Annual report pursuant to Section 13 and 15(d)

Share Exchange Agreement, Private Placements and Common Stock Warrants

v2.4.0.8
Share Exchange Agreement, Private Placements and Common Stock Warrants
12 Months Ended
Dec. 31, 2013
Share Exchange Agreement Private Placements and Common Stock Warrants [Abstract]  
Share Exchange Agreement Private Placements and Common Stock Warrants [Text Block]
3. Share Exchange Agreement, Private Placements and Common Stock Warrants
 
Share Exchange Agreement
 
On June 30, 2006, pursuant to a Share Exchange Agreement dated as of June 8, 2006 (the “Share Exchange Agreement”) by and among the Company, Dr. John S. Kovach (“Seller”) and Lixte, the Company issued 19,021,786 shares of its common stock in exchange for all of the issued and outstanding shares of Lixte (the “Exchange”). Previously, on October 3, 2005, Lixte had issued 1,500 shares of its no par value common stock to its founder for $1,500, which constituted all of the issued and outstanding shares of Lixte prior to the Exchange. As a result of the Exchange, Lixte became a wholly-owned subsidiary of the Company.
  
Pursuant to the Exchange, the Company issued to the Seller 19,021,786 shares of its common stock. The Company had a total of 25,000,832 shares of common stock issued and outstanding after giving effect to the Exchange and the 1,973,869 shares of common stock issued in the initial closing of the private placement.
 
As a result of the Exchange and the shares of common stock issued in the initial closing of the private placement, on June 30, 2006, the stockholders of the Company immediately prior to the Exchange owned 4,005,177 shares of common stock, equivalent to approximately 16% of the issued and outstanding shares of the Company’s common stock, and the former stockholder of Lixte acquired control of the Company.
 
In connection with the Exchange, the Company paid WestPark Capital, Inc. a cash fee of $50,000.
 
Private Placements
 
On June 30, 2006, concurrently with the closing of the Exchange, the Company sold an aggregate of 1,973,869 shares of its common stock to accredited investors in an initial closing of a private placement at a per share price of $0.333, resulting in aggregate gross proceeds to the Company of $657,299. The Company paid to WestPark Capital, Inc., as placement agent, a commission of 10% and a non-accountable fee of 4% of the gross proceeds of the private placement and issued five-year warrants to purchase common stock equal to (a) 10% of the number of shares sold in the private placement exercisable at $0.333 per share and (b) an additional 2% of the number of shares sold in the private placement also exercisable at $0.333 per share. A total of 236,864 warrants were issued. Net cash proceeds to the Company, after the deduction of all private placement offering costs and expenses, were $522,939.
  
On July 27, 2006, the Company sold an aggregate of 1,581,351 shares of its common stock to accredited investors in a second closing of the private placement at a per share price of $0.333 resulting in aggregate gross proceeds to the Company of $526,590. The Company paid to WestPark Capital, Inc., as placement agent, a commission of 10% and a non-accountable fee of 4% of the gross proceeds of the private placement and issued five-year warrants to purchase common stock equal to (a) 10% of the number of shares sold in the private placement exercisable at $0.333 per share and (b) an additional 2% of the number of shares sold in the private placement also exercisable at $0.333 per share. A total of 189,762 warrants were issued. Net cash proceeds to the Company were $446,433.
 
In conjunction with the private placement of common stock, the Company issued a total of 426,626 five-year warrants to WestPark Capital, Inc. exercisable at the per share price of the common stock sold in the private placement ($0.333 per share). The warrants issued to WestPark Capital, Inc. do not contain any price anti-dilution provisions. However, such warrants contained cashless exercise provisions and demand registration rights, but the warrant holder has agreed to waive any claims to monetary damages or financial penalties for any failure by the Company to comply with such registration requirements. Based on the foregoing, the warrants were accounted for as equity and were not accounted for separately from the common stock and additional paid-in capital accounts. The warrants had no accounting impact on the Company’s consolidated financial statements.
 
As part of the Company’s private placement of its securities completed on July 27, 2006, the Company entered into a registration rights agreement with the purchasers, whereby the Company agreed to register the shares of common stock sold in the private placement, and to maintain the effectiveness of such registration statement, subject to certain conditions. The agreement required the Company to file a registration statement within 45 days of the closing of the private placement and to have the registration statement declared effective within 120 days of the closing of the private placement. On September 8, 2006, the Company filed a registration statement on Form SB-2 to register 3,555,220 shares of the common stock sold in the private placement. Since the registration statement was not declared effective by the Securities and Exchange Commission within 120 days of the closing of the private placement, the Company was required to pay each investor prorated liquidated damages equal to 1.0% of the amount raised per month, payable monthly in cash.
 
On the date of the closing of the private placement, the Company believed it would meet the deadlines under the registration rights agreement with respect to filing a registration statement and having it declared effective by the Securities and Exchange Commission. As a result, the Company did not record any liabilities associated with the registration rights agreement at June 30, 2006. At December 31, 2006, the Company determined that the registration statement covering the shares sold in the private placement would not be declared effective within the requisite time frame and therefore recorded a current liability representing six months liquidated damages under the registration rights agreement aggregating approximately $74,000. The Company’s registration statement on Form SB-2 was declared effective by the Securities and Exchange Commission on May 14, 2007. At December 31, 2013, the registration penalty payable to the investors had not been paid, and has been included in the Company’s balance sheet as a current liability for all periods presented.
 
On December 12, 2007, the Company sold an aggregate of 999,995 shares of its common stock to accredited investors in a second private placement at a per share price of $0.65, resulting in aggregate gross proceeds to the Company of $650,000. The Company paid to WestPark Capital, Inc., as placement agent, a commission of 10% and a non-accountable fee of 4% of the gross proceeds of the private placement and issued five-year warrants to purchase common stock equal to (a) 10% of the number of shares sold in the private placement exercisable at $0.65 per share and (b) an additional 2% of the number of shares sold in the private placement also exercisable at $0.65 per share. Net cash proceeds to the Company were $531,320.
 
In conjunction with the second private placement of common stock, the Company issued a total of 120,000 five-year warrants to WestPark Capital, Inc. exercisable at the per share price of the common stock sold in the private placement ($0.65 per share). The warrants issued to WestPark Capital, Inc. did not contain any price anti-dilution provisions. However, such warrants contain cashless exercise provisions and demand registration rights, but the warrant holder has agreed to waive any claims to monetary damages or financial penalties for any failure by the Company to comply with such registration requirements. Based on the foregoing, the warrants were accounted for as equity and were not accounted for separately from the common stock and additional paid-in capital accounts. The warrants had no accounting impact on the Company’s consolidated financial statements. On December 12, 2012, the above described warrants expired unexercised.
  
As part of the Company’s second private placement of its securities completed on December 12, 2007, the Company entered into a registration rights agreement with the purchasers, whereby the Company agreed to register the shares of common stock sold in the second private placement at its sole cost and expense. The registration rights agreement terminates at such time as the common shares may be sold in market transactions without regard to any volume limitations. The registration rights agreement requires the Company to file a registration statement within 75 days of receipt of written demand from holders who represent at least 50% of the common shares issued pursuant to the second private placement, provided that no demand shall be made for less than 500,000 shares, and to use its best efforts to cause such registration statement to become and remain effective for the requisite period. The registration rights agreement also provides for unlimited piggyback registration rights. The registration rights agreement does not provide for any penalties in the event that the Company is unable to comply with its terms.
 
During the year ended December 31, 2009, the Company completed three closings of the third private placement of common stock units, consisting of a total of 1,420,000 shares of common stock and 1,420,000 warrants to acquire common stock, as follows:
 
On February 10, 2009, the Company sold an aggregate of 658,000 common stock units to accredited investors in a first closing of a third private placement at a per unit price of $0.50, resulting in aggregate gross proceeds to the Company of $329,000. Net cash proceeds to the Company were $269,790.
 
On March 2, 2009, the Company sold an aggregate of 262,000 common stock units to accredited investors in a second closing of the third private placement at a per unit price of $0.50, resulting in aggregate gross proceeds to the Company of $131,000. Net cash proceeds to the Company were $112,460.
 
On April 6, 2009, the Company sold an aggregate of 500,000 common stock units to accredited investors in a third closing of the third private placement at a per unit price of $0.50, resulting in aggregate gross proceeds to the Company of $250,000. Net cash proceeds to the Company were $214,800.
 
Each unit sold in the third private placement consisted of one share of the Company’s common stock and a five-year warrant to purchase an additional share of the Company’s common stock on a cashless exercise basis at an exercise price of $0.50 per common share. The Company paid to WestPark Capital, Inc., as placement agent, a commission of 10% and a non-accountable fee of 4% of the gross proceeds of the third private placement and issued five-year warrants to purchase common stock equal to (a) 10% of the number of shares sold in the third private placement exercisable at $0.50 per share and 10% of the number of shares issuable upon exercise of warrants issued in the third private placement exercisable at $0.50 per share; and (b) an additional 2% of the number of shares sold in the third private placement also exercisable at $0.50 per share and 2% of the number of shares issuable upon exercise of the warrants issued in the third private placement exercisable at $0.50 per share. 
 
In conjunction with the closings of the third private placement of common stock units during the year ended December 31, 2009, the Company issued a total of 340,800 five-year warrants to WestPark Capital, Inc., which are exercisable at the per unit price of the common stock units sold in the third private placement ($0.50 per unit). Included in the 340,800 warrants issued to WestPark Capital, Inc. are 170,400 warrants which are only exercisable with respect to common shares that are acquired by investors upon their exercise of the warrants acquired as part of the units sold in the third private placement. The warrants issued to WestPark Capital, Inc. do not contain any price anti-dilution provisions. However, such warrants contain cashless exercise provisions and demand registration rights, but the warrant holder has agreed to waive any claims to monetary damages or financial penalties for any failure by the Company to comply with such registration requirements. Based on the foregoing, the warrants were accounted for as equity and were not accounted for separately from the common stock and additional paid-in capital accounts. The warrants had no accounting impact on the Company’s consolidated financial statements. On May 10, 2012, warrants to purchase 1,440 shares of common stock were exercised.
 
At the request of the holders, the Company has agreed to include any shares sold in the third private placement and any shares issuable upon exercise of the related warrants to be included in any registration statement filed with the Securities and Exchange Commission permitting the resale of such shares, subject to customary cutbacks, at the Company’s sole cost and expense.
 
Effective November 6, 2009, the Company sold 1,000,000 common stock units to an accredited investor in a fourth private placement at a per unit price of $0.50, resulting in proceeds to the Company of $500,000. There were no commissions paid with respect to the fourth private placement. The closing price of the Company’s common stock on November 6, 2009 was $0.50 per share.
 
Each unit sold in the fourth private placement consisted of one share of the Company’s common stock, one three-year warrant to purchase an additional share of the Company’s common stock at an exercise price of $0.50 per share, and one three-year warrant to purchase an additional share of the Company’s common stock at an exercise price of $0.75 per share. The warrants do not have any reset provisions.
 
At the request of the holder, the Company has agreed to include the shares sold in the fourth private placement and any shares issuable upon exercise of the related warrants in any registration statement filed by the Company with the Securities and Exchange Commission permitting the resale of such securities, subject to customary cutbacks. The units sold were not registered under the Securities Act of 1933, as amended (the “Act”), in reliance upon the exemption from registration contained in Section 4(2) of the Act and Regulation D promulgated thereunder. Based on the foregoing, the warrants were accounted for as equity and were not accounted for separately from the common stock and additional paid-in capital accounts. The warrants had no accounting impact on the Company’s consolidated financial statements.
 
Effective January 20, 2010, the Company raised $1,787,500 in a fifth private placement of units sold to certain of its existing stockholders or their designees, all of whom were accredited investors, consisting of an aggregate of 3,575,000 units at a purchase price of $0.50 per unit. Each unit consisted of one share of common stock, one three-year warrant to purchase a share of common stock at an exercise price of $0.50 per share, and one three-year warrant to purchase a share of common stock at an exercise price of $0.75 per share. The warrants do not have any reset provisions. The closing price of the Company’s common stock on January 20, 2010 was $0.49 per share. There were no commissions paid with respect to the private placement. Upon request by the holder, the Company has agreed to include the shares issued and those shares issuable upon exercise of the warrants in any registration statement filed by the Company with the Securities and Exchange Commission permitting the resale of such securities, subject to customary cutbacks. The units sold were not registered under the Act, in reliance upon the exemption from registration contained in Section 4(2) of the Act and Regulation D promulgated thereunder. The Company accounted for the issuance of the units as a capital transaction. As of December 31, 2009, $1,200,000 had been advanced to the Company under this private placement, with the balance of $587,500 being received by the Company in January 2010.
 
Effective February 22, 2010, the Company raised $500,000 through the sale to an accredited investor of 1,000,000 units at a purchase price of $0.50 per unit. Each unit consisted of one share of common stock, one three-year warrant to purchase a share of common stock at an exercise price of $0.50 per share, and one three year-year warrant to purchase a share of common stock at an exercise price of $0.75 per share. The warrants do not have any reset provisions. The closing price of the Company’s common stock on February 22, 2010 was $0.50 per share. There were no commissions paid with respect to the private placement. Upon request by the holder, the Company has agreed to include the shares issued and those shares issuable upon exercise of the warrants in any registration statement filed by the Company with the Securities and Exchange Commission permitting the resale of such securities, subject to customary cutbacks. The units sold were not registered under the Act, in reliance upon the exemption from registration contained in Section 4(2) of the Act and Regulation D promulgated thereunder. The Company accounted for the issuance of the units as a capital transaction.
 
If and when the aforementioned stock warrants are exercised, the Company expects to satisfy such stock obligations through the issuance of authorized but unissued shares of common stock.
  
Common Stock Warrants
 
On July 27, 2009, the Company entered into an agreement with Pro-Active Capital Group, LLC (“Pro-Active”) to retain Pro-Active on a non-exclusive basis for a period of twelve months to provide consulting advice to assist the Company in obtaining research coverage, gaining web-site exposure and coverage on financial blogs and web-sites, enhancing the Company’s visibility to the institutional, retail brokerage and on-line trading communities, and organizing, or assisting in organizing, investor road-shows and presentations. In exchange for such consulting advice, at the initiation of the agreement, the Company agreed to issue to Pro-Active 150,000 shares of restricted common stock and three-year warrants to purchase an aggregate of 150,000 shares of common stock, exercisable 50,000 at $0.75 per share, 50,000 at $1.00 per share, and 50,000 at $1.25 per share. The fair value of the 150,000 shares issued was determined to be $100,500 ($0.67 per share), reflecting the price per share of the Company’s common stock, as quoted on the OTC Bulletin Board, on the transaction date. The fair value of the three-year warrants, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $97,500 ($0.65 per share). The $198,000 aggregate fair value of the shares and warrants issued was charged to operations as stock-based compensation on July 27, 2009, since the shares and warrants were fully vested and non-forfeitable on the date of issuance. On July 27, 2012, the above described warrants expired unexercised.
 
On June 30, 2011, WestPark Capital, Inc. exercised warrants to acquire 152,874 shares of common stock, obtained in connection with its role as placement agent for the June 30, 2006 private placement, on a cashless basis. Such cashless exercise resulted in WestPark Capital, Inc. receiving a net of 100,929 shares of common stock.
 
On July 27, 2011, the Company agreed to extend the remaining portion of the warrants obtained by WestPark Capital, Inc. in connection with its role as placement agent for the June 30, 2006 private placement, consisting of warrants to acquire 273,752 shares of common stock, from July 27, 2011 to July 27, 2012. In conjunction with the extension of these warrants, the cashless exercise feature was deleted. The fair value of the warrant extension, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $199,839 ($0.73 per share), and was charged to operations on July 27, 2011. The fair value of the warrant extension was calculated using the following input variables: stock price - $0.79 per share; exercise price - $0.333 per share; expected life - 1 year; expected volatility – 308.8%; expected dividend yield - 0%; risk-free interest rate – 0.14%.
 
On July 16, 2012, the Company’s Board of Directors agreed to permit the exercise of the above described warrants to acquire 273,752 shares of common stock of the Company on a cashless basis, provided that the cashless exercise price was increased by 20%, from $0.333 to $0.3996 per share. Accordingly, on July 16, 2012, warrants to acquire 273,752 shares of common stock, issued in connection with WestPark Capital, Inc.’s role as placement agent for the June 30, 2006 private placement, were exercised on a cashless basis. Such cashless exercise resulted in the net issuance of 141,955 shares of common stock. The Company’s closing stock price on July 16, 2012 was $0.83 per share. As the fair value of the warrants immediately after the modification was less than the fair value of the warrants immediately prior to the modification (both amounts being calculated pursuant to the Black-Scholes option-pricing model), the Company did not record any accounting adjustment with respect to the warrant modification.
 
On May 3, 2012, the Company offered to all of its warrant holders an inducement to exercise early, by reducing the exercise price of currently outstanding warrants by 25%, if exercised on a cash basis by June 15, 2012. The exercise prices of the warrants before reduction ranged from $0.333 to $1.25 per share, and the offer was open until the sooner of receiving $3,000,000 in net proceeds, or June 15, 2012, subject to the Company’s right to extend the offer to June 30, 2012. The offer was subject to certain conditions. As a result of the discount warrant offer, warrants to acquire 6,082,000 shares of the Company’s common stock were exercised at discounts ranging from $0.125 to $0.188 per share. The exercise of the warrants generated aggregate net proceeds to the Company of $2,468,250. The aggregate fair value of the warrant discounts, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $334,024 (an average of $0.05 per share issued), and such amount was charged to operations during the months of May and June of 2012. The fair value of the warrant discounts attributed to the exercise of 5,082,000 warrants was calculated using the following input variables: stock price on date of exercise - $0.69 to $0.84 per share; stated exercise price – $0.50; discounted exercise price – $0.375 per share; expected life – 157 days to 661 days; expected volatility – 150.1%; expected dividend yield - 0%; risk-free interest rate – 0.24%. The fair value of the warrant discounts attributed to the exercise of 1,000,000 warrants was calculated using the following input variables: stock price on date of exercise - $0.69 per share; stated exercise price – $0.75; discounted exercise price – $0.563 per share; expected life – 157 days; expected volatility – 150.1%; expected dividend yield - 0%; risk-free interest rate – 0.24%.
 
On September 11, 2012, the Company’s Board of Directors extended outstanding warrants to acquire 5,080,000 shares of the Company’s common stock that were purchased by investors as part of the offerings that closed on January 20, 2010 and February 22, 2010, to June 30, 2014. Included in such extension were warrants to acquire 505,000 shares of common stock at $0.50 per share scheduled to expire on January 20, 2013, warrants to acquire 3,575,000 shares of common stock at $0.75 per share scheduled to expire on January 20, 2013, and warrants to acquire 1,000,000 shares at $0.75 per share scheduled to expire on February 22, 2013. The fair value of the warrant extensions, as calculated pursuant to the Black-Scholes option-pricing model, was determined to be $1,139,592 (average of $0.22 per share), and such amount was charged to operations on September 11, 2012. The fair value of the warrant extensions were calculated using the following input variables: stock price - $0.65 per share; exercise price - $0.50 and $0.75 per share; expected life – 526 days and 493 days; expected volatility – 148.4%; expected dividend yield - 0%; risk-free interest rate – 0.29%.
 
A summary of common stock warrant activity, including warrants to purchase common stock that were issued in conjunction with the Company’s private placements, is presented in the tables below. For presentation purposes, warrants that were extended are considered as outstanding for the entire period in which such extension occurs.
 
 
 
 
 
 
 
 
Weighted
 
 
 
 
 
 
 
 
Average
 
 
 
 
 
 
Weighted
 
Remaining
 
 
 
Number
 
Average
 
Contractual
 
 
 
of
 
Exercise
 
Life
 
 
 
Shares
 
Price
 
(in Years)
 
Warrants outstanding at December 31, 2011
 
 
13,454,552
 
$
0.607
 
 
 
 
Issued
 
 
—
 
 
—
 
 
 
 
Exercised
 
 
(6,355,752)
 
 
0.535
 
 
 
 
Expired
 
 
(270,000)
 
 
0.844
 
 
 
 
Warrants outstanding at December 31, 2012
 
 
6,828,800
 
 
0.667
 
 
 
 
Issued
 
 
—
 
 
—
 
 
 
 
Exercised
 
 
—
 
 
—
 
 
 
 
Expired
 
 
—
 
 
—
 
 
 
 
Warrants outstanding at December 31, 2013
 
 
6,828,800
 
$
0.667
 
 
0.67
 
 
 
 
 
 
 
 
 
 
 
 
Warrants exercisable at December 31, 2012
 
 
6,659,840
 
$
0.672
 
 
 
 
Warrants exercisable at December 31, 2013
 
 
6,659,840
 
$
0.672
 
 
0.42
 
  
The exercise prices of common stock warrants outstanding and exercisable are as follows at December 31, 2013:
 
 
 
Warrants
 
Warrants
 
Exercise
 
Outstanding
 
Exercisable
 
Prices
 
(Shares)
 
(Shares)
 
 
 
 
 
 
 
 
$
0.500
 
2,253,800
 
2,084,840
 
$
0.750
 
4,575,000
 
4,575,000
 
 
 
 
6,828,800
 
6,659,840
 
 
Based on a fair market value of $0.13 per share on December 31, 2013, there were no exercisable but unexercised in-the-money common stock warrants on that date. Accordingly, there was no intrinsic value attributed to exercisable but unexercised common stock warrants at December 31, 2013.
 
Based on a fair market value of $0.25 per share on December 31, 2012, there were no exercisable but unexercised in-the-money common stock warrants on that date. Accordingly, there was no intrinsic value attributed to exercisable but unexercised common stock warrants at December 31, 2012
 
At December 31, 2013, warrants exercisable do not include warrants to acquire 168,960 shares of common stock that are contingent upon the exercise of warrants contained in units sold as part of the third private placement, as described above.
 
Effective January 28, 2014, the Company entered into various transactions involving its outstanding warrants, as described at Note 9.