Quarterly report pursuant to Section 13 or 15(d)

Summary of Significant Accounting Policies (Policies)

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Summary of Significant Accounting Policies (Policies)
9 Months Ended
Dec. 31, 2016
Summary Of Significant Accounting Policies Policies  
Basis of Presentation

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared in accordance with accounting principles generally accepted in the United States (U.S. GAAP) for interim financial information and with the instructions to Form 10-Q and Rule 8-03 of Regulation S-X. Accordingly, they do not contain all of the information and footnotes required for complete consolidated financial statements. In the opinion of management, the accompanying unaudited Condensed Consolidated Financial Statements reflect all adjustments, which include only normal recurring adjustments, necessary to present fairly our interim financial information. The accompanying Condensed Consolidated Balance Sheet at March 31, 2016 has been derived from our audited consolidated financial statements at that date but does not include all disclosures required by U.S. GAAP.  The operating results for the three and nine months ended December 31, 2016 are not necessarily indicative of the operating results to be expected for our fiscal year ending March 31, 2017 or for any other interim period or any other future period.

 

The accompanying unaudited Condensed Consolidated Financial Statements and notes to Condensed Consolidated Financial Statements should be read in conjunction with our audited Consolidated Financial Statements for the fiscal year ended March 31, 2016 contained in our Annual Report on Form 10-K, as filed with the Securities and Exchange Commission (SEC) on June 24, 2016.

 

The accompanying unaudited Condensed Consolidated Financial Statements have been prepared assuming we will continue as a going concern. As a developing-technology company having not yet developed commercial products or achieved sustainable revenues, we have experienced recurring losses and negative cash flows from operations resulting in a deficit of $139.4 million accumulated from inception through December 31, 2016. We expect losses and negative cash flows from operations to continue for the foreseeable future as we engage in further potential development of AV-101, including conducting clinical trials, and pursue potential drug rescue, drug development and regenerative medicine opportunities.

 

Since our inception in May 1998 through December 31, 2016, we have financed our operations and technology acquisitions primarily through the issuance and sale of our equity and debt securities, including convertible promissory notes and short-term promissory notes, for cash proceeds of approximately $44.5 million, as well as from an aggregate of approximately $17.6 million of government research grant awards, strategic collaboration payments, intellectual property sublicensing and other revenues. Additionally, we have issued equity securities with an approximate value at issuance of $30.4 million in non-cash settlements of certain liabilities, including liabilities for professional services rendered to us or as compensation for such services.

 

Between April 1, 2016 and May 4, 2016, we sold to accredited investors Series B Preferred Units consisting of 39,714 unregistered shares of our Series B Preferred Stock, par value $0.001 per share (Series B Preferred), and five year warrants exercisable at $7.00 per share (Series B Preferred Warrants) to purchase 39,714 shares of our common stock, from which we received cash proceeds of $278,000. Further, on May 16, 2016 we consummated an underwritten public offering pursuant to which we issued an aggregate of 2,570,040 registered shares of our common stock at the public offering price of $4.24 per share and five-year warrants to purchase up to 2,705,883 registered shares of common stock, with an exercise price of $5.30 per share, at the public offering price of $0.01 per warrant, including shares and warrants issued pursuant to the exercise of the underwriters' over-allotment option (the May 2016 Public Offering). We received net cash proceeds of approximately $9.5 million from the May 2016 Public Offering after deducting fees and expenses. During the quarter ended December 31, 2016, we received aggregate cash proceeds of $247,900 from the sale of an aggregate of 67,000 shares of our unregistered common stock and warrants exercisable through November 30, 2019 to purchase 16,750 unregistered shares of our common stock to two accredited investors in private placement transactions. As described in greater detail in Note 5, Sublicense Fee Receivable and Sublicense Revenue, we received a cash payment of $1.25 million under the BlueRock Therapeutics Agreement in January 2017. We believe that we currently have sufficient financial resources to fund our expected operations at least through the first half of 2017, including preparation for and launch of the Phase 2b Study.  Although our current financial resources are not yet sufficient to fully fund completion of the Phase 2b Study, we anticipate raising sufficient additional capital as and when necessary and advisable to satisfy our key corporate objectives, including conducting and completing the Phase 2b Study in an ordinary course manner. In furtherance of that objective, on January 23, 2017, we filed a Registration Statement on Form S-3 (Registration No. 333-215671) with the Securities and Exchange Commission (the Commission) covering the potential future sale of up to $100 million of our equity and/or debt securities or combinations thereof. There can be no assurance, however, that future financing will be available in sufficient amounts, in a timely manner, or on terms acceptable to us, if at all. We may also seek research and development collaborations that could generate revenue, funding for development of AV-101 and additional product candidates, as well as additional government grant awards and agreements similar to our current CRADA with the NIMH, which provides for the NIMH to fully fund the ongoing Phase 2a study of AV-101 as a monotherapy for MDD. Such strategic collaborations may provide non-dilutive resources to advance our strategic initiatives while reducing a portion of our future cash outlays and working capital requirements. In a manner similar to the BlueRock Therapeutics Agreement, we may also pursue similar arrangements with third-parties covering other of our intellectual property. Although we may seek additional collaborations that could generate revenue and/or non-dilutive funding for development of AV-101 and other product candidates, as well as new government grant awards and/or agreements similar to our CRADA with NIMH, no assurance can be provided that any such collaborations, awards or agreements will occur in the future.  Our future working capital requirements will depend on many factors, including, without limitation, the scope and nature of opportunities related to our success and the success of certain other companies in clinical trials, including our development and commercialization of AV-101 as an adjunctive treatment for MDD and other CNS conditions, and various applications of our stem cell technology platform, the availability of, and our ability to obtain, government grant awards and agreements, and our ability to enter into collaborations on terms acceptable to us. To further advance the clinical development of AV-101 and our stem cell technology platform, as well as support our operating activities, we plan to continue to carefully manage our routine operating costs, including our employee headcount and related expenses, as well as costs relating to regulatory consulting, contract research and development, investor relations and corporate development, legal, intellectual property, accounting, public company compliance and other professional services and working capital costs. 

 

Notwithstanding the foregoing, substantial additional financing may not be available to us on a timely basis, on acceptable terms, or at all. If we are unable to obtain substantial additional financing on a timely basis when needed in 2017 and beyond, our business, financial condition, and results of operations may be harmed, the price of our stock may decline, we may be required to reduce, defer, or discontinue certain of our research and development activities and we may not be able to continue as a going concern.  These unaudited Condensed Consolidated Financial Statements do not include any adjustments that might result from the outcome of this uncertainty.

 

Use of Estimates

The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.  Significant estimates include those relating to share-based compensation, and assumptions that have been used to value warrants, warrant modifications, warrant liabilities. With the exception of the $1.25 million received in January 2017 under the BlueRock Therapeutics Agreement, which agreement is described in greater detail under Note 5, Sublicense Fee Receivable and Sublicense Revenue below, we do not currently have, nor have we had during the periods covered by this report, any arrangements requiring the recognition of revenue.

 

Research and Development Expenses

Research and development expenses are composed of both internal and external costs. Internal costs include salaries and employment-related expenses of scientific personnel and direct project costs. External research and development expenses consist primarily of costs associated with nonclinical and clinical development of AV-101, now in Phase 2 clinical development, initially for Major Depressive Disorder, stem cell technology-related research and development costs, and costs related to the filing, maintenance and prosecution of patents and patent applications and technology licenses. All such costs are charged to expense as incurred.

Stock-Based Compensation

We recognize compensation cost for all stock-based awards to employees or consultants based on the grant date fair value of the award. Non-cash, stock-based compensation expense is recognized over the period during which the employee or consultant is required to perform services in exchange for the award, which generally represents the scheduled vesting period. We have no awards with market or performance conditions. For equity awards to non-employees, we re-measure the fair value of the awards as they vest and the resulting value is recognized as an expense during the period over which the services are performed.

 

The table below summarizes stock-based compensation expense included in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss for the three and nine months ended December 31, 2016 and 2015. 

 

     Three Months Ended      Nine Months Ended  
     December 31,      December 31,  
     2016      2015      2016      2015  
                         
 Research and development expense:                        
                         
 Stock option grants   $ 113,900     $ 71,300     $ 239,900     $ 118,700  
 Warrants granted to officer in March 2014     -       2,800       -       8,500  
 Warrants granted to officer in September 2015     -       -       -       852,200  
                                 
      113,900       74,100       239,900       979,400  
                                 
 General and administrative expense:                                
                                 
 Stock option grants     153,300       20,400       334,000       36,500  
 Warrants granted to officers and directors                                
      in March 2014     -       3,900       -       11,700  
 Warrants granted to officers, directors and                                
      consultants in September 2015     -       -       -       2,840,700  
                                 
      153,300       24,300       334,000       2,888,900  
                                 
 Total stock-based compensation expense   $ 267,200     $ 98,400     $ 573,900     $ 3,868,300  

 

In June 2016, our Board of Directors (the Board) approved the grant of options to purchase an aggregate of 655,000 shares of our common stock at an exercise price of $3.49 per share to the independent members of our Board and to our officers, including our newly-hired Chief Medical Officer. In September 2016, the Board approved the grant of an option to purchase 125,000 shares of our common stock at an exercise price of $4.27 per share to another newly-hired officer. In November 2016, the Board authorized the grant of stock options to independent members of the Board and to our officers and employees to purchase an aggregate of 560,000 shares of our common stock at an exercise price of $3.80 per share. At December 31, 2016, there were stock options outstanding to purchase 1,659,324 shares of our common stock at a weighted average exercise price of $4.76 per share. We valued the options granted in June, September and November 2016 using the Black-Scholes Option Pricing Model and the following weighted average assumptions:

 

Assumption:   June 2016     September 2016     November 2016  
Market price per share at grant date   $ 3.49     $ 4.27     $ 3.80  
Exercise price per share   $ 3.49     $ 4.27     $ 3.80  
Risk-free interest rate     1.34 %     1.29 %     1.76 %
Contractual or estimated term in years     6.68       6.25       6.79  
Volatility     81.69 %     83.26 %     84.38 %
Dividend rate     0.0 %     0.0 %     0.0 %
Shares     655,000       125,000       560,000  
                         
Fair Value per share   $ 2.50     $ 3.05     $ 2.81  

 

During September 2015, the Board approved the grant of options to purchase an aggregate of 90,000 shares of our common stock at an exercise price of $9.25 per share to our non-officer employees and certain consultants. The Board also granted immediately vested warrants to purchase an aggregate of 650,000 shares of our common stock to our executive officers, independent members of the Board and certain consultants. We valued the warrants and options granted in September 2015 using the Black-Scholes Option Pricing Model and the following assumptions:

 

Assumption:   Warrants     Employee Options     Non-employee Options  
Market price per share at grant date   $ 9.11     $ 9.11     $ 9.11  
Exercise price per share   $ 9.25     $ 9.25     $ 9.25  
Risk-free interest rate     1.52 %     2.02 %     2.20 %
Contractual or estimated term in years     5.00       6.25       10.00  
Volatility     77.19 %     79.48 %     103.42 %
Dividend rate     0.0 %     0.0 %     0.0 %
Shares     650,000       60,000       30,000  
                         
Fair Value per share   $ 5.68     $ 6.35     $ 8.27  

 

Comprehensive Loss

We have no components of other comprehensive loss other than net loss, and accordingly our comprehensive loss is equivalent to our net loss for the periods presented.

 

Income (Loss) per Common Share

Basic net income (loss) per share of common stock excludes the effect of dilution and is computed by dividing net income (loss) by the weighted-average number of shares of common stock outstanding for the period. Diluted net income (loss) per share of common stock reflects the potential dilution that could occur if securities or other contracts to issue shares of common stock were exercised or converted into shares of common stock. In calculating diluted net income (loss) per share, we have historically adjusted the numerator for the change in the fair value of the warrant liability attributable to outstanding warrants, only if dilutive, and increased the denominator to include the number of potentially dilutive common shares assumed to be outstanding during the period using the treasury stock method. The change in the fair value of the warrant liability, which was eliminated in May 2015, had no impact on the diluted net earnings per share calculation in any period included in these unaudited Condensed Consolidated Financial Statements.

 

As a result of our net loss for the periods presented, potentially dilutive securities were excluded from the computation of net loss per share, as their effect would be antidilutive. For the three and nine month periods ended December 31, 2016 and 2015, the accrual for dividends on our Series B Preferred and the deemed dividend attributable to the issuance of our Series B Preferred Units represent deductions from our net loss to arrive at net loss attributable to common stockholders for those periods.

 

Potentially dilutive securities excluded in determining diluted net loss attributable to common stockholders per common share are as follows:

 

    As of December 31,  
    2016     2015  
             
Series A Preferred stock issued and outstanding (1)     750,000       750,000  
                 
Series B Preferred stock issued and outstanding (2)     1,160,240       3,588,863  
                 
Series C Preferred stock issued and outstanding (3)     2,318,012       -  
                 
Outstanding options under the 2016 (formerly 2008) and 1999 Stock Incentive Plans     1,659,324       296,738  
                 
Outstanding warrants to purchase common stock     4,550,370       4,971,497  
                 
Warrant shares issuable to PLTG upon exchange of Series A Preferred                
    under the terms of the October 11, 2012 Note Exchange and Purchase                
    Agreement, as subsequently amended     -       535,715  
                 
                 
Total     10,437,946       10,142,813  
____________                
(1) Assumes exchange under the terms of the October 11, 2012 Note Exchange and Purchase Agreement with PLTG, as amended            
(2) Assumes exchange under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series B 10% Convertible Preferred Stock, effective May 5, 2015            
(3) Assumes exchange under the terms of the Certificate of Designation of the Relative Rights and Preferences of the Series C Convertible Preferred Stock, effective January 25, 2016            

 

Recent Accounting Pronouncements

Other than as identified below, there have been no recent accounting pronouncements or changes in accounting pronouncements during the nine months ended December 31, 2016, as compared to the recent accounting pronouncements described in the Company’s Form 10-K for the fiscal year ended March 31, 2016, that are of significance or potential significance to the Company.

 

In August 2016, the Financial Accounting Standards Board issued guidance to reduce the diversity in the presentation of certain cash receipts and cash payments presented and classified in the statement of cash flows. The guidance addresses the following eight specific cash flow issues: (1) debt prepayment or debt extinguishment costs, (2) settlement of zero-coupon debt instruments or other debt instruments with coupon interest rates that are insignificant in relation to the effective interest rate of the borrowing, (3) contingent consideration payments made after a business combination, (4) proceeds from the settlement of insurance claims, (5) proceeds from settlement of corporate-owned life insurance policies, including bank-owned life insurance policies, (6) distributions received from equity method investees, (7) beneficial interests in securitization transitions and (8) separately identifiable cash flows and application of predominance principle. The guidance will be effective for fiscal years and interim periods beginning after December 15, 2017, and early adoption is permitted. The guidance requires retrospective adoption. We are evaluating the effect that ASU No. 2016-15 will have on our consolidated financial statements and related disclosures.