Annual report pursuant to Section 13 and 15(d)

Net (Loss) Income Per Share Of Common Stock, Basic And Diluted

Net (Loss) Income Per Share Of Common Stock, Basic And Diluted

12 Months Ended

Dec. 31, 2018

Net (Loss) Income Per Share of Common Stock, Basic and Diluted

The Company computes earnings per share ("EPS") using the two-class method. The two-class method of computing EPS is an earnings allocation formula that determines EPS for common stock and any participating securities according to dividends declared and participation rights in undistributed earnings. Under the two-class method, EPS for the common stock, preferred stock and participating warrants are computed by dividing the sum of distributed earnings to common shareholders and undistributed earnings allocated to common shareholders by the weighted average number of shares of common stock and participating warrants outstanding for the period. In applying the two-class method, undistributed earnings are allocated to common stock, preferred stock and participating warrants based on the weighted average shares outstanding during the period. In periods of net loss, losses are allocated to the participating security only if the security has not only the right to participate in earnings, but also a contractual obligation to share in the Company's losses.

Diluted net (loss) income per share includes the potential dilutive effect of common stock equivalents as if such securities were converted or exercised during the period, when the effect is dilutive. Common stock equivalents include: (i) outstanding stock options and restricted stock awards which are included under the "treasury stock method" when dilutive, (ii) common stock to be issued upon the assumed conversion of the Company's unit purchase option shares, which are included under the "if-converted method" when dilutive; (iii) prior to issuance, the contingently issuable shares in the TRx acquisition if contingencies would have been satisfied if the end of the contingency period were as of the balance sheet date under the "if converted method" when dilutive; and (iv) common stock to be issued upon the exercise of outstanding warrants which are included under the "treasury stock method" when dilutive. Because the impact of these items is generally anti-dilutive during periods of net loss, there is no difference between basic and diluted loss per common share for periods with net losses. In addition, as stated above, net losses are not allocated to the participating securities unless the participating security has a contractual obligation to share in both earnings and losses of the Company.

The following table sets forth the computation of basic and diluted net loss per share of common stock for the years ended December 31, 2018 and 2017, which includes both classes of participating securities:



	Year ended December 31,
Net (loss) income per share, basic and diluted calculation:	2018			2017
Basic (loss) income per share
Net (loss) income	$	(40,052,810	)	$	11,869,823
Deemed distribution to shareholder	1,657,383			—
Undistributable (loss) earnings allocable to common shares	$	(41,710,193	)	$	7,772,084
Undistributable (loss) earnings allocable to participating warrants	$	—		$	4,097,739

Weighted average shares, basic
Common stock	34,773,613			18,410,005
Participating warrants	—			9,706,458
	34,773,613			28,116,463
Basic (loss) income per share:
Common stock	$	(1.20	)	$	0.42
Participating warrants	$	—		$	0.42

Diluted (loss) income per share:
Net (loss) income attributable to common shares	$	(41,710,193	)	$	7,772,084
Net (loss) income reallocated	—			49,642
Undistributed (loss) earnings allocable to common shares	$	(41,710,193	)	$	7,821,726

Weighted average number of shares attributable to common shareholders - basic	34,773,613			18,410,005
Effect of dilutive securities:
Stock options	—			61,510
Contingently issuable shares	—			283,284
Potentially dilutive shares	—			344,794
Weighted average number of shares - diluted	34,773,613			18,754,799

Diluted (loss) income per share	$	(1.20	)	$	0.42

On December 27, 2018, the Company entered into a series of transactions as part of a private placement with Armistice in order to generate cash to continue to develop our pipeline assets and for general corporate purposes. The transactions are considered one transaction for accounting purposes. As part of the transaction, the Company exchanged common stock warrants issued as a part of the Armistice private placement in 2017 for the purchase up to 14,285,714 shares of the Company’s common stock at an exercise price of $0.40 per share (the "original warrants") for like-kind warrants to purchase up to 2,857,143 shares of the Company's newly designated Series B Convertible Preferred Stock (the "Series B Convertible Preferred Stock" or "convertible preferred stock") with an exercise price of $2.00 per share (the "exchanged warrants"). The convertible preferred stock has the same rights and preferences as common stock other than it is non-voting and converts to shares of common stock on a 1 for 5 ratio. Armistice immediately exercised the exchanged warrants and acquired an aggregate of 2,857,143 shares of the Series B Convertible Preferred Stock to generate net proceeds of approximately $5.7 million. The convertible preferred stock is considered a separate class of stock for EPS purposes, however basic and diluted EPS is not provided for the preferred stock for the year ended December 31, 2018 because the shares were only outstanding for five days for the year. Therefore, EPS for the preferred stock is immaterial for the year ended December 31, 2018, however will be disclosed going forward.

In order to provide Armistice an incentive to exercise the exchanged warrants, the Company also entered into a securities purchase agreement with Armistice pursuant to which the Company issued warrants for 4,000,000 shares of common stock of the Company with a term of 5.5 years and an exercise price of $12.50 per share (the "incentive warrants"). For accounting purposes the fair value of the incentive warrants was considered a deemed distribution to Armistice of $1.7 million. The deemed distribution is calculated as the difference between the fair value of the incentive warrants on the date of the transaction of $2.2 million and the value that Armistice forwent by exchanging the original warrants of $0.5 million. The fair value of the incentive warrant is estimated using a Black-Scholes option-pricing model. The significant assumptions used in the model for valuing the incentive warrant on December 27, 2018 include: (i) volatility of 55%, (ii) risk-free interest rate of 2.62%, (iii) unit strike price of $12.50, (iv) fair value of underlying equity of $3.02, and (v) expected life of 5.5 years.

The net loss of $40.1 million for the year ended December 31, 2018 is increased by the deemed distribution of $1.7 million to arrive at the net loss attributable to common shareholders of $41.7 million. While the incentive warrants do have the rights to participate in undistributed earnings, the incentive warrants issued do not share in net losses of the Company. As such, the incentive warrants are excluded from the weighted average shares and warrants outstanding during periods of net loss. For the 2017 EPS calculation, the shares of unexercised original warrants issued in the Armistice private placement transaction in 2017 are considered participating securities because these warrants contain a non-forfeitable right to dividends irrespective of whether the warrants are ultimately exercised.

The following outstanding securities at December 31, 2018 and 2017 have been excluded from the computation of diluted weighted shares outstanding, as they could have been anti-dilutive:



	December 31,
	2018	2017
Stock options	4,246,597	2,812,006
Warrants on common stock	4,024,708	4,661,145
Restricted Stock Awards	445,000	—
Underwriters' unit purchase option	40,000	40,000