NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1. ORGANIZATION
NovaBay Pharmaceuticals, Inc. (the “Company”) is a pharmaceutical company focused on commercializing prescription Avenova® daily lid and lash hygiene in the domestic eye care market.
The Company was incorporated under the laws of the State of California on January 19, 2000, as NovaCal Pharmaceuticals, Inc. It had no operations until July 1, 2002, on which date it acquired all of the operating assets of NovaCal Pharmaceuticals, LLC, a California limited liability company. In February 2007, it changed its name from NovaCal Pharmaceuticals, Inc. to NovaBay Pharmaceuticals, Inc. In August 2007, it formed two subsidiaries––NovaBay Pharmaceuticals Canada, Inc., a wholly-owned subsidiary incorporated under the laws of British Columbia (Canada), which was formed to conduct research and development in Canada and was dissolved in July 2012, and DermaBay, Inc., a wholly-owned U.S. subsidiary, which may explore and pursue dermatological opportunities (“DermaBay”). In June 2010, it changed the state in which it is incorporated (the “Reincorporation”), and is now incorporated under the laws of the State of Delaware. All references to “the Company” herein refer to the California corporation prior to the date of the Reincorporation, and to the Delaware corporation on and after the date of the Reincorporation. Historically, the Company operated as four business segments. At the direction of its Board of Directors, the Company is focused primarily on commercializing prescription Avenova for managing hygiene of the eyelids and lashes in the United States and is now managed as a single business and not four segments.
Effective December 11, 2015, the Company effected a 1-for-25 reverse split of its outstanding common stock (“Reverse Stock Split”) (See Note 11).
Liquidity
With the funds available at December 31, 2016, the Company believes these resources will be sufficient to fund its operations into 2018. The Company has sustained operating losses for the majority of its corporate history and expects that its 2017 expenses will exceed its 2017 revenues, as we continue to re-invest in our Avenova commercialization efforts. The Company expects to continue incurring operating losses and negative cash flows until revenues reach a level sufficient to support ongoing growth and operations. Accordingly, the Company’s planned operations raise doubt about its ability to continue as a going concern. The Company’s liquidity needs will be largely determined by the success of operations in regards to the commercialization of Avenova. The Company’s plans to alleviate the doubt of its going concern, which are being implemented to mitigate these conditions, primarily include its ability to control the timing and spending on its sales and marketing programs and raising additional funds through equity financings. The Company also may consider other plans to fund operations including: (1) out-licensing rights to certain of its products or product candidates, pursuant to which the Company would receive cash milestones or an upfront fee; (2) raising additional capital through debt financings or from other sources; (3) reducing spending on one or more its sales and marketing programs; and/or (4) restructuring operations to change its overhead structure. The Company may issue securities, including common stock and warrants through private placement transactions or registered public offerings, which would require the filing of a Form S-1 or S-3 registration statement with the Securities and Exchange Commission (“SEC”). The Company’s future liquidity needs, and ability to address those needs, will largely be determined by the success of the commercialization of Avenova. The accompanying financial statements have been prepared assuming the Company will continue to operate as a going concern, which contemplates the realization of assets and the settlement of liabilities in the normal course of business. The consolidated financial statements do not include any adjustments to reflect the possible future effects on the recoverability and classification of assets or the amounts of liabilities that may result from uncertainty related to its ability to continue as a going concern.
NOTE 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
The accompanying consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and are expressed in U.S. dollars.
Reclassifications
Prior period amounts in the accompanying consolidated balance sheets have been reclassified to conform to current period presentation. The reclassifications did not change total assets, total liabilities, or total stockholders’ equity. Additionally, prior period amounts in the accompanying consolidated statement of operations and comprehensive loss and have been reclassified to conform to current period presentation. The reclassifications did not change the net loss or loss per share
Principles of Consolidation
The accompanying consolidated financial statements include the accounts of the Company and its wholly-owned subsidiary, DermaBay, which was dissolved by the Company in April 2016. All inter-company accounts and transactions have been eliminated in consolidation.
Use of Estimates
The preparation of financial statements in accordance with U.S. GAAP requires management to make estimates, assumptions and judgments that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates include useful lives for property and equipment and related depreciation calculations, estimated amortization period for payments received from product development and license agreements as they relate to revenue recognition, assumptions for valuing options and warrants, and income taxes. Actual results could differ from those estimates.
Cash and Cash Equivalents and Short-Term Investments
The Company considers all highly-liquid instruments with a stated maturity of three months or less at the date of purchase to be cash equivalents. Cash and cash equivalents are stated at cost, which approximates fair value. As of December 31, 2016, and December 31, 2015, the Company’s cash and cash equivalents were held in three highly-rated, major financial institutions in the United States.
The Company classifies all highly-liquid investments with a stated maturity of greater than three months at the date of purchase as short-term investments. Short-term investments generally consist of municipal and corporate debt securities. The Company has classified its short-term investments as available-for-sale. The Company does not intend to hold securities with stated maturities greater than twelve months until maturity. These securities are carried at fair value, with the unrealized gains and losses reported as a component of other comprehensive loss until realized. Realized gains and losses from the sale of available-for-sale securities, if any, are determined on a specific identification basis. A decline in the market value below cost of any available-for-sale security that is determined to be other-than-temporary results in a revaluation of its carrying amount to fair value and an impairment charge to earnings, resulting in a new cost basis for the security. No such impairment charges were recorded for the periods presented. The interest income and realized gains and losses are included in other expense, net, within the consolidated statements of operations and comprehensive loss. Interest income is recognized when earned. As of December 31, 2016 and December 31, 2015, the Company had no short-term investments.
Concentrations of Credit Risk, Major Partners and Customers, and Suppliers
Financial instruments that potentially subject us to significant concentrations of credit risk consist primarily of cash and cash equivalents. The Company maintains deposits of cash and cash equivalents with three highly-rated, major financial institutions in the United States.
Deposits in these banks may exceed the amount of federal insurance provided on such deposits. The Company does not believe it is exposed to significant credit risk due to the financial position of the financial institutions in which these deposits are held.
During the years ended December 31, 2016 and 2015 revenues were derived primarily from sales of Avenova directly to doctors through the Company’s webstore and to three major distribution partners. During the year ended December 31, 2014 revenues were derived primarily from one collaboration partner, service revenues and sales of NeutroPhase.
As of December 31, 2016, December 31, 2015 and December 31, 2014 revenues from our major distribution or collaboration partners greater than 10% are as follows:
|
|
Year Ended December 31,
|
|
Major distribution or collaboration partner
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Distributer A
|
|
|
20
|
%
|
|
|
*
|
|
|
|
*
|
|
Distributer B
|
|
|
22
|
%
|
|
|
*
|
|
|
|
*
|
|
Distributer C
|
|
|
16
|
%
|
|
|
*
|
|
|
|
*
|
|
Collaborator D
|
|
|
*
|
|
|
|
*
|
|
|
|
15
|
%
|
*Not greater than 10%
As of December 31, 2016, and December 31, 2015 accounts receivable from our major distribution or collaboration partners greater than 10% are as follows:
|
|
Year Ended December 31,
|
|
Major distribution or collaboration partner
|
|
2016
|
|
|
2015
|
|
Distributer A
|
|
|
22
|
%
|
|
|
36
|
%
|
Distributer B
|
|
|
24
|
%
|
|
|
11
|
%
|
Distributer C
|
|
|
31
|
%
|
|
|
*
|
|
*Not greater than 10%
The Company relies on two third party sole source manufacturers to produce its finished goods. The Company does not have any manufacturing facilities and intends to continue to rely on third parties for the supply of finished goods. Third party manufacturers may not be able to meet the Company’s needs with respect to timing, quantity or quality.
Fair Value of Financial Assets and Liabilities
Financial instruments, including cash and cash equivalents, accounts receivable, accounts payable and accrued liabilities are carried at cost, which management believes approximates fair value due to the short-term nature of these instruments. Our warrant liability is carried at fair value.
The Company measures the fair value of financial assets and liabilities based on U.S. GAAP guidance, which defines fair value, establishes a framework for measuring fair value, and requires disclosures about fair value measurements.
Under U.S. GAAP, fair value is defined as the exchange price that would be received for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date. A fair value hierarchy is also established, which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value. There are three levels of inputs that may be used to measure fair value:
Level 1 – quoted prices in active markets for identical assets or liabilities;
Level 2 – quoted prices for similar assets and liabilities in active markets or inputs that are observable;
Level 3 – inputs that are unobservable (for example cash flow modeling inputs based on assumptions).
Allowance for Doubtful Accounts
The Company charges bad debt expense and records an allowance for doubtful accounts when management believes it unlikely a specific invoice will be collected. Management identifies amounts due that are in dispute and it believes are unlikely to be collected at the end of 2016. At December 31, 2016 and December 31, 2015, management had reserved $10 thousand and $40 thousand, respectively, primarily based on specific amounts that are in dispute and or are over 120 days past due.
Inventory
Inventory is comprised of (1) raw materials and supplies, such as bottles, packaging materials, labels, boxes, pumps; (2) goods in progress, which are normally unlabeled bottles; and (3) finished goods. We utilize contract manufacturers to produce our products and the cost associated with manufacturing is included in inventory. At December 31, 2016 and 2015, management had recorded an allowance for excess and obsolete inventory of $196 thousand and $45 thousand, respectively.
Inventory is stated at the lower of cost or market value determined by the first-in, first-out method.
Property and Equipment
Property and equipment are stated at cost, less accumulated depreciation and amortization. Depreciation is calculated using the straight-line method over the estimated useful lives of the related assets of five to seven years for office and laboratory equipment, three years for computer equipment and software and seven years for furniture and fixtures. Leasehold improvements are amortized over the shorter of seven years or the lease term.
The costs of normal maintenance, repairs, and minor replacements are charged to operations when incurred.
In September 2016, the Company sub-leased its former headquarters and determined that its leasehold improvements were impaired. This resulted in a $66 thousand impairment charge recorded to general and administrative expense for the third quarter of 2016, and is reflected in the results for the year ended December 31, 2016.
Impairment of Long-Lived Assets
The Company accounts for long-lived assets in accordance with U.S. GAAP, which requires that companies consider whether events or changes in facts and circumstances, both internally and externally, may indicate that an impairment of long-lived assets held for use are present. Management periodically evaluates the carrying value of long-lived assets. During the first quarter of fiscal year 2016, the Company impaired a note receivable which was deemed to no longer be collectable, as the originator of the loan is not in business and the collateral held against the loan did not possess value in an amount sufficient to satisfy the loan. As a result, a $91 thousand impairment charge was recorded to research and development expense for the first quarter of fiscal year 2016, and is reflected in the results for the year ended December 31, 2016. Determination of recoverability is based on an estimate of undiscounted future cash flows resulting from the use of the asset and its eventual disposition. In the event that such cash flows are not expected to be sufficient to recover the carrying amount of the asset, the assets are written down to their estimated fair values and the loss is recognized in the statements of operations.
Comprehensive Income (Loss)
ASC 220,
Comprehensive Income,
requires that an entity’s change in equity or net assets during a period from transactions and other events from non-owner sources be reported. The Company reports unrealized gains and losses on its available-for-sale securities as other comprehensive income (loss).
Revenue Recognition
The Company sells products through a limited number of distributors and via its webstore. The Company generally records product sales upon shipment to the final customer for its webstore sales and upon shipment from its distributor to the final customers for its major distribution partners.
The Company recognizes product revenue when: (i) persuasive evidence that a sale arrangement exists; (ii) delivery has occurred and title has passed; (iii) the price is fixed or determinable; and (iv) collectability is reasonably assured. Revenue from sales transactions where the customer has the right to return the product is recognized at the time of sale only if: (i) the Company’s price to the customer is substantially fixed or determinable at the date of sale; (ii) the customer has paid the Company, or the customer is obligated to pay the Company and the obligation is not contingent on resale of the product; (iii) the customer's obligation to the Company would not be changed in the event of theft or physical destruction or damage of the product; (iv) the customer acquiring the product for resale has economic substance apart from that provided by the Company; (v) the Company does not have significant obligations for future performance to directly bring about resale of the product by the customer; and (vi) the amount of future returns can be reasonably estimated. If these factors were to vary, the resulting change could have a material effect on our revenue recognition and on the Company’s results of operations
Product Revenue Allowances
Product revenue is recognized, net of cash consideration paid to the Company’s customers and wholesalers, for services rendered by wholesalers in accordance with such wholesalers’ agreements and includes a fixed rate per prescription shipped and monthly program management and data fees. These services are not deemed sufficiently separable from the customers' purchase of the product; therefore, they are recorded as a reduction of revenue at the time of revenue recognition.
Other product revenue allowances include certain prompt pay discounts and allowances offered to the Company’s customers, program rebates and chargebacks. These product revenue allowances are recognized as a reduction of revenue or as a selling expense at the later of the date at which the related revenue is recognized or the date at which the allowance is offered.
Other Revenue
License and collaboration revenue is primarily generated through agreements with strategic partners for the development and commercialization of the Company’s product candidates. The terms of the agreements typically include non-refundable upfront fees, funding of research and development activities, payments based upon achievement of certain milestones and royalties on net product sales. In accordance with authoritative guidance, we analyze our multiple element arrangements to determine whether the elements can be separated. We perform our analysis at the inception of the arrangement and as each product or service is delivered. If a product or service is not separable, the combined deliverables are accounted for as a single unit of accounting and revenue is recognized over the performance obligation period. Revenue is recognized when the following criteria have been met: persuasive evidence of an arrangement exists; delivery has occurred and risk of loss has passed; the seller’s price to the buyer is fixed or determinable; and collectability is reasonably assured. If these factors were to vary the resulting change could have a material effect on our revenue recognition and on our results of operations.
Cost of Goods Sold
Cost of goods sold includes third party manufacturing costs, shipping costs, and other costs of goods sold. Cost of goods sold also includes any necessary allowances for excess inventory that may expire and become unsalable.
Research and Development Costs
The Company charges research and development costs to expense as incurred. These costs include salaries and benefits for research and development personnel, costs associated with clinical trials managed by contract research organizations, and other costs associated with research, development and regulatory activities. Research and development costs may vary depending on the type of item or service incurred, location of performance or production, or lack of availability of the item or service, and specificity required in production for certain compounds. The Company uses external service providers to conduct clinical trials, to manufacture supplies of product candidates and to provide various other research and development-related products and services. The Company’s research, clinical and development activities are often performed under agreements it enters into with external service providers. The Company estimates and accrues the costs incurred under these agreements based on factors such as milestones achieved, patient enrollment, estimates of work performed, and historical data for similar arrangements. As actual costs are incurred, the Company adjusts its accruals. Historically, the Company’s accruals have been consistent with management’s estimates, and no material adjustments to research and development expenses have been recognized. Subsequent changes in estimates may result in a material change in the Company’s expenses, which could also materially affect its results of operations.
Patent Costs
Patent costs, including legal expenses, are expensed in the period in which they are incurred. Patent expenses are included in general and administrative expenses in the consolidated statements of operations and comprehensive loss.
Stock-Based Compensation
The Company accounts for stock-based compensation under the provisions of Accounting Standards Updates (“ASU”) No. 2014-12,
Compensation-Stock Compensation (Topic 718)
. Under the fair value recognition provisions, stock-based compensation expense is measured at the grant date for all stock-based awards to employees and directors and is recognized as expense over the requisite service period, which is generally the vesting period. Non-employee stock-based compensation charges are amortized over the vesting period on a straight-line basis. For stock options granted, the fair value of the stock options is estimated using a Black-Scholes-Merton option pricing model. See Note 12 for further information regarding stock-based compensation expense and the assumptions used in estimating that expense. The Company accounts for restricted stock unit awards issued to employees and non-employees (consultants and advisory board members) based on the fair market value of the Company’s common stock as of the date of issuance.
Income Taxes
The Company accounts for income taxes under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. A valuation allowance is recognized if it is more likely than not that some portion or the entire deferred tax asset will not be recognized.
Common Stock Warrant Liabilities
For warrants that are newly issued or modified and there is a deemed possibility that the Company may have to settle them in cash, or for warrants it issues or modifies that contain an exercise price adjustment feature, the Company records the fair value of the issued or modified warrants as a liability at each balance sheet date and records changes in the estimated fair value as a non-cash gain or loss in the consolidated statements of operations and comprehensive loss. The fair values of these warrants have been determined using the Binomial Lattice (“Lattice”) valuation model. The Lattice model provides for assumptions regarding volatility, call and put features and risk-free interest rates within the total period to maturity. These values are subject to a significant degree of our judgment.
Net Income (Loss) per Share
The Company computes net income (loss) per share by presenting both basic and diluted earnings (loss) per share (“EPS”).
Basic EPS is computed by dividing net income (loss) available to common shareholders by the weighted average number of common shares outstanding during the period. Diluted EPS gives effect to all dilutive potential common shares outstanding during the period, including stock options and warrants, using the treasury stock method. In computing, diluted EPS, the average stock price for the period is used to determine the number of shares assumed to be purchased from the exercise of stock options or warrants. Potentially dilutive common share equivalents are excluded from the diluted EPS computation in net loss periods because their effect would be anti-dilutive. During years ended December 31, 2016, 2015 and 2014, there is no difference between basic and diluted net loss per share. The following table sets forth the reconciliation between basic EPS and diluted EPS, after giving effect to the reverse stock split.
|
|
Year Ended December 31,
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands, except per share data)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net loss
|
|
$
|
(13,151
|
)
|
|
$
|
(18,973
|
)
|
|
$
|
(15,194
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic shares
|
|
|
9,408
|
|
|
|
2,784
|
|
|
|
1,985
|
|
Add: shares issued upon assumed exercise of stock options and warrants
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Diluted shares
|
|
|
9,408
|
|
|
|
2,784
|
|
|
|
1,985
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic EPS
|
|
$
|
(1.40
|
)
|
|
$
|
(6.82
|
)
|
|
$
|
(7.65
|
)
|
Diluted EPS
|
|
$
|
(1.40
|
)
|
|
$
|
(6.82
|
)
|
|
$
|
(7.65
|
)
|
The following outstanding stock options and stock warrants were excluded from the diluted EPS computation as their effect would have been anti-dilutive:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Stock options
|
|
|
1,489
|
|
|
|
388
|
|
|
|
323
|
|
Stock warrants
|
|
|
565
|
|
|
|
1,458
|
|
|
|
197
|
|
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB”) issued ASU No. 2014-09,
Revenue from Contracts with Customers
(Topic 606). In August 2015 and March, April, May and December 2016, the FASB issued additional amendments to the new revenue guidance relating to reporting revenue on a gross versus net basis, identifying performance obligations, licensing arrangements, collectability, noncash consideration, presentation of sales tax, transition, and clarifying examples. This new standard will replace all current GAAP guidance on this topic and eliminate all industry-specific guidance. The new revenue recognition guidance provides a unified model to determine how revenue is recognized. The core principle of the guidance is that an entity should recognize 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. In doing so, companies will need to use more judgment and make more estimates than under today’s guidance. These may include identifying performance obligations in the contract, estimating the amount of variable consideration to include in the transaction price, and allocating the transaction price to each performance obligation. ASU 2014-09 as amended is effective for interim and annual reporting periods beginning after December 15, 2017 but permitted the Company to adopt the standard early, but not before the original effective date of December 15, 2016. The Company plans to adopt the new standard effective January 1, 2018 with a modified retrospective transition applying the new guidance to the most current period presented with the cumulative effect of changes reflected in the opening balance of retained earnings in the most current period presented.
While the Company is still in the process of assessing the potential impact of this new standard on its consolidated financial statements, the Company has identified that transactions which under current guidance are recognized upon shipment from its distributor to the final customers for its major distribution partners will be recognized upon transfer of control to its major distribution partners at the amount of consideration that the Company expects to be entitled to. As a result, the Company will record contract liabilities for the invoiced amounts that are estimated to be subject to significant reversal, including product revenue allowances for cash consideration paid to customers for services, discounts, rebate programs, chargebacks, and product returns. The constraint on variable consideration for product returns will be a new estimation resulting from the earlier recognition under the new guidance.
The Company has also identified that license and collaboration revenue that is currently accounted for as a combined unit of accounting because products or services are not separable, may be identified as separate performance obligations that are capable of being distinct under the new guidance. As a result, the transaction price under these arrangements, including upfront fees and milestone payments, may be allocated differently to performance obligations, which may each be recognized at earlier points in time or with a different pattern of performance over time.
The Company is still evaluating its major distribution agreements and its license and collaboration agreements and assessing the impact of adoption of the new standard to its consolidated financial statements. The company will continue to monitor additional modifications, clarifications or interpretations undertaken by the FASB that may impact its current conclusions, and will expand its analysis to include any new or modified revenue arrangements prior to adoption. The Company expects to complete the efforts by the fourth quarter of 2017.
In August 2014, FASB issued ASU 2014-15,
Presentation of Financial Statements
–
Going Concern (Subtopic 205-40): Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern
. This new standard provides guidance around management's responsibility to evaluate whether there is substantial doubt about an entity's ability to continue as a going concern and to provide related footnote disclosure if substantial doubt exists. The new standard is effective for annual periods ending after December 15, 2016 and for annual periods and interim periods thereafter. Early adoption is permitted. The Company adopted ASU 2014-15 and for adoption impact see Note1 to the financial statements under “
liquidity
”
In July 2015, the FASB issued ASU No. 2015-11,
Inventory (Topic 330): Simplifying the Measurement of Inventory
, which changes the measurement principle for inventory from the lower of cost or market to the lower of cost and net realizable value. ASU No. 2015-11 defines net realizable value as estimated selling prices in the ordinary course of business, less reasonably predictable costs of completion, disposal, and transportation. The new guidance must be applied on a prospective basis and is effective for the Company in the first quarter of fiscal year 2017, with early adoption permitted. The Company is still evaluating, but does not believe the implementation of this guidance will result in a material impact to its consolidated financial statements.
In January 2016, the FASB issued ASU 2016-01,
Financial Instruments – Overall (Subtopic 825-10)
:
Recognition and Measurement of Financial Assets and Financial Liabilities
, which provides guidance for the recognition, measurement, presentation, and disclosure of financial assets and liabilities. This guidance will be effective for the Company beginning in the first quarter of fiscal year 2018. The Company is evaluating the effects of the adoption of this guidance to its consolidated financial statements.
In February 2016, the FASB issued ASU 2016-02,
Leases (Topic 842)
, which supersedes the lease accounting requirements in
Leases (Topic 840)
. ASU 2016-02 requires a dual approach for lessee accounting under which a lessee would account for leases as finance leases or operating leases. Both finance leases and operating leases will result in the lessee recognizing a right-of-use asset and a corresponding lease liability. For finance leases, the lessee would recognize interest expense and amortization of the right-of-use asset, and for operating leases, the lessee would recognize a straight-line total lease expense. The guidance also requires qualitative and specific quantitative disclosures to supplement the amounts recorded in the financial statements so that users can understand more about the nature of an entity’s leasing activities, including significant judgments and changes in judgments. This guidance is effective beginning in the first quarter of fiscal year 2019. The Company is evaluating the effects of the adoption of this guidance on its consolidated financial statements.
In March 2016, the FASB issued ASU 2016-09,
Compensation – Stock Compensation (Topic 718): Improvements to Employee Share-Based Payment Accounting,
which is intended to simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities, and classification on the statement of cash flows. This guidance is effective beginning in the first quarter of fiscal year 2017 and early adoption is permitted in an interim period with any adjustments reflected as of the beginning of the fiscal year that includes such interim period. The Company is still evaluating, but does not believe the implementation of this guidance will result in a material impact to its consolidated financial statements.
In August 2016, the FASB issued ASU 2016-15,
Classification of Certain Cash Receipts and Cash Payments (Topic 230),
which addresses eight specific issues regarding the treatment of cash flow. This update is effective for the Company for its fiscal year 2018. The Company is currently evaluating the effects of the adoption of ASU 2016-15 to its consolidated financial statements.
In November 2016, the FASB issued ASU 2016-18,
Statement of Cash Flows (Topic 230),
that will require entities to show the changes in the total of cash, cash equivalents, restricted cash and restricted cash equivalents in the statement of cash flows. This update is effective for the Company for its fiscal year 2018. The Company is currently evaluating the effects of the adoption of ASU 2016-18 to its consolidated financial statements.
NOTE 3. FAIR VALUE MEASUREMENTS
The Company measures the fair value of financial assets and liabilities based on authoritative guidance that defines fair value, establishes a framework consisting of three levels for measuring fair value, and requires disclosures about fair value measurements. Fair value is defined as the exchange price that would be receive for an asset or paid to transfer a liability (an exit price) in the principal or most advantageous market for the asset or liability in an orderly transaction between market participants on the measurement date.
The Company’s cash equivalents and investments are classified within Level 1 or Level 2 of the fair value hierarchy because they are valued using quoted market prices in active markets, broker or dealer quotations, or alternative pricing sources with reasonable levels of price transparency. The types of investments that are generally classified within Level 1 of the fair value hierarchy include money market securities and certificates of deposits. The types of investments that are generally classified within Level 2 of the fair value hierarchy include corporate securities and U.S. government securities.
The Company’s warrant liability is classified within level 3 of the fair value hierarchy because the value is calculated using significant judgment based on our own assumptions in the valuation of this liability.
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2016:
|
|
Fair Value Measurements Using
|
|
(in thousands)
|
|
Balance at
December 31,
2016
|
|
|
Quoted Prices in
Active Markets
for Identical
Items
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
100
|
|
|
$
|
100
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Restricted cash held as a certificate of deposit
|
|
|
324
|
|
|
|
324
|
|
|
|
—
|
|
|
|
—
|
|
Deposit held as a certificate of deposit
|
|
|
150
|
|
|
|
150
|
|
|
|
—
|
|
|
|
—
|
|
Total assets
|
|
$
|
574
|
|
|
$
|
574
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
1,446
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,446
|
|
Total liabilities
|
|
$
|
1,446
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,446
|
|
The following table presents the Company’s assets and liabilities measured at fair value on a recurring basis as of December 31, 2015:
|
|
Fair Value Measurements Using
|
|
(in thousands)
|
|
Balance at
December 31,
2015
|
|
|
Quoted Prices in
Active Markets
for Identical
Items
(Level 1)
|
|
|
Significant
Other
Observable
Inputs
(Level 2)
|
|
|
Significant
Unobservable
Inputs
(Level 3)
|
|
Assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash equivalents
|
|
$
|
2,385
|
|
|
$
|
2,385
|
|
|
$
|
—
|
|
|
$
|
—
|
|
Total assets
|
|
$
|
2,385
|
|
|
$
|
2,385
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Liabilities
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Warrant liability
|
|
$
|
1,450
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,450
|
|
Total liabilities
|
|
$
|
1,450
|
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
1,450
|
|
For the year ended December 31, 2016, as a result of the fair value adjustment of the warrant liability, the Company recorded a non-cash loss on a change in the fair value of $2.1 million in its consolidated statements of operations and comprehensive loss. See Note 10 for further discussion on the calculation of the fair value of the warrant liability.
(in thousands)
|
|
2016
|
|
|
2015
|
|
Fair value of warrant liability at January 1
|
|
$
|
1,450
|
|
|
$
|
173
|
|
Fair value of warrants issued
|
|
|
—
|
|
|
|
1,251
|
|
Fair value of warrants transferred (to) from equity upon exercise
|
|
|
(2,103
|
)
|
|
|
2,175
|
|
Increase (decrease) in fair value on exercise date and December 31
|
|
|
2,099
|
|
|
|
(2,149
|
)
|
Fair value of warrant liability at December 31
|
|
$
|
1,446
|
|
|
$
|
1,450
|
|
NOTE 4. PREPAID EXPENSES AND OTHER CURRENT ASSETS
Prepaid expenses and other current assets consisted of the following:
(in thousands)
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Prepaid sales rebates
|
|
$
|
658
|
|
|
$
|
—
|
|
Prepaid outsourced sales team
|
|
|
606
|
|
|
|
—
|
|
Rent receivable
|
|
|
165
|
|
|
|
—
|
|
Prepaid research and development services
|
|
|
123
|
|
|
|
—
|
|
Prepaid rent
|
|
|
120
|
|
|
|
—
|
|
Other
|
|
|
294
|
|
|
|
261
|
|
Total prepaid expenses and other current assets
|
|
$
|
1,966
|
|
|
$
|
261
|
|
NOTE 5. INVENTORY
Inventory consisted of the following:
(in thousands)
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Raw materials and supplies
|
|
$
|
514
|
|
|
$
|
660
|
|
Goods in process
|
|
|
—
|
|
|
|
248
|
|
Finished goods
|
|
|
555
|
|
|
|
482
|
|
Less: Reserve for excess and obsolete inventory
|
|
|
(196
|
)
|
|
|
(45
|
)
|
Total inventory, net
|
|
$
|
873
|
|
|
$
|
1,345
|
|
NOTE 6. PROPERTY AND EQUIPMENT
Property and equipment consisted of the following:
(in thousands)
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Office and laboratory equipment
|
|
$
|
24
|
|
|
$
|
1,528
|
|
Furniture and fixtures
|
|
|
153
|
|
|
|
169
|
|
Computer equipment and software
|
|
|
170
|
|
|
|
122
|
|
Production equipment
|
|
|
105
|
|
|
|
105
|
|
Leasehold improvements
|
|
|
68
|
|
|
|
173
|
|
Total property and equipment, at cost
|
|
|
520
|
|
|
|
2,097
|
|
Less: accumulated depreciation and amortization
|
|
|
(149
|
)
|
|
|
(1,702
|
)
|
Total property and equipment, net
|
|
$
|
371
|
|
|
$
|
395
|
|
In the quarter ended September 30, 2016, the Company sub-leased its prior headquarters and determined that its leasehold improvements were impaired. This resulted in a $66 thousand impairment charge recorded to general and administrative expense in the consolidate statement of operation and comprehensive loss for the year ended December 31, 2016.
In the quarter ended September 30, 2016, the Company transferred title to a significant portion of its lab equipment in exchange for research and development services. As a result, the Company recognized a $232 thousand gain on the sales of these assets, which was recorded to research and development expense in the consolidate statement of operation and comprehensive loss for the year ended December 31, 2016.
In the quarter ended December 31 2016, the Company disposed of damaged, unusable and full depreciated property and equipment. As a result, the Company recognized a $13 thousand loss on the disposal of these assets, and a $4 thousand impairment charge, which were recorded to general and administrative expense in the consolidate statement of operation and comprehensive loss for the year ended December 31, 2016.
Depreciation and amortization expense was $114 thousand, $164 thousand, $232 thousand for the years ended December 31, 2016, 2015 and 2014, respectively.
NOTE 7. ACCRUED LIABILITIES
Accrued liabilities consisted of the following:
(in thousands)
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Research and development
|
|
$
|
2
|
|
|
$
|
394
|
|
Employee payroll and benefits
|
|
|
763
|
|
|
|
414
|
|
Severance pay
|
|
|
250
|
|
|
|
790
|
|
Sales rebates
|
|
|
166
|
|
|
|
150
|
|
Outsourced sales team
|
|
|
333
|
|
|
|
—
|
|
Inventory
|
|
|
75
|
|
|
|
—
|
|
Other
|
|
|
212
|
|
|
|
232
|
|
Total accrued liabilities
|
|
$
|
1,801
|
|
|
$
|
1,980
|
|
NOTE 8. RELATED PARTY NOTES PAYABLE
Beginning on December 30, 2015, the Company entered into a series of agreements pursuant to a loan (the “Loan”) facilitated by China Kington Asset Management Co. Ltd. (“China Kington”). In connection with the Loan, the Company issued five (5) promissory notes (the “Notes”) payable to Mr. Mark Sieczkarek, the Gail J. Maderis Revocable Trust, Dr. T. Alex McPherson, Mr. Jian Ping Fu, and Pioneer Pharma (Singapore) Pte. Ltd. (“Pioneer Singapore”)
(collectively, the “Lenders”), loaning the Company an aggregate of $3.0 million. Specifically, Mr. Sieczkarek, Chairman of the Board of Directors of the Company (the “Board”) and President and Chief Executive Officer of the Company, loaned the Company $199 thousand; the Gail J. Maderis Revocable Trust, on behalf of Ms. Maderis, a Director of the Company, loaned the Company $71 thousand; Dr. McPherson, a Director of the Company, loaned the Company $20 thousand; Pioneer Singapore loaned the Company $1.4 million; and Mr. Fu loaned the Company $1.4 million. China Pioneer, Pioneer Hong Kong (who now holds all of the holdings of Pioneer Singapore due to a recent internal corporate reorganization) and Mr. Fu are the Company's two largest stockholders. All Notes were issued on December 30, 2015 except the Note payable to Mr. Fu, which was issued on January 12, 2016.
The proceeds from the Notes were used for general corporate purposes. Minimum
quarterly payments of principal and interest began on March 31, 2016 and were scheduled to continue on the last day of each of June, September, December and March thereafter. The entire principal sum and any and all accrued and unpaid interest was payable in full upon the Company’s next financing, subsequent to the dates of the Notes, but in no event would the term of the Loan extend beyond December 30, 2018, except for the loan by Mr. Fu, the term of which was to extend three (3) years from the date of issuance. The Notes carried an interest rate of six percent (6%) per annum and could be prepaid in whole or in part at any time without premium or penalty.
In connection with the Notes, China Kington agreed to act as collateral agent for the benefit of the Lenders, in accordance with the terms of a collateral agency and intercreditor agreement (the “Collateral Agency Agreement”), which was entered into on December 30, 2015 between China Kington and the Lenders. To secure the Notes, China Kington perfected a security interest in all tangible and intangible assets of the Company, pursuant to a security agreement (the “Security Agreement”
)
between the Company and China Kington, which was entered into on December 30, 2015.
As consideration to China Kington for facilitating the Loan, the Company agreed to the following: (1) the grant of a first right of refusal for China Kington (or its designee that shall be acceptable to the Company in its reasonable discretion) to lead financings for the Company for a period that is the shorter of two (2) years or the day that the Company’s cash flow has been equal to or greater than $0 in each month for three (3) consecutive months, subject to certain limitations; (2) the participation of Mr. Sieczkarek as a Lender in the financing; (3) the participation of the Board, management and investors that the Board and management provide, to contribute an aggregate nine percent (9%) of funds in the Company’s next financing; (4) the appointment of two new members to the Company’s Board by China Kington; and (5) the Company’s agreement to reasonably cooperate with reasonable requests made by an auditor engaged, and paid for, by China Kington, subject to certain limitations. Upon the recommendation of China Kington, and after reviewing their relevant experiences and background and discussing the same, on January 26, 2016 the Board of Directors unanimously appointed Mr. Mijia “Bob” Wu and Mr. Xiaoyan “Henry” Liu to serve as Class I and Class III members of the Board, respectively.
Because Bob Wu is the Managing Director of China Kington, China Kington became a related party upon his appointment to the Board.
Upon closing the first tranche of an $11.8 million private placement on May 6, 2016 and by agreement with the Lenders, the Company used $2.5 million of the proceeds from the private placement to repay principal on the Notes issued to the Lenders.
Upon closing the second tranche of such $11.8 million private placement on August 1, 2016, the Company repaid the remaining principal on the Notes in the amount of $520 thousand.
As of December 31, 2016, outstanding amounts under these Notes was zero.
NOTE 9. COMMITMENTS AND CONTINGENCIES
Operating Leases
On August 24, 2016, the Company entered into an Office Lease (the “Lease”), pursuant to which the Company leased approximately 7,799 rentable square feet of real property located on the eleventh floor (Suite 1150) at 2000 Powell Street, Emeryville, California 94608 (the “Premises”) from KBSIII Towers at Emeryville, LLC (the “Landlord”), for the Company’s new principal executive offices. The expiration date of the Lease is February 28, 2022, unless earlier terminated pursuant to any provision of the Lease. The Company also has the option to extend the term of the Lease for one five (5)-year period upon written notice to the Landlord which is no earlier than twelve (12) months and no later than nine (9) months prior to the expiration of the then current term. The effective monthly base rental rate for the first twelve (12) months of the Lease is $4.15 per square foot ($338,390 annually), and increases approximately three percent (3%) every eleven (11) months thereafter beginning with the thirteenth (13
th
) month of the Lease, with a maximum monthly rental rate of $4.81 per square foot ($450,250 annually) for months sixty-one (61) to sixty-three (63) of the Lease. The Company will also be responsible for its share of the direct expenses of the Premises, or 2.16%, which includes certain additional operating expenses, utilities costs and tax expenses. The Landlord has agreed to abate all of the Company’s monthly base rental payments for the first three (3) full calendar months of the Lease. The Company was also required to provide a standby letter of credit (the “Letter of Credit”) as security for performance of its obligations and for all losses and damages the Landlord may suffer as a result of any default by the Company under the Lease in the initial amount of $323,658, which is secured by a certificate of deposit and is recorded in other assets. Provided that no default occurs under the terms of the Lease, and certain financial requirements are met, the Company will be entitled to periodically reduce the amount of the Letter of Credit down to a maximum of approximately $151,823 as of the last day of the sixtieth (60
th
) full calendar month of the Lease.
The Company also leases laboratory facilities and office space at Suite 550, EmeryStation North Building, 5980 Horton Street, Emeryville, California (“EmeryStation”) under an operating lease which will expire on October 21, 2020. On July 11, 2016, the Company entered into a Sublease Agreement to sublease all 16,465 rentable square feet of real property at EmeryStation (the “Sublease Agreement”) that the Company currently leases at Emery Station. The commencement date under the Sublease Agreement was September 8, 2016. The expiration date of the Sublease Agreement is October 21, 2020, the expiration date of the Company’s lease for the Emery Station Premises, unless earlier terminated pursuant to any provision of the Company’s lease for EmeryStation, as amended, or the Sublease Agreement. As a result of the sublease, the Company recorded a non-cash loss of $40 thousand, and an impairment to leasehold improvements of $66 thousand, which were recorded to general and administrative expense.
Rent expense, net was $938 thousand, $1,008 thousand, and $1,045 thousand for the years ended December 31, 2016, 2015 and 2014, respectively. The future minimum lease payments under these non-cancellable operating leases were as follows as of December 31, 2016:
(in thousands)
|
|
Lease Commitment
|
|
Year ending December 31:
|
|
|
|
|
2017
|
|
$
|
987
|
|
2018
|
|
|
1,083
|
|
2019
|
|
|
1,116
|
|
2020
|
|
|
1,026
|
|
2021
|
|
|
438
|
|
Thereafter
|
|
|
75
|
|
Total lease commitment
|
|
$
|
4,725
|
|
The Company’s monthly rent payments fluctuate under the master lease agreements. In accordance with U.S. GAAP, the Company recognizes rent expense on a straight-line basis, and records deferred rent for the difference between the amounts paid and recorded as expense. At December 31, 2016 and 2015, the Company had $327 thousand and $189 thousand of deferred rent, respectively.
Sub-lease rental reimbursement in not deducted from the above table. The Company anticipates collecting $709 thousand, $609 thousand, $690 thousand, and $576 thousand in the years ending December 31, 2017, 2018, 2019, and 2020, respectively.
Directors and Officers Indemnity
As permitted under Delaware law and in accordance with its bylaws, the Company indemnifies its officers and directors for certain events or occurrences while the officer or director is or was serving at the Company’s request in such capacity. The term of the indemnification period is for the officer’s or director’s lifetime. The maximum amount of potential future indemnification is unlimited; however, the Company has a director or officer insurance policy that limits its exposure and may enable it to recover a portion of any future payments. The Company believes the fair value of these indemnification agreements is minimal. Accordingly, it has not recorded any liabilities for these agreements as of December 31, 2016.
In the normal course of business, the Company provides indemnifications of varying scope under its agreements with other companies, typically its clinical research organizations, investigators, clinical sites, suppliers and others. Pursuant to these agreements, it generally indemnifies, holds harmless, and agrees to reimburse the indemnified parties for losses suffered or incurred by the indemnified parties in connection with use or testing of its products or product candidates or with any U.S. patent or any copyright or other intellectual property infringement claims by any third party with respect to its products. The term of these indemnification agreements is generally perpetual. The potential future payments the Company could be required to make under these indemnification agreements is unlimited. Historically, costs related to these indemnification provisions have been immaterial. The Company also maintains various liability insurance policies that limit its exposure. As a result, it believes the fair value of these indemnification agreements is minimal. Accordingly, the Company has not recorded any liabilities for these agreements as of December 31, 2016.
Legal Matters
From time to time, the Company may be involved in various legal proceedings arising in the ordinary course of business. There are no matters at December 31, 2016, that, in the opinion of management, would have a material adverse effect on our financial position, results of operations or cash flows.
NOTE 10. WARRANT LIABILITY
In July 2011, the Company sold common stock and warrants in a registered direct financing. As part of this transaction, 139,520 warrants were issued with an exercise price of $33.25 and were exercisable from January 1, 2012 to July 5, 2016. The terms of the warrants require registered shares to be delivered upon each warrant’s exercise and also require possible cash payments to the warrant holders (in lieu of the warrant’s exercise) upon specified fundamental transactions involving the Company’s common stock, such as in an acquisition of the Company. Under ASC 480, Distinguishing Liabilities from Equity,
the Company’s ability to deliver registered shares upon an exercise of the warrants and the Company’s potential obligation to cash-settle the warrants if specified fundamental transactions occur are deemed to be beyond the Company’s control. The warrants contain a provision according to which the warrant holder would have the option to receive cash, equal to the Black Scholes fair value of the remaining unexercised portion of the warrant, as cash settlement in the event that there is a fundamental transaction (contractually defined to include various merger, acquisition or stock transfer activities). Due to this provision, ASC 480 requires that these warrants be classified as liabilities. The fair values of these warrants have been determined using the Lattice valuation model, and the changes in the fair value are recorded in the consolidated statement of operations and comprehensive loss. The Lattice model provides for assumptions regarding volatility and risk-free interest rates within the total period to maturity. In addition, after January 5, 2012, and if the closing bid price per share of the common stock in the principal market equals or exceeds $66.50 for any ten trading days (which do not have to be consecutive) in a period of fifteen consecutive trading days, the Company has the right to require the exercise of one-third of the warrants then held by the warrant holders.
In October 2015, the holders of all warrants issued pursuant to the Company’s securities purchase agreement dated March 3, 2015 (the “2015 Securities Purchase Agreement”) agreed to reduce the length of notice required to such investors prior to the Company’s issuance of new securities from twenty business days to two business days, for the remainder of such investors’ pre-emptive right period (which expired March 3, 2016). The Company entered into these agreements to enable it to expeditiously raise capital in the October 2015 Offering (as described below) and future offerings. As consideration for these agreements, the Company amended certain provisions of both the warrants with a 15-month term (the “Short-Term Warrants”) and warrants with a five-year term (the “Long-Term Warrants”) issued pursuant to the 2015 Securities Purchase Agreement (together, the “March 2015 Warrants”) and the warrants issued pursuant to the placement agent agreement dated June 29, 2011 (the “July 2011 Warrants”). Specifically, the amendments decreased the exercise price for both the March 2015 Warrants and the July 2011 Warrants to $5.00 per share. In addition, the amendments extended the exercise expiration date for the Short-Term Warrants and the July 2011 Warrants to March 6, 2020. A price protection provision also was added to both the July 2011 Warrants and March 2015 Warrants, such that if the Company subsequently sells or otherwise disposes of Company common stock at a lower price per share than $5.00 or any securities exchangeable for common stock with a lower exercise price than $5.00, the exercise price of such warrants will be reduced to that lower price.
In October 2015, the Company also entered into an underwriting agreement with Roth Capital Partners, LLC, relating to the public offering and sale of up to (i) 492,000 shares of the Company’s common stock; and (ii) warrants to purchase up to 442,802 shares of the Company’s common stock (the “October 2015 Warrants”) with an exercise price of $5.00 per share (the “October 2015 Offering”).
In February 2016, the strike price of the July 2011, March 2015 and October 2015 warrants was reduced to $1.81 per share, pursuant to the price protection provisions in such warrants, because the Company sold common stock to Mr. Jian Ping Fu at that price.
The Company evaluated the change in terms of the July 2011 Warrants and noted that the change in terms resulted in a revaluation at the time of the change. The warrants were re-issued and valued as of October 27, 2015 at $360,821 with the new terms, and a modification expense was recorded for the difference between the fair value of the warrants at their new terms after modification on October 27, 2015 and the fair value of the warrants at their original terms prior to modification as of October 27, 2015. The fair values of these warrants have been determined using the Lattice valuation model, and the changes in the fair value are recorded in the consolidated statement of operation and comprehensive loss.
The key assumptions used to value the warrants after the modification at October 27, 2015 were as follows:
Assumption
|
|
|
|
|
Expected price volatility
|
|
|
80.00
|
%
|
Expected term (in years)
|
|
|
4.36
|
|
Risk-free interest rate
|
|
|
1.23
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Weighted-average fair value of warrants
|
|
$
|
2.60
|
|
The shares of common stock and warrants were issued separately. Each warrant was exercisable immediately upon issuance and will expire 60 months from the date of issuance. The price to the public in the October 2015 Offering was $5.00 per share of common stock and related warrant. The net proceeds to the Company were approximately $2.1 million after deducting underwriting discounts and commissions and offering expenses.
The key assumptions used to value the warrant at December 31, 2016 and December 31, 2015 were as follows:
|
|
Year Ended December 31,
|
|
Assumption
|
|
2016
|
|
|
2015
|
|
Expected price volatility
|
|
|
102.00
|
%
|
|
|
80.00
|
%
|
Expected term (in years)
|
|
|
3.18
|
|
|
|
4.18
|
|
Risk-free interest rate
|
|
|
1.51
|
%
|
|
|
1.58
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Weighted-average fair value of warrants
|
|
$
|
2.55
|
|
|
$
|
1.10
|
|
In March 2015, the Company issued both the Short-Term Warrants ($15.00 per share exercise price) and the Long-Term Warrants ($16.25 per share exercise price). At that time, the Company determined that these warrants qualified for equity accounting and did not contain embedded derivatives that required bifurcation. After the Company’s agreement to modify the terms of the March 2015 Warrants and July 2011 Warrants in October 2015, the Company evaluated the change in terms of the March 2015 Warrants and noted that the change in terms resulted in liability classification of both the Short-Term and Long-Term Warrants. The March 2015 Warrants were re-issued and valued as of October 27, 2015 at a total of $1.8 million with the new terms, and a modification expense was recorded at the difference between the fair value of the warrants on their new terms after modification as of October 27, 2015 and the fair value of the warrants on their original terms prior to modification as of October 27, 2015. The fair values of these warrants have been determined using the Lattice valuation model, and the changes in the fair value are recorded in the consolidated statement of operations and comprehensive loss.
The key assumptions used to value the Short-Term and Long-Term Warrants after modification at October 27, 2015 were as follows:
Assumption
|
|
|
|
|
Expected price volatility
|
|
|
80.00
|
%
|
Expected term (in years)
|
|
|
4.36
|
|
Risk-free interest rate
|
|
|
1.23
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Weighted-average fair value of warrants
|
|
$
|
2.78
|
|
The key assumptions used to value the Short-Term Warrants as of December 31, 2016, and December 31, 2015 were as follows:
|
|
Period Ended
|
|
Assumption
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Expected price volatility
|
|
|
102.00
|
%
|
|
|
80.00
|
%
|
Expected term (in years)
|
|
|
3.18
|
|
|
|
4.18
|
|
Risk-free interest rate
|
|
|
1.51
|
%
|
|
|
1.58
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Weighted-average fair value of warrants
|
|
$
|
2.47
|
|
|
$
|
1.16
|
|
The key assumptions used to value the Long-Term Warrants as of December 31, 2016, and December 31, 2015 were as follows:
|
|
Period Ended
|
|
Assumption
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Expected price volatility
|
|
|
102.00
|
%
|
|
|
80.00
|
%
|
Expected term (in years)
|
|
|
3.18
|
|
|
|
4.18
|
|
Risk-free interest rate
|
|
|
1.51
|
%
|
|
|
1.58
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Weighted-average fair value of warrants
|
|
$
|
2.55
|
|
|
$
|
1.16
|
|
As noted above, the Company issued warrants in connection with the October 2015 Offering. The Company evaluated the terms of the October 2015 Warrants and noted that under ASC 480, the Company’s potential obligation to cash-settle the warrants if specified fundamental transactions occur are deemed to be beyond the Company’s control. Due to this provision, ASC 480 requires that these warrants be classified as liabilities. The fair values of these warrants have been determined using the Lattice valuation model, and the changes in the fair value are recorded in the consolidated statement of operations and comprehensive loss. The fair value of the warrants at issuance on October 27, 2015 was $1.3 million.
The key assumptions used to initially value the October 2015 warrants at October 27, 2015 were as follows:
Assumption
|
|
|
|
|
Expected price volatility
|
|
|
75.50
|
%
|
Expected term (in years)
|
|
|
5.00
|
|
Risk-free interest rate
|
|
|
1.38
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
Weighted-average fair value of warrants
|
|
$
|
2.82
|
|
The key assumptions used to value the warrants as of December 31, 2016, and December 31, 2015 were as follows:
|
|
Period Ended
|
|
Assumption
|
|
December 31,
2016
|
|
|
December 31,
2015
|
|
Expected price volatility
|
|
|
96.00
|
%
|
|
|
77.50
|
%
|
Expected term (in years)
|
|
|
3.83
|
|
|
|
4.83
|
|
Risk-free interest rate
|
|
|
1.66
|
%
|
|
|
1.72
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Weighted-average fair value of warrants
|
|
$
|
2.60
|
|
|
$
|
1.21
|
|
During the third quarter of 2016, a total of 3,613,284 warrants to purchase 3,613,284 shares of common stock were exercised related to the July 2011, March 2015 and October 2015 warrants resulting in gross proceeds of $6.9 million. Upon exercise, the warrant liability associated with these warrants was adjusted to its fair value as of the date of exercise of $1.6 million, with any change in fair value recorded in the consolidated income statement and comprehensive loss. The $1.6 million fair value was subsequently transferred to equity as of the date of their exercise.
During the fourth quarter of 2016, a total of 363,523 warrants to purchase 363,523 shares of common stock were exercised related to the October 2011, November 2015 and December 2015 warrants resulting in gross proceeds of $0.9 million. Upon exercise, the warrant liability associated with these warrants was adjusted to its fair value as of the date of exercise of $0.5 million, with any change in fair value recorded in the consolidated income statement and comprehensive loss. The $0.5 million fair value was subsequently transferred to equity as of the date of their exercise.
The details of all outstanding warrant liability as of December 31, 2016, were as follows:
Shares and dollars in thousands
|
|
Shares
|
|
|
Warrant
Liability
|
|
July 2011 Warrants
|
|
|
49
|
|
|
$
|
126
|
|
Long-Term Warrants
|
|
|
105
|
|
|
|
267
|
|
Short-Term Warrants
|
|
|
127
|
|
|
|
312
|
|
October 2015 Warrants
|
|
|
284
|
|
|
|
741
|
|
|
|
|
565
|
|
|
$
|
1,446
|
|
NOTE 11. STOCKHOLDERS’ EQUITY (DEFICIT)
Amendments to Articles of Incorporation – Reverse Stock Split
Effective December 11, 2015, the Company amended its Certificate of Incorporation to effect a 1-for-25 reverse split of its outstanding common stock which was approved by our stockholders on December 11, 2015. The accompanying financial statements and related notes give retroactive effect to this reverse stock split.
Preferred Stock
Under the Company’s amended articles of incorporation, the Company is authorized to issue of up to 5,000,000 shares of preferred stock in such series and with such rights and preferences as may be approved by the board of directors. As of December 31, 2016 and December 31, 2015, there were no shares of preferred stock outstanding.
Common Stock
On March 25, 2014, the Company closed a public offering for the sale of 224,000 units, each unit consisting of (i) one share of common stock and (ii) one warrant to purchase 6.25 shares of common stock (or a total of 56,000 shares), at a purchase price of $30.00 per unit. The warrants were immediately exercisable for $39.00 per share expired eighteen months from the date of issuance. All of the shares of common stock and warrants issued in the offering (and the shares of common stock issuable upon exercise of the warrants) were offered pursuant to a shelf registration statement filed with, and declared effective by, the Securities and Exchange Commission. The shares of common stock and the warrants were immediately separable and were issued separately, but were purchased together. The Company raised a total of $6.7 million from this offering, or approximately $6.0 million in net proceeds after deducting underwriting commissions of $470 thousand and other offering costs of $211 thousand.
On October 16, 2014, the Company entered into an At-The-Market Offering Agreement (the “2014 ATM Agreement”) with Ascendiant under which it may offer and sell its common stock having aggregate sales proceeds of up to $10.0 million from time to time through Ascendiant as its sales agent. Sales of Company common stock through Ascendiant are made by means of ordinary brokers’ transactions on the NYSE MKT or otherwise at market prices prevailing at the time of sale, in block transactions, or as otherwise agreed upon by the Company and Ascendiant. Ascendiant uses commercially reasonable efforts to sell Company common stock from time to time, based upon instructions from it (including any price, time or size limits or other customary parameters or conditions it may impose). The Company pays Ascendiant a commission of 3.0% of the gross sales proceeds of any common stock sold through Ascendiant under the 2014 ATM Agreement. The Company has also provided Ascendiant with customary indemnification rights. In connection with the 2014 ATM Agreement, the Company terminated its existing At-The-Market Offering Agreement with Ascendiant dated November 13, 2013. The Company is not obligated to make any sales of common stock under the 2014 ATM Agreement. The offering of shares of the Company’s common stock pursuant to the 2014 ATM Agreement will terminate upon the earlier of (i) the sale of all common stock subject to the 2014 ATM Agreement, or (ii) termination of the 2014 ATM Agreement in accordance with its terms.
Pursuant to the 2014 ATM Agreement, the Company sold 1.3 million shares for gross proceeds of $1.2 million, or approximately $1.1 million in net proceeds after deducting offering costs and commissions of $81 thousand.
On March 6, 2015, the Company closed a private placement offering of an aggregate of 370,993 immediately separable units, which included 370,933 shares of the Company’s common stock, 278,200 Long-Term Warrants and 370,933 Short-Term Warrants (the “March Offering”). The per unit purchase price was $12.50 for outside investors and $15.00 for Company insiders, and the exercise prices for the 15-month warrants and 5-year warrants were $15.00 and $16.25 per share, respectively. Also on March 6, 2015, the Company entered into a registration rights agreement with the purchasers, pursuant to which the Company agreed to file as many registration statements with the Securities and Exchange Commission (the “SEC”) as may be necessary to cover the resale of the shares of Company common stock issued in the offering, including those shares underlying the March 2015 Warrants, and to keep such registration statements effective for the terms defined therein. The Company raised a total of $4.7 million from this offering, or approximately $4.5 million in net proceeds after deducting offering costs of $200 thousand.
On May 22, 2015, the Company closed a private placement offering of an aggregate of 435,746 shares of the Company’s common stock and 217,873 warrants with a 12-month term (the “May Offering”). The purchase price for a share of Company common stock and related warrant was $15.75, and the exercise price for the warrants was $19.50 per share. On May 18, 2015, the Company entered into a registration rights agreement with the purchasers, pursuant to which the Company agreed to use best efforts to file as many registration statements with the SEC as may be necessary to cover the resale of the shares of Company common stock issued in the offering, including those shares underlying the warrants, and to keep such registration statements effective for the terms defined therein. In connection with the May Offering, the Company agreed to enter into an additional definitive securities purchase agreement with the purchasers in the March Offering. In exchange for a waiver of certain pre-emptive rights granted to the purchasers in the March Offering, an additional 635,000 shares of Company common stock were issued to such purchasers (other than entities affiliated with the Company). The Company raised a total of $7.3
million from this offering, or approximately $6.4 million in net proceeds after deducting offering costs of $900 thousand. China Kington Asset Management Co. Ltd. served as placement agent in exchange for a commission equal to six percent (6%) of the gross proceeds received by the Company upon closing pursuant to the purchases non US citizens. The amount of such commission was approximately $408 thousand, and was included in the offering costs noted above.
On October 27, 2015, pursuant to an underwriting agreement with Roth Capital Partners, LLC, the Company closed a public offering of (i) 492,000 shares of the Company’s common stock; and (ii) warrants to purchase up to 468,280 shares of the Company’s common stock with an exercise price of $5.00 per share (the “October 2015 Warrants”). The shares of common stock and October 2015 Warrants were issued separately. Each October 2015 Warrant was exercisable immediately upon issuance and will expire 60 months from the date of issuance. The price to the public in this offering was $5.00 per share of common stock and related October 2015 Warrant. The Company raised a total of $2.3
million from this offering, or approximately $1.9 million in net proceeds after deducting underwriting discounts and offering costs of $400 thousand.
In February 2016, the Company entered into three securities purchase agreements (the “Purchase Agreements”) for the sale of an aggregate of 1,518,567 shares of the Company’s common stock (the “Common Stock”) to accredited investors for a total of $2.8 million. The Company entered into the first purchase agreement with Mr. Jian Ping Fu (the “Fu Agreement”), pursuant to which the Company agreed to issue and sell to Mr. Fu 696,590 shares of Common Stock, at a per share price of $1.81, which was a five percent (5%) discount to the closing price of the Common Stock on February 16, 2016, the date of the Fu Agreement. The Company entered into the second purchase agreement with Pioneer Singapore (the “Pioneer Agreement”), pursuant to which the Company agreed to issue and sell to Pioneer Singapore 696,590 shares of Common Stock, at a per share price of $1.91, which was the closing price of the Common Stock on February 16, 2016 with no discount. The Company entered into a third purchase agreement with Mark M. Sieczkarek (the “Sieczkarek Agreement”), pursuant to which the Company agreed to issue and sell to Mr. Sieczkarek 125,387 shares of Common Stock, at a per share price of $1.91, which was the closing price of the Common Stock on February 16, 2016 with no discount. The Common Stock issued by the Company pursuant to the Purchase Agreements has not been registered under the Securities Act and may not be offered or sold in the United States absent registration or an applicable exemption from registration requirements.
China Kington Asset Management Co. Ltd. served as placement agent in exchange for a commission equal to six percent (6%) of the gross proceeds received by the Company upon closing pursuant to the purchases by Pioneer Singapore and Mr. Fu. The amount of such commission was approximately $155 thousand.
On April 4, 2016, the Company entered into a securities purchase agreement (the “Securities Purchase Agreement”) for the sale of an aggregate 6,173,299 shares of Common Stock, par value $0.01 per share and warrants (the “April 2016 Warrants”) exercisable for 3,086,651 Shares to accredited investors for an aggregate purchase price of $11.8 million (the “Private Placement”). The warrants have a 4-year term and an exercise price of $1.91, callable by the Company if the closing price of the Common Stock, as reported on the NYSE MKT, is $4.00 or greater for five sequential trading days. The Private Placement closed in two tranches, the first of which closed on May 5, 2016, resulting in proceeds to the Company of $7.8 million (the “Primary Closing”), and the second of which closed on August 1, 2016, resulting in proceeds of $4.0 million to the Company (the “Secondary Closing”). In the Primary Closing, the Company issued 4,079,058 shares of Common Stock and April 2016 Warrants exercisable for 2,039,530 shares of Common Stock. In the Secondary Closing, the Company issued 2,094,241 shares of Common Stock and April 2016 Warrants exercisable for 1,047,121 shares of Common Stock. Both the Primary Closing and the Secondary Closing were subject to the same terms, containing customary representations, warranties and agreements by the Company, customary conditions to closing, indemnification obligations of the Company and the Purchasers (as defined below) and other obligations of the parties and termination provisions.
China Kington Asset Management Co. Ltd. served as placement agent in exchange for a commission equal to six percent (6%) of the gross proceeds received by the Company upon closing pursuant to the purchases by certain investors. The amount of such commission was approximately $618 thousand.
Also on April 4, 2016, the Company entered into a separate registration rights agreement (the “Registration Rights Agreement”) with Messrs. Andros and Geckler, Dr. Rider, and the Children’s Brain Disease Foundation (the “Participating Purchasers”), pursuant to which the Company agreed to file as many registration statements with the SEC as may be necessary to cover the resale of the shares and the April 2016 Warrants held by the Participating Purchasers, to use its commercially reasonable efforts to have all such registration statements declared effective within the time frames set forth in the Securities Purchase Agreement and the Registration Rights Agreement, and to keep such registration statements effective for the terms defined therein. The Company filed such Registration Statement to cover the resale of the shares and April 2016 Warrants held by the Participating Purchasers with the SEC on June 9, 2016 and received effectiveness of such Registration Statement on June 20, 2016 (Registration Number 333-211943).
During the third quarter of 2016, the Company recorded $6.6 million in net proceeds upon the exercise of 3,613,284 of the Company’s warrants for 3,613,284 shares of the Company’s Common Stock, including all of the warrants issued in May 2016 and August 2016. As consideration for the facilitation of the exercise of certain of these warrants held by non-U.S. citizens domiciled outside of the United States, China Kington received a six percent (6%) commission on the aggregate proceeds to the Company pursuant to such exercises. The amount of such commission was approximately $338 thousand.
During the fourth quarter of 2016, the Company recorded $0.9 million in net proceeds upon the exercise of 363,523 of the Company’s warrants for 363,523 shares of the Company’s Common Stock. As consideration for the facilitation of the exercise of certain of these warrants held by non-U.S. citizens domiciled outside of the United States, China Kington received a six percent (6%) commission on the aggregate proceeds to the Company pursuant to such exercises. The amount of such commission was approximately $32 thousand.
Stock Warrants
In July 2011, 139,520 warrants were issued in connection with our July 2011 registered direct financing. These warrants were issued with an exercise price of $33.25 and were set to expire on July 5, 2016. In October 2015, the exercise expiration date was extended until March 6, 2020. Outstanding warrants were exercisable at December 31, 2016. See Note 10 for further details on these warrants.
In March 2015, the Company issued 278,200 Long-Term Warrants and 370,933 Short-Term Warrants. Outstanding March 2015 Warrants were exercisable at December 31, 2016. See Note 10 for further details on these warrants.
In May 2015, the Company issued 217,873 warrants with a 12-month term and an exercise price of $19.50 per share. The warrants became exercisable at any time on or after November 22, 2015, six months from the date of issuance, and will continue to be exercisable for one year thereafter. These outstanding warrants were exercisable at December 31, 2015. See Note 10 for further details on these warrants.
In October 2015, the Company issued warrants to purchase up to 442,800 shares of the Company’s common stock with an exercise price of $5.00 per share. Each warrant was exercisable immediately upon issuance and will expire 60 months from the date of issuance. A price protection provision was included in such warrants, such that if the Company subsequently sells or otherwise disposes of Company common stock at a lower price per share than $5.00 or any securities exchangeable for common stock with a lower exercise price than $5.00, the exercise price of such warrants will be reduced to that lower price. See Note 10 for further details on these warrants.
In February 2016, the strike prices of the July 2011, March 2015 Short-Term and Long-Term, and October 2015 warrants were reduced to $1.81 per share, pursuant to the price protection provisions in such warrants, because the Company sold common stock to Mr. Jian Ping Fu at that price.
In May 2016, the Company issued 2,039,530 warrants at the Primary Closing pursuant to the Securities Purchase Agreement. Please see the preceding subsection, “Common Stock,” for further details.
In August 2016, the Company issued 1,047,121 warrants at the Secondary Closing pursuant to the Securities Purchase Agreement. Please see the preceding subsection, “Common Stock,” for further details.
Effective September 29, 2016, the Company modified the exercise price of all warrants issued pursuant to the securities purchase agreement, dated May 18, 2015, from $19.50 to $3.15 per share, which reflected a discount of approximately sixteen percent (16%) to the closing price of the Company’s Common Stock on September 27, 2016. The Company has estimated the value of warrant modification as of the date of the modification by applying the Black-Scholes-Merton option pricing model using the single-option valuation approach. As a result of this modification, the Company recorded a non-cash loss of $270 thousand in general and administrative expense in the consolidate statement of operation and comprehensive loss.
The following table summarizes information about the Company’s warrants outstanding at December 31, 2016, 2015 and 2014, and activity during the three years then ended.
(in thousands)
|
|
Warrants
|
|
|
Weighted-
Average
Exercise
Price
|
|
Outstanding at December 31, 2013
|
|
|
192
|
|
|
$
|
43.00
|
|
Warrants granted
|
|
|
55
|
|
|
$
|
39.00
|
|
Warrants expired
|
|
|
(50
|
)
|
|
$
|
68.75
|
|
Outstanding at December 31, 2014
|
|
|
197
|
|
|
$
|
35.23
|
|
Warrants granted
|
|
|
1,317
|
|
|
$
|
7.40
|
|
Warrants expired
|
|
|
(56
|
)
|
|
$
|
39.00
|
|
Outstanding at December 31, 2015
|
|
|
1,458
|
|
|
$
|
5.19
|
|
Warrants granted
|
|
|
3,087
|
|
|
$
|
1.91
|
|
Warrants exercised
|
|
|
(3,977
|
)
|
|
$
|
1.95
|
|
Warrants expired
|
|
|
(3
|
)
|
|
$
|
78.13
|
|
Outstanding at December 31, 2016
|
|
|
565
|
|
|
$
|
1.81
|
|
NOTE 12. EQUITY-BASED COMPENSATION
Equity Compensation Plans
In October 2007, the Company adopted the 2007 Omnibus Incentive Plan (the “2007 Plan”) to provide for the granting of stock awards, such as stock options, unrestricted and restricted common stock, stock units, dividend equivalent rights, and stock appreciation rights to employees, directors and outside consultants, as determined by the board of directors. At the inception of the 2007 Plan, 40,000 shares were reserved for issuance under the 2007 Plan.
For the years from 2009 to 2012, the number of shares of common stock authorized for issuance under the 2007 Plan increased annually in an amount equal to the lesser of (a) 40,000 shares; (b) 4% of the number of shares of the Company’s common stock outstanding on the last day of the preceding year; or (c) such lesser number as determined by the Board. Accordingly, an additional 40,000, 37,427, and 37,207 shares of common stock were authorized for issuance under the 2007 Plan in January 2012, 2011 and 2010, respectively. Beginning in 2013, the shareholders voted to remove the 40,000 share cap and the 2007 Plan increases annually by 4% of the number of shares of the Company’s common stock outstanding on the last day of the preceding year. Accordingly, an additional 32,646 and 59,157 shares of common stock were authorized for issuance under the 2007 Plan in January 2014 and 2013, respectively. On March 30
th
, 2015, the Company filed a registration statement to add an additional 82,461 shares to the 2007 Plan. In January 2016, the Company added 139,449 shares to the Plan, per the Plan’s evergreen provision. On May 26, 2016, the stockholders of the Company approved an amendment to the 2007 Plan to increase the number of shares of Company common stock reserved for issuance thereunder by 1,124,826 shares. The aggregate reserved number of shares available under the 2007 Plan is 2,318,486 shares. As of December 31, 2016, there were 53,587 shares available for future grant under the 2007 Plan.
Under the terms of the 2007 Plan, the exercise price of incentive stock options may not be less than 100% of the fair value of the common stock on the date of grant and, if granted to an owner of more than 10% of the Company’s stock, then not less than 110%. Stock options granted under the 2007 Plan expire no later than ten years from the date of grant. Stock options granted to employees generally vest over four years, while options granted to directors and consultants typically vest over a shorter period, subject to continued service. Any options granted prior to October 2007 include early exercise provisions that allow for full exercise of the option prior to the option vesting, subject to certain repurchase provisions. The Company issues new shares to satisfy option exercises under the plans.
Stock Based Compensation Summary
The following table summarizes information about the Company’s stock options and restricted stock outstanding at December 31, 2016, 2015 and 2014, and activity during the three years then ended:
(in thousands, except years
and per share data)
|
|
Options
|
|
|
Weighted-Average Exercise Price
|
|
|
Weighted-Average Remaining Contractual Life (years)
|
|
|
Aggregate Intrinsic Value
|
|
Outstanding at December 31, 2013
|
|
|
287
|
|
|
$
|
42.00
|
|
|
|
6.6
|
|
|
|
422
|
|
Options granted
|
|
|
68
|
|
|
$
|
22.50
|
|
|
|
|
|
|
|
|
|
Restricted stock units granted
|
|
|
3
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
(2
|
)
|
|
$
|
14.00
|
|
|
|
|
|
|
|
|
|
Restricted stock units vested
|
|
|
(4
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Options forfeited/cancelled
|
|
|
(29
|
)
|
|
$
|
36.50
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2014
|
|
|
323
|
|
|
$
|
38.25
|
|
|
|
6.3
|
|
|
|
23
|
|
Options granted
|
|
|
85
|
|
|
$
|
11.20
|
|
|
|
|
|
|
|
|
|
Restricted stock units granted
|
|
|
16
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Restricted stock units vested
|
|
|
(6
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Options forfeited/cancelled
|
|
|
(28
|
)
|
|
$
|
30.58
|
|
|
|
|
|
|
|
|
|
Restricted stock units cancelled
|
|
|
(2
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2015
|
|
|
388
|
|
|
$
|
32.03
|
|
|
|
6.2
|
|
|
|
19
|
|
Options granted
|
|
|
1,227
|
|
|
$
|
2.74
|
|
|
|
|
|
|
|
|
|
Restricted stock units granted
|
|
|
104
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Options exercised
|
|
|
-
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Restricted stock units vested
|
|
|
(114
|
)
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Options forfeited/cancelled
|
|
|
(116
|
)
|
|
$
|
28.27
|
|
|
|
|
|
|
|
|
|
Restricted stock units cancelled
|
|
|
-
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
Outstanding at December 31, 2016
|
|
|
1,489
|
|
|
$
|
8.38
|
|
|
|
8.7
|
|
|
$
|
702
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested and expected to vest at December 31, 2016
|
|
|
1,466
|
|
|
$
|
8.45
|
|
|
|
8.6
|
|
|
$
|
691
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Vested at December 31, 2016
|
|
|
402
|
|
|
$
|
22.45
|
|
|
|
6.6
|
|
|
$
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable at December 31, 2016
|
|
|
402
|
|
|
$
|
22.45
|
|
|
|
6.6
|
|
|
$
|
—
|
|
For options that have a quoted market price in excess of the exercise price (“in-the-money options”), the aggregate intrinsic value is calculated as the difference between the exercise price of the underlying stock option awards and the closing market price of the Company’s common stock as quoted on the NYSE MKT as of December 31, 2016. There were no stock options exercised during the year ended December 31, 2016. The Company received no cash payments for the exercise of stock options during the years ended December 31, 2016 and December 31, 2015. The Company received $34 thousand in cash payments for the exercise of stock options during the year ended December 31, 2014. The aggregate intrinsic value of stock option awards exercised was $0, $4 thousand and $32 thousand for the years ended December 31, 2016, 2015 and 2014, respectively, as determined at the date of option exercise.
As of December 31, 2016, total unrecognized compensation cost related to unvested stock options and restricted stock was $1.5 million. This amount is expected to be recognized as stock-based compensation expense in the Company’s consolidated statements of operations and comprehensive loss over the remaining weighted average vesting period of 2.02 years.
Stock Option Awards to Employees and Directors
The Company grants options to purchase common stock to its employees and directors at prices equal to or greater than the market value of the stock on the dates the options are granted. The Company has estimated the value of stock option awards as of the date of grant by applying the Black-Scholes-Merton option pricing model using the single-option valuation approach. The application of this valuation model involves assumptions that are judgmental and subjective in nature. See Note 2 for a description of the accounting policies that the Company applies to value its stock-based awards.
During the years ended December 31, 2016, 2015 and 2014, the Company granted options to employees and directors to purchase an aggregate of 1,139,000, 59,000 and 52,000 shares of common stock, respectively.
The weighted average assumptions used in determining the value of options granted and a summary of the methodology applied to develop each assumption are as follows:
|
|
Year Ended December 31,
|
|
Assumption
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Expected price volatility
|
|
|
84.47
|
%
|
|
|
77.22
|
%
|
|
|
76.88
|
%
|
Expected term (in years)
|
|
|
7.03
|
|
|
|
6.8
|
|
|
|
6.5
|
|
Risk-free interest rate
|
|
|
1.57
|
%
|
|
|
1.76
|
%
|
|
|
2.06
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Weighted-average fair value of options granted during the period
|
|
$
|
2.06
|
|
|
$
|
7.35
|
|
|
$
|
15.25
|
|
Expected Price Volatility
—This is a measure of the amount by which the stock price has fluctuated or is expected to fluctuate. The computation of expected volatility was based on the historical volatility of our own stock and comparable companies from a representative peer group selected based on industry and market capitalization data.
Expected Term
—This is the period of time over which the options granted are expected to remain outstanding. The expected life assumption is based on the Company’s historical data.
Risk-Free Interest Rate
—This is the U.S. Treasury rate for the week of the grant having a term approximating the expected life of the option.
Dividend Yield
—We have not made any dividend payments nor do we have plans to pay dividends in the foreseeable future.
Forfeitures are estimated at the time of grant and reduce compensation expense ratably over the vesting period. This estimate is adjusted periodically based on the extent to which actual forfeitures differ, or are expected to differ, from the previous estimate.
Additionally, during the years ended December 31, 2016, 2015 and 2014, the Company issued 64,000, 16,000 and 2,000 shares of common stock to employees, respectively.
For the years ended December 31, 2016, 2015 and 2014, we recognized stock-based compensation expense of $1,489 thousand, $1,193 thousand and $853 thousand, respectively, for option awards to employees and directors.
In the second quarter of 2015, the Company modified stock options owned by two of its directors, Mr. Cashion and Mr. Wicks, each of whom retired at the Company’s 2015 annual meeting of stockholders in June 2015. All outstanding stock options held by Mr. Cashion and Mr. Wicks became fully vested upon retirement, and the option exercise period for Mr. Cashion and Mr. Wicks was extended from three months to four years, calculated from the date of retirement. Options with an expiration date prior to the end of the exercise period maintained the same expiration date. In connection with the stock option modification, the Company recognized stock-based compensation expense of $185 thousand.
During the second and third quarters of 2016, the Company modified stock options held by two of its directors, Mr. Radaelli and Mr. McPherson, each of whom resigned as directors of the Company, effective May 6, 2016 and August 24, 2016, respectively. All outstanding stock options held by Mr. Radaelli and Mr. McPherson became fully vested upon retirement, and the option exercise period for Mr. Radaelli and Mr. McPherson was extended from three months to four years, calculated from each former director’s respective date of resignation. Options with an expiration date prior to the end of the exercise period maintained the same expiration date. In connection with the stock option modification, the Company recognized stock-based compensation expense of $58 thousand.
Stock-Based Awards to Non-Employees
During the years ended December 31, 2016, 2015 and 2014, the Company granted options to purchase an aggregate of 89,000, 27,000, and 14,000 shares of common stock, respectively, to non-employees in exchange for advisory and consulting services. The stock options are recorded at their fair value on the measurement date and recognized over the respective service or vesting period. The fair value of the stock options granted was calculated using the Black-Scholes-Merton option pricing model based upon the following assumptions:
|
|
Year Ended December 31,
|
|
Assumption
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Expected price volatility
|
|
|
87.68
|
%
|
|
|
83.77
|
%
|
|
|
79.10
|
%
|
Expected term (in years)
|
|
|
10.0
|
|
|
|
9.6
|
|
|
|
8.6
|
|
Risk-free interest rate
|
|
|
1.61
|
%
|
|
|
2.18
|
%
|
|
|
2.28
|
%
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
Weighted-average fair value of options granted during the period
|
|
$
|
2.29
|
|
|
$
|
7.15
|
|
|
$
|
15.25
|
|
In addition, the Company granted restricted stock to non-employees totaling 41,000, 500 and 600 shares of common stock in the years ended December 31, 2016, 2015 and 2014, respectively, in exchange for advisory and consulting services.
For the years ended December 31, 2016, 2015 and 2014, the Company recognized stock-based compensation expense of $262 thousand, $188 thousand and $189 thousand, respectively, related to non-employee options and restricted stock grants.
In November 2015, Dr. Ron Najafi resigned from his position as President as CEO of the Company. As part of his separation agreement, in December 2016, the Company paid him a portion of the amount due under the agreement via a combination of registered shares and cash during fiscal year 2016. The expense related to this separation agreement was accrued for and expensed in the year ended December 31, 2015, and the shares were issued to him via fully vested restricted stock in December 2016. In January 2017, the remaining portion of the amount due under the agreement was paid via a combination or registered shard and cash.
In March 2016, Roy Wu left the Company as Senior Vice President of Business Development. As part of his separation agreement, in March 2016, the Company paid him a combination of stock and cash. The expense related to this separation agreement was accrued for and expensed in the year ended December 31, 2015 based upon the known terms, and the shares were issued to him via fully vested restricted stock in March 2016.
Summary of Stock-Based Compensation Expense
A summary of the stock-based compensation expense included in results of operations for the option and stock awards discussed above is as follows:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Research and development
|
|
$
|
195
|
|
|
$
|
449
|
|
|
$
|
376
|
|
Sales and Marketing
|
|
|
132
|
|
|
|
-
|
|
|
|
-
|
|
General and administrative
|
|
|
1,424
|
|
|
|
933
|
|
|
|
666
|
|
Total stock-based compensation expense
|
|
$
|
1,751
|
|
|
$
|
1,382
|
|
|
$
|
1,042
|
|
Since the Company has operating losses and net operating loss carryforwards, there are no tax benefits associated with stock-based compensation expense.
NOTE 13. LICENSE, COLLABORATION AND DISTRIBUTION AGREEMENTS
Virbac
In April 2012, the Company entered into a feasibility and option agreement with Virbac, a global animal health company, for the development and potential commercialization of Aganocides for a number of veterinary uses for companion animals. Under the terms of the agreement, NovaBay received an upfront payment and is entitled to additional support for research and development.
In April 2013, the Company entered into a collaboration and license agreement with Virbac. Under this new agreement, Virbac acquired exclusive worldwide rights to develop the Company’s proprietary compound, auriclosene (NVC-422), for global veterinary markets for companion animals. The Company received an option exercise fee and may receive future development and pre-commercial milestone payments as a result of the collaboration.
Revenue has been recognized under the agreement as follows:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Materials, Equipment, and Contract Study Costs
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
39
|
|
The Company had deferred revenue balances of $246 thousand in each of the years ended December 31, 2016, 2015 and 2014, related to these agreements, which consisted of the unamortized balances on the upfront technology and access fee and the support for ongoing research and development.
NeutroPhase Distribution Agreements
In January 2012, the Company entered into a distribution agreement with China Pioneer Pharma Holdings, Ltd. (“China Pioneer”), a Shanghai-based company that markets high-end pharmaceutical products into China and an affiliate of Pioneer Singapore, for the commercialization of NeutroPhase in this territory. Under the terms of the agreement, NovaBay received an upfront payment of $312,500. NovaBay also received $312,500 in January 2013, related to the submission of the first marketing approval for the product to the CFDA. The deferred revenue was recognized as the purchase discounts were earned, with the remaining deferred revenue recognized ratably over the product distribution period. During the year ended December 31, 2014, NovaBay received $625,000 upon receipt of a marketing approval of the product from the CFDA.
In September 2012, the Company entered into two agreements with Pioneer: (1) an international distribution agreement (“Distribution Agreement”) and (2) a unit purchase agreement (“Purchase Agreement”). These agreements were combined and accounted for as one arrangement with one unit of accounting for revenue recognition purposes.
Pursuant to the terms of the Distribution Agreement, Pioneer has the right to distribute NeutroPhase, upon a marketing approval from a Regulatory Authority, in certain territories in Asia (other than China). Upon execution of the Distribution Agreement, the Company received an upfront payment, which was recorded as deferred revenue. Pioneer is also obligated to make certain additional payments to the Company upon receipt of the marketing approval. The Distribution Agreement further provides that Pioneer is entitled to a cumulative purchase discount not to exceed $500,000 upon the purchase of NeutroPhase product, payable in NovaBay unregistered restricted common stock.
Pursuant to the Purchase Agreement, we also received $2.5 million from Pioneer for the purchase of restricted units (comprising one share of common stock and a warrant for the purchase of one share of common stock). The unit purchase was completed in two tranches: (1) 800,000 units in September 2012; and (2) 1,200,000 units in October 2012, with both tranches at a purchase price of $1.25 per unit. The fair value of the total units sold was $3.5 million, based upon the trading price of our common stock on the dates the units were purchased and the fair value of the warrants based on the Black-Scholes Merton option pricing model. Because the aggregate fair value of the units on the dates of purchase exceeded the $2.5 million in proceeds received from the unit purchase by approximately $1 million, we reallocated $600,000 from deferred revenue to stockholders’ equity as consideration for the purchase of the units.
In December 2013, the Company announced it had expanded its NeutroPhase commercial partnership agreement with Pioneer. The expanded agreement includes licensing rights to two new products, Avenova and CelleRx, which were developed internally by NovaBay. The expanded partnership agreement covers the commercialization and distribution of these products in China and 11 countries in Southeast Asia.
Revenue has been recognized under these agreements as follows:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of upfront technology access fee
|
|
$
|
94
|
|
|
$
|
25
|
|
|
$
|
47
|
|
Product sales
|
|
|
324
|
|
|
|
70
|
|
|
|
161
|
|
|
|
$
|
418
|
|
|
$
|
95
|
|
|
$
|
208
|
|
The Company had deferred revenue balances of $1.0 million, $1.1 million, and $1.2 million, respectively, at December 31, 2016, 2015 and 2014, related to these agreements, which consisted of the unamortized balances on the upfront technology and access fee and the support for ongoing research and development.
On February 7, 2012 the Company to enter into a distribution agreement with Integrated Healing Technologies, LLC, (“IHT”) to distribute NeutroPhase. NovaBay received an upfront payment of $750,000.
Revenue has been recognized under this agreement as follows:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of upfront technology access fee
|
|
$
|
21
|
|
|
$
|
5
|
|
|
$
|
7
|
|
Product sales
|
|
|
332
|
|
|
|
34
|
|
|
|
101
|
|
|
|
$
|
353
|
|
|
$
|
39
|
|
|
$
|
108
|
|
The Company had deferred revenue balances of $653 thousand, $674 thousand, and $679 thousand, respectively, at December 31, 2016, 2015 and 2014, related to these agreements, which consisted of the unamortized balances on the upfront technology and access fee and the support for ongoing research and development.
On June 1, 2013 the Company to enter into a distribution agreement with Principal Business Enterprise Inc., (“PBE”) to distribute NeutroPhase. NovaBay received an upfront payment of $200,000.
Revenue has been recognized under this agreement as follows:
|
|
Year Ended December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Amortization of upfront technology access fee
|
|
$
|
—
|
|
|
$
|
1
|
|
|
$
|
4
|
|
Product sales
|
|
|
22
|
|
|
|
66
|
|
|
|
104
|
|
|
|
$
|
22
|
|
|
$
|
67
|
|
|
$
|
108
|
|
The Company had deferred revenue balances of $194 thousand, $195 thousand, and $196 thousand, respectively, at December 31, 2016, 2015 and 2014, related to these agreements, which consisted of the unamortized balances on the upfront technology and access fee and the support for ongoing research and development.
Avenova Distribution Agreements
In November 2014, the Company signed a nationwide distribution agreement for its Avenova product with McKesson Corporation (“McKesson”) as part of the Company’s commercialization strategy. McKesson makes Avenova widely available in local pharmacies and major retail chains across the U.S., such as Wal-Mart, Costco, CVS and Target. [In January 2015, the Company signed a nationwide distribution agreement with Cardinal Health. In April 2015, the Company also signed a nationwide distribution agreement with AmerisourceBergen to market Avenova. Since December 2015, the Company has signed nationwide distribution agreements with Willow Pharmacy, Allure Pharmacy, Smith Drug Company and Dakota Drug to market Avenova.
During the years ended December 31, 2016, 2015 and, 2014, the Company earned $7.3 million, $947 thousand and $4 thousand,
respectively, in net sales revenue for its Avenova product from its distribution agreements.
The Company had a deferred revenue balance of $1,924 thousand and $24 thousand as of December 31, 2016 and December 31, 2015, respectively, for its Avenova product from its distribution agreements.
NOTE 14. EMPLOYEE BENEFIT PLAN
We have a 401(k) plan covering all eligible employees. We are not required to contribute to the plan and have made no contributions through December 31, 2016.
NOTE 15. INCOME TAXES
The federal and state income tax provision is summarized as follows (in thousands):
|
|
Year Ending December 31
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
Current
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
—
|
|
|
$
|
—
|
|
|
$
|
—
|
|
State
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total current tax expense
|
|
|
2
|
|
|
|
2
|
|
|
|
2
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
State
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Other
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
Total deferred tax expense
|
|
|
—
|
|
|
|
—
|
|
|
|
—
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Deferred income taxes reflect the net tax effects of (a) temporary differences between the carrying amounts of assets and liabilities for financial reporting purposes and the amounts used for income tax purposes, and (b) operating losses and tax credit carryforwards.
The tax effects of significant items comprising the Company's deferred taxes as of December 31, are as follows:
|
|
December 31
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating losses
|
|
$
|
34,902
|
|
|
$
|
31,464
|
|
Accruals
|
|
|
287
|
|
|
|
403
|
|
Deferred revenue
|
|
|
829
|
|
|
|
954
|
|
Stock options
|
|
|
1,894
|
|
|
|
1,558
|
|
Other deferred tax assets
|
|
|
765
|
|
|
|
652
|
|
Total deferred tax assets
|
|
|
38,677
|
|
|
|
35,031
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(32
|
)
|
|
|
(28
|
)
|
Total deferred tax liabilities
|
|
|
(32
|
)
|
|
|
(28
|
)
|
|
|
|
|
|
|
|
|
|
Valuation allowance
|
|
|
(38,645
|
)
|
|
|
(35,003
|
)
|
Net deferred taxes
|
|
$
|
—
|
|
|
$
|
—
|
|
The Company records the tax benefit of net operating loss carryforwards and temporary differences as an asset to the extent that management assesses that realization is "more likely than not." Realization of the future tax benefits is dependent on the Company's ability to generate sufficient taxable income within the carryforward period. Because of the Company's recent history of operating losses, management believes that recognition of the deferred tax assets is currently not likely to be realized and, accordingly, has provided a valuation allowance.
The valuation allowance increased by the following amounts (in thousands):
2016
|
|
|
2015
|
|
|
2014
|
|
$
|
3,642
|
|
|
$
|
8,101
|
|
|
$
|
6,286
|
|
In accordance with ASC 718
Compensation – Stock Compensation
, the Company has excluded from deferred tax assets benefits attributable to employee stock option exercises. Therefore, these amounts are not included in gross or net deferred tax assets. The benefit of these NOL carryforwards, totaling $1.1 million and $0.7 million at December 31, 2016 for federal and California tax, respectively, will only be recorded to equity when they reduce cash taxes payable.
NOL and tax credit carryforwards as of December 31, 2016, are as follows (in thousands):
|
|
|
|
|
|
Expiration
|
|
|
|
Amount
|
|
|
Years
|
|
Net operating losses, federal
|
|
$
|
90,165
|
|
|
2024
|
-
|
2036
|
|
Net operating losses, state
|
|
$
|
78,219
|
|
|
2028
|
-
|
2036
|
|
Tax credits, federal
|
|
$
|
1,316
|
|
|
2031
|
-
|
2036
|
|
Tax credits, state
|
|
$
|
282
|
|
|
do not expire
|
|
Under U.S. federal tax law, the amount and availability of tax benefits are subject to a variety of interpretations and restrictive tests. Utilization of the NOL carryforwards may be subject to a substantial annual limitation due to ownership changes that have occurred previously or that could occur in the future, as provided by Section 382 of the Internal Revenue Code of 1986, and similar state provisions. Ownership changes may limit the amount of NOL carryforwards that can be utilized annually to offset future taxable income and tax, respectively. In general, an ownership change, as defined by Section 382, results from transactions increasing the ownership of certain shareholders or public groups in the stock of a corporation by more than 50 percentage points over a three-year period. Since the Company’s formation, the Company has raised capital through the issuance of capital stock on two occasions which, combined with the purchasing shareholders’ subsequent disposition of those shares, may have resulted in one or more changes of control, as defined by Section 382. The Company has not currently completed a study to assess whether any change of control has occurred, or whether there have been multiple changes of control since the Company’s formation, due to the significant complexity and cost associated with the study. If the Company has experienced a change of control at any time since its formation, its NOL carryforwards and tax credits may not be available, or their utilization could be subject to an annual limitation under Section 382. A full valuation allowance has been provided against the Company’s NOL carryforwards, and if an adjustment is required, this adjustment would be offset by an adjustment to the valuation allowance. Accordingly, there would be no impact on the consolidated balance sheet or statement of operations and comprehensive loss if an adjustment is required.
The effective tax rate of the Company's provision (benefit) for income taxes differs from the federal statutory rate as follows:
|
|
Year Ending December 31
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income tax provision (benefit) at federal statutory rate
|
|
$
|
(4,471
|
)
|
|
$
|
(6,439
|
)
|
|
$
|
(5,154
|
)
|
State tax
|
|
|
(157
|
)
|
|
|
(1,060
|
)
|
|
|
(818
|
)
|
ISO-related expense for GAAP
|
|
|
52
|
|
|
|
164
|
|
|
|
144
|
|
Change in valuation allowance
|
|
|
3,641
|
|
|
|
8,101
|
|
|
|
6,286
|
|
Revaluation of warrant liability
|
|
|
806
|
|
|
|
(731
|
)
|
|
|
(565
|
)
|
Tax credits
|
|
|
(31
|
)
|
|
|
(123
|
)
|
|
|
(44
|
)
|
Other
|
|
|
162
|
|
|
|
90
|
|
|
|
153
|
|
Total
|
|
$
|
2
|
|
|
$
|
2
|
|
|
$
|
2
|
|
Uncertain Income Tax Positions
The Company adopted the provisions of ASC 740-10,
Accounting for Uncertainty in Income Taxes
, on January 1, 2007. There was no impact on our consolidated financial position, results of operations and cash flows as a result of adoption. A reconciliation of the beginning and ending balances of the unrecognized tax benefits during the years ended December 31, 2016 and 2015 is as follows:
|
|
Year ended December 31,
|
|
(in thousands)
|
|
2016
|
|
|
2015
|
|
Unrecognized benefit - beginning of period
|
|
$
|
957
|
|
|
$
|
811
|
|
Gross increases - current period tax positions
|
|
|
17
|
|
|
|
76
|
|
Unrecognized benefit - end of period
|
|
$
|
974
|
|
|
$
|
957
|
|
The Company’s policy will be to recognize interest and penalties related to income taxes as a component of income tax expense. It is subject to income tax examinations for U.S. incomes taxes and state income taxes from 2004 and 2006 forward respectively. It does not anticipate that total unrecognized tax benefits will significantly change in the next 12 months.
NOTE 16. RELATED PARTY TRANSACTIONS
Related Party Loans
See Note 8, “Related Party Notes Payable” for a description of the Loan with the following related parties: Mr. Sieczkarek, Chairman of the Board, President and Chief Executive Officer of the Company; the Gail J. Maderis Revocable Trust, on behalf of Ms. Maderis, a Director of the Company; Dr. McPherson, a Director of the Company; and Pioneer China, Pioneer Singapore as a wholly-owned subsidiary of Pioneer China and recipient of all of the holdings of Pioneer Singapore as a result of a recent internal corporate reorganization, and Mr. Fu, the Company’s two largest stockholders. The Loan was fully paid off as of August 1, 2016.
Related Party Financing
See Note 11, “Stockholders’ Equity (Deficit)” – “Common Stock” for a description of the February 2016 Purchase Agreements and April 2016 Securities Purchase Agreement. The following related parties participated in both transactions: Mr. Sieczkarek, Chairman of the Board, President and Chief Executive Officer of the Company; and Pioneer Singapore and Mr. Fu, the Company’s two largest stockholders.
Related Party Revenue
The Company recognized related party revenues from product sales and license and collaboration fees of $418 thousand, $95 thousand, and $208 thousand for the years ended December 31 2016, 2015 and 2014, respectively. The Company had related party accounts receivable of $75 thousand and $0 as of December 31, 2016 and December 31, 2015, respectively. See Note 13, “License, Collaboration and Distribution Agreements - NeutroPhase Distribution Agreements,”
for additional information regarding the Company’s distribution agreements with Pioneer, one of the Company’s largest stockholder.
Related Party Expenses
The Company recognized related party commission fees of $1.1 million, $408 thousand, and $0 for the years ended December 31 2016, 2015, and 2014, respectively. These fees were paid to China Kington, representing the commission on sale of the Company’s common stock and the exercise of the Company’s warrants. See Note 11, “Stockholders’ Equity (Deficit)” – “Common Stock” for additional information regarding such commissions.