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C. STOCKHOLDERS EQUITY
 6 Months Ended
Mar. 31, 2014
Notes to Financial Statements  
C. STOCKHOLDERS' EQUITY

Stock options, stock bonuses and compensation granted by the Company as of March 31, 2014 are as follows:

 

    Total     Shares              
    Shares     Reserved for     Shares     Remaining  
     Reserved      Outstanding      Issued as      Options/Shares  
Name of Plan     Under Plans      Options      Stock Bonus      Under Plans  
Incentive Stock Option Plans     1,960,000       1,573,597       N/A       145,703  
Non-Qualified Stock Option                          
   Plans     5,680,000       4,417,584       N/A       700,497  
Stock Bonus Plans     1,594,000       N/A       983,866       609,378  
Stock Compensation Plan     1,350,000       N/A       893,637       456,363  

 

There were 743,040 and 1,437,566 options granted to employees and directors during the six months ended March 31, 2014 and 2013, respectively.  There were 743,040 and 100 options granted to employees and directors during the three months ended March 31, 2014 and 2013, respectively.

 

In December 2012, the Company offered employees and directors holding options that expire on April 1, 2013 the opportunity to forfeit these options and have new options issued with an expiration date of December 17, 2017.  All twelve employees and directors eligible for this offer accepted the terms.  This resulted in the cancellation of 387,466 options priced at $2.20 per share and the concurrent issuance of the same number of options at $2.80 per share.  In accordance with ASC 718, the Company recorded the incremental compensation cost of the options.  The incremental compensation cost is the excess of the fair value of the replacement award over the fair value of the cancelled award at the cancellation date.  At the cancellation date, the incremental compensation cost was $477,879.

 

Stock-Based Compensation Expense

 

    Six Months Ended March 31,  
    2014     2013  
             
 Employees   $ 1,030,429     $ 1,523,349  
 Non-employees   $ 421,509     $ 208,355  

 

    Three Months Ended March 31,  
    2014     2013  
             
 Employees   $ 520,151     $ 556,764  
 Non-employees   $ 206,789     $ 100,537  

 

For the six months ended March 31, 2014 and March 31, 2013, respectively, non-employee stock compensation expense excluded $99,548 and $176,628 of prepaid consulting expenses.

 

Derivative Liabilities, Warrants and Other Options

 

Below is a chart showing the derivative liabilities, warrants and other options outstanding at March 31, 2014:

 
 

Warrant Issue Date   Shares Issuable upon Exercise of Warrant     Exercise Price   Expiration Date   Reference  
                       
Series N 8/18/08     2,844,627       0.53   8/18/15     1  
Series A 6/24/09     130,347       5.00   12/24/14     1  
Schleuning (Series A) 7/8/09     16,750       5.00   1/8/15     1  
Series B 9/4/09     50,000       6.80   9/4/14     1  
Series C 8/20/09 – 8/26/09     463,487       5.50   2/20/15     1  
Series E 9/21/09     71,428       17.50   8/12/14     1  
Series F 10/6/11     1,200,000       4.00   10/6/14     1  
Series G 10/6/11     66,667       4.00   8/12/14     1  
Series H 1/26/12     1,200,000       5.00   8/1/15     1  
Series Q 6/21/12     1,200,000       5.00   12/22/15     1  
Series R 12/6/12     2,625,000       4.00   12/6/16     1  
Series S 10/11/13-12/24/13     24,111,983       1.25   10/11/18     1  
                             
Series L 4/18/07     25,000       7.50   4/17/14     2  
Series L (repriced) 4/18/07     70,000       2.50   4/2/15     2  
Series M (modified) 4/18/07     -       1.00   4/20/14     2  
                             
Series P 2/10/12     590,001       4.50   3/6/17     3  
                             
Private Investors 7/18/05- 5/18/06     117,500       6.50-8.20   5/17/14 - 7/18/14     4  
                             
Warrants held by Officer and Director 6/24/09-7/6/09     349,754       4.00 – 5.00   12/24/14 – 1/6/15     5  
                             
Consultants 2/15/05-10/28/13     200,750       0.85-20.00   5/20/14 - 12/27/17     6  

 

  

1.   Derivative Liabilities

 

See below for details of the balances of derivative instruments at March 31, 2014 and September 30, 2013.

 

    March 31, 2014     September 30, 2013  
             
Series A through E warrants   $ 30,529     $ 6,106  
Series N warrants     -       41,501  
Series F and G warrants     49,333       12,667  
Series H warrants     72,000       36,000  
Series Q warrants     120,000       48,000  
Series R warrants     472,500       288,750  
Series S warrants     10,247,593       -  
                 
Total derivative liabilities   $ 10,991,955     $ 433,024  

 

The Company reviews all outstanding warrants in accordance with the requirements of ASC 815.  This topic provides that an entity should use a two-step approach to evaluate whether an equity-linked financial instrument (or embedded feature) is indexed to its own stock, including evaluating the instrument’s contingent exercise and settlement provisions.  The warrant agreements provide for adjustments to the exercise price for certain dilutive events, which includes an adjustment to the number of shares issuable upon the exercise of the warrant in the event that the Company makes certain equity offerings in the future at a price lower than the exercise prices of the warrant instruments.  Under the provisions of ASC 815, the warrants are not considered indexed to the Company’s stock because future equity offerings or sales of the Company’s stock are not an input to the fair value of a “fixed-for-fixed” option on equity shares, and equity classification is therefore precluded.

 

In accordance with ASC 815, derivative liabilities must be measured at fair value upon issuance and re-valued at the end of each reporting period through expiration.  Any change in fair value between the respective reporting dates is recognized as a gain or loss.

 

Series A through E Warrants

 

The Company accounted for the Series A through E Warrants as derivative liabilities in accordance with ASC 815.  These warrants do not qualify for equity accounting and must be accounted for as derivative liabilities since the warrant agreements provide the holder with the right, at its option, to require the Company to a cash settlement of the warrants at Black-Scholes value in the event of a Fundamental Transaction, as defined in the warrant agreement.  Since the occurrence of a Fundamental Transaction is not entirely within the Company's control, there exist circumstances that would require net-cash settlement of the warrants while holders of shares would not receive a cash settlement.

 

In June 2009, the Company issued 1,011,656 Series A warrants exercisable at $5.00 per share in connection with a financing.  The cost of the warrants of $2,775,021 was recorded as a debit to additional paid-in capital and a credit to derivative liabilities.  As of March 31, 2014, 130,347 of these warrants remained outstanding.  As of March 31, 2014 and September 30, 2013, the fair value of the remaining Series A warrants was $6,517 and $1,303, respectively.

 

In July 2009, the Company issued 16,750 warrants to a private investor.  The warrants were issued with an exercise price of $5.00 per share and valued at $43,550 using the Black Scholes method. The cost of the warrants was accounted for as a debit to additional paid-in capital and a credit to derivative liabilities. As of March 31, 2014, 16,750 warrants remained outstanding.  As of March 31, 2014 and September 30, 2013, the fair value of the remaining warrants was $838 and $168, respectively.

 

In connection with a loan received and fully repaid in a prior period, the Company issued 50,000 Series B warrants with an exercise price of $6.80 per share.  As of March 31, 2014, 50,000 Series B warrants remained outstanding.  As of March 31, 2014 and September 30, 2013, the fair value of the remaining Series B warrants was $0.

 

In connection with an August 2009 financing, the Company issued 539,222 Series C warrants exercisable at $5.50 per share.  As of March 31, 2014, 463,487 of these warrants remained outstanding.    As of March 31, 2014 and September 30, 2013, the fair value of the remaining Series C warrants was $23,174 and $4,635, respectively.

 

In September 2009, the Company issued 71,428 Series E warrants with an exercise price of $17.50 per share to the placement agent in connection with a financing. As of March 31, 2014, 71,428 Series E warrants remained outstanding.  As of March 31, 2014 and September 30, 2013, the fair value of the remaining Series E warrants was $0.

 

For the six and three months ended March 31, 2014, the Company recorded a loss of $24,423, on the Series A through E warrants.  For the six and three months ended March 31, 2013, the Company recorded a gain of $598,813 and $266,377, respectively, on the Series A through E warrants.

 

Series N Warrants

 

In October 2011, the Company sold 1,333,333 shares of its common stock to private investors for $4,000,000, or $3.00 per share.  This financing triggered the reset provision in the Series N warrants, which allows for adjustments in the exercise price if subsequent equity sales are offered at a lower price.  As a result, the outstanding 389,078 Series N warrants issued to investors in connection with a prior year financing, were reset from $4.00 to $3.00.  In addition, the investors were issued 129,693 warrants exercisable at $3.00 per share at an initial cost of $220,478.  The cost was accounted for as a debit to loss on derivatives and a credit to derivative liabilities.

 

On October 11, 2013 and December 24, 2013, in connection with public offerings of common stock on those dates, the Company issued the Series N warrant holders 2,432,649 additional warrants as required by the warrant agreements.  In January 2014, the Company offered the investors the option to extend the Series N warrants by one year and allow for cashless exercise, in exchange for cancelling the reset provision in the warrant agreement.  One of the investors with 2,844,627 warrants accepted this offer.  Accordingly, these warrants are no longer considered a derivative liability due to the cancelation of the reset provision.  On March 21, 2014, the other investor exercised 106,793 Series N Warrants.  The Company received cash proceeds of $7,424 for 14,078 of the warrants exercised.  The remaining 92,715 warrants were exercised in a cashless exercise.  The fair value of the warrants on the date of exercise was $137,000.  As of March 31, 2014, the remaining 2,844,627 Series N warrants entitle the holders to purchase one share of the Company's common stock at a price of $0.53 per share at any time prior to August 18, 2015.  On March 31, 2014, no derivative liability was recorded because the warrants no longer were considered a liability for accounting purposes.  On September 30, 2013, the value of the Series N warrants was $41,501.  During the six and three months ended March 31, 2014, the Company recorded a loss of $1,404,027 and $914,273, respectively, on the Series N warrants.  During the six and three months ended March 31, 2013, the Company recorded a derivative gain on Series N warrants of $570,649 and $259,387 respectively.

 

Series F and G Warrants

 

In October 2011, in connection with a financing, the Company issued 1,200,000 Series F warrants exercisable at $4.00 per share at any time prior to October 6, 2014.  The Company also issued 66,667 Series G warrants exercisable at $4.00 per share to the placement agent for this offering.  The Series G warrants are exercisable at any time prior to August 12, 2014.  The initial cost of the warrants of $2,146,667 was recorded as a debit to additional paid-in capital and a credit to derivative liabilities. As of March 31, 2014 and September 30, 2013, the fair value of the Series F and G warrants was $49,333 and $12,667, respectively. During the six and three months ended March 31, 2014, the Company recorded a loss of $36,666 on the Series F and G warrants.  During the six and three months ended March 31, 2013, the Company recorded a gain on the Series F and G warrants of $1,140,000 and $500,000, respectively.

 

Series H Warrants

 

In January 2012, in connection with a financing, the Company issued 1,200,000 Series H warrants exercisable at $5.00 per share at any time prior to August 1, 2015. The initial cost of the warrants of $2,400,000 was recorded as a debit to additional paid-in capital and a credit to derivative liabilities. As of March 31, 2014 and September 30, 2013, the fair value of the Series H warrants were $72,000 and $36,000, respectively.   During the six and three months ended March 31, 2014, the Company recorded a loss of $36,000 and $60,000, respectively, on the Series H warrants.  During the six and three months ended March 31, 2013, the Company recorded a gain of $1,200,000 and $600,000, respectively, on the Series H warrants.

 

Series Q Warrants

 

In June 2012, in connection with a financing, the Company issued 1,200,000 Series Q warrants exercisable at $5.00 per share at any time prior to December 22, 2015.  The initial cost of the warrants of $2,160,000 was recorded as a debit to additional paid-in capital and a credit to derivative liabilities. As of March 31, 2014 and September 30, 2013, the fair value of the Series Q warrants was $120,000 and $48,000, respectively.   During the six and three months ended March 31, 2014, the Company recorded a loss of $72,000 and $96,000, respectively, on the Series Q warrants.  During the six and three months ended March 31, 2013, the Company recorded a gain of $1,200,000 and $600,000, respectively, on the Series Q warrants.

 

Series R Warrants

 

In December 2012 the Company sold 3,500,000 shares of its common stock for $10,500,000, or $3.00 per share, in a registered direct offering.  The investors in this offering also received Series R warrants which entitle the investors to purchase up to 2,625,000 shares of the Company’s common stock.  The Series R warrants may be exercised at any time before December 7, 2016 at a price of $4.00 per share.   The initial cost of the warrants of $4,200,000 was recorded as a debit to additional paid-in capital and a credit to derivative liabilities. As of March 31, 2014 and September 30, 2013, the fair value of the derivative liabilities totaled $472,500 and $288,750, respectively.  During the six and three months ended March 31, 2014, the Company recorded a loss of $183,750 and $315,000, respectively, on the Series R warrants.  During the six and three months ended March 31, 2013, the Company recorded a gain of $1,575,000 and $1,312,500, respectively, on the Series R warrants.

 

Series S Warrants

 

On October 11, 2013, the Company closed a public offering of 17,826,087 units of common stock and warrants at a price of $1.00 per unit for net proceeds of $16,400,000, net of underwriting discounts and commissions and offering expenses of the Company.  Each unit consisted of one share of common stock and one Series S warrant to purchase one share of common stock.  The Series S warrants are immediately exercisable, expire on October 11, 2018, and have an exercise price of $1.25.  In November 2013, the underwriters purchased an additional 2,648,913 warrants pursuant to the overallotment option, for which the Company received net proceeds of $24,370.

 

On December 24, 2013, the Company closed a public offering of 4,761,905 units of common stock and warrants at a price of $0.63 per unit for net proceeds of $2,790,000, net of underwriting discounts and commissions and offering expenses of the Company.  Each unit consisted of one share of common stock and one Series S warrant to purchase one share of common stock.  The Series S warrants are immediately exercisable, expire on October 11, 2018, and have an exercise price of $1.25. The underwriters purchased an additional 476,190 units of common stock and warrants pursuant to the overallotment option, for which the Company received net proceeds of approximately $279,000.

 

The initial cost of the S warrants of $7,321,071 was recorded as a debit to additional paid-in capital and a credit to derivative liabilities.

 

On February 7, 2014, the Series S warrants began trading on the New York Stock Exchange.  As of March 31, 2014, 1,601,112 Series S Warrants had been exercised.  The fair value of the warrants on the date of exercise was $838,144.  The remaining 24,111,983 Series S warrants entitle the holders to purchase one share of the Company's common stock at a price of $1.25 per share.

 

As of March 31, 2014, the fair value of the Series S warrants totaled $10,247,593.  During the six and three months ended March 31, 2014, the Company recorded a loss of $3,764,665 and $5,685,986, respectively, on the Series S warrants.

 

2.   Series L and M Warrants

 

In April 2007, the Company completed a $15 million private financing.  Shares were sold at $7.50, a premium over the closing price of the previous two weeks.  The financing was accompanied by 1,000,000 warrants with an exercise price of $7.50 and 1,000,000 warrants with an exercise price of $20.00.  The warrants are known as Series L and Series M warrants, respectively.  The warrants issued with the financing qualified for equity treatment in accordance with ASC 815.  The cost of Series L and Series M warrants were recorded as a debit and a credit to additional paid-in capital.

 

In November 2011, the Company reduced the exercise price of 160,000 Series L warrants to $3.40. The additional cost of $86,826 was recorded as a debit and a credit to additional paid-in capital and was a deemed dividend.  In March 2012, 60,000 Series L warrants were exercised at a price of $3.40, and the Company received proceeds of $204,000.

 

In April 2012, the 25,000 Series L warrants were transferred to a consultant exercisable at a price of $7.50 per share and were extended for two years from the current expiration date.  The additional value of $43,910 was accounted for as a credit to additional paid-in capital and a debit to general and administrative expense.  In June 2012, 10,167 Series L warrants with an exercise price of $7.50 per share, expired.  In April 2013, 100,000 Series L warrants were repriced to $2.50 and extended for two years to April 2, 2015 in return for a reduction in outstanding warrants to 70,000.  The additional cost of $59,531 was recorded as a debit and a credit to additional paid-in capital and was a deemed dividend.  This cost was included in modification of warrants and increased the net loss available to shareholders on the statements of operations.  As of March 31, 2014, 70,000 of the Series L warrants at the reduced exercise price of $2.50 and 25,000 warrants at the original exercise price of $7.50 remained outstanding.

 

In February 2011, 600,000 Series M warrants, exercisable at a price of $6.00 per share were extended for two years to July 31, 2014.  This cost of $661,457 was recorded as a debit and a credit to additional paid-in capital and was a deemed dividend.

 

In November 2011, the Company reduced the exercise price of 600,000 Series M warrants from $6.00 to $3.40.  The additional cost of $238,794 was recorded as a debit and a credit to additional paid-capital and was a deemed dividend.

 

In October 2013, the Company reduced the exercise prices of the Series M warrants from $3.40 to $1.00 in exchange for a reduction in the number of warrants from 600,000 to 500,000.  The additional cost of $76,991 was recorded as non-employee stock compensation expense.  In March 2014, 500,000 Series M warrants were exercised.  As of March 31, 2014, no Series M warrants remained outstanding.

 

3.   Series O and P Warrants

 

In March 2009, as further consideration for its rights under a licensing agreement, Byron Biopharma LLC (“Byron”) purchased 375,000 Units from the Company at a price of $2.00 per Unit.  Each Unit consisted of one share of the Company’s common stock and two Series O warrants.  All Series O warrants were exercised by September 30, 2012.

 

On February 10, 2012, the Company issued 590,001 Series P warrants to the former holder of the Series O warrants as an inducement for the early exercise of the Series O warrants. Series O warrants entitled the holder to purchase 590,001 shares of the Company’s common stock at a price of $2.50 per share at any time on or prior to March 6, 2016.  The Series P warrants allow the holder to purchase up to 590,001 shares of the Company’s common stock at a price of $4.50 per share.  The Series P warrants are exercisable at any time prior to March 6, 2017.  The warrants were accounted for as an equity transaction using the Black-Scholes method to value the warrants.  The fair value of the warrants was calculated to be $1,593,000.  This cost was recorded as a debit and a credit to additional paid-in capital.    As of March 31, 2014, 590,001 Series P warrants remained outstanding.

 

4.   Private Investor Warrants

 

In February 2011, 132,500 warrants issued to an investor with exercise prices between $6.50 and $8.20 were extended for three years.  The additional value of $406,912 was calculated using the Black Scholes method and was accounted for as a debit and a credit to additional paid-in capital.  On February 9, 2014, 15,000 warrants expired.  As of March 31, 2014, 117,500 warrants remained outstanding.

 

In January 2009, as part of an amended lease agreement on the manufacturing facility, the Company repriced 300,000 warrants issued to the lessor in July 2007 at $12.50 per share and which were to expire on July 12, 2013. These warrants were repriced at $7.50 per share and expire on January 26, 2014. The cost of this repricing and extension of the warrants was $70,515 and was accounted for as a debit to the deferred rent asset and a credit to additional paid-in capital.  In addition, 78,750 additional warrants were given to the lessor of the manufacturing facility on the same date, exercisable at a price of $7.50 per share, and will expire on January 26, 2014. The cost of these warrants was $45,207 and was accounted for as a debit to the deferred rent asset and a credit to additional paid-in capital.  On January 26, 2014, all 378,750 warrants that were outstanding expired.

 

Between March 31 and June 30, 2009, 229,688 warrants were issued at $7.50 to the leaseholder on the manufacturing facility in consideration for the deferral of rent payments.  On January 26, 2014, all 229,688 warrants that were outstanding expired.

 

5.   Warrants Held by Officer and Director

 

Between December 2008 and June 2009, Maximilian de Clara, the Company’s President and a director, loaned the Company $1,104,057 under a note payable.  In June 2009, the Company issued 164,824 warrants, exercisable at $4.00 per share, to Mr. De Clara.  The warrants are exercisable at any time prior to December 24, 2014.  These warrants were valued at $65,796 using the Black-Scholes method.  In July 2009, as consideration for a further extension of the loan, the Company issued 184,930 warrants, exercisable at $5.00 per share, to Mr. De Clara.  These warrants were valued at $341,454 using the Black-Scholes method and can be exercised at any time prior to January 6, 2015.  The first warrants were recorded as a discount to the loan and a credit to additional paid-in capital.  The second warrants were recorded as a debit to derivative loss of $831,230, a premium of $341,454 on the loan and a credit to additional paid-in capital of $489,776.  The warrants and premium are fully amortized.  As of March 31, 2014, 349,754 warrants remained outstanding. See Note E for additional information.

 

6.   Options and Shares Issued to Consultants

 

As of March 31, 2014, 200,750 options issued to consultants as payment for services remained outstanding, of which 191,250 options were issued from the Non-Qualified Stock Option plans.   On May 22, 2013, 3,000 options previously issued to a consultant from the Non-Qualified Stock Option plans expired.

 

On October 15, 2013, the Company entered into a consulting agreement for services to be provided through October 14, 2014.  In consideration for services provided, the Company agreed to issue the consultant 100,000 restricted shares in three installments – 34,000 upon signing, 33,000 on January 15, 2014, and 33,000 on March 14, 2014.  Accordingly, during the six months ended March 31, 2014, the Company issued a total of 100,000 restricted shares to the consultant.  During the three months ended March 31, 2014, 66,000 restricted shares of the 100,000 total restricted shares were issued to the consultant.  The aggregate fair market value of the 100,000 restricted shares of $108,710 was recorded as a prepaid expense and is being charged to general and administrative expense over the period of service.

 

On October 20, 2013, the Company entered into a consulting agreement for services to be provided through October 19, 2016.  In consideration for services provided, the Company agreed to issue the consultant 34,164 restricted shares each month of the agreement, with the first three months being issued in advance. Accordingly, during the six months ended March 31, 2014, the Company issued the consultant 204,984 shares of restricted stock at the fair market value on the dates of issuance.  The aggregate fair market value of $172,859 was recorded as a prepaid expense and is being charged to general and administrative expense over the period of service.  The Company had previously entered into a one year consulting agreement with this same consultant for services to be provided through December 27, 2013.  In consideration for the services to be provided, the Company issued the consultant 50,000 shares of common stock and 50,000 options to purchase common stock at a price of $2.80 per share.  The common shares were issued at the fair market value on the agreement date of $2.80.  The aggregate fair market value of $140,000 was recorded as a prepaid expense and was charged to general and administrative expense over the period of service.  The fair value of the options issued, as calculated using the Black-Scholes method, was determined to be $98,150 and was also charged to general and administrative expense over the period of service.

 

On October 28, 2013, the Company entered into a consulting agreement for services to be provided through April 27, 2014.  In consideration for services provided, the Company granted the consultant 60,000 options to purchase common stock at a price of $0.85 per share.  The fair value of the options issued, as calculated using the Black-Scholes method, was determined to be $24,294 and was recorded as a prepaid expense and will be charged to general and administrative expense over the period of service.

 

On December 1, 2013, the Company entered into a consulting agreement for public relation services to be provided through May 31, 2014. The contract includes a monthly retainer of 5,000 shares of restricted stock.  In addition the consultant has received an additional 20,000 shares of restricted stock for meeting certain performance requirements per the consulting agreement.  The common shares were issued at the fair market value on the grant date.  The aggregate fair market value of $43,400 for the six and three months ended March 31, 2014 was recorded as a general and administrative expense.

 

During the six and three months ended March 31, 2014, the Company recorded expense of $344,518 and $206,789, respectively relating to these consulting arrangements.  During the six and three months ended March 31, 2013, the Company recorded expense of $61,522 and $59,537, respectively relating to these consulting arrangements.    As of March 31, 2014 and September 30, 2013, the Company recorded $99,548 and $57,553, respectively, in prepaid consulting expenses.