Rock Creek Pharmaceuticals, Inc. and Subsidiaries
We have audited the accompanying consolidated
balance sheets of Rock Creek Pharmaceuticals, Inc. and Subsidiaries (the “Company”) as of December 31, 2015 and
2014 and the related consolidated statements of operations, stockholders’ equity (deficit) and cash flows for the years then
ended. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an
opinion on these financial statements based on our audits.
We conducted our audits in accordance with
standards of the Public Company Accounting Oversight Board (United States of America). Those standards require that we plan and
perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting. Our
audits included consideration of internal control over financial reporting as a basis of designing audit procedures that are appropriate
in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s internal control
over financial reporting. Accordingly, we express no such opinion. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant
estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide
a reasonable basis for our opinion.
In our opinion, the financial statements referred
to above present fairly, in all material respects, the financial position of the Company at December 31, 2015 and 2014 and
the results of their operations and their cash flows for the years then ended in conformity with accounting principles generally accepted
in the United States of America.
The accompanying financial statements have
been prepared assuming that the Company will continue as a going concern. As discussed in Note 2 to the financial statements, the
Company has recurring losses and negative cash flows from operations that raise substantial doubt about its ability to continue
as a going concern. Management’s plans in regard to these matters are described in Note 2 to the financial statements. The
financial statements do not include any adjustments that might result from the outcome of this uncertainty.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
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1.
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Nature of business and summary of significant accounting
policies:
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Nature of business:
The Company is comprised of three
entities, Rock Creek Pharmaceuticals, Inc. (f/k/a Star Scientific, Inc.), Star Tobacco, Inc. and RCP Development Inc. (f/k/a Rock
Creek Pharmaceuticals, Inc.). In December, 2013, the Company began transitioning from a nutraceutical and dietary supplement business
to position the Company to develop U.S. Federal Food and Drug Administration (FDA) approved products in order to present greater
long term revenue prospects. In December, 2012, the Company decided to exit the tobacco business in its entirety due to continuing
operating losses.
Prior to December 2013,
the Company’s business strategy focused on selling anatabine-based nutraceutical dietary supplements that
provide anti-inflammatory support and decreased the urge to smoke. The Company also sold an associated line of
cosmetic products, pursued research and development of related dietary supplements and pharmaceutical products, and to a much
lesser degree sought to license its low-TSNA curing technology and related products.
On April 10, 2015, the Board of
Directors declared a reverse stock split in which each twenty-five shares of the Company’s common stock were combined into
and became one share of Rock Creek Pharmaceuticals, Inc. common stock to stockholders of record on April 14, 2015. All share and
per share information presented in this Form 10-K has been adjusted for the reverse split.
Notice of delisting for failure to satisfy a continued listing
rule or standard; Transfer of listing
On November 3, 2015, the Company received a
letter from the Nasdaq Stock Market ("NASDAQ") stating that a NASDAQ Hearings Panel would delist the Company's shares
from NASDAQ effective at the open of business on Thursday, November 5, 2015. The Company's shares were delisted as a result
of the Company’s failure to comply with Nasdaq Listing Rule 5550(b)(2), which requires the Company to maintain a minimum
“Market Value of Listed Securities” of $35 million for continued listing on the NASDAQ Capital Market. The Panel’s
determination followed a hearing on October 29, 2015, at which the Company requested additional time to comply with Rule 5550(b)(2).
The Company did not request the Nasdaq Listing
and Hearing Review Council review the Panel's decision. NASDAQ completed the delisting by filing a Form 25 Notification of Delisting
with the U.S. Securities and Exchange Commission on February 27, 2016, after applicable appeal periods had lapsed.
The Company’s common stock began trading
on the OTC Pink market under the ticker symbol "RCPI" effective at the open of the market on November 5, 2015. The Company
applied for and received approval to trade on the OTCQB Venture Marketplace, under the ticker symbol “RCPI” beginning
November 11, 2015. The OTCQB market is generally limited to companies that are subject to and current in Securities and Exchange
Commission reporting obligations.
Principles of consolidation:
The accompanying consolidated financial
statements include the accounts of Rock Creek Pharmaceuticals and its wholly owned subsidiaries, RCP Development and Star Tobacco.
All intercompany accounts and transactions have been eliminated.
Cash and cash equivalents:
For purposes of the statements of
cash flows, the Company classifies all highly liquid investments with an original maturity of three months or less as cash equivalents.
The Federal Deposit Insurance
Corporation insures up to $250,000 for substantially all interest bearing depository accounts. During 2015 the Company had
amounts on deposit (including restricted cash) which exceeded these insured limits. As of December 31, 2015, of $17.2
million was in excess of insured limits.
Debt issuance costs:
Debt issuance costs incurred directly
with the issuance of secured notes payable and revolving credit facilities are deferred and amortized to interest expense over
the respective loan or credit facility term. Any unamortized amounts are written off upon early repayment of the secured notes
payable, and the related cost and accumulated amortization are removed from our Consolidated Balance Sheets.
Debt issuance costs
are presented in the accompanying 2015 Consolidated Balance Sheet as an asset. All loan costs expensed and debt issuance
costs amortized are included in interest expense in our Consolidated Statements of Operations.
As of December
31, 2015, the Company incurred approximately $0.5 million of debt issuance costs associated with the Senior Secured
Convertible Notes (Note 2). For the year ended December 31, 2015, approximately $42 thousand of debt issuance costs
have been amortized and are included in the accompanying consolidated statements of operations as interest expense.
Property and equipment:
Property and equipment are recorded
at cost. Depreciation is determined using the straight-line method over the estimated useful lives of three to seven years for
office equipment and machinery and equipment and improvements. Leasehold improvements are recorded at cost. Amortization is determined
using the straight line method over the initial term of the lease, including periods of extension.
Intangible assets:
Intangible assets consist primarily
of licensing costs, patents and trademarks and packaging design costs. Intangibles are amortized using the straight-line method
over a period of seventeen years for patents and licensing costs and five years for packaging design costs (the assets’ estimated
lives). Substantially all trademarks owned by the Company have indefinite lives and, as such, the cost of trademarks are not amortized,
but are evaluated annually for impairment. Costs to extend or maintain existing patents and trademarks are expensed as incurred.
The Company reviews the carrying
value of its amortizing long-lived assets whenever events or changes in circumstances indicate that the historical cost-carrying
value of an asset may no longer be appropriate.
The Company assesses recoverability
of the asset by estimating the future undiscounted net cash flows expected to result from the asset, including eventual disposition.
If the estimated future undiscounted net cash flows are less than the carrying value of the asset, an impairment loss is recorded
equal to the difference between the asset’s carrying value and its fair value. Non-amortizing intangibles (trademarks) are
reviewed annually for impairment.
As part of the Company’s annual
impairment analysis, we recognized an impairment loss in 2015 of $289 thousand, which is included in other expenses in the accompanying
Consolidated Statements of Operations.
Restricted cash:
Restricted cash consists of remaining
potential proceeds available under the $20 million Senior Secured Convertible Notes (“Notes”), See Note 2.
Credit risk and major customer
information:
Financial instruments which
potentially subject the Company to concentration of credit risk consist principally of cash and restricted cash.
The Master Settlement Agreement
(“MSA” or Master Settlement Agreement”) escrow fund:
Cash deposits to which the Company
has not transferred its ownership rights and which are restricted pursuant to the MSA have been reflected as a non-current asset
in the Company’s consolidated financial statements. Amounts deposited into MSA escrow accounts are required to be held in
escrow for 25 years.
Accounting for derivatives:
The Company evaluates
its options, warrants, preferred stock, or other contracts to determine if those contracts or embedded components of
those contracts qualify as derivatives to be separately accounted for under ASC Topic 815, “Derivatives and
Hedging”. In the event that the fair value is recorded as a liability, classified as a derivative liability, the change
in fair value is recorded in the statement of operations as derivative gain (loss). Upon conversion or exercise of a
derivative instrument, the instrument is marked to fair value at the conversion date and then that fair value is reclassified
to equity. See Note 9, “Derivative liability”.
Income taxes:
Deferred income tax assets and liabilities
are computed annually for differences between the financial statement and federal income tax bases of assets and liabilities that
will result in taxable or deductible amounts in the future, based on enacted tax laws and rates applicable to the periods in which
the differences are expected to affect taxable income. Valuation allowances are established when necessary to reduce deferred tax
assets to the amount expected to be realized. As of the date of this Report, the Company’s income tax returns for the
years 2014, 2013, and 2012 are open to examination by the relevant taxing authority. Management has evaluated all other tax
positions that could have a significant effect on the financial statements and determined the Company had no uncertain tax positions
at December 31, 2015 and 2014.
Employee share-based compensation:
The Company accounts for compensation for all arrangements under which employees and others receive shares
of stock or other equity instruments (including options and warrants) based on fair value. The fair value of each award is estimated
as of the grant date, and measurement date, if applicable, and amortized as compensation expense over the requisite service period.
The fair values of the Company’s share-based awards (options and warrants) are estimated on the grant dates using the Black-
Scholes valuation model. This valuation model requires the input of highly subjective assumptions, including the fair value of
the Company’s common stock on the grant date, the expected stock price volatility, estimated award term and risk-free interest
rates for the expected term. When estimating the expected term, the Company utilizes the “simplified” method for “plain
vanilla” options. The Company bases its estimate of expected stock price volatility on its historical volatility data. The
Company utilizes risk-free interest rates based on zero-coupon U.S. treasury instruments, the terms of which are consistent with
the expected term of the stock awards. The Company has not paid and does not anticipate paying cash dividends on its shares of
common stock; therefore, the expected dividend yield is assumed to be zero.
Other income (expense)
Other income (expense) consists
principally of proceeds received from insurance carriers for covered claims, interest expense, interest income and gain/loss on
disposition of assets. Interest expense relates to borrowings under notes payable, and amortization of loan fees in connection
with the $20 million Notes.
Loss per common share:
We compute net loss per share by dividing our net loss (the numerator) by the weighted average number
of common shares outstanding (the denominator) during the period. Shares issued during the period and shares reacquired during
the period are weighted for the portion of the period that they were outstanding. The computation of diluted earnings per share,
or EPS, is similar to the computation of basic EPS except that the denominator is increased to include the number of additional
common shares that would have been outstanding if the dilutive potential common shares had been issued. Diluted EPS is the same
as basic EPS due to common equivalent shares being excluded from the calculation, as their effect is antidilutive.
The following potentially dilutive securities outstanding at December
31, 2015 and 2014 have been excluded from the computation of diluted weighted average shares outstanding, as they would have been
anti-dilutive given the Company’s net loss:
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December 31,
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2015
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2014
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Stock Options
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850,600
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1,109,000
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Warrants
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2,752,541
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1,085,503
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Potential shares issuable for convertible securities (1)
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4,562,877
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-
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Total anti-dilutive securities excluded from weighted average shares
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8,166,018
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2,104,503
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(1)
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Potential shares issuable for $2.5 million proceeds received from convertible securities through December 31, 2015 based upon
80% of the average of the five (5) lowest Volume Weighted Average Price for the forty (40) trading days prior to December 31, 2015.
As of December 31, 2015, the maximum number of shares available for convertible securities was 3,626,917 per our S-1, which was
declared effective February 11, 2016.
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Discontinued operations:
Dietary
Supplements:
Rock Creek’s dietary supplement
business previously focused on utilizing certain alkaloids found in the Solanacea family of plants (which includes potatoes, tomatoes,
and eggplants) initially to oppose the desire to smoke or use other traditional tobacco products. More recently, the Company concentrated
on the anti-inflammatory aspects of one of those alkaloids, anatabine. Prior to August 2014, it manufactured and sold two nutraceutical
dietary supplements: Anatabloc®, for anti-inflammatory support, and CigRx®, for assistance in fighting the urge to smoke
cigarettes. The Company also engaged in the development of a cosmetic line of products that utilizes its anatabine compound to
improve the appearance of the skin.
The Company manufactured and sold
a nutraceutical, dietary supplement Anatabloc® as well as an unflavored version of Anatabloc®. The Anatabloc® product,
which was intended to provide anti-inflammatory support, was being sold through its interactive website, a customer service center
and on a consignment basis through GNC, a retailer of dietary supplements.
The Company discontinued the marketing
and sale of all of these products in August 2014 pending further review of this business, and in September 2014, Rock Creek’s
Board of Directors decided to permanently exit the dietary supplement business for anatabine based products in the United States.
Advertising costs:
Advertising costs are expensed as
incurred and are included in marketing and sales expenses. The Company ceased all advertising as of December 31, 2013 due to the
FDA Warning letter (see Note 16 “Commitments, contingencies and other matters”). Advertising costs for the years 2015
and 2014 were nominal.
Use of estimates:
The preparation of financial statements
in conformity with accounting principles generally accepted in the United States requires management to make estimates and assumptions
that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the
financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from
those estimates.
Research and development:
Research and development costs are
expensed as incurred.
Commitment and contingency accounting:
The Company evaluates each commitment
and/or contingency in accordance with the accounting standards which state that if the item is probable to become a direct liability
then the Company will record the liability in the financial statements. If not, it will disclose any material commitments or contingencies
that may arise.
Reclassifications:
Certain amounts from prior periods
have been reclassified to conform to the current period’s presentation. The effect of these reclassifications on our previously
reported condensed consolidated financial statements was not material.
Recently Issued and Adopted Accounting
Pronouncements
In April 2014, the FASB issued ASU
2014-08,”Presentation of Financial Statements and Property, Plant and Equipment: Reporting Discontinued Operations and Disclosures
of Disposals of Components of and Entity” ("ASU 2014-08"). ASU 2014-08 is effective for the first interim or annual
period beginning on or after December 15, 2014 with early adoption permitted. ASU 2014-08 amends ASC Topic 205, Presentation of
Financial Statements, and ASC Topic 360, Property, Plant and Equipment, to improve the usefulness of results in the financial statements
to users. The Company adopted the ASU in the first quarter of 2015 and it did not have a material impact on its financial position,
results of operations or disclosures.
Recent Accounting and Reporting
Pronouncements:
From time to time, new accounting pronouncements are issued by the Financial Accounting
Standards Board, or FASB, or other standard setting bodies that may have an impact on the Company’s accounting and
reporting.
In February 2016, the FASB issued
ASU 2016-02, “Leases” (Topic 842). The guidance in ASU 2016-02 supersedes the lease recognition requirements in ASC
Topic 842, Leases. ASU 2016-02 requires an entity to recognize assets and liabilities arising from a lease for both financing
and operating leases, along with additional qualitative and quantitative disclosures. ASU 2016-02 is effective for fiscal years
beginning after December 15, 2018, with early adoption permitted. We are required to adopt this standard in the first quarter
of 2019. The Company is currently evaluating the effect this standard will have on its Consolidated Financial Statements.
In August 2015, the FASB
issued ASU No. 2015-14, which defers the effective date of ASU No. 2014-09, “Revenue from Contracts with Customers
(Topic 606)” by one year. As a result, the ASU is now effective for fiscal years, and interim periods within those
years, beginning after December 15, 2017. ASU No. 2014-09 provides comprehensive guidance on the recognition of revenue from
customers arising from the transfer of goods and services. The ASU also provides guidance on accounting for certain contract
costs, and requires new disclosures. Early adoption is not permitted. We are required to adopt this standard in the first
quarter of 2017. The initial application of the standard is not expected to significantly impact the Company.
In April, 2015 the FASB issued ASU
2015-05, “Intangibles—Goodwill and Other—Internal-Use Software (Subtopic 350-40): Customer’s Accounting
for Fees Paid in a Cloud Computing Arrangement” (“ASU 2015-05). ASU 2015-05 provides explicit guidance about a customer’s
accounting for fees paid in a cloud computing arrangement. The ASU is effective for annual periods, including interim periods within
those annual periods, beginning after December 15, 2015. For all other entities, the amendments will be effective for annual periods
beginning after December 15, 2015, and interim periods in annual periods beginning after December 15, 2016. Early adoption is permitted
for all entities. We are required to adopt this standard in the first quarter of 2016. The initial application of the standard
is not expected to significantly impact the Company.
In March 2015, the FASB
issued ASU No. 2015-03, “Interest—Imputation of Interest” (“ASU 2015-03”), which provides
guidance on the presentation of debt issuance costs. To simplify the presentation of debt issuance costs, the amendments in
this ASU require that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of
the related debt, consistent with the manner in which debt discounts or premiums are presented. The ASU is effective for
fiscal years, and interim periods within those years, beginning after December 15, 2015, which for Rock Creek would be the
first quarter of 2016. The initial adoption of the standard is not expected to significantly impact the Company.
In
January 2015, the FASB issued ASU No. 2015-01,
“Income Statement—Extraordinary and Unusual Items (Subtopic 225-20)
Simplifying Income Statement Presentation by Eliminating the Concept of Extraordinary Items” (“ASU 2015-01)
.ASU
2015-01 is
effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015.
A reporting entity may apply the amendments prospectively. A reporting entity also may apply the amendments retrospectively to
all prior periods presented in the financial statements. Early adoption is permitted provided that the guidance is applied from
the beginning of the fiscal year of adoption.
ASU 2015-01 was issued
as
part of its initiative to reduce complexity in accounting standards (the Simplification Initiative). We are required to adopt this
standard in the first quarter of 2016. The initial application of the standard is not expected to significantly impact the Company.
The Company believes that all recently
issued accounting pronouncements and other authoritative guidance for which the effective date is in the future either will not
have an impact on its accounting or reporting or that such impact will not be material to its financial position, results of operations,
and cash flows when implemented.
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2.
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Liquidity and managements’ plans:
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The Company has been operating
at a loss for the past thirteen years. Rock Creek’s future prospects will depend on its ability to successfully
transition into the area of drug development. In the long term, the Company expects that its revenues will be more dependent
on the ability to successfully implement its drug development program, but it has no drug products in advance development as
of this date. The Company’s future will be dependent on raising capital to sustain its drug development program until a
successful commercial product development occurs, if any.
On March 12, 2014, the
Company entered into a series of equity and financing transactions that resulted in gross cash proceeds to it of
approximately $9.3 million and a loan agreement. Under one transaction, holders of previously held warrants with strike
prices ranging from $37.50 to $50.00 agreed to immediately exercise on an aggregate of 168,000 warrants at a reduced strike
price of $25.00 per share. The investors also were issued new warrants for an equal number of shares that have a term of
seven years and a strike price of $25.00 per share. This transaction resulted in proceeds of approximately $4.2 million.
Under another transaction the Company sold 204,000 shares with matching warrants for 204,000 shares to other investors at
$25.00 for the shares and warrant shares. This transaction resulted in proceeds to Rock Creek of $5.1 million. Finally, the
Company entered into a loan agreement with another investor under which that investor agreed to loan it up to $5.8 million.
The loan agreement provided for an interest rate of 3% on any funds drawn by the Company. It also provided the lender with
the option to convert any loan amount to a unit of the Company’s common stock and a matching seven-year warrant at a
conversion price of $25.00 per unit. In December, 2014, the Company took an advance on the loan agreement of $350 thousand in
return for a two year interest only note payable. No more funds were made available under the loan agreement which led to a
dispute with the lender. The loan agreement expired in August 15, 2015. See Note 11 “Long-term debt”.
On August 8, 2014, the Company completed
a private placement that resulted in gross proceeds to the Company of approximately $4.25 million and an additional credit facility
of approximately $1.75 million. In the August 2014 Private Placement, the Company sold an aggregate of 425,000 shares of its common
stock at a price of $10.00 per share (the closing price, as adjusted, of the Company’s common stock on the Nasdaq Global
Market on August 6, 2014) to five accredited investors, some of whom are existing investors (or their affiliates) in the Company.
The investors in the August 2014 Private Placement were also granted warrants to purchase an aggregate of 425,000 shares at an
exercise price of $25.00 per share. The warrants will expire on the seventh anniversary of the date of grant. As a part of the
August 2014 Private Placement, the Company agreed to file with the SEC a resale registration statement covering the purchased shares
and the shares issuable pursuant to the granted warrants within 75 days of the closing of the transaction. This credit facility
expired in August 2015. See Note 10 “Credit facility”.
In connection with the August
2014 Private Placement, one of the investors in the private placement entered into a credit facility with the Company for
aggregate borrowing availability of up to $1.75 million. This investor also received a warrant to purchase 175,000 shares
of the Company’s common stock at an exercise price of $25.00 per share. The credit facility provides for an annual
interest rate of 3% on any funds drawn by the Company. It also provides the lender with the option to convert any loan amount
into a unit of the Company’s common stock and a matching seven-year warrant at a conversion price and exercise price of
$25.00 per share. The term of the line of credit does not allow the Company to draw funds under the line until all funds
available from the March 12, 2014 loan agreement were exhausted. The borrowing availability under the credit facility will be
reduced by any future financing transactions by the Company in excess of $5.8 million. Also in connection with the
transaction, the terms of the March 12, 2014 loan agreement were amended whereby (i) the August 2014 Private Placement would
not reduce the borrowing availability under the line of credit, (ii) the loan agreement was extended to August 15, 2015
compared to the original date of April 15, 2015, and (iii) the ability of the Company to draw all funds available under the
credit line at the end of term was eliminated. All other terms and conditions of the March 12, 2014 loan agreement remained
materially unchanged. The credit facility expired unused on August 15, 2015.
On December 15, 2014, the Company entered into the Sales Agreement with MLV & Co. LLC, or MLV, relating
to the sale of shares of its common stock offered under an S-3 Registration Statement that was filed in December 2014 and was declared
effective in February 2015. In accordance with the terms of the sales agreement the Company may offer and sell shares of our common
stock, $0.0001 par value per share, having an aggregate offering price of up to $16.5 million from time to time through MLV, acting
as agent. Sales of the Company’s common stock under the sales agreement will be made by any method permitted that is deemed
an “at the market offering” as defined in Rule 415 under the Securities Act of 1933, as amended, or the Securities
Act, including sales made directly on or through The Nasdaq Capital Market, the prior trading market for the Company’s common
stock, sales made to or through a market maker other than on an exchange or otherwise, in negotiated transactions at market prices,
or any other method permitted by law. The Company began selling shares under the sales agreement on February 12, 2015, and through
the May 20, 2015, sold an aggregate of 285,051 shares under the sales agreement for net proceeds to the Company of $885,000. There
have been no additional sales under the sales agreement subsequent to May 20, 2015 and the Company is not eligible to sell any
further shares under the Sale Agreement.
On January 28, 2015, the Company
entered into a Securities Purchase and Registration Rights Agreement with seven accredited investors, pursuant to which the Company
issued and sold to such Investors in a private placement a total of 202,673 shares of the Company’s common stock, par value
$0.0001 per share, at a purchase price of $3.75 per share, and warrants to purchase up to a total of 168,337 shares of Common
Stock. The warrants, have an exercise price of $3.75 per share, are generally exercisable beginning on January 28, 2015, and expire
on January 27, 2022. An aggregate of 134,000 shares sold in the private placement were issued pursuant to, and as a condition
of, the exercise of previously issued warrants to purchase Common Stock held by certain of the Investors at an amended exercise
price of $3.75 per share. An aggregate of $760,023 was raised in the private placement, including $300,000 of which was paid to
the Company as an advance on December 30, 2014. The Purchase Agreement grants customary resale registration rights with respect
to the shares sold in the private placement.
On May 8, 2015, the Company entered
into a Securities Purchase Agreement with an accredited investor, pursuant to which a total of 77,590 shares of its common stock
were issued and sold, at a purchase price of $3.00 per share, and warrants to purchase up to a total of 69,831 shares of common
stock. The warrants, which have an exercise price of $3.00 per share, are generally exercisable beginning on May 8, 2019, and expire
on May 8, 2022. An aggregate of 62,072 shares sold in the private placement were issued pursuant to, and as a condition of, the
exercise of previously issued warrants to purchase common stock held by the investor at an amended exercise price of $3.00 per
share. An aggregate of $232,770 was raised in the private placement, all of which was paid to the Company as an advance in March
2015.
On June 16, 2015, the Company
entered into a Securities Purchase Agreement (the “Purchase Agreement”) with five institutional investors which
provided for the issuance and sale by the Company of 1,644,500 shares of common stock (the “Shares”) and
warrants to purchase up to 1,233,375 shares of common stock (the “Warrants”) in a registered direct
offering. The Shares and Warrants were sold in units, each of which is comprised of one Share and 0.75 Warrants to
acquire one share of common stock. The purchase price per unit in the offering was $2.25. The warrants, which had an
initial exercise price of $2.83, became exercisable six months following the date of issuance and will expire on the fifth
anniversary of the initial date that the warrants become exercisable. For the period of six months following the issuance of
the warrants, the warrants contained full ratchet anti-dilution protection upon the issuance of any common stock, securities
convertible into common stock or certain other issuances at a price below the then-existing exercise price of the warrants,
with certain exceptions. (See Note 9 “Derivative liability”). The closing of the offering occurred on June 19,
2015. An aggregate of $3,441,116, net of expenses, was raised in the offering. The proceeds were used for clinical
development activities, working capital and general corporate purposes. As part of the Purchase Agreement, the Company agreed
not to make any sales under the Sales Agreement, nor to directly or indirectly offer, sell, assign, transfer, pledge,
contract to sell, any shares of common stock or any securities convertible into or exercisable or exchangeable for common
stock, including the filing of a registration statement with the SEC in respect thereof, for 90 days from the close of the
transaction. In connection with the Senior Secured Convertible Notes discussed below, the full ratchet anti-dilution
protection exercise price of the warrants has occurred. The new fixed exercise price of the warrants is $0.556. All
other terms of the warrants remain the same.
On October 14, 2015,
the Company entered into definitive agreements (which were amended on February 4, 2016) with two institutional investors
relating to the private placement of $20.0 million in principal amount of Senior Secured Convertible Notes (the
“Notes”). The closing of the private placement took place on October 15, 2015. Upon the closing of the sale of
Notes, Rock Creek received cash proceeds of $20 million, of which it deposited $1.0 million in an unrestricted bank account
in the Company’s name and $19.0 million, in the aggregate, (representing the cash reserve the Company agreed to
maintain pursuant to the terms of the Notes) into various restricted bank accounts in Rock Creek’s name that the
Company opened at Hancock Bank (collectively, the “Control Accounts”). The Control Accounts are subject to
control agreements in favor of the investors that secure the Company’s outstanding principal and interest obligations
under the Notes and limit our ability to access the monies in the Control Accounts. As of the date of the filing of the
annual report on Form 10-K, approximately $12.5 million remains in the Control Accounts (approximately $2.5 million was
transferred to the Company’s unrestricted bank accounts upon the satisfaction of certain milestones, as defined, and
approximately $4.0 million was used by the Company to pay principal and interest amounts due under the Notes for the months
of November 2015 through March 2016). The unrestricted $3.5 million of Note proceeds received by the Company to date is
expected to be sufficient to support our current operations through April 2016. The Company’s obligation to maintain a
cash reserve will be further reduced, and corresponding amounts held in the Control Accounts transferred to its unrestricted
bank accounts, subject to satisfaction of certain Equity Conditions (as defined in the Notes), as follows: $1.0 million on
each of April 16, 2016 and the 11
th
trading day of each calendar month
thereafter. If the Company fails to meet certain equity conditions set forth in the Notes, however, it will not be eligible
to reduce the cash reserves securing the Notes below $12.5 million nor may it make installment payments on the Notes in
shares of its common stock. Even if the Company satisfies these equity conditions and continue to reduce the cash reserves
securing the Notes, Rock Creek will need to negotiate longer term payment plans with respect to various liabilities and
outstanding obligations. As a result, the Company will continue to explore a variety of potential financing options,
including additional private placements and financing transactions. There can be no assurance that it will be successful in
obtaining such additional funding on commercially favorable terms, if at all. If the Company is not successful in negotiating
terms or does not raise sufficient funding, the Company may be forced to curtail clinical trials and product development
activities.
Moreover, the Company’s ability
to raise future funds on terms acceptable to it (including through the exercise of outstanding warrants) will depend on a number
of factors, including the performance of the Company’s stock price and its operational performance. If the Company is unable
to raise additional capital, its liquidity may be materially adversely affected. Any equity financing will be dilutive to the
Company’s existing stockholders.
The accompanying consolidated financial statements have been prepared assuming that the
Company will continue as a going concern which contemplates the realization of assets and liquidation of liabilities in the normal
course of business and do not include any adjustments relating to the recoverability or classification of assets or the amounts
of liabilities that might result from the outcome of these uncertainties. The Company’s ability to continue as a going concern,
realize the carrying value of the Company’s assets and discharge the Company’s liabilities in the ordinary course
of business is dependent upon a number of factors, including the Company’s ability to obtain additional financing, the success
of the Company’s development efforts, the Company’s ability to obtain marketing approval for the Company’s drug
development candidates in the United States and/or other markets and ultimately the Company’s ability to market and sell
product candidates arising from the Company’s lead compound. These factors, among others, raise substantial doubt about
the Company’s ability to continue operations as a going concern.
As a basis for considering
market participant assumptions in fair value measurements, ASC 820 establishes a fair value hierarchy that distinguishes between
market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs
that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant
assumptions (unobservable inputs classified within Level 3 of the hierarchy).
The fair value hierarchy,
as defined by ASC 820, contains three levels of inputs that may be used to measure fair value as follows:
|
·
|
Level 1: Input prices quoted in an active market for identical financial assets or liabilities.
|
|
·
|
Level 2: Inputs other than prices quoted in Level 1, such as prices quoted for similar financial assets and liabilities in active markets, prices for identical assets and liabilities in markets that are not active or other inputs that are observable or can be corroborated by observable market data.
|
|
·
|
Level 3: Input prices quoted that are significant to the fair value of the financial assets or liabilities which are not observable or supported by an active market.
|
To the extent that the
valuation is based on models or inputs that are less observable or unobservable in the market, the determination of fair value
requires more judgment. Accordingly, the degree of judgment exercised by the Company in determining fair value is greatest for
instruments categorized in Level 3. A financial instrument’s level within the fair value hierarchy is based on the lowest
level of any input that is significant to the fair value measurement.
In order to estimate the
fair value of the derivative liability, the Company uses the Binomial Model to estimate fair value of the warrants including assumptions
that consider, among other variables, the fair value of the underlying stock, risk-free interest rate, volatility, expected life
and dividend rates. The derivative liability resulting from the June, 2015 Warrants are classified within the Level 3 fair value
hierarchy. See Note 9, “Derivative liability”.
|
4.
|
Insurance proceeds receivable:
|
At December 31, 2015,
insurance proceeds receivable consisted of $62 thousand due from an insurance claim resulting from the Company’s stock being
delisted from the NADAQ Capital Markets exchange.
At December 31, 2014 insurance
proceeds receivable consisted of a $5.9 million escrow funding requirement as part of the securities class action litigation paid
directly to an Escrow account by insurance carriers in addition to $778 thousand paid directly to the Company. The $5.9 million
escrow funding of the settlement by insurers occurred in March, 2015.
In April, 2015, additional
funds totaling $3.5 million were received by the Company directly from insurers for costs incurred arising from various legal proceedings,
which has been recorded as other income in the accompanying condensed consolidated statement of operations for the twelve months
ended December 31, 2015.
|
5.
|
Discontinued operations:
|
Dissolvable Tobacco:
On December 14, 2012, the Company’s
Board of Directors voted unanimously to discontinue the manufacturing, distribution and sale of the Company’s dissolvable
smokeless tobacco products as of December 31, 2012.
The following represents a summary
of the Company’s discontinued operating results and the loss on the disposition of the dissolvable tobacco operations.
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
-
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
-
|
|
Gross margin (loss)
|
|
|
-
|
|
|
|
-
|
|
Operating expenses
|
|
|
-
|
|
|
|
-
|
|
Operating loss
|
|
|
-
|
|
|
|
-
|
|
Gain (loss) on disposal
|
|
|
-
|
|
|
|
(9
|
)
|
Loss from discontinued operations
|
|
$
|
-
|
|
|
$
|
(9
|
)
|
There are no remaining assets or
liabilities from the Company’s Dissolvable Tobacco operations.
Dietary
Supplements:
The Company exited the U.S. dietary
supplement business upon completion of its assessment regarding the FDA’s response to the Company’s NDIN for Anatabloc
®
and CigRx
®
. As a result of the decision, in the fiscal
year ended December 31, 2014, the Company recorded a write-off of $3.6 million which included all inventory of the dietary supplements
and a write down of specialized packaging equipment and other assets. (See Note 2 “Liquidity and management’s plans”
for further details related to the business discontinuance).
The following represents a summary
of the discontinued operating results of the Company’s dietary supplement operations for the years ended December
31, 2015 and 2014.
|
|
2015
|
|
|
2014
|
|
|
|
|
|
|
|
|
Net sales
|
|
$
|
-
|
|
|
$
|
2,139
|
|
Cost of goods sold
|
|
|
-
|
|
|
|
1,169
|
|
Gross margin
|
|
|
-
|
|
|
|
970
|
|
Operating expenses
|
|
|
82
|
|
|
|
2,753
|
|
Operating loss
|
|
|
(82
|
)
|
|
|
(1,783
|
)
|
Loss on disposal
|
|
|
-
|
|
|
|
(3,609
|
)
|
Loss from discontinued operations
|
|
$
|
(82
|
)
|
|
$
|
(5,392
|
)
|
Assets and liabilities of the discontinued
dietary supplement operations consisted of the following as of:
$ thousands
|
|
December 31,
2015
|
|
|
December 31,
2014
|
|
Assets:
|
|
|
|
|
|
|
|
|
Prepaid expenses
|
|
$
|
3
|
|
|
$
|
6
|
|
Machinery and equipment
|
|
|
24
|
|
|
|
25
|
|
Total assets
|
|
$
|
27
|
|
|
$
|
31
|
|
|
|
|
|
|
|
|
|
|
Liabilities:
|
|
|
|
|
|
|
|
|
Accounts payable
|
|
$
|
326
|
|
|
$
|
412
|
|
Accrued expenses
|
|
|
107
|
|
|
|
121
|
|
Total liabilities
|
|
$
|
433
|
|
|
$
|
533
|
|
|
6.
|
Property and equipment:
|
Property and equipment consists of the following:
$ thousands
|
|
2015
|
|
|
2014
|
|
Machinery and equipment
|
|
$
|
8
|
|
|
$
|
-
|
|
Leasehold improvements
|
|
|
180
|
|
|
|
180
|
|
Office and sales equipment
|
|
|
38
|
|
|
|
38
|
|
Total property and equipment
|
|
|
226
|
|
|
|
218
|
|
Less accumulated depreciation
|
|
|
(56
|
)
|
|
|
(11
|
)
|
Property and equipment-net
|
|
$
|
170
|
|
|
$
|
207
|
|
The Company owns specialized packaging
equipment that was installed at its dietary supplement contract manufacturing vendor to package CigRx
®
and Anatabloc
®
in its 20 piece container format. The Company
also had invested in equipment to process anatabine, the primary ingredient in Anatabloc
®
,
CigRx
®
and its Anatabloc
®
Cosmetic products, at a separate contract manufacturer facility. The Company has assessed impairment values at each reporting periods.
As of December 31, 2014 the equipment to process anatabine was deemed impaired due in larger part to the Company’s recent
focus on drug development. Therefore the Company wrote down the value of the anatabine process equipment to zero thus incurring
a $690 thousand charge. As of December 31, 2014 all specialized equipment related to the packaging of CigRx
®
and Anatabloc
®
was written down to zero thus incurring
a charge of $412 thousand, which was included in loss from discontinued operations.
In December, 2014, the Company agreed
to exchange two machines from its discontinued tobacco operation and one machine from its discontinued nutraceutical/dietary supplement
operation in exchange for a reduction of amounts due to a vendor for $60 thousand and $40 thousand, respectively. The transaction
resulted in recognition of a loss from discontinued operations in the amount of $9 thousand as of December 31, 2014.
In 2015, the
Company took title to previously sold equipment and subsequently sold it at auction for $280 thousand, which is
included in other income in the accompanying Consolidated Statement of Operations.
Depreciation expense is included
in the Consolidated Statement of Operations for the years ended December 31, 2015 and 2014, as follows:
$ thousands
|
|
2015
|
|
|
2014
|
|
Discontinued operations-dietary supplements
|
|
$
|
-
|
|
|
$
|
65
|
|
Operating expenses
|
|
|
45
|
|
|
|
22
|
|
Total depreciation expense
|
|
$
|
45
|
|
|
$
|
87
|
|
The Company amortizes its leasehold improvements and office equipment on a straight line basis over the period of 5 years.
Intangible assets consist of the following:
$ thousands
|
|
Remaining
weighted-average
estimated
useful life
|
|
|
2015
|
|
|
Remaining
weighted-average
estimated
useful life
|
|
|
2014
|
|
Patents- finite lives
|
|
|
7.4
|
|
|
$
|
103
|
|
|
|
4.5
|
|
|
$
|
1,179
|
|
Trademarks and other intangibles – infinite lives
|
|
|
n/a
|
|
|
|
-
|
|
|
|
n/a
|
|
|
|
83
|
|
|
|
|
|
|
|
|
103
|
|
|
|
|
|
|
|
1,262
|
|
Less: Accumulated amortization
|
|
|
|
|
|
|
(48
|
)
|
|
|
|
|
|
|
(860
|
)
|
Total intangible assets
|
|
|
7.4
|
|
|
$
|
55
|
|
|
|
4.5
|
|
|
$
|
402
|
|
As part of the
Company’s annual impairment analysis, we recognized an impairment loss in 2015 of $289 thousand, which is included in
“other income (expense)” in the accompanying Consolidated Statements of Operations.
Amortization expense associated with the intangibles
was $58 and $69 thousand in 2015 and 2014, respectively. Trademarks have indefinite lives and are therefore not amortized. As of
December 31, 2015, the aggregate carrying costs of trademarks was $0 (zero). Expected future amortization of intangibles with finite
lives is as follows:
Years ending December 31,
|
|
$ thousands
|
|
2016
|
|
$
|
10
|
|
2017
|
|
|
10
|
|
2018
|
|
|
10
|
|
2019
|
|
|
10
|
|
2020
|
|
|
10
|
|
Thereafter
|
|
|
5
|
|
|
|
$
|
55
|
|
As of December 31, 2015 and 2014, Accrued expenses included
the following:
$ thousands
|
|
2015
|
|
|
2014
|
|
Accrued expenses:
|
|
|
|
|
|
|
|
|
Accrued restructuring charges
|
|
$
|
479
|
|
|
$
|
3,391
|
|
Accrued payroll and related expenses
|
|
|
2,559
|
|
|
|
3,132
|
|
Accrued legal*
|
|
|
340
|
|
|
|
2,242
|
|
Accrued expenses
|
|
|
507
|
|
|
|
164
|
|
Total current liabilities
|
|
$
|
3,885
|
|
|
$
|
8,929
|
|
* As of December 31, 2015, $1,942 million of previously
recorded accrued legal costs are included in accounts payable.
As previously
discussed, on June 16, 2015, the Company entered into a Securities Purchase Agreement for the issuance and sale by
the Company of 1,644,500 shares of common stock and warrants to purchase up to 1,233,375 shares of common stock. The warrants had an initial exercise price of $2.83 are exercisable six months following the issuance and will expire on the fifth
anniversary of the initial date that the warrants become exercisable. For a period of six months following the issuance of
the warrants, they contained full ratchet anti-dilution protection upon the issuance of any common stock, securities
convertible into common stock or certain other issuances at a price below the then-existing exercise price of the warrants,
with certain exceptions.
Following the guidance
in ASC 815-40, the Company recorded the warrants issued as derivative instruments due to their full ratchet anti-dilution provision.
The warrant liability
is accounted for at its fair value (Level 3, see Note 3 “Fair value”) as follows:
|
|
|
In 000’s
|
|
Fair value recorded at transaction date (June 16, 2015)
|
|
$
|
2,130
|
|
Change in fair value of warrant liability since issuance
|
|
|
(1,360
|
)
|
Reclassification of derivative
liability to equity
|
|
|
(770
|
)
|
Balance at December 31, 2015
|
|
$
|
0
|
|
The Company’s assessment
of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors
specific to the asset or liability.
The Company uses the
Binomial Model to estimate the fair value of the warrants classified as derivative instruments with the following assumptions:
|
|
At June 16, 2015
|
|
|
At December 15,
2015
|
|
Stock price
|
|
$
|
2.83
|
|
|
$
|
0.82
|
|
Exercise price
|
|
|
2.83
|
|
|
|
0.556
|
|
Risk-free interest rate
|
|
|
1.81
|
%
|
|
|
1.71
|
%
|
Expected volatility
|
|
|
70.3
|
%
|
|
|
91.5
|
%
|
Expected term
|
|
|
5.5 Years
|
|
|
|
5.0 Years
|
|
Dividend yield
|
|
|
0.00
|
%
|
|
|
0.00
|
%
|
In connection with
the Senior Secured Notes previously discussed, the full ratchet anti-dilution protection exercise price has occurred. The
fixed new exercise price of the warrants will be $0.556. All other terms of the warrants remain the same. See Note 2
“Liquidity and management’s plans”.
The full ratchet
anti-dilution protection on the warrants expired December 15, 2015. At that time, we recorded the fair value of the
derivative liability $770 thousand, to Additional paid-in capital, a component of Stockholder’s Deficit, in accordance
with generally accepted accounting principles (GAAP).
In connection with the August 2014 Private
Placement, one of the investors in the private placement entered into a credit facility with the Company for aggregate borrowing
availability of up to $1.75 million. The credit facility provided for an annual interest rate of 3% on any funds drawn by the Company.
It also provided the lender with the option to convert any loan amount into a unit of the Company’s common stock and a matching
seven-year warrant at a conversion price and exercise price of $1.00 per share. The term of the line of credit did not allow the
Company to draw funds under the line until all funds available from the March 2014 Loan Agreement are exhausted (see Note 11 “Long-term
debt”). The borrowing availability under the credit facility was to be reduced by any future financing transactions by the
Company in excess of $5.8 million. Also in connection with the transaction, the terms of the March 2014 Loan Agreement were amended
whereby (i) the August 2014 Private Placement would not reduce the borrowing availability under the March 2014 Loan Agreement,
(ii) the March 2014 Loan Agreement expiration was extended to August 15, 2015 compared to the original date of April 15, 2015,
and (iii) the ability of the Company to draw all funds available under the March 2014 Loan Agreement at the end of term was eliminated.
All other terms and conditions of the March 2014 Loan Agreement remained materially unchanged. The credit facility expired August
15, 2015.
The Company did not borrow any funds under
the credit facility due to inability to take advances under the March 2014 Loan Agreement, (see Note 11 “Long-term debt”).
March 2014 Loan Agreement
The Company and John J. McKeon (“
Lender
”)
previously entered into a Loan Agreement, dated March 12, 2014, as amended on August 8, 2014 (as amended, the “Loan Agreement”),
under which the Company was granted the right, upon the terms and conditions specified in the Loan Agreement, to borrow from Lender
up to a maximum aggregate amount of $5.8 million. The loan agreement expired on August 15, 2015.
In December 2014, following discussions
between the Company and Lender regarding the Company’s liquidity needs, Lender made an advance to the Company in the
amount of $350,000 (the “
Advance
”) under the Lender’s loan facility at which time no more funds were
made available. At such time, Lender expressed a desire that the Loan Agreement be amended to, among other things, decrease
the conversion price of loans made under the Loan Agreement, including the conversion price of the Advance. The Company
agreed to take such request under consideration, but no amendment was ultimately agreed upon by the Company and Lender, and
Lender thereafter informally indicated to the Company that no further advances would be available under the Loan Agreement in
the absence of an amendment. On January 28, 2015, the Company’s Board of Directors concluded that the Company had the
right to treat the Advance as a loan under the Loan Agreement as currently in effect and did not have an obligation to enter
into any amendment thereto, and therefore the Company has issued to Lender a promissory note in the aggregate principal
amount of $350,000, with such note being in the form specified in the Loan Agreement previously filed as Exhibit 10.1 to the
Company’s Form 10-Q filed on May 12, 2014. In view of this dispute and oral communications from the Lender indicating
that the Lender would not make additional funds available under the Loan Agreement as currently in effect, the Company
believes that it is unlikely that Lender will make additional advances available to the Company under the Loan Agreement. The
Company has requested a written confirmation from Lender that no additional advances will be made under the Loan Agreement,
or, in the alternative, that Lender honor a borrowing request made on January 27, 2015. As of the filing of this annual
report on Form 10-K, the, Lender has not responded to the Company.
Pursuant to the loan agreement, a note payable
was executed for the advance of $350,000. The note is due December 8, 2016, with an interest rate of the lower of three (3) percent
or the maximum rate permitted by Florida law, interest to be paid quarterly. As of December 31, 2015 and 2014, interest on the
note is 3%. The note is classified in current obligations of long term debt as of December 31, 2015, and included in long term
debt as of December 31, 2014 in the accompanying Consolidated Balance Sheets.
October 2015
Senior Secured Convertible Notes
In October, 2015,
the Company entered into separate, privately negotiated exchange agreements with certain investors in the June 2015 private placement
pursuant under which we borrowed gross proceeds of $20 million under Senior Secured Convertible Notes (the “Notes”).
The 2015 Notes have a stated interest
rate of 8.0% per year (or 15% during an event of default), payable in $1 million installments plus interest monthly in
arrears in cash or common stock in certain circumstances beginning January 21, 2016 and ending August 31, 2017, maturing
October 15, 2018 unless earlier repurchased or redeemed by the Company or exchanged by the holders.
Conversion of the
Notes
Fixed Price
Conversion.
The Notes, including all accrued and unpaid interest and late charges and any applicable make-whole amount,
are convertible into shares of the Company’s common stock at any time, in whole or part at the option of the holders, at
an initial fixed conversion price of $1.12. Rock Creek may at any time during the term of the Notes, with the prior written consent
of the Required Holders (as defined in the Notes), reduce the then current conversion price to any amount and for any period of
time deemed appropriate by the Company’s Board of Directors. The make-whole amount is the amount of interest that, but for
the conversion, would have accrued with respect to the amount being converted at the interest rate for the period from such conversion
date through the maturity date. The conversion price is subject to adjustment for stock splits, stock dividends, stock combinations,
recapitalizations, and similar transactions. In the event that the Company issues or sells shares of common stock, rights
to purchase shares of common stock, or securities convertible into or exercisable for shares of common stock for a price per share
(or with a conversion or exercise price per share) that is less than the conversion price then in effect, the conversion price
then in effect will be decreased to equal such lower price. The foregoing adjustments to the conversion price for future stock
issues will not apply to certain exempt issuances, including issuances pursuant to certain employee benefit plans.
Alternate
Price Conversion
A holder of Notes may, at any time, convert the Notes, including all accrued and unpaid interest and any
applicable make-whole amount, into shares of the Company’s common stock at the alternate conversion price, which is equal
to the lowest of (i) the fixed conversion price in effect or (ii) the lower of (A) 80% of the volume-weighted average price of
the Company’s common stock as of the trading day immediately preceding the delivery of the applicable conversion notice,
(B) 80% of the volume-weighted average price of its common stock as of the trading day of the delivery of the applicable conversion
notice and (C) 80% of the arithmetic average of the five lowest volume-weighted average prices of Rock Creek’s common stock
during the 40 consecutive trading day period ending and including the trading day immediately preceding the delivery of the applicable
conversion notice (such conversion price, the “Alternate Conversion Price”), provided that the aggregate number of
shares of common stock sold by a holder of Notes (or its affiliates) pursuant to such a conversion of Notes on any trading day,
may not exceed 25% of the aggregate daily share trading volume (as reported on Bloomberg) of the Company’s common stock as
of such trading day.
Mandatory
Conversion.
If, at any time, (i) the volume-weighted average price of the Company’s common stock exceeds $3.36, which
is 300% of the initial fixed conversion price, (as adjusted for stock splits, stock dividends, recapitalizations and similar events)
for 90 consecutive trading days and (ii) no Equity Conditions Failure then exists, the Company may require a holder to convert
all, or any part, of the Notes, including all accrued and unpaid interest and any applicable make-whole amount, into shares of
its common stock at the fixed conversion price described above. The Company may exercise its right to require conversion of the
Notes by providing irrevocable written notice to the holders within five trading days following the end of the 90-trading day measurement
period. The notice will state the trading day selected by Rock Creek for mandatory conversion, which shall be between 60 and 90
trading days following the notice date. The Company may only exercise its right to require mandatory conversion once during any
six-month calendar period. A mandatory conversion will be cancelled if (i) the closing sale price of the Company’s common
stock falls below $3.36, as adjusted, or (ii) an Equity Conditions Failure occurs on any trading day from the beginning of the
measurement period through the trading day immediately prior to the mandatory conversion date.
Conversion Limitation
The Notes provide that the Company may not issue any shares of common stock upon conversion or otherwise with respect to the Notes
if the issuance of such shares of common stock would violate the rules of the NASDAQ Capital Market or any subsequent stock exchange
upon which our common stock trades, unless and until (i) we obtain the approval of the Company’s stockholders as required
by applicable rules of the NASDAQ Capital Market (provided however, that these rules are not currently applicable to Rock Creek,
as their common stock has been delisted) or any subsequent stock exchange upon which their common stock trades or (ii) the Company
obtains a written opinion from outside counsel that such approval is not required. If, after January 4, 2016, the Company may not
issue shares of its common stock pursuant to the limitation described in the preceding sentence, they are required to pay cash
in exchange for the cancellation of shares of its common stock not issuable pursuant to such limitation (when the Company would
otherwise be required to issue shares of common stock) equal to the greater of (i) the greatest closing sale price of its common
stock on any trading day during the period commencing on the conversion notice day and ending on the date payment is made or (ii)
the price at which a holder purchased shares on the open market in order to deliver shares to a purchaser.
In addition, except
upon at least 61 days’ prior notice from the holder to the Company, the holder will not have the right to any shares of common
stock with respect to the Notes if the holder, together with its affiliates, would beneficially own in excess of 4.99% of the outstanding
shares of the Company’s common stock (including securities convertible into common stock); provided, however, that the holder
may not increase this limitation at any time in excess of 9.99%.
Covenants and events of default
The Notes contain customary terms
and covenants and events of default, the occurrence of which trigger certain acceleration and redemption rights. The covenants
in the Notes include, among others, the timely payment of principal and interest, certain limitations on the incurrence of indebtedness,
restrictions on the redemption of outstanding securities, the filing of a resale registration statement, seeking stockholder approval
of the issuance of the Notes and the shares issuable pursuant thereto in compliance with NASDAQ Listing Rules (provided however,
that these Rules are not currently applicable to the Company, as their common stock has been delisted from NASDAQ), restrictions
on the transfer of assets and restrictions on the existence of liens on the Company’s assets. In addition, they are
required to maintain financial covenants, including maintaining a cash balance of at least $500,000 and a cash burn of not more
than $700,000 per month (increasing to $1.0 million per month following the registration statement being declared effective by
the SEC – which occurred on February 11, 2016). If an event of default occurs, a holder of Notes by notice to the Company
may elect to require it to redeem all or a portion of the Notes held by such holder until the 20th trading day after the later
of (i) the date the event of default is cured and (ii) the date such holder receives the required notice of the event of default
from the Company. The redemption price is equal to greater of (i) 125% of the sum of (A) the amount being redeemed (including principal,
accrued and unpaid interest, and accrued and unpaid late charges) and (B) the amount of interest that would have accrued with respect
to the amount being redeemed from the applicable redemption date through the maturity date and (ii) the product of (A) the conversion
rate then in effect multiplied by (B) the product of (I) 125% multiplied by (II) the greatest closing sale price of the shares
of common stock during the period beginning on the date immediately preceding the event of default and ending on the date we pay
the entire redemption price to the holder.
Broken covenant and event
of default; waiver received
The Company paid its
principal and interest payment on January 26, 2016, whereas covenants required payment to be made by January 21, 2016. In
addition, the Company’s cash balance dropped below the required financial covenant of $500,000 on December 31, 2015.
The Company also failed to meet Equity Conditions by being delisted from NASDAQ. The Company has received a waiver of the
broken covenants from the holders of the note.
On February 4, 2016, the Senior
Secured Convertible Notes were amended, (See Note 18 “Subsequent events”).
Aggregate maturities
for the Company’s debt are as follows:
Year
|
|
$ in 000’s
|
|
2016
|
|
$
|
12,350
|
|
2017
|
|
|
8,000
|
|
Total
|
|
$
|
20,350
|
|
Net deferred tax
assets and liabilities consist of the following:
$ thousand
|
|
2015
|
|
|
2014
|
|
Deferred tax assets:
|
|
|
|
|
|
|
|
|
Net operating loss
carry-forwards (portions subject to annual limitation)
|
|
$
|
93,470
|
|
|
$
|
88,040
|
|
Credit carry-forward
|
|
|
477
|
|
|
|
477
|
|
Stock option compensation
|
|
|
12,075
|
|
|
|
17,322
|
|
Differing basis in property and
equipment for tax and financial reporting
purposes
|
|
|
13
|
|
|
|
(70
|
)
|
Inventory reserve
|
|
|
112
|
|
|
|
1,715
|
|
Accrued severance cost
|
|
|
170
|
|
|
|
1,244
|
|
Other
|
|
|
1,274
|
|
|
|
1,568
|
|
|
|
$
|
107,591
|
|
|
$
|
110,296
|
|
$ thousand
|
|
2015
|
|
|
2014
|
|
Deferred tax liabilities:
|
|
|
|
|
|
|
|
|
MSA escrow payments taxable in future
|
|
$
|
(180
|
)
|
|
$
|
(180
|
)
|
Valuation allowance*
|
|
|
(107,411
|
)
|
|
|
(110,116
|
)
|
|
|
$
|
-
|
|
|
$
|
-
|
|
*
Based on the information available, management believes the allowance is appropriate.
Income tax benefit
consists of the following:
|
|
|
2015
|
|
|
|
2014
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
-
|
|
|
$
|
-
|
|
State
|
|
|
-
|
|
|
|
-
|
|
Deferred benefit
|
|
|
-
|
|
|
|
-
|
|
Total provision (benefit) for income taxes
|
|
$
|
-
|
|
|
$
|
-
|
|
The provision for
income tax expense varies from that which would be expected based on applying the statutory federal rate to pre-tax accounting
loss as follows:
|
|
2015
|
|
|
2014
|
|
Statutory federal rate
|
|
|
(34.00
|
)%
|
|
|
(34.00
|
)%
|
Permanent items
|
|
|
0.04
|
|
|
|
0.04
|
|
State tax provision, net of federal benefit
|
|
|
(3.45
|
)
|
|
|
(3.45
|
)
|
Valuation allowance
|
|
|
37.41
|
|
|
|
37.41
|
|
|
|
|
(0.00
|
)%
|
|
|
(0.00
|
)%
|
At December 31,
2015, the Company had net operating loss carry-forwards of approximately $252 million, which expire from 2022 through 2033. As
a result of previous ownership changes, an aggregate of $532 thousand in Federal loss carry-forwards are limited to $116 thousand
annually.
|
13.
|
Stockholders’ deficit:
|
Warrants:
The Company grants
common stock warrants in connection with direct equity shares purchased by investors as an additional incentive for providing
long-term equity capital to the Company and as additional compensation to consultants and advisors. The warrants are granted at
negotiated prices in connection with the equity share purchases and at the market price of the common stock in other instances.
The warrants have been issued for various terms ranging from several months to ten years.
Common stock warrants
issued, redeemed and outstanding during the years ended December 31, 2015 and 2014 are as follows:
|
|
|
|
|
Weighted Average
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
Price Per
|
|
Warrants
|
|
Number
|
|
|
Share
|
|
|
|
|
|
|
|
|
Warrants outstanding at January 1, 2014
|
|
|
425,993
|
|
|
$
|
46.75
|
|
Warrants issued during 2014
|
|
|
852,718
|
|
|
|
25.00
|
|
Warrants exercised during 2014
|
|
|
(166,718
|
)
|
|
|
(43.00
|
)
|
Warrants expired during 2014
|
|
|
(26,490
|
)
|
|
|
(87.50
|
)
|
Warrants outstanding at December 31, 2014
|
|
|
1,085,503
|
|
|
$
|
29.25
|
|
Warrants issued during 2015
|
|
|
1,917,972
|
|
|
|
1.05
|
|
Warrants exercised during 2015
|
|
|
(196,072
|
)
|
|
|
(3.51
|
)
|
Warrants expired during 2015
|
|
|
(54,862
|
)
|
|
|
(37.50
|
)
|
Warrants outstanding at December 31, 2015
|
|
|
2,752,541
|
|
|
$
|
10.57
|
|
Sale of securities,
exercise and issuance of warrants in 2014:
In the March 2014
private placement, holders of previously held warrants with strike prices ranging from $25.00 to $50.00 agreed to immediately
exercise on an aggregate of 168,000 warrants at a reduced strike price of $25.00 per share. The investors also were issued new
warrants for an equal number of shares that have a term of seven years and a strike price of $25.00 per share. This transaction
resulted in proceeds of approximately $4.2 million. Under another transaction the Company sold 204,000 shares with matching warrants
for 204,000 shares to other investors at $25.00 for the shares and warrant shares.
On June 12, 2014,
30,000 warrants were issued to a firm that provided financial consulting services to the Company. The Company has recognized approximately
$0.2 million of expense related to the warrants.
In the August 2014
private placement, the Company sold an aggregate of 425,000 shares of its common stock at a price of $10.00 per share (the closing
price of the Company’s common stock on the Nasdaq Global Market on August 6, 2014) to five accredited investors, some of
whom are existing investors (or their affiliates) in the Company. The investors in the August 2014 Private Placement were also
granted warrants to purchase an aggregate of 425,000 shares at an exercise price of $25.00 per share. The warrants will expire
on the seventh anniversary of the date of grant.
Sale of securities,
exercise and issuance of warrants in 2015:
On December 15,
2014, the Company entered into an At Market Issuance Sales Agreement, or sales agreement, with MLV & Co. LLC, or MLV,
relating to the sale of shares of Rock Creek’s common stock offered under an S-3 Registration Statement that was filed
in December 2014 and was declared effective in February 2015. In accordance with the terms of the sales agreement, the
Company may offer and sell shares of its common stock, $0.0001 par value per share, having an aggregate offering price of up
to $16.5 million from time to time through MLV, acting as agent. Sales of the common stock under the sales agreement will be
made by any method permitted that is deemed an “at the market offering” as defined in Rule 415 under the
Securities Act of 1933, as amended, or the Securities Act, including sales made directly on or through The Nasdaq Capital
Market, the existing trading market for the Company’s common stock, sales made to or through a market maker other than
on an exchange or otherwise, in negotiated transactions at market prices, or any other method permitted by law. MLV is not
required to sell any specific amount, but will act as the Company’s sales agent using commercially reasonable efforts
consistent with its normal trading and sales practices. There is no arrangement for funds to be received in any escrow, trust
or similar arrangement. MLV will be entitled to compensation at a commission rate equal to 3% of the gross sales price per
share sold. The Company began selling shares under the sales agreement on February 12, 2015 and through December 31, 2015 an
aggregate of 285,051 shares were sold for net proceeds of $885 thousand. There have been no additional sales under the sales
agreement subsequent to May 20, 2015 as of the date of this filing.
On January 28, 2015
the Company entered into a Securities Purchase and Registration Rights Agreement with seven accredited investors, pursuant to
which the Company issued and sold to such Investors in a private placement a total of 202,673 shares of the Company’s common
stock at a purchase price of $3.75 per share, and warrants to purchase up to a total of 168,337 shares of Common Stock. The warrants,
which have an exercise price of $3.75 per share, are generally exercisable beginning on January 28, 2015, and expire on January
27, 2022. An aggregate of 134,000 shares sold in the private placement were issued pursuant to, and as a condition of, the exercise
of previously issued warrants to purchase Common Stock held by certain of the Investors at an amended exercise price of $3.75
per share.
On May 8, 2015,
the Company entered into a Securities Purchase Agreement with an accredited investor, pursuant to which a total of 77,590 shares
of its common stock were issued and sold, at a purchase price of $3.00 per share, and warrants to purchase up to a total of 69,831
shares of common stock. The warrants, which have an exercise price of $3.00 per share, are generally exercisable beginning on
May 8, 2019, and expire on May 8, 2022. An aggregate of 62,072 shares sold in the private placement were issued pursuant to, and
as a condition of, the exercise of previously issued warrants to purchase common stock held by the investor at an amended exercise
price of $3.00 per share.
On June
16, 2015, the Company entered into a Securities Purchase Agreement (the “Purchase Agreement”) with five
institutional investors which provided for the issuance and sale by the Company of 1,644,500 shares of common stock
(the “Shares”) and warrants to purchase up to 1,233,375 shares of common stock (the “Warrants”) in
a registered direct offering. The Shares and Warrants were sold in units, each of which is comprised of one Share
and 0.75 Warrants to acquire one share of common stock. The purchase price per unit in the offering was $2.25.
The warrants, which have an exercise price of $2.83, are exercisable six months following the date of issuance and will
expire on the fifth anniversary of the initial date that the warrants become exercisable. For a period of six months
following the issuance of the warrants, the warrants will contain full ratchet anti-dilution protection upon the issuance of
any common stock, securities convertible into common stock or certain other issuances at a price below the then-existing
exercise price of the warrants, with certain exceptions. See Note 9 “Derivative liability”). In connection with
the Senior Secured Convertible Notes discussed below, the full ratchet anti-dilution protection exercise price of the
warrants has occurred. The new fixed exercise price of the warrants will be $0.556. All other terms of the warrants
remain the same.
In connection with
a private placement in October, 2015, the Company issued to Maxim Group, LLC, as the placement agent for the Private Placement,
a warrant to purchase up to 446,429 shares of the Company’s Common Stock, subject to certain anti-dilution adjustments in
the event of stock distributions, subdivisions, combinations or reclassifications, at an exercise price of $1.12.
Stock option
plans:
Prior to 2008 the
Company adopted a 1998 Stock Option Plan, a 2000 Equity Incentive Plan, and in September 2008 it adopted a 2008 Incentive Award
Plan (the “Plans”). The Plans provide for grants of options to those officers, key employees, directors and consultants
whose substantial contributions are essential to the continued growth and success of the Company. In the aggregate the Plans provide
for grants of both qualified and non-qualified stock options to purchase up to 1,808,000 shares at a purchase price equal to the
fair market value on the date of grant in the case of qualified options granted to employees.
On January 2, 2014
the Company issued 120,000 stock options with an exercise price of $29.00 to Michael J. Mullan, the Company’s Chairman and
CEO pursuant to his employment contract. On January 3, 2014 the Company issued 8,922 share grants that vested immediately with
a share price of $25.50 per share to two of its brand ambassadors pursuant to their agreements with the Company to promote its
dietary supplement and cosmetic products. On February 2, 2014 the Company issued 4,000, and 6,000 stock options with an exercise
price of $32.50 and $50.00, respectively and issued 2,000 shares of stock to the Company’s Vice President of Corporate
Development and Strategy at the time he joined the Company.
On April 24, 2014,
the Company issued 2,000 stock options with an exercise price of $18.00 to the Company’s Chief Scientific Officer.
On August 1, 2014,
the Company issued 2,000 stock options to each of its two new directors with an exercise price of $9.25. The stock options vest
over two years, 50% at the first anniversary of the date of grant and the remainder on the second anniversary of the date of grant.
On December 27,
2014 the Company issued 2,000 stock options to each of two directors for their annual stock option grant with an exercise price
of $3.75.
On April 20, 2015
the Company issued 2,000 stock options to a new director with an exercise price of $3.00. The stock options vest over two years,
50% at the first anniversary of the date of grant and the remainder on the second anniversary of the date of grant.
On August 1, 2015
the Company issued 2,000 stock options to a director for their annual stock option grant with an exercise price of $1.18.
On November 17,
2015 the Company issued 2,000 stock options to a new director with an exercise price of $0.91. The stock options vest over two
years, 50% at the first anniversary of the date of grant and the remainder on the second anniversary of the date of grant.
On December 27,
2015 the Company issued 2,000 stock options to a director for their annual stock option grant with an exercise price of $0.72.
Common stock options
issued, redeemed and outstanding during the years ended December 31, 2015 and 2014 are as follows:
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
|
|
|
Exercise
|
|
|
|
|
|
|
|
|
|
Price Per
|
|
|
Grant Date
|
|
Options
|
|
Number
|
|
|
Share
|
|
|
Fair Value
|
|
|
|
|
|
|
|
|
|
|
|
Options outstanding at January 1, 2014
|
|
|
885,800
|
|
|
$
|
56.80
|
|
|
$
|
45.87
|
|
Options forfeited during 2014
|
|
|
(5,200
|
)
|
|
|
(47.46
|
)
|
|
|
|
|
Options exercised during 2014
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Options expired during 2014
|
|
|
(1,600
|
)
|
|
|
(75.00
|
)
|
|
|
|
|
Options issued during 2014
|
|
|
140,000
|
|
|
|
28.56
|
|
|
|
|
|
Options outstanding at December 31, 2014
|
|
|
1,019,000
|
|
|
$
|
56.82.
|
|
|
$
|
45.94
|
|
Options forfeited during 2015
|
|
|
(104,000
|
)
|
|
|
(31.04
|
)
|
|
|
|
|
Options exercised during 2015
|
|
|
-
|
|
|
|
-
|
|
|
|
|
|
Options expired during 2015
|
|
|
(72,400
|
)
|
|
|
(48.19
|
)
|
|
|
|
|
Options issued during 2015
|
|
|
8,000
|
|
|
|
1.45
|
|
|
|
|
|
Options outstanding at December 31, 2015
|
|
|
850,600
|
|
|
$
|
55.47
|
|
|
$
|
45.11
|
|
The following table
summarizes information for options outstanding and exercisable at December 31, 2015.
|
|
Options Outstanding
|
|
|
Exercisable
|
|
|
|
|
|
|
Weighted
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
|
|
|
Avg.
|
|
|
Avg.
|
|
|
|
|
|
|
|
|
Avg.
|
|
|
Aggregate
|
|
|
|
|
|
|
Remaining
|
|
|
Exercise
|
|
|
Aggregate
|
|
|
|
|
|
Exercise
|
|
|
Intrinsic
|
|
Range of Prices
|
|
Number
|
|
|
Life Years
|
|
|
Price
|
|
|
Intrinsic Value (in 000’s)
|
|
|
Number
|
|
|
Price
|
|
|
Value (in 000’s)
|
|
$0.72 - 50.00
|
|
|
366,000
|
|
|
|
6.65
|
|
|
$
|
23.60
|
|
|
$
|
-
|
|
|
|
161,000
|
|
|
$
|
37.21
|
|
|
$
|
-
|
|
50.01 - 75.00
|
|
|
444,200
|
|
|
|
4.95
|
|
|
|
71.67
|
|
|
|
-
|
|
|
|
444,200
|
|
|
|
71.67
|
|
|
|
-
|
|
75.01 - 100.00
|
|
|
34,400
|
|
|
|
6.18
|
|
|
|
79.83
|
|
|
|
-
|
|
|
|
34,400
|
|
|
|
79.83
|
|
|
|
-
|
|
100.00 - 104.25
|
|
|
6,000
|
|
|
|
4.95
|
|
|
|
101.92
|
|
|
|
-
|
|
|
|
6,000
|
|
|
|
101.92
|
|
|
|
-
|
|
$0.72 – 104.25
|
|
|
850,600
|
|
|
|
5.78
|
|
|
|
55.47
|
|
|
$
|
-
|
|
|
|
645,600
|
|
|
|
63.79
|
|
|
$
|
-
|
|
A summary of the
status of the Company’s non-vested stock options as of December 31, 2015, and changes during the year then ended, is
presented below.
|
|
|
|
|
Weighted
|
|
|
|
|
|
|
Average
|
|
|
|
|
|
|
Grant-Date Fair
|
|
Non-vested Stock Options
|
|
Shares
|
|
|
Value
|
|
Non-vested at December 31, 2014
|
|
|
313,000
|
|
|
$
|
22.44
|
|
Granted
|
|
|
8,000
|
|
|
|
1.45
|
|
Vested
|
|
|
(14,000
|
)
|
|
|
(9.72
|
)
|
Forfeited
|
|
|
(102,000
|
)
|
|
|
(13.45
|
)
|
Non-vested at December 31, 2015
|
|
|
205,000
|
|
|
$
|
22.12
|
|
As of
December 31, 2015, there was approximately $0.6 million of total unrecognized compensation cost related to non-vested
share-based compensation arrangements granted under the Plans. Almost the entirety of the $0.6 million of unrecognized
compensation costs relates to performance based stock options granted to Dr. Mullan in 2013, which will be recognized over
the expected period the performance goals will be achieved (December 31, 2018). The remaining $6 thousand of cost will be
recognized over the next two years. There were no options exercised in the year ended December 31, 2015.
Non-vested
stock options have no intrinsic value.
The fair value of
options was estimated on the date of grant issuance using the Black-Scholes option pricing model with the following weighted average
assumptions:
|
|
2015
|
|
2014
|
Expected life of options based on simplified method
for employees
|
|
2 - 5 years
|
|
2 - 5 years
|
Risk free interest rate
|
|
1.57-1.73%
|
|
1.55-1.72%
|
Expected volatility
|
|
92.49-109.91%
|
|
101.62-104.39%
|
Expected dividend yield
|
|
0%
|
|
0%
|
Total stock-based
compensation (stock and stock option) cost recognized is as follows:
$ thousands
|
|
2015
|
|
|
2014
|
|
Employee
|
|
$
|
902
|
|
|
$
|
9,181
|
|
Non-employee consultants and directors
|
|
|
58
|
|
|
|
228
|
|
|
|
$
|
960
|
|
|
$
|
9,409
|
|
In 2014 the Company
issued a total of 8,922 shares of common stock to consultants in connection with services provided to the Company. These grants
had a fair value of $0.2 million.
In 2015 the Company
agreed to issue a total of 35,000 shares of common stock to consultants in connection with services provided to the Company. These
grants had a fair value of $24 thousand.
|
14.
|
Related party transactions:
|
Related party
activity:
The Company has
entered into certain transactions with companies in which members of management, stockholders and one prior Director have an ownership
interest. The following is a summary of the significant related party transactions for the year ended December 31:
$ thousands
|
|
2015
|
|
|
2014
|
|
Business travel-aircraft expense
|
|
$
|
-
|
|
|
$
|
336
|
|
Previously, the
Company entered into an agreement for the use of the aircraft owned by Starwood Aviation, Inc., a company wholly owned by
Mr. Williams, the Company’s former CEO. The former CEO resigned from the Company in August 2014. As of the
third quarter of 2014 the Company had ceased using any chartered aircraft.
Related party
license agreement:
Effective January 1,
1998, the Company entered into an exclusive license agreement with Regent Court Technology, LLC, of which the Company’s
founder and former CEO, Jonnie R. Williams, and the beneficiary of the O’Donnell Trust, are the owners. Pursuant to this
license agreement, the Company has the exclusive world-wide rights to produce and sell tobacco products with low-TSNA tobacco
and to sublicense that technology to third parties. In connection with this agreement, the Company is obligated to pay royalties
equal to 2% of all product sales (less certain costs incurred by the Company) and 6% of any royalty income earned from sublicensing
(less certain costs incurred by the Company). Since the costs incurred by the Company were in excess of the royalty obligations
there were no royalties due under this agreement for 2015 and 2014.
Due to
stockholders:
Due to
Stockholders consists of unsecured non-interest bearing advances of $50 thousand as of December 31, 2015 and
December 31, 2014.
Transactions
with Roskamp:
The Roskamp Institute
is a not-for-profit private medical research organization in Sarasota, Florida whose stated purpose is understanding causes of
and finding cures for neuropsychiatric and neurodegenerative disorders and addictions. Dr. Mullan, Rock Creek’s Chief Executive
Officer, is a co-founder of the Roskamp Institute and formerly served as the Chief Executive Officer of the Roskamp Institute.
In addition, the
Company entered into a Research and Royalty Agreement with an affiliate of the Roskamp Institute pursuant to which the Company
pays royalties of 5% of Anatabloc
®
sales to this affiliate (such royalties
being equal to $0.0 (zero) and $0.1 million in 2015, and 2014, respectively). During the same two year period, the Company
has paid research-related fees of $0.8 million and $0.6 million to the Roskamp Institute and its wholly owned for-profit subsidiary,
SRQ Bio, LLC. All royalties associated with sales of Anatabloc
®
have been
reclassified to discontinued operations in the accompanying Consolidated Statements of Operations accordingly.
The Company also
entered into a lease agreement with the Roskamp Institute, effective March 1, 2014, pursuant to which the Roskamp Institute is
leasing office space to Rock Creek. This office space, which is now being used as the Company’s principal executive office,
is located in Sarasota, Florida. Under the terms of the lease agreement, the Company is obligated to pay rent in the amount of
$2,000 per month plus applicable sales tax to the Roskamp Institute. It also paid a $2,000 security deposit in connection with
the lease agreement. The lease agreement has a 24 month term, after which the Company may elect to continue the lease for up to
three additional 12 month periods. Effective as of April 1, 2014, the Company entered into an amendment to the lease agreement
pursuant to which the Roskamp Institute is leasing it additional space (at the same location) at an additional cost of $250 per
month. For the years ended December 31, 2015 and 2014 respectively, Rock Creek has paid $27 thousand and $30 thousand in rent
to the Roskamp Institute pursuant to the lease agreement, as amended, and $0 (zero) and $42 thousand for administrative services.
As of December 31,
2015 and December 31, 2014, the Company owed Roskamp and its affiliates $0.6 million and $0.1 million, respectively.
|
15.
|
Employee benefit plan:
|
The Company is the
sponsor of a defined contribution retirement plan under Section 401(k) of the Internal Revenue Code. The plan covers all
employees who meet certain eligibility and participation requirements. Participants may contribute up to 15% of their annual compensation.
The Company matches these contributions at a rate of 75% of the first 6% of pay that an employee contributes to the plan. The
Company made contributions of approximately $26 thousand and $45 thousand to the 401-K Plan in 2015 and 2014, respectively.
|
16.
|
Commitments, contingencies, and other matters:
|
Operating leases:
The Company leases
a warehouse and manufacturing facility that was used for manufacturing of its dissolvable tobacco products through December 31,
2012. The cost for this lease, which expires in 2022, is approximately $7 thousand per month. Because the lease is non-cancellable,
the Company is obligated to continue the lease payments through the lease term.
On October 1, 2014,
the Company entered into a sublease with an unrelated entity for a period of two years, automatically renewable for 5 one periods
and one six month period for a monthly rate of $4,000 per month. The sublease will expire no later than March 31, 2022.
The Company closed
its offices in Gloucester, Massachusetts, Washington DC and Glen Allen, VA in 2014. The offices in Gloucester, Massachusetts and
Washington DC closed at the end of their respective leases. The Glen Allen, VA office closed December 31, 2014 with six months
then remaining on the lease, however, the Company signed an early termination agreement effect March 1, 2014. The agreement required
the Company to pay rent of approximately $4,000 per month for January 2014 and February 2014.
In 2014 the Company
entered into a lease agreement with the Roskamp Institute to lease an area of their building for the Company’s Corporate
Offices. The Company paid to build out the space into its offices. Subsequent to the lease execution an addendum to the lease
was executed for additional storage space under the same terms and conditions of the original lease. The initial lease term is
two years with options to renew annually for up to four twelve month periods by the Company. On December 30, 2015, the Company
exercised the option to renew for another 12 months. The lease rate is $2,250 per month.
The following represents
the future minimum rental payments required under operating leases that have initial or remaining non-cancellable terms in excess
of one year as of December 31, 2015.
Year ending December 31,
|
|
$ thousand
|
|
2016
|
|
$
|
88
|
|
2017
|
|
|
79
|
|
2018
|
|
|
62
|
|
2019
|
|
|
62
|
|
2020
|
|
|
62
|
|
Thereafter
|
|
|
87
|
|
|
|
$
|
440
|
|
Net rent
expense for all operating leases was approximately $83 thousand and $318 thousand for the years ended December 31, 2015,
and 2014, respectively. The Company received $48 thousand and $26 thousand in sublease payments for the years ended December
31, 2015 and 2014, respectively.
Obligations under
Master Settlement Agreement:
In November 1998,
46 states and the District of Columbia, the Settling States, entered into the Master Settlement Agreement, or MSA, to resolve
litigation that had been instituted against the major cigarette manufacturers. The Company was not named as a defendant in any
of the litigation matters and chose not to become a participating manufacturer under the terms of the MSA. As a non-participating
manufacturer, the Company was required to satisfy certain escrow obligations for cigarette sales pursuant to statutes that the
MSA required the Settling States to adopt in order for such states to receive the full benefits of the settlement. On March 14,
2007, the Company sold the rights, title and interest in and to all income from and reversionary interest in its MSA escrow accounts,
including its 2006 MSA escrow deposits made in April 2007. Although the Company sold the rights in and to all income from and
reversionary interest in the funds deposited into the MSA escrow accounts for the years up to and including 2006, these MSA escrow
funds remain in the Company’s name and the principal amount of these accounts will be available to satisfy portions of any
state judgments or settlements for the type of claims asserted against the major tobacco manufacturers in the suits that resulted
in the negotiation of the MSA, if such claims are successfully asserted in litigation against the Company.
As
of December 31, 2015, the Company has a deposit in escrow in the amount of approximately $472 thousand for
sales of cigarettes in Settling States, in addition to deposits for which the Company previously sold its rights, title and
interest as part of the March 2007 transaction noted above. Given the discontinuation of the Company’s cigarette
operations in June 2007, the Company does not anticipate having any material MSA escrow obligations in the future.
Securities
Class Action Settlement
On Monday, March
2, 2015, the United States District Court for the Eastern District of Virginia, preliminary approved the class action settlement
in the amount of $6.7 million. The settlement stipulates that the amount of $6.7 million, which includes litigation costs, was
funded in full in March, 2015 from certain Rock Creek Pharmaceuticals, Inc. (f/k/a Star Scientific, Inc.) D&O insurance policies.
On May 4, 2015, the court entered an order setting a meeting with the court’s mediator, Magistrate
Judge Novak, regarding an indemnification issue related to the settlement. The indemnification issue was subsequently resolved
with Judge Novak’s assistance. After notice was furnished to the class, a final approval hearing was held on June 11, 2015,
at which the court indicated it intended to approve the settlement. The court subsequently entered a final judgment and order of
dismissal with prejudice on June 26, 2015.
Derivative Action
Lawsuits
Four individuals,
David C. Inloes, William Skillman, Harold Z. Levine and Louis Lim, filed separate, but similar derivative actions naming all or
most of our then current directors, several of the Company’s officers and, in one case, one former director as defendants.
Two of the actions were filed in the United States District Court for the Eastern District of Virginia, Alexandria Division (the
“Alexandria Actions”). The first Alexandria Action, William Skillman v. Jonnie R. Williams et al., was filed on May
2, 2013. The second Alexandria Action, David C. Inloes v. Jonnie R. Williams et. al., was filed on May 3, 2013. The Alexandria
Actions have been consolidated and co-lead counsel appointed by the Court. Pursuant to a court order, plaintiffs filed a consolidated
amended complaint on January 13, 2014 and a motion to dismiss was filed on February 3, 2014 on behalf of all of the defendants.
Also, on February 3, 2014, the Company, as nominal defendant, moved to stay or dismiss this action pending a resolution a securities
class action litigation then pending in federal court in Richmond, Virginia. Separately, on January 29, 2014, the United States
moved to stay discovery in the case pending the completion or other disposition of the criminal trial of former Governor McDonnell
and his wife. That motion was granted by the Court on January 30, 2014. On February 28, 2014, the Court granted the Company’s
motion to stay the case, ruling that the case would be stayed for all purposes pending further order of the Court and ordering
the Company, within ten days of the dismissal or resolution of the Richmond securities class action or the trial court’s
verdict in the McDonnell case, whichever occurred first, to file a report indicating what action, if any, the Company intended
to take with regard to this case, including specifically, without limitation, whether the Company intended to pursue or seek dismissal
of the claims asserted against each of the named individual defendants.
The third derivative
action, Harold Z. Levine v. Jonnie R. Williams, et. al., was filed on July 8, 2013, in the Circuit Court for the City of Richmond
(the “Levine Action”), and the fourth case, Louis Lim v. Christopher C. Chapman, et. al., was filed in the Circuit
Court for Henrico County on July 11, 2013 (the “Lim Action”). In general, the complaints collectively allege that
the Company’s directors and officers breached their fiduciary duties by causing the Company to issue false and misleading
statements regarding our past and future prospects and certain scientific data relating to our products, as well as engaging in
certain unspecified private placements and related party transactions since 2006. On July 1, 2013 and August 1, 2013, stipulations
were filed in each of the state court actions that stayed the period for defendants to respond to the complaints. These stipulations
were later entered by the Courts. In May 2014, the parties to both state court derivative actions filed further stipulations subsequently
endorsed by the Courts that provided for the transfer of the Lim Action to the Circuit Court for the City of Richmond, the consolidation
of the Lim Action with the Levine Action, and a further stay of the deadline for a response to the complaint.
A mediation session
relating to the derivative actions was held on October 29, 2014, and the parties later reached an agreement in principle regarding
the material terms of a proposed settlement that would address the derivative actions. The parties concluded a stipulation of
settlement as of approximately January 27, 2015, and plaintiffs thereafter filed a motion for approval of the settlement. The
proposed settlement provided for the implementation of certain corporate governance reforms and contemplated payment by the Company
of certain attorney’s fees to plaintiffs’ counsel in an amount that has yet to be determined. A hearing on the motion
for preliminary approval was held on March 6, 2015. The judge requested additional information to be submitted within 14 days,
a deadline that was later extended.
On March 27, 2015,
the parties filed a joint submission setting forth additional information responsive to the Court’s order. On March 31,
2015, the Court entered orders preliminarily approving the proposed settlement and setting a further settlement hearing for July
10, 2015. On June 12, 2015, plaintiffs filed a motion for final approval of the settlement and a motion for attorney’s fees.
On June 19, 2015, the Company filed a response contending that plaintiffs’ request for attorney’s fees was excessive.
At the July 10, 2015 final approval hearing, the Court approved the settlement as fair and adequate and took under advisement
plaintiffs’ motion for attorney’s fees. On July 13, 2015, the Court entered final judgment and, on July 17, 2015,
issued an order directing the parties to schedule a settlement conference with the magistrate judge regarding plaintiffs’
motion for attorney’s fees. The settlement conference was held on August 26, 2015, but the parties were unable to agree
on a settlement for attorney’s fees and the magistrate judge returned the matter to the Court to rule on the plaintiffs’
fee motions. As of the date of this filing, the Court has not issued a ruling. Pursuant to the stipulation of settlement, plaintiffs
were required to dismiss the state court derivative actions with prejudice, and on July 13, 2015, the state court issued an unopposed
final order dismissing the matter with prejudice. At this time, the Company cannot predict the probable outcome of the claims
against it for attorney’s fees. Accordingly, no amounts have been accrued in the Consolidated Financial Statements.
Consumer Class
Action
On January 27, 2014,
Howard T. Baldwin filed a purported class action naming the Company, RCP Development (a wholly owned subsidiary), and GNC Holding,
Inc. (“GNC”) as defendants. The case was filed in the United States District Court for the Northern District of Illinois.
Generally, the complaint alleged that claims made for Anatabloc
®
product
have not been proven and that individuals purchased the product based on alleged misstatements regarding characteristics, uses,
benefits, quality and intended purposes of the product. The complaint purported to allege claims for violation of state consumer
protection laws, breach of express and implied warranties and unjust enrichment. The Company agreed to indemnify and defend GNC
pursuant to the terms of the purchasing agreement between RCP Development and GNC. Consistent with that commitment, the Company
agreed to assume the defense of this matter on its own behalf as well as on behalf of GNC. The defendants filed a motion to dismiss
the complaint on March 24, 2014. On January 13, 2015, the Court entered an order dismissing the complaint in its entirety without
prejudice.
On February 10,
2015, Mr. Baldwin filed an Amended Complaint against the Company, RCP Development and GNC (collectively, “Defendants”).
The Amended Complaint also includes an additional named plaintiff, Jerry Van Norman, who alleges that he is a citizen of Parkville,
Missouri. The Amended Complaint requests certification of an “Illinois Class” consisting of “[a]ll persons who
paid, in whole or in part, for Anatabloc
®
dietary supplement in Illinois
between August 1, 2011 and the present for personal, family or household uses,” and a “Missouri Class” consisting
of “[a]ll persons who paid, in whole or in part, for Anatabloc
®
dietary
supplement in Missouri between August 1, 2011 and the present for personal, family or household uses.” The Amended Complaint
is pleaded in seven counts: (1) violation of the Consumer Fraud and Deceptive Business Practices Act of Illinois; (2) violation
of the Missouri Merchandising Practice Act; (3) breach of express warranty under Illinois law; (4) breach of express warranty
under Missouri law; (5) breach of implied warranty of merchantability under Illinois law; (6) breach of implied warranty of merchantability
under Missouri law; and (7) unjust enrichment.
Like the original
complaint, the Amended Complaint alleges that Defendants manufactured, marketed and/or sold Anatabloc
®
, a dietary supplement purportedly derived from an anatabine alkaloid, and promoted Anatabloc
®
as a “wonder drug” with a number of medical benefits and uses, from treating excessive inflammation
(associated with arthritis) to Alzheimer’s disease, traumatic brain injury (or concussions), diabetes and multiple sclerosis.
Plaintiffs allege that Defendants have never proven any of these claims in clinical trials or received FDA approval for Anatabloc
®
, and that Anatabloc
®
“was never the ‘wonder drug’ it claimed to be.” Plaintiffs allege that they purchased Anatabloc
®
based upon claims that it provides “anti-inflammatory support.” Mr. Baldwin alleges that he purchased
Anatabloc
®
to “reduce inflammation and pain in his joints,” and
Mr. Van Norman alleges that he “suffers back and knee problems, as well as arthritis, and expected Anatabloc
®
to be effective in treating these symptoms and purchased Anatabloc
®
to help alleviate his symptoms.” Both plaintiffs allege that Anatabloc
®
did not provide the relief promised by the Defendants.
Although the Amended
Complaint does not include claims based on the consumer protection laws and breach of warranty laws of several additional states
like the original complaint, on February 10, 2015, counsel for plaintiffs also served a “Notice pursuant to: Alabama Code
§ 8-19-10(e); Alaska Statutes §45.50.535; California Civil Code § 1782; Georgia Code § 10-1-399; Indiana Code
§ 24-5-0.5-5(a); Maine Revised Statutes, Title 5, § 50-634(g); Massachusetts General Laws Chapter 93A, § 9(3);
Texas Business & Commercial Code § 17.505; West Virginia Code § 46A-6-106(b); and Wyoming Statutes § 40-12-109
as well as state warranty statutes,” which purports to give notice to Defendants on behalf of the named plaintiffs and a
“class of similarly situated individuals” that Defendants have “violated state warranty statutes and engaged
in consumer fraud and deceptive practices in connection with its sale of Anatabloc
®
,” and demands that “Defendants correct or otherwise rectify the damage caused by such unfair trade practices and
warranty breaches and return all monies paid by putative class members.”
The Defendants timely
moved to dismiss the Amended Complaint on March 10, 2015. Plaintiffs filed a memorandum in response to the motion to dismiss on
April 9, 2015, and Defendants filed their reply memorandum on April 22, 2015. On April 28, 2015, the Court entered an order
lifting the stay of discovery that had been in place in the case. The Plaintiffs served discovery requests on May 18, 2015, to
which the Company responded on June 17, 2015 and continues to produce responsive documents to the Plaintiffs on a rolling basis.
On February 2, 2016, the Court entered a Memorandum Opinion and Order granting the motion to dismiss the Amended Complaint and
dismissing all claims alleged in the Amended Complaint. The Plaintiffs’ claims under Illinois and Missouri law for breach
of express and implied warranty were dismissed with prejudice. The remaining claims were dismissed without prejudice. The Court
has allowed Plaintiffs 28 days to file a Second Amended Complaint. The next status hearing before the Court is scheduled for March
22, 2016. To date, no amounts for loss contingency have been accrued in the consolidated financial statements.
Action by Iroquois
Master Fund, Ltd. and American Capital Management, LLC
On February 19,
2015, the Company became aware of a complaint filed on February 18, 2015, in New York Supreme Court for New York County in which
the Company and its Chief Executive Officer, Dr. Michael J. Mullan, are named as a defendants. The complaint was filed by Iroquois
Master Fund, Ltd. and American Capital Management, LLC, who were investors in a private placement of the Company’s securities
completed in March 2014 (the “March Private Placement Transaction”). The complaint also names as a defendant John
J. McKeon, a stockholder of the Company. Iroquois and American Capital are seeking $4.2 million, in the aggregate, in damages
or, alternatively, rescission of the March Private Placement Transaction, premised on allegations that the Company entered into
a “sham” loan agreement with Mr. McKeon to provide it with a $5.8 million line of credit in order to fraudulently
induce Iroquois and American Capital to acquire the Company’s securities. On April 29, 2015, Rock Creek filed a motion to
dismiss the complaint because (i) plaintiffs did not register to do business with the New York Secretary of State, and thus lack
the capacity to sue in New York, and (ii) the court lacks personal jurisdiction over the Company and Dr. Mullan because neither
was present in New York in connection with the March Private Placement Transaction, and the critical events relating to it did
not take place in New York. Plaintiff served its papers in opposition to that motion on June 5, 2015, and the Company served its
reply papers on July 1, 2015. Oral argument on the motion was held on September 8, 2015, and a decision is expected shortly after
the filing of this Annual Report on Form 10-K. Although the Company believes that plaintiffs’ material allegations are without
merit and intend to vigorously defend the company and Dr. Mullan against such allegations, no assurances can be given with respect
to the outcome of the motion to dismiss or more generally to the litigation.
The Company has
been notified by the insurance carrier that the carrier’s position is that legal costs incurred on behalf of the Company
for this action are not covered under the policy, although any legal costs incurred on behalf of Dr. Mullan would be covered,
subject to the policy retention. All legal costs incurred to date for this action through December 31, 2015 have been recorded
in the accompanying financial statements accordingly.
Asserted Claims
by Jonnie R. Williams under Employment Agreement
On March 25, 2015,
the Company received an email from an attorney representing Jonnie R. Williams, a former director of the company and its former
Chief Executive Officer, stating that Mr. Williams is contractually entitled to severance compensation. At that time, the Company
disclosed that it was not aware of the claimed legal or contractual basis for Mr. Williams’ severance claim.
On June 11, 2015,
the Company was informed that Mr. Williams plans to file an arbitration action against it under his employment agreement to assert
his alleged contractual severance entitlement. Mr. Williams alleges that the election of the Board of Directors at the Company’s
December 2013 annual stockholder meeting triggered a provision of his employment agreement that provides for severance in the
amount of $2.5 million. However, the Company disagrees that such stockholder meeting triggered the severance entitlement
and contend that Mr. Williams voluntarily resigned from his employment with the Company in August 2014 without any contractual
right to severance compensation. As of the date the filing of this Annual Report on Form 10-K, Mr. Williams has not filed an arbitration
action against the Company.
Settlement Agreement
with Jonnie R. Williams regarding Indemnification Payments
On May 20, 2015,
the Company entered into a Memorandum of Understanding Regarding Settlement (the “MOU”) with Jonnie R. Williams providing
for the manner in which indemnification payments will be made by Rock Creek to law firms previously engaged by Mr. Williams. The
MOU was entered into in furtherance of the settlement of the Company’s securities class action litigation, which settlement
was approved on June 26, 2015.
In general, the
MOU addresses the manner in which the Company will satisfy Mr. Williams’ indemnification rights for reimbursement of legal
expenses incurred by Mr. Williams from the law firms of McGuire Woods LLP and Steptoe and Johnson LLP. The MOU provides for the
payment of such expenses by an aggregate up-front payment of $300,000 to the law firms on or before May 29, 2015 (which payment
was timely made), plus subsequent payments of a total of $60,000 per month between the law firms commencing on August 1, 2015.
The aggregate amount of payments to be made by the Company over an approximately two-year payment period under the MOU will be
$1.6 million to McGuire Woods LLP (against an invoiced amount of $1.93 million) and $437,000 to Steptoe and Johnson LLP (against
an invoiced amount of $629,897). The MOU also provides that certain discounts will be granted to the Company in the event that
we make early payment of the balance of payments due under the MOU. All obligations for this MOU have been recorded as accounts
payable or accrued legal expenses in the accompanying balance sheets as of December 31, 2015.
Corporate Restructuring
As discussed in
Note 1 of these Consolidated Financial Statements the Company has focused the business on pharmaceutical drug development. As
part of the refocused business transformation the Company has consolidated offices in Sarasota, FL and exited the dietary supplement
and cosmetic business. As a result, a number of personnel were not retained and left the company throughout 2014. The Company
has entered into severance agreements with the former employees and the Company has accrued the costs of the severance agreements
as they were executed. All costs related to the closure of the Gloucester, MA, Washington DC and Glen Allen offices have been
accrued as well. Costs for restructuring have been included in General and Administrative expenses in the accompanying Consolidated
Statements of Operations.
In 2014, the
company incurred $5.1 million for salary continuation charges; a loss on abandonment of leasehold improvements and fixed
assets of $44 thousand, and $34 thousand resulting from the office closure in Glen Allen, VA, which are included in General
and Administrative expenses. As of December 31, 2015 and 2014, unpaid restructuring charges were $0.5 million and $ $3.4
million, respectively, which are included in accrued expenses in the accompanying Consolidated Balance Sheets.
Total severance
payments paid in stock were $2.3 million and $313 thousand for the years ended December 31, 2015 and 2014, respectively.
As of
December 31, 2015, the Company was in arrears a required severance payment to one former employee, payable in stock or cash,
in the amount of $312,500.
On February
4, 2016, the Senior Convertible Notes were amended by waiving any breach of the Minimum Cash Test that may have occurred
prior to the date of the amendment, and by exchanging the original notes for Class A Notes ($3,500,000) and Class B
Notes (16,500,000). In addition, future disbursements were amended as follows:
"
Control
Account Release Event" means, as applicable, (i) with respect to any Restricted Principal designated to be converted
in a Conversion Notice, the Company's receipt of both (A) such Conversion Notice hereunder executed by the Holder in which
all, or any part, of the Principal to be converted includes any Restricted Principal and (B) written confirmation by the
Holder that the shares of Common Stock issued pursuant to such Conversion Notice have been properly delivered in accordance
with Section 3(c) (in each case, as adjusted, if applicable, to reflect the withdrawal of any Conversion Notice, in whole or
in part, by the Holder, whether pursuant to Section 3(c)(ii) or otherwise), (ii) the Company's receipt of a notice by the
Holder electing to effect a release of cash with respect to any Restricted Principal to the Company, (iii) with respect to
the Holder Pro Rata Amount of $500,000, the occurrence of the Initial Filing Date (as defined in the Registration
Rights Agreement), (iv) with respect to the Holder Pro Rata Amount of $1,000,000, the occurrence of a Positive UK Trial
Outcome, (v) with respect to the Holder Pro Rata Amount of $1,000,000, the date on which the Company and Holder execute that
certain Amendment Agreement, dated February 4, 2016 (the "Amendment Agreement"), and (iv) on April 16, 2016 and the
11th Trading Day of each calendar month thereafter, the lesser of (x) the amount of Restricted Principal then
outstanding hereunder and (y) the Holder Pro Rata Amount of $1,000,000; provided, in the case of clauses (iii), (iv), (v) and
(vi) above, as of such date of determination, no Equity Conditions Failure then exists ("Monthly Releases")."
Section 32 (rr) of the Note was deleted and replaced with the following: "(rr) "Major Market" means
any Eligible Market." Also, Buyers waived any Equity Conditions Failure that may have occurred under the Note through
and including February 4, 2016. The Minimum Cash Test was amended, to become effective the first day after the first
Monthly Release is made (and for so long as Monthly Releases continue to be made under this Note thereafter). The first
Monthly Release is scheduled for April 16, 2016. Furthermore, Buyer hereby waives any default under the Note arising under
the Company's failure to timely make the Prior Payment that was actually paid on January 26, 2016. Buyers further
permanently waives the covenants and provisions set forth in Section 3(d)(ii) of the Note and Section 4(z) of the Securities
Purchase Agreement.
Between January 28 and February 5, 2016, 20,000 warrants from the June 16, 2015 Securities Purchase Agreement
were exercised at the fixed price of $0.556.
Between
February 17 and March 14, 2016, 724,798 shares of common stock were issued under the conversion feature of the Senior
Convertible Notes, as a $249,000 principal reduction from the final principal payment due August 31, 2017.
Currently, an Equity Conditions Failure exists with respect
to a requirement to maintain the aggregate daily dollar trading volume of $150,000 during the forty (40) Trading Days as defined
in the Notes.