10-Q 1 a14-18518_110q.htm 10-Q

Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 


 

FORM 10-Q

 


 

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

 

For the Quarterly Period Ended June 30, 2014

 

OR

 

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 No.:  000-53072

 


 

EMMAUS LIFE SCIENCES, INC.

(Exact name of Registrant as specified in its charter)

 


 

Delaware

 

41-2254389

(State or other jurisdiction of incorporation or organization)

 

(I.R.S. Employer Identification No.)

 

20725 S. Western Avenue, Suite 136, Torrance, California 90501

(Address of principal executive offices) (Zip code)

 

(310) 214-0065

(Registrant’s telephone number, including area code)

 

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 and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted 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 and post 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” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer  o

 

Accelerated filer  o

 

 

 

Non-accelerated filer  o

(Do not check if a smaller reporting company)

 

Smaller reporting company   x

 

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

 

The registrant had 27,840,665 shares of common stock, par value $0.001 per share, outstanding as of August 8, 2014.

 

 

 



Table of Contents

 

EMMAUS LIFE SCIENCES, INC.

 

FORM 10-Q

 

For the Quarterly Period Ended June 30, 2014

 

INDEX

 

 

 

 

Page

Part I

Financial Information

 

 

 

 

 

 

Item 1.

Financial Statements

 

 

 

 

 

 

 

(a)

Condensed Consolidated Balance Sheets as of June 30, 2014 (Unaudited) and December 31, 2013

1

 

 

 

 

 

 

(b)

Condensed Consolidated Statements of Comprehensive Loss for the Three and Six Months Ended June 30, 2014 and 2013 (Unaudited)

2

 

 

 

 

 

 

(c)

Condensed Consolidated Statements of Changes in Stockholders’ Deficit for the Six Months Ended June 30, 2014 (Unaudited)

3

 

 

 

 

 

 

(d)

Condensed Consolidated Statements of Cash Flows for the Six Months Ended June 30, 2014 and 2013 (Unaudited)

4

 

 

 

 

 

 

(e)

Notes to Condensed Consolidated Financial Statements as of and for the Six Months Ended June 30, 2014 (Unaudited)

5

 

 

 

 

 

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

17

 

 

 

 

 

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

28

 

 

 

 

 

Item 4.

Controls and Procedures

28

 

 

 

 

Part II

Other Information

 

 

 

 

 

 

Item 1.

Legal Proceedings

30

 

 

 

 

 

Item 1A.

Risk Factors

30

 

 

 

 

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

30

 

 

 

 

 

Item 3.

Defaults Upon Senior Securities

30

 

 

 

 

 

Item 4.

Mine Safety Disclosures

30

 

 

 

 

 

Item 5.

Other Information

30

 

 

 

 

 

Item 6.

Exhibits

31

 

 

 

 

Signatures

 

 



Table of Contents

 

Item 1. Financial Statements

 

 EMMAUS LIFE SCIENCES, INC.

 

CONDENSED CONSOLIDATED BALANCE SHEETS

 

 

 

As of

 

 

 

June 30, 2014

 

December 31, 2013

 

 

 

(unaudited)

 

 

 

ASSETS

 

CURRENT ASSETS

 

 

 

 

 

Cash and cash equivalents

 

$

3,604,594

 

$

3,638,600

 

Accounts receivable

 

64,652

 

35,237

 

Inventories, net

 

259,338

 

239,009

 

Marketable securities

 

106,206

 

162,564

 

Prepaid expenses and other current assets

 

151,405

 

81,046

 

Total current assets

 

4,186,195

 

4,156,456

 

 

 

 

 

 

 

PROPERTY AND EQUIPMENT, Net

 

41,562

 

26,120

 

 

 

 

 

 

 

OTHER ASSETS

 

 

 

 

 

Marketable securities, pledged to creditor

 

448,235

 

686,090

 

Intangibles, net

 

1,000,000

 

1,107,143

 

Deposits

 

144,443

 

137,900

 

Total other assets

 

1,592,678

 

1,931,133

 

Total Assets

 

$

5,820,435

 

$

6,113,709

 

 

 

 

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY (DEFICIT)

 

CURRENT LIABILITIES

 

 

 

 

 

Accounts payable and accrued expenses

 

$

2,263,110

 

$

2,283,446

 

Due to related party

 

594,446

 

394,446

 

Dissenting stockholders payable

 

 

125,000

 

Other current liability

 

40,200

 

 

Notes payable, net

 

1,180,000

 

1,765,070

 

Notes payable to related parties, net

 

825,562

 

925,641

 

Convertible notes payable, net

 

6,309,992

 

4,802,472

 

Convertible notes payable to related parties

 

560,706

 

560,706

 

Total current liabilities

 

11,774,016

 

10,856,781

 

 

 

 

 

 

 

LONG-TERM LIABILITIES

 

 

 

 

 

Liability classified warrants

 

9,678,000

 

5,928,000

 

Notes payable

 

833,335

 

200,000

 

Notes payable to related parties

 

133,333

 

 

Convertible notes payable, net

 

2,839,433

 

2,966,588

 

Total long-term liabilities

 

13,484,101

 

9,094,588

 

Total Liabilities

 

25,258,117

 

19,951,369

 

 

 

 

 

 

 

COMMITMENTS AND CONTINGENCIES
STOCKHOLDERS’ EQUITY (DEFICIT)

 

 

 

 

 

Preferred stock — par value $0.001 per share, 20,000,000 shares authorized, none issued and outstanding

 

 

 

Common stock — par value $0.001 per share, 100,000,000 shares authorized, 29,834,828 and 29,228,306 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively

 

29,835

 

29,228

 

Additional paid-in capital

 

44,482,067

 

35,669,291

 

Accumulated other comprehensive (loss) income

 

(32,205

)

262,683

 

Accumulated deficit

 

(63,917,379

)

(49,798,862

)

Total Stockholders’ Deficit

 

(19,437,682

)

(13,837,660

)

Total Liabilities & Stockholders’ Deficit

 

$

5,820,435

 

$

6,113,709

 

 

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

 

1



Table of Contents

 

EMMAUS LIFE SCIENCES, INC.

 

CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE LOSS

(UNAUDITED)

 

 

 

Three Months Ended June 30,

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

2014

 

2013

 

 

 

 

 

 

 

 

 

 

 

REVENUES, Net

 

$

107,404

 

$

91,208

 

$

192,094

 

$

180,768

 

 

 

 

 

 

 

 

 

 

 

COST OF GOODS SOLD

 

60,881

 

54,988

 

107,783

 

98,972

 

GROSS PROFIT

 

46,523

 

36,220

 

84,311

 

81,796

 

 

 

 

 

 

 

 

 

 

 

OPERATING EXPENSES

 

 

 

 

 

 

 

 

 

Research and development

 

596,349

 

696,008

 

1,201,389

 

1,311,261

 

Selling

 

122,883

 

129,335

 

248,814

 

256,688

 

General and administrative

 

3,267,379

 

2,519,148

 

6,253,293

 

4,831,403

 

 

 

3,986,611

 

3,344,491

 

7,703,496

 

6,399,352

 

 

 

 

 

 

 

 

 

 

 

LOSS FROM OPERATIONS

 

(3,940,088

)

(3,308,271

)

(7,619,185

)

(6,317,556

)

 

 

 

 

 

 

 

 

 

 

OTHER INCOME (EXPENSE)

 

 

 

 

 

 

 

 

 

Gain on derecognition of accounts payable

 

 

 

 

341,361

 

Change in fair value of liability classified warrants

 

643,256

 

 

(1,979,744

)

 

Warrant exercise inducement expense

 

(3,523,000

)

 

(3,523,000

)

 

Interest and other income (loss)

 

(4,761

)

5,081

 

(23,166

)

10,722

 

Interest expense

 

(553,561

)

(496,483

)

(970,922

)

(1,101,010

)

 

 

(3,438,066

)

(491,402

)

(6,496,832

)

(748,927

)

 

 

 

 

 

 

 

 

 

 

LOSS BEFORE INCOME TAXES

 

(7,378,154

)

(3,799,673

)

(14,116,017

)

(7,066,483

)

INCOME TAXES (BENEFIT)

 

 

(134,640

)

2,500

 

(399,252

)

NET LOSS

 

(7,378,154

)

(3,665,033

)

(14,118,517

)

(6,667,231

)

 

 

 

 

 

 

 

 

 

 

COMPONENTS OF OTHER COMPREHENSIVE (LOSS) INCOME

 

 

 

 

 

 

 

 

 

Unrealized holding gain (loss) on securities available-for-sale

 

29,615

 

213,987

 

(294,213

)

638,596

 

Unrealized foreign translation

 

(1,561

)

(24,613

)

(675

)

(26,432

)

COMPREHENSIVE LOSS

 

$

(7,350,100

)

$

(3,475,659

)

$

(14,413,405

)

$

(6,055,067

)

NET LOSS PER COMMON SHARE

 

$

(0.25

)

$

(0.14

)

$

(0.48

)

$

(0.27

)

WEIGHTED AVERAGE COMMON SHARES OUTSTANDING

 

29,368,691

 

25,391,949

 

29,298,886

 

25,141,376

 

 

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

 

2



Table of Contents

 

EMMAUS LIFE SCIENCES, INC.

 

CONDENSED CONSOLIDATED STATEMENT OF CHANGES IN STOCKHOLDERS’ EQUITY (DEFICIT)

FOR THE PERIOD FROM DECEMBER 31, 2013 TO JUNE 30, 2014

(UNAUDITED)

 

 

 

Common stock –par value
$0.001 per share,
100,000,000 shares authorized

 

Additional

 

Accumulated
Other

 

 

 

 

 

 

 

Shares

 

Common
Stock

 

Paid-in
Capital

 

Comprehensive
Income (Loss)

 

Accumulated
Deficit

 

Total

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Balance, December 31, 2013

 

29,228,306

 

$

29,228

 

$

35,669,291

 

$

262,683

 

$

(49,798,862

)

$

(13,837,660

)

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Beneficial conversion feature relating to convertible notes payable

 

 

 

465,926

 

 

 

465,926

 

Warrant issued in conjunction with convertible note

 

 

 

126,732

 

 

 

126,732

 

Proceeds from exercise of warrants

 

1,106,522

 

1,107

 

3,866,745

 

 

 

3,867,852

 

Excess value of liability classified warrants upon exercise

 

 

 

1,752,744

 

 

 

1,752,744

 

Common stock repurchased and cancelled

 

(500,000

)

(500

)

(377,000

)

 

 

(377,500

)

Share-based compensation

 

 

 

2,977,629

 

 

 

2,977,629

 

Unrealized loss on marketable securities, net of tax

 

 

 

 

(294,213

)

 

(294,213

)

Foreign currency translation effect

 

 

 

 

(675

)

 

(675

)

Net loss

 

 

 

 

 

(14,118,517

)

(14,118,517

)

Balance, June 30, 2014

 

29,834,828

 

$

29,835

 

$

44,482,067

 

$

(32,205

)

$

(63,917,379

)

$

(19,437,682

)

 

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

 

3



Table of Contents

 

EMMAUS LIFE SCIENCES, INC.

 

CONDENSED CONSOLIDATED STATEMENT OF CASH FLOWS

(UNAUDITED)

 

 

 

Six Months Ended June 30,

 

 

 

2014

 

2013

 

CASH FLOWS FROM OPERATING ACTIVITIES

 

 

 

 

 

Net loss

 

$

(14,118,517

)

$

(6,667,231

)

Adjustments to reconcile net loss to net cash flows used in operating activities

 

 

 

 

 

Depreciation and amortization

 

115,105

 

119,864

 

Interest expense accrued from discount of convertible note

 

384,523

 

580,064

 

Gain on derecognition of accounts payable

 

 

(341,361

)

Share-based compensation

 

2,977,629

 

2,247,268

 

Warrant exercise inducement expense

 

3,523,000

 

 

Change in fair value of liability classified warrants

 

1,979,744

 

 

Tax benefit recognized on unrealized gain on marketable securities available-for-sale

 

 

(401,802

)

Net changes in operating assets and liabilities

 

 

 

 

 

Accounts receivable

 

(29,219

)

34,036

 

Inventory

 

(17,001

)

32,436

 

Prepaid expenses and other current assets

 

(68,244

)

(21,771

)

Deposits

 

(6,324

)

94,640

 

Accounts payable and accrued expenses

 

(29,294

)

609,017

 

Due to related party

 

200,000

 

 

Other current liability

 

40,200

 

 

Net cash flows used in operating activities

 

(5,048,398

)

(3,714,840

)

 

 

 

 

 

 

CASH FLOWS FROM INVESTING ACTIVITIES

 

 

 

 

 

Purchases of property and equipment

 

(23,378

)

(1,202

)

Net cash flows used in investing activities

 

(23,378

)

(1,202

)

 

 

 

 

 

 

CASH FLOWS FROM FINANCING ACTIVITIES

 

 

 

 

 

Proceeds from notes payable issued

 

58,832

 

1,558,200

 

Proceeds from convertible notes payable issued

 

1,611,187

 

1,961,644

 

Due to dissenters

 

(125,000

)

(60,000

)

Repurchase of common stock

 

(377,500

)

 

Payments of notes payable

 

 

(522,236

)

Payments of convertible notes payable

 

 

(216,640

)

Proceeds from exercise of warrants

 

3,867,852

 

 

Proceeds from issuance of common stock

 

 

1,165,700

 

Net cash flows from financing activities

 

5,035,371

 

3,886,668

 

Effect of exchange rate changes on cash

 

2,399

 

(30,259

)

 

 

 

 

 

 

Net (decrease) increase in cash and cash equivalents

 

(34,006

)

140,367

 

Cash and cash equivalents, beginning of period

 

3,638,600

 

402,823

 

Cash and cash equivalents, end of period

 

$

3,604,594

 

$

543,190

 

 

 

 

 

 

 

SUPPLEMENTAL DISCLOSURES OF CASH FLOW ACTIVITIES

 

 

 

 

 

Interest paid

 

$

208,899

 

$

58,592

 

Income taxes paid

 

$

2,500

 

$

2,550

 

Non-cash financing activities:

 

 

 

 

 

Stock issued as a payment of professional fee

 

$

 

$

101,999

 

Conversion of notes payable to common stock

 

$

 

$

2,586,589

 

Conversion of accrued interest payable to common stock

 

$

 

$

6,311

 

 

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

 

4



Table of Contents

 

EMMAUS LIFE SCIENCES, INC.

 

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS

JUNE 30, 2014

(UNAUDITED)

 

NOTE 1 — DESCRIPTION OF BUSINESS

 

Organization — Emmaus Life Sciences, Inc. (the “Company” or “Emmaus”), which is engaged in the discovery, development, and commercialization of innovative treatments and therapies primarily for rare and orphan diseases, was incorporated in the state of Delaware on September 24, 2007. Pursuant to an Agreement and Plan of Merger, dated April 21, 2011 (the “Merger Agreement”), by and among the Company, AFH Merger Sub, Inc., a wholly-owned subsidiary of the Company (“AFH Merger Sub”), AFH Holding and Advisory, LLC (“AFH Advisory”), and Emmaus Medical, Inc. (“Emmaus Medical”), Emmaus Medical merged with and into AFH Merger Sub with Emmaus Medical continuing as the surviving entity (the “Merger”). Upon the closing of the Merger, the Company changed its name from “AFH Acquisition IV, Inc.” to “Emmaus Holdings, Inc.” and became the parent company of Emmaus Medical. The Company changed its name from “Emmaus Holdings, Inc.” to “Emmaus Life Sciences, Inc.” on September 14, 2011.

 

Emmaus Medical is a Delaware corporation originally incorporated on September 12, 2003. Emmaus Medical, LLC was organized on December 20, 2000. In October 2003, Emmaus Medical, LLC conducted a reorganization and merged with Emmaus Medical. As a result of the merger, Emmaus Medical acquired the exclusive patent rights for a treatment for sickle cell disease (“ SCD”).

 

In October 2010, the Company established Emmaus Medical Japan, Inc., a Japanese corporation (“EM Japan”) by paying 97% of the initial capital. EM Japan is engaged in the business of trading in nutritional supplements and other medical products and drugs. The results of EM Japan have been included in the consolidated financial statements of the Company since the date of formation. The aggregate formation cost was $52,500. Emmaus Medical acquired the additional 3% of the outstanding shares of EM Japan during the three months ended March 31, 2011 and is now the 100% owner of the outstanding share capital.

 

In November 2011, the Company formed Emmaus Medical Europe, Ltd. (“EM Europe”), a wholly-owned subsidiary of Emmaus Medical. EM Europe’s primary focus is expanding the business of Emmaus Medical in Europe.

 

Emmaus, its wholly-owned subsidiary, Emmaus Medical, and Emmaus Medical’s wholly-owned subsidiaries, Newfield Nutrition Corporation, EM Japan and EM Europe, are collectively referred to herein as the “Company.”

 

Nature of BusinessThe Company has undertaken the business of developing and commercializing cost-effective treatments and therapies for rare diseases. The Company’s primary business purpose is to commercialize its treatment for SCD.

 

To a lesser extent, the Company is also engaged in the marketing and sale of NutreStore®, which has received approval from the Food and Drug Administration (“FDA”), as a treatment for short bowel syndrome (“SBS”), in patients receiving specialized nutritional support when used in conjunction with a recombinant human growth hormone that is approved for this indication. The Company’s indirect wholly-owned subsidiary, Newfield Nutrition Corporation, sells L-glutamine as a nutritional supplement under the brand name AminoPure® through retail stores in multiple states and via importers and distributors in Japan, Taiwan and South Korea. The Company also owns a minority interest of less than 1% in CellSeed, Inc., a Japanese company listed on the Tokyo Stock Exchange, which is engaged in research and development of regenerative medicine products and the manufacture and sale of temperature-responsive cell culture equipment.

 

The Company also has certain rights to regenerative medicine products owned by CellSeed and is involved in research focused on providing innovative solutions for tissue-engineering through the development of novel cell harvest methods and 3-dimensional living tissue replacement products for “cell sheet therapy” and regenerative medicine and the commercialization of such products.

 

NOTE 2 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

 

Basis of presentation — The accompanying condensed consolidated financial statements are unaudited and have been prepared by the Company in accordance with accounting principles generally accepted in the United States (“GAAP”) as found in the Accounting Standards Codification (“ASC”) and Accounting Standards Update (“ASU”) of the Financial Accounting Standards Board (“FASB”). Certain information and footnote disclosures normally included in the Company’s annual financial statements have been condensed or omitted. These condensed consolidated financial statements, in the opinion of management, reflect all normal recurring adjustments necessary for a fair presentation of the Company’s financial position and results of operations for the interim periods ended June 30, 2014 and 2013.

 

The results of operations for the interim periods are not necessarily indicative of the results of operations to be expected for the full year. These interim financial statements should be read in conjunction with the audited financial statements as of and for the year ended December 31, 2013, and the notes thereto, which are included in the Company’s filings with the Securities and Exchange Commission (“SEC”).

 

5



Table of Contents

 

Immaterial Corrections of Prior Year Amounts — During the preparation of its consolidated financial statements for the year ended December 31, 2013, the Company determined that it had incorrectly recognized share-based compensation expense prior to the grant date for stock options awarded to certain employees and consultants. The Company has corrected this immaterial error in its accompanying 2013 quarterly financial statements. The impact of this correction resulted in a $0.1 million reduction of share-based compensation expense for the three month period ended June 30, 2013 and a $0.2 million reduction for the six months ended June 30, 2013.

 

In the quarter ended June 30, 2013, the Company incorrectly accounted for the May 2013 issuance of shares of its common stock to the Company’s CEO in exchange for the termination of a promissory note held by the CEO and accrued interest thereon. The remaining unamortized loan discount of $249,861 was originally recorded as interest expense. This has been corrected to report the remaining unamortized loan discount of $249,861 as a debt extinguishment loss between related entities which is recorded as a capital transaction.

 

In the quarter ended June 30, 2013, the Company incorrectly recorded the cancelation of 2,504,249 shares of its common stock held by AFH Advisory, Griffin Ventures, Ltd. (“Griffin”), and The Amir & Kathy Heshmatpour Family Foundation (the “Foundation”), and the cancelation of a payment obligation to AFH Advisory in the amount of $394,446. The cancelations had been ordered by the court in connection with a partial summary judgment in the Company’s favor in the ongoing litigation against AFH Advisory, as further described in Note 9—Related Party Transactions. While the partial summary judgment in favor of the Company led to the cancelation of 2,504,249 shares of the Company’s common stock by the Company’s transfer agent on June 28, 2013, the cancelation of such shares and payment obligation is subject to appeal until 30 days after the completion of final court proceedings. The Company has made an adjustment to the accompanying consolidated financial statements for the year ended December 31, 2013 to continue to present these shares as outstanding, and has restored $394,446 to the balance sheet as an amount due to related parties until the right of appeal has lapsed and all contingencies have been resolved.

 

The Company also determined that it had not recognized a tax benefit on the unrealized gain on marketable securities in other comprehensive income. The Company has corrected this immaterial error in its accompanying 2013 quarterly financial statements. The impact of this correction resulted in a $0.1 million adjustment to the tax benefit recognized on unrealized gain on marketable securities for the three month period ended June 30, 2013 and a $0.4 million adjustment for the six months ended June 30, 2013.

 

Going concern — The accompanying condensed consolidated financial statements have been prepared on the basis that the Company will continue as a going concern. The Company had losses for the six months ended June 30, 2014 totaling $14,118,517. In addition, the Company has a significant amount of notes payable and other obligations due within this year and is projecting that its operating losses and expected capital needs will exceed its existing cash balances and cash expected to be generated from operations for the foreseeable future, including the expected costs relating to the commercialization of the Company’s pharmaceutical grade L-glutamine treatment for SCD. In order to meet the Company’s expected obligations, management intends to raise additional funds through equity and debt financings and partnership agreements. However, there can be no assurance that the Company will be able to complete any additional equity or debt financings or enter into partnership agreements. Therefore, due to the uncertainty of the Company’s ability to meet its current operating and capital expenses, there is substantial doubt about the Company’s ability to continue as a going concern, as the continuation and expansion of its business is dependent upon obtaining further financing, successful and sufficient market acceptance of its products, and finally, achieving a profitable level of operations. The condensed consolidated financial statements do not include any adjustments that might result from the outcome of these uncertainties.

 

Principles of consolidation — The condensed consolidated financial statements include the accounts of the Company (and its wholly-owned subsidiary, Emmaus Medical, Inc., and Emmaus Medical’s wholly-owned subsidiaries, Newfield Nutrition Corporation, EM Japan and EM Europe). All significant intercompany transactions have been eliminated.

 

Estimates — Financial statements prepared in accordance with GAAP require management to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Among other things, management has estimated the useful lives of equipment and other assets, along with the variables used to calculate the valuation of stock options and warrants using the Black-Scholes-Merton option valuation model. Actual results could differ from those estimates.

 

In addition, the initial value of warrants issued by the Company in a private placement, as well as the fair value of additional warrants issued to replace the warrants exercised, and the change in fair value of the liability classified warrants were determined using a Binomial Monte-Carlo Cliquet (aka Ratchet) Option Pricing Model and were recorded as a liability classified warrants. The model is similar to traditional Black-Scholes-type option pricing models except that the exercise price resets at certain dates in the future.

 

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Table of Contents

 

Inventories — Inventories as of June 30, 2014 are valued on a first-in, first-out basis at the lower of cost or market value. Work-in-process inventories consist of raw material L-glutamine for the Company’s AminoPure and NutreStore products that has not yet been packaged and labeled for sale.

 

All of the raw material purchased during the six months ended June 30, 2014 were from one vendor and during 2013 were from two vendors.

 

Inventory by category

 

June 30, 2014

 

December 31, 2013

 

Raw material

 

$

38,950

 

$

20,700

 

Work-in-process

 

1,716

 

68,887

 

Finished goods

 

218,672

 

149,422

 

 

 

$

259,338

 

$

239,009

 

 

Advertising cost — Advertising costs are expensed as incurred. Advertising costs for the six months ended June 30, 2014 and 2013 were $132,475 and $100,308, respectively.

 

Comprehensive (loss) income — Comprehensive (loss) income includes net loss and other comprehensive (loss) income. The items of other comprehensive (loss) income for the Company are unrealized gains and losses on marketable securities classified as available-for-sale and foreign translation adjustments relating to its subsidiaries. When the Company realizes a gain or loss on securities available-for-sale for which an unrealized gain or loss was previously recognized, a corresponding reclassification adjustment is made to remove the unrealized gain or loss from accumulated other comprehensive income and reflect the realized gain or loss in current operations.

 

Marketable securities — Investment securities as of June 30, 2014 and December 31, 2013 are classified as available-for-sale. Available-for-sale securities are recorded at cost and any increases or decreases in fair market value are recorded as unrealized gain or loss, net of taxes in accumulated other comprehensive income. The Company monitors these investments for impairment and makes appropriate reductions in carrying values when necessary. CellSeed, Inc. securities are the only marketable security the Company currently carries on its books. The Company’s marketable securities consist of 48,550 shares of CellSeed stock which are part of 147,100 shares acquired in January 2009 for 100,028,000 Japanese Yen (equivalent to $1,109,819), at 680 Yen per share. CellSeed’s IPO (Tokyo Stock Exchange symbol 7776) was completed on March 16, 2010. As of June 30, 2014 and December 31, 2013, the closing price per share was 1,165 Yen and 1,840 Yen, respectively.

 

In July 2013, based on an increase in market value of CellSeed shares, Mitsubishi UFJ Capital III Limited Partnership (Mitsubishi) released to the Company 34,300 shares of CellSeed stock. This was part of the 73,550 shares of CellSeed stock held by Mitsubishi as collateral to secure a $500,000 convertible note issued to Mitsubishi which is due in 2016. The note is now secured by the remaining 39,250 shares of CellSeed stock held by Mitsubishi as collateral.

 

During the fourth quarter of 2013, the Company sold 25,000 of the shares released by Mitsubishi in open market transactions. As of June 30, 2014 and December 31, 2013, 9,300 shares of CellSeed stock are classified as a current asset, as they are available for sale by the Company. The remaining 39,250 shares of CellSeed stock are pledged to secure the Mitsubishi note and are classified as marketable securities, pledged to creditor.

 

Fair value measurements — The Company defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. The Company measures fair value under a framework that provides a fair value hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to unobservable inputs (Level 3 measurements). The three levels of the fair value hierarchy are described as follows:

 

Level 1: Inputs to the valuation methodology are unadjusted quoted prices for identical assets or liabilities in active markets that the Company has the ability to access.

 

Level 2: Inputs to the valuation methodology include:

 

·                  Quoted prices for similar assets or liabilities in active markets;

·                  Quoted prices for identical or similar assets or liabilities in inactive markets;

·                  Inputs other than quoted prices that are observable for the asset or liability;

·                  Inputs that are derived principally from or corroborated by observable market data by correlation or other means.

 

If the asset or liability has a specified (contractual) term, the Level 2 inputs must be observable for substantially the full term of the asset or liability.

 

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Table of Contents

 

Level 3: Inputs to the valuation methodology are unobservable and significant to the fair value measurement.

 

The asset’s or liability’s fair value measurement level within the fair value hierarchy is based on the lowest level of any input that is significant to the fair value measurement. Valuation techniques used need to maximize the use of observable inputs and minimize the use of unobservable inputs. The fair value assigned to marketable securities is determined by obtaining quoted prices on nationally recognized securities exchanges, and are classified as Level 1 investments at June 30, 2014. The fair value of the Company’s debt instruments is not materially different from their carrying values as presented. The fair value of the Company’s convertible debt instruments was determined based on Level 2 inputs. The carrying value of the debt was discounted based on allocating proceeds to other financial instruments within the arrangement as discussed in Note 6.

 

The Company issued stock purchase warrants in conjunction with its September 2013 private placement and the June 2014 warrant exercises and issuance (see Note 7) that are accounted for as liability classified warrants whose fair market value is determined using Level 3 inputs. These inputs include expected term and expected volatility.

 

The following table presents the activity for those items measured at fair value on a recurring basis using Level 3 inputs during the six months ended June 30, 2014 and the year ended December 31, 2013:

 

 

 

Liability Classified warrants –
Stock Purchase Warrants

 

 

 

June 30, 2014

 

December 31, 2013

 

Balance, beginning of period

 

$

5,928,000

 

$

 

Fair value at issuance date

 

3,523,000

 

6,860,000

 

To reduce the warrants exercised to intrinsic value

 

(1,770,256

)

 

To record settlement of liability associated with warrants exercised

 

(1,752,744

)

 

Change in fair value included in the statement of comprehensive loss

 

3,750,000

 

(932,000

)

Balance, end of period

 

$

9,678,000

 

$

5,928,000

 

 

The initial value of the liability classified warrants as of September 11, 2013 and the change in fair value of the liability classified warrants as of December 31, 2013, June 10, 2014 (the date of exercise and issuance) and June 30, 2014 were determined using a Binomial Monte-Carlo Cliquet (aka Ratchet) Option Pricing Model. The model is similar to traditional Black-Scholes-type option pricing models except that the exercise price resets at certain dates in the future. The values as of September 11, 2013, December 31, 2013 and June 30, 2014 were calculated based on the following assumptions:

 

 

 

June 30, 2014

 

June 10, 2014

 

December 31, 2013

 

Initial Value

 

Stock price

 

$

5.10

 

$

5.10

 

$

3.60

 

$

3.60

 

Risk-free interest rate

 

1.25

%

1.32

%

1.75

%

1.72

%

Expected volatility (peer group)

 

68.40

%

68.20

%

63.20

%

72.40

%

Expected life (in years)

 

4.20

 

4.26

 

4.70

 

5.00

 

Expected dividend yield

 

 

 

 

 

Number outstanding

 

3,020,501

 

3,020,501

 

3,020,501

 

3,020,501

 

Balance, end of period

 

$

9,678,000

 

$

9,714,000

 

$

5,928,000

 

$

6,860,000

 

 

Debt and Related Party Debt — The Company accounts for the proceeds from the issuance of convertible notes payable with detachable stock purchase warrants and embedded conversion features in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 470-20, Debt with Conversion and Other Options. Under FASB ASC 470-20, the proceeds from the issuance of a debt instrument with detachable stock purchase warrants shall be allocated to the two elements based on the relative fair values of the debt instrument without the warrants and of the warrants themselves at the time of issuance. The portion of the proceeds allocated to the warrants is accounted for as additional paid-in capital and the remaining proceeds are allocated to the debt instrument which resulted in a discount to debt which is amortized and charged as interest expense over the term of the note agreement. Additionally, pursuant to FASB ASC 470-20, the intrinsic value of the embedded conversion feature of the convertible notes payable is included in the discount to debt and amortized and charged to interest expense over the life of the note agreement. The following chart shows the effective interest rates on the original loan principal amount for loans originated in the respective periods that either had a beneficial conversion interest or an attached warrant:

 

8



Table of Contents

 

Type of Loan

 

Term of
Loan

 

Annual
Interest
Rate

 

Original
Loan
Principal
Amount

 

Conv.
Rate

 

Beneficial
Conversion
Discount
Amount

 

Warrants

 

Exercise
Price

 

Warrant
FMV
Discount
Amount

 

Effective
Interest Rate
Including
Discounts

 

2013 convertible notes payable

 

1~2 years

 

10

%

$

3,079,666

 

$3.30

 

$

396,801

 

50,000

 

 

$

116,831

 

19.1% ~ 61.6%

 

2014 convertible notes payable

 

6 mo~ 2 years

 

10

%

859,320

 

$3.05 ~ $3.30

 

465,926

 

50,000

 

$

3.50

 

$

126,732

 

28.0% ~ 100.4%

 

Total

 

 

 

 

 

$

3,938,986

 

 

 

$

862,727

 

100,000

 

 

 

$

243,563

 

 

 

 

Related party notes are disclosed as separate line items in the Company’s balance sheet presentation.

 

Net loss per share — In accordance with FASB ASC Topic 260, “Earnings per Share,” the basic loss per common share is computed by dividing net loss available to common stockholders by the weighted average number of common shares outstanding. Dilutive loss per share is computed similar to the basic loss per common share except that the denominator is increased to include the number of additional common shares that would have been outstanding if the potential common shares had been issued and if the additional common shares were dilutive. As of June 30, 2014 and 2013, there were 14,842,339 and 10,583,956 shares of potentially dilutive securities outstanding, respectively. As the Company reported a net loss, none of the potentially dilutive securities were included in the calculation of diluted loss per share since their effect would be anti-dilutive for all periods presented.

 

Recent accounting pronouncements — In May 2014, the FASB issued Accounting Standards Update (ASU) No. 2014-09, Revenue from Contracts with Customers. This amendment will eliminate transaction- and industry-specific revenue recognition guidance under current GAAP and replace it with a principle-based approach for determining revenue recognition. The core principle of the revenue recognition guidance is that an entity recognizes revenue to depict the transfer of promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods or services. To achieve that core principle, an entity should apply the following steps: (1) identify the contract(s) with a customer; (2) identify the performance obligations in the contract(s); (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract(s); and (5) recognize revenue when (or as) the entity satisfies a performance obligation. For public companies, these amendments are effective for annual reporting periods beginning after December 15, 2016, including interim periods within that reporting period (early adoption prohibited). The standard permits the use of either the retrospective or cumulative effect transition method. Currently, the Company is assessing the impact of adoption of the amendment on its financial statements and accompanying notes.

 

NOTE 3 — PROPERTY AND EQUIPMENT

 

Property and equipment consisted of the following at:

 

 

 

June 30, 2014

 

December 31, 2013

 

Equipment

 

$

134,828

 

$

128,343

 

Leasehold improvements

 

31,939

 

23,054

 

Furniture and fixtures

 

60,410

 

52,269

 

Sub total

 

227,177

 

203,666

 

Less: accumulated depreciation

 

(185,615

)

(177,546

)

Total

 

$

41,562

 

$

26,120

 

 

During the six months ended June 30, 2014 and 2013, depreciation expense was $8,069 and $12,721, respectively.

 

NOTE 4 — INTANGIBLE ASSETS

 

The Company is licensed to market and sell NutreStore L-glutamine powder for oral solution as a treatment for SBS.

 

In April 2011, the Company entered into the Research Agreement and the Individual Agreement with CellSeed and, in August 2011, entered into an addendum to the Research Agreement. Pursuant to the Individual Agreement, CellSeed granted the Company the exclusive right to manufacture, sell, market and distribute Cultured Autologous Oral Mucosal Epithelial Cell Sheet (“CAOMECS”) for the cornea in the United States and agreed to disclose to the Company its accumulated information package for the joint development of CAOMECS. Under the Individual Agreement, the Company agreed to pay CellSeed $1.5 million, which it paid in February 2012. The technology acquired under the Individual Agreement is being used to support an ongoing research and development project and management believes the technology has alternative future uses in other future development initiatives.

 

Pursuant to the Research Agreement, the Company and CellSeed formed a relationship regarding the future research and development of cell sheet engineering regenerative medicine products, and the future commercialization of such products. Under the Research Agreement, as supplemented by the addendum, the Company agreed to pay CellSeed $8.5 million within 30 days of the completion of all of the following: (i) the execution of the Research Agreement; (ii) the execution of the Individual Agreement; and (iii) CellSeed’s delivery of the accumulated information package, as defined in the Research Agreement, to the Company and the Company providing written confirmation of its acceptance of the complete Package, which has not yet been completed as of June 30, 2014.

 

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Table of Contents

 

The Company has estimated the economic life of the CAOMECS produced in connection with the CellSeed Research and Individual Agreement at seven years. The determination of this life is based in part on the Company’s estimate of economic useful life and the time period in which the Company may enjoy an advantage over competing technologies and techniques. Key reasons for a useful life shorter than the life of a patent include: (i) the patents related to this technology are yet to be approved, (ii) potential redundancy with similar medication/device due to changes in market preferences, (iii) uncertainty of regulatory approval and (iv) potential development of new treatments for the same disease.

 

Intangible assets consisted of the following at:

 

 

 

June 30, 2014

 

December 31, 2013

 

License fees and patent filing costs

 

$

2,250,000

 

$

2,250,000

 

Less: accumulated amortization

 

(1,250,000

)

(1,142,857

)

Total

 

$

1,000,000

 

$

1,107,143

 

 

During the six months ended June 30, 2014 and 2013, amortization expense was $107,143. As of June 30, 2014, estimated aggregate amortization expense for the next five years is as follows:

 

Periods ending December 31,

 

Amount

 

2014

 

$

107,143

 

2015

 

214,286

 

2016

 

214,286

 

2017

 

214,286

 

2018

 

214,286

 

Thereafter

 

35,713

 

Total

 

$

1,000,000

 

 

NOTE 5 — ACCOUNTS PAYABLE AND ACCRUED EXPENSES

 

Accounts payable and accrued expenses consisted of the following at:

 

 

 

June 30, 2014

 

December 31, 2013

 

Accounts payable

 

 

 

 

 

Clinical trial management expenses

 

$

24,102

 

$

270,694

 

Legal expenses

 

92,414

 

178,119

 

Other vendors

 

477,894

 

386,847

 

Subtotal

 

594,410

 

835,660

 

Accrued interest payable, related parties

 

148,453

 

195,051

 

Accrued interest payable

 

785,642

 

473,356

 

Accrued expenses

 

249,605

 

294,379

 

Deferred salary

 

485,000

 

485,000

 

Total accounts payable and accrued expenses

 

$

2,263,110

 

$

2,283,446

 

 

10



Table of Contents

 

NOTE 6 — NOTES PAYABLE

 

Notes payable consisted of the following at June 30, 2014:

 

Year
Issued

 

Interest
rate
range

 

Term of
Notes

 

Conv. Price

 

Principal
Outstanding
June 30,
2014

 

Discount
Amount
June 30,
2014

 

Carrying
Amount
June 30,
2014

 

Shares
Underlying
Principal
as of June
30, 2014

 

Principal
Outstanding
December 31,
2013

 

Discount
Amount
December
31, 2013

 

Carrying
Amount
December
31, 2013

 

Shares
Underlying
Principal
as of
December
31, 2013

 

Convertible notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2009

 

6.50%

 

5 years

 

$3.05

 

$

 

$

 

$

 

 

$

254,460

 

$

 

$

254,460

 

83,366

 

2010

 

0 ~ 6.0%

 

5 years

 

$3.05

 

74,000

 

5,751

 

68,249

 

24,243

 

74,000

 

8,308

 

65,692

 

24,248

 

2011

 

10%

 

5 years

 

$3.05

 

500,000

 

 

500,000

 

163,809

 

500,000

 

 

500,000

 

163,809

 

2012

 

10%

 

2 years

 

$3.30~$3.60

 

251,100

 

 

251,100

 

71,000

 

251,100

 

 

251,100

 

71,000

 

2013

 

10%

 

6 months ~ 2 years

 

$3.30~$3.60

 

6,057,601

 

48,622

 

6,008,979

 

1,746,547

 

6,913,606

 

215,798

 

6,697,808

 

1,998,215

 

2014

 

10%

 

Due on demand ~2 years

 

$3.05~$7.00

 

2,721,652

 

400,555

 

2,321,097

 

579,239

 

 

 

 

 

 

 

 

 

 

 

 

 

$

9,604,353

 

$

454,928

 

$

9,149,425

 

2,584,838

 

$

7,993,166

 

$

224,106

 

$

7,769,060

 

2,340,638

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

$

6,698,203

 

$

388,211

 

$

6,309,992

 

1,927,078

 

$

4,955,868

 

$

153,396

 

$

4,802,472

 

1,438,033

 

 

 

 

 

Non-current

 

 

 

$

2,906,150

 

$

66,717

 

$

2,839,433

 

657,760

 

$

3,037,298

 

$

70,710

 

$

2,966,588

 

902,605

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Convertible notes payable - related party

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

10%

 

Due on demand

 

$3.30

 

$

373,000

 

$

 

$

373,000

 

113,030

 

$

373,000

 

$

 

$

373,000

 

113,030

 

2013

 

10%

 

1 year

 

$3.60

 

187,706

 

 

187,706

 

52,141

 

187,706

 

 

187,706

 

52,141

 

 

 

 

 

 

 

 

 

$

560,706

 

$

 

$

560,706

 

165,171

 

$

560,706

 

$

 

$

560,706

 

165,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

$

560,706

 

$

 

$

560,706

 

165,171

 

$

560,706

 

$

 

$

560,706

 

165,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

11%

 

2 years

 

NA

 

$

 

$

 

$

 

 

$

833,335

 

$

18,265

 

$

815,070

 

 

2013

 

2% ~ 10%

 

Due on demand ~ 2 years

 

NA

 

1,180,000

 

 

1,180,000

 

 

1,150,000

 

 

1,150,000

 

 

2014

 

11%

 

2 years

 

NA

 

833,335

 

 

833,335

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

2,013,335

 

$

 

$

2,013,335

 

 

$

1,983,335

 

$

18,265

 

$

1,965,070

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

$

1,180,000

 

$

 

$

1,180,000

 

 

$

1,783,335

 

$

18,265

 

$

1,765,070

 

 

 

 

 

 

Non-current

 

 

 

$

833,335

 

$

 

$

833,335

 

 

$

200,000

 

$

 

$

200,000

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Notes payable - related party

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

2012

 

8% ~ 10%

 

Due on demand

 

NA

 

$

656,730

 

$

 

$

656,730

 

 

$

880,062

 

$

4,421

 

$

875,641

 

 

2013

 

8%

 

Due on demand

 

NA

 

50,000

 

 

50,000

 

 

50,000

 

 

50,000

 

 

2014

 

11%

 

Due on demand ~ 2 years

 

NA

 

252,165

 

 

252,165

 

 

 

 

 

 

 

 

 

 

 

 

 

 

$

958,895

 

$

 

$

958,895

 

 

$

930,062

 

$

4,421

 

$

925,641

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current

 

 

 

$

825,562

 

$

 

$

825,562

 

 

$

930,062

 

$

4,421

 

$

925,641

 

 

 

 

 

 

Non-current

 

 

 

$

133,333

 

$

 

$

133,333

 

 

$

 

$

 

$

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Grand Total

 

 

 

$

13,137,289

 

$

454,928

 

$

12,682,361

 

2,750,009

 

$

11,467,269

 

$

246,792

 

$

11,220,477

 

2,505,809

 

 

The average stated interest rate of notes payable as of June 30, 2014 and December 31, 2013 was 10%. The average effective interest rate of notes payable as of June 30, 2014 and December 31, 2013 remained the same at 15%, after giving effect to discounts relating to beneficial conversion features and the fair value of warrants issued in connection with these notes. The notes payable and convertible notes payable do not have restrictive financial covenants or acceleration clauses associated with a material adverse change event. The holders of the convertible notes have the option to convert their notes into the Company’s common stock at the stated conversion price at any time during the term of their convertible notes. Conversion prices on the convertible notes payable range from $3.05 to $7.00 per share. All due on demand notes are treated as current liabilities.

 

Contractual principal payments due on notes payable are as follows at June 30, 2014:

 

Year Ending

 

Payments Due

 

2014

 

$

6,804,813

 

2015

 

3,085,761

 

2016

 

3,246,715

 

Total

 

$

13,137,289

 

 

The Company estimated the total fair value of any beneficial conversion feature and accompanying warrants in allocating the debt proceeds. The proceeds allocated to the beneficial conversion feature were determined by taking the estimated fair value of shares issuable under the convertible notes less the fair value of the number of shares that would be issued if the conversion rate equaled the fair value of the Company’s common stock as of the date of issuance (see Note 2). In situations where the debt included both a beneficial conversion feature and a warrant, the proceeds were allocated to the warrants and beneficial conversion feature based on the pro-rata fair value.

 

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NOTE 7 — STOCKHOLDERS’ DEFICIT

 

Private Placement — On September 11, 2013, the Company issued an aggregate of 3,020,501 units at a price of $2.50 per unit (the “Private Placement”). Each unit consisted of one share of common stock and one common stock warrant for the purchase of an additional share of common stock. The aggregate purchase price for the units was $7,551,253.

 

The warrants entitle the holders thereof to purchase, at any time on or prior to September 11, 2018, shares of common stock of the Company at an exercise price of $3.50 per share. The warrants contain non-standard anti-dilution protection and, consequently, are being accounted for as a liability classified warrants, were originally recorded at fair value, and will be adjusted to fair market value each reporting period.

 

Stock warrants — In addition to the warrants issued in connection with the Private Placement discussed above, during the year ended December 31, 2013, the Company issued warrants in connection with the issuance of a convertible note to purchase an aggregate of 50,000 shares of common stock at a per share exercise price equal to $3.30 per share. Also, in December 2013, the warrants to purchase 500,000 shares of common stock at an exercise price of $1.00 per share that had previously been issued to a director expired. On May 1, 2014, in connection with the issuance of a convertible note, the Company issued a five year warrant to purchase an aggregate of 50,000 shares of common stock at an exercise price of $3.50 per share in 2014.

 

Warrant exercises and issuance — On June 10, 2014, certain warrant holders exercised 1,095,465 warrants issued in the Private Placement for the exercise price of $3.50 per share, resulting in the Company receiving aggregate exercise proceeds of $3.8 million and issuing 1,095,465 shares of common stock. Prior to exercise, these Private Placement warrants were accounted for at fair value as liability classified warrants. As of June 10, 2014, immediately prior to exercise, the carrying value of these Private Placement warrants was reduced to their fair value immediately prior to exercise of $1.8 million, representing their intrinsic value, with this adjusted carrying value of $1.8 million being transferred to additional paid in capital. Also on June 10, 2014, based on an offer made to holders of Private Placement warrants in connection with such exercises, the Company issued an aggregate of 1,095,465 replacement warrants to holders exercising Private Placement warrants, which replacement warrants have terms that are generally the same as the exercised warrants, including an expiration date of September 11, 2018 and an exercise price of $3.50 per share. The replacement warrants are treated for accounting purposes as liability classified warrants, and their issuance gave rise to a $3.5 million warrant exercise inducement expense based on their fair value as of issuance as determined using a Binomial Monte-Carlo Cliquet (aka Ratchet) Option Pricing Model.

 

A summary of outstanding warrants as of June 30, 2014 is presented below.

 

 

 

Six months ended
June 30, 2014

 

Year ended
December 31, 2013

 

Warrants outstanding, beginning of period

 

6,279,296

 

3,408,795

 

Granted

 

1,145,465

 

3,370,501

 

Exercised

 

(1,106,522

)

 

Cancelled, forfeited and expired

 

(25,001

)

(500,000

)

Warrants outstanding, end of period

 

6,293,238

 

6,279,296

 

 

A summary of outstanding warrants by year issued and exercise price as of June 30, 2014 is presented below.

 

 

 

Outstanding

 

Exercisable

 

Year issued and
Exercise Price

 

Number of
Warrants
 Issued

 

Weighted
Average
Remaining
Contractual
Life (Years)

 

Weighted
Average
Exercise Price

 

Total

 

Weighted
Average
Exercise
Price

 

Balance 2012

 

 

 

 

 

 

 

 

 

 

 

$1.00

 

1,222,058

 

0.46

 

$

1.00

 

1,222,058

 

$

1.00

 

$2.50

 

1,000,000

 

1.16

 

$

2.50

 

1,000,000

 

$

2.50

 

$3.05

 

287,436

 

0.89

 

$

3.05

 

287,436

 

$

3.05

 

75% of FMV

 

363,243

 

0.28

 

75% of FMV

 

363,243

 

75% of FMV

 

2012 total

 

2,872,737

 

 

 

 

 

2,872,737

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During 2013

 

 

 

 

 

 

 

 

 

 

 

$3.50

 

2,225,036

 

4.20

 

$

3.50

 

2,225,036

 

$

3.50

 

$3.30

 

50,000

 

3.84

 

$

3.30

 

50,000

 

$

3.30

 

2013 total

 

2,275,036

 

 

 

 

 

2,275,036

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

During 2014

 

 

 

 

 

 

 

 

 

 

 

$3.50

 

1,145,465

 

4.23

 

$

3.50

 

1,145,465

 

$

3.50

 

Total

 

6,293,238

 

 

 

 

 

6,293,238

 

 

 

 

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Stock options Management has valued stock options at their date of grant utilizing the Black-Scholes-Merton Option pricing model. The fair value of the underlying shares was determined based on recent sales of Company shares to third parties. The expected volatility was calculated using the historical volatility of a similar public entity in the industry through August 2013 and a group of similar public entities thereafter. The following table shows assumptions used on recent dates on which options were granted by the Board of Directors.

 

 

 

May 8, 2014

 

February 26, 2014

 

July 18, 2013

 

February 28, 2013

 

Stock price

 

$

4.90

 

$

3.60

 

$

3.60

 

$

3.60

 

Exercise price

 

$

4.90

 

$

3.60

 

$

3.60

 

$

3.60

 

Term

 

10 years

 

10 years

 

10 years

 

10 years

 

Risk-Free Interest Rate

 

2.61

%

2.67

%

2.56

%

1.89

%

Dividend Yield

 

0

%

0

%

0

%

0

%

Volatility

 

75.50

%

76.60

%

113.60

%

119.30

%

 

In making the determination of fair value and finding similar companies, the Company considered the industry, stage of life cycle, size and financial leverage of such other entities. While the Company was initially able to identify only one similar public company using these criteria, based on the more advanced stage of development of the Company additional similar companies with enough historical data that met the industry criterion have now been identified. Accordingly, the Company has based its expected volatility on the historical stock prices of a group of companies since September 2013.

 

The risk-free interest rate is based on the implied yield available on U.S. Treasury issues with an equivalent term approximating the expected life of the options depending on the date of the grant and expected life of the options. The expected life of options used was based on the contractual life of the option granted.

 

During the six months ended June 30, 2014, the Company’s Board of Directors granted 740,000 options to its directors, employees and consultants. Of these options, 438,000 options will vest over three years starting February 26, 2015, have an exercise price of $3.60 per share, and are exercisable through 2024, the remaining 302,000 options will vest over three years starting May 8, 2015, have an exercise price of $4.90 per share, and are exercisable through 2024. In addition, 340,000 options that were approved by the Company’s Board of Directors in April 2012 were deemed issued during the six months ended June 30, 2014. Two-thirds of these options have vested and the remaining one-third will vest by April 2015. These options have an exercise price of $3.60 per share and are exercisable through 2022. The aggregate fair value of these groups of options was approximately $2.7 million. As of June 30, 2014, there were 5,569,000 options outstanding under the 2011 Stock Incentive Plan and 11,795 options outstanding that were issued prior to the 2011 Stock Incentive Plan.

 

A summary of outstanding options as of June 30, 2014 is presented below.

 

 

 

 

 

2011 Stock Incentive Plan

 

 

 

Prior Plan

 

June 30, 2014

 

December 31, 2013

 

Options outstanding, beginning of period

 

11,795

 

4,504,000

 

1,199,000

 

Granted

 

 

1,080,000

 

3,305,000

 

Exercised

 

 

 

 

Cancelled, forfeited and expired

 

 

(15,000

)

 

Options outstanding, end of period

 

11,795

 

5,569,000

 

4,504,000

 

 

Registration Rights — The Company has agreed to use its commercially reasonable best efforts to have on file with the SEC, by September 11, 2014 and at the Company’s sole expense, a registration statement to permit the public resale of 4,115,966 shares of the Company’s common stock and 3,320,501 shares of common stock underlying warrants (collectively, the “Registrable Securities”). In the event such registration statement includes securities to be offered and sold by the Company in a fully underwritten primary public offering pursuant to an effective registration under the Securities Act, and the Company is advised in good faith by any managing underwriter of securities being offered pursuant to such registration statement that the number of Registrable Securities proposed to be sold in such offering is greater than the number of such securities which can be included in such offering without materially adversely affecting such offering, the Company will include in such registration (i) first, any securities the Company proposes to sell, and (ii) second, the Registrable Securities, with any reductions in the number of Registrable Securities actually included in such registration to be allocated on a pro rata basis among the holders thereof. The registration rights described above apply until all Registrable Securities have been sold pursuant to Rule 144 under the Securities Act or may be sold without registration in reliance on Rule 144 under the Securities Act without limitation as to volume and without the requirement of any notice filing. If the shares of common stock underlying warrants to purchase 2,225,036 shares are not registered for resale at the time of exercise on or after September 11, 2014 or if the shares of common stock underlying warrants to purchase 1,095,465 shares are not registered for resale at the time of exercise on or after June 10, 2015, and in each such case the registration rights described above then apply with respect to the holder of such warrants, such holder may exercise such warrants on a cashless basis.

 

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Table of Contents

 

NOTE 8 — COMMITMENTS AND CONTINGENCIES

 

Distribution contract — Cardinal Health Specialty Pharmacy Services has been contracted to distribute NutreStore to other wholesale distributors and some independent pharmacies since April 2008. For these services, the Company pays a monthly commercialization management fee of $5,000 with discount.

 

Operating leases — The Company leases its office space under operating leases with unrelated entities. The rent expense during the six months ended June 30, 2014 and 2013 amounted to $58,530 and $66,420, respectively.

 

Future minimum lease payments under the agreements are as follows:

 

2014

 

$

65,723

 

2015

 

75,346

 

2016

 

9,797

 

 

 

$

150,866

 

 

Licensing agreement The Company licensed certain current and future technology from CellSeed (see Note 4 for further discussion). CellSeed may terminate these agreements with the Company if the Company is unable to make timely payments required under the agreements. At the time the Company entered into the agreements with CellSeed, it left for further negotiation provisions covering how the Company and CellSeed will share any financial results of commercializing any cell sheet engineering regenerative medicine products that it is seeking to develop in collaboration with CellSeed. If the Company is not able to successfully negotiate these terms, its current development and commercialization plans with respect to any of these products would be materially adversely affected.

 

NOTE 9 — RELATED PARTY TRANSACTIONS

 

The following table sets forth information relating to the Company’s loans from related persons outstanding as of June 30, 2014.

 

Class

 

Lender

 

Interest
rate

 

Date of
loan

 

Term of Loan

 

Principal
Amount
Outstanding
at June 30,
2014

 

Highest
Principal
outstanding

 

Amount of
Principal
Repaid

 

Amount of
Interest
Paid

 

Conv.
Rate

 

Shares
underlying
principal
at June 30,
2014

 

Current, Promissory note payable to related parties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hope Int’l Hospice (1)

 

8

%

1/17/2012

 

Due on demand

 

$

200,000

 

$

200,000

 

$

 

$

8,000

 

NA

 

 

 

 

Hope Int’l Hospice (1)

 

8

%

6/14/2012

 

Due on demand

 

200,000

 

200,000

 

 

12,000

 

NA

 

 

 

 

Hope Int’l Hospice (1)

 

8

%

6/21/2012

 

Due on demand

 

100,000

 

100,000

 

 

4,000

 

NA

 

 

 

 

Yutaka Niihara (2)(4)

 

10

%

12/5/2012

 

Due on demand

 

156,730

 

1,213,700

 

1,056,970

 

60,851

 

NA

 

 

 

 

Hope Int’l Hospice (1)

 

8

%

2/11/2013

 

Due on demand

 

50,000

 

50,000

 

 

2,000

 

NA

 

 

 

 

Lan T Tran (2)

 

11

%

2/10/2014

 

2 years (3)

 

106,976

 

106,976

 

 

 

NA

 

 

 

 

Cuc T Tran (5)

 

11

%

3/5/2014

 

1 year

 

11,856

 

11,856

 

 

 

NA

 

 

 

 

 

 

 

 

 

 

Sub total

 

$

825,562

 

$

1,882,532

 

1,056,970

 

86,851

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Current, Convertible notes payable to related parties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Yasushi Nagasaki (2)

 

10

%

6/29/2012

 

Due on demand

 

$

373,000

 

$

388,800

 

$

15,800

 

$

 

$

3.30

 

113,030

 

 

 

Hideki & Eiko Uehara (5)

 

10

%

9/7/2013

 

1 year

 

35,640

 

35,640

 

 

 

$

3.60

 

9,900

 

 

 

MLPF&S Cust. FBO Willis C.Lee (2)

 

10

%

10/5/2013

 

1 year

 

152,066

 

152,066

 

 

 

$

3.60

 

42,241

 

 

 

 

 

 

 

 

 

Sub total

 

$

560,706

 

$

576,506

 

$

15,800

 

$

 

 

165,171

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Long-term, Promissory note payable to related parties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hideki & Eiko Uehara (5)

 

11

%

2/15/2014

 

2 years

 

$

133,333

 

$

133,333

 

$

 

$

7,363

 

NA

 

 

 

 

 

 

 

 

 

 

Sub total

 

$

133,333

 

$

133,333

 

$

 

$

7,363

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

1,519,601

 

$

2,592,371

 

$

1,072,770

 

$

94,215

 

 

165,171

 

 


(1)    Dr. Niihara is also the CEO of Hope International Hospice, Inc.

(2)    Officer

(3)    Due on demand

(4)    Director

(5)    Family of Officer/Director

 

14



Table of Contents

 

 

The foregoing table does not reflect $200,000 of subscription proceeds received from one director and a relative of such director during June 2014. The proceeds are included in due to related parties because the convertible notes subscribed for had not yet been issued at June 30, 2014.

 

The following table sets forth information relating to the Company’s loans from related persons outstanding as of December 31, 2013.

 

Class

 

Lender

 

Interest
rate

 

Date of
loan

 

Term of Loan

 

Principal
Amount
Outstanding
as of
December 31,
2013

 

Highest
Principal
outstanding

 

Amount of
Principal
Repaid

 

Amount of
Interest
Paid

 

Conv.
Rate

 

Shares
Underlying
Principal
as of
December
31, 2013

 

Current, Promissory note payable to related parties:

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Hope Int’l Hospice(1)

 

8

%

1/17/2012

 

Due on demand

 

$<