Attached files
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EX-32.1 - AEOLUS PHARMACEUTICALS, INC. | v210878_ex32-1.htm |
EX-31.1 - AEOLUS PHARMACEUTICALS, INC. | v210878_ex31-1.htm |
EX-31.2 - AEOLUS PHARMACEUTICALS, INC. | v210878_ex31-2.htm |
UNITED
STATES
SECURITIES
AND EXCHANGE COMMISSION
Washington,
DC 20549
FORM
10-Q
x
|
QUARTERLY REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
For the quarterly period ended
December 31, 2010.
¨
|
TRANSITION REPORT PURSUANT TO
SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE ACT OF
1934
|
for the
transition period from _____ to _____.
Commission
File Number
0-50481
AEOLUS PHARMACEUTICALS,
INC.
(Exact
Name of Registrant as Specified in Its Charter)
Delaware
|
56-1953785
|
|
(State or Other Jurisdiction of
Incorporation
or Organization)
|
(I.R.S. Employer
Identification
No.)
|
|
26361
Crown Valley Parkway, Ste. 150
Mission Viejo, California
|
92691
|
|
(Address
of Principal Executive Offices)
|
(Zip
Code)
|
(Registrant’s Telephone Number, Including Area Code)
949-481-9825
|
Indicate
by check mark whether the registrant: (1) has filed all reports required to be
filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the
preceding 12 months (or for such shorter period that the registrant was required
to file such reports), and (2) has been subject to such filing requirements for
the past 90 days. YES x NO ¨
Indicate
by check mark whether the registrant has submitted electronically and posted on
its corporate Web site, if any, every Interactive Data File required to be
submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this
chapter) during the preceding 12 months (or for such shorter period that the
registrant was required to submit and post such files). YES ¨ NO ¨
Indicate
by check mark whether the registrant is a large accelerated filer, an
accelerated filer, a non-accelerated filer, or a smaller reporting company. See
the definitions of “large accelerated filer,” “accelerated filer” and “smaller
reporting company” in Rule 12b-2 of the Exchange Act.
Large
accelerated filer ¨
|
Non-accelerated
filer ¨
|
(Do
not check if a smaller reporting company)
|
|
Accelerated
filer ¨
|
Smaller
reporting company x
|
Indicate
by check mark whether the registrant is a shell company (as defined in Rule
12b-2 of the Exchange Act). YES ¨ NO x
Indicate
the number of shares outstanding of each of the issuer’s classes of common
stock, as of the latest practicable date.
Class
|
Outstanding as of
February 10, 2010
|
|
Common Stock, par value $.01 per share
|
59,784,050
shares
|
AEOLUS
PHARMACEUTICALS, INC.
FORM
10-Q
For the
Quarter Ended December 31, 2010
Table of
Contents
Page
|
|||
PART I. FINANCIAL
INFORMATION
|
|||
Item
1.
|
Financial
Statements
|
3
|
|
Statement
Regarding Financial Information
|
3
|
||
Condensed
Consolidated Balance Sheets as of December 31, 2010 (unaudited) and
September 30, 2010
|
4
|
||
Condensed
Consolidated Statements of Operations for the Three Months ended December
31, 2010 and 2009 (unaudited)
|
5
|
||
Condensed
Consolidated Statements of Cash Flows for the Three Months ended December
31, 2010 and 2009 (unaudited)
|
6
|
||
Notes to
Condensed Consolidated Financial Statements
|
7
|
||
Item
2.
|
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations
|
16
|
|
Item
3.
|
Quantitative and
Qualitative Disclosures About Market Risk
|
19
|
|
Item
4.
|
Controls
and Procedures
|
19
|
|
PART
II. OTHER INFORMATION
|
|||
Item
1.
|
Legal
Proceedings
|
20
|
|
Item
1A.
|
Risk
Factors
|
20
|
|
Item
2.
|
Unregistered Sales
of Equity Securities and Use of Proceeds
|
20
|
|
Item
3.
|
Defaults
Upon Senior Securities
|
20
|
|
Item
4.
|
Removed
and Reserved
|
20
|
|
Item
5.
|
Other
Information
|
20
|
|
Item
6.
|
Exhibits
|
21
|
|
SIGNATURES
|
22
|
2
AEOLUS
PHARMACEUTICALS, INC.
PART
I - FINANCIAL INFORMATION
ITEM 1.
Financial Statements.
Statement
Regarding Financial Information
The
condensed consolidated financial statements of Aeolus Pharmaceuticals, Inc. and
its wholly-owned subsidiary, Aeolus Sciences, Inc. (collectively the “Company”),
included herein have been prepared by management, without audit (except for the
Consolidated Balance Sheet as of September 30, 2010), pursuant to the rules and
regulations of the Securities and Exchange Commission (“SEC”). Certain
information normally included in the consolidated financial statements prepared
in accordance with accounting principles generally accepted in the United States
has been condensed or omitted pursuant to such rules and regulations. However,
the Company believes that the disclosures are adequate to make the information
presented not misleading. The Company recommends that you read the consolidated
financial statements included herein in conjunction with the audited
consolidated financial statements and notes thereto included in the Company’s
Annual Report on Form 10-K/A for the fiscal year ended September 30, 2010, filed
with the SEC on December 30, 2010.
3
AEOLUS PHARMACEUTICALS,
INC.
CONDENSED
CONSOLIDATED BALANCE SHEETS
(In
thousands, except shares and per share data)
December 31,
|
September 30,
|
|||||||
2010
|
2010
|
|||||||
(Unaudited)
|
||||||||
ASSETS
|
||||||||
Current
assets:
|
||||||||
Cash
and cash equivalents
|
$
|
2,867
|
$
|
2,355
|
||||
Prepaids
and other current assets
|
34
|
46
|
||||||
Total
current assets
|
2,901
|
2,401
|
||||||
Investment
in CPEC LLC
|
32
|
32
|
||||||
Total
assets
|
$
|
2,933
|
$
|
2,433
|
||||
LIABILITIES
AND STOCKHOLDERS’ EQUITY (DEFICIT)
|
||||||||
Current
liabilities:
|
||||||||
Accounts
payable and accrued expenses
|
$
|
665
|
$
|
957
|
||||
Short-term
debt
|
657
|
663
|
||||||
Total
current liabilities
|
1,322
|
1,620
|
||||||
Warrant
liability
|
34,955
|
27,549
|
||||||
Total
liabilities
|
36,277
|
29,169
|
||||||
Commitments
and Contingencies (Notes E and H)
|
||||||||
Stockholders’
equity (deficit):
|
||||||||
Preferred
stock, $.01 par value per share, 10,000,000 shares
authorized:
|
||||||||
Series
B nonredeemable convertible preferred stock, 600,000 shares authorized;
475,087 shares issued and outstanding as of December 31, 2010 and
September 30, 2010, respectively
|
5
|
5
|
||||||
Common
stock, $.01 par value per share, 200,000,000 shares authorized; 59,634,050
and 56,817,177 shares issued and outstanding at December 31, 2010 and
September 30, 2010, respectively
|
596
|
568
|
||||||
Additional
paid-in capital
|
156,387
|
155,402
|
||||||
Accumulated
deficit
|
(190,332
|
)
|
(182,711
|
) | ||||
Total
stockholders’ equity (deficit)
|
(33,344
|
)
|
(26,736
|
) | ||||
Total
liabilities and stockholders’ equity (deficit)
|
$
|
2,933
|
2,433
|
The
accompanying notes are integral part of these unaudited condensed consolidated
financial statements.
4
AEOLUS PHARMACEUTICALS,
INC.
CONDENSED
CONSOLIDATED STATEMENTS OF OPERATIONS
(Unaudited)
(In
thousands, except per share data)
Three Months Ended
|
||||||||
December 31,
|
||||||||
2010
|
2009
|
|||||||
Revenue
|
||||||||
Miscellaneous
Income (Note B)
|
$
|
337
|
$
|
-
|
||||
Costs
and expenses:
|
||||||||
Research
and development
|
190
|
184
|
||||||
General
and administrative
|
550
|
406
|
||||||
Total
costs and expenses
|
740
|
590
|
||||||
Loss
from operations
|
(403
|
) |
(590
|
) | ||||
Non-cash
financing charges and change in fair value of warrants (Notes
D, E and F)
|
(7,202
|
) |
(13,860
|
) | ||||
Interest
expense, net
|
(15
|
) |
(826
|
) | ||||
Net
loss
|
$
|
(7,620
|
) |
$
|
(15,276
|
) | ||
Net
loss per weighted share attributable to common
stockholders:
|
||||||||
Basic
|
$
|
(0.13
|
) |
$
|
(0.33
|
) | ||
Diluted
|
$
|
(0.13
|
) |
$
|
(0.33
|
) | ||
Weighted
average common shares outstanding:
|
||||||||
Basic
|
57,026
|
46,527
|
||||||
Diluted
|
57,026
|
46,527
|
The
accompanying notes are integral part of these unaudited condensed consolidated
financial statements.
5
AEOLUS PHARMACEUTICALS,
INC.
CONDENSED
CONSOLIDATED STATEMENTS CASH FLOWS
(Unaudited)
(In
thousands)
Three Months Ended
|
||||||||
December 31,
|
||||||||
2010
|
2009
|
|||||||
Cash
flows from operating activities:
|
||||||||
Net
loss
|
$
|
(7,620
|
) |
$
|
(15,276
|
) | ||
Adjustments
to reconcile net loss to net cash used in operating
activities:
|
||||||||
Noncash
compensation
|
187
|
190
|
||||||
Change
in fair value of warrants
|
6,645
|
7,646
|
||||||
Noncash
exercise of warrants
|
169
|
—
|
||||||
Noncash
consulting expense
|
—
|
14
|
||||||
Noncash
interest and warrant costs
|
382
|
6,986
|
||||||
Change
in assets and liabilities:
|
||||||||
Prepaid
and other assets
|
11
|
105
|
||||||
Accounts
payable and accrued expenses
|
(291
|
) |
(54
|
) | ||||
Net
cash used in operating activities
|
(517
|
) |
(389
|
) | ||||
Cash
flows from financing activities:
|
||||||||
Proceeds
from issuance of common stock and warrants
|
1,000
|
1,650
|
||||||
Costs
related to the issuance of common stock and warrants
|
(13
|
) |
(54
|
) | ||||
Proceeds
from exercise of warrants
|
42
|
17
|
||||||
Net
cash provided by financing activities
|
1,029
|
1,613
|
||||||
Net
increase in cash and cash equivalents
|
512
|
1,224
|
||||||
Cash
and cash equivalents at beginning of period
|
2,355
|
646
|
||||||
Cash
and cash equivalents at end of period
|
$
|
2,867
|
$
|
1,870
|
||||
Supplemental
disclosure of cash flow information:
|
||||||||
Cash
payments of interest
|
$
|
—
|
$
|
—
|
||||
Supplemental
disclosure of non-cash investing and financing activities:
|
||||||||
Common
stock issued for payment of accounts payable
|
$
|
—
|
$
|
413
|
||||
Common
stock issued upon conversion of Senior Convertible Notes
|
$
|
—
|
$
|
1,000,000
|
||||
Common
stock issued for payment of interest on Senior Convertible
Notes
|
$
|
—
|
$
|
13
|
6
AEOLUS
PHARMACEUTICALS, INC.
NOTES
TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
A.
Organization and Business
and Basis of Presentation
Aeolus
Pharmaceuticals, Inc. is a biopharmaceutical company that is developing a
platform of a new class of broad-spectrum catalytic antioxidant compounds
based on technology discovered at Duke University and National Jewish Health.
These compounds, known as metalloporphyrins, scavenge reactive oxygen species
(“ROS”) at the cellular level, mimicking the effect of the body’s own natural
antioxidant enzyme superoxide dismutase (“SOD”). While the benefits of
antioxidants in reducing oxidative stress are well-known, research with the
Company’s compounds indicates that metalloporphyrins can be used to affect
signaling via ROS at the cellular level. In addition, there is evidence
that high-levels of ROS can affect gene expression and this may be modulated
through the use of metalloporphyrins. The Company believes this could have a
profound beneficial impact on people who have been exposed, or are about to be
exposed, to high-doses of radiation.
The
Company’s lead compound, AEOL 10150, is a metalloporphyrin specifically designed
to neutralize reactive oxygen and nitrogen species. The neutralization of these
species reduces oxidative stress, inflammation, and subsequent tissue
damage-signaling cascades resulting from radiation exposure. Aeolus is
leveraging the significant investment made by U.S. government agencies to
develop this promising compound for use in oncology indications, where it would
be used in combination with radiation therapy, and is currently in development
for use as both a therapeutic and prophylactic drug. Data has been
published showing that AEOL 10150 does not interfere with the therapeutic
benefit of radiation therapy in prostate and lung cancer preclinical
studies. In 2011 Aeolus expects to release data showing the drug’s
impact, if any, when used in combination with radiation and/or
chemotherapy. In mid-2011 it expects to begin Phase I/II studies in
non-small cell lung cancer (“NSCLC”). Later in 2011 the Company expects to begin
a Phase I/II study in Mesothelioma, where approximately 30% of the patients
succumb to the effects of the radiation therapy.
AEOL
10150 is also currently at Technical Readiness Level (“TRL”) 7 as a medical
countermeasure (“MCM”) for GI-ARS and Lung-ARS, both of which are caused by
exposure to high levels of radiation due to a radiological or nuclear
event. To date, this development program has largely been funded by the
National Institutes of Health (“NIH”) – National Institute of Allergy and
Infectious Diseases (“NIAID”) through programs at the University of Maryland and
Duke University.
In
December 2009, Aeolus was informed by the U.S. Department of Health and Human
Services (“HHS”) Biomedical Advanced Research and Development Authority
(“BARDA”) that it had been chosen to submit a full proposal for funding of its
Lung-ARS program from its current stage all the way through U.S. Food and
Drug Administration (“FDA”) approval, based on a summary “white paper” submitted
by the Company earlier in 2009. Aeolus submitted a full proposal in
February 2010. The Company was notified in July 2010 that its
proposal had been chosen by BARDA, and then entered into negotiations for a
development contract with the agency. The Company is awaiting a final
decision from BARDA on the contract. If the contract from BARDA is
awarded, it is expected that it will fund all of the costs necessary to bring
AEOL 10150 to FDA approval for that indication.
NIAID’s Radiation/Nuclear
Medical Countermeasures development program is currently testing AEOL 10150 as a
countermeasure for GI-ARS caused by exposure to high levels of radiation due to
a radiological or nuclear event. Similarly, the NIH’s CounterACT program has
tested, and continues to test, AEOL 10150 as a medical countermeasure for
exposure to chemical vesicants such as chlorine gas and mustard gas. In
September 2010, BARDA invited Aeolus to submit a full proposal in response to
its “White Paper” for the development of AEOL 10150 as an MCM to chlorine gas
exposure. The proposal seeks funding to take the compound from its
current state to FDA approval over a three year period. Aeolus
submitted its full proposal to BARDA in December 2010, and expects a response
from BARDA by the third quarter of 2011.
AEOL
10150 has already performed well in animal safety studies, been well-tolerated
in two human clinical trials, demonstrated efficacy in two species in acute
radiation syndrome (“ARS”) studies and demonstrated statistically significant
survival efficacy in an acute radiation-induced lung injury model. AEOL
10150 has also demonstrated efficacy in validated animal models for GI-ARS,
chlorine gas exposure, and sulfur mustard gas exposure. Efficacy has been
demonstrated in Lung-ARS in both rodent and non-human primate studies (“NHP”),
with AEOL 10150 treated groups showing significantly reduced weight loss,
inflammation, oxidative stress, lung damage, and most importantly,
mortality. Therapeutic efficacy was demonstrated when delivered after
exposure to radiation (24 hours after exposure for mice in the GI-ARS study and
NHPs in the Lung-ARS studies, and two hours after exposure for mice in the
Lung-ARS studies). The Company is looking at a longer post exposure period in
studies that will begin in early 2011.
7
Aeolus
has an active Investigational New Drug Application (“IND”) on file with the FDA
for AEOL 10150 as a potential treatment for amyotrophic lateral sclerosis
(“ALS”). In the first half of 2011, the Company plans to file an IND for cancer
with the oncology division of the FDA as well as with the Hematology and Imaging
Division for Lung-ARS. Extensive toxicology and pharmacology packages
are already in place. Aeolus has already completed two Phase 1 safety
studies in 50 humans demonstrating the drug to be safe and well tolerated.
Chemistry, Manufacturing, and Controls (“CMC”) work has been completed, and
pilot lots have been prepared for scaling-up.
Aeolus
has two programs underway for the development of its second drug candidate, AEOL
11207, for the treatment of epilepsy and Parkinson’s
disease. These programs are being funded, in part, by private
foundations, including the Michael J. Fox Foundation and Citizens United for
Research in Epilepsy (CURE), and government grants.
The
“Company” or “Aeolus” refers collectively to Aeolus Pharmaceuticals, Inc., a
Delaware corporation (“Aeolus”), and its wholly owned subsidiary, Aeolus
Sciences, Inc., a Delaware corporation. As of December 31, 2010, Aeolus also
owned a 35.0% interest in CPEC LLC, a Delaware limited liability company
(“CPEC”). The Company’s primary operations are located in Mission Viejo,
California.
All
significant intercompany activity has been eliminated in the preparation of the
condensed consolidated financial statements. The unaudited condensed
consolidated financial statements have been prepared in accordance with the
requirements of Form 10-Q and Rule 10-01 of Regulation S-X. Some information and
footnote disclosures normally included in financial statements prepared in
accordance with generally accepted accounting principles have been condensed or
omitted pursuant to those rules and regulations. In the opinion of management,
the accompanying unaudited consolidated financial statements include all
adjustments (consisting only of normal recurring adjustments) necessary to
present fairly the consolidated financial position, results of operations and
cash flows of the Company. The condensed balance sheet at September 30, 2010 was
derived from the Company’s audited financial statements included in the
Company’s Annual Report on Form 10-K/A for the fiscal year ended September 30,
2010. The unaudited condensed consolidated financial statements included herein
should be read in conjunction with the audited consolidated financial statements
and the notes thereto included in that Annual Report on Form 10-K/A and in the
Company’s other SEC filings. Results for the interim period are not necessarily
indicative of the results for any other period.
B.
Liquidity
The
Company had cash and cash equivalents of approximately $2,867,000 on December
31, 2010, and approximately $2,355,000 on September 30, 2010. The
increase in cash was primarily due to $1.0 million in gross proceeds from the
December 2010 financing and the two awards from the IRS under the Qualifying
Therapeutic Discovery Program (“QTDP”). In October 2010, we were
notified that we had been awarded the maximum amount, of about
$244,000, under the QTDP, which is administered by the IRS and the U.S.
Department of Health and Human Services (“HHS”), in support of our development
of AEOL 10150 as an medical countermeasure (“MCM”) for Lung-ARS. In
November 2010, we received approximately $244,000 from the IRS as full payment
for the Lung-ARS award. In October 2010, we were
also notified that we had been awarded the maximum amount, of approximately
$244,000, under the QTDP in support of our development of AEOL 11207 as a
potential treatment for Parkinson’s Disease. In November 2010, we
received about $92,000 from the IRS as an initial payment for the Parkinson’s
program award. We expect to receive the balance of about $152,000
after we file our 2010 fiscal year tax return and submit the request for payment
to the IRS. We believe we have adequate financial resources to conduct
operations into the second quarter of fiscal year 2012, but in order to fund
on-going operating cash requirements beyond that point, or to further accelerate
or expand our programs, we need to raise significant additional
funds.
The
Company has incurred significant losses from operations of approximately
$7,620,000 (including a non-cash charge for increases in valuation of warrants
of approximately $7,202,000) and approximately $25,869,000 (including a non-cash
charge for increases in valuation of warrants of approximately $21,347,000), and
cash outflows from operations of approximately $517,000 and approximately
$2,446,000, for the three months ended December 31, 2010 and for the fiscal year
ended September 30, 2010, respectively. The Company expects to incur additional
losses and negative cash flow from operations during the remainder of fiscal
year 2011 and for several more years.
As a
result of the October 2009 Financing and the Amendment, both of which are
defined and discussed more fully in Note G– Stockholders’ Equity, which is
included in the Company’s Annual Report on Form 10-K/A for the fiscal year ended
September 30, 2010, the Company was able to raise a total of about $1.65 million
during the first quarter of fiscal year 2010. On July 30, 2010,
the Company announced the exercise of the October 2009 Put Option with Xmark
Funds, discussed more fully in Note G – Stockholders’ Equity in that Annual
Report on Form 10-K/A, under which the Company raised additional gross proceeds
of $1.65 million. In addition, on August 11, 2010, the Company completed a
common stock and warrant financing for gross proceeds of $1 million, and granted
the Xmark Funds an option to call another $1 million during the first quarter of
fiscal 2011. During the first quarter of fiscal 2011, Xmark Funds called its
option, resulting in gross proceeds of $1 million to the
Company. Cash on hand, plus the proceeds from the December 2010
option call is expected to enable the Company to continue operations into the
second quarter of fiscal 2012. The level of research and development
activity will depend heavily upon the successful execution of a contract with
BARDA for Lung-ARS. If the Company is successful in obtaining the
contract, research and development activities will increase
significantly. If the Company is not successful in obtaining the
contract, spending on Lung-ARS development by the Company will be halted,
resulting in lower research and development expenses.
8
If the
Company is unable to obtain additional funding for its operations beyond the
second quarter of 2012, it will need to eliminate or substantially limit some or
all of its activities, merge with another company, sell, lease or license some
or all of its assets, or cease operations entirely. There can be no assurance
that the Company will be able to obtain additional financing on favorable terms,
or at all, or that the Company will be able to merge with another Company or
sell, lease or license any or all of its assets.
C.
Net Loss Per Common
Share
The
Company computes basic net loss per weighted average share attributable to
common stockholders using the weighted average number of shares of common stock
outstanding during the period. The Company computes diluted net income (loss)
per weighted average share attributable to common stockholders using the
weighted average number of shares of common and dilutive potential common shares
outstanding during the period. Potential common shares outstanding consist of
stock options, convertible debt, warrants and convertible preferred stock using
the treasury stock method and are excluded if their effect is anti-dilutive.
Diluted weighted average common shares excluded incremental shares of
approximately 76,864,000 as of December 31, 2010 issuable upon the exercise or
conversion of convertible debt, stock options to purchase common stock,
convertible preferred stock and warrants to purchase common stock. These shares
were excluded due to their anti-dilutive effect as a result of the Company’s net
loss for the quarter ended December 31, 2010.
D.
Warrant
Liability
On
October 1, 2009, the Company adopted new accounting guidance originally
referred to as Emerging Issues Task Force 07-5, recently codified by FASB as
Account Standards Codification (“ASC”) Topic 815. The guidance revised
previously existing guidance for determining whether an Instrument (or Embedded
Feature) is indexed to an entity’s own stock. Equity-linked instruments (or
embedded features) that otherwise meet the definition of a derivative are not
accounted for as derivatives if certain criteria are met, one of which is that
the instrument (or embedded feature) must be indexed to the entity’s own stock.
The Company first applied the new guidance to outstanding instruments as of
October 1, 2009.
Increases
or decreases in fair value of the warrants are included as a component of other
income (expenses) in the accompanying statement of operations for the respective
period. As of December 31, 2010, the aggregate liability for warrants increased
to approximately $34,955,000, resulting in an additional charge to the
statements of operations for the quarter ended December 31, 2010 of
approximately $7,202,000. The warrant liability and revaluations have not and
will not have any impact on the Company’s working capital, liquidity or business
operations.
E.
Note
Payable
Senior
Convertible Notes to Related Parties
On
August 1, 2008, the Company entered into a Securities Purchase Agreement
(the “SCN Purchase Agreement”) with three accredited institutional
investors (the “August 2008 Investors”) pursuant to which the Company
agreed to sell to the August 2008 Investors units comprised of senior unsecured
convertible notes of the Company (the “Notes”), in an aggregate principal amount
of up to $5,000,000, which bear interest at a rate of 7% per year and mature on
the 30-month anniversary of their date of issuance, and warrants to purchase up
to an aggregate of 10,000,000 additional shares of the Company’s common stock
(the “August 2008 Warrant Shares”), each with an initial exercise price of $0.50
per share, subject to adjustment as provided in the warrants (the “August 2008
Warrants”). Each unit (collectively, the “August 2008 Units”) is comprised of
$1,000 in Note principal and August 2008 Warrants to purchase up to 2,000 shares
of the Company’s common stock, and has a purchase price of $1,000.
On
August 1, 2008, pursuant to the SCN Purchase Agreement, the Company sold
and issued to the August 2008 Investors an aggregate of 500 August 2008 Units
comprised of Notes in the aggregate principal amount of $500,000 and August 2008
Warrants to purchase up to 1,000,000 shares of common stock for an aggregate
purchase price of $500,000 (the “SCN Financing”).
On each
of September 4, 2008, October 1, 2008, November 3, 2008 and
December 1, 2008, the Company sold and issued to the August 2008 Investors
an aggregate of 125 August 2008 Units comprised of Notes in the aggregate
principal amount of $125,000 and August 2008 Warrants to purchase up to 250,000
shares of common stock for an aggregate purchase price of $125,000 (the
“Subsequent Financings”).
9
The Notes
issued in the SCN Financing and the Subsequent Financings had an initial
conversion price of $0.35 per share, subject to adjustment as provided in the
Notes. In addition, the August 2008 Investors had the option to purchase up to
an additional 4,000 August 2008 Units, in one or more closings at their sole
option at any time on or before December 31, 2013.
Interest
on the Notes accrued at the rate of 7.0% per annum from the date of issuance,
and was payable semi-annually, on January 31 and July 31 of each year.
Interest was payable, at the Company’s sole election, in cash or shares of
common stock, to holders of Notes on the record date for such interest payments,
with the record dates being each January 15 and July 15 immediately
preceding an interest payment date. The effective interest rate of the Notes,
including the effect of the amortization of the embedded conversion feature and
the note discount, was 39.4%.
The net
proceeds to the Company from the sale of 1,000 August 2008 Units in the SCN
Financing and Subsequent Financing, after deducting for expenses, were
approximately $844,000. The Company used the net proceeds to fund the
development of AEOL 10150 and to fund ongoing operations of the Company.
Offering costs of the private placement were $156,000 and were allocated to the
Notes and August 2008 Warrants based upon their respective fair values. The
offering costs attributed to the Notes in the amount of $100,000 were
capitalized as Debt Issuance Costs. The Debt Issuance Costs were amortized over
the life of the Notes in the SCN Financing.
Pursuant
to the Securities Purchase and Exchange Agreement dated October 6, 2009
(the “October 2009 Purchase Agreement”), as more fully described in Note G–
Stockholders’ Equity, which is included in the Company’s Annual Report on Form
10-K/A for the fiscal year ended September 30, 2010, the holders of the
Notes agreed to convert all $1,000,000 in principal amount of the Notes into
common stock at a conversion rate of $0.35 per share and to exchange their
remaining option to purchase an additional $4,000,000 in Notes for warrants to
purchase up to 14,285,714 shares of common stock with an initial exercise price
of $0.28 per share, subject to adjustment as provided in the
warrants.
On
December 24, 2009, the Company entered into an amendment (the “Amendment”)
to the October 2009 Purchase Agreement, pursuant to which the Company
agreed to lower the conversion price of the Notes from $0.35 per share to $0.28
per share and as a result, issued an additional 714,286 shares of common stock
to the former holders of the Notes. The Amendment was executed to resolve a
misunderstanding regarding one of the financing terms in the October 6,
2009 financing between the Company and the investors in the financing. The
Company did not receive any proceeds from the issuance. As a result of the
Amendment and the issuance of the additional shares, the Company recorded a
charge of $343,000 in the Statement of Operations as interest expense for the
value of the shares issued on the date of issuance.
Affiliates
of Xmark Opportunity Partners, LLC were the sole investors in the SCN Financing.
Together with its affiliates, Xmark Opportunity Partners, LLC beneficially owned
approximately 52% of the Company’s outstanding common stock prior to the SCN
Financing. Xmark Opportunity Partners, LLC is the sole manager of Goodnow
Capital, LLC (“Goodnow”) and possesses sole power to vote and direct the
disposition of all securities of the Company held by Goodnow. Goodnow has the
right to designate up to two directors for election to the Company’s Board of
Directors, pursuant to the terms of a purchase agreement between Goodnow and the
Company. David C. Cavalier, a current director of the Company and Managing
Partner of Xmark Opportunity Partners LLC, is President of Goodnow. The
transaction was evaluated by the Company’s management and the Board of Directors
for fairness to ensure the terms were reasonable given the related party nature
of the SCN Financing by providing an option for non-related party investors to
participate in the transaction.
Elan
Note Payable
In
August 2002, Aeolus borrowed $638,000 from Elan Corporation, plc (“Elan”)
pursuant to a promissory note. The note payable accrued interest at 10%
compounded semi-annually. The note was convertible at the option of Elan into
shares of the Company’s Series B non-voting convertible preferred stock (“Series
B Stock”) at a rate of $43.27 per share. The original note matured on
December 21, 2006. However, in February 2007, the Company and Elan
terminated the note, the Company paid $300,000 in cash to Elan, Elan
forgave $225,000 of the note payable and Elan and the Company entered into a new
two-year note payable in the amount of $453,000 under substantially the same
terms as the original note. In February 2009, the Company and Elan agreed
to amend the new note payable to extend its maturity date from February 7,
2009 to February 7, 2011 and increased the interest rate of the convertible
promissory note from 10% to 11% effective February 7, 2009. As of the date
of the amendment, an aggregate of $553,000 in principal and interest was
outstanding under the convertible promissory note. In the event of an event of
default under the convertible promissory note, Elan may demand immediate payment
of all amounts outstanding under the note. For purposes of the note, an event of
default includes, among other items, a default in the payment of the note
principal or interest when due and payable, an uncured breach by the Company of
its obligations to Elan pursuant the agreements under which the convertible
promissory note was issued, an inability of the Company to pay its debts in the
normal course of business, the cessation of business activities by the Company
(other than as a result of a merger or consolidation with a third party) without
Elan’s prior written consent and the appointment of a liquidator, receiver,
administrator, examiner, trustee or similar officer of the Company or over all
or substantially all of its assets under the law.
10
During
the term of the note payable, Elan has the option to convert the note into
shares of Series B Stock at a rate of $9.00 per share. Upon the maturity of the
note payable, Aeolus has the option to repay the note either in cash or in
shares of Series B Stock and warrants having a then fair market value equal to
the amount due under the note; provided that the fair market value used for
calculating the number of shares to be issued will not be less than $13.00 per
share. As of December 31, 2010 and 2009, the outstanding balance, including
interest, on the note payable to Elan was approximately $657,000 and 610,000,
respectively.
On
February 7, 2011, the due date of the loan, Aeolus elected to exercise its right
to repay the note (see also, Section I. Subsequent Events below), with a
maturity value of approximately $663,000, with 50,993 shares of the Company’s
Series B Stock and a warrant to purchase an aggregate of 896,037 shares of the
Company’s Series B Stock at an exercise price of $0.01 per share. The warrants
have a term of five years, a cashless exercise provision and customary
anti-dilution adjustments in the event of stock splits, stock combination,
reorganizations and similar events.
F.
Stockholders’
Equity
Preferred
Stock
The
Certificate of Incorporation of Aeolus authorizes the issuance of up to
10,000,000 shares of Preferred Stock, at a par value of $.01 per share. The
Board of Directors has the authority to issue Preferred Stock in one or more
series, to fix the designation and number of shares of each such series, and to
determine or change the designation, relative rights, preferences, and
limitations of any series of Preferred Stock, without any further vote or action
by the stockholders of the Company.
As of
December 31, 2010, 475,087 shares of Series B Stock were outstanding, all of
which were held by Elan. Each share of Series B Stock is convertible into one
share of common stock.
Common
Stock
October
2009 Financing
On
October 6, 2009, the Company entered into the October 2009 Purchase
Agreement with several accredited institutional investors (the
“October 2009 Investors”) pursuant to which the Company sold and issued to
the October 2009 Investors in a private placement an aggregate of 5,892,857
units (the “October 2009 Units”), comprised of an aggregate of 5,892,857 shares
of common stock (the “October 2009 Shares”) and warrants to purchase up to
an aggregate of 11,785,714 additional shares of common stock (the
“October 2009 Warrants”), with an initial exercise price of $0.28 per
share, subject to adjustment as provided in the October 2009 Warrants, with
each October 2009 Unit representing one share of common stock and a
October 2009 Warrant to purchase two shares of common stock, at a purchase
price of $0.28 per October 2009 Unit for aggregate gross proceeds of $1,650,000
(collectively, the “October 2009 Financing”). The October 2009
Warrants are exercisable for a seven year period from their date of issuance;
contain a “cashless exercise” feature that allows the holder to exercise the
October 2009 Warrants without a cash payment to the Company under certain
circumstances; contain a dividend participation right which allows the holder to
receive any cash dividends paid on the common stock without exercising the
October 2009 Warrant and contain a provision that provides for the
reduction of the exercise price to $0.01 in the event of any such payment of
cash dividends by the Company or upon a change of control and contain
anti-dilution provisions in the event of a stock dividend or split, dividend
payment or other issuance, reorganization, recapitalization or similar
event.
The
Company also granted to the October 2009 Investors the option to acquire,
collectively, up to an additional 5,892,857 October 2009 Units (the “Additional
Units”), comprised of an aggregate of 5,892,857 shares of common stock and
warrants to purchase up to an aggregate of 11,785,714 additional shares of
common stock at the per Additional Unit purchase price of $0.28 (the “October
2009 Call Option”). In addition, the October 2009 Investors granted to the
Company the option to require these October 2009 Investors, severally and
not jointly, to acquire up to 5,892,857 Additional Units, less any Additional
Units acquired under the October 2009 Call Option, at the per Additional Unit
purchase price of $0.28 (the “October 2009 Put Option”). The October 2009 Call
Option was exercisable at any time, and from time to time, on or prior to
June 30, 2010. The October 2009 Put Option was exercisable at any time from
June 30, 2010 to July 30, 2010. On July 30, 2010, the Company
exercised the October 2009 Put Option in full for $1.65 million in gross cash
proceeds and issued 5,892,857 shares of common stock and 11,785,714 warrants to
the October 2009 Investors.
11
In
addition, the October 2009 Investors agreed to convert all $1,000,000 in
principal amount of the Notes into common stock of the Company at a conversion
rate of $0.35 per share (the “Conversion Shares”), which was subsequently
lowered to $0.28 as discussed below, and to exchange their remaining option to
purchase an additional $4,000,000 in Notes for warrants to purchase up to
14,285,714 shares of common stock in substantially the same of form and terms of
the October 2009 Warrants issued in the October 2009 Financing,
including an initial exercise price of $0.28 per share, subject to adjustment as
provided in the warrants (the “Note Warrants”). As consideration for the
October 2009 Investors to convert the Notes, the Company agreed to exchange
warrants to purchase up to 2,000,000 shares of common stock issued to the
October 2009 Investors in connection with the sale of the Notes, warrants
to purchase up to 2,150,000 shares of common stock issued to the
October 2009 Investors and one of their affiliates in connection with a
financing completed in November 2005 and warrants to purchase up to
13,392,857 shares of common stock issued to the October 2009 Investors in
connection with a financing completed in March 2009 (collectively, the
“Prior Warrants”) for warrants to purchase up to an aggregate of 17,542,857
shares of common stock in substantially the same form and terms of the
October 2009 Warrants issued in the October 2009 Financing, including
an initial exercise price of $0.28 per share, subject to adjustment pursuant to
the warrants (the “Exchange Warrants”) (collectively, the
“Conversion”).
In
connection with the October 2009 Financing and the Conversion, the Company
also entered into a Registration Rights Agreement (the “October 2009 Rights
Agreement”) with the October 2009 Investors. In addition, the
October 2009 Investors agreed to terminate the Company’s Registration
Rights Agreements dated November 21, 2005 and March 30, 2009. Pursuant
to the October 2009 Rights Agreement, the Company agreed to file one or
more registration statements (collectively, the “Registration Statements”) with
the Securities and Exchange Commission (the “SEC”) covering the resale of the
October 2009 Shares, the Conversion Shares and all shares of common stock
issuable upon exercise of the October 2009 Warrants, the Note Warrants and
the Exchange Warrants (collectively, the “Registrable Securities”) upon demand
of the holders of a majority of the Registrable Securities (a “Demand
Registration”). Such holders have the right to two Demand Registrations, subject
to certain exceptions. In the event the holders exercise their right to a Demand
Registration, the Company has agreed to file a Registration Statement to
register the resale of the Registrable Securities within a certain number of
days after the request and to use commercially reasonable efforts to cause the
Registration Statement to be declared effective by the SEC as soon as
practicable after the filing thereof. The Company also agreed to use its
commercially reasonable efforts to keep the Registration Statements effective
for a specified period.
The net
proceeds to the Company from the October 2009 Financing, after deducting
for expenses, were approximately $1.6 million. The Company has used, and intends
to continue to use, the net proceeds from the October 2009 Financing to
finance animal efficacy studies in Acute Radiation Syndrome, the development of
AEOL 10150 and ongoing operations of the Company.
The fair
value of the October 2009 Warrants, the Note Warrants and the Exchange
Warrants was estimated to be $10,585,000 using the Black-Scholes option pricing
model with the following assumptions: dividend yield of 0%; expected volatility
of 93%; risk free interest rate of 2.9%; and an expected life of seven years.
The fair value of the Prior Warrants cancelled on October 6, 2009 was
$3,352,000. The proceeds from the October 2009 Financing were allocated
based upon the relative fair values of the October 2009 Warrants and the
October 2009 Shares. Due to the anti-dilution provisions of the
October 2009 Warrants, the Note Warrants and the Exchange Warrants, these
warrants were deemed to be a liability under current accounting guidance and as
a result the warrant liability was increased by $7,233,000 of which $6,213,000
was recorded as a charge to the Statement of Operations and $1,020,000 of
proceeds from the October 2009 Financing was allocated to the value of the
October 2009 Warrants.
Affiliates
of Xmark Opportunity Partners, LLC were the sole investors in the
October 2009 Financing and, together with the Company, were the sole
participants in the Conversion. Together with its affiliates, Xmark Opportunity
Partners, LLC beneficially owned approximately 71% of the Company’s outstanding
common stock prior to the October 2009 Financing and the Conversion. Xmark
Opportunity Partners, LLC is the sole manager of Goodnow and possesses sole
power to vote and direct the disposition of all securities of the Company held
by Goodnow. Goodnow has the right to designate up to two directors for election
to the Company’s Board of Directors pursuant to the terms of a purchase
agreement between Goodnow and the Company. David C. Cavalier, a current
employee, director and Chairman of the Board of the Company, and Managing
Partner of Xmark Opportunity Partners LLC, is President of Goodnow.
On
December 24, 2009, the Company entered into an amendment (the “Amendment”)
to the October 2009 Purchase Agreement pursuant to which the Company agreed
to lower the conversion price of the Notes from $0.35 per share to $0.28 per
share and as a result, issued to the investors in the Company’s
October 2009 Financing an additional 714,286 shares of the Company’s common
stock upon conversion of the Notes (the “Issuance”). The Agreement was executed
to resolve a misunderstanding regarding one of the financing terms between the
Company and the October 2009 Investors. The Company did not receive any
proceeds from the Issuance. The fair value of the common stock on the date of
issuance was $343,000 and was charged to the Statement of Operations as interest
expense.
On
July 30, 2010, the Company exercised the October 2009 Put Option. As a
result of the exercise, the Company received $1.65 million in gross proceeds
from the investors in exchange for 5,892,857 additional Units (the “Additional
Units”), comprised of an aggregate of 5,892,857 shares of common stock and
warrants to purchase up to an aggregate of 11,785,714 additional shares of
common stock at a purchase price of $0.28 per share.
12
Net cash
proceeds from the exercise of the October 2009 Put Option were approximately
$1.6 million after legal costs associated with the exercise and subsequent
issuance of stock and warrants.
August
2010 Financing
On
August 12, 2010, the Company announced an additional financing with certain
existing investors (the “August 2010 Investors”). Under the terms of the
agreement, the Company received $1 million in gross proceeds in exchange for the
issuance of 2.5 million shares of common stock and warrants to purchase up to
1,875,000 shares at an exercise price of $0.50 per share. The Company also
granted to the August 2010 Investors the option to acquire, collectively,
up to an additional 2,500,000 units, comprised of an aggregate of 2,500,000
shares of common stock and warrants to purchase up to an aggregate of 1,875,000
additional shares of common stock at an exercise price of $0.50 (the “August
2010 Call Option”). In addition, the August 2010 Investors granted to the
Company the option to require these August 2010 Investors, severally and
not jointly, to acquire up to 2,500,000 additional units, less any additional
units acquired under the August 2010 Call Option, at the per additional unit
purchase price of $0.40 (the “August 2010 Put Option”).
On
December 28, 2010, the investors exercised their Call Option and the Company
received $1 million in proceeds in exchange for 2,500,000 common shares and
1,875,000 warrants, with an initial exercise price of $0.50 per share, subject
to adjustment as provided in the warrants (the “Additional Warrants”). The
Additional Warrants are exercisable for a seven-year period from their date of
issuance; contain a “cashless exercise” feature that allows the holder to
exercise the Additional Warrants without a cash payment to the Company under
certain circumstances; contain a dividend participation right which allows the
holder to receive any cash dividends paid on the Common Stock without exercising
the Additional Warrant; contain a provision that provides for the reduction of
the exercise price to $0.01 in the event of any such payment of cash dividends
by the Company or upon a change of control; and contain anti-dilution provisions
in the event of a stock dividend or split, dividend payment or other issuance,
reorganization, recapitalization or similar event. The net proceeds to the
Company from the December 2010 financing, after deducting for expenses, were
approximately $990,000.
Dividends
The
Company has never paid a cash dividend on its common stock and does not
anticipate paying cash dividends on its common stock in the foreseeable
future. If we pay a cash dividend on our common stock, we also must
pay the same dividend on an as converted basis on our Series B preferred stock.
In addition, under the terms of the warrants to purchase up to 61,822,749 shares
of our common stock issued to Xmark Opportunity Partners, LLC or its affiliates
(“Xmark”) in four transactions (on each of October 6, 2009, July 30, 2010,
August 11, 2010 and December 31, 2010), if we were to pay a dividend on our
common stock, the exercise price of these warrants would be reset from $0.28 per
share or $0.50 per share, as applicable, to $0.01 per share and the warrant
holders would also be entitled receive any such dividend paid.
Warrants
As of
December 31, 2010, warrants to purchase an aggregate of 68,276,667 shares of
common stock were outstanding. Details of the warrants for common stock
outstanding at December 31, 2010 were as follows:
13
Number of Shares
|
Exercise Price
|
Expiration Date
|
||||||
50,000
|
$
|
0.35
|
May
2011
|
|||||
50,000
|
$
|
1.00
|
May
2011
|
|||||
50,000
|
$
|
1.50
|
May
2011
|
|||||
50,000
|
$
|
2.00
|
May
2011
|
|||||
50,000
|
$
|
2.50
|
May
2011
|
|||||
7,000,000
|
$
|
0.75
|
June
2011
|
|||||
1,776,668
|
$
|
0.28
|
May
2012
|
|||||
20,000
|
$
|
0.39
|
September
2014
|
|||||
15,000
|
$
|
0.50
|
September
2014
|
|||||
15,000
|
$
|
0.60
|
September
2014
|
|||||
43,614,285
|
$
|
0.28
|
October
2016
|
|||||
11,785,714
|
$
|
0.28
|
July
2017
|
|||||
1,875,000
|
$
|
0.50
|
August
2017
|
|||||
1,875,000
|
$
|
0.50
|
December
2017
|
|||||
50,000
|
$
|
0.38
|
April
2020
|
|||||
68,276,667
|
$
|
0.34
|
G.
Stock-Based
Compensation
Below is
a summary of stock option activity for the three months ended December 31,
2010:
Weighted Average
|
||||||||||||||||
Number of
|
Remaining
Contractual
|
Aggregate
|
||||||||||||||
Shares
|
Exercise Price
|
Term (in years)
|
Intrinsic Value
|
|||||||||||||
Outstanding
at 9/30/2010
|
7,921,904
|
$
|
1.12
|
7.00
|
$
|
874,345
|
||||||||||
Granted
|
170,000
|
$
|
0.62
|
9.91
|
$
|
11,625
|
||||||||||
Exercised
|
—
|
$
|
0.00
|
0.00
|
$
|
—
|
||||||||||
Expired or Canceled
|
(55,748
|
)
|
$
|
31.75
|
0.00
|
$
|
—
|
|||||||||
Forfeited
|
—
|
$
|
—
|
—
|
$
|
—
|
||||||||||
Vested (RSAs)
|
—
|
$
|
—
|
—
|
$
|
—
|
||||||||||
Outstanding at 12/31/2010
|
8,036,156
|
$
|
0.89
|
6.86
|
$
|
1,463,680
|
For the
three months ended December 31, 2010 all stock options were issued with an
exercise price at or above the fair market value of the Company’s common stock
on the date of grant.
14
The
details of stock options for the three months ended December 31, 2010 were as
follows:
Options Outstanding
|
Options Exercisable
|
||||||||||||||||||||
|
|
Number
|
|
||||||||||||||||||
Range of
|
Number Outstanding at |
Weighted Average Exercise |
Weighted Average Remaining |
Exercisable at
December
|
Weighted Average Exercise |
||||||||||||||||
Exercise Prices
|
December 31, 2010
|
Price
|
Contractual Life
|
31, 2010
|
Price
|
||||||||||||||||
$
|
0.29-0.32
|
1,526,250
|
$
|
0.30
|
8.82
|
1,526,250
|
$
|
0.30
|
|||||||||||||
$
|
0.33-0.45
|
2,928,500
|
$
|
0.40
|
9.19
|
1,723,504
|
$
|
0.39
|
|||||||||||||
$
|
0.55-0.73
|
674,111
|
$
|
0.60
|
7.07
|
509,739
|
$
|
0.59
|
|||||||||||||
$
|
0.75-0.89
|
667,835
|
$
|
0.81
|
5.18
|
667,835
|
$
|
0.81
|
|||||||||||||
$
|
0.90-1.45
|
516,500
|
$
|
0.94
|
5.53
|
516,500
|
$
|
0.94
|
|||||||||||||
$
|
1.50
|
1,256,019
|
$
|
1.50
|
2.57
|
1,256,019
|
$
|
1.50
|
|||||||||||||
$
|
1.52-1.85
|
211,250
|
$
|
1.84
|
3.72
|
211,250
|
$
|
1.84
|
|||||||||||||
$
|
2.10-12.85
|
237,045
|
$
|
6.46
|
2.47
|
237,045
|
$
|
6.46
|
|||||||||||||
$
|
15.00-19.38
|
18,646
|
$
|
17.91
|
0.40
|
18,646
|
$
|
17.91
|
|||||||||||||
$
|
0.29-19.38
|
8,036,156
|
$
|
0.89
|
6.86
|
6,666,788
|
$
|
0.99
|
Stock-based
compensation expense recognized in the statement of operations is as follows (in
thousands):
For the three months ended
December 31,
|
||||||||
2010
|
2009
|
|||||||
Research
and Development Expenses
|
20 | 24 | ||||||
General
and Administrative Expenses
|
167 | 166 | ||||||
187 | 190 |
The total
deferred compensation expense for outstanding and unvested stock options for the
three months ended December 31, 2010 was approximately $497,000. The
weighted average remaining recognition period for the total deferred
compensation expense is approximately seven months. The fair value of the
options associated with the above compensation expense was determined at the
date of the grant using the Black-Scholes option pricing model with the
following weighted average assumptions:
For the three months ended
December 31
|
||||||||
2010
|
2009
|
|||||||
Dividend
yield
|
0 | % | 0 | % | ||||
Expected
volatility
|
92.0 | % | 96 | % | ||||
Risk-free
interest rate
|
3.1 | % | 3.3 | % | ||||
Expected
term
|
10
years
|
10
years
|
H.
Commitments
The
Company acquires assets still in development and enters into research and
development arrangements with third parties that often require milestone and
royalty payments to the third party contingent upon the occurrence of certain
future events linked to the success of the asset in
development. Milestone payments may be required, contingent upon the
successful achievement of an important point in the development life-cycle of
the pharmaceutical product e.g., approval of the product for marketing by a
regulatory agency). If required by the arrangement, the Company may
have to make royalty payments based upon a percentage of the sales of the
pharmaceutical product in the event that regulatory approval for marketing is
obtained. Because of the contingent nature of these payments, they
are not included in the table of contractual obligations.
15
These
arrangements may be material individually, and in the unlikely event that
milestones for multiple products covered by these arrangements were reached in
the same period, the aggregate charge to expense could be material to the
results of operations in any one period. In addition, these
arrangements often give Aeolus the discretion to unilaterally terminate
development of the product, which would allow Aeolus to avoid making the
contingent payments; however, Aeolus is unlikely to cease development if the
compound successfully achieves clinical testing objectives.
I.
Subsequent
Events
On
February 7, 2011, the due date of the loan payable to Elan Corporation (see
Section E. Note Payable above), Aeolus elected to exercise its right to repay
the note, with a maturity value of approximately $663,000, with 50,993 shares of
the Company’s Series B Stock and a warrant to purchase an aggregate of 896,037
shares of the Company’s Series B Stock at an exercise price of $0.01 per share.
The warrants have a term of five years, a cashless exercise provision and
customary anti-dilution adjustments in the event of stock splits, stock
combination, reorganizations and similar events. In connection with the
issuance, Aeolus amended its certificate of incorporation on February 7, 2011 to
increase the authorized number of shares of the Company’s Series B Stock from
600,000 to 1,600,000.
We have
evaluated subsequent events through the issuance of these condensed consolidated
financial statements and determined that no other material subsequent events
have occurred.
Item 2.
Management’s
Discussion and Analysis of Financial Condition and Results of
Operations.
Introduction
Unless
otherwise noted, the terms “we,” “our” or “us” refer collectively to Aeolus
Pharmaceuticals, Inc. and our wholly owned subsidiary, Aeolus Sciences,
Inc.
This
report contains, in addition to historical information, statements by us with
respect to expectations about our business and future results which are
“forward-looking” statements under the Private Securities Litigation Reform Act
of 1995. These statements and other statements made elsewhere by us or by our
representatives, which are identified or qualified by words such as “likely,”
“will,” “suggests,” “expects,” “might,” “believe,” “could,” “should,” “may,”
“estimates,” “potential,” “predict,” “continue,” “would,” “anticipates,”
“plans,” or similar expressions, are based on a number of assumptions that are
subject to risks and uncertainties. Such statements include, but are not limited
to, those relating to Aeolus’ product candidates and funding options, as well as
its proprietary technologies and uncertainties and other factors that may cause
Aeolus’ actual results to be materially different from historical results or
from any results expressed or implied by such forward-looking statements.
Important factors that could cause results to differ include risks associated
with uncertainties of progress and timing of clinical trials, scientific
testing, obtaining regulatory approval, the need to obtain (and obtaining)
funding for pre-clinical and clinical trials and operations, the scope and
validity of intellectual property protection for Aeolus’ product candidates,
proprietary technologies and their uses, new accounting and SEC requirements and
competition from other biopharmaceutical companies. Certain of these factors and
others are more fully described in Aeolus’ filings with the SEC, including, but
not limited to, Aeolus’ Annual Report on Form 10-K/A for the fiscal year ended
September 30, 2010, filed with the Securities and Exchange Commission on
December 30, 2010. All forward-looking statements are based on
information available as of the date hereof, and we do not assume any obligation
to update such forward-looking statements. Readers are cautioned not to place
undue reliance on these forward-looking statements, which speak only as of the
date hereof.
Operations
Summary
Aeolus
Pharmaceuticals, Inc. (“we,” “us” or the “Company”), a Southern California-based
biopharmaceutical company, is developing a new class of broad spectrum catalytic
antioxidant compounds based on technology discovered at Duke University and
National Jewish Health.
Our lead
compound, AEOL 10150, is entering human clinical trials in oncology, where it
will be used in combination with radiation therapy. AEOL 10150 has
previously been tested in two Phase I clinical trials with no serious adverse
events reported. The compound is also being developed as a medical
countermeasure against the pulmonary sub-syndrome of acute radiation syndrome
(“Pulmonary Acute Radiation Syndrome” or “Lung-ARS”) as well as the
gastrointestinal sub-syndrome of acute radiation syndrome (“GI-ARS”),
both caused by exposure to high levels of radiation due to a radiological
or nuclear event. It is also being developed for use as a
countermeasure for exposure to chemical vesicants such as chlorine gas and
sulfur mustard gas. AEOL 10150 has already performed well in animal
efficacy and safety studies in each of these potential indications. A
significant portion of the funding for the medical countermeasure development
programs to date has come from various government entities. Although
we expect this funding to continue, there is no guarantee that it will do
so.
16
We were
incorporated in the State of Delaware in 1994. Our common stock
trades on the OTC Bulletin Board under the symbol “AOLS.” Our
principal executive offices are located at 26361 Crown Valley Parkway, Suite
150 Mission Viejo, California 92691, and our phone number at that address
is (949) 481-9825. Our website address is
www.aeoluspharma.com. However, the information on, or that can be
accessed through, our website is not part of this report. We also
make available free of charge through our website our most recent annual report
on Form 10-K/A, quarterly reports on Form 10-Q, current reports on Form 8-K, and
any amendments to those reports, as soon as reasonably practicable after such
material is electronically filed with or furnished to the SEC.
We do not
generate revenue from sales. Therefore, we must rely on public or private equity
offerings, debt financings, collaboration arrangements or grants to finance our
operations. Our strategy is to use non-dilutive capital wherever
possible to develop our exciting platform of broad-spectrum catalytic
antioxidant compounds in important unmet indications of national strategic
importance. We plan to continue to leverage that capital, like the investments
made by U.S. government agencies, such as The National Institute of Allergy and
Infectious Diseases (“NIAID”) and National Institutes of Health’s (“NIH”)
Countermeasures Against Chemical Threats (“CounterACT”), in AEOL 10150 as a
medical countermeasure, to concurrently develop these promising compounds for
use in significant unmet medical indications, like oncology. We are currently
doing this with AEOL 10150, where we are leveraging the potential substantial
government investment in research and development of AEOL 10150 as a medical
countermeasure to develop the compound in oncology indications, where it would
be used in combination with radiation therapy.
Need for Additional
Funds
With the
financing announced in December 2010, we believe we have adequate financial
resources to fund our operations into the second quarter of fiscal
2012. In order to fund on-going operating cash requirements beyond
the first half of fiscal year 2012, or to accelerate or expand our
programs, however, we may need to raise significant additional funds. Our need
for additional financing is discussed under “Liquidity and Capital
Resources”.
Results of
Operations
Three months ended December
31, 2010 versus three months ended December 31, 2009
We had
net losses of approximately $7,620,000 (including a non-cash charge for
increases in valuation of warrants of approximately $7,202,000) for the three
months ended December 31, 2010, versus net losses of approximately $15,276,000
(including a non-cash charge for increases in valuation of warrants of
approximately $13,860,000) for the three months ended December 31,
2009.
Revenue
for the three months ended December 31, 2010 was approximately $337,000, which
compares to zero revenue for the three months ended December 31, 2009. The
revenue is from two grants awarded to the Company, each for approximately
$244,000, under the Qualifying Therapeutic Discovery Grant Program
administered by the IRS and the U.S. Department of Health and Human
Services. The Company received payment in full for one grant in support of
development of AEOL 10150 as a medical countermeasure for Lung-ARS in November
and approximately $92,000 as a partial payment in support of our development of
AEOL 11207 as a potential treatment for Parkinson’s Disease.
Research
and development (“R&D”) expenses increased about $6,000, or 4%, to
approximately $190,000 for the three months ended December 31, 2010 from
approximately $184,000 for the three months ended December 31, 2009. We
currently have seven development programs in progress: the study of our drug
candidates as a potential countermeasure against the effects of sulfur mustard
gas on the lung and skin, as a protectant against the effects of radiation on
the lungs and on the gastro-intestinal tract, as a countermeasure against the
effects of chlorine gas, as a potential treatment for epilepsy and for the
potential treatment for Parkinson’s disease.
In
December 2009, Aeolus was informed by the U.S. Department of Health and Human
Services (“HHS”) Biomedical Advanced Research and Development Authority
(“BARDA”) that it had been chosen to submit a full proposal for funding of its
Lung-ARS program from its current stage all the way through U.S. Food and
Drug Administration (“FDA”) approval, based on a summary “white paper” submitted
by the Company earlier in 2009. Aeolus submitted a full proposal in
February 2010. The Company was notified in July 2010 that its
proposal had been chosen by BARDA, and then entered into negotiations for a
development contract with the agency. The Company is awaiting a final
decision from BARDA on the contract. If the contract from BARDA is
awarded, it is expected that it will fund all of the costs necessary to bring
AEOL 10150 to FDA approval for that indication.
R&D
expenses for our antioxidant program have totaled approximately $37,102,000 from
inception through December 31, 2010. Because of the uncertainty of
our research and development and clinical studies, we are unable to predict the
total level of spending on the program or the program completion
date. However, we expect R&D expenses during fiscal 2011 will be
higher than fiscal 2010 if we are awarded the BARDA contract. We
anticipate that much of the increase in R&D spending should be reimbursed
under that contract, if awarded. If the contract is not awarded,
R&D expenses are expected to be relatively in line with the level of
expenditures in fiscal 2010.
17
General
and administrative (“G&A”) expenses increased about $144,000, or 35%, to
approximately $550,000 for the three months ended December 30, 2010 from
approximately $406,000 for the three months ended December 31, 2009. Consulting
Fees increased by $50,000 due to the engagement of consultants to provide
financial and chemistry, manufacturing, and controls (“CMC”) support during the
three months ended December 31, 2010. Legal fees increased by approximately
$35,000 as a result of higher reliance on our outside legal counsel for review
and compliance related to financings and SEC filings during the
current quarter, as well as contract reviews.
We
incurred interest expense of approximately $15,000 for the three months ended
December 31, 2010 compared to interest expense of approximately $826,000 for the
three months ended December 31, 2009. The decrease in interest
expense is the result of the conversion of notes payable to equity in the three
months ended December 31, 2009.
As
previously disclosed, certain of our warrants to purchase common stock were
deemed to be a liability upon adoption of a new accounting pronouncement on
October 1, 2009. Subsequent changes to the fair market value resulted in an
offsetting charge in the statements of operations of approximately $7,202,000
for the three months ended December 31, 2010, and approximately $13,860,000 for
the three months ending December 31, 2009. The warrant liability and
revaluations have not and will not have any impact on our working capital,
liquidity or business operations.
Liquidity and Capital
Resources
In
October 2010, we were notified that we had been awarded the maximum amount, of
about $244,000, under the Qualifying Therapeutic Discovery Grant Program
(“QTDP”) administered by the IRS and the U.S. Department of Health and Human
Services (“HHS”) in support of our development of AEOL 10150 as an medical
countermeasure (“MCM”) for Lung-ARS. In November 2010, we received
approximately $244,000 from the IRS as full payment for the Lung-ARS
award.
In
October 2010, we were also notified that we had been awarded the maximum amount,
of approximately $244,000, under the QTDP administered by the IRS and the
HHS in support of our development of AEOL 11207 as a potential treatment for
Parkinson’s disease. In November 2010, we received about $92,000 from
the IRS as an initial payment for the Parkinson’s program award. We
expect to receive the balance of about $152,000 after we file our 2010 fiscal
year tax return and submit the request for payment to the IRS.
We do not
have any revenue and therefore we rely on investors, grants, collaborations and
licensing of our compounds to finance our operations. At December 31, 2010, we
had approximately $2,867,000 of cash and cash equivalents, an increase of
approximately $512,000 from September 30, 2010. The increase in cash was
primarily due to the funding of expenses from operations, which was more than
offset by the $1.0 million in net proceeds from the December 2010 financing and
the two awards from the IRS. We believe we have adequate financial
resources to conduct operations into the second quarter of fiscal year 2012, but
in order to fund on-going operating cash requirements beyond that point, or to
further accelerate or expand our programs, we need to raise significant
additional funds.
We
incurred significant losses from operations of approximately $7,620,000
(including a non-cash charge for increases in valuation of warrants of
approximately $7,202,000) and cash outflows from operations of approximately
$517,000 for the three months ended December 31, 2010. Our ongoing future cash
requirements will depend on numerous factors, particularly the progress of our
catalytic antioxidant program, clinical trials and ability to negotiate and
complete collaborative agreements or out-licensing arrangements. In order to
help fund our on-going operating cash requirements, we intend to seek new
collaborations for our antioxidant research program that include initial cash
payments and on-going research support. In addition, we might sell additional
shares of our stock and/or debt and explore other strategic and financial
alternatives, including a merger or joint venture with another company, the sale
of stock and/or debt, the establishment of new collaborations for current
research programs, that include initial cash payments and ongoing research
support and the out-licensing of our compounds for development by a third
party.
There are
significant uncertainties as to our ability to access potential sources of
capital. We may not be able to enter into any collaboration on terms acceptable
to us, or at all, due to conditions in the pharmaceutical industry or in the
economy in general or based on the prospects of our catalytic antioxidant
program. Even if we are successful in obtaining collaboration for our
antioxidant program, we may have to relinquish rights to technologies, product
candidates or markets that we might otherwise develop ourselves. These same
risks apply to any attempt to out-license our compounds.
18
Similarly,
due to market conditions, the illiquid nature of our stock and other possible
limitations on equity offerings, we may not be able to sell additional
securities or raise other funds on terms acceptable to us, if at all. Any
additional equity financing, if available, would likely result in substantial
dilution to existing stockholders.
Our
forecast of the period of time through which our financial resources will be
adequate to support our operations is forward-looking information, and actual
results could vary.
Off-Balance Sheet
Commitments
We do not
have any off-balance sheet arrangements that have or are reasonably likely to
have a current or future effect on our financial condition, changes in financial
condition, revenues or expenses, results of operations, liquidity, capital
expenditures or capital resources.
ITEM 3.
Quantitative and
Qualitative Disclosures About Market Risk.
Our
exposure to market risk is presently limited to the interest rate sensitivity of
our cash and cash equivalents, which is affected by changes in the general level
of U.S. interest rates. However, we believe that we are not subject to any
material market risk exposure and do not expect that changes in interest rates
would have a material effect upon our financial position. A hypothetical 10%
change in interest rates would not have a material effect on our Statement of
Operations or Cash Flows for the three months ending December 31, 2010. We do
not have any foreign currency or other derivative financial instruments. Our
debt bears interest at a fixed rate.
ITEM 4.
Controls and
Procedures.
Evaluation
of Disclosure Controls and Procedures
We
maintain “disclosure controls and procedures” as such term is defined in Rule
13a-15(e) and Rule 15d-15(e) under the Securities Exchange Act of 1934, as
amended (the “Exchange Act”). In designing and evaluating our disclosure
controls and procedures, our management recognized that disclosure controls and
procedures, no matter how well conceived and operated, can provide only
reasonable, not absolute, assurance that the objectives of disclosure controls
and procedures are met. Additionally, in designing disclosure controls and
procedures, our management necessarily was required to apply its judgment in
evaluating the cost-benefit relationship of possible disclosure controls and
procedures. The design of any disclosure controls and procedures also is based
in part upon certain assumptions about the likelihood of future events, and
there can be no assurance that any design will succeed in achieving its stated
goals under all potential future conditions. Based on his evaluation as of the
end of the period covered by this report, our Chief Executive Officer who also
serves as our principal financial and accounting officer has concluded that our
disclosure controls and procedures were not effective such that the information
relating to our company, required to be disclosed in our Securities and Exchange
Commission reports (i) is recorded, processed, summarized and reported within
the time periods specified in SEC rules and forms and (ii) is accumulated and
communicated to our management, including our Chief Executive Officer, to allow
timely decisions regarding required disclosure.
Our
management concluded that our disclosure controls and procedures were not
effective as a result of a material weakness in our internal control over
financial reporting as of December 31, 2010. In making the assessment of our
internal control over financial reporting as of December 31, 2010, our
management used criteria set forth by the Committee of Sponsoring Organizations
of the Treadway Commission (“COSO”) in an Internal Control Integrated
Framework. Our management has determined that material weaknesses
existed as of December 31, 2010 as a result of the lack of segregation of duties
and weaknesses in financial reporting and close processes, based on the
criteria set forth by COSO.
A
“material weakness,” as defined by the Public Company Accounting Oversight Board
(PCAOB) is a deficiency, or a combination of deficiencies, in internal control
over financial reporting, such that there is a reasonable possibility that a
material misstatement of our annual or interim financial statements will not be
prevented or detected on a timely basis.
To
address the material weaknesses, management has established mitigating controls
to minimize the potential for material misstatements in the financial
statements. Management has determined that given our size, level of
operations and financial resources, it is not practicable for us to eliminate
the segregation of controls weakness. However, management has established
mitigating controls to minimize the impact of the lack of segregation of duties
and is considering the addition of external or internal resources to assist
with the financial reporting and close processes.
19
Changes
in Internal Control over Financial Reporting
Except
as noted above, there have been no changes in our internal control over
financial reporting (as defined in Rules 13a-15(f) and 15d-15(f) under the
Securities Exchange Act of 1934, as amended) during the quarter ended December
31, 2010 that has materially affected, or is reasonably likely to materially
affect, our internal control over financial reporting.
PART
II. OTHER INFORMATION
ITEM 1.
Legal
Proceedings.
None.
ITEM
1A. Risk
Factors.
None.
ITEM 2.
Unregistered
Sales of Equity Securities and Use of Proceeds.
None.
ITEM 3.
Defaults Upon
Senior Securities.
None.
ITEM 4.
Removed and
Reserved.
N/A.
ITEM 5.
Other
Information.
None.
20
ITEM 6.
Exhibits
Exhibit #
|
Description
|
|
10.1
|
*
|
Consulting
Agreement, dated December 1, 2010, by and among Aeolus Pharmaceuticals,
Inc., Aeolus Sciences, Inc. and Brian J. Day.
|
31.1
|
Certification
of the Chief Executive Officer pursuant to Exchange Act Rules 13a-14(a)
and 15d-14(a).
|
|
31.2
|
Certification
of the Chief Financial Officer pursuant to Exchange Act Rules 13a-14(a)
and 15d-14(a).
|
|
32.1
|
Certification
by the Chief Executive Officer and Chief Financial Officer pursuant to 18
U.S.C. §1350 as adopted pursuant to Section 906 of the Sarbanes-Oxley Act
of 2002.
|
* Filed as Exhibit 10.1 to the
Company's Current Report on Form 8-K filed with the Securities and Exchange
Commission on December 3, 2010.
21
SIGNATURES
Pursuant
to the requirements of the Securities Exchange Act of 1934, the registrant has
duly caused this report to be signed on its behalf by the undersigned thereunto
duly authorized.
AEOLUS
PHARMACEUTICALS, INC.
|
||
Date:
February
10, 2011
|
By:
|
/s/ John L. McManus
|
John
L. McManus
President
and Chief Executive Officer
(Principal
Executive Officer)
Chief
Financial Officer, Treasurer and Secretary
(Principal
Financial and Accounting
Officer)
|
22