Quarterly report pursuant to Section 13 or 15(d)

Capital Stock

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Capital Stock
6 Months Ended
Sep. 30, 2012
Notes to Financial Statements  
NOTE 9 - Capital Stock

Fall 2012 Private Placement of Units

 

In September 2012, the Company sold 300,000 Units in a private placement to an accredited investor and received cash proceeds of $150,000. The Units were sold for $0.50 per Unit and each Unit consisted of one share of the Company’s common stock and a five year warrant to purchase one half (1/2) of one share of the Company’s common stock at an exercise price of $1.50 per share. The proceeds of this private placement have reduced the remaining amount of financing the Company is required to secure from $1.0 million to $850,000 to be entitled to sell additional senior secured convertible promissory notes to Platinum in November and December 2012 under the terms of the Note Exchange and Purchase Agreement described in Note 11, Subsequent Events.

 

Warrants and Stock Grants

 

In April 2012, the Company entered into a contract for investor relations consulting services pursuant to which it granted three-year warrants to purchase 50,000 shares of the Company’s common stock at an exercise price of $2.80 per share.  The Company valued the warrant at $69,200 using the Black Scholes Option Pricing Model and the following assumptions:  market price per share: $2.74; exercise price per share: $2.80; risk-free interest rate: 0.50%; contractual term: 3 years; volatility: 79.09%; expected dividend rate: 0%.  The fair value of the warrant was recorded as a prepaid expense and is being expensed over one year in accordance with the terms of the contract.

 

In June 2012, the Company entered into a contract for investor relations and public company support services through December 31, 2012 pursuant to which it granted 280,000 restricted shares of its common stock valued at $238,000 based on the grant date quoted market price of $0.85 per share and warrants to purchase 100,000 shares of its common stock at an exercise price of $3.00 per share through December 31, 2015.  The Company valued the warrant at $25,800 using the Black Scholes Option Pricing Model and the following assumptions:  market price per share: $0.85; exercise price per share: $3.00; risk-free interest rate: 0.46%; contractual term: 3.53 years; volatility: 84.279%; expected dividend rate: 0%.  The fair value of the stock and the warrant was recorded as a prepaid expense and is being expensed over the approximately six-month term of the contract.

 

In June 2012, the Company entered into a contract for investor relations consulting services pursuant to which it granted 120,000 shares of its common stock valued at $102,000 based on the grant date quoted market price of $0.85 per share.  The fair value of the stock was recorded as a prepaid expense and is being expensed over the approximately six-month term of the contract.

 

In August 2012, the Company modified an existing warrant and issued a new warrant to Morrison & Foerster as additional consideration for the Restructuring Agreement, as disclosed in Note 7, Convertible Promissory Notes and Other Notes Payable.  As described in Note 7, the Company has treated the aggregate of the incremental value of the Amended M&F Warrant and the fair value of the New M&F Warrant as a discount to the Replacement Notes, which discount is being amortized to interest expense using the effective interest rate method over the term of the Replacement Notes.

 

During August 2012, the Company issued 88,235 shares of its common stock valued at a market price of $1.01 per share in settlement of a past-due obligation for business development consulting services in the amount of $25,000.  The Company charged the loss on the settlement to interest expense. As disclosed in Note 7, Convertible Promissory Notes and Other Notes Payable, in August 2012, the Company issued a promissory note in the principal amount of $60,000 and 15,000 shares of its common stock valued at $0.94 per share in settlement of its past due obligation for AV-101 clinical development services.

 

Warrant Modifications

 

Between May and June 30, 2012, the Company offered certain warrant holders the opportunity to exercise their warrants to purchase shares of the Company’s common stock at reduced exercise prices.  The Company subsequently extended the offer through August 2012. Warrant holders exercised warrants to purchase an aggregate of 524,056 shares of the Company’s common stock and the Company received cash proceeds of $262,000.  In addition, certain warrant holders exercised warrants to purchase 25,000 shares of the Company’s common stock in lieu of payment by the Company in satisfaction of amounts due for services in the aggregate amount of $12,500.  For every three discounted warrant shares exercised by the warrant holders, the Company granted a three-year warrant to purchase one share of its common stock at an exercise price of $3.00 per share.

 

The Company calculated the fair value of the warrants exercised immediately before and after the May 18, 2012 Board of Directors approval of the modification offer, and on the exercise date for the exercises occurring after June 30, 2012, and determined that the increase in the fair value of the warrants exercised was $440,700, which is reflected in general and administrative expense in the accompanying Condensed Consolidated Statements of Operations and Comprehensive Loss.  The warrants subject to the exercise price modifications were valued using the Black-Scholes Option Pricing Model and the following assumptions:

 

Assumption:   Pre-modification     Post-modification  
Market price per share (weighted average)   $ 1.95     $ 1.95  
Exercise price per share (weighted average)   $ 2.75     $ 0.50  
Risk-free interest rate (weighted average)     0.29%       0.06%  
Expected term in years (weighted average)     1.93       0.12  
Volatility (weighted average)     78.0%       85.7%  
Dividend rate     0.0%       0.0%  
                 
Weighted Average Fair Value per share   $ 0.64     $ 1.45  

 

The market price per share is based on the quoted market price of the Company’s common stock on the Over-the-Counter Bulletin Board on the date of the modification.  Because of its short history as a public company, the Company has estimated volatility based on the historical volatilities of a peer group of public companies over the expected term of the option.  The risk-free rate of interest is based on the quoted constant maturity rate for U.S Treasury Bills on the date of the modification for the term corresponding with the expected term of the warrant.  The expected dividend rate is zero as the Company has not paid and does not expect to pay dividends in the near future.

 

In connection with the foregoing exercises, the Company issued three-year warrants to purchase 183,025 shares of the Company’s common stock at an exercise price of $3.00 per share.  The Company valued these warrants at $35,900 using the Black Scholes Option Pricing Model and the following assumptions:  weighted average market price per share: $0.89; exercise price per share: $3.00; risk-free interest rate: 0.42%; contractual term: 3.0 years; volatility: 78.04%; expected dividend rate: 0%.  The fair value of the warrants was charged to interest expense.

 

Following the warrant exercises and grants described above, at September 30, 2012, the Company had outstanding warrants to purchase shares of its common stock at a weighted average exercise price of $1.88 per share as follows:

 

Exercise   Expiration   September 30,  
Price   Date   2012  
$ 0.88   5/11/2014     15,428  
$ 1.00   9/15/2017     1,379,376  
$ 1.125   12/28/2012     97,679  
$ 1.25   5/11/2014 to 12/31/2014     120,280  
$ 1.50   12/31/2012 to 9/4/2017     475,000  
$ 1.75   12/31/2013     577,784  
$ 2.00   8/3/2013 to 9/15/2017     604,000  
$ 2.50   5/11/2014     492,004  
$ 2.625   12/31/2013     480,134  
$ 2.75   2/28/2017     272,724  
$ 2.80   4/2/2015     50,000  
$ 3.00   5/11/2015 to 2/13/2016     563,025  
               
            5,127,434  

 

2012 Exchange Agreement with Platinum

 

On June 29, 2012, the Company and Platinum entered into an Exchange Agreement (the “2012 Exchange Agreement”) pursuant to which the Company agreed to issue Platinum 62,945 shares of its Series A Preferred in exchange for 629,450 shares of common stock owned by Platinum, in consideration for Platinum’s agreement to purchase from the Company the July 2012 Platinum Note, as described in Note 7, Convertible Promissory Notes and Other Notes Payable. Under the terms of the 2012 Exchange Agreement, Platinum, at its option, may exchange all or a portion of its Series A Preferred for the securities issued in connection with a qualified financing, an equity or equity-based financing, or series of financing transactions resulting in gross proceeds to the Company of at least $3.0 million, based on the stated value of $15.00 per share of Series A Preferred.  The Company estimated the fair value of the shares of Series A Preferred tendered to Platinum under the terms of the 2012 Exchange Agreement at $736,500 ($1.17 per share on a common share equivalent basis). Following the issuance of the Series A Preferred pursuant to the 2012 Exchange Agreement, Platinum owns all 500,000 authorized and outstanding shares of the Company’s Series A Preferred, each share of which is convertible into ten shares of the Company’s common stock.  The common shares that were exchanged for shares of Series A Preferred are treated as Treasury Stock in the accompanying Condensed Consolidated Balance Sheet at September 30, 2012.  See Note 11, Subsequent Events, regarding the Series A Preferred Exchange component of the October 2012 agreement between the Company and Platinum.