Certain Financial Instrument with Down Round Features, (Part II) Replacement of the Indefinite Deferral for Mandatorily Redeemable Financial Instruments of Certain Nonpublic Entities and Certain Mandatorily Redeemable Non controlling Interests with a Scope Exception (“ASU 2017-11”), which modifies the classification of some financial instruments. A down round feature no longer precludes equity classification, therefore a freestanding equity feature would no longer be accounted for as a derivative liability at fair value as a result of the existence of a down round feature. For freestanding equity-classified financial instruments, the amendments require entities present earnings per share in accordance with Topic 260, and to recognize the effect of the down round feature when triggered. Convertible instruments are now subject to specialized contingent beneficial conversion features. The Company adopted this ASU with no significant impact on the Company’s condensed consolidated financial statements.

 

In January of 2017, the FASB issued ASU No. 2017-04, Intangibles — Goodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (“ASU 2017-04”), which amended the 2014 amendments to the FASB Accounting Standards Codification that allowed companies an alternative accounting treatment for subsequently measuring goodwill. This amendment is Phase 1 of a project by the FASB Board to simplify how an entity is required to test goodwill for impairment by eliminating step 2 from the goodwill impairment test. Step 2 measures a goodwill impairment loss by comparing the implied fair value of a reporting unit’s goodwill with the carrying amount of that goodwill. These amendments are to be applied on a prospective basis and are required to be adopted for annual and any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. The Company is currently evaluating the impact that this guidance will have on the Company’s results of operations, financial position and cash flows.

 

5. Debt

 

On May 8, 2018, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with Iliad Research and Trading, L.P. (“IRT”), pursuant to which the Company issued to IRT a secured convertible promissory note (the “Note”) in the aggregate principal amount of $3,325,000 for an aggregate purchase price of $2,000,000 cash and $1,000,000 aggregate principal amount of investor notes (the “Investor Notes”) payable to the Company in four tranches of $250,000 upon request by the Company. Closing occurred on May 9, 2018. The Note carries an original issue discount of $300,000, and the initial principal balance of $2,225,000 also includes original issue discount of $200,000 and $25,000 to cover IRT’s transaction expenses. The Investor Notes have not been drawn as of September 30, 2019. The Note bears interest at the rate of 10% per annum and matures on November 8, 2019. Beginning on November 8, 2018, IRT has the right to redeem all or any portion of the Note up to the Maximum Monthly Redemption Amount which is $500,000. Payments of each redemption amount may be made in cash or shares of Company common stock at Company’s election (so long as the various conditions to paying stock set forth in the Note are satisfied) provided, however, that if the Company’s common stock is trading below $112.00 per share (as adjusted for the reverse stock split), the redemption(s) must be in cash. Common stock issued upon redemption will be issued at a price equal to 80% of the lowest trade price of the common stock for the 20 consecutive trading days prior to the date of redemption, subject to adjustments; provided, however, that in no event will the redemption price be less than $112.00. The Company has obtained a waiver to the redemption price to enable the Company to be able to redeem balances of the debt with the Company’s common stock. Because of this feature which allows the lender to redeem the entire outstanding balance at the Company’s option within twelve (12) months of initial issuance, the debt is classified as current. The Company also entered into a security agreement with IRT, pursuant to which IRT will receive a security interest in substantially all of the Company’s assets, except for intellectual property. The Company identified numerous embedded features to which bifurcation would be required. The Securities Purchase Agreement requires that the Company comply with certain non-financial covenants customary for financing of this nature which the Company complied with as of September 30, 2019.

 

The Company is eligible to elect the fair value option under ASC 815 and bypass analysis of potential embedded derivatives and further analysis of bifurcation of any such derivatives and has elected such option. Therefore, the debt will be recorded at fair value upon issuance and subsequently re-measured at each reporting period until maturity. Additionally, all issuance costs incurred in connection with a debt instrument that is measured at fair value pursuant to the election of the fair value option are expensed during the period the debt is acquired.

 

The Note carries total debt discount of $225,000 (comprising of original issue discount of $200,000 and $25,000 payment to IRT for transaction expenses) which was not recorded due to the election of the fair value option.

 

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During the nine-month period ended September 30, 2019, the Company made a cash redemption payment on the debt to IRT totaling $0.8 million. The Company also made redemption payments on the debt to IRT utilizing the Company’s common stock totaling 54,322 shares with a redemption fair value of $0.5 million, $0.5 million of which was applied to principal, resulting in a $0.3 million balance of remaining principal as of September 30, 2019.

 

On March 13, 2019, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) with an accredited investor (the “Investor”). Pursuant to the Securities Purchase Agreement, the Company issued to the Investor in a private placement (i) 47,429 shares of the Company’s common stock and (ii) an unsecured $1.25 million aggregate principal amount debenture (the “Debenture”). The maturity date of the Debenture was June 30, 2019. Prior to the maturity date, no interest accrued on the Debenture. Upon an event of default, including upon the non-repayment of the principal amount at the maturity date, interest shall accrue on the Debenture at an interest rate equal to the lesser of 18% per annum or the maximum rate permitted by applicable law until such principal amount is paid in full. The Debenture ranks junior to the Company’s existing secured indebtedness. The relative fair value of Company shares of common stock issued was approximately $487 thousand and was recorded as a debt discount, of which $69,516 was amortized as interest expense during the three months ended March 31, 2019. The Company repaid the outstanding debt balance in June 2019 and recorded the remaining unamortized debt discount of $417 thousand as non cash interest expense during the three months ended June 30, 2019.

 

6. Stockholder’s Equity and Derivative Liability - Warrants

 

Preferred Stock, Common Stock and Warrant Offering

 

During the period from August 5, 2016 to September 30, 2018, certain holders of the Company’s Series A Convertible Preferred Stock elected to convert approximately 1.2 million shares of Series A Convertible Preferred stock into 43,319 shares of the Company’s common stock.

 

Series E Convertible Preferred Stock Issuance

 

On June 18, 2019, the Company filed a Certificate of Designation of Preferences, Rights and Limitations of Series E Convertible Preferred Stock (the “Certificate of Designation”) with the Delaware Secretary of State creating a new series of authorized preferred stock, par value $0.0001 per share, designated as the “Series E Convertible Preferred Stock” (the “Series E Preferred Stock”). The number of shares initially constituting the Series E Preferred Stock was set at 10,570 shares.

 

On June 18, 2019 the Company announced the pricing of a public offering with total gross proceeds of $15.6 million before deducting placement agent fees and other offering expenses payable by the Company (the “Offering”) of approximately $1.6 million inclusive of $0.3 million placement agent warrants. The gross proceeds of $15.6 million comprised of proceeds from issuance of common stock of $5 million and Series E preferred stock of $10.6 million. The Company incurred total offering cost of $1.4 million, excluding $0.3 million of the placement agent warrants, of which $0.4 million was allocated to the common stock issuance, $0.5 million allocated to the issuance of Series E preferred stock and $0.5 million allocated to the common stock warrants. The Offering closed on June 20, 2019. The securities offered by the Company consisted of (i) Class A Units each consisting of one share of Common Stock and one Warrant to purchase one share of Common Stock at a combined price of $6.00 per Class A Unit, and (ii) Class B Units each consisting of one share of Series E Preferred Stock, with a stated value of $1,000 per share, and convertible into approximately 167 shares of Common Stock per share of Series E Preferred Stock, and Warrants to purchase 167 shares of Common Stock, at a combined price of $1,000 per Class B Unit. The aggregate number of shares of Common Stock to be issued pursuant to the Class A Units and issuable upon conversion of all the Series E Preferred Stock is 2,600,000. The aggregate number of Warrants issued in the offering was 2,600,000. The Warrants have an exercise price of $6.00, are exercisable upon issuance and expire five years from the date of issuance.

 

The Company determined that the Series E Convertible Preferred stock should not be classified as temporary equity due to the lack of senior liquidation preferences and is not redeemable on a fixed or determinable date.

 

Conversion.    Each share of Series E Preferred is convertible by the holder at any time, into the number of shares of our common stock determined by dividing the $1,000 stated value per share of the Series E Preferred by $6.00 per share. In addition, the conversion price per share is subject to adjustment for stock dividends, distributions, subdivisions, combinations or reclassifications. Subject to limited exceptions, a holder of the Series E Preferred will not have the right to convert any portion of the Series E Preferred to the extent that, after giving effect to the conversion, the holder, together with the Company’s affiliates, would beneficially own in excess of 4.99% (or, at the election of the purchaser prior to the date of issuance, 9.99%) of the number of shares of our common stock outstanding immediately after giving effect to conversion.

 

Fundamental Transactions.    In the event the Company effect certain mergers, consolidations, sales of substantially all of our assets, tender or exchange offers, reclassifications or share exchanges in which our common stock is effectively converted into or exchanged for other securities, cash or property, the Company consummate a business combination in which another person acquires 50% of the outstanding shares of our common stock, or any person or group becomes the beneficial owner of 50% of the aggregate

 

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