UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q
(Mark One)
| S QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the quarterly period ended June 30, 2014
or
| £ TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 | |
For the transition period from to
Commission File No. 000-54871
BIOPHARMX CORPORATION
(Exact name of registrant as specified in its charter)
| Delaware | 59-3843182 | |
|
(State or Other Jurisdiction of Incorporation or Organization) |
(I.R.S. Employer Identification No.) | |
|
1098 Hamilton Court, Menlo Park, California |
94025 | |
| (Address of principal executive offices) | (Zip Code) |
Registrant's telephone number, including area code: 650-889-5020
Indicate by checkmark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes S No £
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes S No £
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company.
| Large accelerated filer | £ | Accelerated filer | £ |
| Non-accelerated filer | £ | Smaller reporting company | S |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). Yes £ No S
As of August 13, 2014, there were outstanding 10,551,001 shares of the registrant’s common stock, $.001 par value.
Documents incorporated by reference: None.
BIOPHARMX CORPORATION
Form 10-Q
Table of Contents
| PART I – Financial Information | ||||
| Item 1 | Condensed Consolidated Financial Statements: | 3 | ||
| Condensed Consolidated Balance Sheets as of June 30, 2014 and December 31, 2013 (unaudited) | 3 | |||
| Condensed Consolidated Statement of Operations and Comprehensive Loss for the three and six months ended June 30, 2014 and 2013 (unaudited) | 4 | |||
| Condensed Consolidated Statement of Cash Flows for the six months ended June 30, 2014 and 2013 (unaudited) | 5 | |||
| Notes to Condensed Consolidated Financial Statements (unaudited) | 6 | |||
| Item 2 | Management's Discussion and Analysis of Financial Condition and Results of Operations | 13 | ||
| Item 3 | Qualitative and Quantitative Disclosures About Market Risk | 19 | ||
| Item 4 | Controls and Procedures | 20 | ||
| PART II – Other Information | ||||
| Item 1 | Legal Proceedings | 21 | ||
| Item 2 | Unregistered Sales of Equity Securities and Use of Proceeds | 21 | ||
| Item 3 | Defaults Upon Senior Securities | 21 | ||
| Item 4 | Mine Safety Disclosures | 21 | ||
| Item 5 | Other Information | 21 | ||
| Item 6 | Exhibits | 22 | ||
| SIGNATURES | 23 | |||
| 2 |
PART I
| ITEM 1. | CONDENSED CONSOLIDATED FINANCIAL STATEMENTS |
BioPharmX Corporation
Unaudited Condensed Consolidated Balance Sheets
as of June 30, 2014 and December 31, 2013
____________
| June 30, | December 31, | |||||||
| 2014 | 2013 | |||||||
| Assets | ||||||||
| Current assets: | ||||||||
| Cash | $ | 874,000 | $ | 3,000 | ||||
| Prepaid expenses and other current assets | 387,000 | 36,000 | ||||||
| Total current assets | 1,261,000 | 39,000 | ||||||
| Property and equipment, net | 49,000 | 32,000 | ||||||
| Intangible assets | 150,000 | 150,000 | ||||||
| Other assets | 150,000 | 150,000 | ||||||
| Restricted Cash | 35,000 | - | ||||||
| Total assets | $ | 1,645,000 | $ | 371,000 | ||||
| Liabilities, Convertible Redeemable Preferred Stock and Stockholders' Deficit | ||||||||
| Current liabilities: | ||||||||
| Accounts payable and accrued expenses | $ | 835,000 | $ | 491,000 | ||||
| Deferred rent | 58,000 | 65,000 | ||||||
| Convertible notes, short term | - | 90,000 | ||||||
| Related party payables | 293,000 | 125,000 | ||||||
| Total current liabilities | 1,186,000 | 771,000 | ||||||
| Convertible notes payable | - | 938,000 | ||||||
| Other long-term liabilities | - | 32,000 | ||||||
| Total liabilities | 1,186,000 | 1,741,000 | ||||||
| Commitments and contingencies (Note 8) | ||||||||
| Series A convertible redeemable preferred stock, $0.001 par value; 10,000,000 shares authorized; | ||||||||
| 1,270,269 and no shares issued and outstanding at June 30, 2014, and December 31, 2013, respectively (liquidation preference of $2,383,000 as of June 30, 2014) | 2,112,000 | - | ||||||
| Stockholders' deficit: | ||||||||
| Common stock, $0.001 par value; 90,000,000 shares authorized; | ||||||||
| 10,551,001 and 7,025,000 shares issued and outstanding at June 30, 2014 and December 31, 2013, respectively | 11,000 | 7,000 | ||||||
| Additional paid-in capital | 2,985,000 | 306,000 | ||||||
| Accumulated deficit | (4,649,000 | ) | (1,683,000 | ) | ||||
| Total liabilities, convertible redeemable preferred stock and stockholders' deficit | (1,653,000 | ) | (1,370,000 | ) | ||||
| Total liabilities and stockholders' deficit | $ | 1,645,000 | $ | 371,000 | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 3 |
BioPharmX Corporation
Unaudited Condensed Consolidated Statements of Operations and Comprehensive Loss
for the three and six months ended June 30, 2014 and 2013
____________
| Three months ended June 30, |
Six months ended June 30, |
||||||||||||||||
| 2014 | 2013 | 2014 | 2013 | ||||||||||||||
| Operating expenses: | |||||||||||||||||
| Research and development | $ | 657,000 | $ | 148,000 | $ | 1,044,000 | $ | 180,000 | |||||||||
| Sales and marketing | 367,000 | 12,000 | 580,000 | 25,000 | |||||||||||||
| General and administrative | 802,000 | 87,000 | 1,285,000 | 146,000 | |||||||||||||
| Total operating expenses | 1,826,000 | 247,000 | 2,909,000 | 351,000 | |||||||||||||
| Loss from operations | (1,826,000 | ) | (247,000 | ) | (2,909,000 | ) | (351,000 | ) | |||||||||
| Other Income | 15,000 | - | 15,000 | - | |||||||||||||
| Interest expense, net | (2,000 | ) | (13,000 | ) | (72,000 | ) | (20,000 | ) | |||||||||
| Net and comprehensive loss | (1,813,000 | ) | (260,000 | ) | (2,966,000 | ) | (371,000 | ) | |||||||||
| Deemed dividend on Series A convertible redeemable preferred stock | (33,000 | ) | - | (33,000 | ) | - | |||||||||||
| Net loss available to common stockholders | $ | (1,846,000 | ) | $ | (260,000 | ) | $ | (2,999,000 | ) | $ | (371,000 | ) | |||||
| Basic and diluted net loss available to common stockholders per share | $ | (0.18 | ) | $ | (0.04 | ) | $ | (0.31 | ) | $ | (0.05 | ) | |||||
| Shares used in computing basic and diluted net loss per share | 10,367,000 | 7,400,000 | 9,553,000 | 7,400,000 | |||||||||||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 4 |
BioPharmX Corporation
Unaudited Condensed Consolidated Statements of Cash Flows
for the six months ended June 30, 2014 and 2013
____________
| Six months ended June 30, | ||||||||
| 2014 | 2013 | |||||||
| Cash flows from operating activities: | ||||||||
| Net loss | $ | (2,966,000 | ) | $ | (371,000 | ) | ||
| Adjustments to reconcile net loss to net cash used in operating activities: | ||||||||
| Stock-based compensation expense | 313,000 | 11,000 | ||||||
| Depreciation expense | 4,000 | 4,000 | ||||||
| Warrants issued for services provided | 99,000 | - | ||||||
| Noncash interest expense | 76,000 | 12,000 | ||||||
| Changes in assets and liabilities: | ||||||||
| Prepaid expenses and other assets | (351,000 | ) | - | |||||
| Accounts payable and accrued expenses | 337,000 | 81,000 | ||||||
| Related party payables | 168,000 | (2,000 | ) | |||||
| Net cash used in operating activities | (2,320,000 | ) | (265,000 | ) | ||||
| Cash flows from investing activities: | ||||||||
| Change in restricted cash | (35,000 | ) | - | |||||
| Purchases of property and equipment | (21,000 | ) | (10,000 | ) | ||||
| Purchase of intellectual property | - | (50,000 | ) | |||||
| Net cash used in investing activities | (56,000 | ) | (60,000 | ) | ||||
| Cash flows from financing activities: | ||||||||
| Proceeds from issuance of mandatorily convertible preferred stock | 2,227,000 | - | ||||||
| Proceeds from issuance of convertible notes payable | 1,020,000 | 257,000 | ||||||
| Net cash provided by financing activities | 3,247,000 | 257,000 | ||||||
| Net increase (decrease) in cash and cash equivalents | 871,000 | (68,000 | ) | |||||
| Cash at beginning of period | 3,000 | 138,000 | ||||||
| Cash at end of Period | $ | 874,000 | $ | 70,000 | ||||
| Noncash financing activities: | ||||||||
| Conversion of convertible notes payable to common stock | $ | 1,942,000 | $ | - | ||||
| Fair value of beneficial conversion feature issued in connection with convertible notes payable | $ | 204,000 | $ | 60,000 | ||||
| Issuance of common stock warrants in connection with Series A convertible redeemable preferred stock | $ | 154,000 | $ | - | ||||
| Issuance of common stock warrants in connection with convertible notes payable | $ | 105,000 | $ | - | ||||
The accompanying notes are an integral part of these condensed consolidated financial statements.
| 5 |
BIOPHARMX CORPORATION
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
| 1. | DESCRIPTION OF BUSINESS AND BASIS OF PRESENTATION |
Description of Business
BioPharmX Corporation (“BioPharmX” or the “Company”) is a Silicon Valley-based company, registered in Delaware and originally incorporated on August 30, 2010 in Nevada under the name Thompson Designs, Inc. The Company has one wholly-owned subsidiary, BioPharmX, Inc., a Nevada corporation. The Company seeks to provide innovative products through unique, patented platform technologies for pharmaceutical and over-the-counter (“OTC”) applications in the fast growing dermatology and health and wellness markets.
The strategy of the Company begins with obtaining novel, patented, platform technologies through exclusive licensing, joint development or acquisition. BioPharmX then develops platform technologies that can be developed into product lines through specialized formulation and clinical protocol development with a bifurcated market penetration strategy, prescription for the high dose prescription version and OTC consumer for the low dose version. Identifying such technologies requires a strong knowledge of the markets served through technology assessment and evaluation of sell-side and buy-side opportunities through relationships with major pharmaceutical companies. BioPharmX’s products are formulated to address both market pathways to address unmet needs in well-defined, multi-billion dollar markets for licensing or direct commercialization for both pharmaceutical and OTC distribution and sales.
On January 23, 2014, the Company, BioPharmX Inc. and stockholders of BioPharmX, Inc. who collectively owned 100% of BioPharmX, Inc. (the “BioPharmX, Inc. Stockholders”) entered into and consummated transactions pursuant to a Share Exchange Agreement (the “Share Exchange Agreement,” such transaction referred to as the “Share Exchange Transaction”), whereby the Company issued to the BioPharmX, Inc. Stockholders an aggregate of 7,025,000 shares of its common stock, par value $0.001 (“Common Stock”), in exchange for 100% of the shares of BioPharmX, Inc. held by the BioPharmX, Inc. Stockholders. The shares of our Common Stock received by the BioPharmX, Inc. Stockholders in the Share Exchange Transaction constituted approximately 77.8% of our then issued and outstanding Common Stock giving effect to the issuance of shares pursuant to the Share Exchange Agreement.
As a result of the Share Exchange Transaction, BioPharmX, Inc. became a subsidiary of the Company. The acquisition was accounted for as a reverse merger and recapitalization effected by a share exchange. BioPharmX, Inc. is considered the acquirer for accounting and financial reporting purposes. The assets and liabilities of the acquired entity have been brought forward at their book value and no goodwill has been recognized.
On March 3, 2014, we completed the name change of the Company from Thompson Designs, Inc. to BioPharmX Corporation.
Effective May 16, 2014, BioPharmX Corporation, previously a Nevada corporation, was redomiciled as a Delaware corporation and effective June 26, 2014, BioPharmX, Inc, previously a Delaware corporation, was redomiciled as a Nevada corporation.
Basis of Presentation and Principles of Consolidation
These unaudited interim condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) and applicable rules and regulations of the Securities and Exchange Commission (“SEC”) regarding interim financial reporting and include the accounts of BioPharmX and its subsidiary. Certain information and note disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been condensed or omitted pursuant to such rules and regulations. Accordingly, these unaudited interim condensed consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2013, filed on March 31, 2014. The condensed consolidated balance sheet as of December 31, 2013, included herein, was derived from the audited consolidated financial statements as of that date.
| 6 |
The unaudited interim condensed consolidated financial statements have been prepared on the same basis as the audited consolidated financial statements and include all adjustments, consisting only of normal recurring adjustments, necessary for the fair presentation of the Company’s statement of financial position as of June 30, 2014 and December 31, 2013, the Company’s results of operations and its cash flows for each of the three and six months ended June 30, 2014 and 2013 and its cash flows for each of the six months ended June 30, 2014 and 2013. The results for the three and six months ended June 30, 2014 are not necessarily indicative of the results to be expected for the year ending December 31, 2014. All references to June 30, 2014 or to the three and six months ended June 30, 2014 and 2013 in the notes to the condensed consolidated financial statements are unaudited.
Recent Accounting Pronouncements
In May 2014, the Financial Accounting Standards Board (“FASB” issued Accounting Standard Update (“ASU”) No. 2014-09 (ASU 2014-09), Revenue from Contracts with Customers, which requires an entity to recognize the amount of revenue to which it expects to be entitled for the transfer of promised goods and services to customers. ASU 2014-09 will replace most existing revenue recognition guidance in U.S. GAAP when it becomes effective. The new standard will be effective for the Company on January 1, 2017. Early application is not permitted. ASU 2014-09 permits the use of either the retrospective or cumulative effect transition method. The Company has not yet selected a transition method nor has it determined the potential effect that ASU 2014-09 will have on its consolidated financial statements and related disclosures.
In June 2014, FASB issued ASU No. 2014-10, “ Development Stage Entities (Topic 915): Elimination of Certain Financial Reporting Requirements, Including an Amendment to Variable Interest Entities Guidance in Topic 810, Consolidation”. The update removes all incremental financial reporting requirements from GAAP for development stage entities. The update is effective for the annual reporting periods beginning after December 15, 2014, including interim periods within that reporting period. We have elected to adopt the provisions of this ASU early, accordingly all of the past disclosures and presentations on development stage accounting have been eliminated.
| 2. | GOING CONCERN CONSIDERATIONS AND MANAGEMENT’S PLAN |
The accompanying financial statements have been prepared assuming the Company will continue as a going concern. The Company has incurred recurring losses and negative cash flows from operations since inception. The Company has not generated revenues and has funded its operating losses through the issuance of convertible notes payable and convertible preferred stock. The Company has a limited operating history and its prospects are subject to risks, expenses and uncertainties frequently encountered by companies in the industry. These risks include, but are not limited to, the uncertainty of availability of additional financing and the uncertainty of achieving future profitability. Management of the Company intends to raise additional funds through the issuance of equity securities. There can be no assurance that such financing will be available or on terms which are favorable to the Company. Failure to generate sufficient cash flows from operations, raise additional capital or reduce certain discretionary spending could have a material adverse effect on the Company’s ability to achieve its intended business objectives. These factors raise substantial doubt about the Company’s ability to continue as a going concern. The financial statements do not contain any adjustments that might result from the outcome of this uncertainty.
As shown in the accompanying financial statements, the Company incurred a net loss of $3.0 million and $371,000 during the six months ended June 30, 2014 and 2013, respectively, and has an accumulated deficit of $4.6 million as of June 30, 2014. As of June 30, 2014, the Company had working capital of $75,000. As of December 31, 2013, the Company had a working capital deficit of $732,000. While management of the Company believes that it has a plan to fund on-going operations, there is no assurance that its plan will be successfully implemented.
Since 2012, the Company has obtained financing with convertible notes to invite early investors at a 20% discount to the share price in a future offering. Additionally, during the first half of 2014, the Company has issued Series A Preferred stock and warrants resulting in gross proceeds of $2.4 million (see details in Note. 8 -- “Stockholders’ Equity”) and is looking to raise additional funds as a result of this offering prior to the end of the third quarter. While the Company has been able to secure a number of investors, there is continued risk in the Company’s ability to attract additional development-stage investors. Without access to continued funds for working capital, the Company may not be able to execute its product strategy and pursue research and development activities on its novel platform technologies.
The discovery of key raw materials to formulate novel products depends on the Company’s ability to identify, negotiate and secure procurement of such materials. This also depends on the Company’s ability to establish comprehensive and long term vendor contracts and relationships.
The Company’s ability to compete and to achieve its product platform strategy depends on its ability to protect its proprietary discoveries and technologies. The Company currently relies on a combination of copyrights, trademarks, trade secret laws and confidentiality agreements to protect its intellectual property rights. The Company also relies upon unpatented know-how and continuing technological innovation.
The Company’s continued operations are dependent upon its ability to identify, recruit and retain adequate management personnel and contractors to perform certain jobs such as research and development, patent generation, regulatory affairs and general administrative functions. The Company requires highly trained professionals of varying levels and experience along with a flexible work force.
| 7 |
Research and development for novel prescription or OTC based products can be very extensive and lengthy in nature; along with the clinical trial process with the Food and Drug Administration which can require significant funding and time consuming patient studies. The competitive landscape could change significantly over the time period to complete targeted product development milestones. The current competition for BioPharmX’s products could also turn into strategic partners or potential acquirers in the future.
The significant risks and uncertainties described above could have a significant negative impact on the financial viability of BioPharmX and raise substantial doubt about the Company’s ability to continue as a going concern. Management is working on the Company’s business model to increase working capital by managing its cash flow, securing financing and working towards bringing its first product to market.
| 3. | SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES |
These unaudited interim condensed consolidated financial statements and accompanying notes should be read in conjunction with the Company’s annual financial statements and notes thereto contained in the Annual Report on Form 10-K for the year ended December 31, 2013. There have been no significant changes in the Company’s significant accounting policies for the three months ended June 30, 2014, as compared to the significant accounting policies described in the Annual Report on Form 10-K for the year ended December 31, 2013.
| 4. | PROPERTY, PLANT AND EQUIPMENT |
Property and equipment, consisted of the following:
| June 30, 2014 | December 31, 2013 | |||||||
| Furniture and fixtures | $ | 18,000 | $ | 11,000 | ||||
| Laboratory equipment | 26,000 | 12,000 | ||||||
| Computers and equipment | 15,000 | 15,000 | ||||||
| 59,000 | 38,000 | |||||||
| Less: accumulated depreciation | (10,000 | ) | (6,000 | ) | ||||
| $ | 49,000 | $ | 32,000 | |||||
Depreciation expense for the six months ended June 30, 2014 and 2013 was $4,000 and $4,000.
| 5. | RESTRICTED CASH |
The company has restricted cash in the amount of $35,000 held by Bank of America in a money market account to secure the credit line of the Company’s credit cards.
| 6. | RELATED-PARTY PAYABLES |
Since inception, the founding executives of the Company have made advances to cover short-term operating expenses. Additionally, since the beginning of 2014 a portion of their compensation is being deferred and is included in this balance. These advances and deferred compensation are non-interest bearing. As of June 30, 2014 and December 31, 2013, related party payables were $293,000 and $125,000, respectively.
| 8 |
| 7. | LONG-TERM OBLIGATIONS |
Financing Arrangements
During the six months ended June 30, 2014, the Company issued convertible notes payable to twelve individuals in exchange for $1,020,000 in cash. The Notes carry an interest rate of 6% per annum and mature between January 2015 and March 2017, with principal and interest payable at maturity. Prior to 2014, the Company had issued $1,230,000 of convertible notes payable (the “Notes”).
The Notes automatically convert into common stock upon the Company entering into a qualified preferred stock financing at 80% of the price per share at which such preferred stock is issued in such an offering. Additionally, there is a special conversion that at maturity, unless the Company repays all outstanding principal and interest, the Notes shall be automatically converted into a number of shares of common stock of the Company at 80% of the then fair market value per share.
As a result of this beneficial conversion feature, the Company has recorded $204,000 and $246,000 as a debt discount during the six months ended June 30, 2014 and year ended December 31, 2013. The debt discount is being amortized to interest expense over the term of the Notes using the effective interest rate method. The amortization expense related to the debt discount was $6,000 and $49,000 for the three and six months ended June 30, 2014, respectively. The amortization expense related to the debt discount was $4,000 and $7,000 for the three and six months ended June 30, 2013.
The Company entered into Subscription Agreements (the “Subscription Agreements”) for a private placement of shares of our Series A convertible redeemable preferred Stock, par value $0.001 per share (“Series A”), and warrants (the “Warrants”) with two accredited investors on March 14, 2014 and April 1, 2014, respectively, whereby we sold an aggregate of 810,811 shares of Series A at a per share price of $1.85 for gross proceeds of $1,500,000 and issued to the investors for no additional consideration the Warrants to purchase in the aggregate 405,406 shares of the Company’s common stock, par value $0.001 per share, at an exercise price of $3.70 per share. The closing of the sale of the Series A and the Warrants under the Subscription Agreements occurred on April 11, 2014. See Note 9.
As a result, upon the closing, the 6% secured convertible notes in the aggregate principal amount of $2.25 million and accrued interest for one of the note holders were automatically converted into 1,526,001 shares of common stock of the Company (the “Conversion Shares”). The balance of accrued interest was waived. On April 11, 2014, the convertible notes payable balance, net of unamortized discounts, of $1,942,000 was converted to common stock. As of June 30, 2014, there were no remaining outstanding convertible notes.
| 8. | COMMITMENTS AND CONTINGENCIES |
Lease Arrangements
On August 23, 2013, the Company signed a lease for 10,800 square feet of office and laboratory space in Menlo Park, California. The term of the lease is 39 months from the lease commencement date of September 1, 2013. Future minimum commitments under this lease are as follows:
| Six months remaining of 2014 | $ | 140,000 | ||
| 2015 | 288,000 | |||
| 2016 | 271,000 | |||
| Total | $ | 699,000 |
Legal Proceedings
We are not currently a party to any legal proceedings. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.
| 9. | CONVERTIBLE REDEEMABLE PREFERRED STOCK AND STOCKHOLDERS' EQUITY |
Common Stock
As described in Note 1, on January 23, 2014, the Company issued 7,025,000 shares of its common stock to BioPharmX, Inc. stockholders. As described in Note 7, on April 11, 2014, the Company’s convertible notes and eligible interest were converted to 1,526,001 shares of common stock upon the first closing of the offer and sale of Series A Preferred Stock. As a result, the Company has 10,551,001 shares of common stock currently issued and outstanding.
Series A Preferred Stock
During the six months ended June 30, 2014, the Company entered into a series of Subscription Agreements (the “Subscription Agreements”) for a private placement (the “Private Placement”) of shares of our Series A Preferred Stock and the Warrants with a number of accredited investors (the “Investors”), whereby we sold an aggregate of 1,270,269 shares of Series A Preferred Stock at a per share price of $1.85 for gross proceeds of $2,350,000 and issued to the investors for no additional consideration the Warrants to purchase in the aggregate 635,136 shares of the Company’s common stock, par value $0.001 per share, at an exercise price of $3.70 per share. The first closing of the sale of the Series A Preferred Stock and the Warrants under the Subscription Agreements occurred on April 11, 2014.
The Warrants with an allocated fair value of $154,000 were classified as additional paid in capital. The Company determined the fair value using the Black-Scholes option pricing model with the following assumptions: dividend rate of 0%, risk-free rate of 1.6%, contractual term of 5 years and expected volatility of 88.8%. These Warrants were immediately exercisable, and as of June 30, 2014, were all outstanding.
| 9 |
In connection with the Subscription Agreements, the Company, the majority shareholders of the Company and the Investors entered into an Investor Rights Agreement (the “Investor Rights Agreement”) with the Investors, whereby the Investors were granted certain rights including: (i) right to receive copies of quarterly and annual reports of the Company, (ii) right of inspection of the Company’s properties and records, (iii) right of participation in future securities offerings, (iv) tag-along rights in connection with sales of the Company’s stock by a major shareholder, and (v) board of directors representation rights for the subscribers who purchased at least 500,000 shares of Series A and hold at least 30% of such shares (the “Qualified Subscribers”). The Company made certain covenants under the agreement including: (i) uplisting to NYSE or NASDAQ within three years from the issuance shares of Series A, and (ii) increase of the board of directors to five members including one member to be appointed by the Qualified Subscribers.
Significant terms of Series A are as follows:
| · | Holders of the Series A Preferred Stock are entitled to interest payment at the rate of 6% of the purchase price per annum. The Company has the option to pay this interest in shares of common stock or in cash. As of June 30, 2014, $33,000 in interest has been accreted to Series A. Holders of the Series A Preferred Stock are entitled to receive dividends on an as converted basis with the holders of the Company’s common stock. |
| · | The holders of the Series A Preferred Stock are entitled to vote together with the holders of the Company’s common stock, with each such holder of Series A Preferred Stock entitled to the number of votes equal to the number of shares of the Company’s common stock into which such Series A Preferred Stock would be converted if converted on the record date for the taking of a vote. |
| · | Each share of Series A Preferred Stock is initially convertible, at any time at the sole option of the holder, into one share of the Company’s common stock, subject to future adjustments as provided for in the Series A Certificate. The Series A Preferred Stock shall automatically convert into shares of the Company’s common stock upon the uplisting of the common stock to NYSE or NASDAQ within three years from the issuance of shares of Series A Preferred Stock. |
| · | If the Company fails to effect the uplisting within three years from the issuance of shares of Series A Preferred Stock, the holders will have the right to require the Company to redeem all or a portion of the then outstanding Series A Preferred Stock at a price per share equal to the Series A Preferred Stock liquidation preference.” |
Warrants
In addition to the Warrants issued in conjunction with the Subscription Agreements, the Company issued warrants on May 15, 2014, to a service provider for 316,395 shares of common stock at an exercise price of $2.035 per share, which was valued at $99,000 and expensed, and to a qualified investor as a part of his convertible loan package for 343,559 shares of common stock at an exercise price of $1.85 per share. These warrants expire after five years. The Company determined the fiar value using the Black-Scholes option pricing model with the following assumptions: dividend rate of 0%, risk-free rate of 1.6%, contractual term of 5 years and expected volatility of 88.8%. These Warrants were immediately exercisable, and as of June 30, 2014, were all outstanding.
Equity Incentive Plan
On January 23, 2014, the Company adopted the 2014 Equity Incentive Plan (the “2014 Plan”) which permits the Company to grant stock options to directors, officers or employees of the Company or others to purchase shares of common stock of the Company through awards of incentive and nonqualified stock options (“Options”), stock (“Restricted Stock” or “Unrestricted Stock”) and stock appreciation rights (“SARs”). Options previously issued under the BioPharmX, Inc. 2011 Equity Incentive Plan were cancelled, and options under the 2014 Plan were issued to replace all cancelled BioPharmX, Inc. options.
The Company currently has time-based options outstanding. The time-based options generally vest in two to four years and expire ten years from the date of grant. Total number of shares reserved and available for grant and issuance pursuant to this Plan is 2,700,000. Shares issued under the Plan will be drawn from authorized and unissued shares or shares now held or subsequently acquired by the Company. At June 30, 2014, there were 79,000 shares available for grant under the Plan. There was no incremental value recorded in relation to this exchange.
The following table summarizes the Company’s stock option activities for the six month periods ended June 30, 2014 and 2013:
| Weighted | ||||||||
| Average | ||||||||
| Exercise Price | ||||||||
| Shares | Per Share | |||||||
| Outstanding as of January 1, 2014 | 2,606,000 | $ | 0.25 | |||||
| Granted | 175,000 | 1.85 | ||||||
| Exercised | - | - | ||||||
| Cancelled | (160,000 | ) | 0.37 | |||||
| Outstanding as of June 30, 2014 | 2,621,000 | $ | 0.35 | |||||
| Vested and exercisable | 1,266,190 | $ | 0.27 | |||||
| Vested and expected to vest | 2,621,000 | $ | 0.35 | |||||
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| 10. | STOCK-BASED COMPENSATION |
The following table summarizes the stock-based compensation expenses included in our Unaudited Condensed Consolidated Statement of Operations and Comprehensive Loss:
| For the three months ended of June 30 | For the six months ended of June 30 | |||||||||||||||
| 2014 | 2013 | 2014 | 2013 | |||||||||||||
| Research and development | $ | 57,000 | $ | 3,000 | $ | 80,000 | $ | 4,000 | ||||||||
| Sales and marketing | 39,000 | 1,000 | 43,000 | 1,000 | ||||||||||||
| General and administrative expenses | 185,000 | 2,000 | 190,000 | 6,000 | ||||||||||||
| Stock-based compensation expense | $ | 281,000 | $ | 6,000 | $ | 313,000 | $ | 11,000 | ||||||||
The Company estimates the fair value of time-based stock options, if any, granted using the Black-Scholes option pricing model. The fair value is then amortized on a straight-line basis over the requisite service periods of the awards, which is generally the vesting period. Time-based and performance-based options, if any, typically have a ten-year life from date of grant and vesting periods of two to four years.
Valuation Assumptions
The fair value of stock-based awards to employees is calculated through the use of the Black-Scholes option pricing model, even though such model was developed to estimate the fair value of freely tradable, fully transferable options without vesting restrictions, which differ significantly from the Company’s stock option awards. This model also requires subjective assumptions, including future stock price volatility and expected time to exercise, which greatly affect the calculated values.
Expected Term
The expected term represents the period that the Company’s stock-based awards are expected to be outstanding. For awards granted subject only to service vesting requirements, the Company utilizes the simplified method for estimating the expected term of the stock-based award, instead of historical exercise data.
Expected Volatility
The Company uses the historical volatility of the price of the common shares of selected public companies in the biotechnology sector.
Expected Dividend
The Company has never paid dividends on its common shares and currently does not intend to do so and, accordingly, the dividend yield percentage is zero for all periods.
Risk-Free Interest Rate
The Company bases the risk-free interest rate used in the Black-Scholes option pricing model upon the implied yield curve currently available on U.S. Treasury zero-coupon issues with a remaining term equal to the expected term used as the assumption in the model.
During the six months ended June 30, 2014 and 2013, the Company issued options to non employees for the purchase of 175,000 and 1,020,000 shares of common stock in exchange for services. During the six months ended June 30, 2014, the options were issued with an exercise price of $1.85 per share. The options issued during the six months ended June 30, 2013, were issued with a range of exercise prices from $0.05 to $0.25 per share. These options generally vest over four years. The Company accounts for these options as variable awards. The options were valued using the Black-Scholes option pricing model. The total stock based compensation related to nonemployees amounted to $307,000 and $11,000 for the six months ended June 30, 2014 and 2013.
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| 11. | FAIR VALUE MEASUREMENTS |
The Company recognizes and discloses the fair value of its assets and liabilities using a hierarchy that prioritizes the inputs to valuation techniques used to measure fair value. The hierarchy gives the highest priority to valuations based upon unadjusted quoted prices in active markets for identical assets or liabilities (Level 1 measurements) and the lowest priority to valuations based upon unobservable inputs that are significant to the valuation (Level 3 measurements). Each level of input has different levels of subjectivity and difficulty involved in determining fair value.
| ● | Level 1 - Inputs used to measure fair value are unadjusted quoted prices that are available in active markets for the identical assets or liabilities as of the reporting date. Therefore, determining fair value for Level 1 investments generally does not require significant judgment, and the estimation is not difficult. |
| ● | Level 2 - Pricing is provided by third party sources of market information obtained through investment advisors. The Company does not adjust for or apply any additional assumptions or estimates to the pricing information received from its advisors. |
| ● | Level 3 - Inputs used to measure fair value are unobservable inputs that are supported by little or no market activity and reflect the use of significant management judgment. These values are generally determined using pricing models for which the assumptions utilize management’s estimates of market participant assumptions. The determination of fair value for Level 3 instruments involves the most management judgment and subjectivity. |
As of June 30, 2014 and December 31, 2013, the Company held no assets or liabilities with instrument valuations measured on a recurring basis.
| 12. | INCOME TAXES |
No federal income taxes were provided in the three and six months ended June 30, 2014 and 2013 due to the Company’s net losses. State minimum income and franchise taxes are included in general and administrative expenses and were immaterial for the periods presented. The Company evaluates its ability to recover deferred tax assets, in full or in part, by considering all available positive and negative evidence, including past operating results and our forecast of future taxable income on a jurisdictional basis. The Company bases its estimate of current and deferred taxes on the tax laws and rates that are currently in effect in the appropriate jurisdiction. Changes in laws or rates may affect the tax provision as well as the amount of deferred tax assets or liabilities.
Current tax laws impose substantial restrictions on the utilization of net operating loss and credit carry-forwards in the event of an “ownership change,” as defined by the Internal Revenue Code. If there should be an ownership change, the Company’s ability to utilize its carry-forwards could be limited.
As of June 30, 2014 and December 31, 2013, the Company did not have any material unrecognized tax benefits. The 2013 and 2012 tax years remain open for examination by the federal and state authorities.
| 13. | NET LOSS PER SHARE |
Basic net loss per share is computed by dividing income attributable to common stockholders by the weighted-average number of common shares outstanding for the period. Diluted earnings per share reflects the potential dilution of securities by adding other common stock equivalents, including common stock options, warrants, and convertible notes, in the weighted average number of common shares outstanding for a period, if dilutive. Potentially dilutive securities are excluded from the computation if their effect is anti-dilutive. For the three and six months ended June 30, 2014 and 2013, 5.2 million, 5.2 million, 1.0 million and 1.0 million potentially dilutive securities, respectively, were excluded from the computation of diluted loss per share because their effect on net loss per share was anti-dilutive. As a result of the net loss for each of the three and six months ended June 30, 2014 and 2013 there is no dilutive impact to the net loss per share calculation for the periods.
| 14. | SUBSEQUENT EVENTS |
During July, 2014, the Company entered into a Subscription Agreement for a private placement (the “Private Placement”) of shares of our Series A Preferred Stock and the warrants to purchase common stock with an accredited investor, whereby we sold an aggregate of 70,270 shares of Series A Preferred Stock at a per share price of $1.85 for gross proceeds of $130,000 and issued to the investor for no additional consideration the warrants to purchase in the aggregate 35,135 shares of the Company’s common stock, par value $0.001 per share, at an exercise price of $3.70 per share.
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| ITEM 2. | MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS |
This Quarterly Report on Form 10-Q and other written reports and oral statements made from time to time by the Company may contain so-called “forward-looking statements,” all of which are subject to risks and uncertainties. One can identify these forward-looking statements by their use of words such as “expect,” “plan,” “will,” “may,” “anticipate,” “believe,” “estimate,” “should,” “intend,” “forecast,” “project” the negative or plural of these words, and other comparable terminology. One can identify them by the fact that they do not relate strictly to historical or current facts. These statements are likely to address the Company’s growth strategy, financial results and product and development programs. One must carefully consider any such statement and should understand that many factors could cause actual results to differ from the Company’s forward-looking statements. These factors include inaccurate assumptions and a broad variety of other risks and uncertainties, including some that are known and some that are not. No forward-looking statement can be guaranteed and actual future results may vary materially. The Company does not assume the obligation to update any forward-looking statement. One should carefully evaluate such statements in light of factors described in the Company’s filings with the SEC, especially the Company’s Annual Report on Form 10-K and the Company’s Quarterly Reports on Form 10-Q. In various filings the Company has identified important factors that could cause actual results to differ from expected or historic results. One should understand that it is not possible to predict or identify all such factors. Consequently, the reader should not consider any such list to be a complete list of all potential risks or uncertainties.
The following discussion is presented on a consolidated basis, and analyzes our financial condition and results of operations for the three months ended June 30, 2014 and 2013. Unless the context indicates or suggests otherwise, reference to “we”, “our”, “us” and the “Company” in this section refers to the consolidated operations of BioPharmX Corporation and BioPharmX, Inc., as defined in Note 1 —Description of Business and Basis of Presentation to the financial statements.
The following Management's Discussion and Analysis of Financial Condition and Results of Operations, or MD&A, is intended to help the reader understand our results of operations and financial condition. MD&A is provided as a supplement to, and should be read in conjunction with, our financial statements and the accompanying notes to the financial statements and other disclosures included in this Quarterly Report on Form 10-Q. Our financial statements have been prepared in accordance with U.S. generally accepted accounting principles and are presented in U.S. dollars.
Overview
BioPharmX Corporation, a Delaware corporation (“BioPharmX, “we,” “us” or the” Company”), was originally incorporated in Nevada on August 30, 2010 under the name “Thompson Designs, Inc.” The business plan of the Company was originally to design and build custom signs for residential and commercial properties. Immediately after the completion of the Share Exchange Transaction (see details below), the Company discontinued its custom signs business and changed its business plan to development of novel delivery mechanisms and routes of administration for known drugs and tissues.
BioPharmX, Inc., a Nevada corporation, was originally incorporated in Delaware on August 18, 2011, and is headquartered in Menlo Park, California. It is a wholly-owned subsidiary of the Company. It is a research-based biopharmaceutical company that seeks to provide innovative products through unique, proprietary platform technologies for pharmaceutical and over-the-counter, or OTC, applications in the fast growing health and wellness markets, including women’s health, dermatology, and otolaryngology (ears, nose & throat).
We are primarily a research and development, or R&D, company focusing on the development of novel delivery mechanisms and novel routes of administration for known drugs and tissues. We have expertise in formulation development, intellectual property generation, clinical trial execution, and regulatory strategy definition. Our business model is to outsource much of its manufacturing and commercialization activities in order to maintain its focus on technology sourcing, acquisitions, and partner development to create new products to address unmet needs in well-defined, multi-billion dollar markets.
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Redomicile
Effective May 16, 2014 BioPharmX Corporation, previously a Nevada corporation, was redomiciled as a Delaware corporation and effective June 26, 2014, BioPharmX, Inc, previously a Delaware corporation, was redomiciled as a Nevada corporation.
Share Exchange Agreement
On January 23, 2014, the Company, BioPharmX, Inc. and stockholders of BioPharmX, Inc., who collectively owned 100% of BioPharmX, Inc. (the “BioPharmX, Inc. Stockholders”) entered into and consummated transactions pursuant to a Share Exchange Agreement (the “Share Exchange Agreement,” such transaction referred to as the “Share Exchange Transaction”), whereby the Company issued to the BioPharmX, Inc. Stockholders an aggregate of 7,025,000 shares of its common stock, par value $0.001 (“Common Stock”), in exchange for 100% of the shares of BioPharmX, Inc. held by the BioPharmX, Inc. Stockholders. The shares of our Common Stock received by the BioPharmX, Inc. Stockholders in the Share Exchange Transaction constituted approximately 77.8% of our then issued and outstanding Common Stock giving effect to the issuance of shares pursuant to the Share Exchange Agreement.
Series A Preferred Stock
During the six months ended June 30, 2014, the Company entered into a series of Subscription Agreements for the Private Placement of shares of Series A Preferred Stock and the common stock warrants (“Warrants”) with a number of accredited investors (the “Investors”), whereby we sold an aggregate of 1,270,269 shares of Series A Preferred Stock at a per share price of $1.85 for gross proceeds of $2,350,000 and issued to the investors for no additional consideration the Warrants to purchase in the aggregate 635,135 shares of the Company’s common stock, at an exercise price of $3.70 per share. The first closing of the sale of the Series A Preferred Stock and the Warrants under the Subscription Agreements occurred on April 11, 2014.
In connection with the Subscription Agreements, the Company, the majority shareholders of the Company and the Investors entered into the Investor Rights Agreement with the Investors, whereby the Investors were granted certain rights including: (i) right to receive copies of quarterly and annual reports of the Company, (ii) right of inspection of the Company’s properties and records, (iii) right of participation in future securities offerings, (iv) tag-along rights in connection with sales of the Company’s stock by a major shareholder, and (v) board of directors representation rights for the subscribers who purchased at least 500,000 shares of Series A and hold at least 30% of such shares (the “Qualified Subscribers”). The Company made certain covenants under the agreement including: (i) uplisting to NYSE or NASDAQ within three years from the issuance shares of Series A, and (ii) increase of the board of directors to five members including one member to be appointed by the Qualified Subscribers.
Upon the first closing of the Private Placement on April 11, 2014, the 6% secured convertible notes in the aggregate principal amount of $2.25 million and $8,000 in eligible accrued interest previously issued were automatically converted into 1,526,001 shares of common stock of the Company (the “Conversion Shares”).
Critical Accounting Policies
Our financial statements and related public financial information are based on the application of accounting principles generally accepted in the United States, or GAAP. GAAP requires the use of estimates; assumptions, judgments and subjective interpretations of accounting principles that have an impact on the assets, liabilities, revenues and expense amounts reported. These estimates can also affect supplemental information contained in our external disclosures including information regarding contingencies, risk and financial condition. We believe our use of estimates and underlying accounting assumptions adhere to GAAP and are consistently applied. We base our estimates on historical experience and on various other assumptions that we believe to be reasonable under the circumstances. Actual results may differ materially from these estimates under different assumptions or conditions. We continue to monitor significant estimates made during the preparation of our financial statements.
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Our significant accounting policies are summarized in Note 1 of our audited financial statements which are included in our Annual Report on Form 10-K for the year ended December 31, 2013. While all these significant accounting policies impact our financial condition and results of operations, we view certain of these policies as critical. Policies determined to be critical are those policies that have the most significant impact on our financial statements and require management to use a greater degree of judgment and estimates. Actual results may differ from those estimates. Our management believes that given current facts and circumstances, it is unlikely that applying any other reasonable judgments or estimate methodologies would cause effect on our results of operations, financial position or liquidity for the periods presented in this report.
We believe the following critical accounting policies and procedures, among others, affect our more significant judgments and estimates used in the preparation of our financial statements:
Results of Operations
Three and six months ended June 30, 2014 and 2013
Revenue
For June 30, 2014, we have not had any revenues. We are in the research and development stage, but we project our molecular iodine dietary supplement product will be released in late 2014.
Research and Development Expenses
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
| 2014 | 2013 | Change | % | 2014 | 2013 | Change | % | |||||||||||||||||||||||
| $ | 657,000 | $ | 148,000 | $ | 509,000 | 344 | % | $ | 1,044,000 | $ | 180,000 | $ | 864,000 | 480 | % | |||||||||||||||
Research and development expenses for the three months ended June 30, 2014 and 2013 increased $509,000. Headcount when comparing these periods increased by 6 scientists which increased payroll and consulting costs by approximately $323,000 and stock compensation expense by $54,000. For the same period we increased expenses of research and development supplies and overhead by $80,000 and $40,000, respectively.
Research and development expenses for the six months ended June 30, 2014 and 2013 increased $864,000. Headcount, when comparing these periods, increased by 6 scientists which increased payroll costs by approximately $450,000 and stock compensation expense by $76,000. For the same period we increased expenses of research and development supplies and consultants and overhead by $255,000 and $85,000, respectively.
As of June 30, 2014, the company had 8 full-time employees in Research and Development.
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Sales and Marketing Expenses
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
| 2014 | 2013 | Change | % | 2014 | 2013 | Change | % | |||||||||||||||||||||||
| $ | 367,000 | $ | 12,000 | $ | 355,000 | 2958 | % | $ | 580,000 | $ | 25,000 | $ | 555,000 | 2220 | % | |||||||||||||||
Sales and Marketing expenses for the three months ended June 30, 2014 and 2013 increased $355,000. Consultants, agencies and stock compensation expense accounted for almost $246,000 of the increase from period to period. As a precursor to introducing our breast health supplement, we spent approximately $66,000 on programs to educate medical professionals on fibrocystic breast condition and the options for treating it. The remaining $43,000 increase was attributable to travel and overhead.
Sales and Marketing expenses for the six months ended June 30, 2014 and 2013 increased $555,000. Consultants, agencies and stock compensation expense accounted for about $298,000 of the increase from period to period. As a precursor to introducing our breast health supplement, we spent approximately $200,000 on programs to educate medical professionals on fibrocystic breast condition and the options for treating it. The remaining $58,000 increase was attributable to travel and overhead.
As of June 30, 2014, we have one employee in sales and marketing. We plan to continue to use outside consultants for most of this work, although we may hire some staff in late 2014.
General and Administrative Expenses
| Three months ended June 30, | Six months ended June 30, | |||||||||||||||||||||||||||||
| 2014 | 2013 | Change | % | 2014 | 2013 | Change | % | |||||||||||||||||||||||
| $ | 802,000 | $ | 87,000 | $ | 715,000 | 822 | % | $ | 1,285,000 | $ | 146,000 | $ | 1,139,000 | 780 | % | |||||||||||||||
General and administrative expenses for the three months ended June 30, 2014 and 2013 increased $715,000. Headcount when comparing these periods increased by 3 employees and additional consultants causing a $400,000 difference, along with a $183,000 charge for stock compensation expense caused by marking to market the non-employee stock options. Also contributing to the increase was a $99,000 cost of warrants issued to a firm that assisted in the successful completion of our reverse acquisition, the remaining increase was attributable to an increase in overhead.
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General and administrative expenses for the six months ended June 30, 2014 and 2013 increased $1.1 million. Headcount when comparing these periods increased by 3 employees and additional consultants causing a $800,000 difference and a $184,000 charge for stock compensation expense substantially caused by marking to market the non-employee stock options. Also contributing to the increase was a $99,000 cost of warrants issued to a firm that assisted in the successful completion of our reverse acquisition, the remaining increase was attributable to an increase in overhead.
As of June 30, 2014, the company had 3 full-time employees in General and administrative.
Loss from Operations
Loss from operations for the three months ended June 30, 2014 and 2013 was $1.8 million and $247,000, respectively. The increase in the loss from year-to-year is due to the Company ramping up research and development, legal and audit costs related to the reverse acquisition we completed in the first quarter of 2014 and other operations.
Loss from operations for the six months ended June 30, 2014 and 2013 was $2.9 million and $351,000, respectively. The increase in the loss from year-to-year is due to the Company ramping up research and development, legal and audit costs related to the reverse acquisition we completed in the first quarter of 2014 and other operations.
Net Loss
Net loss for the three months ended June 30, 2014 and 2013 was $1.8 million and $260,000, respectively. Net loss for the six months ended June 30, 2014 and 2013 was $3.0 million and $371,000, respectively
Inflation did not have a material impact on the Company’s operations for either of the periods. Other than the foregoing, management knows of no trends, demands, or uncertainties that are reasonably likely to have a material impact on the Company’s results of operations.
Capital Resources and Liquidity
A summary of the sources and uses of cash and cash equivalents is as follows:
| For the six months ended of June 30, | ||||||||
| 2014 | 2013 | |||||||
| Net cash used in operating activities | $ | (2,320,000 | ) | $ | (265,000 | ) | ||
| Net cash used in investing activities | (56,000 | ) | (60,000 | ) | ||||
| Net cash used in financing activities | 3,247,000 | 257,000 | ||||||
| Net increase (decrease) in cash and cash equivalents | $ | 871,000 | $ | (68,000 | ) | |||
At June 30, 2014, we had working capital of $75,000.
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Net cash used for operating activities for the six months ended June 30, 2014 was $2.3 million. Cash used in operating activities was primarily due to net loss for the six months ended June 30, 2014 of $3.0 million which was partially offset by changes in operating assets and liabilities of $154,000, non-cash interest expense of $76,000 and stock-based compensation of $313,000. Cash used in investing activities was primarily due to the change in restricted cash and for acquisition of fixed assets.
Net cash used for operating activities for the six months ended June 30, 2013 was $265,000. Cash used in operating activities was primarily due to net loss for the six months ended June 30, 2013 of $371,000 which was offset by $81,000 increase in accounts payable and accrued expenses, non-cash interest expense of $12,000 and stock-based compensation of $11,000. Cash used in investing activities was primarily for acquisition of intellectual property.
Net cash obtained through all financing activities for the six months ended June 30, 2014 and 2013 was $3.2 million and $257,000, respectively, in proceeds from issuing convertible redeemable preferred stock and convertible notes payable, respectively.
Between September 2012 and March 2014, the Company issued 6% unsecured convertible notes to investors in the aggregate principal amount of $2.3 million. In April 2014, the notes were automatically converted into common stock after the completion of the reverse acquisition and closing of a financing in the amount of $1,500,000 at a conversion price per share equal to 80% of the per share offering price of such financing.
During the second quarter of 2014, we sold an aggregate of 1,270,269 million shares of our Series A Preferred Stock at a per share price of $1.85 for gross proceeds of $2.4 million and issued to the investors for no additional consideration warrants to purchase 635,135 shares of the Company’s common stock in the aggregate at an exercise price of $3.70 per share.
Going Concern
As reflected in the accompanying financial statements, the Company has a net loss of $3.0 million and $371,000, respectively, for the six months ended June 30, 2014 and 2013, respectively and a deficit accumulated of $4.6 million as of June 30, 2014. The net cash used in operations for the six months ended June 30, 2014 and 2013 was $2.3 million and $265,000, respectively.
The ability of the Company to continue its operations is dependent on Management's plans, which include the raising of capital through debt and/or equity markets with some additional funding from other traditional financing sources, including term notes, until such time that funds provided by operations are sufficient to fund working capital requirements. The Company may need to incur additional liabilities with certain related parties to sustain the Company’s existence.
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The Company may require additional funding to finance the growth of its current and expected future operations as well as to achieve its strategic objectives. The Company believes its current available cash along with anticipated revenues may be insufficient to meet its cash needs for the near future if it does not receive the anticipated additional funding. There can be no assurance that financing will be available in amounts or terms acceptable to the Company, if at all. In that event, the Company would be required to change its growth strategy and seek funding on that basis, if at all.
The accompanying financial statements have been prepared on a going concern basis, which contemplates the realization of assets and the satisfaction of liabilities in the normal course of business. These financial statements do not include any adjustments relating to the recovery of the recorded assets or the classification of the liabilities that might be necessary should the Company be unable to continue as a going concern.
In response to the above, management will:
| ● | seek additional third party debt and/or equity financing; |
| ● | continue with the implementation of the business plan; |
| ● | seek to generate revenue through commercialization of the technology. |
To date, all of our funding has been generated from private investments. During the next twelve months, we anticipate raising funding to continue expansion; however, as of this writing, we only have sufficient funds to proceed with basic company operations only. We do not have sufficient funds to fully implement our business plan until such time that we are able to raise additional funding, to which there is no guarantee. If we do not obtain the funds necessary for us to continue our business activities we may need to curtail or cease our operations until such time as we have sufficient funds.
| ITEM 3. | QUALITATIVE AND QUANTITATIVE DISCLOSURES ABOUT MARKET RISK |
Pursuant to Item 305(e) of Regulation S-K the Company, as a smaller reporting company, is not required to provide the information required by this item.
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| ITEM 4. | CONTROLS AND PROCEDURES |
Disclosure Controls and Procedures.
Disclosure controls and procedures are controls and other procedures that are designed to ensure that information required to be disclosed in our reports filed or submitted under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported, within the time periods specified in the Securities and Exchange Commission’s rules and forms. Disclosure controls and procedures include controls and procedures designed to ensure that information required to be disclosed in our company’s reports filed under the Securities Exchange Act of 1934 is accumulated and communicated to management, including our Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosure.
Based upon that evaluation, including our Chief Executive Officer and Chief Financial Officer, we have concluded that our disclosure controls and procedures were ineffective as of the end of the period covered by this quarterly report.
Changes in Internal Controls over Financial Reporting
No change in our system of internal control over financial reporting occurred during the three and six months ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
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PART II
OTHER INFORMATION
| ITEM 1. | LEGAL PROCEEDINGS |
We are not currently a party to any legal proceedings. We are not aware of any pending legal proceeding to which any of our officers, directors, or any beneficial holders of 5% or more of our voting securities are adverse to us or have a material interest adverse to us.
| ITEM 2. | UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS |
On June 30, 2014, the Company issued to accredited investors 40,540 shares of Series A Preferred Stock and warrants to purchase 20,271 shares of common stock.
On May 28, 2014, the Company issued to accredited investors 405,405 shares of Series A Preferred Stock and warrants to purchase 202,703 shares of common stock.
On August 5, 2014, the Company issued to an accredited investor 70,270 shares of Series A Preferred Stock and warrants to purchase 35,135 shares of common stock.
The foregoing issuances of the equity securities were effectuated pursuant to the exemption from the registration requirements of the Securities Act of 1933, as amended (the “Securities Act”), provided by Section 4(2) of the Securities Act and/or Regulation D promulgated thereunder.
| ITEM 3. | DEFAULTS UPON SENIOR SECURITIES |
None.
| ITEM 4. | MINE SAFETY DISCLOSURES |
None.
| ITEM 5. | OTHER INFORMATION |
None.
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| ITEM 6. | EXHIBITS |
| Exhibit No. | Description |
| 31.1 | Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to Rule 13a-14(a) or 15d-14(a) under the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. |
| 32.1 | Certifications by the Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |
| 101.INS | XBRL Instance Document. |
| 101.SCH | XBRL Schema Document |
| 101.CAL | XBRL Calculation Linkbase Document |
| 101.DEF | XBRL Definition Linkbase Document |
| 101.LAB | XBRL Label Linkbase Document |
| 101.PRE | XBRL Presentation Linkbase Document |
* Incorporated by reference to our Current Report on Form 8-K filed with the SEC on January 27, 2014.
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SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report on Form 10-Q to be signed on its behalf by the undersigned, thereunto duly authorized.
| BioPharmX Corporation | |||
| Date: August 14, 2014 | By: | /s/ James Pekarsky | |
| Name: James Pekarsky | |||
Title: Chief Executive Officer, Chief Financial Officer and Director (Principal
Executive Officer, Principal Accounting Officer) |
|||
23
Exhibit 31.1
CERTIFICATION
I, James Pekarsky, certify that:
| (1) | I have reviewed this quarterly report on Form 10-Q of BioPharmX Corporation; | |
| (2) | Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; | |
| (3) | Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the company as of, and for, the periods presented in this report; | |
| (4) | I am responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the company and have: | |
| (a) | Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the company, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; | |
| (b) | Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under their supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; | |
| (c) | Evaluated the effectiveness of the company's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and | |
| (d) | Disclosed in this report any change in the company's internal control over financial reporting that occurred during the company's most recent fiscal quarter (the company's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the company's internal control over financial reporting; and | |
| (5) | I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the company's auditors and the audit committee of the company's board of directors (or persons performing the equivalent functions): | |
| (a) | All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the company's ability to record, process, summarize and report financial information; and | |
| (b) | Any fraud, whether or not material, that involves management or other employees who have a significant role in the company's internal control over financial reporting. | |
| Date: August 14, 2014 | /s/ James Pekarsky | |
| James Pekarsky | ||
| Chief Executive Officer, Chief Financial Officer and Director (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
Exhibit 32.1
Certification Pursuant to 18 U.S.C. Section 1350,
as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
In connection with the Form 10-K of BioPharmX Corporation (the “Company”) for the fiscal quarter ended June 30, 2014, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), the undersigned, in his capacity as an officer of the company, certifies, pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that the Report fully complies with the requirements of Section 13(a) or Section 15(d) of the Securities Exchange Act of 1934, as amended, and the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
| Date: August 14, 2014 | /s/ James Pekarsky | |
| James Pekarsky | ||
| Chief Executive Officer, Chief Financial Officer and Director (Principal Executive Officer, Principal Financial Officer and Principal Accounting Officer) |
A signed original of this written statement required by Section 906 has been provided to the Company and will be retained by the Company and furnished to the Securities and Exchange Commission or its staff upon request.