Attached files
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington, DC
20549
FORM
10-Q
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☑
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES
EXCHANGE ACT OF 1934
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For
the quarterly period ended December 31, 2016.
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☐
TRANSITION REPORT
PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
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for the
transition period from _____ to _____.
Commission File
Number
0-50481
AEOLUS PHARMACEUTICALS, INC.
(Exact
Name of Registrant as Specified in Its Charter)
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Delaware
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56-1953785
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(State
or Other Jurisdiction ofIncorporation or Organization)
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(I.R.S.
EmployerIdentification No.)
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26361
Crown Valley Parkway, Suite 150 Mission Viejo,
California
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92691
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(Address of
Principal Executive Offices)
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(Zip
Code)
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(Registrant’s
Telephone Number, Including Area
Code)949-481-9825
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||
Indicate by check
mark whether the registrant: (1) has filed all reports required to
be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period
that the registrant was required to file such reports), and (2) has
been subject to such filing requirements for the past 90 days. YES
☑ NO ☐
Indicate by check
mark whether the registrant has submitted electronically and posted
on its corporate Web site, if any, every Interactive Data File
required to be submitted and posted pursuant to Rule 405 of
Regulation S-T (§232.405 of this chapter) during the preceding
12 months (or for such shorter period that the registrant was
required to submit and post such files). YES
☑ NO ☐
Indicate by check
mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting
company. See the definitions of “large accelerated
filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange
Act.
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Large accelerated
filer ☐
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Non -accelerated
filer (Do not check if a smaller reporting company)
☐
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Accelerated
filer
☐
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Smaller reporting
company
☑
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Indicate by check
mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES NO ☑
Indicate the number
of shares outstanding of each of the issuer’s classes of
common stock, as of the latest practicable date.
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Class
Common
Stock, par value $.01 per share
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|
Outstanding
as of February 17, 2017
152,085,825
shares
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AEOLUS
PHARMACEUTICALS, INC.
FORM 10-Q
For the Quarter Ended December 31, 2016
Table of
Contents
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Page
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PART I.
FINANCIAL INFORMATION
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3
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Item
1.
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Financial
Statements
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3
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Condensed
Consolidated Balance Sheets as of December 31, 2016 (unaudited) and
September 30, 2016
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3
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Condensed
Consolidated Statements of Operations for the Three Months ended
December 31, 2016 and 2015 (unaudited)
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4
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Condensed
Consolidated Statements of Cash Flows for the Three Months ended
December 31, 2016 and 2015 (unaudited)
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5
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Notes
to Condensed Consolidated Financial Statements
(unaudited)
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6
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Item
2.
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Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
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14
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Item
3.
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Quantitative
and Qualitative Disclosures About Market Risk
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19
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Item
4.
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Controls
and Procedures
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20
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PART II.
OTHER INFORMATION
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20
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Item
1A.
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Risk
Factors
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20
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Item
6.
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Exhibits
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20
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SIGNATURES
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22
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2
PART
I. FINANCIAL INFORMATION
Item 1. Financial Statements
AEOLUS PHARMACEUTICALS, INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except share and per share data)
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December
31,
2016
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September
30,
2016
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(Unaudited)
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ASSETS
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Current
assets:
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Cash and cash
equivalents
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$1,895
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$3,155
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Accounts
receivable
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544
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750
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Prepaid expenses
and other current assets
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178
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230
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Total current
assets
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2,617
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4,135
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Investment in CPEC
LLC
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32
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32
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Total
assets
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$2,649
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$4,167
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LIABILITIES
AND STOCKHOLDERS’ EQUITY
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Current
liabilities:
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Accounts payable
and accrued expenses
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$514
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$972
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Total current
liabilities
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514
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972
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Total
liabilities
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514
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972
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Commitments and
contingencies (Note H)
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Stockholders’
equity:
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Preferred stock,
$.01 par value per share, 10,000,000 shares
authorized:
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Series A
nonredeemable convertible preferred stock, 1,250,000 shares
authorized as of December 31, 2016 and September 30, 2016,
respectively; no shares issued and outstanding as of
December 31, 2016 and September 30, 2016,
respectively
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—
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—
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Series B
nonredeemable convertible preferred stock, 1,600,000 shares
authorized as of December 31, 2016 and September 30, 2016,
respectively; no shares issued and outstanding as of December 31,
2016 and September 30, 2016, respectively
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—
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—
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Series C
nonredeemable convertible preferred stock, 5,000 shares authorized
as of December 31, 2016 and September 30, 2016, respectively; 4,500
shares issued and outstanding as of December 31, 2016 and September
30, 2016, respectively
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—
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—
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Common stock, $.01
par value per share, 200,000,000 shares authorized; 152,085,825
shares issued and outstanding as of December 31, 2016 and September
30, 2016, respectively
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1,520
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1,520
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Additional paid-in
capital
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191,890
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191,863
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Accumulated
deficit
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(191,275)
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(190,188)
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Total
stockholders’ equity
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2,135
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3,195
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Total liabilities
and stockholders’ equity
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$2,649
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$4,167
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The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
3
AEOLUS PHARMACEUTICALS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In
thousands, except per share data)
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Three Months
Ended
December
31,
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2016
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2015
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Revenue:
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Contract
revenue
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$83
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$305
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Costs and
expenses:
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Research and
development
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489
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492
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General and
administrative
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681
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561
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Total costs and
expenses
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1,170
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1,053
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Loss from
operations
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(1,087)
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(748)
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Interest
expense
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—
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285
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Net
loss
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(1,087)
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(1,033)
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Deemed dividend on
Series C preferred stock
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—
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580
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Net loss
attributable to common stockholders
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$(1,087)
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$(1,613)
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Net loss per
weighted share attributable to common stockholders:
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Basic net loss per
common share
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$(0.01)
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$(0.01)
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Diluted net loss
per common share
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$(0.01)
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$(0.01)
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Weighted average
common shares outstanding:
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Basic
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152,086
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139,439
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Diluted
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152,086
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139,439
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The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
4
AEOLUS PHARMACEUTICALS, INC.
CONDENSED
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
(In
thousands)
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Three Months
Ended
December
31,
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2016
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2015
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Cash flows from
operating activities:
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Net
loss
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$(1,087)
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$(1,033)
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Adjustments to
reconcile net loss to net cash used in operating
activities:
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Amortization of
discount on note payable to shareholders
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—
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273
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Accrued
interest
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—
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12
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Noncash
compensation
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27
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38
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Change in assets
and liabilities:
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Accounts
receivable
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206
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714
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Deferred
subcontractor cost
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—
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21
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Prepaid expenses
and other current assets
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52
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(21)
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Accounts payable
and accrued expenses
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(458)
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(802)
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Deferred
revenue
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—
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(22)
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Net cash used in
operating activities
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(1,260)
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(820)
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Cash flows from
financing activities:
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Proceeds from
issuance of common stock and common stock warrants,
net
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—
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2,005
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Proceeds from
issuance of preferred stock and common stock warrants,
net
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—
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4,165
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Net cash provided
by financing activities
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—
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6,170
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Net (decrease)
increase in cash and cash equivalents
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(1,260)
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5,350
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Cash and cash
equivalents at beginning of period
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3,155
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94
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Cash and cash
equivalents at end of period
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$1,895
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$5,444
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Supplemental
disclosure of non-cash financing activities:
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Conversion of note
payable to shareholders for common stock and warrants
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$—
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$1,000
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Conversion of
accrued interest on note payable to shareholders for common stock
and warrants
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$—
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$12
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Issuance of
warrants for financing costs
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$—
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$266
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Deemed dividend on
Series C preferred stock
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$—
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$580
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The
accompanying notes are an integral part of these unaudited
condensed consolidated financial statements.
5
AEOLUS
PHARMACEUTICALS, INC.
Notes
to Condensed Consolidated Financial Statements
(Unaudited)
A.
Organization, Business and Summary of Significant Accounting
Policies
Organization
The
accompanying unaudited condensed consolidated financial statements
include the accounts of Aeolus Pharmaceuticals, Inc. and its
wholly-owned subsidiary, Aeolus Sciences, Inc. (collectively,
“we,” “us,” “Company” or
“Aeolus”). All significant intercompany accounts and
transactions have been eliminated in consolidation. Aeolus is a
Delaware corporation. The Company’s primary operations are
located in Mission Viejo, California.
Business
Aeolus
is developing a platform of novel compounds, known as
metalloporphyrins, for use in biodefense, fibrosis, oncology,
infectious disease and diseases of the central nervous system. Our
lead compound, AEOL 10150, is being developed as a medical
countermeasure against the pulmonary effects of radiation exposure
under a contract (“BARDA Contract”) valued at up to
$118.4 million with the Biomedical Advanced Research and
Development Authority (“BARDA”), a division of the
Department of Health and Human Services (“HHS”). Aeolus
is in its sixth year under the BARDA Contract and has billed BARDA
for 30.4 million of the 30.8 million total contract value exercised
by BARDA. Aeolus also receives development support from the
National Institutes of Health (“NIH”) for development
of the compound as a medical countermeasure against radiation and
exposure to chemical and nerve agents. Our strategy is to leverage
the substantial investment in toxicology, manufacturing, and
preclinical and clinical studies made by US Government agencies in
AEOL 10150 to develop the compound for the treatment of lung
fibrosis, including idiopathic pulmonary fibrosis
(“IPF”) and as a treatment to reduce side effects
caused by radiation toxicity and improve local tumor control in
cancer therapy. The Company is also developing AEOL 11114 as a
treatment for Parkinson’s disease and AEOL 20415 as a
treatment for cystic fibrosis and diseases that have developed a
resistance to existing antibiotic and anti-viral
therapies.
Basis of Presentation
All
significant intercompany activity has been eliminated in the
preparation of the unaudited condensed consolidated financial
statements. The unaudited condensed consolidated financial
statements have been prepared in accordance with the requirements
of Form 10-Q and Rule 10-01 of Regulation S-X. Some information and
footnote disclosures normally included in financial statements
prepared in accordance with generally accepted accounting
principles have been condensed or omitted pursuant to those rules
and regulations. In the opinion of management, the accompanying
unaudited condensed consolidated financial statements include all
adjustments (consisting only of normal recurring adjustments)
necessary to present fairly the consolidated financial position,
results of operations and cash flows of the Company. The condensed
consolidated balance sheet at September 30, 2016 was derived from
the Company’s audited financial statements included in the
Company’s Annual Report on Form 10-K for the fiscal year
ended September 30, 2016, filed with the Securities and Exchange
Commission (the “SEC”) on December 20,
2016.
Use of Estimates
The
preparation of financial statements in conformity with accounting
principles generally accepted in the United States of America
requires management to make estimates and assumptions that affect
the reported amounts of assets and liabilities and disclosures of
contingent assets and liabilities at the date of the financial
statements and the reported amounts of revenues and expenses during
the reporting period. Actual results could differ from those
estimates.
Cash and Cash Equivalents
The
Company invests available cash in short-term bank deposits. Cash
and cash equivalents include investments with maturities of three
months or less at the date of purchase. The carrying value of cash
and cash equivalents approximate their fair market value at
December 31, 2016 and September 30, 2016 due to their short-term
nature.
6
Significant customers and accounts receivable
Concentrations of credit risk
Financial
instruments that potentially subject the Company to concentrations
of credit risk consist primarily of cash and cash equivalents and
accounts receivable. The Company places its cash and cash
equivalents with high quality financial institutions. Management
believes that the financial risks associated with its cash and cash
equivalents and investments are minimal. Because accounts
receivable consist primarily of amounts due from the U.S. federal
government agencies, management deems there to be minimal credit
risk.
Revenue Recognition
Aeolus
recognizes revenue in accordance with the authoritative guidance
for revenue recognition. Revenue is recognized when all
of the following criteria are met: (i) persuasive evidence of an
arrangement exists, (ii) delivery (or passage of title) has
occurred or services have been rendered, (iii) the seller’s
price to the buyer is fixed or determinable, and (iv)
collectability is reasonably assured.
The
BARDA Contract is classified as a “cost-plus-fixed-fee”
contract. Aeolus recognizes government contract revenue in
accordance with the authoritative guidance for revenue recognition
including the authoritative guidance specific to federal government
contracts. Reimbursable costs under the contract primarily include
direct labor, subcontract costs, materials, equipment, travel, and
indirect costs. In addition, the Company receives a fixed fee under
the BARDA Contract, which is unconditionally earned as allowable
costs are incurred and is not contingent on success factors.
Reimbursable costs under the BARDA Contract, including the fixed
fee, are generally recognized as revenue in the period the
reimbursable costs are incurred and become billable.
Fair Value of Financial Instruments
The
carrying amounts of Aeolus’ short-term financial instruments,
which include cash and cash equivalents, accounts receivable,
accounts payable, accrued liabilities, debt and redemption
liability, approximate their fair values due to their short
maturities.
Fair Value Measurements
The
Company applies Accounting Standards Codification
(“ASC”) Topic 820, Fair Value Measurements and
Disclosures, for financial and non-financial assets and
liabilities.
ASC
Topic 820 discusses valuation techniques, such as the market
approach (comparable market prices), the income approach (present
value of future income or cash flow) and the cost approach (cost to
replace the service capacity of an asset or replacement cost). The
statement utilizes a fair value hierarchy that prioritizes the
inputs to valuation techniques used to measure fair value into
three broad levels. The following is a brief description of those
three levels:
●
Level 1: Observable
inputs such as quoted prices (unadjusted) in active markets for
identical assets or liabilities.
●
Level 2: Inputs
other than quoted prices that are observable for the asset or
liability, either directly or indirectly. These include quoted
prices for similar assets or liabilities in active markets and
quoted prices for identical or similar assets or liabilities in
markets that are not active.
●
Level 3:
Unobservable inputs that reflect the reporting entity’s own
assumptions.
Research and Development
Research and
development costs are expensed in the period incurred.
7
Leases
The
Company leases office space and office equipment under month to
month operating lease agreements. For the three months ended
December 31, 2016 and 2015, total rent expense was approximately
$11,000 and $11,000, respectively.
Income Taxes
The
Company recognizes liabilities or assets for the deferred tax
consequences of temporary differences between the tax bases of
assets or liabilities and their reported amounts in the financial
statements. These temporary differences will result in taxable or
deductible amounts in future years when the reported amounts of the
assets or liabilities are recovered or settled. A valuation
allowance is established when management determines that is more
likely than not that all or a portion of a deferred tax asset will
not be realized. Management evaluates the Company’s ability
to realize its net deferred tax assets on a quarterly basis and
valuation allowances are provided, as necessary. During this
evaluation, management reviews its forecasts of income in
conjunction with other positive and negative evidence surrounding
the Company’s ability to realize its deferred tax assets to
determine if a valuation allowance is required. Adjustments to the
valuation allowance will increase or decrease the Company’s
income tax provision or benefit. Management also applies the
relevant guidance to determine the amount of income tax expense or
benefit to be allocated among continuing operations, discontinued
operations, and items charged or credited directly to
stockholders’ equity.
A tax
position must meet a minimum probability threshold before a
financial statement benefit is recognized. The minimum threshold is
a tax position that is more likely than not to be sustained upon
examination by the applicable taxing authority, including
resolution of any related appeals or litigation process, based on
the technical merits of the position. The Company recognizes
interest and penalties related to uncertain tax positions in income
tax expense.
Net Income (Loss) Per Common Share
The
Company computes net income (loss) attributable to common
stockholders using the two-class method required for participating
securities. Under the two-class method, securities that participate
in dividends, such as the Company’s outstanding preferred
shares, preferred warrants, and most common stock warrants, are
considered “participating securities.” Our preferred
shares, preferred warrants and common stock warrants are considered
“participating securities” because they include
non-forfeitable rights to dividends.
In
applying the two-class method, (i) basic net income (loss) per
share is computed by dividing net income (less any dividends paid
on participating securities) by the weighted average number of
shares of common stock and participating securities outstanding for
the period and (ii) diluted earnings per share may include the
additional effect of other securities, if dilutive, in which case
the dilutive effect of such securities is calculated using the
treasury stock method. The Company does have other securities with
a dilutive effect outstanding, so the Company’s basic net
income (loss) per share uses the two-class method and diluted net
income (loss) per share uses the treasury stock
method.
Accounting for Stock-Based Compensation
The
Company recognizes stock based compensation expense in the
statement of operations based upon the fair value of the equity
award amortized over the vesting period.
Segment Reporting
The
Company currently operates in one segment.
B.
Liquidity
As of
December 31, 2016, the Company had approximately $1,895,000 of cash
and cash equivalents, a decrease of $1,260,000 from
September 30, 2016. The decrease in cash was primarily due to
cash used in operations. In order to fund on-going operating
cash requirements, or to accelerate or expand our oncology and
other programs, we may need to raise significant additional
funds.
The
Company had a net loss of $1,087,000 for the three months ended
December 31, 2016, compared to a net loss of $1,033,000 for the
three months ended December 31, 2015. For the same periods, we had
cash outflows from operations of approximately $1,260,000 and cash
outflows from operations of approximately $820,000, respectively,
with the outflows increasing in 2016 due to lower revenue from
BARDA and the timing of cash flows related to accounts
payable.
8
Our
ongoing future cash requirements will depend on numerous factors,
particularly the progress of our development programs, clinical
trials and our ability to negotiate and complete collaborative
agreements or out-licensing arrangements. In order to help fund our
on-going operating cash requirements, we intend to seek new
collaborations for our antioxidant research program that include
initial cash payments and on-going research support. In addition,
we might sell additional shares of our stock and/or convertible
debentures and explore other strategic and financial alternatives,
including a merger with another company, the sale of stock and/or
debt, the establishment of new collaborations for current research
programs that include initial cash payments and ongoing research
support and the out-licensing of our compounds for development by a
third party. We expect to incur additional losses and negative cash
flow from operations for several more years.
Under the BARDA
Contract, substantially all of the costs of the development of
10150 as a medical countermeasure for pulmonary injuries resulting
from an acute exposure to radiation from a radiological/nuclear
accident or attack, particularly injuries associated with ARS or
DEARE could be paid for by the U.S. government through BARDA
funding. We recognized approximately $83,000 in revenue during the
three months ended December 31, 2016 related to the BARDA Contract.
As of December 31, 2016, the total contract value exercised by
BARDA under the BARDA Contract is $30.8 million. From inception of
the BARDA Contract, we have billed BARDA approximately $30.4
million. The lower revenue in this quarter reflected the
smaller number of tasks in progress under the BARDA Contract
compared to prior periods. The net result of this decreased billing
has been a decrease in our ability to charge operational costs to
the BARDA Contract, resulting in a higher than normal cash
burn.
C.
Stockholders’ Equity
Preferred Stock
The
Certificate of Incorporation of the Company authorizes the issuance
of up to 10,000,000 shares of Preferred Stock, at a par value of
$0.01 per share, of which 1,250,000 shares are designated Series A
Convertible Preferred Stock, 1,600,000 shares are designated Series
B Convertible Preferred Stock (the “Series B Stock”)
and 5,000 shares are designated Series C Convertible Preferred
Stock (the “Series C Stock”). The Board of Directors
has the authority to issue Preferred Stock in one or more series,
to fix the designation and number of shares of each such series,
and to determine or change the designation, relative rights,
preferences, and limitations of any series of Preferred Stock,
without any further vote or action by the stockholders of the
Company.
As of
December 31, 2016, 4,500 shares of Series C Convertible Preferred
Stock were outstanding. There are no shares of Series A Convertible
Preferred Stock or Series B Convertible Preferred Stock issued or
outstanding.
The
Series C Stock is non-voting stock. Each share of Series C Stock is
convertible into 4,545 shares of our common stock except to the
extent such conversion would result in such holder of Series C
Stock, and its affiliates, owning in the aggregate more than 9.99%
of the outstanding common stock. Dividends on the Series C Stock
are due whenever dividends are due on the Company’s common
stock on an as-if-converted basis, but shall be subordinate to any
dividends due to holders of the Company's Series B Stock as a
result of such common stock dividends. The Series C Stock shall
also be junior to the Series B Stock in the event of liquidation of
the Company.
On
December 10, 2015, the Company entered into securities purchase
agreements with certain accredited investors to sell and issue
4,500 preferred stock units issued to existing investors,
Biotechnology Value Fund, L.P. and other affiliates of BVF
Partners, L.P., for an aggregate purchase price of $4,500,000. The
preferred units collectively consist of (i) 4,500 shares of Series
C Stock of the Company that are collectively convertible into an
aggregate of 20,454,546 shares of common stock and (ii) warrants to
purchase an aggregate of 20,454,546 shares of common stock, in each
case subject to adjustment. The warrants have an initial exercise
price of $0.22 per share. The Series C Stock and warrants contain
provisions restricting the conversion or exercise of such
securities in circumstances where such event would result in the
holder and its affiliates to beneficially own in excess of 9.99% of
the Company’s outstanding common stock.
The
fair value of the December 10, 2015 financing warrants issued was
estimated to be $4,476,000 using the Black-Scholes option pricing
model with the following assumptions: dividend yield of 0%,
expected volatility of 109.74%, risk free interest rate of 1.67%,
and an expected life equal to the five year contractual term. The
proceeds from the December 10, 2015 financing were allocated based
upon the relative fair values of the warrants and preferred shares
issued in the transaction.
The
allocation of the proceeds based on relative fair values of the
instruments resulted in recognition of a discount on the Series C
Preferred Stock of $2,486,000 from a beneficial conversion feature,
which was being amortized from the date of issuance to the earliest
redemption date of 90 days post issuance. For the quarter ended
December 31, 2015 the Company recognized $580,000 of amortization
of the discount on Series C Preferred Stock as deemed dividends
charged to additional paid in capital. There was no amortization in
the quarter ended December 31, 2016 as the full value of the
beneficial conversion feature was fully amortized in the fiscal
year ended September 30, 2016. The value of the beneficial
conversion feature is calculated as the difference between the
effective conversion price of the Series C Preferred Stock and the
fair market value of the common stock into which the Series C
Preferred Stock are convertible at the commitment
date.
9
Common Stock
On
December 10, 2015, the Company entered into securities purchase
agreements with certain accredited investors to sell and issue (i)
an aggregate of 10,215,275 common units issued at a purchase price
of $0.22 per unit. Each common unit consists of one share of the
Company’s common stock and a five year warrant to purchase
one share of the Company’s common stock, subject to
adjustment. The warrants may not be exercised until after 90 days
following the date of issuance. The warrants contain provisions
restricting the conversion or exercise of such securities in
circumstances where such event would result in the holder and its
affiliates to beneficially own in excess of 9.99% of the
Company’s outstanding common stock.
On
September 29, 2015, the Company received funding in the form of
convertible promissory notes (the “BVF Notes”) from
Biotechnology Value Fund, L.P. and certain other affiliates of BVF
Partners, L.P. The BVF Notes had an aggregate principal balance of
$1,000,000, accrue interest at a rate of 6% per annum and had a
scheduled maturity date of September 28, 2016. The outstanding
principal and accrued interest on the BVF Notes were automatically
convertible into Company equity securities, provided a qualified
financing of not less than $4,000,000 occurred.
On
December 11, 2015, following the completion of a qualified
financing (consisting of the common units and preferred units
involving aggregate proceeds of $6,747,000 described above and
under “Preferred Stock,”) the principal and accrued
interest amounts under the BVF Notes were converted into 5,414,402
shares of the Company’s common stock and warrants to purchase
an additional 5,414,402 shares of the Company’s common stock
at an exercise price per share of $0.22 subject to adjustment. As a
result, the BVF Notes were no longer outstanding as of that
date.
Net
cash proceeds from the December 10, 2015 financing, after deducting
for $577,000 of expenses, were approximately $6,170,000. The
Company also incurred non-cash expenses in the form of 1,214,027
warrants issued to the placement agents with an estimated fair
value of $266,000, at similar terms as the financing warrants, for
services provided. These warrants were recorded to additional paid
in capital as a direct cost of the financing. The Company issued a
total of 37,298,250 warrants in connection with the December 10,
2015 financing.
The
fair value of the December 10, 2015 financing warrants and December
11, 2015 warrants issued for conversion of the BVF notes was
estimated to be $3,420,000 using the Black-Scholes option pricing
model with the following assumptions: dividend yield of 0%,
expected volatility of 109.74%, risk free interest rate of 1.67%,
and an expected life equal to the five year contractual term. The
proceeds from the December 10, 2015 financing and December 11, 2015
conversion of the BVF Notes were allocated based upon the relative
fair values of the warrants and common shares issued in the
transactions.
Dividends
The
Company has never paid a cash dividend on its common stock and does
not anticipate paying cash dividends on its common stock in the
foreseeable future. If the Company pays a cash dividend on its
common stock, it also must pay the same dividend on an as converted
basis on its outstanding Series C Stock.
Warrants
As of
December 31, 2016, warrants to purchase an aggregate of 52,947,877
shares of common stock were outstanding with a weighted average
exercise price of $0.23 per share. Details of the warrants for
common stock outstanding at December 31, 2016 are as
follows:
|
Number of Shares
|
Exercise Price
|
Expiration Date
|
|
1,337,627
|
$0.40
|
March
2017
|
|
325,000
|
$0.40
|
April
2017
|
|
300,000
|
$0.258
|
June
2017
|
|
50,000
|
$0.26
|
June
2017
|
|
140,000
|
$0.35
|
October
2017
|
|
12,205,000
|
$0.25
|
February
2018
|
|
1,242,000
|
$0.25
|
March
2018
|
|
50,000
|
$0.49
|
January
2020
|
|
37,298,250
|
$0.22
|
December
2020
|
|
52,947,877
|
|
|
10
Below
is a summary of warrant activity (“common and
preferred”) for the three months ended December 31,
2016:
|
|
|
Weighted
Average
|
|
|
|
|
Number of
Shares
|
Exercise
Price
|
Remaining
Contractual Term (in years)
|
Aggregate
Intrinsic Value
|
|
Outstanding at
9/30/2016
|
52,947,877
|
$0.23
|
3.3
|
$-
|
|
Granted
|
-
|
$-
|
-
|
$-
|
|
Exercised
|
-
|
$-
|
-
|
$-
|
|
Expired or
Canceled
|
-
|
$-
|
-
|
$-
|
|
Forfeited
|
-
|
$-
|
-
|
$-
|
|
Vested
|
-
|
$-
|
-
|
$-
|
|
Outstanding at
12/31/2016
|
52,947,877
|
$0.23
|
3.1
|
$-
|
D.
Stock-Based Compensation
Below
is a summary of stock option activity for the three months ended
December 31, 2016:
|
|
|
Weighted
Average
|
|
|
|
|
Number of
Shares
|
Exercise
Price
|
Remaining
Contractual Term (in years)
|
Aggregate
Intrinsic Value
|
|
Outstanding at
9/30/2016
|
12,204,000
|
$0.38
|
5.0
|
$1
|
|
Granted
|
450,000
|
$0.20
|
-
|
$-
|
|
Exercised
|
-
|
$-
|
-
|
$-
|
|
Expired or
Canceled
|
(231,000)
|
$0.62
|
-
|
$-
|
|
Forfeited
|
-
|
$-
|
-
|
$-
|
|
Outstanding at
12/31/2016
|
12,423,000
|
$0.37
|
5.0
|
$1
|
For the
three months ended December 31, 2016, all stock options were
granted with an exercise price at or above the fair market value of
the Company’s common stock on the date of grant.
The
details of stock options for the three months ended December 31,
2016 were as follows:
|
|
Options
Outstanding
|
Options
Exercisable
|
||||
|
Range of
Exercise Prices
|
Number
Outstanding At December 31, 2016
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Life (in years)
|
Number
Exercisable At December 31, 2016
|
Weighted Average
Exercise Price
|
Weighted Average
Remaining Contractual Life (in years)
|
|
$0.19-$0.20
|
700,000
|
$0.19
|
9.54
|
262,498
|
$0.19
|
9.33
|
|
$0.21-$0.30
|
3,537,500
|
$0.27
|
5.58
|
3,537,500
|
$0.27
|
5.58
|
|
$0.31-$0.40
|
6,551,500
|
$0.39
|
4.58
|
6,551,500
|
$0.39
|
4.58
|
|
$0.41-$0.50
|
502,000
|
$0.45
|
4.99
|
502,000
|
$0.45
|
4.99
|
|
$0.51-$0.60
|
791,250
|
$0.58
|
3.07
|
791,250
|
$0.58
|
3.07
|
|
$0.61-$0.70
|
4,000
|
$0.69
|
0.20
|
4,000
|
$0.69
|
0.20
|
|
$0.71-$0.80
|
80,750
|
$0.76
|
3.97
|
80,750
|
$3.97
|
3.97
|
|
$0.81-$0.90
|
254,000
|
$0.90
|
0.53
|
254,000
|
$0.90
|
0.53
|
|
$0.91-$1.19
|
2,000
|
$1.19
|
0.33
|
2,000
|
$1.19
|
0.33
|
|
|
12,423,000
|
$0.37
|
4.97
|
11,985,498
|
$0.38
|
4.80
|
11
Stock-based
compensation expense recognized in the statement of operations is
as follows (in thousands):
|
|
For the three
months ended
|
|
|
|
December
31,
|
|
|
|
2016
|
2015
|
|
General and
Administrative Expenses
|
$27
|
$38
|
|
|
$27
|
$38
|
The
total unrecognized compensation expense for outstanding and
unvested stock options for the three months ended December 31, 2016
was $59,000. The weighted average remaining recognition period for
the total unrecognized compensation expense is approximately eight
months. The fair value of the options associated with the above
compensation expense was determined at the date of the grant using
the Black-Scholes option pricing model with the following weighted
average assumptions:
|
|
For the three
months ended
December
31,
|
|
|
|
2016
|
2015
|
|
Dividend
yield
|
0%
|
0%
|
|
Unvested forfeiture
rate
|
1.58%
|
7.87%
|
|
Expected
volatility
|
107%
|
117%
|
|
Risk-free interest
rate
|
1.17%
|
1.42%
|
|
Expected
term
|
5.27
years
|
5.27
years
|
E.
Net Income (Loss) Per Common Share
The
Company computes basic net income (loss) per weighted average share
attributable to common stockholders using the weighted average
number of shares of common stock outstanding during the period. The
Company computes diluted net income (loss) per weighted average
share attributable to common stockholders using the weighted
average number of shares of common and dilutive potential common
shares outstanding during the period. Potential common shares
outstanding consist of stock options, convertible debt, warrants
and convertible preferred stock using the treasury stock method and
are excluded if their effect is anti-dilutive. Diluted weighted
average common shares did not include any incremental shares for
the three months ended December 31, 2016 and 2015. Diluted weighted
average common shares excluded incremental shares of approximately
85,825,000 and 87,697,000, respectively, for the three months ended
2016 and 2015, due to their anti-dilutive effect.
|
|
For three months
ended
December
31,
|
|
|
|
2016
|
2015
|
|
|
(in thousands,
except per share data)
|
|
|
Numerator:
|
|
|
|
Net
loss
|
$(1,087)
|
$(1,033)
|
|
Less deemed
dividend on Series C preferred stock
|
—
|
(580)
|
|
Net loss
attributable to common stockholders – basic
|
$(1,087)
|
$(1,613)
|
|
|
|
|
|
Net loss
attributable to common stockholders – diluted
|
$(1,087)
|
$(1,613)
|
|
Denominator:
|
|
|
|
Weighted-average
shares used in computing net loss per share attributable to common
stockholders – basic
|
152,086
|
139,439
|
|
Effect of
potentially dilutive securities:
|
|
|
|
Common stock
warrants
|
—
|
—
|
|
Convertible
preferred stock
|
—
|
—
|
|
Common stock
options
|
—
|
—
|
|
Weighted-average
shares used in computing net loss per share attributable to common
stockholders – diluted
|
152,086
|
139,439
|
|
Basic net loss per
common share
|
$(0.01)
|
$(0.01)
|
|
Diluted net loss
per common share
|
$(0.01)
|
$(0.01)
|
12
F.
Debt
Convertible Promissory Notes
On
September 29, 2015, the Company received funding from existing
investors, Biotechnology Value Fund, L.P. and other affiliates of
BVF Partners, L.P., in exchange for issuance of convertible
promissory notes (the "Notes").
The
Notes had an aggregate principal balance of $1,000,000, accrued
interest at a rate of 6% per annum and had a scheduled maturity
date of September 28, 2016 (the “Maturity
Date”). The outstanding principal and accrued
interest on the Notes shall automatically convert into Company
equity securities issued in a Qualified Financing (as defined
below) at a conversion rate carrying a 15% discount to the lowest
price per share (or share equivalent) issued in a Qualified
Financing (an “Automatic Conversion”). If, prior
to the Maturity Date, the Company enters into an agreement
pertaining to a Corporate Transaction (as defined below) and the
Notes have not been previously converted pursuant to an Automatic
Conversion, then, the outstanding principal balance and unpaid
accrued interest of the Notes shall automatically convert in whole
into the right of the holder to receive, in lieu of any other
payment and in cancellation of the Notes, an amount in cash upon
closing of the Corporate Transaction equal to two times the
outstanding principal amount of the Notes.
For
purposes of the foregoing: "Qualified Financing"
means a bona fide new money equity securities
financing on or before the Maturity Date with total proceeds
to the Company of not less
than four million dollars; and “Corporate
Transaction” means a sale, lease or other disposition of all
or substantially all of the Company’s assets or a
consolidation or merger of the Company with or into any
other corporation or other entity or person, or any other corporate
reorganization, in which the stockholders of the
Company immediately prior to such consolidation, merger or
reorganization own less than fifty percent (50%) of the voting
power of the surviving entity immediately after such consolidation,
merger or reorganization.
As of
September 30, 2015, the $1,000,000 principal balance of the Notes
was recorded in the financial statements at face value, net of a
discount of $273,000, as a result of separating the fair value of
the Qualified Financing redemption discount (“Redemption
Feature”) of 15% on the price per share in the Notes. The
Redemption Feature qualifies as a derivative and is subject to fair
value treatment. The Redemption Feature is amortized over the
expected life of the derivative, and the amortization expense is
presented with the interest expense from the Notes, yielding an
effective interest rate of 40% that is different than the 6% stated
in the Notes.
On
December 11, 2015, following the completion of a Qualified
Financing described above, the principal and accrued interest
amounts under the Notes were converted into 5,414,402 shares of the
Company’s common stock and warrants to purchase an additional
5,414,402 shares of the Company’s common stock at an exercise
price per share of $0.22 subject to adjustment. As a result, the
Notes were no longer outstanding as of that date.
13
G.
Recently Issued Accounting Pronouncements
From
time to time, new accounting pronouncements are issued by the
Financial Accounting Standards Board ("FASB") that are adopted by
us as of the specified effective date. Unless otherwise discussed,
we believe that the impact of recently issued standards that are
not yet effective will not have a material impact on our financial
position or results of operations upon adoption.
In May
2014, the FASB issued Accounting Standards Update ("ASU") 2015-14
Revenue, which deferred the effective date of ASU 2014-09 Revenue
from Contracts with Customers (ASC 606), which updates the
principles for recognizing revenue. ASU 2014-09 also amends the
required disclosures of the nature, amount, timing and uncertainty
of revenue and cash flows arising from contracts with customers.
ASU 2014-09 is now effective for annual reporting periods beginning
after December 15, 2017, including interim periods within that
reporting period. The Company is evaluating the potential impacts
of the new standard on its existing revenue recognition policies
and procedures.
In
August 2014, the FASB issued ASU 2014-15, Disclosure of
Uncertainties about an Entity's Ability to Continue as a Going
Concern. ASU 2014-15 requires that an entity's management evaluate
whether there are conditions or events that raise substantial doubt
about the entity's ability to continue as a going concern within
one year after the date that the financial statements are issued.
ASU 2014-15 is effective for annual periods beginning after
December 15, 2016 and for interim periods thereafter. The
Company is evaluating the potential impacts of this new standard on
its quarterly reporting process.
H.
Commitments
The
Company acquires assets still in development and enters into
research and development arrangements with third parties that often
require milestone and royalty payments to the third party
contingent upon the occurrence of certain future events linked to
the success of the asset in development. Milestone payments may be
required, contingent upon the successful achievement of an
important point in the development life-cycle of the pharmaceutical
product (e.g., approval of the product for marketing by a
regulatory agency). If required by the arrangement, the Company may
have to make royalty payments based upon a percentage of the sales
of the pharmaceutical product in the event that regulatory approval
for marketing is obtained. Because of the contingent nature of
these payments, they are not included in the table of contractual
obligations. No milestones have been met, nor have any payments
been paid, as of December 31, 2016.
We are
also obligated to pay patent filing, prosecution, maintenance and
defense costs, if any, for the intellectual property we have
licensed from National Jewish Health, National Jewish Medical and
Research Center and Duke University.
These
arrangements may be material individually, and in the unlikely
event that milestones for multiple products covered by these
arrangements were reached in the same period, the aggregate charge
to expense could be material to the results of operations in any
one period. In addition, these arrangements often give Aeolus the
discretion to unilaterally terminate development of the product,
which would allow Aeolus to avoid making the contingent payments;
however, Aeolus is unlikely to cease development if the compound
successfully achieves clinical testing objectives.
Item 2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
Introduction
Unless
otherwise noted, the terms “we,” “our” or
“us” refer collectively to Aeolus Pharmaceuticals, Inc.
and our wholly owned subsidiary, Aeolus Sciences, Inc.
This
report contains, in addition to historical information, statements
by us with respect to expectations about our business and future
results which are “forward-looking” statements under
the Private Securities Litigation Reform Act of 1995. These
statements and other statements made elsewhere by us or by our
representatives, which are identified or qualified by words such as
“likely,” “will,” “suggests,”
“expects,” “might,” “believe,”
“could,” “should,” “may,”
“estimates,” “potential,”
“predict,” “continue,” “would,”
“anticipates,” “plans,” or similar
expressions, are based on a number of assumptions that are subject
to risks and uncertainties. Such statements include, but are not
limited to, those relating to our product candidates and funding
options, as well as our proprietary technologies and uncertainties
and other factors that may cause our actual results to be
materially different from historical results or from any results
expressed or implied by such forward-looking statements. Important
factors that could cause results to differ include risks associated
with uncertainties of progress and timing of clinical trials,
scientific testing, obtaining regulatory approval, the need to
obtain (and obtaining) funding for pre-clinical and clinical trials
and operations, the scope and validity of intellectual property
protection for our product candidates, proprietary technologies and
their uses, new accounting and Securities and Exchange Commission
(“SEC”) requirements and competition from other
biopharmaceutical companies. Certain of these factors and others
are more fully described in our filings with the SEC, including,
but not limited to, our Annual Report on Form 10-K for the fiscal
year ended September 30, 2016, filed with the SEC on December 20,
2016. All forward-looking statements are based on information
available as of the date hereof, and we do not assume any
obligation to update such forward-looking statements. Readers are
cautioned not to place undue reliance on these forward-looking
statements, which speak only as of the date hereof.
14
Operations Summary
We are
a biopharmaceutical company leveraging significant U.S. Government
funding to develop a platform of novel compounds for use in
biodefense, fibrosis, oncology, infectious disease and diseases of
the central nervous system. The platform consists of approximately
180 compounds licensed from the University of Colorado
(“UC”) Duke University (“Duke”) and
National Jewish Health (“NJH”).
Our
lead compound, AEOL 10150 (“10150”), is being developed
under contract with the Biomedical Advanced Research and
Development Authority (“BARDA” and the “BARDA
Contract”), a division of the U.S. Department of Health and
Human Services (“HHS”), as a medical countermeasure
(“MCM”) against the pulmonary sub-syndrome of acute
radiation syndrome (“Pulmonary Acute Radiation
Syndrome” or “Lung-ARS”) and the delayed effects
of acute radiation exposure (“DEARE”). Lung-ARS is
caused by acute exposure to high levels of radiation due to a
nuclear detonation or radiological event.
We are
also developing 10150 for the treatment of lung fibrosis, including
idiopathic pulmonary fibrosis (”IPF”) and other
fibrotic diseases. This new development program was created based
upon the data generated from animal studies in Lung-ARS and
chemical gas exposure under the BARDA Contract and National
Institutes of Health (“NIH”) grants. On March 17, 2015,
we announced that 10150 was granted Orphan Drug Designation by the
U.S. Food and Drug Administration (“FDA”). The Company
plans to initiate a Phase 1 safety study in patients with IPF in
2017. After we have completed safety studies, we plan to initiate
efficacy studies in patients with IPF. AEOL 10150 has previously
been tested in two Phase I human clinical trials with no
drug-related serious adverse events reported.
We are
also developing 10150 for use in combination with radiation therapy
for cancer as a treatment to reduce side effects caused by
radiation toxicity and improve local tumor control. Pre-clinical
studies at Duke, the University of Maryland and Loma Linda
University have demonstrated that 10150 protects healthy, normal
tissue, while not interfering with the benefit of radiation therapy
or chemotherapy in prostate and lung cancer. Additional studies
have demonstrated that 10150 enhances the anti-tumor activity of
chemotherapy and radiation. A significant portion of the
development work funded by the BARDA Contract is applicable to the
development program for radiation oncology, including safety,
toxicology, pharmacokinetics and Chemistry, Manufacturing and
Controls (“CMC”). The Company intends to initiate
safety studies in this indication in 2017. After we have completed
safety studies, we plan to initiate studies to demonstrate efficacy
in protecting against the toxic side effects related to radiation
therapy and/or the improvement of local tumor control.
We are
also developing 10150 as a MCM for exposure to chemical vesicants
(e.g., chlorine gas, sulfur mustard gas and phosgene gas) and nerve
agents (e.g., sarin gas and soman gas) with grant money from the
NIH Countermeasures Against Chemical Threats
(“NIH-CounterACT”) program. 10150 has consistently
demonstrated safety and efficacy in animal studies of chemical gas
exposure and nerve gas exposure.
We are
also developing a second compound, AEOL 11114B
(“11114”), as a treatment for Parkinson’s
disease. Research funded by the Michael J Fox Foundation for
Parkinson’s disease (“MJFF”) demonstrated the
neuro-protective activity of 11114 in mouse and rat models of
Parkinson’s disease. The compounds were invented by Aeolus in
collaboration with Brian J. Day, PhD at National Jewish Health and
Manisha Patel, PhD at the University of Colorado, Anschutz Medical
Campus, Department of Pharmaceutical Sciences in collaboration with
the Company. We have obtained worldwide, exclusive licenses to
develop the compounds from NJH and the UC. We plan to complete the
remaining work to file an Investigational New Drug
(“IND”) application with the FDA in 2017.
In
April 2015, we announced the discovery of a new compound, AEOL
20415 (“20415”), which has demonstrated
anti-inflammatory and anti-infective properties, and could be
effective in treating cystic fibrosis and combatting anti-biotic
resistant bacteria. The compound was developed under collaboration
between Brian J. Day, PhD at National Jewish Health in Denver,
Colorado and Aeolus Pharmaceuticals. We have obtained a worldwide,
exclusive license to develop the rights to the compound from NJH.
We plan to complete the remaining work to file an Investigational
New Drug (“IND”) application with the FDA in
2017.
Finally, we have a
pipeline of approximately 180 additional compounds. We expect that
the development of additional compounds in our portfolio could be
dependent on our finding non-dilutive capital sources to fund the
work.
15
BARDA
Contract
Our
most extensive development program to date is the advanced
development of 10150 for Lung-ARS and DEARE. On February 11, 2011,
we signed a cost-plus contract with BARDA for the development of
10150 as a MCM against Lung-ARS. BARDA is the government agency
responsible for the advanced development and purchase of medical
countermeasures for chemical, biological, radiological and nuclear
threats. The contract contemplates the advanced development of
10150 through approval by the FDA under 21 CFR Part 314 Subpart I
and Part 601 Subpart H (the "Animal Rule.") The Animal Rule allows
for approval of drugs using only animal studies when human clinical
trials cannot be conducted ethically. The ultimate goal of the
BARDA Contract is to complete all of the work necessary to obtain
FDA approval for 10150 as a MCM for Lung-ARS. In addition, the
BARDA Contract is designed to generate the data that would allow
for acquisition of the drug by BARDA prior to FDA approval under a
pre-Emergency Use Authorization (“EUA”).
Pursuant to the
BARDA Contract, we were awarded approximately $10.4 million for the
base period of the contract (from February 2011 to April 2012). On
April 16, 2012, we announced that BARDA had exercised two options
under the BARDA Contract worth approximately $9.1 million. On
September 17, 2013, we announced that BARDA had exercised $6.0
million in additional contract options. On May 07, 2014, we
announced that BARDA had exercised a Contract Modification worth
approximately $1.8 million. The Contract Modification allowed
Aeolus to reconcile actual costs incurred with billings under the
original provisional indirect billing rate. It established a new
provisional indirect billing rate and placed a cap on the current
and future provisional indirect billing rates. On June 26, 2015, we
announced that BARDA had exercised $3.0 million in additional
contract options under its advanced research and development
contract for AEOL 10150. On February 8, 2016, BARDA exercised
approximately $57,000 in additional contract options under its
advanced research and development contract for AEOL 10150. On May
25, 2016, BARDA exercised approximately $421,000 in additional
contract options under its advanced research and development
contract for AEOL 10150. The May option exercise brings the total
contract value exercised as of December 31, 2016 to approximately
$30.8 million. We may receive up to an additional $87.6 million in
options exercisable over the remainder of the BARDA Contract.
Options are exercised based on the progress of the development
program, including the completion of clinical trials or
manufacturing tasks under previously exercised
options.
The
final goal of the contract is to achieve FDA approval for 10150 and
the development of commercial manufacturing capability. In order to
achieve these goals, we believe it will be necessary to exercise
the majority of the options in the contract. We also believe that
BARDA is likely to continue to exercise options as long as 10150
continues to demonstrate efficacy and safety in animal testing for
Lung-ARS. In the event we begin sales to the U.S. government
following the filing of a pre-EUA application, we believe that
BARDA is likely to exercise the majority of the remaining options
under the contract. One of the requirements of an EUA is that the
development program continue towards the goal of FDA approval. If
all of the options are exercised by BARDA, the total value of the
contract would be approximately $118.4 million.
We
believe there are no existing treatments for Lung-ARS or DEARE and
we are not aware of any compounds in development that have shown
efficacy when administered after exposure to radiation. 10150 has
demonstrated efficacy in two animal models (mouse and non-human
primate) when administered after exposure to radiation. The U.S.
government’s planning scenario for a radiation incident is a
10 kiloton detonation of a nuclear device in a major American city.
It is estimated that several hundred thousand civilians would be
exposed to high doses of radiation in this scenario.
Following the
events at the Fukushima nuclear plant in Japan in 2011, we
performed radiation exposure studies in mice at the request of
Japanese researchers to determine how the administration of AEOL
10150 would impact the use of leukocyte growth factors
(“LGF”) used to treat the hematopoietic or bone marrow
syndrome of ARS (“H-ARS”). Data showed that 10150 does
not interfere with the efficacy of LGF (in this case Amgen’s
Neupogen®). Additionally, the study demonstrated that
administration of Neupogen®, the current standard of care for
H-ARS, increased damage to the lungs. When 10150 was administered
with Neupogen® this damage was significantly reduced. We
believe that this finding may have important implications for the
potential procurement of 10150 for the SNS. In September 2013,
BARDA announced that it had entered into a procurement and
inventory management agreement with Amgen to provide Neupogen®
for the SNS. On March 30, 2015, the FDA approved Neupogen® for
the treatment of H-ARS.
The
BARDA Contract is designed to complete the work necessary for 10150
to be purchased for the SNS. BARDA currently acquires drugs for the
SNS through a Special Reserve Fund (the “SRF”) created
under Project BioShield and reauthorized under the Pandemic
All-Hazards Preparedness Reauthorization Act of 2013. Although the
final goal of the contract is full FDA approval under the Animal
Rule, BARDA, based on historical purchases from other suppliers,
may purchase product prior to FDA approval following the filing of
a pre-EUA application. Procurements from BARDA following a pre-EUA
application could result in a significant increase in revenues for
Aeolus and potential profitability.
16
Activities under
the contract to date include animal efficacy studies, animal model
development with radiation survival curve studies, dosing studies,
bulk drug manufacturing, bulk drug and final drug product
manufacturing, validation testing, compliance studies, stability
studies, absorption, distribution, metabolism and excretion
(“ADME”) studies, metabolic studies, genotoxicity
studies and the filing of an orphan drug status application and a
fast track designation application with the FDA. CMC
work has been completed, pilot lots have been prepared and
production is being scaled up under the BARDA
Contract.
In
August 2014, we filed an Investigational New Drug
(“IND”) application with the Division of Medical
Imaging Products of the U.S. Food & Drug Administration
(“FDA”) for 10150 as a treatment for Lung-ARS. On
September 4, 2014, the Company announced positive results from a
study in non-human primates exposed to lethal radiation and treated
with 10150. The study demonstrated that administration of 10150 24
hours after exposure to lethal radiation impacted survival at six
months post-exposure as follows: survival in the 60 day treatment
group was 50%, compared to 25% survival in the radiation only
untreated control group. The data from this study, combined with
development work completed in manufacturing and human safety data,
will form the basis for a pre-EUA application.
On
September 22, 2014, we received a letter from the FDA placing our
proposed Phase I study in healthy normal volunteers for 10150 as a
treatment for Lung-ARS on clinical hold. On February 22, 2016 we
received notice that the FDA had removed the clinical hold on the
Company's IND for 10150 as a treatment for Lung-ARS. The
Company intends to initiate the planned study in the first calendar
quarter of 2017.
As of
December 31, 2016, the total contract value exercised by BARDA
under the BARDA Contract is $30.8 million. From inception of the
BARDA Contract, we have billed BARDA approximately $30.4
million.
Substantially all
of the costs for the Lung-ARS program have been funded by the BARDA
Contract.
10150
has been tested in two human Phase I safety studies where it was
well-tolerated and no adverse events were observed. Efficacy has
been demonstrated in animal models for Lung-ARS, chlorine gas
exposure, phosgene gas exposure, sulfur mustard gas exposure (lungs
and skin) and nerve gas exposure. In both mouse and non-human
primate (“NHP”) studies for Lung-ARS, 10150 treated
groups showed significantly reduced weight loss, inflammation,
oxidative stress, lung damage, and most importantly, mortality.
Therapeutic efficacy has been demonstrated when 10150 is
administered 24 hours after exposure to radiation, a requirement
for consideration as a radiation MCM for the SNS.
We have
also benefitted from research funded by grants for a variety of
other programs involving 10150 and programs other than 10150. These
grants, as well as the particular areas where we have identified
commercialization and development opportunities are described in
greater detail in our Annual Report on Form 10-K for the fiscal
year ended September 30, 2016, filed with the SEC on December 20,
2016. This report on Form 10-Q focuses on our material
developments, results and trends with respect to the period covered
hereby.
Results of Operations
Three months ended December 31, 2016 versus three months ended
December 31, 2015
We had
net loss of $1,087,000 and net loss of $1,033,000 and cash outflows
from operations of $1,260,000 and $820,000 for the three months
ended December 31, 2016 and December 31, 2015, respectively. The
increase in cash outflows in the current period was primarily
attributable to lower revenue from BARDA and the timing of cash
flows related to accounts payable.
Revenue
for the three months ended December 31, 2016 was $83,000, which
compares to $305,000 for the three months ended December 31, 2015.
The revenue is from the collaboration with BARDA announced on
February 11, 2011. The decrease in revenue is primarily
attributable to the timing of work performed and billing for that
work under the BARDA Contract. Since being awarded the BARDA
Contract, we generate contract revenue from a cost-plus fee
arrangement. Revenues on reimbursable contracts are recognized as
costs are incurred, generally based on allowable costs incurred
during the period, plus any recognizable earned fee. We consider
fixed fees under cost-plus fee contracts to be earned in proportion
to the allowable costs incurred in performance of the
contract.
Research and
Development (“R&D”) expenses decreased $3,000, or
1%, to $489,000 for the three months ended December 31, 2016 from
$492,000 for the three months ended December 31, 2015. The decrease
is due to lower expenses for BARDA development, offset by increased
expenses for non-BARDA 10150 development and CMC for 11114. We
currently have eight development programs in progress: studies of
10150 as a medical countermeasure against the effects of radiation
on the lungs, against the effects of sulfur mustard gas and
chlorine gas on the lungs, against the effects of nerve gas
exposure, as a treatment for cancer, as a treatment for IPF and
studies of 11114 as a potential treatment for Parkinson’s
disease and 20415 for cystic fibrosis.
17
General
and administrative (“G&A”) expenses increased
$120,000, or 21%, to $681,000 for the three months ended December
31, 2016 from $561,000 for the three months ended December 31,
2015. The increase is primarily attributable to the higher
accounting and legal fees related to SEC filing
requirements.
Liquidity and Capital Resources
We had
cash and cash equivalents of $1,895,000 on December 31, 2016, and
$3,155,000 on September 30, 2016. The decrease in cash was
primarily due to operating activities.
On
December 10, 2015, the Company received $4,500,000 in gross
proceeds in exchange for the issuance of an aggregate of 4,500
shares of Series C preferred stock and 20,454,546
warrants.
On
December 10, 2015, the Company received approximately $2,247,000 in
gross proceeds in exchange for the issuance of an aggregate of
10,215,275 shares of common stock and 10,215,275
warrants.
Net
cash proceeds from the December 10, 2015 financing, after deducting
for expenses, were approximately $6,170,000. The Company also
incurred non-cash expenses in the form of 1,214,027 warrants issued
to the placement agents, at similar terms as the financing
warrants, for services provided.
We had
net loss of $1,087,000 for the three months ended December 31,
2016. We had cash outflows from operations of $1,260,000. We expect
to incur additional losses and negative cash flow from operations
during the remainder of fiscal year 2017 and for several more
years.
On
February 11, 2011, we were awarded the BARDA Contract to fund the
development of AEOL 10150 as a medical countermeasure for Lung-ARS
from its current status to FDA approval in response to Special
Instructions Amendment 4 to a Broad Agency Announcement
(BAA-BARDA-09-34) for advanced research and development of medical
countermeasures for chemical, biological, radiological and nuclear
threats. The contract value could be up to $118.4 million depending
on options exercised by BARDA and the requirements for approval by
the FDA. Under the BARDA Contract, substantially all of the costs
of the development of AEOL 10150 as a medical countermeasure for
pulmonary injuries resulting from an acute exposure to radiation
from a radiological/nuclear accident or attack, particularly
injuries associated with ARS or Delayed Effects of Acute Radiation
Exposure would be paid for by the U.S. government through BARDA
funding. The BARDA Contract includes provisions to cover
some, but not all, general corporate overhead as well as a small
provision for profit. Certain costs, typically those of being
a public company, like legal costs associated with being a public
company, Investor Relations/Public Relations costs and
patent-related costs, are not included in overhead reimbursement in
the BARDA Contract. In order to fund on-going operating cash
requirements or to accelerate or expand our oncology and other
programs we may need to raise significant additional funds.
Since
2011, the net impact of the BARDA Contract on our liquidity is that
our projected cash burn has been reduced. We recognized
$83,000 in revenue during the quarter ended December 31, 2016
related to the BARDA Contract. The lower revenue in this
quarter and in the year ended September 30, 2016 reflected the
smaller number of tasks in progress under the BARDA Contract
compared to prior periods. The net result of this decreased billing
has been a decrease in our ability to charge operational costs to
the BARDA Contract, resulting in a higher than normal cash
burn.
On
February 4, 2017, we met with BARDA for an In Process Review
("IPR") meeting to review the progress to date under the contract
and request the exercise of additional funding options for the next
set of tasks in the AEOL 10150 development program. The requested
options include funds for reimbursement of operating expenses
allowed under the contract. If BARDA exercises the additional
contract options, we will once again be able to obtain
reimbursement for a significant portion of our operating costs.
This would result in a substantial decrease in our cash usage
compared to the previous twelve months. If BARDA does not exercise
the requested options, we would need to raise equity capital for
operations prior to the end of our current fiscal
year.
We do
not have any revenues from product sales and, therefore, we rely on
investors, grants, collaborations and licensing of our compounds to
finance our operations. We generate limited revenue from
reimbursable, cost-plus R&D contracts and grants. Revenues on
reimbursable contracts are recognized as costs are incurred,
generally based on allowable costs incurred during the period, plus
any recognizable earned fee. We consider fixed fees under
cost-plus fee contracts to be earned in proportion to the allowable
costs incurred in performance of the contract.
We have
incurred significant losses from operations to date. Our ongoing
future cash requirements will depend on numerous factors,
particularly the progress of our catalytic antioxidant program,
potential government procurements for the national stockpile,
clinical trials and/or ability to negotiate and complete
collaborative agreements or out-licensing arrangements. In
addition, we might sell additional shares of our stock and/or debt
and explore other strategic and financial alternatives, including a
merger or joint venture with another company, the sale of stock
and/or debt, the establishment of new collaborations for current
research programs, that include initial cash payments and ongoing
research support and the out-licensing of our compounds for
development by a third party.
There
are significant uncertainties as to our ability to access potential
sources of capital. We may not be able to enter into any
collaboration on terms acceptable to us, or at all, due to
conditions in the pharmaceutical industry or in the economy in
general or based on the prospects of our catalytic antioxidant
program. Even if we are successful in obtaining collaboration for
our antioxidant program, we may have to relinquish rights to
technologies, product candidates or markets that we might otherwise
develop ourselves. These same risks apply to any attempt to
out-license our compounds.
18
Similarly, due to
market conditions, the illiquid nature of our stock and other
possible limitations on equity offerings, we may not be able to
sell additional securities or raise other funds on terms acceptable
to us, if at all. Any additional equity financing, if available,
would likely result in substantial dilution to existing
stockholders.
Our
forecast of the period of time through which our financial
resources will be adequate to support our operations is
forward-looking information, and actual results could
vary.
Off-Balance Sheet Arrangements
We do
not have any off-balance sheet arrangements that have or are
reasonably likely to have a current or future effect on our
financial condition, changes in financial condition, revenues or
expenses, results of operations, liquidity, capital expenditures or
capital resources.
Critical Accounting Policies and Estimates
Revenue Recognition
We do
not currently generate revenue from product sales, but do generate
revenue from the BARDA Contract. We recognize revenue from the
BARDA Contract in accordance with the authoritative guidance for
revenue recognition. Revenue is recognized when all of
the following criteria are met: (i) persuasive evidence of an
arrangement exists, (ii) delivery (or passage of title) has
occurred or services have been rendered, (iii) the seller’s
price to the buyer is fixed or determinable, and (iv)
collectability is reasonably assured. We also comply
with the authoritative guidance for revenue recognition regarding
arrangements with multiple deliverables.
The
BARDA Contract is classified as a “cost-plus-fixed-fee”
contract. We recognize government contract revenue in accordance
with the authoritative guidance for revenue recognition, including
the authoritative guidance specific to federal government
contracts. Reimbursable costs under the BARDA Contract primarily
include direct labor, subcontract costs, materials, equipment,
travel and indirect costs. In addition, we receive a fixed fee
under the BARDA Contract, which is unconditionally earned as
allowable costs are incurred and is not contingent on success
factors. Reimbursable costs under this BARDA Contract, including
the fixed fee, are generally recognized as revenue in the period
the reimbursable costs are incurred and become
billable.
Recently Issued Accounting Pronouncements
We do
not have any recently issued accounting pronouncements that affect
the current fiscal year. See note G in the notes to the financial
statements for disclosure of the effective dates of future
accounting standards that will affect the financial
statements.
Item
3. Quantitative and
Qualitative Disclosures About Market
Risk
Our
exposure to market risk is presently limited to the interest rate
sensitivity of our cash and cash equivalents, which is affected by
changes in the general level of U.S. interest rates. However, we
believe that we are not subject to any material market risk
exposure and do not expect that changes in interest rates would
have a material effect upon our financial position. A hypothetical
10% change in interest rates would not have a material effect on
our Statements of Operations or Cash Flows for the three months
ended December 31, 2016. We do not have any foreign currency or
other derivative financial instruments.
Item
4.
Controls and Procedures
Evaluation
of Disclosure Controls and Procedures
We
maintain “disclosure controls and procedures,” as such
term is defined in Rule 13a-15(e) and Rule 15d-15(e) under the
Securities Exchange Act of 1934, as amended (the “Exchange
Act”). In designing and evaluating our disclosure controls
and procedures, our management recognized that disclosure controls
and procedures, no matter how well conceived and operated, can
provide only reasonable, not absolute, assurance that the
objectives of disclosure controls and procedures are met.
Additionally, in designing disclosure controls and procedures, our
management was required to apply its judgment in evaluating the
cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures
also is based in part upon certain assumptions about the likelihood
of future events, and there can be no assurance that any design
will succeed in achieving its stated goals under all potential
future conditions.
19
Management’s
Report of Internal Control over Financial Reporting as of December
31, 2016
Based
on their evaluation as of the end of the period covered by this
Quarterly Report on Form 10-Q, our Chief Executive Officer and
Chief Financial Officer have concluded that our disclosure controls
and procedures were effective as of the end of the period covered
by this Quarterly Report on Form 10-Q.
Changes
in Internal Control over Financial Reporting
There
have been no changes in our internal control over financial
reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Exchange Act) during the quarter ended December 31, 2016 that have
materially affected, or is reasonably likely to materially affect,
our internal control over financial reporting.
PART
II.
OTHER
INFORMATION
Item
1A.
Risk Factors
As of
December 31, 2016, there have not been any material changes from
the risk factors previously disclosed in Part 1, Item 1A of our
Annual Report on Form 10-K for the fiscal year ended September 30,
2016, which was filed with the SEC on December 20,
2016.
Item
6.
Exhibits
The
following exhibits relate to agreements, arrangements or
obligations that have arisen, been entered into or became effective
or amended during the reporting period covered by the Form
10-Q:
|
Exhibit #
|
|
Description
|
|
31.1
|
|
Certification of
the Chief Executive Officer pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a).
|
|
31.2
|
|
Certification of
the Chief Financial Officer pursuant to Exchange Act Rules
13a-14(a) and 15d-14(a).
|
|
32.1
|
|
Certification by
the Chief Executive Officer and Chief Financial Officer pursuant to
18 U.S.C. §1350 as adopted pursuant to Section 906 of the
Sarbanes-Oxley Act of 2002.
|
|
101.INS
|
+
|
XBRL
Instance Document
|
|
101.SCH
|
+
|
XBRL
Taxonomy Extension Schema Document
|
|
101.CAL
|
+
|
XBRL
Taxonomy Extension Calculation Linkbase Document
|
|
101.DEF
|
+
|
XBRL
Taxonomy Extension Definition Linkbase Document
|
|
101.LAB
|
+
|
XBRL
Taxonomy Extension Label Linkbase Document
|
|
101.PRE
|
+
|
XBRL
Taxonomy Extension Presentation Linkbase Document
|
+
Attached as Exhibit 101 to this report are documents formatted in
XBRL (Extensible Business Reporting Language).
20
SIGNATURES
Pursuant to the
requirements of the Securities Exchange Act of 1934, the registrant
has duly caused this report to be signed on its behalf by the
undersigned thereunto duly authorized.
|
|
AEOLUS PHARMACEUTICALS,
INC.
|
|
|
|
|
|
|
|
|
Date: February 17,
2017
|
By:
|
/s/ John L.
McManus
|
|
|
|
|
John L.
McManus
|
|
|
|
|
President and Chief
Executive Officer
(Principal
Executive Officer)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
By:
|
/s/
David
Cavalier
|
|
|
|
|
David
Cavalier
|
|
|
|
|
Chairman, Chief
Financial Officer and Secretary
(Principal
Financial and Accounting Officer)
|
|
21