PLx Pharma Winddown Corp. - Quarter Report: 2020 September (Form 10-Q)

 

Table of Contents

 

UNITED STATES SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549

 

FORM 10-Q

 

(Mark one)

 

☒	Quarterly Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934

 

For the Quarterly Period Ended September 30, 2020

 

Or 

 

☐	Transition Report Under Section 13 or 15(d) of the Securities Exchange Act of 1934 Commission File Number 001-36351

 

Commission File Number 001-36351

 

PLx Pharma Inc.

(Exact name of registrant as specified in its charter)

 

Delaware		46-4995704
State or other jurisdiction of incorporation or organization		(I.R.S. Employer Identification No.)
9 Fishers Lane, Suite E Sparta, NJ		07871
(Address of principal executive offices)		(Zip Code)

 

Registrant’s telephone number, including area code (973) 409-6541 

 

---

 

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

          

Common Stock, $0.001 par value	PLXP	The NASDAQ Capital Market
(Title of each class)	(Trading Symbol)	(Name of each exchange on which registered)

 

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

 

Indicate by check mark whether the registrant has submitted electronically 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     ☐ No

 

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

 

Large accelerated filer ☐	Accelerated filer ☐
Non-accelerated filer ☒	Smaller reporting company ☒
Emerging growth company ☐

 

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. ☐

 

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

 

As of November 11, 2020, there were 9,156,260 shares of common stock, $0.001 par value, issued and outstanding.

 

PLx Pharma Inc.

 

Table of Contents

 

			Page #
PART I -		FINANCIAL INFORMATION	5
	Item 1.	Unaudited Consolidated Financial Statements	5
		Unaudited Consolidated Balance Sheets as of September 30, 2020 and December 31, 2019	5
		Unaudited Consolidated Statements of Operations for the Three and Nine Months Ended September 30, 2020 and 2019	6
		Unaudited Consolidated Statements of Changes in Temporary Equity and Stockholders’ Equity (Deficit) for the Three and Nine Months Ended September 30, 2020 and 2019	7
		Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended September 30, 2020 and 2019	8
		Notes to Unaudited Consolidated Financial Statements	9
	Item 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	19
	Item 3.	Quantitative and Qualitative Disclosures about Market Risk	24
	Item 4.	Controls and Procedures	24
PART II -		OTHER INFORMATION	25
	Item 1.	Legal Proceedings	25
	Item1A.	Risk Factors	25
	Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds	25
	Item 3.	Defaults Upon Senior Securities	25
	Item 4.	Mine Safety Disclosure	25
	Item 5.	Other Information	25
	Item 6.	Exhibits	26
		Signatures	27
		Certificates

 

 

 

		September 30, 2020				December 31, 2019
ASSETS
CURRENT ASSETS
Cash and cash equivalents		$	9,086,525			$	14,001,304
Accounts receivable			-				18,683
Inventory, net			143,380				-
Prepaid expenses and other current assets			387,801				263,268
TOTAL CURRENT ASSETS			9,617,706				14,283,255
NON-CURRENT ASSETS
Property and equipment, net			1,252,434				1,466,646
Right of use assets			402,640				618,158
Goodwill			2,061,022				2,061,022
Security deposit			17,035				73,665
TOTAL ASSETS		$	13,350,837			$	18,502,746
LIABILITIES, SERIES A AND SERIES B CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)
CURRENT LIABILITIES
Accounts payable and accrued liabilities		$	612,367			$	928,921
Accrued bonuses			718,092				1,166,821
Accrued interest			589,840				34,964
Current portion of term loan, net of discount and fees			1,548,865				3,658,121
Other current liabilities			342,175				304,603
TOTAL CURRENT LIABILITIES			3,811,339				6,093,430
NON-CURRENT LIABILITIES
Accrued interest, net of current portion			-				501,826
Term loan, net of discount, fees and current portion			-				622,265
Warrant liability			5,442,717				8,247,679
Accrued dividends			2,285,920				1,058,498
Other liabilities			146,424				409,431
TOTAL LIABILITIES			11,686,400				16,933,129
Series A convertible preferred stock: $0.001 par value; liquidation value of $17,042,322; 45,000 shares authorized, 15,000 issued and outstanding			13,661,578				13,661,578
Series B convertible preferred stock: $0.001 par value; liquidation value of $8,243,598; 25,000 shares authorized, 8,000 and 0 issued and outstanding			7,723,312				-
Commitments and contingencies
STOCKHOLDERS' EQUITY (DEFICIT)
Preferred stock; $0.001 par value; 930,000 shares authorized; none issued and outstanding			-				-
Common stock; $0.001 par value; 100,000,000 shares authorized; 9,156,260 shares issued and outstanding			9,156				9,156
Additional paid-in capital			74,437,924				74,837,046
Accumulated deficit			(94,167,533	)			(86,938,163	)
TOTAL STOCKHOLDERS' EQUITY (DEFICIT)			(19,720,453	)			(12,091,961	)
TOTAL LIABILITIES, SERIES A AND SERIES B CONVERTIBLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY (DEFICIT)		$	13,350,837			$	18,502,746

 

		Three Months Ended September 30,								Nine Months Ended September 30,
		2020				2019				2020				2019
REVENUES:
Federal grant		$	-			$	41,106			$	30,430			$	541,571
TOTAL REVENUES			-				41,106				30,430				541,571
OPERATING EXPENSES:
Research and development			1,207,302				1,214,029				3,116,097				3,805,617
General and administrative			1,981,037				2,503,314				6,681,452				7,180,674
TOTAL OPERATING EXPENSES			3,188,339				3,717,343				9,797,549				10,986,291
OPERATING LOSS			(3,188,339	)			(3,676,237	)			(9,767,119	)			(10,444,720	)
OTHER INCOME (EXPENSE):
Interest and other expense, net			(72,705	)			(118,432	)			(267,213	)			(476,084	)
Change in fair value of warrant liability			134,552				5,498,391				2,804,962				(7,581,521	)
TOTAL OTHER INCOME (EXPENSE)			61,847				5,379,959				2,537,749				(8,057,605	)
(LOSS) INCOME BEFORE INCOME TAXES			(3,126,492	)			1,703,722				(7,229,370	)			(18,502,325	)
Income taxes			-				-				-				-
NET (LOSS) INCOME			(3,126,492	)			1,703,722				(7,229,370	)			(18,502,325	)
Preferred dividends and beneficial conversion feature			(499,797	)			(311,136	)			(1,227,422	)			(13,433,397	)
NET (LOSS) INCOME ATTRIBUTABLE TO COMMON STOCKHOLDERS		$	(3,626,289	)		$	1,392,586			$	(8,456,792	)		$	(31,935,722	)
Net (loss) income per common share - basic		$	(0.40	)		$	0.09			$	(0.92	)		$	(3.60	)
Net (loss) income per common share - diluted		$	(0.40	)		$	0.09			$	(0.92	)		$	(3.60	)
Weighted average shares of common shares - basic			9,156,260				8,921,345				9,156,260				8,860,168
Weighted average shares of common shares - diluted			9,156,260				8,936,255				9,156,260				8,860,168

 

		Temporary Equity																Permanent Equity
		Series A Convertible Preferred Stock								Series B Convertible Preferred Stock								Common stock								Additional paid-in				Accumulated				Total stockholders' equity
		Shares				Amount				Shares				Amount				Shares				Amount				capital				deficit				(deficit)
Balance at December 31, 2019			15,000			$	13,661,578				-				-				9,156,260			$	9,156			$	74,837,046			$	(86,938,163	)		$	(12,091,961	)
Stock-based compensation expense																											272,537								272,537
Series A Preferred - declared dividends																											(320,290	)							(320,290	)
Net income																															1,496,086				1,496,086
Balance at March 31, 2020			15,000			$	13,661,578				-			$	-				9,156,260			$	9,156			$	74,789,293			$	(85,442,077	)		$	(10,643,628	)
Stock-based compensation expense																											269,578								269,578
Issuance of Series B Preferred Stock, net of issuance costs											8,000			$	7,731,379																				-
Series A Preferred  - declared dividends																											(326,678	)							(326,678	)
Series B Preferred  - declared dividends																											(80,657	)							(80,657	)
Net loss																															(5,598,964	)			(5,598,964	)
Balance at June 30, 2020			15,000			$	13,661,578				8,000			$	7,731,379				9,156,260			$	9,156			$	74,651,536			$	(91,041,041	)		$	(16,380,349	)
Series B Preferred Stock issuance costs															(8,067	)
Stock-based compensation expense																											286,185								286,185
Series A Preferred - declared dividends																											(336,855	)							(336,855	)
Series B Preferred - declared dividends																											(162,942	)							(162,942	)
Net loss																															(3,126,492	)			(3,126,492	)
Balance at September 30, 2020			15,000			$	13,661,578				8,000			$	7,723,312				9,156,260			$	9,156			$	74,437,924			$	(94,167,533	)		$	(19,720,453	)
Balance at December 31, 2018			-			$	-												8,743,950			$	8,744			$	72,871,317			$	(66,435,768	)		$	6,444,293
Stock-based compensation expense																											66,232								66,232
Issuance of Series A Preferred Stock, net of issuance costs			15,000				13,661,578																												-
Series A Preferred - beneficial conversion feature at issuance																											12,692,308								12,692,308
Series A Preferred - conversion feature deemed dividend																											(12,692,308	)							(12,692,308	)
Common shares issued to vendor																			8,228				8				22,492								22,500
Series A Preferred - declared dividends																											(128,218	)							(128,218	)
Net loss																															(10,858,751	)			(10,858,751	)
Balance at March 31, 2019			15,000			$	13,661,578				-			$	-				8,752,178			$	8,752			$	72,831,823			$	(77,294,519	)		$	(4,453,944	)
Stock-based compensation expense																											276,505								276,505
Common shares issued to vendor																			4,218				4				22,496								22,500
Common shares issued for cash																			114,973				115				462,787								462,902
Series A Preferred - declared dividends																											(301,735	)							(301,735	)
Net loss																															(9,347,296	)			(9,347,296	)
Balance at June 30, 2019			15,000			$	13,661,578				-			$	-				8,871,369			$	8,871			$	73,291,876			$	(86,641,815	)		$	(13,341,068	)
Stock-based compensation expense																											260,577								260,577
Common shares issued to vendor																			1,155				1				(1	)							-
Common shares issued for cash																			250,466				251				1,478,834								1,479,085
Series A Preferred - declared dividends																											(311,136	)							(311,136	)
Net income																															1,703,722				1,703,722
Balance at September 30, 2019			15,000			$	13,661,578				-			$	-				9,122,990			$	9,123			$	74,720,150			$	(84,938,093	)		$	(10,208,820	)

 

		Nine months ended September 30,
		2020				2019
CASH FLOWS FROM OPERATING ACTIVITIES
Net loss		$	(7,229,370	)		$	(18,502,325	)
Adjustments to reconcile net loss to net cash used in operating activities:
Depreciation and amortization			98,062				126,692
Stock-based compensation			828,300				603,314
Amortization of right of use assets			215,518				12,538
Amortization of debt discounts and issuance costs			80,979				172,438
Change in fair value of warrant liability			(2,804,962	)			7,581,521
Loss on disposal of property and equipment			218,150				12,398
Changes in operating assets and liabilities
Accounts receivable			18,683				18,234
Inventory			(143,380	)			-
Prepaid expenses and other assets			(67,903	)			165,618
Accounts payable and accrued liabilities			(316,554	)			820,711
Accrued bonuses			(448,729	)			(141,263	)
Accrued interest			53,050				133,410
Other current and long-term liabilities			(225,435	)			(25,912	)
Net cash used in operating activities			(9,723,591	)			(9,022,626	)
CASH FLOWS FROM INVESTING ACTIVITIES
Purchases of property and equipment			(102,000	)			(145,661	)
Proceeds from sale of property and equipment			-				11,442
Net cash used in investing activities			(102,000	)			(134,219	)
CASH FLOWS FROM FINANCING ACTIVITIES
Net proceeds from issuance of Series A convertible preferred stock			-				13,661,578
Net proceeds from issuance of Series B convertible preferred stock			7,723,312				-
Net proceeds from issuance of common stock			-				1,941,987
Repayments of long-term debt			(2,812,500	)			(2,187,500	)
Net cash provided by financing activities			4,910,812				13,416,065
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS			(4,914,779	)			4,259,220
Cash and cash equivalents, beginning of period			14,001,304				14,250,267
Cash and cash equivalents, end of period		$	9,086,525			$	18,509,487
SUPPLEMENTAL INFORMATION
Cash paid during the period for:
Income taxes		$	-			$	-
Interest		$	189,948			$	486,902
NON-CASH INVESTING AND FINANCING TRANSACTIONS
Property and equipment included in accounts payable		$	-			$	2,847
Preferred stock beneficial conversion feature and dividends		$	1,227,422			$	13,433,397
Value of common shares issued to vendor for services		$	-			$	45,000

 

NOTE 1. BACKGROUND AND ORGANIZATION

 

Business Operations

PLx Pharma Inc., together with its subsidiary PLx Opco Inc., is a late-stage specialty pharmaceutical company focusing on commercializing two patent-protected lead products: VAZALORE™ 325 mg and VAZALORE™ 81 mg (referred to together as “VAZALORE”). VAZALORE 325 mg is approved by the U.S. Food and Drug Administration (“FDA”) for over-the-counter distribution and is the first ever liquid-filled aspirin capsule.  

 

 

NOTE 2. LIQUIDITY AND GOING CONCERN

 

The accompanying unaudited consolidated financial statements have been prepared assuming that the Company will continue as a going concern, which contemplates continuity of operations, realization of assets, and satisfaction of liabilities in the ordinary course of business. The propriety of using the going-concern basis is dependent upon, among other things, the achievement of future profitable operations, the ability to generate sufficient cash from operations and potential other funding sources, in addition to cash on-hand, to meet its obligations as they become due. The Company has not generated any revenue from sale of products and has incurred operating losses in each year since it commenced operations. As of September 30, 2020, the Company had an accumulated deficit of $94.2 million. The Company expects to continue to incur significant operating expenses and operating losses for the foreseeable future as the Company continues the development and commercialization of VAZALORE. These expenses include pre-commercial marketing spend which is discretionary and controllable as to the timing of the spending. As of September 30, 2020, the Company had working capital of $5.8 million, including cash and cash equivalents of $9.1 million. In March 2019, the Company entered into an equity distribution agreement (the "Equity Distribution Agreement") with JMP Securities, Inc. (“JMP”) to issue and sell shares of its common stock, having an aggregate offering price of up to $12.5 million, from time to time during the term of the Equity Distribution Agreement, through an “at-the-market” equity offering program at the Company’s sole discretion, under which JMP acts as its agent. At September 30, 2020, the Company had $10.2 million available under this "at-the-market" program. Based on the Company’s expected obligated cash requirements, the Company believes its cash on hand at September 30, 2020 combined with available funding under the "at-the-market" program and the latitude for the timing of spending of certain expenses is adequate to fund its obligations for at least twelve months from the date that these financial statements were issued and mitigate the substantial doubt consideration.

  

 

NOTE 3. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of Accounting and Principles of Consolidation

 

The accompanying interim consolidated financial statements are unaudited. These unaudited interim consolidated financial statements have been prepared in accordance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”) for interim financial information. Accordingly, they do not include all the information and footnotes required by U.S. Generally Accepted Accounting Principles (“GAAP”) for complete financial statements. The December 31, 2019 consolidated balance sheet included herein was derived from audited consolidated financial statements as of that date. Certain information and footnote disclosure normally included in financial statements prepared in accordance with GAAP have been omitted pursuant to instructions, rules, and regulations prescribed by the SEC. The Company believes that the disclosures provided herein are adequate to make the information presented not misleading when these unaudited interim consolidated financial statements are read in conjunction with the audited financial statements and notes previously filed in its Annual Report on Form 10-K for the year ended December 31, 2019. In the opinion of management, the unaudited interim consolidated financial statements reflect all the adjustments (consisting of normal recurring adjustments) necessary to state fairly the Company’s financial position as of September 30, 2020 and the results of operations for the three and nine months ended September 30, 2020 and 2019.

 

The accompanying consolidated financial statements include the accounts of the Company and its direct and indirect wholly-owned subsidiaries, PLx Opco Inc. and PLx Chile SpA. All significant intercompany balances and transactions have been eliminated within the consolidated financial statements. The Company dissolved its subsidiary, PLx Chile SpA, in March 2020. The Company operates in one business segment. 

 

 

Use of Estimates

 

The preparation of financial statements in conformity with 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 financial statements and the reported amount of revenues and expenses during the reporting period. In the accompanying consolidated financial statements, estimates are used for, but not limited to, determining the fair value of warrant liabilities and other financial instruments, stock-based compensation, contingent liabilities, the fair value and depreciable lives of long-lived tangible and intangible assets, and deferred taxes and the associated valuation allowance. Actual results could differ from those estimates.

 

Impact of COVID-19 Pandemic on Financial Statements

 

On March 11, 2020, the World Health Organization declared the outbreak of COVID-19 as a “pandemic”, or a worldwide spread of a new disease. Many countries imposed quarantines and restrictions on travel and mass gatherings to slow the spread of the virus and have closed non-essential businesses.

 

In response to COVID-19, the Company implemented remote working and has not experienced a disruption or delay in the development of VAZALORE. However, the extent to which COVID-19 may impact our business will depend on future developments, which are highly uncertain and cannot be predicted with confidence, such as the duration of the pandemic, travel restrictions and social distancing in the United States and other countries, business closures or business disruptions and the effectiveness of actions taken in the United States and other countries to contain and treat the pandemic.

 

The Company has not experienced any significant negative impact on the September 30, 2020 unaudited interim consolidated financial statements related to COVID-19.

 

Cash and Cash Equivalents

 

The Company considers all highly liquid investments with an original maturity of three months or less when purchased to be cash equivalents. The Company maintains cash and cash equivalents in a financial institution that at times exceeds federally insured limits. Management believes that the Company’s credit risk exposure is mitigated by the financial strength of the banking institution in which the deposits are held. As of September 30, 2020, the Company had cash and cash equivalents of $9.1 million in U.S. bank accounts which were not fully insured by the Federal Deposit Insurance Corporation.

 

Inventory

 

Inventory is stated at the lower of cost or net realizable value, using the average cost method. Inventory as of September 30, 2020 and December 31, 2019 was comprised of raw materials for the manufacture of VAZALORE. The Company regularly reviews inventory quantities on hand and assesses the need for an allowance for obsolescence. The allowance for obsolete inventory was $59,000 and $513,000 as of September 30, 2020 and December 31, 2019, respectively, resulting in net inventory of $143,400 and $0 as of September 30, 2020 and December 31, 2019, respectively.

 

Fair Value of Financial Instruments

 

All financial instruments classified as current assets and liabilities are carried at cost, which approximates fair value, because of the short-term maturities of those instruments. The fair value of the Term Loan (as defined in Note 4) approximates its face value of $1.6 million based on the Company’s current financial condition and on the variable nature of the Term Loan’s interest feature as compared to current rates. For disclosures concerning fair value measurements, see Note 7.

 

Leases

 

At the inception of a contract, the Company determines if the arrangement is, or contains, a lease. Right-of-use (“ROU”) assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent its obligation to make lease payments arising from the lease. Operating lease ROU assets and liabilities are recognized at commencement date based on the present value of lease payments over the lease term. Rent expense is recognized on a straight-line basis over the lease term.

 

The Company has made certain accounting policy elections whereby the Company (i) does not recognize ROU assets or lease liabilities for short-term leases (those with original terms of 12-months or less) and (ii) combines lease and non-lease elements of its operating leases. Operating lease ROU assets are included in right of use assets and operating lease liabilities are included in other current and non-current liabilities in the Company’s consolidated balance sheets. As of September 30, 2020, the Company did not have any finance leases.

 

 

Goodwill

 

Goodwill is not amortized but is subject to periodic review for impairment. Goodwill is reviewed annually, as of October 31, and whenever events or changes in circumstances indicate that the carrying amount of the goodwill might not be recoverable. Management performs its review of goodwill on its one reporting unit.

 

The Company performs a one-step test in its evaluation of the carrying value of goodwill, if qualitative factors determine it is necessary to complete a goodwill impairment test. In the evaluation, the fair value of the relevant reporting unit is determined and compared to the carrying value. If the fair value is greater than the carrying value, then the carrying value is deemed to be recoverable, and no further action is required. If the fair value estimate is less than the carrying value, goodwill is considered impaired for the amount by which the carrying amount exceeds the reporting unit’s fair value, and a charge is reported in impairment of goodwill in the Company’s consolidated statements of operations.

 

The Company has not identified any events or changes in circumstances that indicate that a potential impairment of goodwill occurred during the three and nine months ended September 30, 2020 and 2019.

 

Revenue Recognition

 

The Company analyzes contracts to determine the appropriate revenue recognition using the following steps: (i) identification of contracts with customers; (ii) identification of distinct performance obligations in the contract; (iii) determination of contract transaction price; (iv) allocation of contract transaction price to the performance obligations; and (v) determination of revenue recognition based on timing of satisfaction of the performance obligation. The Company recognizes revenues upon the satisfaction of its performance obligations (upon transfer of control of promised goods or services to customers) in an amount that reflects the consideration to which it expects to be entitled to in exchange for those goods or services. Deferred revenue results from cash receipts from or amounts billed to customers in advance of the transfer of control of the promised services to the customer and is recognized as performance obligations are satisfied. When sales commissions or other costs to obtain contracts with customers are considered incremental and recoverable, those costs are deferred and then amortized as selling and marketing expenses on a straight-line basis over an estimated period of benefit.

 

The Company’s sole revenue arrangement is a cost-reimbursable federal grant with the National Institutes of Health. This federal grant was completed in the second quarter of 2020. The Company recognizes revenue on this grant as grant-related expenses are incurred by the Company or its subcontractors. The Company recognized $0 and $41,106 of revenue under this arrangement during the three months ended September 30, 2020 and 2019, respectively. The Company recognized $30,430 and $541,571 of revenue under this arrangement during the nine months ended September 30, 2020 and 2019, respectively.

 

The Company has not incurred incremental costs to obtain contracts with customers or material costs to fulfill contracts with customers and did not have any contract assets or liabilities as of September 30, 2020 and December 31, 2019.

 

Research and Development Expenses

 

Costs incurred in connection with research and development activities are expensed as incurred. Research and development expenses consist of direct and indirect costs associated with specific projects, manufacturing activities, and include fees paid to various entities that perform research related services for the Company combined with reimbursable costs related to the federal grant with the National Institutes of Health.

 

Stock-Based Compensation

 

The Company recognizes expense in its consolidated statements of operations for the fair value of all stock-based compensation to key employees, nonemployee directors and advisors, generally in the form of stock options and stock awards. The Company uses the Black-Scholes option valuation model to estimate the fair value of stock options on the grant date. Compensation cost is amortized on a straight-line basis over the vesting period for each respective award. The Company accounts for forfeitures as they occur.

 

Income Taxes

 

Income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to temporary differences between financial statement carrying amounts of existing assets and liabilities and their respective tax basis. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is established when necessary to reduce deferred income tax assets to the amount expected to be realized. 

 

 

Tax benefits are initially recognized in the financial statements when it is more likely than not that the position will be sustained upon examination by the tax authorities. Such tax positions are initially, and subsequently, measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority, assuming full knowledge of the position and all relevant facts.

 

Income (Loss) Per Share

 

In periods of net loss, basic loss per share is computed by dividing net loss available to common stockholders by the weighted average number of shares of common stock outstanding during the period. The Company’s Series A convertible preferred stock (the “Series A Preferred Stock”) and the Series B convertible preferred stock (the “Series B Preferred Stock” and, together with the Series A Preferred Stock, collectively the “Preferred Stock”) contain non-forfeitable rights to dividends, and therefore are considered to be participating securities; in periods of net income, the calculation of basic earnings per share excludes from the numerator net income attributable to the Preferred Stock and excludes the impact of those shares from the denominator. 

 

For periods of net loss, diluted loss per share is calculated similarly to basic loss per share because the impact of all potential dilutive common shares is anti-dilutive. For periods of net income, diluted earnings per share is computed using the more dilutive of the “two class method” or the “treasury method.” Dilutive earnings per share under the “two class method” is calculated by dividing net income available to common stockholders as adjusted for the participating impacts of the Preferred Stock, by the weighted-average number of shares outstanding plus the dilutive impact of all other potential dilutive common shares, consisting primarily of common shares underlying common stock options and stock purchase warrants using the treasury stock method. Dilutive earnings per share under the “treasury method” is calculated by dividing net income available to common stockholders by the weighted- average number of shares outstanding plus the dilutive impact of all potential dilutive common shares, consisting primarily of common shares underlying common stock options and stock purchase warrants using the treasury stock method, and convertible preferred stock using the if-converted method. For the three months ended September 30, 2019, the “two class method” was more dilutive.

 

The Company has calculated basic and diluted earnings per share for the three months ended September 30, 2019 as follows:

 

 

Due to net losses, none of the potential dilutive securities had a dilutive impact during the nine months ended September 30, 2020 and 2019 or for the three months ended September 30, 2020.

 

The number of anti-dilutive shares for the three months ended September 30, 2020 and 2019 consisting of common shares underlying (i) common stock options, (ii) stock purchase warrants, and (iii) convertible preferred stock, which have been excluded from the computation of diluted income per share, totaled 13,957,604 and 10,306,370 shares, respectively.

 

The number of anti-dilutive shares for the nine months ended September 30, 2020 and 2019 consisting of common shares underlying (i) common stock options, (ii) stock purchase warrants, and (iii) convertible preferred stock, which have been excluded from the computation of diluted income per share, totaled 13,957,604 and 10,503,537 shares, respectively.

 

 

Recent Accounting Standards

 

In August 2020, the Financial Accounting Standards Board issued Accounting Standards Update 2020-06 Debt – Debt with Conversion and Other Options (Subtopic 470-20) and Derivatives and Hedging – Contracts in Entity’s Own Equity (subtopic 815-40) that provides new guidance on the accounting for convertible debt instruments and contracts in an entity’s own equity. The guidance simplifies the accounting for convertible instruments by reducing the various accounting models that can require the instrument to be separated into a debt component and equity component or derivative component. Additionally, the guidance eliminated certain settlement conditions previously required to be able to classify a derivative in equity. The new guidance is effective on a modified or full retrospective basis for fiscal years beginning after December 15, 2023, including interim periods with those fiscal years. The Company will evaluate the impact on the consolidated financial statements upon adoption.

 

The Company does not believe that any recently issued effective standards, or standards issued but not yet effective, if adopted, would have a material effect on the accompanying consolidated financial statements.

 

Subsequent Events

 

The Company’s management reviewed all material events through the date the consolidated financial statements were issued for subsequent event disclosure consideration.

 

  

 

NOTE 4. DEBT

 

Term Loan Facility

 

On August 9, 2017, the Company entered into a Loan and Security Agreement with Silicon Valley Bank (“SVB”) that provides for a Term Loan Facility (the “Term Loan Facility” and all amounts borrowed thereunder, the “Term Loan”). Under the Term Loan Facility, the Company borrowed an initial amount of $7.5 million, and had the right to borrow an additional $7.5 million on or before December 31, 2018; this right expired unexercised.

 

The Term Loan Facility carries interest at a floating rate of 4.0% above the prime rate per annum (for a total interest rate of 7.25% at September 30, 2020), with interest payable monthly. All outstanding principal and accrued and unpaid interest under the Term Loan will be due and payable on February 9, 2021.

 

The Company may elect to prepay the Term Loan Facility prior to the maturity date subject to defined prepayment fees. The Term Loan Facility includes a final payment fee equal to 8.0% of the original principal amount, which is being accrued using the effective interest method over the term.

 

The Term Loan Facility is collateralized by substantially all of the Company’s assets, contains certain restrictive covenants, and contains customary events of default. Upon the occurrence of an event of default, all amounts owed by the Company would begin to bear interest at a rate that is 5.00% above the rate effective immediately before the event of default and may be declared immediately due and payable by SVB.

 

In connection with its entry into the Term Loan Facility, the Company issued to SVB and one of its affiliates stock purchase warrants to purchase an aggregate of 58,502 shares of the Company’s common stock at an exercise price of $6.41 per share. The warrants are immediately exercisable, have a 10-year term, contain a cashless exercise provision, and are classified in equity.

 

During the nine months ended September 30, 2020 and 2019, the Company made principal Term Loan payments of $2.8 million and $2.2 million, respectively.  As of September 30, 2020, and December 31, 2019, $1.6 million and $4.4 million of the Term Loan was outstanding, respectively, and was presented in the accompanying consolidated balance sheets net of current unamortized discounts and issuance costs of $13,635 and $91,879, respectively, and long-term unamortized discounts and issuance cost of $0 and $2,735, respectively. Total interest expense recognized for the three months ended September 30, 2020 and 2019 was $73,477 and $230,053, respectively. Total interest expense recognized for the nine months ended September 30, 2020 and 2019 was $323,976 and $792,750, respectively.

                                                                         

 

 

NOTE 5. STOCKHOLDERS’ EQUITY

 

Common Stock

 

Equity Distribution Agreement

 

In March 2019, the Company entered into the Equity Distribution Agreement with JMP. Pursuant to the terms of the Equity Distribution Agreement, the Company may sell from time to time, at its option, shares of the Company’s common stock, through JMP, as sales agent, with an aggregate sales price of up to $12.5 million. Any sales of shares pursuant to the Equity Distribution Agreement will be made under the Company’s effective “shelf” registration statement, which allows it to sell debt or equity securities in one or more offerings up to a total public offering price of $75 million. In 2019, the Company issued 398,709 shares under the Equity Distribution Agreement generating gross proceeds of $2.3 million and net proceeds of $2.1 million after deducting legal and commission costs. There have been no issuances in 2020 under the Equity Distribution Agreement.  As of September 30, 2020, $10.2 million remained available under the "at-the-market" program.

 

Convertible Preferred Stock

 

Series A Preferred Stock

 

In December 2018, the Company entered into a purchase agreement with certain accredited investors for the private placement of $15.0 million of Series A Preferred Stock pending stockholders' approval, which approval was subsequently obtained on February 19, 2019. Accordingly, the Company completed the private placement on February 20, 2019, raising $15.0 million through the issuance of 15,000 shares of Series A Preferred Stock. The Series A Preferred Stock was issued at $1,000 per share and is convertible into common shares at a conversion price of $2.60 per share, subject to certain adjustments. Holders of the Series A Preferred Stock are entitled to an initial dividend rate of 8.0% per annum, which will stop accruing on the date of the FDA’s approval of the supplemental NDA of VAZALORE 325 mg and VAZALORE 81mg. The dividends are compounded quarterly and payable in cash or shares of Series A Preferred Stock at the Company’s option. The Series A Preferred Stock carries a liquidation preference equal to its stated value of $1,000 plus accrued and unpaid dividends.

 

The Series A Preferred Stock is classified as temporary equity due to the presence of certain contingent cash redemption features. As a result of the excess value of the Company’s common stock on the issuance date over the conversion price of the Series A Preferred Stock, a beneficial conversion feature in the amount of $12.7 million was bifurcated from the host instrument and accounted for separately as an increase in additional paid-in capital in equity, and resulted in a deemed dividend during the three months ended March 31, 2019 of $12.7 million which was accounted for as a decrease in additional paid-in capital in equity due to the Company’s accumulated deficit position. At September 30, 2020, the carrying value of the temporary equity was $13.7 million, net of $1.3 million in offering costs.

 

The Company recognized $336,855 (or $0.04 per share) and $983,823 (or $0.11 per share) of total dividends on the Series A Preferred Stock during the three and nine months ended September 30, 2020, respectively. The Company recognized $311,136 (or $0.03 per share) and $741,089 (or $0.08 per share) of total dividends on the Series A Preferred Stock during the three and nine months ended September 30, 2019, respectively.

 

Series B Preferred Stock

 

In March 2020, the Company entered into a purchase agreement with certain accredited investors for the private placement of $8.0 million of Series B Preferred Stock pending stockholders' approval, which approval was subsequently obtained on May 15, 2020. Accordingly, the Company completed the private placement on May 15, 2020, raising $8.0 million through the issuance of 8,000 shares of Series B Preferred Stock. The Series B Preferred Stock was issued at $1,000 per share and is convertible into common shares at a conversion price of $3.10 per share, subject to certain adjustments. Holders of the Series B Preferred Stock are entitled to an initial dividend rate of 8.0% per annum, which will stop accruing on the date of the FDA’s approval of the supplemental NDA of VAZALORE 325 mg and VAZALORE 81mg. The dividends are compounded quarterly and payable in cash or shares of Series B Preferred Stock at the Company’s option. The Series B Preferred Stock carries a liquidation preference equal to its stated value of $1,000 plus accrued and unpaid dividends.

 

The Series B Preferred Stock is classified as temporary equity due to the presence of certain contingent cash redemption features. At September 30, 2020, the carrying value of the temporary equity was $7.7 million, net of $0.3 million in offering costs.

 

The Company recognized $162,942 (or $0.02 per share) and $243,599 (or $0.03 per share) of total dividends on the Series B Preferred Stock during the three and nine months ended September 30, 2020.

                                                                        

 

Warrants

 

In June 2017, the Company issued stock purchase warrants to purchase 2,646,091 shares of common stock at an exercise price of $7.50 per share. The warrants, exercisable beginning six months and one day after issuance, have a 10-year term and are liability classified due the holders’ right to require the Company to repurchase the warrants for cash upon certain deferred fundamental transactions. See Note 7 for the fair value measurement of the warrant liability.  

 

In connection with the entry into the Term Loan Facility, the Company issued to SVB and one of its affiliates stock purchase warrants to purchase an aggregate of 58,502 shares of the Company’s common stock at an exercise price of $6.41 per share (see Note 4). These warrants are immediately exercisable, have a 10-year term, contain a cashless exercise provision, and are classified in equity.

 

Stock Options

 

Following is a summary of stock option activities for the nine months ended September 30, 2020:

 

 

On September 13, 2018, the Company’s stockholders approved the 2018 Incentive Plan (the “2018 Plan”). The 2018 Plan provides that the Company may grant equity interests to employees, consultants and members of the Board of Directors in the form of incentive and nonqualified stock options, restricted stock and restricted stock units, stock appreciation rights and various other forms of stock-based awards. There are 1,250,000 shares authorized to be issued pursuant to the 2018 Plan, of which 147,650 shares are available for issuance under the 2018 Plan.

 

The Company granted 571,000 options during the nine months ended September 30, 2020 with an aggregate fair value of $0.9 million calculated using the Black-Scholes model on the grant date. Variables used in the Black-Scholes model include: (1) discount rate of 0.66%, (2) expected life of 6.0 years, (3) expected volatility of 82%, and (4) zero expected dividends.

 

As of September 30, 2020, the Company had $1.9 million in unamortized expense related to unvested options which is expected to be expensed over a weighted average of 1.8 years.

 

During the three months ended September 30, 2020 and 2019, the Company recorded $286,185 and $260,577, respectively, in total stock-based compensation expense related to the stock options and stock bonuses. During the nine months ended September 30, 2020 and 2019, the Company recorded $828,300 and $603,314, respectively, in total stock-based compensation expense related to the stock options and stock bonuses. Substantially all stock-based compensation expense is classified as general and administrative expenses in the accompanying unaudited consolidated statements of operations.

 

 

NOTE 6. COMMITMENTS AND CONTINGENCIES

 

Lease Agreements

 

The Company presently leases office space under operating lease agreements, expiring on July 31, 2021, October 3, 2021, and June 30, 2024. The office leases require the Company to pay for its portion of taxes, maintenance, and insurance. Rental expense under these agreements was $87,851 and $105,072 for the three months ended September 30, 2020 and 2019, respectively. Rental expense under these agreements was $263,054 and $289,553 for the nine months ended September 30, 2020 and 2019, respectively.

 

 

All of the Company’s existing leases as of September 30, 2020 are classified as operating leases and have a weighted average remaining lease term of 2.0 years. Certain of the Company’s existing leases have fair value renewal options, none of which the Company considers certain of being exercised or included in the minimum lease term. The discount rate used in the calculation of the Company’s lease liability is 9.5%. In addition, the Company is the lessor for office space in New York that it sublets to a tenant; the sublease expires in 2021.

 

 

A maturity analysis of the Company’s operating leases follows:

 

 

Patent License Agreement with the Board of Regents of the University of Texas

 

On January 8, 2003, the Company entered into a patent license agreement with the Board of Regents of The University of Texas System (the “University”), under which it acquired an exclusive license for several patents and patent applications both inside and outside of the United States relating to gastrointestinal safer formulations of NSAIDs. Additionally, the Company acquired worldwide rights to commercialize licensed products which allow for the Company to grant sublicenses subject to royalty payments.

 

Under terms of the agreement, the Company is responsible for conducting clinical trials involving investigational use of a licensed product for the determination of metabolic and pharmacologic actions in humans, the side effects associated with increasing doses, examination of suspected indications, determination of the potential short-term side effects in humans and for establishing the safety, efficacy, labeled indications and risk-benefit profile in humans. The patent license agreement also requires the Company to provide reimbursement for all expenses incurred by The University of Texas Health Science Center at Houston for filing, prosecuting, enforcing and maintaining patent rights and requires an annual nonrefundable license management fee. In addition, the Company is obligated to pay certain milestone payments in future years relating to royalties resulting from the approval to sell licensed products and the resulting sales of such licensed products. The Company recognized total expenses of $10,660 and $10,000 related to the University in the three months ended September 30, 2020 and 2019, respectively. The Company recognized total expenses of $237,300 and $260,000 related to the University in the nine months ended September 30, 2020 and 2019, respectively.

 

 

NOTE 7. FAIR VALUE MEASUREMENTS

 

Fair value is defined as the price that would be received in the sale of an asset or that would be paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company has categorized all investments recorded at fair value based upon the level of judgment associated with the inputs used to measure their fair value.

 

Hierarchical levels, directly related to the amount of subjectivity associated with the inputs to fair valuation of these assets and liabilities, are as follows:

 

	●	Level 1: Quoted prices in active markets for identical assets or liabilities that the organization has the ability to access at the reporting date.
	●	Level 2: Inputs other than quoted prices included in Level 1, which are either observable or that can be derived from or corroborated by observable data as of the reporting date.
	●	Level 3: Inputs include those that are significant to the fair value of the asset or liability and are generally less observable from objective resources and reflect the reporting entity’s subjective determinations regarding the assumptions market participants would use in pricing the asset or liability.

 

 

Financial assets and liabilities measured at fair value on a recurring basis

 

The Company evaluates financial assets and liabilities subject to fair value measurements on a recurring basis to determine the appropriate level at which to classify them each reporting period. This determination requires the Company to make subjective judgments as to the significance of inputs used in determining fair value and where such inputs lie within the hierarchy.

 

The stock purchase warrants issued in June 2017 contain certain cash settlement features and, accordingly, the Company considered them to be liabilities and accounted for them at fair value using Level 3 inputs. The Company determined the fair value of this warrant liability using a binomial asset pricing model that consisted of a conditional probability weighted expected return method that values the Company’s equity securities assuming various possible future outcomes to estimate the allocation of value within one or more of the scenarios. Using this method, unobservable inputs included the Company’s equity value, expected timing of possible outcomes, risk free interest rates and stock price volatility. Variables used at September 30, 2020 include: (1) the Company stock price of $3.23, (2) the risk-free rate of 0.41%, (3) remaining expected life of 6.7 years, and (4) expected volatility of 88%.

 

The Series A Preferred Stock and the Series B Preferred Stock both contain a contingent put option and, accordingly, the Company considered them to be liabilities and accounted for them at fair value using Level 3 inputs. The Company determined the fair value of these liabilities was de minimis at issuance and as of September 30, 2020 due to the remote possibly of its occurrence, a Level 3 unobservable input.

 

The following table sets forth a summary of changes in the fair value of Level 3 liabilities measured at fair value on a recurring basis for the three months ended September 30, 2020:

 

 

The following table sets forth a summary of changes in the fair value of Level 3 liabilities measured at fair value on a recurring basis for the nine months ended September 30, 2020:

 

 

The following table identifies the carrying amounts of such liabilities at September 30, 2020 and December 31, 2019:

 

 

 

Financial assets and liabilities carried at fair value on a non-recurring basis

 

The Company does not have any financial assets or liabilities measured at fair value on a non-recurring basis.

 

 

Non-financial assets and liabilities carried at fair value on a recurring basis

 

The Company does not have any non-financial assets or liabilities measured at fair value on a recurring basis.

 

Non-financial assets and liabilities carried at fair value on a non-recurring basis

 

The Company measures its long-lived assets, including property and equipment and goodwill, at fair value on a non-recurring basis when they are deemed to be impaired. No such impairment was recognized in the three and nine months ended September 30, 2020 and 2019.